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”) 2004 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.
The Company makes available free of charge through the Investor Relations portion of its Internet website at www.edcpub.com its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission.
Significant Events During Fiscal Year 2004
There were no significant events during fiscal year 2004.
(b) Financial Information about Industry Segments
See part II, Item 8 - Financial Statements and Supplementary Data
(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 1,300 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 that complement the information contained in the book. The Kid Kits are packaged in a reusable vinyl bag. Alternatively, 14 Kid Kits are also available in an attractive box package. Currently 60 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 only 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.
(ii) Industry Segments
(a) Home Business Division
The Home Business Division markets the Usborne line of approximately 1,300 titles and 60 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 schools 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 8,800 consultants in 50 states at February 29, 2004.
(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 6,000 book, toy and specialty stores. Significant orders totaling 32% of the Publishing Division’s sales have been received from major book chains. During fiscal year 2004 the division continued to expand 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 that have more financial resources. In addition, federal and state funding cuts will also impact 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 that have more financial resources. Industry sales of juvenile paperbacks approached $449 million annually, down 5.2% from the previous year. The Publishing Division’s sales are approximately 1.7% of industry sales. Competitive factors include product quality, price and deliverability. Management believes its product line will enable this division to 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 sales for the Publishing Division is greatest in the Fall while retailers are stocking up for the holiday 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 )
(ix) Employees
As of April 1, 2004, the Company had 71 full-time employees and 1 part-time employee. The Company believes its relations with its employees to be good.
Item 2.
Item 2. PROPERTIES
The Company is located at 10302 E. 55th Pl, Tulsa, Oklahoma. In January 2002, the Company purchased 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.
In October 2003 the Company signed a contract to construct a 20,000 square foot addition to its warehouse facility at an estimated cost of $582,400. This addition is scheduled to be completed in June 2004. As of February 29, 2004, the Company had incurred costs of $179,800 related to the addition to the warehouse facility.
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 and future capacity needs.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
Item 4.
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.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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 2004 and 2003, as reported by the National Association of Securities Dealers, Inc., were as follows:
The number of shareholders of record of EDC’s common stock at April 22, 2004 was 955.
The Company paid a $0.10 per share annual dividend during fiscal year 2004 and a $0.06 per share annual dividend during fiscal year 2003. In January 2003, the Company announced that the Board of Directors had approved a policy to pay 20% of annual net earnings as a cash dividend. Accordingly, the Company announced that it will pay a $0.12 per share dividend on June 10, 2004 to shareholders of record as of May 26, 2004.
The following table sets forth certain information concerning the repurchase of the Company’s Common Stock made by the Company during the fourth quarter of the fiscal year ended February 29, 2004.
ISSUER PURCHASES OF EQUITY SECURITIES
Item 6.
Item 6. SELECTED FINANCIAL DATA
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company operates two separate divisions, Publishing and Usborne Books at Home (“UBAH”) to sell the Usborne line of children’s books. These two divisions each have their own customer base. The Publishing Division markets its products on a wholesale basis to various retail accounts. The UBAH Division markets its products to individual consumers as well as school and public libraries.
Publishing Division
The Publishing Division operates in a market that is highly competitive, with a large number of companies engaged in the selling of books. The Publishing Division is in direct competition with all of these other companies. Sales in the book industry were $23.4 billion for calendar year 2003. Sales in the trade industry, defined as wholesale sales to retailers, were slightly over $5 billion for calendar year 2003. Sales in the juvenile paperback market, the Company’s market segment, were $448 million for calendar year 2003. The Company’s market share in the juvenile paperback market has remained constant during the last three years.
The following table sets forth the annual sales in the book industry for the last three calendar years and compares these sales to the Publishing Division’s net sales.
Table of Book Industry Sales (1)
(amounts in millions)
(1) Source: Association of American Publishers
(2) Reported on fiscal year basis
The Publishing Division’s customer base includes national book chains, regional and local bookstores, toy and gift stores, school supply stores and museums. To reach these markets, the Publishing Division utilizes a combination of commissioned sales representatives located throughout the country and a commissioned telesales group located in the Company’s headquarters. The Vice President of the Publishing Division manages sales to the national chains.
The following table sets forth the percentages of net revenues earned by sales to the national chains and sales to other markets for the Publishing Division for the past three fiscal years.
Sales to national chain stores declined in fiscal year 2004 primarily due to the loss of a customer from bankruptcy.
The Publishing Division follows several avenues in order to attract potential new customers and maintain current customers. Company personnel attend many of the national trade shows held by the book selling industry each year. These shows allow the Company to make contact with potential buyers who may be unfamiliar with the Company’s books. The Company actively targets the national chains through cooperative advertising, joint promotional efforts and institutional advertising in trade publications.
