EDUCATIONAL DEVELOPMENT CORP — Annual Report 2002

May 3, 2002

Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 28, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to . ------------ ------------ Commission file number: 0-4957 EDUCATIONAL DEVELOPMENT CORPORATION (Exact name of registrant as specified in its charter) Delaware 73-0750007 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10302 East 55th Place, Tulsa, Oklahoma 74146-6515 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (918) 622-4522 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.20 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of April 17, 2002, 3,835,117 shares of common stock were outstanding. The aggregate market value of the voting shares held by non-affiliates of the registrant, based on 2,715,223 shares (total outstanding less shares held by all officers, directors and 401(k) Plan) extended at the closing market price on April 17, 2002, of these shares traded on the Nasdaq National Market, was approximately $19,006,561. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Annual Report, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement relating to the annual meeting of stockholders to be held on July 2, 2002. 1 TABLE OF CONTENTS

2 EDUCATIONAL DEVELOPMENT CORPORATION FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED FEBRUARY 28, 2002 FACTORS AFFECTING FORWARD LOOKING STATEMENTS This annual Report on Form 10-K contains certain "forward looking statements" within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain statements contained in "Item 7 - Management Discussion and Analysis" are not based on historical facts, but are forward-looking statements that are based upon numerous assumptions about future conditions that may ultimately prove to be inaccurate. Actual events and results may be materially different from anticipated results described in such statements. The Company's ability to achieve such results is subject to certain risks and uncertainties. Such risks and uncertainties include but are not limited to, product prices, continued availability of capital and financing, and other factors affecting the Company's business that may be beyond its control. Although Educational Development Corporation believes that the expectations reflected by such forward looking statements are reasonable based on information currently available to the Company, no assurances can be given that such exceptions will prove to have been correct. PART 1 Item 1. BUSINESS (a) General Development of Business Educational Development Corporation ("EDC" or the "Company"), a Delaware corporation with its principal office in Tulsa, Oklahoma, is the exclusive trade publisher of a line of children's books produced in the United Kingdom by Usborne Publishing Limited. The Company was incorporated on August 23, 1965. The Company's original corporate name was Tutor Tapes International Corporation of Delaware. Its name was changed to International Teaching Tapes, Inc. on November 24, 1965, and changed again to the present name on June 24, 1968. During Fiscal Year ("FY") 2002 the Company operated two divisions: Home Business Division ("Usborne Books at Home" or "UBAH") and Publishing Division. The Home Business Division distributes books through independent consultants who hold book showings in individual homes, and through book fairs, direct sales and internet sales. The Home Business Division also distributes these titles to school and public libraries. The Publishing Division markets books to bookstores, toy stores, specialty stores and other retail outlets. Significant Events During Fiscal Year 2002 There were no significant events during fiscal year 2002. (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 ("Usborne Books at Home" or "UBAH") and Publishing Division is a line of children's books produced in the United Kingdom by Usborne Publishing Limited. The Company is the sole United States trade publisher of these books. The Company currently offers approximately 1,100 different titles. The Company also distributes a product called "Usborne Kid Kits". These Kid Kits take an Usborne book and combine it with specially selected items and/or toys which complement the information contained in the book. The Kid Kits are packaged in a reusable vinyl bag. Alternatively, 18 Kid Kits are also available in an attractive box package. Currently 70 different Kid Kits are available. The Company considers the political risk of importing books from the United Kingdom to be negligible as the two countries have maintained excellent relations for many years. Likewise there is little direct economic risk to the Company in importing books from the United Kingdom as the Company pays for the books in U.S. dollars and is not directly subject to any currency fluctuations. There is risk of physical loss of the books should an accident occur while the books are in transit, which could cause the Company some economic loss due to lost sales should the supply of some titles be depleted in the event of a lost shipment. The Company considers this to be highly unlikely as this type of loss has yet to occur. There is some risk involved in having only one source for its products - Usborne Publishing Limited. The Company has an excellent working relationship with its foreign supplier Usborne Publishing Limited and can foresee no reason for this to change. Management believes that the Usborne line of books are the best available books of their type and currently has no plans to sell any other line. (ii) Industry Segments (a) Home Business Division The Home Business Division markets the Usborne line of approximately 1,100 titles and 70 Kid Kits through a combination of direct sales, home parties, book fairs and the internet, sold through a network marketing system. The division also sells to school and public libraries. (b) Publishing Division The Publishing Division distributes the Usborne line to bookstores, toy stores, specialty stores and other retail outlets utilizing an inside telephone sales force as well as independent field sales representatives. (iii) Research and Development The Company spent approximately $14,000 in fiscal year 2001 and $120,000 in fiscal year 2000 in development of a new product, "Make Reading Fun", a fully interactive reading and phonics program. The Company began sales of this product during the last quarter of FY 2001. (iv) Marketing (a) Home Business Division The Home Business Division markets through commissioned consultants using a combination of direct sales, home parties, book fairs and the internet. The division had approximately 5,600 consultants in 50 states at February 28, 2002. 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 9,000 book, toy and specialty stores. Significant orders totaling 29% of Publishing sales have been received from major book chains. During fiscal year 2002 the division continued to expand into mass merchandising outlets such as drug, department and discount stores. (v) Competition (a) Home Business Division The Home Business Division faces significant competition from several other direct selling companies which have more financial resources. Federal and state funding cuts to schools affect the availability of funds to the school libraries. The Company is unable to estimate the effect of these funding cuts on the division's future sales to school libraries, because the magnitude of funding cuts has yet to be determined by Congress. Management believes its superior product line and consultant network will enable this division to be highly competitive in its market area. (b) Publishing Division The Publishing Division faces strong competition from large U.S. and international companies which have more financial resources. Industry sales of juvenile paperbacks approaches $888 million annually. The Publishing Division's sales are approximately 0.8% of industry sales. Competitive factors include product quality, price and deliverability. Management believes its product line will enable this division to compete well in its market area. (vi) Seasonality (a) Home Business Division The level of sales for Home Business Division is greatest during the Fall as individuals prepare for the Holiday season. (b) Publishing Division The level of shipments of the Company's books is greatest in the Fall while retailers are stocking up for Holiday season. (vii) Government Funding Local, state and Federal funds are important to the Home Business Division but not to the Publishing Division. In many cities and states in which the Company does business, school funds have been severely cut, which impacts sales to school libraries. (viii) Trademarks, Copyrights and Patents (none) (ix) Employees As of April 1, 2002, the Company had 65 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. In January, 2002, the Company purchased for $1.8 million the warehouse and office facilities it formerly leased. These facilities contain approximately 80,400 square feet of office and warehouse space. 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 2002 and 2001, 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 17, 2002 was 1,121. The Company paid a $0.04 per share annual dividend during fiscal year 2002 and a $0.02 per share annual dividend during fiscal year 2001. The Company plans to pay a $0.04 per share annual dividend during fiscal year 2003. 6 Item 6. SELECTED FINANCIAL DATA

