EDUCATIONAL DEVELOPMENT CORP — Annual Report 2000

May 12, 2000

Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 29, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from __ to _. Commission file number: 0-4957 EDUCATIONAL DEVELOPMENT CORPORATION (Exact name of registrant as specified in its charter) Delaware 73-0750007 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10302 East 55th Place, Tulsa, Oklahoma 74146-6515 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (918) 622-4522 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.20 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of April 18, 2000, 4,076,752 shares of common stock were outstanding. The aggregate market value of the voting shares held by non- affiliates of the registrant, based on 2,947,978 shares (total outstanding less shares held by all officers, directors and 401(k) Plan) extended at the closing market price on April 18, 2000, of these shares traded on the Nasdaq National Market, was approximately $8,797,872. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Annual Report, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement relating to the annual meeting of stockholders to be held on June 22, 2000. 1 TABLE OF CONTENTS

2 EDUCATIONAL DEVELOPMENT CORPORATION FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED FEBRUARY 29, 2000 FACTORS AFFECTING FORWARD LOOKING STATEMENTS - -------------------------------------------- This annual Report on Form 10-K contains certain "forward looking statements" within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain statements contained in "Item 7 - Management Discussion and Analysis" are not based on historical facts, but are forward-looking statements that are based upon numerous assumptions about future conditions that may ultimately prove to be inaccurate. Actual events and results may materially differ from anticipated results described in such statements. The Company's ability to achieve such results is subject to certain risks and uncertainties. Such risks and uncertainties include but are not limited to, product prices, continued availability of capital and financing, and other factors affecting the Company's business that may be beyond its control. Although Educational Development Corporation believes that the expectations reflected by such forward looking statements are reasonable based on information currently available to the Company, no assurances can be given that such exceptions will prove to have been correct. PART 1 ------ Item 1. BUSINESS - ------ -------- (a) General Development of Business ------------------------------- Educational Development Corporation ("EDC" or the "Company"), a Delaware corporation with its principal office in Tulsa, Oklahoma, is the exclusive trade publisher of a line of children's books produced in the United Kingdom by Usborne Publishing Limited. The Company was incorporated on August 23, 1965. The Company's original corporate name was Tutor Tapes International Corporation of Delaware. Its name was changed to International Teaching Tapes, Inc. on November 24, 1965, and changed again to the present name on June 24, 1968. During Fiscal Year ("FY") 2000 the Company operated two divisions: Home Business Division ("Usborne Books at Home" or "UBAH") and Publishing Division. The Home Business Division distributes books through independent consultants who hold book showings in individual homes, and through book fairs and direct sales. The Home Business Division also distributes these titles to school and public libraries. The Publishing Division markets books to bookstores, toy stores, specialty stores and other retail outlets. Significant Events During Fiscal Year 2000 ------------------------------------------ There were no significant events during fiscal year 2000. (b) Financial Information about Industry Segments --------------------------------------------- See part II, Item 8 - Financial Statements and Supplementary Data 3 (c) Narrative Description of Business --------------------------------- (i) General The principal product of both the Home Business Division and Publishing Division is a line of children's books produced in the United Kingdom by Usborne Publishing Limited. The Company is the sole United States trade publisher of these books. The Company currently offers approximately 1,000 different titles. The Company also distributes a product called "Usborne Kid Kits". These Kid Kits take an Usborne book and combine it with specially selected items and/or toys which complement the information contained in the book. The Kid Kits are packaged in a reusable vinyl bag. Presently 61 different Kid Kits are available. The Company considers the political risk of importing books from the United Kingdom to be negligible as the two countries have maintained excellent relations for many years. Likewise there is little direct economic risk to the Company in importing books from the United Kingdom as the Company pays for the books in U.S. dollars and is not directly subject to any currency fluctuations. There is risk of physical loss of the books should an accident occur while the books are in transit, which could cause the Company some economic loss due to lost sales should the supply of some titles be depleted in the event of a lost shipment. The Company considers this to be highly unlikely as this type of loss has yet to occur. There is some risk involved in having all sales tied to one source - Usborne Publishing Limited. The Company has an excellent working relationship with its foreign supplier Usborne Publishing Limited and can foresee no reason for this to change. Management believes that the Usborne line of books are the best available books of their type and currently has no plans to sell any other line. (ii) Industry Segments (a) Home Business Division The Home Business Division markets the Usborne line of approximately 1,000 titles and 61 Kid Kits through a combination of direct sales, home parties and book fairs sold through a network marketing system. The Division also sells to school and public libraries. (b) Publishing Division The Publishing Division distributes the Usborne line to bookstores, toy stores, specialty stores and other retail outlets utilizing an inside telephone sales force as well as independent field sales representatives. (iii) Research and Development During fiscal year 2000 the Company spent approximately $120,000 in development of a new product, "Make Reading Fun", a fully interactive reading and phonics program. The Company expects to begin sales of this product during the second quarter of FY 2001. (iv) Marketing (a) Home Business Division The Home Business Division markets through commissioned consultants using a combination of direct sales, home parties and book fairs. The division had approximately 3,600 consultants in 50 states at February 29, 2000. 4 (b) Publishing Division The Publishing Division markets through commissioned trade representatives who call on book, toy, specialty stores and other retail outlets; and through marketing by telephone to the trade. This Division markets to approximately 12,000 book, toy and specialty stores. Significant orders have been received from major book chains. During fiscal year 2000 the division continued to make further inroads into mass merchandising outlets such as drug, department and discount stores. (v) Competition (a) Home Business Division The Home Business Division faces significant competition from several other direct selling companies which have more financial resources. Federal and state funding cuts to schools affect the availability of funds to the school libraries. The Company is unable to estimate the effect of these funding cuts on the division's future sales to school libraries, because the magnitude of funding cuts has yet to be determined by Congress. Management believes its superior product line will enable this Division to be highly competitive in its market area. (b) Publishing Division The Publishing Division faces strong competition from large U.S. and international companies which have more financial resources. Industry sales of juvenile paperbacks are over $660 million annually. The Publishing Division's sales are approximately 1.2% of industry sales. Competitive factors include product quality, price and deliverability. Possible funding cuts to schools would not impact the Publishing Division as it does not sell to this market. Management believes this Division can compete well in its market area. (vi) Seasonality (a) Home Business Division The level of sales for Home Business Division is greatest during the Fall as individuals prepare for the Holiday season. (b) Publishing Division The level of shipments of the Company's books is greatest in the Fall while retailers are stocking up for Holiday sales. (vii) Government Funding Local, state and Federal funds are important to the Home Business Division but not to the Publishing Division. In many cities and states in which the Company does business, school funds have been severely cut, which impacts sales to school libraries. (viii) Trademarks, Copyrights and Patents (none) (ix) Employees As of April 1, 2000, the Company had 62 full-time employees and 1 part-time employee. The Company believes its relations with its employees to be good. 5 Item 2. PROPERTIES - ------ ---------- The Company is located at 10302 E. 55th PL, Tulsa, Oklahoma. The Company leases approximately 80,400 square feet of office and warehouse space under a five year renewable lease which expires June 30, 2004. The Company's operating facility is well maintained, in good condition and is adequately insured. Equipment items are well maintained and in good operating condition consistent with the requirement of the Company's business. The Company believes that its operating facility meets both its present need and its needs for future expansion. Item 3. LEGAL PROCEEDINGS - ------ ----------------- The Company is not a party to any material pending legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company. PART II ------- Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED - ------ ------------------------------------------------- STOCKHOLDER MATTERS ------------------- The common stock of EDC is traded on the Nasdaq National Market (symbol--EDUC). The high and low closing quarterly common stock quotations for fiscal years 2000 and 1999, as reported by the National Association of Securities Dealers, Inc., were as follows:

