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 May 31, 2002.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ____________.
Commission file number: 0-4957
EDUCATIONAL DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 73-0750007
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10302 East 55th Place, Tulsa Oklahoma 74146-6515
(Address of principal executive offices)
Registrant's telephone number: (918) 622-4522
Indicate by check mark whether the registrant (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- -----------
As of May 31, 2002 there were 3,839,283 shares of Educational
Development Corporation Common Stock, $0.20 par value outstanding.
EDUCATIONAL DEVELOPMENT CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1
BALANCE SHEETS
<Table>
<Caption>
May 31, 2002
(unaudited) February 28, 2002
------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 41,900 $ 906,900
Accounts receivable - (less
allowances for doubtful accounts
and returns: 5/31/02 - $184,400
2/28/02 - $184,100) 2,668,800 2,040,400
Inventories - Net 7,863,800 8,292,000
Prepaid expenses and other assets 217,000 218,300
Deferred income taxes 108,200 120,700
------------ ------------
Total current assets 10,899,700 11,578,300
INVENTORIES - Net 574,600 683,900
PROPERTY AND EQUIPMENT
at cost (less accumulated depreciation:
05/31/02 - $1,468,000; 2/28/02 - $1,446,000) 1,887,700 1,907,600
------------ ------------
$ 13,362,000 $ 14,169,800
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 1,696,700 3,380,100
Accrued salaries and commissions 407,800 352,800
Income tax payable 322,000 63,800
Dividends payable 230,400 --
Other current liabilities 242,600 244,800
------------ ------------
Total current liabilities 2,899,500 4,041,500
DEFERRED INCOME TAXES 12,900 13,000
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common Stock, $.20 par value (Authorized
6,000,000 shares; Issued 5,429,240
shares; Outstanding 3,839,283 and
3,822,117 shares) 1,085,800 1,085,800
Capital in excess of par value 4,443,400 4,417,500
Retained earnings 9,965,000 9,647,700
------------ ------------
15,494,200 15,151,000
Less treasury shares, at cost (5,044,600) (5,035,700)
------------ ------------
10,449,600 10,115,300
------------ ------------
$ 13,362,000 $ 14,169,800
============ ============
</Table>
See notes to financial statements
2
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS (UNAUDITED)
<Table>
<Caption>
Three Months Ended May 31
--------------------------
2002 2001
----------- -----------
GROSS SALES $ 9,138,500 $ 7,283,800
Less discounts & allowances (3,006,200) (2,483,200)
----------- -----------
Net sales 6,132,300 4,800,600
COST OF SALES 2,445,100 1,972,800
----------- -----------
Gross margin 3,687,200 2,827,800
----------- -----------
OPERATING EXPENSES:
Operating & selling 997,200 832,600
Sales commissions 1,437,300 1,033,000
General & administrative 375,200 354,200
Interest 600 16,000
----------- -----------
2,810,300 2,235,800
----------- -----------
OTHER INCOME 6,400 6,600
----------- -----------
EARNINGS BEFORE INCOME TAXES 883,300 598,600
INCOME TAXES 335,600 229,100
----------- -----------
NET EARNINGS $ 547,700 $ 369,500
=========== ===========
BASIC AND DILUTED EARNINGS
PER SHARE:
Basic $ .14 $ .09
=========== ===========
Diluted $ .13 $ .09
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT
SHARES OUTSTANDING:
Basic 3,837,875 3,914,707
=========== ===========
Diluted 4,157,200 4,006,222
=========== ===========
DIVIDENDS DECLARED PER
COMMON SHARE $ .06 $ .02
=========== ===========
</Table>
See notes to financial statements.
3
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
<Table>
<Caption>
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 5,429,240 $ 1,085,800 $ 4,417,500 $ 9,647,700 1,607,123 $ (5,035,700) $ 10,115,300
Purchases of treasury
stock -- -- -- -- 16,100 (113,300) (113,300)
Sales of treasury stock -- -- 1,900 -- (22,866) 71,800 73,700
Exercise of options at
$5.50/share -- -- 23,700 -- (10,000) 31,300 55,000
Exercise of options at
$4.00/share -- -- 300 -- (400) 1,300 1,600
Dividends declared
$(0.06/share) -- -- -- (230,400) -- -- (230,400)
Net earnings -- -- -- 547,700 -- -- 547,700
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MAY 31, 2002 5,429,240 $ 1,085,800 $ 4,443,400 $ 9,965,000 1,589,957 $ (5,044,600) $ 10,449,600
============ ============ ============ ============ ============ ============ ============
</Table>
See notes to financial statements.
