10-Q 1 a10-q.txt FORM 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 June 30, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________ to __________ Commission File Number: 0-23606 ------- EDUCATIONAL INSIGHTS, INC. (Exact name of registrant as specified in its charter) California 95-2392545 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 16941 Keegan Avenue Carson, CA 90746 (Address of principal executive offices) Registrant's telephone number, including area code: (310) 884-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of July 28, 2000 there were 7,040,000 shares of common stock outstanding. Total number of sequential pages: 11 There are no Exhibits in this -- document; hence no Exhibit Index. ================================================================================ Page 1 of 11 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, 1999 balance sheet information)

See accompanying notes to consolidated financial statements. Page 2 of 11 sequentially numbered pages. EDUCATIONAL INSIGHTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited)

See accompanying notes to consolidated financial statements. Page 3 of 11 sequentially numbered pages. EDUCATIONAL INSIGHTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)

Page 4 of 11 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, 1999. The Company's fiscal year ends December 31. The results of operations for the period ended June 30, 2000, are not indicative of the results that might be expected for the full fiscal year. Certain reclassifications have been made to the 1999 amounts to conform with the current year's presentation. 2. INVENTORY Inventory consists principally of finished goods held for sale and is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. 3. NEW ACCOUNTING STANDARD In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements", which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. Subsequent admendments to SAB 101 deferred its implementation until the Company's fourth fiscal quarter of 2000. The Company will adopt SAB 101 and is currently in the process of evaluating the impact, if any, SAB 101 will have on its financial position or results of operations. Page 5 of 11 sequentially numbered pages. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in Part I - Item 1 of this Quarterly Report, and the audited consolidated financial statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The Company's business is highly seasonal. Typically, sales and operating income are highest during the third and fourth quarters and lowest during the first and second quarters. This seasonal pattern is primarily due to the increased demand for the Company's products during the "back-to-school" and year-end holiday selling seasons. SALES Sales decreased by $2,575,000 to $6,460,000 in the quarter ended June 30, 2000, from $9,035,000 in the quarter ended June 30, 1999. Sales decreases occurred in each of the Company's primary markets. The decrease in the Company's core school market was primarily a carryover in the weakness of product reorders that the Company experienced in the fourth quarter of 1999 and the first quarter of 2000, as well as delays in the introduction of most of its new product offerings for this channel. Sales in the Company's other markets were also adversely affected by delays in the introduction of new products. Sales decreased by 27.8% or $4,639,000 to $12,035,000 for the six-month period ended June 30, 2000 from $16,674,000 for the six-month period ended June 30, 1999. Sales decreases occurred in each of the Company's primary markets. The decrease in the Company's core school market was primarily a reflection of the weakness of product reorders that the Company experienced in the fourth quarter of 1999 and the first quarter of 2000. The decreases in the specialty retail and mass markets were primarily due to delays in purchases by certain customers. Additionally, sales in all the Company's markets were adversely affected by delays in the introduction of most of the Company's new product offerings. Due to the lateness in the introduction of a number of its new products, the Company expects lower sales volume in the second half of the year 2000 compared to the same period in 1999. GROSS PROFIT Gross profit margin as a percentage of sales was essentially unchanged at 46.7% for the quarter ended June 30, 2000 as compared to 46.5% for the quarter ended June 30, 1999. Gross profit margin as a percentage of sales was essentially unchanged at 46.5% for the six-month period ended June 30, 2000, as compared to 46.9% for the six-month period ended June 30, 1999. SALES AND MARKETING EXPENSE Sales and marketing expense decreased $252,000 to $1,591,000 for the quarter ended June 30, 2000 from $1,843,000 for the same period in 1999. However, when expressed as a percentage of sales, said expense increased to 24.6% for the quarter ended June 30, 2000, as compared to 20.4% for the same period in 1999. The reason for the variances is primarily as result of the lower sales volume experienced in the quarter. The lower volume sales decreased the absolute dollar amount of variable sales and