**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

# **FORM 10-Q**

# ** **

**(MarkOne)**

 

x       **QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly period ended May 31,2009**

** **

**OR**

** **

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

** **

**For the transition period from                      to                        .**

** **

**Commission file number: 0-4957**

 

# **EDUCATIONALDEVELOPMENT CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

Indicateby check mark whether the registrant (1) has filed all reports to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days.   Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).   Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See definitions of “largeaccelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

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

 

Indicate by check mark whether the Registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act)    Yes o No x

 

As of July 13,2009 there were 3,866,999 shares of Educational Development Corporation CommonStock, $0.20 par value outstanding.

 

 

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1

 

**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSEDBALANCE SHEETS (UNAUDITED)**

 
| ** **                                                                                                                                                                                                         | ** ** | **May 31, 2009** | ** ** | **February 28, 2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                         | ** ** | ** **            | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                         |       |                  |       |                  |       |
|                                                                                                                                                                                                               |       |                  |       |                  |       |
| CURRENT  ASSETS:                                                                                                                                                                                                   |       |                  |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                                         |       | $                     | 1,204,300  |                  | $          | 2,896,200 |   |
| Accounts  receivable, less allowance for doubtful accounts and sales returns $194,900  (May 31) and $176,900 (February 28)                                                                                    |       | 3,642,800             |       | 3,253,000             |       |
| Inventories—Net                                                                                                                                                                                               |       | 11,433,400            |       | 10,302,600            |       |
| Income  taxes receivable                                                                                                                                                                                           |       | 50,400                |       | —                |       |
| Prepaid  expenses and other assets                                                                                                                                                                                 |       | 236,500               |       | 306,800               |       |
| Deferred  income taxes                                                                                                                                                                                             |       | 232,300               |       | 225,500               |       |
| Total  current assets                                                                                                                                                                                              |       | 16,799,700            |       | 16,984,100            |       |
|                                                                                                                                                                                                               |       |                  |       |                  |       |
| INVENTORIES—Net                                                                                                                                                                                               |       | 437,000               |       | 568,000               |       |
|                                                                                                                                                                                                               |       |                  |       |                  |       |
| PROPERTY,  PLANT AND EQUIPMENT—Net                                                                                                                                                                            |       | 2,243,900             |       | 2,278,400             |       |
|                                                                                                                                                                                                               |       |                  |       |                  |       |
| OTHER  ASSETS                                                                                                                                                                                                      |       | 60,400                |       | 60,400                |       |
| DEFERRED  INCOME TAXES                                                                                                                                                                                             |       | 50,500                |       | 50,500                |       |
|                                                                                                                                                                                                               |       |                  |       |                  |       |
| TOTAL  ASSETS                                                                                                                                                                                                      |       | $                     | 19,591,500 |                  | $          | 19,941,400 |   |
|                                                                                                                                                                                                               |       |                  |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                      |       |                  |       |                  |       |
|                                                                                                                                                                                                               |       |                  |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                                                                                                              |       |                  |       |                  |       |
| Accounts  payable                                                                                                                                                                                                  |       | $                     | 3,682,700  |                  | $          | 2,653,200 |   |
| Accrued  salaries and commissions                                                                                                                                                                                  |       | 474,900               |       | 504,500               |       |
| Current  maturities of long-term debt                                                                                                                                                                              |       | 150,000               |       | 150,000               |       |
| Income  taxes payable                                                                                                                                                                                              |       | —                |       | 102,200               |       |
| Other  current liabilities                                                                                                                                                                                         |       | 260,800               |       | 486,200               |       |
| Total  current liabilities                                                                                                                                                                                         |       | 4,568,400             |       | 3,896,100             |       |
|                                                                                                                                                                                                               |       |                  |       |                  |       |
| LONG-TERM  NOTES PAYABLE, net of current maturities                                                                                                                                                                |       | 150,000               |       | 150,000               |       |
|                                                                                                                                                                                                               |       |                  |       |                  |       |
| COMMITMENTS                                                                                                                                                                                                        |       |                  |       |                  |       |
|                                                                                                                                                                                                               |       |                  |       |                  |       |
| SHAREHOLDERS’  EQUITY:                                                                                                                                                                                        |       |                  |       |                  |       |
| Common  stock, $0.20 par value; Authorized 8,000,000 shares; Issued 6,039,040  (May 31) and 6,039,040 (February 28) shares; Outstanding 3,866,999  (May 31) and 3,838,461 (February 28) shares |       | 1,207,800             |       | 1,207,800             |       |
| Capital  in excess of par value                                                                                                                                                                                    |       | 8,508,400             |       | 8,508,400             |       |
| Retained  earnings                                                                                                                                                                                                 |       | 16,941,600            |       | 18,062,800            |       |
|                                                                                                                                                                                                               |       | 26,657,800            |       | 27,779,000            |       |
| Less  treasury stock, at cost                                                                                                                                                                                      |       | (11,784,700           | )          | (11,883,700           | )          |
|                                                                                                                                                                                                               |       | 14,873,100            |       | 15,895,300            |       |
|                                                                                                                                                                                                               |       |                  |       |                  |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                   |       | $                     | 19,591,500 |                  | $          | 19,941,400 |   |

 

See notes to condensed financial statements.

