Washington, D.C. 20549
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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. As used in this Annual Report on Form 10-K, the terms “EDC,” “we,” “our” or “us” mean Educational Development Corporation, a Delaware corporation, unless the context indicates otherwise.
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.
Educational Development Corporation (“EDC”) is the exclusive United States trade publisher of the line of educational children’s books produced in the United Kingdom by Usborne Publishing Limited (“Usborne”). We were incorporated on August 23, 1965.1965, in the State of Delaware. Our fiscal years end on February 28.29(28).
We also own Kane Miller Book Publishers; award-winning publishers of international children’s books.
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.”
While selling children’s books is our only line of business, we sell them through two divisions:
As the sole United States trade publisher of the Usborne line of books, we offer over 1,5002,000 different titles. Many are interactive in nature, including our Touchy-Feely board books, activity and flashcards, adventure and search books, art books, sticker books and foreign language books. The majority of the titles published by Kane Miller Book Publishers originally were published in other countries in their native languages.
We are a smaller reporting company and are not required to provide this information.
Educational Development Corporation is the sole distributor in the United States of the Usborne line of children’s books and is the owner of Kane Miller Book Publishers. We operate two separate divisions, EDC Publishing and Usborne Books & 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. EDC Publishing markets its products on a wholesale basis to various retail accounts. UBAM markets its products to individual consumers as well as to school and public libraries through direct-selling consultants.
EDC Publishing 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 chain customers.
EDC Publishing 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.
EDC Publishing’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.
UBAM 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 internet sales, home shows, direct sales, Internet sales, book fairs and contracts with school and public libraries. This past fiscal year includedcontinued a significant shift toward online home shows via social media outlets, such as Facebook.
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 (defined as those with sales during the past six months) recruit new sales consultants. UBAM makes it easy to recruit by providing signing kits for which new consultants can earn partial or full reimbursement based on established sales criteria. UBAM provides an extensive handbook that is a valuable tool in explaining the various programs to the new recruit.
Once team leaders reach certain established criteria, they become senior team leaders and are eligible to earn promotion bonuses on their consultants.downline groups. 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.
Net Revenues, after Commissions, for UBAM Division
Net Revenues, after Commissions, for UBAM Division | |
| | | FY 2016 | | | FY 2015 | |
| Net Revenues | | $ | 52,786,900 | | | $ | 21,015,800 | |
| Less commissions | | | (17,710,800 | ) | | | (6,491,500 | ) |
| Net Revenues, after commissions | | $ | 35,076,100 | | | $ | 14,524,300 | |
| | | FY 2015 | | | FY 2014 | |
| Net Revenues | | $ | 21,015,800 | | | $ | 15,128,600 | |
| Less commissions | | | (6,491,500 | ) | | | (4,621,700 | ) |
| Net Revenues, after commissions | | $ | 14,524,300 | | | $ | 10,506,900 | |
Percent of Net Revenues, after Commissions, by UBAM Marketing Program | |
| | | FY 2016 | | | FY 2015 | |
| Internet | | | 54 | % | | | 23 | % |
| School & Library | | | 20 | % | | | 41 | % |
| Home Shows | | | 12 | % | | | 25 | % |
| Fund Raisers | | | 2 | % | | | 2 | % |
| Transportation Revenues | | | 12 | % | | | 9 | % |
| Totals | | | 100 | % | | | 100 | % |
Percent of Net Revenues, after Commissions, by UBAM Marketing Program |
Number of Orders by UBAM Marketing Program | |
| | | FY 2016 | | | FY 2015 | |
| Internet | | | 561,000 | | | | 91,700 | |
| School & Library | | | 21,400 | | | | 14,000 | |
| Home Shows | | | 98,800 | | | | 30,200 | |
| Fund Raisers | | | 1,300 | | | | 1,000 | |
| | | | 682,500 | | | | 136,900 | |
| | | FY 2015 | | | FY 2014 | |
| School & Library | | | 41 | % | | | 43 | % |
| Home Shows | | | 24 | % | | | 28 | % |
| Internet | | | 23 | % | | | 15 | % |
| Fund Raisers | | | 2 | % | | | 3 | % |
| Direct Sales | | | 1 | % | | | 2 | % |
| Transportation Revenues | | | 9 | % | | | 9 | % |
| Totals | | | 100 | % | | | 100 | % |
Number of Orders by UBAM Marketing Program
| | | FY 2015 | | | FY 2014 | |
| School & Library | | | 14,000 | | | | 11,000 | |
| Home Shows | | | 27,500 | | | | 18,300 | |
| Internet | | | 91,700 | | | | 43,200 | |
| Fund Raisers | | | 1,000 | | | | 1,000 | |
| Direct Sales | | | 2,700 | | | | 2,800 | |
| | | | 136,900 | | | | 76,300 | |
This increase in net revenues, after commissions, resulted from increases in the following:
| · | 131%598% in internet sales |
| · | 41%50% in school and library sales |
| · | 29%42% in home party sales |
· | 21%135% in fundraiser sales |
The increase in net revenues, after commissions, is alsogreatly attributed to a 32%151% increase in the number of active consultants (defined as those with sales during the past six months) at the end of fiscal year 2015.2016.
The increase in Internet sales,internet net revenues, after commissions, is attributed to 112%512% more orders placed during the period, along with an 8%a 15% increase in average order size. Customers order via the consultants’ UBAM-hosted web sites, which have been customized to their own preferences. Orders are processed through a shopping cart and the consultant receives sales credit and commission on the sales. Much of the increase in Internetinternet sales resulted from the use of social media to host virtual parties, frequently referred to as “Facebook Parties.”
The school and library marketing program increase is attributed to a 27%53% increase in the number of orders, whoseoffset by the average order size increased by 11%decreased of 2% over the prior fiscal year. Much of this change is a result of the increase in the number of sales consultants.
School and library sales are made by 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 most of our titles. They are not available through school supply distribution companies.
This program includes book fairs which are held with an 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.
The increase in home party sales, including the discontinued category of “direct sales”, after commissions, is attributed to a 50%227% increase in the total number of orders, offset by a 14%56% decrease in average order size. Much of this change is a result of the increase in the number of sales consultants and the transition to smaller, online parties.consultants. Consultants contact individuals (“hostesses”) to hold book shows in their homes or via social media.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.show, including online orders. These online orders are reported as internet sales, which has resulted in smaller average home show order sizes. 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 increased 26% during fiscal year 2015. This resulted from a 28% increase in the average order size, offset by a slight, 1% decrease in the number of orders placed during the year. Direct sales are sales without a hostess being involved.
Our fund-raising program, Cards for a Cause, increased 21%135% in sales, after commissions, over the prior year. This resulted from a 20% increase in average order size and a 1%30% increase in the number of orders placed duringand a 71% increase in the average size of these orders over the prior fiscal year. Organizations sell variety boxes of greeting-type cards and keep a portion of the proceeds to help support themselves and their related causes.
Transportation revenues increased 57%270% during fiscal year 2015.2016. Transportation revenues are based on sales order size, with minimums per order depending on order type. DuringThis increase is partially due to the increase in the number of smaller orders for which a standard minimum is applied, along with a full year benefit of a 20% increase in that minimum which occurred halfway through fiscal year 2015, the standard minimum was increased 20% to adjust for increased transportation expenses.2015.
The cost of free books provided under the various UBAM marketing programs is recorded as operating and selling expense in the statements of earnings.
(1-2) Liquidity and Capital Resources
EDC has a history of profitability and positive cash flow. Typically, our primary source of cash is generated from our operations. Outside of cash used in operating activities, generally our primary uses of cash are to pay down our outstanding bank credit facility loan balance, for capital expenditures, to pay dividends, capital expenditures, and to acquire treasury stock. During fiscal year 2015,2016, we utilized our bank credit facility to meet some cash requirements. At fiscal year end, our revolving bank credit facility loan balance was $1,400,000.
We expect our ongoing cash flow to exceed cash required to operate the business. As such, we expect our short-term borrowings to be limited during fiscal year 2016.$3,331,800.
During fiscal year 2015,2016, we experienced a negativepositive cash flow from our operations of $261,600.$6,650,600. Cash outflowflow resulted from the following:
| · | an increase in accounts payable, accrued salaries and commissions, and other current liabilities of $6,837,000, |
| · | an increase in deferred revenue of $2,925,200 |
| · | net earnings of $2,119,300, |
| · | the provision for doubtful accounts and sales returns of $1,239,600, |
| · | an increase in net income tax payable/receivable of $739,500, and |
| · | depreciation expense of $274,500. |
Offset by:
| · | an increase in inventories of $6,048,600, |
| · | an increase in prepaid expenses and other assets of $672,500, |
| · | an increase in accounts receivable of $676,200, |
| · | provision for inventory valuation allowance of $68,100, and |
| · | deferred income tax benefit of $19,100. |
The significant increase in accounts receivablepayable, accrued salaries and commissions, and other current liabilities is primarily a result of $1,356,900, anthe current payments owed to our suppliers for our increased inventory stock required to sustain our sales increase.
The increase in inventoriesdeferred revenue is primarily a result of $1,192,200, an $88,000 increase in prepaid expenses and other assets, and a $77,300 decrease in net income tax payable, offsetorders received for the UBAM division, but not shipped by net earningsthe end of $859,200, the provision for doubtful accounts and sales returns of $1,281,000, an increase in current liabilities of $182,500, depreciation expense of $129,400, and a decrease in deferred income taxes of $700.
Cash used in investing activities was $325,000$24,911,600 for capital expenditures. We began the process to implement new accounting software andOn December 1, 2015, we closed on a new system for the UBAM division’s processes, with an initial $210,700 investment during fiscal year 2015. These systems will be fully operational during fiscal year 2016 and will allowfacility which has allowed us to expand to accommodate our growth over the growth in our UBAM sales force, while utilizing industry best practices and improving online training resources. We also invested $108,000 in our facilities to repair our parking lot and update the office spaces.past year.
