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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, 1996
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
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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)
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
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.
----
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 17, 1997 was approximately $14,520,000 based on the
closing price of such on The Nasdaq Stock Market.
The number of shares of Registrant's Common Stock outstanding on
March 17, 1996 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 27,
1997.
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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 10
Item 3: Legal Proceedings 10
Item 4: Submission of Matters to a Vote of Security Holders 10
PART II
Item 5: Market for the Registrant's Common Equity and Related
Stockholder Matters 12
Item 6: Selected Financial Data 13
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8: Financial Statements and Supplementary Data 19
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
PART III
Item 10: Directors and Executive Officers of the Registrant 20
Item 11: Executive Compensation 20
Item 12: Security Ownership of Certain Beneficial Owners and
Management 20
Item 13: Certain Relationships and Related Transactions 20
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports
on Form 8-K 21
Signatures 22
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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 700 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 and it entered the software/CD-ROM market in the fourth quarter
1995.
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,
(1)
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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 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 700 items and is continuing to develop new products. In
1996, approximately 54 new products 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 has
discontinued this development, 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 1996,
ExploraToy continued as a key supplier of science education toys to many of
the leaders in mass market retailing. The Company met its goal of achieving
distribution through most of the leaders in mass market retailing with the
addition of Wal-Mart, Kay-Bee Toy Stores, Caldor and Hills Department Stores.
The product line has expanded to 34 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 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-R-". In late 1996,
ExploraToy was granted a non-exclusive license with MCA/Universal for certain
science-related products featuring artwork and logos from the motion picture
"Jurassic Park: The Lost World", the sequel to Jurassic Park. The Company
expects to gain wider mass market distribution as a result of offering a
broader range of licensed products.
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, German, Dutch and
(2)
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Scandinavian languages. The Company entered into exclusive agreements for the
distribution of its products to the Italian and Spanish speaking markets in
1996. During 1996, the Company further increased its market visibility in
South Korea especially with electronic learning aid products such as
MathSafari and Adventures in Science. International sales of the Company's
products, including sales of the Company's United Kingdom subsidiary, totaled
approximately $5.6 million in 1996 or approximately 14% of sales. The three
foreign countries in which the Company experienced the highest level of sales
in 1996 were the United Kingdom, Canada and Korea.
PRODUCTS
The Company offers approximately 700 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:
<TABLE>
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<S> <C> <C> <C>
ELECTRONIC LEARNING AIDS SCIENCE ACTIVITY KITS BOXED READING CARD SETS IQ GAMES
GeoSafari Adventures in Science World of Reading Animals of the World
GeoSafari Talking Globe Discovery Collections Sports Wonders of the World
MathSafari Nature Collections Social Studies U.S. Geography
GeoSafari Theater Mini Museums Cliffhangers World Geography
Reading Safari Bug Viewers PHONICS READING PROGRAMS U.S. History
Albert National Wildlife Phonics Factory Presidents
Skillmaster Federation Vinyl Sticker Learning to Read With FUNTHINKERS
Drillmaster Books Phonics Thinking Skills
Alphamaster Galaxy Guide Home Run Reading All Around Fun
IQ Arcade Ant Factory Phonics Readers Reading
Rainbow Cosmic Observer MISCELLANEOUS Math
Charlie Light Writer Human Body Kits BRAINBOOSTERS
Word Arcade RUBBER STAMPS Coin & Stamp Collection Amazing Animals
CompuQuizzer Books Alphabet and Numbers Plastic Food Inventions & Discoveries
BOARD GAMES Story Stamps Plastic Math Counters Digging into the Past
Dino Checkers Grading Stamps Chalkboards Worldwide Wonders
Dino Tic Tac Toe Stamp Pads Stickers Outer Space Adventures
Dino Bingo Adventure stamps Letter Perfect Undersea Adventures
Not So Scary Things Story Maker Stamps Picture Perfect EXPLORATOY
Race to the Sun PICTURE BOOKS Endangered Animal Star Tower
Name That State World & U.S. Atlas Growth Chart ExploraScope
Presto Change-O Giant Steps - Science CD-ROM Test Tube Science
Traverse Giant Steps - Readers GeoSafari Critter Carnival
Science Safari GeoSafari Animals SeaMonkeys-R-
</TABLE>
(3)
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The following briefly describes five of the Company's top selling
product groups, each of which accounted for more than $1 million in
sales in 1996:
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, IQ Arcade, 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 49% in 1996 from approximately
55% in 1992 primarily as a result of the decline of the Company's older
GeoSafari products.
YEARS ENDED DECEMBER 31,(1)
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1996 1995 1994 1993 1992
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(IN THOUSANDS)
Electronic Learning Aids $20,185 $21,445 $27,147 $26,066 $17,710
All Other Products 21,091 18,345 18,493 15,987 14,187
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Total $41,276 $39,790 $45,640 $42,053 $31,897
The Company currently sells a total of seventeen electronic learning aids
that retail from $29.95 to $400.00. Three new electronic learning aids were
introduced in 1996, including the GeoSafari Talking Globe. This portable quiz
unit, available with or without a globe, asks more than 10,000 geography
questions. Sales of the Talking Globe accounted for approximately $4 million
or 10% of sales in 1996. The GeoSafari Electronic Learning Game, first
introduced in 1989, is a portable plastic electronic device which
accommodates 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 $8 million or 20% of
sales in 1996. 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 $3
million or 7% of sales in 1996. Six of the Company's electronic learning
aids, Drillmaster, Alphamaster, Skillmaster, Rainbow, Charlie and the new
GeoSafari Theater 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 1997 and 1998.
