Letter From The President
Dear Shareholders,
I am very pleased to announce that Educational Development Corporation has
completed the largest net revenue year in our history with a 25% increase over last year.
It has now been just over three years since making the bold decision to discontinue
sales to Amazon, which had represented approximately 20% of the annual revenue for
the publishing division, EDC Publishing. This decision was the culmination of realizing
that Amazon sales were negatively impacting all aspects of our Company-from retail
stores, online sales and our direct selling division, Usborne Books & More (UBAM).
And what an amazing three years it has been! EDC Publishing, which sells to retail stores,
just completed its largest revenue year in our history and UBAM continues to reverse a
nine-year decline, posting 21 consecutive months of sales increases when compared to the
same month in previous years.
As I have stated, I believed Amazon had a very negative impact on our Company
and was a significant factor in the sales decline of our direct selling division. Too often,
our direct sales representatives would present our products to the consumer only to have
them order from Amazon and avoid sales tax, which our Company is obligated to collect.
I believe in “Sales 101” which dictates that whoever makes the sale must be compensated
and, when this did not happen, we lost numerous sales representatives resulting in the
sales decline.
However, I am delighted to report, this trend has been reversed which has spurred
a renewed confidence in our sales representatives resulting in a 67% increase in the
numbers of sales representatives joining our organization this past year. There are many
factors that are responsible for the turnaround in our Company revenues, and of course,
the Amazon decision looms as the largest, however many other elements enter into these
results and certainly not the least is the fact that we represent the very best products in
the industry, with award-winning titles from Kane Miller and Usborne Publishing. We are
very proud of our product line and delighted to report Usborne Publishing was recently
named overall Independent Publisher of the Year in Great Britain.
I have never wavered from the philosophy that our products are better served
when presented to the consumer by someone knowledgeable, whether it is one of our
loyal retail outlets or our direct sales division. During this year, we committed additional
incentives and support to our direct selling division and publishing division in their efforts
to be competitive in the marketplace and we will continue this practice in the future.
During the past year we made significant improvements to our Company operations,
including negotiating improved freight rates, and we have announced exciting new
enhancements including the latest technology in software to support our rapidly
expanding direct selling division. The additional incentives have driven revenue to a near
record level in the direct selling division, however with the operational improvements,
we were still able to improve our margins in the fourth quarter and we expect to see
continued improvement in the upcoming fiscal year.
We have an excellent leadership team in place, a loyal customer base, award-winning
products and we are excited about the prospects for the fiscal year 2016.
EDC is a company you can be proud to work for
and one you can be proud to own.
Cordially yours,
Randall W. White
Chairman of the Board, President
and Chief Executive Officer
About Us
Educational Development Corporation was founded in 1965 to develop
supplemental curriculum material for schools. In 1978, EDC acquired the rights
to publish children’s books from Usborne Publishing, Ltd. in England and began
distributing Usborne books through the Publishing Division (EDC Publishing).
What began as a supplement to the corporation’s product line has grown to become
the largest product line for the company.
During the 1980s, EDC eliminated the other product lines to concentrate
exclusively on Usborne books. On March 1, 1989, EDC created the direct selling
division, Usborne Books at Home (currently known as Usborne Books & More). In
late 2008, EDC acquired Kane Miller Publishing, an internationally known publisher
of children’s books with over 25 years in the industry. Concurrently with that
acquisition, the name of the direct selling division was changed to Usborne Books
& More.
Educational Development Corporation has two divisions. EDC Publishing
distributes books to bookstores, toy stores, museums, specialty stores and other
retail outlets. Usborne Books & More distributes books through Independent
Consultants who sell directly to consumers via home shows, direct sales, book fairs,
and web sites. Consultants, when registered as Educational Consultants, also have
the opportunity to sell to the school & library market. This is done through offering
one-on-one sales opportunities, fundraisers, book fairs, matching grant programs
and more, which reinforce the company’s support of literacy and education.
The company’s strategic plan includes growing market share in both divisions.
Everyone benefits from having Usborne and Kane Miler books available in their
homes, classrooms, libraries and stores. Our books make learning fun! Usborne and
Kane Miller books are the most exciting, engaging, and educational books on the
market today. They are high quality, innovative, lavishly-illustrated and, best of all, they
are the books kids love to read. There are almost 1600 bright, colorful and fun titles to
choose from - covering a wide assortment of subjects. We offer an incredible variety
of fiction and non-fiction titles in all age ranges.
Usborne Books
Over forty years ago, Peter Usborne pioneered a new generation of books that
prove it is possible to create books that compete with the vast media that attracts
children today. From activity books, to fascinating fiction series, to internet-linked
science and history encyclopedias, Usborne does books better. With subjects ranging
from history to art, horses to ballet, sticker books to activity cards, math dictionaries
to first readers and touchy-feely board books, every child’s age, stage, subject and
interest can be matched with an Usborne book. Highly illustrated, easy to pore over
and dip into, written with humor, drama and intelligence, Usborne books enrich
children’s interests, helping them discover a myriad of subjects with ease and success.
All of the books in the Usborne line have an accessible, vibrant, distinctive design
and mass commercial appeal. Usborne books are currently sold in over 85 countries
in more than 75 different languages.
Kane Miller Books
For more than 25 years, Kane Miller, based in San Diego, California, has been
publishing award-winning children’s books from around the world. The books chosen
to publish are done so with extraordinary care and attention. Kane Miller searches
the world for great picture books and fiction that enrich the lives and imaginations of
the children who read them. With art and text that combine to bring the world closer
to children, sharing stories and ideas while exploring differences, Kane Miller books
offer a window to other countries, cultures and communities – including those in the
U.S. Books teach attitudes, they reinforce or break stereotypes, they make the world
seem a bigger place or a smaller one, they humanize events, and they make children
feel empathy, sympathy and wonder. Books can personalize the world. Kane Miller
strives to publish books that make kids say “Wow that’s just like me” and also “Wow,
that’s different.” Books that make kids say, “I want to go there someday,” or even just
sometimes “Wow, what a silly story.” And for them to know that maybe someone in
another part of the world is saying “Wow” about the exact same book.
Recognitions
EDC is proud to announce that Usborne Publishing was named 2014 Children’s
Publisher of the Year and 2014 Overall Independent Publisher of the Year by IPG in England.
This honor is especially astounding as they were judged against multiple publishers of
varying sizes and subjects. As was quoted by one of the IPG judges, “the way it not
just keeps going but keeps growing is really impressive. Its presence around the world
is phenomenal, and it is evangelical about getting people to read. All publishers could
learn something from Usborne.”
The Kane Miller title, Splash, Anna Hibiscus!, was selected as a 2014 Summer
Reading selection from The Horn Book (on a shortlist of ten titles).
Usborne Books & More (UBAM)
Celebrating twenty-five years in the direct selling industry is no small feat. The
success of being in the industry for so long was only surpassed by the year-end results.
Continued marketing efforts to not only reach new Consultants, but also encourage
active Consultants to do more with their business, proved successful. Net revenues for
Fiscal 2015 were up 39% over the previous year, totaling $21,015,800. After nine years
of sales decline, Fiscal Year 2014 had started a sales recovery in the home business
division that continued all the way through Fiscal Year 2015. This positive trend has
translated to all aspects of the business, including 6,500 new Consultants joining the
business in Fiscal 2015, representing a 62% increase over the previous year.
The current statistics in the Direct Selling industry continue to show a downturn in
both net sales as well as new recruits. UBAM has experienced quite the opposite, with
increases in multiple Key Performance Indicators, including:
• New Team Leaders – 184
More than double the number of new Team Leaders compared to the prior year
•
•
Incentive Trip Earners – 117
80% more earners than the previous year
Leadership training attendance – 250
38% over last year
• Convention Registration – 672
Representing 31% more attendees than in 2014
These accomplishments in UBAM can be attributed to a multitude of things, not
the least of which are the programs that are offered to Consultants as sales avenues.
Those include home parties, book fairs, a matching grant program, fundraisers,
e-commerce sales and more. The innovative promotions offered continued in Fiscal
2015, building on the theme “Books Are My Ticket to the World”, with offerings of
a fabulous incentive travel trip to Ireland as well as a chance to earn personalized,
branded luggage.
The efforts of the Consultant Services staff, as well as the performance of the
Consultants, culminated in a cover story in Direct Selling News, the premier magazine
of the Direct Selling Industry. This feature article highlighted the success UBAM has
been experiencing in the last two years, as well as the continued quality of product and
business opportunity that is offered within our division.
Heather Cobb
Vice President
UBAM
Todd R. White
Manager
Educational Services
Pat Wright
Manager
Consultant Services
EDC Publishing
The EDC Publishing Division posted the best performance in the division’s
history with an increase of 5% in net revenues in Fiscal 2015 to $11,532,500. Sales
to large national chains increased by 10%, due in large part, to the continuing
increased penetration of some of our bestselling series, such as Sticker Dolly
Dressing and other activity books. EDC Publishing continues to gain an increased
share of valuable real estate in the stores, resulting in increased volume due to
significant customer exposure to our products.
