UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Amendment No. 1)
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2017
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number: 000-04957
EDUCATIONAL DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 73-0750007 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
5402 South 122nd East Avenue, Tulsa, Oklahoma | 74146 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (918) 622-4522
Securities registered pursuant to Section 12(b) of the Act: None [Note: Issuers whose securities are listed on a national exchange use Section 12(b) and list the exchange (NASDAQ for EDC). Section 12(g) is for nonexchange traded public companies.]
Common Stock, $.20 par value | EDUC | NASDAQ |
(Title of class) | (Trading symbol) | (Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”,filer,” “accelerated filer”, andfiler,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer ☐ | Smaller reporting company ☒ | |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes
☐ No ☒The aggregate market value of the outstanding shares of common stock held by non-affiliates of the registrant at the price at which the common stock was last sold on August 31, 2016,2018 on the NASDAQ Stock Market, LLC was $37,764,899.
As of May 23, 2017, 4,084,31122, 2019, 8,175,836 shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART II | ||
Item 8. | 5 | |
PART IV | ||
Item 15. | 5 |
EXPLANATORY NOTE
This Amendment No. 1 to the Annual Report on Form 10-K includes “forward-looking statements.” These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe thatEducational Development Corporation (the “Company”) amends the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties and we can give no assurance that such expectations or assumptions will be achieved. Known and unknown risks, uncertainties and other factors may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, our success in recruiting and retaining new consultants, our ability to locate and procure desired books, our ability to ship the volume of orders that are received without creating backlogs, our ability to obtain adequate financing for working capital and capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in thisCompany’s Annual Report on Form 10-K all of which are difficult to predict. In light of these risks, uncertainties and assumptions,for the forward-looking events discussed may not occur. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Annual Report on Form 10-K and speak only as of the date of this Annual Report on Form 10-K. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise. 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.
| FY 2017 | FY 2016 | |||||||
| UBAM | 92 | % | 83 | % | ||||
| Publishing | 8 | % | 17 | % | ||||
| Total net revenues | 100 | % | 100 | % | ||||
In addition to these owned properties, we also lease a small office in San Diego, California that is used to by our Kane Miller Book Publishing employees. We believe that our operating facilities meet both present and future capacity needs.
| FY 2017 | FY 2016 | |||||||||||||||
| Period | High | Low | High | Low | ||||||||||||
| 1st Qtr | 14.60 | 10.65 | 5.00 | 3.97 | ||||||||||||
| 2nd Qtr | 13.87 | 9.95 | 6.05 | 4.58 | ||||||||||||
| 3rd Qtr | 12.75 | 8.50 | 14.27 | 6.30 | ||||||||||||
| 4th Qtr | 10.50 | 7.10 | 16.97 | 8.98 | ||||||||||||
| FY 2017 | FY 2016 | |||||||
| New Consultants During Fiscal Year | 24,600 | 18,000 | ||||||
| Active Consultants End of Fiscal Year | 25,800 | 19,600 | ||||||
Net Revenues, after Commissions, for UBAM division | ||||||||
| FY 2017 | FY 2016 | |||||||
| Net Revenues | $ | 97,620,600 | $ | 52,786,900 | ||||
| Less Commissions | (33,687,200 | ) | (17,710,800 | ) | ||||
| Net Revenues, after commissions | $ | 63,933,400 | $ | 35,076,100 | ||||
| FY 2017 | FY 2016 | |||||||
| National chain stores | 17 | % | 22 | % | ||||
| All other | 83 | % | 78 | % | ||||
| Total net revenues | 100 | % | 100 | % | ||||
Net Revenues for EDC Publishing division | ||||||||
| FY 2017 | FY 2016 | |||||||
| Net Revenues | $ | 9,007,500 | $ | 10,831,400 | ||||
| FY 2017 | FY 2016 | |||||||
| Net revenues | 100.0 | % | 100.0 | % | ||||
| Cost of sales | 26.8 | % | 32.2 | % | ||||
| Gross margin | 73.2 | % | 67.8 | % | ||||
| Operating expenses: | ||||||||
| Operating and selling | 33.2 | % | 30.5 | % | ||||
| Sales commissions | 31.9 | % | 28.4 | % | ||||
| General and administrative | 3.4 | % | 3.7 | % | ||||
| Impairment of asset | 1.0 | % | 0.0 | % | ||||
| Total operating expenses | 69.5 | % | 62.6 | % | ||||
| Other income, net | 0.6 | % | 0.4 | % | ||||
| Earnings before income taxes | 4.3 | % | 5.6 | % | ||||
| Income taxes | 1.6 | % | 2.3 | % | ||||
| Net earnings | 2.7 | % | 3.3 | % | ||||
FY 2017 | FY 2016 | $ Change | ||||||||||
| GROSS SALES | $ | 124,958,900 | $ | 80,319,400 | $ | 44,639,500 | ||||||
| Less discounts and allowances | (29,486,300 | ) | (22,061,500 | ) | (7,424,800 | ) | ||||||
| Transportation revenue | 11,155,500 | 5,360,400 | 5,795,100 | |||||||||
| NET REVENUES | $ | 106,628,100 | $ | 63,618,300 | $ | 43,009,800 | ||||||
| FY2017 | FY2016 | $ Change | ||||||||||
| Cost of Sales | $ | 28,613,500 | $ | 20,494,200 | $ | 8,119,300 | ||||||
| Operating and selling | 35,369,200 | 19,419,400 | 15,949,800 | |||||||||
| Sales commissions | 33,995,500 | 18,062,800 | 15,932,700 | |||||||||
| General and administrative | 3,621,400 | 2,328,500 | 1,292,900 | |||||||||
| Impairment of asset | 1,082,300 | - | 1,082,300 | |||||||||
| Total | $ | 102,681,900 | $ | 60,304,900 | $ | 42,377,000 | ||||||
Except as described above, this Amendment No. 1 does not amend, update or change any other disclosures in the effectiveness of our internal control over financial reporting based on the framework in INTERNAL CONTROL-INTEGRATED FRAMEWORK issued by the Committee of Sponsoring OrganizationsOriginal Report, including any of the Treadway Commissionfinancial information disclosed in 1992. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determinedPart II, Item 8 or Part IV, Item 15 of the Original Report, and does not purport to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections ofreflect any evaluation of effectiveness to future periods are subjectinformation or events subsequent to the risk that controls may become inadequate becausefiling thereof.
This Amendment No. 1 speaks as of changesthe original filing date of the Original Report, and the Company has not undertaken herein to amend, supplement or update any information contained in conditions, or that the degree of complianceOriginal Report to give effect to any subsequent events. Accordingly, this Amendment No. 1 should be read in conjunction 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, 2017. The original framework was updated with the issuance of the 2013 Internal Control – Integrated Framework issued 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.
PART IIIII
The information required by this Item 10 is furnished by incorporation by reference to the information under the caption "Election of Directors" in our definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on July 26, 2017.
Identification of Executive Officers
(a) The following documents are filed as part of this report:
1. Financial Statements
Page | |
7 | |
8 | |
9 | |
10 | |
11 | |
12-25 |
Schedules have been omitted as such information is either not required or is included in the financial statements.
2. Exhibits
*23.1 | ||
*31.1 | ||
*31.2 | ||
*32.1 |
*Filed Herewith
Pursuant to the requirements of Section 13 or 15(b)15(d) 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: | June 12, 2019 | By | /s/ Dan E. O’Keefe | |
Dan E. O’Keefe | ||||
Chief Financial Officer and Corporate Secretary | ||||
(Principal Financial and Accounting Officer) |
To the Shareholders and the Board of Directors and Shareholders
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Educational Development Corporation (the Company) as of February 28, 20172019 and February 29, 2016,2018, and the related statements of earnings, shareholders' equity and cash flows for the years then ended. ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on thesethe Company's financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. OurAs part of our audits included considerationwe are required to obtain an understanding 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
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ HOGANTAYLOR LLP
We have served as the Company's auditor since 2005.
