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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 28, 1998
[ ] 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 May 14, 1998, 5,223,054 shares of common stock were outstanding.
The aggregate market value of the voting shares held by non-affiliates of the
registrant, based on 4,000,115 shares (total outstanding less shares held by all
officers, directors and 401(k) Plan) extended at the closing market price on May
14, 1998, of these shares traded on the Nasdaq National Market, was
approximately $18,000,518.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated Document Location in Form 10-K
--------------------- ---------------------
All information under the caption Part III - Item 10(a) and Item 10(c)
"Election of Directors" and "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 July 23, 1998.
All information under the caption Part III - Item 11
"Executive Compensation" in the
Company's definitive Proxy Statement
to be filed in connection with the
Annual Meeting of Shareholders to be
held July 23, 1998.
All information under the caption Part III - Item 12
"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
July 23, 1998.
All information under the caption Part III - Item 13
"Certain Relationships and Related
Transactions" in the Company's
definitive Proxy Statement to be
filed in connection with the Annual
Meeting of Shareholders to be held
July 23, 1998.
NOTE: Part IV - Item 14 is located at pages 13 to 16 herein.
2
EDUCATIONAL DEVELOPMENT CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED FEBRUARY 28, 1998
PART 1
------
Item 1. (a) General Development of Business
- ------- -------------------------------
Educational Development Corporation ("EDC" or the "Company"), a Delaware
corporation with its principal office in Tulsa, Oklahoma, is the sole United
States distributor 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") 1998 the Company operated two divisions: Home
Business Division and Publishing Division. The Home Business Division
distributes books through independent consultants who hold book showings in
individual homes, and through book fairs, fund raisers and direct sales. The
Home Business Division also distributes these titles to school and public
libraries. The Publishing Division markets books to book stores, toy stores,
specialty stores and other retail outlets.
Significant Events During Fiscal Year 1998
------------------------------------------
There were no significant events during fiscal year 1998.
(b) Financial Information about Industry Segments
---------------------------------------------
Marketing and distribution of books to the retail trade, including book
stores, toy stores, specialty stores and other retail outlets as well as school
and public libraries, is the principal industry segment in which the Company is
engaged. Reference is made to the financial information contained elsewhere in
this report for financial results of the Company's operations.
Net Sales for each of the three divisions were as follows:
NET SALES BY DIVISION
- ---------------------------------------------------------------------------------------------
FY 1998 FY 1997 FY 1996
- ------------------------------------------------- -------------------- --------------------
Percent Percent Percent
($ M ) of Total ($ M ) of Total ($ M ) of Total
----------- -------- ---------- -------- ---------- --------
Home Business $10,739.3 55.5 $12,932.2 60.9 $ 9,516.0 49.4
Publishing 8,604.1 44.5 7,864.9 37.0 8,191.1 42.5
Library -- . --. 442.4 2.1 1,546.4 8.1
--------- ----- --------- ----- --------- -----
$19,343.4 100.0 $21,239.5 100.0 $19,253.5 100.0
========= ===== ========= ===== ========= =====
As the table above indicates, the Home Business Division has experienced a
decline in net sales and their percentage of net sales to the total net sales
during the current year. The Company expects that the Home Business Division's
sales will increase and that this Division will grow at a greater rate than the
Publishing Division. The Publishing Division's sales increased during FY 1998.
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations further discusses these items. The Library Division was closed
during FY 1997, as discussed in Form 10-K for fiscal year 1997.
3
OPERATING PROFIT BY DIVISION
- --------------------------------------------------------------------------------
FY 1998 FY 1997 FY 1996
---------- --------- ---------
( $ M ) ( $ M ) ( $ M )
---------- --------- ---------
Home Business $2,894.2 $3,150.7 $2,690.1
Publishing $3,073.3 $2,466.6 $3,151.0
Library -- $ 178.3 $ 336.4
IDENTIFIABLE ASSETS BY DIVISION
- --------------------------------------------------------------------------------
( none )
(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 distributor of these
books. The Company currently offers approximately 900 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 52 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 900
titles and 52 Kid Kits through a combination of direct sales, home parties, fund
raisers 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 book stores, toy
stores, specialty stores and other retail outlets utilizing an inside telephone
sales force as well as independent field sales representatives.
4
(iii) Research and Development
The Company did not incur any research and development expenses during the
last three fiscal years.
(iv) Marketing
(a) Home Business Division
The Home Business Division markets through commissioned consultants using a
combination of direct sales, home parties, fund raisers and book fairs. The
division had approximately 4,000 consultants in 50 states at February 28, 1998.
(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 1998 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 stiff competition from several other
direct selling companies which have larger 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 larger financial resources. Industry sales
of juvenile paperbacks are over $470 million annually. The Publishing
Division's sales are less than 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.
5
(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 May 1, 1998, the Company had 75 full-time employees and 4 part-time
employees. The Company believes its relations with its employees to be good.
Item 2. PROPERTIES
- ------- ----------
The Company moved its operations and executive offices on March 1, 1986, to
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 February 28, 1999.
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 1998 and 1997, as reported by the National Association of Securities
Dealers, Inc., were as follows:
1998 1997
------------- -------------
Period High Low High Low
- --------- ----- ------ ------ -----
1st Qtr.. 6-3/8 4-3/4 12-3/4 8-3/4
2nd Qtr.. 7 5-3/8 9-7/8 6
3rd Qtr.. 8-1/4 5-9/16 8-1/8 4-7/8
4th Qtr.. 6 4-1/32 8-1/4 5-3/4
The number of shareholders of record of EDC's common stock at May 14, 1998 was
1170.
