**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

# **FORM 10-Q**

# ** **

**(MarkOne)**

 

x  **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended November 30,2008**

 

**OR**

 

o   **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from             to           .**

 

**Commission file number: 0-4957**

 

# **EDUCATIONALDEVELOPMENT CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                | **73-0750007**       |
|---------------------------------------------|----------------------|
| (State or other  jurisdiction of            | (I.R.S. Employer     |
| incorporation or  organization)             | Identification  No.) |
|                                        |                 |
| **10302  East 55th Place, Tulsa, Oklahoma** | **74146-6515**       |
| (Address of  principal executive offices)   | (Zip Code)           |

 

Registrant’s telephone number, including area code **(918) 622-4522**

 

Indicate by check markwhether the registrant (1) has filed all reports to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes  x       No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”,“accelerated filer”, and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 
|   |   | Large  accelerated filer o |   | Accelerated  filer o         |   |
|--------|--------|---------------------------------|--------|-----------------------------------|--------|
|   |   |                            |   |                              |   |
|   |   | Non-accelerated filer o         |   | Smaller  reporting company x |   |

 

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act)

 

Yes o          No  x

 

As of January 9,2009 there were 3,820,508 shares of Educational Development Corporation CommonStock, $0.20 par value outstanding.

 

 

 

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PART I. FINANCIAL INFORMATION

ITEM 1

 

**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSEDBALANCE SHEETS (UNAUDITED)**

 
| ** **                                                                                                                                                                                                                   | ** ** | **November 30, 2008** | ** ** | **February 29, 2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                   |       |                            |       |                            |       |
| ** **                                                                                                                                                                                                                   |       |                            |       |                            |       |
| CURRENT ASSETS:                                                                                                                                                                                                              |       |                            |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                                                   |       | $                               | 5,054,400  |                            | $          | 2,440,300 |   |
| Accounts  receivable, less allowance for doubtful accounts and sales returns $168,600  (November 30) and $158,400 (February 29)                                                                                    |       | 2,936,500                       |       | 2,611,800                       |       |
| Inventories—Net                                                                                                                                                                                                         |       | 9,132,000                       |       | 11,818,700                      |       |
| Income taxes  receivable                                                                                                                                                                                                     |       | 270,000                         |       | —                          |       |
| Prepaid expenses  and other assets                                                                                                                                                                                           |       | 131,400                         |       | 112,000                         |       |
| Deferred income  taxes                                                                                                                                                                                                       |       | 204,500                         |       | 197,100                         |       |
| Total current  assets                                                                                                                                                                                                        |       | 17,728,800                      |       | 17,179,900                      |       |
|                                                                                                                                                                                                                         |       |                            |       |                            |       |
| INVENTORIES—Net                                                                                                                                                                                                         |       | 502,000                         |       | 459,000                         |       |
|                                                                                                                                                                                                                         |       |                            |       |                            |       |
| PROPERTY, PLANT  AND EQUIPMENT—Net                                                                                                                                                                                      |       | 2,307,700                       |       | 2,382,800                       |       |
|                                                                                                                                                                                                                         |       |                            |       |                            |       |
| DEFERRED INCOME  TAXES                                                                                                                                                                                                       |       | 44,400                          |       | 43,300                          |       |
|                                                                                                                                                                                                                         |       |                            |       |                            |       |
| TOTAL ASSETS                                                                                                                                                                                                                 |       | $                               | 20,582,900 |                            | $          | 20,065,000 |   |
|                                                                                                                                                                                                                         |       |                            |       |                            |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                               |       |                            |       |                            |       |
|                                                                                                                                                                                                                         |       |                            |       |                            |       |
| CURRENT  LIABILITIES:                                                                                                                                                                                                        |       |                            |       |                            |       |
| Accounts payable                                                                                                                                                                                                             |       | $                               | 2,564,000  |                            | $          | 2,456,900 |   |
| Accrued salaries  and commissions                                                                                                                                                                                            |       | 816,300                         |       | 559,000                         |       |
| Income taxes  payable                                                                                                                                                                                                        |       | —                          |       | 56,200                          |       |
| Other current  liabilities                                                                                                                                                                                                   |       | 298,900                         |       | 195,800                         |       |
| Total current  liabilities                                                                                                                                                                                                   |       | 3,679,200                       |       | 3,267,900                       |       |
|                                                                                                                                                                                                                         |       |                            |       |                            |       |
| COMMITMENTS                                                                                                                                                                                                                  |       |                            |       |                            |       |
|                                                                                                                                                                                                                         |       |                            |       |                            |       |
| SHAREHOLDERS’  EQUITY:                                                                                                                                                                                                  |       |                            |       |                            |       |
| Common stock,  $0.20 par value; Authorized 8,000,000 shares; Issued 6,039,040  (November 30) and 5,806,840 (February 29) shares; Outstanding  3,822,850 (November 30) and 3,706,745 (February 29) shares |       | 1,207,800                       |       | 1,161,400                       |       |
| Capital in  excess of par value                                                                                                                                                                                              |       | 8,508,400                       |       | 7,706,100                       |       |
| Retained  earnings                                                                                                                                                                                                           |       | 19,131,800                      |       | 19,206,100                      |       |
|                                                                                                                                                                                                                         |       | 28,848,000                      |       | 28,073,600                      |       |
| Less treasury  stock, at cost                                                                                                                                                                                                |       | (11,944,300                     | )          | (11,276,500                     | )          |
|                                                                                                                                                                                                                         |       | 16,903,700                      |       | 16,797,100                      |       |
|                                                                                                                                                                                                                         |       |                            |       |                            |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                             |       | $                               | 20,582,900 |                            | $          | 20,065,000 |   |

 

See notes tocondensed financial statements.

