SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-Q
(Mark(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 ____________.
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 2003. o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period fromto Commission file number: 0-4957
EDUCATIONAL DEVELOPMENT CORPORATION
(Exact(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.)
Delaware
(State or other jurisdiction of
incorporation or organization)73-0750007
(I.R.S. Employer
Identification No.)10302 East
55th55th Place, Tulsa Oklahoma 74146-6515(Address
(Address of principal executive offices)Registrant'sRegistrant’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[ ]oAs of
August 31,November 30, 2003 there were3,955,0193,970,654 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.TABLE OF CONTENTSEDUCATIONAL DEVELOPMENT CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1
CONDENSED BALANCE SHEETS
August 31, 2003 February 28, 2003 --------------- ----------------- (unaudited)ASSETS CURRENT ASSETS: Cash and cash equivalents $ 401,300 $ 1,433,000 Accounts receivable - (less allowances for doubtful accounts and sales returns: 8/31/03 - $198,600 2/28/03 - $190,000) 2,704,300 2,137,400 Inventories - Net 13,003,600 11,413,700 Prepaid expenses and other assets 103,600 162,700 Income taxes receivable 15,200 -- Deferred income taxes 43,700 72,100 ------------ ------------ Total current assets 16,271,700 15,218,900 INVENTORIES - Net 444,700 341,900 PROPERTY AND EQUIPMENT at cost (less accumulated depreciation: 08/31/03 - $1,625,800; 2/28/03 - $1,559,500) 1,925,000 1,941,200 DEFERRED INCOME TAXES 39,100 59,700 ------------ ------------ $ 18,680,500 $ 17,561,700 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Note payable to bank $ 483,000 $ -- Accounts payable 4,573,600 4,997,300 Accrued salaries and commissions 455,300 435,700 Income taxes -- 160,300 Other current liabilities 307,000 251,800 ------------ ------------ Total current liabilities 5,818,900 5,845,100 COMMITMENTS (Note 8) SHAREHOLDERS' EQUITY: Common Stock, $.20 par value (Authorized 8,000,000 shares; Issued 5,521,340 shares and 5,441,640 shares; Outstanding 3,955,019 shares and 3,827,620 shares) 1,104,300 1,088,300 Capital in excess of par value 5,007,600 4,619,400 Retained earnings 12,182,000 11,455,700 ------------ ------------ 18,293,900 17,163,400 Less treasury shares, at cost (5,432,300) (5,446,800) ------------ ------------ 12,861,600 11,716,600 ------------ ------------ $ 18,680,500 $ 17,561,700 ============ ============
November 30, 2003 (unaudited) February 28, 2003 ASSETSCURRENT ASSETS: Cash and cash equivalents $ 597,900 $ 1,433,000 Accounts receivable – (less allowances for doubtful accounts and returns: 11/30/03 - $203,600 2/28/03 - $190,000) 2,800,300 2,137,400 Inventories – Net 13,543,800 11,413,700 Prepaid expenses and other assets 74,300 162,700 Deferred income taxes 49,500 72,100 Total current assets 17,065,800 15,218,900 INVENTORIES — Net 419,400 341,900 PROPERTY AND EQUIPMENT at cost (less accumulated depreciation: 11/30/03 - $1,660,400; 2/28/03 - $1,559,500) 1,896,500 1,941,200 DEFERRED INCOME TAXES 59,700 59,700 $ 19,441,400 $ 17,561,700 LIABILITIES AND SHAREHOLDERS’ EQUITYCURRENT LIABILITIES: Accounts payable $ 4,286,200 $ 4,997,300 Accrued salaries and commissions 722,500 435,700 Income taxes 249,500 160,300 Other current liabilities 472,000 251,800 Total current liabilities 5,730,200 5,845,100 COMMITMENTS SHAREHOLDERS’ EQUITY: Common Stock, $.20 par value (Authorized 8,000,000 shares; Issued 5,525,340 and 5,441,640 shares; Outstanding 3,970,654 and 3,827,620 shares) 1,105,100 1,088,300 Capital in excess of par value 5,049,600 4,619,400 Retained earnings 13,053,100 11,455,700 19,207,800 17,163,400 Less treasury shares, at cost (5,496,600 ) (5,446,800 ) 13,711,200 11,716,600 $ 19,441,400 $ 17,561,700 See notes to financial