Outstanding growth continues in the toy and gift markets. In fiscal
2015, these markets represented 68% of the EDC Publishing Division’s total net
revenues, up from 63% in the prior fiscal year.
The focus in the fiscal year ahead will be to maintain the growth of the national
chain sector, and the independent retail sector, with special emphasis on the
continuing growth of the toy and gift markets. EDC maintains a continued
presence at prominent national trade shows such as Toy Fair, New York Now, San
Francisco Gift Show, Los Angeles Gift Show, Atlanta Gift Show, Las Vegas Gift
Show, ASTRA and the Museum Store Association Show. EDC Publishing will
continue to maintain the marketing efforts that have proven successful in the past,
in all areas of our business.
Jeanie Crone
Vice President
EDC Publishing
Kira Lynn
Publisher
Kane Miller
STOCK PRICES AND DIVIDENDS PAID
Fiscal Year
Stock Prices
Cash Dividend Paid
2015
2014
2013
2012
2011
High
Low
$
$
$
$
$
5.80
3.95
5.00
6.90
7.00
$
$
$
$
$
3.57
2.49
3.79
3.80
5.15
$
$
$
$
$
0.32
0.32
0.44
0.48
0.54
Operations
Headquartered in Tulsa, Oklahoma, the EDC corporate office and adjacent
100,000 square foot warehouse provide for a streamlined operational and management
workflow. The warehouse’s six hundred foot long flow-rack system expedites order
fulfillment and delivery, with over 95% of orders receiving same-day turnaround.
Craig M. White
Vice President
Information Technology
Marilyn Pinney
Controller & Corporate
Secretary
__________________________________________________________________________________
__________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________________
__________________________________________________________________________________
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2015
OR
(cid:3) (cid:3) (cid:3) (cid:3) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to .
Commission file number: 0-4957
EDUCATIONAL DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
10302 East 55th Place, Tulsa, Oklahoma
(Address of principal executive offices)
73-0750007
(I.R.S. Employer
Identification No.)
74146-6515
(Zip Code)
Registrant’s telephone number, including area code (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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:3) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes (cid:3) No
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 No (cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes No (cid:3)
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer (cid:3)
Accelerated filer (cid:3)
Non-accelerated filer (cid:3)
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes (cid:3) No
The aggregate market value of the voting shares held by non-affiliates of the registrant at the price at which the common stock was
last sold on August 31, 2014, on the NASDAQ Stock Market, LLC was $19,612,100.
As of May 26, 2015, 4,035,134 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for fiscal year 2015 relating to our Annual Meeting of Shareholders to be held on July 16, 2015 are
incorporated by reference into Part III of this Report on Form 10-K.
2
FORWARD-LOOKING STATEMENTS
TABLE OF CONTENTS
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
4
4
6
6
6
6
6
Selected Financial Data
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 7
7
Item 6.
8
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
16
Item 8.
16
Item 9.
16
Item 9A. Controls and Procedures
17
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accountant’s Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
18
18
18
18
18
19
3
FORWARD-LOOKING STATEMENTS
PART I
This report contains statements that are forward-looking. You should read the following discussion in connection with our
financial statements, including the notes to those statements, included in this document. These forward-looking statements are not
historical facts but are expectations or projections based on certain assumptions and analyses made by our senior management in
light of their experience and perception of historical trends, current conditions, expected future developments and other
factors. Actual events and results may be materially different from anticipated results described in such statements. As used in this
Annual Report on Form 10-K, the terms “EDC,” “we,” “our” or “us” mean Educational Development Corporation, a Delaware
corporation, unless the context indicates otherwise.
Our ability to achieve such results is subject to certain risks and uncertainties which are not currently known to us. We
caution you not to place undue reliance on these forward-looking statements, which speak only as of the date that they are
made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or
circumstances after the date of this report.
Item 1. BUSINESS
(a) General Development of Business
Educational Development Corporation (“EDC”) is the exclusive United States trade publisher of the line of educational
children’s books produced in the United Kingdom by Usborne Publishing Limited (“Usborne”). We were incorporated on August
23, 1965. Our fiscal years end on February 28.
We also own Kane Miller Book Publishers; award-winning publishers of international children’s books.
Our company motto is “The future of our world depends on the education of our children. EDC delivers educational
excellence one book at a time. We provide economic opportunity while fostering strong family values. We touch the lives of
children for a lifetime.”
(b) Financial Information about Industry Segments
While selling children’s books is our only line of business, we sell them through two divisions:
·
·
Home Business Division (“Usborne Books & More” or “UBAM”) - This division distributes books nationwide
through independent consultants, who hold book showings in individual homes, through social media, book fairs,
direct sales and Internet sales. The UBAM consultants also distribute these titles to school and public libraries.
Publishing Division (“EDC Publishing”) – This division markets books to bookstores (including major national
chains), toy stores, specialty stores, museums and other retail outlets throughout the country.
Percent Net Revenues by Division
2015
2014
65%
35%
100%
58%
42%
100%
UBAM
Publishing
Total net revenues
(c) Narrative Description of Business
Products
As the sole United States trade publisher of the Usborne line of books, we offer over 1,500 different titles. Many are
interactive in nature, including our Touchy-Feely board books, activity and flashcards, adventure and search books, art books,
sticker books and foreign language books. The majority of the titles published by Kane Miller Book Publishers originally were
published in other countries in their native languages.
4
We have a broad line of ‘internet-linked’ books which allow readers to expand their educational experience by referring
them to relevant non-Usborne websites. Our books include science and math titles, as well as chapter books and novels. We
continually introduce new titles across all lines of our products.
UBAM markets the books through commissioned consultants using a combination of direct sales, home parties, book fairs
and the Internet. The division had approximately 7,800 consultants in 50 states at February 28, 2015.
EDC Publishing markets through commissioned trade representatives who call on book, toy, and specialty stores along
with other retail outlets. We also do in-house marketing by telephone to these customers and potential customers. This division
markets to approximately 5,000 book, toy and specialty stores. Significant orders, totaling 26% of the Publishing division’s net
sales, have been received from major book chains.
Key Customers
No customer represents more than 10% of our net sales.
Seasonality
Sales for both divisions are greatest during the fall due to the holiday season.
Competition
While we have the exclusive U.S. rights to sell Usborne Books, we face competition for UBAM from several other larger
direct selling companies - for sales and consultants. Our school and library market faces competition from Scholastic Books for the
book fair market.
EDC Publishing faces competition from large U.S. and international publishing companies.
Employees
As of April 1, 2015, 83 full-time employees worked at our Tulsa and San Diego facilities; almost 50% of those are in the
distribution warehouse. We believe our relations with our employees are good.
Company Reports
Our annual and quarterly reports (Forms 10-K and 10-Q), current Form 8-K reports and amendments to those reports filed
with the SEC are available for download from the Investor Relations portion of our Internet website at www.edcpub.com.
5
Item 1A. RISK FACTORS
We are a smaller reporting company and are not required to provide this information.
Item 1B. UNRESOLVED STAFF COMMENTS
None
Item 2. PROPERTIES
We are located at 10302 E. 55th Pl., Tulsa, Oklahoma. This facility is owned by us and contains approximately 105,000
square feet of office and warehouse space, which is solely utilized by us. All product distributions are made from this warehouse
using our six-hundred-foot-long flow-rack system, known as “the line,” to expedite order fulfillment, packaging, and shipment. We
believe that our operating facility meets both present and future capacity needs. We also lease a small office in San Diego,
California which houses Kane Miller Book Publishers.
Item 3. LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings.
Item 4. MINE SAFETY DISCLOSURES
None
6
PART II
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 NASDAQ (symbol--EDUC). The high and low quarterly common stock
quotations for fiscal years 2015 and 2014, as reported by the NASDAQ, were as follows:
Period
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
2015
2014
High
Low
High
Low
3.92
4.95
4.88
5.80
3.57
3.71
4.04
4.12
3.95
3.58
3.11
3.89
3.45
3.04
2.49
2.89
The number of shareholders of record of EDC's common stock at February 28, 2015 was 590.
During fiscal year 2015, we paid quarterly dividends totaling $0.32 per share as follows: $0.08 per share dividend on
March 21, 2014, $0.08 per share dividend on June 20, 2014, $0.08 per share dividend on September 19, 2014, and $0.08 per share
dividend on December 19, 2014. An additional $0.08 per share dividend was declared on February 25, 2015 and was paid during
fiscal year 2016 to shareholders of record on March 13, 2015.
The following table shows repurchases of our common stock which we made during the fourth quarter of fiscal year 2015.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
December 1 - 31, 2014
January 1 - 31, 2015
February 1 - 28, 2015
Total
Total # of
Shares
Purchased
Average Price
Paid per
Share
Total # of
Shares
Purchased as
Part of
Publicly
Announced
Plan (1)
Maximum # of
Shares that
May
be
Repurchased
under the Plan
9 $
-
-
9 $
4.87
-
-
4.87
9
-
-
9
303,315
303,315
303,315
(1)
In April 2008 the Board of Directors authorized us to purchase up to 500,000 additional shares of our common stock
under a plan initiated in 1998. This plan has no expiration date.
