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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, 1999
[_] 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 14, 1999, 4,608,690 shares of common stock were
outstanding. The aggregate market value of the voting shares held by non-
affiliates of the registrant, based on 3,489,251 shares (total outstanding less
shares held by all officers, directors and 401(k) Plan) extended at the closing
market price on April 14, 1999, of these shares traded on the Nasdaq National
Market, was approximately $8,723,128.
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 29, 1999.
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........................... 12
Item 8. Financial Statements and Supplementary Data.......................................... 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 12
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 12
Item 11. Executive Compensation............................................................... 13
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 13
Item 13. Certain Relationships and Related Transactions....................................... 13
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 28, 1999
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 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") 1999 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 1999
------------------------------------------
There were no significant events during fiscal year 1999.
(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 distributor
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 59 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 59 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
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 and book fairs. The division
had approximately 3,400 consultants in 50 states at February 28, 1999.
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 1999 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.
(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, 1999, the Company had 69 full-time employees and 2 part-
time employees. The Company believes its relations with its employees to be
good.
5
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 expired February 28, 1999. The Company is presently negotiating a
renewal of this lease and continues to lease the facilities on a month-to-month
basis.
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 1999 and 1998, as reported by the National Association of
Securities Dealers, Inc., were as follows:
1999 1998
------------ ------------
Period High Low High Low
- ------ ---- --- ---- ---
1st Qtr... 5-5/8 4-3/8 6-3/8 4-3/4
2nd Qtr... 4-3/8 2-5/8 7 5-3/8
3rd Qtr... 2-7/8 2-3/16 8-1/4 5-9/16
4th Qtr... 3 2-3/16 6 4-1/32
The number of shareholders of record of EDC's common stock at April 14, 1999 was
1186.
The Company paid a $0.02 per share annual dividend during fiscal year 1999 and
paid a $0.01 per share annual dividend during fiscal year 1998. The Company
will pay a $0.02 per share annual dividend during fiscal year 2000.
6
Item 6. SELECTED FINANCIAL DATA
- ------- -----------------------
YEARS ENDED FEBRUARY 28 (29)
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Net Sales $16,671,385 $19,343,362 $21,239,507 $19,253,467 $12,353,257
----------- ----------- ----------- ----------- -----------
Earnings From Continuing
Operations (1) $ 1,297,493 $ 1,704,568 $ 1,630,088 $ 1,805,335 $ 1,163,647
----------- ----------- ----------- ----------- -----------
Net Earnings $ 1,297,493 $ 1,704,568 $ 1,630,088 $ 1,478,714 $ 1,171,786
----------- ----------- ----------- ----------- -----------
Earnings From Continuing
Operations Per Common Share
Basic $ .26 $ .33 $ .31 $ .40 $ .26
----------- ----------- ----------- ----------- -----------
Diluted $ .26 $ .32 $ .31 $ .34 $ .22
----------- ----------- ----------- ----------- -----------
Net Earnings Per Common Share
Basic $ .26 $ .33 $ .31 $ .33 $ .26
----------- ----------- ----------- ----------- -----------
Diluted $ .26 $ .32 $ .31 $ .28 $ .22
----------- ----------- ----------- ----------- -----------
Total Assets $12,339,594 $13,597,500 $13,365,369 $16,422,068 $ 9,665,378
----------- ----------- ----------- ----------- -----------
Long Term Obligations -- -- -- -- $ 1,000,000
----------- ----------- ----------- ----------- -----------
Cash Dividends Declared
Per Common Share $ .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 1999
- -------
The Home Business Division's sales decreased 17.3% during FY 1999 when
compared with FY 1998. 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 for its field sales force an excellent compensation program
which is competitive with industry leaders. New and exciting incentive programs
are being planned for FY 2000 as well as several travel contests and regional
training seminars throughout the country. The Home Business Division's third
National Seminar will be held in June 1999. Management is hopeful that the 2
year decline in net sales has been halted.
7
The Publishing Division's net sales decreased 9.4% in FY 1999 when compared
with FY 1998. This decline in net sales can be 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 has 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 will increase sales opportunities in FY 2000. The gift market
has considerable potential for the Company and the Company has increased its
gift trade show schedule by 50% to take advantage of this opportunity. The
Company has an aggressive in-house telephone sales force which maintains contact
with over 10,000 customers. During FY 1999 the telesales force opened up 637
new accounts compared with 525 during FY 1998. 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 3,098 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. For these reasons management is
optimistic that the Publishing Division can maintain its market share.