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:
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
Teacher's Choice Award Learning Magazine, USA
Gold Award What Toy, UK
Platinum Award Oppenheim Toy Portfolio, USA
Top Five Winner Duracell National Toy Survey, USA
Gold Award National Association of Parenting Publications, USA
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.
___________
(1) Sales of electronic learning aids by the Company's United Kingdom
subsidiary of $2.2 million, $2.1 million and $2.2 million for the years ended
December 31, 1996, 1995 and 1994, respectively, are presented gross of sales
discounts. The Company's United Kingdom subsidiary does not account for sales
discounts by product categories.
(4)
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SCIENCE ACTIVITY KITS. The Company currently markets fourteen 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
features six similar products ("Test Tube Science" products) that feature
names and characters from the "Beakman's World" television show.
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.
EDUCATIONAL BOARD GAMES. The Company sells thirteen 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 $34.95.
PRODUCT DEVELOPMENT
The Company believes that one of its greatest strengths is its ability to
develop new products. Since January 1995, the Company has introduced
approximately 110 new products and accessories. Products introduced in 1995
or 1996 accounted for approximately 26% of the Company's sales in 1996. In
1996, the Company spent approximately 13% of sales on research and
development and has spent an average of approximately 12% of its annual
sales on research and development since 1994.
In 1996, the Company reduced its research and development staff from 44 to
35 full-time employees, with most of the reduction occurring in the area of
software development. The 35 staff members consist of 8 editors, many of whom
were former classroom teachers, 4 concept developers, an 8 person graphic
arts department, 5 project managers and a variety of additional 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 into its traditional school supply and
specialty retail markets.
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 1996 sales. Approximately 43% of
the Company's sales, excluding sales made by its United Kingdom subsidiary
("U.S. sales"), were derived from the school market in 1996.
(5)
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Traditionally, teacher supply stores 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 retailers 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 2,800 of such
specialty retail outlets. The Company derived approximately 34% of its 1996
U.S. 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. 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 10% of the Company's U.S.
sales in 1996 were made through mass merchant retailers, compared to
approximately 7% in 1995 and 1994.
SOFTWARE CD-ROM. 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. In addition, the
Company sells its GeoSafari Platinum version directly to its traditional
markets.
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 larger 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 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.
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 1996, in support of the school supply and parent-teacher store
markets, the Company mailed 450,000 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.
(6)
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SPECIALTY RETAIL STORES. The Company reaches the specialty retailers through
sixteen independent sales firms which together field approximately 60
sales representatives. Advertising and promotional efforts consist of trade
shows and catalog presentations. The 1996 Toys and Games Trade catalog was
mailed to all dealers and was given to retailers at the annual Toy Fair held
in New York City in February.
In addition, the Company participates in many of the major toy, book and
gift fairs throughout the world, including the New York International Toy
Fair, the Frankfurt International Book Fair and the Nuremburg Toy Show.
Through Company literature programs promoted directly to dealers, over
four million catalogs promoting the Company's products were distributed
nationally in 1996.
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 nine 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 and the Dallas Toy Fair in
January and the New York International Toy Fair in February.
The Company's 1996 ExploraToy promotional efforts were focused on its
marketing tie-ins with two new licenses, "The Amazing Live Sea-Monkeys-R-" a
license to manufacture and sell a product line that has been popular for over
35 years, and "Kratt's Creatures-T-", a new wildlife adventure series for
children that is seen nationwide on PBS. The "Beakman's World-T-" license
continued to be strong at retail for ExploraToy. Licenses are used for
packaging, promotion and sale of the ExploraToy product line in the mass
market in lieu of direct consumer advertising.
ADDITIONAL MARKETING EFFORTS. In recent years the Company has tested several
direct response marketing approaches, both on its own and in concert with
others in order to sell product directly to end users and/or to direct
consumers to its retail base. The Company reduced its direct marketing
testing in 1996 and does not anticipate any significant testing in 1997.
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, and Singapore. The balance are
purchased from a variety of vendors located primarily in the United States.
The Company has approximately 55 overseas vendors. For some 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.
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
(7)
<PAGE>
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 expanding
in 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 hopes 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 has 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, 1996, the Company had approximately 220 full-time
employees. In addition, the Company periodically hires part-time employees
to meet seasonal market demands. Approximately 35 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 55 employees are involved in sales and marketing;
31 are involved in general administrative duties; and 96 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 54 new products in 1996, it was
unsuccessful in completing one major new product, Big Talk, which the Company
considered important for its revenue growth in 1996. This product is now
expected to be ready for initial shipment in the summer of 1997. In 1996,
approximately 26% of the Company's revenues were derived from products
introduced in 1995 or 1996. 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 1996, approximately 20% of
the Company's sales were generated by GeoSafari and related products.
Approximately 40% of the Company's 1995 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.
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
(8)
<PAGE>
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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Quarterly Information and
Seasonality."
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"), 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 180 days. Although no customer accounted for
more than 4% of the Company's sales in 1996, 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 Burt
Cutler, 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.
(9)
<PAGE>
INTERNATIONAL EXPANSION. In 1990, the Company established a distribution
subsidiary in the United Kingdom. Approximately 14% of the Company's fiscal
1996 sales, including sales by the United Kingdom subsidiary, were generated
from sales to customers outside of the United States. 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, changes 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 43% 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 under certain circumstances. 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
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.
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.
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 room for expansion at 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, 1996.