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (a) Results of Operations FY 2002 The Home Business Division's net sales increased 28.8% during FY 2002 when compared with FY 2001. Each quarter of FY 2002 recorded a sales increase when compared with the same quarter of FY 2001. A quarterly comparison of FY 2002 versus FY 2001 shows the first quarter up 28.7%, the second quarter up 42.4%, the third quarter up 22.5% and the fourth quarter up 26.6%. The Company attributes these increases to the fact that the number of consultants selling increased 28% during FY 2002. The Company continued offering its leadership skills seminars throughout FY 2002. These seminars are designed to help supervisors build their business and the seminars proved to be very popular with these supervisors. The Home Business Division will hold its Sixth National Convention in June, 2002, in Tulsa, Oklahoma. Management is optimistic that this division will continue in FY 2003 the growth trend experienced in FY 2002. The Publishing Division's net sales increased slightly in FY 2002 when compared with FY 2001. Increased marketing efforts contributed to the sales increase. The Company has an aggressive in-house sales force which maintains contact with over 9,000 customers. During FY 2002, the telesales force opened 547 new accounts compared with 679 new accounts in FY 2001. The Company offers two display racks to assist stores in displaying the Company's products. One is a six-foot rack with five adjustable shelves which can hold approximately 250 titles. The second rack is a four-sided rack with three levels which will hold between 50 and 60 of the Company's Kid Kits. There were 3,545 of these attractive racks in retail stores throughout the country at the end of FY 2002 compared with 3,428 at the end of FY 2001. The Company attends major national trade shows throughout the country to further enhance product visibility. The trend of prior years in which smaller independent book stores and gift stores closed due to intense competition from larger chains continues. However, this trend appears to be slowing. Our in-house telesales force, which contacts smaller independent stores, reported a slight sales increase during FY 2002. Our field representatives had a slight sales decrease during FY 2002. Sales to the national chains continue to dominate the bookstore market. The Company's sales to these national chains increased 4.5% during FY 2002. The Company plans to continue its aggressive approach to the national chains in the areas of cooperative advertising, joint promotional efforts and institutional advertising in trade publications. Significant potential for growth exists with the national chains and the Company is strongly committed to increasing these sales. For these reasons, management is optimistic that the Publishing Division can maintain its market share. 7 Cost of sales increased 11.4% during FY 2002 when compared with FY 2001. Cost of sales as a percentage of gross sales was 26.7% for both FY 2002 and FY 2001. Cost of sales as a percentage of gross sales will fluctuate depending upon the product mix being sold. Management expects the cost of sales percentage for FY 2003 will remain consistent with FY 2002. Operating and selling expenses increased 12.8% during FY 2002 when compared with FY 2001. As a percentage of gross sales, these costs were 12.2% for FY 2002 and 12.1% for FY 2001. Contributing to the increase in operating and selling expenses were increased payroll costs and higher freight costs. Increased credit card costs and increased marketing costs in the Home Business Division, the result of increased sales, also contributed to the increase. Management expects operating and selling expenses to be approximately 11% to 13% of gross sales in FY 2003. Sales commission increased 30.0% during FY 2002 when compared with FY 2001. As a percentage of gross sales, these costs were 16.0% in FY 2002 and 13.7% in FY 2001. Sales commissions as a percentage of gross sales is determined by the product mix sold and the division that makes the sale. Commission expense in the Publishing Division remained unchanged between FY 2002 and FY 2001. Commission expense in the Home Business Division increased 30.9%, the result of increased sales and the higher commission structure in the Home Business Division. General and administrative expenses increased 2.2% in FY 2002 versus FY 2001. As a percentage of gross sales, these expenses were 4.8% in FY 2002 and 5.3% in FY 2001. An increase in materials and supplies contributed to the increase in general and administrative expenses. Interest expense declined 80.6% in FY 2002 when compared with FY 2001. As a percentage of gross sales, interest expense was 0.07% in FY 2002 and 0.4% in FY 2001. The Company's note payable to the bank was paid off August 29, 2001. This along with lower borrowings during the first six months of FY 2002 and lower interest rates contributed to lower interest expense in FY 2002. FY 2001 The Home Business Division's net sales increased 15.2% during FY 2001 when compared with FY 2000. Each quarter of FY 2001 recorded a sales increase when compared with the same quarter of FY 2000. The last two quarters of FY 2001 were especially strong when compared with the same two quarters last year. Net sales for the third quarter of FY 2001 increased 18.5% over the third quarter of FY 2000 while net sales for the fourth quarter of FY 2001 increased 32.7% over the fourth quarter of FY 2000. The Company attributed this increase to several factors including a 36% increase in the number of active consultants at the end of FY 2001 when compared with FY 2000. In August, 2001 the major competitor of the Home Business Division ceased operations. The Company signed up slightly over 1,000 of this former competitor's sales representatives. The sales by these consultants made a significant contribution to total net sales during the last six months of FY 2001. Throughout FY 2001 the Company offered several leadership skills seminars designed to help supervisors build their business. These seminars proved to be very popular with the supervisors and a large number of them participated. The Home Business Division's fifth National Convention was held in May 2001. 