<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the transition period
from __________ to __________
Commission File Number: 0-23606
EDUCATIONAL INSIGHTS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2392545
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16941 KEEGAN AVENUE
CARSON, CA 90746
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 884-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to 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 No X
--- ---
As of October 29, 1999 there were 7,040,000 shares of common stock outstanding.
Total number of sequential There are no Exhibits, hence no Index page.
pages: 10
-------
Page 1 of 10 sequentially numbered pages.
<PAGE>
PART I. ITEM 1. FINANCIAL STATEMENTS
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited, except for December 31, 1998 balance sheet information)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 514 $ 748
Accounts receivable, less allowances 9,985 8,520
of $331 in 1999 and $551 in 1998
Inventory 12,722 12,075
Income taxes receivable 214 230
Other receivables 27 55
Prepaid expenses and other current assets 550 371
Deferred income taxes 1,582 1,558
-------------- -------------
Total current assets 25,594 23,557
-------------- -------------
PROPERTY AND EQUIPMENT, Net 4,690 5,088
-------------- -------------
OTHER ASSETS 948 634
-------------- -------------
TOTAL $ 31,232 $ 29,279
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 134 $ 134
Line of credit 4,313 3,750
Accounts payable 2,616 1,697
Accrued expenses 1,922 1,472
Deferred income 41 57
------------ -------------
Total current liabilities 9,026 7,110
------------ -------------
LONG-TERM DEBT 830 930
------------ -------------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 10,000,000 shares authorized;
no shares issued
Common stock, no par value; 30,000,000 shares authorized;
7,040,000 shares issued in 1999 and 1998 18,644 18,644
Cumulative translation adjustment 129 134
Retained earnings 2,603 2,461
------------ -------------
Total shareholders' equity 21,376 21,239
------------ -------------
TOTAL $ 31,232 $ 29,279
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2 of 10 sequentially numbered pages.
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine-months Ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $13,435 $12,157 $30,109 $27,152
COST OF SALES 7,229 6,424 16,085 13,899
-------------- ------------- ------------- --------------
GROSS PROFIT 6,206 5,733 14,024 13,253
-------------- ------------- ------------- --------------
OPERATING EXPENSES:
Sales and marketing 2,289 2,132 5,652 5,428
Warehousing and distribution 698 862 2,107 2,496
Research and development 808 928 2,632 3,178
General and administrative 1,121 880 3,042 2,725
-------------- ------------- ------------- --------------
Total operating expenses 4,916 4,802 13,433 13,827
-------------- ------------- ------------- --------------
OPERATING INCOME (LOSS) 1,290 931 591 (574)
-------------- ------------- ------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (174) (138) (363) (247)
Interest income 4 4 16 17
Other income (expense), net 123 (53) (7) (190)
-------------- ------------- ------------- --------------
Total other income (expense) (47) (187) (354) (420)
-------------- ------------- ------------- --------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 1,243 744 237 (994)
PROVISON (BENEFIT) FOR INCOME TAXES 443 282 95 (389)
-------------- ------------- ------------- --------------
NET INCOME (LOSS) 800 462 142 (605)
-------------- ------------- ------------- --------------
OTHER COMPREHENSIVE INCOME -
Foreign currency translation adjustments
(Net of tax of $5 and $4, $(3) and $6 for the three
and nine month periods ended September 30, 1999
and 1998, respectively.) 9 6 (5) 10
-------------- ------------- ------------- --------------
COMPREHENSIVE INCOME $ 809 $ 468 $ 137 $ (595)
============== ============= ============= ==============
Net Income (Loss) Per Share - Basic and Diluted $ 0.11 $ 0.07 $ 0.02 $(0.09)
============== ============= ============= ==============
Weighted Average Number of
Common Shares Outstanding - Basic 7,040 7,040 7,040 7,040
============== ============= ============= ==============
Weighted Average Number of
Common Shares Outstanding - Diluted 7,137 7,040 7,141 7,040
============== ============= ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 10 sequentially numbered pages.