 

2

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**EDUCATIONALDEVELOPMENT CORPORATION**

**CONDENSED STATEMENTS OF EARNINGS(UNAUDITED)**

 
| ** **                                                            | ** ** | **Three Months Ended May 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                            | ** ** | **2008** | ** ** |
|                                                                  |       |                                |       |   |   |
| GROSS SALES                                                           |       | $                                   | 8,753,100  |   | $ | 9,816,200 |   |
| Less discounts and  allowances                                        |       | (2,640,400                          | )          | (2,792,300 | ) |
| Transportation revenue                                                |       | 277,900                             |       | 350,900 |   |
| NET REVENUES                                                          |       | 6,390,600                           |       | 7,374,800 |   |
| COST OF SALES                                                         |       | 2,300,200                           |       | 2,671,100 |   |
| Gross margin                                                          |       | 4,090,400                           |       | 4,703,700 |   |
|                                                                  |       |                                |       |   |   |
| OPERATING EXPENSES:                                                   |       |                                |       |   |   |
| Operating and selling                                                 |       | 1,583,500                           |       | 1,842,200 |   |
| Sales commissions                                                     |       | 1,362,000                           |       | 1,667,100 |   |
| General and  administrative                                           |       | 505,900                             |       | 440,800 |   |
|                                                                  |       | 3,451,400                           |       | 3,950,100 |   |
|                                                                  |       |                                |       |   |   |
| OTHER INCOME                                                          |       | 27,000                              |       | 14,400 |   |
|                                                                  |       |                                |       |   |   |
| EARNINGS BEFORE INCOME  TAXES                                         |       | 666,000                             |       | 768,000 |   |
|                                                                  |       |                                |       |   |   |
| INCOME TAXES                                                          |       | 250,600                             |       | 288,300 |   |
|                                                                  |       |                                |       |   |   |
| NET EARNINGS                                                          |       | $                                   | 415,400    |   | $ | 479,700 |   |
|                                                                  |       |                                |       |   |   |
| BASIC AND DILUTED  EARNINGS PER SHARE:                                |       |                                |       |   |   |
| Basic                                                                 |       | $                                   | 0.11       |   | $ | 0.13 |   |
| Diluted                                                               |       | $                                   | 0.11       |   | $ | 0.13 |   |
|                                                                  |       |                                |       |   |   |
| WEIGHTED AVERAGE NUMBER  OF COMMON AND EQUIVALENT SHARES OUTSTANDING: |       |                                |       |   |   |
| Basic                                                                 |       | 3,843,847                           |       | 3,704,755 |   |
| Diluted                                                               |       | 3,844,859                           |       | 3,706,015 |   |

 

See notes to condensedfinancial statements.

 

3

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**EDUCATIONALDEVELOPMENT CORPORATION**

**CONDENSED STATEMENT OF CHANGES INSHAREHOLDERS’ EQUITY (UNAUDITED)**

**FOR THE THREE MONTHS ENDED MAY 31,2009**

 
| ** **                   | ** ** | **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, 2009  |       | 6,039,040                        |       | $          | 1,207,800  |            | $          | 8,508,400    |       | $                   | 18,062,800 |       | 2,200,579  |   | $ | (11,883,700 | ) | $ | 15,895,300 |   |
| Purchases  of treasury stock |       | —                           |       | —     |       | —          |       | —       |       | 637                 |       | (3,100     | )          | (3,100 | ) |
| Sales  of treasury stock     |       | —                           |       | —     |       | —          |       | —       |       | (29,175             | )          | 102,100    |       | 102,100 |   |
| Dividends  paid ($.40/share) |       | —                           |       | —     |       | —          |       | (1,536,600   | )          | —              |       | —     |       | (1,536,600 | ) |
| Net  earnings                |       | —                           |       | —     |       | —          |       | 415,400      |       | —              |       | —     |       | 415,400 |   |
| BALANCE—May  31, 2009   |       | 6,039,040                        |       | $          | 1,207,800  |            | $          | 8,508,400    |       | $                   | 16,941,600 |       | 2,172,041  |   | $ | (11,784,700 | ) | $ | 14,873,100 |   |

 

Seenotes to condensed financial statements.

