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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________.
Commission file number: 0-4957
EDUCATIONAL DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 73-0750007
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10302 East 55th Place, Tulsa, Oklahoma 74146-6515
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (918) 622-4522
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.20 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of May 14, 1997, 5,217,129 shares of common stock were outstanding. The
aggregate market value of the voting shares held by non-affiliates of the
registrant, based on 3,882,293 shares (total outstanding less shares held by all
officers, directors and 401(k) Plan) extended at the closing market price on May
14, 1997, of these shares traded on the Nasdaq National Market, was
approximately $22,808,471.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated Document Location in Form 10-K
--------------------- ---------------------
All information under the caption Part III - Item 10(a) and Item 10(c)
"Election of Directors" and "Compliance
With Section 16(a)" in the Company's
definitive Proxy Statement to be filed
in connection with the Annual Meeting
of Shareholders to be held July 24, 1997.
All information under the caption Part III - Item 11
"Executive Compensation" in the
Company's definitive Proxy Statement
to be filed in connection with the
Annual Meeting of Shareholders to be
held July 24, 1997.
All information under the caption Part III - Item 12
"Voting Securities and Principal
Holders Thereof" in the Company's
definitive Proxy Statement to be
filed in connection with the Annual
Meeting of Shareholders to be held
July 24, 1997.
NOTE: Part III - Item 14 is located at pages 14 to 17 herein.
2
EDUCATIONAL DEVELOPMENT CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED FEBRUARY 28, 1997
PART 1
------
Item 1. (a) General Development of Business
- ------- -------------------------------
Educational Development Corporation ("EDC" or the "Company"), a Delaware
corporation with its principal office in Tulsa, Oklahoma, is the sole United
States distributer of a line of children's books produced in the United Kingdom
by Usborne Publishing Limited. The Company's Home Business Division distributes
these books through independent sales consultants who hold book showings in
individual homes and through book fairs, fund raisers and directs sales. The
Home Business Division also distributes these titles to public and school
libraries. The Company's Publishing Division distributes these books to book
stores, toy stores, specialty stores and other retail outlets throughout the
United States.
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) 1997 the Company operated primarily two divisions:
Home Business Division and Publishing Division. The Home Business Division
distributes books through independent consultants who hold book showings in
individual homes, and through book fairs, fund raisers and direct sales. The
Home Business Division also distributes these titles to school and public
libraries. The Publishing Division markets books to book stores, toy stores,
specialty stores and other retail stores. The Library Division ceased
operations July 1, 1996.
Significant Events During Fiscal Year 1997
------------------------------------------
Effective July 1, 1996 the Company transferred the responsibility of sales
to school and public libraries from the Library Division to the Home Business
Division. Management believes that the strong consultant base, presently 5,700
active consultants, in the Home Business Division will greatly enhance the sales
to this market segment of the Company's business. The initial response to this
change from the Home Business consultants has been excellent. The Company has
developed a training program for those consultants who wish to sell in this
market. Approximately 850 consultants have gone through this program and earned
the designation of Educational Consultant. As a result of this change, the
Company will no longer represent other publishers of library books but is
confident that the larger base of potential sales representatives should provide
increased sales in the library market.
3
Net Sales for each of the three divisions were as follows:
NET SALES BY DIVISION
- ----------------------------------------------------------------------------------
FY 1997 FY 1996 FY 1995
- -------------------------------------- -------------------- --------------------
Percent Percent Percent
($ M) of Total ($ M) of Total ($ M) of Total
- ----------------------------------------------------------------------------------
Home Business $12,932.2 60.9 $ 9,516.0 49.4 $ 4,425.2 35.8
Publishing 7,864.9 37.0 8,191.1 42.5 6,502.1 52.6
Library 442.4 2.1 1,546.4 8.1 1,426.0 11.6
--------- ----- --------- ----- --------- -----
$21,239.5 100.0 $19,253.5 100.0 $12,353.3 100.0
========= ===== ========= ===== ========= =====
As the table above indicates, the Home Business Division has experienced an
increase in sales in each of the last three years, and their percentage of sales
to the total sales has also increased in each of the last three years. The
Company sees this trend continuing as the Home Business Division continues to
grow at a greater rate than the Publishing Division. The Publishing Division's
sales declined somewhat during FY 1997, as discussed in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operation. The
decline in the Library Division sales was due to the closure of the division, as
previously discussed.
OPERATING PROFIT BY DIVISION
- ---------------------------------------------------
FY 1997 FY 1996 FY 1995
- ----------------------------- --------- ---------
($ M) ($ M) ($ M)
- ---------------------------------------------------
Home Business $3,150.7 $2,690.1 $1,275.1
Publishing $2,466.6 $3,151.0 $2,414.3
Library $ 178.3 $ 336.4 $ 319.9
IDENTIFIABLE ASSETS BY DIVISION
- ---------------------------------------------------
(none)
(b) Financial Information about Industry Segments
---------------------------------------------
Marketing and distribution of books to the retail trade, including book
stores, toy stores, specialty stores and other retail outlets as well as school
and public libraries, is the principal industry segment in which the Company is
engaged. Reference is made to the financial information contained elsewhere in
this report for financial results of the Company's operations.
4
(c) Narrative Description of Business
---------------------------------
(i) General
The principal product of both the Home Business Division and Publishing
Division is a line of children's books produced in the United Kingdom by Usborne
Publishing Limited. The Company is the United States distributor of these
books. The Company currently offers approximately 900 different titles. 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. There likewise 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 run out 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 approximately 98% of net sales from
the Usborne line. 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 has no plans to sell any other line.
(ii) Home Business Division
The Home Business Division markets the Usborne line of approximately 900
titles through a combination of direct sales, home parties, fund raisers and
book fairs sold through a network marketing system. The Division also sells to
school and public libraries.
(iii) Publishing Division
The Publishing Division distributes the Usborne line to book stores, toy
stores, specialty stores and other retail outlets utilizing an inside telephone
sales force as well as independent sales representatives in the field.
(iv) Research and Development
The Company did not incur any research and development expenses during the
last three fiscal years.
(v) Marketing
(a) Home Business Division
The Home Business Division markets through commissioned consultants using a
combination of direct sales, home parties, fund raisers and book fairs. The
division had 5,340 consultants in 50 states at February 28, 1997.
(b) Publishing Division
The Publishing Division markets through commissioned trade representatives
who call on book, toy and specialty stores; and through marketing by telephone
to the trade as well as to school and public libraries. This Division markets
to approximately 12,000 book, toy and specialty stores. Significant orders have
been received from major book chains. During fiscal year 1997 the division
continued to make inroads into mass merchandising outlets such as drug,
department and discount stores.
5
(vi) Competition
(a) Home Business Division
The Home Business Division faces stiff competition from several other direct
selling companies which have larger financial resources. Federal and state
funding cuts to schools affect the availability of funds to the school
libraries. The Company is unable to estimate the effect of these funding cuts
on the division's future sales to school libraries, because the magnitude of
funding cuts has yet to be determined by Congress. Management believes its
superior product line will enable this Division to be highly competitive in its
market area.
