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, 2002.May 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[X] No --------- ------[ ]
As of November 30, 2002May 31, 2003 there were 3,834,4813,939,477 shares of Educational
Development Corporation Common Stock, $0.20 par value outstanding.
EDUCATIONAL DEVELOPMENT CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1
BALANCE SHEETS
November 30, 2002May 31, 2003
(unaudited) February 28, 20022003
------------ ----------------- -----------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,107,100776,300 $ 906,9001,433,000
Accounts receivable - (less
allowances for doubtful accounts
and returns: 11/30/025/31/03 - $189,700$193,800
2/28/0203 - $184,100) 2,720,600 2,040,400$190,000) 2,693,400 2,137,400
Inventories - Net 9,089,300 8,292,00011,526,000 11,413,700
Prepaid expenses and other assets 133,700 218,300141,900 162,700
Deferred income taxes 130,800 120,700
----------------- -----------------52,600 72,100
------------ ------------
Total current assets 14,181,500 11,578,30015,190,200 15,218,900
INVENTORIES 309,400 683,900- Net 459,200 341,900
PROPERTY AND EQUIPMENT
at cost (less accumulated depreciation:
11/30/0205/31/03 - $1,529,400;$1,592,000; 2/28/0203 - $1,446,000) 1,954,100 1,907,600
----------------- -----------------$1,559,500) 1,925,900 1,941,200
DEFERRED INCOME TAXES 37,100 59,700
------------ ------------
$ 16,445,00017,612,400 $ 14,169,800
================= =================17,561,700
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,646,6003,964,500 $ 3,380,1004,997,300
Accrued salaries and commissions 633,600 352,800393,300 435,700
Income taxes 213,800 63,800tax payable 338,700 160,300
Dividends payable 394,000 --
Other current liabilities 373,500 244,800
----------------- -----------------322,800 251,800
------------ ------------
Total current liabilities 4,867,500 4,041,500
DEFERRED INCOME TAXES 11,100 13,0005,413,300 5,845,100
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common Stock, $.20 par value (Authorized 8,000,000 shares; Issued 5,429,2405,518,090
shares and 5,441,640 shares; Outstanding
3,834,4813,939,477 shares and 3,822,1173,827,620 shares) 1,085,800 1,085,8001,103,600 1,088,300
Capital in excess of par value 4,547,900 4,417,5004,912,100 4,619,400
Retained earnings 11,184,200 9,647,700
----------------- -----------------
16,817,900 15,151,00011,647,600 11,455,700
------------ ------------
17,663,300 17,163,400
Less treasury shares, at cost (5,251,500) (5,035,700)
----------------- -----------------
11,566,400 10,115,300
----------------- -----------------(5,464,200) (5,446,800)
------------ ------------
12,199,100 11,716,600
------------ ------------
$ 16,445,00017,612,400 $ 14,169,800
================= =================17,561,700
============ ============
See notes to financial statementsstatements.