6
The Company paid a $0.01 per share annual dividend during fiscal year 1998. No
dividends were paid during fiscal year 1997 or 1996.
The Company will pay a $0.02 per share annual dividend during fiscal year 1999.
Item 6. SELECTED FINANCIAL DATA
- ------- -----------------------
YEARS ENDED FEBRUARY 28 (29)
--------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------
Net Sales $19,343,362 $21,239,507 $19,253,467 $12,353,257 $7,916,527
----------- ----------- ----------- ----------- ----------
Income From Continuing
Operations $ 1,704,568 $ 1,630,088 $ 1,805,335 $ 1,163,647 $ 631,350
----------- ----------- ----------- ----------- ----------
Net Earnings $ 1,704,568 $ 1,630,088 $ 1,478,714 $ 1,171,786 $ 893,651
----------- ----------- ----------- ----------- ----------
Income From Continuing
Operations Per Common Share
Basic $ .33 $ .31 $ .40 $ .26 $ .14
----------- ----------- ----------- ----------- ----------
Diluted $ .32 $ .31 $ .34 $ .22 $ .13
----------- ----------- ----------- ----------- ----------
Net Earnings Per Common Share
Basic $ .33 $ .31 $ .33 $ .26 $ .20
----------- ----------- ----------- ----------- ----------
Diluted $ .32 $ .31 $ .28 $ .22 $ .18
----------- ----------- ----------- ----------- ----------
Total Assets $13,597,500 $13,365,369 $16,422,068 $ 9,665,378 $5,438,709
----------- ----------- ----------- ----------- ----------
Long Term Obligations -- -- -- $ 1,000,000 $ 7,673
----------- ----------- ----------- ----------- ----------
Cash Dividends Declared
Per Common Share $ .01 -- -- -- --
----------- ----------- ----------- ----------- ----------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- -----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
(a) General
-------
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.
7
FY 1998
- -------
The Home Business Division's sales decreased 17.0% during FY 1998 when
compared with FY 1997. The Company believes 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 creates an additional level of compensation and is designed to
encourage participation at all levels of the organization. The Company believes
it now has in place an excellent compensation program for its field sales force.
New and exciting incentive programs are being planned for FY 1999 as well as
several travel contests and regional training seminars throughout the country.
The Division's second National Seminar will be held in July 1998. Management
believes that the decline in FY 1998 net sales has been reversed and FY 1999
will be an excellent year for the Division.
The Publishing Division's sales increased 9.4% in FY 1998 over FY 1997. Sales
nationwide in the juvenile paperback market have declined over 18%. The Company
attributes the increase in sales to an increase in volume and in market
penetration. Orders have increased in size with larger quantities per order as
well as multiple titles per order. The Company has an aggressive in-house
telephone sales force which maintains contact with over 10,000 customers.
During FY 1998 the telesales force opened up 525 new accounts compared with 580
during FY 1997. 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 Kid Kits.
There were 3,000 of these attractive racks in retail stores throughout the
country at the end of FY 1998 compared with 2,750 in FY 1997. The Company
attends several major national trade shows throughout the year to further
enhance product visibility. For these reasons management is optimistic that the
Publishing Division can maintain its market share.
Cost of sales decreased 7.4% for FY 1998 compared with FY 1997. Cost of sales
as a percentage of gross sales was 26.1% for FY 1998 versus 26.6% for FY 1997.
Cost of sales as a percentage of gross sales fluctuates depending upon the mix
of products sold during a given year. Management believes its cost of sales
during FY 1999 will remain consistent with FY 1998 levels.
Operating and selling expenses decreased 12.7% during FY 1998 when compared with
FY 1997. As a percent of gross sales, these costs were 11.4% for FY 1998 and
12.3% for FY 1997. Contributing to the decrease in operating and selling
expenses were lower credit card fees in the Home Business Division and reduced
sales incentives in the Home Business Division, both the direct result of
decreased sales in this Division. Management expects operating and selling
expenses to be approximately 11% to 13% of gross sales for FY 1999.
Sales commissions decreased 19.2% for FY 1998 compared with FY 1997. As a
percentage of gross sales, these costs were 12.8% in FY 1998 compared to 14.9%
for FY 1997. 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 has a higher
commission percentage and the lower sales in this Division contributed to the
decrease in FY 1998 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 will result in
increased commission expense for FY 1999. Management expects sales commissions
will be approximately 13% to 15% of gross sales for FY 1999.
8
General and administrative expenses increased 17.4% during FY 1998 when compared
with FY 1997. As a percentage of gross sales, these expenses were 5.2% and 4.2%
for FY 1998 and FY 1997 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. Management expects general and administrative
expenses for FY 1999 will be approximately 4.5% to 5.5% of gross sales.
Interest expense declined 54.7% in FY 1998 compared with FY 1997. As a
percentage of gross sales, interest expense was 0.5% in FY 1998 versus 1.1% for
FY 1997. The decrease in interest expense during FY 1998 was the result of
lower borrowing levels during the year.
FY 1997
- -------
The Home Business Division's sales increased 36% in FY 1997 compared with
FY 1996. This was due to the number of active consultants, (5,700) who were
actively selling the books through home shows, book fairs, fund raisers and
direct sales. The Division continued to offer new and exciting consultant
incentive programs during FY 1997, including several travel contests. These
programs combined with various specials offered during the year helped attract
and retain consultants. Regional training seminars were held throughout the
country to train supervisors and consultants and exchange new ideas with other
supervisors and consultants. The Division held its first National Seminar in
April, 1997 with approximately 300 consultants and top supervisors in
attendance. This 4-day event offered training sessions for those in attendance.
