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EDUC > SEC Filings for EDUC > Form 10-K on 28-May-2013All Recent SEC Filings

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Annual Report


MD&A contains statements that are forward-looking and include numerous risks which you should carefully consider. Additional risks and uncertainties may also materially and adversely affect our business. You should read the following discussion in connection with our financial statements, including the notes to those statements, included in this document. Our fiscal years end on February 28 (29).

Management Summary

Educational Development Corporation is the sole distributor in the United States of the Usborne line of children's books. We operate two separate divisions, Publishing and Usborne Books and More ("UBAM"), to sell these books. Our Corporate headquarters, including the distribution facility for both divisions, is located in Tulsa, Oklahoma.

These two divisions each have their own customer base. The Publishing Division markets its products on a wholesale basis to various retail accounts. The UBAM 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. The Publishing Division's customer base includes national book chains, regional and local bookstores, toy and gift stores, school supply stores and museums. To reach these markets, the Publishing Division utilizes a combination of commissioned sales representatives located throughout the country and a commissioned inside sales group located in our headquarters. The Vice President of the Publishing Division manages sales to the national chains.

                    Publishing Division Sales by Market Type

                                            FY 2013       FY 2012
                   National chain stores          28 %          40 %
                   All other                      72 %          60 %
                     Total net sales             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.

The Publishing Division's in-house telesales group targets the smaller independent book and gift store market. Our semi-annual, full-color, 160-page catalogs, are mailed to over 5,000 customers and potential customers. We also offer two display racks to assist stores in displaying our products.

Net Revenues for Publishing Division

FY 2013 FY 2012
Net Revenues $ 10,811,600 $ 10,981,100

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Publishing Division's net revenues decreased $169,500 in fiscal year 2013 from fiscal year 2012, or 1.5%. Net revenues were down 31.0% for national chain stores, offset by an increase of 25.0% for smaller retail stores, and 13.6% for inside sales.

Usborne Books and More ("UBAM") Division

The UBAM Division is a multi-level direct selling organization that markets its products through independent sales representatives ("consultants") located throughout the United States. The customer base of UBAM consists of individual purchasers, as well as school and public libraries. Revenues are generated through home shows, direct sales, Internet sales, book fairs and contracts with school and public libraries.

An important factor in the continued growth of the UBAM Division is the addition of new sales consultants and the retention of existing consultants. Current active consultants recruit new sales consultants. UBAM makes it easy to recruit by providing low-cost signing kits. UBAM provides an extensive handbook that is a valuable tool in explaining the various programs to the new recruit.

                            Consultants During Year

                                                         FY 2013      FY 2012
       New Sales Representatives                            2,700        4,300
       Active Sales Representatives End of Fiscal Year      4,700        6,100

The UBAM Division presently has six levels of sales representatives:

Team Leaders

Senior Team Leaders

Executive Team Leaders

Senior Executive Team Leaders


Upon signing up, each individual is considered a consultant. Consultants receive commissions from each sale they make; the commission rate being determined by the marketing program under which the sale is made. In addition, consultants receive a monthly sales bonus once their sales reach an established monthly goal. Consultants who recruit other consultants and meet certain established criteria are eligible to become team leaders. Upon reaching this level, they receive monthly override payments based upon the sales of their downline groups.

Once team leaders reach certain established criteria, they become senior team leaders and are eligible to earn promotion bonuses on their consultants. Once senior team leaders reach certain established criteria, they become executive team leaders, senior executive team leaders or directors. Executive team leaders and higher may receive an additional monthly override payment based upon the sales of their downline groups.

                    Percent of Net Sales by UBAM Marketing Program

                                                  FY 2013       FY 2012
              Home Shows                                27 %          32 %
              Direct Sales                               2 %           2 %
              School & Library                          46 %          43 %
              Internet                                  12 %          12 %
              Fund Raisers                               5 %           3 %
              Transportation Revenues                    8 %           8 %
              Totals                                   100 %         100 %

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                     Number of Orders by UBAM Marketing Program

                                             FY 2013       FY 2012
                  Home Shows                    17,100       19,200
                  Direct Sales                   3,100        3,300
                  School & Library              11,000       11,000
                  Internet                      33,800       34,600
                  Fund Raisers                   1,400          900
                                                66,400       69,000

Net revenues, after commissions, from home shows declined 14% or $449,500 during fiscal year 2013. This was primarily due to 11% fewer orders placed during the period and a 3% decrease in average order size. 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, after commissions, from direct sales decreased 5% or $11,500 during fiscal year 2013. This resulted from a 6% decrease in the number of orders placed during the year. Direct sales are sales without a hostess being involved.

The UBAM 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, after commissions, including book fairs, increased 2% or $86,200 during fiscal year 2013, primarily due to the per-order average increase of 2%.

School and library sales are restricted to consultants who have received additional, specialized training which allows them to sell to schools and libraries. The UBAM consultant is the only source that a library or school has for library-bound Usborne books and for most Kane/Miller titles. They are not available through any of the school supply distribution companies.

