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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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COMMISSION FILE NUMBER 0-23606
EDUCATIONAL INSIGHTS, INC.
(Exact name of Registrant as specified in its Charter)
CALIFORNIA 95-2392545
(State of incorporation) (IRS Employer Identification No.)
16941 KEEGAN AVENUE, CARSON, CALIFORNIA 90746
(Address of principal executive offices) (Zip Code)
(310) 884-2000
(Registrant's telephone number, including area code)
TITLE OF EACH CLASS
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO
PAR VALUE PER SHARE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
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/
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 17, 2000 was approximately $13,200,000 based on the
closing price of such on The Nasdaq Stock Market -SM-.
The number of shares of Registrant's Common Stock outstanding on March 17,
2000 was 7,040,000.
Part III incorporates information by reference from the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held on June 16, 2000.
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EDUCATIONAL INSIGHTS INC.
INDEX TO ANNUAL REPORT
ON FORM 10 - K
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PART I
Item 1: Business 1
Item 2: Properties 9
Item 3: Legal Proceedings 9
Item 4: Submission of Matters to a Vote of Security Holders 9
PART II
Item 5: Market For The Registrant's Common Equity And Related Stockholder Matters 11
Item 6: Selected Consolidated Financial Data 11
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 8: Financial Statements and Supplementary Data 15
Item 9: Changes In Disagreements with Accountants on Accounting and
Financial Disclosure 16
PART III
Item 10: Directors and Executive Officers of The Registrant 17
Item 11: Executive Compensation 17
Item 12: Security Ownership of Certain Beneficial Owners and Management 17
Item 13: Certain Relationships and Related Transactions 17
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K 18
Signatures 19
Independent Auditors' Report 20
Schedule II - Educational Insights, Inc. - Valuation and Qualifying Accounts
Three Year Period Ended December 31, 1999 21
Index to Exhibits 22
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PART I
ITEM 1: BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN
THIS REPORT ARE FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO ECONOMIC, COMPETITIVE, GOVERNMENTAL
AND TECHNOLOGICAL FACTORS AFFECTING THE COMPANY'S OPERATIONS, MARKETS, PRODUCTS,
SERVICES AND PRICES, AND OTHER RISK FACTORS DISCUSSED HEREIN AND IN THE
COMPANY'S FILINGS WITH SECURITIES AND EXCHANGE COMMISSION.
As its core business, Educational Insights, Inc. (Educational Insights or
the Company) designs, develops and markets a variety of educational products
including electronic learning aids, electronic games, activity books, science
and nature products, board games and other products for use in both schools and
homes. The Company's many products and related materials cover a broad range of
price points and are designed to supplement and enhance more traditional
teaching methods while making learning fun. The educational content and
entertainment value of the Company's products appeals to children and students
mainly from pre-kindergarten to eighth grade.
The Company was founded and incorporated in the State of California in 1962
to develop and market supplemental educational materials to assist in the
teaching of reading.
MARKET AND INDUSTRY BACKGROUND
The primary market for the Company's core products consists of two broad
market segments - schools and teachers, who purchase the Company's products for
use in the classroom (the "school market"), and parents and children who
purchase the Company's products for use in the home (the "home market"). The
targeted users of the Company's products are the over 45 million
pre-kindergarten through elementary school students who attend approximately
100,000 pre-school and kindergarten private enterprises and elementary schools
throughout the United States. In addition to the United States market, the
Company's sales to the international market has exposed its products to children
in other parts of the world.
The Company believes that the increased emphasis on education has resulted
in increased opportunities in the school market. Such changes include:
INCREASED PUBLIC CONCERN OVER THE QUALITY OF THE UNITED STATES EDUCATIONAL
SYSTEM. Growing awareness and concern over the quality of public school
education in the United States contributes to an increasing demand for learning
aids that supplement a child's education both in school and at home. Concerned
parents and grandparents are continuing to purchase educational products for
home use to supplement school-based learning in order to improve the education
of their children or grandchildren.
FOCUS ON INDIVIDUAL EDUCATIONAL NEEDS OF STUDENTS. Traditional educational
materials are generally prepared for the "average" child, even though a large
portion of the population is either ahead or behind in its ability. In response
to this diversity, teachers often tailor and structure materials to the ability
of individual students rather than classes as a whole. Supplemental educational
materials, such as those offered by the Company, enable teachers to match course
materials with the differing capabilities of their students.
INCREASING BUDGETS FOR EDUCATION. Funding for most educational materials comes
principally from state and local revenues. Due to the general increase in income
tax revenues being experienced by Federal, state and local governments as well
as the favorable political climate, the Company has observed significant
increases in the funds provided to schools for instructional materials of all
kinds. As a result, the Company believes there currently exists a continued
opportunity to market its quality, cost effective products to teachers as a
supplement to traditional teaching material.
SHIFT TO SITE-BASED PURCHASE DECISIONS. Textbook publishers gear their selling
principally to the school district level while supplemental material publishers
generally direct their sales efforts to individual school sites, making it
easier for teachers, principals and school librarians to place orders and
receive personalized service. The Company believes that there has been a shift
in purchasing decisions from the school district level to individual schools and
teachers which has resulted in increased use of supplemental materials.
INCREASE IN TEACHER SPENDING. Several factors are contributing to increased
spending by teachers including the move to smaller classrooms which will
increase the number of teachers in need of supplemental educational materials
and an increase in teacher turnover.
The Company believes that the consumers' interest in education has also led
to increased opportunities in the home market. In addition to the factors
mentioned above, primarily the concern over the quality of public education, the
Company believes that the following factors have created this increased
interest:
CONCERN ABOUT CHILDREN'S USE OF IDLE TIME. Parents are more sensitive and aware
of their children's use of idle time. Additionally, parents desire to limit what
they consider non-productive or even damaging activities.
(1)
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PARENT'S DESIRE TO SPEND QUALITY TIME WITH THEIR CHILDREN. With the time demands
resulting from two employed parents or single parenting, parents are looking for
tools to enhance the quality of the time they do spend with their children.
FAVORABLE DEMOGRAPHICS. The number of children in the Company's target market is
projected to continue to increase through the year 2002.
INCREASED LIFE EXPECTANCY. People are living longer, which increases the amount
of gift giving by grandparents in particular as well as others.
The Company believes that its products address the issues above leading to
increased sales to the home market.
BUSINESS STRATEGY
In its core business, the Company's principal business objective is to be a
leading supplier of effective supplemental educational products to both the
school and home markets. The following is a summary of the Company's strategy to
achieve this objective:
OFFER EFFECTIVE EDUCATIONAL PRODUCTS THAT MAKE LEARNING FUN. The Company employs
a combination of educators and developers to design products that make the
learning process fun. Each product is carefully designed to convey educational
content that is appropriate for a targeted age group and educational task. The
Company's products use combinations of themes, characters, sound, graphics and
speech in ways which the Company believes are engaging and entertaining to the
user. The educational content of the Company's products appeals to a wide range
of children and students, focused mainly on pre-kindergarten to eighth grade.
INTRODUCE A WIDE RANGE OF PRODUCTS BUT WITHIN SPECIFIC CATEGORIES. The Company
currently offers approximately 800 items including approximately 175 new
products and/or product line extensions which were introduced in 1999. In recent
years the Company has concentrated an increasing proportion of its research and
development effort on electronic learning aids and other higher priced items.
While the Company has traditionally developed products over a very wide range of
supplemental educational products, it is focusing on developing products in a
more limited number of categories such as geography, phonics, science, arts and
crafts, etc., while still emphasizing the use of electronic learning aids as
well as other mediums.
DEVELOP PRODUCTS THAT MORE CLOSELY ADDRESS THE CONSUMER. In order to avoid
incurring substantial development costs for products that are unique to a
particular market, the Company traditionally emphasized the development of
products that attempted to meet the needs of both the school and home markets.
Because home purchasers are often influenced by schools and teachers in
selecting products for their children, this approach is often successful.
However, it can result in developmental compromises that do not address
adequately the needs of either market. The Company believes this has limited the
sales of certain of these products. As such, the Company is developing its
products to address the needs of the market for which the product is primarily
intended. As a result, the Company is now using a four-pronged product,
distribution and marketing strategy aimed specifically at developing products
and targeting the specific needs of the customers and consumers in each channel.
Under the Educational Insights brand, the company will introduce as well as
continue to sell highly educational products for the school market and
parent/teacher stores. The Company's specialty toy division will introduce new
products and continue to market its line of educational toys and games under
the new Kidology brand to not only the specialty toy channels, but also to
parent/teacher stores via the education channel. The ExploraToy brand, which
develops and sells products to mass-market retailers, continues to address the
needs of this marketing and sales channel. Lastly, products unique to the direct
to school market will continue to be developed and marketed under the Learning
Advantage brand. The Company began using this targeted product development
strategy in 1999 for products being introduced in 2000 and beyond.
LICENSE OR BUY COMPUTER SOFTWARE PRODUCTS FOR DISTRIBUTION INTO THE COMPANY'S
CORE MARKETS. For the past three years, the Company incorporated as part of its
strategy the leveraging of its customer relationships and distribution
capabilities by licensing or purchasing software and CD-ROM products for
distribution to its core markets. However, the Company has recently decided to
de-emphasize this approach and is significantly reducing the number of licensed
CD-ROM products. The Company now seeks strategic alliances with others to
develop leading edge technology based products aimed at the pre-kindergarten
through eighth grade market.
EXPAND EXPLORATOY'S PRODUCT LINE AND DISTRIBUTION IN THE MASS MERCHANT RETAIL
MARKET. In 1998, ExploraToy continued as a supplier of educational and
science toys to the leading mass-market toy retailers. In addition to
expanding its product line, the Company created new brands to use in the mass
market and increased the visibility of its existing brands (The Amazing Live
Sea-Monkeys -Registered Trademark- and GeoSafari -Registered Trademark-)
through publicity and advertising. ExploraToy continued to develop products
designed to meet the needs of its mass-market customers in terms of
selection, price and quality.
PURSUE STRATEGIC LICENSING OPPORTUNITIES. The Company has entered into
licenses or other agreements with organizations such as the National
Geographic Society, Transcience Corporation for rights to the Amazing Live
Sea Monkeys -Registered Trademark- and Scholastic, Inc. for rights to the
Magic School Bus -Registered Trademark- property. While the Company does not
aggressively pursue licenses, it does pursue those that address a specific
area especially for the home market. For example, the Company expects to
enter into license agreements with childrens' product companies in order to
enhance the marketability of its early learning series products marketed
under the Kidology brand.
(2)
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EXPAND INTERNATIONALLY. In 1990, the Company opened its international subsidiary
in the United Kingdom which provides a distribution base for the sale of both
English and foreign language products into the European Common Market countries.
In addition, several of the Company's electronic learning aids, including its
GeoSafari products, have been licensed to Hausemann en Hotte, the parent
corporation of Jumbo, a Netherlands toy company, for European sales in French,
Dutch and Scandinavian languages. The Company entered into exclusive agreements
for the distribution of its products to the Italian and Spanish speaking markets
in 1996. International sales (i.e., sales outside of North America) of the
Company's products, including sales of the Company's United Kingdom subsidiary,
totaled approximately $3.6 million in 1999 or approximately 8.8% of sales. The
three foreign countries in which the Company experienced the highest level of
sales in 1999 were the United Kingdom, Italy and Hong Kong.
PRODUCTS
The Company's commitment to results-oriented education has caused it to
diversify its product lines to include a variety of educational content which
appeals to children and students mainly from pre-kindergarten to eighth grade.