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. Management believes its percentage of
cost of sales during FY 2000 will remain consistent with FY 1999.
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. Management
expects operating and selling expenses to be approximately 11% to 13% of gross
sales for FY 2000.
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 has 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. Management expects sales
commissions will be approximately 13% to 15% of gross sales for FY 2000.
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. Management expects general and
administrative expenses for FY 2000 will be approximately 4.5% to 5.5% of gross
sales.
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.
8
FY 1998
- -------
The Home Business Division's sales decreased 17.0% during FY 1998 when
compared with FY 1997. 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 second National Seminar was held in July
1998.
The Publishing Division's sales increased 9.4% in FY 1998 over FY 1997.
Sales nationwide in the juvenile paperback market declined over 18%. The
Company attributed the increase in sales to an increase in volume and in market
penetration. Orders increased in size with larger quantities per order as well
as multiple titles per order. The Company's aggressive in-house telephone sales
force maintained 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 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
3,000 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 attended several
major national trade shows throughout the year to further enhance product
visibility.
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.
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.
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.
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.
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.
9
(b) Financial Position
------------------
Working capital was $9.8 million for fiscal year end 1999 and $9.6 million
for fiscal year end 1998. Reduced payables and short-term bank debt contributed
to the working capital increase at fiscal year end 1999. 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 28, 1999, 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
2000. Capital expenditures are expected to be less than $750,000 in fiscal year
2000. 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, 1998 the Company signed a Second 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, 1999. The note bears interest at the Wall Street
Journal prime floating rate payable monthly (7.75% at February 28, 1999). The
note is collateralized by substantially all of the assets of the Company. At
February 28, 1999 the Company had $756,000 in borrowings and a $50,000 letter of
credit issued under the revolving credit agreement. Available credit under the
revolving credit agreement was $2,694,000 at February 28, 1999.
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, 1999. 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
1999. Accounts receivable decreased during fiscal year 1999, the result of
lower sales in the Publishing Division and the Company's emphasis on collections
and the tightening of credit controls. The Company plans to continue to
maximize its collection efforts in order to maintain cash flows.
Inventory levels declined 8.4% from fiscal year end 1998 to fiscal year end
1999, 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.
Cash used in investing activities during fiscal year 1999 was primarily for
additional computer equipment and additions to the warehouse flow rack shipping
system.
The Company was able to pay down the bank promissory note during fiscal
year 1999 due to improved cash flows during the year.
During the year the Company continued the stock buyback program by
purchasing 376,832 share of its common stock at a cost of $1,277,186. The
Company paid a divided of $0.02 per share or $101,892.
10
(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, 2000. 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 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.
The Company has evaluated its software applications, systems software,
information technology ("IT") system and its non-IT systems. Management has
determined that the various computer programs the Company uses in its operations
are Year 2000 compliant. These programs include the following: inventory;
accounts receivable; accounts payable; general ledger; shipping; order entry.
The Informix database engine which runs these programs is not Year 2000
compliant. The Company has acquired the necessary programs to bring the
Informix database engine to Year 2000 compliance and has been installing and
testing these programs in its test environment. The Company expects this
procedure to be completed by June 1, 1999, at which time these programs will
then be installed on the Company's main system. The Company expects to have
this completed by October 1, 1999. Y2K costs are estimated to be less than
$50,000.
The Company has received assurances from its primary supplier, Usborne
Publishing LTD, that Usborne Publishing LTD will be year 2000 compliant before
the end of 1999.
The Company relies on third-party suppliers for products and services,
including telecommunications and shipping. The Company will be adversely
impacted if these suppliers of products and services do not make necessary
changes to their own systems in a timely and successful manner. There could be
circumstances in which the Company would be unable to receive customer orders,
ship product, invoice customers or collect payments.
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 these other third-party companies
will be timely converted.
The Company is unable to determine the financial impact, if any, to the
Company should some or all of its third-party suppliers be unable to become Year
2000 compliant in a timely manner. The Company relies highly on the
telecommunications industry and the transportation (shipping) industry. It is
highly unlikely that all the major service providers in these two industries
would fail to become Year 2000 compliant in a timely manner. However, should
this worst case scenario occur, the Company would be unable to receive orders
or ship product.
The Company has not yet established a contingency plan, but intends to
formulate one to address the adverse effects should its major third-party
suppliers incur Year 2000 problems. The Company intends to have this
contingency plan formulated by July 1999.
11
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 28, 1999.
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 29, 1999.
