Business Context and Reporting Period
Company: Educational Development Corporation (EDC)
Filing Type: Form 10-K (Annual Report)
Period Ended: February 28, 2007
Business Overview: EDC is the exclusive U.S. trade publisher for Usborne Publishing Limited. It operates two primary divisions: the Publishing Division (wholesale to bookstores, toy stores, and museums) and the Usborne Books at Home (UBAH) Division (direct sales via independent consultants, home shows, and book fairs). The company is headquartered in Tulsa, Oklahoma, and relies on a single distribution facility.
Key Financial Metrics
| Metric | Fiscal 2007 | Fiscal 2006 | Fiscal 2005 |
|---|---|---|---|
| Net Revenues | $31,403,500 | $31,788,900 | $31,650,800 |
| Gross Margin | $20,128,900 (64.1%) | $20,137,700 (63.4%) | $20,312,700 (64.2%) |
| Net Earnings | $2,407,100 | $2,398,400 | $2,406,100 |
| Earnings Per Share (Diluted) | $0.62 | $0.62 | $0.59 |
| Cash Flow from Operations | $2,478,900 | $1,379,800 | $4,075,000 |
| Total Assets | $19,701,900 | $18,397,900 | $17,980,500 |
| Long-Term Debt | $0 | $0 | $0 |
| Short-Term Debt | $0 | $676,000 | $0 |
| Cash and Equivalents | $1,254,300 | $321,500 | $364,000 |
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased by $385,400 (1.2%) compared to fiscal 2006. This was driven by a 3.3% decline in the Publishing Division ($283,000 decrease) and a slight 0.2% decline in the UBAH Division ($43,300 decrease).
- Profitability Stability: Despite lower revenues, Net Earnings increased slightly by $8,700 (0.4%) due to improved cost management and a reduction in interest expense.
- Segment Performance:
- Publishing: Sales to national chains dropped from 42% to 39% of division sales. Discounts and allowances remained high at 51.8% of gross sales.
- UBAH: Internet sales grew significantly by 59% ($694,000), offsetting declines in home shows (down 9.1%) and direct sales. Active consultants increased to 9,800.
- Liquidity Improvement: Cash and cash equivalents increased from $321,500 to $1.25 million. The company repaid its $676,000 bank loan balance, ending the year with no outstanding borrowings.
- Expense Fluctuations: Operating and selling expenses increased by $414,400, primarily due to higher postage, freight, and sales incentives. Sales commissions decreased by $128,400.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects cash flow to exceed operating requirements. Capital expenditures for fiscal 2008 are estimated at under $500,000. The company anticipates continuing cash dividends of 25%–35% of net earnings.
- Unusual Items: "Other Income" increased to $386,900 (from $93,400 in 2006), largely due to a $250,000 breakup fee received from a failed acquisition attempt of a Chapter 11 company.
- Key Risks:
- Supplier Concentration: Approximately 97% of products are sourced from a single supplier (Usborne Publishing Limited, UK). The contract requires a two-year notice for termination.
- Single Facility: All distribution is handled from one facility in Tulsa, Oklahoma, creating operational risk.
- Seasonality: Sales are heavily concentrated in the third fiscal quarter (holiday season).
- Market Competition: Faces strong competition from Scholastic in the book fair market and larger publishers in the trade market.
- Stock Repurchases: The company repurchased 20,204 shares in Q4 2006/Q1 2007 and 35,616 shares total in fiscal 2007. 146,939 shares remain available for repurchase under the current plan.
Investor Verification Checklist
- Supplier Dependency: Verify the stability of the relationship with Usborne Publishing Limited and the terms of the exclusive distribution agreement.
- Inventory Valuation: Review the $382,300 valuation allowance for slow-moving inventory and the classification of $808,000 as non-current inventory.
- Consultant Retention: Assess the sustainability of the UBAH division's growth given the decline in home show revenue and reliance on internet sales.
- Debt Covenants: Confirm compliance with the $5 million revolving credit facility covenants, particularly regarding financial ratios and restricted transactions.
- Dividend Policy: Monitor the company's ability to maintain the 25%–35% payout ratio if operating cash flows decline.