 

4

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**

**FORTHE THREE MONTHS ENDED MAY 31,**

 
| ** **                                          | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:              |       | $          | (254,300   | )          | $          | 860,000 |   |
|                                                |       |       |       |       |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:              |       |       |       |       |       |
| Purchases of property  and equipment                |       | —     |       | (12,000    | )          |
|                                                |       |       |       |       |       |
| Net cash used in  investing activities              |       | —     |       | (12,000    | )          |
|                                                |       |       |       |       |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:              |       |       |       |       |       |
| Cash received from  exercise of stock options       |       | —     |       | 848,700    |       |
| Cash paid to acquire  treasury stock                |       | (3,100     | )          | (702,400   | )          |
| Cash received from sale  of treasury stock          |       | 102,100    |       | 82,100     |       |
| Dividends paid                                      |       | (1,536,600 | )          | (1,526,500 | )          |
|                                                |       |       |       |       |       |
| Net cash used in  financing activities              |       | (1,437,600 | )          | (1,298,100 | )          |
|                                                |       |       |       |       |       |
| NET DECREASE IN CASH  AND CASH EQUIVALENTS          |       | (1,691,900 | )          | (450,100   | )          |
|                                                |       |       |       |       |       |
| CASH AND CASH  EQUIVALENTS—BEGINNING OF PERIOD |       | 2,896,200  |       | 2,440,300  |       |
|                                                |       |       |       |       |       |
| CASH AND CASH  EQUIVALENTS—END OF PERIOD       |       | $          | 1,204,300  |       | $          | 1,990,200 |   |
|                                                |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION:  |       |       |       |       |       |
| Cash paid for income  taxes                         |       | $          | 410,000    |       | $          | 400,100 |   |

 

See notes to condensedfinancial statements.

 

5

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NOTESTO CONDENSED FINANCIAL STATEMENTS (Unaudited)

 

Note1 -      The information shown withrespect to the three months ended May 31, 2009 and 2008, which isunaudited, includes all adjustments which in the opinion of Management areconsidered to be necessary for a fair presentation of earnings for suchperiods.  The adjustments reflected inthe financial statements represent normal recurring adjustments.  The results of operations for the threemonths ended May 31, 2009 and 2008, respectively, are not necessarilyindicative of the results to be expected at year end due to seasonality of theproduct 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 28,2009.

 

Note2 — Effective June 30, 2009, we signed an Eleventh Amendment to theCredit and Security Agreement with Arvest Bank which provided a reduced$2,500,000 line of credit through June 30, 2010.  Interest is payable monthly at the greater of5.00% or the Wall Street Journal prime-floating rate minus 0.75% (3.25%at May 31, 2009) and borrowings are collateralized by substantially allthe assets of the Company.  At May 31,2009the Company had no debt outstanding under this agreement. Availablecredit under the revolving credit agreement was $5,000,000 at May 31, 2009and during the quarter then ended.

 

This agreement also contains a provision for our useof the Bank’s letters of credit.  TheBank agrees to issue commercial or standby letters of credit provided that nonewill have an expiry date later than June 30, 2010 and that the sum of theline of credit plus the letters of credit would not exceed the borrowing basein effect at the time.  For the quarterended May 31, 2009, we had no letters of credit outstanding.

 

Note3 - Inventories consist of the following:

 
| ** **                       | ** ** | **2009**         | ** ** |
|----------------------------------|------------|------------------|------------|
| ** **                       | ** ** | **May 31,** | ** ** | **February 28,** | ** ** |
| Current:                         |       |             |       |   |   |
| Book inventory                   |       | $                | 11,459,900 |   | $ | 10,327,600 |   |
| Inventory valuation  allowance   |       | (26,500          | )          | (25,000 | ) |
|                             |       |             |       |   |   |
| Inventories net—current     |       | $                | 11,433,400 |   | $ | 10,302,600 |   |
|                             |       |             |       |   |   |
| Noncurrent:                      |       |             |       |   |   |
| Book inventory                   |       | $                | 743,000    |   | $ | 913,000 |   |
| Inventory valuation  allowance   |       | (306,000         | )          | (345,000 | ) |
|                             |       |             |       |   |   |
| Inventories  net—noncurrent |       | $                | 437,000    |   | $ | 568,000 |   |

 

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

 

Significant portions of our inventory purchases are concentrated withan England-based publishing company. Purchases from this company were approximately $3.4 million and $1.8million for the three months ended May 31, 2009 and 2008,respectively.  Total inventory purchasesfrom all suppliers were approximately $4.2 million and $2.0 million for thethree months ended May 31, 2009 and 2008, respectively.