(b) Publishing Division
The Publishing Division faces strong competition from large U.S. and
international companies which have much larger financial resources. Industry
sales are over $2.3 billion annually. Publishing Division's sales are less than
1/2 of 1% 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 it
can compete well in its market area.
(vii) 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.
(viii) 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.
(ix) Trademarks, Copyrights and Patents
(none)
(x) Employees
As of May 1, 1997, the Company had 53 full-time employees and 34 part-time
employees. The Company believes its relations with its employees to be good.
6
Item 2. PROPERTIES
- ------- ----------
The Company moved its operations and executive offices on March 1, 1986, to
10302 E. 55th PL, Tulsa, Oklahoma. The Company leases approximately 94,000
square feet of office and warehouse space under a 5 year renewable lease which
expires February 28, 1999.
The Company's operating facility is 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 1997 and 1996, as reported by the National Association of Securities
Dealers, Inc., as adjusted for the two-for-one stock split, were as follows:
1997 1996
------------- ---------------
Period High Low High Low
- ------ ------ ----- ------ -------
1st Qtr.. 12-3/4 8-3/4 7-9/16 5-5/8
2nd Qtr.. 9-7/8 6 9 5-1/2
3rd Qtr.. 8-1/8 4-7/8 11-7/8 7-1/2
4th Qtr.. 8-1/4 5-3/4 13-1/8 8-15/16
The number of shareholders of record of EDC's common stock at May 13, 1997 was
1029.
No dividends were paid in fiscal years 1997 and 1996. In lieu of paying
dividends in the future, the Company intends to invest earnings in Company
growth.
7
Item 6. SELECTED FINANCIAL DATA
- ------- -----------------------
YEARS ENDED FEBRUARY 28 (29)
-------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- ----------
Net Sales $21,239,507 $19,253,467 $12,353,257 $7,916,527 $6,225,751
----------- ----------- ----------- ---------- ----------
Income From Continuing
Operations $ 1,630,088 $ 1,805,335 $ 1,163,647 $ 631,350 $ 422,099
----------- ----------- ----------- ---------- ----------
Net Earnings $ 1,630,088 $ 1,478,714 $ 1,171,786 $ 893,651 $ 564,499
----------- ----------- ----------- ---------- ----------
Income From Continuing
Operations Per Common
Share (Primary and
Fully Diluted) $ .31 $ .34 $ .22 $ .13 $ .09
----------- ----------- ----------- ---------- ----------
Net Earnings Per Common
Share (Primary and
Fully Diluted) $ .31 $ .28 $ .22 $ .18 $ .12
----------- ----------- ----------- ---------- ----------
Total Assets $13,365,369 $16,422,068 $ 9,665,378 $5,438,709 $4,577,639
----------- ----------- ----------- ---------- ----------
Long Term Obligations -- -- $ 1,000,000 $ 7,673 $ 48,598
----------- ----------- ----------- ---------- ----------
There were no cash dividends declared during fiscal years 1993 through 1997.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATION
----------------------------------
(a) General
-------
Certain statements contained in this Management Discussion and Analysis
are not based on historical facts, but are forward-looking statements that are
based upon numerous assumptions about future conditions that may ultimately
prove to be inaccurate. Actual events and results may materially differ from
anticipated results described in such statements. The Company's ability to
achieve such results is subject to certain risks and uncertainties. Such risks
and uncertainties include but are not limited to, product prices, continued
availability of capital and financing, and other factors affecting the Company's
business that may be beyond its control.
8
FY 1997
- -------
The Home Business Division's sales increased 36% in FY 1997 compared with
FY 1996. This was due to the number of active consultants, presently 5,700, who
are actively selling the books through home shows, book fairs, fund raisers and
direct sales. The Division continued to offer new and exciting consultant
incentive programs during FY 1997, including several travel contests. These
programs combined with various specials offered during the year helped attract
and retain consultants. Regional training seminars are held throughout the
country to train supervisors and consultants and exchange new ideas with other
supervisors and consultants. The Division held its first National Seminar in
April, 1997 with approximately 300 consultants and top supervisors in
attendance. This 4-day event offered training and motivational sessions for
those in attendance and was an excellent beginning to FY 1998. Management
expects sales for FY 1998 to exceed those of FY 1997.
The Publishing Division's sales decreased 4% in FY 1997 over FY 1996.
Sales nationwide in the publishing industry have declined. Management believes
the Company has a superior product and can maintain its market share in this
competitive market. The Company has an aggressive in-house telephone sales
force which maintains contact with over 10,000 customers. The telemarketing
staff opened 580 new accounts during FY 1997 versus 609 new accounts in FY 1996.
The rack program continues to be popular with 369 new racks placed during FY
1997 versus 201 in FY 1996. There are now approximately 2,750 racks in place in
bookstores throughout the country. The Company offers special pricing with the
purchase of a display rack. This rack is 6 feet tall with a 21" x 21" base and
5 adjustable shelves. The rack holds approximately 220 books and offers the
retail merchant an excellent method of displaying many of the Company's titles.
These racks serve as a marketing tool for retail merchants. The Company attends
several major national trade shows to further enhance product visibility. For
these reasons, Management is optimistic that the Publishing Division can
maintain its market share.
As discussed under General Development of Business, the Library Division
was closed effective July 1, 1996 and the responsibility for these sales
transferred to the Home Business Division.
Cost of sales increased 2.9% for FY 1997 over FY 1996. Cost of sales as a
percent of gross sales was 26.6% in FY 1997 compared with 27.2% in FY 1996.
Cost of sales as a percentage of gross sales fluctuates depending upon the mix
of products sold during a given year. Management believes that its cost of
sales sold in FY 1998 will remain consistent with 1997 levels.
Operating and selling expenses increased 23.7% for FY 1997 over FY 1996.
As a percent of gross sales these costs were 12.3% in FY 1997 and 10.5% in FY
1996. Contributing to the increases in selling and operating expenses were
increased sales incentives in the Home Business Division and increased credit
card fees in the Home Business Division, both the direct result of increased
sales in this Division. Building rental costs and utilities also increased as
the Company added additional warehouse space during FY 1997. Management expects
operating and selling expense to be approximately 10% - 12% of gross sales for
FY 1998.
Sales commissions increased 22.9% during FY 1997 over FY 1996. As a
percent of gross sales, these costs were 14.9% in FY 1997 compared with 12.7% in
FY 1996. Sales commission as a percentage of gross sales is determined by the
product mix sold, as the commission rates vary with the product being sold and
the Division which makes the sale. The increase in sales by the Home Business
Division, which has a higher commission percentage, resulted in the increase in
commission expense during FY 1997. In October, the Home Business Division put
into place a revised and improved commission structure, which will reduce
commission expense as a percent of Home Business Division sales. Management
expects the full impact of this change to be reflected in FY 1998. Management
anticipates that sales commissions will be approximately 14% - 15% of gross
sales for FY 1998.
