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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, 20012002
[ ] 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 17, 2001, 3,917,0002002, 3,835,117 shares of common stock were outstanding.
The aggregate market value of the voting shares held by non-affiliates of the
registrant, based on 2,772,7122,715,223 shares (total outstanding less shares held by all
officers, directors and 401(k) Plan) extended at the closing market price on
April 17, 2001,2002, of these shares traded on the Nasdaq National Market, was
approximately $8,124,046.$19,006,561.
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 26, 2001.July 2, 2002.
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TABLE OF CONTENTS
FACTORS AFFECTING FORWARD LOOKING STATEMENTS.........................................................3STATEMENTS...................................................................3
PART I
Item 1. Business...................................................................................3Business............................................................................................3
Item 2. Properties.................................................................................6Properties..........................................................................................6
Item 3. Legal Proceedings..........................................................................6Proceedings...................................................................................6
Item 4. Submission of Matters to a Vote of Security Holders........................................6Holders.................................................6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................6Matters...............................6
Item 6. Selected Financial Data....................................................................7Data.............................................................................7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......7Operations...............7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................11Risk.........................................11
Item 8. Financial Statements and Supplementary Data...............................................11Data........................................................11
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......11Disclosure...............12
PART III
Item 10. Directors and Executive Officers of the Registrant........................................11Registrant.................................................12
Item 11. Executive Compensation....................................................................12Compensation.............................................................................12
Item 12. Security Ownership of Certain Beneficial Owners and Management............................12Management.....................................13
Item 13. Certain Relationships and Related Transactions............................................13Transactions.....................................................13
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................138-K...................................14
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EDUCATIONAL DEVELOPMENT CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED FEBRUARY 28, 20012002
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 be materially different
from anticipated results described in such statements. The Company's ability to
achieve such results is subject to certain risks and uncertainties. Such risks
and uncertainties include but are not limited to, product prices, continued
availability of capital and financing, and other factors affecting the Company's
business that may be beyond its control. Although Educational Development
Corporation believes that the expectations reflected by such forward looking
statements are reasonable based on information currently available to the
Company, no assurances can be given that such exceptions will prove to have been
correct.
PART 1
Item 1. BUSINESS
(a) General Development of Business
Educational Development Corporation ("EDC" or the "Company"), a
Delaware corporation with its principal office in Tulsa, Oklahoma, is the
exclusive trade publisher of a line of children's books produced in the United
Kingdom by Usborne Publishing Limited.
The Company was incorporated on August 23, 1965. The Company's original
corporate name was Tutor Tapes International Corporation of Delaware. Its name
was changed to International Teaching Tapes, Inc. on November 24, 1965, and
changed again to the present name on June 24, 1968.
During Fiscal Year ("FY") 20012002 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, direct sales and
internet 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 20012002
There were no significant events during fiscal year 2001.2002.
(b) Financial Information about Industry Segments
See part II, Item 8 - Financial Statements and Supplementary Data
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(c) Narrative Description of Business
(i) General
The principal product of both the Home Business Division ("Usborne
Books at Home" or "UBAH") and Publishing Division is a line of children's books
produced in the United Kingdom by Usborne Publishing Limited. The Company is the
sole United States trade publisher of these books. The Company currently offers
approximately 1,100 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 62Alternatively, 18 Kid Kits are also available in an attractive box package.
Currently 70 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 toonly one source for its products - 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
1,100 titles and 6270 Kid Kits through a combination of direct sales, home
parties, book fairs and the internet, 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 spent approximately $14,000 in fiscal year 2001 and
$120,000 in fiscal year 2000 in development of a new product, "Make Reading
Fun", a fully interactive reading and phonics program. The Company began sales
of this product during the last quarter of FY 2001.
(iv) Marketing
(a) Home Business Division
The Home Business Division markets through commissioned consultants
using a combination of direct sales, home parties, book fairs and the internet.
The division had approximately 4,9005,600 consultants in 50 states at February 28,
2001.2002.
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(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 10,0009,000 book, toy and specialty stores. Significant orders
totaling 29% of Publishing sales have been received from major book chains.
During fiscal year 20012002 the division continued to make further inroadsexpand into mass merchandising
outlets such as drug, department and discount stores.
(v) Competition
(a) Home Business Division
The Home Business Division faces significant competition from several
other direct selling companies which have more financial resources. Federal and
state funding cuts to schools affect the availability of funds to the school
libraries. The Company is unable to estimate the effect of these funding cuts on
the division's future sales to school libraries, because the magnitude of
funding cuts has yet to be determined by Congress. Management believes its
superior product line and consultant network will enable this division to be
highly competitive in its market area.
(b) Publishing Division
The Publishing Division faces strong competition from large U.S. and
international companies which have more financial resources. Industry sales of
juvenile paperbacks are over $753approaches $888 million annually. The Publishing Division's
sales are approximately 1.0%0.8% 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 its product line
will enable this division canto 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.season.
(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 )(none)
(ix) Employees
As of April 1, 2001,2002, the Company had 6065 full-time employees and 21
part-time employees.employee. The Company believes its relations with its employees to be
good.
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Item 2. PROPERTIES
The Company is located at 10302 E. 55th PL,Pl, Tulsa, Oklahoma. TheIn
January, 2002, the Company leasespurchased for $1.8 million the warehouse and office
facilities it formerly leased. These facilities contain approximately 80,400
square feet of office and warehouse space
under a five year renewable lease which expires June 30, 2004.space.
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 20012002 and 2000,2001, as reported by the National Association of
Securities Dealers, Inc., were as follows:
2002 2001
2000
-------------- ------------------------------- -----------------
Period High Low High Low
- ------------- ----- --------- ----- -----
1st Qtr...Qtr ......................... 3.688 2.92 3.50 2.469
2.75 2.375
2nd Qtr...Qtr ......................... 5.30 3.17 4.25 2.0 3.0 2.502.00
3rd Qtr...Qtr ......................... 5.75 4.55 4.125 3.0 4.969 3.03.00
4th Qtr...Qtr ......................... 7.39 5.28 4.00 3.0 4.0 2.6253.00
The number of shareholders of record of EDC's common stock at April 17, 20012002 was
1151.1,121.
The Company paid a $0.04 per share annual dividend during fiscal year 2002 and a
$0.02 per share annual dividend during fiscal year 2001 and
fiscal year 2000.2001. The Company plans to
pay a $0.02$0.04 per share annual dividend during fiscal year 2002.2003.
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Item 6. SELECTED FINANCIAL DATA
YEARS ENDED FEBRUARY 28 (29)
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2002 2001 2000 1999 1998
1997
----------- ----------- ----------- ----------- ------------------------- -------------- -------------- -------------- --------------
Net Sales ......................... $17,596,848 $16,851,261 $16,671,385 $19,343,362 $21,239,507
----------- ----------- ----------- ----------- -----------$ 20,554,451 $ 17,596,848 $ 16,851,261 $ 16,671,385 $ 19,343,362
-------------- -------------- -------------- -------------- --------------
Earnings From Continuing
Operations .....................$ 1,531,274 $ 1,090,262 $ 1,079,028 $ 1,297,493 $ 1,704,568
$ 1,630,088
----------- ----------- ----------- ----------- ------------------------- -------------- -------------- -------------- --------------
Earnings From Continuing Operations
Per Common Share
Basic ........................$ .40 $ .28 $ .25 $ .26 $ .33
-------------- -------------- -------------- -------------- --------------
Diluted $ .31
----------- ----------- ----------- ----------- -----------
Diluted .......................38 $ .27 $ .24 $ .26 $ .32
$ .31
----------- ----------- ----------- ----------- ------------------------- -------------- -------------- -------------- --------------
Total Assets ...................... $12,471,650 $12,340,022 $12,339,594 $13,597,500 $13,365,369
----------- ----------- ----------- ----------- -----------$ 14,169,798 $ 12,471,650 $ 12,340,022 $ 12,339,594 $ 13,597,500
-------------- -------------- -------------- -------------- --------------
Cash Dividends Declared
Per Common Share ...............$ .04 $ .02 $ .02 $ .02 $ .01
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----------- ----------- ----------- ----------- ------------------------- -------------- -------------- -------------- --------------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(a) Results of Operations
FY 2002
The Home Business Division's net sales increased 28.8% during FY 2002
when compared with FY 2001. Each quarter of FY 2002 recorded a sales increase
when compared with the same quarter of FY 2001. A quarterly comparison of FY
2002 versus FY 2001 shows the first quarter up 28.7%, the second quarter up
42.4%, the third quarter up 22.5% and the fourth quarter up 26.6%. The Company
attributes these increases to the fact that the number of consultants selling
increased 28% during FY 2002. The Company continued offering its leadership
skills seminars throughout FY 2002. These seminars are designed to help
supervisors build their business and the seminars proved to be very popular with
these supervisors. The Home Business Division will hold its Sixth National
Convention in June, 2002, in Tulsa, Oklahoma. Management is optimistic that this
division will continue in FY 2003 the growth trend experienced in FY 2002.
