EDUCATIONAL DEVELOPMENT CORP — Interim / Quarterly Report 1999

Jul 8, 1999

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, 1999. [_] 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 May 31, 1999 there were 4,446,195 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding. PART I. FINANCIAL INFORMATION - ---------------------------------------------------

See notes to financial statements. 2 STATEMENTS OF EARNINGS (UNAUDITED)

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

See notes to financial statements. 4 STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to financial statements. 5 NOTES TO FINANCIAL STATEMENTS Note 1 - The information shown with respect to the three months ended May 31, - ------ 1999 and 1998, 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, 1999 and 1998, respectively, are not necessarily indicative of the results to be expected at year end due to seasonality of the product sales. These financial statements and notes are prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and should be read in conjunction with the Financial Statements and accompanying notes contained in the Company's Annual Report to Shareholders for the Fiscal Year ended February 28, 1999. Reclassifications were made to 1998 balances to conform with 1999 presentation. Note 2 - Effective June 30, 1998 the Company signed a Second Amendment to - ------ 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 in the amount of $3,500,000 payable June 30, 1999. The note bore interest at the Wall Street Journal prime floating rate payable monthly (7.75% at May 31, 1999). The note was collateralized by substantially all of the assets of the Company. At May 31 1999, the Company had $701,000 in borrowings and a $50,000 letter of credit issued under the revolving credit agreement. Available credit under the revolving credit agreement was $2,749,000 at May 31, 1999. Effective June 30, 1999 the Company signed a Credit and Security Agreement with State Bank which provides a $3,500,000 line of credit. This line of credit is evidenced by a promissory note in the amount of $3,500,000 payable June 30, 2000. This note bears interest at the Wall Street Journal prime floating rate payable monthly. The note is collateralized by substantially all of the assets of the Company. Note 3 - Inventories consist of the following: - ------

Note 4 - 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 outstanding increased, when appropriate, for the number of common shares issuable upon exercise of stock options, computed using 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.

