EDUCATIONAL DEVELOPMENT CORP - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2004.


o		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 55^th 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 þ No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)

Yes o No þ

As of November 30, 2004 there were 3,805,104 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.

EDUCATIONAL DEVELOPMENT CORPORATION

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1
		NOTES TO CONDENSED FINANCIAL STATEMENTS
	ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 4 CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
	Item 6 EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
Certification of President and CEO Pursuant to Section 302
Certification of Chief Financial Officer Pursuant to Section 302
Certification of President and CEO Pursuant to Section 906
Certification of Chief Financial Officer Pursuant to Section 906

PART I. FINANCIAL INFORMATION

ITEM 1

CONDENSED BALANCE SHEETS (UNAUDITED)


	November 30, 2004			February 29, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	405,100		$	260,500
Accounts receivable - (less allowances for doubtful accounts and returns: 11/30/04 - $132,800; 2/29/04 - $150,900)		2,536,700			2,135,300
Inventories – Net		11,491,700			13,795,200
Prepaid expenses and other assets		96,500			147,000
Income taxes receivable		—			44,900
Deferred income taxes		58,400			30,200

Total current assets		14,588,400			16,413,100

INVENTORIES - - Net		678,100			571,000

PROPERTY AND EQUIPMENT
at cost (less accumulated depreciation:
11/30/04 - $1,769,800; 2/29/04 - $1,690,500)		2,434,300			2,046,100
DEFERRED INCOME TAXES		146,100			56,800

	$	17,846,900		$	19,087,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Note payable to bank	$	695,000		$	394,000
Accounts payable		3,521,000			3,719,400
Accrued salaries and commissions		763,300			445,500
Income taxes		67,500			—
Other current liabilities		380,000			310,200

Total current liabilities		5,426,800			4,869,100

COMMITMENTS

SHAREHOLDERS’ EQUITY:
Common Stock, $.20 par value (Authorized 8,000,000 shares; Issued 5,762,340 and 5,596,340 shares; Outstanding 3,805,104 and 4,025,773 shares)		1,152,500			1,119,300
Capital in excess of par value		6,214,400			5,349,900
Retained earnings		15,037,300			13,435,100

		22,404,200			19,904,300
Less treasury shares, at cost		(9,984,100	)		(5,686,400	)

		12,420,100			14,217,900


	$	17,846,900		$	19,087,000

See notes to condensed financial statements.

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)


	Three Months Ended November 30,						Nine Months Ended November 30,
	2004			2003			2004			2003
REVENUES:
Gross sales	$	11,528,100		$	12,420,300		$	31,763,800		$	31,897,900
Less discounts & allowances		(2,834,300	)		(2,994,100	)		(8,650,000	)		(9,033,300	)
Transportation revenue		493,900			550,500			1,266,400			1,269,600

Net revenues		9,187,700			9,976,700			24,380,200			24,134,200
COST OF SALES		3,108,700			3,350,300			8,482,400			8,507,400

Gross margin		6,079,000			6,626,400			15,897,800			15,626,800

OPERATING EXPENSES:
Operating & selling		1,837,700			2,016,000			4,967,400			5,012,100
Sales commissions		2,526,700			2,792,300			6,277,900			6,152,300
General & administrative		402,800			406,700			1,265,500			1,262,900
Interest		21,500			5,000			51,100			7,800

		4,788,700			5,220,000			12,561,900			12,435,100

OTHER INCOME		7,800			9,200			23,300			23,700

EARNINGS BEFORE INCOME TAXES		1,298,100			1,415,600			3,359,200			3,215,400
INCOME TAXES		488,700			544,500			1,273,000			1,224,000

NET EARNINGS	$	809,400		$	871,100		$	2,086,200		$	1,991,400


BASIC AND DILUTED EARNINGS PER SHARE:
Basic	$	0.21		$	0.22		$	0.53		$	0.51

Diluted	$	0.20		$	0.20		$	0.50		$	0.46


WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING:
Basic		3,878,975			3,974,715			3,954,306			3,933,728

Diluted		4,055,713			4,322,308			4,147,691			4,292,120

DIVIDENDS DECLARED PER COMMON SHARE	$	—		$	—		$	0.12		$	0.10

See notes to condensed financial statements.