The Publishing Division's sales decreased 4% in FY 1997 over FY 1996.
Sales nationwide in the publishing industry declined. The telemarketing staff
opened 580 new accounts during FY 1997 versus 609 new accounts in FY 1996. The
rack program continued to be popular with 369 new racks placed during FY 1997
versus 201 in FY 1996. There were approximately 2,750 racks in place in
bookstores throughout the country at February 28, 1997. The Company offered
special pricing with the purchase of a display rack. This rack is six-foot tall
with a 21" x 21" base and 5 adjustable shelves. The rack holds approximately
220 books and offers the retail merchant an excellent method of displaying many
of the Company's titles. These racks serve as a marketing tool for retail
merchants. The Company attended several major national trade shows to further
enhance product visibility.
The Library Division was closed effective July 1, 1996 and the
responsibility for these sales transferred to the Home Business Division.
Cost of sales increased 2.9% for FY 1997 over FY 1996. Cost of sales as a
percent of gross sales was 26.6% in FY 1997 compared with 27.2% in FY 1996.
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 increased 23.7% for FY 1997 over FY 1996.
As a percent of gross sales these costs were 12.3% in FY 1997 and 10.5% in FY
1996. Contributing to the increases in selling and operating expenses were
increased sales incentives in the Home Business Division and increased credit
card fees in the Home Business Division, both the direct result of increased
sales in this Division. Building rental costs and utilities also increased as
the Company added additional warehouse space during FY 1997.
Sales commissions increased 22.9% during FY 1997 over FY 1996. As a
percent of gross sales, these costs were 14.9% in FY 1997 compared with 12.7% in
FY 1996. Sales commission 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 increase in sales by the Home Business
Division, which has a higher commission percentage, resulted in the increase in
commission expense during FY 1997. In October, the Home Business Division put
into place a revised and improved commission structure, which will reduce
commission expense as a percent of Home Business Division sales.
9
General and administrative costs increased during FY 1997 by 42.8% when
compared with FY 1996. As a percentage of gross sales, these expenses were 4.2%
in FY 1997 and 3.1% in FY 1996. General and administrative costs are not always
directly affected by sales, so comparison of these expenses as a percentage of
gross sales can be misleading. Contributing to the increased general and
administrative costs was depreciation, due to the addition of new computer
equipment, and the addition of staff due to increased volumes.
Interest expense increased 15.8% during FY 1997 when compared with FY 1996.
As a percentage of gross sales, interest expense was 1.1% for both FY 1997 and
FY 1996. The increase in interest expense was due primarily to the increased
borrowing levels during FY 1997 when compared with FY 1996.
(b) Financial Position
------------------
Working capital increased 28.8% to $9.6 million at fiscal year end 1998 over
fiscal year end 1997. Reductions in payables and short term bank debt and an
increase in inventories were the main contributors to the increase in working
capital. The Company pays interest on its bank promissory note monthly from
current cash flows. Management expects its financial position to continue to
improve during FY 1999 and to have increased working capital at fiscal year end
1999.
(c) Liquidity and Capital Resources
-------------------------------
Management believes the Company's liquidity at February 28, 1998, 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 FY 1999.
Capital expenditures are expected to be less than $750,000 in FY 1999. 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, 1997 the Company signed a First Amendment to 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 payable monthly (8.50% at February 28, 1998). The
note is collateralized by substantially all of the assets of the Company. At
February 28, 1998 the Company had available $2,624,000 under this credit
agreement.
Effective June 30, 1996 the Company signed a Restated Credit and Security
Agreement with State Bank which provided a $9,000,000 line of credit. 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 payable monthly (8.25% at February 28, 1997). 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. Payments were made from
current cash flows.
The Company obtained and uses the credit facility to fund routine
operations. Payments are made from current cash flows. The Company is
negotiating to renew this facility when it matures June 30, 1998. 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 FY 1998.
Accounts receivable increased slightly in FY 1998, the result of increased sales
in the Publishing Division. The Company continued its emphasis on collection
efforts and the tightening of credit controls. The Company plans to continue to
maximize its collection efforts in order to maintain cash flows.
10
Inventories experienced a small increase during FY 1998. This is the result
of adding approximately 30 new titles and also adding new components for several
Kid Kits. The Company continues to monitor its inventory levels to ensure that
adequate levels are 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.
Other current liabilities decreased in FY 1998 as the direct result of
product which was shipped during FY 1998 but for which payment was received in
FY 1997. The revenue for these products was recognized in FY 1998 when the
product was shipped.
Cash used in investing activities during FY 1998 was primarily for
additional computer equipment.
The Company was able to pay down the bank promissory note during FY 1998 due
to improved cash flows during the year.
(d) New Accounting Standards
------------------------
Recent pronouncements of the Financial Accounting Standards Board, which are
not required to be adopted at this date, include Statement of Financial
Accounting Standards ("SFAS") No. 132, "Employers' Disclosure About Pensions and
Other Postretirement Benefits," SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," and SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 132 standardizes the disclosure requirements for pension and
other postretirement benefits. SFAS No. 131 requires that a public business
enterprise report financial and descriptive information about its reporting
segments on the same basis that it uses internally for evaluating segment
performance and deciding how to allocate resources to segments. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. To the extent
applicable, these statements were adopted by the Company effective March 1,
1998. The adoption of these statements will not have a material effect on the
Company's financial statements.
