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Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended February 29, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
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) (Zip Code)
Registrant's telephone number: (918) 622-4522
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.20 par value
(Title of class)
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___
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of April 18, 2000, 4,076,752 shares of common stock were
outstanding. The aggregate market value of the voting shares held by non-
affiliates of the registrant, based on 2,947,978 shares (total outstanding less
shares held by all officers, directors and 401(k) Plan) extended at the closing
market price on April 18, 2000, of these shares traded on the Nasdaq National
Market, was approximately $8,797,872.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report, to the
extent not set forth herein, is incorporated herein by reference from the
registrant's definitive proxy statement relating to the annual meeting of
stockholders to be held on June 22, 2000.
1
TABLE OF CONTENTS
FACTORS AFFECTING FORWARD LOOKING STATEMENTS.......................................................... 3
PART I
Item 1. Business.................................................................................... 3
Item 2. Properties.................................................................................. 6
Item 3. Legal Proceedings........................................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......................................... 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 6
Item 6. Selected Financial Data..................................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 11
Item 8. Financial Statements and Supplementary Data................................................. 11
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 11
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 11
Item 11. Executive Compensation...................................................................... 12
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 12
Item 13. Certain Relationships and Related Transactions.............................................. 12
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 13
2
EDUCATIONAL DEVELOPMENT CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED FEBRUARY 29, 2000
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
- --------------------------------------------
This annual Report on Form 10-K contains certain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Certain statements contained in "Item 7 - 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. Although Educational Development
Corporation believes that the expectations reflected by such forward looking
statements are reasonable based on information currently available to the
Company, no assurances can be given that such exceptions will prove to have been
correct.
PART 1
------
Item 1. BUSINESS
- ------ --------
(a) General Development of Business
-------------------------------
Educational Development Corporation ("EDC" or the "Company"), a Delaware
corporation with its principal office in Tulsa, Oklahoma, is the exclusive trade
publisher of a line of children's books produced in the United Kingdom by
Usborne Publishing Limited.
The Company was incorporated on August 23, 1965. The Company's original
corporate name was Tutor Tapes International Corporation of Delaware. Its name
was changed to International Teaching Tapes, Inc. on November 24, 1965, and
changed again to the present name on June 24, 1968.
During Fiscal Year ("FY") 2000 the Company operated two divisions: Home
Business Division ("Usborne Books at Home" or "UBAH") and Publishing Division.
The Home Business Division distributes books through independent consultants who
hold book showings in individual homes, and through book fairs and direct sales.
The Home Business Division also distributes these titles to school and public
libraries. The Publishing Division markets books to bookstores, toy stores,
specialty stores and other retail outlets.
Significant Events During Fiscal Year 2000
------------------------------------------
There were no significant events during fiscal year 2000.
(b) Financial Information about Industry Segments
---------------------------------------------
See part II, Item 8 - Financial Statements and Supplementary Data
3
(c) Narrative Description of Business
---------------------------------
(i) General
The principal product of both the Home Business Division and Publishing
Division is a line of children's books produced in the United Kingdom by Usborne
Publishing Limited. The Company is the sole United States trade publisher of
these books. The Company currently offers approximately 1,000 different titles.
The Company also distributes a product called "Usborne Kid Kits". These Kid
Kits take an Usborne book and combine it with specially selected items and/or
toys which complement the information contained in the book. The Kid Kits are
packaged in a reusable vinyl bag. Presently 61 different Kid Kits are
available.
The Company considers the political risk of importing books from the United
Kingdom to be negligible as the two countries have maintained excellent
relations for many years. Likewise there is little direct economic risk to the
Company in importing books from the United Kingdom as the Company pays for the
books in U.S. dollars and is not directly subject to any currency fluctuations.
There is risk of physical loss of the books should an accident occur while the
books are in transit, which could cause the Company some economic loss due to
lost sales should the supply of some titles be depleted in the event of a lost
shipment. The Company considers this to be highly unlikely as this type of loss
has yet to occur.
There is some risk involved in having all sales tied to one source - Usborne
Publishing Limited. The Company has an excellent working relationship with its
foreign supplier Usborne Publishing Limited and can foresee no reason for this
to change. Management believes that the Usborne line of books are the best
available books of their type and currently has no plans to sell any other line.
(ii) Industry Segments
(a) Home Business Division
The Home Business Division markets the Usborne line of approximately
1,000 titles and 61 Kid Kits through a combination of direct sales, home parties
and book fairs sold through a network marketing system. The Division also sells
to school and public libraries.
(b) Publishing Division
The Publishing Division distributes the Usborne line to bookstores,
toy stores, specialty stores and other retail outlets utilizing an inside
telephone sales force as well as independent field sales representatives.
(iii) Research and Development
During fiscal year 2000 the Company spent approximately $120,000 in
development of a new product, "Make Reading Fun", a fully interactive reading
and phonics program. The Company expects to begin sales of this product during
the second quarter of FY 2001.
(iv) Marketing
(a) Home Business Division
The Home Business Division markets through commissioned consultants
using a combination of direct sales, home parties and book fairs. The division
had approximately 3,600 consultants in 50 states at February 29, 2000.
4
(b) Publishing Division
The Publishing Division markets through commissioned trade
representatives who call on book, toy, specialty stores and other retail
outlets; and through marketing by telephone to the trade. This Division markets
to approximately 12,000 book, toy and specialty stores. Significant orders have
been received from major book chains. During fiscal year 2000 the division
continued to make further inroads into mass merchandising outlets such as drug,
department and discount stores.
(v) Competition
(a) Home Business Division
The Home Business Division faces significant competition from several
other direct selling companies which have more financial resources. Federal and
state funding cuts to schools affect the availability of funds to the school
libraries. The Company is unable to estimate the effect of these funding cuts on
the division's future sales to school libraries, because the magnitude of
funding cuts has yet to be determined by Congress. Management believes its
superior product line will enable this Division to be highly competitive in its
market area.
(b) Publishing Division
The Publishing Division faces strong competition from large U.S. and
international companies which have more financial resources. Industry sales of
juvenile paperbacks are over $660 million annually. The Publishing Division's
sales are approximately 1.2% of industry sales. Competitive factors include
product quality, price and deliverability. Possible funding cuts to schools
would not impact the Publishing Division as it does not sell to this market.
Management believes this Division can compete well in its market area.
(vi) Seasonality
(a) Home Business Division
The level of sales for Home Business Division is greatest during the
Fall as individuals prepare for the Holiday season.
(b) Publishing Division
The level of shipments of the Company's books is greatest in the Fall
while retailers are stocking up for Holiday sales.
(vii) Government Funding
Local, state and Federal funds are important to the Home Business
Division but not to the Publishing Division. In many cities and states in which
the Company does business, school funds have been severely cut, which impacts
sales to school libraries.
(viii) Trademarks, Copyrights and Patents
(none)
(ix) Employees
As of April 1, 2000, the Company had 62 full-time employees and 1
part-time employee. The Company believes its relations with its employees to be
good.