statementsstatements.2
EDUCATIONAL DEVELOPMENT CORPORATION
CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended August 31, Six Months Ended August 31, 2003 2002 2003 2002 ------------ ------------ ------------ ------------GROSS SALES $ 9,716,400 $ 8,728,300 $ 19,477,600 $ 17,866,800 Less discounts & allowances (3,202,800) (3,126,200) (6,039,200) (6,132,400) ------------ ------------ ------------ ------------ Net sales 6,513,600 5,602,100 13,438,400 11,734,400 Transportation revenue 380,900 298,600 719,100 607,400 ------------ ------------ ------------ ------------ Total revenue 6,894,500 5,900,700 14,157,500 12,341,800 COST OF SALES 2,560,000 2,297,900 5,142,300 4,743,000 ------------ ------------ ------------ ------------ Gross margin 4,334,500 3,602,800 9,015,200 7,598,800 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Operating & selling 1,441,700 1,212,800 2,996,100 2,518,800 Sales commissions 1,596,400 1,274,700 3,360,000 2,712,000 General & administrative 440,200 400,700 871,000 775,900 Interest 2,700 300 2,800 900 ------------ ------------ ------------ ------------ 3,481,000 2,888,500 7,229,900 6,007,600 ------------ ------------ ------------ ------------ OTHER INCOME 7,900 15,400 14,500 21,800 ------------ ------------ ------------ ------------ EARNINGS BEFORE INCOME TAXES 861,400 729,700 1,799,800 1,613,000 INCOME TAXES 327,000 275,700 679,500 611,300 ------------ ------------ ------------ ------------ NET EARNINGS $ 534,400 $ 454,000 $ 1,120,300 $ 1,001,700 ============ ============ ============ ============ BASIC AND DILUTED EARNINGS PER SHARE: Basic $ 0.14 $ 0.12 $ 0.29 $ 0.26 ============ ============ ============ ============ Diluted $ 0.12 $ 0.11 $ 0.26 $ 0.24 ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: Basic 3,946,866 3,834,772 3,913,235 3,836,324 ============ ============ ============ ============ Diluted 4,301,033 4,144,683 4,277,027 4,150,941 ============ ============ ============ ============ DIVIDENDS DECLARED PER COMMON SHARE $ -- $ -- $ 0.10 $ 0.06 ============ ============ ============ ============
Three Months Ended November 30, Nine Months Ended November 30, 2003 2002 2003 2002 REVENUES: Gross sales $ 12,420,300 $ 10,555,600 $ 31,897,900 $ 28,422,400 Less discounts & allowances (2,994,100 ) (2,728,200 ) (9,033,300 ) (8,860,600 ) Transportation revenue 550,500 461,800 1,269,600 1,069,200 Net revenues 9,976,700 8,289,200 24,134,200 20,631,000 COST OF SALES 3,274,200 2,802,200 8,416,500 7,545,200 Gross margin 6,702,500 5,487,000 15,717,700 13,085,800 OPERATING EXPENSES: Operating & selling 2,016,000 1,624,000 5,012,100 4,142,800 Sales commissions 2,792,300 2,253,900 6,152,300 4,965,900 General & administrative 482,800 384,300 1,353,800 1,160,200 Interest 5,000 — 7,800 900 5,296,100 4,262,200 12,526,000 10,269,800 OTHER INCOME 9,200 8,100 23,700 29,900 EARNINGS BEFORE INCOME TAXES 1,415,600 1,232,900 3,215,400 2,845,900 INCOME TAXES 544,500 468,000 1,224,000 1,079,300 NET EARNINGS $ 871,100 $ 764,900 $ 1,991,400 $ 1,766,600 BASIC AND DILUTED EARNINGS PER SHARE: Basic $ 0.22 $ 0.20 $ 0.51 $ 0.46 Diluted $ 0.20 $ 0.18 $ 0.46 $ 0.43 WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic 3,974,715 3,836,345 3,933,728 3,836,331 Diluted 4,322,308 4,136,271 4,292,120 4,146,051 DIVIDENDS DECLARED PER COMMON SHARE $ — $ — $ 0.10 $ 0.06 See notes to financial statements.