(10)
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Company's executive officers, and key employees:
NAME AGE POSITION
---- --- --------
Burton Cutler 70 Chairman of the Board
Jay A. Cutler 45 President, Chief Executive Officer
G. Reid Calcott 58 Vice Chairman, Chief Operating and
Financial Officer
James B. Whitney 45 Vice President, Marketing
Dennis J. Graham 41 Vice President, Business Development
Kelly A. Cole 45 Vice President, Warehousing and Distribution
George C. Atamian 59 Vice President, General Manager, ExploraToy
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. 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 since 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.
(11)
<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 1996
and 1995:
1996 1995
---- ----
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
March 31 $5 $3 1/4 $7 3/8 $4
June 30 4 1/8 3 6 1/2 4 3/4
September 30 3 3/8 1 7/8 7 1/4 4 3/4
December 31 3 1 1/2 6 1/8 2 3/4
As of March 17, 1997, the approximate number of shareholders of record of
the Common Stock was 117.
The Company was taxed as an S Corporation under the Internal Revenue Code
of 1986, as amended, from 1988 through April 15, 1994, when the Company
completed its initial public offering. As a result of the Company being an S
Corporation, the taxable income of the Company during such period was taxed,
for federal and state income tax purposes, directly to the persons who were
the shareholders of the Company prior to the completion of its initial public
offering rather than to the Company.
Additionally, immediately prior to the initial public offering, the Board
of Directors approved and the Company made a $10,289,000 distribution to
the S Corporation shareholders representing substantially all of the
Company's retained earnings previously taxed to them. Also, prior to the
initial public offering and consistent with historical practices, the
Board of Directors approved future distributions to the former Subchapter S
Shareholders to fund their expected income tax liabilities (up to a maximum
of $1,000,000) resulting from the Company's S Corporation status through the
date of the offering. As such, $436,000 of dividends were paid to said
shareholders in August 1994, to partially fund the payment of income taxes
associated with their pro rata share of the Company's 1994 income, and an
additional $353,000 was paid during 1995.
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.
(12)
<PAGE>
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales $41,276 $39,790 $45,640 $42,053 $31,897
Cost of sales 19,526 18,150 21,354 18,526 14,381
------- ------- ------- ------- -------
Gross profit 21,750 21,640 24,286 23,527 17,516
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing 8,216 9,242 6,943 6,179 4,721
Warehousing and distribution 3,321 3,994 3,929 4,646 3,826
Research and development 5,289 5,166 4,422 3,705 3,060
General and administrative 3,809 3,830 3,719 3,823 2,726
------- ------- ------- ------- -------
Total operating expenses 20,635 22,232 19,013 18,353 14,333
------- ------- ------- ------- -------
Operating income (loss) 1,115 (592) 5,273 5,174 3,183
Interest expense, net 281 21 104 374 181
Other income, net 479 346 208 301 325
--- --- --- --- ---
Income (loss) before
provision (benefit)
for income taxes 1,313 (267) 5,377 5,101 3,327
Provision (benefit)
for income taxes 484 (95) 881 196 135
---- ----- ------ ------ ------
Net income (loss) $829 $(172) $4,496 $4,905 $3,192
==== ===== ====== ====== ======
NET INCOME DATA (PRO FORMA
FOR YEARS PRIOR TO 1995):
Net income (loss) (1) $ 829 $ (172) $ 3,280 $ 3,050 $ 1,992
Net income (loss)
per share (1) $0.12 $(0.02) $0.49 $0.51
Weighted average shares
outstanding (2) 7,042 7,040 6,748 6,002
BALANCE SHEET DATA
(AT PERIOD END):
Working capital $18,674 $17,982 $19,432 $ 8,168 $ 7,422
Total assets 30,904 28,254 28,282 22,136 17,211
Total debt 2,295 1,394 0 7,000 5,010
Shareholders' equity 23,464 22,584 22,828 10,659 8,809
</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 and 1992 periods, 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.
(13)
<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 $39,790,000 in 1995 as sales of the Company's leading
GeoSafari product line matured and declined and the Company was unsuccessful
in launching enough new products to offset this decline. In 1996, sales of
the GeoSafari product line continued to decline but, the Company was
successful in introducing enough new products to off-set this decline and
produce an increase in revenue of 3.7 percent to $41,276,000.
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 $2.8 million, $2.7 million and $2.5 million and income before
taxes for the subsidiary was $250,000, $28,000 and $300,000 for the years
ended December 31, 1996, 1995 and 1994 respectively.
In 1993, the Company established its ExploraToy Division to develop and
market science activity products to the mass market. In 1996, this division's
revenue continued its year-on-year increase and made its first positive
contribution to the Company's earnings.
In 1993, the Company began the development of computer software products.
The first of these were introduced in late 1995. By late 1996 the Company
determined that increasing costs in the development of these products made
continuing internal development economically unfeasible. In addition,
increasing competition raised the cost of marketing computer software
products to the broad-base consumer market making the introduction of new
products into this market unprofitable. As a result, the Company discontinued
internal development and the introduction of new products to the mass market.
While it will continue to sell its existing software products in their
current channels of distribution, the Company's strategy for further
expansion provides for the purchasing or licensing of products from others
for distribution in the Company's traditional school supply and specialty
retail markets.