The Company's products involve a wide spectrum of subject matter, including
phonics and reading, language, literature and writing, mathematics and critical
thinking, creative play, science and nature, social studies and geography, and
arts and crafts.
The Company designs and sells products that meet specifically targeted
educational goals in an entertaining format. Moreover, the Company believes that
because its products are designed to meet specific educational needs, the
typical Company product has a longer lifecycle than those of many other types of
toys, games and puzzles.
The Company is focusing on the development of products that fall within
specifically identified core categories for each of its primary markets.
Following is a listing of the Company's target core categories for each of its
product brand names:
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EDUCATIONAL INSIGHTS KIDOLOGY
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Electronic Learning Electronic Learning Aids
Reading Science and Nature
Math Arts and Crafts
Geography Infant/Pre-school
Science
Early Learning EXPLORATOY
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Electronic Learning Aids
LEARNING ADVANTAGE Science and Nature
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Classroom Electronic Teaching Tools Electronic Games
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The Company offers approximately 800 products and accessories including
electronic learning aids, science and nature products, board games, reading
programs, activity books and a wide spectrum of other supplemental educational
products. The following briefly describes five of the Company's top selling
product groups, each of which accounted for more than $1 million in sales in
1999:
ELECTRONIC LEARNING AIDS. Electronic-based devices designed for interactive play
have played an important part in the mix of products sold by the Company. As
indicated in the following table, electronic learning aids, which include
GeoSafari, GeoSafari Jr., GeoSafari Talking Globe, GeoSafari Talking Globe Jr.,
MathShark, MathSafari, GeoSafari Know-It-All, Reading Safari, GeoSafari World,
Learning Circle, Word Arcade, Rainbow and associated learning materials, have
been a major source of the Company's sales over the last five years. As a
percentage of sales, electronic learning aids have decreased to 43% in 1999 from
approximately 54% in 1995 primarily as a result of the decline of the Company's
older GeoSafari products.
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YEARS ENDED DECEMBER 31, (1)
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1999 1998 1997 1996 1995
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(IN THOUSANDS)
Electronic Learning Aids........... $17,775 $17,489 $18,645 $20,185 $21,445
All Other Products................. 23,304 22,020 20,090 21,358 18,691
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Total.............................. $41,079 $39,509 $38,735 $41,543 $40,136
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The Company currently sells a total of twenty-four electronic learning aids
that retail from $29.95 to $400.00. Three new electronic learning aids were
introduced in 1999, including the GeoSafari Know It All. This electronic quiz
unit is a laptop version of our famous GeoSafari unit that is aimed at the
mass-market consumer. Also introduced in 1999, were Learning Circle, which
builds the early learning skills of preschoolers, as well as Launch Pad, a
multi-sensory learning tool for primary grade students being marketed via the
Company's new direct-to-school division, Learning Advantage. Together these new
electronic learning aids accounted for $2.1 million in sales.
Sales for the ExploraToy GeoSafari World and the Educational Insights' GeoSafari
Talking Globe, which was introduced in 1996, accounted for approximately $6.6
million or 16% of sales in 1999. The GeoSafari Electronic Learning Games, which
include GeoSafari and GeoSafari Jr. product lines, are portable plastic
electronic devices which accommodate a wide range
(3)
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of separately sold lesson sets for interactive play with more than 50 lesson
sets currently available. GeoSafari is targeted to children ages 8 and up while
GeoSafari Jr. is targeted to ages 3 through 7. Sales of GeoSafari Electronic
Learning Game products accounted for approximately $2.5 million or 6.1% of sales
in 1999. Like GeoSafari, MathSafari, first introduced in 1993, consists of a
portable electronic device and a choice of 17 lesson sets that are sold
separately. Sales of MathSafari products accounted for approximately $1.0
million or 2.4% of sales in 1999. Five of the Company's electronic learning
aids, Word Arcade, Math Safari, Reading Safari, Rainbow, and the GeoSafari
Theater, are sold exclusively to the Company's school supply market.
Many of the Company's electronic learning aids have been widely recognized
as effective, well-designed educational products by various organizations.
Following is a partial list of awards that have been granted to GeoSafari,
MathSafari, GeoSafari Talking Globe and/or GeoSafari Talking Globe Jr.,
GeoSafari, GeoSafari Know It All, Math Shark, and Learning Circle among other
products:
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AWARD ORGANIZATION
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Best Classic Products Dr. Toy's 100 Best Children's Products of 1999
Gold Award Parent's Choice
Educational Toy of the Year British Association of Toy Retailers
Best Top 20 Toys Award Great American Toy Test
Best Bet Award Canadian Toy Testing Council
Gold Star Award Independent Toy Store Association of Canada
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BOOKS. The Company sells over 100 books. These include products such as science
picture books, illustrated classics, children's atlases and reading materials.
SCIENCE AND NATURE PRODUCTS. The Company currently markets a number of science
and nature products, the most popular of which is its line of over eight Amazing
Live Sea Monkeys products which were developed by ExploraToy and are marketed
through all of the Company's channels. Sales of these products accounted for
approximately $4.1 million or 10% of sales in 1999. The Company also offers
twelve "Adventures in Science" kits that retail for $9.95. Each "Adventures in
Science" kit contains a booklet describing more than 20 experiments as well as
an assortment of materials required for each experiment. In addition, six Test
Tube Science Projects each containing ten experiments was introduced in 1998
that retail for $6.95 each.
PHONICS READING PROGRAMS. The Company sells approximately eight phonics products
primarily to the school market. This includes three Ready-to-Read Phonic
products which were introduced in 1999 in order to expand this product group.
This group is anchored by The Phonics Game which the Company began distributing
in 1998. Retail prices for the phonics products range from $19.95 to $249.95.
BOARD GAMES. The Company sells over twenty board games in both the school and
home markets, which teach math, geography and other subjects. Popular board
games sold by the Company include Dino Checkers, Name That State and Presto
Change-O. Retail prices for the Company's board games range from $14.95 to
$29.95.
PRODUCT DEVELOPMENT
Since January 1998, the Company has introduced approximately 225 new
products and accessories. Products introduced in 1999, 1998 or 1997 accounted
for approximately 31% of the Company's sales in 1999 as compared to 1998 when
approximately 30% of sales were generated from products introduced in 1998, 1997
and 1996. In 1999, the Company spent approximately 8% of sales on research and
development and has spent an average of approximately 11% of its annual sales on
research and development since 1996.
The Company employs approximately 30 full-time staff members in the product
development process. The 30 staff members consist of 6 editors, many of who were
former classroom teachers, an 7 person graphic arts department and 8 engineering
and technical design personnel and 7 product developers. The Company also
retains freelance artists, editors, designers and engineers for product
development activities.
Product development ideas come from a number of different sources, both
internal and external. Once a basic product idea is agreed upon,
multi-functional teams consisting of production, art editorial, and technical
personnel under the direction of a Project Manager research, write, illustrate,
draft, engineer, make models, and graphically design each product. A product
development team can generally produce most products within a twelve-month
period. The Company typically works on 50 to 100 development projects
simultaneously in order to provide a steady flow of new product for
introduction.
DISTRIBUTION CHANNELS AND CUSTOMERS
The Company believes that a key element to its success is its multiple
channel strategy through which the Company broadly penetrates both the school
and home markets. The Company's products are sold through six basic distribution
channels: (i) school supply dealers and parent/teacher stores, (ii) direct to
school (iii) specialty retail stores, (iv) specialty catalog companies, (v) mass
merchant retailers, and (vi) e-commerce sites.
(4)
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SCHOOL SUPPLY DEALERS AND PARENT/TEACHER STORES. The school market is served by
approximately 1,400 independent dealers, who sell the Company's products
directly to school districts, individual schools, teachers and a growing number
of parents through supply stores. Many of these dealers have been selling the
Company's products for over twenty years. No individual dealer accounted for
more than 5% of the Company's 1999 sales. Approximately 43% of the Company's
sales, excluding sales made by its United Kingdom subsidiary, ("North American
sales") were derived from the school market in 1999.
Traditionally, teacher-supply dealers sold primarily to teachers and many
school administrators. However, to address parental interest in and concern over
the quality of education in public schools, many school supply dealers have
opened their own retail stores to serve both the school and home markets. These
stores have become "parent/teacher" stores, with as much as 50% of annual sales
coming from parents.
DIRECT TO SCHOOL. In 1999, the Company initiated a new channel strategy to
market a different line of products direct to schools through its new Learning
Advantage division. The products marketed in this channel tend to be more
expensive and/or complex instructional material that requires demonstration to
be effectively marketed. The products are sold directly to elementary school
teachers and administrators as opposed to using a dealer network.
SPECIALTY RETAIL STORES, CATALOG COMPANIES, AND E-COMMERCE SITES. Specialty
retail stores, catalog companies and selected e-commerce sites serve as the
primary distribution source for the Company's products in the home market. In
recent years, the specialty retail market has seen the emergence of up-scale
stores featuring premium products. The Company estimates that its products are
available in over 2,500 of such specialty retail outlets. The Company derived
approximately 28% of its 1999 North American sales from sales through specialty
retail stores, catalog companies, and selected e-commerce sites.
Although specialty retail stores in the United States are primarily
comprised of single store retailers, the Company's largest customers in this
channel are multi-store retailers. In 1999, the Company's top three customers in
this market segment were Zainy Brainy, J.C. Penney and Store of Knowledge.
E-commerce sites through which the Company's products are offered include
Amazon.com, EToys and Games2Learn. Parents, grandparents and children constitute
the substantial majority of purchasers of the Company's products from specialty
retail stores and catalog companies. However, as is the case with respect to the
teacher supply stores in the school market, there is some degree of cross-over
between the school and home markets from teachers and school administrators who
may purchase supplemental educational products at specialty retail stores for
use in the classroom.
MASS MERCHANT RETAILERS. The Company currently sells certain of its products
through mass merchant retail stores, such as K-B Toys, K-Mart, Target Stores
and Toys "R" Us. The Company focuses its sales efforts in the science and
activity toy segment of the mass merchant retail toy market. This includes
electronic learning aids, building sets, model kits and art sets , outdoor
activity kits, as well as the Amazing Live Sea-Monkeys. The science and activity
segment of the market is generally supplied by small companies with more
narrowly focused product lines which are not promotionally oriented in nature,
have a longer than average product life, and are less seasonal than the market
as a whole. Approximately 21% of the Company's sales in 1999, were made through
mass merchant retailers.
SALES AND MARKETING
The Company has developed separate sales and marketing programs for each of
the major markets which it serves. These are described by market as follows:
SCHOOL SUPPLY AND PARENT/TEACHER STORE MARKETS. The Company's sales to the
school supply and parent/teacher store market are made primarily through the
Company's management and in-house sales people who target dealers that own
school supply stores and/or publish school supply catalogs. These sales people
work to make certain that the Company's products are included in the catalogs
and retail outlets utilized by school supply dealers for sales to schools,
teachers and parents. By year-end 1999, the sales force was comprised of five
in-house and five independent sales agents managed by the National Sales
Manager.
The Company advertises and promotes to the school supply and parent/teacher
store market primarily through business to business mailings, direct contact by
the Company's sales force, and participation in trade shows. The Company mails
its Educational Dealer's Buyers Catalog each year to its approximately 1,400
independent school supply dealers. Other mailings are sent to these dealers
throughout the year including new pricing/order forms, special literature
program promotions, mid-year new product introductions, and ad slicks for use in
local advertising.
In addition, the Company participates in the major school dealer trade
shows including the National School Supply and Equipment Association, as well as
selected key educator shows such as National Association for the Education of
Young Children, National Council of Teachers of Mathematics, the International
Reading Association, and the National Educational Computing Conference.