(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 57
President and Treasurer
W. Curtis Fossett Controller and 1989 53
Corporate Secretary
Michael L. Puhl* Vice President - Operations 1998 43
*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.
12
(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 29, 1999.
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 29, 1999.
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
29, 1999.
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 29, 1999.
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.
13
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).
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).
14
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).
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).
15
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).
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.
*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 19, 1999 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 19, 1999 /s/ Randall W. White
------------------------------------
Randall W. White
Chairman of the Board
President, Treasurer and
Director
May 19, 1999 /s/ Robert D. Berryhill
-------------------------------------
Robert D. Berryhill, Director
May 19, 1999 /s/ G. Dean Cosgrove
-------------------------------------
G. Dean Cosgrove, Director
May 19, 1999 /s/ James F. Lewis
-------------------------------------
James F. Lewis, Director
May 19, 1999 /s/ John M. Lare
-------------------------------------
John M. Lare, Director
May 19, 1999 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, 1999 and 1998, and the related statements of
earnings, shareholders' equity and cash flows for each of the three years in the
period ended February 28, 1999. 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, 1999 and 1998,
and the results of its operations and its cash flows for each of the three years
in the period ended February 28, 1999 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
April 19, 1999
Tulsa, Oklahoma
F-1
EDUCATIONAL DEVELOPMENT CORPORATION
BALANCE SHEETS
FEBRUARY 28, 1999 AND 1998
- --------------------------------------------------------------------------------
ASSETS 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $ 210,931 $ 171,549
Accounts receivable, less allowances for doubtful accounts and
sales returns 1,842,616 2,128,012
Inventories - Net 9,546,674 10,402,230
Prepaid expenses and other assets 220,032 95,679
Income taxes receivable 55,077 51,092
Deferred income taxes 121,800 153,300
----------- -----------
Total current assets 11,997,130 13,001,862
PROPERTY AND EQUIPMENT - Net 342,464 595,638
----------- -----------
$12,339,594 $13,597,500
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 756,000 $ 876,000
Accounts payable 1,095,771 2,230,651
Accrued salaries and commissions 242,582 259,760
Other current liabilities 149,563 69,884
----------- -----------
Total current liabilities 2,243,916 3,436,295
DEFERRED INCOME TAXES 56,300 95,000
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock, $0.20 par value; Authorized 6,000,000 shares;
Issued 5,429,240 (1999) and 5,424,240 (1998) shares;
Outstanding 4,873,254 (1999) and 5,232,138 (1998) shares 1,085,848 1,084,848
Capital in excess of par value 4,410,066 4,403,566
Retained earnings 6,266,424 5,070,823
----------- -----------
11,762,338 10,559,237
Less treasury stock, at cost (1,722,960) (493,032)
----------- -----------
10,039,378 10,066,205
----------- -----------
$12,339,594 $13,597,500
=========== ===========
See notes to financial statements.
F-2
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS
YEARS ENDED FEBRUARY 28, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
GROSS SALES $25,889,212 $ 29,764,345 $ 31,547,007
Less discounts and allowances (9,217,827) (10,420,983) (10,307,500)
----------- ------------ ------------
Net sales 16,671,385 19,343,362 21,239,507
COST OF SALES 6,724,539 7,771,311 8,396,060
----------- ------------ ------------
Gross margin 9,946,846 11,572,051 12,843,447
----------- ------------ ------------
OPERATING EXPENSES:
Operating and selling 3,118,179 3,389,317 3,883,438
Sales commissions 3,308,551 3,797,145 4,699,279
General and administrative 1,619,635 1,543,348 1,315,012
Interest 96,427 156,149 344,966
----------- ------------ ------------
8,142,792 8,885,959 10,242,695
----------- ------------ ------------
OTHER INCOME 117,339 127,376 33,436
----------- ------------ ------------
EARNINGS BEFORE INCOME TAXES 1,921,393 2,813,468 2,634,188
INCOME TAXES 623,900 1,108,900 1,004,100
----------- ------------ ------------
NET EARNINGS $ 1,297,493 $ 1,704,568 $ 1,630,088
=========== ============ ============
BASIC AND DILUTED EARNINGS
PER SHARE:
Basic $ 0.26 $ 0.33 $ 0.31
=========== ============ ============
Diluted $ 0.26 $ 0.32 $ 0.31
=========== ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT SHARES
OUTSTANDING:
Basic 5,036,574 5,216,076 5,214,264
=========== ============ ============
Diluted 5,098,167 5,338,188 5,353,938
=========== ============ ============
See notes to financial statements.