Item 6. SELECTED FINANCIAL DATA
We are a smaller reporting company and are not required to provide this information.
7
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management’s discussion and analysis contains statements that are forward-looking and include numerous risks which
you should carefully consider. Additional risks and uncertainties may also materially and adversely affect our business. You
should read the following discussion in connection with our financial statements, including the notes to those statements, included in
this document. Our fiscal years end on February 28.
Management Summary
Educational Development Corporation is the sole distributor in the United States of the Usborne line of children’s books
and is the owner of Kane Miller Book Publishers. We operate two separate divisions, EDC Publishing and Usborne Books & More
(“UBAM”), to sell these books. Our corporate headquarters, including the distribution facility for both divisions, is located in Tulsa,
Oklahoma.
These two divisions each have their own customer base. EDC Publishing markets its products on a wholesale basis to
various retail accounts. UBAM markets its products to individual consumers as well as to school and public libraries through
direct-selling consultants.
Publishing Division
EDC Publishing operates in a market that is highly competitive, with a large number of companies engaged in the selling of
books. 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 inside sales group located in our headquarters. The Vice
President of the Publishing division manages sales to the national chain customers.
Publishing Division Net Revenues by Market Type
National chain stores
All other
Total net revenues
FY 2015
FY 2014
26%
74%
100%
26%
74%
100%
EDC Publishing uses a variety of methods 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, allowing us to make contact with
potential buyers who may be unfamiliar with our books. We actively target the national chains through joint promotional efforts and
institutional advertising in trade publications. The Publishing division also participates with certain customers in a cooperative
advertising allowance program, under which we pay back up to 2% of the net sales to that customer. Our products are then featured
in promotions, such as catalogs, offered by the vendor. We may also acquire, for a fee, an end cap position in a bookstore (our
products are placed on the end of a shelf), which in the publishing industry is considered an advantageous location in the bookstore.
EDC Publishing’s in-house telesales group targets the smaller independent book and gift store market. Our semi-annual,
full-color, 160-page catalogs, are mailed to over 5,000 customers and potential customers. We also offer two display racks to assist
stores in displaying our products.
Net Revenues for Publishing Division
Net Revenues
FY 2015
FY 2014
$
11,532,500
$
10,968,400
Publishing division’s net revenues increased $564,100 in fiscal year 2015 from fiscal year 2014, or 5.1%. Net revenues
were up 5.5% for smaller retail stores and 4.2% for national chain stores.
8
Usborne Books & More (“UBAM”) Division
UBAM is a multi-level direct selling organization that markets its products through independent sales representatives
(“consultants”) located throughout the United States. The customer base of UBAM consists of individual purchasers, as well as
school and public libraries. Revenues are generated through home shows, direct sales, Internet sales, book fairs and contracts with
school and public libraries. This past fiscal year included a shift toward online home shows via social media outlets, such as
Facebook.
An important factor in the continued growth of the UBAM division is the addition of new sales consultants and the
retention of existing consultants. Current active consultants recruit new sales consultants. UBAM makes it easy to recruit by
providing signing kits for which new consultants can earn partial or full reimbursement based on established sales criteria. UBAM
provides an extensive handbook that is a valuable tool in explaining the various programs to the new recruit.
Consultants During Year
New Sales Representatives
Active Sales Representatives End of Fiscal Year
6,500
7,800
4,000
5,900
FY 2015
FY 2014
·
·
·
·
·
·
The UBAM division presently has six levels of sales representatives:
Consultants
Team Leaders
Senior Team Leaders
Executive Team Leaders
Senior Executive Team Leaders
Directors
Upon signing up, each individual is considered a consultant. Consultants receive commissions from each sale they make;
the commission rate being determined by the marketing program under which the sale is made. In addition, consultants receive a
monthly sales bonus once their sales reach an established monthly goal. Consultants who recruit other consultants and meet certain
established criteria are eligible to become team leaders. Upon reaching this level, they receive monthly override payments based
upon the sales of their downline groups.
Once team leaders reach certain established criteria, they become senior team leaders and are eligible to earn promotion
bonuses on their consultants. Once senior team leaders reach certain established criteria, they become executive team leaders,
senior executive team leaders or directors. Executive team leaders and higher may receive an additional monthly override payment
based upon the sales of their downline groups.
9
During fiscal year 2015, a shift occurred in our home party sales model from our traditional, in-person home parties. With
the increased use of social media, online venues such as Facebook, have become a popular outlet for these events. This allows
customers to ‘attend’ online from any location. While we had marked growth in both home party net revenues, after commissions,
and in Internet net revenues, after commissions, this shift is most evident in the proportion of Internet and home show orders to the
total net revenues, after commissions.
Net Revenues, after Commissions, for UBAM Division
Net Revenues
Less commissions
Net Revenues, after commissions
FY 2015
FY 2014
$
$
21,015,800
(6,491,500 )
14,524,300
$
$
15,128,600
(4,621,700)
10,506,900
Percent of Net Revenues, after Commissions, by UBAM Marketing Program
School & Library
Home Shows
Internet
Fund Raisers
Direct Sales
Transportation Revenues
Totals
FY 2015
FY 2014
41%
24%
23%
2%
1%
9%
100%
43%
28%
15%
3%
2%
9%
100%
Number of Orders by UBAM Marketing Program
School & Library
Home Shows
Internet
Fund Raisers
Direct Sales
FY 2015
FY 2014
14,000
27,500
91,700
1,000
2,700
136,900
11,000
18,300
43,200
1,000
2,800
76,300
This increase in net revenues, after commissions, resulted from increases in the following:
·
·
·
·
·
131% in internet sales
41% in school and library sales
29% in home party sales
26% in direct sales
21% in fundraiser sales
The increase in net revenues, after commissions, is also attributed to a 32% increase in the number of active consultants
(defined as those with sales during the past six months) at the end of fiscal year 2015.
The increase in Internet sales, after commissions, is attributed to 112% more orders placed during the period, with an 8%
increase in average order size. Customers order via the consultants’ UBAM-hosted web sites, which have been customized to their
own preferences. Orders are processed through a shopping cart and the consultant receives sales credit and commission on the
sales. Much of the increase in Internet sales resulted from the use of social media to host virtual parties, frequently referred to as
“Facebook Parties.”
10
The school and library marketing program increase is attributed to a 27% increase in the number of orders whose average
size increased by 11% over the prior fiscal year. Much of this change is a result of the increase in the number of sales consultants.
School and library sales are made by consultants who have received additional, specialized training which allows them to
sell to schools and libraries. The UBAM consultant is the only source that a library or school has for most of our titles. They are not
available through school supply distribution companies.
This program includes book fairs which are held with an 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. UBAM also has a Reach for the Stars fundraiser program. This is a pledge-based reading
incentive program that provides cash and books to the sponsoring organization and books for the children.
The increase in home party sales, after commissions, is attributed to a 50% increase in the total number of orders, offset by
a 14% decrease in average order size. Much of this change is a result of the increase in the number of sales consultants and the
transition to smaller, online parties. Consultants contact individuals (“hostesses”) to hold book shows in their homes or via social
media. The consultant assists the hostess in setting up the details for the show and 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. Additionally, home shows provide an excellent opportunity for recruiting new consultants.
Net revenues, after commissions, from direct sales increased 26% during fiscal year 2015. This resulted from a 28%
increase in the average order size, offset by a slight, 1% decrease in the number of orders placed during the year. Direct sales are
sales without a hostess being involved.
Our fund-raising program, Cards for a Cause, increased 21% in sales, after commissions, over the prior year. This resulted
from a 20% increase in average order size and a 1% increase in the number of orders placed during the year. Organizations sell
variety boxes of greeting-type cards and keep a portion of the proceeds to help support themselves and their related causes.
Transportation revenues increased 57% during fiscal year 2015. Transportation revenues are based on sales order size,
with minimums per order depending on order type. During the fiscal year 2015, the standard minimum was increased 20% to adjust
for increased transportation expenses.
The cost of free books provided under the various UBAM marketing programs is recorded as operating and selling expense
in the statements of earnings.
(1-2) Liquidity and Capital Resources
EDC has a history of profitability and positive cash flow. Typically, our primary source of cash is generated from our
operations. Outside of cash used in operating activities, generally our primary uses of cash are to pay down our outstanding bank
credit facility loan balance, to pay dividends, capital expenditures, and to acquire treasury stock. During fiscal year 2015, we
utilized our bank credit facility to meet some cash requirements. At fiscal year end, our bank credit facility loan balance was
$1,400,000.
We expect our ongoing cash flow to exceed cash required to operate the business. As such, we expect our short-term
borrowings to be limited during fiscal year 2016.