During 1999, in support of the school supply and parent-teacher store
markets, the Company mailed out over 900,000 K-8 Catalogs directly to individual
teachers and school administrators.
(5)
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DIRECT TO SCHOOL. The Company sells a select number of unique products directly
to elementary school teachers and administrators primarily through thirty-eight
independent sales representative groups, which together field approximately 59
sales representatives as well as direct promotional mailings.
In addition, the Company and/or its sales representatives participates in
many local, regional and state educational conventions as educators have
typically ranked such shows very highly in terms of how they learn of new
products. The Company also participated in many national conventions in 1999
including the International Reading Association, the National Association of
Elementary School Principals, and the Council for Exceptional Children.
SPECIALTY RETAILERS. The Company reaches the specialty retailers through
twenty-two independent sales firms, which together field approximately 80 sales
representatives. Advertising and promotional efforts consist of trade shows and
catalog presentations. The 1999 Toys and Games Trade catalog was mailed to all
dealers and was given to retailers at the annual New York International Toy Fair
in February.
In addition, the Company participates in many of the major toy, book and
gift fairs throughout the world, including the Canadian Toy Fair and the
Frankfurt International Book Fair.
CATALOG COMPANIES. Sales to catalog companies are made using a combination of
in-house sales staff and non-exclusive independent sales representatives.
MASS MERCHANT RETAILERS. The Company's mass merchant retailers are reached
through a combination of independent sales representatives and direct
presentations made by ExploraToy's management team. The non-exclusive
independent sales force consists of ten firms, employing approximately 26 sales
personnel. Direct presentations are made to major prospective customers in the
United States and Canada. In addition, the Company independently presents its
ExploraToy products at the Hong Kong Toy Fair, the Dallas Import Show and the
Canadian Toy Fair in January and the New York International Toy Fair in
February.
In 1998, ExploraToy moved away from marketing licensed products with the
exception of the Amazing Live Sea-Monkeys -Registered Trademark-, which
continued to generate significant sales in 1999. This licensed brand name is
extremely strong worldwide and supported by most of the major mass merchant
retailers.
Using the above approach, ExploraToy has been able to successfully market
its own line of branded products to said retailers.
BACKLOG
The Company normally ships within two days of receiving an order and,
therefore, does not customarily have a significant backlog.
MANUFACTURING
Most of the Company's sales are generated from products supplied complete
by contract manufacturers. The remaining products are assembled or completed
from components provided by other vendors. In excess of 85% of the Company's
purchases of products and/or components are from vendors based in Taiwan, China,
Hong Kong, Thailand, Korea, Japan and Singapore. The balance are purchased from
a variety of vendors located primarily in the United States. The Company has
approximately 70 international vendors. The terms of the Company's arrangements
with its contract manufacturers are negotiated individually as to price and
quantity and vary from purchase order to purchase order depending on the size of
the particular order, the speed in which the Company requires the order to be
completed, and other factors. Purchase order quantities vary depending on the
product type and the Company's anticipated demand for such product. Payment
terms generally consist of either letters of credit, wire transfers or 30 to 60
day payment terms.
The Company receives most of its products in finished form at its
distribution facility in Columbia, Tennessee. At this facility products are
inspected, any necessary final assembly is completed and shipment is made to
customers. Certain ExploraToy customers purchase products that are shipped
directly to them from the Company's Asian vendors.
TRADEMARKS, COPYRIGHTS AND PATENTS
The Company relies primarily on a combination of patents, copyrights,
trademarks, trade secret laws, and employee and third-party nondisclosure
agreements to protect its proprietary rights. While the Company believes that
these protections are important, they are less significant to the Company's
success than factors such as breadth and quality of its products, the knowledge,
ability and experience of its personnel, its relationship with distributors and
specialty retail stores and its product development procedures.
COMPETITION
The markets for the Company's products are both highly competitive and
highly fragmented. The Company competes for shelf and catalog space with a
number of suppliers of educational games and toys, some of which have greater
financial and marketing resources than the Company. The Company believes that
the principal competitive factors in the markets it serves are breadth and
quality of product offering, price, and market responsiveness. Although the
Company
(6)
<PAGE>
believes that it competes favorably on the basis of these factors, there are
competitors in each of the Company's major markets with significant financial
and marketing resources.
The markets being penetrated by the Company's ExploraToy products is also
highly competitive and the Company typically competes with larger companies
offering a broader line of products. The Company intends to limit its risk in
these markets by concentrating on a narrowly defined product group dealing with
science activity and related educational products where competition is typically
less severe. There can be no guarantees, however, that this strategy will be
successful.
During the past three years, the Company has been seeking software product
to be purchased or licensed from others for sale and distribution through its
core customer base. However, the Company no longer believes that it can compete
favorably in its traditional markets within the parameters of this strategy. The
Company is currently emphasizing the development of digital products based on
its content archives and other resources via strategic alliances with outside
developers.
EMPLOYEES
As of December 31, 1999, the Company had approximately 155 full-time
employees. In addition, the Company periodically hires part-time employees to
meet seasonal market demands. Approximately 30 of the Company's full-time
employees are engaged in the Company's product development and creative efforts,
designing, writing, editing, drafting and developing the Company's products. An
additional 32 employees are involved in sales and marketing; 36 are involved in
general administrative duties; and approximately 57 are involved in warehousing
and distribution activities. The Company believes that its relationships with
its employees are good. The employees of the Company are not parties to any
collective bargaining agreements.
Renewed growth will depend, in part, on the Company's ability to attract
and retain qualified personnel. The Company has not conducted any efforts to
determine the feasibility of expanding its staff, but in the past has generally
found qualified personnel available to satisfy its growth requirements.
RISK FACTORS
The Company believes the following factors present risks to the Company's
business:
DEPENDENCE ON NEW PRODUCTS. The Company's ability to maintain and expand
its sales base depends in part on its continued successful development of new
products. In 1999, the Company introduced over 175 new products. Approximately
31% of the Company's 1999 revenues were derived from products introduced in
1999, 1998 or 1997. While the Company makes substantial investments in product
development and is continually developing ideas for new products, there is no
assurance that it will be successful in these efforts in the future. If new
products or upgrades to existing products are not introduced or accepted in the
marketplace, the Company's operating results could be materially adversely
affected.
CONTINUED ACCEPTANCE OF EXISTING PRODUCTS. In 1999, approximately 16% of
the Company's sales were generated by GeoSafari Talking Globe, Globe Jr. and
GeoSafari World products, whereas, approximately 20% of the Company's 1998 sales
were generated by said GeoSafari Talking Globe related products. If sales of the
Company's leading products decline at a rate greater than sales increases
generated by the introduction of new products, the Company's operating results
could be materially adversely affected.
SEASONALITY AND FLUCTUATIONS IN QUARTERLY PERFORMANCE. A large portion of
the Company's business is highly seasonal, with operating results varying
substantially from quarter to quarter. Sales tend to be lowest in the first and
second quarters and highest in the third and fourth quarters of the calendar
year. The Company has typically experienced losses during the first quarter and
may experience such seasonal losses in the future. Products are generally
shipped as orders are received and accordingly the Company has historically
operated with little backlog. As a result, sales in any quarter are dependent on
orders booked and shipped in that quarter. If sales or timing of orders fall
below the Company's expectations, operating results could be adversely affected
for relevant quarters and for the year if expenses based on these expectations
have already been incurred. Further, due to the seasonality of the business,
cash flow tends to be negative during the second and third quarters when
inventory and accounts receivable have historically increased in anticipation of
the seasonally higher product sales in the third and fourth quarters. Cash flow
requirements during these periods are funded by the revolving line of credit
that the Company has with a bank. See further discussion of said line of credit
at "Liquidity and Capital Resources" in Item 7. Should the Company not have a
sufficient line of credit available during the year, it could have a material
adverse effect on the Company's results of operations due to its limited ability
to internally finance the growth in inventory and accounts receivables necessary
to generate the seasonally higher net income the Company typically experiences
in the third and fourth quarters. See "Quarterly Information and Seasonality"
section in Item 7 for discussion of seasonality risks and quantification of
quarterly sales and net income amounts exemplified therein.
DEPENDENCE ON CONTRACT MANUFACTURERS. The Company conducts substantially
all of its manufacturing operations through contract manufacturers, many of
which are located in the People's Republic of China (the "PRC"), Hong Kong,
Singapore and Taiwan. The Company does not have long-term contracts with any of
its manufacturers. Foreign manufacturing is subject to a number of risks,
including but not limited to transportation delays and interruptions, political
and economic disruptions, the impositions of tariffs and import and export
controls and changes in governmental policies. While the Company to date has not
experienced any material adverse effects due to such risks, there can be no
assurance that
(7)
<PAGE>
such events will not occur in the future and possibly result in increases in
costs and delays of, or interferences with, product deliveries resulting in
losses of sales and goodwill.
GOVERNMENTAL REGULATION. In the United States, the Company is subject to
the provisions of, among other laws, the Federal Consumer Product Safety Act and
the Federal Hazardous Substances Act (the "Acts"). The Acts empower the Consumer
Product Safety Commission (the "Consumer Commission") to protect the public
against unreasonable risks of injury associated with consumer products,
including toys and other articles. The Consumer Commission has the authority to
exclude from the market articles which are found to be hazardous and can require
a manufacturer to repair or repurchase such toys under certain circumstances.
Any such determination by the Consumer Commission is subject to court review.
Violations of the Acts may also result in civil and criminal penalties. Similar
laws exist in some states and cities in the United States and in many
jurisdictions throughout the world. The Company maintains a quality control
program (including the retention of independent testing laboratories) to ensure
compliance with applicable laws. The Company believes it currently is in
substantial compliance with these laws. In general, the Company has not
experienced difficulty complying with such regulations, and compliance has not
had an adverse effect on the Company's business.
COMPETITION. The market for educational products is highly fragmented
and competitive. In the home and school markets, the Company competes for
shelf and catalog space with a number of suppliers of educational games and
toys, many of which have greater financial and marketing resources than the
Company. Existing competitors may continue to broaden their product lines and
potential competitors, including large toy manufacturers, entertainment
companies and publishers, may enter or increase their focus on the
supplemental educational products market, resulting in greater competition
for the Company. Expenditures in the market for educational products are
shifting towards a higher degree of reliance on software and computer-based
products. While the Company has recently changed its strategy from focusing
on licensing CD-ROM products obtained from others to entering into strategic
alliances with others to develop its software products, there is no assurance
that changes in the broader software market which are driving competitors
from the consumer software market into the educational software market will
not produce such intense competition that the Company will not be able to
successfully market its software products.
DEPENDENCE ON NEW DISTRIBUTION CHANNELS. There is no guarantee that the
Company will continue to be successful in its attempts to expand its
distribution into the mass merchant retail channels with its ExploraToy line of
science products.
ACCOUNTS RECEIVABLE RISKS. Certain of the Company's customers participate
in an accounts receivable dating program pursuant to which payments for products
are delayed for up to 120 days. Although no customer accounted for more than 5%
of the Company's sales in 1999, the insolvency or business failure of any
customer with a large account receivable could have a material adverse affect on
the Company.
DEPENDENCE ON KEY PERSONNEL. The Company's future success depends in large
part on the continued service of key technical, marketing, sales and management
personnel and on its ability to continue to attract, motivate and retain highly
qualified employees. The Company's key employees include Theodore Eischeid,
George Atamian, Kevin Casey, Alan Fine, James Whitney, Kelly Cole and Stephen
Billis. While the Company has employment agreements with certain of its
employees, any employee may voluntarily terminate employment with the Company at
any time. Competition for such employees is intense and the process of locating
key technical and management personnel with the combination of skills and
attributes required to execute the Company's strategy is often lengthy.