 

2

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**EDUCATIONALDEVELOPMENT CORPORATION**

**CONDENSED STATEMENTS OF EARNINGS(UNAUDITED)**

 
| ** **                                                            | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                                | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| GROSS SALES                                                           |       | $                                                       | 12,301,200 |                                                   | $          | 12,660,700 |   | $ | 31,444,500 |   | $ | 31,564,800 |   |
| Less discounts  and allowances                                        |       | (3,447,600                                              | )          | (3,344,200                                             | )          | (9,557,000 | ) | (9,163,300 | ) |
| Transportation  revenue                                               |       | 534,600                                                 |       | 587,000                                                |       | 1,243,000 |   | 1,326,900 |   |
| NET REVENUES                                                          |       | 9,388,200                                               |       | 9,903,500                                              |       | 23,130,500 |   | 23,728,400 |   |
| COST OF SALES                                                         |       | 3,424,000                                               |       | 3,388,900                                              |       | 8,581,600 |   | 8,397,400 |   |
| Gross margin                                                          |       | 5,964,200                                               |       | 6,514,600                                              |       | 14,548,900 |   | 15,331,000 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| OPERATING  EXPENSES:                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| Operating and  selling                                                |       | 2,149,800                                               |       | 2,178,200                                              |       | 5,640,700 |   | 5,607,300 |   |
| Sales  commissions                                                    |       | 2,371,300                                               |       | 2,517,400                                              |       | 5,296,900 |   | 5,565,200 |   |
| General and  administrative                                           |       | 416,500                                                 |       | 434,300                                                |       | 1,318,400 |   | 1,251,600 |   |
|                                                                  |       | 4,937,600                                               |       | 5,129,900                                              |       | 12,256,000 |   | 12,424,100 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| OTHER INCOME                                                          |       | 18,200                                                  |       | 21,800                                                 |       | 40,500 |   | 44,200 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| EARNINGS BEFORE  INCOME TAXES                                         |       | 1,044,800                                               |       | 1,406,500                                              |       | 2,333,400 |   | 2,951,100 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| INCOME TAXES                                                          |       | 395,300                                                 |       | 529,700                                                |       | 881,200 |   | 1,109,200 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| NET EARNINGS                                                          |       | $                                                       | 649,500    |                                                   | $          | 876,800 |   | $ | 1,452,200 |   | $ | 1,841,900 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| BASIC AND DILUTED EARNINGS PER SHARE:                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                                 |       | $                                                       | 0.17       |                                                   | $          | 0.23 |   | $ | 0.38 |   | $ | 0.49 |   |
| Diluted                                                               |       | $                                                       | 0.17       |                                                   | $          | 0.23 |   | $ | 0.38 |   | $ | 0.48 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| WEIGHTED AVERAGE  NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                                 |       | 3,820,864                                               |       | 3,755,704                                              |       | 3,784,163 |   | 3,760,554 |   |
| Diluted                                                               |       | 3,821,860                                               |       | 3,845,694                                              |       | 3,785,317 |   | 3,867,223 |   |

 

See notes to condensedfinancial statements.

 

3

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSEDSTATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)**

**FOR THENINE MONTHS ENDED NOVEMBER 30, 2008**

 
| ** **                       | ** ** | **Common Stock**                               | ** ** | ** ** | ** ** | ** **          | ** ** | ** **   | ** ** | ** **              | ** ** | ** ** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|------------|------------|---------------------|------------|--------------|------------|-------------------------|------------|------------|------------|
| ** **                       | ** ** | **(par value $0.20 per share)** | ** ** | ** ** | ** ** | ** **          | ** ** | ** **   | ** ** | ** **              | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Number of**                                  | ** ** | ** ** | ** ** | **Capital in** | ** ** | ** **   | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Shares**                                          | ** ** | ** ** | ** ** | **Excess of**  | ** ** | **Retained** | ** ** | **Number of**      | ** ** | ** ** | ** ** | **Shareholders’** | ** ** |
| ** **                       | ** ** | **Issued**                                          | ** ** | **Amount** | ** ** | **Par Value**  | ** ** | **Earnings** | ** ** | **Shares**              | ** ** | **Amount** | ** ** | **Equity** | ** ** |
| ** **                       | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** **          | ** ** | ** **   | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| BALANCE—March 1,  2008 |       | 5,806,840                                           |       | $          | 1,161,400  |                | $          | 7,706,100    |       | $                       | 19,206,100 |       | 2,100,095  |   | $ | (11,276,500 | ) | $ | 16,797,100 |   |
| Purchases of  treasury stock     |       | —                                              |       | —     |       | —              |       | —       |       | 138,434                 |       | (776,800   | )          | (776,800 | ) |
| Sales of treasury  stock         |       | —                                              |       | —     |       | —              |       | —       |       | (22,339                 | )          | 109,000    |       | 109,000 |   |
| Exercise of  options             |       | 232,200                                             |       | 46,400     |       | 802,300             |       |         |       |                    |       |       |       | 848,700 |   |
| Dividends paid  ($.40/share)     |       | —                                              |       | —     |       | —              |       | (1,526,500   | )          | —                  |       | —     |       | (1,526,500 | ) |
| Net earnings                     |       | —                                              |       | —     |       | —              |       | 1,452,200    |       | —                  |       | —     |       | 1,452,200 |   |
| BALANCE-November 30,  2008  |       | 6,039,040                                           |       | $          | 1,207,800  |                | $          | 8,508,400    |       | $                       | 19,131,800 |       | 2,216,190  |   | $ | (11,944,300 | ) | $ | 16,903,700 |   |

 

Seenotes to condensed financial statements.

 

4

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**

**FORTHE NINE MONTHS ENDED NOVEMBER 30,**

 
| ** **                                                                      | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                          |       | $          | 3,989,600  |       | $          | 3,451,100 |   |
|                                                                            |       |       |       |       |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES— Purchases of property and equipment |       | (29,900    | )          | (105,400   | )          |
|                                                                            |       |       |       |       |       |
| Net cash used in  investing activities                                          |       | (29,900    | )          | (105,400   | )          |
|                                                                            |       |       |       |       |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                          |       |       |       |       |       |
| Cash received  from exercise of stock options                                   |       | 848,700    |       | —     |       |
| Cash paid to  acquire treasury stock                                            |       | (776,800   | )          | (142,200   | )          |
| Cash received  from sale of treasury stock                                      |       | 109,000    |       | 68,600     |       |
| Dividends paid                                                                  |       | (1,526,500 | )          | (826,000   | )          |
|                                                                            |       |       |       |       |       |
| Net cash used in  financing activities                                          |       | (1,345,600 | )          | (899,600   | )          |
|                                                                            |       |       |       |       |       |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                      |       | 2,614,100  |       | 2,446,100  |       |
|                                                                            |       |       |       |       |       |
| CASH AND CASH  EQUIVALENTS—BEGINNING OF PERIOD                             |       | 2,440,300  |       | 1,254,300  |       |
|                                                                            |       |       |       |       |       |
| CASH AND CASH  EQUIVALENTS—END OF PERIOD                                   |       | $          | 5,054,400  |       | $          | 3,700,400 |   |
|                                                                            |       |       |       |       |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                              |       |       |       |       |       |
| Cash paid for  income taxes                                                     |       | $          | 1,215,100  |       | $          | 871,500 |   |

 

See notes tocondensed financial statements.