During fiscal year 2015, we experienced a negative cash flow from our operations of $261,600. Cash outflow resulted
from an increase in accounts receivable of $1,356,900, an increase in inventories of $1,192,200, an $88,000 increase in prepaid
expenses and other assets, and a $77,300 decrease in net income tax payable, offset by net earnings of $859,200, the provision for
doubtful accounts and sales returns of $1,281,000, an increase in current liabilities of $182,500, depreciation expense of $129,400,
and a decrease in deferred income taxes of $700.
11
Cash used in investing activities was $325,000 for capital expenditures. We began the process to implement new
accounting software and a new system for the UBAM division’s processes, with an initial $210,700 investment during fiscal year
2015. These systems will be fully operational during fiscal year 2016 and will allow us to accommodate the growth in our UBAM
sales force, while utilizing industry best practices and improving online training resources. We also invested $108,000 in our
facilities to repair our parking lot and update the office spaces.
Cash provided by financing activities was $290,500 which was primarily due to $4,550,000 in borrowings under our
revolving credit agreement and $174,400 from the sale of treasury stock. These were offset by payments of $3,150,000 towards our
revolving credit agreement, dividend payments of $1,278,700, and $5,200 paid to acquire treasury stock. In September 2002, the
Board of Directors authorized a minimum annual cash dividend of 20% of net earnings. In fiscal years 2015 and 2014, we declared
dividends equal to 149% and 356%, respectively, of net income after taxes.
Our Board of Directors adopted a stock repurchase plan in which we may purchase up to an additional 500,000 shares as
market conditions warrant. Management believes the stock is undervalued and when stock becomes available at an attractive price,
we can utilize free cash flow to repurchase shares. Management believes this enhances the value to the remaining stockholders and
that these repurchases will have no adverse effect on our short-term and long-term liquidity.
(3) Results of Operations
Earnings as a Percent of Net Revenues
Net revenues
Cost of sales
Gross margin
Operating expenses:
Operating and selling
Sales commissions
General and administrative
Total operating expenses
Other income (expense)
Earnings before income taxes
Income taxes
Net earnings
FY 2015
FY 2014
100.0%
39.2%
60.8%
29.2%
21.0%
6.3%
56.5%
-%
4.3%
1.7%
2.6%
100.0%
40.3%
59.7%
27.8%
18.9%
8.1%
54.8%
(1.5%)
3.4%
2.0%
1.4%
Fiscal Year 2015 Compared with Fiscal Year 2014
The following presents an overview of our results of operations for years ended February 28, 2015 and 2014. We had
earnings before income taxes of $1,402,500 for fiscal year 2015 compared with $873,500 for fiscal year 2014.
Revenues
FY 2015
FY 2014
$ Change
Gross sales
Less discounts & allowances
Transportation revenue
Net revenues
$
$
$
48,345,400
(17,273,100)
1,476,000
32,548,300
$
$
40,558,000
(15,414,200)
953,200
26,097,000
$
7,787,400
(1,858,900 )
522,800
6,451,300
UBAM’s gross sales increased 36.8% or $6,484,200 during fiscal year 2015 when compared with fiscal year 2014. This
increase is attributable to a 32% increase in the number of independent sales consultants, with resulting increases in all types of
sales, including Internet, school and library/book fair, home parties, direct sales, and fund raisers. The overall number of orders was
up 79% due to increases in Internet, home show, school and library, and fund raiser orders, offset by a slight decrease in the number
of direct sales orders. Average sales per order for this division were down 17%, primarily due to a shift from larger home party
orders to multiple individual online orders per Internet-based party.
EDC Publishing’s gross sales increased 5.7% or $1,303,200 during fiscal year 2015 when compared with fiscal year
2014. Sales increased by 5.5% to smaller retail stores and by 4.2% to national chain stores.
12
UBAM’s discounts and allowances were $4,533,600 in fiscal year 2015 and $3,414,200 in fiscal year 2014. Most sales by
UBAM are at retail. As a part of UBAM’s marketing programs, discounts between 40% and 50% of retail are offered on selected
items at various times throughout the year. The discounts and allowances in the UBAM division will vary from year to year
depending upon the marketing programs in place during any given year. UBAM’s discounts and allowances were 18.8% of
UBAM’s gross sales in fiscal year 2015 and 19.4% in fiscal year 2014.
EDC Publishing’s discounts and allowances are a much larger percentage of gross sales than discounts and allowances in
the UBAM division due to the different customer markets that each division targets. The Publishing division’s discounts and
allowances were $12,739,500 in fiscal year 2015 and $12,000,000 in fiscal year 2014. To be competitive with other wholesale book
distributors, EDC Publishing sells at discounts between 48% and 55% of the retail price, based upon the quantity of books ordered
and the dollar amount of the order. EDC Publishing’s discounts and allowances were 52.6% of their gross sales in fiscal year 2015
and 52.3% in fiscal year 2014.
Transportation revenues increased $522,800 in fiscal year 2015, due primarily to the increase in UBAM gross sales during
the year and the shift in sales to more, smaller Internet-based orders, which are proportionately more expensive to ship.
Expenses
Cost of sales
Operating and selling
Sales commissions
General and administrative
Total
FY 2015
12,763,900
9,515,400
6,842,700
2,039,900
31,161,900
$
$
FY 2014
10,523,500
7,258,500
4,939,800
2,123,500
24,845,300
$
$
$
$
$ Change
2,240,400
2,256,900
1,902,900
(83,600)
6,316,600
Cost of sales increased 21.3% in fiscal year 2015 when compared with fiscal year 2014. Our cost of products is 25% to
28% of the gross sales price, depending upon the product. The percentage change in gross sales to the percentage change in cost of
goods, depends largely on the mix of products sold. Approximately 79% of our products come from one vendor, where the cost of
the products is a fixed percentage of the retail price. Cost of sales is the inventory cost of product sold (including the cost of the
product itself and inbound freight charges), along with royalties accrued for sales of Kane Miller titles for which we have royalty
payment contracts. The costs of our distribution network are not included in our cost of sales, but rather in our operating and selling
expenses.
Operating and selling expenses include purchasing and receiving, inspection, warehousing, and other costs of our
distribution network. These costs totaled $1,259,500 in fiscal year 2015 and $1,133,100 in fiscal year 2014. In addition to costs
associated with our distribution network (noted above), operating and selling costs include expenses of the Publishing and UBAM
divisions, along with the order entry and customer service functions. Operating and selling expenses as a percentage of gross sales
were 19.7% for fiscal year 2015 and 17.9% for fiscal year 2014.
13
Sales commissions for EDC Publishing increased $33,100 for the fiscal year ended 2015. Sales commissions for this
division fluctuate depending upon the amount of sales made to our “house accounts,” which are our largest customers and do not
have any commission expense associated with them, and sales made by our outside sales representatives. Publishing division sales
commissions are paid on net sales and were 3.0% for fiscal year 2015 and 2.9% for fiscal year 2014.
Sales commissions for UBAM increased $1,869,800. UBAM division sales commissions are paid based on the retail price
of non-promotional products sold and were 26.9% of UBAM gross sales for fiscal year 2015 and 26.2% for fiscal year 2014. The
fluctuation in the percentages of commission expense to gross sales is the result of the type of sale. Home shows, book fairs, school
and library sales and direct sales have different commission 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 higher gross sales in the UBAM division.
General and administrative expenses include the executive department, accounting department, information services
department, general office management and building facilities management. General and administrative expenses as a percentage of
gross sales were 4.2% for fiscal year 2015 and 5.2% for fiscal year 2014.
The tax provision for fiscal year 2015 was $543,300. The effective rate for fiscal year 2015 was 38.7% and for fiscal year
2014 was 59.1%. Our effective tax rate is higher than the Federal statutory rate due to state income and franchise taxes and a
fully-reserved capital loss carry forward, which we do not reasonably expect to deduct for income tax purposes.
Contractual Obligations
We are a smaller reporting company and are not required to provide this information.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our 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. Our significant accounting policies are
described in the notes accompanying the financial statements included elsewhere in this report. However, we consider the
following accounting policies to be more significantly dependent on the use of estimates and assumptions.
Stock-Based Compensation
We account for stock-based compensation whereby share-based payment transactions with employees, such as stock
options and restricted stock, are measured at estimated fair value at date of grant and recognized as compensation expense.
14
Revenue Recognition
Sales are recognized and recorded when products are shipped. Products are shipped FOB shipping point. UBAM’s sales
are paid at the time the product is shipped. These sales accounted for 65% and 58% of net revenues in fiscal years 2015 and 2014,
respectively.
Estimated allowances for sales returns are recorded as sales are recognized and recorded. Management uses a moving
average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged
returns are primarily from the retail stores. The damages occur in the stores, not in shipping to the stores. It is industry practice to
accept returns from wholesale customers. Transportation revenue represents the amount billed to the customer for shipping the
product and is recorded when the product is shipped. Management has estimated and included a reserve for sales returns of
$100,000 for the years ended February 28, 2015 and 2014.