The number of shareholders of record of EDC's common stock at April 18, 2000 was 1184. The Company paid a $0.02 per share annual dividend during fiscal year 2000 and fiscal year 1999. The Company will pay a $0.02 annual dividend during fiscal year 2001. 6 Item 6. SELECTED FINANCIAL DATA - ------ -----------------------

(1) Effective February 29, 1996 the Company discontinued its School Division. The operating results of the School Division were reported as discontinued operations in 1996 and 1995. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ------ ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- (a) Results of Operations --------------------- FY 2000 - ------- The Home Business Division's net sales increased slightly during FY 2000 when compared with FY 1999. The months of January and February 2000 were especially strong when compared with the same two months last year. During the past two years, this division has experienced sales declines which the Company believes was primarily due to a reduction in the compensation structure made in October 1996. This change was not well received by the field sales force. In June 1997 and May 1998 the Company made enhancements to the compensation program. The Company believes its compensation program is competitive with industry leaders. The division will offer during FY 2001 new and exciting incentive programs as well as several travel contests and regional training seminars throughout the country. The Company believes these programs will help attract new consultants as well as retain existing consultants. The Home Business Division has also introduced a leadership skills program for supervisors. The Home Business Division's fourth National Seminar will be held in June 2000. Management is hopeful that the current year increase in net sales indicates that recent improvements in the compensation programs have brought a halt to the two year decline in net sales. 7 The Publishing Division's net sales increased 2.1% in FY 2000 when compared with FY 1999. Increased volumes and increased market penetration contributed to the increase in net sales. The Company has an aggressive in-house telephone sales force which maintains contact with over 12,000 customers. During FY 2000 the telesales force opened up 675 new accounts compared with 637 new accounts opened in FY 1999. The Company offers two display racks to assist stores in displaying the Company's products. One is a six-foot rack with five adjustable shelves which can hold approximately 220 titles. The second rack is a four-sided rack with three levels which will hold between 50 and 60 of the Company's Kid Kits. There were 3,307 of these attractive racks in retail stores throughout the country at the end of FY 2000 compared with 3,098 at the end of FY 1999. National chains continue to dominate the bookstore market, resulting in fewer independent bookstores. The closing of these independent bookstores, an important market to the Company, has a negative impact on sales. To counter this, the Company last year restructured sales and marketing coverage on the national chains in order to increase market share. Independent toy retailers have also experienced increased competition from national chains, resulting in lower sales in this market segment. The gift market has considerable potential for the Company and the Company continues to develop its presence in this segment of the book market. The Company attends many major national trade shows throughout the country to further enhance product visibility. For these reasons management is optimistic that the Publishing Division can maintain its market share. Cost of sales increased 3.9% for FY 2000 when compared with FY 1999. Cost of sales as a percentage of gross sales was 26.2% in FY 2000 versus 26.0% for FY 1999. Cost of sales as a percentage of gross sales fluctuates with the mix of products sold during a given year. Management believes its percentage of cost of sales in FY 2001 will remain consistent with FY 2000. Operating and selling expenses increased 3.4% during FY 2000 when compared with FY 1999. As a percent of gross sales, these costs were 12.1% for FY 2000 compared with 12.0% in FY 1999. Higher freight costs, the result of increases in sales and an increase in rates by the delivery carrier, contributed to increased operating and selling costs for both the Publishing Division and the Home Business Division. Increased credit card fees in the Home Business Division, the direct result of increased sales, also contributed to the increase in operating and selling expenses. Management expects operating and selling expenses to be approximately 11% to 13% of gross sales in FY 2001. Sales commissions declined 1.3% during FY 2000 when compared with FY 1999. As a percentage of gross sales, these costs were 12.3% in FY 2000 compared to 12.8% for FY 1999. Sales commissions as a percentage of gross sales is determined by the product mix sold and the division that makes the sale. While net sales in the Publishing Division increased during FY 2000, the Division's commission expense decreased 45%, the result of the changing sales market from independent bookstores to the national chains. Offsetting this decline in commission expense was an increase in sales commission expense in the Home Business Division, the result of an increase in sales and a higher commission structure than offered in the Publishing Division. General and administrative expenses increased less than 1.0% during FY 2000 when compared with FY 1999. As a percentage of gross sales, these expenses were 6.1% and 6.3% for FY 2000 and FY 1999 respectively. General and administrative