 

5

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NOTES TO CONDENSEDFINANCIAL STATEMENTS

 

Note 1- The information shown with respect to the three and nine months ended November 30,2008 and 2007, which is unaudited, includes all adjustments which in theopinion of Management are considered to be necessary for a fair presentation ofearnings for such periods.  Theadjustments reflected in the financial statements represent normal recurringadjustments.  The results of operationsfor the three and nine months ended November 30, 2008 and 2007,respectively, are not necessarily indicative of the results to be expected atyear end due to seasonality of the product sales.

 

These financial statements and notes are prepared pursuant to the rules andregulations of the Securities and Exchange Commission for interim reporting andshould be read in conjunction with the Financial Statements and accompanyingnotes contained in our Annual Report to Shareholders for the Fiscal Year ended February 29,2008.

 

Note 2 –Effective June 30, 2008 we signed a Tenth Amendment to the Credit andSecurity Agreement with Arvest Bank which provided a $5,000,000 line of creditthrough June 30, 2009.  Interest ispayable monthly at the Wall Street Journal prime-floating rate minus0.75% (3.25% at November 30, 2008) and borrowings are collateralized bysubstantially all the assets of the Company. At November 30, 2008 the Company had no debt outstandingunder this agreement.  Available creditunder the revolving credit agreement was $5,000,000 at November 30, 2008and during the quarter then ended.

 

This agreement also contains a provision for our useof the Bank’s letters of credit.  TheBank agrees to issue, or obtain issuance of commercial or standby letters ofcredit provided that no letters of credit will have an expiry date later than June 30,2009 and that the sum of the line of credit plus the letters of credit wouldnot exceed the borrowing base in effect at the time.  For the quarter ended November 30, 2008,we had no letters of credit outstanding.

 

Note 3- Inventories consist of the following:

 
| ** **                      | ** ** | **2008**              | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **November 30,** | ** ** | **February 29,** | ** ** |
| Current:                        |       |                  |       |   |   |
| Book inventory                  |       | $                     | 9,157,000  |   | $ | 11,844,900 |   |
| Inventory  valuation allowance  |       | (25,000               | )          | (26,200 | ) |
|                            |       |                  |       |   |   |
| Inventories net–current    |       | $                     | 9,132,000  |   | $ | 11,818,700 |   |
|                            |       |                  |       |   |   |
| Noncurrent:                     |       |                  |       |   |   |
| Book inventory                  |       | $                     | 822,000    |   | $ | 764,000 |   |
| Inventory  valuation allowance  |       | (320,000              | )          | (305,000 | ) |
|                            |       |                  |       |   |   |
| Inventories net–noncurrent |       | $                     | 502,000    |   | $ | 459,000 |   |

 

We occasionally purchase book inventory in quantitiesin excess of what will be sold within the normal operating cycle due to minimumorder requirements of our primary supplier. These amounts are included in non-current inventory.

 

Significantportions of our inventory purchases are concentrated with an England-basedpublishing company.  Purchases from thiscompany were approximately $1.7 million and $3.2 million for the three monthsended November 30, 2008 and 2007, respectively.  Total inventory purchases from all supplierswere approximately $2.4 million and $3.8 million for the three months ended November 30,2008 and 2007, respectively.

 

For the ninemonths ended November 30, 2008 and 2007, respectively, purchases from thiscompany were approximately $5.6 million and $7.5 million.  Total inventory purchases from all supplierswere approximately $7.1 million and $9.6 million for the same respectiveperiods.

 

Note 4 - Basicearnings per share (“EPS”) is computed by dividing net earnings by the weightedaverage number of common shares outstanding during the period.  Diluted EPS is based on the combined weightedaverage number of common shares outstanding and dilutive potential commonshares issuable which include, where appropriate, the assumed exercise ofoptions.

 

6

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##### In computingdiluted EPS we have utilized the treasury stock method.

#####  

The computation ofweighted average common and common equivalent shares used in the calculation ofbasic and diluted earnings per share (“EPS”) is shown below.

 
| ** **                                      | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                                | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| **Earnings Per Share:**                         |       |                                                    |       |                                                   |       |   |   |   |   |
| ** **                                      |       |                                                    |       |                                                   |       |   |   |   |   |
| Net earnings  applicable to common shareholders |       | $                                                       | 649,500    |                                                   | $          | 876,800 |   | $ | 1,452,200 |   | $ | 1,841,900 |   |
|                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| **Shares:**                                     |       |                                                    |       |                                                   |       |   |   |   |   |
|                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| Weighted average  shares outstanding - basic    |       | 3,820,864                                               |       | 3,755,704                                              |       | 3,784,163 |   | 3,760,554 |   |
| Assumed exercise  of options                    |       | 997                                                     |       | 89,990                                                 |       | 1,154 |   | 106,669 |   |
|                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| Weighted average  shares outstanding - diluted  |       | 3,821,860                                               |       | 3,845,694                                              |       | 3,785,317 |   | 3,867,223 |   |
|                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| **Basic  Earnings Per Share**                   |       | $                                                       | 0.17       |                                                   | $          | 0.23 |   | $ | 0.38 |   | $ | 0.49 |   |
| **Diluted  Earnings Per Share**                 |       | $                                                       | 0.17       |                                                   | $          | 0.23 |   | $ | 0.38 |   | $ | 0.48 |   |

 

In April 2008, ourBoard of Directors authorized us to purchase up to 500,000 additional shares ofour common stock under a plan initiated in 1998. This plan has no expirationdate. During the third quarter of fiscal year 2009, we repurchased 2,210 sharesof common stock.  The maximum number ofshares that may be repurchased in the future is 438,077.

 

Note 5 –We account for stock-based compensation whereby share-based paymenttransactions with employees, such as stock options and restricted stock, aremeasured at estimated fair value at date of grant and recognized ascompensation expense over the vesting period.

 

Note 6-  Freight costs and handling costsincurred are included in operating & selling expenses and were$801,300 and $836,300 for the three months ended November 30, 2008 and2007, respectively.

 

For the nine months endedNovember 30, 2008 and 2007, respectively, freight and handling costsincurred are included in operating & selling expenses and were$1,908,300 and $1,953,500.