Accordingly, the loss of the services of and the unavailability of replacements
for key personnel could have material adverse effect upon the Company's results
of operations and on research and development efforts. The Company does not have
key-person insurance covering its management personnel or other key employees.
INTERNATIONAL EXPANSION. In 1990, the Company established a distribution
subsidiary in the United Kingdom. Approximately 8.8% of the Company's fiscal
1999 sales, including sales by the United Kingdom subsidiary, were generated
from sales to customers outside of North America. The Company's success in
Europe and elsewhere is dependent upon a number of factors, including the
Company's ability to successfully convert the textual portions of its products
into foreign languages and the Company's ability to successfully develop a
market for its products. The Company is also subject to the attendant risks of
doing business abroad, including delays in shipments, adverse fluctuations in
currency exchange rates, increases in duties and tariffs, changes in foreign
regulations, political turmoil and deterioration in international economic
conditions. There can be no assurance that the Company will be able to
successfully expand its international sales.
DEPENDENCE ON GOVERNMENT FUNDING. Approximately 43% of the Company's North
American sales come directly or indirectly from the school market. This market
is, to a degree, dependent upon government support from one or more sources.
Future constraints on education funding by federal, state and local governments
could have a material adverse effect on the Company's business.
CONCENTRATION OF STOCK OWNERSHIP. Members of the Cutler family and certain
family trusts controlled by them beneficially own approximately 70% of the
outstanding stock. As a result, such persons will have the ability to control
the Company and direct its affairs and business. Such concentration of ownership
may have the effect of delaying or preventing change in control of the Company.
POSSIBLE ADVERSE IMPACT OF ISSUANCE OF PREFERRED STOCK. The Board of
Directors of the Company has authority to issue up to 10,000,000 shares of
Preferred Stock and to fix the rights, preferences, privileges and restrictions
of those shares without any further vote or action by the shareholders. The
potential issuances of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company, may adversely affect
the market price of, and the
(8)
<PAGE>
voting and other rights of, the holders of Common Stock. The Company
currently has no plans to issue shares of Preferred Stock.
ITEM 2: PROPERTIES
In September 1995, the Company moved its headquarters to a building which
it purchased in January of 1995 in Carson, California. This facility comprises
approximately 54,000 square feet, essentially all of which is office space. The
Company's product development, marketing, finance and customer service personnel
are located in this facility.
The Company's Tennessee distribution facility comprises approximately
162,000 square feet and includes approximately 9,000 square feet of offices. The
Tennessee facility is owned by Karen M. Duncan Cutler and Jay Cutler, a Director
and shareholder of the Company and is leased by them to the Company. The Company
believes that there is adequate warehousing space available for expansion near
the Tennessee facility should the need arise.
ITEM 3: LEGAL PROCEEDINGS
The Company is involved from time to time in litigation incidental to its
business. The Company is not currently involved in any pending litigation
matters which would have a material adverse effect on the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of securities holders during the
fourth quarter of the fiscal year ended December 31, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
Company's executive officers and key employees at December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Burton Cutler.......... 73 Chairman of the Board
Theodore J. Eischeid... 49 President and Chief Executive Officer
George C. Atamian...... 62 Vice President, Product Concept, Development and Production
Stephen E. Billis...... 50 Vice President, Chief Financial Officer and Secretary
Kevin M. Casey......... 48 Vice President, Sales & Marketing - Educational Division
Kelly A. Cole.......... 48 Vice President, Information Systems, Warehousing and Distribution
Alan I. Fine........... 52 Vice President, Sales and Marketing - Consumer Division
James B. Whitney....... 48 Vice President, Sales and Marketing - Learning Advantage
</TABLE>
Burton Cutler is one of the founders of the Company and has been Chairman
of the Board of Directors since the Company's inception in 1962. Mr. Cutler also
served as the Company's principal executive officer from its formation until
1992.
Theodore J. Eischeid joined the Company in September 1998 as President and
Chief Executive Officer. Mr. Eischeid's experience includes seven years as
President of Revell-Monogram of Morton Grove, Illinois, a subsidiary of Binney
and Smith and Hallmark Cards, Inc. He currently serves as Vice Chairman of the
Toy Manufacturers of America. His educational credentials consist of a B.S.
degree from Iowa State University, a Masters of Management degree from
Northwestern University's Kellogg School of Management and a Juris Doctor, Cum
Laude degree from Loyola University of Chicago.
George C. Atamian was appointed Vice President, Product Concept,
Development and Production in January 1999. In this capacity he is responsible
for all of the Company's product research and development activities. He joined
the Company in 1993 as General Manager of the ExploraToy line of products for
mass merchant retailers. Prior to April 1993, Mr. Atamian served as an
independent consultant to the Company. From 1989 to 1992, Mr. Atamian was an
officer of Super Science, Ltd., a science toy company. Prior to 1989, Mr.
Atamian served as Vice President of Educational Science Products for the
Bushnell division of Bausch and Lomb, a producer of optical products.
Stephen E. Billis was elected Vice President and Chief Financial Officer
in March 1999. He joined the Company in 1994 as Controller and was appointed
Corporate Secretary in 1996. From 1991 to 1993, Mr. Billis was Vice President,
Finance and Administration of the Relays divisions of Teledyne, Inc. Prior to
1991, Mr. Billis was a Senior Audit Manager with the international accounting
firm of Deloitte & Touche LLP. He received a Masters of Business Administration
degree from the Anderson School of Management at UCLA.
(9)
<PAGE>
Kevin M. Casey was promoted to Vice President, Sales and Marketing -
Educational Division in January 1999. He joined the Company in 1992 as National
Sales Manager, Education Division and was promoted to Director of Sales and
Marketing for both the education and specialty consumer divisions in 1994. Mr.
Casey has over 25 years experience in the school supply and teacher store
industry. From 1984 to 1991, Mr. Casey was Director of Sales and Marketing for
Incentive Publications a teacher resource publisher and from 1980 to 1984 was
regional sales manager with Enrich/Ohaus a supplemental teaching aids publisher.
Kelly A. Cole has been employed by the Company since 1986 and has served
as Vice President, Warehouse and Distribution since 1990. In December 1999, his
responsibilities were expanded to include the final selection and implementation
of the Company's new enterprise resource planning (ERP) system. Prior to joining
the Company, Mr. Cole served in Operations and Material Management with Terry
Hinge, Inc., a manufacturer and importer of hardware.
Alan I. Fine joined the Company in August 1999 as Vice President, Sales
and Marketing - Consumer Division. He is responsible for sales and marketing to
all customers in the specialty retail toy store and mass merchant channels. From
1995 to 1999, Mr. Fine was principal of KaleidOScope, a marketing consulting
firm specializing in family entertainment and youth marketing whose clients
included Knowledge Adventure, Radica Games, Ltd. and BRIO Corporation. Prior
experience includes fifteen years with Mattel Toys in a variety of marketing
positions including Senior Vice President, Marketing & Entertainment.
James B. Whitney, in January 1999, was assigned to focus exclusively on
managing and profitably growing the Company's new direct-to-school product line
under the Learning Advantage brand name. He had been the Company's Vice
President, Marketing since 1987 and served as the Company's Director of
Marketing from 1985 until 1987. Prior to joining the Company in 1985, Mr.
Whitney was a classroom teacher and spent 14 years in sales and marketing of
products in the school market.
Each officer serves at the discretion of the Board of Directors.
(10)
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Since April 15, 1994, the Company's Common Stock has traded on The Nasdaq
Stock Market ("Nasdaq") under the symbol "EDIN".
The following table sets forth the high and low sales prices per share for
the Common Stock as reported by Nasdaq for fiscal years 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31 $4 1/4 $1 11/16 $2 9/16 $1 1/4
June 30 2 1/4 1 17/32 2 3/4 1 5/8
September 30 2 1/4 1 1/2 2 1/4 1 1/8
December 31 2 11/16 1 1/8 2 5/16 1 1/8
</TABLE>
As of March 15, 2000, the approximate number of shareholders of record
of the Common Stock was 106.
The Company does not anticipate paying cash dividends in the foreseeable
future. Any future determination as to payments of dividends will be at the
discretion of the Company's Board of Directors and will depend on the Company's
results of operations, financial condition, contractual restrictions and other
factors deemed relevant by the Board of Directors.
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share
data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Sales................................. $41,079 $39,509 $38,735 $41,543 $40,136
Cost of sales......................... 22,298 22,582 19,208 19,526 18,150
------ ------ ------ ------ ------
Gross profit.......................... 18,781 16,927 19,527 22,017 21,986
------ ------ ------ ------ ------
Operating Expenses:
Sales and marketing................... 7,849 7,624 7,835 8,216 9,242
Warehousing and distribution.......... 2,850 3,281 3,197 3,321 3,994
Research and development.............. 3,384 4,829 4,328 5,289 5,166
General and administrative............ 4,110 4,285 3,640 3,809 3,830
----- ----- ----- ----- -----
Total operating expenses........... 18,193 20,019 19,000 20,635 22,232
------ ------ ------ ------ ------
Operating income (loss)............... 588 (3,092) 527 1,382 (246)
------ ------ ------ ------ ------
Interest expense, net................. (463) (406) (207) 233 21
Other income, net..................... (146) (231) 158 164
Income (loss) before provision
(benefit) for income taxes......... (21) (3,729) 162 1,313 (267)
Provision (benefit) for income taxes.. (13) (1,445) 97 484 (95)
------- ------- ------- ------ ------
Net income (loss)..................... $ (8) $(2,284) $ 65 $ 829 $ (172)
====== ======= ====== ======= =======
Net income (loss) per share - basic and
diluted (1)......................... $(0.00) $ (0.32) $ 0.01 $ 0.12 $ (0.02)
Weighted average shares outstanding -
basic (1)........................... 7,040 7,040 7,040 7,040 7,040
Weighted average shares outstanding -
diluted (1)......................... 7,040 7,040 7,082 7,042 7,040
BALANCE SHEET DATA (AT PERIOD END):
Working capital....................... $15,973 $16,447 $19,143 $18,674 $17,982
Total assets.......................... 27,814 29,279 30,130 30,904 28,254
Total debt............................ 3,691 4,814 1,685 2,295 1,394
Shareholders' equity.................. 21,223 21,239 23,471 23,464 22,584
</TABLE>
(1) The earnings per share amounts prior to 1997 have been restated
as required to comply with Statement of Financial Accounting
Standards No. 128,
EARNINGS PER SHARE.
(11)
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was founded in 1962 to develop and market supplemental
educational materials to assist in the teaching of reading. Initially, the
Company's product development and marketing efforts were concentrated on
products for use primarily within the school environment. As sales of the
Company's products for use at home increased, products were packaged for the
home market and sales to this market began to grow rapidly through specialty
retail stores. Sales peaked at $45,640,000 in 1994 by which time the Company
had achieved distribution in most of the nation's specialty retail stores.
Sales decreased in the more recent years because sales of the Company's
leading GeoSafari product line had matured and subsequently declined and the
Company was unsuccessful in launching enough new products to offset this
decline. The Company had difficulty in bringing new products to market in
1997 and 1998. However, subsequent to year end 1998, the Company implemented
organizational changes that it believes will improve the product development
process. Such organizational changes included the promotion of the former
Vice-President and General Manager for the ExploraToy division to Vice
President Product Concept, Development and Production who is responsible for
the development of all the Company's products. Although improvements have
been made, increasing the efficiency of the product development process
continues to be a strong focus of the Company's management.