Our capital expenditures included:
| · | Purchase of new facility of $23,213,600 |
| · | Warehouse rack system for new facility of $1,074,000 |
| · | Additional investment in accounting and UBAM software systems of $410,400 |
| · | Warehouse equipment of $95,400 |
| · | Other improvements to new facility of $94,800 |
Cash provided by financing activities was $290,500$19,060,800, which was primarily due to $4,550,000$18,400,000 in long-term debt related to the purchase of our new facility, offset by long-term debt payments of $97,200. Also, $4,881,800 in borrowings were provided under our revolving credit agreement, and $174,400offset by $2,950,000 in payments against this agreement. Additionally, $202,500 was provided from the sale of treasury stock. These werestock, offset by payments of $3,150,000 towards our revolving credit agreement, dividend payments of $1,278,700, and $5,200$1,600 paid to acquire treasury stock. Cash was also used for dividend payments of $1,374,700.
In September 2002, the Board of Directors authorized a minimum annual cash dividend of 20% of net earnings. In fiscal years 20152016 and 2014,2015, we declared dividends equal to 149%67% and 356%149%, respectively, of net income after taxes.
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. ManagementWhen 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 stockholdersshareholders and that these repurchases will have no adverse effect on our short-term and long-term liquidity.
(3) Results of Operations
Earnings as a Percent of Net Revenues| Earnings as a Percent of Net Revenues | | | | |
| | | FY 2016 | | | FY 2015 | |
| Net revenues | | | 100.0 | % | | | 100.0 | % |
| Cost of sales | | | 32.2 | % | | | 39.2 | % |
| Gross margin | | | 67.8 | % | | | 60.8 | % |
| Operating expenses: | | | | | | | | |
| Operating and selling | | | 30.5 | % | | | 29.2 | % |
| Sales commissions | | | 28.4 | % | | | 21.0 | % |
| General and administrative | | | 3.7 | % | | | 6.3 | % |
| Total operating expenses | | | 62.6 | % | | | 56.5 | % |
| Other income, net | | | 0.4 | % | | | 0.0 | % |
| Earnings before income taxes | | | 5.6 | % | | | 4.3 | % |
| Income taxes | | | 2.3 | % | | | 1.7 | % |
| Net earnings | | | 3.3 | % | | | 2.6 | % |
| | | FY 2015 | | | FY 2014 | |
| Net revenues | | | 100.0 | % | | | 100.0 | % |
| Cost of sales | | | 39.2 | % | | | 40.3 | % |
| Gross margin | | | 60.8 | % | | | 59.7 | % |
| Operating expenses: | | | | | | | | |
| Operating and selling | | | 29.2 | % | | | 27.8 | % |
| Sales commissions | | | 21.0 | % | | | 18.9 | % |
| General and administrative | | | 6.3 | % | | | 8.1 | % |
| Total operating expenses | | | 56.5 | % | | | 54.8 | % |
| Other income (expense) | | | - | % | | | (1.5 | %) |
| Earnings before income taxes | | | 4.3 | % | | | 3.4 | % |
| Income taxes | | | 1.7 | % | | | 2.0 | % |
| Net earnings | | | 2.6 | % | | | 1.4 | % |
Fiscal Year 20152016 Compared with Fiscal Year 20142015
The following presents an overview of our results of operations for years ended February 29, 2016 and February 28, 2015 and 2014.2015. We had earnings before income taxes of $3,545,900 for fiscal year 2016 compared with $1,402,500 for fiscal year 2015 compared with $873,500 for fiscal year 2014.2015.
Revenues
| | | FY 2016 | | | FY 2015 | | | $ Change | |
| Gross sales | | $ | 80,319,400 | | | $ | 48,345,400 | | | $ | 31,974,000 | |
| Less discounts & allowances | | | (22,061,500 | ) | | | (17,273,100 | ) | | | (4,788,400 | ) |
| Transportation revenue | | | 5,360,400 | | | | 1,476,000 | | | | 3,884,400 | |
| Net revenues | | $ | 63,618,300 | | | $ | 32,548,300 | | | $ | 31,070,000 | |
| | | FY 2015 | | | FY 2014 | | | $ Change | |
| Gross sales | | $ | 48,345,400 | | | $ | 40,558,000 | | | $ | 7,787,400 | |
| Less discounts & allowances | | | (17,273,100 | ) | | | (15,414,200 | ) | | | (1,858,900 | ) |
| Transportation revenue | | | 1,476,000 | | | | 953,200 | | | | 522,800 | |
| Net revenues | | $ | 32,548,300 | | | $ | 26,097,000 | | | $ | 6,451,300 | |
UBAM’s gross sales increased 36.8%138.0% or $6,484,200$33,274,800 during fiscal year 20152016 to $57,385,300 when compared with fiscal year 2014.2015. This increase is attributable to a 32%151% increase in the number of independent sales consultants, with resulting increases in all types of sales, including Internet,internet, school and library/book fair, home parties, direct sales, and fund raisers. The overall number of orders was up 79%398% due to increases in Internet,internet, home show, school and library, and fund raiser orders, offset by a slight decrease in the number of direct sales orders. Average sales per order for this division were down 17%48%, primarily due to a shift from larger home party orders to multiple individual online orders per Internet-basedinternet-based party.
EDC Publishing’s gross sales increased 5.7%decreased 5.4% or $1,303,200$1,300,800 during fiscal year 20152016 when compared with fiscal year 2014.2015. Sales increased by 5.5%5.0% to smaller retail stores and decreased by 4.2%14.4% to national chain stores.
UBAM’s discounts and allowances were $9,927,900 in fiscal year 2016 and $4,533,600 in fiscal year 2015 and $3,414,200 in fiscal year 2014.2015. Most sales by UBAM are at retail. As a part of UBAM’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.UBAM’s discounts and allowances were 18.8%17.3% of UBAM’s gross sales in fiscal year 20152016 and 19.4%18.8% in fiscal year 2014.2015.
EDC Publishing’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 $12,133,600 in fiscal year 2016 and $12,739,500 in fiscal year 2015 and $12,000,000 in fiscal year 2014.2015. To be competitive with other wholesale book distributors, EDC Publishing 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. EDC Publishing’s discounts and allowances were 52.6%52.9% of their gross sales in fiscal year 20152016 and 52.3%52.6% in fiscal year 2014.2015.
Transportation revenues increased $522,800$3,884,400 or 263.2% in fiscal year 2015,2016, due primarily to the increase in UBAM gross sales during the year and the shift in sales to more, smaller Internet-basedinternet-based orders, which each are proportionately more expensivesubject to ship.a flat minimum shipping charge. Also, we realized the benefit of a full year with a 20% increase in the minimum shipping charge made during fiscal year 2015.
Expenses
| | | FY 2015 | | | FY 2014 | | | $ Change | | | FY 2016 | | | FY 2015 | | | $ Change | |
| Cost of sales | | $ | 12,763,900 | | | $ | 10,523,500 | | | $ | 2,240,400 | | | $ | 20,494,200 | | | $ | 12,763,900 | | | $ | 7,730,300 | |
| Operating and selling | | | 9,515,400 | | | | 7,258,500 | | | | 2,256,900 | | | | 19,419,400 | | | | 9,515,400 | | | | 9,904,000 | |
| Sales commissions | | | 6,842,700 | | | | 4,939,800 | | | | 1,902,900 | | | | 18,062,800 | | | | 6,842,700 | | | | 11,220,100 | |
| General and administrative | | | 2,039,900 | | | | 2,123,500 | | | | (83,600 | ) | | | 2,328,500 | | | | 2,039,900 | | | | 288,600 | |
| Total | | $ | 31,161,900 | | | $ | 24,845,300 | | | $ | 6,316,600 | | | $ | 60,304,900 | | | $ | 31,161,900 | | | $ | 29,143,000 | |
Cost of sales increased 21.3%60.6% in fiscal year 20152016 when compared with fiscal year 2014.2015. Our cost of products is 25%22% to 28% of the gross sales price, depending upon the product. The percentage change in gross sales to the percentage change in cost of goods,sales, depends largely on the mix of products sold. Approximately 79%67% 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), along with royalties accrued for sales of Kane Miller titles for which we have royalty payment contracts. The costs of our distribution network are not included in our cost of sales, but rather in our operating and selling expenses.
Operating and selling expenses include purchasing and receiving, inspection, warehousing, and other costs of our distribution network. These costs totaled $2,865,700 in fiscal year 2016 and $1,259,500 in fiscal year 2015 and $1,133,100 in fiscal year 2014.2015. In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of the Publishing and UBAM divisions, along with the order entry and customer service functions. functions. Operating and selling expenses as a percentage of gross sales were 24.2% for fiscal year 2016 and 19.7% for fiscal year 2015 and 17.9% for fiscal year 2014.
Sales commissions for EDC Publishing increased $33,100$800 for the fiscal year ended 2015.2016. 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 3.2% for fiscal year 2016 and 3.0% for fiscal year 2015 and 2.9% for fiscal year 2014.2015.
Sales commissions for UBAM increased $1,869,800.$11,219,300. UBAM division sales commissions are paid based on the retail price of non-promotional products sold and were 26.9%30.9% of UBAM gross sales for fiscal year 20152016 and 26.2%26.9% for fiscal year 2014.2015. The fluctuation in the percentages of commission expense to gross sales is the result of the type of sale. HomeInternet sales, home shows, book fairs, school and library sales and directfundraiser sales have different commission rates. Also, another factor contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants’ monthly sales and downline sales. The increase in sales commissions is the result of higher 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 2.9% for fiscal year 2016 and 4.2% for fiscal year 2015 and 5.2% for fiscal year 2014.2015.