The Publishing Division's net sales increased slightly in FY 2002 when
compared with FY 2001. Increased marketing efforts contributed to the sales
increase. The Company has an aggressive in-house sales force which maintains
contact with over 9,000 customers. During FY 2002, the telesales force opened
547 new accounts compared with 679 new accounts in FY 2001. 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 250
titles. The second rack is a four-sided rack with three levels which will hold
between 50 and 60 of the Company's Kid Kits. There were 3,545 of these
attractive racks in retail stores throughout the country at the end of FY 2002
compared with 3,428 at the end of FY 2001. The Company attends major national
trade shows throughout the country to further enhance product visibility. The
trend of prior years in which smaller independent book stores and gift stores
closed due to intense competition from larger chains continues. However, this
trend appears to be slowing. Our in-house telesales force, which contacts
smaller independent stores, reported a slight sales increase during FY 2002. Our
field representatives had a slight sales decrease during FY 2002. Sales to the
national chains continue to dominate the bookstore market. The Company's sales
to these national chains increased 4.5% during FY 2002. The Company plans to
continue its aggressive approach to the national chains in the areas of
cooperative advertising, joint promotional efforts and institutional advertising
in trade publications. Significant potential for growth exists with the national
chains and the Company is strongly committed to increasing these sales. For
these reasons, management is optimistic that the Publishing Division can
maintain its market share.
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Cost of sales increased 11.4% during FY 2002 when compared with FY
2001. Cost of sales as a percentage of gross sales was 26.7% for both FY 2002
and FY 2001. Cost of sales as a percentage of gross sales will fluctuate
depending upon the product mix being sold. Management expects the cost of sales
percentage for FY 2003 will remain consistent with FY 2002.
Operating and selling expenses increased 12.8% during FY 2002 when
compared with FY 2001. As a percentage of gross sales, these costs were 12.2%
for FY 2002 and 12.1% for FY 2001. Contributing to the increase in operating and
selling expenses were increased payroll costs and higher freight costs.
Increased credit card costs and increased marketing costs in the Home Business
Division, the result of increased sales, also contributed to the increase.
Management expects operating and selling expenses to be approximately 11% to 13%
of gross sales in FY 2003.
Sales commission increased 30.0% during FY 2002 when compared with FY
2001. As a percentage of gross sales, these costs were 16.0% in FY 2002 and
13.7% in FY 2001. Sales commissions as a percentage of gross sales is determined
by the product mix sold and the division that makes the sale. Commission expense
in the Publishing Division remained unchanged between FY 2002 and FY 2001.
Commission expense in the Home Business Division increased 30.9%, the result of
increased sales and the higher commission structure in the Home Business
Division.
General and administrative expenses increased 2.2% in FY 2002 versus FY
2001. As a percentage of gross sales, these expenses were 4.8% in FY 2002 and
5.3% in FY 2001. An increase in materials and supplies contributed to the
increase in general and administrative expenses.
Interest expense declined 80.6% in FY 2002 when compared with FY 2001.
As a percentage of gross sales, interest expense was 0.07% in FY 2002 and 0.4%
in FY 2001. The Company's note payable to the bank was paid off August 29, 2001.
This along with lower borrowings during the first six months of FY 2002 and
lower interest rates contributed to lower interest expense in FY 2002.
FY 2001
The Home Business Division's net sales increased 15.2% during FY 2001
when compared with FY 2000. Each quarter of FY 2001 recorded a sales increase
when compared with the same quarter of FY 2000. The last two quarters of FY 2001
were especially strong when compared with the same two quarters last year. Net
sales for the third quarter of FY 2001 increased 18.5% over the third quarter of
FY 2000 while net sales for the fourth quarter of FY 2001 increased 32.7% over
the fourth quarter of FY 2000. The Company attributesattributed this increase to several
factors including a 36% increase in the number of active consultants at the end
of FY 2001 when compared with FY 2000. In August, 2001 the major competitor of
the Home Business Division ceased operations. The Company signed up slightly
over 1,000 of this former competitor's sales representatives. The sales by these
consultants made a significant contribution to total net sales during the last
six months of FY 2001. Throughout FY 2001 the Company offered several leadership
skills seminars designed to help supervisors build their business. These
seminars proved to be very popular with the supervisors and a large number of
them participated. The Home Business Division's fifth National Convention will
bewas
held in May 2001.
Management is optimistic that this division will continue
the growth trend experienced in FY 2001.
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The Publishing Division's net sales declined 7.6% in FY 2001 when
compared with FY 2000. Decreased volumes contributed to the decline in net
sales. The Company has anCompany's aggressive in-house telephone sales force which maintainsmaintained
contact with over 10,000 customers. During FY 2001, the telesales force opened
679 new accounts compared with 675 new accounts in FY 2000. The Company offersoffered
two display racks to assist stores in displaying the Company's products. One iswas
a six-foot rack with five adjustable shelves which can hold approximately 250
titles. The second rack iswas a four-sided rack with three levels which will hold
between 50 and 60 of the Company's Kid Kits. There were 3,428 of these
attractive racks in retail stores throughout the country at the end of FY 2001
compared with 3,307 at the end of FY 2000. The Company attendsattended major national
trade shows throughout the country to further enhance product visibility. In
recent years, numerous independent book and gift stores have been closed due to
increased competition from larger chains. During the past year, this trend
appearsappeared to be changing in a favorable manner. In-house marketing, which
contacts smaller independent stores, reflected an actual increase in sales in
fiscal year 2001. Our field representatives had a sales decrease, but reported
that their account base was finally stabilizing. These developments have the
potential to reflect positively on future sales. National chains continue,
however, to dominate the bookstore market. In order to increase our presence
with the national chains the Company is takingtook a more aggressive approach in the
areas of cooperative advertising, joint promotional efforts and institutional
advertising in trade publications. These efforts were initiated in the last
portion of fiscal year 2001 and will bewere dramatically increaseincreased in fiscal year 2002.
The initial response to these efforts has beenwas encouraging. There is significant
potential with national chains, and the Company is strongly committed to
increasing these sales. For these reasons, Management is optimistic that the
Publishing Division can maintain its market share.
Cost of sales increased 4.3% during FY 2001 when compared with FY 2000.
Cost of sales as a percentage of gross sales was 26.7% in FY 2001 and 26.2% in
FY 2000. Cost of sales as a percentage of gross sales fluctuates with the mix of
product sold during a given year. Management believes the cost of sales
percentage for FY 2002 will remain consistent with FY 2001.
Operating and selling expenses increased 2.2% during FY 2001 when
compared with FY 2000. As a percentage of gross sales, these costs were 12.1%
for both FY 2001 and FY 2000. Contributing to the increase in operating and
selling expenses was $130,000 non-recurring charge related to recruiting
expenses in the Home Business Division. Increased credit card costs in the Home
Business Division, the result of increased sales, also contributed to the
increase. Offsetting these increases were decreases in depreciation expense and
payroll costs. Management expects operating and selling expenses to be approximately 11%
to 13% of gross sales in FY 2002.
Sales commissions increased 14.6% during FY 2001 when compared to FY
2000. As a percentage of gross sales, these costs were 13.7% in FY 2001 compared
with 12.3% in FY 2000. Sales commissions as a percentage of gross sales is
determined by the product mix sold and the division which makes the sale.
Commission expense in the Publishing Division declined 10.8% for FY 2001, the
result of a decline in that division's net sales. Offsetting this decline was an
increase in the Home Business Division's commission expense of 15.5% during FY
2001, the result of increased sales and the higher commission structure in the
Home Business Division.