5
Item 2. PROPERTIES
- ------ ----------
The Company is located at 10302 E. 55th PL, Tulsa, Oklahoma. The
Company leases approximately 80,400 square feet of office and warehouse space
under a five year renewable lease which expires June 30, 2004.
The Company's operating facility is well maintained, in good condition
and is adequately insured. Equipment items are well maintained and in good
operating condition consistent with the requirement of the Company's business.
The Company believes that its operating facility meets both its present need and
its needs for future expansion.
Item 3. LEGAL PROCEEDINGS
- ------ -----------------
The Company is not a party to any material pending legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
There were no matters submitted during the fourth quarter of the
fiscal year covered by this report to a vote of security holders of the Company.
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------ -------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The common stock of EDC is traded on the Nasdaq National Market
(symbol--EDUC). The high and low closing quarterly common stock quotations for
fiscal years 2000 and 1999, as reported by the National Association of
Securities Dealers, Inc., were as follows:
2000 1999
------------------ --------------------
Period High Low High Low
- ------ ---- --- ---- ---
1st Qtr... 2.75 2.375 5.625 4.375
2nd Qtr... 3.0 2.50 4.375 2.625
3rd Qtr... 4.969 3.0 2.875 2.1875
4th Qtr... 4.0 2.625 3.0 2.1875
The number of shareholders of record of EDC's common stock at April 18, 2000 was
1184.
The Company paid a $0.02 per share annual dividend during fiscal year 2000 and
fiscal year 1999. The Company will pay a $0.02 annual dividend during fiscal
year 2001.
6
Item 6. SELECTED FINANCIAL DATA
- ------ -----------------------
YEARS ENDED FEBRUARY 28 (29)
---------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Net Sales $16,851,261 $16,671,385 $19,343,362 $21,239,507 $19,253,467
----------- ----------- ----------- ----------- -----------
Earnings From Continuing
Operations (1) $ 1,079.028 $ 1,297,493 $ 1,704,568 $ 1,630,088 $ 1,805,335
----------- ----------- ----------- ----------- -----------
Net Earnings $ 1,079,028 $ 1,297,493 $ 1,704,568 $ 1,630,088 $ 1,478,714
----------- ----------- ----------- ----------- -----------
Earnings From Continuing
Operations Per Common Share
Basic $ .25 $ .26 $ .33 $ .31 $ .40
----------- ----------- ----------- ----------- -----------
Diluted $ .24 $ .26 $ .32 $ .31 $ .34
----------- ----------- ----------- ----------- -----------
Net Earnings Per Common Share
Basic $ .25 $ .26 $ .33 $ .31 $ .33
----------- ----------- ----------- ----------- -----------
Diluted $ .24 $ .26 $ .32 $ .31 $ .28
----------- ----------- ----------- ----------- -----------
Total Assets $12,340,022 $12,339,594 $13,597,500 $13,365,369 $16,422,068
----------- ----------- ----------- ----------- -----------
Cash Dividends Declared
Per Common Share $ .02 $ .02 $ .01 -- --
----------- ----------- ----------- ----------- -----------
(1) Effective February 29, 1996 the Company discontinued its School Division.
The operating results of the School Division were reported as discontinued
operations in 1996 and 1995.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------ -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
(a) Results of Operations
---------------------
FY 2000
- -------
The Home Business Division's net sales increased slightly during FY 2000
when compared with FY 1999. The months of January and February 2000 were
especially strong when compared with the same two months last year. During the
past two years, this division has experienced sales declines which the Company
believes was primarily due to a reduction in the compensation structure made in
October 1996. This change was not well received by the field sales force. In
June 1997 and May 1998 the Company made enhancements to the compensation
program. The Company believes its compensation program is competitive with
industry leaders. The division will offer during FY 2001 new and exciting
incentive programs as well as several travel contests and regional training
seminars throughout the country. The Company believes these programs will help
attract new consultants as well as retain existing consultants. The Home
Business Division has also introduced a leadership skills program for
supervisors. The Home Business Division's fourth National Seminar will be held
in June 2000. Management is hopeful that the current year increase in net sales
indicates that recent improvements in the compensation programs have brought a
halt to the two year decline in net sales.
7
The Publishing Division's net sales increased 2.1% in FY 2000 when compared
with FY 1999. Increased volumes and increased market penetration contributed to
the increase in net sales. The Company has an aggressive in-house telephone
sales force which maintains contact with over 12,000 customers. During FY 2000
the telesales force opened up 675 new accounts compared with 637 new accounts
opened in FY 1999. The Company offers two display racks to assist stores in
displaying the Company's products. One is a six-foot rack with five adjustable
shelves which can hold approximately 220 titles. The second rack is a four-sided
rack with three levels which will hold between 50 and 60 of the Company's Kid
Kits. There were 3,307 of these attractive racks in retail stores throughout
the country at the end of FY 2000 compared with 3,098 at the end of FY 1999.
National chains continue to dominate the bookstore market, resulting in fewer
independent bookstores. The closing of these independent bookstores, an
important market to the Company, has a negative impact on sales. To counter
this, the Company last year restructured sales and marketing coverage on the
national chains in order to increase market share. Independent toy retailers
have also experienced increased competition from national chains, resulting in
lower sales in this market segment. The gift market has considerable potential
for the Company and the Company continues to develop its presence in this
segment of the book market. The Company attends many major national trade shows
throughout the country to further enhance product visibility. For these reasons
management is optimistic that the Publishing Division can maintain its market
share.
Cost of sales increased 3.9% for FY 2000 when compared with FY 1999. Cost
of sales as a percentage of gross sales was 26.2% in FY 2000 versus 26.0% for FY
1999. Cost of sales as a percentage of gross sales fluctuates with the mix of
products sold during a given year. Management believes its percentage of cost
of sales in FY 2001 will remain consistent with FY 2000.
Operating and selling expenses increased 3.4% during FY 2000 when compared
with FY 1999. As a percent of gross sales, these costs were 12.1% for FY 2000
compared with 12.0% in FY 1999. Higher freight costs, the result of increases
in sales and an increase in rates by the delivery carrier, contributed to
increased operating and selling costs for both the Publishing Division and the
Home Business Division. Increased credit card fees in the Home Business
Division, the direct result of increased sales, also contributed to the increase
in operating and selling expenses. Management expects operating and selling
expenses to be approximately 11% to 13% of gross sales in FY 2001.
Sales commissions declined 1.3% during FY 2000 when compared with FY 1999.
As a percentage of gross sales, these costs were 12.3% in FY 2000 compared to
12.8% for FY 1999. Sales commissions as a percentage of gross sales is
determined by the product mix sold and the division that makes the sale. While
net sales in the Publishing Division increased during FY 2000, the Division's
commission expense decreased 45%, the result of the changing sales market from
independent bookstores to the national chains. Offsetting this decline in
commission expense was an increase in sales commission expense in the Home
Business Division, the result of an increase in sales and a higher commission
structure than offered in the Publishing Division.
General and administrative expenses increased less than 1.0% during FY 2000
when compared with FY 1999. As a percentage of gross sales, these expenses were
6.1% and 6.3% for FY 2000 and FY 1999 respectively. General and administrative
expenses are not always directly affected by sales, so comparison of these
expenses as a percentage of gross sales can be misleading. An increase in
depreciation expense in the MIS department contributed to the increase in
general and administrative expenses.
