SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 31, 1999.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ____________.
Commission file number: 0-4957
EDUCATIONAL DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 73-0750007
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10302 East 55th Place, Tulsa Oklahoma 74146-6515
(Address of principal executive offices)
Registrant's telephone number: (918) 622-4522
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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As of August 31, 1999 there were 4,320,796 shares of Educational
Development Corporation Common Stock, $0.20 par value outstanding.
EDUCATIONAL DEVELOPMENT CORPORATION
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PART I. FINANCIAL INFORMATION
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ITEM 1
BALANCE SHEETS
August 31, 1999 February 28, 1999
(unaudited) -----------------
---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 228,100 $ 210,900
Accounts receivable - (less
allowances for doubtful accounts
and returns: 8/31/99 - $188,000
2/28/99 - $189,600) 2,184,100 1,842,600
Inventories - Net 8,706,900 9,546,700
Prepaid expenses and other assets 184,900 220,000
Income taxes receivable 37,400 55,100
Deferred income taxes 131,800 121,800
------------ ------------
Total current assets 11,473,200 11,997,100
PROPERTY AND EQUIPMENT
at cost (less accumulated
depreciation: 8/31/99 - $1,174,100
2/28/99 - $1,033,200) 210,800 342,500
------------ ------------
$ 11,684,000 $ 12,339,600
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 587,000 $ 756,000
Accounts payable 1,501,300 1,095,800
Accrued salaries and commissions 280,900 242,600
Other current liabilities 107,200 149,500
------------ ------------
Total current liabilities 2,476,400 2,243,900
DEFERRED INCOME TAXES 56,700 56,300
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common Stock, $.20 par value (Authorized
6,000,000 shares; Issued 5,429,240
shares; Outstanding 4,320,796 and
4,873,254 shares) 1,085,800 1,085,800
Capital in excess of par value 4,410,100 4,410,100
Retained earnings 6,784,000 6,266,400
------------ ------------
12,279,900 11,762,300
Less treasury shares, at cost (3,129,000) (1,722,900)
------------ ------------
9,150,900 10,039,400
------------ ------------
$ 11,684,000 $ 12,339,600
============ ============
See notes to financial statements.
2
EDUCATIONAL DEVELOPMENT CORPORATION
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STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended August 31, Six Months Ended August 31,
1999 1998 1999 1998
--------------- -------------- -------------- -------------
GROSS SALES $ 6,950,800 $ 6,612,300 $ 13,507,400 $ 13,113,700
Less discounts & allowances (2,748,300) (2,661,900) (5,182,800) (5,002,600)
------------ ------------ ------------ ------------
Net sales 4,202,500 3,950,400 8,324,600 8,111,100
COST OF SALES 1,805,100 1,696,500 3,531,600 3,373,000
------------ ------------ ------------ ------------
Gross margin 2,397,400 2,253,900 4,793,000 4,738,100
OPERATING EXPENSES:
Operating & selling 755,500 677,400 1,540,800 1,480,100
Sales commissions 738,600 629,200 1,480,400 1,363,300
General & administrative 387,200 429,600 788,600 794,200
Interest 17,700 36,900 30,700 60,800
------------ ------------ ------------ ------------
498,400 480,800 952,500 1,039,700
OTHER INCOME 9,700 17,400 25,500 37,100
------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES 508,100 498,200 978,000 1,076,800
INCOME TAXES 194,500 191,200 374,100 419,800
------------ ------------ ------------ ------------
NET EARNINGS $ 313,600 $ 307,000 $ 603,900 $ 657,000
============ ============ ============ ============
BASIC AND DILUTED EARNINGS
PER SHARE:
Basic $ 0.07 $ 0.06 $ 0.14 $ 0.13
============ ============ ============ ============
Diluted $ 0.07 $ 0.06 $ 0.13 $ 0.13
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic 4,289,961 5,085,404 4,457,239 5,151,420
============ ============ ============ ============
Diluted 4,330,842 5,144,929 4,495,165 5,241,520
============ ============ ============ ============
DIVIDENDS DECLARED PER
COMMON SHARE $ -- $ -- $ 0.02 $ 0.02
============ ============ ============ ============
See notes to financial statements.