In 1990, the Company formed Educational Insights Limited, a United Kingdom
company, to market and distribute the Company's products throughout the United
Kingdom and other foreign countries. Sales of Educational Insights Limited were
$3.1 million, $3.0 million and $3.0 million and income (loss) before taxes for
the subsidiary was $(35,000), $15,000 and $60,000 for the years ended December
31, 1999, 1998 and 1997 respectively. Income (loss) before taxes in 1999, 1998
and 1997 includes foreign exchange losses of $26,000, $64,000 and $45,000,
respectively. Foreign exchange gains/losses are reported in "Other income, net"
in the Company's consolidated financial statements.
The Company's cost of sales includes amounts paid to its vendors for
products and components purchased, the cost of freight and duty to land such
goods at the Company's distribution facility in Columbia, Tennessee, plus the
cost of assembly labor for certain of the Company's products. Research and
development expenses include costs associated with the identification and
validation of the educational content of the Company's products and the
incorporation of new technology as well as expenses relating to engineering and
quality assurance. All product development costs have been expensed as incurred.
RESULTS OF OPERATIONS:
The following table sets forth certain data as a percentage of sales:
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales......................... 54.3 57.1 49.6
Gross profit...................... 45.7 42.9 50.4
Operating expenses:
Sales and marketing............... 19.1 19.3 20.2
Warehousing and distribution...... 6.9 8.3 8.3
Research and development.......... 8.3 12.2 11.2
General and administrative........ 10.0 10.9 9.4
---- ---- ---
Total operating expenses.......... 44.3 50.7 49.1
Operating income (loss)............... 1.4 (7.8) 1.3
Interest expense, net................. (1.1) (1.0) (0.5)
Other income (expense), net........... (0.4) (0.6) (0.4)
----- ----- -----
Income (loss) before provision
(benefit) for income taxes.......... (0.1) (9.4) 0.4
</TABLE>
1999 COMPARED TO 1998
SALES. Sales increased by 4.0%, or $ 1.6 million, to $41.1 million in 1999
from $39.5 million in 1998. Sales in the school market increased 2.3% and sales
in the specialty retail market increased 18.9% primarily due to the continued
success of the Math Shark, Talking Globe Jr. and Phonics Game products as well
as increased sales to the larger specialty retail toy store chains. Sales in the
mass market channel decreased 12.4% despite the success of the GeoSafari
Know-It-All primarily due to lower sales of the GeoSafari World.
(12)
<PAGE>
GROSS PROFIT. The Company's gross profit increased 1.9 million to $18.8
million in 1999 from $16.9 million in 1998. Expressed as a percentage of
sales, the gross margin increased to 45.7% in 1999 from 42.8% in 1998. The
increase in gross profit was primarily due to decreased charges for excess
inventory taken in the fourth quarter of 1998. Adjusted for these charges,
gross profit margins would have been somewhat lower in 1999 than 1998
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, as well as increased depreciation in 1999 compared
to 1998 due to the higher levels of new product tooling purchased during 1998
compared to 1997 tooling purchases.
SALES AND MARKETING EXPENSE. Sales and marketing expense increased by
3.0%, or $0.2 million, to $7.8 million in 1999 from $7.6 million in 1998.
However, as sales increased at a higher rate than these expenses, sales and
marketing expenses decreased from 19.3% to 19.1%, as a percentage of sales.
WAREHOUSING AND DISTRIBUTION EXPENSE. Warehousing and distribution expense
decreased by 13.1%, or $0.4 million, to $2.9 million in 1999 from $3.3 million
in 1998. Expressed as a percentage of sales, warehousing and distribution
expense decreased to 6.9% in 1999 compared to 8.3% in 1998. The decrease in
warehousing costs is due in part to increased efficiency experienced in 1999 as
a result of the implementation of a new automated warehouse system in the fall
of 1998.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
decreased 30.0%, or $1.4 million, to $3.4 million in 1999 from $4.8 million in
1998. Research and development expense expressed as a percentage of sales
decreased to 8.3% in 1999 from 12.2% in 1998. The decrease was primarily the
result of cost reductions resulting from the reorganization of this department
in 1999, as well as relatively higher expenses in 1998 relating to the
cancellation of the Big Talk project in the fourth quarter of 1998.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
decreased 4.1%, or $0.2 million, to $4.1 million in 1999 from $4.3 million in
1998. General and administrative expense expressed as a percentage of sales
decreased to 10.0% in 1999 from 10.9% in 1998. The decrease was primarily a
result of severance costs incurred in 1998 resulting from organizational changes
that were not incurred in 1999. This decrease was partially offset by increased
costs in 1999 relating to increased compensation expense resulting from
personnel changes, and a higher provision for bad debt and sales returns due to
the higher sales volume in 1999 compared to 1998.
INTEREST EXPENSE, NET. Net interest increased by $57,000 to $463,000 in
1999 from $406,000 in 1998. This increase was due to increased borrowings under
the company's revolving line of credit as well as increases in the prime
interest rate which is the basis for the interest charged on the line of credit
facility.
OTHER INCOME, NET. Other income (expense) net is comprised primarily of
foreign exchange rate gains/losses from international operations and Canadian
sales as well as various bank account charges. Net other expense decreased by
36.8% or $85,000 to $146,000 in 1999 from $231,000 in 1998. The decrease was
primarily due to lower foreign exchange losses recorded at the Company's UK
subsidiary in 1999 compared to 1998. In addition, foreign exchange gains on
sales to Canada were experienced in 1999 due to the strengthening Canadian
dollar, compared to foreign exchange losses experienced in 1998.
1998 COMPARED TO 1997
SALES. Sales increased by 2.0%, or $0.8 million, to $39.5 million in
1998 from $38.7 million in 1997. Although sales in the school market remained
essentially unchanged, sales in the specialty retail market decreased by
16.1% while sales in the mass market increased 68.8%. The decrease in the
specialty retail market reflects the continued decline of its historically
leading product line, GeoSafari, which decline was not entirely offset by
revenues from its newer products despite the success of the Company's new
Math Shark and Talking Globe Jr. products. The decline in specialty retail
sales was more than offset, however, by the increase in sales to the mass
market. This was primarily the result of 1998 being the first full year of
sales of the GeoSafari World as well as the introduction of certain product
line extensions to the already successful Sea-Monkeys -Resgistered Trademark-
product line. The Sea-Monkeys -Registered Trademark- product line is sold
through all of the Company's channels and generated revenue of approximately
$3.4 million in 1998 as compared to approximately $2 million in 1997.
GROSS PROFIT. The Company's gross profit declined $2.6 million to $16.9
million in 1998 from $19.5 million in 1997. Expressed as a percentage of sales,
the gross margin decreased to 42.8% in 1998 from 50.4% in 1997. The decrease was
primarily the result of charges relating to excess inventory and recent
decisions to discontinue certain low volume product lines as well as an increase
in the proportion of sales to the mass market which generates somewhat lower
margins than sales to other channels.
SALES AND MARKETING EXPENSE. Sales and marketing expense decreased by
2.7%, or $0.2 million, to $7.6 million in 1998 from $7.8 million in 1997. Sales
and marketing expense decreased to 19.3% of sales in 1998 from 20.2% of sales in
1997. The decrease was primarily the result of lower variable expenses resulting
from the decline in sales to the specialty retail market.
WAREHOUSING AND DISTRIBUTION EXPENSE. Warehousing and distribution expense
increased by 2.6% or $0.1 million to $3.3 million in 1998 from $3.2 million in
1997. However, expressed as a percentage of sales, warehousing and distribution
expense remained essentially unchanged at 8.3% in both 1998 and 1997.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased 11.6%, or $0.5 million, to $4.8 million in 1998 from $4.3 million in
1997. Research and development expense expressed as a percentage of sales
increased
(13)
<PAGE>
to 12.2% in 1998 from 11.2% in 1997. This increase was primarily the result of
charges relating to the Big Talk project that was cancelled in 1998 due to
unresolved technical problems.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased 17.7%, or $0.7 million, to $4.3 million in 1998 from $3.6 million in
1997. General and administrative expense expressed as a percentage of sales
increased to 10.9% in 1998 from 9.4% in 1997. The increase was primarily the
result of compensation expense relating to severance costs associated with
organizational changes as well as costs associated with the recruitment and
employment of the Company's new Chief Executive Officer.
INTEREST EXPENSE, NET. Net interest expense increased by $199,000 to
$406,000 in 1998 from $207,000 in 1997. This increase was due to increased
borrowings under the Company's revolving line of credit which were used
primarily to fund operating losses and capital expenditures.
OTHER INCOME NET. Other income (expense) net is comprised primarily of
foreign exchange rate gains/losses from international operations and Canadian
sales as well as various bank account charges. Net other expense increased by
46.2% or $73,000 to $231,000 in 1998 from $158,000 in 1997. This increase was
principally due to foreign exchange rate losses totaling $147,000 in 1998 as
compared to $96,000 in 1997.
QUARTERLY INFORMATION AND SEASONALITY
The Company's business is highly seasonal. Typically, sales and operating
income are highest during the third and fourth quarters and are 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 has typically experienced losses
during the first two quarters in the past and may experience such seasonal
losses in the future, including the first two quarters of 2000.
The following table sets forth, unaudited statement of operations data for
each of the Company's last eight quarters. This unaudited quarterly financial
information was prepared on the same basis as the annual information presented
elsewhere in this Report and, in management's opinion, reflects all the
adjustments (of normal recurring entries) necessary for a fair presentation of
the information presented. The operating results for any quarter are not
necessarily indicative of results for any future period. Net income per share
computations for each quarter are independent of the year-end computations.
Accordingly, the sum of said net income per share amounts for the four quarters
of 1999 or 1998 which are based on average shares outstanding during each
quarter, may not equal net income per share for the year which is based on
average shares outstanding during the year.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 1998 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales ..................... $ 7,639 $ 9,035 $ 13,435 $ 10,970 $ 6,005 $ 8,990 $ 12,157 $ 12,357
Gross profit ............ 3,553 4,265 6,206 4,757 3,000 4,520 5,733 3,674
Operating expenses:
Sales and marketing ..... 1,518 1,845 2,289 2,197 1,438 1,858 2,132 2,196
Warehousing and
distribution ........... 690 719 698 743 788 846 862 785
Research and
development ............ 960 864 808 752 1,112 1,138 928 1,651
General and
administrative.......... 998 923 1,121 1,068 904 941 880 1,560
Operating income (loss) ... (613) (86) 1,290 (3) (1,242) (263) 931 (2,518)
Income (loss) before
provision
(benefit) for income .... (805) (202) 1,243 (257) (1,275) (463) 744 (2,735)
taxes
Net income (loss) ......... (521) (137) 800 (150) (783) (284) 462 (1,679)
Net income (loss)
per share ............... $ (0.07) $ (0.02) $ 0.11 $ (0.02) $ (0.11) $ (0.04) $ 0.07 $ (0.24)
</TABLE>
Quarterly sales and operating results are also affected by the timing of new
product introductions, the product mix, the timing of orders placed by the
Company's distributors and dealers, and the timing of marketing expenditures.
The Company's quarterly gross profit margins have fluctuated as a result of such
factors as customer and product mix. Products are generally shipped as orders
are received and accordingly the Company has historically operated with little
backlog. As a result, sales in any quarter are dependent on orders booked and
shipped in that quarter. A significant portion of the Company's operating
expenses are relatively fixed and are budgeted based primarily on the Company's
annual sales forecast.
LIQUIDITY AND 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 pattern.
The Company increases inventory levels during the spring and summer months in
anticipation of increasing shipments in the late summer and fall. Accounts
receivable typically increase 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 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.