Interest expense declined 52.9% in FY 2000 when compared with FY 1999. As
a percentage of gross sales, interest expense was 0.2% in FY 2000 versus 0.4%
for FY 1999. The decrease in interest expense during FY 2000 was the result of
lower borrowing levels due to improved cash flows during the year.
8
FY 1999
- -------
The Home Business Division's sales decreased 17.3% during FY 1999 when
compared with FY 1998. The Company believed this decrease was primarily the
result of a reduction in the compensation structure, which was effective October
1, 1996, and was not well received by the field sales force. The compensation
structure was enhanced in June 1997 and the downturn in sales was slowed. In
May 1998 the Company made additional enhancements to the compensation structure.
The new program created an additional level of compensation and was designed to
encourage participation at all levels of the organization. Several travel
contests were conducted and regional training seminars were held throughout the
country. The Home Business Division's third National Seminar was held in June
1999.
The Publishing Division's net sales decreased 9.4% in FY 1999 when compared
with FY 1998. This decline in net sales was attributed to changing market
conditions. National chains increasingly dominate the bookstore market, which
in turn has resulted in fewer independent bookstores. The closings of these
independent bookstores, an important market for the Company, have led to lower
sales. The Company restructured sales and marketing coverage on the national
chains in order to increase market share. Independent toy retailers have also
experienced increased competition from national discount chains, resulting in
lower sales in this market segment. An increase in the number of front list
titles increased sales opportunities in FY 2000. The gift market has
considerable potential for the Company and the Company increased its gift trade
show schedule by 50% to take advantage of this opportunity. The Company's
aggressive in-house telephone sales force maintained contact with over 11,000
customers. During FY 1999 the telesales force opened up 637 new accounts
compared with 525 during FY 1998. The Company offered two display racks to
assist stores in displaying the Company's products. One is a six-foot rack with
five adjustable shelves which can hold approximately 220 titles. The second rack
is a four-sided rack with three levels which will hold between 50 and 60 of the
Kid Kits. There were 3,098 of these attractive racks in retail stores
throughout the country at the end of FY 1999 compared with 3,000 in FY 1998. The
Company attends several major national trade shows throughout the year to
further enhance product visibility.
Cost of sales decreased 13.5% for FY 1999 compared with FY 1998. Cost of
sales as a percentage of gross sales was 26.0% for FY 1999 versus 26.1% for FY
1998. Cost of sales as a percentage of gross sales fluctuates depending upon
the mix of products sold during a given year.
Operating and selling expenses decreased 8.0% during FY 1999 when compared
with FY 1998. As a percent of gross sales, these costs were 12.0% for FY 1999
and 11.4% for FY 1998. Contributing to the decrease in operating and selling
expenses were lower credit card fees and reduced sales incentives in the Home
Business Division, both the direct result of decreased sales in the Home
Business Division. In addition, payroll and benefit costs related to selling
and operating expenses declined due to a decrease in headcount.
Sales commissions decreased 12.9% for FY 1999 compared with FY 1998. As a
percentage of gross sales, these costs were 12.8% in FY 1999 compared to 12.8%
for FY 1998. Sales commissions as a percentage of gross sales is determined by
the product mix sold, as the commission rates vary with the product being sold
and the division which makes the sale. The Home Business Division had a higher
commission percentage and the lower sales in this division contributed to the
decrease in FY 1999 sales commissions. The revised marketing plan which went
into effect in June 1997 for the Home Business Division partially offset the
decrease in sales commissions. Effective May 1, 1998 management added a
recruiting bonus program in the Home Business Division which resulted in
increased commission expense for FY 1999, offset by a decline in total
commission expense as a result of decreased sales.
9
General and administrative expenses increased 4.9% during FY 1999 when
compared with FY 1998. As a percentage of gross sales, these expenses were 6.3%
and 5.2% for FY 1999 and FY 1998 respectively. General and administrative
expenses are not always directly affected by sales, so comparison of these
expenses as a percentage of gross sales can be misleading. Contributing to the
increase in general and administrative expenses were increased salaries and
benefits, primarily to existing employees.
Interest expense declined 38.3% in FY 1999 compared with FY 1998. As a
percentage of gross sales, interest expense was 0.4% in FY 1999 versus 0.5% for
FY 1998. The decrease in interest expense during FY 1999 was the result of
lower borrowing levels due to improved cash flows during the year.
(b) Financial Position
------------------
Working capital was $7.6 million for fiscal year end 2000 and $8.7 million
for fiscal year end 1999. Increases in payables and short-term bank debt
contributed to the decrease in working capital at fiscal year end 2000. The
Company pays interest on its bank promissory note monthly from current cash
flows. Management expects its financial position to remain strong and to
increase working capital during the next fiscal year.
(c) Liquidity and Capital Resources
-------------------------------
Management believes the Company's liquidity at February 29, 2000, to be
adequate. There are no known demands, commitments, events or uncertainties that
would result in a material change in the Company's liquidity during fiscal year
2001. Capital expenditures are expected to be less than $750,000 in fiscal year
2001. These expenditures would consist primarily of software and hardware
enhancements to the Company's existing data processing equipment, leasehold
improvements and additions to the warehouse shipping system.
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 (8.5% at February 29, 2000). The note
is collateralized by substantially all of the assets of the Company. At
February 29, 2000 the Company had $1,278,000 in borrowings. Available credit
under the revolving credit agreement was $2,222,000 at February 29, 2000.
The Company obtained and uses the credit facility to fund routine
operations. Payments are made from current cash flows. The Company plans to
renew this facility when it matures June 30, 2000. The Company believes its
borrowing capacity under this line to be adequate for the next several years.
The Company generated cash from operating activities during fiscal year
2000. Accounts receivable increased during fiscal year 2000, the result of
higher sales in the Publishing Division. The Company plans to continue to
maximize its collection efforts in order to maintain cash flows.
Inventory levels increased 1.0% from fiscal year end 1999 to fiscal year
end 2000, the result of the Company's continued efforts of monitoring inventory
levels to ensure that adequate inventory is on hand to support sales as well as
to meet the six to eight month resupply requirements of its principal supplier.
The Company expects inventory levels to increase moderately each year as new
titles are added to the product line.
The major component of accounts payable is the amount due the Company's
principal supplier. Increases and decreases in inventory levels directly affect
the level of accounts payable. Also the timing of the purchases and the payment
terms offered by the suppliers affect the year end levels of accounts payable.
As inventory levels increase moderately each year, the Company expects accounts
payable will also increase moderately each year. Management anticipates cash
flows from operating activities to increase in the foreseeable future.
10
Cash used in investing activities during fiscal year 2000 was primarily for
additional computer equipment and software and additions to the warehouse flow
rack shipping system.
The short-term bank loan increased during fiscal year 2000 as the Company
continued its stock buyback program.
During the year the Company continued the stock buyback program by
purchasing 874,087 shares of its common stock at a cost of $2,516,232. The
Company paid a divided of $0.02 per share or $86,311.