expenses are not always directly affected by sales, so comparison of these expenses as a percentage of gross sales can be misleading. An increase in depreciation expense in the MIS department contributed to the increase in general and administrative expenses. Interest expense declined 52.9% in FY 2000 when compared with FY 1999. As a percentage of gross sales, interest expense was 0.2% in FY 2000 versus 0.4% for FY 1999. The decrease in interest expense during FY 2000 was the result of lower borrowing levels due to improved cash flows during the year. 8 FY 1999 - ------- The Home Business Division's sales decreased 17.3% during FY 1999 when compared with FY 1998. The Company believed this decrease was primarily the result of a reduction in the compensation structure, which was effective October 1, 1996, and was not well received by the field sales force. The compensation structure was enhanced in June 1997 and the downturn in sales was slowed. In May 1998 the Company made additional enhancements to the compensation structure. The new program created an additional level of compensation and was designed to encourage participation at all levels of the organization. Several travel contests were conducted and regional training seminars were held throughout the country. The Home Business Division's third National Seminar was held in June 1999. The Publishing Division's net sales decreased 9.4% in FY 1999 when compared with FY 1998. This decline in net sales was attributed to changing market conditions. National chains increasingly dominate the bookstore market, which in turn has resulted in fewer independent bookstores. The closings of these independent bookstores, an important market for the Company, have led to lower sales. The Company restructured sales and marketing coverage on the national chains in order to increase market share. Independent toy retailers have also experienced increased competition from national discount chains, resulting in lower sales in this market segment. An increase in the number of front list titles increased sales opportunities in FY 2000. The gift market has considerable potential for the Company and the Company increased its gift trade show schedule by 50% to take advantage of this opportunity. The Company's aggressive in-house telephone sales force maintained contact with over 11,000 customers. During FY 1999 the telesales force opened up 637 new accounts compared with 525 during FY 1998. The Company offered two display racks to assist stores in displaying the Company's products. One is a six-foot rack with five adjustable shelves which can hold approximately 220 titles. The second rack is a four-sided rack with three levels which will hold between 50 and 60 of the Kid Kits. There were 3,098 of these attractive racks in retail stores throughout the country at the end of FY 1999 compared with 3,000 in FY 1998. The Company attends several major national trade shows throughout the year to further enhance product visibility. Cost of sales decreased 13.5% for FY 1999 compared with FY 1998. Cost of sales as a percentage of gross sales was 26.0% for FY 1999 versus 26.1% for FY 1998. Cost of sales as a percentage of gross sales fluctuates depending upon the mix of products sold during a given year. Operating and selling expenses decreased 8.0% during FY 1999 when compared with FY 1998. As a percent of gross sales, these costs were 12.0% for FY 1999 and 11.4% for FY 1998. Contributing to the decrease in operating and selling expenses were lower credit card fees and reduced sales incentives in the Home Business Division, both the direct result of decreased sales in the Home Business Division. In addition, payroll and benefit costs related to selling and operating expenses declined due to a decrease in headcount. Sales commissions decreased 12.9% for FY 1999 compared with FY 1998. As a percentage of gross sales, these costs were 12.8% in FY 1999 compared to 12.8% for FY 1998. Sales commissions as a percentage of gross sales is determined by the product mix sold, as the commission rates vary with the product being sold and the division which makes the sale. The Home Business Division had a higher commission percentage and the lower sales in this division contributed to the decrease in FY 1999 sales commissions. The revised marketing plan which went into effect in June 1997 for the Home Business Division partially offset the decrease in sales commissions. Effective May 1, 1998 management added a recruiting bonus program in the Home Business Division which resulted in increased commission expense for FY 1999, offset by a decline in total commission expense as a result of decreased sales. 9 General and administrative expenses increased 4.9% during FY 1999 when compared with FY 1998. As a percentage of gross sales, these expenses were 6.3% and 5.2% for FY 1999 and FY 1998 respectively. General and administrative expenses are not always directly affected by sales, so comparison of these expenses as a percentage of gross sales can be misleading. Contributing to the increase in general and administrative expenses were increased salaries and benefits, primarily to existing employees. Interest expense declined 38.3% in FY 1999 compared with FY 1998. As a percentage of gross sales, interest expense was 0.4% in FY 1999 versus 0.5% for FY 1998. The decrease in interest expense during FY 1999 was the result of lower borrowing levels due to improved cash flows during the year. (b) Financial Position ------------------ Working capital was $7.6 million for fiscal year end 2000 and $8.7 million for fiscal year end 1999. Increases in payables and short-term bank debt contributed