F-3
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED FEBRUARY 28, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
COMMON STOCK
(PAR VALUE $.20 PER SHARE)
------------------------
NUMBER OF CAPITAL IN TREASURY STOCK
-----------------------
SHARES EXCESS OF RETAINED NUMBER OF SHAREHOLDERS'
ISSUED AMOUNT PAR VALUE EARNINGS SHARES AMOUNT EQUITY
BALANCE, MARCH 1, 1996 5,398,240 $1,079,648 $4,391,339 $1,788,343 206,742 $ (527,442) $ 6,731,888
Exercise of options at $0.25/share 20,000 4,000 1,000 - - - 5,000
Exercise of options at $1.50/share 6,000 1,200 7,800 - - - 9,000
Issuance of treasury stock - - 3,103 - (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 - - 1,630,088
--------- ---------- ---------- ---------- -------- ----------- -----------
BALANCE, FEBRUARY 28, 1997 5,424,240 1,084,848 4,403,242 3,418,431 223,543 (633,476) 8,273,045
Issuance of treasury stock - - 324 - (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 ($0.01/share) - - - (52,176) - - (52,176)
Net earnings - - - 1,704,568 - - 1,704,568
--------- ---------- ---------- ---------- -------- ----------- -----------
BALANCE, FEBRUARY 28, 1998 5,424,240 1,084,848 4,403,566 5,070,823 192,102 (493,032) 10,066,205
Exercise of options at $1.50/share 5,000 1,000 6,500 - - - 7,500
Issuance of treasury stock - - - - (400) 1,240 1,240
Purchase 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) - - (101,892)
Net earnings - - - 1,297,493 - - 1,297,493
--------- ---------- ---------- ---------- -------- ----------- -----------
BALANCE, FEBRUARY 28, 1999 5,429,240 $1,085,848 $4,410,066 $6,266,424 555,986 $(1,722,960) $10,039,378
========= ========== ========== ========== ======== =========== ===========
See notes to financial statements.
F-4
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,297,493 $ 1,704,568 $ 1,630,088
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 308,805 296,803 252,113
Write off of asset 535 - -
Deferred income taxes (7,200) 100,900 9,100
Provision for doubtful accounts and sales returns 1,277,201 862,900 1,225,000
Recovery of obsolete inventory reserve - (150,913) -
Stock issued for awards 1,240 2,393 4,251
Changes in assets and liabilities:
Accounts and income taxes receivable (995,790) (885,224) (273,973)
Inventories 855,556 (202,860) 1,951,416
Prepaid expenses and other assets (124,353) (25,378) 44,462
Accounts payable and accrued expenses (1,072,379) (522,029) (787,856)
----------- ----------- ------------
Total adjustments 243,615 (523,408) 2,424,513
----------- ----------- ------------
Net cash provided by operating activities 1,541,108 1,181,160 4,054,601
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (56,166) (43,963) (275,639)
----------- ----------- ------------
Net cash used in investing activities (56,166) (43,963) (275,639)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 7,000,000 8,484,900 7,130,000
Payments under revolving credit agreement (7,120,000) (9,618,900) (10,940,000)
Cash received from exercise of stock options 7,500 - 14,000
Cash received from sale of stock 46,018 223,739 125,958
Cash paid to acquire treasury stock (1,277,186) (85,364) (242,730)
Dividends paid (101,892) (52,176) -
----------- ----------- ------------
Net cash used in financing activities (1,445,560) (1,047,801) (3,912,772)
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 39,382 89,396 (133,810)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 171,549 82,153 215,963
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 210,931 $ 171,549 $ 82,153
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 98,482 $ 164,519 $ 368,051
=========== =========== ============
Cash paid for income taxes $ 779,000 $ 935,000 $ 766,769
=========== =========== ============
See notes to financial statements.
F-5
EDUCATIONAL DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT 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.
ACCOUNTS RECEIVABLE - Accounts receivable at February 28, 1999 and 1998,
include approximately $148,000 and $65,000, 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.
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.
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 and common share equivalents outstanding which include, where
appropriate, the assumed exercise of options. In computing diluted EPS the
Company has utilized the treasury stock method.