Allowance for Doubtful Accounts
We maintain an allowance for estimated losses resulting from the inability of our customers to make required
payments. An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer
receivable balances, age of customer receivable balances, customers’ financial conditions and current economic
trends. Management has estimated an allowance for doubtful accounts of $234,500 and $233,900 as of February 28, 2015 and 2014,
respectively.
Inventory
Management continually estimates and calculates the amount of noncurrent inventory. The inventory arises due to
occasional purchases of book inventory in quantities in excess of what will be sold within the normal operating cycle due to
minimum order requirements of our primary supplier. Noncurrent inventory was estimated by management using the current year
turnover ratio by title. All inventory in excess of 2 Ѕ years of anticipated sales was classified as noncurrent inventory. Noncurrent
inventory balances were $718,900 and $824,000 at February 28, 2015 and 2014, respectively.
Inventories are presented net of a valuation allowance. Management has estimated and included a valuation allowance for
both current and noncurrent inventory. This allowance is based on management’s identification of slow moving inventory on
hand. Management has estimated a valuation allowance for both current and noncurrent inventory of $393,100 and $378,800 as of
February 28, 2015 and
2014, respectively.
Our product line contains approximately 1,500 titles, each with different rates of sale, depending upon the nature and
popularity of the title. Almost all of our product line is saleable as the books are not topical in nature and remain current in content
today as well as in the future. Most of our products are printed in Europe, China, Singapore, India, Malaysia and Dubai resulting in
a three to four-month lead-time to have a title reprinted and delivered to us.
Our principal supplier, based in England, generally requires a minimum reorder of 6,500 or more of a title in order to get a
solo print run. Smaller orders would require a shared print run with the supplier’s other customers, which can result in more lengthy
delays to receive the ordered title. Anticipating customer preferences and purchasing habits requires historical analysis of similar
titles in the same series. We then place the initial order or re-order based upon this analysis.
These factors and historical analysis have led Management to determine that 2 Ѕ years represents a reasonable estimate of
the normal operating cycle for our products.
15
New Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort
to improve standards of financial accounting and reporting. We have reviewed the recently issued pronouncements and concluded
that the following recently issued accounting standards apply to us.
In April 2014, FASB issued Accounting Standards Update (ASU) No. 2014-08 “Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity,” which changes the criteria for determining which disposals can be presented
as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is
defined as a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that
has or will have a major effect on an entity’s operations and financial results. The change is effective for fiscal years, and interim
reporting periods within those years, beginning on or after December 15, 2014, which means the first quarter of our fiscal year 2016,
with early adoption permitted. The ASU applies prospectively to new disposals and new classifications of disposal groups as held
for sale after the effective date. This new ASU will not affect our financial position, results of operations or cash flows.
In May 2014, FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers,” which provides a single revenue
recognition model which is intended to improve comparability over a range of industries, companies and geographical boundaries
and will also result in enhanced disclosures. The changes are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016, which means the first quarter of our fiscal year 2018. We are currently reviewing the ASU and
assessing the potential impact on our financial statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company and are not required to provide this information.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 begins at page 23.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
Item 9A. CONTROLS AND PROCEDURES
An evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of February 28, 2015. This evaluation was conducted under the
supervision and with the participation of our management, including our Chief Executive Officer and our Controller/Corporate
Secretary (Principal Financial and Accounting Officer).
Based on that evaluation, these officers concluded that our disclosure controls and procedures 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 accumulated and
communicated to them, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed,
summarized and reported in accordance within the time periods specified in Securities and Exchange Commission rules and
forms. 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.
During the fourth fiscal quarter of the fiscal year covered by this report on Form 10-K, there have been no changes in our
internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal
control over financial reporting.
16
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (the "Exchange Act"). Under the supervision and with the
participation of our management, including our President and our Controller, we evaluated the effectiveness of our internal control
over financial reporting based on the framework in INTERNAL CONTROL-INTEGRATED FRAMEWORK issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 1992. All internal control systems, no matter how well
designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. Based on our evaluation under that framework and applicable SEC rules, our management
concluded that our internal control over financial reporting was effective as of February 28, 2015.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control
over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to
rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
Item 9B. OTHER INFORMATION
None
17
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
PART III
The information required by this Item 10 is furnished by incorporation by reference to the information under the caption
"Election of Directors" in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be
held on July 16, 2015.
(b) Identification of Executive Officers
Information regarding our executive officers required by Item 401 of Regulation S-K is presented in Item 1 hereof under
the subcaption "Executive Officers" as permitted by General Instruction G (3) to Form 10-K and Instruction 3 to Item 401(b) of
Regulation S-K.
(c) Compliance with Section 16 (a) of the Exchange Act
The information required by this Item 10 is furnished by incorporation by reference to the information under the caption
"Section 16 (a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement to be filed in connection with the
Annual Meeting of Shareholders to be held on July 16, 2015.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is furnished by incorporation by reference to the information under the caption
"Executive Compensation" in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to
be held on July 16, 2015.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item 12 is furnished by incorporation by reference to the information under the captions
"Security Ownership of Certain Beneficial Owners and Management" and "Compensation Plans" in our definitive Proxy Statement
to be filed in connection with the Annual Meeting of Shareholders to be held on July 16, 2015.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
Item 14. PRINCIPAL ACCOUNTANT’S FEES AND SERVICES
The information required by this Item 14 is furnished by incorporation by reference to the information under the caption
"Independent Registered Public Accountants" in our definitive Proxy Statement to be filed in connection with the Annual Meeting
of Shareholders to be held on July 16, 2015.
18
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Balance Sheets - February 28, 2015 and 2014
Statements of Earnings - Years ended February 28, 2015 and 2014
Statements of Shareholders' Equity -Years ended February 28, 2015 and February 28, 2014
Statements of Cash Flows - Years ended February 28, 2015 and 2014
Notes to Financial Statements
Page
23
24
25
26
27
28-37
Schedules have been omitted as such information is either not required or is included in the financial statements.
2. Exhibits
3.1
3.2
3.3
Restated Certificate of Incorporation dated April 26, 1968 and Certificate of Amendment thereto dated June
21, 1968 are incorporated herein by reference to Exhibit 1 to Registration Statement on Form 10-K (File No.
0-4957).
Certificate of Amendment of Restated Certificate of Incorporation dated August 27, 1977 is incorporated
herein by reference to Exhibit 20.1 to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-4957).
By-Laws, as amended, are incorporated herein by reference to Exhibit 20.2. to Form 10-K for fiscal year
ended February 28, 1981 (File No. 0-4957).
19
3.4
3.5
3.6
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Certificate of Amendment of Restated Certificate of Incorporation 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).
Certificate of Amendment of Restated Certificate of Incorporation dated March 22, 1996 is incorporated
herein by reference to Exhibit 3.4 to Form 10-K for fiscal year ended February 28, 1997 (File No. 0-4957).
Certificate of Amendment of Restated Certificate of Incorporation dated July 15, 2002 is incorporated
herein by reference to Exhibit 10.30 to Form 10-K dated February 28, 2003 (File No. 0-4957).
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) filed June 29, 1970.
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).
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).
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).
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).
Restated Loan Agreement dated June 30, 1999 between the Company and State Bank & Trust, N.A., Tulsa,
OK, is incorporated herein by reference to Exhibit 10.24 to Form 10-K dated February 29, 2000 (File No.
0-4957).
Educational Development Corporation 2002 Incentive Stock Option Plan is incorporated herein by
reference to Exhibit A to definitive proxy statement on Schedule 14A dated May 23, 2002 (File No. 0-4957).
Amendment dated November 12, 2002 to Usborne Agreement – Contractual agreement by and between we
and Usborne Publishing Limited is incorporated herein by reference to Exhibit 10.24 to Form 10-K dated
February 28, 2003 (File No. 0-4957).
10.8
Employment Agreement between Randall W. White and the Company dated February 28, 2004.
10.9
Eleventh Amendment dated June 30, 2009 to Restated Loan Agreement between the Company and Arvest
Bank, Tulsa, OK.
10.10 Twelfth Amendment dated June 30, 2010 to Restated Loan Agreement between the Company and Arvest
Bank, Tulsa, OK.
10.11 Thirteenth Amendment dated June 30, 2011 to Restated Loan Agreement between the Company and Arvest
Bank, Tulsa, OK.
20
10.12 Fourteenth Amendment dated June 30, 2012 to Restated Loan Agreement between the Company and Arvest
Bank, Tulsa, OK.
10.13 Fifteenth Amendment dated June 30, 2013 to Restated Loan Agreement between the Company and Arvest
Bank, Tulsa, OK.
10.14 Sixteenth Amendment dated June 30, 2014 to Restated Loan Agreement between the Company and Arvest
Bank, Tulsa, OK.
10.15 Seventeenth Amendment dated September 19, 2014 to Restated Loan Agreement between the Company and
Arvest Bank, Tulsa, OK.