<PAGE>
<TABLE>
<CAPTION>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine-months Ended
September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $142 $(605)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts and sales returns 272 162
Provision for inventory obsolescence 373 124
Depreciation 954 748
Deferred income taxes (24)
Changes in operating assets and liabilities:
Accounts receivable (1,767) (131)
Inventory (1,028) (4,603)
Income taxes receivable 16 (392)
Other receivables 28 133
Prepaid expenses and other current assets (179) (140)
Other assets (310) (576)
Accounts payable 948 108
Accrued expenses 450 354
Deferred income (16) (45)
Income taxes payable (35)
--------------- ---------------
Net cash used in operating activities (141) (4,898)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (556) (609)
--------------- ---------------
Net cash used in investing activities (556) (609)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in line of credit 563 6,250
Repayments of long-term debt (100) (90)
--------------------------------
Net cash provided by financing activities 463 6,160
--------------- ---------------
Effect of exchange rate changes on cash 9
--------------- ---------------
NET INCREASE (DECREASE) IN CASH (234) 662
CASH, BEGINNING OF PERIOD 748 235
--------------- ---------------
CASH, END OF PERIOD $514 $897
=============== ===============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period for:
Interest $373 $217
Income taxes paid $111 $ 28
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 10 sequentially numbered pages.
<PAGE>
EDUCATIONAL INSIGHTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Educational Insights, Inc. (the
"Company") include all of the accounts of the Company and its wholly owned
subsidiary. All significant inter-company balances and transactions have been
eliminated in consolidation.
The interim consolidated financial statements are not audited, but include all
adjustments (including normal recurring adjustments) which are, in the opinion
of management, necessary for a fair representation of the financial position,
results of operations and cash flows for the period.
The consolidated financial statements as presented herein should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto as filed with the Securities and Exchange Commission and included
in the Company's Form 10-K for the year ended December 31, 1998. The Company's
fiscal year ends December 31. The results of operations for the period ended
September 30, 1999 are not indicative of the results that might be expected for
the full fiscal year.
Certain reclassifications have been made to the 1998 amounts to conform with the
current year's presentation.
2. INVENTORY
Inventory consists principally of finished goods held for sale and are stated at
the lower of cost or market. Cost is determined using the first-in, first-out
method.
3. LINE OF CREDIT
On June 30, 1999, the Company entered into a new revolving line of credit
agreement with a bank, which is collateralized by substantially all of the
Company's assets. Under the revolving line of credit agreement, which expires
June 30, 2001, the Company may borrow up to $8 million from January through
June and up to $10 million from July through December. Advances bear interest
at one half-percentage point above the bank's reference rate (8.25% at
September 30, 1999). The agreement requires the maintenance of minimum net
income amounts and net worth amounts, and provides for various restrictions
including limitations on capital expenditures and additional indebtedness. At
September 30, 1999, the Company had $4,313,000 of outstanding borrowings
against this line of credit
Page 5 of 10 sequentially numbered pages.
<PAGE>
PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and accompanying notes included in
Part I - Item 1 of this Quarterly Report, and the audited consolidated financial
statements and accompanying notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
The Company's business is highly seasonal. Typically, sales and
operating income are highest during the third and fourth quarters and lowest
during the first and second quarters. This seasonal pattern is primarily due to
the increased demand for the Company's products during the "back-to-school" and
year-end holiday selling seasons.
SALES.
Sales increased by 10.5 % or $1,278,000 to $13,435,000 in the quarter
ended September 30, 1999, from $12,157,000 in the quarter ended September 30,
1998.
Sales increased by 10.9% or $2,957,000 to $30,109,000 for the
nine-month period ended September 30, 1999 from $27,152,000 for the nine-month
period ended September 30, 1998.
The increases for both the quarter and the nine-month period were
primarily due to increased sales in the specialty toy market principally from
sales to the larger specialty retail toy store chains.
GROSS PROFIT.
Gross profit margin as a percentage of sales decreased 1.0 percentage
point to 46.2% for the quarter ended September 30, 1999 from 47.2% for the
quarter ended September 30, 1998.
Gross profit margin as a percentage of sales decreased 2.2 percentage
points to 46.6% for the nine-month period ended September 30, 1999 from 48.8%
for the nine-month period ended September 30, 1998.
The decrease in gross profit margins on both a quarterly and
year-to-date basis was primarily due to the change in product mix of sales to
the school and specialty retail markets resulting in a higher percentage of
sales of certain lower margined products, increased depreciation due to the
higher levels of new product tooling purchased in 1998 compared to 1997, and
higher sales allowances and material handling charges related to the Company's
UK subsidiary.
SALES AND MARKETING EXPENSE.
Sales and marketing expense increased by 7.4% or $157,000 to $2,289,000
for the quarter ended September 30, 1999 compared to $2,132,000 for the same
quarter of 1998.
