EDUCATIONAL DEVELOPMENT CORP — Interim / Quarterly Report 2003

Oct 14, 2003

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, 2003. [ ] 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, 2003 there were 3,955,019 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding. EDUCATIONAL DEVELOPMENT CORPORATION PART I. FINANCIAL INFORMATION ITEM 1 CONDENSED BALANCE SHEETS

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

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

See notes to financial statements. 4 EDUCATIONAL DEVELOPMENT CORPORATION CONDENSED 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 six months ended August 31, 2003 and 2002, 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. The adjustments reflected in the financial statements represent normal recurring accruals. The results of operations for the three months and six months ended August 31, 2003 and 2002, 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, 2003. Note 2 - Effective June 30, 2003 the Company signed a Fourth Amendment to the Credit and Security Agreement with Arvest 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, 2004. This note bears interest, payable monthly, at the Wall Street Journal prime floating rate minus 0.25% (3.75% at August 31, 2003). The note is collateralized by substantially all the assets of the Company. Available credit under the loan was $3,017,000 at August 31, 2003. Note 3 - Inventories consist of the following:

The Company occasionally purchases book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of the Company's primary supplier. These amounts are included in non-current inventory. Significant portions of inventory purchases by the Company are concentrated with an England based publishing company. Purchases from this England based publishing company were approximately $6.5 million and $4.4 million for the six months ended August 31, 2003 and 2002, respectively. Total inventory purchases from all suppliers were approximately $7.8 million and $5.6 million for the six months ended August 31, 2003 and 2002, respectively. Note 4- Basic earnings per share ("EPS") is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options. In computing diluted EPS the Company has utilized the treasury stock method. 6 EDUCATIONAL DEVELOPMENT CORPORATION 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, when the Company began its stock repurchase program, 1,810,872 shares of the Company's common stock at a total cost of $6,279,063 have been acquired. The Board of Directors previously authorized purchasing up to 2,000,000 shares as market conditions warrant. Note 5 - The Company applies APB Opinion No. 25 and related interpretations in accounting for its Incentive Plan. Accordingly, no stock-based employee compensation cost is reflected in net earnings, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. There were no options granted in the three-month period or six-month period ended August 31, 2003 and 2002. Note 6 -- Freight costs and handling costs incurred are included in operating & selling expenses and were $469,100 and $914,200, respectively, for the three months and six months ended August 31, 2003 and $374,500 and $744,300, respectively, for the three months and six months ended August 31, 2002. Note 7 - 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. 7 EDUCATIONAL DEVELOPMENT CORPORATION Information by industry segment for the three months and six months ended August 31, 2003 and 2002 is set forth below:

Note 8-The Company signed a contract on September 25, 2003 to construct a 20,000 square foot addition to its Tulsa facility. This addition will cost approximately $582,000 and will provide additional warehouse storage space. 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 Working capital at August 31, 2003 was $10,452,800 compared with $9,373,800 at the end of fiscal year 2003. Accounts receivable increased 24.7% during the first six months of fiscal year 2004. The Company's "fall special" began during the second quarter and contributed to the increase in accounts receivable. This "fall special" offered extended payment terms of 90 days or a December 15 due date, depending upon the size of the order. Inventory levels increased 14.1% over inventory at fiscal year end 2003. The level of inventory will fluctuate depending upon sales, the quantity of new titles purchased 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. Accounts payable decreased 8.5% during the first six months of fiscal year 2004. A major component of accounts payable is the amount due to the Company's principal supplier. Increases and decreases in inventory levels as well as the timing of the purchases and the payment terms offered by various suppliers affect the levels of accounts payable. The Company made a large cash payment to its principal supplier during the last month of the 2nd quarter and correspondingly concluded the quarter with short-term bank debt of $483,000. The Company paid a cash dividend of $0.10 per share on June 11, 2003. Cash flows used in operating activities was $1,489,400 for the six months ended August 31, 2003. Contributing to this was a decline in accounts payable as the Company paid its principal supplier for inventory received in the previous quarter. Also affecting cash flow was an increase in accounts receivable, an increase in inventories and a decrease in income taxes payable. 8 EDUCATIONAL DEVELOPMENT CORPORATION Capital expenditures for the six months ended August 31, 2003 were $50,000, a decrease of 60.4% from capital expenditures of $126,200 for the same period a year ago. Capital expenditures in the current six months were primarily for improvements to the Company's warehouse facilities. The Company believes that its cash on hand and the available line of credit (see note 2) is sufficient to meet its foreseeable cash requirements. RESULTS OF OPERATIONS Revenues - Net sales from the Home Business Division were $9,308,000 for the six months ended August 31, 2003 compared with $7,328,700 for the six months ended August 31, 2002, an increase of 27.0%. Net sales for the three-month period ending August 31, 2003 were $4,357,200, an increase of 29.2% over net sales of $3,372,300 for the same three-month period last year. The Company attributes these increases to the addition of new sales consultants and the retention of existing sales consultants. The Company continues to offer new incentive programs, travel contests and regional seminars to help stimulate sales and recruiting. The Company also continues to offer its leadership skills program for the supervisors. Management believes that the Home Business Division will continue to grow. Net sales in the Publishing Division were $4,130,400 for the six months ended August 31, 2003 compared with net sales of $4,405,700 for the six months ended August 31, 2002, an decrease of 6.2%. Net sales for the three months ended August 31, 2003 were $2,156,400, an decrease of 3.3% over net sales of $2,229,800 for the same three month period last year. The juvenile paperback market is highly competitive. Industry sales of juvenile paperbacks approaches $876 million annually, down 1.3% from the previous year. The Publishing Division's annual sales are approximately 0.9% of industry sales. The major retail chains continue to suffer lower sales because of the slump in our national economy. This resulted in a 20.4% decline in the Publishing Division's sales to these chains during the six months ended August 31, 2003. Sales to national chains continue to be of major importance to the Publishing Division. To insure that the Company remains competitive in selling to the major chains, the Company plans to continue to actively target the national chains through cooperative advertising, joint promotional efforts and institutional advertising in trade publications. These activities have improved our relationship with the national chains and we anticipate further positive development in this important area. We feel that we have an edge in the competitive factors of product quality, price and deliverability. Transportation revenues were $719,100 for the six months ended August 31, 2003, an increase of 18.4% over transportation revenues of $607,400 for the six months ended August 31, 2002. Transportation revenues for the three months ended August 31, 2003 were $380,900 and for the three months ended August 31, 2002 were $298,600, an increase of 27.6%. These increases in transportation revenue were the result of increases in sales. The related freight costs are included in operating expense. Freight costs were $914,200 for the six months ended August 31, 2003 and $744,300 for the six months ended August 31, 2002, an increase of 22.8%. Freight costs for the three months ended August 31, 2003 were $469,100 compared to $374,500 for the three months ended August 31, 2002., an increase of 25.3%. These increases in freight costs were the result