Tulsa, Oklahoma
May 30, 2017
| EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||
| AS OF FEBRUARY 28 (29), | ||||||||
| ASSETS | 2017 | 2016 | ||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | 699,200 | $ | 1,183,700 | ||||
Accounts receivable, less allowance for doubtful accounts and sales returns $675,000 (2017) and $501,900 (2016) | 2,917,000 | 2,513,300 | ||||||
| Inventories—Net | 34,253,100 | 17,479,500 | ||||||
| Prepaid expenses and other assets | 695,200 | 1,028,100 | ||||||
| Deferred income taxes | 466,600 | 298,200 | ||||||
| Total current assets | 39,031,100 | 22,502,800 | ||||||
| INVENTORIES—Net | 192,100 | 169,000 | ||||||
| PROPERTY, PLANT AND EQUIPMENT—Net | 27,034,300 | 26,710,300 | ||||||
| OTHER ASSETS | 61,400 | 262,000 | ||||||
| DEFERRED INCOME TAXES | - | 50,900 | ||||||
| TOTAL ASSETS | $ | 66,318,900 | $ | 49,695,000 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | 17,565,300 | $ | 7,801,300 | ||||
| Line of credit | 4,882,900 | 3,331,800 | ||||||
| Deferred revenues | 633,100 | 2,925,200 | ||||||
| Current maturities of long-term debt | 898,500 | 615,400 | ||||||
| Accrued salaries and commissions | 1,379,700 | 1,202,500 | ||||||
| Income taxes payable | 1,519,400 | 803,100 | ||||||
| Dividends payable | - | 366,300 | ||||||
| Other current liabilities | 3,218,200 | 1,732,500 | ||||||
| Total current liabilities | 30,097,100 | 18,778,100 | ||||||
| LONG-TERM DEBT—Net of current maturities | 20,665,800 | 17,687,400 | ||||||
| DEFERRED INCOME TAX LIABILITY | 338,600 | - | ||||||
| Total liabilities | 51,101,500 | 36,465,500 | ||||||
| COMMITMENTS (Note 8) | ||||||||
| SHAREHOLDERS’ EQUITY: | ||||||||
Common stock, $0.20 par value; Authorized 8,000,000 shares; Issued 6,041,040 shares; Outstanding 4,090,074 (2017) and | 1,208,200 | 1,208,200 | ||||||
| Capital in excess of par value | 8,548,000 | 8,548,000 | ||||||
| Retained earnings | 16,317,800 | 14,557,500 | ||||||
| 26,074,000 | 24,313,700 | |||||||
| Less treasury stock, at cost | (10,856,600 | ) | (11,084,200 | ) | ||||
| Total shareholders' equity | 15,217,400 | 13,229,500 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 66,318,900 | $ | 49,695,000 | ||||
EDUCATIONAL DEVELOPMENT CORPORATION
BALANCE SHEETS
AS OF FEBRUARY 28,
| 2019 | 2018 | ||||||
| ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 3,199,300 | $ | 2,723,300 | ||||
Accounts receivable, less allowance for doubtful accounts of $268,600 (2019) and $297,100 (2018) | 3,258,800 | 2,913,700 | ||||||
Inventories - Net | 33,445,600 | 26,618,600 | ||||||
Prepaid expenses and other assets | 1,603,500 | 1,259,000 | ||||||
Total current assets | 41,507,200 | 33,514,600 | ||||||
INVENTORIES - Net | 575,000 | 435,900 | ||||||
PROPERTY, PLANT AND EQUIPMENT - Net | 27,164,600 | 27,860,500 | ||||||
OTHER ASSETS | 19,500 | 26,900 | ||||||
TOTAL ASSETS | $ | 69,266,300 | $ | 61,837,900 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 14,228,600 | $ | 12,469,000 | ||||
Deferred revenues | 965,600 | 693,000 | ||||||
Current maturities of long-term debt | 945,900 | 881,200 | ||||||
Accrued salaries and commissions | 2,039,000 | 2,007,900 | ||||||
Income taxes payable | 756,400 | 1,798,800 | ||||||
Dividends payable | 410,100 | - | ||||||
Other current liabilities | 4,177,900 | 3,517,900 | ||||||
Total current liabilities | 23,523,500 | 21,367,800 | ||||||
LONG-TERM DEBT - Net of current maturities | 18,830,700 | 19,825,100 | ||||||
DEFERRED INCOME TAXES - Net | 872,600 | 136,900 | ||||||
OTHER LONG-TERM LIABILITIES | 109,000 | 106,000 | ||||||
Total liabilities | 43,335,800 | 41,435,800 | ||||||
COMMITMENTS (Note 7) | ||||||||
SHAREHOLDERS' EQUITY: | ||||||||
Common stock, $0.20 par value; Authorized 16,000,000 shares; Issued 12,092,080 shares; Outstanding 8,195,082 (2019) and 8,179,612 (2018) shares | 2,418,400 | 2,418,400 | ||||||
Capital in excess of par value | 8,975,100 | 8,573,300 | ||||||
Retained earnings | 25,754,900 | 20,714,500 | ||||||
| 37,148,400 | 31,706,200 | |||||||
Less treasury stock, at cost | (11,217,900 | ) | (11,304,100 | ) | ||||
Total shareholders' equity | 25,930,500 | 20,402,100 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 69,266,300 | $ | 61,837,900 | ||||
See notes to financial statements.
| EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||
| FOR THE YEARS ENDED FEBRUARY 28 (29), | ||||||||
| 2017 | 2016 | |||||||
| GROSS SALES | $ | 124,958,900 | $ | 80,319,400 | ||||
| Less discounts and allowances | (29,486,300 | ) | (22,061,500 | ) | ||||
| Transportation revenue | 11,155,500 | 5,360,400 | ||||||
| NET REVENUES | 106,628,100 | 63,618,300 | ||||||
| COST OF SALES | 28,613,500 | 20,494,200 | ||||||
| Gross margin | 78,014,600 | 43,124,100 | ||||||
| OPERATING EXPENSES: | ||||||||
| Operating and selling | 35,369,200 | 19,419,400 | ||||||
| Sales commissions | 33,995,500 | 18,062,800 | ||||||
| General and administrative | 3,621,400 | 2,328,500 | ||||||
| Impairment of asset | 1,082,300 | - | ||||||
| Total operating expenses | 74,068,400 | 39,810,700 | ||||||
| INTEREST EXPENSE | 1,028,800 | 244,900 | ||||||
| OTHER INCOME | (1,694,700 | ) | (477,400 | ) | ||||
| EARNINGS BEFORE INCOME TAXES | 4,612,100 | 3,545,900 | ||||||
| INCOME TAXES | 1,751,200 | 1,426,600 | ||||||
| NET EARNINGS | $ | 2,860,900 | $ | 2,119,300 | ||||
| BASIC AND DILUTED EARNINGS PER SHARE: | ||||||||
| Basic | $ | 0.70 | $ | 0.52 | ||||
| Diluted | $ | 0.70 | $ | 0.52 | ||||
| WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: | ||||||||
| Basic | 4,077,695 | 4,049,154 | ||||||
| Diluted | 4,082,854 | 4,051,678 | ||||||
| Dividends per share | $ | 0.27 | $ | 0.35 | ||||
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED FEBRUARY 28,
2019 | 2018 | |||||||
GROSS SALES | $ | 157,870,100 | $ | 139,040,400 | ||||
Less discounts and allowances | (49,754,000 | ) | (38,103,500 | ) | ||||
Transportation revenue | 10,695,200 | 11,047,700 | ||||||
NET REVENUES | 118,811,300 | 111,984,600 | ||||||
COST OF GOODS SOLD | 39,063,600 | 35,824,300 | ||||||
Gross margin | 79,747,700 | 76,160,300 | ||||||
OPERATING EXPENSES: | ||||||||
Operating and selling | 18,550,600 | 17,694,700 | ||||||
Sales commissions | 36,480,400 | 35,359,000 | ||||||
General and administrative | 16,164,300 | 15,736,300 | ||||||
Total operating expenses | 71,195,300 | 68,790,000 | ||||||
INTEREST EXPENSE | 931,300 | 1,119,500 | ||||||
OTHER INCOME | (1,559,700 | ) | (1,581,900 | ) | ||||
EARNINGS BEFORE INCOME TAXES | 9,180,800 | 7,832,700 | ||||||
INCOME TAXES | 2,502,400 | 2,618,000 | ||||||
NET EARNINGS | $ | 6,678,400 | $ | 5,214,700 | ||||
BASIC AND DILUTED EARNINGS PER SHARE: | ||||||||
Basic | $ | 0.82 | $ | 0.64 | ||||
Diluted | $ | 0.81 | $ | 0.64 | ||||
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: | ||||||||
Basic | 8,189,149 | 8,175,996 | ||||||
Diluted | 8,196,628 | 8,181,322 | ||||||
Dividends declared per share | $ | 0.20 | $ | - | ||||
See notes to financial statements.
| EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||||||||||||||||||||||
| FOR THE YEARS ENDED FEBRUARY 28 (29), | ||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||
| (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
| Number of | Capital in | |||||||||||||||||||||||||||
| Shares | Excess of | Retained | Number of | Shareholders’ | ||||||||||||||||||||||||
| Issued | Amount | Par Value | Earnings | Shares | Amount | Equity | ||||||||||||||||||||||
| BALANCE—March 1, 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 | |||||||||||||||
| Purchases of treasury stock | - | - | - | - | 23 | (200 | ) | (200 | ) | |||||||||||||||||||
| Sales of treasury stock | - | - | - | - | (25,487 | ) | 227,800 | 227,800 | ||||||||||||||||||||
| Dividends paid ($0.27/share) | - | - | - | (1,100,600 | ) | - | - | (1,100,600 | ) | |||||||||||||||||||
| Net earnings | - | - | - | 2,860,900 | - | - | 2,860,900 | |||||||||||||||||||||
| BALANCE—February 28, 2017 | 6,041,040 | $ | 1,208,200 | $ | 8,548,000 | $ | 16,317,800 | 1,950,966 | $ | (10,856,600 | ) | $ | 15,217,400 | |||||||||||||||
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF SHAREHOLDERS’ EQUITY
AS OF FEBRUARY 28,
Common Stock (par value $0.20 per share) | Treasury Stock | |||||||||||||||||||||||||||
Number of Shares Issued | Amount | Capital in Excess of Par Value | Retained Earnings | Number of Shares | Amount | Shareholders' Equity | ||||||||||||||||||||||
BALANCE - February 28, 2017 | 12,082,080 | $ | 2,416,400 | $ | 8,549,000 | $ | 15,499,800 | 3,901,932 | $ | (11,247,800 | ) | $ | 15,217,400 | |||||||||||||||
Exercise of stock options | 10,000 | 2,000 | 24,300 | - | - | - | 26,300 | |||||||||||||||||||||
Purchases of treasury stock | - | - | - | - | 20,138 | (98,400 | ) | (98,400 | ) | |||||||||||||||||||
Sales of treasury stock | - | - | - | - | (9,602 | ) | 42,100 | 42,100 | ||||||||||||||||||||
Net earnings | - | - | - | 5,214,700 | - | - | 5,214,700 | |||||||||||||||||||||
BALANCE - February 28, 2018 | 12,092,080 | $ | 2,418,400 | $ | 8,573,300 | $ | 20,714,500 | 3,912,468 | $ | (11,304,100 | ) | $ | 20,402,100 | |||||||||||||||
Purchases of treasury stock | - | - | - | - | 25,171 | (256,500 | ) | (256,500 | ) | |||||||||||||||||||
Sales of treasury stock | - | - | - | - | (40,641 | ) | 342,700 | 342,700 | ||||||||||||||||||||
Dividends paid ($0.15/share) | - | - | - | (1,227,900 | ) | - | - | (1,227,900 | ) | |||||||||||||||||||
Dividends declared ($0.05/share) | - | - | - | (410,100 | ) | - | - | (410,100 | ) | |||||||||||||||||||
Share-based compensation expense (see Note 9 to the financial statements) | - | - | 401,800 | - | - | - | 401,800 | |||||||||||||||||||||
Net earnings | - | - | - | 6,678,400 | - | - | 6,678,400 | |||||||||||||||||||||
BALANCE - February 28, 2019 | 12,092,080 | $ | 2,418,400 | $ | 8,975,100 | $ | 25,754,900 | 3,896,998 | $ | (11,217,900 | ) | $ | 25,930,500 | |||||||||||||||
See notes to financial statements.
| EDUCATIONAL DEVELOPMENT CORPORATION | ||||||||
| FOR THE YEARS ENDED FEBRUARY 28 (29), | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net earnings | $ | 2,860,900 | $ | 2,119,300 | ||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | ||||||||
| Impairment of asset | 1,082,300 | - | ||||||
| Depreciation | 1,079,000 | 274,500 | ||||||
| Deferred income taxes | 221,100 | (19,100 | ) | |||||
| Provision for doubtful accounts and sales returns | 283,200 | 1,239,600 | ||||||
| Provision for inventory valuation allowance | (25,000 | ) | (68,100 | ) | ||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (686,900 | ) | (676,200 | ) | ||||
| Inventories, net | (16,771,700 | ) | (6,048,600 | ) | ||||
| Prepaid expenses and other assets | 533,500 | (672,500 | ) | |||||
Accounts payable, accrued salaries and commissions, and other current liabilities | 11,427,000 | 6,837,000 | ||||||
| Deferred revenue | (2,292,100 | ) | 2,925,200 | |||||
| Income tax payable | 716,300 | 739,500 | ||||||
| Total adjustments | (4,433,300 | ) | 4,531,300 | |||||
| Net cash provided by (used in) operating activities | (1,572,400 | ) | 6,650,600 | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property, plant and equipment | (2,485,400 | ) | (24,911,600 | ) | ||||
| Net cash used in investing activities | (2,485,400 | ) | (24,911,600 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments—long-term debt | (738,500 | ) | (97,200 | ) | ||||
| Proceeds from long-term debt | 4,000,000 | 18,400,000 | ||||||
| Cash received from sale of treasury stock | 227,800 | 202,500 | ||||||
| Cash paid to acquire treasury stock | (200 | ) | (1,600 | ) | ||||
| Net borrowings under line of credit | 1,551,100 | 1,931,800 | ||||||
| Dividends paid | (1,466,900 | ) | (1,374,700 | ) | ||||
| Net cash provided by financing activities | 3,573,300 | 19,060,800 | ||||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (484,500 | ) | 799,800 | |||||
| CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR | 1,183,700 | 383,900 | ||||||
| CASH AND CASH EQUIVALENTS—END OF YEAR | $ | 699,200 | $ | 1,183,700 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: | ||||||||
| Cash paid for interest | $ | 1,005,200 | $ | 179,800 | ||||
| Cash paid for income taxes | $ | 543,800 | $ | 706,400 | ||||
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28,
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net earnings | $ | 6,678,400 | $ | 5,214,700 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation | 1,455,800 | 1,251,000 | ||||||
Deferred income taxes, net | 735,700 | 264,900 | ||||||
Provision for doubtful accounts | 74,100 | 510,900 | ||||||
Provision for inventory valuation allowance | 140,700 | 311,800 | ||||||
Share-based compensation expense | 401,800 | - | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (419,100 | ) | (407,700 | ) | ||||
Inventories, net | (7,106,800 | ) | 7,079,000 | |||||
Prepaid expenses and other assets | (337,100 | ) | (412,300 | ) | ||||
Accounts payable | 2,399,100 | (5,096,300 | ) | |||||
Accrued salaries and commissions, and other liabilities | 694,000 | 177,400 | ||||||
Deferred revenues | 272,600 | 59,900 | ||||||
Income taxes payable | (1,042,400 | ) | 279,400 | |||||
Total adjustments | (2,731,600 | ) | 4,018,000 | |||||
Net cash provided by operating activities | 3,946,800 | 9,232,700 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property, plant and equipment | (1,399,400 | ) | (1,437,700 | ) | ||||
Net cash used in investing activities | (1,399,400 | ) | (1,437,700 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Payments on long-term debt | (929,700 | ) | (1,877,000 | ) | ||||
Proceeds from long-term debt | - | 1,019,000 | ||||||
Cash received from sale of treasury stock | 342,700 | 42,100 | ||||||
Cash used to purchase treasury stock | (256,500 | ) | (98,400 | ) | ||||
Cash proceeds from issuance of stock options | - | 26,300 | ||||||
Net payments on line of credit | - | (4,882,900 | ) | |||||
Dividends paid | (1,227,900 | ) | - | |||||
Net cash used in financing activities | (2,071,400 | ) | (5,770,900 | ) | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | 476,000 | 2,024,100 | ||||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 2,723,300 | 699,200 | ||||||
CASH AND CASH EQUIVALENTS - END OF PERIOD | $ | 3,199,300 | $ | 2,723,300 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: | ||||||||
Cash paid for interest | $ | 926,900 | $ | 1,116,500 | ||||
Cash paid for income taxes | $ | 2,874,300 | $ | 2,073,600 | ||||
NON-CASH TRANSACTIONS: | ||||||||
Accrued capital expenditures | $ | - | $ | 639,500 | ||||
See notes to financial statements.
YEARS ENDED FEBRUARY 28, 20172019 AND FEBRUARY 29, 20162018
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
—Educational Development Corporation (“Stock Split—On July 24, 2018, our Board of Directors authorized a two-for-one stock split in the form of a stock dividend. The stock dividend was distributed on August 22, 2018 to shareholders of record as of August 14, 2018. All share-based data, including the number of shares outstanding, have been retroactively adjusted to reflect the stock split for all periods presented.
Estimates
—Our financial statements were prepared in conformity with generally accepted accounting principlesReclassifications
—CertainBusiness Concentration
—A significant portion of our inventory purchases are concentrated with Usborne. Purchases from them were approximatelyA significant portion of our UBAM division sales are facilitated through the use of social media collaboration platforms that allow our consultants to interact in real-time, or near real-time, with customers. Consultants use these platforms to invite potential customers to “online parties,” provide book recommendations, answer questions and provide links to other supporting online materials. When a customer is ready to purchase books from the online party, they are redirected from the social media platform to the consultant’s e-commerce site where the order can be placed.