*23.1 Consent of Independent Registered Public Accounting Firm.
*31.1 Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of the Controller and Corporate Secretary (Principal Financial and Accounting Officer) of
Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1 Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
__________________________________________________________________________________
*Filed Herewith
21
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.
SIGNATURES
EDUCATIONAL DEVELOPMENT CORPORATION
Date: May 28, 2015 By /s/ Marilyn Pinney
Marilyn Pinney
Controller and Corporate Secretary
(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, 2015 /s/ Randall W. White
Randall W. White
Chairman of the Board
President, Treasurer and
Director
May 28, 2015 /s/ John A. Clerico
John A. Clerico, Director
May 28, 2015 /s/ Ronald McDaniel
Ronald McDaniel, Director
May 28, 2015 /s/ Kara Gae Neal
Kara Gae Neal, Director
May 28, 2015 /s/ Betsy Rickert
Betsy Rickert, Director
May 28, 2015 /s/ Marilyn Pinney
Marilyn Pinney
Controller and Corporate Secretary
(Principal Financial and Accounting Officer)
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Educational Development Corporation
We have audited the accompanying balance sheets of Educational Development Corporation as of February 28, 2015 and 2014, and
the related statements of earnings, shareholders’ equity and cash flows for the years then ended. 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 the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, the financial statements referred to above present fairly, in all material respects, the financial position of Educational
Development Corporation as of February 28, 2015 and 2014, and the results of its operations and its cash flows for the years then
ended, in conformity with U.S. generally accepted accounting principles.
/s/ HOGANTAYLOR LLP
Tulsa, Oklahoma
May 28, 2015
23
EDUCATIONAL DEVELOPMENT CORPORATION
BALANCE SHEETS
AS OF FEBRUARY 28,
__________________________________________________________________________________
2015
2014
$
383,900 $
680,000
3,076,700
11,181,000
374,200
249,800
15,265,600
3,000,800
9,869,400
262,200
259,300
14,071,700
350,800
470,200
2,073,200
1,877,600
243,400
80,200
267,400
71,400
$
18,013,200 $
16,758,300
$
2,237,700 $
1,400,000
618,100
63,600
322,000
1,043,500
5,684,900
2,543,700
-
514,900
140,900
318,200
658,200
4,175,900
1,208,200
8,548,000
13,857,200
23,613,400
(11,285,100)
12,328,300
18,013,200 $
1,208,200
8,548,000
14,280,500
24,036,700
(11,454,300)
12,582,400
16,758,300
$
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts and
sales returns $334,500 (2015) and $333,900 (2014)
Inventories—Net
Prepaid expenses and other assets
Deferred income taxes
Total current assets
INVENTORIES—Net
PROPERTY, PLANT AND EQUIPMENT—Net
OTHER ASSETS
DEFERRED INCOME TAXES
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Line of credit
Accrued salaries and commissions
Income taxes payable
Dividends payable
Other current liabilities
Total current liabilities
COMMITMENTS (Note 7)
SHAREHOLDERS’ EQUITY:
Common stock, $0.20 par value; Authorized 8,000,000 shares;
Issued 6,041,040 shares; Outstanding 4,024,539 (2015) and
3,977,943 (2014) shares
Capital in excess of par value
Retained earnings
Less treasury stock, at cost
Total shareholders' equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
See notes to financial statements.
24
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED FEBRUARY 28,
__________________________________________________________________________________
GROSS SALES
Less discounts and allowances
Transportation revenue
NET REVENUES
COST OF SALES
Gross margin
OPERATING EXPENSES:
Operating and selling
Sales commissions
General and administrative
Total operating expenses
OTHER INCOME (EXPENSE)
EARNINGS BEFORE INCOME TAXES
INCOME TAXES
NET EARNINGS
BASIC AND DILUTED EARNINGS
PER SHARE:
Basic and diluted
WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT SHARES OUTSTANDING:
Basic and diluted
Dividends per share
See notes to financial statements.
2015
2014
$
48,345,400 $
(17,273,100)
1,476,000
32,548,300
12,763,900
19,784,400
40,558,000
(15,414,200)
953,200
26,097,000
10,523,500
15,573,500
9,515,400
6,842,700
2,039,900
18,398,000
7,258,500
4,939,800
2,123,500
14,321,800
16,100
(378,200)
1,402,500
873,500
543,300
859,200 $
515,900
357,600
$
$
0.21 $
0.09
4,003,702
0.32 $
3,968,214
0.32
$
25
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED FEBRUARY 28,
__________________________________________________________________________________
Common Stock
(par value $0.20 per
share)
Number of
Capital in
Treasury Stock
Shares
Issued
Excess of Retained Number of
Sharehold
ers’
Amount Par Value Earnings Shares
Amount Equity
-
-
-
-
-
-
-
-
BALANCE—March 1, 2013 6,041,040 $ 1,208,200 $ 8,548,000 $
-
Purchases of treasury stock
Sales of treasury stock
-
Dividends declared
($0.08/share)
Dividends paid
($0.24/share)
Net earnings
BALANCE—February 28,
2014
Purchases of treasury stock
Sales of treasury stock
Dividends declared
($0.08/share)
Dividends paid
($0.24/share)
Net earnings
BALANCE—February 28,
2015
6,041,040 $ 1,208,200 $ 8,548,000 $
-
-
6,041,040 $ 1,208,200 $ 8,548,000 $
-
-
-
-
-
-
-
-
-
-
-
-
15,194,70
(11,499,1
13,451,80
0
43,349 (129,200) (129,200)
(60,480) 174,000 174,000
0 2,080,228 $
-
-
00) $
- (318,200)
-
- (318,200)
- (953,600)
- 357,600
14,280,50
-
-
- (953,600)
- 357,600
12,582,40
0
(5,200)
(47,935) 174,400 174,400
00) $
(5,200)
0 2,063,097 $
-
1,339
-
(11,454,3
- (322,000)
- (960,500)
- 859,200
13,857,20
-
-
-
- (322,000)
- (960,500)
- 859,200
12,328,30
0
00) $
(11,285,1
0 2,016,501 $
See notes to financial statements.
26
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28,
__________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Impairment of investment in nonmarketable equity securities
Depreciation
Deferred income taxes
Provision for doubtful accounts and sales returns
Changes in assets and liabilities:
Accounts receivable
Inventories, net
Prepaid expenses and other assets
Accounts payable, accrued salaries and commissions,
and other current liabilities
Income tax payable/receivable
Total adjustments
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from sale of treasury stock
Cash paid to acquire treasury stock
Borrowings under revolving credit agreement
Payments under revolving credit agreement
Dividends paid
Net cash provided by (used in) financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS—END OF YEAR
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest
Cash paid for income taxes
See notes to financial statements.
2015
2014
$
859,200 $
357,600
-
129,400
700
1,281,000
430,300
115,400
127,600
978,000
(1,356,900)
(1,192,200)
(88,000)
(559,700)
(55,900)
165,900
182,500
(77,300)
(1,120,800)
(261,600)
835,700
370,200
2,407,500
2,765,100
(325,000)
(325,000)
(77,500)
(77,500)
174,400
(5,200)
4,550,000
(3,150,000)
(1,278,700)
290,500
(296,100)
680,000
383,900 $
174,000
(129,200)
1,250,000
(2,500,000)
(1,271,500)
(2,476,700)
210,900
469,100
680,000
54,000 $
619,900 $
34,500
11,000
$
$
$
27
EDUCATIONAL DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 2015 AND 2014
__________________________________________________________________________________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business—Educational Development Corporation (“we”, “our”, “us”, or “the Company”) distributes books and
publications through our EDC Publishing and Usborne Books & More (“UBAM”) divisions to book, toy and gift stores, libraries
and home educators located throughout the United States (“U.S.”). We are the sole U.S. distributor of books and related items,
which are published by an England-based publishing company, Usborne, our primary supplier. We are also in the direct publishing
market through our ownership of Kane Miller Book Publishers.
Estimates—Our 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 our inventory purchases are concentrated with Usborne. Purchases
from them were approximately $12.2 million and $9.0 million for the years ended February 28, 2015 and 2014, respectively. Total
inventory purchases for those same periods were approximately $15.3 million and $11.4 million, respectively.
Cash and Cash Equivalents—Cash and cash equivalents are maintained at financial institutions and, at times, balances
may exceed federally insured limits. We have never experienced any losses related to these balances. Insurance coverage on our
non-interest bearing cash balances was limited to $250,000 and our non-interest bearing cash balances exceed federally insured
limits. The majority of payments due from banks for third party credit card transactions process within two business days. These
amounts due are classified as cash and cash equivalents. Cash and cash equivalents includes demand and time deposits, money
market funds and other marketable securities with maturities of three months or less when acquired.