8 The Publishing Division's net sales declined 7.6% in FY 2001 when compared with FY 2000. Decreased volumes contributed to the decline in net sales. The Company's aggressive in-house telephone sales force maintained contact with over 10,000 customers. During FY 2001, the telesales force opened 679 new accounts compared with 675 new accounts in FY 2000. The Company offered two display racks to assist stores in displaying the Company's products. One was a six-foot rack with five adjustable shelves which can hold approximately 250 titles. The second rack was a four-sided rack with three levels which will hold between 50 and 60 of the Company's Kid Kits. There were 3,428 of these attractive racks in retail stores throughout the country at the end of FY 2001 compared with 3,307 at the end of FY 2000. The Company attended major national trade shows throughout the country to further enhance product visibility. In recent years, numerous independent book and gift stores have been closed due to increased competition from larger chains. During the past year, this trend appeared to be changing in a favorable manner. In-house marketing, which contacts smaller independent stores, reflected an actual increase in sales in fiscal year 2001. Our field representatives had a sales decrease, but reported that their account base was finally stabilizing. These developments have the potential to reflect positively on future sales. National chains continue, however, to dominate the bookstore market. In order to increase our presence with the national chains the Company took a more aggressive approach in the areas of cooperative advertising, joint promotional efforts and institutional advertising in trade publications. These efforts were initiated in the last portion of fiscal year 2001 and were dramatically increased in fiscal year 2002. The initial response to these efforts was encouraging. There is significant potential with national chains, and the Company is strongly committed to increasing these sales. Cost of sales increased 4.3% during FY 2001 when compared with FY 2000. Cost of sales as a percentage of gross sales was 26.7% in FY 2001 and 26.2% in FY 2000. Cost of sales as a percentage of gross sales fluctuates with the mix of product sold during a given year. Operating and selling expenses increased 2.2% during FY 2001 when compared with FY 2000. As a percentage of gross sales, these costs were 12.1% for both FY 2001 and FY 2000. Contributing to the increase in operating and selling expenses was $130,000 non-recurring charge related to recruiting expenses in the Home Business Division. Increased credit card costs in the Home Business Division, the result of increased sales, also contributed to the increase. Offsetting these increases were decreases in depreciation expense and payroll costs. Sales commissions increased 14.6% during FY 2001 when compared to FY 2000. As a percentage of gross sales, these costs were 13.7% in FY 2001 compared with 12.3% in FY 2000. Sales commissions as a percentage of gross sales is determined by the product mix sold and the division which makes the sale. Commission expense in the Publishing Division declined 10.8% for FY 2001, the result of a decline in that division's net sales. Offsetting this decline was an increase in the Home Business Division's commission expense of 15.5% during FY 2001, the result of increased sales and the higher commission structure in the Home Business Division. General and administrative expenses decreased 12.4% in FY 2001 when compared with FY 2000. As a percentage of gross sales, these expenses were 5.3% and 6.1% for FY 2001 and FY 2000, respectively. A decrease in depreciation expense contributed to the decrease in general and administrative expenses for FY 2001. Interest expense increased 131.1% in FY 2001 when compared with FY 2000. As a percentage of gross sales, interest expense was 0.4% in FY 2001 and 0.2% in FY 2000. Higher interest rates and increased borrowings throughout the year contributed to the increase in interest expense. 9 (b) Financial Position Working capital was $7.5 million for fiscal year end 2002 and $8.1 million at fiscal year end 2001. The net effect of a decrease in inventory, an increase in accounts payable and the elimination of short-term bank debt resulted in the decrease in working capital at fiscal year end 2002. Management expects its financial position to remain strong and to increase working capital during the next fiscal year. (c) Liquidity and Capital Resources Management believes the Company's liquidity at February 28, 2002, is adequate. There are no known demands, commitments, events or uncertainties that would result in a material change in the Company's liquidity during fiscal year 2003. Capital expenditures are expected to be less than $750,000 during fiscal year 2003. These expenditures would consist primarily of software and hardware enhancements to the Company's existing data processing equipment, property improvements and additions to equipment in the warehouse. Effective June 30, 2001 the Company signed a Second Amendment to the 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, 2002. The note bears interest at the Wall Street Journal prime floating rate minus 0.25% payable monthly (4.50% at February 28, 2002). The note is collateralized by substantially all of the assets of the Company. At February 28, 2002 the Company had no borrowings outstanding. Available credit under the revolving credit agreement was $3,500,000 at February 