(14)
<PAGE>
Net cash provided by operating activities was $1.7 million in 1999
compared to cash used by operating activities of $1.6 million in 1998. This
$3.3 million net increase in cash provided by operations was primarily due to
the net loss of $2.3 million in 1998 compared to the net loss of $0.0 million
in 1999. An increase of $0.9 million in accounts receivable resulting from
the increase in sales experienced in 1999 was off-set by the $1.0 million
decrease in inventory resulting from the disposition of excess and slow
moving inventory identified in 1998. Net cash used by operating activities
was $1.6 million in 1998 compared to cash provided by operating activities of
$0.6 million in 1997. This $2.2 million increase in the use of cash by
operations was primarily due to the net loss of $2.3 million in 1998 compared
to the net income of $0.1 million in 1997. A decrease of $1.6 million in
accounts receivable was largely offset by the $1.4 million decrease in
accounts payable.
In 1999, $1.1 million of cash was used by financing activities compared to
$3.1 million of cash provided by financing activities in 1998. This was
principally due to the $1.0 million decrease in the line of credit outstanding
at December 31, 1999 compared to the increase in the line of credit experienced
in 1998 necessary to fund the operating loss experienced in 1998. Financing
activities provided cash of $3.1 million in 1998 compared to cash used of $0.6
million in 1997. This was principally due to the $3.3 million increase in the
line of credit outstanding at December 31, 1998 necessary to fund 1998 operating
losses and capital expenditures as compared to the decrease in the line of
credit outstanding experienced in 1997.
The Company has a revolving line of credit agreement with a bank that
is collateralized by substantially all of the Company's assets. Under the
credit facility, 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 (8.50% at December 31, 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. Although the Company was in
violation of the net income covenant at December 31, 1999, the Company has
obtained the appropriate waiver. Outstanding letters of credit, primarily
related to imports from offshore manufacturers, amounted to $35,000 at
December 31, 1999. The Company had outstanding borrowings of $2.8 million,
$3.8 million and $0.5 million under its line of credit at December 31, 1999,
1998 and 1997, respectively. The Company's capital expenditures were $0.6
million in 1999, $1.0 million in 1998, and $0.8 million in 1997. The Company
anticipates that 2000 capital expenditures will be approximately $1 million
with these expenditures primarily in the areas of new product tooling. 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.
The Company has an outstanding commitment in conjunction with the lease of
its Tennessee warehouse facility. In 1992, a shareholder who is also a Director
of the Company entered into a loan agreement with the Industrial Development
Board of Maury County, Tennessee, for Industrial Development Revenue Bonds
Series 1992, in the amount of $1,000,000 at 8% interest per annum, to construct
a building being leased to the Company. The Company has guaranteed the loan with
the Industrial Development Board of Maury County, Tennessee. Should the
shareholder default on said loan the Company would be required to make the
applicable loan payments but would offset such payments against the lease
payments due to said shareholder.
YEAR 2000 UPDATE
The Company completed all planned software and hardware remediation
efforts prior to December 31, 1999. As anticipated, there were no materially
adverse consequences on the Company's results of operations, liquidity and
financial condition resulting from the Year 2000 issue.
ITEM 7A: 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 primary market risk, which is associated
with the Company's foreign currency transactions, is presented below. For
discussion of market risk associated with long-term debt see Note 1. to the
consolidated financial statements.
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.
At December 31, 1999, the Company was 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 $260,000 as of that date.
Although the Company has used derivatives to hedge this foreign exchange
risk, it does not currently hedge this risk nor does it anticipate doing so in
the future.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information, other than quarterly information, required by this item
is incorporated herein by reference to the consolidated financial statements and
supplementary data listed in Item 14 of Part IV of this report.
(15)
<PAGE>
ITEM 9: CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
(16)
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item with respect to directors is
incorporated herein by reference to the information contained under the caption
"Nomination and Election of Directors" in the Proxy Statement relating to the
Annual Meeting of Shareholders to be held on June 16, 2000, which will be filed
with the Securities and Exchange Commission no later than 120 days after the
close of the year ended December 31, 1999. Information with respect to executive
officers is included in Part I of this report. The information required by this
Item with respect to compliance with Section 16(a) of the Securities Exchange
Act of 1934 is incorporated herein by reference to the information contained
under the caption "Compliance with Section 16(a) of the Securities exchange Act
of 1934" in the Proxy Statement relating to the Annual Meeting of Shareholders
to be held on June 16, 2000, which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the year ended
December 31, 1999.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the information contained under the caption "Executive Compensation and Other
Information" in the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on June 16, 2000, which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
year ended December 31, 1999.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the information contained under the captions "Voting Securities and Principal
Shareholders" and "Stock Ownership of Management" in the Proxy Statement
relating to the Annual Meeting of Shareholders to be held on June 16, 2000,
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the year ended December 31, 1999.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the information contained under the caption "Certain Transactions" in the
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
June 16, 2000, which will be filed with the Securities and Exchange Commission
no later than 120 days after the close of the year ended December 31, 1999.
(17)
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(a)(1) Financial Statements:
Report of Deloitte & Touche LLP, Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2
Consolidated Statements of Operations for each of the three years in the period ended December
31, 1999 F-3
Consolidated Statements of Shareholders' Equity for each of the three years in the period ended
December 31, 1999 F-4
Consolidated Statements of Cash Flows for each of the three years in the period ended December
31, 1999 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) Financial Statement Schedule *
Independent Auditors' Report 20
Schedule II - Valuation and Qualifying Accounts 21
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter ended December 31,
1999.
(c) Index to Exhibits 22
</TABLE>
* All other schedules and notes specified under Regulation S-X are
omitted because they are either not applicable, not required or
the information called for therein appears in the consolidated
financial statements or notes thereto.
(18)
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Educational Insights, Inc. has duly caused this annual
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, on March 24, 2000
EDUCATIONAL INSIGHTS, INC.
(Registrant)
By: /s/ Theodore J. Eischeid
--------------------------------
Theodore J. Eischeid, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Educational Insights, Inc. and in the capacities indicated on March 24, 2000.
Signature Title
--------- -----
/s/ Burton Cutler Chairman of the Board
- ----------------------------------------
Burton Cutler
/s/ Theodore J. Eischeid President and Chief Executive
- ---------------------------------------- Officer
Theodore J. Eischeid
/s/ Stephen E. Billis Vice President, Chief Financial
- ---------------------------------------- Officer and Secretary (Principal
Stephen E. Billis Financial Officer)
/s/ Gerald Bronstein Director
- ----------------------------------------
Gerald Bronstein
/s/ Jay Cutler Director
- ----------------------------------------
Jay Cutler
(19)
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Educational Insights, Inc.:
We have audited the consolidated financial statements of Educational Insights,
Inc. as of December 31, 1999 and 1998, and for each of the three years in the
period ended December 31, 1999, and have issued our report thereon dated March
13, 2000; such report is included elsewhere in this Annual Report on Form 10-K.
Our audits also included the financial statement schedule listed in Item 14. The
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Los Angeles, California
March 13, 2000
(20)
<PAGE>
SCHEDULE II
EDUCATIONAL INSIGHTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
THREE YEAR PERIOD ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS DEDUCTIONS BALANCES
BEGINNING CHARGED TO FROM AT END
OF YEAR OPERATIONS RESERVES OF YEAR
---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Allowances for doubtful accounts year ended:
December 31, 1997......................... 298,000 86,000 212,000
December 31, 1998......................... 212,000 89,000 88,000 213,000
December 31, 1999......................... 213,000 127,000 184,000 156,000
Reserve for sales returns year ended:
December 31, 1997......................... 75,000 125,000 200,000
December 31, 1998......................... 200,000 322,000 184,000 338,000
December 31, 1999......................... 338,000 409,000 470,000 277,000
Reserve for inventory obsolescence year ended:
December 31, 1997......................... 635,000 282,000 306,000 611,000
December 31, 1998......................... 611,000 1,600,000 259,000 1,952,000
December 31, 1999......................... 1,952,000 515,000 1,459,000 1,008,000
</TABLE>
(21)
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ----
<S> <C> <C>
3.1 Restated Articles of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4 Specimen Stock Certificate of the Company (1)
10.1* Stock Awards Plan and form of stock option agreement (1)
10.2 Lease, dated March 25, 1985, between the Company and Burton and Diana P. Cutler for the
facility in Dominguez Hills, California (1)
10.3 Real Estate Lease, dated April 27, 1992, between the Company and Jay A. and Karen D.
Cutler for the facility in Columbia, Tennessee (1)
10.4 Loan and Security Agreement, dated August 31, 1993, between the Company and Union Bank
(1)
10.5 Merchandising License Agreement, dated August 24, 1993, between the Company and ELP
Communications Merchandising (1)
10.6 Royalty Agreement, dated May 12, 1993, between the Company and Stanley Cutler (1)
10.7 Form of Indemnification Agreement (1)
10.8 Promissory Note, dated April 27, 1992, by Jay A. Cutler in favor of the Company (1)
10.9 Agreement of Unconditional Guaranty, dated April 27, 1992, between the Company and The
Industrial Development Board of Maury County, Tennessee (1)
10.10 Form of Employee Non-Disclosure Agreement (1)
10.11 Form of Tax Allocation and Indemnification Agreement (1)
10.12 Development and Distribution Agreement, dated July 9, 1992, between the Company and the
National Geographic Society (1)
10.13 License Agreement, dated January 31, 1991, between the Company and the Smithsonian
Institution (1)
10.14 Amended and Restated Loan and Security Agreement, dated September 29, 1994 between the
Company and Union Bank (2)
10.15 First Amendment to Amended and Restated Loan and Security Agreement, dated December 15,
1994 between the Company and Union Bank for financing the purchase of Carson, California
facility (2)
10.16 Second Amendment to Amended and Restated Loan and Security Agreement, dated August 29,
1994 to delete accounts receivable borrowing base limitation
10.17 Amended and Restated Loan Agreement dated May 27, 1997 between the Company and Union Bank
of California (3)
10.18 First Amendment to Amended and Restated Loan Agreement dated December 29, 1997 between
the Company and Union Bank of California to provide security interest in all inventory
and to reduce minimum profitability requirement. (4)
10.19 Directors Stock Option Plan No. 1 and form of Stock Option Agreement (5) `
10.20 Amended and Restated Loan Agreement dated September 3, 1998 between the Company and Union
Bank of California (6)
10.21 Employment Agreement dated September 4, 1998 between the Company and Theodore J. Eischeid
(6)
10.22 Credit and Security Agreement by and between Educational Insights, Inc. and Wells Fargo
Business Credit, Inc. dated as of June 28, 1999 (7)
16 Letter Re Change in Certifying Accountant (1)
27 Subsidiaries of the Company (1)
27.1 FDS
</TABLE>
- -------------------------------
* Management contract or compensating plan or arrangement
(1) Incorporated by reference to the exhibits to the Registration statement on
Form S-1 (Registration No. 33-75672) filed on February 25, 1994, as amended
by Amendment No. 1 filed on April 8, 1994, and Amendment No. 2 filed on
April 15, 1994.
(2) Incorporated by reference to the exhibits to Form 10-K for the fiscal year
ended December 31, 1994.
(3) Incorporated by reference to the exhibit to Form 10-Q for the quarterly
period ended June 30, 1997.
(4) Incorporated by reference to the exhibit to Form 10-K for the fiscal year
ended December 31, 1997.
(5) Incorporated by reference to the exhibits to Form 10-Q for the quarterly
period ended March 31, 1998.
(6) Incorporated by reference to the exhibits to Form 10-Q for the quarterly
period ended September 30, 1998.
(7) Incorporated by reference to the exhibit to Form 10-Q for the quarterly
period ended June 30, 1999.
