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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 June 30, 2000
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
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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
As of July 28, 2000 there were 7,040,000 shares of common stock outstanding.
Total number of sequential pages: 11 There are no Exhibits in this
-- document; hence no Exhibit Index.
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Page 1 of 11 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, 1999 balance sheet information)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 594 $ 698
Accounts receivable, less allowance for doubtful accounts of
$252 in 2000 and $433 in 1999 6,919 8,880
Inventory 12,932 10,492
Income taxes receivable 1,544 311
Other receivables 33 30
Prepaid expenses and other current assets 1,349 663
Deferred income taxes 897 904
------------ ------------
Total current assets 24,268 21,978
------------ ------------
PROPERTY AND EQUIPMENT, Net 4,274 4,372
------------ ------------
DEFERRED INCOME TAXES 737 732
------------ ------------
OTHER ASSETS 700 732
------------ ------------
TOTAL $ 29,979 $ 27,814
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 149 $ 149
Line of credit 5,669 2,761
Accounts payable 3,010 1,595
Accrued expenses 1,791 1,305
Deferred income 45 0
------------ ------------
Total current liabilities 10,664 5,810
------------ ------------
LONG TERM DEBT 709 781
------------ ------------
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 117 126
Accumulated deficit/Retained earnings (155) 2,453
------------ ------------
Total shareholders' equity 18,606 21,223
------------ ------------
TOTAL $ 29,979 $ 27,814
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2 of 11 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 Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES $ 6,460 $ 9,035 $ 12,035 $ 16,674
COST OF SALES 3,445 4,837 6,436 8,856
------------ ------------ ------------ ------------
GROSS PROFIT 3,015 4,198 5,599 7,818
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 1,591 1,843 3,470 3,375
Warehousing and distribution 756 680 1,552 1,409
Research and development 1,173 864 2,167 1,824
General and administrative 1,215 897 2,192 1,909
------------ ------------ ------------ ------------
Total operating expenses 4,735 4,284 9,381 8,517
------------ ------------ ------------ ------------
OPERATING (LOSS) (1,720) (86) (3,782) (699)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (144) (105) (210) (189)
Interest income 6 6 26 12
Other expense, net (67) (17) (185) (130)
------------ ------------ ------------ ------------
Total other expense (205) (116) (369) (307)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,925) (202) (4,151) (1,006)
INCOME TAX BENEFIT (717) (65) (1,543) (348)
------------ ------------ ------------ ------------
NET LOSS (1,208) (137) (2,608) (658)
OTHER COMPREHENSIVE INCOME-
Foreign currency translation
adjustments (Net of tax of
$(1)and $(6), $(1), and $(9)
for the three and six month period
ended June 30, 2000 and 1999,
respectively) (1) (2) (9) (14)
------------ ------------ ------------ ------------
COMPREHENSIVE LOSS $ (1,209) $ (139) $ (2,617) $ (672)
============ ============ ============ ============
NET LOSS PER SHARE - Basic
and Diluted $ (0.17) $ (0.02) $ (0.37) $ (0.09)
============ ============ ============ ============
Weighted average Number of Common
Shares Outstanding - Basic
and Diluted 7,040 7,040 7,040 7,040
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 11 sequentially numbered pages.
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EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,608) $ (658)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for doubtful accounts and sales returns 94 182
Provision for inventory obsolescence 174 205
Depreciation 566 631
Deferred income taxes 7 (341)
Changes in operating assets and liabilities:
Accounts receivable 1,805 (703)
Inventory (2,678) (1,770)
Income taxes receivable (1,233)
Other receivables (3) (5)
Prepaid expenses and other current assets (695) (358)
Other assets 10 (107)
Accounts payable 1,574 1,518
Accrued expenses 488 (41)
Deferred income 45 (17)
------------ ------------
Net cash used in operating activities (2,454) (1,464)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (468) (329)
------------ ------------
Net cash used in investing activities (468) (329)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in line of credit 2,908 1,643
Repayments of long-term debt (72) (66)
------------ ------------
Net cash provided by financing activities 2,836 1,577
------------ ------------
Effect of exchange rate changes on cash (18) (14)
------------ ------------
NET CHANGE IN CASH (104) (230)
CASH, BEGINNING OF PERIOD 698 748
------------ ------------
CASH, END OF PERIOD $ 594 $ 518
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 194 $ 192
Income taxes paid $ 1 $ 1
Cash received from income taxes $ 310
</TABLE>
Page 4 of 11 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, 1999. The Company's
fiscal year ends December 31. The results of operations for the period ended
June 30, 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 is
stated at the lower of cost or market. Cost is determined using the first-in,
first-out method.