28, 2002. The Company obtained and uses the credit facility to fund routine operations. Payments are made from current cash flows. The Company plans to renew this facility when it matures on June 30, 2002. The Company believes its borrowing capacity under this line to be adequate for anticipated operating levels. The Company generated cash from operating activities during fiscal year 2002. Accounts receivable increased during the year as several large orders in the Publishing Division were received in January and February, and the Publishing Division offered special dating terms during the fourth quarter with payment due during the first quarter of fiscal year 2003. The Company plans to continue to maximize its collection efforts in order to maintain cash flows during fiscal year 2003. Inventory levels declined 11.2% from fiscal year end 2001 to fiscal year end 2002, the result of the timing of deliveries from the Company's principal supplier. The Company continues to monitor inventory levels to ensure that adequate inventory is on hand to support sales as well as to meet the six to eight month resupply requirements of its principal supplier. The Company expects inventory levels to increase moderately next year. The major component of accounts payable is the amount due the Company's principal supplier. Increases and decreases in inventory levels directly affect the level of accounts payable. Also the timing of the purchases and the payment terms offered by the suppliers affect the year end levels of accounts payable. The Company expects accounts payable to increase moderately next year. Management anticipates cash flows from operating activities to increase in the foreseeable future. Cash used in investing activities during fiscal year 2002 was primarily for the acquisition of the Company's office and warehouse facility which previously had been leased. The Company did not incur any debt in this purchase but used cash reserves generated by the increased sales in the Home Business Division. The short-term bank loan was paid off in August, 2001, using cash generated by increased sales in the Home Business Division, whose sales are primarily cash. During the year the Company continued the stock buyback program by purchasing 139,603 shares of its common stock at a cost of $634,752. The Company paid a divided of $0.04 per share or $154,175. 10 (d) Critical Accounting Policies Management continually estimates and calculates the amount of non-current inventory. The inventory arises due to the Company occasionally purchasing book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of the Company's primary supplier. These non-current inventory quantities are estimated by management using the historical inventory turnover rates by title and were $817,500 and $1,051,600 at February 28, 2002 and 2001, respectively. Management also estimates a reserve for obsolete inventory based on inventory turnover rates and market conditions. Management has estimated and included a reserve for obsolesce for both current and non-current inventory of $179,990 and $92,990 as of February 28, 2002 and 2001, respectively. Management also estimates a reserve for sales returns. The Company's sales return policy allows the customer to return all purchases for an exchange or refund for up to 30 days after the customer receives the item. Management has estimated and included a reserve for sales returns of $101,000 as of February 28, 2002 and 2001. The reserve for sales returns is estimated by management using historical sales returns data. These critical accounting polices represent the best estimate of management. Actual results could vary significantly and have a material impact on the financial position of the Company. (e) New Accounting Standards In June 2001 the FASB issued Statement of Financial Accounting (SFAS) No 141, Business Combinations. SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes Accounting Principals Board (APB) opinion No. 16, Business Combinations, and FASB No. 38, Accounting for Preacquisition Contingencies for Purchased Enterprises. All business combinations in the scope of SFAS No. 141 are to be accounted for using one method, the purchase method. The Company adopted SFAS No. 141 effective July 1, 2001, as required; however, the Company has not entered into any business combinations since the effective date of the statement. (f) Accounting Standards Issued But Not Yet Adopted In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Company will adopt SFAS No. 142 in its 2003 financial statements, as required. Since the Company has no material intangible assets or goodwill, Management believes adoption of this new standard will have no impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. The Company adopted the provision of SFAS No. 144 as required on March 1, 2002. This standard had no effect on the Company's financial statements upon adoption. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any material market risk. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 begins at page F-1, following page 18 hereof. 11 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements on any matter of accounting principles or practices or financial statement disclosure within the twenty-four months prior to February 28, 2002. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Identification of Directors The information required by this Item 10 is furnished by incorporation by reference to all information under the caption "Election of Directors" in the Company's definitive Proxy Statement to be filed in connection with the annual Meeting of Shareholders to be held on July 2, 2002. (b) Identification of Executive Officers The following information is furnished with respect to each of the executive officers of the Company, each of whom is elected by and serves at the pleasure of the Board of Directors.