2
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended November 30, Nine Months Ended November 30,May 31
-------------------------------
2003 2002
2001 2002 2001
------------ ------------ ------------ ----------------------- -----------
GROSS SALES $ 10,555,6009,761,200 $ 8,261,700 $ 28,422,400 $ 23,498,5009,138,500
Less discounts & allowances (2,728,200) (2,253,800) (8,860,600) (7,581,600)
------------ ------------ ------------ ------------(2,836,400) (3,006,200)
----------- -----------
Net sales 7,827,400 6,007,900 19,561,800 15,916,9006,924,800 6,132,300
COST OF SALES 2,802,200 2,235,200 7,545,200 6,316,100
------------ ------------ ------------ ------------2,582,300 2,445,100
----------- -----------
Gross margin 5,025,200 3,772,700 12,016,600 9,600,800
------------ ------------ ------------ ------------4,342,500 3,687,200
----------- -----------
OPERATING EXPENSES:
Operating & selling 1,139,100 992,900 3,050,500 2,702,6001,554,400 1,306,000
Sales commissions 2,253,900 1,632,500 4,965,900 3,770,1001,763,600 1,437,300
General & administrative 407,400 366,800 1,183,300 1,082,700430,800 375,200
Interest -- -- 900 20,300
------------ ------------ ------------ ------------
3,800,400 2,992,200 9,200,600 7,575,700
------------ ------------ ------------ ------------100 600
----------- -----------
3,748,900 3,119,100
----------- -----------
OTHER INCOME 8,100 19,600 29,900 38,300
------------ ------------ ------------ ------------344,800 315,200
----------- -----------
EARNINGS BEFORE INCOME TAXES 1,232,900 800,100 2,845,900 2,063,400938,400 883,300
INCOME TAXES 468,000 315,100 1,079,300 785,100
------------ ------------ ------------ ------------352,500 335,600
----------- -----------
NET EARNINGS $ 764,900585,900 $ 485,000 $ 1,766,600 $ 1,278,300
============ ============ ============ ============547,700
=========== ===========
BASIC AND DILUTED EARNINGS
PER SHARE:
Basic $ 0.20.15 $ 0.13 $ 0.46 $ 0.33
============ ============ ============ ============.14
=========== ===========
Diluted $ 0.19.14 $ 0.12 $ 0.43 $ 0.32
============ ============ ============ ============.13
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic 3,836,345 3,851,496 3,836,331 3,877,764
============ ============ ============ ============3,879,605 3,837,875
=========== ===========
Diluted 4,136,271 4,095,284 4,146,051 4,043,381
============ ============ ============ ============4,253,020 4,157,200
=========== ===========
DIVIDENDS DECLARED PER
COMMON SHARE $ --.10 $ -- $ 0.06 $ 0.04
============ ============ ============ ============.06
=========== ===========
See notes to financial statements.
3
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Common Stock
(par value $.20 per share) Treasury Stock
-------------------------- -------------------------------------------------
Number of Capital in Number
Shares Excess of Retained of Shareholders'
Issued Amount Par Value Earnings Shares Amount Equity
----------- ---------- ------------ ------------ ------------ ------------ ------------ ---------------------- ----------- -------------
BALANCE, MAR. 1, 2002 5,429,2402003 5,441,640 $1,088,300 $ 1,085,8004,619,400 $ 4,417,50011,455,700 1,614,020 $(5,446,800) $ 9,647,700 1,607,123 $ (5,035,700) $ 10,115,30011,716,600
Purchases of treasury
stock -- -- -- -- 82,200 (549,700) (549,700)22,350 (214,400) (214,400)
Sales of treasury stock -- -- 106,400191,500 -- (84,164) 301,300 407,700
Exercise of options at
$5.50/share -- -- 23,700 -- (10,000) 31,300 55,000(57,757) 197,000 388,500
Exercise of options at
$4.00/share 1,750 400 6,700 -- -- 300 -- (400) 1,300 1,6007,100
Exercise of options at
$3.00/share 3,200 600 9,000 -- -- -- 9,600
Exercise of options at
$1.50/share 11,500 2,300 15,000 -- -- -- 17,300
Exercise of options at
$1.375/share 60,000 12,000 70,500 -- -- -- 82,500
Dividends paiddeclared ($0.06 / 0.10/share) -- -- -- (230,100)(394,000) -- -- (230,100)(394,000)
Net earnings -- -- -- 1,766,600585,900 -- -- 1,766,600585,900
----------- ---------- ------------ ------------ ------------ ------------ ------------ ---------------------- ----------- ------------
BALANCE, NOV. 30, 2002 5,429,240MAY 31, 2003 5,518,090 $1,103,600 $ 1,085,8004,912,100 $ 4,547,90011,647,600 1,578,613 $(5,464,200) $ 11,184,200 1,594,759 $ (5,251,500) $ 11,566,40012,199,100
=========== ========== ============ ============ ============ ============ ============ ====================== =========== ============
See notes to financial statements.