9
General and administrative costs increased during FY 1997 by 42.8% when
compared with FY 1996. As a percentage of gross sales, these expenses were 4.2%
in FY 1997 and 3.1% in FY 1996. General and administrative costs are not always
directly affected by sales, so comparison of these expenses as a percentage of
gross sales can be misleading. Contributing to the increased general and
administrative costs was depreciation, due to the addition of new computer
equipment, and the addition of staff due to increased volumes. Management
expects general and administrative expenses for FY 1998 will be approximately
3.5% to 4.5% of gross sales.
Interest expense increased 15.8% during FY 1997 when compared with FY 1996.
As a percentage of gross sales, interest expense was 1.1% for both FY 1997 and
FY 1996. The increase in interest expense was due primarily to the increased
borrowing levels during FY 1997 when compared with FY 1996.
FY 1996
- -------
The Home Business Division's sales increased 117% in FY 1996 compared with
FY 1995. This was due to a 147% increase in the number of independent
consultants distributing the books. The Division continued to offer new and
exciting consultant incentive programs during FY 1996, including several travel
contests. These programs combined with various specials offered during the year
helped attract and retain consultants. The Division continued to hold several
training seminars during the year to train supervisors and to exchange ideas
with other supervisors.
The Publishing Division's sales increased 25% in FY 1996 over FY 1995. This
increase was attributable to an increase in volume and an increase in market
penetration. Orders continued to increase in size with larger quantities per
order as well as multiple titles being ordered. The rack program continued to
increase with 201 new racks placed during FY 1996 in bookstores throughout the
country. The Division had 2383 racks in place in bookstores. The Company offered
special pricing with the purchase of a display rack. The telemarketing staff
opened 609 new accounts during FY 1996 vs 811 new accounts in FY 1995.
The Library Services Division's sales increased 8% in FY 1996 compared with
FY 1995. Management believed this increase was due primarily to increased
market penetration by the commissioned sales force. The Division represented 20
other publishers in addition to the Usborne line of titles. Sales in the
Library Division continue to increase yearly over the previous year, but the
percentage of total net sales produced by the Library Division declined in
fiscal year 1996 when compared with fiscal year 1995. As discussed earlier,
competition in this market is very competitive and subject to the availability
of government funding.
Cost of sales increased 46% for FY 1996 over FY 1995. Cost of sales as a
percent of gross sales was 27.2% in FY 1996 compared with 27.1% in FY 1995.
Cost of sales as a percentage of gross sales fluctuates depending upon the mix
of products sold.
Operating and selling expenses increased 37% for FY 1996 over FY 1995. As a
percent of gross sales these costs were 10.5% in FY 1996 compared to 11.1% in FY
1995. Sales incentives increased 167% in the Home Business Division as a result
of the increase in sales.
Sales commissions increased 101% during FY 1996 over FY 1995. As a percent
of gross sales, these costs were 12.7% in FY 1996 compared with 9.2% in FY 1995.
Sales commission as a percentage of gross sales is determined by the product mix
being sold, as the commission rates vary with the product being sold and the
Division which makes the sale. The increase in sales by the Home Business
Division, which has a higher commission percentage, resulted in higher
commission cost.
10
General and administrative costs increased 20.5% in FY 1996 compared with FY
1995. As a percentage of gross sales, these costs were 3.1% in FY 1996 versus
3.7% in FY 1995. General and administrative costs are not always directly
affected by sales, so comparison of these costs as a percentage of sales can be
misleading. Salaries increased 23% as additional staff was added in the
financial and administrative areas.
Interest expense increased $287,897 during FY 1996 compared with FY 1995.
As a percentage of gross sales, interest expense was 1.1% in FY 1996 and
negligible in FY 1995. This increase was due primarily to the increased
borrowing levels during FY 1996 and a higher average interest rate.
FY 1995
- -------
The Home Business Division's sales increased 169% in FY 1995 compared with
FY 1994. This was due to a 110% increase in the number of independent
consultants distributing the books. The Division continued to offer new and
exciting consultant incentive programs during FY 1995, including several travel
contests. These programs combined with various specials offered during the year
helped attract and retain consultants. The Division held several training
seminars during the year to train supervisors and to exchange ideas with other
supervisors.
The Publishing Division's sales increased 24% in FY 1995 over FY 1994. This
increase was attributable to an increase in volume and an increase in market
penetration. Orders increased in size with larger quantities per order as well
as multiple titles being ordered. The rack program continued to increase with
266 new racks placed during FY 1995 in bookstores throughout the country. The
telemarketing staff opened 811 new accounts during FY 1995 vs 1,004 new accounts
in FY 1994.
The Library Services Division's sales increased 42% in FY 1995 compared with
FY 1994. Management believed this increase was due primarily to increased
market penetration by the commissioned sales force. The Division represented 20
other publishers in addition to the Usborne line of titles.
Cost of sales increased 49% for FY 1995 over FY 1994. Cost of sales as a
percent of gross sales was 27.1% in FY 1995 compared with 27.6% in FY 1994.
Cost of sales as a percentage of gross sales fluctuates depending upon the mix
of products sold.
Operating and selling expenses increased 34.4% for FY 1995 over FY 1994. As
a percent of gross sales these costs were 11.1% in FY 1995 compared to 12.6% in
FY 1994. Travel costs increased 96% as the Home Business Division sponsored
several consultant travel contests throughout the year.
Sales commissions increased 117% during FY 1995 over FY 1994. As a percent
of gross sales, these costs were 9.2% in FY 1995 compared with 6.5% in FY 1994.
Sales commission as a percentage of gross sales is determined by the product mix
being sold, as the commission rates vary with the product being sold and the
Division which makes the sale. The increase in sales by the Home Business
Division, which has a higher commission percentage, resulted in higher
commission cost.
General and administrative costs increased 24.7% in FY 1995 compared with FY
1994. As a percentage of gross sales, these costs were 3.7% in FY 1995 versus
4.5% in FY 1994. General and administrative costs are not always directly
affected by sales, so comparison of these costs as a percentage of sales can be
misleading.
Interest expense decreased 66% during FY 1995 compared with FY 1994. As a
percentage of gross sales, interest expense was negligible in FY 1995 and in FY
1994. This decline was due primarily to the decreased borrowing levels during
FY 1995.
11
(b) Financial Position
------------------
Working capital increased 25% to $7.4 million at fiscal year end 1997 over
fiscal year end 1996. A reduction in payables and short term bank debt,
partially offset by reduced inventory and receivables were the principal
contributors to the increase in working capital. The Company pays interest on
its bank promissory note monthly from current cash flows. Management expects
its financial position to continue to improve during FY 1998 and to have
increased working capital at fiscal year end 1998.
(c) Liquidity and Capital Resources
-------------------------------
Management believes the Company's liquidity at February 28, 1997, to be
adequate. There are no known demands, commitments, events or uncertainties that
would result in a material change in the Company's liquidity during FY 1998.