(e) Year 2000 Matters
-----------------
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
In FY 1996, the Company purchased new computer hardware and software which is
Year 2000 compliant. Management has determined that the Year 2000 issue will not
pose operational problems for its computer systems.
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issue.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
11
The total cost, if any, to the Company of these Year 2000 Compliance activities
has not been and is not anticipated to be material to its financial position or
results of operations in any given year.
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 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 28, 1998.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
(a) Identification of Directors
---------------------------
The information required by this item 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 July 23, 1998.
(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 56
President and Treasurer
W. Curtis Fossett Controller and 1989 52
Corporate Secretary
(c) Compliance With Section 16 (a) of the Exchange Act
--------------------------------------------------
The information required by this item 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 July 23, 1998.
Item 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information required by this item 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 July 23, 1998.
12
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------
MANAGEMENT
----------
The information required by this item 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 July 23, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information required by this item 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 July 23, 1998.
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, 1998
and 1997 F-2
Statements of Earnings - Years ended
February 28, 1998 and 1997
and February 29, 1996 F-3
Statements of Changes in Shareholders' Equity -
Years ended February 28, 1998 and
1997 and February 29, 1996 F-4 - F-5
Statements of Cash Flows -
Years ended February 28, 1998 and
1997 and February 29, 1996 F-6
Notes to Financial Statements F-7 - F-16
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).
13
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).
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).
14
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).
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 10.13 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 10.13 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 10.13 to Form 10-KSB dated February
28, 1995 (File No. 0-4957).
15
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 10.13 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 10.13 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).
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.
*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 27, 1998 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 27, 1998 /s/ Randall W. White
-----------------------------------
Randall W. White
Chairman of the Board
President, Treasurer and
Director
May 27, 1998 /s/ Robert D. Berryhill
-------------------------------------
Robert D. Berryhill, Director
May 27, 1998 /s/ G. Dean Cosgrove
-----------------------------------
G. Dean Cosgrove, Director
May 27, 1998 /s/ James F. Lewis
------------------------------------
James F. Lewis, Director
May 27, 1998 /s/ John M. Lare
-------------------------------------
John M. Lare, Director
May 27, 1998 By /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 28, 1998 and 1997, and the related statements of
earnings, shareholders' equity and cash flows for each of the three years in the
period ended February 28, 1998. 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 generally accepted auditing
standards. 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 28, 1998 and 1997,
and the results of its operations and its cash flows for each of the three years
in the period ended February 28, 1998 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
May 8, 1998
Tulsa, Oklahoma
F-1
EDUCATIONAL DEVELOPMENT CORPORATION
BALANCE SHEETS
FEBRUARY 28, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------
1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 171,549 $ 82,153
Accounts receivable, less allowances for doubtful accounts and
sales returns 2,128,012 2,032,688
Inventories - Net 10,402,230 10,048,457
Prepaid expenses and other assets 95,679 70,301
Income taxes receivable 51,092 124,092
Deferred income taxes 153,300 159,200
----------- -----------
Total current assets 13,001,862 12,516,891
PROPERTY AND EQUIPMENT - Net 595,638 848,478
----------- -----------
$13,597,500 $13,365,369
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 876,000 $ 2,010,000
Accounts payable 2,096,770 2,305,067
Accrued salaries and commissions 259,760 214,198
Other current liabilities 203,765 563,059
----------- -----------
Total current liabilities 3,436,295 5,092,324
DEFERRED INCOME TAXES 95,000 -
SHAREHOLDERS' EQUITY:
Common stock, $0.20 par value; Authorized 6,000,000 shares;
Issued 5,424,240 shares; Outstanding 5,232,138 (1998) and
5,200,697 (1997) shares 1,084,848 1,084,848
Capital in excess of par value 4,403,566 4,403,242
Retained earnings 5,070,823 3,418,431
----------- -----------
10,559,237 8,906,521
Less treasury stock, at cost (493,032) (633,476)
----------- -----------
10,066,205 8,273,045
----------- -----------
$13,597,500 $13,365,369
=========== ===========
See notes to financial statements.
F-2
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS
YEARS ENDED FEBRUARY 28, 1998 AND 1997, AND FEBRUARY 29, 1996
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
GROSS SALES $ 29,764,345 $ 31,547,007 $ 30,039,963
Less discounts and allowances (10,420,983) (10,307,500) (10,786,496)
------------ ------------ ------------
Net sales 19,343,362 21,239,507 19,253,467
COST OF SALES 7,771,311 8,396,060 8,155,725
------------ ------------ ------------
Gross margin 11,572,051 12,843,447 11,097,742
------------ ------------ ------------
OPERATING EXPENSES:
Operating and selling 3,389,317 3,883,438 3,138,851
Sales commissions 3,797,145 4,699,279 3,824,500
General and administrative 1,543,348 1,315,012 920,786
Interest 156,149 344,966 297,849
------------ ------------ ------------
8,885,959 10,242,695 8,181,986
------------ ------------ ------------
OTHER INCOME 127,376 33,436 2,279
------------ ------------ ------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 2,813,468 2,634,188 2,918,035
INCOME TAXES 1,108,900 1,004,100 1,112,700
------------ ------------ ------------
EARNINGS FROM CONTINUING OPERATIONS 1,704,568 1,630,088 1,805,335
DISCONTINUED OPERATIONS, NET OF TAX:
Loss from operations - - (25,637)
Loss on disposal - - (300,984)
------------ ------------ ------------
- - (326,621)
------------ ------------ ------------
NET EARNINGS $ 1,704,568 $ 1,630,088 $ 1,478,714
============ ============ ============
BASIC AND DILUTED EARNINGS PER SHARE:
Basic:
Earnings from continuing operations $ 0.33 $ 0.31 $ 0.40
Discontinued operations - - (0.07)
------------ ------------ ------------
Net earnings $ 0.33 $ 0.31 $ 0.33
============ ============ ============
Diluted:
Earnings from continuing operations $ 0.32 $ 0.31 $ 0.34
Discontinued operations - - (0.06)
------------ ------------ ------------
Net earnings $ 0.32 $ 0.31 $ 0.28
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING:
Basic 5,216,076 5,214,264 4,553,658
------------ ------------ ------------
Diluted 5,338,188 5,353,938 5,338,834
------------ ------------ ------------
See notes to financial statements.
