-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CmRU3nIKxnGI0Qn4wUPFRgBbDDfqLYPEB/ZrEFmHM43DwF5aEClwIs7THLp8hE6j YN6YVNNuZaZinjFl0kuAJw== 0001047469-99-020525.txt : 19990517 0001047469-99-020525.hdr.sgml : 19990517 ACCESSION NUMBER: 0001047469-99-020525 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDUCATIONAL INSIGHTS INC CENTRAL INDEX KEY: 0000919570 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 952392545 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23606 FILM NUMBER: 99622840 BUSINESS ADDRESS: STREET 1: 19560 S RANCHO WAY CITY: DOMINGUEZ HILLS STATE: CA ZIP: 90220 BUSINESS PHONE: 3108841931 MAIL ADDRESS: STREET 1: 16941 KEEGAN AVENUE CITY: CARSON STATE: CA ZIP: 90746 10-Q 1 10-Q - ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________ to __________ Commission File Number: 0-23606 EDUCATIONAL INSIGHTS, INC. (Exact name of registrant as specified in its charter) California 95-2392545 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 16941 Keegan Avenue Carson, CA 90746 (Address of principal executive offices) Registrant's telephone number, including area code: (310) 884-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- --------- As of May 10, 1999 there were 7,040,000 shares of common stock outstanding. Total number of sequential pages: 10 There are no Exhibits in this ------ document; hence no Exhibit Index. - ------------------------------------------------------------------------------ Page 1 of 10 sequentially numbered pages. PART I - ITEM 1. FINANCIAL STATEMENTS EDUCATIONAL INSIGHTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) (Unaudited, except for December 31, 1998 balance sheet information) ASSETS
MARCH 31, DECEMBER 31, 1999 1998 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 841 $ 748 Accounts receivable, less allowance for doubtful accounts of $414 in 1999 and $551 in 1998. 6,433 8,520 Inventory 12,046 12,075 Income taxes receivable 230 230 Other receivables 52 55 Prepaid expenses and other current assets 722 371 Deferred income taxes 1,833 1,558 ---------------- ----------------- Total current assets 22,157 23,557 ---------------- ----------------- PROPERTY AND EQUIPMENT, Net 5,004 5,088 ---------------- ----------------- OTHER ASSETS 697 634 ---------------- ----------------- TOTAL $ 27,858 $29,279 ---------------- ----------------- ---------------- ----------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 134 $ 134 Line of credit 2,600 3,750 Accounts payable 1,859 1,697 Accrued expenses 1,605 1,472 Deferred income 57 57 ----------------- ----------------- Total current liabilities 6,255 7,110 ----------------- ----------------- LONG TERM DEBT 897 930 ----------------- ----------------- SHAREHOLDERS' EQUITY Preferred stock, no par value; 10,000,000 shares authorized; no shares issued Common stock, no par value; 30,000,000 shares authorized; 7,040,000 shares issued in 1999 and 1998 18,644 18,644 Accumulated other comprehensive income - foreign currency translation adjustments 122 134 Retained earnings 1,940 2,461 ----------------- ----------------- Total shareholders' equity 20,706 21,239 ----------------- ----------------- TOTAL $ 27,858 $29,279 ---------------- ----------------- ---------------- -----------------
See accompanying notes to consolidated financial statements. Page 2 of 10 sequentially numbered pages. EDUCATIONAL INSIGHTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited)
THREE MONTHS ENDED MARCH 31, -------------------------------------- 1999 1998 ---- ---- SALES $ 7,639 $ 6,005 COST OF SALES 4,086 3,005 ----------------- ----------------- GROSS PROFIT 3,553 3,000 ----------------- ----------------- OPERATING EXPENSES: Sales and marketing 1,518 1,438 Warehousing and distribution 690 788 Research and development 960 1,112 General and administrative 998 904 ----------------- ----------------- Total operating expenses 4,166 4,242 ----------------- ----------------- OPERATING LOSS (613) (1,242) ----------------- ----------------- OTHER INCOME (EXPENSE): Interest expense (85) (36) Interest income 6 6 Other expense, net (113) (3) ----------------- ----------------- Total other expense (192) (33) ----------------- ----------------- LOSS BEFORE BENEFIT FOR INCOME TAXES (805) (1,275) BENEFIT FOR INCOME TAXES (284) (492) ----------------- ----------------- NET LOSS (521) (783) ----------------- ----------------- OTHER COMPREHENSIVE INCOME- Foreign currency translation adjustments (Net of tax of $(8) in 1999 and $4 in 1998) (12) 6 COMPREHENSIVE LOSS $ (533) $ (777) ----------------- ----------------- ----------------- ----------------- NET LOSS PER SHARE - Basic and Diluted $ (0.07) $ (0.11) ----------------- ----------------- ----------------- ----------------- Weighted Average Number of Common Shares Outstanding - Basic and Diluted 7,040 7,040 ----------------- ----------------- ----------------- -----------------
See accompanying notes to consolidated financial statements. Page 3 of 10 sequentially numbered pages. EDUCATIONAL INSIGHTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