3
EDUCATIONAL DEVELOPMENT CORPORATION
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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, 1999 5,429,240 $1,085,800 $4,410,100 $6,266,400 555,986 $(1,722,900) $ 10,039,400
Issuance of treasury
stock --- --- --- --- (200) 600 600
Purchases of treasury
stock --- --- --- --- 661,968 (1,680,200) ( 1,680,200)
Sales of treasury stock --- --- --- --- (109,310) 273,500 273,500
Dividends paid --- --- --- (86,300) --- --- (86,300)
Net earnings --- --- --- 603,900 --- --- 603,900
--------- ---------- ---------- ----------- --------- ----------- ------------
BALANCE, AUG. 31, 1999 5,429,240 $1,085,800 $4,410,100 $6,784,000 1,108,444 $(3,129,000) $ 9,150,900
========= ========== ========== =========== ========= =========== ============
See notes to financial statements.
4
EDUCATIONAL DEVELOPMENT CORPORATION
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STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended August 31
1999 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES: $ 1,691,500 $ ( 345,900 )
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment ( 12,300 ) ( 22,900 )
------------- -------------
Net cash used in investing activities ( 12,300 ) ( 22,900 )
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 3,708,000 4,706,000
Payments under revolving credit agreement ( 3,877,000 ) ( 3,621,000 )
Cash received from exercise of stock options -- 7,500
Cash received from sale of treasury stock 273,500 46,000
Cash paid to acquire treasury stock ( 1,680,200 ) ( 800,400 )
Dividends paid ( 86,300 ) ( 101,900 )
------------- -------------
Net cash provided by (used in) financing activities ( 1,662,000 ) 236,200
------------- -------------
Net Increase (Decrease) in Cash and Cash
Equivalents 17,200 ( 132,600 )
Cash and Cash Equivalents, Beginning of Period 210,900 171,600
------------- -------------
Cash and Cash Equivalents, End of Period $ 228,100 $ 39,000
============= =============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 27,800 $ 51,500
============= =============
Cash paid for income taxes $ 366,000 $ 402,500
============= =============
See notes to financial statements.
5
EDUCATIONAL DEVELOPMENT CORPORATION
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NOTES TO FINANCIAL STATEMENTS
Note 1 - The information shown with respect to the three months and six months
- ------
ended August 31, 1999 and 1998, which is unaudited, includes all adjustments
which in the opinion of Management are considered to be necessary for a fair
presentation of earnings for such periods. There were no adjustments, other
than normal recurring accruals, entering into the determination of the results
shown except as noted in this report. The results of operations for the three
months and six months ended August 31, 1999 and 1998, respectively, are not
necessarily indicative of the results to be expected at year end due to
seasonality of the product sales.
These financial statements and notes are prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for interim reporting and
should be read in conjunction with the Financial Statements and accompanying
notes contained in the Company's Annual Report to Shareholders for the Fiscal
Year ended February 28, 1999.
Note 2 - Effective June 30, 1999 the Company signed a Restated Credit and
- ------
Security Agreement with State Bank, which provides a $3,500,000 line of credit.
The line of credit is evidenced by a promissory note in the amount of $3,500,000
payable June 30, 2000. The note bears interest at the Wall Street Journal prime
floating rate minus 0.25% payable monthly (8.00% at August 31, 1999). The note
is collateralized by substantially all of the assets of the Company. At August
31, 1999 the Company had $587,000 in borrowings and a $50,000 letter of credit
issued under the revolving credit agreement. Available credit under the
revolving credit agreement was $2,863,000 at August 31, 1999.
Note 3 - Inventories consist of the following:
- ------
August 31, 1999 February 28, 1999
--------------- -----------------
Book Inventory $ 8,830,600 $ 9,670,400
Reserve for Obsolescence ( 123,700 ) ( 123,700 )
----------- -----------
$ 8,706,900 $ 9,546,700
=========== ===========
Note 4 - Basic earnings per share is computed by dividing net earnings by the
- ---------
weighted average number of common shares outstanding during the period. Diluted
earnings per share is based on the combined weighted average number of common
shares outstanding increased, when appropriate, for the number of common shares
issuable upon exercise of stock options, computed using the treasury stock
method.