F-6
The following reconciles the diluted earnings per share:
Year Ended February 28,
-------------------------------------------
1999 1998 1997
DILUTED EARNINGS PER SHARE:
Net earnings applicable to common shareholders $ 1,297,493 $ 1,704,568 $ 1,630,088
============ ============ ============
SHARES:
Weighted average shares outstanding - basic 5,036,574 5,216,076 5,214,264
Assumed exercise of options 61,593 122,112 139,674
------------ ------------ ------------
5,098,167 5,338,188 5,353,938
============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.26 $ 0.32 $ 0.31
============ ============ ============
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 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, 2000. The Company
is currently evaluating SFAS No. 133, but does not expect its adoption will
have a material impact on its consolidated financial statements.
RECLASSIFICATIONS - Reclassifications were made to certain 1998 balances to
conform with the 1999 presentation.
F-7
2. INVENTORIES
Inventories consist of the following:
FEBRUARY 28,
-----------------------------
1999 1998
Book inventory $ 9,670,406 $ 10,552,417
Reserve for obsolescence (123,732) (150,187)
------------ ------------
$ 9,546,674 $ 10,402,230
============ ============
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
FEBRUARY 28,
---------------------------
1999 1998
Computer equipment $ 802,899 $ 777,699
Warehouse and office equipment 471,438 441,954
Furniture, fixtures and other 101,335 101,335
----------- ----------
1,375,672 1,320,988
Less accumulated depreciation and amortization (1,033,208) (725,350)
----------- ----------
$ 342,464 $ 595,638
=========== ==========
4. NOTE PAYABLE
The note payable to bank is under a $3,500,000 revolving credit agreement,
with interest payable monthly at prime (7.75% and 8.50% at February 28,
1999 and 1998, respectively), collateralized by substantially all assets of
the Company, maturing on June 30, 1999. At February 28, 1999, the Company
had $756,000 in borrowings and a $50,000 letter of credit issued under the
revolving credit agreement. Available credit under the revolving credit
agreement was $2,694,000 at February 28, 1999. 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.
For each of the three years in the period ended February 28, 1999, 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,
---------------------------------------
1999 1998 1997
Note payable to bank:
Largest amount borrowed $ 2,306,000 $ 2,860,000 $ 5,850,000
Average amount borrowed 1,343,549 1,766,813 4,061,250
Weighted average interest rate 8.3% 8.5% 8.5%
F-8
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 28, 1999 and 1998 are as follows:
FEBRUARY 28,
-------------------------------
1999 1998
Current:
Deferred tax assets:
Allowance for doubtful accounts $ 34,600 $ 55,300
Inventories 48,300 59,500
Expenses deducted on the cash basis for income tax purposes 23,400 23,400
Change in accounting method 15,500 15,100
------------ ------------
Deferred tax asset $ 121,800 $ 153,300
============ ============
Noncurrent:
Deferred tax asset - Change in accounting method $ - $ 15,100
Deferred tax liability - Property and equipment (56,300) (110,100)
------------ ------------
Net deferred tax liability $ (56,300) $ (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,
-----------------------------------------
1999 1998 1997
Current:
Federal $ 536,500 $ 856,900 $ 845,800
State 94,600 151,100 149,200
----------- ----------- -----------
631,100 1,008,000 995,000
Deferred:
Federal (6,100) 85,800 7,700
State (1,100) 15,100 1,400
----------- ----------- -----------
(7,200) 100,900 9,100
----------- ----------- -----------
Total income tax expense $ 623,900 $ 1,108,900 $ 1,004,100
=========== =========== ===========
F-9
The following reconciles the Company's expected income tax expense utilizing
statutory tax rates to the actual tax expense:
YEAR ENDED FEBRUARY 28,
------------------------------------------------
1999 1998 1997
Tax expense at federal statutory rate $653,000 $ 957,000 $ 896,000
State income tax, net of federal tax benefit 66,000 116,000 105,000
Other (95,100) 35,900 3,100
-------- ---------- ----------
$623,900 $1,108,900 $1,004,100
======== ========== ==========
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 $27,291, $27,113 and $31,457 in fiscal years 1999, 1998 and 1997,
respectively.
7. COMMITMENTS
The Company leases its office and warehouse facilities under a noncancelable
operating lease which expired in February 1999. Total rent expense related
to these leases was $225,960, in both fiscal 1999 and 1998 and $219,000 for
fiscal 1997.
At February 28, 1999, the Company had outstanding commitments to purchase
inventory from its primary vendor totaling approximately $1,548,000.
8. 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, 1999 expire in 2003
through 2009.