(d) New Accounting Standards
------------------------
Recent pronouncements of the Financial Accounting Standards Board, which
are not required to be adopted at this date, include SFAS No 133, "Accounting
for Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that all derivatives be recognized as either assets or liabilities
in the statement of financial position and be measured at fair value. SFAS No.
133 is effective for the Company beginning March 1, 2001. The Company is
currently evaluating SFAS No. 133, but does not expect its adoption will have a
material impact on its consolidated financial statements.
(e) Year 2000 Matters
-----------------
The Company encountered only minor problems with the date change from 1999
to 2000 and experienced no business disruptions. The total costs involved in
preparation for the year 2000 date change was $45,000, comprised of $40,000
software costs and $5,000 labor costs.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
The Company does not have any material market risk.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The information required by this Item 8 begins at page F-1, following
page 17 hereof.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- ------ ---------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------
There have been no disagreements on any matter of accounting
principles or practices or financial statement disclosure within the twenty-four
months prior to February 29, 2000.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------- --------------------------------------------------
(a) Identification of Directors
---------------------------
The information required by this Item 10 is furnished by incorporation
by reference to all information under the caption "Election of Directors" in the
Company's definitive Proxy Statement to be filed in connection with the annual
Meeting of Shareholders to be held on June 22, 2000.
11
(b) Identification of Executive Officers
------------------------------------
The following information is furnished with respect to each of the
executive officers of the Company, each of whom is elected by and serves at the
pleasure of the Board of Directors.
Office
Name Office Held Since Age
---- ------ ---------- ---
Randall W. White Chairman of the Board, 1986 58
President and Treasurer
W. Curtis Fossett Controller and 1989 54
Corporate Secretary
Michael L. Puhl* Vice President - Operations 1998 44
*The prior business experience for those executive officers who have
been employed by the Company for less than five years is as follows:
Michael L. Puhl joined EDC on September 3, 1996. Prior to that he was
Controller of the Aftermarket Division of Mark IV Industries. During that time
he was in charge of all accounting functions of the combined Purolater/Dayco
Aftermarket sales division. Prior to being appointed as controller of the
Aftermarket Division, he was Vice President/Finance of Purodenso, a joint
venture between Purolater Products and Nippondenso LTD of Japan.
(c) Compliance With Section 16 (a) of the Exchange Act
--------------------------------------------------
The information required by this Item 10 is furnished by incorporation
by reference to all information under the caption "Compliance With Section 16
(a)" in the Company's definitive Proxy Statement to be filed in connection with
the Annual Meeting of Shareholders to be held on June 22, 2000.
Item 11. EXECUTIVE COMPENSATION
- ------- ----------------------
The information required by this Item 11 is furnished by incorporation
by reference to all information under the caption "Executive Compensation" in
the Company's definitive Proxy Statement to be filed in connection with the
Annual Meeting of Shareholders to be held on June 22, 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------- ---------------------------------------------------
MANAGEMENT
----------
The information required by this Item 12 is furnished by incorporation
by reference to all information under the caption "Voting Securities and
Principal Holders Thereof" in the Company's definitive Proxy Statement to be
filed in connection with the Annual Meeting of Shareholders to be held on June
22, 2000.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------- ----------------------------------------------
The information required by this Item 13 is furnished by incorporation
by reference to all information under the caption "Transactions with Management
and Others" in the Company's definitive Proxy Statement to be filed in
connection with the Annual Meeting of Shareholders to be held on June 22, 2000.
12
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ------- ----------------------------------------------------------------
(a) The following documents are filed as part of this
report:
1. Financial Statements Page
-------------------- ------
Independent Auditors' Report F-1
Balance Sheets - February 28, 1999
and 1998 F-2
Statements of Earnings - Years ended
February 28, 1999, 1998 and 1997 F-3
Statements of Shareholders' Equity -
Years ended February 28, 1999, 1998 and 1997 F-4
Statements of Cash Flows -
Years ended February 28, 1999,
1998 and 1997 F-5
Notes to Financial Statements F-6-F-14
Schedules have been omitted as such information is either not
required or is included in the financial statements.
2. Exhibits
3.1 Restated Certificate of Incorporation of the Company dated
April 26, 1968, Certificate of Amendment there to dated
June 21, 1968 and By-Laws of the Company are incorporated
herein by reference to Exhibit 1 to Registration Statement
on Form 10 (File No. 0-4957).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated August 27, 1977 and
By-Laws of the Company as amended are incorporated herein
by reference to Exhibits 20.1 and 20.2 to Form 10-K for fiscal
year ended February 28, 1981 (File No. 0-4957).
3.3 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated November 17, 1986,
is incorporated herein by reference to Exhibit 3.3 to Form
10-K for fiscal year ended February 28, 1987 (File No. 0-4957).
3.4 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated March 22, 1996.
4.1 Specimens of Common Stock Certificates are incorporated
herein by reference to Exhibits 3.1 and 3.2 to Registration
Statement on Form 10-K (File No. 0-4957).
13
10.1 Educational Development Corporation Incentive Stock Option Plan
of 1981, is incorporated herein by reference to Exhibit 10.9 to
Form 10-K for fiscal year ended February 28, 1982 (File No. 0-
4957).
10.2 Agreement by and among the Company, Usborne Publishing Ltd., and
Hayes Books, Inc., dated May 17, 1983, is incorporated herein by
reference to Exhibit 10.16 to Form 10-K for fiscal year ended
February 29, 1984 (File No. 0-4957).
10.3 Settlement Agreement dated August 7, 1986, by and between the
Company and Hayes Publishing Ltd., Cyril Hayes Books, Inc.
(formerly named Hayes Books, Inc.), and Cyril Hayes is
incorporated herein by reference to Exhibit 10.1 to Form 8-K
dated August 7, 1986 (File No. 0-4957).
10.4 Usborne Agreement-Contractual agreement by and between the
Company and Usborne Publishing Limited dated November 25, 1988,
is incorporated herein by reference to Exhibit 10.12 to Form 10-
K dated February 28, 1989 (File No. 0-4957).
10.5 Party Plan-Contractual agreement by and between the Company and
Usborne Publishing Limited dated March 14, 1989, is incorporated
herein by reference to Exhibit 10.13 to Form 10-K dated February
28, 1989 (File No. 0-4957).
10.6 Loan Agreement dated January 18, 1990, by and between the
Company and State Bank & Trust, N.A., Tulsa, OK (formerly
WestStar Bank, N.A., Bartlesville, OK), is incorporated herein
by reference to Exhibit 10.11 to Form 10-K dated February 28,
1990 (File No. 0-4957).
10.7 Lease Agreement by and between the Company and James D. Dunn
dated March 1, 1991, is incorporated herein by reference to
Exhibit 10.12 to Form 10-K dated February 28, 1991 (File No. 0-
4957).
10.8 Agreement for Exchange of Contract Rights and Securities by and
between the Company and Robert D. Berryhill dated October 1,
1990, is incorporated herein by reference to Exhibit 10.1 to
Form 10-K dated February 28, 1991 (File No. 0-4957).