General and administrative expenses decreased 12.4% in FY 2001 when
compared with FY 2000. As a percentage of gross sales, these expenses were 5.3%
and 6.1% for FY 2001 and FY 2000, respectively. A decrease in depreciation
expense contributed to the decrease in general and administrative expenses for
FY 2001.
Interest expense increased 131.1% in FY 2001 when compared with FY
2000. As a percentage of gross sales, interest expense was 0.4% in FY 2001 and
0.2% in FY 2000. Higher interest rates and increased borrowings throughout the
year contributed to the increase in interest expense.
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FY 2000
The Home Business Division's net sales increased slightly during FY
2000 when compared with FY 1999. The months of January and February 2000 were
especially strong when compared with the same two months last year. During the
past two years, this division had experienced sales declines which the Company
believes was primarily due to a reduction in the compensation structure made in
October 1996. This change was not well received by the field sales force. In
June 1997 and May 1998 the Company made enhancements to the compensation
program. The Company believes its compensation program is competitive with
industry leaders. The division will offer during FY 2001 new and exciting
incentive programs as well as several travel contests and regional training
seminars throughout the country. The Company believes these programs will help
attract new consultants as well as retain existing consultants. The Home
Business Division introduced a leadership skills program for supervisors. The
Home Business Division's fourth National Convention was held in June 2000.
The Publishing Division's net sales increased 2.1% in FY 2000 when
compared with FY 1999. Increased volumes and increased market penetration
contributed to the increase in net sales. The Company's aggressive in-house
telephone sales force maintained contact with over 12,000 customers. During FY
2000 the telesales force opened up 675 new accounts compared with 637 new
accounts opened in FY 1999. The Company 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 250 titles. The second rack is a
four-sided rack with three levels which will hold between 50 and 60 of the
Company's Kid Kits. There were 3,307 of these attractive racks in retail stores
throughout the country at the end of FY 2000 compared with 3,098 at the end of
FY 1999. National chains continued to dominate the bookstore market, resulting
in fewer independent bookstores. The closing of these independent bookstores, an
important market to the Company, had a negative impact on sales. To counter
this, the Company last year restructured sales and marketing coverage on the
national chains in order to increase market share. Independent toy retailers
have also experienced increased competition from national chains, resulting in
lower sales in this market segment. The gift market has considerable potential
for the Company and the Company continued to develop its presence in this
segment of the book market. The Company attended many major national trade shows
throughout the country to further enhance product visibility.
Cost of sales increased 3.9% for FY 2000 when compared with FY 1999.
Cost of sales as a percentage of gross sales was 26.2% in FY 2000 versus 26.0%
for FY 1999. Cost of sales as a percentage of gross sales fluctuates with the
mix of products sold during a given year.
Operating and selling expenses increased 3.4% during FY 2000 when
compared with FY 1999. As a percent of gross sales, these costs were 12.1% for
FY 2000 compared with 12.0% in FY 1999. Higher freight costs, the result of
increases in sales and an increase in rates by the delivery carrier, contributed
to increased operating and selling costs for both the Publishing Division and
the Home Business Division. Increased credit card fees in the Home Business
Division, the direct result of increased sales, also contributed to the increase
in operating and selling expenses.
Sales commissions declined 1.3% during FY 2000 when compared with FY
1999. As a percentage of gross sales, these costs were 12.3% in FY 2000 compared
to 12.8% for FY 1999. Sales commissions as a percentage of gross sales is
determined by the product mix sold and the division that makes the sale. While
net sales in the Publishing Division increased during FY 2000, the Division's
commission expense decreased 45%, the result of the changing sales market from
independent bookstores to the national chains. Offsetting this decline in
commission expense was an increase in sales commission expense in the Home
Business Division, the result of an increase in sales and a higher commission
structure than offered in the Publishing Division.
General and administrative expenses increased less than 1.0% during FY
2000 when compared with FY 1999. As a percentage of gross sales, these expenses
were 6.1% and 6.3% for FY 2000 and FY 1999 respectively. General and
administrative expenses are not always directly affected by sales, so comparison
of these expenses as a percentage of gross sales can be misleading. An increase
in depreciation expense in the MIS department contributed to the increase in
general and administrative expenses.
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Interest expense declined 52.9% in FY 2000 when compared with FY 1999.
As a percentage of gross sales, interest expense was 0.2% in FY 2000 versus 0.4%
for FY 1999. The decrease in interest expense during FY 2000 was the result of
lower borrowing levels due to improved cash flows during the year.
(b) Financial Position
Working capital was $8.1$7.5 million for fiscal year end 20012002 and $7.6$8.1 million
forat fiscal year end 2000. An increase in inventory and2001. The net effect of a decrease in inventory, an increase
in accounts payable and the elimination of short-term bank debt contributed toresulted in the
increasedecrease in working capital at fiscal year end 2001. The Company pays interest on its bank promissory note monthly
from current cash flows.2002. 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, 2001, to be2002, is
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
2002.2003. Capital expenditures are expected to be less than $750,000 induring fiscal
year 2002.2003. These expenditures would consist primarily of software and hardware
enhancements to the Company's existing data processing equipment, leaseholdproperty
improvements and additions to equipment in the warehouse shipping system.warehouse.
Effective June 30, 20002001 the Company signed a FirstSecond Amendment to the
Restated Credit
and Security Agreement with State Bank which provides a $3,500,000 line of
credit. The line of credit is evidenced by a promissory note in the amount of
$3,500,000 payable June 30, 2001.2002. The note bears interest at the Wall Street
Journal prime floating rate minus 0.25% payable monthly (8.25%(4.50% at February 28,
2001)2002). The note is collateralized by substantially all of the assets of the
Company. At February 28, 20012002 the Company had $1,084,000 in
borrowings.no borrowings outstanding.
Available credit under the revolving credit agreement was $2,416,000$3,500,000 at February
28, 2001.2002.
The Company obtained and uses the credit facility to fund routine
operations. Payments are made from current cash flows. The Company plans to
renew this facility when it matures on June 30, 2001.2002. The Company believes its
borrowing capacity under this line to be adequate for the next several years.anticipated operating
levels.
The Company generated cash from operating activities during fiscal year
2001.2002. Accounts receivable decreasedincreased during fiscalthe year 2001, the result of lower
salesas several large orders in
the Publishing Division.Division were received in January and February, and the
Publishing Division offered special dating terms during the fourth quarter with
payment due during the first quarter of fiscal year 2003. The Company plans to
continue to maximize its collection efforts in order to maintain cash flows.flows
during fiscal year 2003.
Inventory levels increased 5.9%declined 11.2% from fiscal year end 20002001 to fiscal year
end 2001 as new titles were added to2002, the product line.result of the timing of deliveries from the Company's principal
supplier. The Company continues to monitor 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 eachnext year.
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, theThe Company expects accounts payable will alsoto increase moderately eachnext year.
Management anticipates cash flows from operating activities to increase in the
foreseeable future.
Cash used in investing activities during fiscal year 20012002 was primarily tofor
the acquisition of the Company's office and warehouse facility which previously
had been leased. The Company did not incur any debt in this purchase additional computer equipment and software.but used
cash reserves generated by the increased sales in the Home Business Division.
The short-term bank loan decreased during fiscal yearwas paid off in August, 2001, due tousing cash generated
by increased sales in the Home Business Division, whose sales are primarily
cash.
10
11
During the year the Company continued the stock buyback program by
purchasing 289,252139,603 shares of its common stock at a cost of $856,215.$634,752. The Company
paid a divided of $0.02$0.04 per share or $78,779.$154,175.
10
(d) Critical Accounting Policies
Management continually estimates and calculates the amount of
non-current inventory. The inventory arises due to the Company occasionally
purchasing book inventory in quantities in excess of what will be sold within
the normal operating cycle due to minimum order requirements of the Company's
primary supplier. These non-current inventory quantities are estimated by
management using the historical inventory turnover rates by title and were
$817,500 and $1,051,600 at February 28, 2002 and 2001, respectively.
Management also estimates a reserve for obsolete inventory based on
inventory turnover rates and market conditions. Management has estimated and
included a reserve for obsolesce for both current and non-current inventory of
$179,990 and $92,990 as of February 28, 2002 and 2001, respectively.