The Publishing Division’s in-house telesales group targets the smaller independent book and gift store market. They maintain contact with approximately 6,000 customers. During fiscal year 2004 the telesales group opened 371 new accounts. The Company’s full color, 130-page catalogs, which are revised twice a year, are mailed to nearly 6,000 customers and potential customers. The Company also offers two display racks to assist stores in displaying the Company’s products. One is a six-foot rack with five adjustable shelves that can hold approximately 250 titles. The second rack is a four-sided rack with three levels that will hold between 50 and 60 of the Company’s Kid Kits. There were 3,797 of these attractive racks in retail stores throughout the country at the end of fiscal year 2004.
Publishing Division’s revenues have remained constant the last three fiscal years, with net revenues of $7.4 million - $7.6 million each fiscal year. Management expects that in fiscal year 2005 the Publishing Division will achieve revenues in the $7.5 million - $8.0 million range.
Usborne Books at Home (“UBAH”) Division
The UBAH Division is a multi-level selling organization that markets its products through independent sales representatives (“consultants”) located throughout the United States. The customer base of UBAH consists of individual purchasers and school and public libraries. Revenues are generated through home shows, direct sales, Internet sales, book fairs and contracts with school and public libraries.
An important factor in the continued growth of the UBAH Division is the addition of new sales consultants and the retention of existing sales consultants. Current active consultants recruit new sales consultants. UBAH makes it easy to recruit by providing low sign-up costs. Kits containing sample products and supplies can be purchased for as little as $29. UBAH provides an extensive handbook that is a valuable tool in explaining the various programs to the new recruit.
The following table sets forth the number of new consultants added during the last three fiscal years and the number of active sales consultants at the end of the last three fiscal years.
The UBAH Division presently has three levels of sales representatives: consultants; supervisors; executive supervisors. Upon signing up, each individual is considered a consultant. A consultant receives commissions from each sale the consultant makes, the commission rate being determined by the marketing program under which the sale is made. In addition, consultants receive a monthly sales bonus once the consultant’s sales reach an established monthly goal. Consultants who recruit other consultants and meet certain established criteria are eligible to become supervisors. Upon reaching this level, they receive monthly override payments based upon the sales of their downline groups. The marketing program under which the sales are made determines the rate for the override payments. Once a supervisor reaches certain established criteria, they become executive supervisors. An executive supervisor may receive an additional monthly override payment based upon the sales of their downline groups.
The table below sets forth the different types of marketing programs UBAH offers and the percentage of total revenues that each marketing program has generated for the last three fiscal years, including transportation revenue
The table below sets forth a comparison of the percentage increase (decrease) between fiscal years in the net revenue generated by the different types of marketing programs offered by UBAH, along with the percentage increase (decrease) in transportation revenue.
Home shows are the largest generator of revenue for the UBAH Division and will continue this for the foreseeable future. The significant increase in home show revenue is attributed to the increase in active consultants, which have increased from 5,600 in fiscal year 2002 to 7,000 in fiscal year 2003 to 8,800 at the end of fiscal year 2004.
The direct sales market continues to increase as a result of increases in the number of active sales consultants.
The book fair marketing program has experienced tremendous growth the last several years. UBAH believes that its program is superior to that of their major competitor in this market. Many schools have begun to hold joint book fairs with UBAH and our competitor and the Company does well at these events. In many cases, UBAH book fairs have been the only allowed participant. The Company looks forward to continued growth in this market as it gains wider acceptance.
The school and library market is affected by the budget constraints of the various state school budgets. Cuts in the school’s budget affect the ability of UBAH to be more effective in this market. As a result, sales in the last two fiscal years remained constant.
The Internet market is a relatively new market for UBAH. The revenues from this market, when compared with the other markets, are quite small. However, the Internet sales have increased significantly year to year.
The UBAH Marketing Programs
Homes shows were the original marketing program when UBAH began in 1989 and continues today to generate the greatest percentage of revenue for UBAH. Consultants contact individuals (“hostesses”) to hold book shows in their homes. The consultant assists the hostess in setting up the details for the show. The consultant makes a presentation at the show and takes orders for the books. The hostess earns free books based upon the total sales at the show. Customer specials are available for customers when they order a selected amount. Home shows provide an excellent opportunity for recruiting as well. Direct sales are sales without a hostess being involved. This program makes it possible for the consultant to work directly out of her home selling to friends, neighbors and other customers. It is especially convenient for those individuals who wish to order books from a consultant but they are unable to attend a home show. Customer specials are available for customers when they order a selected amount.