10.9 Amendment dated January 1, 1992 to Usborne Agreement -
Contractual agreement by and between the Company and Usborne
Publishing Limited is incorporated herein by reference to
Exhibit 10.13 to Form 10-K dated February 29, 1992 (File No. 0-
4957).
14
10.10 First Amendment dated January 31, 1992 to Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa,
OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is
incorporated herein by reference to Exhibit 10.14 to Form
10-K dated February 29, 1992 (File No. 0-4957).
10.11 Educational Development Corporation 1992 Incentive Stock
Option Plan is incorporated herein by reference to Exhibit 4(c)
to Registration Statement on Form S-8 (File No. 33-60188)
10.12 Second Amendment dated June 30, 1992 to Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa,
OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is
incorporated herein by reference to Exhibit 10.12 to Form
10-KSB dated February 28, 1994 (File No. 0-4957).
10.13 Third Amendment dated June 30, 1993 to Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa,
OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is
incorporated herein by reference to Exhibit 10.13 to Form
10-KSB dated February 28, 1995 (File No. 0-4957).
10.14 Fourth Amendment dated June 30, 1994 to Loan Agreement
between the Company and State Bank & Trust, N.A, Tulsa, OK,
is incorporated herein by reference to Exhibit 10.14 to Form
10-KSB dated February 28, 1995 (File No. 0-4957).
10.15 Fifth Amendment dated March 13, 1995 to Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa, OK,
is incorporated herein by reference to Exhibit 10.15 to Form
10-KSB dated February 28, 1995 (File No. 0-4957).
10.16 Sixth Amendment dated March 27, 1995 to Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa, OK,
is incorporated herein by reference to Exhibit 10.16 to Form
10-KSB dated February 28, 1995 (File No. 0-4957).
10.17 Seventh Amendment dated April 27, 1995 to Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa, OK,
is incorporated herein by reference to Exhibit 10.17 to Form
10-KSB dated February 28, 1995 (File No. 0-4957).
10.18 Amendment dated February 28, 1995 to the Lease Agreement by
and between the Company and James D. Dunn, is incorporated
herein by reference to Exhibit 10.18 to Form 10-KSB dated
February 28, 1995 (File No. 0-4957).
10.19 Eighth Amendment Dated July 27, 1995 to Loan Agreement between
the Company and State Bank & Trust, N.A., Tulsa, OK, is
incorporated herein by reference to Exhibit 10.19 to Form
10-KSB dated February 29, 1996 (File No. 0-4957).
15
10.20 Restated Loan Agreement dated September 25, 1995 between the
Company and State Bank & Trust, N.A., Tulsa, OK, is
incorporated herein by reference to Exhibit 10.20 to Form 10-
KSB dated February 29, 1996 (File No. 0-4957).
10.21 Restated Loan Agreement dated June 10, 1996 between the
Company and State Bank & Trust, N.A., Tulsa, OK, is
incorporated herein by reference to Exhibit 10.21 to Form
10-K dated February 28, 1997 (File No. 0-4957).
10.22 First Amendment dated June 30, 1997 to Restated Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa, OK,
is incorporated herein by reference to Exhibit 10.22 to Form
10-K dated February 28, 1998 (File No. 0-4957).
10.23 Second Amendment dated June 30, 1998 to Restated Loan
Agreement between the Company and State Bank & Trust, N.A.,
Tulsa, OK, is incorporated herein by reference to Exhibit
10.23 to Form 10-K dated February 28, 1999 (File No. 0-4957).
*10.24 Restated Loan Agreement dated June 30, 1999 between the
Company and State Bank & Trust, N.A., Tulsa, OK.
*10.25 Lease agreement by and between the Company and James D. Dunn
dated July 1, 1999.
*23. Independent Auditors' Consent
__________
*Filed Herewith
(b) No reports on Form 8-K were filed during
the last quarter of the period covered by this
report.
16
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(b) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EDUCATIONAL DEVELOPMENT CORPORATION
Date: May 12, 2000 By /s/ W. Curtis Fossett
-----------------------------------------
W. Curtis Fossett
Principal Financial
and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Date: May 12, 2000 /s/ Randall W. White
----------------------------------
Randall W. White
Chairman of the Board
President, Treasurer and
Director
May 12, 2000 /s/ Robert D. Berryhill
----------------------------------
Robert D. Berryhill, Director
May 12, 2000 /s/ Dean Cosgrove
----------------------------------
G. Dean Cosgrove, Director
May 12, 2000 /s/ James F. Lewis
----------------------------------
James F. Lewis, Director
May 12, 2000 /s/ John M. Lare
----------------------------------
John M. Lare, Director
May 12, 2000 /s/ W. Curtis Fossett
----------------------------------
W. Curtis Fossett
Principal Financial
and Accounting Officer
17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Educational Development Corporation:
We have audited the accompanying balance sheets of Educational Development
Corporation as of February 29, 2000 and February 28, 1999, and the related
statements of earnings, shareholders' equity and cash flows for each of the
three years in the period ended February 29, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at February 29, 2000 and
February 28, 1999, and the results of its operations and its cash flows for each
of the three years in the period ended February 29, 2000 in conformity with
accounting principles generally accepted in the United States of America.
Tulsa, Oklahoma
April 4, 2000
F-1
EDUCATIONAL DEVELOPMENT CORPORATION
BALANCE SHEETS
FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
ASSETS 2000 1999
CURRENT ASSETS:
Cash and cash equivalents $ 214,321 $ 210,931
Accounts receivable, less allowances for doubtful accounts and
sales returns $209,466 (2000) and $189,556 (1999) 2,020,454 1,842,616
Inventories - Net 8,364,096 8,486,674
Prepaid expenses and other assets 220,381 220,032
Income taxes receivable - 55,077
Deferred income taxes 137,700 121,800
----------- -----------
Total current assets 10,956,952 10,937,130
INVENTORIES 1,280,000 1,060,000
PROPERTY AND EQUIPMENT - Net 85,270 342,464
DEFERRED INCOME TAXES 17,800 -
----------- -----------
$12,340,022 $12,339,594
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 1,278,000 $ 756,000
Accounts payable 1,681,601 1,095,771
Accrued salaries and commissions 258,123 243,030
Other current liabilities 102,966 149,115
Income tax payable 46,923 -
----------- -----------
Total current liabilities 3,367,613 2,243,916
DEFERRED INCOME TAXES - 56,300
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock, $0.20 par value; Authorized 6,000,000 shares;
Issued 5,429,240 shares;
Outstanding 4,167,389 (2000) and 4,873,254 (1999) shares 1,085,848 1,085,848
Capital in excess of par value 4,410,066 4,410,066
Retained earnings 7,259,141 6,266,424
----------- -----------
12,755,055 11,762,338
Less treasury stock, at cost (3,782,646) (1,722,960)
----------- -----------
8,972,409 10,039,378
----------- -----------
$12,340,022 $12,339,594
=========== ===========
See notes to financial statements.