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)
----------------------- --------------
1996 1995
over over
1996 1995 1994 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 3.7% (12.8)%
Cost of sales 47.3 45.6 46.8 7.6 (15.0)
Gross profit 52.7 54.4 53.2 .5 (10.9)
Operating expenses:
Sales and marketing 19.9 23.2 15.2 (11.1) 33.1
Warehousing and distribution 8.1 10.1 8.6 (16.9) 1.7
Research and development 12.8 13.0 9.7 2.4 16.8
General and administrative 9.2 9.6 8.1 (.6) 3.0
Total operating expenses 50.0 55.9 41.6 (7.2) 16.9
Operating income (loss) 2.7 (1.5) 11.6 288.3 (111.2)
Interest expense, net .7 .1 .2 1238.1 (79.8)
Other income, net 1.2 .9 .5 38.4 66.3
Income (loss) before provision
(benefit)for income taxes 3.2 (.7) 11.8 591.8 (103.8)
</TABLE>
(14)
<PAGE>
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.
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 $260,000 to
$281,000 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
(15)
<PAGE>
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.
1995 COMPARED TO 1994
SALES. Sales decreased by 12.8% or $5.8 million to $39.8 million in 1995
from $45.6 million in 1994. Sales in the school market declined 8.3%, sales
in the specialty retail market declined 17.4% while sales in the ExploraToy,
private label and international markets, including the UK declined 7.4%.
Sales decreased in all of the Company markets except software which the
Company entered for the first time in 1995.
The Company believes that the decreases were due in part to production
difficulties associated with the redesign of its GeoSafari product line which
delayed its introduction, a reduction in its traditional direct marketing
activities, a less robust specialty market and the normal aging of its
product line which was not offset by adequate introduction of new products to
make up for the normal decline in its more mature products.
In addition, two of the Company's major new products, the GeoSafari
CD-ROM and the GeoSafari Theater overhead projection unit both reached the
market too late in 1995 to have a material effect on 1995 revenue.
GROSS PROFIT. The Company's gross profit decreased by 10.9% or $2.6
million to $21.6 million in 1995 from $24.3 million in 1994. When expressed
as a percentage of sales, gross margins increased to 54.4% in 1995 from 53.2%
in 1994. This increase was primarily the result of a decrease in the
proportion of lower margin product sales to the Company's private label
customers and the first year revenue from the Company's CD-ROM division which
has higher margins than the Company's traditional product lines. Mass market
and private label sales volume is expected to increase in 1996 but it is not
anticipated that this increase will have a material effect on the Company's
gross margin.
SALES AND MARKETING EXPENSE. Sales and marketing expense increased by
33.1% or $2.3 million to $9.2 million in 1995 from $6.9 million in 1994.
Sales and marketing expense increased to 23.2% of sales in 1995 from 15.2% of
sales in 1994. This increase was due to increases in literature costs and
trade-show and promotional expense in the Company's traditional products;
increases in compensation expense to support the ExploraToy line and
marketing expenditures in the CD-ROM market in advance of the introduction of
the Company's first CD-ROM product in the fourth quarter of 1995.
WAREHOUSING AND DISTRIBUTION EXPENSE. Warehousing and distribution
expense remained relatively unchanged at $4.0 million in 1995 compared to
$3.9 million in 1994. Expressed as percentage of sales, warehousing and
distribution expense increased to 10.1% compared to 8.6% in 1994. The primary
reason for the increase expressed as a percentage of sales was due to the
Company's inability to reduce warehousing and distribution costs proportional
to the decrease in sales volume because most of the Company's warehousing and
distribution costs are fixed. In addition, rent expense increased in 1995 as
a result of the addition of 40,000 square feet of space at the Company's
facility in Tennessee.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased by 16.8% or $744,000 to $5.2 million in 1995 from $4.4 million in
1994 and increased as a percentage of sales to 13.0% in 1995 from 9.7% in
1994. The increase was due primarily to the increased development expenses
associated with the Company's CD-ROM product, increased emphasis on the
development of electronic learning aids which are more costly to develop than
the Company's less complex more traditional products and the continuing
historically high levels of spending for product to be introduced in 1996 and
thereafter in spite of the reduction in revenue.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
remained relatively unchanged at $3.8 million in 1995 compared to $3.7
million in 1994 but increased as a percentage of sales to 9.6% in 1995 from
8.1% in 1994. The increase as a percentage of sales was due to decreased
sales volumes.
INTEREST EXPENSE, NET. Net interest expense decreased by 79.8% or
$83,000 to $21,000 in 1995 from $104,000 in 1994. This decrease was primarily
the result of reduction in the Company's borrowings on its revolving line of
credit made possible by the use of part of the proceeds of the Company's
initial public offering for working capital purposes and interest income
earned on short term investments made during 1995.
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 66.3% or $138,000 to $346,000 in 1995 from $208,000 in
1994. This increase was primarily a result of foreign exchange rate gains
recognized on Canadian sales during 1995 as compared to foreign exchange
losses recognized in 1994.
(16)
<PAGE>
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 season. 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
1997.
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 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 1996 or 1995, 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.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1995 1995 1995 1995
------ ------ ------- ------- ------ ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Sales $7,666 $8,653 $11,751 $13,206 $8,347 $8,278 $12,004 $11,161
Gross profit 4,298 4,475 6,139 6,838 4,458 4,765 6,336 6,081
Operating expenses:
Sales and marketing 2,022 1,745 2,189 2,260 1,571 1,799 2,170 3,702
Warehousing and distribution 882 929 751 759 1,045 903 986 1,060
Research and development 1,406 1,525 1,205 1,153 1,499 1,298 1,180 1,189
General and administrative 1,005 939 971 894 953 899 1,220 758
Operating income (loss) (1,017) (663) 1,023 1,772 (610) (134) 780 (628)
Income (loss) before
provision (benefit) for
income taxes (949) (622) 973 1,911 (475) 44 820 (656)
Net income (loss) (584) (372) 593 1,192 (286) 28 511 (425)
Net income (loss) per share $(0.08) $(0.05) $0.08 $0.17 (0.04) .00 .07 (0.06)
</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 and changes in the purchased cost of
products. 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
(17)
<PAGE>
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 was $0.2 million in 1996
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 as these
tax refunds were received during 1996. Net cash used in operating activities
was $1.2 million in 1995 compared to cash provided by operating activities of
$2.8 million in 1994. This increase in the use of cash by operations was
primarily due to the net loss of $0.2 million in 1995 compared to the net
income of $4.5 million in 1994, an increase in inventory of $2.3 million, a
decrease in accrued expenses of $0.9 million and a decrease in income taxes
payable of $1.5 million. These increases in the use of cash were partially
offset by a decrease in accounts receivable of $1.5 million.