3
EDUCATIONAL DEVELOPMENT CORPORATION
CONDENSED STATEMENT OF CHANGES IN
SHAREHOLDERS'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, 2003 5,441,640 $1,088,300 $4,619,400 $ 11,455,700 1,614,020 $(5,446,800) $ 11,716,600 Purchases of treasury stock -- -- -- -- 23,600 (229,400) (229,400) Sales of treasury stock -- -- 275,600 -- (71,299) 243,900 519,500 Exercise of options at $4.00/share 4,000 800 15,200 -- -- -- 16,000 Exercise of options at $3.125/share 1,000 200 2,900 -- -- -- 3,100 Exercise of options at $3.00/share 3,200 700 9,000 -- -- -- 9,700 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 paid ($0.10/share) -- -- -- (394,000) -- -- (394,000) Net earnings -- -- -- 1,120,300 -- -- 1,120,300 --------- ---------- ---------- ------------ --------- ----------- ------------ BALANCE, AUG 31, 2003 5,521,340 $1,104,300 $5,007,600 $ 12,182,000 1,566,321 $(5,432,300) $ 12,861,600 ========= ========== ========== ============ ========= =========== ============
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, 2003 5,441,640 $ 1,088,300 $ 4,619,400 $ 11,455,700 1,614,020 $ (5,446,800 ) $ 11,716,600 Purchases of treasury stock — — — — 35,735 (376,300 ) (376,300 ) Sales of treasury stock — — 275,600 — (95,069 ) 326,500 602,100 Stock option transactions, including tax benefit 83,700 16,800 154,600 — — — 171,400 Dividends paid ($0.10/share) — — — (394,000 ) — — (394,000 ) Net earnings — — — 1,991,400 — — 1,991,400 BALANCE, NOV. 30, 2003 5,525,340 $ 1,105,100 $ 5,049,600 $ 13,053,100 1,554,686 $ (5,496,600 ) $ 13,711,200 See notes to financial statements.
4
EDUCATIONAL DEVELOPMENT CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended August 31 -------------------------- 2003 2002 ----------- -----------CASH FLOWS FROM OPERATING ACTIVITIES $(1,489,400) $ (11,900) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (50,000) (126,200) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit agreement 2,515,000 1,317,000 Payments under revolving credit agreement (2,032,000) (1,317,000) Cash received from exercise of stock options 128,600 56,600 Cash received from sales of treasury stock 519,500 73,700 Cash paid to acquire treasury stock (229,400) (197,700) Dividends paid (394,000) (230,100) ----------- ----------- Net cash provided by (used in) financing activities 507,700 (297,500) ----------- ----------- Net Decrease in Cash and Cash Equivalents (1,031,700) (435,600) Cash and Cash Equivalents, Beginning of Period 1,433,000 906,900 ----------- ----------- Cash and Cash Equivalents, End of Period $ 401,300 $ 471,300 =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 1,000 $ 700 =========== =========== Cash paid for income taxes $ 806,000 $ 705,000 =========== ===========
Nine Months Ended November 30 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES $ (782,200 ) $ 1,652,700 CASH FLOWS FROM INVESTING ACTIVITIES – Purchases of property and equipment (56,100 ) (137,000 ) Net cash used in investing activities (56,100 ) (137,000 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit agreement 6,790,000 1,317,000 Payments under revolving credit agreement (6,790,000 ) (1,317,000 ) Cash received from exercise of stock option 171,400 56,600 Cash received from sale of treasury stock 602,100 407,700 Cash paid to acquire treasury stock (376,300 ) (549,700 ) Dividends paid (394,000 ) (230,100 ) Net cash provided by (used in) financing activities 3,200 (315,500 ) Net (Decrease) Increase in Cash and Cash Equivalents (835,100 ) 1,200,200 Cash and Cash Equivalents, Beginning of Period 1,433,000 906,900 Cash and Cash Equivalents, End of Period $ 597,900 $ 2,107,100 Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 6,700 $ 900 Cash paid for income taxes $ 1,081,500 $ 941,200 See notes to financial statements.