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED 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, 2004		5,596,340	$	1,119,300	$	5,349,900	$	13,435,100			1,570,567		$	(5,686,400	)	$	14,217,900
Purchases of treasury stock		—		—		—		—			409,569			(4,382,400	)		(4,382,400	)
Sales of treasury stock		—		—		35,700		—			(22,900	)		84,700			120,400
Exercise of options at $2.1875 - $6.00/share		166,000		33,200		510,300		—			—			—			543,500
Tax benefit of stock options		—		—		318,500		—			—			—			318,500
Dividends paid ($0.12/share)		—		—		—		(484,000	)		—			—			(484,000	)
Net earnings		—		—		—		2,086,200			—			—			2,086,200

BALANCE, NOV. 30, 2004		5,762,340	$	1,152,500	$	6,214,400	$	15,037,300			1,957,236		$	(9,984,100	)	$	12,420,100

See notes to condensed financial statements.

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended November 30,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES	$	4,527,600		$	(782,200	)
CASH FLOWS FROM INVESTING ACTIVITIES–
Purchases of property and equipment		(481,500	)		(56,100	)

Net cash used in investing activities		(481,500	)		(56,100	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement		10,059,000			6,790,000
Payments under revolving credit agreement		(9,758,000	)		(6,790,000	)
Cash received from exercise of stock options		543,500			171,400
Cash received from sale of treasury stock		120,400			602,100
Cash paid to acquire treasury stock		(4,382,400	)		(376,300	)
Dividends paid		(484,000	)		(394,000	)


Net cash provided by (used in) financing activities		(3,901,500	)		3,200


Net Increase (Decrease) in Cash and Cash Equivalents		144,600			(835,100	)
Cash and Cash Equivalents, Beginning of Period		260,500			1,433,000

Cash and Cash Equivalents, End of Period	$	405,100		$	597,900

Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	47,700		$	6,700

Cash paid for income taxes	$	959,700		$	1,081,500

See notes to condensed financial statements.

EDUCATIONAL DEVELOPMENT CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1 - The information shown with respect to the three months and nine months ended November 30, 2004 and 2003, 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 and nine months ended November 30, 2004 and 2003, 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 29, 2004.

Certain reclassifications have been made to the fiscal 2004 financial statements to conform with the fiscal 2005 presentation.

Note 2 – Effective June 30, 2004 the Company signed a Fifth Amendment to the Credit and Security Agreement with Arvest Bank which provided a $3,500,000 line of credit through June 30, 2005. Interest is payable monthly at the Wall Street Journal prime floating rate minus 0.25% (4.75% at November 30, 2004) and borrowings are collateralized by substantially all the assets of the Company. At November 30, 2004 the Company had $695,000 outstanding. Available credit under the revolving credit agreement was $2,805,000 at November 30, 2004.

Note 3 - Inventories consist of the following:


	November 30, 2004			February 29, 2004
Current:
Book Inventory	$	11,575,700		$	13,824,600
Reserve for Obsolescence		(84,000	)		(29,400	)


Inventories net – current	$	11,491,700		$	13,795,200


Non-current:
Book Inventory	$	943,500		$	823,800
Reserve for Obsolescence		(265,400	)		(252,800	)


Inventories – non-current	$	678,100		$	571,000

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.

Significant portions of inventory purchases by the Company are concentrated with an England based publishing company. Purchases from this England based publishing company were approximately $2.4 million and $3.5 million for the three months ended November 30, 2004 and 2003, respectively. Total inventory purchases from all suppliers were approximately $3.1 million and $4.6 million for the three months ended November 30, 2004 and 2003, respectively.

Purchases from this England based publishing company were approximately $5.8 million and $10.0 million for the nine months ended November 30, 2004 and 2003, respectively. Total inventory purchases from all suppliers were approximately $7.9 million and $12.3 million for the nine months ended November 30, 2004 and 2003, respectively.

