EDUCATIONAL DEVELOPMENT CORP — Interim / Quarterly Report 1998

Oct 14, 1998

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 1998. [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __ to ___. Commission file number: 0-4957 EDUCATIONAL DEVELOPMENT CORPORATION (Exact name of registrant as specified in its charter) Delaware 73-0750007 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10302 East 55th Place, Tulsa Oklahoma 74146-6515 (Address of principal executive offices) Registrant's telephone number: (918) 622-4522 Indicate by check mark whether the registrant (1) has filed all reports 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 August 31, 1998 there were 5,067,386 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding. EDUCATIONAL DEVELOPMENT CORPORATION - --------------------------------------------------- PART I. FINANCIAL INFORMATION - ------------------------------------ ITEM 1

See notes to financial statements. 2 EDUCATIONAL DEVELOPMENT CORPORATION - -------------------------------------------- STATEMENTS OF EARNINGS (UNAUDITED)

See notes to financial statements. 3 EDUCATIONAL DEVELOPMENT CORPORATION - -------------------------------------------- STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

See notes to financial statements. 4 EDUCATIONAL DEVELOPMENT CORPORATION - --------------------------------------------

See notes to financial statements. 5 EDUCATIONAL DEVELOPMENT CORPORATION - -------------------------------------------- NOTES TO FINANCIAL STATEMENTS Note 1 - The information shown with respect to the three months and six months - ------ ended August 31, 1998 and 1997, which is unaudited, includes all adjustments which in the opinion of Management are considered to be necessary for a fair presentation of earnings for such periods. There were no adjustments, other than normal recurring accruals, entering into the determination of the results shown except as noted in this report. The results of operations for the three months and six months ended August 31, 1998 and 1997, respectively, are not necessarily indicative of the results to be expected at year end due to seasonality of the product sales. These statements should be read in conjunction with the Notes to Financial Statements contained in the Company's Annual Report to Shareholders for the Fiscal Year ended February 28, 1998, which are incorporated herein by reference, and with Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 8 of this report. Reclassifications were made to 1997 balances to conform with 1998 presentation. Note 2 - Deferred income taxes reflect the net tax effects of temporary - ------ differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax assets and liabilities as of August 31, 1998 and February 28, 1998 are as follows:

Management has determined that no valuation allowance is necessary to reduce the value of deferred tax assets as it is more likely than not that such assets are realizable. The components of income tax expense are as follows:

6 EDUCATIONAL DEVELOPMENT CORPORATION - -------------------------------------------- Note 3 - Effective June 30, 1997, the Company signed a First Amendment to the - ------ Restated Credit and Security Agreement with State Bank, which provided a $3,500,000 line of credit. The line of credit was evidenced by a promissory note payable June 30, 1998. Effective June 30, 1998, the Company signed a Second Amendment to the Restated Credit and Security Agreement with State Bank, extending the due date of the note to June 30, 1999. The note bears interest at the Wall Street Journal prime floating rate and is collateralized by substantially all of the assets of the Company. The Company utilizes this line of credit primarily to fund routine operations. At August 31, 1998 the Company had available $1,539,000 under this credit agreement. Note 4 - Inventories consist of the following: - ------

Note 5 - Basic earnings per share is computed by dividing net earnings by the - ------ weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the combined weighted average number of common shares and common share equivalents outstanding which include, where appropriate, the assumed exercise of options. In computing diluted earnings per share, the Company has utilized the treasury stock method. The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share ("EPS") is shown below.

