10-Q 1 d93047e10-q.txt FORM 10-Q FOR QUARTER ENDED NOVEMBER 30, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 2001. [ ] 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 November 30, 2001 there were 3,844,617 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding. EDUCATIONAL DEVELOPMENT CORPORATION PART I. FINANCIAL INFORMATION ITEM 1 BALANCE SHEETS
November 30, 2001 February 28, 2001 (unaudited) ----------------- ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,319,200 $ 268,300 Accounts receivable - (less allowances for doubtful accounts and sales returns: 11/30/01 - $176,500 2/28/01 - $224,300) 2,672,500 1,478,400 Inventories - Net 7,006,300 9,211,900 Prepaid expenses and other assets 193,700 247,100 Income taxes receivable -- 72,600 Deferred income taxes 82,800 97,800 --------------- --------------- Total current assets 12,274,500 11,376,100 INVENTORIES 813,900 1,005,000 PROPERTY AND EQUIPMENT at cost (less accumulated depreciation: 11/30/01 - $1,424,200; 2/28/01 - $1,390,100) 117,900 84,200 DEFERRED INCOME TAXES 28,600 6,300 --------------- --------------- $ 13,234,900 $ 12,471,600 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Note payable to bank $ -- $ 1,084,000 Accounts payable 2,266,200 1,703,100 Accrued salaries and commissions 501,500 325,700 Income taxes 141,700 -- Other current liabilities 267,800 118,700 --------------- --------------- Total current liabilities 3,177,200 3,231,500 DEFERRED INCOME TAXES -- 24,300 COMMITMENTS SHAREHOLDERS' EQUITY: Common Stock, $.20 par value (Authorized 6,000,000 shares; Issued 5,429,240 shares; Outstanding 3,844,617 and 3,911,400 shares) 1,085,800 1,085,800 Capital in excess of par value 4,419,000 4,413,600 Retained earnings 9,394,800 8,270,600 --------------- --------------- 14,899,600 13,770,000 Less treasury shares, at cost (4,841,900) (4,554,200) --------------- --------------- 10,057,700 9,215,800 --------------- --------------- $ 13,234,900 $ 12,471,600 =============== ===============
See notes to financial statements. 2 EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended November 30, Nine Months Ended November 30, 2001 2000 2001 2000 -------------- -------------- -------------- -------------- GROSS SALES $ 8,261,700 $ 7,704,300 $ 23,498,500 $ 21,743,000 Less discounts & allowances (2,253,800) (2,458,700) (7,581,600) (7,832,400) -------------- -------------- -------------- -------------- Net sales 6,007,900 5,245,600 15,916,900 13,910,600 COST OF SALES 2,235,200 2,065,300 6,316,100 5,813,000 -------------- -------------- -------------- -------------- Gross margin 3,772,700 3,180,300 9,600,800 8,097,600 -------------- -------------- -------------- -------------- OPERATING EXPENSES: Operating & selling 992,900 870,200 2,702,600 2,388,300 Sales commissions 1,632,500 1,329,500 3,770,100 2,894,800 General & administrative 366,800 341,900 1,082,700 1,111,200 Interest -- 27,700 20,300 93,900 -------------- -------------- -------------- -------------- 2,992,200 2,569,300 7,575,700 6,488,200 -------------- -------------- -------------- -------------- OTHER INCOME 19,600 8,400 38,300 29,200 -------------- -------------- -------------- -------------- EARNINGS BEFORE INCOME TAXES 800,100 619,400 2,063,400 1,638,600 INCOME TAXES 315,100 237,500 785,100 627,900 -------------- -------------- -------------- -------------- NET EARNINGS $ 485,000 $ 381,900 $ 1,278,300 $ 1,010,700 ============== ============== ============== ============== BASIC AND DILUTED EARNINGS PER SHARE: Basic $ 0.13 $ 0.10 $ 0.33 $ 0.25 ============== ============== ============== ============== Diluted $ 0.12 $ 0.10 $ 0.32 $ 0.25 ============== ============== ============== ============== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic 3,851,496 3,914,806 3,877,764 3,974,920 ============== ============== ============== ============== Diluted 4,095,284 4,039,210 4,043,381 4,056,382 ============== ============== ============== ============== DIVIDENDS DECLARED PER COMMON SHARE $ -- $ -- $ 0.04 $ 0.02 ============== ============== ============== ==============