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.
Financing activities provided cash of $1.0 million in 1995 compared to $0.9
million in 1994. Financing activities in 1995 consisted of proceeds of
long-term debt associated with the purchase of the Company's new office
building and a cash distribution paid to shareholders of the former
sub-chapter S corporation to pay taxes on earnings allocated to these
shareholders from January 1, to April 15, 1994. This represented the final
payment to reimburse former sub-chapter S shareholders for such taxes.
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 December 31, 1996, the Company had outstanding borrowings
of $1 million under its line of credit. At December 31, 1995 and 1994, the
Company had no outstanding borrowings against its line of credit. The
Company's capital expenditures were $0.5 million in 1996, $3.9 million in
1995 and $1.8 million in 1994. The Company anticipates that 1997 capital
expenditures will be less than $1 million with these expenditures primarily
in the areas of new product tooling and the purchase of equipment to automate
warehousing activities; purchase of said equipment commenced in the fourth
quarter of 1996. 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.
(18)
<PAGE>
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 AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
(19)
<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 27, 1997,
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the year ended December 31, 1996. 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 27, 1997,
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the year ended December 31, 1996.
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 27, 1997, which will be
filed with the Securities and Exchange Commission no later than 120 days
after the close of the year ended December 31, 1996.
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
27, 1997, which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended December 31, 1996.
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 27, 1997, which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of
the year ended December 31, 1996.
(20)
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8 - K
PAGE
(a)(1) Financial Statements:
Report of Deloitte & Touche LLP, Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-2
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1996 F-4
Consolidated Statements of Shareholders' Equity for each
of the three years in the period ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1996 F-6
Notes to Consolidated Financial Statements F-8
(a)(2) Financial Statement Schedule *
Independent Auditors' Report 23
Schedule II - Valuation and Qualifying Accounts 24
(b) Reports on Form 8-K - No reports on Form 8-K were filed
during the quarter ended December 31, 1996.
(c) Index to Exhibits 25
* 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.
(21)
<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 26, 1997.
EDUCATIONAL INSIGHTS, INC.
(Registrant)
By: ___________________________
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 26, 1997.
Signature Title
--------- -----
_____________________________________ Chairman of the Board
Burton Cutler
_____________________________________ President and Chief Executive
Jay Cutler Officer
_____________________________________ Vice Chairman and Chief
G. Reid Calcott Operating and Financial Officer
(Principal Financial Officer)
____________________________________ Controller and Secretary
Stephen E. Billis (Principal Accounting Officer)
____________________________________ Director
Gerald Bronstein
(22)
<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, 1996 and
1995 and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996. 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, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 21, 1997
F-1
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- ------------------------------------------------------------------------------
ASSETS 1996 1995
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 1,018,000 $ 378,000
Accounts receivable, net of allowance
for doubtful accounts of $373,000 in
1996 and $394,000 in 1995 9,779,000 9,459,000
Inventory 12,139,000 10,309,000
Prepaid expenses and other assets 663,000 439,000
Income taxes receivable 749,000
Other receivables 170,000 16,000
Deferred income taxes 808,000 716,000
----------- -----------
Total current assets 24,577,000 22,066,000
----------- -----------
PROPERTY AND EQUIPMENT, Net 5,446,000 5,844,000
----------- -----------
OTHER ASSETS:
Deposits 23,000 72,000
Other 858,000 272,000
----------- -----------
Total other assets 881,000 344,000
----------- -----------
TOTAL $30,904,000 $28,254,000
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
(Continued)
F-2
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- -----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
---- ----
CURRENT LIABILITIES:
Current portion of long-term debt $110,000 $99,000
Line of credit 1,000,000
Accounts payable 2,512,000 2,463,000
Accrued expenses 1,584,000 1,522,000
Income taxes payable 440,000
Deferred Income 257,000
----------- -----------
Total current liabilities 5,903,000 4,084,000
----------- -----------
LONG-TERM DEBT 1,185,000 1,295,000
----------- -----------
DEFERRED INCOME TAXES 352,000 291,000
----------- -----------
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 140,000 89,000
Retained earnings 4,680,000 3,851,000
----------- -----------
Total shareholders' equity 23,464,000 22,584,000
----------- -----------
TOTAL $30,904,000 $28,254,000
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
(Concluded)
F-3
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
- ------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
SALES $41,276,000 $39,790,000 $45,640,000
COST OF SALES 19,526,000 18,150,000 21,354,000
----------- ----------- -----------
GROSS PROFIT 21,750,000 21,640,000 24,286,000
----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing 8,216,000 9,242,000 6,943,000
Warehousing and distribution 3,321,000 3,994,000 3,929,000
Research and development 5,289,000 5,166,000 4,422,000
General and administrative 3,809,000 3,830,000 3,719,000
----------- ----------- -----------
