<PAGE>
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, 1997.
[ ] 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 required 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 August 31, 1997 there were 5,219,426 shares of Educational Development
Corporation Common Stock, $0.20 par value outstanding.
1
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
- ----------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1
<TABLE>
<CAPTION>
BALANCE SHEETS
August 31, 1997
(unaudited) February 28, 1997
--------------- -----------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 280,000 $ 82,100
Accounts receivable - (less
allowances for doubtful accounts
and returns: 8/31/97 - $227,000
2/28/97 - $192,900) 2,967,000 2,032,700
Inventories - Net 10,177,100 10,048,500
Prepaid expenses 62,600 55,700
Income taxes receivable 36,700 124,100
Deferred income taxes 142,300 159,200
------------ ------------
Total current assets 13,665,700 12,502,300
PROPERTY AND EQUIPMENT
at cost (less accumulated
depreciation: 8/31/97 - $593,200
2/28/97 - $445,900) 725,600 848,500
OTHER ASSETS - Net 7,500 14,600
------------ ------------
$ 14,398,800 $ 13,365,400
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 2,405,000 $ 2,010,000
Accounts payable 2,109,300 2,305,100
Accrued salaries and commissions 197,300 214,200
Other current liabilities 438,500 563,000
------------ ------------
Total current liabilities 5,150,100 5,092,300
SHAREHOLDERS' EQUITY:
Common Stock, $.20 par value (authorized
6,000,000 shares; issued 5,424,240
and 5,424,240 shares; outstanding
5,219,426 and 5,200,697 shares) 1,084,900 1,084,900
Capital in excess of par value 4,403,600 4,403,200
Retained earnings 4,310,900 3,418,400
------------ ------------
9,799,400 8,906,500
Less treasury shares, at cost (550,700) (633,400)
------------ ------------
9,248,700 8,273,100
------------ ------------
$ 14,398,800 $ 13,365,400
============ ============
</TABLE>
See notes to financial statements.
2
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
- ----------------------------------------------------------------------
STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended August 31 Six Months Ended August 31
---------------------------- ---------------------------
1997 1996 1997 1996
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
GROSS SALES $ 8,623,500 $ 7,674,000 $15,731,100 $15,908,500
Less discounts & allowances (3,356,900) (2,639,700) (5,804,100) (5,184,000)
------------ ------------ ------------ -----------
Net sales 5,266,600 5,034,300 9,927,000 10,724,500
COST OF SALES 2,245,000 2,070,500 4,110,900 4,383,800
------------ ------------ ------------ -----------
Gross margin 3,021,600 2,963,800 5,816,100 6,340,700
OPERATING EXPENSES:
Operating & selling 840,000 892,500 1,683,000 2,019,400
Sales commissions 930,600 1,058,800 1,755,800 2,403,600
General & admin. 379,400 313,000 740,500 599,900
Interest 53,700 101,600 103,500 225,900
------------ ------------ ------------ -----------
817,900 597,900 1,533,300 1,091,900
OTHER INCOME 24,700 1,200 55,700 2,000
------------ ------------ ------------ -----------
EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 842,600 599,100 1,589,000 1,093,900
INCOME TAXES 361,800 241,400 644,300 433,100
------------ ------------ ------------ -----------
NET EARNINGS $ 480,800 $ 357,700 $ 944,700 $ 660,800
============ ============ ============ ===========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE -
Primary and fully diluted
Net earnings $ .09 $ .07 $ .18 $ .12
============ ============ ============ ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING -
Primary and fully diluted 5,336,927 5,354,879 5,324,119 5,364,321
============ ============ ============ ===========
DIVIDENDS DECLARED PER
COMMON SHARE $ .01 -- $ .01 --
============ ============ ============ ===========
</TABLE>
See notes to financial statements.
3
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
- ----------------------------------------------------------------------
STATEMENTS 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
--------- ---------- ---------- ---------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MAR. 1, 1997 5,424,240 $1,084,900 $4,403,200 $3,418,400 223,543 $(633,400) $8,273,100
Issuance of treasury
stock --- --- 400 --- (700) 2,000 2,400
Purchases of treasury
stock --- --- --- --- 11,000 (64,400) (64,400)
Sales of treasury stock --- --- --- --- (29,029) 145,100 145,100
Net earnings --- --- --- 944,700 --- --- 944,700
Dividend declared --- --- --- (52,200) --- --- (52,200)
--------- ---------- ---------- ---------- -------- --------- ----------
BALANCE, AUG. 31, 1997 5,424,240 $1,084,900 $4,403,600 $4,310,900 204,814 $(550,700) $9,248,700
========= ========== ========== ========== ======== ========= ==========
</TABLE>
See notes to financial statements.