The computation of weighted average common and common equivalent shares used in
the calculation of basic and diluted earnings per share ("EPS") is shown below.
Three Months Ended August 31, Six Months Ended August 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net Earnings $ 313,600 $ 307,000 $ 603,900 $ 657,000
========== ========== ========== ==========
Basic EPS:
Weighted Average Shares Outstanding 4,289,961 5,085,404 4,457,239 5,151,420
========== ========== ========== ==========
Basic EPS $ 0.07 $ 0.06 $ 0.14 $ 0.13
========== ========== ========== ==========
Diluted EPS:
Weighted Average Shares Outstanding 4,289,961 5,085,404 4,457,239 5,151,420
Assumed Exercise of Options 40,881 59,525 37,926 90,100
---------- ---------- ---------- ----------
Shares Applicable to Diluted Earnings 4,330,842 5,144,929 4,495,165 5,241,520
========== ========== ========== ==========
Diluted EPS $ 0.07 $ 0.06 $ 0.13 $ 0.13
========== ========== ========== ==========
Since March 1, 1998, when the Company began its stock repurchase program,
1,038,800 shares of the Company's common stock at a total cost of $2,957,400
have been acquired. The Board of Directors has authorized purchasing up to
2,000,000 shares as market conditions warrant.
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EDUCATIONAL DEVELOPMENT CORPORATION
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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
August 31, 1999 was $8,996,800 compared to working capital of $9,753,200 at
fiscal year-end February 28, 1999. Accounts receivable increased 16.7% over
year-ended February 28, 1999 due to special extended credit terms offered during
the second quarter. Inventory dropped 8.7% from February 28, 1999 levels. The
amount 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 on hand adequate supplies to meet sales
requirements. The note payable to the bank declined 22.4% from the balance due
on February 28, 1999, the result of improved cash flow from operations during
the first six months of fiscal year 2000. Increased sales in the Home Business
Division, which is primarily cash sales, contributed to the improved cash flow.
Accounts payable increased 37.0% over February 28, 1999. The major component of
accounts payable is the amount due the Company's principal supplier.
Fluctuations in the level of inventory and the timing of purchases as well as
the payment terms offered by suppliers affect the levels of accounts payable.
Pre-tax margins were 11.7% for the six months ended August 31, 1999 versus 13.3%
for the six months ended August 31, 1998. Pre-tax margins for the quarters ended
August 31, 1999 and 1998 were 12.1% and 12.6% respectively..
RESULTS OF OPERATIONS
- ---------------------
Revenues - Net sales from the Home Business Division (Usborne Books at Home -
- --------
"UBAH") were $4,046,100 for the six months ended August 31, 1999 compared with
$3,652,700 for the six months ended August 31, 1998, an increase of 10.8%. Net
sales for the three months ended August 31, 1999 were $2,021,600 versus
$1,661,800 for the three months ended August 31, 1998, an increase of 21.7%. The
Company believes the increased sales in the Home Business Division resulted from
increases in new recruits and the retention of existing recruits, both the
result of increases in advertising expenditures and other promotions designed to
attract and retain new consultants. The per-show order size increased 4.1% for
the six months ended August 31, 1999 compared with the six months ended August
31, 1998. The Company continues to offer new and exciting incentive programs,
travel contests and regional training seminars to further stimulate sales growth
and recruiting. Management is hopeful that the two-year decline in net sales in
the Home Business Division has been halted.
Net sales from the Publishing Division were $4,278,500 for the six months ended
August 31, 1999 versus $4,458,400 for the same six month period a year ago, a
decline of 4.0%. Net sales for the three months ended August 31, 1999 and 1998
were $2,180,900 and $2,288,600 respectively, a decrease of 4.7%. The Company
attributes this decline in net sales to changing market conditions. National
chains increasingly dominate the bookstore market, resulting in fewer
independent bookstores. The closings of these independent bookstores, an
important market segment for the Company, contributed to the decline in net
sales. Independent toy stores have also experienced increased competition from
national discount stores, resulting in lower sales by the Company in this market
area. The Company has restructured sales and marketing coverage on the national
chains in order to increase market share. The gift store market offers
considerable potential to the Company and the Company has been exploring this
market segment. The Company has increased its presence at national trade shows
throughout the country to further promote its products. For these reasons
Management is optimistic that the Publishing Division will maintain its market
share in the highly competitive publishing market.