(22)
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Educational Insights, Inc.:
We have audited the accompanying consolidated balance sheets of Educational
Insights, Inc. (the "Company") and subsidiary as of December 31, 1999 and 1998
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Educational Insights, Inc. and
subsidiary as of December 31, 1999 and 1998 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 13, 2000
F-1
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 698,000 $ 748,000
Accounts receivable, net of allowance for doubtful accounts of
$433,000 in 1999 and $551,000 in 1998 8,880,000 8,520,000
Inventory 10,492,000 12,075,000
Prepaid expenses and other assets 663,000 371,000
Income taxes receivable 311,000 230,000
Other receivables 30,000 55,000
Deferred income taxes 904,000 1,558,000
----------- -----------
Total current assets 21,978,000 23,557,000
----------- -----------
PROPERTY AND EQUIPMENT, Net 4,372,000 5,088,000
----------- -----------
DEFERRED INCOME TAXES 732,000 29,000
----------- -----------
OTHER ASSETS 732,000 605,000
----------- -----------
TOTAL $27,814,000 $29,279,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 149,000 $ 134,000
Line of credit 2,761,000 3,750,000
Accounts payable 1,595,000 1,697,000
Accrued expenses 1,299,000 1,472,000
Deferred income 6,000 57,000
---------- -----------
Total current liabilities 5,810,000 7,110,000
---------- -----------
LONG TERM DEBT 781,000 930,000
---------- -----------
COMMITMENTS AND CONTINGENCIES
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 18,644,000 18,644,000
Accumulated comprehensive income 126,000 134,000
Retained earnings 2,453,000 2,461,000
----------- -----------
Total shareholders' equity 21,223,000 21,239,000
----------- -----------
TOTAL $27,814,000 $29,279,000
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
SALES $41,079,000 $39,509,000 $38,735,000
COST OF SALES 22,298,000 22,582,000 19,208,000
---------- ---------- ----------
GROSS PROFIT 18,781,000 16,927,000 19,527,000
---------- ---------- ----------
OPERATING EXPENSES:
Sales and marketing 7,849,000 7,624,000 7,835,000
Warehousing and distribution 2,850,000 3,281,000 3,197,000
Research and development 3,384,000 4,829,000 4,328,000
General and administrative 4,110,000 4,285,000 3,640,000
---------- ---------- ----------
Total operating expenses 18,193,000 20,019,000 19,000,000
---------- ---------- ----------
OPERATING INCOME (LOSS) 588,000 (3,092,000) 527,000
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (491,000) (434,000) (273,000)
Interest income 28,000 28,000 66,000
Other income (expense), net (146,000) (231,000) (158,000)
---------- ---------- ----------
Total other income (expense) (609,000) (637,000) (365,000)
---------- ---------- ----------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES (21,000) (3,729,000) 162,000
(BENEFIT) PROVISION FOR INCOME TAXES (13,000) (1,445,000) 97,000
---------- ---------- ----------
NET (LOSS) INCOME 8,000 (2,284,000) 65,000
---------- ---------- ----------
OTHER COMPREHENSIVE INCOME (LOSS) -
Foreign currency translation adjustments,
net of tax of $(5,000), $2,000 and $(6,000) for the
periods ended December 31, 1999, 1998 and
1997, respectively. (8,000) 4,000 (10,000)
---------- ---------- ----------
COMPREHENSIVE (LOSS) INCOME $ (16,000) $(2,280,000) $ 55,000
=========== =========== ===========
NET (LOSS) INCOME PER SHARE - Basic and Diluted $ (0.00) $ (0.32) $ 0.01
=========== =========== ===========
Weighted Average Number of
Common Shares Outstanding - Basic 7,040,000 7,040,000 7,040,000
=========== =========== ===========
Weighted Average Number of
Common Shares Outstanding - Diluted 7,040,000 7,040,000 7,082,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Common Comprehensive Retained
Stock Income Earnings Total
----- ------ -------- -----
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $18,644,000 $ 140,000 $4,680,000 $23,464,000
Translation adjustment (10,000) (10,000)
Net Loss 65,000 65,000
----------- --------- ---------- ------------
BALANCE, DECEMBER 31, 1997 18,644,000 130,000 4,745,000 23,519,000
Translation adjustment 4,000 4,000
Net Loss (2,284,000) (2,284,000)
----------- --------- ---------- ------------
18,644,000 134,000 2,461,000 21,239,000
BALANCE, DECEMBER 31, 1998
Translation adjustment (8,000) (8,000)
Net Loss (8,000) (8,000)
----------- --------- ---------- ------------
BALANCE, DECEMBER 31, 1999 $18,644,000 $126,000 $2,453,000 $21,223,000
=========== ========= ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EDUCATIONAL INSIGHTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (8,000) $(2,284,000) $ 65,000
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Provision for doubtful accounts and sales returns 536,000 411,000 125,000
Provision for inventory obsolescence 515,000 1,600,000 282,000
Loss on disposal of fixed assets 70,000
Deferred income taxes (49,000) (1,192,000) 61,000
Depreciation and amortization 1,290,000 1,109,000 1,018,000
Changes in operating assets and liabilities:
Accounts receivable (945,000) 1,555,000 (875,000)
Inventory 1,027,000 (1,583,000) (336,000)
Prepaid expenses and other current assets (292,000) 222,000 70,000
Other receivables 25,000 138,000 (30,000)
Other assets (129,000) (25,000) 286,000
Accounts payable (10,000) (1,362,000) 712,000
Accrued expenses (173,000) 81,000 (193,000)
Deferred income (51,000) (44,000) (156,000)
Income taxes payable / receivable (81,000) (264,000) (403,000)
-------------- ------------ ------------
Net cash provided by (used in) operating activities 1,725,000 1,638,000 626,000
-------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (645,000) (979,000) (790,000)
-------------- ------------ ------------
Net cash used in investing activities (645,000) (979,000) (790,000)
-------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayment of) proceeds from line of credit (989,000) 3,250,000 (500,000)
Repayment of long-term debt (134,000) (121,000) (110,000)
-------------- ------------ ------------
Net cash (used in) provided by financing activities (1,123,000) 3,129,000 (610,000)
-------------- ------------ ------------
Effect of exchange rate changes in cash (7,000) 1,000 (9,000)
-------------- ------------ ------------
NET (DECREASE) INCREASE IN CASH (50,000) 513,000 (783,000)
CASH, BEGINNING OF YEAR 748,000 235,000 1,018,000
-------------- ------------ ------------
CASH, END OF YEAR $ 698,000 $ 748,000 $ 235,000
============== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EDUCATIONAL INSIGHTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Educational Insights, Inc. (the "Company") designs, develops and
markets educational materials intended for use in both homes and schools.
The Company sells its products to school districts, independent toy
dealers, and mass merchandisers principally located throughout the United
States and Canada.
CONSOLIDATION POLICY - The consolidated financial statements include the
accounts of Educational Insights, Inc. and its wholly owned subsidiary.
All significant inter-company transactions and balances have been
eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses for
the reporting period. Actual results could differ from those estimates.
CASH - The Company's policy is to maintain its uninvested cash at minimum
levels.
ACCOUNTS RECEIVABLE - Accounts receivable are principally from school
supply distributors, specialty retail stores, toy superstores, and
individuals. Certain of the Company's customers participate in an accounts
receivable extended payment program where payment is delayed for up to 120
days depending on the size of the sales order. The Company performs
ongoing credit evaluations of its customers and maintains reserves, which
estimate the potential for doubtful accounts and future product returns.
Allowance for sales returns approximated $277,000 and $338,000 at December
31, 1999 and 1998, respectively. Such reserves have been included in the
allowance for doubtful accounts.
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. During the fourth quarter of 1998, the Company
recorded an adjustment of approximately $1,300,000 relating to its
decision to discontinue certain low volume product lines as well as the
typical valuation reserve adjustment for excess inventory.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost and
include interest on funds borrowed to finance construction of building and
improvements. Depreciation and amortization is computed on the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Building and improvements 39 years
Furniture, fixtures and equipment 5 years
Molds, tools and dies 3 years
Leasehold improvements 5 years
</TABLE>
REVENUE RECOGNITION - The Company recognizes revenue from product sales at
the time of shipment. The Company also has license and royalty agreements
with international manufacturers to license certain of its products. The
agreements typically provide for continuing royalties based on unit sales
by the licensee. Royalties are recognized when reported by the licensee.
Royalties received in advance are deferred until shipments are reported by
licensees. License fees and royalty revenues earned during 1999, 1998 and
1997, which are included in sales revenue in the accompanying consolidated
statements of operations, were $224,000, $308,000, and $293,000,
respectively.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs related to
the designing, developing and testing of new educational products are
charged to expense as incurred.
INCOME TAXES - Deferred tax assets and liabilities are recognized based on
differences between the financial statement and tax bases of assets and
liabilities using presently enacted rates.
OTHER INCOME (EXPENSE), NET - Other income (expense) is presented in the
accompanying consolidated statements of operations net of other expenses
of $154,000, $109,000 and $110,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
F-6
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist primarily of cash accounts receivable and payable, and a debt
instrument. The book values of all financial instruments, other than the
debt instrument, are representative of their fair values due to short-term
maturity. The book value of the Company's debt instrument is not
materially different from its fair value because the interest rate of this
instrument approximates the current rates offered to the Company.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company evaluates long-lived assets
for impairment whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. If the estimated
future cash flows (undiscounted and without interest charges) from the use
of an asset are less than the carrying value, a write-down would be
recorded to reduce the related asset to its estimated fair value.
CONCENTRATIONS OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of
cash equivalents, short-term investments and trade receivables. The
Company places its cash equivalents with high credit quality institutions.
While no one customer accounted for more than 5% of sales in any year
presented, the Company's aforementioned accounts receivable extended
payment program has resulted in a limited number of customers whose
accounts receivable balances have comprised up to 17% of the total
accounts receivable balance at certain times of the year and 5% at
year-end.
FOREIGN CURRENCY TRANSLATION - Assets and liabilities of the Company's
foreign subsidiary are translated into U.S. dollars at the exchange rate
prevailing at the balance sheet date, and income and expense accounts at
the average rate in effect during the year. The aggregate effect of
translating the financial statements of the foreign subsidiary is included
in a separate component of shareholders' equity. Foreign exchange gains
for the year ended December 31, 1999 were $10,000 and are net of $26,000
of exchange losses recorded by the Company's foreign subsidiary. Foreign
exchange losses for the year ended December 31, 1998 and 1997 were
$147,000 and $96,000, respectively, of which $64,000 and $45,000 were
recorded by the Company's foreign subsidiary.
STOCK OPTION PLAN - Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured based
on the fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company has elected to continue to apply APB
Opinion No. 25 in accounting for its stock-based compensation
arrangements. Had the Company elected to measure compensation cost based
on the fair value to stock options awarded in 1999, 1998, and 1997 the net
loss and net loss per share - basic and diluted would have been $108,000
and $0.02, respectively, for the year ended December 31, 1999, the net
loss and net loss per share - basic and diluted would have been $2,359,000
and $0.34, respectively, for the year ended December 31, 1998, and the net
income and net income per share - basic and diluted would have been $1,000
and $0.00, respectively, for the year ended December 31, 1997. Stock
options issued during 1999 were valued using the Black-Scholes model using
a risk-free interest rate of 4.9%, expected life of 60 months, expected
volatility of 82% and expected dividends of zero. Stock options issued
during 1998 were valued using the Black-Scholes model using a risk-free
interest rate of 4.92%, expected life of 60 months, expected volatility of
100% and expected dividends of zero. Vested and non-vested stock options
repriced during 1997 were valued using the Black-Scholes model using a
remaining expected life of 2 years and 4 years, respectively, a risk-free
interest rate of 6.15% and 6.32% respectively, expected volatility of 78%
and expected dividends of zero.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1998
and 1997 amounts to conform to the current year's presentation.