Capital expenditures are expected to be less than $750,000 in FY 1998. These
expenditures would consist primarily of software and hardware enhancements to
the Company's existing data processing equipment, leasehold improvements and
additions to the warehouse shipping system.
Effective September 25, 1995 the Company signed a Restated Credit and
Security Agreement with State Bank which provided a $6,000,000 line of credit
and replaced the existing loan agreement. The line of credit matured June 30,
1996. The note bore interest at prime plus 1/2%, payable monthly and was
collateralized by substantially all of the assets of the Company. The Company
utilized this line of credit primarily to fund routine operations. Payments
were made from current cash flows.
Effective June 30, 1996 the Company signed a Restated Credit and Security
Agreement with State Bank which provides a $9,000,000 line of credit. The line
of credit is evidenced by a promissory note in the amount of $9,000,000 payable
June 30, 1997. The note bears interest at the Wall Street Journal prime
floating rate payable monthly (8.25% at February 28, 1997). The note is
collateralized by substantially all of the assets of the Company. The Company
utilizes this line of credit primarily to fund routine operations. At February
28, 1997 the Company had available $6,990,000 under this credit agreement.
The Company obtained and uses the credit facility to fund routine
operations. Payments are made from current cash flows. The Company is
negotiating to renew this facility when it matures June 30, 1997. The Company
believes its borrowing capacity under this line to be adequate for the next
several years.
The Company generated cash from operating activities during FY 1997.
Accounts receivable declined in FY 1997 as the Company placed emphasis on
collection efforts and the tightening of credit controls. The Company plans to
continue to maximize its collection efforts in order to maintain cash flows.
Inventories decreased during FY 1997 from the levels of FY 1996 as the
Company streamlined its purchasing procedures. The Company continues to
evaluate its purchasing system in order to ensure that adequate levels are on
hand to support increased sales as well as to meet the six to eight month
resupply requirements of its principal supplier. The Company expects inventory
levels to increase moderately each year as new titles are added to the product
line.
The major component of accounts payable is the amount due the Company's
principal supplier. The reduction in inventory purchases also reduces the
accounts payable to the suppler. As inventory levels increase moderately each
year, accounts payable will also increase moderately each year. Management
anticipates cash flows from operating activities to increase in the foreseeable
future.
Other current liabilities increased in FY 1997 as the direct result of
payments received for product which was not shipped until FY 1998. The revenue
for these products was recognized in FY 1998 when the product was shipped.
12
Cash used in investing activities increased in FY 1997 as the Company made
enhancements to its computer system and added additional equipment to the
warehouse shipping system.
Net cash provided by financing activities declined in FY 1997 as the Company
was able to pay down the bank promissory note due to improved cash flows during
the year.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The information required by this item begins at page F-1, following
page 18 hereof.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- ------- ---------------------------------------------
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------
There have been no disagreements on any matter of accounting
principles or practices or financial statement disclosure within the twenty-four
months prior to February 28, 1997.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
(a) Identification of Directors
---------------------------
The information required by this item is furnished by incorporation by
reference to all information under the caption "Election of Directors" in the
Company's definitive Proxy Statement to be filed in connection with the annual
Meeting of Shareholders to be held on July 24, 1997.
(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 55
President and Treasurer
W. Curtis Fossett Controller and 1989 51
Corporate Secretary
(c) Compliance With Section 16 (a) of the Exchange Act
--------------------------------------------------
The information required by this item is furnished by incorporation by
reference to all information under the caption "Compliance With Section 16 (a)"
in the Company's definitive Proxy Statement to be filed in connection with the
Annual Meeting of Shareholders to be held on July 24, 1997.
13
Item 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information required by this item is furnished by incorporation by
reference to all information under the caption "Executive Compensation" in the
Company's definitive Proxy Statement to be filed in connection with the Annual
Meeting of Shareholders to be held on July 24, 1997.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------
MANAGEMENT
----------
The information required by this item is furnished by incorporation by
reference to all information under the caption "Voting Securities and Principal
Holders Thereof" in the Company's definitive Proxy Statement to be filed in
connection with the Annual Meeting of Shareholders to be held on July 24, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
There are no relationships or related transactions required to be
disclosed.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) The following documents are filed as part of this a report:
1. Financial Statements Page
-------------------- ----
Independent Auditors' Report F-1
Balance Sheets - February 28, 1997 and
February 29, 1996 F-2
Statements of Earnings - Years ended
February 28, 1997, February 29, 1996
and February 28, 1995 F-3
Statements of Changes in Shareholders' Equity -
Years ended February 28, 1997,
February 29, 1996 and February 28, 1995 F-4
Statements of Cash Flows -
Years ended February 28, 1997,
February 29, 1996 and February 28, 1995 F-5
Notes to Financial Statements F-6-F-14
Schedules have been omitted as such information is either not required
or is included in the financial statements.
2. Exhibits
3.1 Restated Certificate of Incorporation of the Company dated
April 26, 1968, Certificate of Amendment there to dated
June 21, 1968 and By-Laws of the Company are incorporated
herein by reference to Exhibit 1 to Registration Statement
on Form 10 (File No. 0-4957).
14
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).
15
10.7 Lease Agreement by and between the Company and James D. Dunn dated
March 1, 1991, is incorporated herein by reference to Exhibit 10.12
to Form 10-K dated February 28, 1991 (File No. 0-4957).
10.8 Agreement for Exchange of Contract Rights and Securities by and
between the Company and Robert D. Berryhill dated October 1, 1990,
is incorporated herein by reference to Exhibit 10.1 to Form 10-K
dated February 28, 1991 (File No. 0-4957).
10.9 Amendment dated January 1, 1992 to Usborne Agreement -Contractual
agreement by and between the Company and Usborne Publishing Limited
is incorporated herein by reference to Exhibit 10.13 to Form 10-K
dated February 29, 1992 (File No. 0-4957).
10.10 First Amendment dated January 31, 1992 to Loan Agreement between
the Company and State Bank & Trust, N.A., Tulsa, OK, (formally
WestStar Bank, N.A., Bartlesville, OK,) is incorporated herein by
reference to Exhibit 10.14 to Form 10-K dated February 29, 1992
(File No. 0-4957).
10.11 Educational Development Corporation 1992 Incentive Stock Option
Plan is incorporated herein by reference to Exhibit 4(c) to
Registration Statement on Form S-8 (File No. 33-60188).
10.12 Second Amendment dated June 30, 1992 to Loan Agreement between the
Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar
Bank, N.A., Bartlesville, OK,) is incorporated herein by reference
to Exhibit 10.12 to Form 10-KSB dated February 28, 1994 (File No.
0-4957).
10.13 Third Amendment dated June 30, 1993 to Loan Agreement between the
Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar
Bank, N.A., Bartlesville, OK,) is incorporated herein by reference
to Exhibit 10.13 to Form 10-KSB dated February 28, 1995 (File No.
