**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

| **x**                     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES** |
|---------------------------|-----------------------------------------------------------------------------------|
| **EXCHANGE  ACT OF 1934** |

 

**For the quarterly period ended November 30,2007**

 

| **o**            | **TRANSITION REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE** |
|------------------|---------------------------------------------------------------------------------------|
| **ACT OF  1934** |

 

**For the transition period from              to               .**

 

**Commission file number: 0-4957**

 

**EDUCATIONAL DEVELOPMENTCORPORATION**

(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’stelephone 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 checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in rule 12b-2of the Exchange Act. (Check one):

 

Large acceleratedfiler  o          Acceleratedfiler  o          Non-acceleratedfiler  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 8,2008 there were 3,705,935 shares of Educational Development Corporation CommonStock, $0.20 par value outstanding.

 

 

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**TABLE OFCONTENTS**

 
| PART I. FINANCIAL INFORMATION                                                                 |   |
|----------------------------------------------------------------------------------------------------|--------|
| ITEM 1                                                                                             |   |
| ITEM 2 MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
| Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                |   |
| Item 4 CONTROLS AND  PROCEDURES                                                                    |   |
| PART II OTHER  INFORMATION                                                                    |   |
| Item 1A RISK FACTORS                                                                               |   |
| Item 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                |   |
| Item 5 OTHER INFORMATION                                                                           |   |
| Item 6 EXHIBITS                                                                                    |   |
| SIGNATURES                                                                                         |   |
| EXHIBIT INDEX                                                                                      |   |
| Certification of CEO  Pursuant to Section 302                                                 |   |
| Certification of  Principal Financial and Accounting Officer Pursuant to Section 302          |   |
| Certification Pursuant  to 18 U.S.C Section 1350                                              |   |

 

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PART I.  FINANCIAL INFORMATION

ITEM 1

 

**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSEDBALANCE SHEETS (UNAUDITED)**

 
| ** **                                                                                                                                                    | ** ** | **November 30, 2007** | ** ** | **February 28, 2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                    | ** ** | ** **                      | ** ** | ** **                      | ** ** |
|                                                                                                                                                          |       |                            |       |                            |       |
| CURRENT ASSETS:                                                                                                                                               |       |                            |       |                            |       |
| Cash and cash  equivalents                                                                                                                                    |       | $                               | 3,700,400  |                            | $          | 1,254,300 |   |
| Accounts  receivable, less allowance for doubtful accounts and sales returns $167,400  (November 30) and $158,900 (February 28)                     |       | 3,409,700                       |       | 2,849,300                       |       |
| Inventories—Net                                                                                                                                          |       | 11,857,100                      |       | 12,388,000                      |       |
| Prepaid expenses  and other assets                                                                                                                            |       | 64,100                          |       | 95,400                          |       |
| Income taxes  receivable                                                                                                                                      |       | —                          |       | 3,400                           |       |
| Deferred income  taxes                                                                                                                                        |       | 129,000                         |       | 117,500                         |       |
| Total current  assets                                                                                                                                         |       | 19,160,300                      |       | 16,707,900                      |       |
|                                                                                                                                                          |       |                            |       |                            |       |
| INVENTORIES—Net                                                                                                                                          |       | 567,000                         |       | 459,100                         |       |
|                                                                                                                                                          |       |                            |       |                            |       |
| PROPERTY, PLANT  AND EQUIPMENT—Net                                                                                                                       |       | 2,383,700                       |       | 2,385,300                       |       |
|                                                                                                                                                          |       |                            |       |                            |       |
| DEFERRED INCOME  TAXES                                                                                                                                        |       | 152,000                         |       | 149,600                         |       |
|                                                                                                                                                          |       |                            |       |                            |       |
| TOTAL                                                                                                                                                         |       | $                               | 22,263,000 |                            | $          | 19,701,900 |   |
|                                                                                                                                                          |       |                            |       |                            |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                |       |                            |       |                            |       |
|                                                                                                                                                          |       |                            |       |                            |       |
| CURRENT  LIABILITIES:                                                                                                                                         |       |                            |       |                            |       |
| Accounts payable                                                                                                                                              |       | $                               | 4,300,000  |                            | $          | 3,308,300 |   |
| Accrued salaries  and commissions                                                                                                                             |       | 853,200                         |       | 560,900                         |       |
| Income taxes  payable                                                                                                                                         |       | 248,700                         |       | —                          |       |
| Other current  liabilities                                                                                                                                    |       | 257,500                         |       | 171,400                         |       |
| Total current  liabilities                                                                                                                                    |       | 5,659,400                       |       | 4,040,600                       |       |
|                                                                                                                                                          |       |                            |       |                            |       |
| COMMITMENTS                                                                                                                                                   |       |                            |       |                            |       |
|                                                                                                                                                          |       |                            |       |                            |       |
| SHAREHOLDERS’  EQUITY:                                                                                                                                   |       |                            |       |                            |       |
| Common stock,  $0.20 par value; Authorized 8,000,000 shares; Issued 5,791,840 shares;  Outstanding 3,744,903 (Nov 30) and 3,757,323 (February 28) shares |       | 1,158,400                       |       | 1,158,400                       |       |
| Capital in  excess of par value                                                                                                                               |       | 7,649,100                       |       | 7,649,100                       |       |
| Retained  earnings                                                                                                                                            |       | 18,723,600                      |       | 17,707,700                      |       |
|                                                                                                                                                          |       | 27,531,100                      |       | 26,515,200                      |       |
| Less treasury  stock, at cost                                                                                                                                 |       | (10,927,500                     | )          | (10,853,900                     | )          |
|                                                                                                                                                          |       | 16,603,600                      |       | 15,661,300                      |       |
|                                                                                                                                                          |       |                            |       |                            |       |
| TOTAL                                                                                                                                                         |       | $                               | 22,263,000 |                            | $          | 19,701,900 |   |

 

See notes to financialstatements.

 

2

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)**

 
| ** **                                                            | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                                                | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| GROSS SALES                                                           |       | $                                                       | 12,660,700 |                                                   | $          | 12,729,200 |   | $ | 31,564,800 |   | $ | 32,532,600 |   |
| Less discounts  and allowances                                        |       | (3,344,200                                              | )          | (3,527,500                                             | )          | (9,163,300 | ) | (9,540,300 | ) |
| Transportation  revenue                                               |       | 587,000                                                 |       | 618,800                                                |       | 1,326,900 |   | 1,419,600 |   |
| NET REVENUES                                                          |       | 9,903,500                                               |       | 9,820,500                                              |       | 23,728,400 |   | 24,411,900 |   |
| COST OF SALES                                                         |       | 3,388,900                                               |       | 3,421,600                                              |       | 8,397,400 |   | 8,817,500 |   |
| Gross margin                                                          |       | 6,514,600                                               |       | 6,398,900                                              |       | 15,331,000 |   | 15,594,400 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| OPERATING  EXPENSES:                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| Operating and  selling                                                |       | 2,178,200                                               |       | 2,152,900                                              |       | 5,607,300 |   | 5,634,400 |   |
| Sales  commissions                                                    |       | 2,517,400                                               |       | 2,534,100                                              |       | 5,565,200 |   | 5,811,000 |   |
| General and  administrative                                           |       | 434,300                                                 |       | 420,600                                                |       | 1,251,600 |   | 1,330,300 |   |
| Interest                                                              |       | —                                                  |       | —                                                 |       | — |   | 7,600 |   |
|                                                                  |       | 5,129,900                                               |       | 5,107,600                                              |       | 12,424,100 |   | 12,783,300 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| OTHER INCOME                                                          |       | 21,800                                                  |       | 12,700                                                 |       | 44,200 |   | 284,300 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| EARNINGS BEFORE  INCOME TAXES                                         |       | 1,406,500                                               |       | 1,304,000                                              |       | 2,951,100 |   | 3,095,400 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| INCOME TAXES                                                          |       | 529,700                                                 |       | 505,800                                                |       | 1,109,200 |   | 1,176,600 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| NET EARNINGS                                                          |       | $                                                       | 876,800    |                                                   | $          | 798,200 |   | $ | 1,841,900 |   | $ | 1,918,800 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| BASIC AND  DILUTED EARNINGS PER SHARE:                                |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                                 |       | $                                                       | 0.23       |                                                   | $          | 0.21 |   | $ | 0.49 |   | $ | 0.51 |   |
| Diluted                                                               |       | $                                                       | 0.23       |                                                   | $          | 0.21 |   | $ | 0.48 |   | $ | 0.49 |   |
|                                                                  |       |                                                    |       |                                                   |       |   |   |   |   |
| WEIGHTED AVERAGE  NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                                 |       | 3,755,704                                               |       | 3,758,422                                              |       | 3,760,554 |   | 3,756,975 |   |
| Diluted                                                               |       | 3,845,694                                               |       | 3,872,277                                              |       | 3,867,223 |   | 3,876,375 |   |

 

See notes to condensedfinancial statements.

 

3

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**EDUCATIONAL DEVELOPMENT CORPORATION**

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

**FOR THEPERIOD ENDED NOVEMBER 30, 2007**

 
| ** **                           | ** ** | **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,  2007     |       | 5,791,840                                           |       | $          | 1,158,400  |                | $          | 7,649,100    |       | $                       | 17,707,700 |       | 2,034,517  |   | $ | (10,853,900 | ) | $ | 15,661,300 |   |
| Purchases of  treasury stock         |       | —                                              |       | —     |       | —              |       | —       |       | 21,232                  |       | (142,200   | )          | (142,200 | ) |
| Sales of treasury  stock             |       | —                                              |       | —     |       | —              |       | —       |       | (8,812                  | )          | 68,600     |       | 68,600 |   |
| Dividends  declared ($.22 per share) |       | —                                              |       | —     |       | —              |       | (826,000     | )          | —                  |       | —     |       | (826,000 | ) |
| Net earnings                         |       | —                                              |       | —     |       | —              |       | 1,841,900    |       | —                  |       | —     |       | 1,841,900 |   |
| BALANCE-November 30,2007        |       | 5,791,840                                           |       | $          | 1,158,400  |                | $          | 7,649,100    |       | $                       | 18,723,600 |       | 2,046,937  |   | $ | (10,927,500 | ) | $ | 16,603,600 |   |

 

See notes to financialstatements.

 

4

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**EDUCATIONALDEVELOPMENT CORPORATION**

**CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)**

**FOR THE NINE MONTHS ENDED NOVEMBER 30,**

 
| ** **                                                                       | ** ** | **2007**  | ** ** | **2006**   | ** ** |
|----------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|
|                                                                             |       |      |       |       |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                           |       | $         | 3,451,100  |       | $          | 4,175,500 |   |
|                                                                             |       |      |       |       |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES—  Purchases of property and equipment |       | (105,400  | )          | (34,900    | )          |
|                                                                             |       |      |       |       |       |
| Net cash used in  investing activities                                           |       | (105,400  | )          | (34,900    | )          |
|                                                                             |       |      |       |       |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                           |       |      |       |       |       |
| Borrowings on  revolving credit agreement                                        |       | —    |       | 3,295,000  |       |
| Payments on  revolving credit agreement                                          |       | —    |       | (3,971,000 | )          |
| Cash received  from exercise of stock options                                    |       | —    |       | 12,500     |       |
| Tax benefit of  stock options exercised                                          |       |      |       | 9,100      |       |
| Cash received  from sale of treasury stock                                       |       | 68,600    |       | 65,200     |       |
| Cash paid to  acquire treasury stock                                             |       | (142,200  | )          | (112,400   | )          |
| Dividends paid                                                                   |       | (826,000  | )          | (751,200   | )          |
|                                                                             |       |      |       |       |       |
| Net cash used in  financing activities                                           |       | (899,600  | )          | (1,452,800 | )          |
|                                                                             |       |      |       |       |       |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                       |       | 2,446,100 |       | 2,687,800  |       |
|                                                                             |       |      |       |       |       |
| CASH AND CASH  EQUIVALENTS—BEGINNING OF PERIOD                              |       | 1,254,300 |       | 321,500    |       |
|                                                                             |       |      |       |       |       |
| CASH AND CASH  EQUIVALENTS—END OF PERIOD                                    |       | $         | 3,700,400  |       | $          | 3,009,300 |   |
|                                                                             |       |      |       |       |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                               |       |      |       |       |       |
| Cash paid for  interest                                                          |       | $         | —     |       | $          | 11,400 |   |
| Cash paid for  income taxes                                                      |       | $         | 871,500    |       | $          | 1,177,400 |   |

 

5

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NOTES TO CONDENSEDFINANCIAL STATEMENTS

 

Note 1- The information shown with respect to the three and nine months ended November 30,2007 and 2006, 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, 2007 and 2006,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 28,2007.

 

Note 2 -Effective June 30, 2007 we signed a Ninth Amendment to the Credit andSecurity Agreement with Arvest Bank which provided a $5,000,000 line of creditthrough June 30, 2008.  Interest ispayable monthly at the Wall Street Journal prime-floating rate minus0.75% (7.50% at November 30, 2007) and borrowings are collateralized bysubstantially all the assets of the Company. At November 30, 2007the Company had no debt outstandingunder this agreement.  Available creditunder the revolving credit agreement was $5,000,000 at November 30,2007. No borrowings were outstanding under the agreement during the quarterended November 30, 2007.

 

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 30,2008 and that the sum of the line of credit plus the letters of credit wouldnot exceed the borrowing base in effect at the time.

 

Note 3- Inventories consist of the following:

 
| ** **                      | ** ** | **2007**              | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **November 30,** | ** ** | **February 28,** | ** ** |
| Current:                        |       |                  |       |   |   |
| Book inventory                  |       | $                     | 11,882,100 |   | $ | 12,421,400 |   |
| Inventory  valuation allowance  |       | (25,000               | )          | (33,400 | ) |
|                            |       |                  |       |   |   |
| Inventories net–current    |       | $                     | 11,857,100 |   | $ | 12,388,000 |   |
|                            |       |                  |       |   |   |
| Noncurrent:                     |       |                  |       |   |   |
| Book inventory                  |       | $                     | 922,000    |   | $ | 808,000 |   |
| Inventory  valuation allowance  |       | (355,000              | )          | (348,900 | ) |
|                            |       |                  |       |   |   |
| Inventories net–noncurrent |       | $                     | 567,000    |   | $ | 459,100 |   |

 

We occasionallypurchase book inventory in quantities in excess of what will be sold within thenormal operating cycle due to minimum order requirements of our primarysupplier.  These amounts are included innon-current inventory.

 

Significantportions of our inventory purchases are concentrated with an England-basedpublishing company.  Purchases from thiscompany were approximately $3.2 million and $3.5 million for the three monthsended November 30, 2007 and 2006, respectively.  Total inventory purchases from all supplierswere approximately $3.8 million and $4.3 million for the three months ended November 30,2007 and 2006, respectively.

 

For the ninemonths ended November 30, 2007 and 2006, respectively, purchases from thiscompany were approximately $7.1 million and $7.6 million.  Total inventory purchases from all supplierswere approximately $9.6 million and $9.4 million for the same respectiveperiods.

 

6

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Note 4 - Basic earnings per share(“EPS”) is computed by dividing net earnings by the weighted average number ofcommon shares outstanding during the period. Diluted EPS is based on the combined weighted average number of commonshares 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 ofweighted average common and common equivalent shares used in the calculation ofbasic and diluted earnings per share (“EPS”) is shown below.

 

**Earnings Per Share:**

** **
| ** **                                      | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                                | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| Net earnings  applicable to common shareholders |       | $                                                       | 876,800    |                                                   | $          | 798,200 |   | $ | 1,841,900 |   | $ | 1,918,800 |   |
|                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| **Shares:**                                     |       |                                                    |       |                                                   |       |   |   |   |   |
|                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| Weighted average  shares outstanding - basic    |       | 3,755,704                                               |       | 3,758,422                                              |       | 3,760,554 |   | 3,756,975 |   |
| Assumed exercise  of options                    |       | 89,990                                                  |       | 113,855                                                |       | 106,669 |   | 119,400 |   |
|                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| Weighted average  shares outstanding - diluted  |       | 3,845,694                                               |       | 3,872,277                                              |       | 3,867,223 |   | 3,876,375 |   |
|                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| **Basic  Earnings Per Share**                   |       | $                                                       | 0.23       |                                                   | $          | 0.21 |   | $ | 0.49 |   | $ | 0.51 |   |
| **Diluted  Earnings Per Share**                 |       | $                                                       | 0.23       |                                                   | $          | 0.21 |   | $ | 0.48 |   | $ | 0.49 |   |

 

In April 2004, 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 2008, we repurchased 12,421shares of common stock.  The maximumnumber of shares that may be repurchased in the future is 134,018.

 

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 costs incurred are included in operating &selling expenses and were $836,300 and $755,400 for the three months ended November 30,2007 and 2006, respectively.

 

For the nine months endedNovember 30, 2007 and 2006, respectively, freight and handling costsincurred are included in operating & selling expenses and were$1,953,500 and $1,819,400.

 

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 30,2007 and 2006 follows:

 

**NET REVENUES**

 
| ** **     | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|----------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **     | ** ** | **2007**                                                | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Publishing** |       | $                                                       | 2,216,800  |                                                   | 1,998,600  |   | $ | 6,382,900 |   | 6,167,300 |   |
| **UBAH**       |       | $                                                       | 7,686,700  |                                                   | 7,821,900  |   | $ | 17,351,500 |   | 18,244,600 |   |
| **Other**      |       | $                                                       | —     |                                                   | $          | — |   | $ | — |   | $ | — |   |
| **Total**      |       | $                                                       | 9,903,500  |                                                   | $          | 9,820,500 |   | $ | 23,734,400 |   | $ | 24,411,900 |   |

 

**EARNINGS (LOSS) BEFORE INCOME TAXES**

 
| ** **     | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|----------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **     | ** ** | **2007**                                                | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Publishing** |       | $                                                       | 698,200    |                                                   | 698,800    |   | $ | 1,982,800 |   | 1,942,600 |   |
| **UBAH**       |       | $                                                       | 1,680,700  |                                                   | 1,583,500  |   | $ | 3,753,400 |   | 3,788,500 |   |
| **Other**      |       | $                                                       | (972,400   | )                                                      | (978,300   | ) | $ | (2,785,100 | ) | (2,635,700 | ) |
| **Total**      |       | $                                                       | 1,406,500  |                                                   | $          | 1,304,000 |   | $ | 2,951,100 |   | $ | 3,095,400 |   |
|                |            |                                                         |            |                                                        |            |  |  |  |  |  |  |  |  |

 

Note 8 –The Financial Accounting StandardsBoard (“FASB”) periodically issues new accounting standards in a continuing effortto improve standards of financial accounting and reporting. We have reviewedthe recently issued pronouncements and concluded that the following newaccounting standards are applicable to us.

 

In February 2006, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 155 “Accountingfor Certain Hybrid Financial Instruments” amending SFAS No. 133 and SFAS No. 140.SFAS No. 155 eliminates the exemption from applying SFAS No. 133 tosecuritized financial assets. The provisions of SFAS No. 155 are to beapplied to financial instruments issued or acquired during fiscal periodsbeginning after September 15, 2006. The adoption of SFAS No. 155 didnot have a material impact on our financial position or results of operations.

 

FASB Interpretation No. 48“Accounting for Uncertainty in Income Taxes” (FIN 48) was issued in June 2006.It clarifies recognition and derecognition criteria for tax positions taken ina return that may be subject to challenge upon audit. If it is “more likelythan not,” that the tax position will be sustained upon examination, thebenefit is to be recognized in the financial statements. Conversely, if theposition is less likely than not to be sustained, the benefit should not berecognized. The recognition/derecognition decision should be reflected in thefirst interim period when the status changes and not deferred to a futuresettlement upon audit. General tax reserves to cover aggressive positions takenin filed returns are no longer allowable. Each issue must be judged on its ownmerits and a recognition/derecognition decision recorded in the financialstatements. FIN 48 is effective for fiscal years beginning after December 15,2006. The adoption of this Interpretation in the first quarter of fiscal year2008 did not have a material effect on our financial position or results ofoperations in future periods.

 

In September 2006, theFASB issued SFAS No. 157 “Fair Value Measurements” which amends and putsin one place guidance on the use of fair value measurements which had beenspread through four APB Opinions and 37 FASB Standards. No extensions of theuse of fair value measurements are contained in this new pronouncement, andwith some special industry exceptions (e.g., broker-dealers), no significantchanges in practice should ensue. The standard is to be applied to financialstatements beginning after November 15, 2007. The adoption of SFAS No. 157is not expected to have a material impact on our financial position or resultsof operations.

 

In February 2007, theFASB issued SFAS No. 159 “Fair Value Option for Financial Assets andFinancial Liabilities — including an amendment of FASB Statement No. 115”.This standard permits the use of fair value measurement of financial assets andliabilities in the balance sheet with the net change in fair value recognizedin periodic net income. The Standard is effective for fiscal years beginningafter November 15, 2007. The adoption of this standard is not expected tohave a material effect on our financial position or results of operations.

 

In December 2007, the FASB issued SFAS No. 160“Noncontrolling Interests in Consolidated Financial Statements.” This statementamends Accounting Research Bulletin No. 51 “Consolidated Financial Statements”to establish accounting and reporting standards for noncontrolling interest ina subsidiary and for the deconsolidation of a subsidiary.  This statement is effective for fiscal yearsbeginning after December 15, 2008.  Theadoption of this standard is not expected to have a material effect on ourfinancial position or results of operations.

 

In December 2007, the FASB issued SFAS 141(revised2007) “Business Combinations.”  Thestatement requires the acquiring entity in a business combination to recognizeall the assets acquired and liabilities assumed in the transaction; establishesthe acquisition-date fair value as the measurement objective for all assetsacquired and liabilities 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 acquisitiondates on or after the beginning of the first annual reporting period beginningafter December 15, 2008.  The adoption ofthis standard is not expected to have a material effect on our financialposition or results of operations.

 

8

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ITEM2   MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL 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 consolidated financialstatements, including the notes to those statements, included in thisdocument.  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 oftotal revenues.

 

**Earnings as a Percent of Net Revenues**

 
| ** **                         | ** ** | **Three Months Ended November 30,** | ** ** | **Six Months Ended November 30,** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                                | ** ** | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues                       |       | 100.0                                                   | %          | 100.0                                                 | %          | 100.0 | % | 100.0 | % |
| Cost of sales                      |       | 34.2                                                    | %          | 34.8                                                  | %          | 35.4 | % | 36.1 | % |
| Gross margin                       |       | 65.8                                                    | %          | 65.2                                                  | %          | 64.6 | % | 63.9 | % |
| Operating  expenses:               |       |                                                    |       |                                                  |       |   |   |   |   |
| Operating &  selling      |       | 22.0                                                    | %          | 21.9                                                  | %          | 23.6 | % | 23.1 | % |
| Sales  commissions                 |       | 25.4                                                    | %          | 25.8                                                  | %          | 23.4 | % | 23.8 | % |
| General &  administrative |       | 4.4                                                     | %          | 4.3                                                   | %          | 5.3 | % | 5.4 | % |
| Interest                           |       | 0.0                                                     | %          | 0.0                                                   | %          | 0.0 | % | 0.1 | % |
| Total operating  expenses          |       | 51.8                                                    | %          | 52.0                                                  | %          | 52.3 | % | 52.4 | % |
| Income from  operations            |       | 14.0                                                    | %          | 13.2                                                  | %          | 12.3 | % | 11.5 | % |
| Other income                       |       | 0.2                                                     | %          | 0.1                                                   | %          | 0.2 | % | 1.2 | % |
| Earnings before  income taxes      |       | 14.2                                                    | %          | 13.3                                                  | %          | 12.5 | % | 12.7 | % |
| Income taxes                       |       | 5.3                                                     | %          | 5.2                                                   | %          | 4.7 | % | 4.8 | % |
| Net earnings                       |       | 8.9                                                     | %          | 8.1                                                   | %          | 7.8 | % | 7.9 | % |

 

**Operating Results for the Three Months EndedNovember 30, 2007**

 

Weearned income before income taxes of $1,406,100 for the three months ended November 30,2007 compared with $1,304,000 for the three months ended November 30,2006.

 

**Revenues**

 
| ** **                            | ** ** | **For the Three Months Ended November 30,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2007**                                                                  | ** ** | **2006**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Gross sales                           |       | $                                                                         | 12,660,700 |                 | $          | 12,729,200           |       | $ | (68,500 | ) | -0.5 | % |
| Less  discounts & allowances |       | (3,344,200                                                                | )          | (3,527,500           | )          | 183,300              |       | -5.2 | % |
| Transportation  revenue               |       | 587,000                                                                   |       | 618,800              |       | (31,800              | )          | -5.1 | % |
| Net revenues                          |       | $                                                                         | 9,903,500  |                 | $          | 9,820,500            |       | $ | 83,000 |   | 0.8 | % |

 

The UBAH Division’s gross sales decreased 5.8% or $506,600 during thethree month period ending November 30,2007 when compared with the same quarterly period a year ago.  This decrease consists of a 9% decrease inhome party sales and a 17% decrease in direct sales, offset by a 31% increasein Internet sales and a 5% increase in school and library sales.  The decline in home party sales is attributedprimarily to an 8% decline in the total number of home shows held and a 1%decrease in average per order sales.  Thedecline in home party sales and direct sales occurred as more consultantsreplaced these with Internet orders.

 

9

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The Publishing Division’s gross sales increased 11.0% or $437,900during the three month period ending November 30, 2007 when compared with the same quarterly period ayear ago.  We attribute this to a 21.9%increase in sales to other accounts, offset by a 45.0% decrease in sales to thesmaller book stores and a 5.6% decrease in sales to the national chains.

 

TheUBAH Division’s discounts and allowances were $1,028,300 and $1,431,300 for thequarterly periods ended November 30, 2007 and 2006, 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 at retail.  As a part of the UBAH Division’s marketingprograms, discounts between 40% and 50% of retail are offered on selected itemsat various times throughout the year. The discounts and allowances in the UBAH Division will vary from year toyear depending upon the marketing programs in place during any given year.  The UBAH Division’s discounts and allowanceswere 12.6% of UBAH’s gross sales for the quarterly period ended November 30,2007 and 16.6% for the quarterly period ended November 30, 2006.

 

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 $2,315,900 and$2,096,100 for the quarterly periods ended November 30, 2007 and 2006,respectively.  The Publishing Division sells toretail book chains, regional and local bookstores, toy and gift stores, schoolsupply stores and museums.  To be competitivewith other wholesale book distributors, the Publishing Division sells atdiscounts between 48% and 55% of the retail price, based upon the quantity ofbooks ordered and the dollar amount of the order.  The Publishing Division’s discountsand allowances were 51.2% of Publishing’s gross sales for the quarterly periodended November 30, 2007 and 51.3% for the quarterly period ended November 30,2006.

 

Thedecrease in transportation revenues for the three months ended November30, 2007 was due in part to the decrease in sales for the period.

 

## **Expenses**

 
| ** **                         | ** ** | **For Three Months Ended November 30,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2007**                                                         | ** ** | **2006**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Cost of sales                      |       | $                                                                | 3,388,900  |                 | $          | 3,421,600            |       | $ | (32,700 | ) | -1.0 | % |
| Operating &  selling      |       | 2,178,100                                                        |       | 2,152,900            |       | 25,200               |       | 1.2 | % |
| Sales  commissions                 |       | 2,517,500                                                        |       | 2,534,100            |       | (16,600              | )          | -0.7 | % |
| General &  administrative |       | 434,400                                                          |       | 420,600              |       | 13,800               |       | 3.3 | % |
| Interest                           |       | 0                                                                |       | 0                    |       | —               |       | 0.0 | % |
| Total                              |       | $                                                                | 8,518,900  |                 | $          | 8,529,200            |       | $ | (10,300 | ) | -0.1 | % |
|                                    |            |                                                                  |            |                      |            |                      |            |  |  |  |  |  |  |

 

Cost of salesdecreased 1.0% for the three months ended November 30, 2007 when compared withthe three months ended November 30, 2006. Cost of sales as a percentage of gross sales was 26.8% for the threemonths ended November 30, 2007 and for the three months ended November 30,2006 was 26.9%.  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 $294,800 in the quarterended November 30, 2007 and $320,500 in the quarter ended November 30,2006.  Readers should be cautious whencomparing our gross margins with the gross margins of other companies, sincesome companies include the costs of their distribution networks in cost ofsales.

 

In addition tocosts associated with our distribution network (noted above), operating andselling costs include expenses of the Publishing Division, the UBAH Divisionand the order entry and customer service functions.  Operating and selling expenses as apercentage of gross sales were 17.2% for the quarter ended November 30, 2007and 16.9% for the quarter ended November 30, 2006.

 

10

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Sales commissions in the Publishing Divisionincreased 30.1% to $34,400 for the three months ended November 30, 2007.  Publishing Division sales commissions arepaid on net sales and were 1.6% of net sales for the three months ended November30, 2007 and 1.3% of net salesfor the three months ended November 30, 2006.  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 1.0% to $2,483,000 for the three months ended November 30,2007 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 37.7% of retail sales for the three monthsended November 30, 2007 and38.1% of retail sales for the three months ended November 30, 2006.  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 37.7% and 38.8% for the quarterly periods ended November30, 2007 and 2006,respectively.  These rates are higherthan the federal statutory rate due to state income taxes.

 

**Operating Results for the Nine Months Ended November30, 2007**

 

Weearned income before income taxes of $2,951,100 for the nine months ended November30, 2007 compared with $3,095,400 for the nine months ended November 30,2006.

** **

**Revenues**

 
| ** **                            | ** ** | **For the Nine Months Ended November 30,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2007**                                                                 | ** ** | **2006**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Gross sales                           |       | $                                                                        | 31,564,800 |                 | $          | 32,532,600           |       | $ | (967,800 | ) | -3.0 | % |
| Less  discounts & allowances |       | (9,163,300                                                               | )          | (9,540,300           | )          | 377,000              |       | -4.0 | % |
| Transportation  revenue               |       | 1,326,900                                                                |       | 1,419,600            |       | (92,700              | )          | -6.5 | % |
| Net revenues                          |       | $                                                                        | 23,728,400 |                 | $          | 24,411,900           |       | $ | (683,500 | ) | -2.8 | % |

 

The UBAH Division’s gross sales decreased 3.0% or $961,800 during thenine month period ending November30, 2007 when compared with the same nine month period a year ago.  This decrease consists of a 10% decrease inhome party sales, a 10% decrease in direct sales and a 3% decrease in schooland library sales, offset by a 29% increase in Internet sales.  The decline in home party sales is attributedprimarily to a 6% decline in the total number of home shows held and a 4%decrease in average per order sales.  Thedecline in home party sales and direct sales occurred as more consultantsreplaced these with Internet orders.

 

The Publishing Division’s gross sales increased 3.4% during the ninemonth period ending November30, 2007 when compared with the same nine month period a year ago.  We attribute this to a 21.5% increase insales to the smaller books stores, offset by a 12.3% decrease in sales to thenational chains and a 10.4% increase in sales to other accounts.

 

TheUBAH Division’s discounts and allowances were $2,358,200 and $2,960,900 for thenine month periods ended November 30, 2007 and 2006, 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 12.8% of UBAH’s gross sales forthe nine month period ended November 30, 2007 and 14.9% for the nine monthperiod ended November 30, 2006.

 

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 $6,805,100 and$6,579,300 for the nine month periods ended November 30, 2007 and 2006,respectively.  The Publishing Division sells toretail book chains, regional and local bookstores, toy and gift stores, school 

 

11

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supply stores and museums. To be competitive with other wholesale book distributors, the PublishingDivision sells at discounts between 48% and 55% of the retail price, based uponthe quantity of books ordered and the dollar amount of the order.  The Publishing Division’s discounts andallowances were 51.7% of Publishing’s gross sales for both nine month periodsended November 30, 2007 and 2006.

 

The decrease in transportation revenues for the nine months ended November30, 2007 was primarily a result of the decrease in sales for the period.

 

**Expenses**

 
| ** **                         | ** ** | **For Nine Months Ended November 30,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2007**                                                        | ** ** | **2006**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Cost of sales                      |       | $                                                               | 8,397,400  |                 | $          | 8,817,500            |       | $ | (420,100 | ) | -4.8 | % |
| Operating &  selling      |       | 5,607,300                                                       |       | 5,634,400            |       | (27,100              | )          | -0.5 | % |
| Sales  commissions                 |       | 5,565,200                                                       |       | 5,811,000            |       | (245,800             | )          | -4.2 | % |
| General &  administrative |       | 1,251,600                                                       |       | 1,330,300            |       | (78,700              | )          | -5.9 | % |
| Interest                           |       | —                                                          |       | 7,600                |       | (7,600               | )          | -100.0 | % |
| Total                              |       | $                                                               | 20,821,500 |                 | $          | 21,600,800           |       | $ | (779,300 | ) | -3.6 | % |
|                                    |            |                                                                 |            |                      |            |                      |            |  |  |  |  |  |  |

 

Cost of sales decreased4.8% for the nine months ended November 30, 2007 when compared with the ninemonths ended November 30, 2006, due in part to the decrease in sales forthe period.  Cost of sales as apercentage of gross sales was 26.6% for the nine months ended November 30, 2007and for the nine months ended November 30, 2006 was 27.1%.  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 $838,600 in the nine months ended November 30, 2007and $833,500 in the nine months ended November 30, 2006.  Readers should be cautious when comparing ourgross margins with the gross margins of other companies, since some companiesinclude the costs of their distribution networks in 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 service functions. Operating and selling expenses as apercentage of gross sales were 17.8% for the nine months ended November 30,2007 and 17.3% for the nine months ended November 30, 2006.

 

Sales commissions in the Publishing Divisionincreased 29.4% to $110,300 for the nine months ended November 30, 2007.  Publishing Division sales commissions arepaid on net sales and were 1.7% of net sales for the nine months ended November30, 2007 and 1.4% of net salesfor the nine months ended November 30, 2006.  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 4.2% to $5,454,900 for the nine months ended November 30, 2007, the direct result of decreased sales fromhome shows and school and library sales in this division.  UBAH Division sales commissions are paid onretail sales and were 36.3% of retail sales for the nine months ended November30, 2007 and 36.9% of retail sales forthe nine months ended November 30, 2006.  The fluctuation in thepercentages of commission expense to retail sales is the result of the type ofsale.  Home shows, book fairs, school andlibrary sales and direct sales have different commission rates.  Also contributing to the fluctuations in the percentagesis the payment of overrides and bonuses, both dependent on consultants’ monthlysales and downline sales.

 

Oureffective tax rate was 37.6% and 38.0% for the nine month periods ended November30, 2007 and 2006,respectively.  These rates are higherthan the federal statutory rate due to state income taxes.

 

12

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**Liquidity and Capital Resources**

 

Our primary source ofcash is operating cash flow.  Our primaryuses of cash are to purchase property and equipment and pay dividends.  We utilize our bank credit facility to meetour short-term cash needs when necessary.

 

Our Board of Directors has adopted a stock repurchase plan inwhich we may purchase up to 2,500,000 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 our short-termand long-term liquidity.  We repurchased12,421 shares at a cost of $76,400 during the quarter ended November 30, 2007.

 

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 third three month period of fiscalyear 2008, we experienced a positive cash flow from operating activities of$2,346,000.  Cash flow from operatingactivities was increased primarily by net income after taxes of $876,800, anincrease in accounts payable and accrued expenses of $1,917,400, and a decreasein inventory of $36,900.  Offsettingthese were increases in accounts receivable of $541,400 and a decrease inincome taxes payable of $268,900. Fluctuations in accounts payable and accrued expenses involve timing ofshipments received from our principal supplier and the payments associated withthese shipments.  They tend to be highestin the third quarter when holiday season shipments have arrived and prior topayments being made.

 

Webelieve that in fiscal year 2008 we will experience a positive cash flow andthat this positive cash flow along with the bank credit facility will beadequate to meet our liquidity requirements for the foreseeable future.

 

Weestimate that total cash used in investing activities for fiscal year 2008 willbe less than $250,000.  This wouldconsist of software and hardware enhancements to our existing data processingequipment, property improvements and additional warehouse equipment.

 

Cashused in financing activities was $76,400 from the purchase of treasury stock.

 

Asof November 30, 2007 we did not have any commitments in excess of one year.

 

**Bank Credit Agreement**

 

Effective June 30,2007 we signed a Ninth Amendment to the Credit and Security Agreement withArvest Bank which provided a $5,000,000 line of credit through June 30,2008.  Interest is payable monthly at theWall Street Journal prime-floating rate minus 0.75% (7.50% at November30, 2007) and borrowings are collateralized by substantially all of our assets.At November 30,2007 we had no debt outstanding underthis agreement.  Available credit underthe revolving credit agreement was $5,000,000 at November 30, 2007.  Noborrowings were outstanding under the agreement during the quarter ended November30, 2007.

 

This agreement also contains a provision for our use of the Bank’sletters of credit.  The Bank agrees toissue, or obtain issuance of commercial or standby letters of credit providedthat no letters of credit will have an expiry date later than June 30,2008 and that the sum of the line of credit plus the letters of credit wouldnot exceed the borrowing base in effect at the time.

 

13

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**CriticalAccounting Policies**

 

*Our discussion and analysis of our financial condition and results of operations are based upon our consolidated 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 76.3% of net revenues for the quarter ended November 30, 2007 and 78.4% for the quarter ended November 30, 2006.  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, 2007 and $78,000 as of February 28, 2007.

 

**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 $83,400 and $81,000 as of November 30, 2007 and February 28, 2007, 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 bytitle.  All inventory in excess of 2 1⁄2years of anticipated sales was classified as noncurrent inventory. Noncurrentinventory balances, before valuation allowance, were $697,000 at November 30,2007 and $808,000 at February 28, 2007.

 

Inventories are presentednet of a valuation allowance.  Managementhas estimated and included a valuation allowance for both current andnoncurrent inventory.  This reserve is basedon management’s identification of slow moving inventory on hand at November 30,2007 and February 28, 2007. Management has estimated a valuation allowance for both current andnoncurrent inventory of $380,000 and $382,300 as of November 30, 2007 and February 28,2007, respectively.

 

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**Stock-Based Compensation**

 

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 as compensationexpense over the vesting period.

 

Item 3.                       QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We do not have any material 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, 2007. This evaluation was conducted under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Controller/Corporate Secretary (Principal Financialand 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.

 

During the fiscalquarter covered by this report on Form 10-Q, there have been no changes inour internal control over financial reporting that have materially affected orare reasonably likely to materially affect, our internal control over financialreporting.

 

PART II              OTHERINFORMATION

 

Item 1A                RISKFACTORS

 

No material changesoccurred in the risk factors discussed in our Fiscal Year 2007 Form 10-K.

 

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Item 2     UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS

 

The following table showsrepurchases of our Common Stock during the quarter ended November 30, 2007.

 

ISSUER PURCHASESOF EQUITY SECURITIES

 
| **Period**                     | ** ** | **(a) Total Number  of Shares (or  Units) Purchased (1)** | ** ** | **(b) Average  Price Paid per  Share (or Unit)** | ** ** | **(c) Total Number  of Share (or  Units) Purchased  as Part of  Publicily  Announced  Plans  or Programs (2)** | ** ** | **(d) Maximum  Number (or  Approximate  Dollar Value)  of Shares (or  Units) that may  Yet Be Purchased  Under the  Plans or Programs** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| September 1,  2007 – |       |                                                      |       |                                             |       |                                                                                                           |       |                                                                                                                                    |       |
| September 30,  2007       |       | —                                                    |       | —                                           |       | —                                                                                                         |       | 146,439                                                                                                                                 |       |
|                           |       |                                                      |       |                                             |       |                                                                                                           |       |                                                                                                                                    |       |
| October 1,  2007 –   |       |                                                      |       |                                             |       |                                                                                                           |       |                                                                                                                                    |       |
| October 31,  2007         |       | —                                                    |       | —                                           |       | —                                                                                                         |       | 146,439                                                                                                                                 |       |
|                           |       |                                                      |       |                                             |       |                                                                                                           |       |                                                                                                                                    |       |
| November 1,  2007 –  |       |                                                      |       |                                             |       |                                                                                                           |       |                                                                                                                                    |       |
| November 30,  2007             |       | 12,421                                                    |       | 6.10                                             |       | 12,421                                                                                                         |       | 134,018                                                                                                                                 |       |
|                           |       |                                                      |       |                                             |       |                                                                                                           |       |                                                                                                                                    |       |
| Total                          |       | 12,421                                                    |       | 6.10                                             |       | 12,421                                                                                                         |       |                                                                                                                                    |       |

 

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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.                                                                                                                                         |
|--------|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |               |                                                                                                                                                                                                                                                                                                 |
| (2)    |               | In April 2004 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 134,018 additional shares of our common stock until  2,500,000 shares have been repurchased. |
|   |               |                                                                                                                                                                                                                                                                                                 |
| (3)    |               | There is no expiration  date for the repurchase plan.                                                                                                                                                                                                                                                |
|   |               |                                                                                                                                                                                                                                                                                                 |
| Item 5 | OTHER  INFORMATION |

 

None.

 

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| **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, 2008 |   | 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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