F-3
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED FEBRUARY 28, 1998 AND 1997, AND FEBRUARY 29, 1996
- --------------------------------------------------------------------------------------------------------------------
COMMON STOCK
(PAR VALUE $.20 PER SHARE)
------------------------------
NUMBER OF
CAPITAL IN
SHARES EXCESS OF RETAINED
ISSUED AMOUNT PAR VALUE EARNINGS
BALANCE, MARCH 1, 1995 2,344,120 $ 468,824 $4,569,125 $ 309,629
Exercise of options at $6.25/share 25,000 5,000 151,250 -
Exercise of options at $3.00/share 5,000 1,000 14,000 -
Exercise of options at $2.75/share 30,000 6,000 76,500 -
Exercise of options at $1.875/share 15,000 3,000 25,125 -
Exercise of options at $1.25/share 15,000 3,000 15,750 -
Exercise of options at $0.50/share 265,000 53,000 79,500 -
Issuance of treasury stock - - (87) -
Purchase of treasury stock - - - -
Sales of treasury stock - - - -
Net earnings - - - 1,478,714
Effect of two-for-one stock split (Note 9) 2,699,120 539,824 (539,824) -
---------- ---------- ---------- ----------
BALANCE, FEBRUARY 29, 1996 5,398,240 1,079,648 4,391,339 1,788,343
Exercise of options at $0.25/share 20,000 4,000 1,000 -
Exercise of options at $1.50/share 6,000 1,200 7,800 -
Issuance of treasury stock - - 3,103 -
Purchase of treasury stock - - - -
Sales of treasury stock - - - -
Net earnings - - - 1,630,088
---------- ---------- ---------- ----------
TREASURY STOCK
---------------------------- SHARE-
NUMBER OF HOLDERS'
SHARES AMOUNT EQUITY
BALANCE, MARCH 1, 1995 85,873 $ (74,974) $5,272,604
Exercise of options at $6.25/share - - 156,250
Exercise of options at $3.00/share - - 15,000
Exercise of options at $2.75/share - - 82,500
Exercise of options at $1.875/share - - 28,125
Exercise of options at $1.25/share - - 18,750
Exercise of options at $0.50/share - - 132,500
Issuance of treasury stock (100) 87 -
Purchase of treasury stock 22,575 (523,048) (523,048)
Sales of treasury stock (4,977) 70,493 70,493
Net earnings - - 1,478,714
Effect of two-for-one stock split (Note 9) 103,371 - -
---------- ---------- ----------
BALANCE, FEBRUARY 29, 1996 206,742 (527,442) 6,731,888
Exercise of options at $0.25/share - - 5,000
Exercise of options at $1.50/share - - 9,000
Issuance of treasury stock (3,840) 10,738 13,841
Purchase of treasury stock 32,975 (242,730) (242,730)
Sales of treasury stock (12,334) 125,958 125,958
Net earnings - - 1,630,088
---------- ---------- ----------
(continued)
F-4
COMMON STOCK
(PAR VALUE $.20 PER SHARE)
------------------------------
NUMBER OF CAPITAL IN
SHARES EXCESS OF RETAINED
ISSUED AMOUNT PAR VALUE EARNINGS
BALANCE, FEBRUARY 28, 1997 5,424,240 1,084,848 4,403,242 3,418,431
Issuance of treasury stock - - 324 -
Purchase of treasury stock - - - -
Sales of treasury stock - - - -
Dividends paid - - - (52,176)
Net earnings - - - 1,704,568
---------- ---------- ---------- ----------
BALANCE, FEBRUARY 28, 1998 5,424,240 $1,084,848 $4,403,566 $5,070,823
========== ========== ========== ==========
TREASURY STOCK
---------------------------- SHARE-
NUMBER OF HOLDERS'
SHARES AMOUNT EQUITY
BALANCE, FEBRUARY 28, 1997 223,543 (633,476) 8,273,045
Issuance of treasury stock (700) 2,069 2,393
Purchase of treasury stock 15,900 (85,364) (85,364)
Sales of treasury stock (46,641) 223,739 223,739
Dividends paid - - (52,176)
Net earnings - - 1,704,568
---------- ---------- -----------
BALANCE, FEBRUARY 28, 1998 192,102 $(493,032) $10,066,205
========== ========== ===========
See notes to financial statements.