F-7
<PAGE>
2. PROPERTY AND EQUIPMENT
The following are the components of property and equipment:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 676,000 $ 676,000
Building and improvements 2,129,000 2,080,000
Equipment 3,343,000 3,129,000
Office furniture and fixtures 671,000 617,000
Vehicles 32,000 27,000
Molds, tools and dies 3,997,000 4,040,000
Leasehold improvements 236,000 236,000
------- ---------
Total 11,084,000 10,805,000
Less accumulated depreciation and
amortization 6,712,000 5,717,000
--------- ---------
Property and equipment - net $ 4,372,000 $ 5,088,000
========= =========
</TABLE>
3. LINE OF CREDIT
The Company has a revolving line of credit agreement with a bank that is
collateralized by substantially all of the Company's assets. Under the
credit facility, 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 (8.50% at December 31, 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. Although
the Company was in violation of one of these loan covenants at December
31, 1999, the Company has obtained the appropriate waiver.
Outstanding letters of credit, primarily related to imports from offshore
manufacturers, amounted to $35,000 at December 31, 1999.
4. LONG-TERM DEBT
Long-term debt represents a note payable bearing interest at 10%, which
matures in 2005, payable in equal monthly installments and collateralized
by land and building. Scheduled principal payments of long-term debt
$149,000 in 2000, $165,000 in 2001, $182,000 in 2002, $201,000 in 2003,
$223,000 in 2004, and $10,000 thereafter.
5. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal
Current $ 37,000 $ (272,000) $ (3,000)
Deferred (68,000) (1,047,000) 74,000
------- --------- - ------
(31,000) (1,319,000) 71,000
------- ---------- ------
State
Current (2,000) 15,000 8,000
Deferred 24,000 (145,000) (3,000)
------ -------- ------
22,000 (130,000) 5,000
------ -------- -----
Foreign
Current (4,000) 4,000 21,000
Deferred 0 0 0
------ ------ -------
(4,000) 4,000 21,000
------ ----- ------
$(13,000) $(1,445,000) $ 97,000
======== =========== ========
</TABLE>
F-8
<PAGE>
Deferred taxes arise from the recognition of certain items of revenue
and expense for tax purposes in years different from those in which
they are recognized in the financial statements. The major components
of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Federal State Federal State
------- ----- ------- -----
<S> <C> <C> <C> <C>
Inventory allowances $ 343,000 $ 42,000 $ 664,000 $ 81,000
Inventory capitalization 196,000 24,000 217,000 27,000
Accounts receivable and
sales return allowances 147,000 18,000 187,000 23,000
State taxes 52,000 2,000 55,000 7,000
Vacation accrual 73,000 9,000 82,000 10,000
Other accrued liabilities 48,000 6,000 153,000 19,000
Prepaid expenses (51,000) (5,000) (59,000) (7,000)
Foreign tax credit 65,000 8,000
Other 0 0 23,000 3,000
-------- -------- ------ ------
Net current deferred tax asset $ 808,000 $ 96,000 $1,387,000 $171,000
========= ======== ========== ========
Tax depreciation in excess of book $(175,000) $(22,000) $ (253,000) $(31,000)
Net operating loss carry forward 548,000 80,000 279,000 34,000
Foreign tax credits 163,000
Charitable contribution carry 89,000
forward
Other 46,000 3,000 0 0
---------- ---------- -------- ---------
Net non-current deferred tax asset
(liability) $ 671,000 $ 61,000 $ (26,000) $ (3,000)
========= ======== ========== ========
</TABLE>
At December 31, 1999, the Company has $549,000 in net operating loss
carryforward available to offset future federal taxable income of which
$249,000 expires in 2018 and $299,000 expires in 2019. Although
realization is not assured, management believes that the net deferred
tax asset will be realized.
A reconciliation of income tax (benefit) expense to the federal
statutory rate follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax at the statutory rate $ (8,000) $(1,268,000) $74,000
State taxes, net of federal benefit (1,000) (130,000) 2,000
Foreign taxes and other (4,000) (47,000) 21,000
------- ------------- -------
$(13,000) $(1,445,000) $97,000
========= ============ =======
</TABLE>
F-9
<PAGE>
6. RELATED PARTY TRANSACTIONS
The Company's warehouse facility is leased from a significant
shareholder for a term expiring April 2002. In addition to the base
rent, the Company is responsible for property taxes, insurance and
maintenance of the buildings. Rent expense for the years ended
December 31, 1999, 1998 and 1997 was $313,000, $342,000 and
$317,000, respectively, of which $300,000 in each year resulted from
leases with related parties.
Future minimum cash lease payments under non-cancelable operating
leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
2000 $262,000
2001 262,000
2002 91,000
2003 0
2004 0
---------
$615,000
========
</TABLE>
In 1992, a shareholder of the Company entered into a loan agreement
with the Industrial Development Board of Maury County, Tennessee, for
Industrial Development Revenue Bonds Series 1992, in the amount of
$1,000,000 at 8% interest per annum, to construct a building being
leased to the Company. The Company has guaranteed the loan with the
Industrial Development Board of Maury County, Tennessee.
A family member of a shareholder receives royalties from the Company
based on sales of electronic products that were developed with the
family member's assistance. Under the terms of the royalty agreement,
the family member is to receive royalties equal to 1% of net sales of
certain products up to a maximum of $150,000 per year. The agreement
expires on December 31, 2010. Royalty expense under this agreement for
the years ended December 31, 1999, 1998 and 1997 was $35,000, $44,000
and $71,000, respectively. In addition, this family member provides
certain consulting services relating to the Company's new product
development activities. Compensation expense for said services for the
years ended December 31, 1999, 1998, and 1997 amounted to $1,000,
$6,000 and $50,000 respectively.
During 1996, the Company's subsidiary entered into a loan agreement
with a company that is owned by the general manager of said subsidiary.
The loan is collateralized by accounts receivable and bears interest at
the rate of 8%. The outstanding balance at December 31, 1999 and 1998
of $391,000 and $227,000, respectively, is included in other assets in
the accompanying consolidated balance sheet. In addition,
approximately $276,000 is included in prepaids and/or accounts
receivable at December 31, 1999 from transactions arising in the normal
course of business with said company.
7. PROFIT SHARING PLANS
The Company has a noncontributory profit sharing plan covering
substantially all of its employees who are eligible to participate
after one year of service. There was no contribution expense in 1999,
1998 or 1997. Participants vest in the Company's contributions over a
period of six years.
The Company has a salary savings and profit sharing plan, which is
available to all employees (the "Plan"). The Plan provides that all
employees become eligible to participate after one year of service.
Participants may elect to contribute up to 15% of their salary to the
Plan. The Company is required to make a matching contribution equal to
a minimum of 25% of each employee's contribution up to 4% of each
employee's salary. The Company's contributions to this Plan for the
years ended December 31, 1999, 1998, and 1997 were $37,000, $40,000 and
$42,000, respectively. All participants vest 100% in Company
contributions each December 31.
F-10
<PAGE>
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator for basic earnings (loss) per share- income available to
common stockholders:
Net income (loss) $(8,000) $(2,284,000) $65,000
-------- ------------ -------
Denominator for basic earnings per share--
Weighted - average shares outstanding: 7,040,000 7,040,000 7,040,000
Effect of dilutive securities:
Stock options
0 0 42,000
--------- ---------- ---------
Denominator for diluted earnings per share --
Adjusted for weighted average shares
and assumed conversions 7,040,000 7,040,000 7,082,000
========= ========= =========
Basic earnings per share $ (0.00) $ (0.32) $ 0.01
======= ======= =====
Diluted earnings per share $ (0.00) $ (0.32) $ 0.01
======= ======= =====
</TABLE>
9. STOCK OPTION PLANS
The Company has reserved 900,000 shares of common stock for issuance
pursuant to an employee Stock Awards Plan (the "Employee Plan"). Under
the Employee Plan, the exercise price of each option equals the market
price of the Company's stock on the date of grant. The options are
exercisable in annual one-third increments beginning two years from the
date of grant, and expire ten years from the date of grant. On June 6,
1997 all outstanding options granted prior to that date were repriced
to an excise price of $1.75 per share which equaled the market price on
said date. In addition, the Company has reserved 25,000 shares of
common stock for issuance pursuant to the Directors Stock Option Plan
No. 1 (the "Directors Plan"). Under the Directors Plan, the exercise
price of each option equals the market price of the Company's stock on
the date of grant. The options are exercisable at the date of grant.
A summary of the status of the Company's stock option plans as of
December 31, 1999, 1998 and 1997 and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 567,060 $1.63 276,910 $1.75 276,910 $2.98
Granted 348,420 2.05 315,000 1.54
Canceled 95,540 1.75 24,850 1.75 276,910 2.98
Repriced 276,910 1.75
--------- --------- -------
Outstanding at December 31 819,940 1.78 567,060 1.63 276,910 1.75
======= ======= =======
Options exercisable at year-end 169,520 214,728 193,910
Weighted average fair value
Of options granted during
The year $1.39 $1.18 $0.95
</TABLE>
F-11
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ---------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/99 LIFE PRICE AT 12/31/99 PRICE
--------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
1.50 - 2.38 819,940 6.6 $1.78 169,520 $1.77
</TABLE>
10. ROYALTY LICENSE AGREEMENTS
Under the terms of various license agreements, the Company is
obligated to pay the licensors royalties equal to specified percentages of
the sales of the Company's products subject to the license agreements.
Certain license agreements require the Company to pay an advance against
future royalties, which would be due based on a units sold basis. Such
advances have been included in other assets in the accompanying
consolidated balance sheets and amounted to approximately $153,000 at
December 31, 1999 and $158,000 at December 31, 1998.
11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $512,000 $396,000 $281,000
Income taxes $116,000 $11,000 $349,000
</TABLE>
12. SEGMENT INFORMATION
The Company's operating segments have similar economic characteristics
and, as such, the Company is considered to be a single operating segment in
conformity with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
business activities of said operating segment are the design, development
and sale of various supplemental educational products. Following is the
relevant geographic and long-lived asset information.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
United States $35,879,000 $4,372,000 $34,064,000 $5,088,000 $33,293,000 $5,218,000
Foreign countries 5,200,000 5,171,000 5,149,000
----------- ---------- ----------- ---------- ----------- ----------
TOTAL $41,079,000 $4,372,000 $39,235,000 $5,088,000 $38,442,000 $5,218,000
=========== ========== =========== ========== =========== ==========
</TABLE>
************
F-12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 698
<SECURITIES> 0
<RECEIVABLES> 9,313
<ALLOWANCES> 433
<INVENTORY> 10,492
<CURRENT-ASSETS> 21,783
<PP&E> 11,084
<DEPRECIATION> 6,712
<TOTAL-ASSETS> 27,814
<CURRENT-LIABILITIES> 5,810
<BONDS> 6
0
0
<COMMON> 18,644
<OTHER-SE> 2,579
<TOTAL-LIABILITY-AND-EQUITY> 27,814
<SALES> 41,079
<TOTAL-REVENUES> 41,079
<CGS> 22,298
<TOTAL-COSTS> 22,298
<OTHER-EXPENSES> 18,193
<LOSS-PROVISION> 536
<INTEREST-EXPENSE> 491
<INCOME-PRETAX> (21)
<INCOME-TAX> (13)
<INCOME-CONTINUING> (8)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