Book fairs can be held with almost any organization as the sponsor. The consultant provides promotional materials to acquaint parents with the books. Parents turn in their orders at a designated time. The book fair program generates free books for the sponsoring organization. UBAH also has a Reach For The Stars fund raiser program. This is a pledge-based reading incentive program that provides cash and books to the organization and books for the children.
School and library sales are restricted to consultants who have received additional training in order to allow them to sell to schools and libraries. The UBAH consultant is the only source that a library or school has for library bound Usborne books. They are not available through any of the school supply distribution companies.
The UBAH Division offers individual web sites to the consultants. These sites are hosted by the Company and are available for a nominal price. The consultant can customize the web site to their own particular needs or they can maintain the generic site. These web sites provide access to the Company’s 1,300 plus titles. Orders can be processed on line through a shopping cart arrangement. The orders are transmitted to the Company and the consultant receives sales credit and commission on the sales.
The table below sets forth the number of orders for each UBAH marketing program.
The Company monitors the trends displayed in the above table in order to judge how the five marketing programs are performing. This table shows strong growth in four of the five categories. As addressed above, the school and library market is impacted by the budget cuts undertaken by many schools.
UBAH’s revenues and profits for fiscal year 2004 increased for the 5th consecutive year. The Company believes that the UBAH Division has the greatest growth potential for the Company. While there are many multi-level companies in the United States, UBAH is the only one selling books exclusively. The Company believes this is a fertile market with excellent opportunities for continued growth. The keys to future growth in the UBAH Division are recruiting of new consultants and retaining existing consultants.
Results of Operations
The following table sets forth consolidated statement of income data as a percentage of total revenues
Fiscal Year 2004 Compared with Fiscal Year 2003
Operating Results
The Company had income before income taxes of $3,832,450 for fiscal year 2004 compared with $3,264,785 for fiscal year 2003.
Revenues
The UBAH Division’s gross sales increased 20% during FY 2004 when compared with FY 2003. Each quarter of FY 2004 recorded a sales increase when compared with the same quarter of FY 2003. A quarterly comparison of FY 2004 versus FY 2003 shows the first quarter up 20%, the second quarter up 27%, the third quarter up 23% and the fourth quarter up 11%. The Company attributes these increases primarily as a result of a 22% increase in the number of new consultants. In addition, the Company continued to offer leadership skills seminars throughout FY 2004. These seminars are designed to help supervisors build their business and the seminars proved to be very popular with these supervisors. The Publishing Division’s gross sales declined 1% during FY 2004 when compared with FY 2003. The Company attributes this decline to the loss of a major customer from bankruptcy.
The UBAH Division’s discounts and allowances were $3.4 million and $3.2 million in fiscal years 2004 and 2003, respectively. The Publishing Division’s discounts and allowances were $7.9 million and $8.0 million in fiscal years 2004 and 2003, respectively. The UBAH Division’s discounts and allowances were 14% and 16% of UBAH’s gross sales for the fiscal years 2004 and 2003 respectively. The Publishing Division’s discounts and allowances were 52% and 51% of Publishing’s gross sales for the fiscal years 2004 and 2003, respectively. The increase in transportation revenues is the result of increased sales in the UBAH Division.
Expenses
Cost of sales increased approximately 10% in fiscal year 2004 when compared with fiscal year 2003. The Company’s cost of its products is 25% to 32% of the gross sales price, depending upon the product. In comparing the percentage increase in sales with the percentage increase in cost of goods, consideration must be given to the mix of products sold. The 10% increase in cost of sales is consistent with the percent increase in gross sales of approximately 11% for the same two fiscal years.
Operating and selling expenses increased because of an increase in freight expense for both divisions combined of $310,000 and an increase in damaged returns for both divisions combined of $68,000. The UBAH Division incurred increases of $452,000 in customer sales incentive costs and an increase in credit card fees in the UBAH Division of $98,000. These increases are directly attributable to the increase in sales. Also contributing to the increase in operating and selling expenses were other items aggregating $56,200. Operating and selling expenses as a percentage of gross sales were 16.4% for fiscal year 2004 and 15.5% for fiscal year 2003.
Sales commissions in the Publishing Division remained flat for the fiscal years ended 2004 and 2003. Publishing Division sales commissions are paid on net sales and were 1.4% of net sales in fiscal years 2004 and 2003. Sales commissions in the UBAH Division increased $1,385,000. UBAH Division sales commissions are paid on retail sales and were 38.9% for fiscal year 2004 and 39.4% for fiscal year 2003. The fluctuation in the percentages of commission expense to retail sales is the result of the type of sale. Home shows, book fairs, school and library sales and direct sales have different commissions rates. Also contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants’ monthly sales and downline sales. The increase in sales commissions is the result of increased sales in the UBAH Division.