(concluded)
F-5
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 1998 AND 1997, AND FEBRUARY 29, 1996
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,704,568 $ 1,630,088 $ 1,478,714
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 296,803 252,113 126,697
Deferred income taxes 100,900 9,100 88,700
Provision for doubtful accounts and sales returns 862,900 1,225,000 1,250,900
Recovery of obsolete inventory reserve (150,913) - -
Stock issued for awards 2,393 4,251 -
Changes in assets and liabilities:
Accounts and income taxes receivable (885,224) (273,973) (2,450,713)
Inventories (202,860) 1,951,416 (5,106,474)
Prepaid expenses and other assets (25,378) 44,462 (36,815)
Accounts payable and accrued expenses (522,029) (787,856) 320,979
----------- ------------ -----------
Total adjustments (523,408) 2,424,513 (5,806,726)
----------- ------------ -----------
Net cash provided by (used in) operating 1,181,160 4,054,601 (4,328,012)
activities ----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (43,963) (275,639) (577,847)
----------- ------------ -----------
Net cash used in investing activities (43,963) (275,639) (577,847)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 8,484,900 7,130,000 11,820,000
Payments under revolving credit agreement (9,618,900) (10,940,000) (7,000,000)
Principal payments on capital lease obligations - - (7,673)
Cash received from exercise of stock options - 14,000 64,952
Cash received from sale of stock 223,739 125,958 70,493
Cash paid to acquire treasury stock (85,364) (242,730) (154,875)
Dividends paid (52,176) - -
----------- ------------ -----------
Net cash provided by (used in) financing (1,047,801) (3,912,772) 4,792,897
activities ----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 89,396 (133,810) (112,962)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 82,153 215,963 328,925
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 171,549 $ 82,153 $ 215,963
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 164,519 $ 368,051 $ 264,462
=========== ============ ===========
Cash paid for income taxes $ 935,000 $ 766,769 $ 1,259,022
=========== ============ ===========
See notes to financial statements.
F-6
EDUCATIONAL DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 1998 AND 1997, AND FEBRUARY 29, 1996
1. SUMMARY OF SIGNFICANT ACCOUNTING POLICIES
Nature of Business - Educational Development Corporation (the "Company")
distributes books and publications through its Publishing and Home Business
Divisions. In July 1996, the Company's Library Division ceased operations and
responsibility for sales to this market segment was taken over by the Home
Business Division. The Company is the United States ("U.S.") distributor 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 generally accepted accounting principles 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.
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.
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-7
Earnings Per Share - Earnings per share are computed using the weighted average
number of common shares outstanding during the year. The Company has applied
the provisions of Statement of Financial Accounting Standards No. 128 "Earnings
Per Share" to all periods presented.
The following reconciles the diluted earnings per share:
YEAR ENDED
---------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1997 1996
DILUTED EARNINGS PER SHARE:
Net earnings applicable to common shareholders $1,704,568 $1,630,088 $1,478,714
========== ========== ==========
SHARES:
Weighted average shares outstanding - basic 5,216,076 5,214,264 4,553,658
Assumed exercise of options 122,112 139,674 785,176
---------- ---------- ----------
5,338,188 5,353,938 5,338,834
========== ========== ==========
DILUTED EARNINGS PER SHARE:
Earnings from continuing operations $ 0.32 $ 0.31 $ 0.34
Discontinued operations $ - $ - $ (0.06)
---------- ---------- ----------
Net earnings $ 0.32 $ 0.31 $ 0.28
========== ========== ==========
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 average 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 has adopted the disclosure standards of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes a fair value method and
disclosure standards for stock-based employee compensation arrangements, such as
stock purchase plans and stock options. It also applies to transactions in
which an entity issues its equity instruments to acquire goods or services from
non-employees, requiring that such transactions be accounted for based on fair
value. As allowed by SFAS No. 123, the Company will continue to follow the
provisions of Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock-based employee compensation
arrangements.
New Accounting Standards - The Company plans to adopt the provisions of SFAS No.
130, "Reporting Comprehensive Income," in its 1999 fiscal year. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The Company
currently does not have any items of other comprehensive income.
F-8
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June, 1997. This statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131, effective for fiscal years
beginning after December 15, 1997, requires comparative information for previous
years to be restated to comply with SFAS No. 131's reporting requirements. The
Company currently does not expect adoption of this statement to have a material
effect on financial statement presentation or related footnote disclosures.
Reclassifications - Reclassifications were made to certain 1996 and 1997
balances to conform with the 1998 presentation.
2. DISCONTINUED OPERATIONS
Effective February 29, 1996, the Company discontinued its School Division.
Accordingly, the operating results of the School Division, which were not
material, are segregated and reported as discontinued operations in the
accompanying statement of earnings for the year ended February 29, 1996.
The estimated loss on disposal of $300,984, which is net of income tax benefits
of $169,000, includes the write-off of inventory, supplies and other assets.
3. INVENTORIES
Inventories consist of the following:
FEBRUARY 28,
---------------------------
1998 1997
Book inventory $10,552,417 $10,349,557
Reserve for obsolescence (150,187) (301,100)
----------- -----------
$10,402,230 $10,048,457
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the
following:
FEBRUARY 28,
--------------------------
1998 1997
Computer equipment $ 777,699 $ 757,982
Warehouse and office equipment 441,954 438,325
Furniture, fixtures and other 101,335 98,065
---------- ----------
1,320,988 1,294,372
Less accumulated depreciation and amortization (725,350) (445,894)
---------- ----------
$ 595,638 $ 848,478
========== ==========
F-9
During the year ended February 28, 1997, the Company acquired a vehicle with a
cost of $9,590 through the issuance of 3,390 shares of treasury stock.
Depreciation expense was $296,803, $252,113, and $126,697 for the fiscal years
ended February 28, 1998, 1997, and February 29, 1996, respectively.