Total operating expenses 20,635,000 22,232,000 19,013,000
----------- ----------- -----------
OPERATING INCOME (LOSS) 1,115,000 (592,000) 5,273,000
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (304,000) (159,000) (135,000)
Interest income 23,000 138,000 31,000
Other income, net 479,000 346,000 208,000
----------- ----------- -----------
Total other income (expense) 198,000 325,000 104,000
----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES 1,313,000 (267,000) 5,377,000
PROVISION (BENEFIT) FOR
INCOME TAXES 484,000 (95,000) 881,000
----------- ----------- -----------
NET INCOME (LOSS) $ 829,000 (172,000) $ 4,496,000
=========== =========== ===========
NET INCOME (LOSS) DATA (PRO
FORMA FOR 1994):
INCOME (LOSS) BEFORE INCOME
TAXES, AS REPORTED $ 1,313,000 $ (267,000) $ 5,377,000
PROVISION (BENEFIT) FOR
INCOME TAXES 484,000 (95,000) 2,097,000
----------- ----------- -----------
NET INCOME (LOSS) $ 829,000 $ (172,000) $ 3,280,000
=========== =========== ===========
NET INCOME (LOSS) PER SHARE $ 0.12 $ (0.02) $ 0.49
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 7,042,000 7,040,000 6,748,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
- -------------------------------------------------------------------------------
CUMULATIVE
COMMON TRANSLATION RETAINED
STOCK ADJUSTMENT EARNINGS TOTAL
---------- ------ -------- ----------
BALANCE, DECEMBER 31, 1993 5,000 49,000 10,605,000 10,659,000
Net proceeds from issuance
of common stock 18,639,000 18,639,000
Translation adjustment 16,000 16,000
Distributions to
shareholders (10,982,000) (10,982,000)
Net income 4,496,000 4,496,000
----------- ------- ---------- ----------
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
----------- -------- ---------- ----------
----------- -------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EDUCATIONAL INSIGHTS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 829,000 $ (172,000) $4,496,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts and sales returns 133,000 191,000 316,000
Provision for inventory obsolescence (240,000) (129,000) 470,000
Deferred income taxes (31,000) 330,000 (755,000)
Depreciation and amortization 903,000 794,000 530,000
Changes in operating assets and liabilities:
Accounts receivable (317,000) 1,469,000 (4,162,000)
Inventory (1,493,000) (2,256,000) 1,230,000
Prepaid expenses and other current assets (224,000) (147,000) 4,000
Other receivables (139,000) (6,000) (7,000)
Other assets (506,000) 484,000 179,000
Accounts payable (202,000) 569,000 (356,000)
Accrued expenses 87,000 (868,000) 188,000
Deferred income 257,000
Income taxes payable/receivable 1,157,000 (1,474,000) 633,000
----------- ------------ ------------
Net cash provided by (used in) operating activities 214,000 (1,215,000) 2,766,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (505,000) (3,930,000) (1,754,000)
Decrease in amounts due from shareholder 202,000
----------- ------------ ------------
Net cash used in investing activities (505,000) (3,930,000) (1,552,000)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayment of) line of credit 1,000,000 (7,000,000)
Proceeds from long-term debt 1,480,000
Repayment of long-term debt (99,000) (86,000)
Proceeds from issuing common stock 19,437,000
Payment of costs relating to initial public offering (798,000)
Cash distributions to shareholders (353,000) (10,725,000)
----------- ------------ ------------
Net cash provided by financing activities 901,000 1,041,000 914,000
----------- ------------ ------------
Effect of exchange rate changes on cash 30,000 (2,000) 14,000
----------- ------------ ------------
</TABLE>
See accompanying notes to consolidate financial statements.
(Continued)
F-6
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH $ 640,000 $(4,106,000) $2,142,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 378,000 4,484,000 2,342,000
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $1,018,000 $ 378,000 $4,484,000
----------- ------------ ------------
----------- ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 288,000 $ 218,000 $ 175,000
Income taxes $1,049,000 $ 963,000
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, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
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
UnitedStates and Canada.
Trading of the Company's common stock on The Nasdaq Stock Market commenced
following the initial public offering of its stock in April 1994.
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 revenues
and expenses for the reporting period. Actual results could differ from
those estimates. During 1996, the Company disposed of certain obsolete
inventory on terms more favorable than anticipated; therefore, it revised
its estimate of potential obsolete inventory resulting in a reduction of
the reserve of $179,000 in the fourth quarter.
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 $75,000 at both December 31, 1996 and 1995. 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:
Building and improvements 39 years
Furniture, fixtures and equipment 5 years
Molds, tools and dies 3 years
Leasehold improvements 5 years
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 1996, 1995 and 1994, which are included in other
income in the accompanying consolidated statements of income, were
$267,000, $346,000 and $317,000, respectively.
F-8
<PAGE>
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.
The Company had elected to be taxed as an S corporation under the
provisions of the Internal Revenue Code up until the effective date of
the initial public offering (see Note 2). Under those provisions, the
Company did not pay federal or state corporate income taxes on its
taxable income. Instead, the shareholders were liable for federal and
state income taxes on the Company's taxable income. The State of
California has adopted the provisions of the S corporation election;
however, there was a franchise tax charged at the corporate level. In
connection with its initial public offering, the Company's Subchapter S
election was terminated, and accordingly, the Company is now subject to
federal and state income taxes. For information purposes, the
consolidated statements of operations also include pro forma amounts for
the income taxes that would have been recorded if the Company had
historically been a C corporation during all of 1994.