5
EDUCATIONAL DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1
-— The information shown with respect to the three months andsixnine months endedAugust 31,November 30, 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 andsixnine months endedAugust 31,November 30, 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'sCompany’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% atAugust 31,November 30, 2003). The note is collateralized by substantially all the assets of the Company. Available credit under the loan was$3,017,000$3,500,000 atAugust 31,November 30, 2003.Note 3
-— Inventories consist of the following:
August 31, 2003 February 28, 2003 --------------- -----------------Current: Book Inventory $ 13,033,400 $ 11,460,100 Reserve for Obsolescence (29,800) (46,400) ------------ ------------ Inventories net - current $ 13,003,600 $ 11,413,700 ============ ============ Non-current: Book Inventory $ 626,300 $ 511,500 Reserve for Obsolescence (181,600) (169,600) ------------ ------------ Inventories - non-current $ 444,700 $ 341,900 ============ ============
November 30, 2003 February 28, 2003 Current: Book Inventory $ 13,573,900 $ 11,460,100 Reserve for Obsolescence (30,100 ) (46,400 ) Inventories net – current $ 13,543,800 $ 11,413,700 Non-current: Book Inventory $ 666,200 $ 511,500 Reserve for Obsolescence (246,800 ) (169,600 ) Inventories – non-current $ 419,400 $ 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'sCompany’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$10.0 million and$4.4$7.2 million for thesixnine months endedAugust 31,November 30, 2003 and 2002, respectively. Total inventory purchases from all suppliers were approximately$7.8$12.3 million and$5.6$9.2 million for thesixnine months endedAugust 31,November 30, 2003 and 2002, respectively.Note 4- Basic earnings per share
("EPS"(“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"(“EPS”) is shown below.
Three Months Ended August 31, Six Months Ended August 31, 2003 2002 2003 2002 ---------- ---------- ---------- ----------Net Earnings $ 534,400 $ 454,000 $1,120,300 $1,001,700 ========== ========== ========== ========== Basic EPS: Weighted Average Shares Outstanding 3,946,866 3,834,772 3,913,235 3,836,324 ========== ========== ========== ========== Basic EPS $ 0.14 $ 0.12 $ 0.29 $ 0.26 ========== ========== ========== ========== Diluted EPS: Weighted Average Shares Outstanding 3,946,866 3,834,772 3,913,235 3,836,324 Assumed Exercise of Options 354,167 309,911 363,792 314,617 ---------- ---------- ---------- ---------- Shares Applicable to Diluted Earnings 4,301,033 4,144,683 4,277,027 4,150,941 ========== ========== ========== ========== Diluted EPS $ 0.12 $ 0.11 $ 0.26 $ 0.24 ========== ========== ========== ==========
Three Months Ended November 30, Nine Months Ended November 30, 2003 2002 2003 2002 Net Earnings $ 871,100 $ 764,900 $ 1,991,400 $ 1,766,600 Basic EPS: Weighted Average Shares Outstanding 3,974,715 3,836,345 3,933,728 3,836,331 Basic EPS $ 0.22 $ 0.20 $ 0.51 $ 0.46 Diluted EPS: Weighted Average Shares Outstanding 3,974,715 3,836,345 3,933,728 3,836,331 Assumed Exercise of Options 347,593 299,926 358,392 309,720 Shares Applicable to Diluted Earnings 4,322,308 4,136,271 4,292,120 4,146,051 Diluted EPS $ 0.20 $ 0.18 $ 0.46 $ 0.43 Since March 1, 1998, when the Company began its stock repurchase program,
1,810,8721,823,007 shares of theCompany'sCompany’s common stock at a total cost of$6,279,063$6,425,883 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 orsix-monthnine-month period endedAugust 31,November 30, 2003 and 2002.Note 6
--— Freight costs and handling costs incurred are included in operating & selling expenses and were$469,100$607,900 and$914,200,$1,522,100, respectively, for the three months andsixnine months endedAugust 31,November 30, 2003 and$374,500$490,800 and$744,300,$1,235,100, respectively, for the three months andsixnine months endedAugust 31,November 30, 2002.Note 7
-— The Company has two reportable segments: Publishing and Usborne Books at Home("UBAH"(“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'sCompany’s assets are not allocated on a segment basis.7
EDUCATIONAL DEVELOPMENT CORPORATION
Information by industry segment for the three months and
sixnine months endedAugust 31,November 30, 2003 and 2002 is set forth below:
Unallocated Corporate Publishing UBAH Expenses Total ---------- ---------- ----------- -----------SIX MONTHS ENDED AUGUST 31, 2003 Net sales from external customers $4,130,400 $9,308,000 $ -- $13,438,400 Earnings before income taxes 1,428,800 2,089,600 (1,718,600) 1,799,800 THREE MONTHS ENDED AUGUST 31, 2003 Net sales from external customers $2,156,400 $4,357,200 $ -- $ 6,513,600 Earnings before income taxes 727,100 1,005,900 (871,600) 861,400 SIX MONTHS ENDED AUGUST 31, 2002 Net sales from external customers $4,405,700 $7,328,700 $ -- $11,734,400 Earnings before income taxes 1,542,700 1,608,100 (1,537,800) 1,613,000 THREE MONTHS ENDED AUGUST 31, 2002 Net sales from external customers $2,229,800 $3,372,300 $ -- $ 5,602,100 Earnings before income taxes 752,300 758,800 (781,400) 729,700Note 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.
Publishing UBAH Other Total Nine months Ended November 30, 2003Net revenues from external customers $ 5,919,900 $ 18,214,300 $ — 24,134,200 Earnings before income taxes $ 2,047,900 $ 3,868,000 $ (2,700,500 ) $ 3,215,400 Three Months Ended November 30, 2003Net revenues from external customers $ 1,776,400 $ 8,200,300 $ — $ 9,976,700 Earnings before income taxes $ 619,100 $ 1,778,400 $ (981,900 ) $ 1,415,600 Nine Months Ended November 30, 2002Net revenues from external customers $ 6,054,000 $ 14,577,000 $ — $ 20,631,000 Earnings before income taxes $ 2,112,400 $ 3,129,000 $ (2,395,500 ) $ 2,845,900 Three Months Ended November 30, 2002Net revenues from external customers $ 1,636,400 $ 6,652,800 $ — $ 8,289,200 Earnings before income taxes $ 569,700 $ 1,520,900 $ (857,700 ) $ 1,232,900 ITEM 2
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCertain 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'sCompany’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 theCompany'sCompany’s business that may be beyond its control.FINANCIAL CONDITION
Working capital at
August 31,November 30, 2003 was$10,452,800$11,335,600 compared with $9,373,800 at the end of fiscal year 2003. Accounts receivable increased24.7%29.1% during the firstsixnine months of fiscal year 2004. TheCompany's "fall special"Company’s “fall special” began during the second quarter and contributed to the increase in accounts receivable. This"fall special"“fall special” offered extended payment terms of 90 days or a December 15 due date, depending upon the size of the order. Inventory levels increased14.1%18.9% over inventory at fiscal year end 2003. Contributing to the increase in inventory was the addition of 168 new titles to the product line. The level of inventory will fluctuate depending upon salesthe quantity of new titles purchasedand the timing of shipments from theCompany'sCompany’s principal supplier. The Company continuously monitors inventory to assure it has adequate supplies on hand to meet sales requirements. Accounts payable decreased8.5%14.2% during the firstsixnine months of fiscal year 2004. A major component of accounts payable is the amount due to theCompany'sCompany’s principal supplier. Increases and decreases in inventory levels as well as the timing ofthepurchases of inventory and the payment terms offered by various suppliers affect the levels of accounts payable.TheCash generated by increased sales in the Home Business Division enabled the Companymade a large cash paymenttoits principal supplier during the last month of the 2nd quarter and correspondingly concludedconclude the quarter ended November 30, 2003 with no short-term bankdebt of $483,000.debt.The Company paid a
cash dividenddivided of $0.10 per share on June 11, 2003.Cash flows used in operating activities was
$1,489,400$782,200 for thesixnine months endedAugust 31,November 30, 2003. Cash flows provided by operating activities was $1,652,700 for the nine months ended November 30, 2002. 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 flowwas an increasewere increases in accounts receivable,an increase ininventories, accrued salaries anda decrease incommissions and income taxes payable.8EDUCATIONAL DEVELOPMENT CORPORATIONCapital expenditures for the
sixnine months endedAugust 31,November 30, 2003 were$50,000,$56,100, a decrease of60.4%59.1% from capital expenditures of$126,200$137,000 for the same period a year ago. Capital expenditures in the currentsixnine months were primarily for improvements to theCompany'sCompany’s warehouse facilities.8