to the decrease in working capital at fiscal year end 2000. The Company pays interest on its bank promissory note monthly from current cash flows. Management expects its financial position to remain strong and to increase working capital during the next fiscal year. (c) Liquidity and Capital Resources ------------------------------- Management believes the Company's liquidity at February 29, 2000, to be adequate. There are no known demands, commitments, events or uncertainties that would result in a material change in the Company's liquidity during fiscal year 2001. Capital expenditures are expected to be less than $750,000 in fiscal year 2001. These expenditures would consist primarily of software and hardware enhancements to the Company's existing data processing equipment, leasehold improvements and additions to the warehouse shipping system. Effective June 30, 1999 the Company signed a Restated Credit and Security Agreement with State Bank which provides a $3,500,000 line of credit. The line of credit is evidenced by a promissory note in the amount of $3,500,000 payable June 30, 2000. The note bears interest at the Wall Street Journal prime floating rate minus 0.25% payable monthly (8.5% at February 29, 2000). The note is collateralized by substantially all of the assets of the Company. At February 29, 2000 the Company had $1,278,000 in borrowings. Available credit under the revolving credit agreement was $2,222,000 at February 29, 2000. The Company obtained and uses the credit facility to fund routine operations. Payments are made from current cash flows. The Company plans to renew this facility when it matures June 30, 2000. The Company believes its borrowing capacity under this line to be adequate for the next several years. The Company generated cash from operating activities during fiscal year 2000. Accounts receivable increased during fiscal year 2000, the result of higher sales in the Publishing Division. The Company plans to continue to maximize its collection efforts in order to maintain cash flows. Inventory levels increased 1.0% from fiscal year end 1999 to fiscal year end 2000, the result of the Company's continued efforts of monitoring inventory levels to ensure that adequate inventory is on hand to support sales as well as to meet the six to eight month resupply requirements of its principal supplier. The Company expects inventory levels to increase moderately each year as new titles are added to the product line. The major component of accounts payable is the amount due the Company's principal supplier. Increases and decreases in inventory levels directly affect the level of accounts payable. Also the timing of the purchases and the payment terms offered by the suppliers affect the year end levels of accounts payable. As inventory levels increase moderately each year, the Company expects accounts payable will also increase moderately each year. Management anticipates cash flows from operating activities to increase in the foreseeable future. 10 Cash used in investing activities during fiscal year 2000 was primarily for additional computer equipment and software and additions to the warehouse flow rack shipping system. The short-term bank loan increased during fiscal year 2000 as the Company continued its stock buyback program. During the year the Company continued the stock buyback program by purchasing 874,087 shares of its common stock at a cost of $2,516,232. The Company paid a divided of $0.02 per share or $86,311. (d) New Accounting Standards ------------------------ Recent pronouncements of the Financial Accounting Standards Board, which are not required to be adopted at this date, include SFAS No 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and be measured at fair value. SFAS No. 133 is effective for the Company beginning March 1, 2001. The Company is currently evaluating SFAS No. 133, but does not expect its adoption will have a material impact on its consolidated financial statements. (e) Year 2000 Matters ----------------- The Company encountered only minor problems with the date change from 1999 to 2000 and experienced no business disruptions. The total costs involved in preparation for the year 2000 date change was $45,000, comprised of $40,000 software costs and $5,000 labor costs. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- The Company does not have any material market risk. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ ------------------------------------------- The information required by this Item 8 begins at page F-1, following page 17 hereof. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS - ------ --------------------------------------------- ON ACCOUNTING AND FINANCIAL DISCLOSURE -------------------------------------- There have been no disagreements on any matter of accounting principles or practices or financial statement disclosure within the twenty-four months prior to February 29, 2000. PART III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- -------------------------------------------------- (a) Identification of Directors --------------------------- The information required by this Item 10 is furnished by incorporation by reference to all information under the caption "Election of Directors" in the Company's definitive Proxy Statement to be filed in connection with the annual Meeting of Shareholders to be held on June 22, 2000. 11 (b) Identification of Executive Officers ------------------------------------ The following information is furnished with respect to each of the executive officers of the Company, each of whom is elected by and serves at the pleasure of the Board of Directors.