 

Note 4 - Basic earnings per share (“EPS”) is computed bydividing net earnings by the weighted average number of common sharesoutstanding during the period.  DilutedEPS is based on the combined weighted average number of common sharesoutstanding and dilutive potential common shares issuable which include, whereappropriate, the assumed exercise of options.

 

##### In computing diluted EPS we have utilized the treasurystock method.

#####  

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

 

6

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**EarningsPer Share:**

 
| ** **                                      | ** ** | **Three Months Ended May 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **2009**                       | ** ** | **2008** | ** ** |
|                                            |       |                           |       |   |   |
| Net earnings  applicable to common shareholders |       | $                              | 415,400    |   | $ | 479,700 |   |
|                                            |       |                           |       |   |   |
| **Shares:**                                     |       |                           |       |   |   |
|                                            |       |                           |       |   |   |
| Weighted average  shares outstanding - basic    |       | 3,843,847                      |       | 3,704,755 |   |
| Assumed exercise  of options                    |       | 1,012                          |       | 1,260 |   |
|                                            |       |                           |       |   |   |
| Weighted average  shares outstanding - diluted  |       | 3,844,859                      |       | 3,706,015 |   |
|                                            |       |                           |       |   |   |
| **Basic  Earnings Per Share**                   |       | $                              | 0.11       |   | $ | 0.13 |   |
| **Diluted  Earnings Per Share**                 |       | $                              | 0.11       |   | $ | 0.13 |   |

 

In April 2008, ourBoard of Directors authorized us to purchase up to 500,000 additional shares ofour common stock under a plan initiated in 1998. This plan has no expirationdate. During the first quarter of fiscal year 2010, we repurchased 637 sharesof common stock.  The maximum number ofshares that may be repurchased in the future is 433,515.

 

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

 

Note 6 — Freight costs and handling costsincurred are included in operating & selling expenses and were$478,600 and $569,600 for the three months ended May 31, 2009 and 2008,respectively.

 

Note7 — We have two reportable segments: Publishing and Usborne Books and More (“UBAM”).  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 UBAM Division markets its product line through a network ofindependent sales consultants through a combination of direct sales, homeshows, book fairs and the Internet.

 

Theaccounting policies of the segments are the same as those of the rest of theCompany.  We evaluate segmentperformance based on earnings (loss) before income taxes of the segments, whichis defined as segment net sales reduced by direct cost of sales and directexpenses.  Corporate expenses,depreciation, interest expense and income taxes are not allocated to thesegments, but are listed in the “other” row. Corporate expenses include theexecutive department, accounting department, information services department,general office management and building facilities management.  Our assets and liabilities are not allocatedon a segment basis.

 

7

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Information by industry segment for the three months ended May 31,2009 and 2008 follows:

 
| **NET REVENUES** |
|------------------|
| ** **       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **       | ** ** | **Three Months Ended May 31,** | ** ** |
| ** **       | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Publishing**   |   | $ | 1,981,800 |   | $ | 1,914,200 |   |
| **UBAM**         |   | $ | 4,408,800 |   | $ | 5,460,600 |   |
| **Other**        |   | $ | — |   | $ | — |   |
| **Total**        |   | $ | 6,390,600 |   | $ | 7,374,800 |   |

 
| **EARNINGS (LOSS) BEFORE INCOME TAXES** |
|-----------------------------------------|
| ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Three Months Ended May 31,** | ** ** |
| ** **                              | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Publishing**                          |   | $ | 661,700 |   | $ | 572,100 |   |
| **UBAM**                                |   | $ | 1,014,100 |   | $ | 1,154,400 |   |
| **Other**                               |   | $ | (1,009,800 | ) | $ | (958,500 | ) |
| **Total**                               |   | $ | 666,000 |   | $ | 768,000 |   |

 

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

 

In December 2007, theFASB issued SFAS No. 160 “Noncontrolling Interests in ConsolidatedFinancial Statements” (SFAS 160).  Thisstatement amends Accounting Research Bulletin No. 51 “ConsolidatedFinancial Statements” to establish accounting and reporting standards fornoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary.  This statement is effective for fiscal years beginning after December 15,2008.  On March 1, 2009, we adopted SFAS 160.  The adoption of this pronouncement did nothave a material effect on our financial position or results of operations.