of increases in sales. Cost of Sales - The Company's cost of sales for the six months ended August 31, 2003 was $5,142,300, an increase of 8.4% over cost of sales of $4,743,000 for the six months ended August 31, 2002. Cost of sales expressed as a percentage of gross sales was 26.4% for the six months ended August 31, 2003 and 26.5% for the same six month period a year ago. Cost of sales for the three months ended August 31, 2003 was $2,560,000 compared with $2,297,900 for the three months ended August 31, 2002, an increase of 11.4%. Cost of sales expressed as a percentage of gross sales were 26.3% and 26.3% for the three month periods ending August 31, 2003 and 2002, respectively. Cost of sales as a percentage of gross sales will fluctuate primarily depending upon the product mix sold. Operating Expenses - Operating and selling expenses increased 18.9% to $2,996,100 for the six months ended August 31, 2003 when compared with $2,518,800 for the six months ended August 31, 2002. Expressed as a percentage of gross sales, operating and selling expenses were 15.4% for the six months ended August 31, 2003 and 14.1% for the same six month period last year. Operating and selling expenses for the three months ended August 31, 2003 and 2002 were $1,441,700 and $1,212,800, respectively, an increase of 18.9%. These costs expressed as a percentage of gross sales were 14.8% for the three months ended August 31, 2003 and 13.9% for the three months ended August 31, 2002. Contributing to the increased operating and selling costs were increased credit card fees, higher freight costs, increased payroll costs and increased marketing costs. These increased costs are attributed to the overall increase in sales in the first six months of fiscal year 2004 when compared with the first six months of fiscal year 2003. 9 EDUCATIONAL DEVELOPMENT CORPORATION Sales commissions for the six months ended August 31, 2003 were $3,360,000, an increase of 23.9% over sales commission of $2,712,000 for the six months ended August 31, 2002. These expenses expressed as a percentage of gross sales were 17.3% for the six months ended August 31, 2003 and 15.2% for the six months ended August 31, 2002. Sales commissions for the three months ended August 31, 2003 and 2002 were $1,596,400 and $1,274,700, respectively, an increase of 25.2%. Sales commissions expressed as a percentage of gross sales were 16.4% for the three months ended August 31, 2003 and 14.6% for the three months ended August 31, 2002. Sales commissions as a percentage of gross sales is determined by the product mix sold and the division which makes the sale. The Home Business Division and the Publishing Division have separate and distinct commission programs and rates. Sales commissions in the Home Business Division increased 25.3% and 24.4% for the three months and six months ended August 31, 2003, the result of increased sales in that division. Although sales in the Publishing Division decreased in both the three-month period and six-month period ended August 31, 2003, sales commissions in the Publishing Division increased 21.0% and 0.7% for the three months and six months ended August 31, 2003. This was the result of increased sales from the Company's outside sales representatives. General and administrative expenses for the six months ended August 31, 2003 were $871,000, an increase of 12.3% over $775,900 for the same six month period last year. These expenses expressed as a percentage of gross sales were 4.5% for the six months ended August 31, 2003 and 4.3% for the six months ended August 31, 2002. General and administrative expenses for the three months ended August 31, 2003 were $440,200 versus $400,700 for the same three months last year, an increase of 9.9%. These costs expressed as a percentage of gross sales were 4.5% and 4.6% for the three months ended August 31, 2003 and 2002, respectively. Contributing to the increases in general and administrative expenses were increases in payroll costs and public relation costs. Interest expense was $2,800 and $2,700, respectively, for the six months and three months ended August 31, 2003 compared to $900 and $300, respectively, for the six months and three months ended August 31, 2002. Increased borrowings offset by lower interest costs contributed to the increase in interest expense. Pre-tax margins were 13.2% and 13.4% for the three months and six months ended August 31, 2003, respectively, compared with 13.0% and 13.7% for the same comparable periods last year. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectable accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. The Company's significant accounting policies are described in the notes accompanying the financial statements included in the Company's annual report filed on Form 10-K. However, the Company considers the following accounting policies to be significant and more dependent on the use of estimates and assumptions Revenue Recognition Revenue from merchandise sales is net of returns and allowances. The provisions of the SEC Staff Accounting Bulletin No.101, "Revenue Recognition in Financial Statements," have been applied, and as a result, a reserve is provided for estimated future sales returns. The Company's sales return policy allows the customer to return all purchases for an exchange or refund for up to 30 days after the customer receives the item. Management has estimated and included a reserve for sales returns