Cash and Cash Equivalents
—Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits of $250,000. We have never experienced any losses related to these balances. 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 also 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. ExtendedManagement 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 accounts receivable. Recoveries of accounts receivable previously written off are recorded as income when received.
Management has estimated an allowance for doubtful accounts of $485,000$268,600 and $401,900$297,100 as of February 28, 20172019 and February 29, 2016,2018, respectively. Included within this allowance is $217,000 and $148,000$93,900 of reserve relatedfor vendor discounts to consignmentsell remaining inventory held by inactive consultants.
Inventories
—Inventories are stated at the lower of cost orConsultants that meet certain eligibility requirements are allowed tomay request and receive inventory on consignment. Consignment inventory is stated at the lower of cost or net realizable value, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total valuecost of inventory on consignment, excluding the estimated reserve, with active consultants was $1,140,700$1,545,000 and $571,400$1,549,300 at February 28, 20172019 and February 29, 2016,2018, respectively. Inventory relatedThe Company has reserved for consignment inventory not expected to inactive consultants is reclassified to accounts receivables and amounted to $309,000 and $174,000 at the end of fiscal year 2017 and 2016, respectively. Such inventory is subject to a reserve based on estimated amounts that will not be sold or returned.
Inventories are presented net of a valuation allowance, which includes reserves for inventory obsolescence and active consultant consignment inventory that is not expected to be sold or returned. Management estimates the allowance for both current and noncurrent inventory. The allowance is based on management’s identification of slow movingslow-moving inventory and estimated consignment inventory that will not be sold or returned.
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 – 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.
Impairments of Long-Lived Assets
—We review the value of long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable based on estimated future cash flows. Such indicators include, among others, the nature of the asset, the projected future economic benefit of the asset, historical and future cash flows and profitability measurements. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset, we recognize an impairment charge for the excess of carrying value of the asset over its estimated fair value. Determination as to whether and how much an asset is impaired involves management estimates and can be impacted by other uncertainties.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 generally recognized and recorded when products are shipped. Products are shipped FOB shipping point. UBAM’s sales are generally paid at the time the product is ordered. Sales which have been paid for but not shipped are classified as deferred revenue on the balance sheet. Sales associated with consignment inventory are recognized when reported and payment associated with the sale has been remitted. Transportation revenue represents the amount billed to the customer for shipping the product and is recorded when the product is shipped.Estimated allowances for sales returns, which reduce net sales and costs of goods sold, are recorded as sales are recognized and recorded.recognized. 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 occurThese returns result from damage that occurs in the stores, not in shipping to the stores. It is industry practice to accept non-damaged returns from wholesaleretail customers. Management has estimated and included a reserve for sales returns of $190,000approximately $204,000 and $100,000$217,000 as of February 28, 2019 and 2018, respectively, which is included in other current liabilities on the Company’s balance sheet. In addition, Management has recorded an asset for the fiscal years endedexpected value of non-damaged inventories to be returned. The estimated value of returned products of $102,000 and $117,000 is included in other current assets on the Company’s balance sheet as of February 28, 20172019 and February 29, 2016,2018, respectively.
Advertising Costs—Advertising costs are expensed as incurred. Advertising expenses, included in sellinggeneral and operatingadministrative expenses in the statements of earnings, were $266,400$629,900 and $531,500$546,600 for the years ended February 28, 20172019 and February 29, 2016,2018, 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 wereInterest Expense
—Interest related to our outstanding debt is recognized as incurred. Interest expense, classified separately in the statements of earnings, wereEarnings per Share
—Basic earnings per share (“EPS”) is computed by dividing net earnings 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 EPS is shown below.
| Year Ended February 28 (29), | ||||||||
| 2017 | 2016 | |||||||
| Earnings Per Share: | ||||||||
Net earnings applicable to common shareholders | $ | 2,860,900 | $ | 2,119,300 | ||||
| Shares: | ||||||||
Weighted average shares outstanding–basic | 4,077,695 | 4,049,154 | ||||||
| Assumed exercise of options | 5,159 | 2,524 | ||||||
Weighted average shares outstanding–diluted | 4,082,854 | 4,051,678 | ||||||
| Diluted Earnings Per Share: | ||||||||
| Basic | $ | 0.70 | $ | 0.52 | ||||
| Diluted | $ | 0.70 | $ | 0.52 | ||||
Year Ended February 28, | ||||||||
2019 | 2018 | |||||||
Earnings per share: | ||||||||
Net earnings applicable to common shareholders | $ | 6,678,400 | $ | 5,214,700 | ||||
Shares: | ||||||||
Weighted average shares outstanding-basic | 8,189,149 | 8,175,996 | ||||||
Assumed exercise of options | 7,479 | 5,326 | ||||||
Weighted average shares outstanding-diluted | 8,196,628 | 8,181,322 | ||||||
Diluted earnings per share: | ||||||||
Basic | $ | 0.82 | $ | 0.64 | ||||
Diluted | $ | 0.81 | $ | 0.64 | ||||
Stock-Based Compensation
—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 standard updates (“ASU”) apply to us.In May 2014, FASB issued ASU No. 2014-09, and amended with ASU No. 2015-14 “Revenue from Contracts with Customers,” (“Topic 606”) 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 means2017. The amendments in this series of updates shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the first quarterdate of our fiscal year 2019. Weadoption. The Company adopted Topic 606, Revenue from Contracts with Customers, with a date of initial application of March 1, 2018, using the full retrospective method applied to all contracts. Results for all reporting periods are currently reviewingpresented under Topic 606. As a result of adopting this new accounting guidance, the ASUCompany has changed the method of accounting for its hostess awards program from reporting the net cost of these awards in operating and assessingselling expenses to allocating a portion of the potentialtransaction price to the material right and reporting these in gross sales and discounts with the associated costs in cost of goods sold. The new reporting of these awards increases gross sales and increases discounts and allowances for a similar amount, having an immaterial effect on net revenues and no effect on net earnings or retained earnings, but lowering the Company’s gross margin percentage. The Company has also removed the allowance for sales returns from the net accounts receivable amount reported on the balance sheet. The allowance for sales returns has been adjusted to reflect a refund liability and a return asset. The cumulative impact of adoption of the new revenue recognition standard had no 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 reviewinghave reviewed the ASU and evaluatingevaluated the potential impact on our financial statements.
In June 2016, FASB issued ASU No. 2016-13 "Financial Instruments—Instruments - Credit Losses",Losses,” which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means the first quarter of our fiscal year 2020.2021. We anticipateexpect the implementation of this ASU having minimalwill not have a significant impact on our financial statements.
In August 2016, FASB issued ASU No. 2016-15 “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments.” The guidance's objective is to reduce diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flow. The new standards required date of adoption is effective for fiscal years beginning after December 15, 2017. This standard was adopted as of March 1, 2018. Adoption of this new standard did not have a material impact on our financial position, results of operations and cash flows.
In May 2017, FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This update amends the scope of modification accounting surrounding share-based payment arrangements as issued in ASU 2016-09 by providing guidance on the various types of changes which would trigger modification accounting for share-based payment awards. This ASU is effective for annual periods beginning after December 15, 2017. The new standard is required to be applied prospectively. The guidance was effective March 1, 2018, and the adoption of this ASU did not have a material impact on our financial position, results of operations and cash flows.