*The prior business experience for this executive officer who has been employed by the Company for less than five years is as follows: In April 2001, Craig M. White, son of Randall W. White, Chairman of the Board, President and Chief Executive Officer, was elected Vice President of Information Systems. Craig White graduated from Oklahoma State University in December 1994 with a BS degree in Electrical and Computer Engineering. He joined EDC in December 1994 as an Inventory Analyst. In July 1995 he was named Manager - - Information Systems. (c) Compliance With Section 16 (a) of the Exchange Act The information required by this Item 10 is furnished by incorporation by reference to all information under the caption "Compliance With Section 16 (a)" in the Company's definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 2, 2002. Item 11. EXECUTIVE COMPENSATION The information required by this Item 11 is furnished by incorporation by reference to all information under the caption "Executive Compensation" in the Company's definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 2, 2002. 12 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is furnished by incorporation by reference to all information under the caption "Voting Securities and Principal Holders Thereof" in the Company's definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 2, 2002. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There are no relationships or related transactions required to be disclosed. 13 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report:

1. 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. 14 4.1 Specimens of Common Stock Certificates are incorporated herein by reference to Exhibits 3.1 and 3.2 to Registration Statement on Form 10-K (File No. 0-4957). 10.1 Educational Development Corporation Incentive Stock Option Plan of 1981, is incorporated herein by reference to Exhibit 10.9 to Form 10-K for fiscal year ended February 28, 1982 (File No. 0-4957). 10.2 Agreement by and among the Company, Usborne Publishing Ltd., and Hayes Books, Inc., dated May 17, 1983, is incorporated herein by reference to Exhibit 10.16 to Form 10-K for fiscal year ended February 29, 1984 (File No. 0-4957). 10.3 Settlement Agreement dated August 7, 1986, by and between the Company and Hayes Publishing Ltd., Cyril Hayes Books, Inc. (formerly named Hayes Books, Inc.), and Cyril Hayes is incorporated herein by reference to Exhibit 10.1 to Form 8-K dated August 7, 1986 (File No. 0-4957). 10.4 Usborne Agreement-Contractual agreement by and between the Company and Usborne Publishing Limited dated November 25, 1988, is incorporated herein by reference to Exhibit 10.12 to Form 10-K dated February 28, 1989 (File No. 0-4957). 10.5 Party Plan-Contractual agreement by and between the Company and Usborne Publishing Limited dated March 14, 1989, is incorporated herein by reference to Exhibit 10.13 to Form 10-K dated February 28, 1989 (File No. 0-4957). 10.6 Loan Agreement dated January 18, 1990, by and between the Company and State Bank & Trust, N.A., Tulsa, OK (formerly WestStar Bank, N.A., Bartlesville, OK), is incorporated herein by reference to Exhibit 10.11 to Form 10-K dated February 28, 1990 (File No. 0-4957). 10.7 Lease Agreement by and between the Company and James D. Dunn dated March 1, 1991, is incorporated herein by reference to Exhibit 10.12 to Form 10-K dated February 28, 1991 (File No. 0-4957). 10.8 Agreement for Exchange of Contract Rights and Securities by and between the Company and Robert D. Berryhill dated October 1, 1990, is incorporated herein by reference to Exhibit 10.1 to Form 10-K dated February 28, 1991 (File No. 0-4957). 10.9 Amendment dated January 1, 1992 to Usborne Agreement - Contractual agreement by and between the Company and Usborne Publishing Limited is incorporated herein by reference to Exhibit 10.13 to Form 10-K dated February 29, 1992 (File No. 0-4957). 15 10.10 First Amendment dated January 31, 1992 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is incorporated herein by reference to Exhibit 10.14 to Form 10-K dated February 29, 1992 (File No. 0-4957). 10.11 Educational Development Corporation 1992 Incentive Stock Option Plan is incorporated herein by reference to Exhibit 4(c) to Registration Statement on Form S-8 (File No. 33-60188) 10.12 Second Amendment dated June 30, 1992 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is incorporated herein by reference to Exhibit 10.12 to Form 10-KSB dated February 28, 1994 (File No. 0-4957). 