Accounts Receivable— Accounts receivable are uncollateralized customer obligations due under normal trade terms
generally requiring payment within thirty days from the invoice date. Extended, seasonal dating is frequently available for orders of
minimum quantities or amounts. Trade accounts are stated at the amount management expects to collect from outstanding
balances. Delinquency fees are not assessed. Payments of accounts receivable are allocated to the specific invoices identified on
the customers’ remittance advice. Accounts receivable are carried at original invoice amount less an estimated reserve made for
returns and discounts based on quarterly review of historical rates of returns and expected discounts to be taken. The carrying
amount of accounts receivable is reduced, if needed, by a valuation allowance that reflects management’s best estimate of the
amounts that will not be collected.
Management periodically reviews accounts receivable balances and, based on an assessment of historical bad debts, current
customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends,
estimates the portion of the balance that will not be collected. Management provides for probable uncollectible amounts through a
charge to earnings and a credit to a valuation account based on its assessment of the current status of the individual
accounts. Balances which remain outstanding after management has used reasonable collection efforts are written off through a
charge to the valuation allowance and a credit to trade accounts receivable. Recoveries of trade receivables previously written off
are recorded as income when received.
28
Inventories—Inventories are stated at the lower of cost or market. Cost is determined using the FIFO method. We present
a portion of our inventory as a noncurrent asset. Occasionally we purchase book inventory in quantities in excess of what will be
sold within the normal operating cycle due to minimum order requirements of our primary supplier. These excess quantities are
included in noncurrent inventory. We estimate noncurrent inventory using the current year turnover ratio by title. All inventory in
excess of 2½ years of anticipated sales is classified as noncurrent inventory.
Inventories are presented net of a valuation allowance. Management has estimated and included an allowance for slow
moving inventory for both current and noncurrent inventory. This allowance is based on management’s analysis of inventory on
hand at February 28, 2015 and 2014.
Property, Plant and Equipment—Property, plant and equipment are stated at cost and depreciated on a straight-line basis
over the estimated useful lives, as follows:
Building
Machinery and equipment
Furniture and fixtures
30 years
3 - 10 years
3 years
Capitalized projects that are not placed in service are recorded as in progress and are not depreciated until the related assets
are placed in service.
Income Taxes—We account for income taxes using the liability method. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial statement and the tax basis of assets and liabilities using the
current tax laws and rates. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts that are
“more likely than not” to be realized.
Revenue Recognition—Sales are recognized and recorded when products are shipped. Products are shipped FOB
shipping point. The UBAM division’s sales are paid at the time the product is shipped. These sales accounted for 65% of net
revenues in fiscal year 2015 and 58% in fiscal year 2014.
Estimated allowances for sales returns are recorded as sales are recognized and recorded. Management uses a moving
average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged
returns are primarily from the retail stores related to damages which occur in the stores, not in shipping to the stores. It is industry
practice to accept returns from wholesale customers. Management has estimated and included a reserve for sales returns of
$100,000 as of February 28, 2015 and 2014.
Transportation revenue represents the amount billed to the customer for shipping the product and is recorded when the
product is shipped.
Advertising Costs—Advertising costs are expensed as incurred. Advertising expenses, included in selling and operating
expenses in the statements of earnings, were $367,300 and $348,600 for the years ended February 28, 2015 and 2014, respectively.
Shipping and Handling Costs— We classify shipping and handling costs as operating and selling expenses in the
statements of earnings. Shipping and handling costs were $3,719,300 and $2,699,800 for the years ended February 28, 2015 and
2014, respectively.
29
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, we have utilized the treasury stock method.
The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted
earnings per share (“EPS”) is shown below.
Earnings Per Share:
Net earnings applicable to
common shareholders
Shares:
Weighted average shares
outstanding–basic
Assumed exercise of options
Weighted average shares
outstanding–diluted
Year Ended February 28,
2015
2014
$ 859,200 $ 357,600
4,003,702 3,968,214
-
-
4,003,702 3,968,214
Basic and Diluted Earnings Per Share
$
0.21 $
0.09
Stock options not considered above because they were
antidilutive
10,000
11,000
Long-Lived Asset Impairment— We review 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 28, 2015 and 2014.
Stock-Based Compensation—Share-based payment transactions with employees, such as stock options and restricted
stock, are measured at estimated fair value at date of grant and recognized as compensation expense over the requisite service period,
net of estimated forfeitures.
New Accounting Pronouncements— The Financial Accounting Standards Board (“FASB”) periodically issues new
accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the
recently issued pronouncements and concluded that the following recently issued accounting standards apply to us.
In April 2014, FASB issued Accounting Standards Update (ASU) No. 2014-08 “Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity,” which changes the criteria for determining which disposals can be presented
as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is
defined as a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that
has or will have a major effect on an entity’s operations and financial results. The change is effective for fiscal years, and interim
reporting periods within those years, beginning on or after December 15, 2014, which means the first quarter of our fiscal year 2016,
with early adoption permitted. The ASU applies prospectively to new disposals and new classifications of disposal groups as held
for sale after the effective date. This new ASU will not affect our financial position, results of operations or cash flows.
30
In May 2014, FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers,” which provides a single revenue
recognition model which is intended to improve comparability over a range of industries, companies and geographical boundaries
and will also result in enhanced disclosures. The changes are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2016, which means the first quarter of our fiscal year 2018. We are currently reviewing the ASU and
assessing the potential impact on our financial statements.
2. INVENTORIES
Inventories consist of the following:
Current:
Book inventory
Inventory valuation allowance
Inventories net–current
Noncurrent:
Book inventory
Inventory valuation allowance
Inventories net–noncurrent
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
Land
Building
Machinery and equipment
Furniture and fixtures
System installations in progress
Less accumulated depreciation
4. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
Accrued royalties
Accrued UBAM trip incentives
Sales tax payable
Other
February 28,
2015
2014
11,206,000
(25,000)
11,181,000
718,900
(368,100)
350,800
$
$
$
$
9,894,400
(25,000)
9,869,400
824,000
(353,800)
470,200
February 28,
2015
250,000
2,124,700
2,488,000
75,700
200,800
5,139,200
(3,066,000)
2,073,200
2014
250,000
2,124,700
2,363,800
75,700
-
4,814,200
(2,936,600)
1,877,600
$
$
February 28,
2015
368,200
323,700
181,000
170,600
1,043,500
2014
374,000
24,100
116,800
143,300
658,200
$
$
$
$
$
$
$
$
$
$
31
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items
comprising our net deferred tax assets and liabilities as of February 28 are as follows:
Current:
Deferred tax assets:
Allowance for doubtful accounts
Inventory overhead capitalization
Inventory valuation allowance
Allowance for sales returns
Accruals
Deferred tax assets-current
Noncurrent:
Deferred tax assets:
Inventory valuation allowance
Capital loss carryforward
Subtotal deferred tax assets
Less valuation allowance
Total net deferred tax assets
Deferred tax liabilities:
Property and equipment
Deferred tax liabilities
$
$
2015
2014
$
41,100
86,900
9,500
38,000
74,300
58,500
79,000
9,500
38,000
74,300
249,800
259,300
$
143,300
163,600
306,900
(163,600)
143,300
(63,100)
(63,100)
134,400
163,600
298,000
(163,600)
134,400
(63,000)
(63,000)
Net deferred tax asset-noncurrent
$
80,200
$
71,400
Management has assessed the evidence to estimate whether sufficient future capital gains will be generated to utilize the
existing capital loss carryforward. As no current expectation of capital gains exists, Management has objectively determined that a
valuation allowance is necessary to reduce the carrying value of deferred tax assets as it is “more likely than not” that such assets are
unrealizable.
The amount of the deferred tax asset considered realizable, however, could be adjusted if future capital gains are generated
during the carryforward period. Management has determined that no valuation allowance is necessary to reduce the carrying value
of other deferred tax assets as it is “more likely than not” that such assets are realizable.
32
The components of income tax expense are as follows:
Current:
Federal
State
Deferred:
Federal
State
Total income tax expense
February 28,
2015
2014
$
$
439,200
103,400
542,600
600
100
700
543,300
$
$
299,000
89,300
388,300
133,200
(5,600)
127,600
515,900
The following reconciles our expected income tax expense utilizing statutory tax rates to the actual tax expense:
Tax expense at federal statutory rate
State income tax–net of federal tax benefit
Change in capital loss valuation allowance
Other
Total income tax expense
February 28,
2015
2014
$
$
476,800
73,300
-
(6,800)
543,300
$
$
297,000
70,100
163,600
(14,800)
515,900
We file our tax returns in the U.S. and certain state jurisdictions. We are no longer subject to income tax examinations by
tax authorities for fiscal years before 2012. We are currently the subject of an income tax examination for fiscal year 2012 by the
IRS.
Based upon a review of our income tax filing positions, we believe that our positions would be sustained upon an audit and
do not anticipate any adjustments that would result in a material change to our financial position. Therefore, no reserves for
uncertain income tax positions have been recorded. We classify interest and penalties associated with income taxes as a component
of income tax expense on the statement of earnings.