0-4957).
10.14 Fourth Amendment dated June 30, 1994 to Loan Agreement between the
Company and State Bank & Trust, N.A, Tulsa, OK, is incorporated
herein by reference to Exhibit 10.13 to Form 10-KSB dated February
28, 1995 (File No. 0-4957).
10.15 Fifth Amendment dated March 13, 1995 to Loan Agreement between the
Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated
herein by reference to Exhibit 10.13 to Form 10-KSB dated February
28, 1995 (File No. 0-4957).
10.16 Sixth Amendment dated March 27, 1995 to Loan Agreement between the
Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated
herein by reference to Exhibit 10.13 to Form 10-KSB dated February
28, 1995 (File No. 0-4957).
16
10.17 Seventh Amendment dated April 27, 1995 to Loan Agreement between
the Company and State Bank & Trust, N.A., Tulsa, OK, is
incorporated herein by reference to Exhibit 10.13 to Form 10-KSB
dated February 28, 1995 (File No. 0-4957).
10.18 Amendment dated February 28, 1995 to the Lease Agreement by and
between the Company and James D. Dunn, is incorporated herein by
reference to Exhibit 10.13 to Form 10-KSB dated February 28, 1995
(File No. 0-4957).
10.19 Eighth Amendment Dated July 27, 1995 to Loan Agreement between the
Company and State Bank & Trust, N.A., Tulsa, OK is incorporated
herein by reference to Exhibit 10.19 to Form 10-KSB dated February
29, 1996 (File No. 0-4957).
10.20 Restated Loan Agreement dated September 25, 1995 between the
Company and State Bank & Trust, N.A., Tulsa, OK is incorporated
herein by reference to Exhibit 10.20 to Form 10-KSB dated February
29, 1996 (File No. 0-4957).
*10.21 Restated Loan Agreement dated June 10, 1996 between the Company and
State Bank & Trust, N.A., Tulsa, OK.
*11. Earnings per share computation.
*23. Independent Auditors' Consent
- -------------------
*Filed Herewith
(b) No reports on Form 8-K were filed during
the last quarter of the period covered by
this report.
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 28, 1997 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 28, 1997 /s/ Randall W. White
------------------------------------
Randall W. White
Chairman of the Board
President, Treasurer and
Director
May 28, 1997 /s/ Robert D. Berryhill
------------------------------------
Robert D. Berryhill, Director
May 28, 1997 /s/ G. Dean Cosgrove
------------------------------------
G. Dean Cosgrove, Director
May 28, 1997 /s/ James F. Lewis
------------------------------------
James F. Lewis, Director
May 28, 1997 /s/ John M. Lare
------------------------------------
John M. Lare, Director
May 28, 1997 By /s/ W. Curtis Fossett
------------------------------------
W. Curtis Fossett
Principal Financial
and Accounting Officer
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 as of February 28, 1997 and February 29, 1996, and the related
statements of earnings, shareholders' equity and cash flows for each of the
three years in the period ended February 28, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at February 28, 1997 and
February 29, 1996, and the results of its operations and its cash flows for each
of the three years in the period ended February 28, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
May 2, 1997
Tulsa, Oklahoma
F - 1
EDUCATIONAL DEVELOPMENT CORPORATION
BALANCE SHEETS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
- -------------------------------------------------------------------------------------------------------------------------
1997 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 82,153 $ 215,963
Accounts receivable, less allowances
for doubtful accounts and sales returns 2,032,688 2,755,484
Inventories - Net 10,048,457 11,999,873
Prepaid expenses 55,697 109,661
Income taxes receivable 124,092 352,323
Deferred income taxes 159,200 168,300
-------------- --------------
Total current assets 12,502,287 15,601,604
PROPERTY AND EQUIPMENT - Net 848,478 815,362
OTHER ASSETS - Net 14,604 5,102
-------------- --------------
$ 13,365,369 $ 16,422,068
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 2,010,000 $ 5,820,000
Accounts payable 2,305,067 3,215,691
Accrued salaries and commissions 214,198 270,864
Other current liabilities 563,059 383,625
-------------- --------------
Total current liabilities 5,092,324 9,690,180
SHAREHOLDERS' EQUITY:
Common stock, $.20 par value; Authorized 6,000,000 shares;
Issued 5,424,240 and 5,398,240 shares; Outstanding 5,200,697
and 5,191,498 shares 1,084,848 1,079,648
Capital in excess of par value 4,403,242 4,391,339
Retained earnings 3,418,431 1,788,343
-------------- --------------
8,906,521 7,259,330
Less treasury stock, at cost (633,476) (527,442)
-------------- --------------
8,273,045 6,731,888
-------------- --------------
$ 13,365,369 $ 16,422,068
============== ==============
See notes to financial statements.
F - 2
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996, AND FEBRUARY 28, 1995
- ----------------------------------------------------------------------------------------------
1997 1996 1995
GROSS SALES $ 31,547,007 $ 30,039,963 $ 20,616,152
Less discounts and allowances (10,307,500) (10,786,496) (8,262,895)
------------ ------------ ------------
Net sales 21,239,507 19,253,467 12,353,257
COST OF SALES 8,396,060 8,155,725 5,587,402
------------ ------------ ------------
Gross margin 12,843,447 11,097,742 6,765,855
------------ ------------ ------------
OPERATING EXPENSES:
Operating and selling 3,883,438 3,138,851 2,289,725
Sales commissions 4,699,279 3,824,500 1,899,317
General and administrative 1,315,012 920,786 764,351
Interest 344,966 297,849 9,952
------------ ------------ ------------
10,242,695 8,181,986 4,963,345
------------ ------------ ------------
OTHER INCOME 33,436 2,279 59,137
------------ ------------ ------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 2,634,188 2,918,035 1,861,647
INCOME TAXES 1,004,100 1,112,700 698,000
------------ ------------ ------------
EARNINGS FROM CONTINUING OPERATIONS 1,630,088 1,805,335 1,163,647
DISCONTINUED OPERATIONS, NET OF TAX:
Earnings (loss) from operations - (25,637) 8,139
Loss on disposal - (300,984) -
------------ ------------ ------------
- (326,621) 8,139
------------ ------------ ------------
NET EARNINGS $ 1,630,088 $ 1,478,714 $ 1,171,786
============ ============ ============
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Primary and fully diluted:
Earnings from continuing operations $ 0.31 $ 0.34 $ 0.22
Discontinued operations - (0.06) -
------------ ------------ ------------
Net earnings $ 0.31 $ 0.28 $ 0.22
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING -
Primary and fully diluted 5,353,938 5,338,834 5,223,490
============ ============ ============
See notes to financial statements.