The prior business experience for those executive officers who have been employed by the Company for less than five years is as follows: Michael L. Puhl joined EDC on September 3, 1996. Prior to that he was Controller of the Aftermarket Division of Mark IV Industries. During that time he was in charge of all accounting functions of the combined Purolater/Dayco Aftermarket sales division. Prior to being appointed as controller of the Aftermarket Division, he was Vice President/Finance of Purodenso, a joint venture between Purolater Products and Nippondenso LTD of Japan. (c) Compliance With Section 16 (a) of the Exchange Act -------------------------------------------------- The information required by this Item 10 is furnished by incorporation by reference to all information under the caption "Compliance With Section 16 (a)" in the Company's definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on June 22, 2000. Item 11. EXECUTIVE COMPENSATION - ------- ---------------------- The information required by this Item 11 is furnished by incorporation by reference to all information under the caption "Executive Compensation" in the Company's definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on June 22, 2000. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - ------- --------------------------------------------------- MANAGEMENT ---------- The information required by this Item 12 is furnished by incorporation by reference to all information under the caption "Voting Securities and Principal Holders Thereof" in the Company's definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on June 22, 2000. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ---------------------------------------------- The information required by this Item 13 is furnished by incorporation by reference to all information under the caption "Transactions with Management and Others" in the Company's definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on June 22, 2000. 12 PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------- ---------------------------------------------------------------- (a) The following documents are filed as part of this report: 1. Financial Statements Page -------------------- ------ Independent Auditors' Report F-1 Balance Sheets - February 28, 1999 and 1998 F-2 Statements of Earnings - Years ended February 28, 1999, 1998 and 1997 F-3 Statements of Shareholders' Equity - Years ended February 28, 1999, 1998 and 1997 F-4 Statements of Cash Flows - Years ended February 28, 1999, 1998 and 1997 F-5 Notes to Financial Statements F-6-F-14 Schedules have been omitted as such information is either not required or is included in the financial statements. 2. Exhibits 3.1 Restated Certificate of Incorporation of the Company dated April 26, 1968, Certificate of Amendment there to dated June 21, 1968 and By-Laws of the Company are incorporated herein by reference to Exhibit 1 to Registration Statement on Form 10 (File No. 0-4957). 3.2 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated August 27, 1977 and By-Laws of the Company as amended are incorporated herein by reference to Exhibits 20.1 and 20.2 to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-4957). 3.3 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated November 17, 1986, is incorporated herein by reference to Exhibit 3.3 to Form 10-K for fiscal year ended February 28, 1987 (File No. 0-4957). 3.4 Certificate of Amendment of Restated Certificate of Incorporation of the Company dated March 22, 1996. 4.1 Specimens of Common Stock Certificates are incorporated herein by reference to Exhibits 3.1 and 3.2 to Registration Statement on Form 10-K (File No. 0-4957). 13 10.1 Educational Development Corporation Incentive Stock Option Plan of 1981, is incorporated herein by reference to Exhibit 10.9 to Form 10-K for fiscal year ended February 28, 1982 (File No. 0- 4957). 10.2 Agreement by and among the Company, Usborne Publishing Ltd., and Hayes Books, Inc., dated May 17, 1983, is incorporated herein by reference to Exhibit 10.16 to Form 10-K for fiscal year ended February 29, 1984 (File No. 0-4957). 10.3 Settlement Agreement dated August 7, 1986, by and between the Company and Hayes Publishing Ltd., Cyril Hayes Books, Inc. (formerly named Hayes Books, Inc.), and Cyril Hayes is incorporated herein by reference to Exhibit 10.1 to Form 8-K dated August 7, 1986 (File No. 0-4957). 10.4 Usborne Agreement-Contractual agreement by and between the Company and Usborne Publishing Limited dated November 25, 1988, is incorporated herein by reference to Exhibit 10.12 to Form 10- K dated February 28, 1989 (File No. 0-4957). 10.5 Party Plan-Contractual agreement by and between the Company and Usborne Publishing Limited dated March 14, 1989, is incorporated herein by reference to Exhibit 10.13 to Form 10-K dated February 28, 1989 (File No. 0-4957). 10.6 Loan Agreement dated January 18, 1990, by and between the Company and State Bank & Trust, N.A., Tulsa, OK (formerly WestStar Bank, N.A., Bartlesville, OK), is incorporated herein by reference to Exhibit 10.11 to Form 10-K dated February 28, 1990 (File No. 0-4957). 