2.INVENTORIES
Inventories consist of the following:
| February 28 (29), | ||||||||
| 2017 | 2016 | |||||||
| Current: | ||||||||
| Book inventory | $ | 34,278,100 | $ | 17,504,500 | ||||
| Inventory valuation allowance | (25,000 | ) | (25,000 | ) | ||||
| Inventories net–current | $ | 34,253,100 | $ | 17,479,500 | ||||
| Noncurrent: | ||||||||
| Book inventory | $ | 467,100 | $ | 469,000 | ||||
| Inventory valuation allowance | (275,000 | ) | (300,000 | ) | ||||
| Inventories net–noncurrent | $ | 192,100 | $ | 169,000 |
February 28, | ||||||||
2019 | 2018 | |||||||
Current: | ||||||||
Book inventory | $ | 33,494,200 | $ | 27,078,600 | ||||
Inventory valuation allowance | (48,600 | ) | (460,000 | ) | ||||
Inventories net - current | $ | 33,445,600 | $ | 26,618,600 | ||||
Noncurrent: | ||||||||
Book inventory | $ | 904,400 | $ | 707,700 | ||||
Inventory valuation allowance | (329,400 | ) | (271,800 | ) | ||||
Inventories net - noncurrent | $ | 575,000 | $ | 435,900 | ||||
3.PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
| February 28 (29), | ||||||||
| 2017 | 2016 | |||||||
| Land | $ | 4,107,200 | $ | 4,107,200 | ||||
| Building | 20,321,800 | 20,321,800 | ||||||
| Building improvements | 1,692,500 | 2,735,800 | ||||||
| Machinery and equipment | 5,230,700 | 2,190,300 | ||||||
| Furniture and fixtures | 101,600 | 85,700 | ||||||
| System installations in progress | - | 610,000 | ||||||
| 31,453,800 | 30,050,800 | |||||||
| Less accumulated depreciation | (4,419,500 | ) | (3,340,500 | ) | ||||
| $ | 27,034,300 | $ | 26,710,300 | |||||
February 28, | ||||||||
2019 | 2018 | |||||||
Land | $ | 4,107,200 | $ | 4,107,200 | ||||
Building | 20,321,800 | 20,321,800 | ||||||
Building improvements | 1,777,100 | 1,758,800 | ||||||
Machinery and equipment | 7,972,900 | 7,231,300 | ||||||
Furniture and fixtures | 109,000 | 109,000 | ||||||
| 34,288,000 | 33,528,100 | |||||||
Less accumulated depreciation | (7,123,400 | ) | (5,667,600 | ) | ||||
| $ | 27,164,600 | $ | 27,860,500 | |||||
During fiscal years 2018 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.
4.OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
| February 28 (29), | ||||||||
| 2017 | 2016 | |||||||
| Accrued royalties | $ | 721,600 | $ | 578,200 | ||||
| Accrued UBAM incentives | 1,180,400 | 705,200 | ||||||
| Interest payable | 88,600 | 65,000 | ||||||
| Sales tax payable | 425,700 | 145,700 | ||||||
| Other | 801,900 | 238,400 | ||||||
| $ | 3,218,200 | $ | 1,732,500 | |||||
February 28, | ||||||||
2019 | 2018 | |||||||
Accrued royalties | $ | 869,200 | $ | 791,800 | ||||
Accrued UBAM incentives | 832,100 | 633,800 | ||||||
Accrued freight | 431,400 | 357,800 | ||||||
Sales tax payable | 547,000 | 557,600 | ||||||
Allowance for expected inventory returns | 204,000 | 217,000 | ||||||
Other | 1,294,200 | 959,900 | ||||||
| Total other current liabilities | $ | 4,177,900 | $ | 3,517,900 | ||||
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 28 (29), are as follows:
February 28, | ||||||||
2019 | 2018 | |||||||
Deferred tax assets: | ||||||||
Allowance for doubtful accounts | $ | 72,500 | $ | 149,600 | ||||
Inventory overhead capitalization | 87,600 | 69,800 | ||||||
Inventory valuation allowance | 13,100 | 47,200 | ||||||
Inventory valuation allowance – noncurrent | 88,900 | 70,700 | ||||||
Allowance for sales returns | 27,500 | 26,000 | ||||||
Capital loss carryforward | 116,200 | 111,900 | ||||||
Accruals | 252,900 | 141,700 | ||||||
Deferred tax assets | 658,700 | 616,900 | ||||||
Less valuation allowance | (116,200 | ) | (111,900 | ) | ||||
Total deferred tax assets | 542,500 | 505,000 | ||||||
Deferred tax liabilities: | ||||||||
Property, plant and equipment | (1,415,100 | ) | (641,900 | ) | ||||
Total deferred tax liabilities | (1,415,100 | ) | (641,900 | ) | ||||
Net deferred income tax liabilities | $ | (872,600 | ) | $ | (136,900 | ) | ||
| FY2017 | FY2016 | |||||||
| Current: | ||||||||
| Deferred tax assets: | ||||||||
| Allowance for doubtful accounts | $ | 164,600 | $ | 40,000 | ||||
| Inventory overhead capitalization | 131,000 | 131,000 | ||||||
| Inventory valuation allowance | 9,500 | 9,500 | ||||||
| Allowance for sales returns | 72,200 | 38,000 | ||||||
| Accruals | 89,300 | 79,700 | ||||||
| Deferred tax assets-current | 466,600 | 298,200 | ||||||
| Noncurrent: | ||||||||
| Deferred tax assets (liabilities): | ||||||||
| Inventory valuation allowance | $ | 104,500 | $ | 114,000 | ||||
| Property, plant and equipment | (443,100 | ) | (63,100 | ) | ||||
| Capital loss carryforward | 163,600 | 163,600 | ||||||
| Subtotal deferred tax assets (liabilities): | (175,000 | ) | 214,500 | |||||
| Less valuation allowance | (163,600 | ) | (163,600 | ) | ||||
| Net deferred tax assets (liabilities)-noncurrent | $ | (338,600 | ) | $ | 50,900 | |||
On December 22, 2017, President Trump signed into law the Tax Act. Among its provisions, the Tax Act reduces the statutory U.S. Corporate income tax rate from a maximum rate of 35% to 21% effective January 1, 2018. The Tax Act also provides for accelerated deductions of certain capital expenditures made after September 27, 2017 through bonus depreciation. Upon the enactment of the Tax Act in fiscal 2018, we recorded a reduction in our deferred income tax liabilities of $43,200 for the effect of the aforementioned change in the U.S. statutory income tax rate. The application of the Tax Act may change due to regulations subsequently issued by the U.S. Treasury Department.
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 determined that a valuation allowance is necessary to reduce the carrying value of the capital loss carryforward deferred tax asset 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 which endsended 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 components of income tax expense are as follows:
| February 28 (29), | ||||||||
| 2017 | 2016 | |||||||
| Current: | ||||||||
| Federal | $ | 1,267,600 | $ | 1,210,900 | ||||
| State | 262,500 | 234,800 | ||||||
| 1,530,100 | 1,445,700 | |||||||
| Deferred: | ||||||||
| Federal | 186,200 | (16,100 | ) | |||||
| State | 34,900 | (3,000 | ) | |||||
| 221,100 | (19,100 | ) | ||||||
| Total income tax expense | $ | 1,751,200 | $ | 1,426,600 | ||||
February 28, | ||||||||
2019 | 2018 | |||||||
Current: | ||||||||
Federal | $ | 1,253,600 | $ | 1,964,700 | ||||
State | 513,100 | 388,400 | ||||||
| 1,766,700 | 2,353,100 | |||||||
Deferred: | ||||||||
Federal | 674,500 | 239,800 | ||||||
State | 61,200 | 25,100 | ||||||
| 735,700 | 264,900 | |||||||
Total income tax expense | $ | 2,502,400 | $ | 2,618,000 | ||||
The following reconciles our expected income tax expense utilizing statutory tax ratesrate to the actualU.S. federal statutory income tax expense:
| February 28 (29), | ||||||||
| 2017 | 2016 | |||||||
| Tax expense at federal statutory rate | $ | 1,568,200 | $ | 1,205,600 | ||||
| Federal income tax audit expense for 2012 | - | 67,900 | ||||||
| State income tax–net of federal tax benefit | 182,000 | 158,200 | ||||||
| Other | 1,000 | (5,100 | ) | |||||
| Total income tax expense | $ | 1,751,200 | $ | 1,426,600 | ||||
February 28, | ||||||||
2019 | 2018 | |||||||
U.S. federal statutory income tax rate | 21.0 | % | 31.8 | % | ||||
U.S. state and local income taxes–net of federal benefit | 4.7 | % | 4.0 | % | ||||
Other | 1.6 | % | (2.4 | %) | ||||
Total income tax expense | 27.3 | % | 33.4 | % | ||||
Our U.S. federal statutory income tax rate declined from 34.0% to 21.0% as of January 1, 2018. As our fiscal year ends February 28, our federal effective tax rate for fiscal 2018 was a blended rate of 31.8%. We file our tax returns in the U.S. and certain state jurisdictions.jurisdictions in which we have nexus. We are no longer subject to income tax examinations by tax authorities for fiscal years before 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 statementstatements of earnings.
6.EMPLOYEE BENEFIT PLAN
We have a profit sharingprofit-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 $61,200$133,300 and $51,400$89,400 during the fiscal years ended February 28, 20172019 and February 29, 2016,2018, 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 Treasurytreasury stock amounted to 25,48740,641 net shares and 40,1219,602 net shares during the fiscal years ended February 28, 20172019 and February 29, 2016,2018, respectively.
In connection with the purchase of theour 400,000 square-foot facility disclosedon 40-acres, in Note 3,2015, we entered into a 15-year lease with the seller, a non-related third party, who leases 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 at $10,159,000, which was also the carrying costand as of February 28, 2017.2019, was estimated at $10,159,000. The accumulated depreciation associated with the leased assets was $438,700$1,139,700 and $88,000$789,100 for the fiscal years ended February 28, 20172019 and February 29, 2016,2018, respectively. Both the leased assets and accumulated depreciation are included in property, plant and equipment-net in the balance sheet.