 

Note 7 –We have two reportable segments: Publishing and Usborne Books at Home (“UBAH”).  These reportable segments are business unitsthat offer different methods of distribution to different types ofcustomers.  They are managed separatelybased on the fundamental differences in their operations.  The Publishing Division markets its productsto retail accounts, which include book, school supply, toy and gift stores andmuseums, through commissioned sales representatives, trade and specialtywholesalers and an internal telesales group. The UBAH Division markets its product line through a network ofindependent sales consultants through a combination of direct sales, homeshows, book fairs and the Internet.

 

The accounting policiesof the segments are the same as those of the rest of the Company.  We evaluate segment performance based on earnings (loss) before incometaxes of the segments, which is defined as segment net sales reduced by directcost of sales and direct expenses. Corporate expenses, depreciation, interest expense and income taxes arenot allocated to the segments, but are listed in the “other” column.  Corporate expenses include the executivedepartment, accounting department, information services department, generaloffice management and building facilities management.  Ourassets and liabilities are not allocated on a segment basis.

 

7

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Information by industry segment for the three and nine months ended November 30,2008 and 2007 follows:

 

**NET REVENUES**

 
| ** **     | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|----------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **     | ** ** | **2008**                                                | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Publishing** |       | $                                                       | 2,030,800  |                                                   | $          | 2,216,800 |   | $ | 6,267,400 |   | $ | 6,379,900 |   |
| **UBAH**       |       | $                                                       | 7,357,400  |                                                   | $          | 7,686,700 |   | $ | 16,863,100 |   | $ | 17,348,500 |   |
| **Other**      |       | $                                                       | —     |                                                   | $          | — |   | $ | — |   | $ | — |   |
| **Total**      |       | $                                                       | 9,388,200  |                                                   | $          | 9,903,500 |   | $ | 23,130,500 |   | $ | 23,728,400 |   |

 

**EARNINGS(LOSS) BEFORE INCOME TAXES**

 
| ** **     | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|----------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **     | ** ** | **2008**                                                | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Publishing** |       | $                                                       | 671,700    |                                                   | $          | 698,200 |   | $ | 2,010,900 |   | $ | 1,982,800 |   |
| **UBAH**       |       | $                                                       | 1,326,500  |                                                   | $          | 1,680,700 |   | $ | 3,185,500 |   | $ | 3,753,400 |   |
| **Other**      |       | $                                                       | (953,400   | )                                                      | $          | (972,400 | ) | $ | (2,863,000 | ) | $ | (2,785,100 | ) |
| **Total**      |       | $                                                       | 1,044,800  |                                                   | $          | 1,406,500 |   | $ | 2,333,400 |   | $ | 2,951,100 |   |

 

Note 8 –The Financial Accounting Standards Board (“FASB”)periodically issues new accounting standards in a continuing effort to improvestandards of financial accounting and reporting. We have reviewed the recentlyissued pronouncements and concluded that the following new accounting standardsare applicable to us.

 

In September 2006,the FASB issued SFAS No. 157 “Fair Value Measurements” (SFAS 157).  This Statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles (GAAP), and expands disclosures about fair valuemeasurements. This Statement applies under other accounting pronouncements thatrequire or permit fair value measurements, the Board having previouslyconcluded in those accounting pronouncements that fair value is the relevantmeasurement attribute. Accordingly, this Statement does not require any newfair value measurements.  This statementis effective for fiscal years beginning after November 15, 2007.  On March 1, 2008, we adopted SFAS157.  The adoption of this pronouncementdid not have a material effect on our financial position or results ofoperations.

 

In February 2008, the FASB issues FASB Staff Position No. 157-2 “EffectiveDate of FASB Statement No. 157” which defers the effective date of SFAS 157 forone year for certain nonfinancial assets and liabilities except those that arerecognized and disclosed at fair value on a recurring basis.  The adoption of those provisions isnot expected to have a material effect on our financial position or results ofoperations.

 

In February 2007,the FASB issued SFAS No. 159 “TheFair Value Option for Financial Assets and Financial Liabilities” (SFAS159).  The fair value option establishedby this Statement permits all entities to choose to measure eligible items atfair value at specified election dates. A business entity shall reportunrealized gains and losses on items for which the fair value option has beenelected in earnings at each subsequent reporting date.  This statement is effective for fiscal yearsbeginning after November 15, 2007. We elected not to apply the fair value option permitted under SFAS 159to any financial assets or liabilities.

 

In December 2007, theFASB issued SFAS No. 160 “Noncontrolling Interests in ConsolidatedFinancial Statements” (SFAS 160).  Thisstatement amends Accounting Research Bulletin No. 51 “ConsolidatedFinancial Statements” to establish accounting and reporting standards fornoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary.  This statement is effective for fiscal years beginning after December 15,2008.  The adoption of this standard is not expected to have a materialeffect on our financial position or results of operations.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (SFAS141).  The statement requires the acquiring entity in a businesscombination to recognize all the assets acquired and liabilities assumed in thetransaction; establishes the acquisition-date fair value as the measurementobjective for all assets acquired and liabilities 

 

8

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assumed; and requires the acquirer to disclose toinvestors and other users all of the information they need to evaluate andunderstand the nature and financial effect of the business combination. This statement is effective for acquisition dates on or after the beginning ofthe first annual reporting period beginning after December 15, 2008. The adoption of this standard is not expected to have a material effect on ourfinancial position or results of operations.

 

Note 9 – Subsequent Events.

 

On December 11, 2008,we closed on the acquisition of Kane/Miller Book Publishers of La Jolla,California, through the purchase of the outstanding stock of thecorporation.  Kane/Miller is a publisher of international children’stitles with over 20 years of experience with approximately 100 titles.  We have maintained the editorial office in LaJolla, California and have consolidated the remaining operations into our Tulsafacility.

 

On December 1, 2008, the Board of Directorsauthorized, a one-time special dividend of $.40 to be paid on December 19, 2008to shareholders of record December 11 2008.

 

ITEM 2   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

###### **FactorsAffecting Forward Looking Statements**

###### ** **

# ***MD&Acontains statements that are forward-looking and include numerous risks whichyou should carefully consider. Additional risks and uncertainties may also materially and adverselyaffect our business.   You should readthe following discussion in connection with our financial statements, includingthe notes to those statements, included in this document.  Our fiscal years end on February 28.***

 

# **Overview**

 

We operate twoseparate divisions, Publishing and Usborne Books at Home (“UBAH”), to sell theUsborne line of children’s books.  Thesetwo divisions each have their own customer base.  The Publishing Division markets its productson a wholesale basis to various retail accounts.  The UBAH Division markets its products toindividual consumers as well as school and public libraries.

 

Thefollowing table shows consolidated statement of income data as a percentage ofnet revenues.

