Schedules have been omitted as such information is either not required or is included in the financial statements.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Business
—
Educational Development Corporation (“we”, “our”, “us”, or “the Company”) distributes books and publications through our Usborne Books & More (“UBAM”) and EDC Publishing divisions to individual consumers, book, toy and gift stores, libraries and home educators located throughout the United States (“U.S.”). We are the exclusive U.S. trade distributor of books and related items, published by Usborne Publishing Limited (“Usborne”), an England-based publishing company, our largest supplier. We are also a publishing company 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.
Reclassifications
—
Certain accounts in the 2016 statement of earnings have been reclassified between operating and selling expenses and general and administrative expenses to more appropriately present these classifications.
Business Concentration
—
A significant portion of our inventory purchases are concentrated with Usborne. Purchases from them were approximately $34.8 million and $20.0 million for the years ended February 28, 2017 and February 29, 2016, respectively. Total inventory purchases for those same periods were approximately $45.4 million and $29.8 million, respectively. As of February 28, 2017, our outstanding accounts payable due to Usborne was $13.9 million.
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. Extended, seasonal dating is frequently available for orders of minimum quantities or amounts. Accounts receivable 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.
Accounts receivable also includes consignment inventory balances of inactive consultants as the Company considers these amounts to be collectable directly from the inactive consultants either through payment or the return of titles consigned.
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 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 and $401,900 as of February 28, 2017 and February 29, 2016, respectively. Included within this allowance is $217,000 and $148,000 of reserve related to consignment inventory held by inactive consultants.
Inventories
—
Inventories are stated at the lower of cost or market. Cost is determined using the average costing 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.
Consultants that meet certain eligibility requirements are allowed to receive inventory on consignment. Consignment inventory is stated at cost, less an estimated reserve for consignment inventory that is not expected to be sold or returned to the Company. The total value of inventory on consignment with active consultants was $1,140,700 and $571,400 at February 28, 2017 and February 29, 2016, respectively. Inventory related 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 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 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. We recorded impairment loss of $1.1 million to long-lived assets in our UBAM segment in the fourth quarter of fiscal 2017 (Note 4).
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 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 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. Management has estimated and included a reserve for sales returns of $190,000 and $100,000 for the fiscal years ended February 28, 2017 and February 29, 2016, respectively.
Advertising Costs
—
Advertising costs are expensed as incurred. Advertising expenses, included in selling and operating expenses in the statements of earnings, were $266,400 and $531,500 for the years ended February 28, 2017 and February 29, 2016, 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 $16,637,500 and $8,655,600 for the years ended February 28, 2017 and February 29, 2016, respectively.
Interest Expense
—
Interest related to our outstanding debt is recognized as incurred. Interest expense, classified separately in the statements of earnings, were $1,028,800 and $244,900 for the years ended February 28, 2017 and February 29, 2016, respectively.
Earnings 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
|
|
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 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,” 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 July 2015, FASB issued ASU No. 2015-11 "Inventory - Simplifying the Measurement of Inventory", which is intended to allow measurement of inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which means the first quarter of our fiscal year 2018. We anticipate this ASU having minimal impact on our financial statements.
In November 2015, FASB issued ASU No. 2015-17 “Income Taxes – Balance Sheet Classification of Deferred Taxes,” 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.
In June 2016, FASB issued ASU No. 2016-13 "Financial Instruments—Credit 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. We anticipate this ASU having minimal impact on our financial statements.
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
|
|
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
|
|
On December 1, 2015, we completed the purchase of a new facility to 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 8 and Note 9 for additional information
Beginning in fiscal 2015, the Company began working with a third-party to develop an integrated direct-sales order system. This system was to be used by the Company’s independent sales consultants to assist them in order processing, payment collection, genealogy tracking, commission reporting among other features. Our sales consultants started using the new system during the third quarter of fiscal 2017.
During the fourth quarter of fiscal year 2017 it was concluded that the system was not fulfilling the needs of the direct-sales program. Management evaluated various alternatives, but ultimately concluded it was necessary to abandon the system as it became clear the third-party developer would be unable to get the system to operate as originally intended. As a result, we reverted to our original web-based proprietary system and recognized an impairment loss of $1.1 million, as it was determined that the system had no fair value as a result of being abandoned.
