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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from _________ to _________
Commission File Number: 0-23606
EDUCATIONAL INSIGHTS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2392545
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16941 KEEGAN AVENUE
CARSON, CA 90746
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 884-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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As of October 30, 1998 there were 7,040,000 shares of common stock
outstanding.
Total number of sequential pages: 6
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There are no exhibits hence no index page.
Page 1 of 6 sequentially numbered pages.
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PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and accompanying notes included
in Part I - Item 1 of this Quarterly Report, and the audited consolidated
financial statements and accompanying notes and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The Company's business is highly seasonal. Typically, sales and
operating income are highest during the third and fourth quarters and lowest
during the first and second quarters. This seasonal pattern is primarily due
to the increased demand for the Company's products during the
"back-to-school" and year end holiday selling seasons.
SALES.
Sales increased by 10.9% or $1,184,000 to $12,084,000 in the quarter
ended September 30, 1998, from $10,900,000 in the quarter ended September 30,
1997. Sales increased in the Company's mass market and school supply market
and decreased in the specialty toy, international and private label markets.
Sales increased by 4.5% or $1,161,000 to $26,881,000 for the nine month
period ended September 30, 1998 from $25,720,000 for the nine months ended
September 30, 1997.
For the quarter and the nine month period, the increased sales in the
mass market was due to the continuing success of new products introduced in
late 1997 including the GeoSafari World and the Sea Monkeys-Registered
Trademark- product line. The Company attributes its increases in the school
supply market to increased emphasis on developing its field sales effort in
this market. The decrease in the specialty toy market is due to delays in
new product introductions and a decrease in the sales of GeoSafari product
line in this market.
GROSS PROFIT.
Gross profit margin as a percentage of sales decreased 3.6 percentage
points to 46.6% for the quarter ended September 30, 1998 from 50.2% for the
quarter ended September 30, 1997.
Gross profit margin decreased to 48.1% for the nine month period ended
September 30, 1998 from 51.0% for the nine month period ended September 30,
1997.
The decrease in gross profit margins on both the quarterly and
year-to-date basis resulted from both the continuing increase in the
proportion of ExploraToy (i.e., mass market) sales which have lower margins
as well as increases in the provision for the obsolescence of certain
inventory items.
SALES AND MARKETING EXPENSE.
Sales and marketing expense decreased by 2.4% or $51,000 to $2,096,000
for the quarter ended September 30, 1998 compared to $2,147,000 for the same
quarter of 1997.
Sales and marketing expense remained essentially unchanged at $5,353,000
or 19.9% of sales for the nine month period ended September 30, 1998 compared
to $5,338,000 or 20.8% of sales for the same period in 1997.
Page 2 of 6 sequentially numbered pages.
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WAREHOUSING AND DISTRIBUTION EXPENSE.
Warehousing and distribution expense increased $40,000 to $874,000 or
7.2% of sales for the quarter ended September 30, 1998 compared to $834,000
or 7.7% of sales for the same quarter of 1997. The decrease in warehousing
costs for the nine month period is due in part to increased efficiency
resulting from the implementation of more modern, automated warehouse
management systems.
Warehousing and distribution expense decreased $147,000 to $2,523,000 or
9.4% of sales for the nine month period ended September 30, 1998 compared to
$2,670,000 or 10.4% of sales for the same period in 1997.
RESEARCH AND DEVELOPMENT EXPENSE.
Research and development expense decreased $47,000 to $928,000 or 7.7%
of sales for the quarter ended September 30, 1998 compared to $975,000 for
the same quarter in 1997.
Research and development expense remained essentially unchanged at
$3,178,000 or 11.8% of sales for the nine month period ended September 30,
1998 compared to $3,161,000 or 12.3% of sales for the same period in 1997.
GENERAL AND ADMINISTRATIVE EXPENSE.
General and administrative expense increased $68,000 to $880,000 or 7.3%
of sales for the quarter compared to $812,000 or 7.5% of sales for the third
quarter of 1997. The increase was primarily due to costs associated with the
recruitment and employment of the Company's new Chief Executive Officer.