General and administrative expenses increased because of additions to the reserve for obsolete inventory of $77,300, additions to the reserve for bad debts of $12,000, an increase in the accrual for audit and tax fees of $14,700 and increased payroll costs of $60,700. Also contributing to the increase in general and administrative expenses were other items aggregating $26,100. General and administrative expenses as a percentage of gross sales were 4.4% for fiscal year 2004 and 4.4% for fiscal year 2003.
Interest expense increased $8,900 due to increased borrowings throughout fiscal year 2004. Interest expense as a percentage of gross sales was 0.02% in fiscal year 2004 and was nominal in fiscal year 2003.
Other income increased $15,600 due to other items.
The tax provision for fiscal year 2004 was $1,459,000. The effective rate for fiscal year 2004 was 38.0%, which is consistent with fiscal year 2003. The Company’s current tax liability was reduced by $87,900 as a result of the benefit obtained from several Company officers exercising stock options.
Fiscal Year 2003 Compared with Fiscal Year 2002
Operating Results
The Company had income before income taxes of $3,264,785 for fiscal year 2003 compared with $2,440,074 for fiscal year 2002.
Revenues
The UBAH Division’s gross sales increased 33% during FY 2003 when compared with FY 2002. Each quarter of FY 2003 recorded a sales increase when compared with the same quarter of FY 2002. A quarterly comparison of FY 2003 versus FY 2002 shows the first quarter up 44%, the second quarter up 18%, the third quarter up 39% and the fourth quarter up 30%. The Company attributes these increases to the fact that the number of active sales consultants increased 14% during FY 2003. In addition, the Company continued to offer leadership skills seminars throughout FY 2003. These seminars are designed to help supervisors build their business. The Publishing Division’s gross sales increased 3% during FY 2003 when compared with FY 2002. The Company attributes this to an increase in sales to the national chains, the result of increased marketing efforts directed at the national chains.
The UBAH Division’s discounts and allowances were $3.2 million and $2.2 million in fiscal years 2003 and 2002, respectively. The Publishing Division’s discounts and allowances were $8.0 million and $7.7 million in fiscal years 2003 and 2002, respectively. The UBAH Division’s discounts and allowances were 16% and 14% of UBAH’s gross sales for the fiscal years 2003 and 2002 respectively. The Publishing Division’s discounts and allowances were 51% and 51% of Publishing’s gross sales for the fiscal years 2003 and 2002, respectively.
The increase in transportation revenues is the result of increased sales in both the UBAH Division and the Publishing Division.
Expenses
Cost of sales increased approximately 18% in fiscal year 2003 when compared with fiscal year 2002. This is consistent with the percent increase in gross sales of approximately 18% for the same two fiscal years.
Operating and selling expenses increased because of an increase in freight expense for both divisions combined of $393,000 and an increase in damaged returns for both divisions combined of $92,900. The UBAH Division incurred an increase of $206,400 in customer sales incentive costs and an increase in credit card fees. These increases are directly attributable to the increase in sales. Payroll costs increased $201,500, mostly in the warehouse operations, where the Company increased base wages in order to be competitive in the local job market and added personnel in order to complete order fulfillment or a timely basis. Other items aggregating $90,600 decreased operating and selling expenses during the fiscal year. Operating and selling expenses as a percentage of gross sales were 15.5% for fiscal year 2003 and 15.7% for fiscal year 2002.
Sales commissions in the Publishing Division increased $3,100 in fiscal year 2003, the result of increased sales. Publishing Division sales commissions are paid on net sales and were 1.4% of net sales in fiscal years 2003 and 2002. Sales commissions in the UBAH Division increased $1,456,000. UBAH Division sales commissions are paid on retail sales and were 39.4% for fiscal year 2003 and 39.6% for fiscal year 2002. The fluctuation in the percentages of commission expense to retail sales is the result of the type of sale. Home shows, book fairs, school and library sales and direct sales have different commissions rates. Also contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants’ monthly sales and downline sales. The increase in sales commissions is the result of increased sales in the UBAH Division.
General and administrative expenses increased because of increased payroll costs of $106,500. General and administrative expenses as a percentage of gross sales were 4.4% for fiscal year 2003 and 4.8% for fiscal year 2002.
Interest expense decreased $19,500 due to decreased borrowings throughout fiscal year 2003. Interest expense as a percentage of gross sales was nominal in fiscal year 2003 and nominal in fiscal year 2002.
The tax provision for fiscal year 2003 was $1,226,700. The effective rate for fiscal year 2003 was 37.6%, which was consistent with fiscal year 2002.
