**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

# **FORM 10-Q**

# ** **

**(MarkOne)**

 

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

** **

**For the quarterly period ended Aug 31, 2008**

 

**OR**

 

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

** **

**For the transition period from                      to                        .**

 

**Commission file number: 0-4957**

 

# **EDUCATIONAL DEVELOPMENT CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

 

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

 

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

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

 

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 October 10,2008 there were 3,821,636 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)**

 
| ** **                                                                                                                                                                                                               | ** ** | **August 31, 2008** | ** ** | **February 29, 2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                               |       |                          |       |                            |       |
| ** **                                                                                                                                                                                                               |       |                          |       |                            |       |
| CURRENT ASSETS:                                                                                                                                                                                                          |       |                          |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                                               |       | $                             | 3,102,100  |                            | $          | 2,440,300 |   |
| Accounts  receivable, less allowance for doubtful accounts and sales returns $159,000  (August 31) and $158,400 (February 29)                                                                                  |       | 2,707,600                     |       | 2,611,800                       |       |
| Inventories—Net                                                                                                                                                                                                     |       | 10,661,800                    |       | 11,818,700                      |       |
| Prepaid expenses  and other assets                                                                                                                                                                                       |       | 138,900                       |       | 112,000                         |       |
| Deferred income  taxes                                                                                                                                                                                                   |       | 224,800                       |       | 197,100                         |       |
| Total current  assets                                                                                                                                                                                                    |       | 16,835,200                    |       | 17,179,900                      |       |
|                                                                                                                                                                                                                     |       |                          |       |                            |       |
| INVENTORIES—Net                                                                                                                                                                                                     |       | 547,000                       |       | 459,000                         |       |
|                                                                                                                                                                                                                     |       |                          |       |                            |       |
| PROPERTY, PLANT  AND EQUIPMENT—Net                                                                                                                                                                                  |       | 2,343,000                     |       | 2,382,800                       |       |
|                                                                                                                                                                                                                     |       |                          |       |                            |       |
| DEFERRED INCOME  TAXES                                                                                                                                                                                                   |       | 44,400                        |       | 43,300                          |       |
|                                                                                                                                                                                                                     |       |                          |       |                            |       |
| TOTAL ASSETS                                                                                                                                                                                                             |       | $                             | 19,769,600 |                            | $          | 20,065,000 |   |
|                                                                                                                                                                                                                     |       |                          |       |                            |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                           |       |                          |       |                            |       |
|                                                                                                                                                                                                                     |       |                          |       |                            |       |
| CURRENT  LIABILITIES:                                                                                                                                                                                                    |       |                          |       |                            |       |
| Accounts payable                                                                                                                                                                                                         |       | $                             | 2,616,400  |                            | $          | 2,456,900 |   |
| Accrued salaries  and commissions                                                                                                                                                                                        |       | 599,700                       |       | 559,000                         |       |
| Income taxes  payable                                                                                                                                                                                                    |       | 130,800                       |       | 56,200                          |       |
| Other current  liabilities                                                                                                                                                                                               |       | 172,000                       |       | 195,800                         |       |
| Total current  liabilities                                                                                                                                                                                               |       | 3,518,900                     |       | 3,267,900                       |       |
|                                                                                                                                                                                                                     |       |                          |       |                            |       |
| COMMITMENTS                                                                                                                                                                                                              |       |                          |       |                            |       |
|                                                                                                                                                                                                                     |       |                          |       |                            |       |
| SHAREHOLDERS’  EQUITY:                                                                                                                                                                                              |       |                          |       |                            |       |
| Common stock,  $0.20 par value; Authorized 8,000,000 shares; Issued 6,039,040  (August 31) and 5,806,840 (February 29) shares; Outstanding  3,821,666 (August 31) and 3,706,745 (February 29) shares |       | 1,207,800                     |       | 1,161,400                       |       |
| Capital in excess  of par value                                                                                                                                                                                          |       | 8,508,400                     |       | 7,706,100                       |       |
| Retained  earnings                                                                                                                                                                                                       |       | 18,482,300                    |       | 19,206,100                      |       |
|                                                                                                                                                                                                                     |       | 28,198,500                    |       | 28,073,600                      |       |
| Less treasury  stock, at cost                                                                                                                                                                                            |       | (11,947,800                   | )          | (11,276,500                     | )          |
|                                                                                                                                                                                                                     |       | 16,250,700                    |       | 16,797,100                      |       |
|                                                                                                                                                                                                                     |       |                          |       |                            |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                                         |       | $                             | 19,769,600 |                            | $          | 20,065,000 |   |

 

Seenotes to condensed financial statements.