General and administrative expense remained essentially unchanged at
$2,725,000 or 10.1% of sales for the nine month period ended September 30,
1998 compared to $2,680,000 or 10.4% of sales for the same period of 1997.
INTEREST EXPENSE.
Interest expense increased $34,000 to $138,000 for the quarter ended
September 30, 1998 compared to $104,000 for the same quarter of 1997 as a
result of increased borrowings under the Company's line of credit.
For the nine month period ended September 30, 1998, interest expense
increased by $56,000 to $247,000 compared to $191,000 for same period of
1997. The increase in interest expense was due primarily to increased
borrowings under the Company's line of credit which were used to finance
increases in inventory purchased in connection with the Company's new product
efforts in the mass market.
OTHER INCOME AND EXPENSE
Other income increased by $71,000 to $20,000 for the quarter ended
September 30, 1998 compared to expense of $51,000 for the same quarter in
1997. The increase is principally due to foreign exchange gains recorded at
the Company's UK subsidiary during the quarter.
For the nine month period ended September 30, 1998, other income
remained essentially unchanged at $81,000 compared to $93,000 for the same
period in 1997.
Page 3 of 6 sequentially numbered pages.
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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.
For the nine month period ended September 30, 1998, the Company's
primary source of funds was the net increase in borrowings under its
revolving line of credit in the amount of $6,250,000.
The primary use of cash during the period ended September 30, 1998 was
for the funding of an increase in inventory in the amount of $4,603,000
principally due to purchases of ExploraToy product for anticipated fourth
quarter sales as well as approximately $500,000 of hardware and software
relating to the Company's Big Talk product which has not yet been
successfully launched due to unresolved technical problems.
The increase in other assets of $587,000 was not a use of cash as it was
primarily the result of the Company bartering certain inventory (principally
excess ExploraToy products) for credit towards the future purchase of various
goods and services. The dollar value recorded in other assets relating to
this transaction of approximately $500,000 is the net realizable value of
said inventory. This barter arrangement entitles the Company to acquire up
to approximately $1,200,000 of goods and services, however, there can be no
assurance that the Company will utilize all of said credits.
The Company currently has a revolving line of credit with a bank, which
is collateralized by substantially all of the Company's assets. Under the
revolving line of credit agreement, which expires June 15, 1999, the Company
may borrow up to $9 million. The agreement requires the maintenance of
certain financial ratios, minimum annual net income amounts and tangible net
worth amounts, and provides for various restrictions including limitations on
capital expenditures and additional indebtedness. At September 30, 1998, the
Company had $6,750,000 outstanding against this line of credit.
The Company believes that borrowings available under the revolving line
of credit and anticipated funds from operations will satisfy the Company's
projected working capital and capital expenditure requirements for at least
the next 12 months.
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 substantively 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
Page 4 of 6 sequentially numbered pages.
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assessed as to whether they will consistently and properly recognize the year
2000.
The business accounting software and hardware is believed to be the
Company's only critical system with respect to which the Year 2000 problem is
known to exist. The Company is using primarily external resources to
reprogram or replace and test this business accounting software and hardware
for Year 2000 compliance. The Company expects to complete this phase by the
end of 1998. The assessment and upgrade or replacement of other systems and
devices is expected to be completed by June 30, 1999. The requirements for
the correction of Year 2000 issues and the date on which the Company believes
it will complete the Year 2000 modifications are based on management's
current best estimates, which were derived utilizing numerous assumptions of
future events including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that may cause
such material differences include, but are not limited to, the availability
of personnel trained in this area, the ability to locate and collect all
relevant computer codes and similar uncertainties.
The total cost to the Company of these Year 2000 compliance activities
have not been and are not expected to be 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. 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 5 of 6 sequentially numbered pages.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDUCATIONAL INSIGHTS, INC.
Date: 02-18-99 By: /s/ Theodore J. Eischeid
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Theodore J. Eischeid
President and Chief Executive Officer
Date: 02-18-99 By: /s/ Stephen E. Billis
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Stephen E. Billis
Principal Accounting Officer
Page 6 of 6 sequentially numbered pages.