OTHER INCOME, NET - Other income is presented in the accompanying
consolidated statements of income net of other expenses of $169,000,
$175,000 and $225,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
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 considered to approximate its
fair value because the interest rate of this instrument approximates the
current rates offered to the Company.
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 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 years ended December
31, 1995 and 1994.
NET INCOME PER SHARE (PRO FORMA FOR 1994) - Net income per share is
based on the weighted average number of shares of common stock
outstanding and dilutive common equivalent shares from stock options
(using the treasury stock method), if any. The shares outstanding for
all periods give effect to the stock split described in Note 2 as well
as 1,000,000 shares deemed to be outstanding in 1994, which represent
the approximate number of shares deemed to have been sold by the Company
(at the initial public offering price of $10.00 per share) to fund the S
corporation distribution, as said dividends were paid from the proceeds
of the offering. Common and common equivalent shares issued during the
12-month period prior to the proposed offering have been included in the
calculation using the treasury stock method as if they were outstanding
for the 1994 fiscal year.
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
F-9
<PAGE>
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 1996 and 1995, the net income and net income per share would
have been $655,000 and $0.09, respectively, for the year ended December
31, 1996 and net loss and net loss per share would have been $295,000
and $0.04, respectively, for the year ended December 31, 1996. 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 1995
amounts to conform with the current year's presentation.
2. INITIAL PUBLIC OFFERING
The Company completed its initial public offering on April 15, 1994 and
sold 2,090,999 shares of common stock at $10.00 per share, generating
net proceeds of $18,639,000. In connection with the initial public
offering of common stock, the Company's Board of Directors declared a 30
for 1 stock split of its common stock and increased the number of shares
authorized to 30,000,000. In addition, 10,000,000 shares of no par value
preferred stock were authorized. All per share amounts in the
accompanying consolidated financial statements have been adjusted
retroactively to give effect to these changes.
Additionally, immediately prior to the initial public offering, the
Board of Directors approved and the Company made a $10,289,000
distribution to the S corporation shareholders, representing
substantially all of the Company's retained earnings previously taxed to
them. Also, prior to the initial public offering and consistent with
historical practices, the Board of Directors approved future
distributions to the former S corporation shareholders to fund their
expected income tax liabilities (up to a maximum of $1,000,000)
resulting from the Company's S corporation status through the date of
the offering. As such, $436,000 of dividends were paid to said
shareholders in August 1994 to partially fund the payment of income
taxes associated with their pro rata share of the Company's 1994 income,
and the final distribution amounting to $353,000 was paid during 1995.
3. PROPERTY AND EQUIPMENT
The following are the components of property and equipment:
1996 1995
---- ----
Land $ 676,000 $ 676,000
Building and improvements 2,047,000 2,042,000
Machinery and equipment 899,000 943,000
Office furniture and fixtures 2,086,000 1,991,000
Vehicles 22,000 22,000
Molds, tools and dies 3,126,000 2,679,000
Leasehold improvements 233,000 231,000
---------- ---------
Total 9,089,000 8,584,000
Less accumulated depreciation
and amortization 3,643,000 2,740,000
---------- ----------
Property and equipment - net $5,446,000 $5,844,000
========== ==========
F-10
<PAGE>
4. 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 (8.25% at December 31, 1996) or 1
3/4 % above the London Interbank Offer Rate (at the Company's option).
The line of credit agreement expires June 3, 1997. The agreement
requires the maintenance of certain financial ratios, annual net income
amounts and tangible net worth amounts, and provides for various
restrictions, including limitations on advances to its subsidiary,
capital expenditures, and additional indebtedness.
Outstanding letters of credit, primarily related to imports from
off-shore manufacturers, amounted to $234,000 at December 31, 1996.
5. 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 $110,000 in 1997, $121,000 in 1998, $134,000 in 1999,
$148,000 in 2000, $165,000 in 2001 and $617,000 thereafter.
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
1996 1995
Federal
Current $469,000 $(425,000)
Deferred (27,000) 342,000
-------- ---------
442,000 (83,000)
-------- ---------
State
Current 46,000
Deferred (4,000) (12,000)
-------- ---------
42,000 (12,000)
-------- ---------
$484,000 $ (95,000)
-------- ---------
-------- ---------
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:
YEAR ENDED DECEMBER 31,
1996 1995
Inventory allowances $254,000 $ 347,000
Inventory capitalization 118,000 162,000
Accounts receivable allowance 159,000 167,000
State taxes 58,000 64,000
Vacation accrual 84,000 89,000
Other accrued liabilities 101,000 19,000
Prepaid expenses (66,000) (132,000)
Deferred revenue 100,000
--------- ---------
Deferred tax assets $ 808,000 $ 716,000
========= =========
Deferred tax liability - depreciation $(352,000) $ 291,000
========= =========
F-11
<PAGE>
A reconciliation of income tax expense (benefit) to the federal statutory
rate follows;
YEAR ENDED DECEMBER 31,
1996 1995
Federal income tax at the statutory rate $446,000 $(91,000)
State taxes, net of federal benefit 33,000 (8,000)
Other 5,000 4,000
-------- --------
$484,000 $(95,000)
======== ========
The pro forma adjustments for federal and state income taxes which would
have been recorded had the Company not been an S Corporation for a
portion of 1994, based on the tax laws in effect during the period
presented, consist of the following:
YEAR ENDED DECEMBER 31,
1994
Federal and state income tax provision,
as previously reported $ 881,000
Pro forma adjustments:
Federal 1,107,000
State 109,000
-------
Pro forma income tax provision $2,097,000
==========
7. 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, 1996, 1995 and 1994 was
$320,000, $462,000 and $496,000, respectively, of which $300,000,
$428,000, and $439,000, respectively, resulted from leases with related
parties.