4
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
NineThree Months Ended November 30May 31
-----------------------------
2003 2002
2001
------------ ----------------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES $ 1,652,700(930,100) $ 3,648,700(872,900)
CASH FLOWS FROM INVESTING ACTIVITIES -ACTIVITIES:
Purchases of property and equipment (137,000) (77,400)
------------ ------------
Net cash used in investing activities (137,000) (77,400)
------------ ------------(17,200) (9,100)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 1,317,000 2,347,000230,000 892,000
Payments under revolving credit agreement (1,317,000) (3,431,000)(230,000) (892,000)
Cash received from exercise of stock optionoptions 116,500 56,600 9,900
Cash received from salesales of treasury stock 407,700 79,200388,500 73,700
Cash paid to acquire treasury stock (549,700) (371,400)
Dividends paid (230,100) (154,100)
------------ ------------(214,400) (113,300)
----------- -----------
Net cash used inprovided by financing activities (315,500) (1,520,400)
------------ ------------290,600 17,000
----------- -----------
Net IncreaseDecrease in Cash and Cash Equivalents 1,200,200 2,050,900(656,700) (865,000)
Cash and Cash Equivalents, Beginning of Period 1,433,000 906,900
268,300
------------ ----------------------- -----------
Cash and Cash Equivalents, End of Period $ 2,107,100776,300 $ 2,319,200
============ ============41,900
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 900-- $ 26,400
============ ============--
=========== ===========
Cash paid for income taxes $ 941,200132,000 $ 602,300
============ ============65,000
=========== ===========
Supplemental Disclosure of Non Cash Operating Activities:
Dividends declared $ 394,000 $ 230,400
=========== ===========
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,
2003 and nine months
ended November 30, 2002, and 2001, 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 ended May 31, 2003 and nine months ended November 30, 2002, and
2001, respectively, are not necessarily indicative
of the results to be expected at year endyear-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, 2002.2003.
Note 2 - Effective June 30, 20022003 the Company signed a ThirdFourth Amendment to the
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, 2003.2004. This note bears interest at the Wall Street
Journal prime floating rate minus 0.25% payable monthly.monthly (4% at May 31, 2003).
The note is collateralized by substantially all the assets of the Company. At
November 30,
2002,May 31, 2003, the Company had no borrowings outstanding.
Note 3 - Inventories consist of the following:
November 30, 2002May 31, 2003 February 28, 2002
-----------------2003
------------ -----------------
Current:
Book Inventory $ 9,135,70011,572,400 $ 8,338,40011,460,100
Reserve for Obsolescence (46,400) (46,400)
----------- ----------------------- ------------
Inventories net - current $ 9,089,30011,526,000 $ 8,292,000
=========== ===========
Non-current:11,413,700
============ ============
Noncurrent:
Book Inventory $ 470,000634,800 $ 817,500511,500
Reserve for Obsolescence (160,600) (133,600)
----------- -----------(175,600) (169,600)
------------ ------------
Inventories - non-currentnoncurrent $ 309,400459,200 $ 683,900
=========== ===========341,900
============ ============
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-currentnoncurrent inventory.
A significant portion of inventory purchases by the Company are
concentrated with an England based publishing company. Purchases
from this England based publishing company were approximately
$2.7 million and $1.5 million for the quarters ended May 31,
2003 and 2002, respectively. Total inventory purchases from all
suppliers were approximately $3.2 million and $2.2 million for
the quarters ended May 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.
Three Months Ended November 30, Nine Months Ended November 30,May 31,
--------------------------
2003 2002 2001 2002 2001
---------- ----------
---------- ----------
Net Earnings $ 764,900585,900 $ 485,000 $1,766,600 $1,278,300
========== ==========547,700
========== ==========
Basic EPS:
Weighted Average Shares Outstanding 3,836,345 3,851,496 3,836,331 3,877,764
========== ==========3,879,605 3,837,875
========== ==========
Basic EPS $ 0.20.15 $ 0.13 $ 0.46 $ 0.33
========== ==========.14
========== ==========
Diluted EPS:
Weighted Average Shares Outstanding 3,836,345 3,851,496 3,836,331 3,877,7643,879,605 3,837,875
Assumed Exercise of Options 299,926 243,788 309,720 165,617
---------- ----------373,415 319,325
---------- ----------
Shares Applicable to Diluted Earnings 4,136,271 4,095,284 4,146,051 4,043,381
========== ==========4,253,020 4,157,200
========== ==========
Diluted EPS $ 0.19.14 $ 0.12 $ 0.43 $ 0.32
========== ==========.13
========== ==========
Since March 1, 1998, when the Company began its stock repurchase program,
1,761,9741,809,622 shares of the Company's common stock at a total cost of $5,834,000$6,264,100
have been acquired. The Board of Directors previouslyhas authorized purchasing up to
2,000,000 shares as market conditions warrant.