 

In December 2007,the FASB issued SFAS No. 141R (revised 2007) “Business Combinations” (SFAS141R).  The statement requires the acquiring entity in a businesscombination to recognize all the assets acquired and liabilities assumed in thetransaction; establishes the acquisition-date fair value as the measurementobjective for all assets acquired and liabilities assumed; and requires theacquirer to disclose to investors and other users all of the information theyneed to evaluate and understand the nature and financial effect of the businesscombination.  This statement is effective for acquisition dates on orafter the beginning of the first annual reporting period beginning after December 15,2008.  On March 1, 2009, we adopted SFAS 141R.  The adoption of this pronouncement did nothave a material effect on our financial position or results of operations.

 

InApril 2009, the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amendsSFAS No. 107, Disclosures about Fair Value of Financial Instruments, torequire disclosures about fair value of financial instruments not measured onthe balance sheet at fair value in interim financial statements as well as inannual financial statements. Prior to this FSP, fair values for these assets andliabilities were only disclosed annually. This FSP applies to all financialinstruments within the scope of SFAS 107 and requires all entities to disclosethe method(s) and significant assumptions used to estimate the fair valueof financial instruments. This FSP shall be effective for interim periodsending after June 15, 2009, with early adoption permitted for periodsending after March 15, 2009. An entity may early adopt this FSP only if italso elects to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. ThisFSP does not require disclosures for earlier periods presented for comparativepurposes at initial adoption. In periods after initial adoption, this FSPrequires comparative disclosures only for periods ending after initialadoption. The adoption of these provisions is not expected to have a materialeffect on our financial position or results of operations.

 

In May 2009,FASB issued SFAS No. 165, “SubsequentEvents” (SFAS 165), to establish general standards of accounting for anddisclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued. SFAS 165 iseffective for financial statements issued for interim and annual periods endingafter

 

8

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June 15, 2009.Management is currently assessing the impact of the adoption of SFAS 165 butdoes not expect the adoption to have a material effect on our financialposition or results of operations.

 

In June 2009,FASB issued SFAS No. 168, “TheFASB Accounting Standard Codification and the Hierarchy of the GenerallyAccepted Accounting Principles — a replacement of SFAS No. 162”(SFAS 168), to become the source of authoritative U.S. generally acceptedaccounting principles (“GAAP”) recognized by the FASB to be applied bynongovernmental entities. SFAS 168 is effective for financial statements issuedfor interim and annual periods ending after September 15, 2009. Managementis currently assessing the impact of the adoption of SFAS 168 but does notexpect the adoption to have a material effect on our financial position orresults of operations.

 

ITEM2   MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

###### ** **

# ***MD&A containsstatements that are forward-looking and include numerous risks which you shouldcarefully consider.  Additional risks anduncertainties may also materially and adversely affect our business.   You should read the following discussion inconnection with our financial statements, including the notes to thosestatements, included in this document. Our fiscal years end on February 28.***

# ** **

# **Overview**

# ** **

We operate twoseparate divisions, Publishing and Usborne Books and More (“UBAM”), to sell theUsborne and Kane/Miller lines of children’s books.  These two divisions each have their owncustomer base.  The Publishing Divisionmarkets its products on a wholesale basis to various retail accounts.  The UBAM Division markets its products toindividual consumers as well as school and public libraries.

 

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

 

**Earningsas a Percent of Total Revenues**

 
| ** **                         | ** ** | **Three  Months Ended May 31,** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| Net revenues                       |       | 100.0                           | %          | 100.0 | % |
| Cost of sales                      |       | 36.0                            | %          | 36.2 | % |
| Gross margin                       |       | 64.0                            | %          | 63.8 | % |
| Operating expenses:                |       |                            |       |   |   |
| Operating &  selling      |       | 24.8                            | %          | 25.0 | % |
| Sales commissions                  |       | 21.3                            | %          | 22.6 | % |
| General &  administrative |       | 7.9                             | %          | 6.0 | % |
| Total operating  expenses          |       | 54.0                            | %          | 53.6 | % |
| Income from operations             |       | 10.0                            | %          | 10.2 | % |
| Other income                       |       | 0.4                             | %          | 0.2 | % |
| Earnings before income  taxes      |       | 10.4                            | %          | 10.4 | % |
| Income taxes                       |       | 3.9                             | %          | 3.9 | % |
| Net earnings                       |       | 6.5                             | %          | 6.5 | % |

 

## **Operating Results for the ThreeMonths Ended May 31, 2009**

##  

Weearned income before income taxes of $666,000 for the three months ended May 31,2009 compared with $768,000 for the three months ended May 31, 2008.