F - 3
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
(par value $.20 per share)
------------------------- Retained Treasury Stock
Number of Capital in Earnings --------------------------- Share-
Shares Excess of (Accumulated Number of holders'
Issued Amount Par Value Deficit) Shares Amount Equity
BALANCE, MARCH 1, 1994 2,329,120 $ 465,824 $ 4,449,767 $ (862,157) 96,299 $ (84,076) $ 3,969,358
Exercise of options at $1.875/share 10,000 2,000 16,750 - - - 18,750
Exercise of options at $0.625/share 5,000 1,000 2,125 - - - 3,125
Sales of treasury stock - - 100,483 - (10,426) 9,102 109,585
Net earnings - - - 1,171,786 - - 1,171,786
--------- ----------- ----------- ----------- -------- ----------- -----------
BALANCE, FEBRUARY 28, 1995 2,344,120 468,824 4,569,125 309,629 85,873 (74,974) 5,272,604
Exercise of options at $6.25/share 25,000 5,000 151,250 - - - 156,250
Exercise of options at $3.00/share 5,000 1,000 14,000 - - - 15,000
Exercise of options at $2.75/share 30,000 6,000 76,500 - - - 82,500
Exercise of options at $1.875/share 15,000 3,000 25,125 - - - 28,125
Exercise of options at $1.25/share 15,000 3,000 15,750 - - - 18,750
Exercise of options at $0.50/share 265,000 53,000 79,500 - - - 132,500
Issuance of treasury stock - - (87) - (100) 87 -
Purchase of treasury stock - - - - 22,575 (523,048) (523,048)
Sales of treasury stock - - - - (4,977) 70,493 70,493
Net earnings - - - 1,478,714 - - 1,478,714
Effect of two-for-one stock split
(Note 9) 2,699,120 539,824 (539,824) - 103,371 - -
--------- ----------- ----------- ----------- -------- ----------- -----------
BALANCE, FEBRUARY 29, 1996 5,398,240 1,079,648 4,391,339 1,788,343 206,742 (527,442) 6,731,888
Exercise of options at $0.25/share 20,000 4,000 1,000 - - - 5,000
Exercise of options at $1.50/share 6,000 1,200 7,800 - - - 9,000
Issuance of treasury stock - - 3,103 - (3,840) 10,738 13,841
Purchase of treasury stock - - - - 32,975 (242,730) (242,730)
Sales of treasury stock - - - - (12,334) 125,958 125,958
Net earnings - - - 1,630,088 - - 1,630,088
--------- ----------- ----------- ----------- -------- ----------- -----------
BALANCE, FEBRUARY 28, 1997 5,424,240 $ 1,084,848 $ 4,403,242 $ 3,418,431 223,543 $ (633,476) $ 8,273,045
========= =========== =========== =========== ======== =========== ===========
See notes to financial statements.
F - 4
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996, AND FEBRUARY 28, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,630,088 $ 1,478,714 $ 1,171,786
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 252,113 126,697 147,431
Deferred income taxes 9,100 88,700 (113,000)
Provision for doubtful accounts and sales returns 1,225,000 1,250,900 1,143,500
Provision for obsolete inventories -- -- 118,100
Stock issued for awards 4,251 -- --
Changes in assets and liabilities:
Accounts and income taxes receivable (273,973) (2,450,713) (1,567,653)
Inventories 1,951,416 (5,106,474) (3,320,267)
Prepaid expenses and other assets 44,462 (36,815) (111,285)
Accounts payable and accrued expenses (787,856) 320,979 1,964,348
------------ ------------ ------------
Total adjustments 2,424,513 (5,806,726) (1,738,826)
------------ ------------ ------------
Net cash provided by (used in) operating activities 4,054,601 (4,328,012) (567,040)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (275,639) (577,847) (273,129)
------------ ------------ ------------
Net cash used in investing activities (275,639) (577,847) (273,129)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 7,130,000 11,820,000 2,040,000
Payments under revolving credit agreement (10,940,000) (7,000,000) (1,040,000)
Principal payments on capital lease obligations -- (7,673) (40,925)
Cash received from exercise of stock options 14,000 64,952 21,875
Cash received from sale of stock 125,958 70,493 109,585
Cash paid to acquire treasury stock (242,730) (154,875) --
------------ ------------ ------------
Net cash provided by (used in) financing activities (3,912,772) 4,792,897 1,090,535
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (133,810) (112,962) 250,366
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 215,963 328,925 78,559
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 82,153 $ 215,963 $ 328,925
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 368,051 $ 264,462 $ 7,691
============ ============ ============
Cash paid for income taxes $ 766,769 $ 1,259,022 $ 836,500
============ ============ ============
See notes to financial statements.
F - 5
EDUCATIONAL DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996, AND FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Educational Development Corporation (the "Company")
distributes books and publications through its Publishing and Home Business
Divisions. In July 1996, the Company's Library Division ceased operations
and responsibility for sales to this market segment were taken over by the
Home Business Division. The Company is the United States ("U.S.")
distributor of books and related matters, published primarily in England, to
book, toy and gift stores, libraries and home educators. The Company is also
involved in the production and publishing of new book titles. The English
publishing company is the Company's primary supplier. The Company sells to
its customers, located throughout the U.S., primarily on standard credit
terms.
ESTIMATES - The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand
and cash on deposit in banks.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out ("FIFO") method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and
depreciated and amortized using the straight-line method over the estimated
useful lives of the related assets.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("SFAS No. 109"). SFAS No. 109 requires that deferred income taxes
are recorded for temporary differences between the financial reporting and
tax basis of the Company's assets and liabilities and for operating loss and
tax credit carryforwards.
INCOME RECOGNITION - Sales are recorded when products are shipped. At the
time sales are recognized for certain products under specified conditions,
allowances for returns are recorded based on prior experience.
ADVERTISING COSTS - The Company expenses advertising costs as incurred.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE - The computation of earnings
per common and common equivalent share is based on the weighted average
shares of common stock outstanding and, when the effect is dilutive, common
stock equivalents attributable to stock options and stock warrants.
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
F - 6
on the borrowing rates currently available to the Company for bank loans with
similar terms and average maturities.
LONG-LIVED ASSET IMPAIRMENT - Effective March 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of,"
("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 121 also
requires that assets to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. The adoption of SFAS No. 121 did not
have an effect on the Company's financial statements.
STOCK-BASED COMPENSATION - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation." SFAS No. 123
establishes a fair value method and disclosure standards for stock-based
employee compensation arrangements, such as stock purchase plans and stock
options. It also applies to transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees, requiring
that such transactions be accounted for based on fair value. As allowed by
SFAS No. 123, the Company will continue to follow the provisions of
Accounting Principles Board Opinion No. 25 and related interpretations for
its stock-based employee compensation arrangements.
NEW ACCOUNTING STANDARD - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128
("SFAS No. 128"), "Earnings per Share". SFAS No. 128 establishes standards
for computing and presenting earnings per share ("EPS") and requires
restatement of all prior-period EPS data presented. This statement is
effective for financial statements for periods ending after December 15,
1997. The Company does not anticipate that adoption of this standard will
have a significant effect on its financial statements.