 

**Earnings as a Percent of TotalRevenues**

 
| ** **                         | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                                | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenues                       |       | 100.0                                                   | %          | 100.0                                                  | %          | 100.0 | % | 100.0 | % |
| Cost of sales                      |       | 36.5                                                    | %          | 34.2                                                   | %          | 37.1 | % | 35.4 | % |
| Gross margin                       |       | 63.5                                                    | %          | 65.8                                                   | %          | 62.9 | % | 64.6 | % |
| Operating  expenses:               |       |                                                    |       |                                                   |       |   |   |   |   |
| Operating &  selling      |       | 22.9                                                    | %          | 22.0                                                   | %          | 24.4 | % | 23.6 | % |
| Sales  commissions                 |       | 25.3                                                    | %          | 25.4                                                   | %          | 22.9 | % | 23.4 | % |
| General &  administrative |       | 4.4                                                     | %          | 4.4                                                    | %          | 5.7 | % | 5.3 | % |
| Interest                           |       | 0.0                                                     | %          | 0.0                                                    | %          | 0.0 | % | 0.0 | % |
| Total operating  expenses          |       | 52.6                                                    | %          | 51.8                                                   | %          | 53.0 | % | 52.3 | % |
| Income from  operations            |       | 10.9                                                    | %          | 14.0                                                   | %          | 9.9 | % | 12.3 | % |
| Other income                       |       | 0.2                                                     | %          | 0.2                                                    | %          | 0.2 | % | 0.2 | % |
| Earnings before  income taxes      |       | 11.1                                                    | %          | 14.2                                                   | %          | 10.1 | % | 12.5 | % |
| Income taxes                       |       | 4.2                                                     | %          | 5.3                                                    | %          | 3.8 | % | 4.7 | % |
| Net earnings                       |       | 6.9                                                     | %          | 8.9                                                    | %          | 6.3 | % | 7.8 | % |

 

## **Operating Results for the ThreeMonths Ended November 30, 2008**

 

Weearned income before income taxes of $1,044,800 for the three months ended November 30,2008 compared with $1,406,500 for the three months ended November 30,2007.

 

9

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## **Revenues**

 
| ** **                            | ** ** | **For the Three Months Ended November 30,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2008**                                                                  | ** ** | **2007**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Gross sales                           |       | $                                                                         | 12,301,200 |                 | $          | 12,660,700           |       | $ | (359,500 | ) | -2.8 | % |
| Less  discounts & allowances |       | (3,447,600                                                                | )          | (3,344,200           | )          | (103,400             | )          | 3.1 | % |
| Transportation  revenue               |       | 534,600                                                                   |       | 587,000              |       | (52,400              | )          | -8.9 | % |
| Net revenues                          |       | $                                                                         | 9,388,200  |                 | $          | 9,903,500            |       | $ | (515,300 | ) | -5.2 | % |

 

The UBAH Division’s gross sales decreased $1,200 during the three monthperiod ending November 30,2008 when compared with the same quarterly period a year ago.  This decrease consists of a 3% increase inInternet sales, offset by a  26% decreasein school and library sales, a 10% decrease in home party sales and 12%decrease in direct sales.  The decline inhome party sales is attributed to a 4% decline in the total number of homeshows held and a 6% decrease in the average order size.

 

The Publishing Division’s gross sales decreased 8.6% or $358,200 duringthe three month period ending November 30, 2008 when compared with the same quarterlyperiod a year ago.  We attribute this toan 18.6% decrease in inside sales accounts and a 4.5% decrease in sales tomajor national accounts, offset by a 4.6% increase in smaller retail stores.

 

TheUBAH Division’s discounts and allowances were $1,303,300 and $1,028,200 for thequarterly periods ended November 30, 2008 and 2007, respectively.  The UBAH Division is a multi-level selling organization thatmarkets its products through independent sales representatives (“consultants”).Sales are made to individual purchasers and school and public libraries.  Most sales in the UBAH Division are atretail.  As a part of the UBAH Division’smarketing programs, discounts between 40% and 50% of retail are offered onselected items at various times throughout the year.  The discounts and allowances in the UBAHDivision will vary from year to year depending upon the marketing programs inplace during any given year.  TheUBAH Division’s discounts and allowances were 16.0% of UBAH’s gross sales forthe quarterly period ended November 30, 2008 and 12.6% for the quarterlyperiod ended November 30, 2007.

 

The Publishing Division’s discounts and allowances are a muchlarger percentage of gross sales than discounts and allowances in the UBAHDivision due to the different customer markets that each division targets.  The Publishing Division’s discounts and allowances were $2,144,300 and$2,315,900 for the quarterly periods ended November 30, 2008 and 2007,respectively.  The Publishing Division sells toretail book chains, regional and local bookstores, toy and gift stores, schoolsupply stores and museums.  To becompetitive with other wholesale book distributors, the Publishing Divisionsells at discounts between 48% and 55% of the retail price, based upon thequantity of books ordered and the dollar amount of the order.  The Publishing Division’s discountsand allowances were 51.5% of Publishing’s gross sales for the quarterly periodended November 30, 2008 and 51.2% for the quarterly period ended November 30,2007.

 

## **Expenses**

 
| ** **                         | ** ** | **For Three Months Ended November 30,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2008**                                                         | ** ** | **2007**             | ** ** | **(decrease)**       | ** ** | ** (decrease)** | ** ** |
| Cost of sales                      |       | 3,424,000                                                        |       | $                    | 3,388,900  |                 | $          | 35,100 |   | 1.0 | % |
| Operating &  selling      |       | 2,149,800                                                        |       | 2,178,200            |       | (28,400              | )          | -1.3 | % |
| Sales  commissions                 |       | 2,371,300                                                        |       | 2,517,400            |       | (146,100             | )          | -5.8 | % |
| General &  administrative |       | 416,500                                                          |       | 434,300              |       | (17,800              | )          | -4.1 | % |
| Total                              |       | $                                                                | 8,361,600  |                 | $          | 8,518,800            |       | $ | (157,200 | ) | -1.8 | % |
|                                    |            |                                                                  |            |                      |            |                      |            |  |  |  |  |  |

 

Cost of sales increased1.0% for the three months ended November 30, 2008 when compared with thethree months ended November 30, 2007. Cost of sales as a percentage of gross sales was 27.8% for the threemonths ended November 30, 2008 and for the three months ended November 30,2007 was 26.8%.  Cost of sales is the inventory costof the product sold, which includes the cost of the product itself and inboundfreight charges.  Purchasing andreceiving costs, inspection costs, warehousing costs, and other costs of ourdistribution network are included in operating and selling expenses.  These costs totaled $289,200 in the quarterended November 30, 2008 and $294,800 in the quarter ended November 30,2007.  When comparing our gross marginswith the gross margins of other companies, note that we do not include thecosts of our distribution network in our cost of sales.