5. NOTE PAYABLE
At February 28, 1998 and 1997, the note payable to bank was under a $3,500,000
and $9,000,000 revolving credit agreement, respectively, with interest payable
monthly at prime (8.50% and 8.25% at February 28, 1998 and 1997, respectively),
collateralized by substantially all assets of the Company. The revolving credit
agreement matures on June 30, 1998. At February 28, 1998, the Company had
available credit of $2,624,000 under the revolving credit agreement. The
agreement contains provisions that require the maintenance of specified
financial ratios, restrict transactions with related parties, prohibit mergers
or consolidation, prohibit declaration of dividends, disallow additional debt,
and limit the amount of compensation, salaries, investments, capital
expenditures and leasing transactions. The Company is in compliance or has
obtained waivers for all restrictive covenants. The Company intends to renew the
bank agreement or obtain other financing upon maturity.
For each of the three years in the period ended February 28, 1998, 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 28, FEBRUARY 28, FEBRUARY 29,
1998 1997 1996
Note payable to bank:
Largest amount borrowed $2,860,000 $5,850,000 $5,820,000
Average amount borrowed 1,766,813 4,061,250 3,183,333
Weighted average interest rate 8.5% 8.5% 9.4%
6. 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 28, 1998 and
1997 are as follows:
FEBRUARY 28,
--------------------------
1998 1997
Current:
Deferred tax assets:
Allowance for doubtful accounts $ 55,300 $ 35,200
Inventories 59,500 118,000
Expenses deducted on the cash basis
for income tax purposes 23,400 13,600
Change in accounting method 15,100 -
--------- --------
153,300 166,800
Deferred tax liability -
Property and equipment - (7,600)
--------- --------
Net deferred tax asset $ 153,500 $159,200
========= ========
F-10
Noncurrent:
Deferred tax asset -
Change in accounting method $ 15,100 $ -
Deferred tax liability -
Property and equipment (110,100) -
--------- --------
Net deferred tax liability $ (95,000) $ -
========= ========
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:
Year Ended
---------------------------------------------------
FEBRUARY 28, February 28, February 29,
1998 1997 1996
Income tax expense on continuing operations:
Current:
Federal $ 856,900 $ 845,800 $ 916,300
State 151,100 149,200 161,700
---------- ---------- ----------
1,008,000 995,000 1,078,000
Deferred:
Federal 85,800 7,700 29,500
State 15,100 1,400 5,200
---------- ---------- ----------
100,900 9,100 34,700
---------- ---------- ----------
1,108,900 1,004,100 1,112,700
Income tax benefit on discontinued operations:
From operations - - (16,000)
Loss on disposal - - (169,000)
---------- ---------- ----------
Total income tax expense $1,108,900 $1,004,100 $ 927,700
========== ========== ==========
The following reconciles the Company's expected income tax expense on continuing
operations utilizing statutory tax rates to the actual tax expense:
Year Ended
---------------------------------------------
FEBRUARY 28, FEBRUARY 28, February 29,
1998 1997 1996
Tax expense at Federal statutory rate $ 957,000 $ 896,000 $ 992,000
State income tax, net of Federal tax benefit 116,000 105,000 114,700
Other 35,900 3,100 6,000
---------- ---------- ----------
$1,108,900 $1,004,100 $1,112,700
========== ========== ==========
F-11
7. 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 $27,113, $31,457, and $30,118 in fiscal years 1998, 1997, and 1996,
respectively.
8. COMMITMENTS
The Company leases its office and warehouse facilities under a noncancelable
operating lease which expires in February 1999. Future minimum rental
commitments of $225,960 at February 28, 1998 are payable during the year ended
February 28, 1999.
Total rent expense was approximately $225,960, $219,000, and $185,000 for the
fiscal years ended 1998, 1997, and 1996, respectively.
At February 28, 1998, the Company had outstanding commitments to purchase
inventory from its primary vendor totaling approximately $1,860,000.
9. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS
On December 20, 1995, the Company's Board of Directors declared a two-for-one
split of the Company's common stock in the form of a stock dividend for
shareholders of record as of April 1, 1996. On March 13, 1996, in a special
meeting of the stockholders, an increase in the number of authorized shares from
3,000,000 to 6,000,000 was approved. A total of 2,699,120 shares of common
stock were issued in connection with the split related to shares outstanding at
February 29, 1996. The stated par value of each share was not changed from
$0.20. A total of $539,824 was reclassified from the Company's capital in
excess of par value account to the Company's common stock account.
In October 1981, the Board of Directors adopted an Incentive Stock Option Plan
which expired in 1991; accordingly, no additional options will be granted under
the 1981 Plan.
In June 1992, the Board of Directors adopted the 1992 Incentive Stock Option
Plan. A total of 1,000,000 stock options are authorized to be granted under the
1992 Plan.
Options granted under either of the two Incentive Stock Option Plans,
collectively the "Incentive Plan," are exercisable up to ten years from the date
of grant. Options outstanding at February 28, 1998 expire in 2003 through 2007.
A summary of the status of the Company's Incentive Plan as of February 28, 1998,
February 28, 1997, and February 29, 1996 and changes during the years ended on
those dates is presented below:
1998 1997 1996
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at
Beginning of Year 309,800 $ 3.79 206,000 $ 2.55 906,000 $ 1.00
Granted 140,600 4.03 117,400 6.00 10,000 6.25
Exercised/Canceled (121,900) (6.02) (13,600) (4.01) (710,000) (0.62)
-------- ------ ------- ------ -------- ------
Outstanding at End
of Year 328,500 $ 3.06 309,800 $ 3.79 206,000 $ 2.55
======== ====== ======= ====== ======== ======
F-12
The following table summarizes information about stock options outstanding at
February 28, 1998:
NUMBER
RANGE OF OUTSTANDING WEIGHTED
EXERCISE AT FEBRUARY 28, AVERAGE REMAINING WEIGHTED AVERAGE
PRICES 1998 CONTRACTUAL LIFE EXERCISE PRICE
------ ------------- ---------------- --------------
(Years)
$1.375-$1.50 84,000 5 $ 1.41
$3.13 106,000 6 3.13
$4.00 138,500 9 4.00
------------- ---------------- --------------
328,500 8 $ 3.06
============= ================ ==============
All options outstanding are exercisable at February 28, 1998.