6. EMPLOYEE BENEFIT PLAN
We have a profit sharing plan that 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 are
discretionary and amounted to $44,900 and $57,100 in the fiscal years ended February 28, 2015 and 2014, respectively. The 401(k)
plan includes an option for employees to invest in our stock, which is purchased from our treasury stock shares. Shares purchased
for the 401(k) plan from Treasury stock amounted to 47,935 net shares and 60,480 net shares in the fiscal years ended February 28,
2015 and 2014, respectively.
33
7. DEBT
We have a $3,200,000 revolving credit agreement, with interest payable monthly at the greater of (a) prime rate minus
0.75% or (b) 4.00%. At February 28, 2015, the rate in effect was 4.00%. The revolving credit agreement is collateralized by
substantially all of our assets and matures on June 30, 2015.
We had $1,400,000 in borrowings outstanding on the above revolving credit agreement at February 28, 2015 and no
borrowings outstanding at February 28, 2014. Available credit under the revolving credit agreement was $1,800,000 at February
28, 2015. This agreement also contains a provision for our use of the Bank’s letters of credit. The Bank agrees to issue, or obtain
issuance of commercial or stand-by letters of credit provided that no letters of credit will have an expiry date later than June 30, 2015
and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time. The
agreement contains provisions that require us to maintain specified financial ratios, restrict transactions with related parties, prohibit
mergers or consolidation, disallow additional debt, and limit the amount of compensation, salaries, investments, capital expenditures
and leasing transactions. We intend to renew the bank agreement or obtain other financing upon maturity.
8. COMMITMENTS
At February 28, 2015, we had outstanding purchase commitments for inventory totaling approximately $7,613,400, which
is due during fiscal year 2016. Of these commitments, $6,440,600 were with Usborne, $1,023,400 with various Kane Miller
publishers and the remaining $149,400 with other suppliers.
Rent expense for the year ended February 28, 2015 was $25,500. As of February 28, 2015, we did not have any lease
commitments in excess of one year.
9. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS
The Board of Directors adopted the 2002 Incentive Stock Option Plan (the “2002 Plan”) in June of 2002. The 2002 Plan
also authorized us to grant up to 1,000,000 stock options.
Options granted under the 2002 Plan vest at date of grant and are exercisable up to ten years from the date of grant. The
exercise price on options granted is equal to the market price at the date of grant. Options outstanding at February 28, 2015 expire in
December 2019.
A summary of the status of our 2002 Plan as of February 28, 2015 and 2014, and changes during the years then ended is
presented below:
Outstanding at
Beginning of Year
Exercised
Expired
February 28,
2015
Weighted
Average
Exercise
Price
Shares
2014
Weighted
Average
Exercise
Price
Shares
11,000 $
-
(1,000)
5.68
-
(10.00)
16,000 $
-
(5,000)
5.55
-
(5.25)
Outstanding at End of Year
10,000 $
5.25
11,000 $
5.68
All options outstanding are exercisable at February 28, 2015.
34
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended February 28, 2015 and 2014.
2015
First quarter
Second quarter
Third quarter
Fourth quarter
Total year
2014
First quarter
Second quarter
Third quarter
Fourth quarter
Total year
Net
Revenues
Earnings
Gross Margin Net Earnings Per Share
Basic
Diluted
Earnings
Per Share
$
$
$
$
7,178,300 $
6,808,200
10,936,500
7,625,300
32,548,300 $
4,334,800 $
3,795,100
6,821,700
4,832,800
19,784,400 $
239,700 $
(3,900)
526,400
97,000
859,200 $
5,990,500 $
5,715,100
8,502,000
5,889,400
26,097,000 $
3,514,300 $
3,054,100
5,207,500
3,797,600
15,573,500 $
66,600 $
56,400
547,800
(313,200)
357,600 $
0.06 $
(0.00)
0.13
0.02
0.21 $
0.02 $
0.01
0.14
(0.08)
0.09 $
0.06
(0.00)
0.13
0.02
0.21
0.02
0.01
0.14
(0.08)
0.09
11. BUSINESS SEGMENTS
We have two reportable segments: EDC Publishing and Usborne Books & More (“UBAM”) which 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.
·
·
EDC Publishing markets its products to retail accounts, which include book, toy and gift stores, school supply stores and
museums, through commissioned sales representatives, trade and specialty wholesalers and an internal telesales group.
UBAM markets its product line through a nationwide network of independent sales consultants using a combination of
home shows, Internet shows, direct sales, and book fairs. The UBAM 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. We evaluate segment performance based on earnings (loss) before income taxes of the segments, which is defined as
segment net sales reduced by direct cost of sales and direct expenses. Corporate expenses, depreciation, interest expense and income
taxes are not allocated to the segments, but are listed in the “other” column. Corporate expenses include the executive department,
accounting department, information services department, general office management and building facilities management. Our
assets and liabilities are not allocated on a segment basis.
35
Information by industry segment for the years ended February 28, 2015 and 2014 is set forth below:
Publishing
UBAM
Other
Total
Publishing
UBAM
Other
Total
NET REVENUES
2015
11,532,500
21,015,800
-
32,548,300
$
$
2014
10,968,400
15,128,600
-
26,097,000
$
$
EARNINGS (LOSS) BEFORE INCOME
TAXES
2015
3,452,800
2,456,300
(4,506,600)
1,402,500
$
$
2014
3,448,900
2,159,700
(4,735,100)
873,500
$
$
12. STOCK REPURCHASE PLAN
In April 2008, the Board of Directors authorized us to purchase up to an additional 500,000 shares of our common stock
under the plan initiated in 1998. This plan has no expiration date. During fiscal year 2015, we purchased 1,339 shares of common
stock at an average price of $3.88 per share totaling approximately $5,200. The maximum number of shares that may be
repurchased in the future is 303,315.
13. STOCK PURCHASE AGREEMENT
Prior to the fiscal year ended 2014, we acquired a 15.6% investment in Demibooks, Inc., obtained under a Stock Purchase
Agreement. Demibooks provides a publishing platform, Composer, a code-free way for publishers and self-published authors and
illustrators to create interactive books for the iPad on the device itself.
During the fiscal year ended 2014, we identified an impairment indicator in the value of our investment in Demibooks, and
determined the impairment to be other than temporary. We estimated the fair value of the investment to be $0 based on the estimated
future cash flows, and recognized an impairment loss of $430,300, which is reflected on the statements of earnings under other
expenses for fiscal year 2014.
36
14. FAIR VALUE MEASUREMENTS
The valuation hierarchy included in U.S. GAAP considers the transparency of inputs used to value assets and liabilities as
of the measurement date. The less transparent or observable the inputs used to value assets and liabilities, the lower the classification
of the assets and liabilities in the valuation hierarchy. A financial instrument's classification within the valuation hierarchy is based
on the lowest level of input that is significant to its fair value measurement. The three levels of the valuation hierarchy and the
classification of our financial assets and liabilities within the hierarchy are as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the
ability to access at the measurement date.
Level 2 - Observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or
indirectly. If an asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or
liability.
Level 3 - Unobservable inputs for the asset or liability.
We do not report any assets or liabilities at fair value in the financial statements. However, the estimated fair value of our
line of credit is estimated by management to approximate the carrying value of $1,400,000 and $0 at February 28, 2015 and 2014,
respectively. Management's estimates are based on the obligations' characteristics, including floating interest rate, maturity, and
collateral. Such valuation inputs are considered a Level 2 measurement in the fair value valuation hierarchy.
15. SUBSEQUENT EVENT
On March 20, 2015, we paid the previously declared $0.08 dividend per share to shareholders of record as of March 13,
2015.
******
37
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statements No. 33-60188 and 333-100659 of Educational
Development Corporation on Form S-8 of our report dated May 28, 2015, appearing in this Annual Report on Form 10-K of
Educational Development Corporation for the year ended February 28, 2015.
/s/ HoganTaylor LLP
Tulsa, Oklahoma
May 28, 2015
38
Exhibit 31.1
I, Randall W. White, certify that:
CERTIFICATION
1.
2.
3.
4.
a.
b.
c.
d.
5.
a.
b.
I have reviewed this Annual Report on Form 10-K of Educational Development Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: May 28, 2015
/s/ Randall W. White
Chairman of the Board, President
and Chief Executive Officer
39
Exhibit 31.2
I, Marilyn Pinney, certify that:
CERTIFICATION
1.
2.
3.
4.
a.
b.
c.
d.
5.
a.
b.
I have reviewed this Annual Report on Form 10-K of Educational Development Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: May 28, 2015
/s/ Marilyn Pinney
Controller and Corporate Secretary
(Principal Financial and Accounting Officer)
40
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
In connection with the Annual Report of Educational Development Corporation (the “Company”) on Form 10-K for the
period ending February 28, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the
undersigned certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: May 28, 2015 By /s/ Randall W. White
Randall W. White
President and Chief Executive Officer
Date: May 28, 2015 By /s/ Marilyn Pinney
Marilyn Pinney
Controller and Corporate Secretary
(Principal Financial and Accounting Officer)
41
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