Operating expenses - The Company's cost of sales for the six months ended August
- ------------------
31, 1999 was $3,531,600 compared with $3,373,000 for the six months ended August
31, 1998, an increase of 4.7%. Cost of sales for the three months ended August
31, 1999 increased 6.4% to $1,805,100 versus $1,696,500 for the same three month
period a year ago. Cost of sales expressed as a percentage of gross sales was
26.2 % and 25.7% for the six months ended August 31, 1999 and 1998,
respectively. For the three months ended August 31, 1999 and 1998, cost of sales
expressed as a percentage of gross sales was 26.0% and 25.7% respectively. Cost
of sales expressed as a percentage of gross sales will fluctuate depending upon
the product mix sold.
7
EDUCATIONAL DEVELOPMENT CORPORATION
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Operating and selling expenses for the six months ended August 31, 1999
increased 4.1% to $1,540,800 compared with $1,480,100 for the six months ended
August 31, 1998. These expenses expressed as a percentage of gross sales were
11.4% for the current six months and 11.3% for the same six months of the prior
year. For the three months ended August 31, 1999, operating and selling expenses
were $755,500, an increase of 11.5% over the $677,400 for the three months ended
August 31, 1998. These expenses expressed as a percentage of gross sales were
10.9% for the three months ended August 31, 1999 and 10.2% for the three months
ended August 31, 1998. An increase in the costs of trade shows and an increase
in packaging materials used in shipping contributed to the increases in
operating and selling expenses.
Sales commissions for the six months ended August 31, 1999 were $1,480,400
compared with $1,363,300 for the six months ended August 31, 1998, an increase
of 8.6%. Sales commissions for the three months ended August 31, 1999 and 1998
were $738,600 and $629,200 respectively, an increase of 17.4%. Sales commissions
expressed as a percentage of gross sales were 10.6% and 11.0% for the three and
six months ended August 31, 1999 and 9.5% and 10.4% for the three months and six
months ended August 31, 1998. The Home Business Division and the Publishing
Division have separate and distinct commission programs and commission rates.
Increased sales in the Home Business Division, offset by lower sales in the
Publishing Division, contributed to the increase in sales commission expenses.
General and administrative expenses for the six months ended August 31, 1999
decreased slightly to $788,600 when compared with $794,200 for the six months
ended August 31, 1998. These same expenses were $387,200 for the three months
ended August 31, 1999, a decrease of 9.9% from general and administrative
expenses of $429,600 for the three months ended August 31, 1998. When expressed
as a percentage of gross sales, general and administrative expenses were 5.6%
and 5.8% for the three and six months ended August 31, 1999 and 6.5% and 6.1%
for the three and six months ended August 31, 1998. General and administrative
expenses are not always directly affected by sales, thus analysis of these
expenses solely as a percentage of gross sales can be misleading.
Interest expense declined 49.5% for the six months ended August 31, 1999 when
compared with the same six month period a year ago. For the second quarter of
1999 versus 1998, interest expense declined 52.0%. The interest rate was 1/2 of
1% to 3/4 of 1% lower during the first half of fiscal year 2000 when compared
with the first half of fiscal year 1999. The average amounts borrowed during the
three months and six months ended August 31, 1999 were $892,200 and $765,200
compared with $1,399,100 and $1,695,900 for the three and six months ended
August 31, 1998 respectively. The lower borrowing levels and lower interest
rates during the first six months of fiscal year 2000 resulted in lower interest
expense during this period. The reduction in average bank borrowings can be
attributed to the continuing efforts of the Company to manage its inventory
levels through improved efficiencies in purchasing policies. Increased sales in
the Home Business Division, which are cash sales, also contributed to lower bank
borrowings.