See notes to financial statements. 3 EDUCATIONAL DEVELOPMENT CORPORATION STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Common Stock (par value $.20 per share) ------------------------- Number of Capital in Shares Excess of Retained Issued Amount Par Value Earnings ------------- ------------- ------------- ------------- BALANCE, MAR. 1, 2001 5,429,240 $ 1,085,800 $ 4,413,600 $ 8,270,600 Purchases of treasury stock -- -- -- -- Sales of treasury stock -- -- 5,600 -- Exercise of options at $3.00/share -- -- (200) -- Dividends paid ($0.04 / share) -- -- -- (154,100) Net earnings -- -- -- 1,278,300 ------------- ------------- ------------- ------------- BALANCE, NOV. 30, 2001 5,429,240 $ 1,085,800 $ 4,419,000 $ 9,394,800 ============= ============= ============= ============= Treasury Stock ----------------------------- Number of Shareholders' Shares Amount Equity ------------- ------------- ------------- BALANCE, MAR. 1, 2001 1,517,840 $ (4,554,200) $ 9,215,800 Purchases of treasury stock 94,500 (371,400) (371,400) Sales of treasury stock (24,417) 73,600 79,200 Exercise of options at $3.00/share (3,300) 10,100 9,900 Dividends paid ($0.04 / share) -- -- (154,100) Net earnings -- -- 1,278,300 ------------- ------------- ------------- BALANCE, NOV. 30, 2001 1,584,623 $ (4,841,900) $ 10,057,700 ============= ============= =============
See notes to financial statements. 4 EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended November 30 -------------------------------- 2001 2000 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES $ 3,648,700 $ 1,302,700 CASH FLOWS FROM INVESTING ACTIVITIES - Purchases of property and equipment (77,400) (58,500) -------------- -------------- Net cash used in investing activities (77,400) (58,500) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit agreement 2,347,000 5,801,000 Payments under revolving credit agreement (3,431,000) (6,289,000) Cash received from exercise of stock option 9,900 -- Cash received from sale of treasury stock 79,200 41,000 Cash paid to acquire treasury stock (371,400) (800,100) Dividends paid (154,100) (78,800) -------------- -------------- Net cash used in financing activities (1,520,400) (1,325,900) -------------- -------------- Net Increase (Decrease) in Cash and Cash Equivalents 2,050,900 (81,700) Cash and Cash Equivalents, Beginning of Period 268,300 214,300 -------------- -------------- Cash and Cash Equivalents, End of Period $ 2,319,200 $ 132,600 ============== ============== Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 26,400 $ 92,400 ============== ============== Cash paid for income taxes $ 602,300 $ 631,000 ============== ==============
See notes to financial statements. 5 EDUCATIONAL DEVELOPMENT CORPORATION NOTES TO FINANCIAL STATEMENTS Note 1 - The information shown with respect to the three months and nine months ended November 30, 2001 and 2000, 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 nine months ended November 30, 2001 and 2000, 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, 2001. 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. There were no borrowings under the revolving credit agreement at November 30, 2001. Note 3 - Inventories consist of the following:
November 30, 2001 February 28, 2001 ----------------- ----------------- Current: Book Inventory $ 7,052,700 $ 9,258,300 Reserve for Obsolescence (46,400) (46,400) -------------- -------------- Inventories net - current $ 7,006,300 $ 9,211,900 ============== ============== Non-current: Book Inventory $ 938,500 $ 1,051,600 Reserve for Obsolescence (124,600) (46,600) -------------- -------------- Inventories - non-current $ 813,900 $ 1,005,000 ============== ==============
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 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. 6 EDUCATIONAL DEVELOPMENT CORPORATION The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share ("EPS") is shown below.