The lease requires payments of $105,800lessee pays $112,200 per month, startingthrough the lease anniversary date of December 1, 2015,2019, with a 2.0% annual increase adjustment on each anniversary date thereafter. The lease terms allow for one five-year extension, which is not a bargain renewal option, at the expiration of the 15-year term. RevenueRevenues associated with the lease isare being recorded on a straight-line basis over the initial lease term and isare reported in other income on the statementstatements of earnings.
The following table reflects future minimum rental income payments under the non-cancellable portion of this lease as of February 28, 2017:
| Year Ending February 28, | ||||
| 2018 | $ | 1,301,000 | ||
| 2019 | 1,327,000 | |||
| 2020 | 1,353,500 | |||
| 2021 | 1,380,600 | |||
| 2022 | 1,408,200 | |||
| Thereafter | 13,584,100 | |||
| Total | $ | 20,354,400 | ||
Year Ending February 28 (29), | ||||
2020 | $ | 1,351,300 | ||
2021 | 1,378,300 | |||
2022 | 1,405,900 | |||
2023 | 1,434,000 | |||
2024 | 1,462,700 | |||
Thereafter | 10,806,600 | |||
Total | $ | 17,838,800 | ||
At February 28, 2017,2019, we had outstanding purchase commitments for inventory totaling approximately $5,969,800,$13,324,800, which is due during fiscal year 2018.2020. Of these commitments, $2,037,600$8,825,600 were with Usborne, $3,836,400$4,489,400 with various Kane Miller publishers and the remaining $95,700$9,800 with other suppliers.
Rent expense for the year ended February 28, 20172019 and February 29, 20162018, was $69,500$18,800 and $26,100,$17,200, respectively. As of February 28, 2017, we did not have any The current lease commitments in excess of one year.
8.DEBT
Debt consists of the following:
| February 28 (29), | ||||||||
| 2017 | 2016 | |||||||
| Line of credit | $ | 4,882,900 | $ | 3,331,800 | ||||
| Long-term debt | $ | 21,564,300 | $ | 18,302,800 | ||||
| Less current maturities | (898,500 | ) | (615,400 | ) | ||||
| Long-term debt, net of current maturities | $ | 20,665,800 | $ | 17,687,400 | ||||
February 28, | ||||||||
2019 | 2018 | |||||||
Line of credit | $ | - | $ | - | ||||
Long-term debt | $ | 19,776,600 | $ | 20,706,300 | ||||
Less current maturities | (945,900 | ) | (881,200 | ) | ||||
Long-term debt, net of current maturities | $ | 18,830,700 | $ | 19,825,100 | ||||
We have a Loan Agreement dated as of March 10, 2016 (as amended the “Loan Agreement”) with MidFirst Bank (“the Bank”) which includes multiple loans. Term Loan #1 is comprised of Tranche A totaling $13.4 million and Tranche B totaling $5.0 million, both with the maturity date of December 1, 2025. Tranche A has a fixed interest rate of 4.23% and interest is payable monthly. For Tranche B interest is payable monthly at the bank adjusted LIBOR Index plus 3.25% (4.03%a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.99% at February 28, 2017)2019). Term Loan #1 is secured by the primary office, warehouse and land. The outstanding borrowings on Tranche A were $11,984,100 and $12,453,300 at February 28, 2019 and 2018, respectively. The outstanding borrowings on Tranche B were $4,479,700 and $4,657,700 at February 28, 2019 and 2018, respectively.
We also have Term Loan #2 with the Bank in the amount of $4.0 million with the maturity date of June 28, 2021, and interest payable monthly at the bank adjusted LIBOR Index plus 3.25% (4.03%a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.99% at February 28, 2017)2019). Term Loan #2 is secured by our secondary warehouse and land. The Loan Agreement also providesprovided a $7.0$15.0 million revolving loan (“line of credit’credit”) through JuneAugust 15, 20172019 with interest payable monthly at the bank adjusted LIBOR Index plus 3.25% (4.03%a tiered pricing rate based on the Company’s Adjusted Funded Debt to EBITDA Ratio (4.99% at February 28, 2017)2019). The Presidentoutstanding borrowings on Term Loan #2 were $3,312,800 and Chief Executive Officer$3,595,100 at February 28, 2019 and his wife have executed a Guaranty Agreement obligating them to repay $3,680,0002018, respectively. We had no borrowings outstanding on line of any unpaid Term Loans, unpaid accrued interestcredit at February 28, 2019 and any recourse amounts as defined in2018. Available credit under the Continuing Guaranty Agreement.
The Tranche B, the line of credit and the Term Loan #2 all accrue interest at a tiered rate based on our funded debtAdjusted Funded Debt to EBITDA ratio (“ratio”) which is payable monthly. The current pricing tier is as follows:
Pricing Tier | Adjusted Funded Debt to EBITDA Ratio | LIBOR Margin (bps) |
I | > | 325.00 |
II | > | 300.00 |
III | > | 275.00 |
IV | <1 | 250.00 |
Adjusted Funded Debt is defined as all long term and short-term bank debt less the outstanding balances of Tranche A and Tranche B Term Loans. EBITDA is defined in the Loan Agreement as earnings before interest expense, income tax expense (benefit) and depreciation and amortization expenses.
On June 15, 2018, the Company executed the Eighth Amendment Loan Agreement with the Bank related to our Loan Agreement. The amendment modifies the Loan Agreement, extending the termination date until August 15, 2019, reduces the interest rate pricing grid for all floating rate borrowings outstanding oncovered by the Loan Agreement, establishes a new $3,000,000 advancing term loan to be used for capital expansions to increase daily shipping capacity, releases the personal Guaranty of Randall W. White and Carol White, along with other covenant restrictions being lessened. The amendment also includes an adjustment to the Adjusted Funded Debt to EBITDA ratio for covenant compliance.
On February 7, 2019, the Company executed the Ninth Amendment Loan Agreement with the Bank related to our revolving credit agreement at February 28, 2017 and February 29, 2016, respectively. Available credit underLoan Agreement. The amendment modifies the revolving credit agreement was $2,117,100 at February 28, 2017 and $668,200 at February 29, 2016.
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 JuneAugust 15, 2017,2019, 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. ForWe had no letters of credit outstanding for the year ended February 28, 2017, we had no letters of credit outstanding.
The Loan Agreement also contains provisions that require us to maintain specified financial ratios, restrict transactions with related parties, prohibitprohibits mergers or consolidation, disallow additional debt, and limit the amount of compensation, salaries, investments, capital expenditures, leasing transactions and the amount of distributions we can make on a quarterly basis. Additionally, the Loan Agreement suspendsplaces limitations on the amount of dividends that may be distributed and the total value of stock buybacks.
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), | ||||
2020 | $ | 945,900 | ||
2021 | 988,600 | |||
2022 | 1,038,100 | |||
2023 | 1,087,600 | |||
2024 | 1,139,500 | |||
Thereafter | 14,576,900 | |||
| $ | 19,776,600 | |||
| Year ending February 28, | ||||
| 2018 | $ | 898,500 | ||
| 2019 | 952,200 | |||
| 2020 | 989,600 | |||
| 2021 | 1,026,500 | |||
| 2022 | 1,069,000 | |||
| Thereafter | 16,628,500 | |||
| $ | 21,564,300 | |||
9.STOCK-BASED COMPENSATION
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 1,000,0002,000,000 stock options.
A summary of the status of our 2002 Plan as of February 28, 20172019 and February 29, 2016,2018, and changes during the years then ended is presented below:
| February 28 (29), | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Exercise | Exercise | |||||||||||||||
| Shares | Price | Shares | Price | |||||||||||||
| Outstanding at | ||||||||||||||||
| Beginning of Year | 10,000 | $ | 5.25 | 10,000 | $ | 5.25 | ||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Expired | - | - | - | - | ||||||||||||
| Outstanding at End of Year | 10,000 | $ | 5.25 | 10,000 | $ | 5.25 | ||||||||||
February 28, | ||||||||||||||||
2019 | 2018 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Exercise | |||||||||||||||
Shares | Price | Shares | Price | |||||||||||||
Outstanding at beginning of year | 10,000 | $ | 2.63 | 20,000 | $ | 2.63 | ||||||||||
Exercised | - | - | 10,000 | 2.63 | ||||||||||||
Expired | - | - | - | - | ||||||||||||
Outstanding at end of year | 10,000 | $ | 2.63 | 10,000 | $ | 2.63 | ||||||||||
At February 28, 2017,2019, all options outstanding are exercisable with an aggregate intrinsic value of $43,000$54,300 and weighted-average remaining contractual terms of options outstanding of 2.80.8 years.