THREE MONTHS ENDED MARCH 31, -------------------------------------- 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (521) $ (783) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts and sales returns 62 (37) Provision of inventory obsolesence 105 Depreciation 314 214 Deferred income taxes (275) Changes in operating assets and liabilities: Accounts receivable 1,984 4,185 Inventory (120) (1,272) Income taxes receivable (495) Other receivables 3 3 Prepaid expenses and other current assets (351) (398) Other assets (71) (79) Accounts payable 254 (328) Accrued expenses 133 (74) Deferred income (2) Income taxes payable (20) ----------------- ----------------- Net cash provided by operating activities 1,517 914 ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (230) (327) ----------------- ----------------- Net cash used in investing activities (230) (327) ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in line of credit (1,150) (500) Repayments of long-term debt (33) (30) ----------------- ----------------- Net cash used in financing activities (1,183) (530) ----------------- ----------------- Effect of exchange rate changes on cash (11) 3 ----------------- ----------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 93 60 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 748 235 ----------------- ----------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 841 $ 295 ----------------- ----------------- ----------------- ----------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 94 $ 46 Income taxes paid $ 16
See accompanying notes to consolidated financial statements. Page 4 of 10 sequentially numbered pages. EDUCATIONAL INSIGHTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL The consolidated financial statements of Educational Insights, Inc. (the "Company") include all of the accounts of the Company and its wholly owned subsidiary. All significant inter-company balances and transactions have been eliminated in consolidation. The interim consolidated financial statements are not audited, but include all adjustments (including normal recurring adjustments) which are, in the opinion of management, necessary for a fair representation of the financial position, results of operations and cash flows for the period. The consolidated financial statements as presented herein should be read in conjunction with the Company's audited consolidated financial statements and notes thereto as filed with the Securities and Exchange Commission and included in the Company's Form 10-K for the year ended December 31, 1998. The Company's fiscal year ends December 31. The results of operations for the period ended March 31, 1999, are not indicative of the results that might be expected for the full fiscal year. Certain reclassifications have been made to the 1998 amounts to conform with the current year's presentation. 2. INVENTORY Inventory consists principally of finished goods held for sale and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Page 5 of 10 sequentially numbered pages. PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements and accompanying notes, included in Part I - Item 1 of this Quarterly Report, and the audited consolidated financial statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K. Consolidated sales were $7,639,000 for the first quarter ended March 31, 1999, an increase of 27.2%, or $1,634,000, compared to the same period in 1998. Net loss was $521,000 or $0.07 per share compared with a net loss of $783,000 or $0.11 per share for the same period in 1998. The Company's business is highly seasonal. Typically, sales and operating income are highest during the third and fourth quarters and lowest during the first and second quarters. This seasonal pattern is primarily due to the increased demand for the Company's products during the "Back-to-school" and year-end holiday selling seasons. The Company typically experiences losses during the first quarter. SALES Sales increased by 27.2%, or $1,634,000, to $7,639,000 in the quarter ended March 31, 1999 from $6,005,000 in the quarter ended March 31, 1998. This increase was due primarily to increased sales to school supply dealers and to specialty retail stores of approximately $800,000 and $600,000, respectively. This was principally due to high product sell-through in the fourth quarter of 1998, and resulted in certain customers requesting shipments earlier in the year than experienced in the prior year in order to replenish their inventories. Although the Company does not expect similar percentage sales level increases during the remainder of the year, an overall increase in sales compared to the prior year is projected. GROSS PROFIT Gross profit margin as a percentage of sales decreased to 46.5% for the quarter ended March 31, 1999 from 50.0% for the same period in 1998. This decrease is primarily due to the product mix of sales to the school and specialty retail markets resulting in a higher percentage of sales of certain lower margined