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.

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,
	2004		2003		2004		2003
Net Earnings	$	809,400	$	871,100	$	2,086,200	$	1,991,400


Basic EPS:
Weighted Average Shares Outstanding		3,878,975		3,974,715		3,954,306		3,933,728

Basic EPS	$	0.21	$	0.22	$	0.53	$	0.51


Diluted EPS:
Weighted Average Shares Outstanding		3,878,975		3,974,715		3,954,306		3,933,728
Assumed Exercise of Options		176,738		347,593		193,385		358,392

Shares Applicable to Diluted Earnings		4,055,713		4,322,308		4,147,691		4,292,120

Diluted EPS	$	0.20	$	0.20	$	0.50	$	0.46

Since March 1, 1998, when the Company began its stock repurchase program, 2,251,145 shares of the Company’s common stock at a total cost of $11,007,789 have been acquired. The Board of Directors has authorized purchasing up to 2,500,000 shares as market conditions warrant.

Note 5 – The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock. The following table illustrates the effects on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended, to stock-based employee compensation. There were no options granted in the three month period ended November 30, 2004. There were 1,000 options granted in the nine-month period ended November 30, 2004.


	Three Months Ended November 30,				Nine Months Ended November 30,
	2004		2003		2004			2003
Net Earnings – as reported	$	809,400	$	871,100	$	2,086,200		$	1,991,400
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		—		—		(3,500	)		—


Net earnings – pro forma	$	809,400	$	871,100	$	2,082,700		$	1,991,400


Earnings per share – as reported:
Basic	$	0.21	$	0.22	$	0.53		$	0.51

Diluted	$	0.20	$	0.20	$	0.50		$	0.46


Earnings per share – pro forma:
Basic	$	0.21	$	0.22	$	0.53		$	0.51

Diluted	$	0.20	$	0.20	$	0.50		$	0.46

In December 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, which is effective for the Company beginning September 1, 2005. Statement 123(R) will require the fair value of all stock option awards issued to employees of the Company on or after September 1, 2005 to be recorded as an expense over the related vesting period. Statement 123(R) also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. The Company is evaluating these new regulations, but expects no impact upon adoption relating to outstanding options since all awards under the existing incentive stock option plan are fully vested at the date of grant.

EDUCATIONAL DEVELOPMENT CORPORATION

Note 6 – Freight costs and handling costs incurred are included in operating & selling expenses and were $601,700 and $607,900 for the three months ended November 30, 2004 and 2003, respectively. Freight costs and handling costs were $1,587,200 and $1,522,100 for the nine months ended November 30, 2004 and 2003, respectively.

Note 7 - 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, book fairs and the Internet.

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 revenues 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, 2004 and 2003 is set forth below:


	Publishing		UBAH		Other			Total
Three Months Ended November 30, 2004

Net revenues from external customers	$	1,651,800	$	7,535,900	$	—		$	9,187,700
Earnings before income taxes	$	562,400	$	1,691,200	$	( 955,500	)	$	1,298,100

Three Months Ended November 30, 2003

Net revenues from external customers	$	1,776,400	$	8,200,300	$	—		$	9,976,700
Earnings before income taxes	$	581,100	$	1,740,300	$	( 905,800	)	$	1,415,600

Nine Months Ended November 30, 2004

Net revenues from external customers	$	5,603,600	$	18,776,600	$	—		$	24,380,200
Earnings before income taxes	$	1,885,200	$	4,265,400	$	(2,791,400	)	$	3,359,200

Nine Months Ended November 30, 2003

Net revenues from external customers	$	5,919,900	$	18,214,300	$	—		$	24,134,200
Earnings before income taxes	$	2,002,500	$	3,822,500	$	(2,609,600	)	$	3,215,400

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.

Overview

The Company operates two separate divisions, Publishing and Usborne Books at Home (“UBAH”) to sell the Usborne line of children’s books. These two divisions each have their own customer base. The Publishing Division markets its products on a wholesale basis to various retail accounts. The UBAH Division markets its products to individual consumers as well as school and public libraries.

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