<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 March 31, 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 X No
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As of May 10, 1999 there were 7,040,000 shares of common stock outstanding.
Total number of sequential pages: 10 There are no Exhibits in this
------ document; hence no Exhibit Index.
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Page 1 of 10 sequentially numbered pages.
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PART I - ITEM 1. FINANCIAL STATEMENTS
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited, except for December 31, 1998 balance sheet information)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 841 $ 748
Accounts receivable, less allowance for doubtful accounts of
$414 in 1999 and $551 in 1998. 6,433 8,520
Inventory 12,046 12,075
Income taxes receivable 230 230
Other receivables 52 55
Prepaid expenses and other current assets 722 371
Deferred income taxes 1,833 1,558
---------------- -----------------
Total current assets 22,157 23,557
---------------- -----------------
PROPERTY AND EQUIPMENT, Net 5,004 5,088
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OTHER ASSETS 697 634
---------------- -----------------
TOTAL $ 27,858 $29,279
---------------- -----------------
---------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 134 $ 134
Line of credit 2,600 3,750
Accounts payable 1,859 1,697
Accrued expenses 1,605 1,472
Deferred income 57 57
----------------- -----------------
Total current liabilities 6,255 7,110
----------------- -----------------
LONG TERM DEBT 897 930
----------------- -----------------
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
Accumulated other comprehensive income - foreign currency
translation adjustments 122 134
Retained earnings 1,940 2,461
----------------- -----------------
Total shareholders' equity 20,706 21,239
----------------- -----------------
TOTAL $ 27,858 $29,279
---------------- -----------------
---------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2 of 10 sequentially numbered pages.
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EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
SALES $ 7,639 $ 6,005
COST OF SALES 4,086 3,005
----------------- -----------------
GROSS PROFIT 3,553 3,000
----------------- -----------------
OPERATING EXPENSES:
Sales and marketing 1,518 1,438
Warehousing and distribution 690 788
Research and development 960 1,112
General and administrative 998 904
----------------- -----------------
Total operating expenses 4,166 4,242
----------------- -----------------
OPERATING LOSS (613) (1,242)
----------------- -----------------
OTHER INCOME (EXPENSE):
Interest expense (85) (36)
Interest income 6 6
Other expense, net (113) (3)
----------------- -----------------
Total other expense (192) (33)
----------------- -----------------
LOSS BEFORE BENEFIT FOR INCOME TAXES (805) (1,275)
BENEFIT FOR INCOME TAXES (284) (492)
----------------- -----------------
NET LOSS (521) (783)
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OTHER COMPREHENSIVE INCOME-
Foreign currency translation adjustments
(Net of tax of $(8) in 1999 and $4 in 1998) (12) 6
COMPREHENSIVE LOSS $ (533) $ (777)
----------------- -----------------
----------------- -----------------
NET LOSS PER SHARE - Basic and Diluted $ (0.07) $ (0.11)
----------------- -----------------
----------------- -----------------
Weighted Average Number of Common Shares
Outstanding - Basic and Diluted 7,040 7,040
----------------- -----------------
----------------- -----------------
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 10 sequentially numbered pages.
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EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (521) $ (783)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts and sales returns 62 (37)
Provision of inventory obsolesence 105
Depreciation 314 214
Deferred income taxes (275)
Changes in operating assets and liabilities:
Accounts receivable 1,984 4,185
Inventory (120) (1,272)
Income taxes receivable (495)
Other receivables 3 3
Prepaid expenses and other current assets (351) (398)
Other assets (71) (79)
Accounts payable 254 (328)
Accrued expenses 133 (74)
Deferred income (2)
Income taxes payable (20)
----------------- -----------------
Net cash provided by operating activities 1,517 914
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (230) (327)
----------------- -----------------
Net cash used in investing activities (230) (327)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in line of credit (1,150) (500)
Repayments of long-term debt (33) (30)
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Net cash used in financing activities (1,183) (530)
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Effect of exchange rate changes on cash (11) 3
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NET CHANGE IN CASH AND CASH EQUIVALENTS 93 60
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 748 235
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 841 $ 295
----------------- -----------------
----------------- -----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 94 $ 46
Income taxes paid $ 16
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 10 sequentially numbered pages.
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EDUCATIONAL INSIGHTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of Educational Insights, Inc.
(the "Company") include all of the accounts of the Company and its wholly
owned subsidiary. All significant inter-company balances and transactions
have been eliminated in consolidation.
The interim consolidated financial statements are not audited, but
include all adjustments (including normal recurring adjustments) which are,
in the opinion of management, necessary for a fair representation of the
financial position, results of operations and cash flows for the period.
The consolidated financial statements as presented herein should be
read in conjunction with the Company's audited consolidated financial
statements and notes thereto as filed with the Securities and Exchange
Commission and included in the Company's Form 10-K for the year ended
December 31, 1998. The Company's fiscal year ends December 31. The results of
operations for the period ended March 31, 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.
Page 5 of 10 sequentially numbered pages.
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PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited consolidated financial statements and accompanying notes, included
in Part I - Item 1 of this Quarterly Report, and the audited consolidated
financial statements and accompanying notes and Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1998 included in the Company's Annual Report on Form 10-K.
Consolidated sales were $7,639,000 for the first quarter ended March
31, 1999, an increase of 27.2%, or $1,634,000, compared to the same period in
1998. Net loss was $521,000 or $0.07 per share compared with a net loss of
$783,000 or $0.11 per share for the same period in 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. The Company typically experiences losses during the
first quarter.
