EDUCATIONAL DEVELOPMENT CORP — Interim / Quarterly Report 1998

Jul 10, 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 May 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 55/th/ 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 May 31, 1998 there were 5,088,105 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding. EDUCATIONAL DEVELOPMENT CORPORATION - -------------------------------------------- PART I. FINANCIAL INFORMATION - --------------------------------------------------- ITEM 1 BALANCE SHEETS

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 - -------------------------------------------- STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to financial statements. 5 EDUCATIONAL DEVELOPMENT CORPORATION - -------------------------------------------- NOTES TO FINANCIAL STATEMENTS Note 1 - The information shown with respect to the three months ended May 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 ended May 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 appearing 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 May 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. The note bore interest at the Wall Street Journal prime floating rate and was collateralized by substantially all of the assets of the Company. The Company utilized this line of credit primarily to fund routine operations. At May 31, 1998 the Company had available $2,132,000 under this credit agreement. Effective June 30, 1998, the Company signed a Second Amendment to the Restated Credit and Security Agreement with State Bank, which provides a $3,500,000 line of credit. The line of credit is evidenced by a promissory note payable 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 will utilize this line of credit primarily to fund routine operations. 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.

Note 6 - Effective March 1, 1998, the Company adopted Statement of Financial - ------ Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company did not have other comprehensive income for the periods presented. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected financial information about operating segments in annual financial statements and interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 does not require disclosure in interim financial reports in the first year of adoption. 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 May 31, 1998 was $9,189,200, a decrease of 3.9% over year-end February 28, 1998 working capital of $9,565,600. Accounts receivable increased 5.4% over year- ended February 28, 1998. Inventory at May 31, 1998 declined 1.6% 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 56.2% over fiscal year-end February 28, 1998 as the Company purchased 150,300 shares of treasury stock. Accounts payable declined 22.1% over year-end February 28, 1998, the result of smaller purchases during the current period and the payment for inventory received in prior periods. Pre-tax margins were 13.9% for the three months ended May 31, 1998 compared with 16.0% for the three months ended May 31, 1997. 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 $1,990,900 for the - -------- three months ended May 31, 1998 a decrease of 21.0% when compared with net sales of $2,520,900 for the three months ended May 31, 1997. Management believes this decline is primarily the result of a reduction in the compensation structure which was made in October 1996 and was not well received by the field sales force. The compensation structure was enhanced in June 1997 and the downturn in sales was slowed. In May 1998 the Company made additional enhancements to the compensation structure. 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 will be offered during FY 1999. The Division's second National Seminar will be held in July 1998. Management is optimistic that FY 1999 will be an excellent year for the Division. Net sales from the Publishing Division were $2,169,800 for the three months ended May 31, 1998, an increase of 1.4% over the net sales of $2,139,500 for the three months ended May 31, 1997. Sales nationwide in the juvenile paperback market declined over 18% last year. The Company attributes the increase in net sales to increased market penetration and additional volume. The Company has an aggressive in-house telephone sales force which maintains contact with over 10,000 customers. The Division attends several national trade shows each year in order to present the Company's products to a wide variety of consumers. 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. Operating Expenses - The Company's cost of sales for the three months ended May - ------------------ 31, 1998 was $1,676,500 versus $1,865,900 for the three months ended May 31, 1997, a decline of 10.2%. Cost of sales expressed as a percentage of gross sales was 25.8% for the three months ended May 31, 1998 compared with 26.3% for the three months ended May 31, 1997. Cost of sales will fluctuate depending upon the product mix sold. 8 EDUCATIONAL DEVELOPMENT CORPORATION - ------------------------------------------ Operating and selling expenses decreased 4.8% to $802,700 for the three months ended May 31, 1998 when compared with $843,000 for the three months ended May 31, 1997. Operating and selling expenses as a percentage of gross sales were 12.3% for the three months ended May 31, 1998 and 11.9% for the three months ended May 31, 1997. A reduction in credit card fees, the direct result of lower sales in the Home Business Division, contributed to the decrease in operating and selling expenses. Also contributing to the decrease in operating and selling expenses were reduced sales incentives in the Home Business Division. Sales commissions for the three months ended May 31, 1998 were $743,100 compared with $825,200 for the same three month period a year ago, a decrease of 10.0%. Sales commissions as a percentage of gross sales were 11.3% for the three months ended May 31, 1998 and 11.6% for the three months ended May 31, 1997. 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 contributed to the decrease in commission expense for the quarter. General and administrative expenses increased 1.0% for the three months ended May 31, 1998 to $364,600 when compared with $361,100 for the three months ended May 31, 1997. General and administrative expenses as a percentage of gross sales were 5.6% and 5.1% for the three months ended May 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. Contributing to the increase in general and administrative expenses were increased salaries and benefits, primarily to existing employees. Interest expense declined 52% to $23,900 for the three months ended May 31, 1998 when compared with $49,800 for the same three month period a year ago. The average borrowing under the bank loan declined to $1.1 million for the three months ended May 31, 1998 from $2.3 million for the three months ended May 31, 1997. This decrease in the average bank borrowings resulted in lower interest costs. 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. In FY 1996, the Company purchased new computer hardware and software which is Year 2000 compliant. Management has determined that the Year 2000 issue will not pose operational problems for its computer systems. In addition, 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 other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The total cost, if any, to the Company of these Year 2000 Compliance activities has not been and is not anticipated to be material to its financial position or results of operations in any given year. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- The Company does not have any material market risk. PART II OTHER INFORMATION - -------------------------- None 9 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: July 10, 1998 -------------------- 10