10.7 Lease Agreement by and between the Company and James D. Dunn dated March 1, 1991, is incorporated herein by reference to Exhibit 10.12 to Form 10-K dated February 28, 1991 (File No. 0- 4957). 10.8 Agreement for Exchange of Contract Rights and Securities by and between the Company and Robert D. Berryhill dated October 1, 1990, is incorporated herein by reference to Exhibit 10.1 to Form 10-K dated February 28, 1991 (File No. 0-4957). 10.9 Amendment dated January 1, 1992 to Usborne Agreement - Contractual agreement by and between the Company and Usborne Publishing Limited is incorporated herein by reference to Exhibit 10.13 to Form 10-K dated February 29, 1992 (File No. 0- 4957). 14 10.10 First Amendment dated January 31, 1992 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is incorporated herein by reference to Exhibit 10.14 to Form 10-K dated February 29, 1992 (File No. 0-4957). 10.11 Educational Development Corporation 1992 Incentive Stock Option Plan is incorporated herein by reference to Exhibit 4(c) to Registration Statement on Form S-8 (File No. 33-60188) 10.12 Second Amendment dated June 30, 1992 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is incorporated herein by reference to Exhibit 10.12 to Form 10-KSB dated February 28, 1994 (File No. 0-4957). 10.13 Third Amendment dated June 30, 1993 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is incorporated herein by reference to Exhibit 10.13 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.14 Fourth Amendment dated June 30, 1994 to Loan Agreement between the Company and State Bank & Trust, N.A, Tulsa, OK, is incorporated herein by reference to Exhibit 10.14 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.15 Fifth Amendment dated March 13, 1995 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.15 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.16 Sixth Amendment dated March 27, 1995 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.16 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.17 Seventh Amendment dated April 27, 1995 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.17 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.18 Amendment dated February 28, 1995 to the Lease Agreement by and between the Company and James D. Dunn, is incorporated herein by reference to Exhibit 10.18 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.19 Eighth Amendment Dated July 27, 1995 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.19 to Form 10-KSB dated February 29, 1996 (File No. 0-4957). 15 10.20 Restated Loan Agreement dated September 25, 1995 between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.20 to Form 10- KSB dated February 29, 1996 (File No. 0-4957). 10.21 Restated Loan Agreement dated June 10, 1996 between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.21 to Form 10-K dated February 28, 1997 (File No. 0-4957). 10.22 First Amendment dated June 30, 1997 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.22 to Form 10-K dated February 28, 1998 (File No. 0-4957). 10.23 Second Amendment dated June 30, 1998 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.23 to Form 10-K dated February 28, 1999 (File No. 0-4957). 10.24 Restated Loan Agreement dated June 30, 1999 between the Company and State Bank & Trust, N.A., Tulsa, OK. 10.25 Lease agreement by and between the Company and James D. Dunn dated July 1, 1999. 23. Independent Auditors' Consent ____ *Filed Herewith (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. 16 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EDUCATIONAL DEVELOPMENT CORPORATION Date: May 12, 2000 By /s/ W. Curtis Fossett ----------------------------------------- W. Curtis Fossett Principal Financial and Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Date: May 12, 2000 /s/ Randall W. White ---------------------------------- Randall W. White Chairman of the Board President, Treasurer and Director May 12, 2000 /s/ Robert D. Berryhill ---------------------------------- Robert D. Berryhill, Director May 12, 2000 /s/ Dean Cosgrove ---------------------------------- G. Dean Cosgrove, Director May 12, 2000 /s/ James F. Lewis ---------------------------------- James F. Lewis, Director May 12, 2000 /s/ John M. Lare ---------------------------------- John M. Lare, Director May 12, 2000 /s/ W. Curtis Fossett ---------------------------------- W. Curtis Fossett Principal Financial and Accounting Officer 17 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Educational Development Corporation: We have audited the accompanying balance sheets of Educational Development Corporation as of February 29, 2000 and February 28, 1999, and the related statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended February 29, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at February 29, 2000 and February 28, 1999, and the results of its operations and its cash flows for each of the three years in the period ended February 29, 2000 in conformity with accounting principles generally accepted in the United States of America. Tulsa, Oklahoma April 4, 2000 F-1 EDUCATIONAL DEVELOPMENT CORPORATION BALANCE SHEETS FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 - --------------------------------------------------------------------------------