 

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##  

## **Revenues**

 
| ** **                            | ** ** | **For  the Three Months Ended May 31,** | ** ** | **$ Increase/** | ** ** | **%  Increase/** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|----------------------|------------|------------------|------------|
| ** **                            | ** ** | **2009**                                     | ** ** | **2008**             | ** ** | **(decrease)**   | ** ** | **(decrease)** | ** ** |
| Gross sales                           |       | $                                            | 8,753,100  |                 | $          | 9,816,200        |       | $ | (1,063,100 | ) | (10.8 | )% |
| Less  discounts & allowances |       | (2,640,400                                   | )          | (2,792,300           | )          | 151,900          |       | (5.4 | )% |
| Transportation revenue                |       | 277,900                                      |       | 350,900              |       | (73,000          | )          | (20.8 | )% |
| Net revenues                          |       | $                                            | 6,390,600  |                 | $          | 7,374,800        |       | $ | (984,200 | ) | (13.3 | )% |

 

The UBAM Division’s gross sales decreased $1,118,300 during the threemonth period ending May 31,2009 when compared with the same quarterly period a year ago.  This decrease consists of decreases ininternet sales of 29%, 21% in home party sales, 13% school and library sales,and a 7% decrease in direct sales.  Thedecline in home party sales is attributed to a 17% decline in the total numberof home shows held and a 5% decrease in the average order size.

 

The Publishing Division’s gross sales increased $55,200 during thethree month period ending May 31,2009 when compared with the same quarterly period a year ago.  We attribute this to a 27.0% increase insales to major national accounts, a 9.7% increase in sales to smaller retailstores, offset by a 6.3% decrease in inside sales accounts.

 

TheUBAM Division’s discounts and allowances were $597,800 and $737,500 for thequarterly periods ended May 31, 2009 and 2008, respectively.  TheUBAM Division is a multi-level selling organization that markets its productsthrough independent sales representatives (“consultants”). Sales are made toindividual purchasers and school and public libraries.  Most sales in the UBAM Division are atretail.  As a part of the UBAM 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 UBAMDivision will vary from year to year depending upon the marketing programs inplace during any given year.  TheUBAM Division’s discounts and allowances were 12.6% of UBAM’s gross sales forthe quarterly periods ended May 31, 2009 and 2008.

 

The Publishing Division’s discounts andallowances are a much larger percentage of gross sales than discounts andallowances in the UBAM Division due to the different customer markets that eachdivision targets.  The PublishingDivision’s discounts and allowances were $2,042,600 and $2,054,800 for thequarterly periods ended May 31, 2009 and 2008, respectively.  ThePublishing Division sells to retail book chains, regional and local bookstores,toy and gift stores, school supply stores and museums.  To be competitive with other wholesale bookdistributors, the Publishing Division sells at discounts between 48% and 55% ofthe retail price, based upon the quantity of books ordered and the dollaramount of the order.  The PublishingDivision’s discounts and allowances were 50.9% of Publishing’s gross sales forthe quarterly period ended May 31, 2009 and 51.9% for the quarterly periodended May 31, 2008.

 

## **Expenses**

 
| ** **                         | ** ** | **For  the Three Months Ended May 31,** | ** ** | **$ Increase/** | ** ** | **%  Increase/** | ** ** |
|------------------------------------|------------|----------------------------------------------|------------|----------------------|------------|------------------|------------|
| ** **                         | ** ** | **2009**                                     | ** ** | **2008**             | ** ** | **(decrease)**   | ** ** | **(decrease)** | ** ** |
| Cost of sales                      |       | 2,300,200                                    |       | $                    | 2,671,100  |             | $          | (370,900 | ) | -13.9 | % |
| Operating &  selling      |       | 1,583,500                                    |       | 1,842,200            |       | (258,700         | )          | -14.0 | % |
| Sales commissions                  |       | 1,362,000                                    |       | 1,667,100            |       | (305,100         | )          | -18.3 | % |
| General &  administrative |       | 505,900                                      |       | 440,800              |       | 65,100           |       | 14.8 | % |
| Total                              |       | $                                            | 5,751,600  |                 | $          | 6,621,200        |       | $ | (869,600 | ) | -13.1 | % |
|                                    |            |                                              |            |                      |            |                  |            |  |  |  |  |  |

 

Cost of sales decreased13.9% for the three months ended May 31, 2009 when compared with the threemonths ended May 31, 2008.  Cost ofsales as a percentage of gross sales was 26.3% for the three months ended May 31,2009 and for the three months ended May 31, 2008 was 27.2%.  Cost of sales is the inventory cost of the product sold, whichincludes the cost of the product itself and inbound freight charges.  Purchasing and receiving costs, inspectioncosts, warehousing costs, and other costs of our distribution network areincluded in operating and selling expenses, not in cost of sales.  These costs totaled $286,500 in the quarterended May 31, 2009 and $284,100 in the quarter ended May 31, 2008.