 

2

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**EDUCATIONALDEVELOPMENT CORPORATION**

**CONDENSED STATEMENTS OF EARNINGS(UNAUDITED)**

 
| ** **                                                             | ** ** | **Three Months Ended August 31,** | ** ** | **Six Months Ended August 31,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                                              | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                   |       |                                                  |       |                                                |       |   |   |   |   |
| GROSS SALES                                                            |       | $                                                     | 9,327,100  |                                                | $          | 8,768,000 |   | $ | 19,143,300 |   | $ | 18,904,100 |   |
| Less discounts  and allowances                                         |       | (3,317,100                                            | )          | (2,913,500                                          | )          | (6,109,400 | ) | (5,819,100 | ) |
| Transportation  revenue                                                |       | 357,500                                               |       | 364,000                                             |       | 708,400 |   | 740,000 |   |
| NET REVENUES                                                           |       | 6,367,500                                             |       | 6,218,500                                           |       | 13,742,300 |   | 13,825,000 |   |
| COST OF SALES                                                          |       | 2,486,500                                             |       | 2,302,000                                           |       | 5,157,600 |   | 5,008,500 |   |
| Gross margin                                                           |       | 3,881,000                                             |       | 3,916,500                                           |       | 8,584,700 |   | 8,816,500 |   |
|                                                                   |       |                                                  |       |                                                |       |   |   |   |   |
| OPERATING  EXPENSES:                                                   |       |                                                  |       |                                                |       |   |   |   |   |
| Operating and  selling                                                 |       | 1,648,700                                             |       | 1,593,200                                           |       | 3,490,900 |   | 3,429,100 |   |
| Sales  commissions                                                     |       | 1,258,500                                             |       | 1,317,200                                           |       | 2,925,600 |   | 3,047,700 |   |
| General and  administrative                                            |       | 461,100                                               |       | 408,500                                             |       | 901,900 |   | 817,300 |   |
|                                                                   |       | 3,368,300                                             |       | 3,318,900                                           |       | 7,318,400 |   | 7,294,100 |   |
|                                                                   |       |                                                  |       |                                                |       |   |   |   |   |
| OTHER INCOME                                                           |       | 7,900                                                 |       | 9,200                                               |       | 22,300 |   | 22,400 |   |
|                                                                   |       |                                                  |       |                                                |       |   |   |   |   |
| EARNINGS BEFORE  INCOME TAXES                                          |       | 520,600                                               |       | 606,800                                             |       | 1,288,600 |   | 1,544,800 |   |
|                                                                   |       |                                                  |       |                                                |       |   |   |   |   |
| INCOME TAXES                                                           |       | 197,600                                               |       | 227,000                                             |       | 485,900 |   | 579,500 |   |
|                                                                   |       |                                                  |       |                                                |       |   |   |   |   |
| NET EARNINGS                                                           |       | $                                                     | 323,000    |                                                | $          | 379,800 |   | $ | 802,700 |   | $ | 965,300 |   |
|                                                                   |       |                                                  |       |                                                |       |   |   |   |   |
| BASIC AND  DILUTED EARNINGS PER SHARE:                                 |       |                                                  |       |                                                |       |   |   |   |   |
| Basic                                                                  |       | $                                                     | 0.08       |                                                | $          | 0.10 |   | $ | 0.21 |   | $ | 0.26 |   |
| Diluted                                                                |       | $                                                     | 0.08       |                                                | $          | 0.10 |   | $ | 0.21 |   | $ | 0.25 |   |
|                                                                   |       |                                                  |       |                                                |       |   |   |   |   |
| WEIGHTED AVERAGE  NUMBER OF COMMON  AND EQUIVALENT SHARES OUTSTANDING: |       |                                                  |       |                                                |       |   |   |   |   |
| Basic                                                                  |       | 3,826,869                                             |       | 3,766,413                                           |       | 3,765,812 |   | 3,763,257 |   |
| Diluted                                                                |       | 3,828,075                                             |       | 3,877,557                                           |       | 3,767,045 |   | 3,878,266 |   |

 

See notes tocondensed financial statements.