The tax provision for fiscal year 20152016 was $543,300. $1,426,600. The effective rate for fiscal year 20152016 was 38.7%40.2% and for fiscal year 20142015 was 59.1%38.7%. Our effective tax rate is higher than the Federal statutory rate due to an IRS audit settlement for $67,800 of our 2012 tax year, state income and franchise taxes and a fully-reserved capital loss carry forward, which we do not reasonably expect to deduct for income tax purposes.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 uncollectableuncollectible 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. UBAM’s sales are paid at the time the product is shipped.ordered. These sales accounted for 65%83% and 58%65% of net revenues in fiscal years 20152016 and 2014,2015, respectively.
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 represents the amount billed to the customer for shipping the product and is recorded when the product is shipped. Management has estimated and included a reserve for sales returns of $100,000 for the years ended February 29, 2016 and February 28, 2015 and 2014.2015.
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 uncollectible 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 an allowance for doubtful accounts of $234,500$401,900 and $233,900$234,500 as of February 29, 2016 and February 28, 2015, and 2014, respectively.
Inventory
Management continually estimates and calculates the amount of noncurrent 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 inventory balances prior to valuation allowances were $718,900$469,000 and $824,000$718,900 at February 29, 2016 and February 28, 2015, and 2014, 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 $393,100$325,000 and $378,800$393,100 as of February 28,29, 2016 and 2015, and
2014, respectively.
Our product line contains approximately 1,5002,000 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 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 recently issued accounting standards apply to us.
In April 2014, FASB issued Accounting Standards Update (ASU) No. 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. The change is effective for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2014, which means the first quarter of our fiscal year 2016, with early adoption permitted. The ASU applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. This new ASU will not affect our financial position, results of operations or cash flows.
In May 2014, FASB issued ASU No. 2014-09, and amended with ASU No. 2015-14 “Revenue from Contracts with Customers,” which provides a single revenue recognition model which is intended to improve comparability over a range of industries, companies and geographical boundaries and will also result in enhanced disclosures. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, which means the first quarter of our fiscal year 2019. We are currently reviewing the ASU and assessing the potential impact on our financial statements.
In August 2015, FASB issued ASU No. 2015-15 “Interest—Imputation of Interest,” which modifies the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. These changes allow an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The changes are effective for financial statements issued for annual periods beginning after December 15, 2015, and interim periods within those annual periods, which means the first quarter of our fiscal year 2017.We are currently reviewing the ASU and assessing the potential impact on our financial statements.
In November 2015, FASB issued ASU No. 2015-17, which is intended to improve how deferred taxes are classified on organizations’ balance sheets by eliminating the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will now be required to classify all deferred tax assets and liabilities as noncurrent. The changes are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, which means the first quarter of our fiscal year 2018. We anticipate this ASU having minimal impact on our financial statements.
In February 2016, FASB issued ASU No. 2016-02, “Leases,” which is intended to establish a comprehensive new lease accounting model. The new standard clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset. The new standard is effective for interim and annual periods beginning after December 15, 2018, which means the first quarter of our fiscal year 2020. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. We are currently reviewing the ASU and evaluating the potential impact on our financial statements.
In March 2016, FASB issued ASU No. 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for interim and annual periods beginning after December 15, 2016, which means the first quarter of our fiscal year 2018. We are currently reviewing the ASU and assessingevaluating the potential impact on our financial statements.
ItemItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company and are not required to provide this information.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 begins at page 23.
ItemItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
Item 9A.9A. 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 28, 2015.29, 2016. 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 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.
MANAGEMENT'SMANAGEMENT’S 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"“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 in 1992. 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 28, 2015.29, 2016. The original framework was updated with the issuance of the 2013 Internal Control – Integrated Framework by the Committee of Sponsoring Organizations of the Treadway Commission. Our management has not yet implemented the 2013 Framework, but does not deem it impacting our effective assessment conclusion.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management'sManagement’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management'smanagement’s report in this annual report.
Item 9B.Item 9B.OTHER INFORMATION
None
PART III
Item 10.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“Election of Directors"Directors” in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 16, 2015.19, 2016.
(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"“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“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 16, 2015.19, 2016.
Item 11.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"“Executive Compensation” in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 16, 2015.19, 2016.
Item 12.Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 is furnished by incorporation by reference to the information under the captions "Security“Security Ownership of Certain Beneficial Owners and Management"Management” and "Compensation Plans"“Compensation Plans” in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 16, 2015.19, 2016.
ItemItem 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
Item 14.Item 14.PRINCIPALPRINCIPAL ACCOUNTANT’S FEES AND SERVICES
The information required by this Item 14 is furnished by incorporation by reference to the information under the caption "Independent“Independent Registered Public Accountants"Accountants” in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 16, 2015.19, 2016.
PART IV
Item 15.Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)The following documents are filed as part of this report:
| | Page |
| | |
| 21 |
| |
| Balance Sheets as of February 29, 2016 and February 28, 2015 | 22 |
| |
| Statements of Earnings for the Years ended February 29, 2016 and February 28, 2015 | 23 |
| | |
| 24 |
| | |
| 25 |
| | |
| 26 |
| |
| 27 |
| |
| 28-3726-35 |
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-K (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). |
| | |
| 3.3 | 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). |
| | |
| 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 weus 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 | Eleventh Amendment dated June 30, 2009 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK. |
| | |
| 10.10 | Twelfth Amendment dated June 30, 2010 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK. |
| | |
| 10.11 | Thirteenth Amendment dated June 30, 2011 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK. |
| | |
| 10.12 | Fourteenth Amendment dated June 30, 2012 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK. |
| | |
| 10.13 | Fifteenth Amendment dated June 30, 2013 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK. |
| | |
| 10.14 | Sixteenth Amendment dated June 30, 2014 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK. |
| | |
| 10.15 | Seventeenth Amendment dated September 19, 2014 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK. |
| |
| 10.16 | Eighteenth Amendment dated June 30, 2015 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK. |
| |
| 10.17 | Nineteenth Amendment dated July 7, 2015 to Restated Loan Agreement between the Company and Arvest Bank, Tulsa, OK. |
| |
| 10.18 | Loan Agreement dated December 1, 2015 by and between the Company and MidFirst Bank, Tulsa, OK. |
| |
| 10.19 | Purchase and Sale Agreement dated October 1, 2015 by and between the Company and Hilti, Inc., Tulsa, OK. |
| |
| 10.20 | Lease Agreement dated December 1, 2015 by and between the Company and Hilti, Inc., Tulsa, OK. |
| |
| 10.21 | First Amendment Loan Agreement dated March 10, 2016 by and between the Company and MidFirst Bank, Tulsa, OK. |
| |
| *23.1 | |
*Filed Herewith
SIGNATURES
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, 2015 By26, 2016 /s/By:/s/ Marilyn Pinney