BUSINESS SEGMENTS
- -----------------
The Company has two reportable segments: Publishing and Usborne Books at Home
("UBAH"). These reportable segments are business units that offer different
methods of distribution to different types of customers. They are managed
separately based on the fundamental differences in their operations. The
Publishing Division markets its products to retail accounts, which include book,
school supply, toy and gift stores and museums, through commissioned sales
representatives, trade and specialty wholesalers and an internal telesales
group. The UBAH Division markets its product line through a network of
independent sales consultants through a combination of direct sales, home shows
and book fairs.
The accounting policies of the segments are the same as those of the Company.
The Company evaluates segment performance based on operating profits of the
segments which is defined as segment net sales reduced by direct cost of sales
and direct expenses. Corporate expenses, including interest and depreciation,
and income taxes are not allocated to the segments. The Company's assets are
not allocated on a segment basis.
8
EDUCATIONAL DEVELOPMENT CORPORATION
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Information by industry segment for the three months and six months ended August
31, 1999 and 1998 is set forth below:
Publishing UBAH Other Total
---------- ---------- ------------ ----------
Six months Ended August 31, 1999
Net sales from external customers $4,278,500 $4,046,100 $ -- $8,324,600
Earnings before income taxes $1,512,300 $1,059,700 $(1,594,000) $ 978,000
Three Months Ended August 31, 1999
Net sales from external customers $2,180,900 $2,021,600 $ -- $4,202,500
Earnings before income taxes $ 741,800 $ 558,800 $ ( 792,500) $ 508,100
Six months Ended August 31, 1998
Net sales from external customers $4,458,400 $3,652,700 $ -- $8,111,100
Earnings before income taxes $1,667,700 $1,064,800 $(1,655,700) $1,076,800
Three Months Ended August 31, 1998
Net sales from external customers $2,288,600 $1,661,800 $ -- $3,950,400
Earnings before income taxes $ 850,900 $ 493,200 $ ( 845,900) $ 498,200
YEAR 2000 MATTERS
- -----------------
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has evaluated its software applications, systems software,
information technology ("IT") system and its non-IT systems. Management has
determined that the various computer programs the Company uses in its operations
are Year 2000 compliant. These programs include the following: inventory;
accounts receivable; accounts payable; general ledger; shipping; order entry.
The Informix database engine, which runs these programs, is not Year 2000
compliant. The Company has acquired the necessary programs to bring the
Informix database engine to Year 2000 compliance and has installed and tested
these programs in its test environment. The Company is presently installing the
programs on the Company's main system and expects to have this completed by
October 1999. The Company's ("IT") system and its non-IT system should be fully
compliant by October 1999. Y2K costs are estimated to be less than $50,000.
Costs incurred to date have been insignificant.
The Company has received assurances from its primary supplier, Usborne
Publishing LTD, that Usborne Publishing LTD will be year 2000 compliant before
the end of 1999.
The Company relies on third-party suppliers for products and services, including
telecommunications and shipping. The Company will be adversely impacted if these
suppliers of products and services do not make necessary changes to their own
systems in a timely and successful manner. There could be circumstances in
which the Company would be unable to receive customer orders, ship product, and
invoice customers or collect payments.
The Company has communicated with others with whom it does significant business
to determine their Year 2000 compliance readiness and the extent to which the
Company is vulnerable to any third-party Year 2000 issue. However, there can be
no guarantee that the systems of these other third-party companies will be
timely converted.
The Company is unable to determine the financial impact, if any, to the Company
should some or all of its third-party suppliers be unable to become Year 2000
compliant in a timely manner. The Company relies highly on the
telecommunications industry and the transportation (shipping) industry. It is
highly unlikely that all the major service providers in these two industries
would fail to become Year 2000 compliant in a timely manner. However, should
this worst case scenario occur, the Company would be unable to receive orders or
ship product.
9
EDUCATIONAL DEVELOPMENT CORPORATION
- ----------------------------------------------
The Company has developed an informal contingency plan to address the potential
adverse effects of the Year 2000 problem.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
The Company does not have any material market risk.
PART II OTHER INFORMATION
- --------------------------
None
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: September 30, 1999
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10