 

3

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**EDUCATIONAL DEVELOPMENT CORPORATION**

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

**FOR THESIX MONTHS ENDED AUGUST 31, 2008**

 
| ** **                       | ** ** | **Common Stock**                                     | ** ** | ** ** | ** ** | ** **          | ** ** | ** **   | ** ** | ** **              | ** ** | ** ** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------|------------|------------|------------|---------------------|------------|--------------|------------|-------------------------|------------|------------|------------|
| ** **                       | ** ** | **(par value $ 0.20 per share)** | ** ** | ** ** | ** ** | ** **          | ** ** | ** **   | ** ** | ** **              | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Number of**                                        | ** ** | ** ** | ** ** | **Capital in** | ** ** | ** **   | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
| ** **                       | ** ** | **Shares**                                                | ** ** | ** ** | ** ** | **Excess of**  | ** ** | **Retained** | ** ** | **Number of**      | ** ** | ** ** | ** ** | **Shareholders’** | ** ** |
| ** **                       | ** ** | **Issued**                                                | ** ** | **Amount** | ** ** | **Par Value**  | ** ** | **Earnings** | ** ** | **Shares**              | ** ** | **Amount** | ** ** | **Equity** | ** ** |
| ** **                       | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** **          | ** ** | ** **   | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| BALANCE—March 1,  2008 |       | 5,806,840                                                 |       | $          | 1,161,400  |                | $          | 7,706,100    |       | $                       | 19,206,100 |       | 2,100,095  |   | $ | (11,276,500 | ) | $ | 16,797,100 |   |
| Purchases of  treasury stock     |       | —                                                    |       | —     |       | —              |       | —       |       | 136,224                 |       | (766,700   | )          | (766,700 | ) |
| Sales of treasury  stock         |       | —                                                    |       | —     |       | —              |       | —       |       | (18,945                 | )          | 95,400     |       | 95,400 |   |
| Exercise of  options             |       | 232,200                                                   |       | 46,400     |       | 802,300             |       |         |       |                    |       |       |       | 848,700 |   |
| Dividends paid  ($.40/share)     |       | —                                                    |       | —     |       | —              |       | (1,526,500   | )          | —                  |       | —     |       | (1,526,500 | ) |
| Net earnings                     |       | —                                                    |       | —     |       | —              |       | 802,700      |       | —                  |       | —     |       | 802,700 |   |
| BALANCE-August 31,  2008    |       | 6,039,040                                                 |       | $          | 1,207,800  |                | $          | 8,508,400    |       | $                       | 18,482,300 |       | 2,217,374  |   | $ | (11,947,800 | ) | $ | 16,250,700 |   |

 

See notes tocondensed financial statements.

 

4

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**EDUCATIONALDEVELOPMENT CORPORATION**