 

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In addition to costs associated with our distribution network(noted above), operating and selling costs include expenses of the PublishingDivision, the UBAH Division and the order entry and customer service functions. Operating and selling expenses asa percentage of gross sales were 17.5% for the quarter ended November 30,2008 and 17.2% for the quarter ended November 30, 2007.

 

Sales commissions in the Publishing Divisiondecreased 1.8% to $33,800 for the three months ended November 30,2008.  Publishing Division sales commissions arepaid on net sales and were 1.7% of net sales for the three months ended November 30,2008 and 1.7% of net sales for thethree months ended November 30, 2007.  Sales commissions in thePublishing Division will fluctuate depending upon the amount of sales made toour “house accounts,” which are the Publishing Division’s largest customers anddo not have any commission expense associated with them, and sales made by ouroutside sales representatives.

 

Sales commissions in the UBAH Divisiondecreased 6.2% to $2,337,500 for the three months ended November 30,2008 as a result of decreasedsales from home shows and direct sales, offset by increased internetsales.  UBAH Division sales commissionsare paid on retail sales and were 36.3% of retail sales for the three monthsended November 30, 2008 and37.7% of retail sales for the three months ended November 30, 2007.  Thefluctuation in the percentages of commission expense to retail sales is theresult of the type of sale.  Home shows,book fairs, school and library sales and direct sales have different commissionrates.  Also contributing to thefluctuations in the percentages is the payment of overrides and bonuses, bothdependent on consultants’ monthly sales and downline sales.

 

Oureffective tax rate was 37.8 % and 37.7% for the quarterly periods ended November 30,2008 and 2007,respectively.  These rates are higherthan the federal statutory rate due to state income taxes.

 

## **Operating Results for the Nine MonthsEnded November 30, 2008**

##  

Weearned income before income taxes of $2,333,400 for the nine months ended November 30,2008 compared with $2,951,100 for the nine months ended November 30, 2007.

 

## **Revenues**

 
| ** **                            | ** ** | **For the Nine Months Ended November 30,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2008**                                                                 | ** ** | **2007**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Gross sales                           |       | $                                                                        | 31,444,500 |                 | $          | 31,564,800           |       | $ | (120,300 | ) | -0.4 | % |
| Less  discounts & allowances |       | (9,557,000                                                               | )          | (9,163,300           | )          | (393,700             | )          | 4.3 | % |
| Transportation  revenue               |       | 1,243,000                                                                |       | 1,326,900            |       | (83,900              | )          | -6.3 | % |
| Net revenues                          |       | $                                                                        | 23,130,500 |                 | $          | 23,728,400           |       | $ | (597,900 | ) | -2.5 | % |

 

The UBAH Division’s gross sales increased 0.6% or $113,800 during thenine month period ending November 30,2008 when compared with the same nine month period a year ago.  This increase consists of a 17% increase inInternet sales, offset by an 11% decrease in home party sales and a 19%decrease in direct sales.  The decline inhome party sales is attributed primarily to a 7% decline in the total number ofhome shows held and a 5% decrease in average per order sales.

 

The Publishing Division’s gross sales decreased by 1.8% or $234,100during the nine month period ending November 30, 2008 when compared with the same nine monthperiod a year ago.  We attribute this toa 7.6% decrease in inside sales accounts, offset by a 3.7% increase in sales tothe national chains.

 

TheUBAH Division’s discounts and allowances were $2,872,100 and $2,358,200 for thenine month periods ended November 30, 2008 and 2007, respectively.  The UBAH Division is a multi-level selling organization thatmarkets its products through independent sales representatives (“consultants”).Sales are made to individual purchasers and school and public libraries.  Most sales in the UBAH Division are atretail.  As a part of the UBAH Division’smarketing programs, discounts between 40% and 50% of retail are offered onselected items at various times throughout the year.  The discounts and allowances in the UBAHDivision will vary from year to year depending upon the marketing programs inplace during any given year.  TheUBAH Division’s discounts and allowances were 15.5% of UBAH’s gross sales forthe nine month period ended November 30, 2008 and 12.8% for the nine monthperiod ended November 30, 2007.

 

The Publishing Division’s discounts and allowances are a muchlarger percentage of gross sales than discounts and allowances in the UBAHDivision due to the different customer markets that each division targets.  The Publishing Division’s

 

11

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discounts and allowances were $6,684,900 and$6,805,100 for the nine month periods ended November 30, 2008 and 2007,respectively.  The Publishing Division sells toretail book chains, regional and local bookstores, toy and gift stores, schoolsupply stores and museums.  To becompetitive with other wholesale book distributors, the Publishing Divisionsells at discounts between 48% and 55% of the retail price, based upon thequantity of books ordered and the dollar amount of the order.  The Publishing Division’s discountsand allowances were 51.7% of Publishing’s gross sales for the nine month periodended November 30, 2008 and 51.7% for the nine month period ended November 30,2007.

 

**Expenses**

 
| ** **                         | ** ** | **For Nine Months Ended November 30,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2008**                                                        | ** ** | **2007**             | ** ** | ** (decrease)** | ** ** | ** (decrease)** | ** ** |
| Cost of sales                      |       | 8,581,600                                                       |       | 8,397,400            |       | $                    | 184,200    |   | 2.2 | % |
| Operating &  selling      |       | 5,640,700                                                       |       | 5,607,300            |       | 33,400               |       | 0.6 | % |
| Sales  commissions                 |       | 5,296,900                                                       |       | 5,565,200            |       | (268,300             | )          | -4.8 | % |
| General &  administrative |       | 1,318,400                                                       |       | 1,251,600            |       | 66,800               |       | 5.3 | % |
| Total                              |       | $                                                               | 20,837,600 |                 | $          | 20,821,500           |       | $ | 16,100 |   | 0.1 | % |
|                                    |            |                                                                 |            |                      |            |                      |            |  |  |  |  |  |

 

Cost of sales increased2.2% for the nine months ended November 30, 2008 when compared with thenine months ended November 30, 2007, consistent with the increase in salesfor the period.  Cost of sales as apercentage of gross sales was 27.8% for the nine months ended November 30,2008 and for the nine months ended November 30, 2007 was 27.2%.  Cost of sales is the inventory cost of the product sold, whichincludes the cost of the product itself and inbound freight charges.  Purchasing and receiving costs, inspectioncosts, warehousing costs, and other costs of our distribution network areincluded in operating and selling expenses. These costs totaled $847,000 in the nine months ended November 30,2008 and $838,600 in the nine months ended November 30, 2007.  When comparing our gross margins with thegross margins of other companies, note that we do not include the costs of ourdistribution network in our cost of sales.

 

In addition to costs associated with our distribution network(noted above), operating and selling costs include expenses of the PublishingDivision, the UBAH Division and the order entry and customer servicefunctions.  Operating and sellingexpenses as a percentage of gross sales were 17.9% for the nine months ended November 30,2008 and 17.8% for the nine months ended November 30, 2007.

 

Sales commissions in the Publishing Divisiondecreased 3.0% to $107,100 for the nine months ended November 30,2008.  Publishing Division sales commissions arepaid on net sales and were 1.7% of net sales for the nine months ended November 30,2008 and 1.7% of net sales for the ninemonths ended November 30, 2007.  Sales commissions in the Publishing Divisionwill fluctuate depending upon the amount of sales made to our “house accounts,”which are the Publishing Division’s largest customers and do not have anycommission expense associated with them, and sales made by our outside salesrepresentatives.

 

Sales commissions in the UBAH Divisiondecreased 5.1% to $5,189,800 for the nine months ended November 30,2008, the direct result ofdecreased sales from home shows and school and library sales in thisdivision.  UBAH Division salescommissions are paid on retail sales and were 35.1% of retail sales for thenine months ended November 30, 2008 and 36.3% of retail sales for the nine months ended November 30,2007. The fluctuation in the percentages of commission expense to retail salesis the result of the type of sale.  Homeshows, book fairs, school and library sales and direct sales have differentcommission rates.  Also contributing tothe fluctuations in the percentages is the payment of overrides and bonuses,both dependent on consultants’ monthly sales and downline sales.

 

Oureffective tax rate was 37.7% and 37.6% for the nine month period ended November 30,2008 and 2007,respectively.  These rates are higherthan the federal statutory rate due to state income taxes.

 

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**Liquidity and Capital Resources**

 

Our primary sources ofcash are operating cash flow and proceeds from the exercise of stockoptions.  Our primary uses of cash are torepurchase outstanding shares of stock, purchase property and equipment and paydividends.  We utilize our bank creditfacility to meet our short-term cash needs when necessary.

 

Our Board of Directors has adopted a stock repurchase plan inwhich we may purchase up to 3,000,000 shares as market conditions warrant.  Management believes the stock is undervaluedand when stock becomes available at an attractive price, we will utilize freecash flow to repurchase shares. Management believes this enhances the value to the remainingstockholders and that these repurchases will have no adverse effect on ourshort-term and long-term liquidity.  Werepurchased 138,434 shares at a cost of $776,800 during the nine month periodended November 30, 2008.

 

We have a history of profitability and positive cash flow.  We can sustain planned growth levels withminimal capital requirements. Consequently, cash generated from operations is used to liquidate anyexisting debt and then to repurchase shares outstanding or capitaldistributions through dividends.

 

Ourprimary source of liquidity is cash generated from operations.  During the first nine months of fiscal year2009, we experienced a positive cash flow from operating activities of$3,989,600.  Cash flow from operatingactivities was increased primarily by net income after taxes of $1,452,200, adecrease in inventories of $2,643,700 and increases in current liabilities of$467,500, offset by a net change in net income taxes receivable of$326,200.  Fluctuations in accountspayable and accrued expenses involve timing of shipments received from ourprincipal supplier and the payments associated with these shipments.  They tend to be highest in the third quarterwhen holiday season shipments have arrived and prior to payments being made.

 

Webelieve that in fiscal year 2009 we will experience a positive cash flow and thatthis positive cash flow along with the bank credit facility will be adequate tomeet our liquidity requirements for the foreseeable future.

 

Weestimate that total cash used in investing activities for fiscal year 2009 willbe less than $200,000.  This wouldconsist of software and hardware enhancements to our existing data processingequipment, property improvements and additional warehouse equipment.

 

Cashused in financing activities was $1,345,600 from dividend payments of$1,526,500, the purchase of $776,800 of treasury stock, offset by the exerciseof $848,700 in stock options and the sale of $109,000 in treasury stock.

 

Asof November 30, 2008 we did not have any commitments in excess of oneyear.

 

## **Bank Credit Agreement**

##  

Effective June 30,2008, we signed a Tenth Amendment to the Credit and Security Agreement withArvest Bank which provided a $5,000,000 line of credit through June 30,2009.  Interest is payable monthly at theWall Street Journal prime-floating rate minus 0.75% (3.25% at November 30,2008) and borrowings are collateralized by substantially all of our assets. At November 30, 2008 we had no debt outstanding under thisagreement.  Available credit under therevolving credit agreement was $5,000,000 at November 30, 2008.  Noborrowings were outstanding under the agreement during the quarter ended November 30,2008.

 

Thisagreement also contains a provision for our use of the Bank’s letters ofcredit.  The Bank agrees to issue, orobtain issuance of commercial or standby letters of credit provided that noletters of credit will have an expiry date later than June 30, 2009 andthat the sum of the line of credit plus the letters of credit would not exceedthe borrowing base in effect at the time. For the quarter ended November 30, 2008, we had no letters of creditoutstanding.

 

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**CriticalAccounting Policies**

 

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

 

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

 

**RevenueRecognition**

 

Sales are recognized and recorded when products are shipped.  Products are shipped FOB shipping point. The UBAH Division’s sales are paid before the product is shipped.  These sales accounted for 78.4% of net revenues for the quarter ended November 30, 2008 and 77.6% for the quarter ended November 30, 2007.  The provisions of the SEC Staff Accounting Bulletin No.104, “Revenue Recognition in Financial Statements,” have been applied, and as a result, a reserve is provided for estimated future sales returns.

 

Our sales return policy allows the customer to return all purchases for an exchange or refund for up to 30 days after the customer receives the item.  Estimated allowances for sales returns are recorded as sales are recognized and recorded.  Management uses a moving average calculation to estimate the allowance for sales returns.  We are not responsible for product damaged in transit.  Damaged returns are primarily from the retail stores.  The damages occur in the stores, not in shipping to the stores.  It is industry practice to accept returns from wholesale customers.  Transportation revenue, the amount billed to the customer for shipping the product, is recorded when products are shipped.  Management has estimated and included a reserve for sales returns of $84,000 as of November 30, 2008 and February 29, 2008.

 

**Allowance for Doubtful Accounts**

 

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends.  If the actual uncollected amounts significantly exceed the estimated allowance, then our operating results would be significantly adversely affected.  Management has estimated and included an allowance for doubtful accounts of $84,600 and $74,400 as of November 30, 2008 and February 29, 2008, respectively.

 

**Inventory**

 

Management continuallyestimates and calculates the amount of non-current inventory.  Non-current inventory arises due tooccasionally purchasing book inventory in quantities in excess of what will besold within the normal operating cycle due to minimum order requirements of ourprimary supplier.  Non-current inventorywas estimated by management using the current year turnover ratio by title.  All inventory in excess of 2 1⁄2 years ofanticipated sales was classified as noncurrent inventory. Noncurrent inventorybalances, before valuation allowance, were $822,000 at November 30, 2008and $764,000 at February 29, 2008.

 

Inventories are presented net of a valuationallowance.  Management has estimated andincluded a valuation allowance for both current and noncurrent inventory.  This reserve is based on management’sidentification of slow moving inventory on hand at November 30, 2008 and February 29,2008.  Management has estimated a valuationallowance for both current and noncurrent inventory of $345,000 and $331,200 asof November 30, 2008 and February 29, 2008, respectively.

 

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**Stock-Based Compensation**

 

We account for stock-based compensation wherebyshare-based payment transactions with employees, such as stock options andrestricted stock, are measured at estimated fair value at date of grant andrecognized as compensation expense over the vesting period.

 

Item 3.    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We do not have anymaterial market risk.

 

Item 4    CONTROLSAND PROCEDURES

 

An evaluation wasperformed of the effectiveness of the design and operation of our disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15(e) and15d-15(e) as of November 30, 2008. This evaluation was conductedunder the supervision and with the participation of our management, includingour Chief Executive Officer and our Controller/Corporate Secretary (PrincipalFinancial and Accounting Officer).

 

Based on thatevaluation, these officers concluded that our disclosure controls andprocedures were effective to ensure that information required to be disclosedin reports that we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported in accordance within the timeperiods specified in Securities and Exchange Commission rules andforms.  It should be noted that thedesign of any system of controls is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

 

PART II  OTHER INFORMATION

 

Item I    LegalProceedings

 

Not Applicable

 

Item 1A  RISK FACTORS

 

Nomaterial changes occurred in the risk factors discussed in our Fiscal Year 2008Form 10-K.

 

Item 2     UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS

 

The following table showsrepurchases of our Common Stock during the quarter ended November 30,2008.

 

ISSUER PURCHASESOF EQUITY SECURITIES

 
| ** **                   | ** ** | ** **                           | ** ** | ** **                   | ** ** | ** **                           | ** ** | **Maximum # of ** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | ** **                           | ** ** | ** **                   | ** ** | **Total # of Shares** | ** ** | **Shares that May**    | ** ** |
| ** **                   | ** ** | ** **                           | ** ** | ** **                   | ** ** | **Purchased as**                | ** ** | **be Repurchased **    | ** ** |
| ** **                   | ** ** | **Total # of Shares** | ** ** | **Average Price**       | ** ** | **Part of Publicly**       | ** ** | **under the Plan**     | ** ** |
| **Period**                   | ** ** | **Purchased**                        | ** ** | **Paid per Share** | ** ** | **Announced Plan (1)**     | ** ** | **(2) (3)**                 | ** ** |
| September 1  - 30, 2008 |       | 0                                    |       | N/A                          |       | 0                                    |       | 440,287                          |       |
| October 1 -  31, 2008   |       | 1,417                                |       | $                            | 4.34       |                                 | 1,417      |                             | 438,870    |   |
| November 1  - 30, 2008  |       | 793                                  |       | $                            | 4.95       |                                 | 793        |                             | 438,077    |   |
| Total                        |       | 2,210                                |       | $                            | 4.56       |                                 | 2,210      |                             |       |   |

 

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| (1) | All  of the shares of common stock set forth in this column (a) were  purchased pursuant to a publicly announced plan as described in footnote 2  below. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

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| (2)    | In April 2008  the Board of Directors authorized us to purchase up to an additional 500,000  shares of our common stock under a repurchase plan.  Pursuant to the plan, we may purchase a  total of 438,077 additional shares of our common stock until 3,000,000 shares  have been repurchased. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                       |
| (3)    | There  is no expiration date for the repurchase plan.                                                                                                                                                                                                                                                      |

 

Item 3     Defaults Upon SeniorSecurities

 

NotApplicable

 

Item 4     Submission of Matters to avote of Security Holders

 

NotApplicable

 

Item 5     OTHER INFORMATION

 

On December 11, 2008,we closed on the acquisition of Kane/Miller Book Publishers of La Jolla,California, through the purchase of the outstanding stock of thecorporation.  Kane/Miller is a publisher of international children’stitles with over 20 years of experience.  They have approximately 100 titles. We will maintain the editorial office in La Jolla, California and haveconsolidated the remaining operations into our Tulsa facility.

 

Item 6     EXHIBITS

 
| 31.1   |   | Certification of the  Chief Executive Officer of Educational Development Corporation pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.                                                      |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                          |
| 31.2   |   | Certification of  Controller and Corporate Secretary (Principal Financial and Accounting  Officer) of Educational Development Corporation pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 furnished herewith. |
|   |   |                                                                                                                                                                                                                          |
| 32.1   |   | Certification  pursuant to 18 U.S.C Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                            |

 

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#### **SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

EDUCATIONAL DEVELOPMENTCORPORATION

(Registrant)

 

 
| Date:  | January 14, 2009 |             | By     |   | /s/ Randall W. White |   |
|--------|-----------------------|------------------|--------|--------|----------------------|--------|
|   |                  | Randall W. White |   |
|   |                  | President        |   |

 

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EXHIBIT INDEX

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                               |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                          |
| 31.1                 |       | Certification of the  Chief Executive Officer of Educational Development Corporation pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.                                                      |
|                 |       |                                                                                                                                                                                                                          |
| 31.2                 |       | Certification of  Controller and Corporate Secretary (Principal Financial and Accounting  Officer) of Educational Development Corporation pursuant to Section 302  of the Sarbanes-Oxley Act of 2002 furnished herewith. |
|                 |       |                                                                                                                                                                                                                          |
| 32.1                 |       | Certification  pursuant to 18 U.S.C Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                            |

 

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