 

Inaddition to costs associated with our distribution network (noted above),operating and selling costs include expenses of the Publishing Division, theUBAM Division and the order entry and customer service functions.  Operating and 

 

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sellingexpenses as a percentage of gross sales were 18.1% for the quarter ended May 31,2009 and 18.8% for the quarter ended May 31, 2008.

 

Sales commissions in the Publishing Divisionincreased 10.4% to $39,200 for the three months ended May 31, 2009. Publishing Division sales commissions are paid on net sales and were2.0% of net sales for the three months ended May 31, 2009 and 1.9% of net sales for the three monthsended May 31, 2008.  Sales commissions in the Publishing Divisionfluctuate depending upon the amount of sales made to our “house accounts,”which are the Publishing Division’s largest customers and do not have anycommission expense associated with them, and sales made by our outside salesrepresentatives.

 

Sales commissions in the UBAM Divisiondecreased 18.9% to $1,322,800 for the three months ended May 31,2009 as a result of decreases ininternet sales, home show sales, school and library sales and directsales.  UBAM Division sales commissionsare paid on retail sales and were 36.8% of retail sales for the three monthsended May 31, 2009 and33.4% of retail sales for the three months ended May 31, 2008.  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 37.6 % and 37.5% for the quarterly periods ended May 31,2009 and 2008, respectively.  Theserates are higher than the federal statutory rate due to state income taxes.

 

**Liquidity and Capital Resources**

 

Our primary sourceof cash is operating cash flow.  Ourprimary uses of cash are to repurchase outstanding shares of stock, paydividends and purchase property and equipment. We utilize our bank credit facility to meet our short-term cash needswhen necessary.

 

Our Board of Directors has adopted a stock repurchase plan inwhich we may purchase up to a total of 3,000,000 shares as market conditionswarrant.  Management believes the stockis undervalued and when stock becomes available at an attractive price, we willutilize free cash flow to repurchase shares. Management believes this enhances the value to the remainingstockholders and that these repurchases will have no adverse effect on ourshort-term and long-term liquidity.  Werepurchased 637 shares at a cost of $3,100 during the quarter ended May 31,2009.

 

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

 

Ourprimary source of liquidity is cash generated from operations.  During the first three months of fiscal year2010, we experienced a negative cash flow from operating activities of$254,300.  Cash flow from operatingactivities was decreased primarily due to an increase in inventories of$999,800, an increase in accounts receivable of $389,800 and an increase inincome taxes payable/receivable of $152,600, offset by net income after taxesof $415,400, an increase in current liabilities of $774,500 and a decrease inprepaid expenses and other current assets of $70,300.  Fluctuations in accounts payable and accruedexpenses involve timing of shipments received from our principal supplier andthe payments associated with these shipments. They tend to be highest in the third quarter when holiday seasonshipments have arrived and prior to payments being made, although in fiscalyear 2010, we received a larger volume of shipments during the first quarterdue to our inventory stock being down at fiscal year end.

 

Webelieve that in fiscal year 2010 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 2010 willbe less than $200,000.  This wouldconsist of software and hardware enhancements to our existing data processingequipment, property improvements and additional warehouse equipment.

 

Cashused in financing activities was $1,437,600 from dividend payments of$1,536,600, the purchase of $3,100 of treasury stock, offset by the sale of$102,100 in treasury stock.

 

Asof May 31, 2009 we did not have any commitments in excess of one year.

 

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##  

## **Bank Credit Agreement**

##  

EffectiveJune 30, 2009, we signed an Eleventh Amendment to the Credit and SecurityAgreement with Arvest Bank which provided a reduced $2,500,000 line of creditthrough June 30, 2010.  Interest ispayable monthly at the greater of 5.00% or the Wall Street Journalprime-floating rate minus 0.75% (3.25% at May 31, 2009) and borrowings arecollateralized by substantially all of our assets. At May 31,2009 we had no debt outstanding under this agreement.  Available credit under the revolving creditagreement was $5,000,000 at May 31, 2009.  No borrowings were outstanding under theagreement during the quarter ended May 31, 2009.