Sales and marketing expense increased by $224,000 to $5,652,000 for the
nine-month period ended September 30, 1999 compared to $5,428,000 for the same
period in 1998. However, as a percentage of sales, sales and marketing expense
decreased from 17.5% to 17.0% for the quarter and from 20.0% to 18.8% for the
nine-month period.
WAREHOUSING AND DISTRIBUTION EXPENSE.
Warehousing and distribution expense decreased $164,000 to $698,000 or
5.2% of sales for the quarter ended September 30, 1999 compared to $862,000 or
7.1% of sales for the same quarter of 1998.
Warehousing and distribution expense decreased $389,000 to $2,107,000
or 7.0% of sales for the nine-month period ended September 30, 1999 compared to
$2,496,000 or 9.2% of sales for the same period in 1998. The decrease in
warehousing costs for both the quarterly and the nine-month periods is due in
part to increased efficiency resulting from the implementation of a new,
automated warehouse management system in 1998.
Page 6 of 10 sequentially numbered pages.
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSE.
Research and development expense decreased $120,000 to $808,000 or 6.0%
of sales for the quarter ended September 30, 1999 compared to $928,000 or 7.6%
of sales for the same quarter in 1998.
Research and development expense decreased $546,000 to $2,632,000 or
8.7% of sales for the nine-month period ended September 30, 1999 compared to
$3,178,000 or 11.7% of sales for the same period in 1998.
The decrease in research and development expense on both a quarterly
and year-to-date basis was due primarily to the reorganization of the research
and development department in 1999 as well as the limited use of outside
consultants for product development in 1999 compared to 1998.
GENERAL AND ADMINISTRATIVE EXPENSE.
General and administrative expense increased $241,000 to $1,121,000 or
8.3% of sales for the quarter compared to $880,000 or 7.2% of sales for the
third quarter of 1998.
General and administrative expense increased $317,000 to $3,042,000 or
10.1% of sales for the nine-month period ended September 30, 1999 compared to
$2,725,000 or 10.0% of sales for the same period of 1998.
The increase in general and administrative expense on both a quarterly
and year-to-date basis is primarily due to a partial reversal of the profit
sharing accrual in 1998 which did not occur in 1999, increased compensation
expense resulting from personnel changes, and a higher provision for bad debt
due to the higher sales volume in 1999 compared to the same periods in 1998.
INTEREST EXPENSE.
Interest expense increased $36,000 to $174,000 for the quarter ended
September 30, 1999 compared to $138,000 for the same quarter of 1998 as a result
of increased borrowings under the Company's line of credit.
For the nine-month period ended September 30, 1999, interest expense
increased by $116,000 to $363,000 compared to $247,000 for same period of 1998
as a result of increased borrowings under the Company's line of credit.
OTHER INCOME AND EXPENSE.
Other income increased by $176,000 to $123,000 for the quarter ended
September 30, 1999 compared to expense of $53,000 for the same quarter in 1998.
For the nine-month period ended September 30, 1999, other expense
decreased $183,000 to $7,000 compared to $190,000 for the same period in 1998.
The decrease in other expense on both a quarterly and year-to-date
basis was principally due to larger foreign exchange gains recorded at the
Company's UK subsidiary during the periods as compared to the same periods in
1998. In addition, foreign exchange gains on sales to Canada were experienced in
1999 due to the strengthening Canadian dollar, whereas there was a small foreign
exchange loss on sales to Canada experienced in 1998.
LIQUIDITY & CAPITAL RESOURCES
In recent years, the Company's working capital needs have been met
through funds generated from operations and from the Company's revolving line of
credit. The Company's principal need for working capital has been to meet peak
inventory and accounts receivable requirements associated with its seasonal
sales patterns. The Company increases inventory levels during the spring and
summer months in anticipation of increasing shipments in the summer and fall.
Accounts receivable have historically increased during the summer and fall
because of the Company's use of "dating" programs wherein sales are made to the
Company's customers for which payment is deferred for one to three months based
on the size of the sales orders. Due to said sales patterns, the largest
customer orders are shipped during the summer and fall, hence increasing
accounts receivable balances during the third and fourth quarters.
Page 7 of 10 sequentially numbered pages.
<PAGE>
For the nine-month period ended September 30, 1999, the Company's
primary sources of funds were the net increase in borrowings under its revolving
line of credit in the amount of $563,000 and an increase in accounts payable of
$948,000.
The principal uses of cash during the period ended September 30, 1999,
were an increase in accounts receivable of $1,767,000 and an increase in
inventory of $1,028,000 due to the seasonal nature of the Company's business
cycle. Capital spending of $556,000 during the period was primarily for tooling
relating to new products.