Three Months Ended November 30, Nine Months Ended November 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Net Earnings $ 485,000 $ 381,900 $ 1,278,300 $ 1,010,700 ============= ============= ============= ============= Basic EPS: Weighted Average Shares Outstanding 3,851,496 3,914,806 3,877,764 3,974,920 ============= ============= ============= ============= Basic EPS $ 0.13 $ 0.10 $ 0.33 $ 0.25 ============= ============= ============= ============= Diluted EPS: Weighted Average Shares Outstanding 3,851,496 3,914,806 3,877,764 3,974,920 Assumed Exercise of Options 243,788 124,404 165,617 81,462 ------------- ------------- ------------- ------------- Shares Applicable to Diluted Earnings 4,095,284 4,039,210 4,043,381 4,056,382 ============= ============= ============= ============= Diluted EPS $ 0.12 $ 0.10 $ 0.32 $ 0.25 ============= ============= ============= =============
Since March 1, 1998, when the Company began its stock repurchase program, 1,634,674 shares of the Company's common stock at a total cost of $5,020,989 have been acquired. The Board of Directors has authorized purchasing up to 2,000,000 shares as market conditions warrant. Note 5 - On December 12, 2001 the Company paid an earnest money deposit of $89,500 and entered into an agreement to purchase its current leased office and warehouse facility for cash of approximately $1,790,000. Closing is anticipated to occur in January 2002. 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. With the exception of the overall impact on the general economy, the tragic events of September 11, 2001 have not had a direct material effect on the Company. FINANCIAL CONDITION The financial condition of the Company remains strong. Working capital at November 30, 2001 was $9,097,300 compared with working capital of $8,144,600 at the end of fiscal year 2001. Cash provided by increased sales in the Home Business Division resulted in cash and cash equivalents increasing $2,050,900 over fiscal year 2001 year end balances. Accounts receivable increased 67.3% during the first nine months of fiscal year 2002. The Company's "fall special", which began in the second quarter and continued during the third quarter, extended the payment terms until the fourth quarter of fiscal year 2002. Inventory levels declined 22.5% during the first nine months of fiscal year 2002. The level of inventory will fluctuate throughout the year, depending upon sales and the timing of shipments from the Company's principal supplier. The Company continuously monitors inventory to assure it has adequate supplies on hand to meet sales requirements. Accounts payable increased 33.1% over accounts payable at the end of last fiscal year. The 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 purchases and the payment terms offered by various suppliers affect the levels of accounts payable. The Company paid off its short term bank borrowings during the second quarter using cash generated by increased sales in the Home Business Division. Pre-tax margins were 13.3% and 13.0% for the three months and nine months ended November 30, 2001, respectively and 11.8% and 11.8% for the same comparable periods last year. 7 EDUCATIONAL DEVELOPMENT CORPORATION RESULTS OF OPERATIONS Revenues - Net sales from the Home Business Division were $10,231,400 for the nine months ended November 30, 2001 compared with $7,904,900 for the nine months ended November 30, 2000, an increase of 29.4%. Sales for the three months ended November 30, 2001 increased 22.5% to $4,474,800 compared with $3,652,000 for the three months ended November 30, 2000. 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 and exciting incentive programs, travel contests and regional seminars to help stimulate sales and recruiting. The Company also continues to offer its leadership skills program for supervisors. This training program is designed to help supervisors build their business. Management is optimistic that the Home Business Division will continue to grow. Net sales for the Publishing Division were $5,685,500 for the nine months ended November 30, 2001 compared with $6,005,700 for the same period a year ago, a decline of 5.3%. Net sales for the three months ended November 30, 2001 and 2000 were $1,533,100 and $1,593,600 respectively, a decrease of 3.8%. The Company attributes this decline to a 45% decrease in purchasing by one of the Company's major wholesale distributors who closed down two distribution centers during the last six months of fiscal year 2002. This wholesaler's consolidation has been completed and their purchases have begun to return to a more normal level. The juvenile paperback market is highly competitive. Industry sales last year were $753 million. The Publishing Division's annual sales are approximately 1% of industry sales. Competitive factors include product quality, price and deliverability. National chains continue to dominate the market. The Company has taken a very aggressive approach towards increasing sales in this market segment by the use of cooperative advertising, joint