 

This agreement also contains a provision for our useof the Bank’s letters of credit.  TheBank agrees to issue commercial or standby letters of credit provided that nonewill have an expiry date later than June 30, 2010 and that the sum of theline of credit plus the letters of credit would not exceed the borrowing basein effect at the time.  For the quarterended May 31, 2009, we had no letters of credit outstanding.

 

**CriticalAccounting Policies**

 

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

 

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

 

**RevenueRecognition**

 

Sales are recognized and recorded when products are shipped.  Products are shipped FOB shipping point. The UBAM Division’s sales are paid before the product is shipped.  These sales accounted for 69.0% of net revenues for the quarter ended May 31, 2009 and 72.9% for the quarter ended May 31, 2008.  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.

 

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 $100,000 as of May 31, 2009 and $84,000 as of February 28, 2009.

 

**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 $94,900 and $92,900 as of May 31, 2009 and February 28, 2009, 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 

 

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due to minimum orderrequirements of our primary supplier. Non-current inventory was estimated by management using the current year turnover ratio by title.  All inventory in excess of 2 1⁄2 years ofanticipated sales was classified as noncurrent inventory. Noncurrent inventorybalances, before valuation allowance, were $743,000 at May 31, 2009 and$913,000 at February 28, 2009.

 

Inventories are presented net of a valuationallowance.  Management has estimated andincluded a valuation allowance for both current and noncurrent inventory.  This allowance is based on management’sidentification of slow moving inventory on hand.  Management has estimated a valuationallowance for both current and noncurrent inventory of $332,500 and $370,000 asof May 31, 2009 and February 28, 2009, respectively.

 

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**Stock-Based Compensation**

 

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

 

Item 3              QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Wedo not have any material market risk.

 

Item 4              CONTROLS ANDPROCEDURES

 

An evaluation was performed of the effectiveness of the design andoperation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and15d-15(e) as of May 31, 2009. 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 that evaluation, these officers concluded that our disclosurecontrols and procedures were effective to ensure that information required tobe disclosed in reports that we file or submit under the Securities ExchangeAct of 1934 is recorded, processed, summarized and reported in accordancewithin the time periods specified in Securities and Exchange Commission rules andforms.  It should be noted that thedesign of any system of controls is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

 

PART II  OTHER INFORMATION

 

Item 1              LEGALPROCEEDINGS

 

NotApplicable.

 

Item 1A    RISK FACTORS

 

Not required bysmaller reporting company.

 

Item 2              UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table showsrepurchases of our Common Stock during the quarter ended May 31, 2009.

 

ISSUER PURCHASESOF EQUITY SECURITIES

 
| **Period**              | ** ** | **Total  # of Shares  Purchased** | ** ** | **Average  Price********Paid per Share** | ** ** | **Total  # of Shares  Purchased as********Part of Publicly  Announced Plan (1)** | ** ** | **Maximum  # of  Shares that May  be Repurchased  under the Plan  (2) (3)** | ** ** |
|-------------------------|------------|-----------------------------------|------------|------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
|                    |       |                              |       |                                     |       |                                                                                  |       |                                                                        |       |
| March 1 -31, 2009  |       | —                            |       | N/A                                      |       | —                                                                                |       | 434,152                                                                     |       |
| April 1 - 30, 2009 |       | 500                               |       | $                                        | 4.65       |                                                                                  | 500        |                                                                        | 433,652    |   |
| May 1 - 31, 2009   |       | 137                               |       | $                                        | 5.51       |                                                                                  | 137        |                                                                        | 433,515    |   |
| Total                   |       | 637                               |       | $                                        | 4.84       |                                                                                  | 637        |                                                                        |       |   |

 

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(1)             All of the shares ofcommon stock set forth in this column were purchased pursuant to a publiclyannounced plan as described in footnote 2 below.

 

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(2)             In April 2008the Board of Directors authorized us to purchase up to an additional 500,000shares of our common stock under a repurchase plan.  Pursuant to the plan, we may purchase a totalof 433,515 additional shares of our common stock until 3,000,000 shares havebeen repurchased.

 

(3)             There is noexpiration date for the repurchase plan.

 

Item 3              DEFAULTS UPONSENIOR SECURITIES

 

NotApplicable.

 

Item 4              SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

 

NotApplicable.

 

Item 5              OTHERINFORMATION

 

None

 

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**

#### ** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 

EDUCATIONALDEVELOPMENT CORPORATION

(Registrant)

 

 
| Date:  | July 15,  2009 |   | By                | /s/  Randall W. White |
|--------|---------------------|--------|-------------------|-----------------------|
|   |                |   | Randall  W. White |
|   |                |   | President         |

 

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EXHIBIT INDEX

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

 

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