In July 2018, our shareholders approved the Company’s 2019 Long-Term Incentive Plan (“2019 LTI Plan”). The 2019 LTI Plan establishes up to 600,000 shares of restricted stock which can be granted to certain members of management based on exceeding specified net revenues and pre-tax performance metrics during fiscal years 2019, 2020 and 2021. The first award of 200,000 shares of restricted stock will be made for exceeding the initial annual net revenues target of $100,000,000. The second award of an additional 200,000 shares of restricted stock will begin to be awarded for exceeding annual net revenues of $112,500,000 up to the full award of shares for reaching the second targeted annual net revenues of $130,000,000. The third award of 200,000 shares of restricted stock will begin to be awarded for exceeding annual net revenues of $146,250,000 up to the full award of shares for reaching the third targeted annual net revenues of $160,000,000. Should the Company’s annual net revenues exceed $160,000,000 in any of the three years under the plan, the 2019 LTI Plan calls for the full award of the 600,000 shares of restricted stock to be issued. Awards of restricted stock will be made based on interpolation for years that net revenues exceed an established net revenues target but do not fully reach the next net revenues target. Net revenues under the 2019 LTI Plan is defined as gross sales, less discounts plus transportation revenue, similarly as presented on the Company’s Statement of Earnings. Awards of shares will be delayed if the Company does not achieve a minimum pre-tax profit of 3.0% in any fiscal year. Delayed awards will be made to participants upon the Company achieving the minimum profitability during the next completed fiscal year. Restricted shares granted under the 2019 LTI Plan “cliff vest” after five years of continued employment.
The restricted share awards granted under the 2019 LTI Plan contain both service and performance conditions. The Company recognizes share compensation expense only for the portion of the restricted share awards that are considered probable of vesting. Shares are considered granted, and the service inception date begins, when a mutual understanding of the key terms and conditions between the Company and the employee have been established. The fair value of these awards is determined based on the closing price of the shares on the grant date. The probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment.
For certain awards that provide discretion to adjust the allocation of the restricted shares, the service-inception date for such awards could precede the grant date as a mutual understanding of the key terms and conditions between the Company and the employee has not yet been established. For awards in which the service-inception date precedes the grant date, compensation cost is accrued beginning on the service-inception date. The Company estimates the award's fair value on each subsequent reporting date, until the grant date, based on the closing market price of the Company’s common stock. On the grant date, the award's fair value is fixed, subject to the remaining performance conditions, and the cumulative amount of previously recognized compensation expense is adjusted to the fair value at the grant date.
During fiscal year 2019, the Company granted approximately 308,000 restricted shares under the 2019 LTI Plan with an average grant-date fair value of $9.94 per share. During fiscal year 2019, the Company recognized $401,800 of compensation expense associated with the shares granted. The remaining compensation expense for these awards, totaling approximately $2,660,500, will be recognized ratably over the remaining vesting period of approximately 48 months.
A summary of compensation expense recognized in connection with restricted share awards follows:
Year Ended February 28, | ||||||||
2019 | 2018 | |||||||
Share-based compensation expense | $ | 401,800 | $ | - | ||||
10.STOCK REPURCHASE PLAN
In April 2008, the Board of Directors authorized us to repurchase up to an additional 1,000,000 shares of our common stock under the plan initiated in 1998 (“amended 2008 plan”). On February 4, 2019, the Board of Directors replaced the amended 2008 plan with a new plan which authorized us to repurchase up to 800,000 of outstanding common stock in the open market or in privately negotiated transactions, and to utilize any derivative or similar instrument to effect share repurchase transactions (including without limitation, accelerated share repurchase contracts, equity forward transactions, equity swap transactions, floor transactions or other similar transactions or any combination of the foregoing transactions). The Company received approval for the new plan from its primary lender, which removed certain restrictions on share repurchases outlined in the fourth amendment and added other restrictions outlined in the ninth amendment to the Company’s Loan Agreement (see Note 8 to the financial statements).
During fiscal year 2019, and prior to February 4, 2019, we purchased 16,805 shares at an average price of $11.31 per share totaling approximately $190,100 under the amended 2008 stock repurchase plan. Between February 4 and February 28, 2019, we purchased 8,366 shares at an average price of $7.93 per share totaling approximately $66,400 under the new 2019 stock repurchase plan.
11.REVENUE RECOGNITION
Revenue is derived from the sales of children’s books and related products which are generally capable of being distinct and accounted for as a single performance obligation to deliver tangible goods. Substantially all of our books are sold to end consumers and publishing retail outlets. Revenues are recognized at shipping point, which is the point in time the customer obtains control of the products and risk of loss and rewards of ownership have been transferred. Shipping and handling fees are recorded as operating and selling expenses when the product is shipped and revenue is recognized. The Company estimates product returns based on historical return rates. The majority of the Company's contracts have a single performance obligation and are short term in nature. Sales taxes, that are collected from customers and remitted to governmental authorities, are accounted for on a net basis and therefore are excluded from net sales.
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
On March 1, 2018, the Company adopted Topic 606, as prescribed by the FASB, using the full retrospective method. Results for all reporting periods are presented under Topic 606.
There was no change to net earnings or retained earnings due to the adoption of Topic 606, with the impact primarily related to the recording of our hostess awards program in gross sales and discounts and allowances, as opposed to recording the net costs in operating and selling expenses.
Disaggregation of Revenue
Refer to Note 13 – Business Segments for revenue by segment.
Arrangements with Multiple Performance Obligations
Certain contracts associated with the hostess awards program include sales incentives, such as discounted or free products. These incentives provide a separate performance obligation in the contract and material right to the customer. The transaction price is allocated to the material right based on its relative standalone selling price and is recognized in revenue as the performance obligations are satisfied, which occurs at shipping point or at the expiration of the material right. As our sales incentives are delivered with the associated products ordered, there is no deferral required. Revenue allocated to the material right are recognized in gross sales, discounts and allowances and cost of goods sold in our statement of earnings.
Practical Expedients and Exemptions
The Company generally expenses sales commissions when incurred. These costs are recorded within operating expenses. The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
Impact on Financial Statements
As a result of applying Topic 606, the impact to the Company’s balance sheet as of February 28, 2018 was as follows:
Without | ||||||||||||
As Reported | Adjustments | Adoption | ||||||||||
ASSETS | ||||||||||||
Accounts receivable-Net | $ | 2,913,700 | $ | (99,900 | ) | $ | 2,813,800 | |||||
Inventories-Net | 26,618,600 | (100 | ) | 26,618,500 | ||||||||
Prepaid expenses and other assets | 1,259,000 | (117,000 | ) | 1,142,000 | ||||||||
Total current assets | 33,514,600 | (217,000 | ) | 33,297,600 | ||||||||
TOTAL ASSETS | 61,837,900 | (217,000 | ) | 61,620,900 | ||||||||
LIABILITIES | ||||||||||||
Other current liabilities | 3,517,900 | (217,000 | ) | 3,300,900 | ||||||||
Total liabilities | 41,435,800 | (217,000 | ) | 41,218,800 | ||||||||
As a result of applying Topic 606, the impact to the Company’s statement of earnings for the year ended February 28, 2018 was as follows:
Without | ||||||||||||
As Reported | Adjustments | Adoption | ||||||||||
GROSS SALES | $ | 139,040,400 | $ | (13,193,200 | ) | $ | 125,847,200 | |||||
Less discounts and allowances | (38,103,500 | ) | 13,174,700 | (24,928,800 | ) | |||||||
Transportation revenue | 11,047,700 | - | 11,047,700 | |||||||||
NET REVENUES | 111,984,600 | (18,500 | ) | 111,966,100 | ||||||||
COST OF GOODS SOLD | 35,824,300 | (4,893,000 | ) | 30,931,300 | ||||||||
Gross margin | 76,160,300 | 4,874,500 | 81,034,800 | |||||||||
OPERATING EXPENSE: | ||||||||||||
Operating and selling | 17,694,700 | 4,876,500 | 22,571,200 | |||||||||
Sales commissions | 35,359,000 | - | 35,359,000 | |||||||||
General and administrative | 15,736,300 | - | 15,736,300 | |||||||||
Total operating expenses | 68,790,000 | 4,876,500 | 73,666,500 | |||||||||
INTEREST EXPENSE | 1,119,500 | - | 1,119,500 | |||||||||
OTHER INCOME | (1,581,900 | ) | (2,000 | ) | (1,583,900 | ) | ||||||
EARNINGS BEFORE INCOME TAXES | 7,832,700 | - | 7,832,700 | |||||||||
INCOME TAXES | 2,618,000 | - | 2,618,000 | |||||||||
NET EARNINGS | $ | 5,214,700 | $ | - | $ | 5,214,700 | ||||||
As a result of applying Topic 606, the impact to the Company’s operating results by reporting segment for the year ended February 28, 2018 was as follows:
UBAM
Without | ||||||||||||
As Reported | Adjustments | Adoption | ||||||||||
GROSS SALES | $ | 121,364,700 | $ | (13,193,900 | ) | $ | 108,170,800 | |||||
Less discounts and allowances | (28,657,900 | ) | 13,175,400 | (15,482,500 | ) | |||||||
Transportation revenue | 11,010,300 | - | 11,010,300 | |||||||||
NET REVENUES | 103,717,100 | (18,500 | ) | 103,698,600 | ||||||||
COST OF GOODS SOLD | 31,132,800 | (4,893,000 | ) | 26,239,800 | ||||||||
Gross margin | 72,584,300 | 4,874,500 | 77,458,800 | |||||||||
OPERATING EXPENSE: | ||||||||||||
Operating and selling | 14,509,500 | 4,875,500 | 19,385,000 | |||||||||
Sales commissions | 35,043,200 | - | 35,043,200 | |||||||||
General and administrative | 3,602,000 | - | 3,602,000 | |||||||||
Total operating expenses | 53,154,700 | 4,875,500 | 58,030,200 | |||||||||
OPERATING INCOME | $ | 19,429,600 | $ | (1,000 | ) | $ | 19,428,600 | |||||
Publishing
Without | ||||||||||||
As Reported | Adjustments | Adoption | ||||||||||
GROSS SALES | $ | 17,675,700 | $ | 700 | $ | 17,676,400 | ||||||
Less discounts and allowances | (9,445,600 | ) | (700 | ) | (9,446,300 | ) | ||||||
Transportation revenue | 37,400 | - | 37,400 | |||||||||
NET REVENUES | 8,267,500 | - | 8,267,500 | |||||||||
COST OF GOODS SOLD | 4,691,500 | - | 4,691,500 | |||||||||
Gross margin | 3,576,000 | - | 3,576,000 | |||||||||
OPERATING EXPENSE: | ||||||||||||
Operating and selling | 987,500 | - | 987,500 | |||||||||
Sales commissions | 315,700 | - | 315,700 | |||||||||
General and administrative | 509,600 | - | 509,600 | |||||||||
Total operating expenses | 1,812,800 | - | 1,812,800 | |||||||||
OPERATING INCOME | $ | 1,763,200 | $ | - | $ | 1,763,200 | ||||||
12.QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended February 28, 20172019 and February 29, 2016.