6 Since March 1, 1998, when the Company began its stock repurchase program, 803,991 shares of the Company's common stock at a total cost of $2,365,400 have been acquired. The Board of Directors has authorized purchasing up to 2,000,000 shares as market conditions warrant. 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, 1999 was $8,920,300 compared to working capital of $9,753,200 at fiscal year-end February 28, 1999. Accounts receivable increased 15% over year-ended February 28, 1999. Two sizable orders in the first quarter with payment due during the second quarter contributed to the first quarter increase in accounts receivable. Inventory levels decreased 2.8% during the first quarter of fiscal year 2000. The level of inventory will fluctuate depending upon sales and the timing of shipments from the Company's principal supplier. The Company continuously monitors inventory to assure it has adequate supplies on hand to meet sales requirements. The note payable to the bank declined 7.3% from the balance at February 28, 1999, the result of improved cash flow during the first three months of fiscal year 2000. Accounts payable increased 44.6% over year-end February 28, 1999. The major component of accounts payable is the amount due to the Company's principal supplier. Increases and decreases in inventory levels directly affect the level of accounts payable. Also the timing of the purchases and the payment terms offered by various suppliers affect the levels of accounts payable. In May 1999 the Company declared a cash dividend of $0.02 per share to shareholders of record August 1, 1999, to be paid August 13, 1999. Also, in May 1999 the Board of Directors authorized the Company to purchase an additional 1,000,000 shares of the Company's common stock as market conditions warrant, bringing the total authorized amount the Company may repurchase to 2,000,000 shares. Through the end of the first quarter of fiscal year 2000 the Company has acquired 803,991 shares at a price of $2,365,400. Pre-tax margins were 11.4% for the three months ended May 31, 1999 compared with 13.9% for the three months ended May 31, 1998. Contributing to the decline in pre-tax margins was an increase in sales discounts given during the first quarter of fiscal year 2000 as special promotions were offered to increase sales. RESULTS OF OPERATIONS - --------------------- Revenues - Net sales from the Home Business Division were $2,024,500 for the - -------- three months ended May 31, 1999 compared with net sales of $1,990,900 for the three months ended May 31, 1998, an increase of 1.7%. The Company believes this increase is the result of an increase in the number of new recruits and the retention of existing recruits, both the result of increases in advertising expenditures and other promotions designed to attract and retain new consultants. A 5% increase in the per-show sales average also contributed to the increase in net sales. The Company continues to offer new and exciting incentive programs, travel contests and regional seminars to help stimulate sales growth and recruiting. Management is hopeful that the two-year decline in net sales has been halted. Net sales from the Publishing Division were $2,097,600 for the three months ended May 31, 1999 compared with net sales of $2,169,800 for the three months ended May 31, 1998, a decrease of 3.3%. The Company attributes this decrease in net sales to changing market conditions. National chains increasingly dominate the bookstore market, resulting in fewer independent bookstores. The closings of these independent bookstores, an important market segment to the Company, contributed to the decline in net sales. Independent retail toy stores have also experienced increased competition from national discount stores, resulting in lower sales in this market area. The Company has restructured sales and marketing coverage on the national chains in order to increase market share. The gift market offers considerable potential for the Company and the Company has been exploring this opportunity by attending more gift trade shows. The Company also attends several national trade shows throughout the country to further promote its products. For these reasons Management is optimistic that the Publishing Division will maintain its market share in the highly competitive publishing market. 7 Operating Expenses - The Company's cost of sales for the three months ended May - ------------------ 31, 1999 was $1,726,500, an increase of 3.0% over the cost of sales of $1,676,500 for the three months ended May 31, 1998. Cost of sales expressed as a percentage of gross sales was 26.3% versus 25.8% for the three months ended May 31, 1999 and 1998 respectively. Cost of sales as a percentage of gross sales will fluctuate depending upon the product mix sold. Operating and selling expenses decreased 2.2% to $785,300 for the three months ended May 31, 1999 compared with $802,700 for the three months ended May 31, 1998. These expenses expressed as a percentage of gross sales were 12.0% for the three months ended May 31, 1999 and 12.3% for the three months ended May 31, 1998. A decrease in advertising expenditures in the Publishing Division contributed to the decline in operating and selling expenses. Sales commissions increased 1.0% during the quarter ended May 31, 1999 to $741,800 compared with $734,100 for the quarter ended May 31, 1998. Sales commissions expressed as a percentage of gross sales were 11.3% for both quarters ended May 31, 1999 and 1998. 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 and rates. The increase in sales for the Home Business Division offset by lower sales in the Publishing Division resulted in a net 1.0% increase in commission expenses for the first quarter of fiscal year 2000. General and administrative expenses were $401,400 for the three months ended May 31, 1999, an increase of 10.1% over the $364,600 for the three months ended May 31, 1998. These expenses expressed as a percentage of gross sales were 6.1% for the three months ended May 31, 1999 versus 5.6% for the three months ended May 31, 1998. General and administrative expenses are not always directly affected by sales, thus comparison of these expenses as a percentage of gross sales can be misleading. Increases in salaries and benefits, primarily to existing employees, contributed to the increase in general and administrative expenses. Interest expense declined 45.6% for the first quarter of fiscal year 2000 when compared with the first quarter of fiscal year 1999. The average amount borrowed during the first quarter ended May 31, 1999 was $657,600 compared with $1,102,300 for the first quarter ended May 31, 1998, a decrease of 40.3%. The rate of interest was 3/4 of 1% lower during the first quarter of fiscal year 2000 than the interest rate in the first quarter a year ago. The decline in the average amount borrowed and a lower interest rate resulted in lower interest expenses for the quarter ended May 31, 1999 when compared with the quarter ended May 31, 1998. The 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. BUSINESS SEGMENTS - ----------------- The Company has two reportable segments: Publishing and Usborne Books at Home ("UBAH"). These reportable segments are business units that offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations. The Publishing Division markets its products to retail accounts, which include book, school supply, toy and gift stores and museums, through commissioned sales representatives, trade and specialty wholesalers and an internal telesales group. The UBAH Division markets its product line through a network of independent sales consultants through a combination of direct sales, home shows and book fairs. The accounting policies of the segments are the same as those of the Company. The Company evaluates segment performance based on operating profits of the segments which is defined as segment net sales reduced by direct cost of sales and direct expenses. Corporate expenses, including interest and depreciation, and income taxes are not allocated to the segments. The Company's assets are not allocated on a segment basis. Information by industry segment for the three months ended May 31, 1999 and 1998 is set forth below:

8 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 the various computer programs the Company uses in its operations are Year 2000 compliant. These programs include the following: inventory; accounts receivable; accounts payable; general ledger; shipping; order entry. The Informix database engine, which runs these programs, is not Year 2000 compliant. The Company has acquired the necessary programs to bring the Informix database engine to Year 2000 compliance and has installed and tested these programs in its test environment. The Company is presently installing the programs on the Company's main system and expects to have this completed by October 1999. The Company's ("IT") system and its non-IT system should be fully compliant by October 1999. Y2K costs are estimated to be less than $50,000. The Company has received assurances from its primary supplier, Usborne Publishing LTD, that Usborne Publishing LTD will be year 2000 compliant before the end of 1999. 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. 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 developed an informal contingency plan to address the potential adverse effects of the Year 2000 problem. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- The Company does not have any material market risk. PART II OTHER INFORMATION - -------------------------- None 9 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 8, 1999 --------------- 10