4
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
- ----------------------------------------------------------------------
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended August 31 Six Months Ended August 31
---------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net earnings $ 480,800 $ 357,700 $ 944,700 $ 660,800
Adjustments to reconcile net
earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 74,000 57,500 147,300 113,600
Deferred income taxes 12,700 (4,500) 16,900 (8,600)
Provision for doubtful accounts
and sales returns 216,400 485,500 439,000 728,700
Provision for obsolete inventories (92,200) -- (92,200) --
Stock issued for awards -- -- 2,400 --
Changes in assets and liabilities:
Accounts and income taxes receivable (964,600) (449,900) (1,285,900) (286,700)
Inventories 88,300 74,800 (36,400) 1,758,900
Prepaid expenses and other assets (4,500) 139,400 200 75,300
Accounts payable and accrued expenses (68,900) 435,800 (337,200) (1,684,600)
Income taxes payable (109,200) 7,900 -- 7,900
------------ ------------ ------------ ------------
Total adjustments (848,000) 746,500 (1,145,900) 704,500
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities (367,200) 1,104,200 (201,200) 1,365,300
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (5,000) (115,800) (24,400) (151,000)
------------ ------------ ------------ ------------
Net cash used in investing activities (5,000) (115,800) (24,400) (151,000)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit
agreement 3,423,500 1,120,000 4,588,500 3,510,000
Payments under revolving credit
agreement (2,768,500) (2,260,000) (4,193,500) (4,960,000)
Cash received from exercise of
stock options -- -- -- 14,000
Cash received from sale of
treasury stock 26,900 -- 145,100 106,000
Cash paid to acquire treasury stock (9,000) -- (64,400) (47,300)
Dividends paid (52,200) -- (52,200) --
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 620,700 (1,140,000) 423,500 (1,377,300)
------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents 248,500 (151,600) 197,900 (163,000)
Cash and Cash Equivalents, Beginning of
Period 31,500 204,600 82,100 216,000
------------ ------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 280,000 $ 53,000 $ 280,000 $ 53,000
============ ============ ============ ============
Supplemental Disclosure of Cash Flow
Information:
Cash paid for interest $ 51,300 $ 112,100 $ 97,800 $ 230,600
============ ============ ============ ============
Cash paid for income taxes $ 495,000 $ 66,500 $ 540,000 $ 81,500
============ ============ ============ ============
</TABLE>
See notes to financial statements.
5
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
- ----------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Note 1 - Deferred income taxes reflect the net tax effects of temporary
- ------
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant items comprising the Company's net deferred tax asset as
of August 31, 1997 and February 28, 1997 are as follows:
<TABLE>
<CAPTION>
August 31, 1997 February 28, 1997
--------------- ------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 49,100 $ 35,200
Inventories 81,500 118,000
Expenses deducted on the cash
basis for income tax purposes 11,700 13,600
-------- --------
142,300 166,800
Deferred tax liability -
Property and equipment -- (7,600)
-------- --------
Net deferred tax asset $142,300 $159,200
======== ========
</TABLE>
Management has determined that no valuation allowance is necessary to reduce the
value of deferred tax assets as it is more likely than not that such assets are
realizable.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
August 31, 1997 August 31, 1996 August 31, 1997 August 31, 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Income tax expense:
Current
Federal $293,900 $207,000 $528,200 $371,800
State 55,200 38,900 99,200 69,900
-------- -------- -------- --------
349,100 245,900 627,400 441,700
Deferred
Federal 10,700 (3,800) 14,300 (7,300)
State 2,000 (700) 2,600 (1,300)
-------- -------- -------- --------
12,700 (4,500) 16,900 (8,600)
-------- -------- -------- --------
$361,800 $241,400 $644,300 $433,100
======== ======== ======== ========
</TABLE>
6
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
- ----------------------------------------------------------------------
Note 2 - Effective June 10, 1996 the Company signed a Restated Credit and
- ------
Security Agreement with State Bank which provided a $9,000,000 line of credit
and replaced the existing loan agreement. The line of credit was evidenced by a
promissory note in the amount of $9,000,000 payable June 30, 1997. The note
bore interest at the Wall Street Journal prime floating rate. The note was
collateralized by substantially all of the assets of the Company. The Company
utilized this line of credit primarily to fund routine operations.
Effective June 30, 1997, the Company signed a First Amendment to the 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, 1998. The note bears interest at the Wall Street
Journal prime floating rate. The note is collateralized by substantially all of
the assets of the Company. The Company utilizes this line of credit primarily
to fund routine operations. At August 31, 1997 the Company had available
$1,095,000 under this credit agreement.