4
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
<Table>
<Caption>
Three Months Ended May 31
--------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES $ (872,900) $ 379,300
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (9,100) (41,100)
----------- -----------
Net cash used in investing activities (9,100) (41,100)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 892,000 1,399,000
Payments under revolving credit agreement (892,000) (1,856,000)
Cash received from exercise of stock options 56,600 --
Cash received from sales of treasury stock 73,700 21,000
Cash paid to acquire treasury stock (113,300) (31,900)
----------- -----------
Net cash provided by (used in) financing activities 17,000 (467,900)
----------- -----------
Net Decrease in Cash and Cash Equivalents (865,000) (129,700)
Cash and Cash Equivalents, Beginning of Period 906,900 268,300
----------- -----------
Cash and Cash Equivalents, End of Period $ 41,900 $ 138,600
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ -- $ 17,600
=========== ===========
Cash paid for income taxes $ 65,000 $ 20,000
=========== ===========
Supplemental Disclosure of Non Cash Operating Activities:
Dividends declared $ 230,400 $ 78,200
=========== ===========
</Table>
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,
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, 2002 and 2001, 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, 2002.
Note 2 - Effective June 30, 2001 the Company signed a Second 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, 2002. This note bears interest at the Wall Street
Journal prime floating rate minus 0.25% payable monthly. The note is
collateralized by substantially all the assets of the Company. At May 31, 2002,
the Company had no borrowings outstanding. The Company expects to renew this
agreement at maturity.
Note 3 - Inventories consist of the following:
<Table>
<Caption>
May 31, 2002 February 28, 2002
------------ -----------------
Current:
Book Inventory $ 7,910,200 $ 8,338,400
Reserve for Obsolescence (46,400) (46,400)
----------- -----------
Inventories net - current $ 7,863,800 $ 8,292,000
=========== ===========
Non-current:
Book Inventory $ 717,200 $ 817,500
Reserve for Obsolescence (142,600) (133,600)
----------- -----------
Inventories - non-current $ 574,600 $ 683,900
=========== ===========
</Table>
The Company occasionally purchases book inventory in quantities in excess of
what will be sold within the normal operating cycle due to minimum order
requirements of the Company's primary supplier. These amounts are included in
non-current inventory.
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.
<Table>
<Caption>
Three Months Ended May 31,
--------------------------
2002 2001
---------- ----------
Net Earnings $ 547,700 $ 369,500
========== ==========
Basic EPS:
Weighted Average Shares Outstanding 3,837,875 3,914,707
========== ==========
Basic EPS $ .14 $ .09
========== ==========
Diluted EPS:
Weighted Average Shares Outstanding 3,837,875 3,914,707
Assumed Exercise of Options 319,325 91,515
---------- ----------
Shares Applicable to Diluted Earnings 4,157,200 4,006,222
========== ==========
Diluted EPS $ .13 $ .09
========== ==========
</Table>
Since March 1, 1998, when the Company began its stock repurchase program,
1,695,874 shares of the Company's common stock at a total cost of $5,397,600
have been acquired. The Board of Directors has authorized purchasing up to
2,000,000 shares as market conditions warrant.
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 May
31, 2002 was $8,000,200 compared with $7,536,800 at the end of fiscal year 2002.
Accounts receivable increased 28.3% during the first quarter ended May 31, 2002.
Sales in the Publishing Division were up 28% for the month of May, 2002 and were
up 9% for the first quarter ended May 31, 2002, resulting in the increase in
receivables. Inventory levels declined 5.8% during the first quarter ended May
31, 2002. 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 decreased 49.8% during the first
quarter ended May 31, 2002. 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 sales in the Home Business Division enabled the Company
to conclude the first quarter ended May 31, 2002 with no short term bank debt.