F-2
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS
YEARS ENDED FEBRUARY 29, 2000, FEBRUARY 28, 1999 AND 1998
- --------------------------------------------------------------------------------
2000 1999 1998
GROSS SALES $26,613,943 $25,889,212 $ 29,764,345
Less discounts and allowances (9,762,682) (9,217,827) (10,420,983)
----------- ----------- ------------
Net sales 16,851,261 16,671,385 19,343,362
COST OF SALES 6,984,387 6,724,539 7,771,311
----------- ----------- ------------
Gross margin 9,866,874 9,946,846 11,572,051
----------- ----------- ------------
OPERATING EXPENSES:
Operating and selling 3,224,442 3,118,179 3,389,317
Sales commissions 3,266,733 3,308,551 3,797,145
General and administrative 1,634,027 1,619,635 1,543,348
Interest 45,401 96,427 156,149
----------- ----------- ------------
8,170,603 8,142,792 8,885,959
----------- ----------- ------------
OTHER INCOME 51,757 117,339 127,376
----------- ----------- ------------
EARNINGS BEFORE INCOME TAXES 1,748,028 1,921,393 2,813,468
INCOME TAXES 669,000 623,900 1,108,900
----------- ----------- ------------
NET EARNINGS $ 1,079,028 $ 1,297,493 $ 1,704,568
=========== =========== ============
BASIC AND DILUTED EARNINGS
PER SHARE:
Basic $ 0.25 $ 0.26 $ 0.33
=========== =========== ============
Diluted $ 0.24 $ 0.26 $ 0.32
=========== =========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT SHARES
OUTSTANDING:
Basic 4,364,608 5,036,574 5,216,076
=========== =========== ============
Diluted 4,426,836 5,098,167 5,338,188
=========== =========== ============
See notes to financial statements.
F-3
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED FEBRUARY 29, 2000, FEBRUARY 28, 1999 AND 1998
- -------------------------------------------------------------------------------
Common Stock
(par value $.20 per share)
-------------------------------
Number of Capital in
Shares Excess of Retained
Issued Amount Par Value Earnings
BALANCE, MARCH 1, 1997 5,424,240 $1,084,848 $4,403,242 $3,418,431
Issuance of treasury stock - - 324 -
Purchases of treasury stock - - - -
Sales of treasury stock - - - -
Dividends paid ($0.01/share) - - - (52,176)
Net earnings - - - 1,704,568
------------- ----------- ----------- ----------
BALANCE, FEBRUARY 28, 1998 5,424,240 1,084,848 4,403,566 5,070,823
Exercise of options at $1.50/share 5,000 1,000 6,500 -
Issuance of treasury stock - - - -
Purchases of treasury stock - - - -
Sales of treasury stock - - - -
Dividends paid ($0.02/share) - - - (101,892)
Net earnings - - - 1,297,493
------------- ----------- ----------- ----------
BALANCE, FEBRUARY 28, 1999 5,429,240 1,085,848 4,410,066 6,266,424
Issuance of treasury stock - - - -
Purchases of treasury stock - - - -
Sales of treasury stock - - - -
Dividends paid ($0.02/share) - - - (86,311)
Net earnings - - - 1,079,028
------------- ----------- ----------- ----------
BALANCE, FEBRUARY 29, 2000 5,429,240 $1,085,848 $4,410,066 $7,259,141
============= =========== =========== ==========
Treasury Stock
----------------------------
Number of Shareholders'
Shares Amount Equity
BALANCE, MARCH 1, 1997 223,543 $ (633,476) $ 8,273,045
Issuance of treasury stock (700) 2,069 2,393
Purchases of treasury stock 15,900 (85,364) (85,364)
Sales of treasury stock (46,641) 223,739 223,739
Dividends paid ($0.01/share) - - (52,176)
Net earnings - - 1,704,568
--------- ----------- -----------
BALANCE, FEBRUARY 28, 1998 192,102 (493,032) 10,066,205
Exercise of options at $1.50/share - - 7,500
Issuance of treasury stock (400) 1,240 1,240
Purchases of treasury stock 376,832 (1,277,186) (1,277,186)
Sales of treasury stock (12,548) 46,018 46,018
Dividends paid ($0.02/share) - - (101,892)
Net earnings - - 1,297,493
--------- ----------- -----------
BALANCE, FEBRUARY 28, 1999 555,986 (1,722,960) 10,039,378
Issuance of treasury stock (200) 600 600
Purchases of treasury stock 874,087 (2,516,232) (2,516,232)
Sales of treasury stock (168,022) 455,946 455,946
Dividends paid ($0.02/share) - - (86,311)
Net earnings - - 1,079,028
--------- ----------- -----------
BALANCE, FEBRUARY 29, 2000 1,261,851 $(3,782,646) $ 8,972,409
========= =========== ===========
See notes to financial statements.
F-4
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 AND 1998
- --------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,079,028 $ 1,297,493 $ 1,704,568
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 299,179 308,805 296,803
Loss on disposal 1,199 535 -
Deferred income taxes (90,000) (7,200) 100,900
Provision for doubtful accounts and sales returns 984,575 1,277,201 862,900
Recovery of obsolete inventory reserve - - (150,913)
Stock issued for awards 600 1,240 2,393
Changes in assets and liabilities:
Accounts and income taxes receivable (1,107,336) (995,790) (885,224)
Inventories (97,422) 855,556 (202,860)
Prepaid expenses and other assets (349) (124,353) (25,378)
Accounts payable, accrued salaries and
commissions,
and other current liabilities 554,774 (1,072,379) (522,029)
Income tax payable 46,923 - -
----------- ----------- -----------
Total adjustments 592,143 243,615 (523,408)
----------- ----------- -----------
Net cash provided by operating activities 1,671,171 1,541,108 1,181,160
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (43,184) (56,166) (43,963)
----------- ----------- -----------
Net cash used in investing activities (43,184) (56,166) (43,963)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 6,899,000 7,000,000 8,484,900
Payments under revolving credit agreement (6,377,000) (7,120,000) (9,618,900)
Cash received from exercise of stock options - 7,500 -
Cash received from sale of stock 455,946 46,018 223,739
Cash paid to acquire treasury stock (2,516,232) (1,277,186) (85,364)
Dividends paid (86,311) (101,892) (52,176)
----------- ----------- -----------
Net cash used in financing activities (1,624,597) (1,445,560) (1,047,801)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,390 39,382 89,396
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 210,931 171,549 82,153
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 214,321 $ 210,931 $ 171,549
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 41,251 $ 98,482 $ 164,519
=========== =========== ===========
Cash paid for income taxes $ 657,000 $ 779,000 $ 935,000
=========== =========== ===========
See notes to financial statements.
F-5
EDUCATIONAL DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 AND 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Educational Development Corporation (the "Company")
distributes books and publications through its Publishing and Usborne Books
at Home Divisions. The Company is the United States ("U.S.") trade publisher
of books and related matters, published primarily in England, to book, toy
and gift stores, libraries and home educators. The Company is also involved
in the production and publishing of new book titles. The English publishing
company is the Company's primary supplier. The Company sells to its
customers, located throughout the U.S., primarily on standard credit terms.
Estimates - The preparation of the Company's financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand
and cash on deposit in banks.
Accounts Receivable - Accounts receivable at February 29, 2000 and February
28, 1999, include approximately $151,000 and $148,000, respectively, due from
directors of the Company.