Liquidity and Capital Resources
The Company’s primary uses of cash are for purchases of treasury stock under the stock buyback program, capital expenditures associated with the construction of additional warehouse space and for working capital. The Company utilizes its bank credit facility to meet its short-term cash needs.
The Company expects its ongoing cash flow to exceed cash required to operate the business. In March and April of fiscal year 2005 the Company repurchased approximately 149,000 shares of its common stock under the stock repurchase program at a cost of $1.5 million. The Company is completing construction of a 20,000 square foot addition to its warehouse and will have costs of approximately $402,600 to pay in fiscal year 2005. Consequently, the Company will have short-term bank borrowings during fiscal year 2005.
The Company’s primary source of liquidity is cash generated from operations. During fiscal year 2004 the Company experienced a negative cash flow of $1,370,500. Net income, adjusted for depreciation, was reduced by increased inventory of $2,610,600 and a reduction in accounts payable and accrued expenses of $1,209,700. The Company believes that the inventory levels are at an adequate level to meet sales requirements and does not foresee increasing inventory during fiscal year 2005. Fluctuations in accounts payable and accrued expenses involve timing of shipments received from the Company’s principal supplier and the payments associated with these shipments.
The Company believes that in fiscal year 2005 it will experience a positive cash flow and that this positive cash flow along with the bank credit facility will be adequate to meet its liquidity requirements for the foreseeable future.
Cash used in investing activities was $235,900. The principal use of cash in investing activities was for progress payments, totaling $179,800, on the construction of the 20,000 square foot addition to the Company’s warehouse facility. Additional cash used in investing activities included $33,700 in property improvements, $13,400 for warehouse equipment and $9,000 for data processing equipment. The Company estimates that cash used in investing activities for fiscal year 2005 will be less than $1,000,000. This would consist of $402,600 remaining due on the construction of the warehouse addition, with the balance to be used for software and hardware enhancements to the Company’s existing data processing equipment, property improvements and additional warehouse equipment.
Cash received in financing activities was $637,700 from the sale of treasury stock, $372,000 from the exercise of stock options and a net $394,000 in borrowings under the bank credit agreement. Cash used in financing activities included $575,800 paid to acquire treasury stock and the annual dividend totaling $393,900.
As of February 29, 2004 the Company did not have any commitments in excess of one year.
Bank Credit Agreement
Effective June 30, 2003, the Company signed a Fourth Amendment to the Credit and Security Agreement with Arvest 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, 2004. The note bears interest at the Wall Street Journal prime floating rate minus 0.25% payable monthly (3.75% at February 29, 2004). The note is collateralized by substantially all of the assets of the Company. At February 29, 2004 the Company had $394,000 outstanding. Available credit under the revolving credit agreement was $3,106,000 at February 29, 2004. The Company intends to renew the credit line prior to the maturity date and extend the maturity date to June 30, 2005.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectable accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. The Company’s significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report. However, the Company considers the following accounting policies to be more dependent on the use of estimates and assumptions
Revenue Recognition
Revenue from merchandise sales is net of returns and allowances. The provisions of the SEC Staff Accounting Bulletin No.101, “Revenue Recognition in Financial Statements,” have been applied, and as a result, a reserve is provided for estimated future 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 29, 2004 and February 28, 2003. The reserve for sales returns is estimated by management using historical sales returns data.
Allowance for Doubtful Accounts
The Company maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends. If the actual uncollected amounts significantly exceed the estimated allowance, then the Company’s operating results would be significantly adversely affected. Management has estimated allowance for doubtful accounts of $49,919 and $88,962 as of February 29, 2004 and February 28, 2003, respectively.
Inventory
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. Noncurrent inventory was estimated by management using the current year turnover ratio by title. All inventory in excess of 2 -1/2 years of anticipated sales was classified as noncurrent inventory. Noncurrent inventory balances were $823,751 and $511,500 at February 29, 2004 and February 28, 2003, respectively.
Inventories are presented net of a reserve for obsolete inventory. Management has estimated and included a reserve for obsolescence for both current and noncurrent inventory. This reserve is based on management’s identification of obsolete inventory on hand at February 29, 2004 and February 28, 2003. Management has estimated reserves for both current and noncurrent inventory of $282,165 and $215,990 as of February 29, 2004 and February 28, 2003, respectively.
Deferred Tax Assets
As discussed in Note 4 of the consolidated financial statements, the Company does not currently have a valuation allowance recorded against its deferred tax assets. If management determines it is more likely than not that its deferred tax assets would not be realizable in the future, a valuation allowance would be recorded to reduce the deferred tax asset to its net realizable value.