RECLASSIFICATIONS - Reclassifications were made to certain 1995 and 1996
balances to conform with the 1997 presentation.
2. DISCONTINUED OPERATIONS
Effective February 29, 1996, the Company discontinued its School Division.
The remaining assets of this division were written off at February 29, 1996.
Accordingly, the operating results of the School Division are segregated and
reported as discontinued operations in the accompanying statements of
earnings for the years ended February 29, 1996 and February 28, 1995.
F - 7
The condensed statements of operations relating to the discontinued School
Division operations for each of the years ended February 29, 1996 and February
28, 1995 are presented below:
YEAR ENDED
----------------------------
FEBRUARY 29, FEBRUARY 28,
1996 1995
Gross sales $ 43,085 $ 136,521
Less discounts and allowances (5,030) (9,871)
-------- ---------
Net sales 38,055 126,650
Cost of sales 8,271 (41,852)
-------- ---------
Gross margin 46,326 84,798
Operating expenses (87,963) (114,659)
-------- ---------
Loss before income taxes (41,637) (29,861)
Income tax benefit 16,000 38,000
-------- ---------
Earnings (loss) from operations $(25,637) $ 8,139
======== =========
The estimated loss on disposal of $300,984, which is net of income tax
benefits of $169,000, includes the write-off of inventory, supplies and
other assets.
3. INVENTORIES
Inventories consist of the following:
FEBRUARY 28, FEBRUARY 29,
1997 1996
Book inventory $ 10,349,557 $ 12,300,973
Reserve for obsolescence (301,100) (301,100)
------------ ------------
$ 10,048,457 $ 11,999,873
============ ============
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
FEBRUARY 28, FEBRUARY 29,
1997 1996
Computer equipment $ 757,982 $ 733,036
Warehouse and office equipment 438,325 337,111
Furniture, fixtures and other 98,065 86,267
---------- ----------
1,294,372 1,156,414
Less accumulated depreciation
and amortization (445,894) (341,052)
---------- ----------
$ 848,478 $ 815,362
========== ==========
F - 8
During the year ended February 28, 1997, the Company acquired a vehicle
with a cost of $9,590 through the issuance of 3,390 shares of treasury
stock.
Depreciation expense was $252,113, $126,697, and $109,086 for the fiscal
years ended 1997, 1996, and 1995, respectively.
5. NOTE PAYABLE
At February 28, 1997 and February 29, 1996, the note payable to bank was
under a $9,000,000 and $6,000,000 revolving credit agreement,
respectively, with interest payable monthly at prime and prime plus 0.5%
(8.25 and 8.75%, respectively), collateralized by substantially all assets
of the Company. The revolving credit agreement matures on June 30, 1997.
At February 28, 1997, the Company had available credit of $6,990,000 under
the revolving credit agreement. The agreement contains provisions that
require the maintenance of specified financial ratios, restrict
transactions with related parties, prohibit mergers or consolidation,
prohibit declaration of dividends, disallow additional debt, and limit the
amount of compensation, salaries, investments, capital expenditures and
leasing transactions. The Company is in compliance with all restrictive
financial covenants. The Company intends to renew the bank agreement or
obtain other financing upon maturity.
For each of the three years in the period ended February 28, 1997, the
highest amount of short-term borrowings, the average amount of borrowings
under these short-term notes, and the weighted average interest rates are
as follows:
YEAR ENDED
------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
Notes payable to bank:
Largest amount borrowed $ 5,850,000 $ 5,820,000 $ 1,000,000
Average amount borrowed 4,061,250 3,183,333 199,714
Weighted average interest rate 8.5 % 9.4 % 8.4 %
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and
operating loss and tax credit carryforwards. The tax effects of
significant items comprising the Company's net deferred tax asset as of
February 28, 1997 and February 29, 1996 are as follows:
FEBRUARY 28, FEBRUARY 29,
1997 1996
Deferred tax assets:
Allowance for doubtful accounts $ 35,200 $ 50,300
Inventories 118,000 118,000
Expenses deducted on the cash basis for income tax purposes 13,600 --
--------- ---------
166,800 168,300
Deferred tax liability -
Property and equipment (7,600) --
--------- ---------
Net deferred tax asset $ 159,200 $ 168,300
========= =========
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Management has determined that no valuation allowance is necessary to reduce
the value of deferred tax assets as it is more likely than not that such
assets are realizable.
The components of income tax expense are as follows:
YEAR ENDED
-------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
Income tax expense on continuing operations:
Current:
Federal $ 845,800 $ 916,300 $ 655,400
State 149,200 161,700 115,600
----------- ----------- -----------
995,000 1,078,000 771,000
Deferred:
Federal 7,700 29,500 (62,100)
State 1,400 5,200 (10,900)
----------- ----------- -----------
9,100 34,700 (73,000)
----------- ----------- -----------
1,004,100 1,112,700 698,000
Income tax benefit on discontinued operations:
From operations -- (16,000) (38,000)
Loss on disposal -- (169,000) --
----------- ----------- -----------
Total income tax expense $ 1,004,100 $ 927,700 $ 660,000
=========== =========== ===========
The following reconciles the Company's expected income tax expense on
continuing operations utilizing statutory tax rates to the actual tax
expense:
YEAR ENDED
----------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
Tax expense at Federal statutory rate $ 896,000 $ 992,000 $ 633,000
State income tax, net of Federal tax benefit 105,000 114,700 74,000
Other 3,100 6,000 (9,000)
---------- ---------- ----------
$1,004,100 $1,112,700 $ 698,000
========== ========== ==========
7. EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan which incorporates the provisions of
Section 401(k) of the Internal Revenue Code. The 401(k) plan covers
substantially all employees meeting specific age and length of service
requirements. Matching contributions from the Company are discretionary and
amounted to $31,457, $30,118, and $24,558 in fiscal years 1997, 1996, and
1995, respectively.
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8. COMMITMENTS
The Company leases its office and warehouse facilities under a noncancelable
operating lease which expires in February 1999. Future minimum rental
commitments at February 28, 1997 are payable as follows:
YEAR
1998 $225,960
1999 225,960
--------
Total minimum lease payments $451,920
========
Total rent expense was approximately $219,000, $185,000, and $119,000 for the
fiscal years ended 1997, 1996, and 1995, respectively.
At February 28, 1997, the Company had outstanding commitments to purchase
inventory from its primary vendor totaling approximately $1,072,000.
9. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS
On December 20, 1995, the Company's Board of Directors declared a two-for-one
split of the Company's common stock in the form of a stock dividend for
shareholders of record as of April 1, 1996. On March 13, 1996, in a special
meeting of the stockholders, an increase in the number of authorized shares
from 3,000,000 to 6,000,000 was approved. A total of 2,699,120 shares of
common stock were issued in connection with the split related to shares
outstanding at February 29, 1996. The stated par value of each share was not
changed from $.20. A total of $539,824 was reclassified from the Company's
capital in excess of par value account to the Company's common stock account.