Inventories - Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out ("FIFO") method.
Property and Equipment - Property and equipment are stated at cost and
depreciated and amortized using the straight-line method over the estimated
useful lives of the related assets. Estimated useful lives range from two to
five years.
During the fourth quarter of fiscal year 2000, the Company changed the
estimated life on certain property and equipment. This resulted in an
increase in depreciation expense in the fourth quarter of approximately
$30,000. Management expects that the book value of the property and
equipment on hand as of February 29, 2000 will be fully depreciated by the
end of the first quarter of fiscal year 2001.
Income Taxes - The Company records deferred income taxes for temporary
differences between the financial reporting and tax bases of the Company's
assets and liabilities and for operating loss and tax credit carryforwards.
Income Recognition - Sales are recorded when products are shipped. At the
time sales are recognized for certain products under specified conditions,
allowances for returns are recorded based on prior experience.
Advertising Costs - The Company expenses advertising costs as incurred.
F-6
Earnings Per Share - Basic earnings per share ("EPS") is computed by dividing
net income 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.
The following reconciles the diluted earnings per share:
Year Ended
February 29, Year Ended February 28,
-----------------------
2000 1999 1998
Diluted Earnings Per Share:
Net earnings applicable to common shareholders $1,079,028 $1,297,493 $1,704,568
========== ========== ==========
Shares:
Weighted average shares outstanding - basic 4,364,608 5,036,574 5,216,076
Assumed exercise of options 62,228 61,593 122,112
---------- ---------- ----------
Weighted average shares outstanding - diluted 4,426,836 5,098,167 5,338,188
========== ========== ==========
Diluted Earnings Per Share $ 0.24 $ 0.26 $ 0.32
========== ========== ==========
Fair Value of Financial Instruments - For cash and cash equivalents, accounts
receivable and accounts payable, the carrying amount approximates fair value
because of the short maturity of those instruments. The fair value of the
Company's note payable to bank is estimated to approximate carrying value
based on the borrowing rates currently available to the Company for bank
loans with similar terms and maturities.
Long-Lived Asset Impairment - The Company reviews the value of long-lived
assets and certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable based on estimated future cash flows.
Stock-Based Compensation - 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 Company has adopted the
disclosure requirements of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation."
New Accounting Standards - SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that all derivatives be recognized as either assets or liabilities in the
statement of financial position and be measured at fair value. SFAS No. 133
is effective for the Company beginning March 1, 2001. The Company is
currently evaluating SFAS No. 133, but does not expect its adoption will have
a material impact on its financial statements.
Reclassifications - Reclassifications were made to certain 1999 balances to
conform with the 2000 presentation.
F-7
2. INVENTORIES
Inventories consist of the following:
February 29, February 28,
2000 1999
Current:
Book inventory $8,487,828 $8,610,406
Reserve for obsolescence (123,732) (123,732)
---------- ----------
Inventories net - current $8,364,096 $8,486,674
========== ==========
Inventories - non-current $1,280,000 $1,060,000
========== ==========
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.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
February 29, February 28,
2000 1999
Computer equipment $ 838,075 $ 802,899
Warehouse and office equipment 476,324 471,438
Furniture, fixtures and other 101,335 101,335
----------- -----------
1,415,734 1,375,672
Less accumulated depreciation and amortization (1,330,464) (1,033,208)
----------- -----------
$ 85,270 $ 342,464
=========== ===========
4. NOTE PAYABLE
The note payable to bank is under a $3,500,000 revolving credit agreement,
with interest payable monthly at prime minus .25% (8.5% and 7.75% at February
29, 2000 and February 28, 1999, respectively), collateralized by
substantially all assets of the Company, maturing on June 30, 2000. At
February 29, 2000 and February 28, 1999, the Company had $1,278,000 and
$756,000, respectively, in borrowings under the revolving credit agreement.
Available credit under the revolving credit agreement was $2,222,000 at
February 29, 2000. The agreement contains provisions that require the
maintenance of specified financial ratios, restrict transactions with related
parties, prohibit mergers or consolidation, disallow additional debt, and
limit the amount of compensation, salaries, investments, capital expenditures
and leasing transactions. The Company is in compliance with or has obtained
waivers for all restrictive covenants. The Company intends to renew the bank
agreement or obtain other financing upon maturity.
F-8
For each of the three years in the period ended February 29, 2000, the
highest amount of short-term borrowings, the average amount of borrowings
under these short-term notes, and the weighted average interest rates are as
follows:
Year Ended
February 29, Year Ended February 28,
----------------------------
2000 1999 1998
Note payable to bank:
Largest amount borrowed $1,369,000 $2,306,000 $2,860,000
Average amount borrowed 650,702 1,343,549 1,766,813
Weighted average interest rate 8.0% 8.3% 8.5%
5. INCOME TAXES
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, and
operating loss and tax credit carryforwards. The tax effects of significant
items comprising the Company's net deferred tax assets and liabilities as of
February 29, 2000 and February 28, 1999 are as follows:
February 29, February 28,
2000 1999
Current:
Deferred tax assets:
Allowance for doubtful accounts $ 42,300 $ 34,600
Inventories 72,000 48,300
Expenses deducted on the cash basis for income tax purposes 23,400 23,400
Change in accounting method - 15,500
-------- --------
Deferred tax asset $137,700 $121,800
======== ========
Noncurrent:
Deferred tax asset - Property and equipment $ 17,800 $ -
Deferred tax liability - Property and equipment - (56,300)
-------- --------
Deferred tax asset (liability) $ 17,800 $(56,300)
======== ========
Management has determined that no valuation allowance is necessary to reduce
the deferred tax assets as it is more likely than not that such assets are
realizable.
F-9
The components of income tax expense are as follows:
February 29, February 28,
-----------------------
2000 1999 1998
Current:
Federal $645,200 $536,500 $ 856,900
State 113,800 94,600 151,100
-------- -------- ----------
759,000 631,100 1,008,000
Deferred:
Federal (76,500) (6,100) 85,800
State (13,500) (1,100) 15,100
-------- -------- ----------
(90,000) (7,200) 100,900
-------- -------- ----------
Total income tax expense $669,000 $623,900 $1,108,900
======== ======== ==========
The following reconciles the Company's expected income tax expense utilizing
statutory tax rates to the actual tax expense:
Year Ended
February 29, Year Ended February 28,
--------------------------
2000 1999 1998
Tax expense at federal statutory rate $594,000 $653,000 $ 957,000
State income tax, net of federal tax benefit 70,000 66,000 116,000
Other 5,000 (95,100) 35,900
-------- -------- ----------
$669,000 $623,900 $1,108,900
======== ======== ==========
6. EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan which incorporates the provisions of
Section 401(k) of the Internal Revenue Code. The 401(k) plan covers
substantially all employees meeting specific age and length of service
requirements. Matching contributions from the Company are discretionary and
amounted to $33,477, $27,291 and $27,113 in fiscal years 2000, 1999 and 1998,
respectively.
7. COMMITMENTS
The Company leases its office and warehouse facilities under a noncancelable
operating lease which expires in June 2004. Total rent expense related to
these facilities was $232,980 in fiscal 2000 and $225,960, in both fiscal
1999 and 1998.