products, increased depreciation due to the higher levels of new product tooling purchased in 1998 compared to 1997 and, higher sales allowances and material handling charges related to the Company's UK subsidiary. The Company does not expect a significant change in gross profit margin for the remainder of the year from that experienced in the first quarter of 1999. SALES AND MARKETING EXPENSE Although sales and marketing expense increased $80,000 to $1,518,000 from $1,438,000 for the same period in 1998, when expressed as a percentage of sales, sales and marketing expense decreased to 19.9% from 23.9% due to higher sales volume in the first quarter of 1999. The increase in absolute dollars is primarily due to marketing expenses relating to the Company's Learning Advantage division which was launched in 1999 to provide the Company with a direct channel to its school market for certain of its products. WAREHOUSING AND DISTRIBUTION EXPENSE Warehousing and distribution expense decreased $98,000 to $690,000 from $788,000 for the same period in 1998. Warehousing and distribution expense, when expressed as a percentage of sales, decreased to 9.0% as compared to 13.1% for the same period in 1998. The principal reason for the decrease is due to increased efficiencies in warehouse operations primarily due to the implementation of a new warehouse management system during 1998. RESEARCH AND DEVELOPMENT EXPENSE Research and development expense decreased $152,000 to $960,000 from $1,112,000 for the same period in 1998 in large part due to the limited use of outside consultants in 1999 compared to 1998. When expressed as a percentage of sales, research and development expense decreased to 12.6% from 18.5% primarily as a result of the increased sales volume in 1999. Page 6 of 10 sequentially numbered pages. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense increased $94,000 to $998,000 for the quarter ended March 31, 1999 compared to $904,000 for the same period in 1998 principally due to increased customer service staffing, as well as increased compensation, travel and moving expenses relating to the Company's new President. When expressed as a percentage of sales, general and administrative expense decreased to 13.1% from 15.1% in the first quarter of 1998 as a result of the increased sales volume in the current quarter. The Company expects general and administrative expenses, in absolute dollars, to continue to exceed the prior year amounts during the remainder of 1999. INTEREST EXPENSE Interest expense increased $49,000 to $85,000 from $36,000 for the same period in 1998 primarily due to increased borrowings under the Company's line of credit principally as a result of the operating loss incurred in 1998. OTHER EXPENSE Other expense, net increased by $110,000 to $113,000 in 1999 from $3,000 in 1998. This decrease was principally due to foreign exchange rate losses totaling approximately $67,000 in 1999 as compared to foreign exchange rate gains of $27,000 during the same period in 1998 experienced by the Company's subsidiary in the UK due to the relative weakness of the Pound Sterling. LIQUIDITY & CAPITAL RESOURCES In recent years, the Company's working capital needs have been met through funds generated from operations and from the Company's revolving line of credit. The Company's principal need for working capital has been to meet peak inventory and accounts receivable requirements associated with its seasonal sales patterns. The Company increases inventory levels during the spring and summer months in anticipation of increasing shipments in the summer and fall. Accounts receivable have historically increased during the summer and fall because of the Company's use of extended payment programs wherein sales are made to the Company's customers for which payment is deferred for one to three months based on the size of the sales orders. Due to these sales patterns, the largest customer orders are shipped during the summer and fall, hence increasing accounts receivable balances during the third and fourth quarters. During the quarter ended March 31,1999, the Company's source of funds was net cash provided by operating activities, primarily from the collection of outstanding accounts receivable. The principal uses of cash during the period ended March 31, 1999 were an increase in prepaid expenses of $351,000 and an increase in deferred income taxes of $275,000 as well as repayment of outstanding borrowings under the Company's revolving line of credit of $1,150,000. Capital spending of $230,000 during the quarter was primarily for tooling relating to new products. The Company currently has a revolving line of credit with a bank which is collateralized by substantially all of the Company's assets. Under the revolving line of credit agreement, which expires June 15, 1999, the Company may borrow up to $9 million. Advances bear interest at .25% above the bank's reference rate (7.75% at March 31, 1999) or 2.50% above the London Interbank Offer Rate (at the Company's option.) The