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 30, 2001, the Company may
borrow up to $8 million from January through June and up to $10 million from
July through December. Advances bear interest at one half-percentage point above
the bank's reference rate (8.25% at September 30, 1999). The agreement requires
the maintenance of minimum net income amounts and net worth amounts, and
provides for various restrictions including limitations on capital expenditures
and additional indebtedness. At September 30, 1999, the Company had $4,313,000
of outstanding borrowings against this line of credit.
The Company believes that borrowings available under the revolving line
of credit and anticipated funds from operations will satisfy the Company's
projected working capital and capital expenditure requirements for at least the
next 12 months.
YEAR 2000 UPDATE
The Company is continuing the process of addressing the Year 2000
problem with an overall goal of ensuring that its critical systems, devices and
business applications are suitable for continued use beyond 1999. The Company
has completed its assessment phase wherein all of its hardware and software
systems and all of the embedded systems contained in the Company's buildings,
plant, equipment and other infrastructure have been assessed as to whether they
will consistently and properly recognize the year 2000.
The business accounting software and hardware, as well as certain
warehouse management software are believed to be the Company's only critical
systems with respect to which the Year 2000 problem was known to exist. The
Company used primarily external resources to reprogram or replace and test this
software and hardware for Year 2000 compliance. With respect to the business
accounting software and hardware, the Company completed this phase by the end of
1998. The upgrade or replacement of other critical and non-critical systems and
devices was completed by June 30, 1999. The requirements for the correction of
Year 2000 issues were based on management's best knowledge and belief. The total
cost to the Company of these Year 2000 compliance activities have not been
material to its results of operations, liquidity or capital resources. None of
the Company's other information technology projects have been delayed due to the
implementation of Year 2000 remediation efforts.
Based on the nature of the Company's business and the fact that no individual
supplier or customer is material to its operations as a whole, management
believes that the Year 2000 issue is not reasonably likely to have a materially
adverse effect on the Company's results of operations, liquidity and financial
condition. However, the Company currently anticipates purchasing a limited
quantity of additional inventory in December of 1999 to enhance its ability to
fill anticipated sales order in the early months of the year 2000. Should the
above-described modifications to the Company's systems not adequately address
the Year 2000 problem, the most likely worst case scenario is that there would
be delays in the billing and collection of accounts receivable and accounts
payable payments would be processed manually. The above does not address all
possible catastrophic events including, but not limited to, failure of the power
grid or area wide telecommunications systems as the Company is not aware that a
material disruption in these basic infrastructures is reasonably likely to
occur.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, this Report
contains forward-looking statements which involve a number of risks and
uncertainties, including but not limited to continued successful development and
acceptance of new products, dependence on off-shore contract manufacturers,
competitive factors, dependence on new distribution channels, dependence on
education funding by Federal, State and local governments, dependence on key
development and marketing personnel, general economic conditions and the risk
factors listed from time-to-time in the Company's filings with the Securities
and Exchange Commission.
Page 8 of 10 sequentially numbered pages.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
None
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the period
in question.
Page 9 of 10 sequentially numbered pages.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDUCATIONAL INSIGHTS, INC.
Date: 11-11-99 By: /s/ THEODORE J. EISCHEID
--------------- ------------------------------------------
Theodore J. Eischeid
President and Chief Executive Officer
Date: 11-11-99 By: /s/ STEPHEN E. BILLIS
--------------- ------------------------------------------
Stephen E. Billis
Vice President and Chief Financial Officer
Page 10 of 10 sequentially numbered pages.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 514
<SECURITIES> 0
<RECEIVABLES> 9,985
<ALLOWANCES> 331
<INVENTORY> 12,722
<CURRENT-ASSETS> 25,594
<PP&E> 4,690
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,232
<CURRENT-LIABILITIES> 9,026
<BONDS> 964
0
0
<COMMON> 18,644
<OTHER-SE> 2,732
<TOTAL-LIABILITY-AND-EQUITY> 31,232
<SALES> 30,109
<TOTAL-REVENUES> 30,109
<CGS> 16,085
<TOTAL-COSTS> 16,085
<OTHER-EXPENSES> 13,433
<LOSS-PROVISION> 272
<INTEREST-EXPENSE> 363
<INCOME-PRETAX> 237
<INCOME-TAX> 95
<INCOME-CONTINUING> 142
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