AtNote 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. The following table illustrates the effect on net earnings and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, as amended by SFAS No. 148, to stock-based employee
compensation.
Three Months Ended May 31,
------------------------------------
2003 2002
--------------- ---------------
Net earnings - as reported $ 585,900 $ 547,700
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related
tax effects -- --
--------------- ---------------
Net earnings - pro forma $ 585,900 $ 547,700
=============== ===============
Earnings per share - as reported:
Basic $ .15 $ .14
=============== ===============
Diluted $ .14 $ .13
=============== ===============
Earnings per share - pro forma:
Basic $ .15 $ .14
=============== ===============
Diluted $ .14 $ .13
=============== ===============
Note 6- Other income includes revenue generated by freight costs invoiced to
customers of $338,200 for the quarter ended May 31, 2003 and $308,800 for the
quarter ended May 31, 2002. Freight costs and handling costs incurred are
included in operating & selling expenses and were $445,100 for the quarter ended
May 31, 2003 and $369,800 for the quarter ended May 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 September 18,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.
7
EDUCATIONAL DEVELOPMENT CORPORATION
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, 2003 and 2002
meeting, the Board of Directors authorized purchasing up to an additional
500,000 shares as market conditions warrant.is set forth below:
Unallocated
Corporate
Publishing UBAH Expenses Total
---------- ---------- ----------- ----------
THREE MONTHS ENDED MAY 31, 2003
Net sales from external customers $1,974,000 $4,950,800 $ -- $6,924,800
Earnings before income taxes 701,700 1,083,700 (847,000) 938,400
THREE MONTHS ENDED MAY 31, 2002
Net sales from external customers $2,175,900 $3,956,400 $ -- $6,132,300
Earnings before income taxes 790,400 849,300 (756,400) 883,300
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, 2002May 31, 2003 was $9,314,000$9,776,900 compared with $7,536,800$9,373,800 at the
end of fiscal year 2002.2003. Accounts receivable increased 30.8%24.1% during the first
nine months of
fiscal yearquarter ended May 31, 2003. The Company's "fall special", whichPublishing Division offered extended payment
terms to December 15, 2002, began during the secondfirst quarter and contributedended May 31, 2003, which led to the increase in
accounts receivable. Inventory levels rose slightly, increasing
4.9% over inventory at fiscal year end 2002.increased 2% during the first quarter
ended May 31, 2003. 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. Accounts payable increased
7.9%decreased 20.7% during the first
nine months of fiscal yearquarter ended May 31, 2003. 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 of inventory and the payment terms
offered by various suppliers affect the levels of accounts payable. Cash
generated by increased in sales in the Home Business Division enabled the Company
to conclude the first quarter ended November 30,
2002May 31, 2003 with no short termshort-term bank debt.
The Company paid a divided of $0.06 per share on August 9, 2002.
Pre-tax margins were 15.8% and 14.6%Cash flows from operating activities was negative for the three months ended May
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
income taxes payable and nine monthsan increase in inventories.
Capital expenditures for the quarter ended November 30, 2002, respectively, compared with 13.3% and 13.0%May 31, 2003 were $17,200, an
increase of 89.0% over capital expenditures of $9,100 for the same comparable periods last year.
7period a year
ago, and is attributable primarily to leasehold 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 cash requirements.
Pre-tax margins were 13.6% for the first quarter ended May 31, 2003, compared
with 14.4% for the first quarter ended May 31, 2002. Increased sales commissions
in the Home Business Division, the result of increased sales, contributed to the
decline in pre-tax margins.