This program includes our book fairs. 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. UBAM also has a Reach for the Stars fundraiser program. This is a pledge-based reading incentive program that provides cash and books to the sponsoring organization and books for the children.

Internet sales, after commissions, were down 10% or $129,700 during fiscal year 2013. Consultants utilize in-house-developed and hosted web sites in their businesses for a nominal annual fee. They 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.

Our fund-raising program, after commissions, Cards for a Cause, which was added during the second quarter of the prior fiscal year, increased 39% or $136,100 in sales over its inaugural year. Organizations sell variety boxes of greeting-type cards and keep a portion of the proceeds to help support themselves and their related causes.

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Transportation revenues decreased 11% or $101,900 during fiscal year 2013. Transportation revenues are based on order sales, with minimums per order depending on order type.

The cost of free books provided under the various UBAM marketing programs is recorded as operating and selling expense in the statements of earnings.

While there are many, UBAM continues to be the only multi-level company in the United States exclusively selling books. We believe this is a fertile market with opportunities for growth. The keys to future growth in the UBAM Division are recruiting and retaining consultants.

(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. Outside of cash used in operating activities, generally our primary uses of cash are to pay dividends and acquire treasury stock. During fiscal year 2013, we have utilized our bank credit facility to meet some short-term cash requirements.

We expect our ongoing cash flow to continue to exceed cash required to operate the business. Consequently, we expect to pay down our short-term borrowings during fiscal year 2014.

During fiscal year 2013, we experienced a positive cash flow from operations of $639,000. Cash flow from net earnings of $802,900 was increased due to the provision for doubtful accounts and sales returns of $1,508,700, a decrease in inventories of $118,300 and depreciation expense of $114,200, offset by an increase in accounts receivable of $1,352,800, a $293,500 increase in net income tax receivable, a decrease in deferred income taxes of $12,600, a decrease in current liabilities of $128,900, and a $117,300 increase in prepaid expenses and other assets.

Cash used in investing activities was $209,600 due to an additional $180,300 investment in Demibooks and $29,300 for capital expenditures. We estimate that cash used in investing activities for fiscal year 2014 will be less than $200,000. 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 $720,400 which was primarily due to dividend payments of $1,884,800, $1,185,000 payments under our revolving credit agreement, and $56,700 paid to acquire treasury stock. These were offset by cash received of $2,185,000 from borrowings under our revolving credit agreement and $221,100 from the sale of treasury stock. In September 2002, the Board of Directors authorized a minimum annual cash dividend of 20% of net earnings. In fiscal years 2013 and 2012, we declared dividends equal to 216% and 132%, respectively, 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.

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(3) Results of Operations

Earnings as a Percent of Net Revenues
                                                 FY 2013      FY 2012
                Net revenues                        100.0 %      100.0 %
                Cost of sales                        41.2 %       40.2 %
                 Gross margin                        58.8 %       59.8 %
                Operating expenses:
                 Operating and selling               26.3 %       25.5 %
                 Sales commissions                   18.7 %       18.5 %
                 General and administrative           9.0 %        7.5 %
                 Total operating expenses            54.0 %       51.5 %
                Other income                          0.2 %        0.4 %
                Earnings before income taxes          5.0 %        8.7 %
                Income taxes                          1.9 %        3.3 %
                Net earnings                          3.1 %        5.4 %

Fiscal Year 2013 Compared with Fiscal Year 2012

The following presents an overview of our results of operations for years ended
February 28, 2013 and February 29, 2012. We had earnings before income taxes of
$1,282,000 for fiscal year 2013 compared with $2,277,700 for fiscal year 2012.


                                       FY 2013           FY 2012          $ Change
      Gross sales                   $  39,215,300     $  40,906,200     $ (1,690,900 )
      Less discounts & allowances     (14,585,800 )     (15,592,000 )      1,006,200
      Transportation revenue              858,000           959,100         (101,100 )
      Net revenues                  $  25,487,500     $  26,273,300     $   (785,800 )

The UBAM Division's gross sales decreased 6.9% or $1,243,700 during fiscal year 2013 when compared with fiscal year 2012. This decrease is attributable to lower sales in the home party, direct sales, and internet markets, offset by an increase in fund raisers and school and library/book fair sales. Average sales per order for this division were down 0.3% and the overall number of orders was down 3.8% due to reductions in each of those markets, except fund raisers which were up.

The Publishing Division's gross sales decreased 2.0% or $447,200 during fiscal year 2013 when compared with fiscal year 2012. Sales to national chain stores decreased 31%, offset by increases of 25% in sales to smaller retail stores and 14% in inside sales.

The Publishing Division's discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAM Division due to the different customer markets that each division targets. The Publishing Division's discounts and allowances were $11,679,500 in fiscal year 2013 and $11,956,400 in fiscal year 2012. 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 Division's discounts and allowances were 52.0% of Publishing's gross sales in fiscal year 2013 and 52.2% in fiscal year 2012.