SALES
Sales increased by 27.2%, or $1,634,000, to $7,639,000 in the
quarter ended March 31, 1999 from $6,005,000 in the quarter ended March 31,
1998. This increase was due primarily to increased sales to school supply
dealers and to specialty retail stores of approximately $800,000 and
$600,000, respectively. This was principally due to high product sell-through
in the fourth quarter of 1998, and resulted in certain customers requesting
shipments earlier in the year than experienced in the prior year in order to
replenish their inventories. Although the Company does not expect similar
percentage sales level increases during the remainder of the year, an overall
increase in sales compared to the prior year is projected.
GROSS PROFIT
Gross profit margin as a percentage of sales decreased to 46.5% for
the quarter ended March 31, 1999 from 50.0% for the same period in 1998. This
decrease is primarily due to the 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. The Company does not expect a significant change in gross profit
margin for the remainder of the year from that experienced in the first
quarter of 1999.
SALES AND MARKETING EXPENSE
Although sales and marketing expense increased $80,000 to $1,518,000
from $1,438,000 for the same period in 1998, when expressed as a percentage
of sales, sales and marketing expense decreased to 19.9% from 23.9% due to
higher sales volume in the first quarter of 1999. The increase in absolute
dollars is primarily due to marketing expenses relating to the Company's
Learning Advantage division which was launched in 1999 to provide the Company
with a direct channel to its school market for certain of its products.
WAREHOUSING AND DISTRIBUTION EXPENSE
Warehousing and distribution expense decreased $98,000 to $690,000
from $788,000 for the same period in 1998. Warehousing and distribution
expense, when expressed as a percentage of sales, decreased to 9.0% as
compared to 13.1% for the same period in 1998. The principal reason for the
decrease is due to increased efficiencies in warehouse operations primarily
due to the implementation of a new warehouse management system during 1998.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense decreased $152,000 to $960,000 from
$1,112,000 for the same period in 1998 in large part due to the limited use
of outside consultants in 1999 compared to 1998. When expressed as a
percentage of sales, research and development expense decreased to 12.6% from
18.5% primarily as a result of the increased sales volume in 1999.
Page 6 of 10 sequentially numbered pages.
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GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased $94,000 to $998,000 for
the quarter ended March 31, 1999 compared to $904,000 for the same period in
1998 principally due to increased customer service staffing, as well as
increased compensation, travel and moving expenses relating to the Company's
new President. When expressed as a percentage of sales, general and
administrative expense decreased to 13.1% from 15.1% in the first quarter of
1998 as a result of the increased sales volume in the current quarter. The
Company expects general and administrative expenses, in absolute dollars, to
continue to exceed the prior year amounts during the remainder of 1999.
INTEREST EXPENSE
Interest expense increased $49,000 to $85,000 from $36,000 for the
same period in 1998 primarily due to increased borrowings under the Company's
line of credit principally as a result of the operating loss incurred in 1998.
OTHER EXPENSE
Other expense, net increased by $110,000 to $113,000 in 1999 from
$3,000 in 1998. This decrease was principally due to foreign exchange rate
losses totaling approximately $67,000 in 1999 as compared to foreign exchange
rate gains of $27,000 during the same period in 1998 experienced by the
Company's subsidiary in the UK due to the relative weakness of the Pound
Sterling.
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 extended payment 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 these sales patterns, the largest customer orders are shipped during the
summer and fall, hence increasing accounts receivable balances during the
third and fourth quarters.
During the quarter ended March 31,1999, the Company's source of
funds was net cash provided by operating activities, primarily from the
collection of outstanding accounts receivable.
The principal uses of cash during the period ended March 31, 1999
were an increase in prepaid expenses of $351,000 and an increase in deferred
income taxes of $275,000 as well as repayment of outstanding borrowings under
the Company's revolving line of credit of $1,150,000. Capital spending of
$230,000 during the quarter 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 15, 1999, the
Company may borrow up to $9 million. Advances bear interest at .25% above the
bank's reference rate (7.75% at March 31, 1999) or 2.50% above the London
Interbank Offer Rate (at the Company's option.) 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
March 31, 1999, the Company was in violation of one of the loan covenants.
The bank subsequently amended the loan agreement to waive said covenant until
December 31, 1999. At March 31, 1999, the Company had $2,600,000 of
outstanding borrowings against this line of credit.
The Company believes that borrowings available under the revolving
line of credit, if and when renewed, and anticipated funds from operations
will satisfy the Company's projected working capital and capital expenditure
requirements for at least the next 12 months.
Page 7 of 10 sequentially numbered pages.
<PAGE>
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 is known to exist. The
Company is using 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 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. 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 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.
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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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDUCATIONAL INSIGHTS, INC.
(Registrant)
Date: May 10, 1999 By: /s/ Theodore J. Eischeid
----------------------------------------
Theodore J. Eischeid
President and Chief Executive Officer
Date: May 10, 1999 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 841
<SECURITIES> 0
<RECEIVABLES> 6,847
<ALLOWANCES> 414
<INVENTORY> 12,046
<CURRENT-ASSETS> 22,157
<PP&E> 5,004
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,858
<CURRENT-LIABILITIES> 6,255
<BONDS> 897
0
0
<COMMON> 18,644
<OTHER-SE> 2,062
<TOTAL-LIABILITY-AND-EQUITY> 27,858
<SALES> 7,639
<TOTAL-REVENUES> 7,639
<CGS> 4,086
<TOTAL-COSTS> 4,086
<OTHER-EXPENSES> 4,166
<LOSS-PROVISION> 62
<INTEREST-EXPENSE> 85
<INCOME-PRETAX> (805)
<INCOME-TAX> (284)
<INCOME-CONTINUING> (521)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (521)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