5.
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
|
|
6.
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:
|
|
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
|
|
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 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 amount of the deferred tax liability related to property, plant and equipment and current income tax (payable) receivable could be adjusted if a scheduled future cost segregation analysis, expected to be completed by the end of the second fiscal quarter 2018, results in changes which affect this liability. An estimate of the range of the change in deferred tax liability cannot be made at this time.
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
|
|
The following reconciles our expected income tax expense utilizing statutory tax rates to the actual 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
|
|
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 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 $61,200 and $51,400 during the fiscal years ended February 28, 2017 and February 29, 2016, 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 25,487 net shares and 40,121 net shares during the fiscal years ended February 28, 2017 and February 29, 2016, respectively.
8. 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 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 cost as of February 28, 2017. The accumulated depreciation associated with the leased assets was $438,700 and $88,000 for the fiscal years ended February 28, 2017 and February 29, 2016, 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 $105,800 per month starting December 1, 2015, 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. 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 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
|
|
At February 28, 2017, we had outstanding purchase commitments for inventory totaling approximately $5,969,800, which is due during fiscal year 2018. Of these commitments, $2,037,600 were with Usborne, $3,836,400 with various Kane Miller publishers and the remaining $95,700 with other suppliers.
Rent expense for the year ended February 28, 2017 and February 29, 2016 was $69,500 and $26,100, respectively.
As of February 28, 2017, we did not have any lease commitments in excess of one year.
9. 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
|
|
We have a 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% at February 28, 2017). Term Loan #1 is secured by the primary office, warehouse and land.
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% at February 28, 2017). Term Loan #2 is secured by our secondary warehouse and land. The Loan Agreement also provides a $7.0 million revolving loan (“line of credit’) through June 15, 2017 with interest payable monthly at the bank adjusted LIBOR Index plus 3.25% (4.03% at February 28, 2017). The President and Chief Executive Officer and his wife have executed a Guaranty Agreement obligating them to repay $3,680,000 of any unpaid Term Loans, unpaid accrued interest and any recourse amounts as defined in the Continuing Guaranty Agreement.
The Tranche B, the line of credit and the Term Loan #2 accrue interest at a tiered rate based on our 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
|
>3.25
|
362.50
|
II
|
>2.75 but
<
3.25
|
350.00
|
III
|
>2.25 but
<
2.75
|
337.50
|
IV
|
<
2.25
|
325.00
|
EBITDA is defined as earnings before interest expense, income tax expense (benefit) and depreciation and amortization expenses.
We had $4,882,900 and $3,331,800 in borrowings outstanding on our revolving credit agreement at February 28, 2017 and February 29, 2016, respectively. Available credit under 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 June 15, 2017, 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. For the year ended February 28, 2017, we had no letters of credit outstanding.
The Loan 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, leasing transactions and the amount of distributions we can make on a quarterly basis. Additionally, the Loan Agreement suspends dividends and 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,
|
|
2018
|
|
$
|
898,500
|
|
2019
|
|
|
952,200
|
|
2020
|
|
|
989,600
|
|
2021
|
|
|
1,026,500
|
|
2022
|
|
|
1,069,000
|
|
Thereafter
|
|
|
16,628,500
|
|
|
|
$
|
21,564,300
|
|
10.
|
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, 2017 expire in December 2019.
A summary of the status of our 2002 Plan as of February 28, 2017 and February 29, 2016, 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
|
|
At February 28, 2017, all options outstanding are exercisable with an aggregate intrinsic value of $43,000 and weighted-average remaining contractual terms of options outstanding of 2.8 years.
11.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended February 28, 2017 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
|
|
We have two reportable segments: EDC Publishing and 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, internet shows, and book fairs. UBAM 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 28, 2017 and February 29, 2016 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
|
|
13.
|
STOCK REPURCHASE PLAN
|
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 2017, we purchased 23 shares of common stock at an average price of $8.70 per share totaling approximately $200. The maximum number of shares that may be repurchased in the future is 303,129.
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 at February 28, 2017 and February 29, 2016, respectively. The estimated fair value of our term notes payable is estimated by management to approximate $20,130,100 at February 28, 2017 and $18,078,300 February 29, 2016, 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.
SUBSEQUENT EVENTS
None.