Future minimum lease payments are as follows:
Year Ending
February 28,
2001 $ 240,000
2002 240,000
2003 240,000
2004 240,000
2005 80,000
----------
$1,040,000
==========
F-10
At February 29, 2000, the Company had outstanding commitments to purchase
inventory from its primary vendor totaling approximately $1,868,000.
8. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS
In June 1992, the Board of Directors adopted the 1992 Incentive Stock Option
Plan "Incentive Plan." A total of 1,000,000 stock options are authorized to
be granted under the 1992 Plan.
Options granted under the Incentive Plan vest at date of grant and are
exercisable up to ten years from the date of grant. The exercise price on
options granted is equal to the market price at the date of grant. Options
outstanding at February 29, 2000 expire in 2003 through 2009.
A summary of the status of the Company's Incentive Plan as of February 29,
2000 and February 28, 1999 and 1998 and changes during the years ended on
those dates is presented below:
2000 1999 1998
----------------------- ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
Beginning of Year 490,000 $ 3.51 328,500 $ 3.06 309,800 $ 3.79
Granted 40,000 2.50 171,700 4.34 140,600 4.03
Exercised/canceled (22,600) (3.77) (10,200) (2.77) (121,900) (6.02)
------- ------ ------- ------ -------- ------
Outstanding at End of Year 507,400 $ 3.42 490,000 $ 3.51 328,500 $ 3.06
======= ====== ======= ====== ======== ======
The following table summarizes information about stock options outstanding at
February 29, 2000:
Number
Range of Outstanding Weighted
Exercise at February 29, Average Remaining Weighted Average
Prices 2000 Contractual Life (Years) Exercise Price
------ ---- ----------------------- --------------
$1.375 - $1.50 79,000 3 $1.41
$ 2.50 55,000 9 2.50
$ 3.13 100,000 4 3.13
$ 3.81 21,500 8 3.81
$ 4.00 116,700 7 4.00
$ 4.63 135,200 8 4.63
------- --- -----
507,400 6 $3.42
======= === =====
All options outstanding are exercisable at February 29, 2000.
F-11
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its Incentive Plan. Accordingly, no compensation cost has
been recognized for its Incentive Plan. Had compensation cost for the
Company's Incentive Plan been determined based on the fair value at the grant
dates for awards under the Incentive Plan consistent with the method
prescribed by SFAS No. 123, the Company's net earnings and earnings per share
for the years ended February 29, 2000 and February 28, 1999 and 1998 would
have been reduced to the pro forma amounts indicated below:
2000 1999 1998
Net earnings - as reported $1,079,028 $1,297,493 $1,704,568
========== ========== ==========
Net earnings - pro forma $1,038,582 $1,104,347 $1,636,618
========== ========== ==========
Earnings per share - as reported:
Basic $ 0.25 $ 0.26 $ 0.33
========== ========== ==========
Diluted $ 0.24 $ 0.26 $ 0.32
========== ========== ==========
Earnings per share - pro forma:
Basic $ 0.24 $ 0.22 $ 0.31
========== ========== ==========
Diluted $ 0.24 $ 0.22 $ 0.31
========== ========== ==========
The fair value of options granted under the Incentive Plan was estimated on
the date of grant using the Black-Scholes option-pricing model. The
following assumptions were used for options granted in 2000; no dividend
yield, expected volatility of 45%, risk free interest rate of 5.7% and
expected lives of ten years; the following assumptions were used for options
granted in 1999; no dividend yield, expected volatility of 50%, risk free
interest rate of 5.06% and expected lives of four years; 1998, no dividend
yield, expected volatility of 54%, risk free interest rate of 6.2% and
expected lives of four years.
9. SUPPLEMENTARY INFORMATION
The activity in the allowances for doubtful accounts receivable, sales
returns and inventory valuation for each of the three years in the period
ended February 29, 2000 is as follows:
Doubtful accounts receivable:
Balance at Amounts Amounts Balance
Beginning Charged to Charged to at End
Year of Year Expense Reserve of Year
1998 $ 91,900 $ 60,000 $ (10,200) $141,700
1999 141,700 66,000 (119,144) 88,556
2000 88,556 52,000 (32,090) 108,466
Sales returns:
Balance at Amounts Amounts Balance
Beginning Charged to Charged to at End
Year of Year Expense Reserve of Year
1998 $101,000 $ 802,900 $ (802,900) $101,000
1999 101,000 1,211,201 (1,211,201) 101,000
2000 101,000 932,575 (932,575) 101,000
F-12
Inventory valuation:
Balance at Amounts Amounts Balance
Beginning Charged to Charged to at End
Year of Year Expense Reserve of Year
1998 $301,100 $ - $(150,913) $150,187
1999 150,187 33,545 (60,000) 123,732
2000 123,732 - - 123,732
Charges to certain expense accounts for each of the three years in the period
ended February 29, 2000 are shown below:
Year Ended
February 29, Year Ended February 28,
------------------------
2000 1999 1998
Maintenance and repairs $27,043 $33,515 $30,919
Taxes other than payroll and income taxes 30,110 31,079 30,093
Advertising costs 69,001 51,730 83,865
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended February 29, 2000 and February 28, 1999:
Basic Diluted
Earnings Earnings
Net Sales Gross Margin Net Earnings Per Share Per Share
2000
First quarter $ 4,122,100 $2,395,600 $ 290,300 $0.06 $0.06
Second quarter 4,202,500 2,397,400 313,600 0.07 0.07
Third quarter 5,012,800 3,029,400 419,800 0.10 0.10
Fourth quarter 3,513,861 2,044,474 55,328 0.02 0.01
----------- ---------- ---------- ----- -----
Total year $16,851,261 $9,866,874 $1,079,028 $0.25 $0.24
=========== ========== ========== ===== =====
1999
First quarter $ 4,160,700 $2,484,200 $ 350,000 $0.07 $0.07
Second quarter 3,950,400 2,253,900 307,000 0.06 0.06
Third quarter 5,453,700 3,391,000 537,600 0.11 0.11
Fourth quarter 3,106,585 1,817,746 102,893 0.02 0.02
----------- ---------- ---------- ----- -----
Total year $16,671,385 $9,946,846 $1,297,493 $0.26 $0.26
=========== ========== ========== ===== =====
F-13
11. 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 UBAH Division
also distributes to school and public libraries.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. 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 years ended February 29, 2000 and
February 28, 1999 and 1998 is set forth below:
Publishing UBAH Other Total
2000
Net sales to external customers $7,960,891 $ 8,890,370 $ - $16,851,261
Earnings before income taxes 2,811,887 2,181,300 (3,245,159) 1,748,028
1999
Net sales to external customers $7,794,702 $ 8,876,683 $ - $16,671,385
Earnings before income taxes 2,848,749 2,365,204 (3,292,560) 1,921,393
1998
Net sales to external customers $8,604,096 $10,739,266 $ - $19,343,362
Earnings before income taxes 3,309,603 2,894,612 (3,390,747) 2,813,468
* * * * * *
F-14