Marilyn Pinney
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 26, 2016 | | /s/ Randall W. White | |
| | | Randall W. White | |
| | | Chairman of the Board | |
| | | President, Treasurer and | |
| | | Director | |
| | | | |
| | | | |
| May 26, 2016 | | /s/ John A. Clerico | |
| | | John A. Clerico, Director | |
| | | | |
| | | | |
| May 26, 2016 | | /s/ Ronald McDaniel | |
| | | Ronald McDaniel, Director | |
| | | | |
| | | | |
| May 26, 2016 | | /s/ Kara Gae Neal | |
| | | Kara Gae Neal, Director | |
| | | | |
| | | | |
| May 26, 2016 | | /s/ Betsy Rickert | |
| | | Betsy Rickert, Director | |
| | | | |
| | | | |
| May 26, 2016 | | /s/ Marilyn Pinney | |
| | | Marilyn Pinney | |
| | | Controller and Corporate Secretary | |
| | | (Principal Financial and Accounting Officer) | |
Date: May 28, 2015 /s/ Randall W. White 20
Randall W. White
Chairman of the Board
President, Treasurer and
Director
May 28, 2015 /s/ John A. Clerico
John A. Clerico, Director
May 28, 2015 /s/ Ronald McDaniel
Ronald McDaniel, Director
May 28, 2015 /s/ Kara Gae Neal
Kara Gae Neal, Director
May 28, 2015 /s/ Betsy Rickert
Betsy Rickert, Director
May 28, 2015 /s/ Marilyn Pinney
Marilyn Pinney
Controller and Corporate Secretary
(Principal Financial and Accounting Officer)
REPORTREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Educational Development Corporation
We have audited the accompanying balance sheets of Educational Development Corporation as of February 29, 2016 and February 28, 2015, and 2014, and the related statements of earnings, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company'sCompany’s 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 ofFebruary 29, 2016 and February 28, 2015, and 2014, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ HOGANTAYLOR LLP
Tulsa, Oklahoma
May 28, 201526, 2016
EDUCATIONAL DEVELOPMENT CORPORATION| EDUCATIONAL DEVELOPMENT CORPORATION | | | | | | |
| | | | | | |
| AS OF FEBRUARY 29(28), | | | | | | |
| | | | | | | |
| ASSETS | | 2016 | | | 2015 | |
| | | | | | | |
| CURRENT ASSETS: | | | | | | |
| Cash and cash equivalents | | $ | 1,183,700 | | | $ | 383,900 | |
Accounts receivable, less allowance for doubtful accounts and sales returns $501,900 (2016) and $334,500 (2015) | | | 2,513,300 | | | | 3,076,700 | |
| Inventories—Net | | | 17,479,500 | | | | 11,181,000 | |
| Prepaid expenses and other assets | | | 1,028,100 | | | | 374,200 | |
| Deferred income taxes | | | 298,200 | | | | 249,800 | |
| Total current assets | | | 22,502,800 | | | | 15,265,600 | |
| | | | | | | | | |
| INVENTORIES—Net | | | 169,000 | | | | 350,800 | |
| | | | | | | | | |
| PROPERTY, PLANT AND EQUIPMENT—Net | | | 26,710,300 | | | | 2,073,200 | |
| | | | | | | | | |
| OTHER ASSETS | | | 262,000 | | | | 243,400 | |
| DEFERRED INCOME TAXES | | | 50,900 | | | | 80,200 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 49,695,000 | | | $ | 18,013,200 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Accounts payable | | $ | 7,801,300 | | | $ | 2,237,700 | |
| Line of credit | | | 3,331,800 | | | | 1,400,000 | |
| Deferred revenues | | | 2,925,200 | | | | - | |
| Current maturities of long-term debt | | | 615,400 | | | | - | |
| Accrued salaries and commissions | | | 1,202,500 | | | | 618,100 | |
| Income taxes payable | | | 803,100 | | | | 63,600 | |
| Dividends payable | | | 366,300 | | | | 322,000 | |
| Other current liabilities | | | 1,732,500 | | | | 1,043,500 | |
| Total current liabilities | | | 18,778,100 | | | | 5,684,900 | |
| | | | | | | | | |
| LONG-TERM DEBT—Net of current maturities | | | 17,687,400 | | | | - | |
| Total liabilities | | | 36,465,500 | | | | 5,684,900 | |
| | | | | | | | | |
| COMMITMENTS (Note 7) | | | | | | | | |
| | | | | | | | | |
| SHAREHOLDERS’ EQUITY: | | | | | | | | |
Common stock, $0.20 par value; Authorized 8,000,000 shares; Issued 6,041,040 shares; Outstanding 4,064,610 (2016) and 4,024,539 (2015) shares | | | 1,208,200 | | | | 1,208,200 | |
| Capital in excess of par value | | | 8,548,000 | | | | 8,548,000 | |
| Retained earnings | | | 14,557,500 | | | | 13,857,200 | |
| | | | 24,313,700 | | | | 23,613,400 | |
| Less treasury stock, at cost | | | (11,084,200 | ) | | | (11,285,100 | ) |
| Total shareholders’ equity | | | 13,229,500 | | | | 12,328,300 | |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 49,695,000 | | | $ | 18,013,200 | |
| ASSETS | | 2015 | | | 2014 | |
| | | | | | | |
| CURRENT ASSETS: | | | | | | |
| Cash and cash equivalents | | $ | 383,900 | | | $ | 680,000 | |
Accounts receivable, less allowance for doubtful accounts and sales returns $334,500 (2015) and $333,900 (2014) | | | 3,076,700 | | | | 3,000,800 | |
| Inventories—Net | | | 11,181,000 | | | | 9,869,400 | |
| Prepaid expenses and other assets | | | 374,200 | | | | 262,200 | |
| Deferred income taxes | | | 249,800 | | | | 259,300 | |
| Total current assets | | | 15,265,600 | | | | 14,071,700 | |
| | | | | | | | | |
| INVENTORIES—Net | | | 350,800 | | | | 470,200 | |
| | | | | | | | | |
| PROPERTY, PLANT AND EQUIPMENT—Net | | | 2,073,200 | | | | 1,877,600 | |
| | | | | | | | | |
| OTHER ASSETS | | | 243,400 | | | | 267,400 | |
| DEFERRED INCOME TAXES | | | 80,200 | | | | 71,400 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 18,013,200 | | | $ | 16,758,300 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Accounts payable | | $ | 2,237,700 | | | $ | 2,543,700 | |
| Line of credit | | | 1,400,000 | | | | - | |
| Accrued salaries and commissions | | | 618,100 | | | | 514,900 | |
| Income taxes payable | | | 63,600 | | | | 140,900 | |
| Dividends payable | | | 322,000 | | | | 318,200 | |
| Other current liabilities | | | 1,043,500 | | | | 658,200 | |
| Total current liabilities | | | 5,684,900 | | | | 4,175,900 | |
| | | | | | | | | |
| COMMITMENTS (Note 7) | | | | | | | | |
| | | | | | | | | |
| SHAREHOLDERS’ EQUITY: | | | | | | | | |
Common stock, $0.20 par value; Authorized 8,000,000 shares; Issued 6,041,040 shares; Outstanding 4,024,539 (2015) and | | | 1,208,200 | | | | 1,208,200 | |
| Capital in excess of par value | | | 8,548,000 | | | | 8,548,000 | |
| Retained earnings | | | 13,857,200 | | | | 14,280,500 | |
| | | | 23,613,400 | | | | 24,036,700 | |
| Less treasury stock, at cost | | | (11,285,100 | ) | | | (11,454,300 | ) |
| Total shareholders' equity | | | 12,328,300 | | | | 12,582,400 | |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 18,013,200 | | | $ | 16,758,300 | |
See notes to financial statements.
EDUCATIONAL DEVELOPMENT CORPORATION| EDUCATIONAL DEVELOPMENT CORPORATION | |
| | | | | | |
| FOR THE YEARS ENDED FEBRUARY 29(28), | | | | | | |
| | | | | | | |
| | | 2016 | | | 2015 | |
| | | | | | | |
| GROSS SALES | | $ | 80,319,400 | | | $ | 48,345,400 | |
| Less discounts and allowances | | | (22,061,500 | ) | | | (17,273,100 | ) |
| Transportation revenue | | | 5,360,400 | | | | 1,476,000 | |
| NET REVENUES | | | 63,618,300 | | | | 32,548,300 | |
| COST OF SALES | | | 20,494,200 | | | | 12,763,900 | |
| Gross margin | | | 43,124,100 | | | | 19,784,400 | |
| | | | | | | | | |
| OPERATING EXPENSES: | | | | | | | | |
| Operating and selling | | | 19,419,400 | | | | 9,515,400 | |
| Sales commissions | | | 18,062,800 | | | | 6,842,700 | |
| General and administrative | | | 2,328,500 | | | | 2,039,900 | |
| Total operating expenses | | | 39,810,700 | | | | 18,398,000 | |
| | | | | | | | | |
| INTEREST EXPENSE | | | 244,900 | | | | 54,000 | |
| | | | | | | | | |
| OTHER INCOME | | | (477,400 | ) | | | (70,100 | ) |
| | | | | | | | | |
| EARNINGS BEFORE INCOME TAXES | | | 3,545,900 | | | | 1,402,500 | |
| | | | | | | | | |
| INCOME TAXES | | | 1,426,600 | | | | 543,300 | |
| NET EARNINGS | | $ | 2,119,300 | | | $ | 859,200 | |
| | | | | | | | | |
| BASIC AND DILUTED EARNINGS | | | | | | | | |
| PER SHARE: | | | | | | | | |
| Basic | | $ | 0.52 | | | $ | 0.21 | |
| Diluted | | $ | 0.52 | | | $ | 0.21 | |
| | | | | | | | | |
| WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: | | | | | | | | |
| Basic | | | 4,049,154 | | | | 4,003,702 | |
| Diluted | | | 4,051,678 | | | | 4,003,702 | |
| Dividends per share | | $ | 0.35 | | | $ | 0.32 | |
FOR THE YEARS ENDED FEBRUARY 28,
| | | 2015 | | | 2014 | |
| | | | | | | |
| GROSS SALES | | $ | 48,345,400 | | | $ | 40,558,000 | |
| Less discounts and allowances | | | (17,273,100 | ) | | | (15,414,200 | ) |
| Transportation revenue | | | 1,476,000 | | | | 953,200 | |
| NET REVENUES | | | 32,548,300 | | | | 26,097,000 | |
| COST OF SALES | | | 12,763,900 | | | | 10,523,500 | |
| Gross margin | | | 19,784,400 | | | | 15,573,500 | |
| | | | | | | | | |
| OPERATING EXPENSES: | | | | | | | | |
| Operating and selling | | | 9,515,400 | | | | 7,258,500 | |
| Sales commissions | | | 6,842,700 | | | | 4,939,800 | |
| General and administrative | | | 2,039,900 | | | | 2,123,500 | |
| Total operating expenses | | | 18,398,000 | | | | 14,321,800 | |
| | | | | | | | | |
| OTHER INCOME (EXPENSE) | | | 16,100 | | | | (378,200 | ) |
| | | | | | | | | |
| EARNINGS BEFORE INCOME TAXES | | | 1,402,500 | | | | 873,500 | |
| | | | | | | | | |
| INCOME TAXES | | | 543,300 | | | | 515,900 | |
| NET EARNINGS | | $ | 859,200 | | | $ | 357,600 | |
| | | | | | | | | |
BASIC AND DILUTED EARNINGS PER SHARE: | | | | | | | | |
| Basic and diluted | | $ | 0.21 | | | $ | 0.09 | |
| | | | | | | | | |
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: | | | | | | | | |
| Basic and diluted | | | 4,003,702 | | | | 3,968,214 | |
| Dividends per share | | $ | 0.32 | | | $ | 0.32 | |
See notes to financial statements.