| Basic | Diluted | |||||||||||||||||||
| Net | Earnings | Earnings | ||||||||||||||||||
| Revenues | Gross Margin | Net Earnings | Per Share | Per Share | ||||||||||||||||
| 2017 | ||||||||||||||||||||
| First quarter | $ | 22,784,200 | $ | 16,110,400 | $ | 620,200 | $ | 0.15 | $ | 0.15 | ||||||||||
| Second quarter | 25,893,000 | 18,394,600 | 318,500 | 0.08 | 0.08 | |||||||||||||||
| Third quarter | 30,697,600 | 22,369,500 | 1,274,200 | 0.31 | 0.31 | |||||||||||||||
| Fourth quarter | 27,253,300 | 21,140,100 | 648,000 | 0.16 | 0.16 | |||||||||||||||
| Total year | $ | 106,628,100 | $ | 78,014,600 | $ | 2,860,900 | $ | 0.70 | $ | 0.70 | ||||||||||
| 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 | ||||||||||
Net Revenues | Gross Margin | Net Earnings | Basic Earnings Per Share | Diluted Earnings Per Share | ||||||||||||||||
2019 | ||||||||||||||||||||
First quarter | $ | 30,022,300 | $ | 20,352,600 | $ | 1,816,600 | $ | 0.22 | $ | 0.22 | ||||||||||
Second quarter | 24,681,000 | 16,218,300 | 1,490,700 | 0.18 | 0.18 | |||||||||||||||
Third quarter | 40,482,600 | 27,341,000 | 2,815,600 | 0.34 | 0.34 | |||||||||||||||
Fourth quarter | 23,625,400 | 15,835,800 | 555,500 | 0.08 | 0.07 | |||||||||||||||
Total year | $ | 118,811,300 | $ | 79,747,700 | $ | 6,678,400 | $ | 0.82 | $ | 0.81 | ||||||||||
2018 | ||||||||||||||||||||
First quarter | $ | 26,941,200 | $ | 18,342,400 | $ | 1,225,300 | $ | 0.15 | $ | 0.15 | ||||||||||
Second quarter | 24,186,900 | 16,536,600 | 1,036,900 | 0.13 | 0.13 | |||||||||||||||
Third quarter | 38,909,900 | 26,698,200 | 2,128,400 | 0.26 | 0.26 | |||||||||||||||
Fourth quarter | 21,946,600 | 14,583,100 | 824,100 | 0.10 | 0.10 | |||||||||||||||
Total year | $ | 111,984,600 | $ | 76,160,300 | $ | 5,214,700 | $ | 0.64 | $ | 0.64 | ||||||||||
13.BUSINESS SEGMENTS
We have two reportable segments: EDC Publishing and UBAM which are business units thatUBAM. These reportable segments offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations.
The accounting policies of the segments are the same as those described inof the summaryrest of significant accounting policies.the Company. We evaluate segment performance based on earnings (loss) before income taxes of the segments, which is defined as segment net salesrevenues 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.“Other” row below. Corporate expenses include the executive department, accounting department, information services department, general office management, warehouse operations and building facilities management. Our assets and liabilities are not allocated on a segment basis.
Information by industry segment for the years ended February 28, 20172019 and February 29, 20162018 is set forth below:
| NET REVENUES | ||||||||
| 2017 | 2016 | |||||||
| EDC Publishing | $ | 9,007,500 | $ | 10,831,400 | ||||
| UBAM | 97,620,600 | 52,786,900 | ||||||
| Total | $ | 106,628,100 | $ | 63,618,300 | ||||
| EARNINGS (LOSS) BEFORE INCOME TAXES | ||||||||
| 2017 | 2016 | |||||||
| EDC Publishing | $ | 2,566,400 | $ | 3,305,300 | ||||
| UBAM | 15,376,000 | 7,336,200 | ||||||
| Other | (13,330,300 | ) | (7,095,600 | ) | ||||
| Total | $ | 4,612,100 | $ | 3,545,900 | ||||
NET REVENUES
2019 | 2018 | |||||||
Publishing | $ | 10,430,000 | $ | 8,267,500 | ||||
UBAM | 108,381,300 | 103,717,100 | ||||||
Total | $ | 118,811,300 | $ | 111,984,600 | ||||
EARNINGS (LOSS) BEFORE INCOME TAXES
2019 | 2018 | |||||||
Publishing | $ | 2,885,800 | $ | 1,763,200 | ||||
UBAM | 19,250,100 | 19,429,600 | ||||||
Other | (12,955,100 | ) | (13,360,100 | ) | ||||
Total | $ | 9,180,800 | $ | 7,832,700 | ||||
14.FAIR VALUE MEASUREMENTS
The valuation hierarchy included in U.S. GAAP considers the transparency of inputs used to value assets and liabilities as of the measurement date. The less transparent or observable the inputs used to value assets and liabilities, the lower the classification of the assets and liabilities in the valuation hierarchy. A financial instrument's classification within the valuation hierarchy is based on the lowest level of input that is significant to its fair value measurement. The three levels of the valuation hierarchy and the classification of our financial assets and liabilities within the hierarchy are as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly. If an asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 - Unobservable inputs for the asset or liability.
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 $4,882,900 and $3,331,800$0 at February 28, 20172019 and February 29, 2016, respectively.2018. The estimated fair value of our term notes payable is estimated by management to approximate $20,130,100$19,123,700 and $19,454,500 at February 28, 20172019 and $18,078,300 February 29, 2016,2018, respectively. Management's estimates are based on the obligations' characteristics, including floating interest rate, maturity, and collateral. Such valuation inputs are considered a Level 2 measurement in the fair value valuation hierarchy.
15.DEFERRED REVENUES
The Company’s UBAM division receives payments on orders in advance of shipment. Any payments received prior to our fiscal year end that were not shipped as of February 28, 2019 are recorded as deferred revenues on the balance sheet. We received approximately $965,600 and $693,000 at February 28, 2019 and 2018, respectively, in payments for sales orders which were, or will be, shipped out subsequent to the year end. Orders that were included in deferred revenues predominantly shipped within the first few days of the next fiscal year.
16.SUBSEQUENT EVENTS
On May 21, 2019, the Board of Directors of EDC approved a $0.05 dividend that will be paid to shareholders of record on Tuesday, June 4, 2019.