3. NEW ACCOUNTING STANDARD
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements",
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. Subsequent admendments to SAB 101 deferred
its implementation until the Company's fourth fiscal quarter of 2000. The
Company will adopt SAB 101 and is currently in the process of evaluating the
impact, if any, SAB 101 will have on its financial position or results of
operations.
Page 5 of 11 sequentially numbered pages.
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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, 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.
SALES
Sales decreased by $2,575,000 to $6,460,000 in the quarter ended June 30,
2000, from $9,035,000 in the quarter ended June 30, 1999. Sales decreases
occurred in each of the Company's primary markets. The decrease in the Company's
core school market was primarily a carryover in the weakness of product reorders
that the Company experienced in the fourth quarter of 1999 and the first quarter
of 2000, as well as delays in the introduction of most of its new product
offerings for this channel. Sales in the Company's other markets were also
adversely affected by delays in the introduction of new products.
Sales decreased by 27.8% or $4,639,000 to $12,035,000 for the six-month
period ended June 30, 2000 from $16,674,000 for the six-month period ended June
30, 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
weakness of product reorders that the Company experienced in the fourth quarter
of 1999 and the first quarter of 2000. The decreases in the specialty retail and
mass markets were primarily due to delays in purchases by certain customers.
Additionally, sales in all the Company's markets were adversely affected by
delays in the introduction of most of the Company's new product offerings.
Due to the lateness in the introduction of a number of its new products,
the Company expects lower sales volume in the second half of the year 2000
compared to the same period in 1999.
GROSS PROFIT
Gross profit margin as a percentage of sales was essentially unchanged at
46.7% for the quarter ended June 30, 2000 as compared to 46.5% for the quarter
ended June 30, 1999.
Gross profit margin as a percentage of sales was essentially unchanged at
46.5% for the six-month period ended June 30, 2000, as compared to 46.9% for the
six-month period ended June 30, 1999.
SALES AND MARKETING EXPENSE
Sales and marketing expense decreased $252,000 to $1,591,000 for the
quarter ended June 30, 2000 from $1,843,000 for the same period in 1999.
However, when expressed as a percentage of sales, said expense increased to
24.6% for the quarter ended June 30, 2000, as compared to 20.4% for the same
period in 1999. The reason for the variances is primarily as result of the lower
sales volume experienced in the quarter. The lower volume sales decreased the
absolute dollar amount of variable sales and marketing expense incurred, but the
combination of variable and fixed marketing expenses was proportionally higher
as a percentage of sales in 2000 than in 1999 due to the lower sales volume in
2000.
Page 6 of 11 sequentially numbered pages.
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Sales and marketing expense increased $95,000 to $3,470,000 for the six-month
period ended June 30, 2000 from $3,375,000 for the same period in 1999 despite
the decrease in said expense for the quarter. This was a result of the increase
in sales and marketing expense experienced in the first quarter of 2000, as
compared to the same period in 1999, which was primarily due to increased
marketing expenses relating to the Company's specialty retail division. When
expressed as a percentage of sales, sales and marketing expense increased to
28.8% for the six-month period ended June 30, 2000 from 20.2% for the same
period in 1999.
WAREHOUSING AND DISTRIBUTION EXPENSE
Warehousing and distribution expense increased $76,000 to $756,000 or 11.7%
of sales for the quarter ended June 30, 2000 compared to $680,000 or 7.5% of
sales for the same quarter in 1999.
Warehousing and distribution expense increased $143,000 to $1,552,000 or
12.9% of sales for the six-month period ended June 30, 2000 compared to
$1,409,000 or 8.4% of sales for the same period in 1999.
The increase in warehousing and distribution expense in absolute dollars on
both a quarterly and year-to-date basis was primarily due higher compensation
expense relating to personnel increases in the Company's purchasing and quality
assurance functions in the year 2000.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased $309,000 to $1,173,000 or 18.2%
of sales for the quarter ended June 30, 2000 compared to $864,000 or 9.6% of
sales for the same quarter in 1999.
Research and development expense increased $343,000 to $2,167,000 or 18.0%
of sales for the six-month period ended June 30, 2000 compared to $1,824,000 or
10.9% of sales for the same period in 1999.
The increase in research and development expense on both a quarterly and
year-to-date basis was due primarily to increased development activity for both
new and repackaged products, as well as increased use of outside resources to
attempt to reduce the design time of new products, thereby mitigating any
further delays in the introduction of new products to market.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased $318,000 to $1,215,000 or
18.8% of sales for the quarter ended June 30, 2000 compared to $897,000 or 9.9%
of sales for the same quarter in 1999.
General and administrative expense increased $283,000 to $2,192,000 or
18.2% of sales for the six-month period ended June 30, 2000 compared to
$1,909,000 or 11.4% of sales for the same period in 1999.