Management also estimates a reserve for sales returns. The Company's
sales return policy allows the customer to return all purchases for an exchange
or refund for up to 30 days after the customer receives the item. Management has
estimated and included a reserve for sales returns of $101,000 as of February
28, 2002 and 2001. The reserve for sales returns is estimated by management
using historical sales returns data.
These critical accounting polices represent the best estimate of
management. Actual results could vary significantly and have a material impact
on the financial position of the Company.
(e) New Accounting Standards
Effective March 1,In June 2001 the Company adoptedFASB issued Statement of Financial Accounting (SFAS)
No 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes141, Business Combinations. SFAS No. 141 addresses financial accounting and
reporting standards for derivative
instruments, including certain derivative instruments embeddedbusiness combinations and supersedes Accounting Principals Board
(APB) opinion No. 16, Business Combinations, and FASB No. 38, Accounting for
Preacquisition Contingencies for Purchased Enterprises. All business
combinations in the scope of SFAS No. 141 are to be accounted for using one
method, the purchase method. The Company adopted SFAS No. 141 effective July 1,
2001, as required; however, the Company has not entered into any business
combinations since the effective date of the statement.
(f) Accounting Standards Issued But Not Yet Adopted
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other contractsassets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition. This statement also addresses how goodwill and other
intangible assets should be accounted for hedging activities. It requires that all derivatives beafter they have been initially
recognized in the financial statements. The Company will adopt SFAS No. 142 in
its 2003 financial statements, as eitherrequired. Since the Company has no material
intangible assets or liabilities ingoodwill, Management believes adoption of this new standard
will have no impact on the balance sheet and be measured
at fair value.Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets, which is effective for fiscal years
beginning after December 15, 2001. The Company currently does not hold any derivative instruments or
engage in hedging activities. Accordingly, thisadopted the provision of SFAS No.
144 as required on March 1, 2002. This standard had no effect on the Company's
financial statements upon adoption.
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 1718 hereof.
11
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, 2001.2002.
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 26, 2001
11
12July 2, 2002.
(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 5960
President and Treasurer
W. Curtis Fossett Controller and 1989 5556
Corporate Secretary
Michael L. Puhl*Puhl Vice President - Operations 1998 4546
Craig M. WhiteWhite* Vice President - Information Systems 2001 3233
*The prior business experience for this executive officer who has 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.
In April 2001, Craig M. White, son of Randall W. White, Chairman of the
Board, President and Chief Executive Officer, was elected Vice President of
Information Systems. Craig White graduated from Oklahoma State University in
December 1994 with a BS degree in Electrical and Computer Engineering. He joined
EDC in December 1994 as an Inventory Analyst. In July 1995 he was named Manager
- - Information Systems.
(c) Compliance With Section 16(a)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)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 26, 2001.July 2, 2002.
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 26, 2001.July 2, 2002.
12
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 26, 2001.
12
13July
2, 2002.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no relationships or related transactions required to be
disclosed.
13
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, 20012002
and February 29, 200028, 2001 F-2
Statements of Earnings - Years ended
February 28, 2002, February 28, 2001
and February 29, 2000 and
February 28, 1999 F-3
Statements of Shareholders' Equity -
Years ended February 28, 2002,
February 28, 2001 and February 29, 2000 and February 28, 1999 F-4
Statements of Cash Flows -
Years ended February 28, 2002,
February 28, 2001 and February 29, 2000 and February 28, 1999 F-5
Notes to Financial Statements F-6-F-14F-6-F-15
Schedules have been omitted as such information is either not required or is
included in the financial statements.
2. Exhibits
3.1 Restated Certificate of Incorporation of the Company
dated April 26, 1968, Certificate of Amendment there to
dated June 21, 1968 and By-Laws of the Company are
incorporated herein by reference to Exhibit 1 to
Registration Statement on Form 10 (File No. 0-4957).
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated August 27, 1977 and
By-Laws of the Company as amended are incorporated
herein by reference to Exhibits 20.1 and 20.2 to Form
10-K for fiscal year ended February 28, 1981 (File No.
0-4957).
3.3 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated November 17, 1986, is
incorporated herein by reference to Exhibit 3.3 to Form
10-K for fiscal year ended February 28, 1987 (File No.
0-4957).
13
14
3.4 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated March 22, 1996.
14
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).
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).
14
15
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).
15
10.10 First Amendment dated January 31, 1992 to Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa,
OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is
incorporated herein by reference to Exhibit 10.14 to
Form 10-K dated February 29, 1992 (File No. 0-4957).
10.11 Educational Development Corporation 1992 Incentive Stock
Option Plan is incorporated herein by reference to
Exhibit 4(c) to Registration Statement on Form S-8 (File
No. 33-60188)
10.12 Second Amendment dated June 30, 1992 to Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa,
OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is
incorporated herein by reference to Exhibit 10.12 to
Form 10-KSB dated February 28, 1994 (File No. 0-4957).
10.13 Third Amendment dated June 30, 1993 to Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa,
OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is
incorporated herein by reference to Exhibit 10.13 to
Form 10-KSB dated February 28, 1995 (File No. 0-4957).
10.14 Fourth Amendment dated June 30, 1994 to Loan Agreement
between the Company and State Bank & Trust, N.A, Tulsa,
OK, is incorporated herein by reference to Exhibit 10.14
to Form 10-KSB dated February 28, 1995 (File No.
0-4957).
10.15 Fifth Amendment dated March 13, 1995 to Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa,
OK, is incorporated herein by reference to Exhibit 10.15
to Form 10-KSB dated February 28, 1995 (File No.
0-4957).
10.16 Sixth Amendment dated March 27, 1995 to Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa,
OK, is incorporated herein by reference to Exhibit 10.16
to Form 10-KSB dated February 28, 1995 (File No.
0-4957).
10.17 Seventh Amendment dated April 27, 1995 to Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa,
OK, is incorporated herein by reference to Exhibit 10.17
to Form 10-KSB dated February 28, 1995 (File No.
0-4957).
10.18 Amendment dated February 28, 1995 to the Lease Agreement
by and between the Company and James D. Dunn, is
incorporated herein by reference to Exhibit 10.18 to
Form 10-KSB dated February 28, 1995 (File No. 0-4957).
15
16
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).
16
10.20 Restated Loan Agreement dated September 25, 1995 between
the Company and State Bank & Trust, N.A., Tulsa, OK, is
incorporated herein by reference to Exhibit 10.20 to
Form 10-KSB dated February 29, 1996 (File No. 0-4957).
10.21 Restated Loan Agreement dated June 10, 1996 between the
Company and State Bank & Trust, N.A., Tulsa, OK, is
incorporated herein by reference to Exhibit 10.21 to
Form 10-K dated February 28, 1997 (File No. 0-4957).
10.22 First Amendment dated June 30, 1997 to Restated Loan
Agreement between the Company and State Bank & Trust,
N.A., Tulsa, OK, is incorporated herein by reference to
Exhibit 10.22 to Form 10-K dated February 28, 1998 (File
No. 0-4957).
10.23 Second Amendment dated June 30, 1998 to Restated Loan
Agreement between the Company and State Bank & Trust,
N.A., Tulsa, OK, is incorporated herein by reference to
Exhibit 10.23 to Form 10-K dated February 28, 1999 (File
No. 0-4957).
10.24 Restated Loan Agreement dated June 30, 1999 between the
Company and State Bank & Trust, N.A., Tulsa, OK, is
incorporated herein by reference to Exhibit 10.24 to
Form 10-K dated February 29, 2000 (File No. 0-4957).
10.25 Lease agreement by and between the Company and James D.
Dunn dated July 1, 1999, is incorporated herein by
reference to Exhibit 10.25 to Form 10-K dated February
29, 2000 (File No. 0-4957).
*10.2610.26 First Amendment dated June 30, 2000 to Restated Loan
Agreement between the Company and State Bank & Trust,
N.A., Tulsa, OK, is incorporated herein by reference to
Exhibit 10.25 to Form 10-K dated February 28, 2001 (File
No. 0-4957).
*10.27 Second Amendment dated June 30, 2001 to Restated Loan
Agreement between the Company and State Bank & Trust,
N.A., Tulsa, OK.