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

**FOR THE SIX MONTHS ENDED AUGUST 31,**

 
| ** **                                          | ** ** | **2008**   | ** ** | **2007**  | ** ** |
|-----------------------------------------------------|------------|------------|------------|-----------|------------|
|                                                |       |       |       |      |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES:              |       | $          | 2,040,800  |      | $          | 1,105,300 |   |
|                                                |       |       |       |      |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES—         |       |       |       |      |       |
| Purchases of  property and equipment                |       | (29,900    | )          | (105,400  | )          |
|                                                |       |       |       |      |       |
| Net cash used in  investing activities              |       | (29,900    | )          | (105,400  | )          |
|                                                |       |       |       |      |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:              |       |       |       |      |       |
| Cash received  from exercise of stock options       |       | 848,700    |       | —    |       |
| Cash paid to  acquire treasury stock                |       | (766,700   | )          | (65,800   | )          |
| Cash received  from sale of treasury stock          |       | 95,400     |       | 68,600    |       |
| Dividends paid                                      |       | (1,526,500 | )          | (826,000  | )          |
|                                                |       |       |       |      |       |
| Net cash used in  financing activities              |       | (1,349,100 | )          | (823,200  | )          |
|                                                |       |       |       |      |       |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS          |       | 661,800    |       | 176,700   |       |
|                                                |       |       |       |      |       |
| CASH AND CASH  EQUIVALENTS—BEGINNING OF PERIOD |       | 2,440,300  |       | 1,254,300 |       |
|                                                |       |       |       |      |       |
| CASH AND CASH  EQUIVALENTS—END OF PERIOD       |       | $          | 3,102,100  |      | $          | 1,431,000 |   |
|                                                |       |       |       |      |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:  |       |       |       |      |       |
| Cash paid for  income taxes                         |       | $          | 440,100    |      | $          | 76,500 |   |

 

See notes tocondensed financial statements.

 

5

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NOTES TO CONDENSEDFINANCIAL STATEMENTS

 

Note 1-  The information shown with respect tothe three and six months ended August 31, 2008 and 2007, 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 three andsix months ended August 31, 2008 and 2007, respectively, are notnecessarily indicative of the results to be expected at year end due toseasonality of the product sales.

 

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

 

Note 2 –Effective June 30, 2008 we signed a Tenth Amendment to the Credit andSecurity Agreement with Arvest Bank which provided a $5,000,000 line of creditthrough June 30, 2009.  Interest ispayable monthly at the Wall Street Journal prime-floating rate minus0.75% (4.25% at August 31, 2008) and borrowings are collateralized bysubstantially all the assets of the Company. At August 31, 2008 the Company had no debt outstanding underthis agreement.  Available credit underthe revolving credit agreement was $5,000,000 at August 31, 2008.  No borrowings were outstanding under theagreement during the quarter ended August 31, 2008.

 

This agreement also contains a provision for our useof the Bank’s letters of credit.  TheBank agrees to issue, or obtain issuance of commercial or standby letters ofcredit provided that no letters of credit will have an expiry date later than June 30,2009 and that the sum of the line of credit plus the letters of credit wouldnot exceed the borrowing base in effect at the time. As of August 31,2008, we had no letters of credit outstanding.

 

Note 3- Inventories consist of the following:

 
| ** **                      | ** ** | **2008**            | ** ** |
|---------------------------------|------------|---------------------|------------|
| ** **                      | ** ** | **August 31,** | ** ** | **February 29,** | ** ** |
| Current:                        |       |                |       |   |   |
| Book inventory                  |       | $                   | 10,688,000 |   | $ | 11,844,900 |   |
| Inventory  valuation allowance  |       | (26,200             | )          | (26,200 | ) |
|                            |       |                |       |   |   |
| Inventories net–current    |       | $                   | 10,661,800 |   | $ | 11,818,700 |   |
|                            |       |                |       |   |   |
| Noncurrent:                     |       |                |       |   |   |
| Book inventory                  |       | $                   | 882,000    |   | $ | 764,000 |   |
| Inventory  valuation allowance  |       | (335,000            | )          | (305,000 | ) |
|                            |       |                |       |   |   |
| Inventories net–noncurrent |       | $                   | 547,000    |   | $ | 459,000 |   |

 

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 $2.0 million and $2.6 million for the three monthsended August 31, 2008 and 2007, respectively.  Total inventory purchases from all supplierswere approximately $2.7 million and $3.5 million for the three months ended August 31,2008 and 2007, respectively.

 

For the six monthsended August 31, 2008 and 2007, respectively, purchases from this companywere approximately $3.8 million and $4.3 million.  Total inventory purchases from all supplierswere approximately $4.7 million and $5.8 million for the same respectiveperiods.