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The UBAM Division's discounts and allowances were $2,906,300 in fiscal year 2013 and $3,635,600 in fiscal year 2012. Most sales in the UBAM Division are at retail. As a part of the UBAM Division's marketing programs, discounts between 40% and 50% of retail are offered on selected items at various times throughout the year. The discounts and allowances in the UBAM Division will vary from year to year depending upon the marketing programs in place during any given year. The UBAM Division's discounts and allowances were 17.3% of UBAM's gross sales in fiscal year 2013 and 20.2% in fiscal year 2012.

Transportation revenues decreased $101,100 in fiscal year 2013, primarily due to the decrease in UBAM sales during the year.


                                        FY 2013          FY 2012        $ Change
         Cost of sales                $ 10,494,200     $ 10,549,000     $ (54,800 )
         Operating and selling           6,714,600        6,710,400         4,200
         Sales commissions               4,764,900        4,855,200       (90,300 )
         General and administrative      2,285,700        1,972,500       313,200
         Total                        $ 24,259,400     $ 24,087,100     $ 172,300

Cost of sales decreased 0.5% in fiscal year 2013 when compared with fiscal year 2012. 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 76% of our products come from one vendor, where the cost of the products is a fixed percentage of the retail price.

Cost of sales is the inventory cost of product sold (including the cost of the product itself and inbound freight charges). Operating and selling expenses include purchasing and receiving, inspection, warehousing, and other costs of our distribution network. These costs totaled $1,283,900 in fiscal year 2013 and $1,274,100 in fiscal year 2012. 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 UBAM Division and the order entry and customer service functions. Operating and selling expenses as a percentage of gross sales were 17.1% for fiscal year 2013 and 16.4% for fiscal year 2012.

Sales commissions in the Publishing Division increased $55,900 for the fiscal year ended 2013. Sales commissions for this division fluctuate depending upon the amount of sales made to our "house accounts," which are our largest customers and do not have any commission expense associated with them, and sales made by our outside sales representatives. Publishing Division sales commissions are paid on net sales and were 2.7% for fiscal year 2013 and 2.1% for fiscal year 2012.

Sales commissions in the UBAM Division decreased $146,200. UBAM Division sales commissions are paid based on the retail price of non-promotional products sold and were 26.7% of gross sales for fiscal year 2013 and 25.7% for fiscal year 2012. The fluctuation in the percentages of commission expense to gross sales is the result of the type of sale. Home shows, book fairs, school and library sales and direct sales have different commission rates. Also contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants' monthly sales and downline sales. The decrease in sales commissions is the result of lower gross sales in the UBAM Division.

General and administrative expenses include the executive department, accounting department, information services department, general office management and building facilities management. General and administrative expenses as a percentage of gross sales were 5.8% for fiscal year 2013 and 4.8% for fiscal year 2012.

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The tax provision for fiscal year 2013 was $479,100. The effective rate for fiscal year 2013 was 37.4% and for fiscal year 2012 was 37.6%. Our effective tax rate is higher than the Federal statutory rate due to state income taxes.

Contractual Obligations

We are a smaller reporting company and are not required to provide this information.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectable accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report. However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.

Stock-Based Compensation

We account for stock-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at date of grant and recognized as compensation expense.

Revenue Recognition

Sales are recognized and recorded when products are shipped. Products are shipped FOB shipping point. The UBAM Division's sales are paid at the time the product is shipped. These sales accounted for 58% of net revenues in both fiscal years 2013 and 2012.

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 $100,000 as of both February 28, 2013 and February 29, 2012.

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 $471,900 and $456,300 as of February 28, 2013 and February 29, 2012, respectively.

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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 years of anticipated sales was classified as noncurrent inventory. Noncurrent inventory balances were $934,000 and $888,000 at February 28, 2013 and February 29, 2012, respectively.

Inventories are presented net of a valuation allowance. Management has estimated and included a valuation allowance for both current and noncurrent inventory. This allowance is based on management's identification of slow moving inventory on hand. Management has estimated a valuation allowance for both current and noncurrent inventory of $400,000 and $365,000 as of February 28, 2013 and
February 29, 2012, respectively.

Our product line contains approximately 1,500 titles, each with different rates of sale, depending upon the nature and popularity of the title. Almost all of our product line is saleable as the books are not topical in nature and remain current in content today as well as in the future. Most of our products are printed in Europe, China, Singapore, India, Malaysia and Dubai resulting in a three to four-month lead-time to have a title reprinted and delivered to us.

Our principal supplier, based in England, generally requires a minimum reorder of 6,500 or more of a title in order to get a solo print run. Smaller orders would require a shared print run with the supplier's other customers, which can result in more lengthy delays to receive the ordered title. Anticipating customer preferences and purchasing habits requires historical analysis of similar titles in the same series. We then place the initial order or re-order based upon this analysis.

These factors and historical analysis have led Management to determine that 2 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 . . .

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