*23. Independent Auditors' Consent
- ----------
*Filed* Filed Herewith
(b) No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
1617
17
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 8, 20016, 2002 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 8, 20016, 2002 /s/ Randall W. White
------------------------------------------------------------------------
Randall W. White
Chairman of the Board
President, Treasurer and
Director
May 8, 20016, 2002 /s/ Robert D. Berryhill
------------------------------------------------------------------------
Robert D. Berryhill, Director
May 8, 20016, 2002 /s/ Dean Cosgrove
------------------------------------------------------------------------
G. Dean Cosgrove, Director
May 8, 20016, 2002 /s/ James F. Lewis
------------------------------------------------------------------------
James F. Lewis, Director
May 8, 2001 /s/ John M. Lare
-------------------------------
John M. Lare, Director
May 8, 20016, 2002 /s/ W. Curtis Fossett
------------------------------------------------------------------------
W. Curtis Fossett
Principal Financial
and Accounting Officer
1718
18
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 (the "Company") as of February 28, 20012002 and February 29, 2000,2001, and the related
statements of earnings, shareholders' equity and cash flows for each of the
three years in the period ended February 28, 2001.2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at February 28, 20012002 and February 29, 2000,2001,
and the results of its operations and its cash flows for each of the three years
in the period ended February 28, 20012002 in conformity with accounting principles
generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
April 18, 20011, 2002
F-1
19
EDUCATIONAL DEVELOPMENT CORPORATION
BALANCE SHEETS
FEBRUARY 28, 20012002 AND FEBRUARY 29, 20002001
- --------------------------------------------------------------------------------
ASSETS 2002 2001 2000
CURRENT ASSETS:
Cash and cash equivalents $ 268,271906,889 $ 214,321268,271
Accounts receivable, less allowances for doubtful accounts and
sales returns $184,076 (2002) and $224,346 (2001) and $209,466 (2000)2,040,423 1,478,355 2,020,454
Income tax receivable -- 72,697 --
Inventories - Net 8,291,950 9,211,942 8,364,096
Prepaid expenses and other assets 218,341 247,126 220,381
Deferred income taxes 120,700 97,800 137,700
------------ ------------
Total current assets 11,578,303 11,376,191 10,956,952
INVENTORIES - Net 683,880 1,004,980
1,280,000
PROPERTY, PLANT AND EQUIPMENT - Net 1,907,615 84,179 85,270
DEFERRED INCOME TAXES 6,300 17,800
------------ ------------
$ 12,471,65014,169,798 $ 12,340,02212,465,350
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 1,084,000-- $ 1,278,0001,084,000
Accounts payable 3,380,102 1,703,151 1,681,601
Accrued salaries and commissions 352,756 325,661 258,123
Other current liabilities 244,846 118,711 102,966
Income tax payable 63,753 -- 46,923
------------ ------------
Total current liabilities 4,041,457 3,231,523 3,367,613
DEFERRED INCOME TAXES 24,300 --13,000 18,000
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock, $0.20 par value; Authorized 6,000,000 shares;
Issued 5,429,240 shares;
Outstanding 3,822,117 (2002) and 3,911,400 (2001) and 4,167,389 (2000) shares 1,085,848 1,085,848
Capital in excess of par value 4,417,507 4,413,627 4,410,066
Retained earnings 9,647,723 8,270,624 7,259,141
------------ ------------
15,151,078 13,770,099 12,755,055
Less treasury stock, at cost (5,035,737) (4,554,272) (3,782,646)
------------ ------------
10,115,341 9,215,827 8,972,409
------------ ------------
$ 12,471,65014,169,798 $ 12,340,02212,465,350
============ ============
See notes to financial statements.
F-2
20
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS
YEARS ENDED FEBRUARY 28, 2002 AND 2001, AND FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
2002 2001 2000 1999
GROSS SALES $ 30,457,695 $ 27,260,879 $ 26,613,943 $ 25,889,212
Less discounts and allowances (9,903,244) (9,664,031) (9,762,682) (9,217,827)
------------ ------------ ------------
Net sales 20,554,451 17,596,848 16,851,261 16,671,385
COST OF SALES 8,121,522 7,287,920 6,984,387 6,724,539
------------ ------------ ------------
Gross margin 12,432,929 10,308,928 9,866,874 9,946,846
------------ ------------ ------------
OPERATING EXPENSES:
Operating and selling 3,717,465 3,295,164 3,224,442
3,118,179
Sales commissions 4,867,970 3,743,954 3,266,733 3,308,551
General and administrative 1,463,631 1,432,030 1,634,027
1,619,635
Interest 20,343 104,925 45,401 96,427
------------ ------------ ------------
10,069,409 8,576,073 8,170,603 8,142,792
------------ ------------ ------------
OTHER INCOME 76,554 37,507 51,757 117,339
------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES 2,440,074 1,770,362 1,748,028
1,921,393
INCOME TAXES 908,800 680,100 669,000 623,900
------------ ------------ ------------
NET EARNINGS $ 1,531,274 $ 1,090,262 $ 1,079,028 $ 1,297,493
============ ============ ============
BASIC AND DILUTED EARNINGS
PER SHARE:
Basic $ 0.40 $ 0.28 $ 0.25 $ 0.26
============ ============ ============
Diluted $ 0.38 $ 0.27 $ 0.24 $ 0.26
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT SHARES
OUTSTANDING:
Basic 3,867,221 3,955,527 4,364,608 5,036,574
============ ============ ============
Diluted 4,061,956 4,042,642 4,426,836 5,098,167
============ ============ ============
See notes to financial statements.
F-3
21
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED FEBRUARY 28, 2002 AND 2001, AND FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
COMMON STOCK
(PAR VALUE $.20 PER SHARE)
---------------------------
Number of Capital in
Shares Excess of Retained
Issued Amount Par Value Earnings-------------------------- TREASURY STOCK
NUMBER OF CAPITAL IN --------------------------
SHARES EXCESS OF RETAINED NUMBER OF
ISSUED AMOUNT PAR VALUE EARNINGS SHARES AMOUNT
BALANCE, MARCH 1, 1998 5,424,2401999 5,429,240 $ 1,084,8481,085,848 $ 4,403,5664,410,066 $ 5,070,823
Exercise of options at $1.50/share 5,000 1,000 6,500 --6,266,424 555,986 $ (1,722,960)
Issuance of treasury stock -- -- -- -- (200) 600
Purchases of treasury stock -- -- -- -- 874,087 (2,516,232)
Sales of treasury stock -- -- -- -- Dividends paid ($0.02/share) -- -- -- (101,892)
Net earnings -- -- -- 1,297,493
------------ ------------ ------------ ------------
BALANCE, FEBRUARY 28, 1999 5,429,240 1,085,848 4,410,066 6,266,424
Issuance of treasury stock -- -- -- --
Purchases of treasury stock -- -- -- --
Sales of treasury stock -- -- -- --(168,022) 455,946
Dividends paid ($0.02/share) -- -- -- (86,311) -- --
Net earnings -- -- -- 1,079,028 -- --
--------- ------------ ------------ ------------ --------- ------------
BALANCE, FEBRUARY 29, 2000 5,429,240 1,085,848 4,410,066 7,259,141 1,261,851 (3,782,646)
Issuance of treasury stock -- -- -- -- (583) 1,700
Purchases of treasury stock -- -- -- -- 289,252 (856,215)
Sales of treasury stock -- -- 3,561 -- (32,680) 82,889
Dividends paid ($0.02/share) -- -- -- (78,779) -- --
Net earnings -- -- -- 1,090,262 -- --
--------- ------------ ------------ ------------ --------- ------------
BALANCE, FEBRUARY 28, 2001 5,429,240 1,085,848 4,413,627 8,270,624 1,517,840 (4,554,272)
Issuance of treasury stock -- -- 1,327 -- (1,000) 3,023
Purchases of treasury stock -- -- -- -- 139,603 (634,752)
Sales of treasury stock -- -- 18,480 -- (31,520) 95,812
Exercise of options ($1.50 - $3.00/
share) -- -- (15,927) -- (17,800) 54,452
Dividends paid ($0.04/share) -- -- -- (154,175) -- --
Net earnings -- -- -- 1,531,274 -- --
--------- ------------ ------------ ------------ --------- ------------
BALANCE, FEBRUARY 28, 2002 5,429,240 $ 1,085,848 $ 4,413,6274,417,507 $ 8,270,6249,647,723 1,607,123 $ (5,035,737)
========= ============ ============ ============ ========= ============
Treasury Stock
---------------------------
Number of Shareholders'
Shares Amount EquitySHAREHOLDERS'
EQUITY
BALANCE, MARCH 1, 1998 192,1021999 $ (493,032) $ 10,066,205
Exercise of options at $1.50/share -- -- 7,500
Issuance of treasury stock (400) 1,240 1,240
Purchases of treasury stock 376,832 (1,277,186) (1,277,186)
Sales of treasury stock (12,548) 46,018 46,018
Dividends paid ($0.02/share) -- -- (101,892)
Net earnings -- -- 1,297,493
------------ ------------ ------------
BALANCE, FEBRUARY 28, 1999 555,986 (1,722,960) 10,039,378
Issuance of treasury stock (200) 600 600
Purchases of treasury stock 874,087 (2,516,232) (2,516,232)
Sales of treasury stock (168,022) 455,946 455,946
Dividends paid ($0.02/share) -- -- (86,311)
Net earnings -- -- 1,079,028
------------ ------------
------------
BALANCE, FEBRUARY 29, 2000 1,261,851 (3,782,646) 8,972,409
Issuance of treasury stock (583) 1,700 1,700
Purchases of treasury stock 289,252 (856,215) (856,215)
Sales of treasury stock (32,680) 82,889 86,450
Dividends paid ($0.02/share) -- -- (78,779)
Net earnings -- -- 1,090,262
------------ ------------
------------
BALANCE, FEBRUARY 28, 2001 1,517,8409,215,827
Issuance of treasury stock 4,350
Purchases of treasury stock (634,752)
Sales of treasury stock 114,292
Exercise of options ($1.50 - $3.00/
share) 38,525
Dividends paid ($0.04/share) (154,175)
Net earnings 1,531,274
------------
BALANCE, FEBRUARY 28, 2002 $ (4,554,272) $ 9,215,827
============ ============10,115,341
============
See notes to financial statements.