Long-lived Assets
In evaluating the fair value and future benefits of long-lived assets, we perform an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets and reduce their carrying value by the excess, if any, of the result of such calculation. We believe at this time that the long-lived assets’ carrying values and useful lives continues to be appropriate.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material market risk.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 begins at page, following page 26 hereof.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements on any matter of accounting principles or practices or financial statement disclosure within the twenty-four months prior to February 29, 2004.
Item 9.A CONTROLS AND PROCEDURES
An evaluation was performed of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c) and 15d-14(c) within 90 days of the filing date of this Annual Report on Form 10-K. This evaluation was conducted under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and its Chief Financial Officer. Based on that evaluation, the Company’s Chief Executive Officer and its Chief Financial Officer concluded that he Company’s disclosure controls were effective to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported in accordance with the rules and forms of the SEC. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls since the date controls were evaluated.
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 July 27, 2004.
(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.
* The prior business experience for these executive officers who have been employed by the Company for less than five years is as follows:
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.
In July 2002, Ronald T. McDaniel was elected Vice President of the Publishing Division. Ronald McDaniel joined EDC on September 25, 2000 as National Sales Manager of the Publishing Division. Prior to that he was affiliated with Prudential Detrick Realty, serving as a Residential and Light Commercial Sales Associate. In addition, he was President of The McDaniel Company, a residential management and rehabilitation company.
(c) Compliance With Section 16 (a) of the Exchange Act
The information required by this Item 10 is furnished by incorporation by reference to all information under the caption “Compliance With Section 16 (a)” in the Company’s definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 27, 2004.
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 July 27, 2004.
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 “Security Ownership of Certain Beneficial Owners and Management” in the Company’s definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 27, 2004.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company sells to the EDC Employee 401(k) Plan treasury shares at a cost equal to or greater than the Company’s cost of those shares. During fiscal year 2004 the EDC Employee 401(k) Plan acquired 50,665 shares priced from $3.50 - $7.00 per share, for a total cost of approximately $199,900.
Item 14. PRINCIPAL ACCOUNTANT’S FEES AND SERVICES
The information required by this Item 14 is furnished by incorporation by reference to all information under the caption “Independent Public Accountants” in the Company’s definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 27, 2004.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
The following documents are filed as part of this report:
1.
Financial Statements
Schedules have been omitted as such information is either not required or is included in the financial statements.
(b)
No reports on Form 8-K were filed during the last quarter of the period covered by this report.
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
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.
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 29, 2004 and February 28, 2003, and the related statements of earnings, shareholders’ equity, and cash flows for each of the three years in the period ended February 29, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at February 29, 2004 and February 28, 2003, and the results of its operations and its cash flows for each of the three years in the period ended February 29, 2004, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Tulsa, Oklahoma
May 19, 2004
-F- 1 -
EDUCATIONAL DEVELOPMENT CORPORATION
BALANCE SHEETS
FEBRUARY 29, 2004 AND FEBRUARY 28, 2003
See notes to financial statements.
-F- 2 -
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS
YEARS ENDED FEBRUARY 29, 2004, FEBRUARY 28, 2003 AND 2002
See notes to financial statements.
-F- 3 -
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED FEBRUARY 29, 2004, FEBRUARY 28, 2003 AND 2002
See notes to financial statements.
-F- 4 -
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 29, 2004, FEBRUARY 28, 2003 AND 2002
See notes to financial statements.
-F- 5 -
EDUCATIONAL DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 2004, FEBRUARY 28, 2003 AND 2002
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 to book, toy and gift stores, libraries and home educators located throughout the United States (“U.S.”). The Company is the sole U.S. distributor of books and related items, which are published by an England based publishing company. The England based publishing company is the Company’s primary supplier.
Estimates - 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.
Business Concentration - A significant portion of inventory purchases by the Company are concentrated with an England based publishing company. Purchases from this England based publishing company were approximately $12.7 million, $11.1 million and $6.1 million for the fiscal year ended February 29, 2004, February 28, 2003 and 2002, respectively. Total inventory purchases were approximately $15.3 million, $13.9 million and $8.1 million for the fiscal year ended February 29, 2004, February 28, 2003 and 2002, respectively.
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. The Company presents a portion of its inventory as a noncurrent asset. Occasionally the Company 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 excess quantities were included in noncurrent inventory. Noncurrent inventory was estimated by management using the current year turnover ratio by title. All inventory in excess of 2-½ years of anticipated sales was classified as noncurrent inventory.
Inventories are presented net of a reserve for obsolete inventory. Management has estimated and included a reserve for obsolescence for both current and noncurrent inventory. This reserve is based on management’s identification of obsolete inventory on hand at February 29, 2004 and February 28, 2003.