The Company applies Accounting Principals Board 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
of SFAS No. 123, the Company's net earnings and earnings per share for the years
ended February 28, 1998 and 1997 would have been reduced to the pro forma
amounts indicated below:
1998 1997
Net earnings - as reported $1,704,568 $1,630,088
========== ==========
Net earnings - pro forma $1,636,618 $1,375,088
========== ==========
Earnings per share - as reported:
Basic $ 0.33 $ 0.31
========== ==========
Diluted $ 0.32 $ 0.31
========== ==========
Earnings per share - pro forma:
Basic $ 0.31 $ 0.26
========== ==========
Diluted $ 0.31 $ 0.26
========== ==========
The fair value of options granted under the Incentive Plan were estimated on the
date of grant using the Black-Scholes option-pricing model. The following
weighted average assumptions were used for options granted in fiscal 1998: no
dividend yield, expected volatility of 54%, risk free interest rate of 6.2% and
expected lives of four years. The following weighted average assumptions were
F-13
used in fiscal 1997: no dividend yield, expected volatility of 76%, risk free
interest rate of 6% and expected lives of four years. The use of the fair value
method of SFAS No. 123 would not have had a significant impact on reported net
earnings and earnings per share for the year ended February 29, 1996.
Of the 710,000 option shares exercised in fiscal 1996, 660,000 shares with a
total option price of $368,173 were exercised by the transfer to the Company of
28,596 outstanding shares held by the option holders.
Additionally, at February 1992, options to purchase 80,000 shares of the
Company's common stock were outstanding. These options were issued to directors
and a stockholder who were not officers of the Company at exercise prices of
$0.25-$0.625. During August 1992, 40,000 of these options were exercised at an
option price of $0.625 per share, and the Company simultaneously reacquired the
common stock issued at a net cost to the Company of $7,500. During February
1996, 20,000 of these options were exercised at an option price of $0.25. The
remaining 20,000 of these options were exercised at an option price of $0.25 in
March 1996.
10. 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
28, 1998 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
1996 $105,000 $60,000 $(38,000) $127,000
1997 127,000 60,000 (95,100) 91,900
1998 91,900 60,000 (10,200) 141,700
Sales returns:
BALANCE AT AMOUNTS AMOUNTS BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
YEAR OF YEAR EXPENSE RESERVE OF YEAR
1996 $101,000 $1,190,900 $(1,190,900) $101,000
1997 101,000 1,165,000 (1,165,000) 101,000
1998 101,000 802,900 (802,900) 101,000
Inventory valuation:
BALANCE AT AMOUNTS AMOUNTS BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
YEAR OF YEAR EXPENSE RESERVE OF YEAR
1996 $301,100 $ - $ - $301,100
1997 301,100 - - 301,100
1998 301,100 - 150,913 150,187
F-14
Charges to certain expense accounts in continuing operations for each of the
three years in the period ended February 28, 1998 are shown below:
YEAR ENDED
------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1997 1996
Maintenance and repairs $30,919 $34,435 $ 48,199
Taxes other than payroll and income taxes 30,093 20,805 12,143
Advertising costs 83,865 84,501 170,573
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended February 28, 1998 and 1997:
FIRST SECOND THIRD FOURTH
YEAR ENDED FEBRUARY 28, 1998 QUARTER QUARTER QUARTER QUARTER
Net Sales $4,660,400 $5,266,600 $5,559,100 $3,857,262
---------- ---------- ---------- ----------
Gross Profit $2,794,500 $3,021,600 $3,395,700 $2,360,251
---------- ---------- ---------- ----------
Net Earnings $ 463,900 $ 480,800 $ 561,000 $ 198,868
========== ========== ========== ==========
Earnings Per Share:
Basic $ 0.09 $ 0.09 $ 0.11 $ 0.04
========== ========== ========== ==========
Diluted $ 0.09 $ 0.09 $ 0.10 $ 0.04
========== ========== ========== ==========
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding:
Basic 5,199,050 5,216,942 5,223,942 5,224,373
========== ========== ========== ==========
Diluted 5,311,310 5,336,927 5,363,886 5,340,628
========== ========== ========== ==========
FIRST SECOND THIRD FOURTH
YEAR ENDED FEBRUARY 28, 1997 QUARTER QUARTER QUARTER QUARTER
Net Sales $5,685,100 $5,029,700 $6,279,200 $4,245,507
---------- ---------- ---------- ----------
Gross Profit $3,396,200 $3,001,700 $3,923,400 $2,522,147
---------- ---------- ---------- ----------
Net Earnings $ 303,100 $ 357,700 $ 655,100 $ 314,188
========== ========== ========== ==========
Earnings Per Share:
Basic $ 0.06 $ 0.07 $ 0.13 $ 0.06
========== ========== ========== ==========
F-15
Diluted $ 0.06 $ 0.07 $ 0.12 $ 0.06
========== ========== ========== ==========
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding:
Basic 5,217,967 5,221,631 5,218,208 5,199,251
========== ========== ========== ==========
Diluted 5,373,763 5,354,880 5,344,697 5,342,411
========== ========== ========== ==========
* * * * * *
F-16