See notes to financial statements. F-2 EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF EARNINGS YEARS ENDED FEBRUARY 29, 2000, FEBRUARY 28, 1999 AND 1998 - --------------------------------------------------------------------------------

See notes to financial statements. F-3 EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED FEBRUARY 29, 2000, FEBRUARY 28, 1999 AND 1998 - -------------------------------------------------------------------------------

See notes to financial statements. F-4 EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 AND 1998 - --------------------------------------------------------------------------------

See notes to financial statements. F-5 EDUCATIONAL DEVELOPMENT CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 AND 1998 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - Educational Development Corporation (the "Company") distributes books and publications through its Publishing and Usborne Books at Home Divisions. The Company is the United States ("U.S.") trade publisher of books and related matters, published primarily in England, to book, toy and gift stores, libraries and home educators. The Company is also involved in the production and publishing of new book titles. The English publishing company is the Company's primary supplier. The Company sells to its customers, located throughout the U.S., primarily on standard credit terms. Estimates - The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and cash on deposit in banks. Accounts Receivable - Accounts receivable at February 29, 2000 and February 28, 1999, include approximately $151,000 and $148,000, respectively, due from directors of the Company. Inventories - Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method. Property and Equipment - Property and equipment are stated at cost and depreciated and amortized using the straight-line method over the estimated useful lives of the related assets. Estimated useful lives range from two to five years. During the fourth quarter of fiscal year 2000, the Company changed the estimated life on certain property and equipment. This resulted in an increase in depreciation expense in the fourth quarter of approximately $30,000. Management expects that the book value of the property and equipment on hand as of February 29, 2000 will be fully depreciated by the end of the first quarter of fiscal year 2001. Income Taxes - The Company records deferred income taxes for temporary differences between the financial reporting and tax bases of the Company's assets and liabilities and for operating loss and tax credit carryforwards. Income Recognition - Sales are recorded when products are shipped. At the time sales are recognized for certain products under specified conditions, allowances for returns are recorded based on prior experience. Advertising Costs - The Company expenses advertising costs as incurred. F-6 Earnings Per Share - Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options. In computing diluted EPS the Company has utilized the treasury stock method. The following reconciles the diluted earnings per share:

Fair Value of Financial Instruments - For cash and cash equivalents, accounts receivable and accounts payable, the carrying amount approximates fair value because of the short maturity of those instruments. The fair value of the Company's note payable to bank is estimated to approximate carrying value based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities. Long-Lived Asset Impairment - The Company reviews the value of long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future cash flows. Stock-Based Compensation - The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." New Accounting Standards - SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and be measured at fair value. SFAS No. 133 is effective for the Company beginning March 1, 2001. The Company is currently evaluating SFAS No. 133, but does not expect its adoption will have a material impact on its financial statements. Reclassifications - Reclassifications were made to certain 1999 balances to conform with the 2000 presentation. F-7 2. INVENTORIES Inventories consist of the following: February 29, February 28, 2000 1999 Current: Book inventory $8,487,828 $8,610,406 Reserve for obsolescence (123,732) (123,732) ---------- ---------- Inventories net - current $8,364,096 $8,486,674 ========== ========== Inventories - non-current $1,280,000 $1,060,000 ========== ========== The Company occasionally purchases book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of the Company's primary supplier. These amounts are included in non-current inventory. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following: February 29, February 28, 2000 1999 Computer equipment $ 838,075 $ 802,899 Warehouse and office equipment 476,324 471,438 Furniture, fixtures and other 101,335 101,335 ----------- ----------- 1,415,734 1,375,672 Less accumulated depreciation and amortization (1,330,464) (1,033,208) ----------- ----------- $ 85,270 $ 342,464 =========== =========== 4. NOTE PAYABLE The note payable to bank is under a $3,500,000 revolving credit agreement, with interest payable monthly at prime minus .25% (8.5% and 7.75% at February 29, 2000 and February 28, 1999, respectively), collateralized by substantially all assets of the Company, maturing on June 30, 2000. At February 29, 2000 and February 28, 1999, the Company had $1,278,000 and $756,000, respectively, in borrowings under the revolving credit agreement. Available credit under the revolving credit agreement was $2,222,000 at February 29, 2000. The agreement contains provisions that require the maintenance of specified financial ratios, restrict transactions with related parties, prohibit mergers or consolidation, disallow additional debt, and limit the amount of compensation, salaries, investments, capital expenditures and leasing transactions. The Company is in compliance with or has obtained waivers for all restrictive covenants. The Company intends to renew the bank agreement or obtain other financing upon maturity. F-8 For each of the three years in the period ended February 29, 2000, the highest amount of short-term borrowings, the average amount of borrowings under these short-term notes, and the weighted average interest rates are as follows:

1. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax assets and liabilities as of February 29, 2000 and February 28, 1999 are as follows:

Management has determined that no valuation allowance is necessary to reduce the deferred tax assets as it is more likely than not that such assets are realizable. F-9 The components of income tax expense are as follows: February 29, February 28, ----------------------- 2000 1999 1998 Current: Federal $645,200 $536,500 $ 856,900 State 113,800 94,600 151,100 -------- -------- ---------- 759,000 631,100 1,008,000 Deferred: Federal (76,500) (6,100) 85,800 State (13,500) (1,100) 15,100 -------- -------- ---------- (90,000) (7,200) 100,900 -------- -------- ---------- Total income tax expense $669,000 $623,900 $1,108,900 ======== ======== ========== The following reconciles the Company's expected income tax expense utilizing statutory tax rates to the actual tax expense:

1. EMPLOYEE BENEFIT PLAN The Company has a profit sharing plan which incorporates the provisions of Section 401(k) of the Internal Revenue Code. The 401(k) plan covers substantially all employees meeting specific age and length of service requirements. Matching contributions from the Company are discretionary and amounted to $33,477, $27,291 and $27,113 in fiscal years 2000, 1999 and 1998, respectively. 7. COMMITMENTS The Company leases its office and warehouse facilities under a noncancelable operating lease which expires in June 2004. Total rent expense related to these facilities was $232,980 in fiscal 2000 and $225,960, in both fiscal 1999 and 1998. Future minimum lease payments are as follows: Year Ending February 28, 2001 $ 240,000 2002 240,000 2003 240,000 2004 240,000 2005 80,000 ---------- $1,040,000 ========== F-10 At February 29, 2000, the Company had outstanding commitments to purchase inventory from its primary vendor totaling approximately $1,868,000. 8. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS In June 1992, the Board of Directors adopted the 1992 Incentive Stock Option Plan "Incentive Plan." A total of 1,000,000 stock options are authorized to be granted under the 1992 Plan. Options granted under the Incentive Plan vest at date of grant and are exercisable up to ten years from the date of grant. The exercise price on options granted is equal to the market price at the date of grant. Options outstanding at February 29, 2000 expire in 2003 through 2009. A summary of the status of the Company's Incentive Plan as of February 29, 2000 and February 28, 1999 and 1998 and changes during the years ended on those dates is presented below:

The following table summarizes information about stock options outstanding at February 29, 2000:

All options outstanding are exercisable at February 29, 2000. F-11 The Company applies APB Opinion No. 25 and related interpretations in accounting for its Incentive Plan. Accordingly, no compensation cost has been recognized for its Incentive Plan. Had compensation cost for the Company's Incentive Plan been determined based on the fair value at the grant dates for awards under the Incentive Plan consistent with the method prescribed by SFAS No. 123, the Company's net earnings and earnings per share for the years ended February 29, 2000 and February 28, 1999 and 1998 would have been reduced to the pro forma amounts indicated below:

The fair value of options granted under the Incentive Plan was estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for options granted in 2000; no dividend yield, expected volatility of 45%, risk free interest rate of 5.7% and expected lives of ten years; the following assumptions were used for options granted in 1999; no dividend yield, expected volatility of 50%, risk free interest rate of 5.06% and expected lives of four years; 1998, no dividend yield, expected volatility of 54%, risk free interest rate of 6.2% and expected lives of four years. 9. SUPPLEMENTARY INFORMATION The activity in the allowances for doubtful accounts receivable, sales returns and inventory valuation for each of the three years in the period ended February 29, 2000 is as follows: Doubtful accounts receivable:

F-12 Inventory valuation:

Charges to certain expense accounts for each of the three years in the period ended February 29, 2000 are shown below:

1. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended February 29, 2000 and February 28, 1999:

F-13 11. BUSINESS SEGMENTS The Company has two reportable segments: Publishing and Usborne Books at Home ("UBAH"). These reportable segments are business units that offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations. The Publishing Division markets its products to retail accounts, which include book, school supply, toy and gift stores and museums, through commissioned sales representatives, trade and specialty wholesalers and an internal telesales group. The UBAH Division markets its product line through a network of independent sales consultants through a combination of direct sales, home shows and book fairs. The UBAH Division also distributes to school and public libraries. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on operating profits of the segments which is defined as segment net sales reduced by direct cost of sales and direct expenses. Corporate expenses, including interest and depreciation, and income taxes are not allocated to the segments. The Company's assets are not allocated on a segment basis. Information by industry segment for the years ended February 29, 2000 and February 28, 1999 and 1998 is set forth below:

F-14