Prepaid Expenses and Other Assets - Prepaid expenses and other assets at February 28, 2003 include notes receivable of approximately $14,000 due from directors and related parties of the Company. There were no notes receivable due from directors and related parties at February 29, 2004.
Property, Plant and Equipment - Property, plant and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives, which range from 2 to 30 years.
-F- 6 -
Income Taxes - The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using the regular tax rate expected to be in effect when the taxes are actually paid or recovered. The Company records net deferred tax assets related to the recognition of future tax benefits, to the extent that realization of such benefits is considered more likely than not to occur.
Revenue Recognition - Sales are recognized and recorded when products are shipped. The estimated allowance for sales returns is recorded as sales are recognized and recorded. Management uses prior experience to estimate the allowance for sales returns.
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.
The following reconciles the diluted earnings per share:
There were no stock options for the fiscal years ended February 29, 2004, February 28, 2003 and 2002 excluded from the diluted earnings per share calculation.
Fair Value of Financial Instruments - For cash and cash equivalents, accounts receivable, accounts payable and notes payable to the bank, the carrying amount approximates fair value because of the short maturity of those instruments.
Long-Lived Asset Impairment - The Company reviews the value of long-lived assets 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. No impairment was noted as a result of such review during the years ended February 29, 2004, February 28, 2003 and 2002.
Stock-Based Compensation - The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Compensation cost for stock options, if any, is measured as the excess of the
-F- 7 -
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 following table illustrates the effects on net income and earnings per share. If the Company had applied the fair value recognition provisions of Statement of Financial Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended, to stock-based employee compensation.
Reclassifications - Certain prior year amounts have been reclassified to conform with the 2004 presentation.
2.
INVENTORIES
Inventories consist of the following:
-F- 8 -
3.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
-F- 9 -
4.
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. The tax effects of significant items comprising the Company’s net deferred tax assets and liabilities as of February 29, 2004 and February 28, 2003 are as follows:
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- 10 -
The components of income tax expense are as follows:
The following reconciles the Company’s expected income tax expense utilizing statutory tax rates to the actual tax expense:
-F- 11 -
-F- 12 -
-F- 13 -
The February 28, 2003 and 2002 fiscal year quarterly results reflect the reclassification of freight revenue which aggregated $1,377,563 and $1,060,202, respectively.
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, 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.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on operating profits of the segments, which is defined as segment net sales reduced by direct cost of sales and direct expenses. Corporate expenses, including interest and depreciation, and income taxes are not allocated to the segments. The Company’s assets are not allocated on a segment basis.
Information by industry segment for the years ended February 29, 2004, February 28, 2003 and 2002 is set forth below:
-F- 14 -
******
-F- 15 -
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 July 27, 2004.
(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.
* The prior business experience for these executive officers who have been employed by the Company for less than five years is as follows:
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.
In July 2002, Ronald T. McDaniel was elected Vice President of the Publishing Division. Ronald McDaniel joined EDC on September 25, 2000 as National Sales Manager of the Publishing Division. Prior to that he was affiliated with Prudential Detrick Realty, serving as a Residential and Light Commercial Sales Associate. In addition, he was President of The McDaniel Company, a residential management and rehabilitation company.
(c) Compliance With Section 16 (a) of the Exchange Act
The information required by this Item 10 is furnished by incorporation by reference to all information under the caption “Compliance With Section 16 (a)” in the Company’s definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 27, 2004.
Item 11.
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 July 27, 2004.
Item 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 “Security Ownership of Certain Beneficial Owners and Management” in the Company’s definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 27, 2004.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company sells to the EDC Employee 401(k) Plan treasury shares at a cost equal to or greater than the Company’s cost of those shares. During fiscal year 2004 the EDC Employee 401(k) Plan acquired 50,665 shares priced from $3.50 - $7.00 per share, for a total cost of approximately $199,900.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT’S FEES AND SERVICES
The information required by this Item 14 is furnished by incorporation by reference to all information under the caption “Independent Public Accountants” in the Company’s definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 27, 2004.
PART IV
Item 15.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
The following documents are filed as part of this report:
1.
Financial Statements
Schedules have been omitted as such information is either not required or is included in the financial statements.
(b)
No reports on Form 8-K were filed during the last quarter of the period covered by this report.
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
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.
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 29, 2004 and February 28, 2003, and the related statements of earnings, shareholders’ equity, and cash flows for each of the three years in the period ended February 29, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at February 29, 2004 and February 28, 2003, and the results of its operations and its cash flows for each of the three years in the period ended February 29, 2004, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Tulsa, Oklahoma
May 19, 2004
-F- 1 -
EDUCATIONAL DEVELOPMENT CORPORATION
BALANCE SHEETS
FEBRUARY 29, 2004 AND FEBRUARY 28, 2003
See notes to financial statements.