| 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 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| BALANCE—March 1, 2014 | | | 6,041,040 | | | $ | 1,208,200 | | | $ | 8,548,000 | | | $ | 14,280,500 | | | | 2,063,097 | | | $ | (11,454,300 | ) | | $ | 12,582,400 | |
| Purchases of treasury stock | | | - | | | | - | | | | - | | | | - | | | | 1,339 | | | | (5,200 | ) | | | (5,200 | ) |
| Sales of treasury stock | | | - | | | | - | | | | - | | | | - | | | | (47,935 | ) | | | 174,400 | | | | 174,400 | |
| Dividends declared ($0.08/share) | | | - | | | | - | | | | - | | | | (322,000 | ) | | | - | | | | - | | | | (322,000 | ) |
| Dividends paid ($0.24/share) | | | - | | | | - | | | | - | | | | (960,500 | ) | | | - | | | | - | | | | (960,500 | ) |
| Net earnings | | | - | | | | - | | | | - | | | | 859,200 | | | | - | | | | - | | | | 859,200 | |
| BALANCE—February 28, 2015 | | | 6,041,040 | | | $ | 1,208,200 | | | $ | 8,548,000 | | | $ | 13,857,200 | | | | 2,016,501 | | | $ | (11,285,100 | ) | | $ | 12,328,300 | |
| Purchases of treasury stock | | | - | | | | - | | | | - | | | | - | | | | 163 | | | | (1,600 | ) | | | (1,600 | ) |
| Sales of treasury stock | | | - | | | | - | | | | - | | | | - | | | | (40,234 | ) | | | 202,500 | | | | 202,500 | |
| Dividends declared ($0.09/share) | | | - | | | | - | | | | - | | | | (366,300 | ) | | | - | | | | - | | | | (366,300 | ) |
| Dividends paid ($0.26/share) | | | - | | | | - | | | | - | | | | (1,052,700 | ) | | | - | | | | - | | | | (1,052,700 | ) |
| Net earnings | | | - | | | | - | | | | - | | | | 2,119,300 | | | | - | | | | - | | | | 2,119,300 | |
| BALANCE—February 29, 2016 | | | 6,041,040 | | | $ | 1,208,200 | | | $ | 8,548,000 | | | $ | 14,557,500 | | | | 1,976,430 | | | $ | (11,084,200 | ) | | $ | 13,229,500 | |
EDUCATIONAL DEVELOPMENT CORPORATIONSTATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED FEBRUARY 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 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| BALANCE—March 1, 2013 | | | 6,041,040 | | | $ | 1,208,200 | | | $ | 8,548,000 | | | $ | 15,194,700 | | | | 2,080,228 | | | $ | (11,499,100 | ) | | $ | 13,451,800 | |
| Purchases of treasury stock | | | - | | | | - | | | | - | | | | - | | | | 43,349 | | | | (129,200 | ) | | | (129,200 | ) |
| Sales of treasury stock | | | - | | | | - | | | | - | | | | - | | | | (60,480 | ) | | | 174,000 | | | | 174,000 | |
| Dividends declared ($0.08/share) | | | - | | | | - | | | | - | | | | (318,200 | ) | | | - | | | | - | | | | (318,200 | ) |
| Dividends paid ($0.24/share) | | | - | | | | - | | | | - | | | | (953,600 | ) | | | - | | | | - | | | | (953,600 | ) |
| Net earnings | | | - | | | | - | | | | - | | | | 357,600 | | | | - | | | | - | | | | 357,600 | |
| BALANCE—February 28, 2014 | | | 6,041,040 | | | $ | 1,208,200 | | | $ | 8,548,000 | | | $ | 14,280,500 | | | | 2,063,097 | | | $ | (11,454,300 | ) | | $ | 12,582,400 | |
| Purchases of treasury stock | | | - | | | | - | | | | - | | | | - | | | | 1,339 | | | | (5,200 | ) | | | (5,200 | ) |
| Sales of treasury stock | | | - | | | | - | | | | - | | | | - | | | | (47,935 | ) | | | 174,400 | | | | 174,400 | |
| Dividends declared ($0.08/share) | | | - | | | | - | | | | - | | | | (322,000 | ) | | | - | | | | - | | | | (322,000 | ) |
| Dividends paid ($0.24/share) | | | - | | | | - | | | | - | | | | (960,500 | ) | | | - | | | | - | | | | (960,500 | ) |
| Net earnings | | | - | | | | - | | | | - | | | | 859,200 | | | | - | | | | - | | | | 859,200 | |
| BALANCE—February 28, 2015 | | | 6,041,040 | | | $ | 1,208,200 | | | $ | 8,548,000 | | | $ | 13,857,200 | | | | 2,016,501 | | | $ | (11,285,100 | ) | | $ | 12,328,300 | |
See notes to financial statements.
| EDUCATIONAL DEVELOPMENT CORPORATION | | | | | | |
| | | | | | |
| FOR THE YEARS ENDED FEBRUARY 29(28), | | | | | | |
| | | | | | | |
| | | 2016 | | | 2015 | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net earnings | | $ | 2,119,300 | | | $ | 859,200 | |
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | | | | | | | | |
| Depreciation | | | 274,500 | | | | 129,400 | |
| Deferred income taxes | | | (19,100 | ) | | | 700 | |
| Provision for doubtful accounts and sales returns | | | 1,239,600 | | | | 1,281,000 | |
| Provision for inventory valuation allowance | | | (68,100 | ) | | | - | |
| Changes in assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (676,200 | ) | | | (1,356,900 | ) |
| Inventories, net | | | (6,048,600 | ) | | | (1,192,200 | ) |
| Prepaid expenses and other assets | | | (672,500 | ) | | | (88,000 | ) |
Accounts payable, accrued salaries and commissions, and other current liabilities | | | 6,837,000 | | | | 182,500 | |
| Deferred revenue | | | 2,925,200 | | | | - | |
| Income tax payable | | | 739,500 | | | | (77,300 | ) |
| Total adjustments | | | 4,531,300 | | | | (1,120,800 | ) |
| Net cash provided by (used in) operating activities | | | 6,650,600 | | | | (261,600 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Purchases of property, plant and equipment | | | (24,911,600 | ) | | | (325,000 | ) |
| Net cash used in investing activities | | | (24,911,600 | ) | | | (325,000 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Payments—long-term debt | | | (97,200 | ) | | | - | |
| Proceeds from long-term debt | | | 18,400,000 | | | | - | |
| Cash received from sale of treasury stock | | | 202,500 | | | | 174,400 | |
| Cash paid to acquire treasury stock | | | (1,600 | ) | | | (5,200 | ) |
| Borrowings under line of credit | | | 4,881,800 | | | | 4,550,000 | |
| Payments under line of credit | | | (2,950,000 | ) | | | (3,150,000 | ) |
| Dividends paid | | | (1,374,700 | ) | | | (1,278,700 | ) |
| Net cash provided by financing activities | | | 19,060,800 | | | | 290,500 | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | 799,800 | | | | (296,100 | ) |
| CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR | | | 383,900 | | | | 680,000 | |
| CASH AND CASH EQUIVALENTS—END OF YEAR | | $ | 1,183,700 | | | $ | 383,900 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
| Cash paid for interest | | $ | 179,800 | | | $ | 54,000 | |
| Cash paid for income taxes | | $ | 706,400 | | | $ | 619,900 | |
EDUCATIONAL DEVELOPMENT CORPORATIONFOR THE YEARS ENDED FEBRUARY 28,
| | | 2015 | | | 2014 | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net earnings | | $ | 859,200 | | | $ | 357,600 | |
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | | | | | | | | |
| Impairment of investment in nonmarketable equity securities | | | - | | | | 430,300 | |
| Depreciation | | | 129,400 | | | | 115,400 | |
| Deferred income taxes | | | 700 | | | | 127,600 | |
| Provision for doubtful accounts and sales returns | | | 1,281,000 | | | | 978,000 | |
| Changes in assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (1,356,900 | ) | | | (559,700 | ) |
| Inventories, net | | | (1,192,200 | ) | | | (55,900 | ) |
| Prepaid expenses and other assets | | | (88,000 | ) | | | 165,900 | |
Accounts payable, accrued salaries and commissions, and other current liabilities | | | 182,500 | | | | 835,700 | |
| Income tax payable/receivable | | | (77,300 | ) | | | 370,200 | |
| Total adjustments | | | (1,120,800 | ) | | | 2,407,500 | |
| Net cash provided by (used in) operating activities | | | (261,600 | ) | | | 2,765,100 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Purchases of property, plant and equipment | | | (325,000 | ) | | | (77,500 | ) |
| Net cash used in investing activities | | | (325,000 | ) | | | (77,500 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Cash received from sale of treasury stock | | | 174,400 | | | | 174,000 | |
| Cash paid to acquire treasury stock | | | (5,200 | ) | | | (129,200 | ) |
| Borrowings under revolving credit agreement | | | 4,550,000 | | | | 1,250,000 | |
| Payments under revolving credit agreement | | | (3,150,000 | ) | | | (2,500,000 | ) |
| Dividends paid | | | (1,278,700 | ) | | | (1,271,500 | ) |
| Net cash provided by (used in) financing activities | | | 290,500 | | | | (2,476,700 | ) |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | (296,100 | ) | | | 210,900 | |
| CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR | | | 680,000 | | | | 469,100 | |
| CASH AND CASH EQUIVALENTS—END OF YEAR | | $ | 383,900 | | | $ | 680,000 | |
| | | | | | | | | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | |
| Cash paid for interest | | $ | 54,000 | | | $ | 34,500 | |
| Cash paid for income taxes | | $ | 619,900 | | | $ | 11,000 | |
See notes to financial statements.
EDUCATIONALEDUCATIONAL DEVELOPMENT CORPORATIONNOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 2016 AND FEBRUARY 28, 2015 AND 2014
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business—Educational Development Corporation (“we”, “our”, “us”, or “the Company”) distributes books and publications through our EDC Publishing and Usborne Books & More (“UBAM”) 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, Usborne, our primary supplier. We are also in the direct publishing market through our ownership of Kane Miller Book Publishers.
Estimates—Our 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 Concentration—A significant portion of our inventory purchases are concentrated with Usborne. Purchases from them were approximately $12.2$20.0 million and $9.0$12.2 million for the years ended February 29, 2016 and February 28, 2015, and 2014, respectively. Total inventory purchases for those same periods were approximately $29.8 million and $15.3 million, and $11.4 million, respectively.
Cash and Cash Equivalents—Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances. Insurance coverage on our non-interest bearing cash balances was limited to $250,000 and our non-interest bearing cash balances exceed federally insured limits. The majority of payments due from banks for third party credit card transactions process within two business days. These amounts due are classified as cash and cash equivalents. Cash and cash equivalents includesalso include demand and time deposits, money market funds and other marketable securities with maturities of three months or less when acquired.
Accounts Receivable— Accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within thirty days from the invoice date. Extended, seasonal dating is frequently available for orders of minimum quantities or amounts. 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 management’s best estimate of the amounts that will not be collected.
Management periodically reviews accounts receivable balances and, based on an assessment of historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends, estimates the portion 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. Recoveries of trade receivables previously written off are recorded as income when received.
