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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-23606
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EDUCATIONAL INSIGHTS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
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)
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Registrant's telephone number, including area code: (310) 884-2000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of May 9, 2000 there were 7,040,000 shares of common stock outstanding.
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Total number of sequential pages: 10 There are no Exhibits in this document;
hence no Exhibit Index.
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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, 1999 BALANCE SHEET INFORMATION)
ASSETS
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<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
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CURRENT ASSETS
Cash $ 310 $ 698
Accounts receivable, less allowance for doubtful accounts
of $327 in 2000 and $433 in 1999 5,859 8,880
Inventory 11,401 10,492
Income taxes receivable 835 311
Other receivables 30 30
Prepaid expenses and other current assets 1,409 663
Deferred income taxes 897 904
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Total current assets 20,741 21,978
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PROPERTY AND EQUIPMENT, NET 4,382 4,372
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DEFERRED INCOME TAXES 727 732
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OTHER ASSETS 735 732
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TOTAL $26,585 $27,814
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 149 $ 149
Line of credit 2,661 2,761
Accounts payable 1,903 1,595
Accrued expenses 1,312 1,305
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Total current liabilities 6,025 5,810
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LONG TERM DEBT 745 781
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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 2000 and 1999 18,644 18,644
Accumulated other comprehensive income--foreign currency
translation adjustments 118 126
Retained earnings 1,053 2,453
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Total shareholders' equity 19,815 21,223
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TOTAL $26,585 $27,814
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See accompanying notes to consolidated financial statements.
2
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EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS
ENDED
MARCH 31,
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2000 1999
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SALES $ 5,575 $7,639
COST OF SALES 2,991 4,019
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GROSS PROFIT 2,584 3,620
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OPERATING EXPENSES:
Sales and marketing 1,879 1,532
Warehousing and distribution 796 729
Research and development 994 960
General and administrative 977 1,012
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Total operating expenses 4,646 4,233
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OPERATING LOSS (2,062) (613)
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OTHER INCOME (EXPENSE):
Interest expense (66) (85)
Interest income 20 6
Other expense, net (118) (113)
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Total other expense (164) (192)
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LOSS BEFORE BENEFIT FOR INCOME TAXES (2,226) (805)
BENEFIT FOR INCOME TAXES (826) (284)
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NET LOSS (1,400) (521)
OTHER COMPREHENSIVE INCOME--
Foreign currency translation adjustments (Net of tax of
$(1) in 2000 and $(8) in 1999) (8) (12)
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COMPREHENSIVE LOSS $(1,408) $ (533)
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NET LOSS PER SHARE--Basic and Diluted $ (0.20) $(0.07)
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Weighted Average Number of Common Shares Outstanding--Basic
and Diluted 7,040 7,040
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
3
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EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,400) $ (521)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for doubtful accounts and sales returns 63 62
Provision of inventory obsolescence 95 105
Depreciation 288 314
Deferred income taxes 8 (275)
Changes in operating assets and liabilities:
Accounts receivable 2,942 1,984
Inventory (1,018) (120)
Income taxes receivable (524)
Other receivables 3
Prepaid expenses and other current assets (749) (351)
Other assets (8) (71)
Accounts payable 343 254
Accrued expenses 10 133
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Net cash provided by operating activities 50 1,517
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (298) (230)
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Net cash used in investing activities (298) (230)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in line of credit (100) (1,150)
Repayments of long-term debt (36) (33)
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Net cash used in financing activities (136) (1,183)
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Effect of exchange rate changes on cash (4) (11)
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NET CHANGE IN CASH (388) 93
CASH, BEGINNING OF PERIOD 698 748
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CASH, END OF PERIOD $ 310 $ 841
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 77 $ 94
Cash received from income taxes $ 310
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See accompanying notes to consolidated financial statements.
4
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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, 1999. The Company's
fiscal year ends December 31. The results of operations for the period ended
March 31, 2000, are not indicative of the results that might be expected for the
full fiscal year.
Certain reclassifications have been made to the 1999 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.
5
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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,
1999 included in the Company's Annual Report on Form 10-K.
Consolidated sales were $5,575,000 for the first quarter ended March 31,
2000, a decrease of 27.0%, or $2,064,000, compared to the same period in 1999.
Net loss was $1,400,000 or $0.20 per share compared with a net loss of $521,000
or $0.07 per share for the same period in 1999. 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 decreased by 27.0%, or $2,064,000, to $5,575,000 in the quarter ended
March 31, 2000 from $7,639,000 in the quarter ended March 31, 1999. Sales
decreases occurred in each of the Company's primary markets. The decrease in the
Company's core school market was primarily a reflection of the general weakness
in the school supply dealer channel, as well as a carryover in the weakness of
product reorders that the Company experienced in the fourth quarter of 1999. The
decreases in the specialty retail and mass markets were primarily due to delays
in purchases by certain customers. The Company expects lower sales volume during
the first six months of 2000 than in the same period in 1999, but does not
believe that this is indicative of the expected sales volume for the remainder
of the year as many new and/or repackaged products are scheduled for
introduction in the latter half of 2000.