marketing expense incurred, but the combination of variable and fixed marketing expenses was proportionally higher as a percentage of sales in 2000 than in 1999 due to the lower sales volume in 2000. Page 6 of 11 sequentially numbered pages. Sales and marketing expense increased $95,000 to $3,470,000 for the six-month period ended June 30, 2000 from $3,375,000 for the same period in 1999 despite the decrease in said expense for the quarter. This was a result of the increase in sales and marketing expense experienced in the first quarter of 2000, as compared to the same period in 1999, which was primarily due to increased marketing expenses relating to the Company's specialty retail division. When expressed as a percentage of sales, sales and marketing expense increased to 28.8% for the six-month period ended June 30, 2000 from 20.2% for the same period in 1999. WAREHOUSING AND DISTRIBUTION EXPENSE Warehousing and distribution expense increased $76,000 to $756,000 or 11.7% of sales for the quarter ended June 30, 2000 compared to $680,000 or 7.5% of sales for the same quarter in 1999. Warehousing and distribution expense increased $143,000 to $1,552,000 or 12.9% of sales for the six-month period ended June 30, 2000 compared to $1,409,000 or 8.4% of sales for the same period in 1999. The increase in warehousing and distribution expense in absolute dollars on both a quarterly and year-to-date basis was primarily due higher compensation expense relating to personnel increases in the Company's purchasing and quality assurance functions in the year 2000. RESEARCH AND DEVELOPMENT EXPENSE Research and development expense increased $309,000 to $1,173,000 or 18.2% of sales for the quarter ended June 30, 2000 compared to $864,000 or 9.6% of sales for the same quarter in 1999. Research and development expense increased $343,000 to $2,167,000 or 18.0% of sales for the six-month period ended June 30, 2000 compared to $1,824,000 or 10.9% of sales for the same period in 1999. The increase in research and development expense on both a quarterly and year-to-date basis was due primarily to increased development activity for both new and repackaged products, as well as increased use of outside resources to attempt to reduce the design time of new products, thereby mitigating any further delays in the introduction of new products to market. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense increased $318,000 to $1,215,000 or 18.8% of sales for the quarter ended June 30, 2000 compared to $897,000 or 9.9% of sales for the same quarter in 1999. General and administrative expense increased $283,000 to $2,192,000 or 18.2% of sales for the six-month period ended June 30, 2000 compared to $1,909,000 or 11.4% of sales for the same period in 1999. The increase in general and administrative expense on both a quarterly and year-to-date basis was primarily due to compensation expense relating to the severance agreement with the Company's ex-President and CEO. INTEREST EXPENSE Interest expense increased $39,000 to $144,000 for the quarter ended June 30, 2000 compared to $105,000 for the same quarter of 1999, as a result of increased borrowings under the Company's line of credit and the higher prime rate (which is the reference rate on the Company's line of credit) in 2000 than in 1999. For the six-month period ended June 30, 2000, interest expense increased $21,000 to $210,000 compared to $189,000 for same period of 1999 as a result of the higher prime rate in 2000 compared to 1999. Page 7 of 11 sequentially numbered pages. OTHER INCOME AND EXPENSE Other expense, net of other income, increased $50,000 to $67,000 for the quarter ended June 30, 2000 compared to $17,000 for the same quarter in 1999. For the six-month period ended June 30, 2000, other expense increased $55,000 to $185,000 compared to $130,000 for the same period in 1999. The increase in other expense, net of other income, on both a quarterly and year-to-date basis resulted principally from other income recorded in 1999 generated from foreign exchange gains on sales to Canada due to the strengthening Canadian dollar during the quarter, whereas there was a small foreign exchange loss incurred on sales to Canada during 2000. LIQUIDITY & CAPITAL RESOURCES In recent years, the Company's working capital needs have been met through funds generated from operations and from the Company's revolving line of credit. The Company's principal need for working capital has been to meet peak inventory and accounts receivable requirements associated with its seasonal sales patterns. The Company increases inventory levels during the spring and summer months in anticipation of increasing shipments in the summer and fall. Accounts receivable have historically increased during the summer and fall because of the Company's use of extended payment programs wherein sales are made to the Company's customers for which payment is deferred for one to three months based on the size of the sales orders. Due to these sales patterns, the largest customer orders are shipped during the summer and fall, hence increasing accounts receivable balances during the third and fourth quarters. During