Inventories—Inventories are stated at the lower of cost or market. Cost is determined using the FIFOfirst-in-first-out 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 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 management’s analysis of inventory on hand at February 29, 2016 and February 28, 2015 and 2014.2015.
Property, Plant and Equipment—Property, plant and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives, as follows:
| Building | 30 years |
| Building improvements | 10 – 15 years |
Machinery, and equipment | 3 - 10– 15 years |
| Furniture and fixtures | 3 years |
Capitalized projects that are not placed in service are recorded as in progress and are not depreciated until the related assets are placed in service.
Income Taxes—We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and the tax basis of assets and liabilities using the current tax laws and rates. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts that are “more likely than not” to be realized.
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.ordered. These sales accounted for 65%83% of net revenues in fiscal year 20152016 and 58%65% in fiscal year 2014.2015. Sales which have been paid but not shipped are classified as deferred revenue on the balance sheet.
Estimated allowancesAllowances for estimated 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 $100,000 as of February 29, 2016 and February 28, 2015 and 2014.2015.
Transportation revenue represents the amount billed to the customer for shipping the product and is recorded when the product is shipped.
Advertising Costs—Advertising costs are expensed as incurred. Advertising expenses, included in selling and operating expenses in the statements of earnings, were $367,300$531,500 and $348,600$367,300 for the years ended February 29, 2016 and February 28, 2015, and 2014, respectively.
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 $3,719,300$8,655,600 and $2,699,800$3,719,300 for the years ended February 29, 2016 and February 28, 2015, and 2014, respectively.
Interest ExpenseTable—Interest related to our outstanding debt is recognized as incurred. Interest expense, classified separately in the statements of Contentsearnings, were $244,900 and $54,000 for the years ended February 29, 2016 and February 28, 2015, respectively.
Earnings per Share—Basic earnings per share (“EPS”) is computed by dividing net incomeearnings 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.
The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share (“EPS”) is shown below.
| | | Year Ended February 28, | | | Year Ended February 29(28), | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Earnings Per Share: | | | | | | | | | | | | |
Net earnings applicable to common shareholders | | $ | 859,200 | | | $ | 357,600 | | | $ | 2,119,300 | | | $ | 859,200 | |
| | | | | | | | | | | | | | | | | |
| Shares: | | | | | | | | | | | | | | | | |
Weighted average shares outstanding–basic | | | 4,003,702 | | | | 3,968,214 | | | | 4,049,154 | | | | 4,003,702 | |
| Assumed exercise of options | | | - | | | | - | | | | 2,524 | | | | - | |
| | | | | | | | | | | | | | | | | |
Weighted average shares outstanding–diluted | | | 4,003,702 | | | | 3,968,214 | | | | 4,051,678 | | | | 4,003,702 | |
| | | | | | | | | | | | | | | | | |
| Basic and Diluted Earnings Per Share | | $ | 0.21 | | | $ | 0.09 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Diluted Earnings Per Share | | | | | | | | | |
| Basic | | | $ | 0.52 | | | $ | 0.21 | |
| Diluted | | | $ | 0.52 | | | $ | 0.21 | |
| Stock options not considered above because they were antidilutive | | | 10,000 | | | | 11,000 | | | | - | | | | 10,000 | |
Long-Lived Asset Impairment— We review the value of long-livedlong‑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, 2016 and February 28, 2015 and 2014.2015.
Stock-Based Compensation—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 requisite service period, net of estimated forfeitures.
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 recently issued accounting standards apply to us.
In April 2014, FASB issued Accounting Standards Update (ASU) No. 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. The change is effective for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2014, which means the first quarter of our fiscal year 2016, with early adoption permitted. The ASU applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. This new ASU will not affect our financial position, results of operations or cash flows.
In May 2014, FASB issued ASU No. 2014-09, and amended with ASU No. 2015-14 “Revenue from Contracts with Customers,” which provides a single revenue recognition model which is intended to improve comparability over a range of industries, companies and geographical boundaries and will also result in enhanced disclosures. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016,2017, which means the first quarter of our fiscal year 2018.2019. We are currently reviewing the ASU and assessing the potential impact on our financial statements.
2. INVENTORIESIn August 2015, FASB issued ASU No. 2015-15 “Interest—Imputation of Interest,” which modifies the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. These changes allow an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The changes are effective for financial statements issued for annual periods beginning after December 15, 2015, and interim periods within those annual periods, which means the first quarter of our fiscal year 2017. We are currently reviewing the ASU and assessing the potential impact on our financial statements.
In November 2015, FASB issued ASU No. 2015-17, which is intended to improve how deferred taxes are classified on organizations’ balance sheets by eliminating the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will now be required to classify all deferred tax assets and liabilities as noncurrent. The changes are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, which means the first quarter of our fiscal year 2018. We anticipate this ASU having minimal impact on our financial statements.
In February 2016, FASB issued ASU No. 2016-02, “Leases,” which is intended to establish a comprehensive new lease accounting model. The new standard clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset. The new standard is effective for interim and annual periods beginning after December 15, 2018, which means the first quarter of our fiscal year 2020. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. We are currently reviewing the ASU and evaluating the potential impact on our financial statements.
In March 2016, FASB issued ASU No. 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for interim and annual periods beginning after December 15, 2016, which means the first quarter of our fiscal year 2018.We are currently reviewing the ASU and evaluating the potential impact on our financial statements.
2.INVENTORIES
Inventories consist of the following:
| | | February 28, | | | February 29(28), | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Current: | | | | | | | | | | | | |
| Book inventory | | $ | 11,206,000 | | | $ | 9,894,400 | | | $ | 17,504,500 | | | $ | 11,206,000 | |
| Inventory valuation allowance | | | (25,000 | ) | | | (25,000 | ) | | | (25,000 | ) | | | (25,000 | ) |
| Inventories net–current | | $ | 11,181,000 | | | $ | 9,869,400 | | | $ | 17,479,500 | | | $ | 11,181,000 | |
| Noncurrent: | | | | | | | | |
| Book inventory | | $ | 718,900 | | | $ | 824,000 | |
| Inventory valuation allowance | | | (368,100 | ) | | | (353,800 | ) |
| Inventories net��noncurrent | | $ | 350,800 | | | $ | 470,200 | |
| Noncurrent: | | | | | | | | |
| Book inventory | | $ | 469,000 | | | $ | 718,900 | |
| Inventory valuation allowance | | | (300,000 | ) | | | (368,100 | ) |
| Inventories net–noncurrent | | $ | 169,000 | | | $ | 350,800 | |
3. PROPERTY, PLANT AND EQUIPMENT
| 3. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consist of the following:
| | | February 29(28), | |
| | | 2016 | | | 2015 | |
| Land | | $ | 4,107,200 | | | $ | 250,000 | |
| Building | | | 20,321,800 | | | | 2,124,700 | |
| Building improvements | | | 2,735,800 | | | | 781,600 | |
| Machinery and equipment | | | 2,190,300 | | | | 1,706,400 | |
| Furniture and fixtures | | | 85,700 | | | | 75,700 | |
| System installations in progress | | | 610,000 | | | | 200,800 | |
| | | | 30,050,800 | | | | 5,139,200 | |
| Less accumulated depreciation | | | (3,340,500 | ) | | | (3,066,000 | ) |
| | | $ | 26,710,300 | | | $ | 2,073,200 | |
| | | February 28, | |
| | | 2015 | | | 2014 | |
| Land | | $ | 250,000 | | | $ | 250,000 | |
| Building | | | 2,124,700 | | | | 2,124,700 | |
| Machinery and equipment | | | 2,488,000 | | | | 2,363,800 | |
| Furniture and fixtures | | | 75,700 | | | | 75,700 | |
| System installations in progress | | | 200,800 | | | | - | |
| | | | 5,139,200 | | | | 4,814,200 | |
| Less accumulated depreciation | | | (3,066,000 | ) | | | (2,936,600 | ) |
| | | $ | 2,073,200 | | | $ | 1,877,600 | |
On December 1, 2015, we completed the purchase of a new facilityto provide larger office and warehouse capacity which will accommodate the future growth of our operations.The land, building and equipment associated with the facility were purchased for $23,213,000, which includes $327,000 of transaction costs. Refer to Note 7 and Note 8 for additional information.