F-10
A summary of the status of the Company's Incentive Plan as of February 28,
1999, 1998 and 1997 and changes during the years ended on those dates is
presented below:
1999 1998 1997
------------------------ -------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at
Beginning of Year 328,500 $ 3.06 309,800 $ 3.79 206,000 $ 2.55
Granted 171,700 4.34 140,600 4.03 117,400 6.00
Exercised/canceled (10,200) (2.77) (121,900) (6.02) (13,600) (4.01)
------- ------ -------- ------ ------- ------
Outstanding at End of Year 490,000 $ 3.51 328,500 $ 3.06 309,800 $ 3.79
======= ====== ======== ====== ======= ======
The following table summarizes information about stock options outstanding at
February 28, 1999:
NUMBER
RANGE OF OUTSTANDING WEIGHTED
EXERCISE AT FEBRUARY, 28 AVERAGE REMAINING WEIGHTED AVERAGE
PRICES 1999 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE
-------- --------------- ------------------------ ----------------
$1.375-$1.50 79,000 4 $ 1.41
$2.50 15,000 9 $ 2.50
$3.13 106,000 5 $ 3.13
$3.81 21,500 9 $ 3.81
$4.00 133,300 8 $ 4.00
$4.63 135,200 9 $ 4.63
---------- --- ------
490,000 8 $ 3.51
========== === ======
All options outstanding are exercisable at February 28, 1999.
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 28, 1999, 1998 and 1997 would have been reduced
to the pro forma amounts indicated below:
1999 1998 1997
Net earnings - as reported $1,297,493 $1,704,568 $1,630,088
========== ========== ==========
Net earnings - pro forma $1,104,347 $1,636,618 $1,375,088
========== ========== ==========
Earnings per share - as reported:
Basic $ 0.26 $ 0.33 $ 0.31
========== ========== ==========
Diluted $ 0.26 $ 0.32 $ 0.31
========== ========== ==========
Earnings per share - pro forma:
Basic $ 0.22 $ 0.31 $ 0.26
========== ========== ==========
Diluted $ 0.22 $ 0.31 $ 0.26
========== ========== ==========
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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
weighted average 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; and 1997, no dividend yield, expected volatility of 76%, risk free
interest rate of 6% and expected lives of four years.
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.
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 28, 1999 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
1997 $127,000 $60,000 $ (95,100) $ 91,900
1998 91,900 60,000 (10,200) 141,700
1999 141,700 66,000 (119,144) 88,556
Sales returns:
BALANCE AT AMOUNTS AMOUNTS BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
YEAR OF YEAR EXPENSE RESERVE OF YEAR
1997 $101,000 $1,165,000 $(1,165,000) $101,000
1998 101,000 802,900 (802,900) 101,000
1999 101,000 1,211,201 (1,211,201) 101,000
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Inventory valuation:
BALANCE AT AMOUNTS AMOUNTS BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
YEAR OF YEAR EXPENSE RESERVE OF YEAR
1997 $301,100 $ - $ - $301,100
1998 301,100 - (150,913) 150,187
1999 150,187 33,545 (60,000) 123,732
Charges to certain expense accounts for each of the three years in the
period ended February 28, 1999 are shown below:
YEAR ENDED FEBRUARY 28,
-------------------------------
1999 1998 1997
Maintenance and repairs $33,515 $ 30,919 $34,435
Taxes other than payroll and
income taxes 31,079 30,093 20,805
Advertising costs 51,730 83,865 84,501
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended February 28, 1999 and 1998:
BASIC DILUTED
EARNINGS EARNINGS
NET SALES GROSS PROFIT NET INCOME PER SHARE PER SHARE
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
=========== =========== ========== ========= =========
1998
First quarter $ 4,660,400 $ 2,794,500 $ 463,900 $ 0.09 $ 0.09
Second quarter 5,266,600 3,021,600 480,800 0.09 0.09
Third quarter 5,559,100 3,395,700 561,000 0.11 0.10
Fourth quarter 3,857,262 2,360,251 198,868 0.04 0.04
----------- ----------- ---------- --------- ---------
Total year $19,343,362 $11,572,051 $1,704,568 $ 0.33 $ 0.32
=========== =========== ========== ========= =========
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
F-13
specialty wholesalers and an internal telesales group. The UBAH Division
markets its product line through a network of independent sales consultants
through a combination of direct sales, home shows, and book fairs.
The accounting policies of the segments are the same as those 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 28, 1999, 1998
and 1997 is set forth below:
PUBLISHING UBAH OTHER TOTAL
1999
Net sales from 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 from 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
1997
Net sales from external customers $7,864,910 $12,932,176 $ 442,421 $21,239,507
Earnings before income taxes 2,687,492 3,150,704 (3,204,008) 2,634,188
******
F-14