8
EDUCATIONAL DEVELOPMENT CORPORATION
RESULTS OF OPERATIONS
Revenues - Net sales from the Home Business Division were $13,525,100increased 25.1% to
$4,950,800 for the nine monthsfirst quarter ended November 30, 2002May 31, 2003 when compared with
$10,231,400$3,956,400 for the nine
monthsfirst quarter ended November 30, 2001, an increase of 32.2%. Net sales for the three
month period ending November 30, 2002 were $6,196,400, an increase of 38.5% over
net sales of $4,474,800 for the same three month period last year.May 31, 2002. The Company attributes these increasesthis
to the addition ofan increase in 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 programseminars for the
supervisors. Management believes that the Home Business Division will continue
to grow.
Net sales forfrom the Publishing Division were $6,036,700$1,974,000 for the nine monthsfirst quarter
ended November 30, 2002 compared with net salesMay 31, 2003, a decrease of $5,685,500 for the nine months
ended November 30, 2001, an increase of 6.2%. Net sales for the three months
ended November 30, 2002 were $1,631,000, an increase of 6.4%9.3% over net sales of $1,533,100$2,175,900 for the
same three month period last year.first quarter a year ago. The juvenile paperback market is highly competitive.
Industry sales of juvenile paperbacks approaches $888$876 million annually.annually, down
1.3% from the previous year. The Publishing Division's annual sales are
approximately 0.8%0.9% of industry sales. Competitive factors include product quality, price and
deliverability.The major retail chains continue to suffer
lower sales because of the slump in our national economy. This resulted in an
31.0% decline in the Publishing Division's sales to these chains during the
first quarter ended May 31, 2003. Sales to national chains continue to be of
major importance to the Publishing Division. To insure that the Company successfully participatesremains
competitive in their growth, weselling to the major chains, the Company plans to continue ourto
actively target the national chains through cooperative advertising, joint
promotional efforts and other special
promotional programs.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. Management believes the Company can improve its market share in the
juvenile paperback market.share.
Cost of Sales - The Company's cost of sales for the ninethree months ended November
30, 2002May 31,
2003 was $7,545,200,$2,582,300, an increase of 19.5%5.6% over the cost of sales of $6,316,100$2,445,100
for the ninethree months ended November 30, 2001.May 31, 2002. Cost of sales expressed as a percentage
of gross sales was 26.5% for the ninethree months ended November 30, 2002May 31, 2003 and 26.9%26.8% for
the same ninethree month period a year ago. Cost of sales for the three
months ended November 30, 2002 was $2,802,200 compared with $2,235,200 for the
same three months ended November 30, 2001, an increase of 25.4%. Cost of sales
expressed as a percentage of gross sales was 26.5% and 27.1% for the three
months ended November 30, 2002 and 2001 respectively. Cost of sales as a percentage of gross
sales will fluctuate depending upon the product mix sold.
Operating Expenses - Operating and selling expenses increased 12.9%19.0% to
$3,050,500$1,554,400 for the nine monthsfirst quarter ended November 30, 2002May 31, 2003 when compared with
$2,702,600$1,306,000 for the nine monthsfirst quarter ended November 30, 2001. Expressed asMay 31, 2002. As a percentage of gross
sales, these expenses were 15.9% for the first quarter ended May 31, 2003 and
14.3% for the first quarter ended May 31, 2002. Contributing to the increased
operating and selling expensescosts were 10.7% forincreased credit card fees, higher freight
costs, increased payroll costs and increased marketing costs. These increased
costs are attributed to the nine months ended November 30, 2002 and 11.5% foroverall increase in sales in the same nine month period
last year. Operating and selling expensesfirst quarter of
fiscal year 2004 when compared with the first quarter of fiscal year 2003.
Sales commissions for the three months ended November
30, 2002 and 2001May 31, 2003 were $1,139,100 and $992,900, respectively,$1,763,600, an
increase of 14.7%. These costs22.7% over sales commissions of $1,437,300 for the three months
ended May 31, 2002. When expressed as a percentage of gross sales, sales
commissions were 10.8%18.1% for the three months ended November 30, 2002May 31, 2003 and 12.0%15.7% for the
three months ended November 30, 2001. Increases in promotional costs and credit card fees in the
Home Business Division, plus increases in shipping costs and promotional costs
in the Publishing Division, all of which are the direct results of increased
sales in these two divisions, contributed to the increase in operating expenses.