GROSS PROFIT
Gross profit margin as a percentage of sales decreased to 46.3% for the
quarter ended March 31, 2000 from 47.4% for the same period in 1999. This
decrease is primarily due to a higher percentage of sales of low margin
discontinued items in 2000 than in 1999.
SALES AND MARKETING EXPENSE
Sales and marketing expense increased $347,000 to $1,879,000 for the quarter
ended March 31, 2000 from $1,532,000 for the same period in 1999. When expressed
as a percentage of sales, sales and marketing expense increased to 33.7% as
compared to 20.0% for the same period in 1999. The increase in absolute dollars
is primarily due to marketing expenses relating to the Company's specialty
retail division which was newly branded in 2000 under the name Kidology. As
such, increased expenditures in 2000 were primarily in advertising/promotions
and trade shows as well as compensation relating to the new Vice President in
charge of this division. While much of the expense has been incurred, the
increase in revenue is not expected until the second half of the year. In
addition, marketing expenditures in the Learning Advantage division are
relatively higher in the areas of direct promotion, catalogs and trade shows as
this division was only in a start-up phase during the first half of 1999. The
Company expects sales and marketing expense to continue to exceed the prior year
amounts during the remainder of 2000.
6
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WAREHOUSING AND DISTRIBUTION EXPENSE
Warehousing and distribution expense increased $67,000 to $796,000 for the
quarter ended March 31, 2000 from $729,000 for the same period in 1999.
Warehousing and distribution expense, when expressed as a percentage of sales,
increased to 14.3% as compared to 9.5% for the same period in 1999, primarily as
a result of the decreased sales volume in 2000 as compared to 1999. The increase
in absolute dollars is primarily due to higher compensation expense relating to
personnel increases in the Company's purchasing and quality assurance functions.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased slightly by $34,000 to $994,000
for the quarter ended March 31, 2000 from $960,000 for the same period in 1999.
When expressed as a percentage of sales, research and development expense
increased to 17.8% from 12.6% primarily as a result of the decreased sales
volume in 2000 as compared to 1999. The Company expects research and development
expense to exceed the prior year amounts during the remainder of 2000 primarily
due to increased development activity for both new and repackaged products.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense decreased $35,000 to $977,000 for the
quarter ended March 31, 2000 compared to $1,012,000 for the same period in 1999.
When expressed as a percentage of sales, general and administrative expense
increased to 17.5% from 13.2% in the first quarter of 1999 as a result of the
decreased sales volume in the current quarter.
INTEREST EXPENSE
Interest expense decreased $19,000 to $66,000 from $85,000 for the same
period in 1999 primarily due to decreased borrowings under the Company's line of
credit. This occurred as a result of fiscal 1999 generating an operating profit
as compared to fiscal 1998 when an operating loss was incurred.
OTHER EXPENSE
Other expense, net remained essentially unchanged at $118,000 in 2000 as
compared to $113,000 in 1999.
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, 2000, 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, 2000 were an
increase in prepaid expenses of $749,000 and an increase in inventory of
$1,018,000 as well as repayment of outstanding borrowings under the Company's
revolving line of credit of $100,000. Capital spending of $298,000 during the
quarter was primarily for tooling relating to new products.
7
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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 (9.00% at March 31, 2000). 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 March 31, 2000, the Company had $2,661,000 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.
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.
8
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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.
9
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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.
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EDUCATIONAL INSIGHTS, INC.
(Registrant)
By: /s/ THEODORE J. EISCHEID
-----------------------------------------
Theodore J. Eischeid
Date: May 10, 2000 PRESIDENT AND CHIEF EXECUTIVE OFFICER
By: /s/ STEPHEN E. BILLIS
-----------------------------------------
Stephen E. Billis
Date: May 10, 2000 VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
</TABLE>
10
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<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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 310
<SECURITIES> 0
<RECEIVABLES> 6,186
<ALLOWANCES> 327
<INVENTORY> 11,401
<CURRENT-ASSETS> 20,741
<PP&E> 4,382
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,585
<CURRENT-LIABILITIES> 6,025
<BONDS> 745
0
0
<COMMON> 18,644
<OTHER-SE> 1,171
<TOTAL-LIABILITY-AND-EQUITY> 26,585
<SALES> 5,575
<TOTAL-REVENUES> 5,575
<CGS> 2,991
<TOTAL-COSTS> 2,991
<OTHER-EXPENSES> 4,646
<LOSS-PROVISION> 63
<INTEREST-EXPENSE> 66
<INCOME-PRETAX> (2,226)
<INCOME-TAX> (826)
<INCOME-CONTINUING> (1,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,400)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