Note 3 - Inventories consist of the following:
- ------
<TABLE>
<CAPTION>
08/31/97 02/28/97
----------- -----------
<S> <C> <C>
Book Inventory $10,386,000 $10,349,600
Reserve for Obsolescence (208,900) (301,100)
----------- -----------
$10,177,100 $10,048,500
=========== ===========
</TABLE>
Note 4 - The results of operations for the three months and six months ended
- ------
August 31, 1997 and 1996, respectively, are not necessarily indicative of the
results to be expected at year end due to seasonality of the product sales.
Note 5 - The information shown with respect to the three months and six months
- ------
ended August 31, 1997 and 1996, 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. Reclassifications were made to 1996
balances to conform with 1997 presentation.
Note 6 - These statements should be read in conjunction with the Notes to
- ------
Financial Statements contained in the Company's Annual Report to Shareholders
for the Fiscal Year ended February 28, 1997, which are incorporated herein by
reference, and with Management's Discussion and Analysis of Financial Condition
and Results of Operations appearing on page 8 of this report.
7
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
- ----------------------------------------------------------------------
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
increased 14.9% at August 31, 1997 to $8,515,600 when compared with working
capital of $7,410,000 at year-end February 28, 1997. Inventory levels increased
slightly as the Company continued to evaluate and improve its purchasing
procedures in order to supply adequate inventory to meet projected sales levels.
Accounts payable decreased 8.5% at August 31, 1997 over year-end February 28,
1997, the result of smaller purchases of inventory in the current period and the
payments for inventory received in prior periods.
Pre-tax margins were 16.0% for both the quarter and six months ended August 31,
1997 versus 11.9% for the three months ended August 31, 1996 and 10.2% for the
six months ended August 31, 1996. The Company attributes this improvement in
its pre-tax margin to the changes made to the Home Business Division's Marketing
Plan. These changes, which primarily involved the override percentages for
sales commissions, were first implemented October 1, 1996 with further changes
June 1, 1997.
RESULTS OF OPERATIONS
- ---------------------
Revenues - Net sales from the Home Business Division were $5,026,800 for the six
- --------
months ended August 31, 1997, a decrease of 17.5% when compared with the net
sales of $6,093,100 for the six months ended August 31, 1996. Net sales for
the three months ended August 31, 1997 were $2,505,900 versus $2,734,000 for the
same three month period the previous year, a decrease of 8.3%. As discussed in
the first quarter's Form 10-Q, the Company believes the decrease in net sales is
the direct result of changes implemented by the Company last year in the
commission override structure. The Company re-evaluated the commission
override structure for the Home Business Division and on June 1, 1997
implemented several improvements by increasing commission override percentages.
In addition, several new incentive programs were added. The results have been
positive as indicated by the improvement in sales from the first to the second
quarter. Net sales for the month of August 1997 were up 30% over net sales of
August 1996. Management believes that the decline in the Home Business
Division's net sales has been halted and anticipates increased sales in future
quarters. Effective July 1, 1996, the Company transferred responsibility of
sales to schools and libraries from the Library Division to the Home Business
Division. Net sales from the Library Division were $407,600 for the six months
ended August 31, 1996 and $88,300 for the three months ended August 31, 1996.
Net sales from the Publishing Division were $4,900,200 for the six months ended
August 31, 1997, compared with $4,223,800 for the six months ended August 31,
1996, an increase of 16.0%. Net sales for the three months ended August 31,
1997 were $2,760,700, an increase of 24.8% over the August 31, 1996 net sales of
$2,212,000. The Company believes this increase resulted from increased market
penetration as the Company's products become more well known in the marketplace.
The Division attends several national trade shows each year to present the
Company's products to a wide variety of consumers. The Company also has an
aggressive internal telephone sales force which helped generate the increase in
net sales. Management believes that it has a superior product line and is
optimistic that the Publishing Division can maintain its market share in the
highly competitive publishing market.
8
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
- ----------------------------------------------------------------------
Operating Expenses - The Company's cost of sales was $4,110,900 for the six
- ------------------
months ended August 31, 1997 and $4,383,800 for the six months ended August 31,
1996, a decrease of 6.2%. Cost of sales expressed as a percentage of gross
sales was 26.1% for the six months ended August 31, 1997 versus 27.6% for the
same period a year ago. Cost of sales for the three months ended August 31,
1997 and 1996 were $2,245,000 and $2,070,500, respectively, an increase of 8.4%.
Cost of sales as a percentage of gross sales was 26.0% for the three months
ended August 31, 1997 and 27.0% for the three months ended August 31, 1996.
Cost of sales as a percentage of gross sales will fluctuate depending upon the
product mix sold.