 

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

 

6

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

#####  

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

 
| ** **                                      | ** ** | **Three Months Ended August 31** | ** ** | **Six Months Ended August 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Earnings  Per Share:**                        |       |                                                 |       |                                                |       |   |   |   |   |
|                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Net earnings  applicable to common shareholders |       | $                                                    | 323,000    |                                                | $          | 379,800 |   | $ | 802,700 |   | $ | 965,300 |   |
|                                            |       |                                                 |       |                                                |       |   |   |   |   |
| **Shares:**                                     |       |                                                 |       |                                                |       |   |   |   |   |
|                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average  shares outstanding - basic    |       | 3,826,869                                            |       | 3,766,413                                           |       | 3,765,812 |   | 3,763,257 |   |
| Assumed exercise  of options                    |       | 1,206                                                |       | 111,144                                             |       | 1,233 |   | 115,009 |   |
|                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average  shares outstanding - diluted  |       | 3,828,075                                            |       | 3,877,557                                           |       | 3,767,045 |   | 3,878,266 |   |
|                                            |       |                                                 |       |                                                |       |   |   |   |   |
| **Basic  Earnings Per Share**                   |       | $                                                    | 0.08       |                                                | $          | 0.10 |   | $ | 0.21 |   | $ | 0.26 |   |
| **Diluted  Earnings Per Share**                 |       | $                                                    | 0.08       |                                                | $          | 0.10 |   | $ | 0.21 |   | $ | 0.25 |   |

 

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 second quarter of fiscal year 2009, we repurchased 11,062shares of common stock.  The maximumnumber of shares that may be repurchased in the future is 440,287.

 

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 $537,400 and $523,800 for the three months ended August 31,2008 and 2007, respectively.

 

For the six months ended August 31,2007 and 2006, respectively, freight and handling costs incurred are includedin operating & selling expenses and were $1,106,900 and $1,117,200.

 

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 six months ended August 31,2008 and 2007 follows:

 

**NETREVENUES**

 
| ** **     | ** ** | **Three Months Ended August 31,** | ** ** | **Six Months Ended August 31,** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **     | ** ** | **2008**                                              | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Publishing** |       | $                                                     | 2,322,400  |                                                | $          | 2,131,800 |   | $ | 4,236,600 |   | $ | 4,163,100 |   |
| **UBAH**       |       | $                                                     | 4,045,100  |                                                | $          | 4,086,700 |   | $ | 9,505,700 |   | $ | 9,661,900 |   |
| **Other**      |       | $                                                     | —     |                                                | $          | — |   | $ | — |   | $ | — |   |
| **Total**      |       | $                                                     | 6,367,500  |                                                | $          | 6,218,500 |   | $ | 13,742,300 |   | $ | 13,825,000 |   |

 

**EARNINGS(LOSS) BEFORE INCOME TAXES**

 
| ** **     | ** ** | **Three Months Ended August 31,** | ** ** | **Six Months Ended August 31,** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **     | ** ** | **2008**                                              | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Publishing** |       | $                                                     | 767,100    |                                                | $          | 669,500 |   | $ | 1,339,200 |   | $ | 1,284,600 |   |
| **UBAH**       |       | $                                                     | 704,600    |                                                | $          | 868,900 |   | $ | 1,859,000 |   | $ | 2,072,900 |   |
| **Other**      |       | $                                                     | (951,100   | )                                                   | $          | (931,600 | ) | $ | (1,909,600 | ) | $ | (1,812,700 | ) |
| **Total**      |       | $                                                     | 520,600    |                                                | $          | 606,800 |   | $ | 1,288,600 |   | $ | 1,544,800 |   |

 

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

 

In September 2006,the FASB issued SFAS No. 157 “Fair Value Measurements.”  This Statement defines fair value, establishesa framework for measuring fair value in generally accepted accountingprinciples (GAAP), and expands disclosures about fair value measurements. ThisStatement applies under other accounting pronouncements that require or permitfair value measurements, the Board having previously concluded in thoseaccounting pronouncements that fair value is the relevant measurementattribute. Accordingly, this Statement does not require any new fair valuemeasurements.  This statement iseffective for fiscal years beginning after November 15, 2007.  The adoption of this standard did not have amaterial effect on our financial position or results of operations.