F-4
22
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 2002 AND 2001, AND FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
2002 2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,531,274 $ 1,090,262 $ 1,079,028 $ 1,297,493
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 120,738 59,662 299,179 308,805
Loss on disposal of property and equipment -- -- 1,199 535
Deferred income taxes (27,900) 75,700 (90,000) (7,200)
Provision for doubtful accounts and sales returns 991,813 1,381,704 984,575 1,277,201
Stock issued for awards 4,350 1,700 600 1,240
Changes in assets and liabilities:
Accounts and income tax receivable (1,481,184) (912,302) (1,107,336)
(995,790)
Inventories 1,241,092 (572,826) (97,422) 855,556
Prepaid expenses and other assets (26,456) (26,745) (349) (124,353)
Accounts payable, accrued salaries and commissions,
and other current liabilities 1,830,181 104,833 554,774 (1,072,379)
Income tax payable 63,753 (46,923) 46,923 --
----------- ----------- -----------
Total adjustments 2,716,387 64,803 592,143 243,615
----------- ----------- -----------
Net cash provided by operating activities 4,247,661 1,155,065 1,671,171 1,541,108
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,888,933) (58,571) (43,184) (56,166)
----------- ----------- -----------
Net cash used in investing activities (1,888,933) (58,571) (43,184) (56,166)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit agreement 2,347,000 7,703,000 6,899,000 7,000,000
Payments on revolving credit agreement (3,431,000) (7,897,000) (6,377,000) (7,120,000)
Cash received from exercise of stock options 38,525 -- -- 7,500
Cash received from sale of treasury stock 114,292 86,450 455,946 46,018
Cash paid to acquire treasury stock (634,752) (856,215) (2,516,232)
(1,277,186)
Dividends paid (154,175) (78,779) (86,311) (101,892)
----------- ----------- -----------
Net cash used in financing activities (1,720,110) (1,042,544) (1,624,597) (1,445,560)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 638,618 53,950 3,390 39,382
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 268,271 214,321 210,931 171,549
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 906,889 $ 268,271 $ 214,321 $ 210,931
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 26,392 $ 105,348 $ 41,251 $ 98,482
=========== =========== ===========
Cash paid for income taxes $ 800,250 $ 724,020 $ 657,000 $ 779,000
=========== =========== ===========
See notes to financial statements.
F-5
23
EDUCATIONAL DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 2002 AND 2001, AND FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Educational Development Corporation (the "Company")
distributes books and publications through its Publishing and Usborne Books
at Home Divisions. The Company is the United States ("U.S.") trade
publisher of books and related matters, which are published primarily in
England and distributed 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 were prepared in conformity
with accounting principles generally accepted in the United States of
America, which requires management to make estimates and assumptions that
affect the amounts and disclosures in the financial statements. Actual
results could differ from these 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, 20012002 and February 29, 2000,2001,
include approximately $57,000$26,000 and $151,000,$57,000, respectively, due from directors
and related parties 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, PLANT AND EQUIPMENT - Property, plant 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.liabilities.
INCOME RECOGNITION - Sales are recorded when products are shipped. At the
time sales are recognized for certain products under specified conditions,
estimated 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 outstanding and dilutive potential
common shares issuable which include, where appropriate, the assumed
exercise of options. In computing diluted EPS the Company has utilized the
treasury stock method.
F-6
24
The following reconciles the diluted earnings per share:
YEAR ENDED
FEBRUARY 28, YEAR ENDED
YEAR ENDED
FEBRUARY 28,----------------------- FEBRUARY 29,
FEBRUARY 28,2002 2001 2000 1999
DILUTED EARNINGS PER SHARE:
Net earnings applicable to
common shareholders $1,531,274 $1,090,262 $1,079,028 $1,297,493
========== ========== ==========
SHARES:
Weighted average shares
outstanding - basic 3,867,221 3,955,527 4,364,608 5,036,574
Assumed exercise of options 194,735 87,115 62,228 61,593
---------- ---------- ----------
Weighted average shares
outstanding - diluted 4,061,956 4,042,642 4,426,836 5,098,167
========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.38 $ 0.27 $ 0.24 $ 0.26
========== ========== ==========
Stock options representing 249,600, 273,400 and 411,000273,400 of common shares for the
years ended 2001 and 2000, and 1999,respectively, were not included in calculation
of diluted earnings per share since the effect was antidilutive. There were
no stock options for the year ended 2002 excluded from the diluted earnings
per share calculation.
FAIR VALUE OF FINANCIAL INSTRUMENTS - For cash and cash equivalents,
accounts receivable and accounts payable, the carrying amount approximates
fair value because of the short maturity of those instruments. The fair
value of the Company's note payable to bank is estimated to approximate
carrying value based on the borrowing rates currently available to the
Company for bank loans with similar terms and maturities.
LONG-LIVED ASSET IMPAIRMENT - The Company reviews the value of long-lived
assets and certain identifiable intangibles for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable based on estimated future cash flows.
STOCK-BASED COMPENSATION - The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "AccountingAccounting 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, "AccountingAccounting for Stock-Based
Compensation."
NEW ACCOUNTING STANDARDSTANDARDS - Effective March 1,In June 2001 the Company adopted
Statement of Financial Accounting Standards ("SFAS")FASB issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which establishes141,
Business Combinations. SFAS No. 141 addresses financial accounting and
reporting standards for derivative instruments, including
certain derivative instruments embeddedbusiness combinations and supersedes APB Opinion No. 16,
Business Combinations, and FASB No. 38, Accounting for Preacquisition
Contingencies for Purchased Enterprises. All business combinations in the
scope of SFAS No. 141 are to be accounted for using one method, the
purchase method. The Company adopted SFAS No. 141 effective July 1, 2001,
as required; however, the Company has not entered into any business
combinations since the effective date of the statement.
F-7
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED - In June 2001, the FASB
issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142
addresses how intangible assets that are acquired individually or with a
group of other contractsassets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition.
This statement also addresses how goodwill and other intangible assets
should be accounted for hedging
activities. It requires that all derivatives beafter they have been initially recognized in the
financial statements. The Company will adopt SFAS No. 142 in its 2003
financial statements, as eitherrequired. Since the Company has no material
intangible assets or liabilities ingoodwill, management believes adoption of this new
standard will have no impact on the balance sheet and be measured at fair value.Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is effective for fiscal years
beginning after December 15, 2001. The Company currently does not hold any derivative instruments or engage
in hedging activities. Accordingly, thisadopted the provisions of
SFAS No. 144 as required on March 1, 2002. This standard had no effect on
the Company's financial statements upon adoption.