promotional efforts and institutional advertising in trade publications. Management believes the Company can maintain its 1% market share. Cost of Sales - The Company's cost of sales for the nine months ended November 30, 2001 was $6,316,100, an increase of 8.7% over cost of sales of $5,813,000 for the nine months ended November 30, 2000. Cost of sales expressed as a percentage of gross sales was 26.9% for the nine months ended November 30, 2001 and 26.7% for the same nine month period a year ago. Cost of sales for the three months ended November 30, 2001 was $2,235,200 compared with $2,065,300 for the same three month period last year, an increase of 8.2%. When expressed as a percentage of gross sales, cost of sales for the three months ended November 30, 2001 was 27.1% and was 26.8% for the three months ended November 30, 2000. Operating Expenses - Operating and selling expenses increased 13.2% to $2,702,600 for the nine months ended November 30, 2001 compared with $2,388,300 for the nine months ended November 30, 2000. These expenses expressed as a percentage of gross sales were 11.5% and 11.0% for the nine months ended November 30, 2001 and 2000 respectively. Operating and selling expenses for the three months ended November 30, 2001 were $992,900, an increase of 14.1% over these expenses of $870,200 for the same period a year ago. When expressed as a percentage of gross sales, these expenses for the three months ended November 30, 2001 and 2000 were 12.0% and 11.3% respectively. Increased costs for special promotions and incentives in the Home Business Division contributed to the increase in operating and selling expenses for both the three months and nine months ended November 30, 2001. Sales commissions for the nine months ended November 30, 2001 were $3,770,100 compared with $2,894,800 for the same nine month period last year, an increase of 30.2%. Sales commissions for the third quarters ended November 30, 2001 and 2000, respectively, were $1,632,500 and $1,329,500, an increase of 22.8%. When expressed as a percentage of gross sales, sales commissions for the three months and nine months ended November 30, 2001 were 19.8% and 16.0% respectively and were 17.3% and 13.3% for the three months and nine months ended November 30, 2000, respectively. Sales commissions will fluctuate depending upon the product being sold and the division making the sale. The Home Business Division and the Publishing Division have separate and distinct commission programs and rates. Sales commissions increased in both periods for the Home Business Division and declined in both periods for the Publishing Division. General and administrative expenses were $1,082,700 for the nine months ended November 30, 2001 versus $1,111,200 for the nine months ended November 30, 2000, a decrease of 2.6%. These costs expressed as a percentage of gross sales were 4.6% for the current nine month period and 5.1% for the same nine month period a year ago. General and administrative expenses for the three months ended November 30, 2001 were $366,800, an increase of 7.3% over $341,900, for the same three months last year. When expressed as a percentage of gross sales, these costs for the three months ended November 30, 2001 and 2000 were 4.4% and 4.4% respectively. A decrease in depreciation expense contributed to the decrease in general and administrative expenses for the nine months ended November 30, 2001. The Company did not incur any interest expenses for the three months ended November 30, 2001 as the bank loan had been paid off in the previous quarter. Interest expense for the nine months ended November 30, 2001 decreased 78.4% when compared with the same nine month period a year ago. Reduced borrowings and lower interest rates contributed to the lower interest costs. 8 EDUCATIONAL DEVELOPMENT CORPORATION 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. Information by industry segment for the three months and nine months ended November 30, 2001 and 2000 is set forth below:
Publishing UBAH Other Total -------------- -------------- -------------- -------------- NINE MONTHS ENDED NOVEMBER 30, 2001 Net sales from external customers $ 5,685,500 $ 10,231,400 $ -- $ 15,916,900 Earnings before income taxes $ 2,022,700 $ 2,312,000 $ (2,271,300) $ 2,063,400 THREE MONTHS ENDED NOVEMBER 30, 2001 Net sales from external customers $ 1,533,100 $ 4,474,800 $ -- $ 6,007,900 Earnings before income taxes $ 526,300 $ 1,058,000 $ (784,200) $ 800,100 NINE MONTHS ENDED NOVEMBER 30, 2000 Net sales from external customers $ 6,005,700 $ 7,904,900 $ -- $ 13,910,600 Earnings before income taxes $ 2,173,100 $ 1,790,600 $ (2,325,100) $ 1,638,600 THREE MONTHS ENDED NOVEMBER 30, 2000 Net sales from external customers $ 1,593,600 $ 3,652,000 $ -- $ 5,245,600 Earnings before income taxes $ 556,600 $ 810,600 $ (747,800) $ 619,400
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any material market risk. PART II OTHER INFORMATION Item 5. 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: December 20, 2001 ------------------------ 10