 

In February 2007,the FASB issued SFAS No. 159 “TheFair Value Option for Financial Assets and Financial Liabilities.” Thefair value option established by this Statement permits all entities to chooseto measure eligible items at fair value at specified election dates. A businessentity shall report unrealized gains and losses on items for which the fairvalue option has been elected in earnings at each subsequent reportingdate.  This statement is effective forfiscal years beginning after November 15, 2007.  The adoption of this standard is not expectedto have a material effect on our financial position or results of operations.

 

In December 2007, theFASB issued SFAS No. 160 “Noncontrolling Interests in ConsolidatedFinancial Statements.” This statement amends Accounting Research Bulletin No. 51“Consolidated Financial Statements” to establish accounting and reportingstandards for noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  This statement is effective for fiscalyears beginning after December 15, 2008.  The adoption of thisstandard did not have a material effect on our financial position or results ofoperations.

 

In December 2007,the FASB issued SFAS No. 141(revised 2007) “Business Combinations.” The statement requires the acquiring entity in a business combination torecognize all the assets acquired and liabilities assumed in the transaction;establishes the acquisition-date fair value as the measurement objective forall assets acquired and liabilities assumed; and requires the acquirer todisclose to investors and other users all of the information they need to evaluateand 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.  The adoption of this standard is not expected to have a materialeffect on our financial position or results of operations.

 

8

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

 

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

###### ** **

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

# ** **

# **Overview**

# ** **

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

 

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

 

**Earnings as a Percent of TotalRevenues**

 
| ** **                         | ** ** | **Three Months Ended August 31,** | ** ** | **Six Months Ended August 31,** | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                              | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenues                       |       | 100.0                                                 | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| Cost of sales                      |       | 39.0                                                  | %          | 37.0                                                | %          | 37.5 | % | 36.2 | % |
| Gross margin                       |       | 61.0                                                  | %          | 63.0                                                | %          | 62.5 | % | 63.8 | % |
| Operating  expenses:               |       |                                                  |       |                                                |       |   |   |   |   |
| Operating &  selling      |       | 25.9                                                  | %          | 25.5                                                | %          | 25.4 | % | 24.8 | % |
| Sales  commissions                 |       | 19.8                                                  | %          | 21.2                                                | %          | 21.3 | % | 22.1 | % |
| General &  administrative |       | 7.2                                                   | %          | 6.7                                                 | %          | 6.6 | % | 5.9 | % |
| Interest                           |       | 0.0                                                   | %          | 0.0                                                 | %          | 0.0 | % | 0.0 | % |
| Total operating  expenses          |       | 52.9                                                  | %          | 53.4                                                | %          | 53.3 | % | 52.8 | % |
| Income from  operations            |       | 8.1                                                   | %          | 9.6                                                 | %          | 9.2 | % | 11.0 | % |
| Other income                       |       | 0.1                                                   | %          | 0.2                                                 | %          | 0.2 | % | 0.2 | % |
| Earnings before  income taxes      |       | 8.2                                                   | %          | 9.8                                                 | %          | 9.4 | % | 11.2 | % |
| Income taxes                       |       | 3.1                                                   | %          | 3.7                                                 | %          | 3.5 | % | 4.2 | % |
| Net earnings                       |       | 5.1                                                   | %          | 6.1                                                 | %          | 5.9 | % | 7.0 | % |

 

## **Operating Results for the ThreeMonths Ended August 31, 2008**

##  

Weearned income before income taxes of $520,600 for the three months ended August 31,2008 compared with $606,800 for the three months ended August 31, 2007.

 

## **Revenues**

 
| ** **                            | ** ** | **For the Three Months Ended August 31** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2008**                                 | ** ** | **2007**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Gross sales                           |       | $                                        | 9,327,100  |                 | $          | 8,768,000            |       | $ | 559,100 |   | 6.4 | % |
| Less  discounts & allowances |       | (3,317,100                               | )          | (2,913,500           | )          | (403,600             | )          | 13.9 | % |
| Transportation  revenue               |       | 357,500                                  |       | 364,000              |       | (6,500               | )          | -1.8 | % |
| Net revenues                          |       | $                                        | 6,367,500  |                 | $          | 6,218,500            |       | $ | 149,000 |   | 2.4 | % |

 

The UBAH Division’s gross sales increased 4.0% or $173,800 during thethree month period ending August 31,2008 when compared with the same quarterly period a year ago.  This increase consists of an 11% increase inschool and library sales and a 32% increase in Internet sales, offset by a 15%decrease in home party sales and 24% decrease in direct sales.  The decline in home party sales is attributedto a 10% decline in the total number of home shows held and a 5% 

 

9

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decrease in the average order size. The decline in home party sales and direct sales occurred as moreconsultants replaced these with Internet orders.