EDUCATIONAL DEVELOPMENT CORPORATION
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-— Netsalesrevenues from the Home Business Division were$9,308,000$18,214,300 for thesixnine months endedAugust 31,November 30, 2003 compared with$7,328,700$14,577,000 for thesixnine months endedAugust 31,November 30, 2002, an increase of27.0%25.0%. Netsalesrevenues for the three-month period endingAugust 31,November 30, 2003 were$4,357,200,$8,200,300, an increase of29.2%23.3% over net sales of$3,372,300$6,652,800 for the samethree-monththree 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 forthesupervisors. Management believes that the Home Business Division will continue to grow.Net sales
infor the Publishing Division were$4,130,400$5,919,900 for thesixnine months endedAugust 31,November 30, 2003 compared with net sales of$4,405,700$6,054,000 for thesixnine months endedAugust 31,November 30, 2002,ana decrease of6.2%2.2%. Net sales for the three months endedAugust 31,November 30, 2003 were$2,156,400,$1,776,400, andecreaseincrease of3.3%8.6% over net sales of$2,229,800$1,636,400 for the samethree monththree-month period last year. The juvenile paperback market is highly competitive. Industry sales of juvenile paperbacksapproachesapproach $876 million annually, down 1.3% from the previous year. The PublishingDivision'sDivision’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 a20.4%9.7% decline in the PublishingDivision'sDivision’s sales to these chains during thesixnine months endedAugust 31,November 30, 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$1,269,600 for thesixnine months endedAugust 31,November 30, 2003, an increase of18.4%18.7% over transportation revenues of$607,400$1,069,200 for thesixnine months endedAugust 31,November 30, 2002. Transportation revenues for the three months endedAugust 31,November 30, 2003 were$380,900$550,500 and for the three months endedAugust 31,November 30, 2002 were$298,600,$461,800, an increase of27.6%19.2%. These increases in transportation revenue were the result of increases in sales. The related freight costs are included in operatingexpense.and selling expenses. Freight costs were$914,200$1,522,100 for thesixnine months endedAugust 31,November 30, 2003 and$744,300$1,235,100 for thesixnine months endedAugust 31,November 30, 2002, an increase of22.8%23.2%. Freight costs for the three months endedAugust 31,November 30, 2003 were$469,100$607,900 compared to$374,500$490,800 for the three months endedAugust 31, 2002.,November 30, 2002, an increase of25.3%23.9%. These increases in freight costs were the result of increases in sales.Cost of Sales
-— TheCompany'sCompany’s cost of sales for thesixnine months endedAugust 31,November 30, 2003 was$5,142,300,$8,416,500, an increase of8.4%11.5% over cost of sales of$4,743,000$7,545,200 for thesixnine months endedAugust 31,November 30, 2002. Cost of sales expressed as a percentage of gross sales was 26.4% for thesixnine months endedAugust 31,November 30, 2003 and 26.5% for the samesix monthnine-month period a year ago. Cost of sales for the three months endedAugust 31,November 30, 2003 was$2,560,000$3,274,200 compared with$2,297,900$2,802,200 for the same three months endedAugust 31,November 30, 2002, an increase of11.4%16.8%. Cost of sales expressed as a percentage of gross saleswere 26.3%was 26.4% and26.3%26.5% for the threemonth periods ending August 31,months ended November 30, 2003 and 2002 respectively. Cost of sales as a percentage of gross sales will fluctuateprimarilydepending upon the product mix sold.Operating and Selling Expenses
-— Operating and selling expenses increased18.9%21.0% to$2,996,100$5,012,100 for thesixnine months endedAugust 31,November 30, 2003 when compared with$2,518,800$4,142,800 for thesixnine months endedAugust 31,November 30, 2002. Expressed as a percentage of gross sales, operating and selling expenses were15.4%15.7% for thesixnine months endedAugust 31,November 30, 2003 and14.1%14.6% for the samesixnine month period last year. Operating and selling expenses for the three months endedAugust 31,November 30, 2003 and 2002 were$1,441,700$2,016,000 and$1,212,800,$1,624,000, respectively, an increase of18.9%24.1%. These costs expressed as a percentage of gross sales were14.8%16.2% for the three months endedAugust 31,November 30, 2003 and13.9%15.4% for the three months endedAugust 31,November 30, 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 firstsixnine months of fiscal year 2004 when compared with the firstsixnine months of fiscal year 2003.9