of $101,000 as of August 31, 2003 and February 28, 2003. The reserve for sales returns is estimated by management using historical sales returns data. 10 EDUCATIONAL DEVELOPMENT CORPORATION Allowance for Doubtful Accounts The Company maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer's financial condition and current economic trends. If the actual uncollected amounts significantly exceed the estimated allowance, then the Company's operating results would be significantly adversely affected. Management has estimated allowance for doubtful accounts of $97,600 and $89,000 as of August 31, 2003 and February 28, 2003, respectively Inventory Management continually estimates and calculates the amount of noncurrent inventory. The inventory arises due to the Company occasionally purchasing book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of the Company's primary supplier. Noncurrent inventory was estimated by management using the current year turnover ratio by title. All inventory in excess of 2 1/2 years of anticipated sales was classified as noncurrent inventory. Noncurrent inventory balances were $444,700 and $511,500 at August 31, 2003 and February 28,2003, respectively. Inventories are presented net of a reserve for obsolete inventory. Management has estimated and included a reserve for obsolescence for both current and noncurrent inventory. This reserve is based on management's identification of obsolete inventory on hand at August 31, 2003 and February 28,2003. Management has estimated reserves for both current and noncurrent inventory of $211,400 and $216,000 as of August 31, 2003 and February 28,2003, respectively. Deferred Tax Assets The Company does not currently have a valuation allowance recorded against its deferred tax assets. If management determines it is more likely than not that its deferred tax assets would not be realizable in the future, a valuation allowance would be recorded to reduce the deferred tax asset to its net realizable value. Long-lived Assets In evaluating the fair value and future benefits of long-lived assets, we perform an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets. If the carrying value of the related long-lived asset exceeds its fair value, an impairment loss is recorded. We believe at this time that the long-lived assets' carrying values and useful lives continues to be appropriate. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any material market risk. Item 4. - CONTROLS AND PROCEDURES Within the 90-day period prior to filing of this report, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) was performed. Based upon this evaluation, the CEO and CFO have concluded that the design and operation of these disclosure controls and procedures were effective. Subsequent to this evaluation on September 18, 2003 through the date of this filing on Form 10-Q for the quarterly period ended August 31, 2003, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls, including any significant deficiencies or material weaknesses of internal controls that would require corrective action. 11 EDUCATIONAL DEVELOPMENT CORPORATION Item 5 - OTHER INFORMATION None PART II OTHER INFORMATION Item 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of Randall W. White, President and Chief Executive Officer of Educational Development Corporation, dated October 14, 2003, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith. 31.2 Certification of W. Curtis Fossett, Chief Financial Officer of Educational Development Corporation, dated October 14, 2003, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith. 32.1 Certification of Randall W. White, President and Chief Executive Officer of Educational Development Corporation, dated October 14, 2003, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith. 32.2 Certification of W. Curtis Fossett, Chief Financial Officer of Educational Development Corporation, dated October 14, 2003, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith. (b) Reports on Form 8-K A Form 8-K was filed on June 18, 2003 to submit to the Securities and Exchange Commission a press release announcing earnings and sales for the first quarter of fiscal year 2003. The press release contained the following financial information for the three months ended May 31, 2003 and May 31, 2002: (1) net sales; (2) pre tax earnings; (3) income taxes; (4) net earnings; (5) earnings per share. A Form 8-K was filed on August 4, 2003 to submit to the Securities and Exchange Commission a press release announcing record July 2003 sales. 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 12 EDUCATIONAL DEVELOPMENT CORPORATION EXHIBIT INDEX Exhibit No. Description 31.1 Certification of Randall W. White, President and Chief Executive Officer of Educational Development Corporation, dated October 14, 2003, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith. 31.2 Certification of W. Curtis Fossett, Chief Financial Officer of Educational Development Corporation, dated October 14, 2003, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith. 32.1 Certification of Randall W. White, President and Chief Executive Officer of Educational Development Corporation, dated October 14, 2003, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith. 32.2 Certification of W. Curtis Fossett, Chief Financial Officer of Educational Development Corporation, dated October 14, 2003, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith.