UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended February 29, 2008 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 0-4957
EDUCATIONAL DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
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73-0750007 |
(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
10302 East 55th Place, Tulsa, Oklahoma |
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74146-6515 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code (918) 622-4522
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.20 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o |
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o |
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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 |
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No o |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants 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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Accelerated filer o |
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Non-accelerated filer x |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o |
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No x |
The aggregate market value of the voting shares held by non-affiliates of the registrant at the price at which the common stock was last sold on August 31, 2007, on the Nasdaq National Market was $24,427,200.
As of May 19, 2008, 3,816,235 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for fiscal year 2008 relating to our Annual Meeting of Shareholders to be held on July 29, 2008 are incorporated by reference into Part III of this Report on Form 10-K.
TABLE OF CONTENTS
FACTORS AFFECTING FORWARD LOOKING STATEMENTS |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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2
FORWARD LOOKING STATEMENTS
This report contains statements that are forward-looking. You should read the following discussion in connection with our financial statements, including the notes to those statements, included in this document. These forward-looking statements are not historical facts but are expectations or projections based on certain assumptions and analyses made by our senior management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors. Actual events and results may be materially different from anticipated results described in such statements.
Our ability to achieve such results is subject to certain risks and uncertainties which are not currently known to us. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date that they are made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report.
(a) General Development of Business
Educational Development Corporation (EDC) is the exclusive United States trade publisher of the line of educational childrens books produced in the United Kingdom by Usborne Publishing Limited (Usborne). We were incorporated on August 23, 1965. Our fiscal years end on February 28(29).
Our company motto is The future of our world depends on the education of our children. EDC delivers educational excellence one book at a time. We provide economic opportunity while fostering strong family values. We touch the lives of children for a lifetime.
(b) Financial Information about Industry Segments
While selling childrens books is our only line of business, we sell them through two divisions:
· Home Business Division (Usborne Books at Home or UBAH) - This division distributes books nationwide through independent consultants who hold book showings in individual homes, and through book fairs, direct sales and Internet sales. The UBAH Consultants also distribute these titles to school and public libraries.
· Publishing Division (Publishing) This division markets books to bookstores (including major national chains), toy stores, specialty stores, museums and other retail outlets throughout the country.
Percent Net Revenues by Division
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2008 |
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2007 |
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2006 |
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Publishing |
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27 |
% |
26 |
% |
26 |
% |
UBAH |
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73 |
% |
74 |
% |
74 |
% |
Total revenues |
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100 |
% |
100 |
% |
100 |
% |
(c) Narrative Description of Business
Products
As the sole United States trade publisher of the Usborne line of books, we offer over 1,400 different titles. Many are interactive in nature, including our Touchy-Feely board books, jigsaw puzzle books, activity and flashcards, adventure and search books, art books, sticker books and foreign language books. Many titles are also published in Spanish.
3
We have a broad line of internet-linked books which allow readers to expand their educational experience by referring them to relevant non-Usborne websites. Our books include science and math titles, as well as chapter books and novels.
We also produce and distribute Usborne Kid Kits, which combine an Usborne book with specialty items/toys that complement the information contained in the book. The Kid Kits are packaged in reusable vinyl bags or box packages. Currently, 60 different Kid Kits are available.
We continually introduce new titles across all lines of our products.
UBAH markets the books through commissioned consultants using a combination of direct sales, home parties, book fairs and the Internet. The division had approximately 7,900 consultants in 50 states at February 29, 2008.
Publishing markets through commissioned trade representatives who call on book, toy, specialty stores and other retail outlets, as well as through in-house marketing by telephone to the trade. This division markets to approximately 5,100 book, toy and specialty stores. Significant orders totaling 32% of the Publishing Divisions sales have been received from major book chains. During fiscal year 2008, the division continued to expand into mass merchandising outlets such as drug, department and discount stores.
Seasonality
Sales for both divisions are greatest during the Fall due to the holiday season.
Competition
We face competition on two fronts for our UBAH Division from several other larger direct selling companies - for sales and consultants. Our school and library market faces strong competition from Scholastic Books for the book fair market.
Publishing faces strong competition from large U.S. and international companies. Industry sales of juvenile paperbacks approached $1.4 billion annually for calendar year 2007. Historically, this divisions sales are approximately 1.0% 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.
Employees
As of April 1, 2008, 76 full-time and 3 part-time employees worked at our Tulsa facility, about half of those are in the assembly facility or distribution warehouse. We believe our relations with our employees are good.
Company Reports
Our annual and quarterly reports (Forms 10-K and 10-Q), current Form 8-K reports and amendments to those reports filed with the SEC are available for download from the Investor Relations portion of our Internet website at www.edcpub.com.
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Investors should carefully consider the following risks in addition to the other information contained in this report. Each of these factors could adversely affect our business, operating results and financial condition. In addition, these factors could adversely affect the value of an investment in our common stock.
Our operations may be adversely affected by general economic conditions
General economic factors that are beyond our control impact our forecasts and actual performance. These factors include interest rates, recession, inflation, consumer credit availability, consumer debt levels, energy costs, tax policy changes, unemployment trends, the threat of war, terrorism or other political unrest, and other matters that influence consumer confidence and spending. Volatility in financial markets may cause these factors to change with a greater degree of frequency and magnitude. Changes in the economic climate could adversely affect our performance.
Our growth is dependent upon attracting and retaining independent sales consultants
Our continued growth and success in UBAH is dependent on our ability to attract and retain sales consultants, their ability to operate their businesses successfully and to recruit other sales consultants. To attract and retain new sales consultants, we provide operational manuals and sales materials, participate in regional and national training seminars, offer low-cost start-up opportunities, provide a variety of sales incentives and pay competitive sales commissions and bonuses. These sales consultants are independent business owners and we have no control over the time and effort each individual consultant chooses to spend on their business.
Our business faces a great deal of competitive pressure
The retail business is highly competitive. We compete for sales consultants with many other direct selling companies, most of whom offer products different from our products. Most of these competitors have a greater market presence and larger financial resources. Unanticipated changes in the pricing and marketing practices of these competitors may adversely affect the performance of UBAH.
The Publishing Division operates in a highly competitive market. The Publishing Division is in direct competition with other booksellers, the majority of which have larger financial resources than we have. The book industry is a $25 billion market. Sales in the juvenile paperback market, our primary market, were approximately $1.4 billion for calendar year 2007. Our market share in the juvenile paperback market was less than 1.0% in fiscal year 2008. Unanticipated changes in the pricing and marketing practices of these competitors may adversely affect the performance of our Publishing Division.
Seasonality of sales
Our business is subject to seasonal influences, with a higher portion of sales and income historically realized during the third quarter of the fiscal year, which includes the back-to-school and holiday seasons. This seasonality causes our operating results to vary somewhat from quarter to quarter and could materially and adversely affect the market price of our securities.
Our operations are dependent on a single distribution facility
Our distribution activities for all books are handled from a single facility in Tulsa, Oklahoma. Any significant interruption in the operation of the distribution facility due to natural disasters, accidents, system failures or other unforeseen causes could impair our ability to distribute merchandise to our customers.
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We have a sole source supplier for our products
We are the exclusive United States distributor for the line of childrens books published by Usborne Publishing, Limited, London, UK and our distribution of other publishers products is extremely limited. There is some risk in having a sole source for our products. The contract between Usborne Publishing, Limited and us has a two-year notice of termination requirement. However, we have an excellent working relationship with our foreign supplier Usborne Publishing, Limited and can foresee no reason for this to change.
All our products are imported from overseas locations
Our products are printed at locations throughout Europe, China, Singapore, India, Malaysia and Dubai. The products are then shipped by ocean cargo to the United States. Political unrest in a particular location could cause delays in securing products. However, since our supplier has numerous sources for printing the products, should political unrest occur in one area, the supplier could utilize printers in other locations to provide our product. Should an accident occur while the books are in transit and the supply of a title be depleted as a result, we would experience lost sales.
Our common stock is thinly traded
Our common stock is traded on the NASDAQ market under the symbol EDUC. There were 3,706,745 shares outstanding at February 29, 2008. The average shares traded daily for the fiscal years ended February 29, 2008, February 28, 2007, and February 28, 2006 were 3,790 shares, 3,021 shares, and 3,371 shares, respectively.
Personnel changes
Our development has largely been achieved through the vision and efforts of our President and CEO. If his services were not available for any reason, our business could be adversely affected.
Other factors may negatively affect our business
The foregoing list of risk factors is not exclusive. Other factors and unanticipated events could adversely affect us. We do not undertake to revise any forward-looking statement to reflect events or circumstances that occur after the date the statement is made.
Item 1B. UNRESOLVED STAFF COMMENTS
None
We are located at 10302 E. 55th Pl., Tulsa, Oklahoma. These facilities are owned by us and contain approximately 105,000 square feet of office and warehouse space. All product distributions are made from this warehouse. We believe that our operating facility meets both present and future capacity needs.
We are not a party to any material pending legal proceedings.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of fiscal year 2008 covered by this report to a vote of our security holders.
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of EDC is traded on the NASDAQ National Market (symbolEDUC). The high and low closing quarterly common stock quotations for fiscal years 2008 and 2007, as reported by the National Association of Securities Dealers, Inc., were as follows:
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2008 |
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2007 |
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Period |
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High |
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Low |
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High |
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Low |
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1st Qtr |
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8.58 |
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7.18 |
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8.85 |
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6.86 |
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2nd Qtr |
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8.44 |
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5.85 |
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7.90 |
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6.10 |
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3rd Qtr |
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7.28 |
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5.30 |
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7.88 |
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6.24 |
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4th Qtr |
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6.59 |
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5.19 |
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7.88 |
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6.50 |
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The number of shareholders of record of EDCs common stock at May 9, 2008 was 743.
We paid a $0.22 per share annual dividend during fiscal year 2008 and a $0.20 per share annual dividend during fiscal year 2007. We paid a $0.30 per share annual dividend and a $0.10 per share special dividend (total $0.40 per share) on May 19, 2008 to shareholders of record as of May 9, 2008.
The following table shows repurchases of our Common Stock which we made during the fourth quarter of fiscal year 2008.
ISSUER PURCHASES OF EQUITY SECURITIES
Period |
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Total # of Shares |
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Average Price |
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Total # of Shares |
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Maximum # of |
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December 1 - 31, 2007 |
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51,648 |
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$ |
5.71 |
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51,648 |
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82,370 |
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January 1 - 31, 2008 |
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0 |
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$ |
0.00 |
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0 |
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82,370 |
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February 1 - 29, 2008 |
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5,859 |
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$ |
5.42 |
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5,859 |
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79,000 |
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Total |
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57,507 |
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$ |
5.68 |
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57,507 |
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76,511 |
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(1) In April 2004 the Board of Directors authorized us to purchase up to 500,000 additional shares of our common stock under a plan initiated in 1998. This plan has no expiration date.
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Item 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended February 29, 2008 should be read in conjunction with our consolidated financial statements and the related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 of this Report.
YEARS ENDED FEBRUARY 28 (29)
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2008 |
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2007 |
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2006 |
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2005 |
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2004 |
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Net Revenues |
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$ |
30,520,700 |
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$ |
31,403,500 |
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$ |
31,788,900 |
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$ |
31,650,800 |
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$ |
31,127,300 |
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Earnings from Operations |
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$ |
2,324,400 |
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$ |
2,407,100 |
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$ |
2,398,400 |
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$ |
2,406,100 |
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$ |
2,373,500 |
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Earnings from Operations Per Common Share |
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Basic |
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$ |
0.62 |
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$ |
0.64 |
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$ |
0.64 |
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$ |
0.62 |
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$ |
0.60 |
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Diluted |
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$ |
0.60 |
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$ |
0.62 |
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$ |
0.62 |
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$ |
0.59 |
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$ |
0.55 |
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Total Assets |
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$ |
20,055,000 |
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$ |
19,701,900 |
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$ |
18,397,900 |
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$ |
17,980,500 |
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$ |
19,112,700 |
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Cash Dividends Paid Per Common Share |
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$ |
0.22 |
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$ |
0.20 |
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$ |
0.15 |
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$ |
0.12 |
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$ |
0.10 |
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8
Item 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Educational Development Corporation is the sole distributor in the United States of the Usborne line of childrens books. We operate two separate divisions, Publishing and Usborne Books at Home (UBAH), to sell these books. Our Corporate headquarters, including the distribution facility for both divisions, is located in Tulsa, Oklahoma.
These two divisions each have their own customer base. The Publishing Division markets its products on a wholesale basis to various retail accounts. The UBAH Division markets its products to individual consumers as well as to school and public libraries through direct-selling consultants.
Publishing Division
The Publishing Division operates in a market that is highly competitive, with a large number of companies engaged in the selling of books. Sales in the book industry were approximately $25 billion for calendar year 2007. Sales in the trade industry, defined as wholesale sales to retailers, were approximately $8.5 billion for calendar year 2007. Sales in the juvenile paperback market, our primary market segment, were approximately $1.4 billion for calendar year 2007. Our market share in the juvenile paperback market has remained between 0.9% and 1.0% during the last three years.
The Publishing Divisions customer base includes national book chains, regional and local bookstores, toy and gift stores, school supply stores and museums. To reach these markets, the Publishing Division utilizes a combination of commissioned sales representatives located throughout the country and a commissioned telesales group located in our headquarters. The Vice President of the Publishing Division manages sales to the national chains.
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Publishing Division Sales by Market Type |
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FY 2008 |
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FY 2007 |
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FY 2006 |
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National chain stores |
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32 |
% |
39 |
% |
42 |
% |
All other |
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68 |
% |
61 |
% |
58 |
% |
Total net sales |
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100 |
% |
100 |
% |
100 |
% |
The Publishing Division uses a variety of methods to attract potential new customers and maintain current customers. Company personnel attend many of the national trade shows held by the book selling industry each year, allowing us to make contact with potential buyers who may be unfamiliar with our books. We actively target the national chains through joint promotional efforts and institutional advertising in trade publications. The Publishing Division also participates with certain customers in a cooperative advertising allowance program, under which we pay back up to 2% of the net sales to that customer. Our products are then featured in promotions, such as catalogs, offered by the vendor.
We may also acquire, for a fee, an end cap position in a bookstore (our products are placed on the end of a shelf), which in the publishing industry is considered an advantageous location in the bookstore. The costs of these promotions have been classified as reductions in revenue in the statements of earnings.
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The Publishing Divisions in-house telesales group targets the smaller independent book and gift store market. During fiscal year 2008 the telesales group opened 364 new accounts. Our semi-annual, full-color, 130-page catalogs, are mailed to over 5,000 customers and potential customers. We also offer two display racks to assist stores in displaying our products. The larger rack has adjustable shelves that can hold approximately 250 titles. The second rack is four-sided with three levels that will hold between 50 and 60 of our Kid Kits.
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Net Revenues for Publishing Division |
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FY 2008 |
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FY 2007 |
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FY 2006 |
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Net Revenues |
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$ |
8,144,100 |
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$ |
8,121,100 |
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$ |
8,403,700 |
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Publishing Divisions net revenues increased $23,000 in fiscal year 2008 from fiscal year 2007, or 0.3%. Net revenues were up 3% for inside sales and 7% for smaller retail sales, offset by a decrease of 7% for national chain stores. Sales for fiscal year 2007 were 3.3% lower than 2006.
Usborne Books at Home (UBAH) Division
The UBAH Division is a multi-level selling organization that markets its products through independent sales representatives (consultants) located throughout the United States. The customer base of UBAH consists of individual purchasers, as well as school and public libraries. Revenues are generated through home shows, direct sales, Internet sales, book fairs and contracts with school and public libraries.
An important factor in the continued growth of the UBAH Division is the addition of new sales consultants and the retention of existing consultants. Current active consultants recruit new sales consultants. UBAH makes it easy to recruit by providing low-cost signing kits. For one month, kits containing sample products and supplies were free to new recruits when a minimum dollar home show was submitted by the new recruit. UBAH provides an extensive handbook that is a valuable tool in explaining the various programs to the new recruit.
Consultants During Year
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FY 2008 |
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FY 2007 |
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FY 2006 |
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New Sales Representatives |
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5,500 |
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7,200 |
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5,300 |
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Active Sales Representatives End of Fiscal Year |
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7,900 |
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9,800 |
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8,100 |
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The UBAH Division presently has six levels of sales representatives:
· Consultants
· Supervisors
· Senior Supervisors
· Executive Supervisors
· Senior Executive Supervisors
· Directors
Upon signing up, each individual is considered a consultant. Consultants receive commissions from each sale they make; the commission rate being determined by the marketing program under which the sale is made. In addition, consultants receive a monthly sales bonus once their sales reach an established monthly goal. Consultants who recruit other consultants and meet certain established criteria are eligible to become supervisors. Upon reaching this level, they receive monthly override payments based upon the sales of their downline groups.
Once supervisors reach certain established criteria, they become senior supervisors and are eligible to earn promotion bonuses on their consultants. Once senior supervisors reach certain established criteria,
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they become executive supervisors, senior executive supervisors or directors. Executive supervisors and higher may receive an additional monthly override payment based upon the sales of their downline groups.
Percent of Net Revenues by UBAH Marketing Program
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FY 2008 |
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FY 2007 |
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FY 2006 |
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Home Shows |
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39 |
% |
42 |
% |
46 |
% |
Direct Sales |
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3 |
% |
3 |
% |
3 |
% |
School & Library, including Book Fair |
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36 |
% |
36 |
% |
36 |
% |
Internet |
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11 |
% |
8 |
% |
5 |
% |
Transportation Revenue |
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11 |
% |
11 |
% |
10 |
% |
Totals |
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100 |
% |
100 |
% |
100 |
% |
Number of Orders by UBAH Marketing Program
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FY 2008 |
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FY 2007 |
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FY 2006 |
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Home Shows |
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33,900 |
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36,200 |
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37,000 |
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Direct Sales |
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6,500 |
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7,700 |
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9,000 |
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School & Library |
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11,700 |
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12,000 |
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12,100 |
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Internet |
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47,800 |
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40,900 |
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27,400 |
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99,900 |
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96,800 |
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85,500 |
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Net revenues from home shows declined 9% or $668,800 during fiscal year 2008. This was a combination of per order averages which were down 3.0% and a lower number of orders placed during fiscal year 2008. Homes shows were the original marketing program when UBAH began in 1989 and continue to generate the greatest percentage of revenue for UBAH. Consultants contact individuals (hostesses) to hold book shows in their homes. The consultant assists the hostess in setting up the details for the show and makes a presentation at the show and takes orders for the books. The hostess earns free books based upon the total sales at the show. Customer specials are available for customers when they order a selected amount. Additionally, home shows provide an excellent opportunity for recruiting new consultants.
Net revenues from direct sales declined 13% or $58,700 during fiscal year 2008. This resulted from a 15% decrease in the number of orders placed during the year, offset by a 2% increase in the per order average. Direct sales are sales without a hostess being involved. This program makes it possible for consultants to work directly out of their homes by selling to friends, neighbors and other customers. It is especially convenient for those individuals who wish to order books from a consultant but are unable to attend a home show. The UBAH Division offers many promotions (customer specials) throughout the year. These promotions offer the customer the opportunity to purchase selected items at a discount if the customer meets the defined criteria. The discounts under these promotions are recorded in discounts and allowances.
The school and library marketing program, including book fairs, decreased 1% or $81,900 during fiscal year 2008. The number of orders placed during the year was down 2% while the per order average increased 2%. Scholastic continues to dominate the book fair market. Our book fair program is comparable to Scholastics program. Many schools hold joint book fairs with UBAH and our competitors and we do well at these events. In many cases, UBAH book fairs have been the only participant. We look forward to future growth in this market area as our book fair program gains wider acceptance.
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School and library sales are restricted to consultants who have received additional, specialized training which allows them to sell to schools and libraries. The UBAH consultant is the only source that a library or school has for library-bound Usborne books. They are not available through any of the school supply distribution companies.
Book fairs can be held with almost any organization as the sponsor. The consultant provides promotional materials to acquaint parents with the books. Parents turn in their orders at a designated time. The book fair program generates free books for the sponsoring organization. UBAH also has a Reach for the Stars fundraiser program. This is a pledge-based reading incentive program that provides cash and books to the organization and books for the children.
As shown in the tables above, internet sales continue to show significant growth for UBAH, increasing 28% or $381,900 during fiscal year 2008. This is the result of more consultants utilizing in-house-developed and hosted web sites in their businesses for a nominal monthly fee. Consultants can customize the web sites to their own particular needs or they can maintain the generic site. Orders are transmitted to us through a shopping cart arrangement and the consultant receives sales credit and commission on the sales. Web-only specials are changed frequently and have proved successful, contributing to the growth in this market.
The cost of free books provided under the various UBAH marketing programs is recorded as operating and selling expense in the statements of earnings.
We believe that the UBAH Division has the greatest growth potential for us. While there are many multi-level companies in the United States, UBAH is the only one exclusively selling books. We believe this is a fertile market with excellent opportunities for continued growth. The keys to future growth in the UBAH Division is recruiting and retaining consultants.
12
(1-2) Liquidity and Capital Resources
EDC has a history of profitability and positive cash flow. We can continue to grow with minimal additional capital requirements. Our primary source of cash is generated from operations. Our primary uses of cash are to pay dividends, acquire treasury stock, purchase property and equipment, and repay borrowings on our line of credit. We utilize our bank credit facility to meet our short-term cash requirements, when needed.
We expect our ongoing cash flow to continue to exceed cash required to operate the business. Consequently, we expect short-term borrowings to remain at a minimum during the current fiscal year.
During fiscal year 2008 we experienced a positive cash flow from operations of $2,511,500. Cash flow from operations was increased by a decrease in inventories of $569,400 and an increase in income taxes payable of $56,200, offset by a decrease in accounts payable and accrued expenses of $828,900.
Cash used in investing activities was $136,900 for capital expenditures related to replacing the building and warehouse roof, new warehouse equipment, computers and various warehouse improvements. We estimate that cash used in investing activities for fiscal year 2009 will be less than $500,000. This would consist of software and hardware enhancements to our existing data processing equipment, property improvements and additional warehouse equipment.
Cash used in financing activities was $1,188,600 which was primarily due to dividend payments of $826,000 and $504,900 paid to acquire treasury stock. These were offset by cash received from financing activities of $82,300 from the sale of treasury stock and $60,000 from the exercise of stock options. In September 2002, the Board of Directors authorized paying a minimum annual cash dividend of 20% of net earnings. In fiscal years 2008, 2007 and 2006 we paid 36%, 31% and 31%, respectively, of net earnings as a cash dividend. We anticipate that in future years we will continue paying cash dividends of 25% - 35% of net earnings.
Our Board of Directors adopted a stock repurchase plan in which we may purchase up to an additional 500,000 shares as market conditions warrant. Management believes the stock is undervalued and when stock becomes available at an attractive price, we can utilize free cash flow to repurchase shares. Management believes this enhances the value to the remaining stockholders and that these repurchases will have no adverse effect on our short-term and long-term liquidity.
13
(3) Results of Operations
Earnings as a Percent of Net Revenues |
|
|
|
|
|
||
|
|
FY 2008 |
|
FY 2007 |
|
FY 2006 |
|
Net revenues |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
Cost of sales |
|
35.2 |
% |
35.9 |
% |
36.6 |
% |
Gross margin |
|
64.8 |
% |
64.1 |
% |
63.4 |
% |
Operating expenses: |
|
|
|
|
|
|
|
Operating & selling |
|
24.3 |
% |
23.6 |
% |
22.3 |
% |
Sales commissions |
|
23.4 |
% |
23.6 |
% |
23.7 |
% |
General & administrative |
|
5.4 |
% |
5.8 |
% |
5.4 |
% |
Interest |
|
0.0 |
% |
0.0 |
% |
0.3 |
% |
Total operating expenses |
|
53.1 |
% |
53.0 |
% |
51.7 |
% |
Income from Operations |
|
11.7 |
% |
11.1 |
% |
11.7 |
% |
Other income |
|
0.5 |
% |
1.2 |
% |
0.3 |
% |
Earnings before income taxes |
|
12.2 |
% |
12.3 |
% |
12.0 |
% |
Income taxes |
|
4.6 |
% |
4.7 |
% |
4.5 |
% |
Net earnings |
|
7.6 |
% |
7.6 |
% |
7.5 |
% |
Fiscal Year 2008 Compared with Fiscal Year 2007
The following presents an overview of our results of operations for the years ended February 29, 2008 and February 28, 2007. We had earnings before income taxes of $3,732,100 for fiscal year 2008 compared with $3,878,100 for fiscal year 2007.
|
|
|
|
|
|
$ Increase/ |
|
|||
|
|
FY 2008 |
|
FY 2007 |
|
(decrease) |
|
|||
Gross sales |
|
$ |
40,600,300 |
|
$ |
41,920,700 |
|
$ |
(1,320,400 |
) |
Less discounts & allowances |
|
(11,806,700 |
) |
(12,358,800 |
) |
552,100 |
|
|||
Transportation revenue |
|
1,727,100 |
|
1,841,600 |
|
(114,500 |
) |
|||
Net revenues |
|
$ |
30,520,700 |
|
$ |
31,403,500 |
|
$ |
(882,800 |
) |
The UBAH Divisions gross sales decreased 9.4% or $1,379,700 during FY 2008 when compared with FY 2007. This decrease is attributable to lower sales in the home party, direct sale market, and school and library/book fair market, offset by increased sales in the internet markets. Average sales per order for this division were down 6.5%, while the overall number of orders was up 2.4% primarily due to additional internet sales orders. The Publishing Divisions gross sales increased 0.4% or $59,300 during FY 2008 when compared with FY 2007.
The Publishing Divisions discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAH Division due to the different customer markets that each division targets. The Publishing Divisions discounts and allowances were $8.7 million in both fiscal years 2008 and 2007. To be competitive with other wholesale book distributors, the Publishing Division sells at discounts between 48% and 55% of the retail price, based upon the quantity of books ordered and the dollar amount of the order. The Publishing Divisions discounts and allowances were 51.8% of Publishings gross sales in both fiscal year 2008 and 2007.
The UBAH Divisions discounts and allowances were $3.1 million in fiscal year 2008 and $3.7 million in fiscal year 2007. Most sales in the UBAH Division are at retail. As a part of the UBAH
14
Divisions marketing programs, discounts between 40% and 50% of retail are offered on selected items at various times throughout the year. The discounts and allowances in the UBAH Division will vary from year to year depending upon the marketing programs in place during any given year. The UBAH Divisions discounts and allowances were 13.0% of UBAHs gross sales in fiscal year 2008 and 14.6% in fiscal year 2007.
Transportation revenues decreased $114,500 in fiscal year 2008 consistent with the decrease in sales during the year.
|
|
FY 2008 |
|
FY 2007 |
|
$ |
Increase/ |
|
||
Cost of sales |
|
$ |
10,750,200 |
|
$ |
11,274,600 |
|
$ |
(524,400 |
) |
Operating & selling |
|
7,424,500 |
|
7,509,400 |
|
(84,900 |
) |
|||
Sales commissions |
|
7,137,600 |
|
7,397,800 |
|
(260,200 |
) |
|||
General & administrative |
|
1,653,100 |
|
1,722,900 |
|
(69,800 |
) |
|||
Interest |
|
|
|
7,600 |
|
(7,600 |
) |
|||
|
|
|
|
|
|
|
|
|||
Total |
|
$ |
26,965,400 |
|
$ |
27,912,300 |
|
$ |
(946,900 |
) |
Cost of sales decreased approximately 4.7% in fiscal year 2008 when compared with fiscal year 2007. Our cost of products is 25% to 34% of the gross sales price, depending upon the product. In comparing the percentage change in gross sales with the percentage change in cost of goods, consideration must be given to the mix of products sold. Approximately 85% of our products come from one vendor, where the cost of the products is a fixed percentage of the retail price. The mix of products sold has not materially changed in recent years.
We expect the percentage change in year-to-year gross sales and the percentage change in year-to-year cost of sales to be proportional. The 4.7% decrease in cost of sales for fiscal year 2008 over fiscal year 2007 is relatively consistent with the percent decrease in gross sales of approximately 3.1% for the same periods.
Cost of sales is the inventory cost of product sold (including the cost of the product itself and inbound freight charges). Operating and selling expenses include purchasing and receiving, inspection, warehousing, and other costs of our distribution network. These costs totaled $1,132,000 in FY2008 and $1,200,800 in FY2007. When comparing our gross margins with the gross margins of other companies, note that we do not include the costs of our distribution network in our cost of sales.
In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of the Publishing Division, the UBAH Division and the order entry and customer service functions. Operating and selling expenses as a percentage of gross sales were 18.3% and 17.9% for fiscal year 2008 and fiscal year 2007, respectively.
Sales commissions in the Publishing Division increased $25,900 for the fiscal year ended 2008. Sales commissions for this division fluctuate depending upon the amount of sales made to our house accounts, which are our largest customers and do not have any commission expense associated with them, and sales made by the Companys outside sales representatives. Publishing Division sales commissions are paid on net sales and were 1.7% of net sales in fiscal year 2008 and 1.4% of net sales in fiscal year 2007.
Sales commissions in the UBAH Division decreased $287,000. UBAH Division sales commissions are paid on retail sales and were 36.3% for fiscal year 2008 and 31.3% for fiscal year 2007.
15
The fluctuation in the percentages of commission expense to retail sales is the result of the type of sale. Home shows, book fairs, school and library sales and direct sales have different commission rates. Also contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants monthly sales and downline sales. The decrease in sales commissions is the result of lower sales in the UBAH Division.
General and administrative expenses include the executive department, accounting department, information services department, general office management and building facilities management. General and administrative expenses as a percentage of gross sales were 4.1% for both fiscal years 2008 and 2007.
The tax provision for fiscal year 2008 was $1,407,700. The effective rate for fiscal year 2008 was 37.7% and for fiscal year 2007 was 37.9%. Our effective tax rate is higher than the Federal statutory rate due to state income taxes.
Fiscal Year 2007 Compared with Fiscal Year 2006
The following presents an overview of our results of operations for the years ended February 28, 2007 and 2006. We had earnings before income taxes of $3,880,100 for fiscal year 2007 compared with $3,814,400 for fiscal year 2006.
|
|
|
|
|
|
$ Increase/ |
|
|||
|
|
FY 2007 |
|
FY 2006 |
|
(decrease) |
|
|||
Gross sales |
|
$ |
41,920,700 |
|
$ |
42,567,700 |
|
$ |
(647,000 |
) |
Less discounts & allowances |
|
(12,358,800 |
) |
(12,367,800 |
) |
9,000 |
|
|||
Transportation revenue |
|
1,841,600 |
|
1,589,000 |
|
252,600 |
|
|||
Net revenues |
|
$ |
31,403,500 |
|
$ |
31,788,900 |
|
$ |
(385,400 |
) |
The UBAH Divisions gross sales decreased a slight 0.2% or $43,300 during FY 2007 when compared with FY 2006. We attribute this decrease to lower sales in the home party, direct sale market, and school and library/book fair market, offset by increased sales in the internet markets. Average sales per order for this division were down 8.9%, while the overall number of orders was up 13.3% primarily due to additional internet sales orders. The Publishing Divisions gross sales decreased 3.5% or $603,700 during FY 2007 when compared with FY 2006.
The Publishing Divisions discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAH Division due to the different customer markets that each division targets. The Publishing Divisions discounts and allowances were $8.7 million and $9.0 million in fiscal years 2007 and 2006, respectively. To be competitive with other wholesale book distributors, the Publishing Division sells at discounts between 48% and 55% of the retail price, based upon the quantity of books ordered and the dollar amount of the order. The Publishing Divisions discounts and allowances were 51.8% of Publishings gross sales in both fiscal year 2007 and 2006.
The UBAH Divisions discounts and allowances were $3.7 million in fiscal year 2007 and $3.4 million in fiscal year 2006. Most sales in the UBAH Division are at retail. As a part of the UBAH Divisions marketing programs, discounts between 40% and 50% of retail are offered on selected items at various times throughout the year. The discounts and allowances in the UBAH Division will vary from year to year depending upon the marketing programs in place during any given year. The UBAH Divisions discounts and allowances were 14.6% of UBAHs gross sales in fiscal year 2007 and 13.4% in fiscal year 2006.
16
Transportation revenues increased $252,600 in fiscal year 2007 due to an increase in the transportation rate charged to the UBAH Division.
|
|
FY 2007 |
|
FY 2006 |
|
$ Increase/ |
|
|||
Cost of sales |
|
$ |
11,274,600 |
|
$ |
11,651,200 |
|
$ |
(376,600 |
) |
Operating & selling |
|
7,509,400 |
|
7,095,000 |
|
414,400 |
|
|||
Sales commissions |
|
7,397,800 |
|
7,526,200 |
|
(128,400 |
) |
|||
General & administrative |
|
1,722,900 |
|
1,712,500 |
|
10,400 |
|
|||
Interest |
|
7,600 |
|
83,100 |
|
(75,500 |
) |
|||
Total |
|
$ |
27,912,300 |
|
$ |
28,068,000 |
|
$ |
(155,700 |
) |
Cost of sales decreased approximately 3.2% in fiscal year 2007 when compared with fiscal year 2006. Our cost of products is 25% to 34% of the gross sales price, depending upon the product. In comparing the percentage increase in gross sales with the percentage increase in cost of goods, consideration must be given to the mix of products sold. The mix of products sold has not materially changed in recent years.
We expect the percentage change in year-to-year gross sales and the percentage increases in year-to-year cost of sales to be proportional. The 3.2% decrease in cost of sales for fiscal year 2007 over fiscal year 2006 is relatively consistent with the percent decrease in gross sales of approximately 1.5% for the same periods.
Cost of sales is the inventory cost of product sold (including the cost of the product itself and inbound freight charges). Operating and selling expenses are made up of purchasing and receiving costs, inspection costs, warehousing costs, and other costs of our distribution network. These costs totaled $1,200,800 in FY2007 and $1,414,900 in FY2006. Readers are advised to be cautious when comparing our gross margins with the gross margins of other companies, since some companies include the costs of their distribution networks in cost of sales.
In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of the Publishing Division, the UBAH Division and the order entry and customer service functions. Operating and selling expenses increased $414,400 primarily due to higher postage and freight expenses of $103,500 over the prior year, increases in travel contest incentives and other sales incentives offered by the UBAH Division totaling $108,300, higher promotion costs in the Publishing Division totaling $89,400 and an increase in payroll/benefits costs of $100,500. Operating and selling expenses as a percentage of gross sales were 17.9% and 16.7% for fiscal year 2007 and fiscal year 2006, respectively.
Sales commissions in the Publishing Division increased $16,100 for the fiscal year ended 2007. Sales commissions for this division fluctuate depending upon the amount of sales made to our house accounts, which are our largest customers and do not have any commission expense associated with them, and sales made by the Companys outside sales representatives. Publishing Division sales commissions are paid on net sales and were 1.4% of net sales in fiscal year 2007 and 1.1% of net sales in fiscal year 2006.
Sales commissions in the UBAH Division decreased $144,500. UBAH Division sales commissions are paid on retail sales and were 31.3% for fiscal year 2007 and 37.6% for fiscal year 2006. The fluctuation in the percentages of commission expense to retail sales is the result of the type of sale. Home shows, book fairs, school and library sales and direct sales have different commission rates. Also
17
contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants monthly sales and downline sales. The decrease in sales commissions is the result of lower sales in the UBAH Division.
General and administrative expenses include the executive department, accounting department, information services department, general office management and building facilities management. General and administrative expenses increased slightly because of an increase in materials and supplies, outside services and payroll costs, offset by a decrease in legal and audit fees. General and administrative expenses as a percentage of gross sales were 4.1% for fiscal year 2007 and 4.0% for fiscal year 2006.
Interest expense decreased $75,500 due to decreased short-term borrowings throughout the fiscal year. Interest expense as a percentage of gross sales was negligible at 0.02% in fiscal year 2007 and 0.2% in fiscal year 2006.
The tax provision for fiscal year 2006 was $1,471,000. The effective rate for fiscal year 2007 was 37.9% and for fiscal year 2006 was 37.1%. Our effective tax rate is higher than the Federal statutory rate due to state income taxes.
Contractual Obligations
The table below summarizes the maturity dates of our contractual obligations by period.
|
|
Payments due by period |
|
|||||||||||||
Contractual obligations |
|
Total |
|
Less |
|
1-3 |
|
3-5 |
|
More |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Long-Term Debt Obligations |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Capital Lease Obligations |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Lease Obligations |
|
|
|
|
|
|
|
|
|
|
|
|||||
Purchase Obligations |
|
$ |
3,046,700 |
|
$ |
3,046,700 |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Other Long-Term Liabilities Reflected on the Registrants Balance Sheet under GAAP |
|
|
|
|
|
|
|
|
|
|
|
|||||
Total |
|
$ |
3,046,700 |
|
$ |
3,046,700 |
|
$ |
|
|
$ |
|
|
$ |
|
|
Effective June 30, 2007 we signed a Ninth Amendment to the Credit and Security Agreement with Arvest Bank which provided a $5,000,000 line of credit through June 30, 2008. Interest is payable monthly at the Wall Street Journal prime-floating rate minus 0.75% (5.25% at February 29, 2008) and borrowings are collateralized by substantially all assets. At February 29, 2008, we had no borrowings
18
outstanding. Available credit under the revolving credit agreement was $5,000,000 at February 29, 2008. We also had no borrowings outstanding under the agreement during the fiscal year ended February 29, 2008.
This agreement also contains a provision for our use of the Banks letters of credit. The Bank agrees to issue, or obtain issuance of commercial or standby letters of credit provided that no letters of credit will have an expiry date later than June 30, 2008 and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time.
19
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectable accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report. However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.
Stock-Based Compensation
We account for stock-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at date of grant and recognized as compensation expense over the vesting period.
Revenue Recognition
Sales are recognized and recorded when products are shipped. Products are shipped FOB shipping point. The UBAH Divisions sales are paid before the product is shipped. These sales accounted for 73% of net revenues in FY2008, 74% of net revenues in FY2007, and 74% of net revenues in FY2006. The provisions of the SEC Staff Accounting Bulletin No.104, Revenue Recognition in Financial Statements, have been applied, and as a result, a reserve is provided for estimated future sales returns. Our 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. Estimated allowances for sales returns are recorded as sales are recognized and recorded.
Management uses a moving average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged returns are primarily from the retail stores. The damages occur in the stores, not in shipping to the stores. It is industry practice to accept returns from wholesale customers. Transportation revenue, the amount billed to the customer for shipping the product, is recorded when products are shipped. Management has estimated and included a reserve for sales returns of $84,000 as of February 29, 2008 and $84,000 as of February 28, 2007.
Allowance for Doubtful Accounts
We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers financial conditions and current economic trends. Management has estimated allowance for doubtful accounts of $74,400 as of February 29, 2008 and $75,000 as of February 28, 2007.
Inventory
Management continually estimates and calculates the amount of non-current inventory. The inventory arises due to occasional purchases of book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of our primary supplier. Noncurrent inventory was estimated by management using the current year turnover ratio by title. All inventory in excess of 2 ½ years of anticipated sales was classified as noncurrent inventory. Noncurrent
20
inventory balances were $764,000 and $808,000 at February 29, 2008 and February 28, 2007, respectively.
Inventories are presented net of a valuation allowance. Management has estimated and included a valuation allowance for both current and noncurrent inventory. This allowance is based on managements identification of slow moving inventory on hand. Management has estimated a valuation allowance for both current and noncurrent inventory of $331,200 and $382,300 as of February 29, 2008 and February 28, 2007, respectively.
Our product line contains approximately 1,400 titles, each with different rates of sale, depending upon the popularity of the title. Almost all of our product line is saleable as the books are not topical in nature and remain current in content today as well as in the future. A few of the titles, less than 50, have a limited time when they remain current in content, i.e. computer books, and these few titles are fully reserved. Our products are printed in Europe, China, Singapore, India, Malaysia and Dubai resulting in a six-month lead-time to have a title reprinted and delivered to us.
Our principal supplier, based in England, imposes minimum order requirements before reprinting a title. At the current time we must reorder 7,500 or more of a title in order to get a solo print run. If we order less than 7,500 of a title, then we must share a print run with the suppliers other customers. Sharing a print run has resulted in delays of up to twelve months in receiving the ordered title. Anticipating customer preferences and purchasing habits requires historical analysis of similar titles in the same series. We then place the initial order or re-order based upon this analysis.
These factors and historical analysis have led Management to determine that 2 ½ years represents a reasonable estimate of the normal operating cycle for our products.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable to us.
21
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements which amends and puts in one place guidance on the use of fair value measurements which had been spread through four APB Opinions and 37 FASB Standards. No extensions of the use of fair value measurements are contained in this new pronouncement and, with some special industry exceptions (e.g., broker-dealers), no significant changes in practice should ensue. The standard is to be applied to financial statements beginning after November 15, 2007. The adoption of SFAS No. 157 is not expected to have a material impact on our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159 Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115. This standard permits the use of fair value measurement of financial assets and liabilities in the balance sheet with the net change in fair value recognized in periodic net income. The Standard is effective for fiscal years beginning after November 15, 2007. The adoption of this standard is not expected to have a material effect on our financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements. This statement amends Accounting Research Bulletin No. 51 Consolidated Financial Statements to establish accounting and reporting standards for noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for fiscal years beginning after December 15, 2008. The adoption of this standard is not expected to have a material effect on our financial position or results of operations.
In December 2007, the FASB issued SFAS 141(revised 2007) Business Combinations. The statement requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This statement is effective for acquisition dates on or after the beginning of the first annual reporting period beginning after December 15, 2008. The adoption of this standard is not expected to have a material effect on our financial position or results of operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any material market risk.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 begins at page 30.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
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, 2008.
22
Item 9.A CONTROLS AND PROCEDURES
An evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of February 29, 2008. This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and our Controller/Corporate Secretary (Principal Financial and Accounting Officer).
Based on that evaluation, these officers concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to them, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported in accordance within the time periods specified in Securities and Exchange Commission rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events.
During the 4th quarter of FY 2008 and subsequently, we made changes to our controls over accounts receivables. Processes involving detailed entries have been changed to improve controls over data entry. In addition, detection controls have been established to help identify older accounts receivable entries that may require correction.
Except as described above, during the fourth fiscal quarter of the fiscal year covered by this report on Form 10-K, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934 (the Exchange Act). Under the supervision and with the participation of our management, including our President and our Controller, we evaluated the effectiveness of our internal control over financial reporting based on the framework in INTERNAL CONTROL-INTEGRATED FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway Commission. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our evaluation under that framework and applicable SEC rules, our management concluded that our internal control over financial reporting was effective as of February 29, 2008.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only managements report in this annual report.
None
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 the information under the caption Election of Directors in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 29, 2008.
(b) Identification of Executive Officers
Information regarding our executive officers required by Item 401 of Regulation S-K is presented in Item 1 hereof under the subcaption Executive Officers as permitted by General Instruction G (3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K.
(c) Compliance with Section 16 (a) of the Exchange Act
The information required by this Item 10 is furnished by incorporation by reference to the information under the caption Section 16 (a) Beneficial Ownership Reporting Compliance in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 29, 2008.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is furnished by incorporation by reference to the information under the caption Executive Compensation in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 29, 2008.
23
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
The information required by this Item 12 is furnished by incorporation by reference to the information under the captions Security Ownership of Certain Beneficial Owners and Management and Compensation Plans in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 29, 2008.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
24
Item 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
The information required by this Item 14 is furnished by incorporation by reference to the information under the caption Independent Registered Public Accountants in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 29, 2008.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements
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Page |
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29 |
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30 |
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|
Statements of Earnings - Years ended February 29, 2008, February 28, 2007 |
|
31 |
|
|
|
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|
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Statements of Shareholders Equity -Years ended February 29, 2008, |
|
32 |
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|
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Statements of Cash Flows - Years ended February 29, 2008, February 28, 2007 |
|
33 |
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34 |
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|
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 dated April 26, 1968 and Certificate of Amendment thereto dated June 21, 1968 are incorporated herein by reference to Exhibit 1 to Registration Statement on Form 10 (File No. 0-4957).
3.2 Certificate of Amendment of Restated Certificate of Incorporation dated August 27, 1977 is incorporated herein by reference to Exhibit 20.1 to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-4957).
3.2 By-Laws as amended are incorporated herein by reference to Exhibit 20.2 to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-4957).
3.4 Certificate of Amendment of Restated Certificate of Incorporation dated November 17, 1986 is incorporated herein by reference to exhibit 3.3 to Form 10-K for fiscal year ended February 28, 1987 (File No. 0-4957).
3.5 Certificate of Amendment of Restated Certificate of Incorporation dated March 22, 1996 is incorporated herein by reference to Exhibit 3.4 to Form 10-K for fiscal year ended February 28, 1997 (File No. 0-4957).
25
3.6 Certificate of Amendment of Restated Certificate of Incorporation dated July 15, 2002 is incorporated herein by reference to Exhibit 10.30 to Form 10-K dated February 28, 2003 (File No. 0-4957).
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) filed June 29, 1970.
10.1 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).
10.2 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).
10.3 Amendment dated January 1, 1992 to Usborne Agreement - Contractual agreement by and between the Company and Usborne Publishing Limited is incorporated herein by reference to Exhibit 10.13 to Form 10-K dated February 29, 1992 (File No. 0-4957).
10.4 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).
10.5 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).
10.6 Educational Development Corporation 2002 Incentive Stock Option Plan is incorporated herein by reference to Exhibit A to definitive proxy statement on Schedule 14A dated May 23, 2002 (File No. 0-4957).
10.7 Amendment dated November 12, 2002 to Usborne Agreement Contractual agreement by and between we and Usborne Publishing Limited is incorporated herein by reference to Exhibit 10.24 to Form 10-K dated February 28, 2003 (File No. 0-4957).
10.8 Employment Agreement between Randall W. White and the Company dated February 28, 2004.
10.9 Fifth Amendment dated June 30, 2004 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
10.10 Sixth Amendment dated June 30, 2005 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
10.11 Seventh Amendment dated September 2, 2005 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
10.12 Eighth Amendment dated June 30, 2006 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
26
10.13 Ninth Amendment dated June 30, 2007 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK.
*23.1 Consent of Independent Registered Public Accounting Firm
*31.1 Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of the Controller and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*32.1 Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*Filed Herewith
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EDUCATIONAL DEVELOPMENT CORPORATION
Date: |
May 28, 2008 |
By |
/s/ Marilyn Welborn |
|
|
|
|
Marilyn Welborn |
|
|
|
|
Controller and Corporate Secretary |
|
|
|
|
(Principal Financial and Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Date: |
May 28, 2008 |
/s/ Randall W. White |
|
|
|
Randall W. White |
|
|
|
Chairman of the Board |
|
|
|
President, Treasurer and |
|
|
|
Director |
|
|
|
|
|
|
|
|
|
|
May 28, 2008 |
/s/ John A. Clerico |
|
|
|
John A. Clerico, Director |
|
|
|
|
|
|
|
|
|
|
May 28, 2008 |
/s/ Dean Cosgrove |
|
|
|
G. Dean Cosgrove, Director |
|
|
|
|
|
|
|
|
|
|
May 28, 2008 |
/s/ James F. Lewis |
|
|
|
James F. Lewis, Director |
|
|
|
|
|
|
|
|
|
|
May 28, 2008 |
/s/ Marilyn Welborn |
|
|
|
Marilyn Welborn |
|
|
|
Controller and Corporate Secretary |
|
|
|
(Principal Financial and Accounting Officer) |
28
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Educational Development Corporation
We have audited the balance sheets of Educational Development Corporation as of February 29, 2008 and February 28, 2007, and the related statements of earnings, shareholders equity, and cash flows for each of the three years in the period ended February 29, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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, the financial statements referred to above present fairly, in all material respects, the financial position of Educational Development Corporation as of February 29, 2008 February 28, and 2007, and the results of its operations and its cash flows for each of the three years in the period ended February 29, 2008, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to examine managements assertion about the effectiveness of Educational Development Corporations internal control over financial reporting as of February 29, 2008 included in the accompanying Managements Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.
/s/ Tullius Taylor Sartain & Sartain LLP
Tulsa, Oklahoma
May 28, 2008
29
EDUCATIONAL DEVELOPMENT CORPORATION
BALANCE SHEETS
|
|
2008 |
|
2007 |
|
||
ASSETS |
|
|
|
|
|
||
|
|
|
|
|
|
||
CURRENT ASSETS: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
2,440,300 |
|
$ |
1,254,300 |
|
Accounts receivable, less allowance for doubtful accounts and sales returns $158,400 (2008) and $158,900 (2007) |
|
2,611,800 |
|
2,849,300 |
|
||
InventoriesNet |
|
11,818,700 |
|
12,388,000 |
|
||
Prepaid expenses and other assets |
|
112,000 |
|
95,400 |
|
||
Income taxes receivable |
|
|
|
3,400 |
|
||
Deferred income taxes |
|
197,100 |
|
207,700 |
|
||
Total current assets |
|
17,179,900 |
|
16,798,100 |
|
||
|
|
|
|
|
|
||
INVENTORIESNet |
|
459,000 |
|
459,100 |
|
||
|
|
|
|
|
|
||
PROPERTY, PLANT AND EQUIPMENTNet |
|
2,382,800 |
|
2,385,300 |
|
||
|
|
|
|
|
|
||
DEFERRED INCOME TAXES |
|
43,300 |
|
59,400 |
|
||
|
|
|
|
|
|
||
TOTAL |
|
$ |
20,065,000 |
|
$ |
19,701,900 |
|
|
|
|
|
|
|
||
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
||
CURRENT LIABILITIES: |
|
|
|
|
|
||
Accounts payable |
|
$ |
2,456,900 |
|
$ |
3,308,300 |
|
Accrued salaries and commissions |
|
559,000 |
|
560,900 |
|
||
Income taxes payable |
|
56,200 |
|
|
|
||
Other current liabilities |
|
195,800 |
|
171,400 |
|
||
Total current liabilities |
|
3,267,900 |
|
4,040,600 |
|
||
|
|
|
|
|
|
||
COMMITMENTS (Note 7) |
|
|
|
|
|
||
|
|
|
|
|
|
||
SHAREHOLDERS EQUITY: |
|
|
|
|
|
||
Common stock, $0.20 par value; Authorized 8,000,000 shares; |
|
|
|
|
|
||
Issued 5,806,840 (2008) and 5,791,840 (2007) shares; |
|
|
|
|
|
||
Outstanding 3,706,745 (2008) and 3,757,323 (2007) shares |
|
1,161,400 |
|
1,158,400 |
|
||
Capital in excess of par value |
|
7,706,100 |
|
7,649,100 |
|
||
Retained earnings |
|
19,206,100 |
|
17,707,700 |
|
||
|
|
28,073,600 |
|
26,515,200 |
|
||
Less treasury stock, at cost |
|
(11,276,500 |
) |
(10,853,900 |
) |
||
|
|
16,797,100 |
|
15,661,300 |
|
||
|
|
|
|
|
|
||
TOTAL |
|
$ |
20,065,000 |
|
$ |
19,701,900 |
|
See notes to financial statements.
30
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED FEBRUARY 29(28),
|
|
2008 |
|
2007 |
|
2006 |
|
|||
|
|
|
|
|
|
|
|
|||
GROSS SALES |
|
$ |
40,600,300 |
|
$ |
41,920,682 |
|
$ |
42,567,648 |
|
Less discounts and allowances |
|
(11,806,700 |
) |
(12,358,838 |
) |
(12,367,775 |
) |
|||
Transportation revenue |
|
1,727,100 |
|
1,841,621 |
|
1,589,017 |
|
|||
NET REVENUES |
|
30,520,700 |
|
31,403,465 |
|
31,788,890 |
|
|||
COST OF SALES |
|
10,750,200 |
|
11,274,571 |
|
11,651,182 |
|
|||
Gross margin |
|
19,770,500 |
|
20,128,894 |
|
20,137,708 |
|
|||
|
|
|
|
|
|
|
|
|||
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|||
Operating and selling |
|
7,424,500 |
|
7,509,439 |
|
7,094,963 |
|
|||
Sales commissions |
|
7,137,600 |
|
7,397,767 |
|
7,526,184 |
|
|||
General and administrative |
|
1,653,100 |
|
1,722,933 |
|
1,712,469 |
|
|||
Interest |
|
|
|
7,581 |
|
83,054 |
|
|||
|
|
16,215,200 |
|
16,637,720 |
|
16,416,670 |
|
|||
|
|
|
|
|
|
|
|
|||
OTHER INCOME |
|
176,800 |
|
386,926 |
|
93,362 |
|
|||
|
|
|
|
|
|
|
|
|||
EARNINGS BEFORE INCOME TAXES |
|
3,732,100 |
|
3,878,100 |
|
3,814,400 |
|
|||
|
|
|
|
|
|
|
|
|||
INCOME TAXES |
|
1,407,700 |
|
1,471,000 |
|
1,416,000 |
|
|||
|
|
|
|
|
|
|
|
|||
NET EARNINGS |
|
$ |
2,324,400 |
|
$ |
2,407,100 |
|
$ |
2,398,400 |
|
|
|
|
|
|
|
|
|
|||
BASIC AND DILUTED EARNINGS |
|
|
|
|
|
|
|
|||
PER SHARE: |
|
|
|
|
|
|
|
|||
Basic |
|
$ |
0.62 |
|
$ |
0.64 |
|
$ |
0.64 |
|
Diluted |
|
$ |
0.60 |
|
$ |
0.62 |
|
$ |
0.62 |
|
|
|
|
|
|
|
|
|
|||
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|||
Basic |
|
3,748,121 |
|
3,755,608 |
|
3,747,759 |
|
|||
Diluted |
|
3,859,937 |
|
3,875,000 |
|
3,898,737 |
|
See notes to financial statements.
31
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED FEBRUARY 29(28),
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
(par value $ 0.20 per share) |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
|
Number of |
|
|
|
Capital in |
|
|
|
Treasury Stock |
|
|
|
|||||||||||
|
|
Shares |
|
|
|
Excess of |
|
Retained |
|
Number of |
|
|
|
Shareholders |
|
|||||||||
|
|
Issued |
|
Amount |
|
Par Value |
|
Earnings |
|
Shares |
|
Amount |
|
Equity |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
BALANCEFebruary 28, 2005 |
|
5,762,340 |
|
1,152,500 |
|
7,469,500 |
|
14,214,100 |
|
2,026,827 |
|
(10,703,900 |
) |
12,132,200 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Purchases of treasury stock |
|
|
|
|
|
|
|
|
|
7,500 |
|
(77,300 |
) |
(77,300 |
) |
|||||||||
Sales of treasury stock |
|
|
|
|
|
48,300 |
|
|
|
(16,410 |
) |
86,900 |
|
135,200 |
|
|||||||||
Exercise of options ($2.1875$6.00/share) |
|
9,500 |
|
1,900 |
|
47,500 |
|
|
|
|
|
|
|
49,400 |
|
|||||||||
Tax benefitstock options |
|
|
|
|
|
12,200 |
|
|
|
|
|
|
|
12,200 |
|
|||||||||
Dividends paid ($0.15/share) |
|
|
|
|
|
|
|
(560,700 |
) |
|
|
|
|
(560,700 |
) |
|||||||||
Dividends declared ($0.20/share) |
|
|
|
|
|
|
|
(750,800 |
) |
|
|
|
|
(750,800 |
) |
|||||||||
Net earnings |
|
|
|
|
|
|
|
2,398,400 |
|
|
|
|
|
2,398,400 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
BALANCEFebruary 28, 2006 |
|
5,771,840 |
|
1,154,400 |
|
7,577,500 |
|
15,301,000 |
|
2,017,917 |
|
(10,694,300 |
) |
13,338,600 |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Purchases of treasury stock |
|
|
|
|
|
|
|
|
|
35,616 |
|
(260,700 |
) |
(260,700 |
) |
|||||||||
Sales of treasury stock |
|
|
|
|
|
10,500 |
|
|
|
(19,016 |
) |
101,100 |
|
111,600 |
|
|||||||||
Exercise of options ($2.1875$4.00/share) |
|
20,000 |
|
4,000 |
|
51,900 |
|
|
|
|
|
|
|
55,900 |
|
|||||||||
Tax benefitstock options |
|
|
|
|
|
9,200 |
|
|
|
|
|
|
|
9,200 |
|
|||||||||
Cash dividends - net of accrual |
|
|
|
|
|
|
|
(400 |
) |
|
|
|
|
(400 |
) |
|||||||||
Net earnings |
|
|
|
|
|
|
|
2,407,100 |
|
|
|
|
|
2,407,100 |
|
|||||||||
BALANCEFebruary 28, 2007 |
|
5,791,840 |
|
|
1,158,400 |
|
|
7,649,100 |
|
|
17,707,700 |
|
2,034,517 |
|
|
(10,853,900 |
) |
|
15,661,300 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Purchases of treasury stock |
|
|
|
|
|
|
|
|
|
81,059 |
|
(504,900 |
) |
(504,900 |
) |
|||||||||
Sales of treasury stock |
|
|
|
|
|
|
|
|
|
(15,481 |
) |
82,300 |
|
82,300 |
|
|||||||||
Exercise of options($4.00/sh) |
|
15,000 |
|
3,000 |
|
57,000 |
|
|
|
|
|
|
|
60,000 |
|
|||||||||
Dividends paid ($0.22/share) |
|
|
|
|
|
|
|
(826,000 |
) |
|
|
|
|
(826,000 |
) |
|||||||||
Net earnings |
|
|
|
|
|
|
|
2,324,400 |
|
|
|
|
|
2,324,400 |
|
|||||||||
BALANCEFebruary 28, 2008 |
|
5,806,840 |
|
$ |
1,161,400 |
|
$ |
7,706,100 |
|
$ |
19,206,100 |
|
2,100,095 |
|
$ |
(11,276,500 |
) |
$ |
16,797,100 |
|
||||
See notes to financial statements.
32
EDUCATIONAL DEVELOPMENT CORPORATION
FOR THE YEARS ENDED FEBRUARY 29(28)
|
|
2008 |
|
2007 |
|
2006 |
|
||||
|
|
|
|
|
|
|
|
||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
||||
Net earnings |
|
$ |
2,324,400 |
|
$ |
2,407,100 |
|
$ |
2,398,400 |
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
||||
Depreciation |
|
139,400 |
|
143,500 |
|
138,000 |
|
||||
Deferred income taxes |
|
26,700 |
|
(43,500 |
) |
(82,000 |
) |
||||
Provision for doubtful accounts and sales returns |
|
1,527,200 |
|
1,482,800 |
|
1,323,500 |
|
||||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
||||
Accounts and income tax receivable |
|
(1,286,300 |
) |
(1,635,100 |
) |
(1,527,700 |
) |
||||
Inventories |
|
569,400 |
|
(308,100 |
) |
(66,400 |
) |
||||
Prepaid expenses and other assets |
|
(16,600 |
) |
24,100 |
|
(16,200 |
) |
||||
Accounts payable, accrued salaries and commissions, and other current liabilities |
|
(828,900 |
) |
479,800 |
|
(859,600 |
) |
||||
Income tax payable |
|
56,200 |
|
(71,700 |
) |
71,800 |
|
||||
Total adjustments |
|
187,100 |
|
71,800 |
|
(1,018,600 |
) |
||||
|
|
|
|
|
|
|
|
||||
Net cash provided by operating activities |
|
2,511,500 |
|
2,478,900 |
|
1,379,800 |
|
||||
|
|
|
|
|
|
|
|
||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
||||
Purchases of property and equipment |
|
(136,900 |
) |
(34,900 |
) |
(229,200 |
) |
||||
|
|
|
|
|
|
|
|
||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
||||
Borrowings on revolving credit agreement |
|
|
|
3,295,000 |
|
14,239,000 |
|
||||
Payments on revolving credit agreement |
|
|
|
(3,971,000 |
) |
(14,990,900 |
) |
||||
Cash received from exercise of stock options |
|
60,000 |
|
55,900 |
|
49,400 |
|
||||
Tax benefit of stock options exercised |
|
|
|
9,200 |
|
12,200 |
|
||||
Cash received from sale of treasury stock |
|
82,300 |
|
111,600 |
|
135,200 |
|
||||
Cash paid to acquire treasury stock |
|
(504,900 |
) |
(260,700 |
) |
(77,300 |
) |
||||
Dividends paid |
|
(826,000 |
) |
(751,200 |
) |
(560,700 |
) |
||||
|
|
|
|
|
|
|
|
||||
Net cash used in financing activities |
|
(1,188,600 |
) |
(1,511,200 |
) |
(1,193,100 |
) |
||||
|
|
|
|
|
|
|
|
||||
NET INCREASE (DECREASE) IN CASH AND |
|
|
|
|
|
|
|
||||
CASH EQUIVALENTS |
|
1,186,000 |
|
932,800 |
|
(42,500 |
) |
||||
|
|
|
|
|
|
|
|
||||
CASH AND CASH EQUIVALENTSBEGINNING OF YEAR |
|
1,254,300 |
|
321,500 |
|
364,000 |
|
||||
|
|
|
|
|
|
|
|
||||
CASH AND CASH EQUIVALENTSEND OF YEAR |
|
$ |
2,440,300 |
|
$ |
1,254,300 |
|
$ |
321,500 |
|
|
|
|
|
|
|
|
|
|
||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
||||
Cash paid for interest |
|
$ |
|
|
$ |
11,400 |
|
$ |
85,900 |
|
|
Cash paid for income taxes |
|
$ |
1,321,500 |
|
$ |
1,542,400 |
|
$ |
1,381,100 |
|
|
|
|
|
|
|
|
|
|
||||
SUPPLEMENTAL DISCLOSURE NON CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
||||
Dividend declared not paid |
|
$ |
|
|
|
|
$ |
750,800 |
|
||
See notes to financial statements.
33
EDUCATIONAL DEVELOPMENT CORPORATION
YEARS ENDED FEBRUARY 29, 2008, FEBRUARY 28, 2007 AND FEBRUARY 28, 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of BusinessWe distribute books and publications through our Publishing and Usborne Books at Home (UBAH) Divisions to book, toy and gift stores, libraries and home educators located throughout the United States (U.S.). We are the sole U.S. distributor of books and related items, which are published by an England based publishing company. The England based publishing company is our primary supplier.
EstimatesOur financial statements were prepared in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Actual results could differ from these estimates.
Business ConcentrationA significant portion of our inventory purchases are concentrated with an England-based publishing company. Purchases from this company were approximately $9.7 million, $10.6 million, and $11.9 million for the fiscal years ended February 29, 2008, February 28, 2007 and February 28, 2006, respectively. Total inventory purchases for those same periods were approximately $12.3 million, $12.4 million, and $13.1 million, respectively.
Cash and Cash EquivalentsCash and cash equivalents include cash on hand and cash on deposit in banks. We maintain bank accounts that are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At times, cash balances may be in excess of the FDIC insurance limit. We believe no significant concentrations of risk exist with respect to our cash. The majority of payments due from banks for third party credit card transactions process within two business days. Amounts due are classified as cash and cash equivalents at February 29, 2008 and February 28, 2007.
Accounts Receivable Accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within thirty days from the invoice date. Trade accounts are stated at the amount management expects to collect from outstanding balances. Delinquency fees are not assessed. Payments of accounts receivable are allocated to the specific invoices identified on the customers remittance advice. Accounts receivable are carried at original invoice amount less an estimated reserve made for returns and discounts based on quarterly review of historical rates of returns and expected discounts to be taken. The carrying amount of accounts receivable is reduced, if needed, by a valuation allowance that reflects managements best estimate of the amounts that will not be collected.
Management periodically reviews accounts receivable balances and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation account based on its assessment of the current status of the individual accounts. Balances which remain outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Changes in the valuation allowance have not been material to the financial statements. Recoveries of trade receivables previously written off are recorded when received.
InventoriesInventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. We present a portion of our inventory as a noncurrent asset. Occasionally we purchase book inventory in quantities in excess of what will be sold within the normal
34
operating cycle due to minimum order requirements of our primary supplier. These excess quantities are included in noncurrent inventory. We estimate noncurrent inventory using the current year turnover ratio by title. All inventory in excess of 2½ years of anticipated sales is classified as noncurrent inventory.
Inventories are presented net of a valuation allowance. Management has estimated and included an allowance for slow moving inventory for both current and noncurrent inventory. This allowance is based on managements analysis of inventory on hand at February 29, 2008 and February 28, 2007.
Property, Plant and EquipmentProperty, plant and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives, as follows:
Building |
|
30 years |
Machinery & equipment |
|
3 - 10 years |
Furniture & fixtures |
|
3 years |
Income TaxesDeferred tax assets and liabilities are recorded for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using the regular tax rate expected to be in effect when the taxes are actually paid or recovered. Net deferred tax assets related to the recognition of future tax benefits are recorded to the extent that realization of such benefits is considered more likely than not to occur.
The Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN No. 48) which was effective for us on March 1, 2007. FIN No. 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN No. 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements.
We classify interest and penalties associated with income taxes as a component of income tax expense (benefit) on the statement of earnings.
Revenue RecognitionSales are recognized and recorded when products are shipped. Products are shipped FOB shipping point. The UBAH Divisions sales are paid before the product is shipped. These sales accounted for 73% of net revenues in FY 2008 and 74% of net revenues in both FY 2007 and 2006. The provisions of the SEC Staff Accounting Bulletin No.104, Revenue Recognition in Financial Statements, have been applied, and as a result, a reserve is provided for estimated future sales returns.
Our 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. Estimated allowances for sales returns are recorded as sales are recognized and recorded. Management uses a moving average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged returns are primarily from the retail stores related to damages which occur in the stores, not in shipping to the stores. It is industry practice to accept returns from wholesale customers. Management has estimated and included a reserve for sales returns of $84,000 as of February 29, 2008 and of February 28, 2007.
Transportation revenue, the amount billed to the customer for shipping the product, is recorded when products are shipped.
Advertising CostsAdvertising costs are expensed as incurred. Advertising expenses, included in selling and operating expenses in the statements of earnings, were $127,900 in FY 2008, $148,000 in FY 2007, and $41,400 in FY2006.
Shipping and Handling Costs We classify shipping and handling costs as operating and selling expenses in the statements of earnings. Shipping and handling costs were $2,548,700 for FY 2008, $2,420,700 for FY 2007, and $2,278,200 for FY 2006.
Earnings per ShareBasic earnings per share (EPS) is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options. In computing Diluted EPS we have utilized the treasury stock method.
35
The following reconciles the diluted earnings per share:
|
|
Year Ended February 29(28), |
|
|||||||
|
|
2008 |
|
2007 |
|
2006 |
|
|||
Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|||
Net earnings applicable to common shareholders |
|
$ |
2,324,400 |
|
$ |
2,407,100 |
|
$ |
2,398,400 |
|
|
|
|
|
|
|
|
|
|||
Shares: |
|
|
|
|
|
|
|
|||
Weighted average shares outstandingbasic |
|
3,748,121 |
|
3,755,608 |
|
3,747,759 |
|
|||
Assumed exercise of options |
|
111,816 |
|
119,392 |
|
150,978 |
|
|||
|
|
|
|
|
|
|
|
|||
Weighted average shares outstandingdiluted |
|
3,859,937 |
|
3,875,600 |
|
3,898,737 |
|
|||
|
|
|
|
|
|
|
|
|||
Diluted Earnings Per Share |
|
$ |
0.60 |
|
$ |
0.62 |
|
$ |
0.62 |
|
There were no stock options for the fiscal years ended February 29, 2008, February 28, 2007 and February 28, 2006 excluded from the diluted earnings per share calculation.
Fair Value of Financial InstrumentsFor cash and cash equivalents, accounts receivable, accounts payable, the carrying amount approximates fair value because of the short maturity of those instruments.
Long-Lived Asset Impairment We review the value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future cash flows. No impairment was noted as a result of such review during the years ended February 29, 2008, February 28, 2007 and February 28, 2006.
Stock-Based CompensationShare-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at date of grant and recognized as compensation expense over the vesting period.
ReclassificationsCertain prior year amounts have been reclassified to conform with the FY 2008 presentation.
New accounting pronouncementsThe Financial Accounting Standards Board (FASB) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable to us.
36
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements which amends and puts in one place guidance on the use of fair value measurements which had been spread through four APB Opinions and 37 FASB Standards. No extensions of the use of fair value measurements are contained in this new pronouncement, and with some special industry exceptions (e.g., broker-dealers), no significant changes in practice should ensue. The standard is to be applied to financial statements beginning after November 15, 2007. The adoption of SFAS No. 157 is not expected to have a material impact on our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159 Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115. This standard permits the use of fair value measurement of financial assets and liabilities in the balance sheet with the net change in fair value recognized in periodic net income. The Standard is effective for fiscal years beginning after November 15, 2007. The adoption of this standard is not expected to have a material effect on our financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements. This statement amends Accounting Research Bulletin No. 51 Consolidated Financial Statements to establish accounting and reporting standards for noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for fiscal years beginning after December 15, 2008. The adoption of this standard is not expected to have a material effect on our financial position or results of operations.
In December 2007, the FASB issued SFAS 141(revised 2007) Business Combinations. The statement requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This statement is effective for acquisition dates on or after the beginning of the first annual reporting period beginning after December 15, 2008. The adoption of this standard is not expected to have a material effect on our financial position or results of operations.
37
2. INVENTORIES
Inventories consist of the following:
|
|
February 29(28), |
|
||||
|
|
2008 |
|
2007 |
|
||
Current: |
|
|
|
|
|
||
Book inventory |
|
$ |
11,844,900 |
|
$ |
12,421,400 |
|
Inventory valuation allowance |
|
(26,200 |
) |
(33,400 |
) |
||
|
|
|
|
|
|
||
Inventories netcurrent |
|
$ |
11,818,700 |
|
$ |
12,388,000 |
|
|
|
|
|
|
|
||
Noncurrent: |
|
|
|
|
|
||
Book inventory |
|
$ |
764,000 |
|
$ |
808,000 |
|
Inventory valuation allowance |
|
(305,000 |
) |
(348,900 |
) |
||
|
|
|
|
|
|
||
Inventories netnoncurrent |
|
$ |
459,000 |
|
$ |
459,100 |
|
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
|
|
February 29(28), |
|
||||
|
|
2008 |
|
2007 |
|
||
Land |
|
$ |
250,000 |
|
$ |
250,000 |
|
Building |
|
2,124,700 |
|
2,124,700 |
|
||
Machinery and equipment |
|
2,129,100 |
|
1,992,200 |
|
||
Furniture and fixtures |
|
66,900 |
|
66,900 |
|
||
|
|
4,570,700 |
|
4,433,800 |
|
||
Less accumulated depreciation |
|
(2,187,900 |
) |
(2,048,500 |
) |
||
|
|
$ |
2,382,800 |
|
$ |
2,385,300 |
|
38
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising our net deferred tax assets and liabilities as of February 29, 2008 and February 28, 2007 are as follows:
|
|
2008 |
|
2007 |
|
||
Current: |
|
|
|
|
|
||
Deferred tax assets: |
|
|
|
|
|
||
Allowance for doubtful accounts |
|
$ |
28,300 |
|
$ |
28,500 |
|
Inventory overhead capitalization |
|
90,400 |
|
90,200 |
|
||
Allowance for slow moving inventory |
|
10,000 |
|
12,700 |
|
||
Allowance for sales returns |
|
31,900 |
|
31,900 |
|
||
Accruals |
|
36,500 |
|
44,400 |
|
||
|
|
|
|
|
|
||
Deferred tax assets |
|
197,100 |
|
207,700 |
|
||
|
|
|
|
|
|
||
Deferred tax assetNet |
|
$ |
197,100 |
|
$ |
207,700 |
|
|
|
|
|
|
|
||
Noncurrent: |
|
|
|
|
|
||
Deferred tax assets: |
|
|
|
|
|
||
Allowance for slow moving inventory |
|
$ |
115,900 |
|
$ |
132,600 |
|
|
|
|
|
|
|
||
Deferred tax assets |
|
115,900 |
|
132,600 |
|
||
|
|
|
|
|
|
||
Deferred tax liabilities: |
|
|
|
|
|
||
Property and equipment |
|
(72,600 |
) |
(73,200 |
) |
||
|
|
|
|
|
|
||
Deferred tax liabilities |
|
(72,600 |
) |
(73,200 |
) |
||
|
|
|
|
|
|
||
Deferred tax assetNet |
|
$ |
43,300 |
|
$ |
59,400 |
|
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.
The components of income tax expense are as follows:
|
|
As of February 29(28), |
|
|||||||
|
|
2008 |
|
2007 |
|
2006 |
|
|||
Current: |
|
|
|
|
|
|
|
|||
Federal |
|
$ |
1,160,000 |
|
$ |
1,287,300 |
|
$ |
1,273,200 |
|
State |
|