7 EDUCATIONAL DEVELOPMENT CORPORATION - -------------------------------------------- ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS - --------------------- Certain statements contained in this Management Discussion and Analysis are not based on historical facts, but are forward-looking statements that are based upon numerous assumptions about future conditions that may ultimately prove to be inaccurate. Actual events and results may materially differ from anticipated results described in such statements. The Company's ability to achieve such results is subject to certain risks and uncertainties. Such risks and uncertainties include but are not limited to, product prices, continued availability of capital and financing, and other factors affecting the Company's business that may be beyond its control. FINANCIAL CONDITION - ------------------- The financial condition of the Company remains strong. Working capital at August 31, 1998 was $9,505,100, down slightly from year-end February 28, 1998 working capital of $9,565,600. Accounts receivable increased 16.0% over year- ended February 28, 1998 due to special credit terms given during the second quarter. Inventory at August 31, 1998 declined 3.5% over year-end February 28, 1998. The inventory level will fluctuate depending upon sales and the timing of shipments from the Company's principal supplier. The Company continues to monitor inventory levels to assure adequate supplies to meet sales requirements. The note payable to the bank increased 123.9% over fiscal year-end February 28, 1998. The Company attributes this to the purchases of 182,300 shares of treasury stock and payments to the Company's principal supplier. Accounts payable declined 44.3% over year-end February 28, 1998, the result of smaller purchases during the current period and payments made for inventory received in prior periods. Pre-tax margins were 12.6% and 13.3% for the three months and six months ended August 31, 1998 respectively compared with 16.0% and 16.0% for the same periods a year ago. The Company attributes this decline to the unanticipated lingering aftereffects of the changes made to the Home Business Division's Marketing Plan in October 1996. New compensation programs have been created to encourage sales and recruiting at all levels of the organization. RESULTS OF OPERATIONS - --------------------- Revenues - Net sales from the Home Business Division were $3,652,700 for the six months ended August 31, 1998, a decrease of 27.3% when compared with net sales of $5,026,800 for the six months ended August 31, 1997. Net sales for the three months ended August 31, 1998 were $1,661,800 compared with $2,505,900 for the three months ended August 31, 1997, a decrease of 33.7%. Management believes this decline in sales is primarily attributable to the reduction in the compensation program which was made in October 1996 and was not well received by the field sales force. The compensation program was enhanced in June 1997 and a further enhancement was made in May 1998. The Company now believes it has in place an excellent compensation program for its field sales force. New and exciting incentive programs, travel contests and regional training seminars are being offered during FY 1999 to stimulate sales growth and recruiting. The Division's second National Seminar was held in July 1998, providing training and developmental assistance to help the field sales force build their businesses. Net sales from the Publishing Division were $4,458,400 for the six months ended August 31, 1998, compared with $4,900,200 for the same six month period a year ago, a decrease of 9.0%. Net sales for the three months ended August 31, 1998 were $2,288,600 versus $2,760,700 for the three months ended August 31, 1997, a decrease of 17.1%. The Company attributes this decline to increased competition in the juvenile paperback market. The Company has an aggressive in-house telephone sales force which maintains contact with over 10,000 customers. The Division also attends several national trade shows each year in order to present the Company's products to a wide variety of consumers. The Division offered special payment terms during the second quarter to stimulate sales. Management believes the Company has a superior product line and is optimistic that the Publishing Division can maintain its market share in the highly competitive publishing market. 8 EDUCATIONAL DEVELOPMENT CORPORATION - -------------------------------------------- Operating Expenses - The Company's cost of sales for the six months ended August 31, 1998 was $3,373,000 compared with $4,110,900 for the six months ended August 31, 1997, a decline of 18.0%. Cost of sales expressed as a percentage of gross sales was 25.7% for the six months ended August 31, 1998 versus 26.1% for the same period a year ago. Cost of sales was $1,696,500 and $2,245,000 for the three months ended August 31, 1998 and 1997 respectively, a decrease of 24.4%. Expressed as a percentage of gross sales, cost of sales was 25.6% for the three months ended August 31, 1998 and 26.0% for the three months ended August 31, 1997. Cost of sales as a percentage of gross sales will fluctuate depending upon the product mix sold. Operating and selling expenses decreased 12.1% to $1,480,100 for the six months ended August 31, 1998 versus $1,683,000 for the six months ended August 31, 1997. As a percentage of gross sales, operating and selling expenses were 11.3% for the current six months and 10.7% for the same six month period a year ago. For the three months ended August 31, 1998, operating and selling expenses were $677,400 compared with $840,000 for the three months ended August 31, 1997, a decrease of 19.4%. Operating and selling expenses for the second quarter ended August 31, 1998 expressed as a percentage of gross sales were 10.2% compared with 9.7% for the second quarter a year ago. A reduction in credit card fees and a decrease in sales incentives, both the result of decreased sales in the Home Business Division, contributed to the decrease in operating and selling expenses. Sales commissions for the six months ended August 31, 1998 were $1,363,300 compared with $1,755,800 for the same six months a year ago, a decrease of 22.4%. As a percentage of gross sales, sales commissions were 10.4% for the six months ended August 31, 1998 and 11.2% for the six months ended August 31, 1997. Sales commissions for the three months ended August 31, 1998 decreased 32.4% to $629,200 versus $930,600 for the three months ended August 31, 1997. Sales commissions as a percentage of gross sales were 9.5% and 10.8% for the three months ended August 31, 1998 and 1997 respectively. Sales commissions will vary with the product being sold and the Division making the sale. The Home Business Division and the Publishing Division have separate and different commission programs. Lower sales in the Home Business Division and the Publishing Division contributed to the decrease in commission expense. General and administrative expenses increased 7.3% to $794,200 for the six months ended August 31, 1998 versus $740,500 for the six months ended August 31, 1997. General and administrative expenses as a percentage of gross sales were 6.1% for the six months ended August 31, 1998 and 4.7% for the six months ended August 31, 1997. General and administrative expenses for the second quarter ended August 31, 1998 increased to $429,600 versus $379,400 for the second quarter a year ago, an increase of 13.2%. As a percentage of gross sales, general and administrative expenses were 6.5% and 4.4% for the three months ended August 31, 1998 and 1997 respectively. General and administrative expenses are not always directly affected by sales, so comparison of these expenses as a percentage of gross sales can be misleading. Increased salaries and benefits, primarily to existing employees, contributed to the increase in general and administrative expenses. Interest expense declined 41.3% to $60,800 for the six months ended August 31, 1998 when compared with $103,500 for the six months ended August 31, 1997. Interest expense for the three months ended August 31, 1998 was $36,900 compared with $53,700 for the same three month period a year ago, a decrease of 31.3%. The average borrowing under the bank loan declined $896,000 for the six months ended August 31, 1998 and $582,000 for the three months ended August 31, 1998 compared to the same periods in the prior year. This decrease in the average amount borrowed resulted in lower interest costs for both the three months and six months ended August 31, 1998. This reduction in average bank borrowings can be attributed to the continuing efforts of the Company to manage its inventory levels through improved efficiencies in purchasing policies. YEAR 2000 MATTERS - ----------------- The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has evaluated its software applications, systems software, information technology ("IT) system and its non-IT systems. Management has determined that all the Company's systems are Year 2000 compliant and that internal Company operations will not be affected by the Year 2000 issue. The Company relies on third-party suppliers for products and services, including telecommunications and shipping. The Company will be adversely impacted if these suppliers of products and services do not make necessary changes to their own systems in a timely and successful manner. There could be circumstances in which the Company would be unable to receive customer orders, ship product, invoice customers or collect payments. 9 EDUCATIONAL DEVELOPMENT CORPORATION - -------------------------------------------- The Company has communicated with others with whom it does significant business to determine their Year 2000 compliance readiness and the extent to which the Company is vulnerable to any third-party Year 2000 issue. However, there can be no guarantee that the systems of these other third-party companies will be timely converted. The Company is unable to determine the financial impact, if any, to the Company should some or all of its third-party suppliers be unable to become Year 2000 compliant in a timely manner. The Company relies highly on the telecommunications industry and the transportation (shipping) industry. It is highly unlikely that all the major service providers in these two industries would fail to become Year 2000 compliant in a timely manner. However, should this worst case scenario occur, the Company would be unable to receive orders or ship product. The Company has not yet established a contingency plan, but intends to formulate one to address the adverse effects should its major third-party suppliers incur Year 2000 problems. The Company intends to have this contingency plan formulated by July 1999. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- The Company does not have any material market risk. PART II OTHER INFORMATION - -------------------------- None 10 EDUCATIONAL DEVELOPMENT CORPORATION - -------------------------------------------- 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 DEVELOPMENT CORPORATION (Registrant) By /s/ Randall W. White -------------------------------- Randall W. White President Date: October 14, 1998 ----------------------- 11