4.OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
| | | February 29(28), | |
| | | 2016 | | | 2015 | |
| Accrued royalties | | $ | 578,200 | | | $ | 368,200 | |
| Accrued UBAM trip incentives | | | 705,200 | | | | 323,700 | |
| Interest payable | | | 65,000 | | | | - | |
| Sales tax payable | | | 145,700 | | | | 181,000 | |
| Other | | | 238,400 | | | | 170,600 | |
| | | $ | 1,732,500 | | | $ | 1,043,500 | |
| | | February 28, | |
| | | 2015 | | | 2014 | |
| Accrued royalties | | $ | 368,200 | | | $ | 374,000 | |
| Accrued UBAM trip incentives | | | 323,700 | | | | 24,100 | |
| Sales tax payable | | | 181,000 | | | | 116,800 | |
| Other | | | 170,600 | | | | 143,300 | |
| | | $ | 1,043,500 | | | $ | 658,200 | |
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising our net deferred tax assets and liabilities as of February 2829(28) are as follows:
| | | 2016 | | | 2015 | |
| Current: | | | | | | |
| Deferred tax assets: | | | | | | |
| Allowance for doubtful accounts | | $ | 40,000 | | | $ | 41,100 | |
| Inventory overhead capitalization | | | 131,000 | | | | 86,900 | |
| Inventory valuation allowance | | | 9,500 | | | | 9,500 | |
| Allowance for sales returns | | | 38,000 | | | | 38,000 | |
| Accruals | | | 79,700 | | | | 74,300 | |
| | | | | | | | | |
| Deferred tax assets-current | | | 298,200 | | | | 249,800 | |
| | | | | | | | | |
| Noncurrent: | | | | | | | | |
| Deferred tax assets: | | | | | | | | |
| Inventory valuation allowance | | $ | 114,000 | | | $ | 143,300 | |
| Capital loss carryforward | | | 163,600 | | | | 163,600 | |
| Subtotal deferred tax assets | | | 277,600 | | | | 306,900 | |
| Less valuation allowance | | | (163,600 | ) | | | (163,600 | ) |
| Total net deferred tax assets | | | 114,000 | | | | 143,300 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Property, plant and equipment | | | (63,100 | ) | | | (63,100 | ) |
| | | | | | | | | |
| Deferred tax liabilities | | | (63,100 | ) | | | (63,100 | ) |
| | | | | | | | | |
| Net deferred tax asset-noncurrent | | $ | 50,900 | | | $ | 80,200 | |
| | | 2015 | | | 2014 | |
| Current: | | | | | | |
| Deferred tax assets: | | | | | | |
| Allowance for doubtful accounts | | $ | 41,100 | | | $ | 58,500 | |
| Inventory overhead capitalization | | | 86,900 | | | | 79,000 | |
| Inventory valuation allowance | | | 9,500 | | | | 9,500 | |
| Allowance for sales returns | | | 38,000 | | | | 38,000 | |
| Accruals | | | 74,300 | | | | 74,300 | |
| | | | | | | | | |
| Deferred tax assets-current | | | 249,800 | | | | 259,300 | |
| | | | | | | | | |
| Noncurrent: | | | | | | | | |
| Deferred tax assets: | | | | | | | | |
| Inventory valuation allowance | | $ | 143,300 | | | $ | 134,400 | |
| Capital loss carryforward | | | 163,600 | | | | 163,600 | |
| Subtotal deferred tax assets | | | 306,900 | | | | 298,000 | |
| Less valuation allowance | | | (163,600 | ) | | | (163,600 | ) |
| Total net deferred tax assets | | | 143,300 | | | | 134,400 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Property and equipment | | | (63,100 | ) | | | (63,000 | ) |
| | | | | | | | | |
| Deferred tax liabilities | | | (63,100 | ) | | | (63,000 | ) |
| | | | | | | | | |
| Net deferred tax asset-noncurrent | | $ | 80,200 | | | $ | 71,400 | |
Management has assessed the evidence to estimate whether sufficient future capital gains will be generated to utilize the existing capital loss carryforward. As no current expectation of capital gains exists, Management has objectively determined that a valuation allowance is necessary to reduce the carrying value of deferred tax assets as it is “more likely than not” that such assets are unrealizable.
The amount of the deferred tax asset considered realizable, however, could be adjusted if future capital gains are generated during the carryforward period.period which ends February 28, 2019. Management has determined that no valuation allowance is necessary to reduce the carrying value of other deferred tax assets as it is “more likely than not” that such assets are realizable.
the deferred tax liability related to property, plant and equipment could be adjusted if a scheduled future cost segregation analysis, expected to be completed by the end of the second fiscal quarter 2017, results in changes which affect this liability.
The components of income tax expense are as follows:
| | | February 28, | | | February 29(28), | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Current: | | | | | | | | | | | | |
| Federal | | $ | 439,200 | | | $ | 299,000 | | | $ | 1,210,900 | | | $ | 439,200 | |
| State | | | 103,400 | | | | 89,300 | | | | 234,800 | | | | 103,400 | |
| | | | 542,600 | | | | 388,300 | | | | 1,445,700 | | | | 542,600 | |
| Deferred: | | | | | | | | | | | | | | | | |
| Federal | | | 600 | | | | 133,200 | | | | (16,100 | ) | | | 600 | |
| State | | | 100 | | | | (5,600 | ) | | | (3,000 | ) | | | 100 | |
| | | | 700 | | | | 127,600 | | | | (19,100 | ) | | | 700 | |
| Total income tax expense | | $ | 543,300 | | | $ | 515,900 | | | $ | 1,426,600 | | | $ | 543,300 | |
The following reconciles our expected income tax expense utilizing statutory tax rates to the actual tax expense:
| | | February 28, | | | February 29(28), | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Tax expense at federal statutory rate | | $ | 476,800 | | | $ | 297,000 | | | $ | 1,205,600 | | | $ | 476,800 | |
| Federal income tax audit expense for 2012 | | | | 67,900 | | | | - | |
| State income tax–net of federal tax benefit | | | 73,300 | | | | 70,100 | | | | 158,200 | | | | 73,300 | |
| Change in capital loss valuation allowance | | | - | | | | 163,600 | | |
| Other | | | (6,800 | ) | | | (14,800 | ) | | | (5,100 | ) | | | (6,800 | ) |
| Total income tax expense | | $ | 543,300 | | | $ | 515,900 | | | $ | 1,426,600 | | | $ | 543,300 | |
We file our tax returns in the U.S. and certain state jurisdictions. We are no longer subject to income tax examinations by tax authorities for fiscal years before 2012. We are currently the subject of an income tax examination for fiscal year 2012 by the IRS.2013.
Based upon a review of our income tax filing positions, we believe that our positions would be sustained upon an audit and do not anticipate any adjustments that would result in a material change to our financial position. Therefore, no reserves for uncertain income tax positions have been recorded. We classify interest and penalties associated with income taxes as a component of income tax expense on the statement of earnings.
We have a profit sharing plan that incorporates the provisions of Section 401(k) of the Internal Revenue Code. The 401(k) plan covers substantially all employees meeting specific age and length of service requirements. Matching contributions are discretionary and amounted to $44,900$51,400 and $57,100$44,900 in the fiscal years ended February 29, 2016 and February 28, 2015, and 2014, respectively. The 401(k) plan includes an option for employees to invest in our stock, which is purchased from our treasury stock shares. Shares purchased for the 401(k) plan from Treasury stock amounted to 47,93540,121 net shares and 60,48047,935 net shares in the fiscal years ended February 29, 2016 and February 28, 2015, and 2014, respectively.
7. COMMITMENTS
In connection with the purchase of the facility, disclosed in Note 3, we entered into a 15-year lease with the seller, a non-related third party, who will lease 181,300 square feet, or 45.3% of the facility. The lease is being accounted for as an operating lease.
The cost of the leased space upon acquisition was estimated as $10,159,000, which was also the carrying cost as of February 29, 2016. The accumulated depreciation associated with the leased assets as of February 29, 2016, was $88,000. Both the leased assets and accumulated depreciation are included in property, plant and equipment-net classification in the balance sheet.
The lessee will pay $105,800 per month, with a 2.0% annual increase adjustment on the anniversary of the lease. The lease terms allow for one five-year extension, which is not a bargain renewal option, at the expiration of the 15-year term. Revenue associated with the lease is being recorded on a straight-line basis and is reported in Other Income on the statement of earnings.
The following table reflects future minimum rental income payments under the non-cancellable portion of this lease as of February 29, 2016:
| Year ending February 28(29), | | | |
| 2017 | | $ | 1,275,400 | |
| 2018 | | | 1,301,000 | |
| 2019 | | | 1,327,000 | |
| 2020 | | | 1,353,500 | |
| 2021 | | | 1,380,600 | |
| Thereafter | | | 14,992,400 | |
| Total | | $ | 21,629,900 | |
7.
At February 29, 2016, we had outstanding purchase commitments for inventory totaling approximately $18,143,200, which is due during fiscal year 2017. Of these commitments, $14,370,300 were with Usborne, $3,550,000 with various Kane Miller publishers and the remaining $223,000 with other suppliers.
Rent expense for the year ended February 29, 2016 was $26,100. As of February 29, 2016, we did not have any lease commitments in excess of one year.
8.DEBT
We haveDebt consists of the following:
| | | February 29(28), | |
| | | 2016 | | | 2015 | |
| | | | | | | |
| Line of credit | | $ | 3,331,800 | | | $ | 1,400,000 | |
| | | | | | | | | |
| Long-term debt | | $ | 18,302,800 | | | $ | - | |
| Less current maturities | | | (615,400 | ) | | | - | |
| Total | | $ | 17,687,400 | | | $ | - | |
In connection with our purchase of the new facility, disclosed in Note 3, and effective December 1, 2015, we signed a $3,200,000Loan Agreement with MidFirst Bank (the Bank) including a Term Loan comprised of Tranche A of $13.4 million and Tranche B of $5.0 million both with the maturity date of December 1, 2025. The Loan Agreement also provides a $4.0 million revolving loan (“line of credit”) through December 1, 2016. Available credit under the line of credit agreement withwas $668,200 as of February 29, 2016. Tranche A has a fixed interest rate of 4.23% and interest is payable monthly. For Tranche B and the line of credit, interest is payable monthly at the greaterlesser of (a) primethe maximum interest rate minus 0.75%permitted under the Governing law, or (b) 4.00%. At February 28, 2015, the rate in effect was 4.00%. The revolving credit agreement is collateralized by substantially all of our assets and matures on June 30, 2015.
We had $1,400,000 in borrowings outstanding on the above revolving credit agreementbank adjusted LIBOR Index plus 2.75% (3.18% at February 28, 2015 and no borrowings outstanding at February 28, 2014. Available29, 2016). Subsequent to year end, we executed the First amendment to the loan agreement in March 2016, which increased the line of credit under the revolving credit agreement was $1,800,000 at February 28, 2015. This agreementto $6.0 million.
The Loan Agreement also contains a provision for our use of the Bank’s letters of credit. The Bank agrees to issue, or obtain issuance of commercial or stand-by letters of credit provided that no letters of credit will have an expiry date later than June 30, 2015December 1, 2016, 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. The agreementLoan Agreement contains provisions that require us to maintain specified financial ratios, restrict transactions with related parties, prohibit mergers or consolidation, disallow additional debt, and limit the amount of compensation, salaries, investments, capital expenditures and leasing transactions. We intend to renew the bank agreement or obtain other financing upon maturity.