10.13 Third Amendment dated June 30, 1993 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar Bank, N.A., Bartlesville, OK,) is incorporated herein by reference to Exhibit 10.13 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.14 Fourth Amendment dated June 30, 1994 to Loan Agreement between the Company and State Bank & Trust, N.A, Tulsa, OK, is incorporated herein by reference to Exhibit 10.14 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.15 Fifth Amendment dated March 13, 1995 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.15 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.16 Sixth Amendment dated March 27, 1995 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.16 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.17 Seventh Amendment dated April 27, 1995 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.17 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.18 Amendment dated February 28, 1995 to the Lease Agreement by and between the Company and James D. Dunn, is incorporated herein by reference to Exhibit 10.18 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 10.19 Eighth Amendment Dated July 27, 1995 to Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.19 to Form 10-KSB dated February 29, 1996 (File No. 0-4957). 16 10.20 Restated Loan Agreement dated September 25, 1995 between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.20 to Form 10-KSB dated February 29, 1996 (File No. 0-4957). 10.21 Restated Loan Agreement dated June 10, 1996 between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.21 to Form 10-K dated February 28, 1997 (File No. 0-4957). 10.22 First Amendment dated June 30, 1997 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.22 to Form 10-K dated February 28, 1998 (File No. 0-4957). 10.23 Second Amendment dated June 30, 1998 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.23 to Form 10-K dated February 28, 1999 (File No. 0-4957). 10.24 Restated Loan Agreement dated June 30, 1999 between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.24 to Form 10-K dated February 29, 2000 (File No. 0-4957). 10.25 Lease agreement by and between the Company and James D. Dunn dated July 1, 1999, is incorporated herein by reference to Exhibit 10.25 to Form 10-K dated February 29, 2000 (File No. 0-4957). 10.26 First Amendment dated June 30, 2000 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.25 to Form 10-K dated February 28, 2001 (File No. 0-4957). 10.27 Second Amendment dated June 30, 2001 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK. 23. Independent Auditors' Consent - ---------- * Filed Herewith (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EDUCATIONAL DEVELOPMENT CORPORATION Date: May 6, 2002 By /s/ W. Curtis Fossett -------------------------------------- W. Curtis Fossett Principal Financial and Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Date: May 6, 2002 /s/ Randall W. White ----------------------------------------- Randall W. White Chairman of the Board President, Treasurer and Director May 6, 2002 /s/ Robert D. Berryhill ----------------------------------------- Robert D. Berryhill, Director May 6, 2002 /s/ Dean Cosgrove ----------------------------------------- G. Dean Cosgrove, Director May 6, 2002 /s/ James F. Lewis ----------------------------------------- James F. Lewis, Director May 6, 2002 /s/ W. Curtis Fossett ----------------------------------------- W. Curtis Fossett Principal Financial and Accounting Officer 18 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Educational Development Corporation: We have audited the accompanying balance sheets of Educational Development Corporation (the "Company") as of February 28, 2002 and 2001, and the related statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended February 28, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at February 28, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended February 28, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP April 1, 2002 F-1 EDUCATIONAL DEVELOPMENT CORPORATION BALANCE SHEETS FEBRUARY 28, 2002 AND 2001 - --------------------------------------------------------------------------------