The increase in general and administrative expense on both a quarterly and
year-to-date basis was primarily due to compensation expense relating to the
severance agreement with the Company's ex-President and CEO.
INTEREST EXPENSE
Interest expense increased $39,000 to $144,000 for the quarter ended June
30, 2000 compared to $105,000 for the same quarter of 1999, as a result of
increased borrowings under the Company's line of credit and the higher prime
rate (which is the reference rate on the Company's line of credit) in 2000 than
in 1999.
For the six-month period ended June 30, 2000, interest expense increased
$21,000 to $210,000 compared to $189,000 for same period of 1999 as a result of
the higher prime rate in 2000 compared to 1999.
Page 7 of 11 sequentially numbered pages.
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OTHER INCOME AND EXPENSE
Other expense, net of other income, increased $50,000 to $67,000 for the
quarter ended June 30, 2000 compared to $17,000 for the same quarter in 1999.
For the six-month period ended June 30, 2000, other expense increased
$55,000 to $185,000 compared to $130,000 for the same period in 1999.
The increase in other expense, net of other income, on both a quarterly and
year-to-date basis resulted principally from other income recorded in 1999
generated from foreign exchange gains on sales to Canada due to the
strengthening Canadian dollar during the quarter, whereas there was a small
foreign exchange loss incurred on sales to Canada during 2000.
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 period ended June 30, 2000, the Company's sources of funds were
primarily the net increase in borrowings under the Company's line of credit of
$2,908,000, an increase in accounts payable of $1,574,000 and a decrease in
accounts receivable of $1,805,000.
The principal uses of cash during the period ended June 30, 2000 were an
increase in inventory of $2,678,000 due to the seasonal nature of the Company's
business cycle, as well as funding of the year-to-date net loss of $2,608,000.
Capital spending of $468,000 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, which are formula driven based on eligible accounts
receivable and inventory levels, bear interest at one half-percentage point
above the bank's reference rate (9.5% at June 30, 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 June 30, 2000, the Company had $5,669,000 of
outstanding borrowings against this line of credit.
The Company's borrowings available under the revolving line of credit and
anticipated funds from operations that are used to satisfy the Company's working
capital and capital expenditure requirements may not be adequate if the
downtrend in sales continues at its current pace for the remainder of the year.
The Company is currently investigating other means of raising capital, as well
as expense reductions in order to mitigate the potential cash flow impact of
further potential sales declines. In the event that the Company's sales do not
improve and the Company is unable to raise additional capital and reduce
operating expenses, the Company's financial position could be materially
adversely affected.
Page 8 of 11 sequentially numbered pages.
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks, which arise during the
normal course of business from changes in foreign exchange rates and interest
rates. A discussion of the Company's market risk associated with it's foreign
currency transactions is presented below. The market risk associated with
long-term debt is not material.
FOREIGN EXCHANGE RISK
The Company sells its products in numerous countries around the world,
however, except in Canada, such sales are denominated in U.S. Dollars.
Additionally, the Company's UK subsidiary conducts its business in British pound
sterling which is its functional currency, although its intercompany payable is
denominated in U.S. dollars. These factors create an exposure to the future
earnings of the Company when foreign exchange rates change and certain of its
receivables as well as its foreign subsidiary's financial statements are
denominated in foreign currencies.
As such, the Company is primarily exposed to the following foreign
currencies: the Canadian dollar and the British pound sterling. Based upon a
hypothetical five-percent strengthening of the U.S. dollar across these
currencies, the potential foreign exchange losses due to said foreign currency
exposures would have been approximately $220,000 at June 30, 2000. The Company
does not currently hedge this risk.
Page 9 of 11 sequentially numbered pages.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 16, 2000 the Company held its Annual Meeting of Shareholders.
The selection of Deloitte & Touche LLP as the Company's independent
auditors was ratified. 6,871,559 shares were voted in favor of
ratification, 275 shares were voted against ratification and 5 shares
abstained.
The candidates for Director positions received the votes indicated
below. The five candidates receiving the highest number of votes were
elected as Directors.
<TABLE>
<CAPTION>
Candidate Votes For Withheld
--------- --------- --------
<S> <C> <C>
Burt Cutler 6,855,064 16,775
Jay Cutler 6,855,064 16,775
Timothy Kilpin 6,855,064 16,775
Gerald Bronstein 6,855,064 16,775
G. Reid Calcott 3,465,230
Theodore J. Eischeid 2,789,834 616,775
</TABLE>
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 10 of 11 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: August 3, 2000 By: /s/ G. REID CALCOTT
-------------------------------------
G. Reid Calcott
President and Chief Executive Officer
Date: August 3, 2000 By: /s/ STEPHEN E. BILLIS
-------------------------------------
Stephen E. Billis
Vice President and Chief Financial
Officer
Page 11 of 11 sequentially numbered pages.