EDUCATIONAL DEVELOPMENT CORPORATION
Sales commissions for the
sixnine months endedAugust 31,November 30, 2003 were$3,360,000,$6,152,300, an increase of 23.9% over salescommissioncommissions of$2,712,000$4,965,900 for thesixnine months endedAugust 31,November 30, 2002. These expenses expressed as a percentage of gross sales were17.3%19.3% for thesixnine months endedAugust 31,November 30, 2003 and15.2%17.5% for thesixnine months endedAugust 31,November 30, 2002. Sales commissions for the three months endedAugust 31,November 30, 2003 and 2002 were$1,596,400$2,792,300 and$1,274,700,$2,253,900, respectively, an increase of25.2%23.9%. Sales commissions expressed as a percentage of gross sales were16.4%22.5% for the three months endedAugust 31,November 30, 2003 and14.6%21.4% for the three months endedAugust 31,November 30, 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 increased25.3%24.0% and24.4%24.2% for the three months andsixnine months endedAugust 31,November 30, 2003, the result of increased sales in that division.Although salesSales in the Publishing Divisiondecreasedincreased inboththe three-month periodand six-monthbut decreased for the nine-month period endedAugust 31, 2003, salesNovember 30, 2003. Sales commissions in the Publishing Division increased21.0% and 0.7%13.4% for the three months ended November 30, 2003 andsixincreased 4.3% for the nine months endedAugust 31,November 30, 2003.This wasSales commissions will fluctuate depending upon theresultamount ofincreasedsalesfrommade to theCompany'sCompany’s “house accounts”, which are the Publishing Division’s largest customers and do not have any commission expense associated with them, and sales made by the Company’s outside sales representatives.General and administrative expenses for the
sixnine months endedAugust 31,November 30, 2003 were$871,000,$1,353,800, an increase of12.3%16.7% over$775,900$1,160,200 for the samesixnine month period last year. These expenses expressed as a percentage of gross sales were4.5%4.2% for thesixnine months endedAugust 31,November 30, 2003 and4.3%4.1% for thesixnine months endedAugust 31,November 30, 2002. General and administrative expenses for the three months endedAugust 31,November 30, 2003 were$440,200$482,800 versus$400,700$384,300 for the same three months last year, an increase of9.9%25.6%. These costs expressed as a percentage of gross sales were4.5%3.9% and4.6%3.6% for the three months endedAugust 31,November 30, 2003 and 2002, respectively.ContributingThe Company in the third quarter of FY2004 recorded a one-time adjustment of $59,100 to the long term inventory reserve for obsolescence. Also contributing to the increases in general and administrative expenses were increases in payroll costs, materials andpublic relation costs.supplies and property taxes.Interest expense was
$2,800 and $2,700, respectively,$7,800 for thesixnine monthsandended November 30, 2003 compared with $900 for the same nine months a year ago. Interest expense for the three months endedAugust 31,November 30, 2003compared to $900 and $300, respectively,was $5,000. No interest expense was incurred for thesix months andthree months endedAugust 31,November 30, 2002.IncreasedAn increase in occasional borrowingsoffset by lower interest costscontributed to the increase in interest expense.Pre-tax margins were
13.2%14.2% and13.4%13.3% for the three months andsixnine months endedAugust 31,November 30, 2003, respectively, compared with13.0%14.9% and13.7%13.8% for the same comparable periods last year.Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material market risk.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our
consolidatedfinancial 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. TheCompany'sCompany’s significant accounting policies are described in the notes accompanying the financial statements included in theCompany'sCompany’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 assumptions10
EDUCATIONAL DEVELOPMENT CORPORATION