F-7
25RECLASSIFICATIONS - Certain prior year amounts have been reclassed to
conform with the 2002 presentation.
2. INVENTORIES
Inventories consist of the following:
FEBRUARY 28,
FEBRUARY 29,--------------------------
2002 2001 2000
Current:
Book inventory $ 9,258,3128,338,320 $ 8,487,8289,258,312
Reserve for obsolescence (46,370) (123,732)
------------ ------------(46,370)
----------- -----------
Inventories net - current $ 8,291,950 $ 9,211,942
$ 8,364,096
============ ======================= ===========
Non-current:
Book inventory $ 1,051,600817,500 $ 1,280,0001,051,600
Reserve for obsolescence (133,620) (46,620)
--
------------ ----------------------- -----------
Inventories net - non-current $ 683,880 $ 1,004,980
$ 1,280,000
============ ======================= ===========
The Company occasionally purchases book inventory in quantities in excess
of what will be sold within the normal operating cycle due to minimum order
requirements of the Company's primary supplier. These amounts are included
in non-current inventory.
F-8
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
ESTIMATED FEBRUARY 28,
FEBRUARY 29,USEFUL --------------------------
LIVES 2002 2001 2000
Land -- $ 250,000 $ --
Building 30 years 1,540,000 --
Machinery and equipment $2 - 5 years 1,439,057 1,349,715 $ 1,291,144
Furniture and fixtures 2 - 5 years 56,814 56,814
Leasehold improvements 2 - 5 years 67,778 67,778
------------ ----------------------- -----------
3,353,649 1,474,307 1,415,736
Less accumulated depreciation and amortization (1,446,034) (1,390,128)
(1,330,466)
------------ ----------------------- -----------
$ 1,907,615 $ 84,179
$ 85,270
============ ======================= ===========
4. NOTE PAYABLE
The note payable to bank is under a $3,500,000 revolving credit agreement,
with interest payable monthly at prime minus .25% (8.25% and 8.5% at February 28,
2001 and February 29, 2000, respectively)2001), collateralized by substantially all assets of the Company, maturing
on June 30, 2001.2002. At February 28, 2001, and February 29, 2000, the Company had borrowings of
$1,084,000 and $1,278,000, respectively, under the revolving credit agreement. There were no borrowings
outstanding under the revolving credit agreement at February 28, 2002.
Available credit under the revolving credit agreement was $2,416,000$3,500,000 at
February 28, 2001.2002. The agreement contains provisions that require the
maintenance ofCompany to maintain 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
all restrictive covenants except for loans due from
directors or executive officers, at February 28, 2001. The Company
obtained a debt waiver for the loans due from the directors or executive
officers at February 28, 2001.2002. The Company intends to
renew the bank agreement or obtain other financing upon maturity.
F-8
26
For each of the three years in the period ended February 28, 2001,2002, 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, YEAR ENDED
YEAR ENDED
FEBRUARY 28,------------------------ FEBRUARY 29,
FEBRUARY 28,2002 2001 2000 1999
Note payable to bank:
Largest amount borrowed $1,112,000 $1,733,000 $1,369,000 $2,306,000
Average amount borrowed 621,613 1,232,000 650,702 1,343,549
Weighted average interest rate 7.36% 9.0% 8.0% 8.3%
F-9
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.purposes. The tax
effects of significant items comprising the Company's net deferred tax
assets and liabilities as of February 28, 20012002 and February 29, 20002001 are as follows:
FEBRUARY 28,
FEBRUARY 29,----------------------
2002 2001 2000
Current:
Deferred tax assets:
Allowance for doubtful accounts $ 46,80031,600 $ 42,30046,800
Allowance for obsolescence 79,100 46,000 72,000
Expenses deducted on the cash basis for income
tax purposes 22,800 23,40022,800
Other 3,800 5,000
--
------------ --------------------- ---------
Deferred tax assetassets 137,300 120,600
137,700
------------ --------------------- ---------
Deferred tax liability - Software development (16,600) (22,800)
--
------------ --------------------- ---------
Deferred tax asset - Net $ 120,700 $ 97,800
$ 137,700
============ ===================== =========
Noncurrent:
Deferred tax asset -assets:
Property and equipment $ -- $ 6,300
$ 17,800
============ ============Other 3,800 --
--------- ---------
Deferred tax assets 3,800 6,300
--------- ---------
Deferred tax liabilities:
Software development (13,900) (24,300)
Property and equipment (2,900) --
--------- ---------
Deferred tax liability (16,800) (24,300)
--------- ---------
Deferred tax liability - Software developmentNet $ (24,300)(13,000) $ --
============ ============(18,000)
========= =========
Management has determined that no valuation allowance is necessary to
reduce the deferred tax assets as it is more likely than not that such
assets are realizable.
F-9F-10
27
The components of income tax expense are as follows:
YEAR ENDED
FEBRUARY 28, YEAR ENDED
YEAR ENDED
FEBRUARY 28,---------------------- FEBRUARY 29,
FEBRUARY 28,2002 2001 2000 1999
Current:
Federal $ 796,200 $ 513,800 $ 645,200
$ 536,500
State 140,500 90,600 113,800
94,600
------------ ------------ --------------------- --------- ---------
936,700 604,400 759,000
631,100
Deferred:
Federal (23,700) 64,300 (76,500)
(6,100)
State (4,200) 11,400 (13,500)
(1,100)
------------ ------------ --------------------- --------- ---------
(27,900) 75,700 (90,000)
(7,200)
------------ ------------ --------------------- --------- ---------
Total income tax expense $ 908,800 $ 680,100 $ 669,000
$ 623,900
============ ============ ===================== ========= =========
The following reconciles the Company's expected income tax expense
utilizing statutory tax rates to the actual tax expense:
YEAR ENDED
FEBRUARY 28, YEAR ENDED
YEAR ENDED
FEBRUARY 28,---------------------- FEBRUARY 29,
FEBRUARY 28,2002 2001 2000 1999
Tax expense at federal statutory rate $ 830,000 $ 602,000 $ 594,000 $ 653,000
State income tax, net of federal tax benefit 96,000 72,000 70,000
66,000
Other (17,200) 6,100 5,000
(95,100)
------------ ------------ --------------------- --------- ---------
$ 908,800 $ 680,100 $ 669,000
$ 623,900
============ ============ ===================== ========= =========
6. EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan which incorporates the provisions of
Section 401(k) of the Internal Revenue Code. The 401(k) plan covers
substantially all employees meeting specific age and length of service
requirements. Matching contributions from the Company are discretionary and
amounted to $52,258, $40,557, $33,477 and $27,291$33,477 in fiscal years 2002, 2001, and
2000, and 1999, respectively.
F-10
28
7. COMMITMENTS
The Company leasesleased its office and warehouse facilities under a
noncancelable operating lease which expires in June 2004.until January 2002. On January 7, 2002, the
Company purchased its leased office and warehouse facilities for $1,790,000
and simultaneously terminated its lease. Total rent expense related to
these facilities was $204,000 in fiscal 2002, $240,000 in fiscal 2001, and
$232,980 in fiscal 2000 and $225,960 in fiscal 1999.
Future minimum lease payments are as follows:
YEAR ENDING
FEBRUARY 28,
2002 $ 240,000
2003 240,000
2004 240,000
2005 80,000
-----------
$ 800,000
===========
2000.
At February 28, 2001,2002, the Company had outstanding commitments to purchase
inventory from its primary vendor totaling approximately $1,703,000.$4,559,000.
F-11
8. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS
In June 1992, the Board of Directors adopted the 1992 Incentive Stock
Option Plan (the "Incentive Plan"). A total of 1,000,000 stock options are
authorized to be granted under the Incentive Plan.
Options granted under the Incentive Plan vest at date of grant and are
exercisable up to ten years from the date of grant. The exercise price on
options granted is equal to the market price at the date of grant. Options
outstanding at February 28, 20012002 expire beginning in April 2003 through
December 2010.January 2012.