 

The Publishing Division’s gross sales increased 8.7% or $385,300 duringthe three month period ending August 31, 2008 when compared with the same quarterlyperiod a year ago.  We attribute this toa 19.8% increase in sales to the national chains and a 2.5% increase in inside salesaccounts.

 

TheUBAH Division’s discounts and allowances were $831,300 and $623,800 for thequarterly periods ended August 31, 2008 and 2007, respectively.  The UBAH Division is a multi-level selling organization thatmarkets its products through independent sales representatives (“consultants”).Sales are made to individual purchasers and school and public libraries.  Most sales in the UBAH Division are atretail.  As a part of the UBAH Division’smarketing programs, discounts between 40% and 50% of retail are offered onselected items at various times throughout the year.  The discounts and allowances in the UBAHDivision will vary from year to year depending upon the marketing programs inplace during any given year.  TheUBAH Division’s discounts and allowances were 18.3% of UBAH’s gross sales forthe quarterly period ended August 31, 2008 and 14.3% for the quarterlyperiod ended August 31, 2007.

 

The Publishing Division’s discounts and allowances are a muchlarger percentage of gross sales than discounts and allowances in the UBAHDivision due to the different customer markets that each division targets.  The Publishing Division’s discounts and allowances were $2,485,800 and$2,289,700 for the quarterly periods ended August 31, 2008 and 2007,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 dollar amountof the order.  The PublishingDivision’s discounts and allowances were 51.8% of Publishing’s gross sales forthe quarterly period ended August 31, 2008 and 51.9% for the quarterlyperiod ended August 31, 2007.

 

## **Expenses**

 
| ** **                         | ** ** | **For Three Months Ended August 31,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|------------------------------------|------------|----------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2008**                                                       | ** ** | **2007**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Cost of sales                      |       | 2,486,500                                                      |       | $                    | 2,302,000  |                 | $          | 184,500 |   | 8.0 | % |
| Operating &  selling      |       | 1,648,700                                                      |       | 1,593,200            |       | 55,500               |       | 3.5 | % |
| Sales  commissions                 |       | 1,258,500                                                      |       | 1,317,200            |       | (58,700              | )          | -4.5 | % |
| General &  administrative |       | 461,100                                                        |       | 408,500              |       | 52,600               |       | 12.9 | % |
| Total                              |       | $                                                              | 5,854,800  |                 | $          | 5,620,900            |       | $ | 233,900 |   | 4.2 | % |
|                                    |            |                                                                |            |                      |            |                      |            |  |  |  |  |  |

 

Cost of sales increased8.0% for the three months ended August 31, 2008 when compared with thethree months ended August 31, 2007. Cost of sales as a percentage of gross sales was 26.7% for the threemonths ended August 31, 2008 and for the three months ended August 31,2007 was 26.3%.  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 $265,900 in the quarterended August 31, 2008 and $242,900 in the quarter ended August 31,2007.  When comparing our gross marginswith the gross margins of other companies, note that we do not include thecosts of our distribution network in our cost of sales.

 

In addition to costs associated with our distribution network(noted above), operating and selling costs include expenses of the PublishingDivision, the UBAH Division and the order entry and customer service functions. Operating and selling expenses asa percentage of gross sales were 17.7% for the quarter ended August 31,2008 and 18.2% for the quarter ended August 31, 2007.