8. COMMITMENTS
At February 28, 2015, we had outstanding purchase commitments for inventory totaling approximately $7,613,400, which is due during fiscal year 2016. Of these commitments, $6,440,600 were with Usborne, $1,023,400 with various Kane Miller publishers and the remaining $149,400 with other suppliers.
Rent expense forFor the year ended February 28,29, 2016, we had no letters of credit outstanding.
Effective November 18, 2015, was $25,500. Aswe paid off and terminated our previous Credit and Security Agreement with Arvest Bank which provided a $4.0 million line of credit. We had $1.4 million in borrowings outstanding on the line of credit at February 28, 2015, we did not have any lease commitments in excess of one year.2015.
9. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS
The following table reflects aggregate future maturities of long-term debt during the next five fiscal years and thereafter as follows:
| Year ending February 28(29), | | | |
| 2017 | | $ | 615,400 | |
| 2018 | | | 641,800 | |
| 2019 | | | 667,300 | |
| 2020 | | | 693,800 | |
| 2021 | | | 719,700 | |
| Thereafter | | | 14,964,800 | |
| | | $ | 18,302,800 | |
| 9. | CAPITAL STOCK, STOCK OPTIONS AND WARRANTS |
The Board of Directors adopted the 2002 Incentive Stock Option Plan (the “2002 Plan”) in June of 2002. The 2002 Plan also authorized us to grant up to 1,000,000 stock options.
Options granted under the 2002 Plan vest at date of grant and are exercisable up to ten years from the date of grant. The exercise price on options granted is equal to the market price at the date of grant. Options outstanding at February 28, 201529, 2016 expire in December 2019.
A summary of the status of our 2002 Plan as of February 29, 2016 and February 28, 2015, and 2014, and changes during the years then ended is presented below:
| | | February 29(28), | |
| | | 2016 | | | 2015 | |
| | | | | | Weighted | | | | | | Weighted | |
| | | | | | Average | | | | | | Average | |
| | | | | | Exercise | | | | | | Exercise | |
| | | Shares | | | Price | | | Shares | | | Price | |
Outstanding at Beginning of Year | | | 10,000 | | | $ | 5.25 | | | | 11,000 | | | $ | 5.68 | |
| Exercised | | | - | | | | - | | | | - | | | | - | |
| Expired | | | - | | | | - | | | | (1,000 | ) | | | (10.00 | ) |
| | | | | | | | | | | | | | | | | |
| Outstanding at End of Year | | | 10,000 | | | | 5.25 | | | | 10,000 | | | | 5.25 | |
AllAt February 29, 2016, all options outstanding are exercisable at February 28, 2015.
$60,900 and weighted-average remaining contractual terms of options outstanding of 3.8 years.
10.QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended February 29, 2016 and February 28, 2015 and 2014.
| | | | | | | | | | | | Basic | | | Diluted | |
| | | Net | | | | | | | | | Earnings | | | Earnings | |
| | | Revenues | | | Gross Margin | | | Net Earnings | | | Per Share | | | Per Share | |
| 2015 | | | | | | | | | | | | | | | |
| First quarter | | $ | 7,178,300 | | | $ | 4,334,800 | | | $ | 239,700 | | | $ | 0.06 | | | $ | 0.06 | |
| Second quarter | | | 6,808,200 | | | | 3,795,100 | | | | (3,900 | ) | | | (0.00 | ) | | | (0.00 | ) |
| Third quarter | | | 10,936,500 | | | | 6,821,700 | | | | 526,400 | | | | 0.13 | | | | 0.13 | |
| Fourth quarter | | | 7,625,300 | | | | 4,832,800 | | | | 97,000 | | | | 0.02 | | | | 0.02 | |
| Total year | | $ | 32,548,300 | | | $ | 19,784,400 | | | $ | 859,200 | | | $ | 0.21 | | | $ | 0.21 | |
| | | | | | | | | | | | | | | | | | | | | |
| 2014 | | | | | | | | | | | | | | | | | | | | |
| First quarter | | $ | 5,990,500 | | | $ | 3,514,300 | | | $ | 66,600 | | | $ | 0.02 | | | $ | 0.02 | |
| Second quarter | | | 5,715,100 | | | | 3,054,100 | | | | 56,400 | | | | 0.01 | | | | 0.01 | |
| Third quarter | | | 8,502,000 | | | | 5,207,500 | | | | 547,800 | | | | 0.14 | | | | 0.14 | |
| Fourth quarter | | | 5,889,400 | | | | 3,797,600 | | | | (313,200 | ) | | | (0.08 | ) | | | (0.08 | ) |
| Total year | | $ | 26,097,000 | | | $ | 15,573,500 | | | $ | 357,600 | | | $ | 0.09 | | | $ | 0.09 | |
11. BUSINESS SEGMENTS
| | | | | | | | | | | | Basic | | | Diluted | |
| | | Net | | | | | | | | | Earnings | | | Earnings | |
| | | Revenues | | | Gross Margin | | | Net Earnings | | | Per Share | | | Per Share | |
| 2016 | | | | | | | | | | | | | | | |
| First quarter | | $ | 9,637,800 | | | $ | 6,064,000 | | | $ | 324,600 | | | $ | 0.08 | | | $ | 0.08 | |
| Second quarter | | | 12,606,800 | | | | 8,029,400 | | | | 644,400 | | | | 0.16 | | | | 0.16 | |
| Third quarter | | | 24,424,200 | | | | 17,038,000 | | | | 1,258,500 | | | | 0.31 | | | | 0.31 | |
| Fourth quarter | | | 16,949,500 | | | | 11,992,700 | | | | (108,200 | ) | | | (0.03 | ) | | | (0.03 | ) |
| Total year | | $ | 63,618,300 | | | $ | 43,124,100 | | | $ | 2,119,300 | | | $ | 0.52 | | | $ | 0.52 | |
| | | | | | | | | | | | | | | | | | | | | |
| 2015 | | | | | | | | | | | | | | | | | | | | |
| First quarter | | $ | 7,178,300 | | | $ | 4,334,800 | | | $ | 239,700 | | | $ | 0.06 | | | $ | 0.06 | |
| Second quarter | | | 6,808,200 | | | | 3,795,100 | | | | (3,900 | ) | | | (0.00 | ) | | | (0.00 | ) |
| Third quarter | | | 10,936,500 | | | | 6,821,700 | | | | 526,400 | | | | 0.13 | | | | 0.13 | |
| Fourth quarter | | | 7,625,300 | | | | 4,832,800 | | | | 97,000 | | | | 0.02 | | | | 0.02 | |
| Total year | | $ | 32,548,300 | | | $ | 19,784,400 | | | $ | 859,200 | | | $ | 0.21 | | | $ | 0.21 | |
We have two reportable segments: EDC Publishing and Usborne Books & More (“UBAM”) which are business units that offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations.
| · | EDC Publishing markets its products to retail accounts, which include book, toy and gift stores, school supply stores and museums, through commissioned sales representatives, trade and specialty wholesalers and an internal telesales group. |
| · | UBAM markets its product line through a nationwide network of independent sales consultants using a combination of home shows, Internetinternet shows, direct sales, and book fairs. The UBAM division also distributes to school and public libraries. |
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. We evaluate segment performance based on earnings (loss) before income taxes of the segments, which is defined as segment net sales reduced by direct cost of sales and direct expenses. Corporate expenses, depreciation, interest expense, other income and income taxes are not allocated to the segments, but are listed in the “other” column. Corporate expenses include the executive department, accounting department, information services department, general office management and building facilities management. Our assets and liabilities are not allocated on a segment basis.
Information by industry segment for the years ended February 29, 2016 and February 28, 2015 and 2014 is set forth below:
| | | NET REVENUES | | |
| NET REVENUES | | NET REVENUES | |
| | | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Publishing | | $ | 11,532,500 | | | $ | 10,968,400 | | | $ | 10,831,400 | | | $ | 11,532,500 | |
| UBAM | | | 21,015,800 | | | | 15,128,600 | | | | 52,786,900 | | | | 21,015,800 | |
| Other | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 32,548,300 | | | $ | 26,097,000 | | | $ | 63,618,300 | | | $ | 32,548,300 | |
| | | EARNINGS (LOSS) BEFORE INCOME TAXES | | |
| EARNINGS (LOSS) BEFORE INCOME TAXES | | EARNINGS (LOSS) BEFORE INCOME TAXES | |
| | | | | | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Publishing | | $ | 3,452,800 | | | $ | 3,448,900 | | | $ | 3,305,300 | | | $ | 3,452,800 | |
| UBAM | | | 2,456,300 | | | | 2,159,700 | | | | 7,336,200 | | | | 2,456,300 | |
| Other | | | (4,506,600 | ) | | | (4,735,100 | ) | | | (7,095,600 | ) | | | (4,506,600 | ) |
| Total | | $ | 1,402,500 | | | $ | 873,500 | | | $ | 3,545,900 | | | $ | 1,402,500 | |
In April 2008, the Board of Directors authorized us to purchase up to an additional 500,000 shares of our common stock under the plan initiated in 1998. This plan has no expiration date. During fiscal year 2015,2016, we purchased 1,339163 shares of common stock at an average price of $3.88$9.82 per share totaling approximately $5,200.$1,600. The maximum number of shares that may be repurchased in the future is 303,315.
We do not report any assets or liabilities at fair value in the financial statements. However, the estimated fair value of our line of credit is estimated by management to approximate the carrying value of $3,331,800 and $1,400,000 at February 29, 2016 and $0 at February 28, 2015, respectively, the estimated fair value of our term note payable is estimated by management to approximate $18,078,300 at February 29, 2016 and 2014,$0 February 28, 2015, respectively. Management'sManagement’s estimates are based on the obligations'obligations’ characteristics, including floating interest rate, maturity, and collateral. Such valuation inputs are considered a Level 2 measurement in the fair value valuation hierarchy.