Revenue Recognition
Revenue from merchandise sales is net of returns and allowances. The provisions of the SEC Staff Accounting Bulletin No.101,
"Revenue“Revenue Recognition in Financial Statements,"” have been applied, and as a result, a reserve is provided for estimated future sales returns. TheCompany'sCompany’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 ofAugust 31,November 30, 2003 and February 28, 2003. The reserve for sales returns is estimated by management using historical sales returns data.10EDUCATIONAL DEVELOPMENT CORPORATIONAllowance 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'scustomer’s financial condition and current economic trends. If the actual uncollected amounts significantly exceed the estimated allowance, then theCompany'sCompany’s operating results would be significantly adversely affected. Management has estimated allowance for doubtful accounts of$97,600$102,600 and $89,000 as ofAugust 31,November 30, 2003 and February 28, 2003, respectivelyInventory
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'sCompany’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$666,200 and $511,500 atAugust 31,November 30, 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'smanagement’s identification of obsolete inventory on hand atAugust 31,November 30, 2003 and February 28,2003. Management has estimated reserves for both current and noncurrent inventory of$211,400$276,900 and $216,000 as ofAugust 31,November 30, 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 benefitsimpairment of long-lived assets, weperform 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,recognize an impairment loss only if the carrying amount of a long-lived asset isrecorded.not recoverable from its undiscounted cash flows. The impairment loss is calculated as the difference between the carrying amount and the fair value of asset. We believe at this time that the long-livedassets'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 PROCEDURESWithin the 90-day period prior to filing of this report, under the supervision and with the participation of the
Company'sCompany’s management, including theCompany'sCompany’s Chief Executive Officer("CEO"(“CEO”) and the Chief Financial Officer("CFO"(“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.11
EDUCATIONAL DEVELOPMENT CORPORATION
Subsequent to this evaluation on
September 18,December 17, 2003 through the date of this filing on Form 10-Q for the quarterly period endedAugust 31,November 30, 2003, there have been no significant changes in theCompany'sCompany’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.11EDUCATIONAL DEVELOPMENT CORPORATION Item 5 - OTHER INFORMATION NonePART 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.
31.1 Certification of Randall W. White, President and Chief Executive Officer of Educational Development Corporation, dated January 12, 2004 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 January 12, 2004, 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 January 12, 2004, 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 January 12, 2004, 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,September 25, 2003 to submit to the Securities and Exchange Commission a press release announcing earnings and sales for thefirstsecond quarter of fiscal year2003.2004. The press release contained the following financial information for the three months and six months endedMayAugust 31, 2003 andMayAugust 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,October 1, 2003 to submit to the Securities and Exchange Commission a press release announcing recordJulySeptember 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
By /s/ Randall W. White Randall W. White
President12
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.
Exhibit No. | Description | |
31.1 | Certification of Randall W. White, President and Chief Executive Officer of Educational Development Corporation, dated January 12, 2004, 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 January 12, 2004, 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 January 12, 2004, 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 January 12, 2004, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith. |
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