See notes to financial statements. F-2 EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF EARNINGS YEARS ENDED FEBRUARY 28, 2002 AND 2001, AND FEBRUARY 29, 2000 - --------------------------------------------------------------------------------

See notes to financial statements. F-3 EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED FEBRUARY 28, 2002 AND 2001, AND FEBRUARY 29, 2000

See notes to financial statements. F-4 EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED FEBRUARY 28, 2002 AND 2001, AND FEBRUARY 29, 2000 - --------------------------------------------------------------------------------

See notes to financial statements. F-5 EDUCATIONAL DEVELOPMENT CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED FEBRUARY 28, 2002 AND 2001, AND FEBRUARY 29, 2000 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS - Educational Development Corporation (the "Company") distributes books and publications through its Publishing and Usborne Books at Home Divisions. The Company is the United States ("U.S.") trade publisher of books and related matters, which are published primarily in England and distributed to book, toy and gift stores, libraries and home educators. The Company is also involved in the production and publishing of new book titles. The English publishing company is the Company's primary supplier. The Company sells to its customers, located throughout the U.S., primarily on standard credit terms. ESTIMATES - The Company's financial statements were prepared in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and cash on deposit in banks. ACCOUNTS RECEIVABLE - Accounts receivable at February 28, 2002 and 2001, include approximately $26,000 and $57,000, respectively, due from directors and related parties of the Company. INVENTORIES - Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets. 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. INCOME RECOGNITION - Sales are recorded when products are shipped. At the time sales are recognized for certain products under specified conditions, estimated allowances for returns are recorded based on prior experience. ADVERTISING COSTS - The Company expenses advertising costs as incurred. EARNINGS PER SHARE - Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options. In computing diluted EPS the Company has utilized the treasury stock method. F-6 The following reconciles the diluted earnings per share:

Stock options representing 249,600, and 273,400 of common shares for the years ended 2001 and 2000, respectively, were not included in calculation of diluted earnings per share since the effect was antidilutive. There were no stock options for the year ended 2002 excluded from the diluted earnings per share calculation. FAIR VALUE OF FINANCIAL INSTRUMENTS - For cash and cash equivalents, accounts receivable and accounts payable, the carrying amount approximates fair value because of the short maturity of those instruments. The fair value of the Company's note payable to bank is estimated to approximate carrying value based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities. LONG-LIVED ASSET IMPAIRMENT - The Company reviews the value of long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future cash flows. STOCK-BASED COMPENSATION - The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, 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 - In June 2001 the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB No. 38, Accounting for Preacquisition Contingencies for Purchased Enterprises. All business combinations in the scope of SFAS No. 141 are to be accounted for using one method, the purchase method. The Company adopted SFAS No. 141 effective July 1, 2001, as required; however, the Company has not entered into any business combinations since the effective date of the statement. F-7 ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED - In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The Company will adopt SFAS No. 142 in its 2003 financial statements, as required. Since the Company has no material intangible assets or goodwill, management believes adoption of this new standard will have no impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. The Company adopted the provisions of SFAS No. 144 as required on March 1, 2002. This standard had no effect on the Company's financial statements upon adoption. RECLASSIFICATIONS - Certain prior year amounts have been reclassed to conform with the 2002 presentation. 2. INVENTORIES Inventories consist of the following:

The Company occasionally purchases book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of the Company's primary supplier. These amounts are included in non-current inventory. F-8 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:

1. NOTE PAYABLE The note payable to bank is under a $3,500,000 revolving credit agreement, with interest payable monthly at prime minus .25% (8.25% at February 28, 2001), collateralized by substantially all assets of the Company, maturing on June 30, 2002. At February 28, 2001, the Company had borrowings of $1,084,000 under the revolving credit agreement. There were no borrowings outstanding under the revolving credit agreement at February 28, 2002. Available credit under the revolving credit agreement was $3,500,000 at February 28, 2002. The agreement contains provisions that require the Company to maintain specified financial ratios, restrict transactions with related parties, prohibit mergers or consolidation, disallow additional debt, and limit the amount of compensation, salaries, investments, capital expenditures and leasing transactions. The Company is in compliance with all restrictive covenants at February 28, 2002. The Company intends to renew the bank agreement or obtain other financing upon maturity. For each of the three years in the period ended February 28, 2002, the highest amount of short-term borrowings, the average amount of borrowings under these short-term notes, and the weighted average interest rates are as follows:

F-9 5. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising the Company's net deferred tax assets and liabilities as of February 28, 2002 and 2001 are as follows:

Management has determined that no valuation allowance is necessary to reduce the deferred tax assets as it is more likely than not that such assets are realizable. F-10 The components of income tax expense are as follows:

The following reconciles the Company's expected income tax expense utilizing statutory tax rates to the actual tax expense:

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 $52,258, $40,557, and $33,477 in fiscal years 2002, 2001, and 2000, respectively. 7. COMMITMENTS The Company leased its office and warehouse facilities under a noncancelable operating lease until January 2002. On January 7, 2002, the Company purchased its leased office and warehouse facilities for $1,790,000 and simultaneously terminated its lease. Total rent expense related to these facilities was $204,000 in fiscal 2002, $240,000 in fiscal 2001, and $232,980 in fiscal 2000. At February 28, 2002, the Company had outstanding commitments to purchase inventory from its primary vendor totaling approximately $4,559,000. F-11 8. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS In June 1992, the Board of Directors adopted the 1992 Incentive Stock Option Plan (the "Incentive Plan"). A total of 1,000,000 stock options are authorized to be granted under the Incentive Plan. Options granted under the Incentive Plan vest at date of grant and are exercisable up to ten years from the date of grant. The exercise price on options granted is equal to the market price at the date of grant. Options outstanding at February 28, 2002 expire beginning in April 2003 through January 2012. A summary of the status of the Company's Incentive Plan as of February 28, 2002 and 2001, and February 29, 2000, and changes during the years then ended is presented below:

The following table summarizes information about stock options outstanding at February 28, 2002:

All options outstanding are exercisable at February 28, 2002. F-12 The Company applies APB Opinion No. 25 and related interpretations in accounting for its Incentive Plan. Accordingly, no compensation cost has been recognized for its Incentive Plan. Had compensation cost for the Company's Incentive Plan been determined based on the fair value at the grant dates for awards under the Incentive Plan consistent with the method prescribed by SFAS No. 123, the Company's net earnings and earnings per share for the years ended February 28, 2002 and 2001, and February 29, 2000 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 2002: no dividend yield, expected volatility of 35.60%, risk free interest rate of 1.98%, and expected life of one year; the following assumptions were used for options granted in 2001: no dividend yield, expected volatility of 84%, risk free interest rates between 5.13% and 6.16%, and expected lives of ten years; the following assumptions were used for options granted in 2000: no dividend yield, expected volatility of 45%, risk free interest rate of 5.7%, and expected lives of ten years. F-13 9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended February 28, 2002 and 2001, and February 29, 2000:

During the fourth quarter of fiscal years 2001 and 2000, the Company corrected the depreciation calculated on certain property and equipment, which resulted in a decrease and an increase, respectively, in depreciation expense of approximately $30,000. 10. BUSINESS SEGMENTS The Company has two reportable segments: Publishing and Usborne Books at Home ("UBAH"). These reportable segments are business units that offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations. The Publishing Division markets its products to retail accounts, which include book, toy and gift stores, school supply and museums, through commissioned sales representatives, trade and specialty wholesalers and an internal telesales group. The UBAH Division markets its product line through a network of independent sales consultants through a combination of direct sales, home shows and book fairs. The UBAH Division also distributes to school and public libraries. F-14 The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on operating profits of the segments which is defined as segment net sales reduced by direct cost of sales and direct expenses. Corporate expenses, including interest and depreciation, and income taxes are not allocated to the segments. The Company's assets are not allocated on a segment basis. Information by industry segment for the years ended February 28, 2002 and 2001, and February 29, 2000 is set forth below:

** F-15 EXHIBIT INDEX

• ---------- * Filed Herewith