Sales commissions for the nine months ended November 30, 2002 were $4,965,900,
an increase of 31.7% over sales commissions of $3,770,100 for the nine months
ended November 30, 2001. These expenses expressed as a percentage of gross sales
were 17.5% for the nine months ended November 30, 2002 and 16.0% for the nine
months ended November 30, 2001. Sales commissions for the three months ended
November 30, 2002 and 2001 were $2,253,900 and $1,632,500, respectively, an
increase of 38.1%. Sales commissions expressed as a percentage of gross sales
were 21.4% for the three months ended November 30, 2002 and 19.8% for the three
months ended November 30, 2001.May 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 commissionsCommission expense in the Publishing
Division was down 18.0% due to lower sales while commission expense increased
23.6% in the Home Business Division, increased 32.5% and 38.5% for the three months and nine months ended November
30, 2002, the result of increased sales in that division. Although sales in the
Publishing Division increased in both the three month period and nine month
period ended November 30, 2002, sales commissions in the Publishing Division
decreased 1.1% for the nine months ended November 30, 2002 and increased 4.1%
for the three months ended November 30, 2002. The amount of sales in the
Company's "house accounts", which are the Publishing Division's largest
customers, affects the relationship of its commission expense to sales, as these
sales do not have any commission expense associated with them.
8
EDUCATIONAL DEVELOPMENT CORPORATIONsales.
General and administrative expenses for the ninethree months ended November 30, 2002May 31, 2003 were
$1,183,300,$430,800 compared to $375,200 for the same period a year ago, an increase of
9.3% over $1,082,700 for the same nine month
period last year. These14.8%. General and administrative expenses expressed as a percentage of gross
sales were 4.2% for the nine months ended November 30, 20024.4% and 4.6% for the nine months
ended November 30, 2001. General and administrative expenses4.1% respectively for the three months ended November 30, 2002 were $407,400 versus $366,800 for the same three
months last year, anMay 31, 2003
and 2002. An increase of 11.1%. Thesein payroll costs, expressed as a percentage of
gross sales were 3.9%attributed to adding employees and
4.4% for the three months ended November 30, 2002 and
2001, respectively. Contributinggeneral salaries increases, contributed to the increasesincrease in general and
administrative expenses were increases in payroll costs and public relation costs.expenses.
Interest expense was $900$100 for the nine monthsfirst quarter ended November 30, 2002May 31, 2003 compared with
$20,300$600 for the same nine monthsfirst quarter a year ago. There was noLower interest expense
forrates and minimal
borrowings during the three monthsfirst quarter ended November 30, 2002 and November 30, 2001. Minimal
borrowings and lower interest ratesMay 31, 2003 contributed to the lower
interest expenseexpense.
Other income was $344,800 for the first quarter ended May 31, 2003 compared with
$315,200 for the same period a year ago, an increase of 9.4%. An increase in
freight costs billed customers contributed to the increase in other income.
9
EDUCATIONAL DEVELOPMENT CORPORATION
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 elsewhere in this report.
However, the Company considers the following accounting policies to be 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 May 31, 2003 and May 31, 2002. The
reserve for sales returns is estimated by management using historical sales
returns data.
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 fiscal year.
Cashcustomer 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 $92,800 and $83,400
as of May 31, 2003 and May 31, 2002, 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 $634,800 and $717,200 at May 31, 2003 and May 31, 2002,
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 May 31, 2003 and May 31, 2002. Management has
estimated reserves for both current and noncurrent inventory of $222,000 and
$189,000 as of May 31, 2003 and 2002, 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 from operating activities was positive forof the
nine months ended
November 30, 2002. Contributing to this were increases in net earnings, payablesrelated long-lived assets and accrued expenses, offsetreduce their carrying value by increases in receivables,the excess, if any,
of the result of such calculation. We believe at this time that the Company's "fall special" which offered customers extended payment terms,long-lived
assets' carrying values and an
increase in inventory.
