EDUCATIONAL DEVELOPMENT CORP — Interim / Quarterly Report 1999

Jan 11, 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 November 30, 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 November 30, 1998 there were 4,916,496 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 - -------------------------------------------------------------- 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 and nine months - ------ ended November 30, 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 nine months ended November 30, 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 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, 1998. Reclassifications were made to 1997 balances to conform with 1998 presentation. Note 2 - 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 November 30, 1998 the Company had available $2,988,000 under this credit agreement. 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.

Since March 1, 1998 the Company has purchased 333,140 shares of the Company's common stock at a total cost of $1,171,200. The Board of Directors has authorized purchasing up to 1,000,000 shares as market conditions warrant. 6 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 November 30, 1998 was $9,746,000, a slight increase over year-end working capital of $9,565,600. Accounts receivable increased 13.8% over year-end February 28, 1998 due to special credit terms given during the second quarter. Inventory at November 30, 1998 declined 9.2% over year-end February 28, 1998 levels. 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 41.6% from the balance February 28, 1998. The Company attributes this to increased cash flow provided by operating activities. Accounts payable declined 27.2% over year-end February 28, 1998, the result of smaller purchases during the current period and payments made for inventory received in prior periods. Since March 1, 1998 the Company has purchased 333,140 shares of the Company's common stock at a total cost of $1,171,200. The Board of Directors has authorized purchasing up to 1,000,000 shares as market conditions warrant. Pre-tax margins were 15.6% and 14.2% for the three months and nine months ended November 30, 1998 respectively compared with 16.3% and 16.1% 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 $7,164,800 for the - -------- nine months ended November 30, 1998, a decrease of 15.9% when compared with net sales of $8,521,000 for the nine months ended November 30, 1997. Net sales for the three months ended November 30, 1998 and 1997 were $3,512,100 and $3,494,200 respectively, a slight increase. Management attributes this small increase in net sales during the third quarter to a special sales promotion the Company offered during October 1998. Management believes the overall decline in net sales for the nine months is primarily the result of a reduction to 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 third National Seminar is scheduled for June 1999 and will provide training and developmental assistance to help the field sales force build their businesses. Net sales from the Publishing Division were $6,400,000 and $6,965,100 for the nine months ended November 30, 1998 and 1997 respectively, a decrease of 8.1%. Net sales for the three months ended November 30, 1998 were $1,941,600 compared with $2,064,900 for the same three month period last year, a decline of 6.0%. 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. 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. 7 EDUCATIONAL DEVELOPMENT CORPORATION - -------------------------------------------------------------- Operating Expenses - The Company's cost of sales for the nine months ended - ------------------ November 30, 1998 was $5,435,700 compared with $6,274,300 for the nine months ended November 30, 1997, a decline of 13.4%. Cost of sales expressed as a percentage of gross sales was 25.8% and 26.3% for the nine months ended November 30, 1998 and 1997, respectively. Cost of sales for the three months ended November 30, 1998 was $2,062,700, down 4.7% from the cost of sales of $2,163,400 for the same three month period a year ago. Expressed as a percentage of gross sales, cost of sales for the three months ended November 30, 1998 was 25.8% compared with 26.5% for the three months ended November 30, 1997. Cost of sales as a percentage of gross sales will fluctuate depending upon the product mix sold. Operating and selling expenses decreased 8.3% to $2,312,600 for the nine months ended November 30, 1998 when compared with $2,521,900 for the same nine month period a year ago. As a percentage of gross sales, these expenses were 11.0% for the nine months ended November 30, 1998 and 10.6% for the nine months ended November 30, 1997. Operating and selling expenses for the three months ended November 30, 1998 were $832,500, down 1% from operating and selling expenses of $838,900 for the same quarter last year. Expressed as a percentage of gross sales, these expenses were 10.4%. for the third quarter ended November 30, 1998 and 10.3% for the same 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 nine months ended November 30, 1998 were $2,693,700 compared to $3,012,900 for the nine months ended November 30, 1997, a decline of 10.6%. Sales commissions expressed as a percentage of gross sales were 12.8% and 12.6% for the nine months ended November 30, 1998 and 1997, respectively. For the three months ended November 30, 1998, sales commissions were $1,330,400 and were 16.6% of gross sales. These same expenses for the three months ended November 30, 1997 were $1,257,100 and were 15.4% of gross sales. Sales commissions increased 5.8% in the current three month period when compared with the same three month period last year. 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 increased sales in the Home Business Division during the third quarter resulted in increased commission expense for this period. Lower sales for the nine months in both the Home Business and the Publishing Division contributed to the decrease in commission expense for the nine months ended November 30. 1998. General and administrative expenses increased 6.7% to $1,197,400 for the nine months ended November 30, 1998 when compared with $1,122,100 for the nine months ended November 30, 1997. General and administrative expenses expressed as a percentage of gross sales were 5.7% and 4.7% for the nine months ended November 30, 1998 and 1997 respectively. During the third quarter ended November 30, 1998, general and administrative expenses increased 5.7% to $403,200 versus $381,600 for the same quarter last year. These expenses as a percentage of gross sales were 5.0% and 4.7% for the quarters ending November 30, 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 35.9% to $93,900 for the nine months ended November 30, 1998 when compared with $146,400 for the nine months ended November 30, 1997. For the third quarter ended November 30, 1998 interest expense was $33,100 versus $42,900 for the same period a year ago, a decrease of 22.8%. The average borrowing under the bank loan declined $733,100 for the nine months ended November 30, 1998 and $390,500 for the three months ended November 30, 1998, compared to the same two periods in the previous year. This decrease in the average amount borrowed resulted in lower interest costs for both the three months and nine months ended November 30, 1998. The interest rate charged the Company on its bank loan was reduced three times during the third quarter of fiscal 1999, a further contributor to the lower interest expense. 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. 8 EDUCATIONAL DEVELOPMENT CORPORATION - -------------------------------------------------------------- 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 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 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 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: January 11, 1999 ----------------------- 9