Future minimum cash lease payments under non-cancelable
operating leases as of December 31, 1996 are as follows:
YEAR ENDING DECEMBER 31,
1997 $ 304,000
1998 304,000
1999 276,000
2000 262,000
2001 262,000
Thereafter 91,000
-------
$1,499,000
==========
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 each of the years ended
F-12
<PAGE>
December 31, 1995 and 1994 (see Note 10). Thereafter, the family member
will 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, 1996, 1995 and 1994 was $88,000, $150,000 and $150,000,
respectively. In addition, this family member provides certain
consulting services relating to the Company's new product development
activities. Compensation for said services amounted to $50,000 for the
year ended December 31, 1996. There was no such compensation for the
years ended December 31, 1995 or 1994.
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, 1996 of $277,000 is
included in other assets in the accompanying consolidated balance sheet.
8. 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. Contribution expense for the years ended December
31, 1996, and 1994 was $50,000 and $350,000, respectively. There was no
contribution expense in 1995. 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.
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, 1996, 1995 and 1994 were $44,000, $40,000, and
$36,000, respectively. All participants vest 100% in Company
contributions each December 31.
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 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, 1996, 1995 and 1994 and changes during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- ---------------------- ------------------
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 1 253,680 $3.31 248,620 $6.88 198,000 $7.37
Granted 63,500 1.87 12,500 3.31 61,000 5.37
Canceled 40,270 3.31 248,620 6.88 10,380 7.37
Repriced 241,180 3.31
------- ------- -------
Outstanding at December 31 276,910 2.98 253,680 3.31 248,620 6.88
======= ======= =======
Options exerciseable at
year-end 122,773 60,060 -
Weighted average fair value
of options granted during
the year $1.16 $2.04
</TABLE>
F-13
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<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 12/31/96 Life Price at 12/31/96 Price
--------------- ----------- ----------- -------- --------------- ----------
<S> <C> <C> <C> <C> <C>
1.87 63,500 10.0 1.87 ------- -----
3.31 213,410 7.3 3.31 122,826 3.31
------- -------
276,910 7.9 122,826 3.31
======= =======
</TABLE>
10. COMMITMENTS
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.
Under certain of the agreements, the Company was obligated to pay
minimum royalties aggregating approximately $160,000 at December 31,
1995. There were no such amounts at December 31, 1996. Such minimum
royalties were capitalized as other assets and included in accrued
expenses in the accompanying consolidated balance sheet. Certain other
license agreements required 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 $350,000 at
December 31, 1996 and $100,000 at December 31, 1995.
*********
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, 1996 and 1995, and for each of the three
years in the period ended December 31, 1996, and have issued our report
thereon dated February 21, 1997; 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
February 21, 1997
(23)
<PAGE>
SCHEDULE II
EDUCATIONAL INSIGHTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
THREE YEAR PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS DEDUCTIONS BALANCES
BEGINNING CHARGED TO FROM AT END
OF YEAR OPERATIONS RESERVES OF YEAR
--------- ---------- --------- --------
<S> <C> <C> <C> <C>
Allowances for doubtful accounts year ended:
December 31, 1994 . . . . . . . . . . . . . . . . . . . 57,000 316,000 99,000 274,000
December 31, 1995 . . . . . . . . . . . . . . . . . . . 274,000 191,000 146,000 319,000
December 31, 1996 . . . . . . . . . . . . . . . . . . . 319,000 133,000 154,000 298,000
Reserve for sales returns year ended:
December 31, 1994 . . . . . . . . . . . . . . . . . . . 100,000 ------- ------- 100,000
December 31, 1995 . . . . . . . . . . . . . . . . . . . 100,000 ------- 25,000 75,000
December 31, 1996 . . . . . . . . . . . . . . . . . . . 75,000 ------- ------- 75,000
Reserve for inventory obsolescence year ended:
December 31, 1994 . . . . . . . . . . . . . . . . . . . 534,000 470,000 -------- 1,004,000
December 31, 1995 . . . . . . . . . . . . . . . . . . . 1,004,000 ------- 129,000 875,000
December 31, 1996 . . . . . . . . . . . . . . . . . . . 875,000 ------- 240,000 635,000
</TABLE>
(24)
<PAGE>
INDEX TO EXHIBITS
Exhibit Sequentially
Number Description Numbered Page
- ------- ----------- -------------
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
16 Letter Re Change in Certifying Accountant (1)
27 Subsidiaries of the Company (1)
* 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.
(25)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,018
<SECURITIES> 0
<RECEIVABLES> 10,152
<ALLOWANCES> 373
<INVENTORY> 12,139
<CURRENT-ASSETS> 24,577
<PP&E> 9,089
<DEPRECIATION> 3,643
<TOTAL-ASSETS> 30,904
<CURRENT-LIABILITIES> 5,903
<BONDS> 0
0
0
<COMMON> 18,644
<OTHER-SE> 4,820
<TOTAL-LIABILITY-AND-EQUITY> 30,904
<SALES> 41,276
<TOTAL-REVENUES> 41,276
<CGS> 19,526
<TOTAL-COSTS> 19,526
<OTHER-EXPENSES> 20,635
<LOSS-PROVISION> 133
<INTEREST-EXPENSE> 304
<INCOME-PRETAX> 1,313
<INCOME-TAX> 484
<INCOME-CONTINUING> 829
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 829
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0
</TABLE>