A summary of the status of the Company's Incentive Plan as of February 28,
2002 and 2001, and February 29, 2000, and February 28, 1999 and changes during the years then
ended is presented below:
2002 2001 2000
1999
---------------------------- ------------------------------ ------------------------------------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at
Outstanding at
Beginning of Year 599,600 $3.17 507,400 $ 3.42$3.42 490,000 $ 3.51 328,500 $ 3.06$3.51
Granted 10,000 5.50 136,000 2.28 40,000 2.50
171,700 4.34
Exercised/canceled (19,000) (2.28) (43,800) (3.30) (22,600) (3.77)
(10,200) (2.77)
------------ ------------ ------------ ------------ ------------ ------------------- ----- ------- ----- ------- -----
Outstanding at End of Year 590,600 $3.24 599,600 $ 3.17$3.17 507,400 $ 3.42 490,000 $ 3.51
============ ============ ============ ============ ============ ============$3.42
======= ===== ======= ===== ======= =====
F-11
29
The following table summarizes information about stock options outstanding
at February 28, 2001:2002:
NUMBER
RANGE OF OUTSTANDING WEIGHTED
EXERCISE AT FEBRUARY 28, AVERAGE REMAINING WEIGHTED AVERAGE
PRICES 20012002 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE
------------------- --------------- ------------------------ -------------------------------
$1.375 - $1.50 79,000 274,500 1 $1.40
$ 1.41
$1.511.51 - $2.50 156,000 9146,000 8 2.26
$2.51$ 2.51 - $3.13 115,000 4111,700 3 3.11
$ 3.81 15,000 76 3.81
$ 4.00 99,400 598,200 6 4.00
$ 4.63 135,200 96 4.63
-----------
599,600
===========$ 5.50 10,000 10 5.50
-------
590,600
=======
All options outstanding are exercisable at February 28, 2001.2002.
F-12
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, 2002 and 2001, and February 29, 2000 and
February 28, 1999
would have been reduced to the pro forma amounts indicated below:
2002 2001 2000 1999
Net earnings - as reported $ 1,531,274 $ 1,090,262 $ 1,079,028 $ 1,297,493
============= ============= =============
Net earnings - pro forma $ 1,526,164 $ 923,805 $ 1,038,582 $ 1,104,347
============= ============= =============
Earnings per share - as reported:
Basic $ 0.40 $ 0.28 $ 0.25 $ 0.26
============= ============= =============
Diluted $ 0.38 $ 0.27 $ 0.24 $ 0.26
============= ============= =============
Earnings per share - pro forma:
Basic $ 0.39 $ 0.23 $ 0.24 $ 0.22
============= ============= =============
Diluted $ 0.38 $ 0.23 $ 0.24 $ 0.22
============= ============= =============
The fair value of options granted under the Incentive Plan was estimated on
the date of grant using the Black-Scholes option-pricing model. The
following assumptions were used for options granted in 2001;2002: no dividend
yield, expected volatility of 35.60%, risk free interest rate of 1.98%, and
expected life of one year; the following assumptions were used for options
granted in 2001: no dividend yield, expected volatility of 84%, risk free
interest rates between 5.13% and 6.16%, and expected lives of ten years;
the following assumptions were used for options granted in 2000;2000: no
dividend yield, expected volatility of 45%, risk free interest rate of
5.7%, and expected lives of ten years;
the following assumptions were used for options granted in 1999; no
dividend yield, expected volatility of 50%, risk free interest rate of
5.06% and expected lives of four years.
F-12F-13
30
9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended February 28, 2002 and 2001, and February 29, 2000 and February 28, 1999:2000:
BASIC DILUTED
EARNINGS EARNINGS
NET SALES GROSS MARGIN NET EARNINGS PER SHARE PER SHARE
2002
First quarter $ 4,800,600 $ 2,827,800 $ 369,5000 $ 0.09 $ 0.09
Second quarter 5,108,400 3,000,300 423,800 0.11 0.11
Third quarter 6,007,900 3,772,700 485,000 0.13 0.12
Fourth quarter 4,637,551 2,832,129 252,974 0.07 0.06
----------- ----------- ---------- -------- --------
Total year $20,554,451 $12,432,929 $ 1,531,274 $ 0.40 $ 0.38
=========== =========== =========== ======== ========
2001
First quarter $ 4,250,400 $ 2,453,000 $ 276,100276,1000 $ 0.07 $ 0.07
Second quarter 4,414,600 2,464,300 352,700 0.09 0.09
Third quarter 5,245,600 3,180,300 381,900 0.10 0.10
Fourth quarter 3,686,248 2,211,328 79,562 0.02 0.01
------------ ------------ ------------ ----------- ----------- ---------- -------- --------
Total year $ 17,596,848 $ 10,308,928$17,596,848 $10,308,928 $ 1,090,262 $ 0.28 $ 0.27
============ ============ ============ =========== =========== =========== ======== ========
2000
First quarter $ 4,122,100 $ 2,395,600 $ 290,300290,3000 $ 0.06 $ 0.06
Second quarter 4,202,500 2,397,400 313,600 0.07 0.07
Third quarter 5,012,800 3,029,400 419,800 0.10 0.10
Fourth quarter 3,513,861 2,044,474 55,328 0.02 0.01
------------ ------------ ------------ ----------- ----------- ---------- -------- --------
Total year $ 16,851,261$16,851,261 $ 9,866,874 $ 1,079,028 $ 0.25 $ 0.24
============ ============ ============ =========== =========== 1999
First quarter $ 4,160,700 $ 2,484,200 $ 350,000 $ 0.07 $ 0.07
Second quarter 3,950,400 2,253,900 307,000 0.06 0.06
Third quarter 5,453,700 3,391,000 537,600 0.11 0.11
Fourth quarter 3,106,585 1,817,746 102,893 0.02 0.02
------------ ------------ ------------ ----------- -----------
Total year $ 16,671,385 $ 9,946,846 $ 1,297,493 $ 0.26 $ 0.26
============ ============ ============ =========== =================== ========
During the fourth quarter of fiscal years 2001 and 2000, the Company
corrected the depreciation calculated on certain property and equipment,
which resulted in a decrease and an increase, respectively, in depreciation
expense of approximately $30,000.
10. 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, school supply and
museums, through commissioned sales representatives, trade and specialty
wholesalers and an internal telesales group. The UBAH Division markets its
product line through a network of independent sales consultants through a
combination of direct sales, home shows and book fairs. The UBAH Division
also distributes to school and public libraries.
F-13F-14
31
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, 2002 and
2001, and February 29, 2000 and February 28, 1999 is set forth below:
PUBLISHING UBAH OTHER TOTAL
2002
Net sales $ 7,362,332 $13,192,119 $ -- $20,554,451
Earnings (loss) before income taxes 2,579,082 2,845,712 (2,984,720) 2,440,074
2001
Net sales $ 7,353,750 $10,243,098 $ 10,243,098 $ $ 17,596,848-- $17,596,848
Earnings (loss) before income taxes 2,577,593 2,234,031 (3,041,262) 1,770,362
2000
Net sales $ 7,960,891 $ 8,890,370 $ -- $ 16,851,261
Earnings (loss) before income taxes 2,811,887 2,181,300 (3,245,159) 1,748,028
1999
Net sales $ 7,794,702 $ 8,876,683 $ -- $ 16,671,385$16,851,261
Earnings (loss) before income taxes 2,848,749 2,365,204 (3,292,560) 1,921,3932,811,887 2,181,300 (3,245,159) 1,748,028
******
F-14F-15
32
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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).
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).
33
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, is
incorporated herein by reference to Exhibit 10.23 to Form 10-K
dated February 28, 1999 (File No. 0-4957).
10.24 Restated Loan Agreement dated June 30, 1999 between the Company
and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein
by reference to Exhibit 10.24 to Form 10-K dated February 29,
2000 (File No. 0-4957).
10.25 Lease agreement by and between the Company and James D. Dunn
dated July 1, 1999, is incorporated herein by reference to
Exhibit 10.25 to Form 10-K dated February 29, 2000 (File No.
0-4957).
*10.2610.26 First Amendment dated June 30, 2000 to Restated Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa, OK, is
incorporated herein by reference to Exhibit 10.25 to Form 10-K
dated February 28, 2001 (File No. 0-4957).
*10.27 Second Amendment dated June 30, 2001 to Restated Loan Agreement
between the Company and State Bank & Trust, N.A., Tulsa, OK.
*23. Independent Auditors' Consent
- ----------
*Filed* Filed Herewith