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 distributionuseful lives continues 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 and nine months ended
November 30, 2002 and 2001 is set forth below:
Publishing UBAH Other Total
----------- ----------- ----------- -----------
NINE MONTHS ENDED NOVEMBER 30, 2002
Net sales from external customers $ 6,036,700 $13,525,100 $ -- $19,561,800
Earnings before income taxes $ 2,112,400 $ 3,129,000 $(2,395,500) $ 2,845,900
THREE MONTHS ENDED NOVEMBER 30, 2002
Net sales from external customers $ 1,631,000 $ 6,196,400 $ -- $ 7,827,400
Earnings before income taxes $ 569,700 $ 1,520,900 $ (857,700) $ 1,232,900
NINE MONTHS ENDED NOVEMBER 30, 2001
Net sales from external customers $ 5,685,500 $10,231,400 $ -- $15,916,900
Earnings before income taxes $ 2,022,700 $ 2,312,000 $(2,271,300) $ 2,063,400
THREE MONTHS ENDED NOVEMBER 30, 2001
Net sales from external customers $ 1,533,100 $ 4,474,800 $ -- $ 6,007,900
Earnings before income taxes $ 526,300 $ 1,058,000 $ (784,200) $ 800,100
9be appropriate.
10
EDUCATIONAL DEVELOPMENT CORPORATION
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material market risk.
Item 4.4 - CONTROLS AND PROCEDURES
(a) Evaluation of Controls and Procedures - Within 90 daysthe 90-day period prior to the 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 Company'sdesign 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 onupon this evaluation, the CEO and CFO
have concluded that the Company'sdesign and operation of these disclosure controls and
procedures are effectivewere effective.
Subsequent to insure
that material information is recorded, processed, summarized and reported
by Managementthis evaluation on a timely basis in order to comply withJune 11, 2003 through the Company's
disclosure obligations underdate of this filing
on Form 10-Q for the Securities Exchange Act of 1934 and the
SEC rules thereunder.
(b) Changes in Internal Controls - There werequarterly period ended May 31, 2003, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls, subsequent to the dateincluding any significant
deficiencies or material weaknesses of the evaluation.internal controls that would require
corrective action.
PART II OTHER INFORMATION
10None
11
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: January 10,July 9, 2003
-----------------------
11
EDUCATIONAL DEVELOPMENT CORPORATION-------------------
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
In connection with the Quarterly Report of Educational Development Corporation
(the "Company") on Form 10-Q for the period ending November 30, 2002,May 31, 2003, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Randall W. White, President and Chief Executive Officer of the Company, certify
pursuant to 18 U.S.C. Section 1350,ss.1350, as adopted pursuant to Sectionss. 906 of the
Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the
requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934;
and (2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: January 10,July 9, 2003 By /s/ Randall W. White
--------------------- --------------------------------------------------- -------------------------------------
Randall W. White
President and Chief Executive Officer
In connection with the Quarterly Report of Educational Development Corporation
(the "Company") on Form 10-Q for the period ending November 30, 2002,May 31, 2003, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I, W.
Curtis Fossett, Chief Financial Officer of the Company, certify pursuant to 18
U.S.C. Section 1350,ss.1350, as adopted pursuant to Sectionss. 906 of the Sarbanes-Oxley Act of
2002, that: (1) The Report fully complies with the requirements of Section 13
(a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information
contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: January 10,July 9, 2003 By /s/ W. Curtis Fossett
--------------------- ---------------------------------------------------- -------------------------------------
W. Curtis Fossett
Chief Financial Officer
12
EDUCATIONAL DEVELOPMENT CORPORATION
CERTIFICATION
I, Randall W. White, President and CEO of Educational Development Corporation
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Educational
Development Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 10,July 9, 2003 By /s/ Randall W. White
---------------------- --------------------------------------------------- --------------------------------------
Randall W. White
President and Chief Executive Officer
13
EDUCATIONAL DEVELOPMENT CORPORATION
I, W. Curtis Fossett, CFO of Educational Development Corporation certify that:
1. I have reviewed this quarterly report on Form 10-Q of Educational
Development Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
13
EDUCATIONAL DEVELOPMENT CORPORATION
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 10,July 9, 2003 By /s/ W. Curtis Fossett
---------------------------------------- ---------------------------------
W. Curtis Fossett
Chief Financial Officer
14