agreement requires the maintenance of certain financial ratios, minimum annual net income amounts and tangible net worth amounts, and provides for various restrictions including limitations on capital expenditures and additional indebtedness. At March 31, 1999, the Company was in violation of one of the loan covenants. The bank subsequently amended the loan agreement to waive said covenant until December 31, 1999. At March 31, 1999, the Company had $2,600,000 of outstanding borrowings against this line of credit. The Company believes that borrowings available under the revolving line of credit, if and when renewed, and anticipated funds from operations will satisfy the Company's projected working capital and capital expenditure requirements for at least the next 12 months. Page 7 of 10 sequentially numbered pages. YEAR 2000 UPDATE The Company is continuing the process of addressing the Year 2000 problem with an overall goal of ensuring that its critical systems, devices and business applications are suitable for continued use beyond 1999. The Company has completed its assessment phase wherein all of its hardware and software systems and all of the embedded systems contained in the Company's buildings, plant, equipment and other infrastructure have been assessed as to whether they will consistently and properly recognize the year 2000. The business accounting software and hardware, as well as certain warehouse management software are believed to be the Company's only critical systems with respect to which the Year 2000 problem is known to exist. The Company is using primarily external resources to reprogram or replace and test this software and hardware for Year 2000 compliance. With respect to the business accounting software and hardware, the Company completed this phase by the end of 1998. The upgrade or replacement of other critical and non-critical systems and devices is expected to be completed by June 30, 1999 The requirements for the correction of Year 2000 issues and the date on which the Company believes it will complete the Year 2000 modifications are based on management's current best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that may cause such material differences include, but are not limited to, the availability of personnel trained in this area, the ability to locate and collect all relevant computer codes and similar uncertainties. The total cost to the Company of these Year 2000 compliance activities have not been and are not expected to be material to its results of operations, liquidity or capital resources. None of the Company's other information technology projects have been delayed due to the implementation of Year 2000 remediation efforts. Based on the nature of the Company's business and the fact that no individual supplier or customer is material to its operations as a whole, management believes that the Year 2000 issue is not reasonably likely to have a materially adverse effect on the Company's results of operations, liquidity and financial condition. Should the above-described modifications to the Company's systems not adequately address the Year 2000 problem, the most likely worst case scenario is that there would be delays in the billing and collection of accounts receivable and accounts payable payments would be processed manually. The above does not address all possible catastrophic events including, but not limited to, failure of the power grid or area wide telecommunications systems as the Company is not aware that a material disruption in these basic infrastructures is reasonably likely to occur. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, this Report contains forward-looking statements which involve a number of risks and uncertainties, including but not limited to continued successful development and acceptance of new products, dependence on education funding by Federal, State and local governments, dependence on key development and marketing personnel, general economic conditions and the risk factors listed from time-to-time in the Company's filings with the Securities and Exchange Commission. Page 8 of 10 sequentially numbered pages. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS None (b) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the period in question. Page 9 of 10 sequentially numbered pages. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EDUCATIONAL INSIGHTS, INC. (Registrant) Date: May 10, 1999 By: /s/ Theodore J. Eischeid ---------------------------------------- Theodore J. Eischeid President and Chief Executive Officer Date: May 10, 1999 By: /s/ Stephen E. Billis ---------------------------------------- Stephen E. Billis Vice President and Chief Financial Officer Page 10 of 10 sequentially numbered pages. EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 841 0 6,847 414 12,046 22,157 5,004 0 27,858 6,255 897 0 0 18,644 2,062 27,858 7,639 7,639 4,086 4,086 4,166 62 85 (805) (284) (521) 0 0 0 (521) (0.07) (0.07)
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