the period ended June 30, 2000, the Company's sources of funds were primarily the net increase in borrowings under the Company's line of credit of $2,908,000, an increase in accounts payable of $1,574,000 and a decrease in accounts receivable of $1,805,000. The principal uses of cash during the period ended June 30, 2000 were an increase in inventory of $2,678,000 due to the seasonal nature of the Company's business cycle, as well as funding of the year-to-date net loss of $2,608,000. Capital spending of $468,000 during the period was primarily for tooling relating to new products. The Company currently has a revolving line of credit with a bank, which is collateralized by substantially all of the Company's assets. Under the revolving line of credit agreement, which expires June 30, 2001, the Company may borrow up to $8 million from January through June and up to $10 million from July through December. Advances, which are formula driven based on eligible accounts receivable and inventory levels, bear interest at one half-percentage point above the bank's reference rate (9.5% at June 30, 2000). The agreement requires the maintenance of minimum net income amounts and net worth amounts, and provides for various restrictions including limitations on capital expenditures and additional indebtedness. At June 30, 2000, the Company had $5,669,000 of outstanding borrowings against this line of credit. The Company's borrowings available under the revolving line of credit and anticipated funds from operations that are used to satisfy the Company's working capital and capital expenditure requirements may not be adequate if the downtrend in sales continues at its current pace for the remainder of the year. The Company is currently investigating other means of raising capital, as well as expense reductions in order to mitigate the potential cash flow impact of further potential sales declines. In the event that the Company's sales do not improve and the Company is unable to raise additional capital and reduce operating expenses, the Company's financial position could be materially adversely affected. Page 8 of 11 sequentially numbered pages. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, this Report contains forward-looking statements which involve a number of risks and uncertainties, including but not limited to continued successful development and acceptance of new products, dependence on education funding by Federal, State and local governments, dependence on key development and marketing personnel, general economic conditions and the risk factors listed from time-to-time in the Company's filings with the Securities and Exchange Commission. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks, which arise during the normal course of business from changes in foreign exchange rates and interest rates. A discussion of the Company's market risk associated with it's foreign currency transactions is presented below. The market risk associated with long-term debt is not material. FOREIGN EXCHANGE RISK The Company sells its products in numerous countries around the world, however, except in Canada, such sales are denominated in U.S. Dollars. Additionally, the Company's UK subsidiary conducts its business in British pound sterling which is its functional currency, although its intercompany payable is denominated in U.S. dollars. These factors create an exposure to the future earnings of the Company when foreign exchange rates change and certain of its receivables as well as its foreign subsidiary's financial statements are denominated in foreign currencies. As such, the Company is primarily exposed to the following foreign currencies: the Canadian dollar and the British pound sterling. Based upon a hypothetical five-percent strengthening of the U.S. dollar across these currencies, the potential foreign exchange losses due to said foreign currency exposures would have been approximately $220,000 at June 30, 2000. The Company does not currently hedge this risk. Page 9 of 11 sequentially numbered pages. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On June 16, 2000 the Company held its Annual Meeting of Shareholders. The selection of Deloitte & Touche LLP as the Company's independent auditors was ratified. 6,871,559 shares were voted in favor of ratification, 275 shares were voted against ratification and 5 shares abstained. The candidates for Director positions received the votes indicated below. The five candidates receiving the highest number of votes were elected as Directors.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS None. (b) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the period in question. Page 10 of 11 sequentially numbered pages. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EDUCATIONAL INSIGHTS, INC. (Registrant) Date: August 3, 2000 By: /s/ G. REID CALCOTT ------------------------------------- G. Reid Calcott President and Chief Executive Officer Date: August 3, 2000 By: /s/ STEPHEN E. BILLIS ------------------------------------- Stephen E. Billis Vice President and Chief Financial Officer Page 11 of 11 sequentially numbered pages.

EDUCATIONAL INSIGHTS INC 10-Q