-F- 2 -
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS
YEARS ENDED FEBRUARY 29, 2004, FEBRUARY 28, 2003 AND 2002
See notes to financial statements.
-F- 3 -
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED FEBRUARY 29, 2004, FEBRUARY 28, 2003 AND 2002
See notes to financial statements.
-F- 4 -
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 29, 2004, FEBRUARY 28, 2003 AND 2002
See notes to financial statements.
-F- 5 -
EDUCATIONAL DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 2004, FEBRUARY 28, 2003 AND 2002
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 to book, toy and gift stores, libraries and home educators located throughout the United States (“U.S.”). The Company is the sole U.S. distributor of books and related items, which are published by an England based publishing company. The England based publishing company is the Company’s primary supplier.
Estimates - 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.
Business Concentration - A significant portion of inventory purchases by the Company are concentrated with an England based publishing company. Purchases from this England based publishing company were approximately $12.7 million, $11.1 million and $6.1 million for the fiscal year ended February 29, 2004, February 28, 2003 and 2002, respectively. Total inventory purchases were approximately $15.3 million, $13.9 million and $8.1 million for the fiscal year ended February 29, 2004, February 28, 2003 and 2002, respectively.
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. The Company presents a portion of its inventory as a noncurrent asset. Occasionally the Company 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 excess quantities were included in noncurrent inventory. Noncurrent inventory was estimated by management using the current year turnover ratio by title. All inventory in excess of 2-½ years of anticipated sales was classified as noncurrent inventory.
Inventories are presented net of a reserve for obsolete inventory. Management has estimated and included a reserve for obsolescence for both current and noncurrent inventory. This reserve is based on management’s identification of obsolete inventory on hand at February 29, 2004 and February 28, 2003.
Prepaid Expenses and Other Assets - Prepaid expenses and other assets at February 28, 2003 include notes receivable of approximately $14,000 due from directors and related parties of the Company. There were no notes receivable due from directors and related parties at February 29, 2004.
Property, Plant and Equipment - Property, plant and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives, which range from 2 to 30 years.
-F- 6 -
Income Taxes - The Company records deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using the regular tax rate expected to be in effect when the taxes are actually paid or recovered. The Company records net deferred tax assets related to the recognition of future tax benefits, to the extent that realization of such benefits is considered more likely than not to occur.
Revenue Recognition - Sales are recognized and recorded when products are shipped. The estimated allowance for sales returns is recorded as sales are recognized and recorded. Management uses prior experience to estimate the allowance for sales returns.
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.
The following reconciles the diluted earnings per share:
There were no stock options for the fiscal years ended February 29, 2004, February 28, 2003 and 2002 excluded from the diluted earnings per share calculation.
Fair Value of Financial Instruments - For cash and cash equivalents, accounts receivable, accounts payable and notes payable to the bank, the carrying amount approximates fair value because of the short maturity of those instruments.
Long-Lived Asset Impairment - The Company reviews the value of long-lived assets 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. No impairment was noted as a result of such review during the years ended February 29, 2004, February 28, 2003 and 2002.
Stock-Based Compensation - The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Compensation cost for stock options, if any, is measured as the excess of the
-F- 7 -
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 following table illustrates the effects on net income and earnings per share. If the Company had applied the fair value recognition provisions of Statement of Financial Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended, to stock-based employee compensation.
Reclassifications - Certain prior year amounts have been reclassified to conform with the 2004 presentation.
2.
INVENTORIES
Inventories consist of the following:
-F- 8 -
3.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
-F- 9 -
4.
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. The tax effects of significant items comprising the Company’s net deferred tax assets and liabilities as of February 29, 2004 and February 28, 2003 are as follows:
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- 10 -
The components of income tax expense are as follows:
The following reconciles the Company’s expected income tax expense utilizing statutory tax rates to the actual tax expense:
-F- 11 -
-F- 12 -
-F- 13 -
The February 28, 2003 and 2002 fiscal year quarterly results reflect the reclassification of freight revenue which aggregated $1,377,563 and $1,060,202, respectively.
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, 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.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on operating profits of the segments, which is defined as segment net sales reduced by direct cost of sales and direct expenses. Corporate expenses, including interest and depreciation, and income taxes are not allocated to the segments. The Company’s assets are not allocated on a segment basis.
Information by industry segment for the years ended February 29, 2004, February 28, 2003 and 2002 is set forth below:
-F- 14 -
******
-F- 15 -