Earnings per share, weighted average shares of common stock outstanding and
the stock option information for all periods presented reflect the stock
split.
In October 1981, the Board of Directors adopted an Incentive Stock Option
Plan which expired in 1991; accordingly, no additional options will be
granted under the 1981 Plan.
In June 1992, the Board of Directors adopted the 1992 Incentive Stock Option
Plan. A total of 1,000,000 stock options are authorized to be granted under
the 1992 Plan.
Options granted under either of the two Incentive Stock Option Plans,
collectively the "Incentive Plan," are exercisable up to ten years from the
date of grant. Options outstanding at February 28, 1997 expire in 2001
through 2006.
F - 11
A summary of the status of the Company's Incentive Plan as of February 28,
1997, February 29, 1996 and February 28, 1995 and changes during the years
ended on those dates is presented below:
1997 1996 1995
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at
Beginning of Year 206,000 $ 2.55 906,000 $ 1.00 780,000 $ 0.56
Granted 117,400 6.00 10,000 6.25 156,000 3.13
Exercised/Canceled (13,600) (4.01) (710,000) (0.62) (30,000) (0.73)
------- ------ -------- ------ ------- ------
Outstanding at End
of Year 309,800 $ 3.79 206,000 $ 2.55 906,000 $ 1.00
======= ====== ======== ====== ======= ======
The following table summarizes information about stock options outstanding
at February 28, 1997:
NUMBER
RANGE OF OUTSTANDING WEIGHTED
EXERCISE AT FEBRUARY 28, AVERAGE REMAINING WEIGHTED AVERAGE
PRICES 1997 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE
-------- -------------- ------------------------ ----------------
$1.375-$1.50 84,000 6 $ 1.41
3.13 106,000 7 3.13
$6.00-$6.25 119,800 9 6.02
------- ------- -------
309,800 8 $ 3.79
======= ======== =======
All options outstanding are exercisable at February 28, 1997.
The Company applies Accounting Principals Board Opinion No. 25 and related
Interpretations in accounting for its Incentive Plan. Accordingly, no
compensation cost has been recognized for its Incentive Plan. Had
compensation cost for the Company's Incentive Plan been determined based on
the fair value at the grant dates for awards under the Incentive Plan
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share for the year ended February 28, 1997 would have been
reduced to the pro forma amounts indicated below:
1997
Net earnings - as reported $ 1,630,088
=============
Net earnings - pro forma $ 1,375,088
=============
Earnings per share - as reported $ 0.31
=============
Earnings per share - pro forma $ 0.26
=============
The fair value of options granted under the Incentive Plan during the year
ended February 28, 1997 was estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted
F - 12
average assumptions used: no dividend yield, expected volatility of 76%,
risk free interest rate of 6% and expected lives of 4 years. The use of the
fair value method of SFAS No. 123 would not have had a significant impact on
reported net earnings and earnings per share for the year ended February 29,
1996.
Of the 710,000 option shares exercised in fiscal 1996, 660,000 shares with a
total option price of $368,173 were exercised by the transfer to the Company
of 28,596 outstanding shares held by the option holders.
Additionally, at February 1992, options to purchase 80,000 shares of the
Company's common stock were outstanding. These options were issued to
directors and a stockholder who were not officers of the Company at exercise
prices of $0.25-$.625. During August 1992, 40,000 of these options were
exercised at an option price of $.625 per share, and the Company
simultaneously reacquired the common stock issued at a net cost to the
Company of $7,500. During February 1996, 20,000 of these options were
exercised at an option price of $0.25. The remaining 20,000 of these options
were exercised at an option price of $0.25 in March 1996.
10. SUPPLEMENTARY INFORMATION
The activity in the allowances for doubtful accounts receivable, sales
returns and inventory valuation for each of the three years in the period
ended February 28, 1997 is as follows:
Doubtful accounts receivable:
BALANCE AT AMOUNTS AMOUNTS BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
YEAR OF YEAR EXPENSE RESERVE OF YEAR
1995 $ 75,000 $58,000 $(28,000) $105,000
1996 105,000 60,000 (38,000) 127,000
1997 127,000 60,000 (95,100) 91,900
Sales returns:
BALANCE AT AMOUNTS AMOUNTS BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
YEAR OF YEAR EXPENSE RESERVE OF YEAR
1995 $ 66,000 $1,085,500 $(1,050,500) $101,000
1996 101,000 1,190,900 (1,190,900) 101,000
1997 101,000 1,165,000 (1,165,000) 101,000
Inventory valuation:
BALANCE AT AMOUNTS AMOUNTS BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
YEAR OF YEAR EXPENSE RESERVE OF YEAR
1995 $183,000 $118,100 $ -- $301,100
1996 301,100 -- -- 301,100
1997 301,100 -- -- 301,100
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Charges to certain expense accounts in continuing operations for each of the
three years in the period ended February 28, 1997 are shown below:
YEAR ENDED
-------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
Maintenance and repairs $ 34,435 $ 48,199 $ 24,545
Taxes other than payroll and income taxes 20,805 12,143 10,553
Advertising costs 84,501 170,573 107,565
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended February 28, 1997 and February 29, 1996:
FIRST SECOND THIRD FOURTH
YEAR ENDED FEBRUARY 28, 1997 QUARTER QUARTER QUARTER QUARTER
Net Sales $ 5,685,100 $ 5,029,700 $ 6,279,200 $ 4,245,507
----------- ----------- ----------- -----------
Gross Profit $ 3,396,200 $ 3,001,700 $ 3,923,400 $ 2,522,147
----------- ----------- ----------- -----------
Net Earnings $ 303,100 $ 357,700 $ 655,100 $ 314,188
=========== =========== =========== ===========
Earnings Per Share -
Net Earnings $ 0.06 $ 0.07 $ 0.12 $ 0.06
=========== =========== =========== ===========
FIRST SECOND THIRD FOURTH
YEAR ENDED FEBRUARY 29, 1996 QUARTER QUARTER QUARTER QUARTER
Net Sales $ 3,985,100 $ 4,711,200 $ 5,905,300 $ 4,651,867
----------- ----------- ----------- -----------
Gross Profit $ 2,299,300 $ 2,691,100 $ 3,546,400 $ 2,560,942
----------- ----------- ----------- -----------
Earnings from Continuing
Operations $ 434,900 $ 549,700 $ 553,400 $ 267,335
Discontinued Operations, Net (4,200) (9,900) (10,500) (302,021)
----------- ----------- ----------- -----------
Net Earnings (Loss) $ 430,700 $ 539,800 $ 542,900 $ (34,686)
=========== =========== =========== ===========
Earnings Per Share:
Earnings from Continuing
Operations $ 0.08 $ 0.10 $ 0.10 $ 0.06
Discontinued Operations -- -- -- (0.06)
----------- ----------- ----------- -----------
Net Earnings $ 0.08 $ 0.10 $ 0.10 $ --
=========== =========== =========== ===========
* * * * * *
F - 14