Pre-tax margins were 14.4% for the first quarter ended May 31, 2002 compared
with 12.5% for the first quarter ended May 31, 2001. Increased sales and lower
sales discounts contributed to the improved pre-tax margins.
RESULTS OF OPERATIONS
Revenues - Net sales from the Home Business Division increased 41.1% to
$3,956,400 for the first quarter ended May 31, 2002 when compared with
$2,803,500 for the first quarter ended May 31, 2001. The Company attributes this
to an 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 program for the
supervisors. Management believes that the Home Business Division will continue
to grow.
7
EDUCATIONAL DEVELOPMENT CORPORATION
Net sales from the Publishing Division were $2,175,900 for the first quarter
ended May 31, 2002, an increase of 9.0% over net sales of $1,997,100 for the
first quarter a year ago. The juvenile paperback market is highly competitive.
Industry sales of juvenile paperbacks approaches $888 million annually. The
Publishing Division's annual sales are approximately 0.8% of industry sales.
Competitive factors include product quality, price and deliverablility. Sales to
national chains continues to be of major importance to the Publishing Division.
To insure that the Company successfully participates in their growth, we have
greatly accelerated our cooperative advertising and other special promotional
programs. These activities have improved our relationship with the national
chains and we anticipate further positive development in this important area.
Management believes the Company can improve its market share.
Cost of Sales - The Company's cost of sales for the three months ended May 31,
2002 was $2,445,100, an increase of 23.9% over the cost of sales of $1,972,800
for the three months ended May 31, 2001. Cost of sales expressed as a percentage
of gross sales was 26.8% for the three months ended May 31, 2002 and 27.1% for
the same three month period a year ago. Cost of sales as a percentage of gross
sales will fluctuate depending upon the product mix sold.
Operating Expenses - Operating and selling expenses increased 19.8% to $997,200
for the first quarter ended May 31, 2002 when compared with $832,600 for the
first quarter ended May 31, 2001. As a percentage of gross sales, these expenses
were 10.9% for the first quarter ended May 31, 2002 and 11.4% for the first
quarter ended May 31, 2001. Increased promotional costs and increased credit
card fees, both the result of increases in sales in the Home Business Division,
contributed to the increase in operating and selling expenses.
Sales commissions for the three months ended May 31, 2002 were $1,437,300, an
increase of 39.1% over sales commissions of $1,033,000 for the three months
ended May 31, 2001. When expressed as a percentage of gross sales, sales
commissions were 15.7% for the three months ended May 31, 2002 and 14.2% for the
three months ended May 31, 2001. 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. Commission expense in the Publishing
Division was up 1.8% and was up 40.3% in the Home Business Division, both the
result of increased sales.
General and administrative expenses for the three months ended May 31, 2002 were
$375,200 compared to $354,200 for the same period a year ago, an increase of
5.9%. General and administrative expenses expressed as a percentage of gross
sales were 4.1% and 4.9% respectively for the three months ended May 31, 2002
and 2001. Contributing to the increase in general and administrative expenses
was an increase in payroll costs and an increase in public relations
expenditures.
Interest expense was $600 for the first quarter ended May 31, 2002 compared with
$16,000 for the first quarter a year ago. Lower interest rates and minimal
borrowings during the first quarter ended May 31, 2002 contributed to the lower
interest expense.
Cash flows from operating activities was negative for the three months ended May
31, 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 flow was an increase in accounts receivable, an increase in
income taxes payable and a decrease in inventories.
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
Information by industry segment for the three months ended May 31, 2002 and 2001
is set forth below:
<Table>
<Caption>
Unallocated
Corporate
Publishing UBAH Expenses Total
---------- ----------- ------------ ----------
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
THREE MONTHS ENDED MAY 31, 2001
Net sales from external customers $1,997,100 $2,803,500 $ -- $4,800,600
Earnings before income taxes 751,900 605,200 (758,500) 598,600
</Table>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material market risk.
PART II OTHER INFORMATION
None
9
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: June 26, 2002
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10