Operating and selling expenses declined 16.7% to $1,683,000 for the six months
ended August 31, 1997 versus $2,019,400 for the same six month period a year
ago. For the three months ended August 31, 1997, operating and selling expenses
were $840,000, a decrease of 5.9% from $892,500 for the three month period ended
August 31, 1996. Operating and selling expenses as a percentage of gross sales
were 9.7% and 10.7% for the three months and six months ended August 31, 1997
compared with 11.6% and 12.7% for the same two periods a year ago. Contributing
to the decrease in operating and selling expenses were reduced travel contest
expenses and reduced sales incentives in the Home Business Division. Also
contributing to the decrease was a reduction in credit card fees, the direct
result of lower sales in the Home Business Division.
Sales commissions were $1,755,800 for the six months ended August 31, 1997
versus $2,403,600 for the six months ended August 31, 1996, a decrease of 27.0%.
As a percentage of gross sales, sales commissions were 11.2% and 15.1% for the
six months ended August 31, 1997 and 1996 respectively. Sales commissions for
the three months ended August 31, 1997 were $930,600 compared with $1,058,800
for the three months ended August 31, 1996, a decrease of 12.1%. Sales
commissions as a percentage of gross sales was 10.8% for the three months ended
August 31, 1997 compared with 13.8% for the same quarter last year. Sales
commissions will vary with the product being sold and the Division making the
sale. The Home Business Division and the Publishing Division have different and
separate commission programs. The revisions in the Home Business Division's
commission program contributed to the decrease in sales commissions for both the
three months and six months ended August 31, 1997.
General and administrative expenses increased 23.4% to $740,500 for the six
months ended August 31, 1997 when compared with $599,900 for the six months
ended August 31, 1996. General and administrative expenses as a percentage of
gross sales were 4.7% for the six months ended August 31, 1997 versus 3.8% for
the same six month period a year ago. For the quarter ended August 31, 1997
general and administrative expenses were $379,400, an increase of 21.2% over the
$313,000 for the same quarter last year. Expressed as a percentage of gross
sales, general and administrative expenses for the quarters ended August 31,
1997 and 1996 were 4.4% and 4.1% respectively. The addition of corporate staff
contributed to the increase in general and administrative expenses.
Interest expense declined 54.2% to $103,500 for the six months ended August 31,
1997 versus $225,900 for the six months ended August 31, 1996. Interest expense
for the quarter ended August 31, 1997 was $53,700, a decrease of 47.1% from the
$101,600 for the quarter ended August 31, 1996. The average borrowing under the
bank loan declined from $5.1 million for the six months ended August 31, 1996 to
$2.3 million for the six months ended August 31, 1997, resulting in the
decreased interest expense. This reduction in bank borrowings can be attributed
to the continuing efforts of the Company to manage its inventory levels through
improved efficiencies in purchasing policies.
9
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
- ----------------------------------------------------------------------
PART II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits
1. None
B. Reports on Form 8-K
1. There were no reports filed on Form 8-K during the three
months covered by this report.
10
<PAGE>
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: September 30, 1997
-------------------------
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> FEB-28-1997 FEB-28-1997
<PERIOD-START> MAR-01-1997 MAR-01-1996
<PERIOD-END> AUG-31-1997 FEB-28-1997
<CASH> 280,000 82,153
<SECURITIES> 0 0
<RECEIVABLES> 3,194,000 2,225,588
<ALLOWANCES> 227,000 192,900
<INVENTORY> 10,177,100 10,048,457
<CURRENT-ASSETS> 13,665,700 12,502,287
<PP&E> 1,318,800 1,294,372
<DEPRECIATION> 593,200 445,894
<TOTAL-ASSETS> 14,398,800 13,365,369
<CURRENT-LIABILITIES> 5,150,100 5,092,324
<BONDS> 0 0
1,084,900 1,084,848
0 0
<COMMON> 0 0
<OTHER-SE> 8,163,800 7,188,197
<TOTAL-LIABILITY-AND-EQUITY> 14,398,800 13,365,369
<SALES> 9,927,000 21,239,507
<TOTAL-REVENUES> 9,927,000 21,239,507
<CGS> 4,110,900 8,396,060
<TOTAL-COSTS> 7,494,000 16,945,341
<OTHER-EXPENSES> 710,500 1,255,012
<LOSS-PROVISION> 30,000 60,000
<INTEREST-EXPENSE> 103,500 344,966
<INCOME-PRETAX> 1,589,000 2,634,188
<INCOME-TAX> 644,300 1,004,100
<INCOME-CONTINUING> 944,700 1,630,088
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 944,700 1,630,088
<EPS-PRIMARY> .18 .31
<EPS-DILUTED> .18 .31
</TABLE>