 

Sales commissions in the Publishing Divisionincreased 8.0% to $37,800 for the three months ended August 31,2008.  Publishing Division sales commissions arepaid on net sales and were 1.6% of net sales for the three months ended August 31,2008 and 1.9% of net sales for thethree months ended August 31, 2007.  Sales commissions in thePublishing Division will fluctuate depending upon the amount of sales made toour “house accounts,” which are the Publishing 

 

10

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Division’s largest customers and do not have any commission expenseassociated with them, and sales made by our outside sales representatives.

 

Sales commissions in the UBAH Divisiondecreased 4.3% to $1,220,700 for the three months ended August 31,2008 as a result of decreasedsales from home shows and direct sales, offset by increased internetsales.  UBAH Division sales commissionsare paid on retail sales and were 35.3% of retail sales for the three monthsended August 31, 2008 and37.4% of retail sales for the three months ended August 31, 2007.  Thefluctuation in the percentages of commission expense to retail sales is theresult of the type of sale.  Home shows,book fairs, school and library sales and direct sales have different commissionrates.  Also contributing to thefluctuations in the percentages is the payment of overrides and bonuses, bothdependent on consultants’ monthly sales and downline sales.

 

Oureffective tax rate was 38.0 % and 37.4% for the quarterly periods ended August 31,2008 and 2007,respectively.  These rates are higherthan the federal statutory rate due to state income taxes.

 

## **Operating Results for the Six MonthsEnded August 31, 2008**

##  

Weearned income before income taxes of $1,288,600 for the six months ended August 31,2008 compared with $1,544,800 for the six months ended August 31, 2007.

 

## **Revenues**

 
| ** **                            | ** ** | **For the Six Months Ended August 31,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2008**                                                              | ** ** | **2007**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Gross sales                           |       | $                                                                     | 19,143,300 |                 | $          | 18,904,100           |       | $ | 239,200 |   | 1.3 | % |
| Less  discounts & allowances |       | (6,109,400                                                            | )          | (5,819,100           | )          | (290,300             | )          | 5.0 | % |
| Transportation  revenue               |       | 708,400                                                               |       | 740,000              |       | (31,600              | )          | -4.3 | % |
| Net revenues                          |       | $                                                                     | 13,742,300 |                 | $          | 13,825,000           |       | $ | (82,700 | ) | -0.6 | % |

 

The UBAH Division’s gross sales increased 1.1% or $115,000 during thesix month period ending August 31,2008 when compared with the same six month period a year ago.  This increase consists of a 29% increase inInternet sales, offset by a 12% decrease in home party sales and a 24% decreasein direct sales.  The decline in homeparty sales is attributed primarily to a 9.6% decline in the total number ofhome shows held and a 2.7% decrease in average per order sales.  The decline in home party sales and directsales occurred as more consultants replaced these with Internet orders.

 

The Publishing Division’s gross sales increased by $124,200 during thesix month period ending August 31,2008 when compared with the same six month period a year ago.  We attribute this to a 10.0% increase insales to the national chains, offset by a 4.7% decrease in sales to smallerretail stores and a 2.7% decrease in inside sales accounts.

 

TheUBAH Division’s discounts and allowances were $1,568,800 and $1,329,900 for thesix month periods ended August 31, 2008 and 2007, respectively.  The UBAH Division is a multi-level selling organization thatmarkets its products through independent sales representatives (“consultants”).Sales are made to individual purchasers and school and public libraries.  Most sales in the UBAH Division are atretail.  As a part of the UBAH Division’smarketing programs, discounts between 40% and 50% of retail are offered onselected items at various times throughout the year.  The discounts and allowances in the UBAHDivision will vary from year to year depending upon the marketing programs inplace during any given year.  TheUBAH Division’s discounts and allowances were 15.1% of UBAH’s gross sales forthe six month period ended August 31, 2008 and 12.9% for the six monthperiod ended August 31, 2007.

 

The Publishing Division’s discounts and allowances are a muchlarger percentage of gross sales than discounts and allowances in the UBAHDivision due to the different customer markets that each division targets.  The Publishing Division’s discounts and allowances were $4,540,600 and$4,489,200 for the six month periods ended August 31, 2008 and 2007,respectively.  The Publishing Division sells toretail book chains, regional and local bookstores, toy and gift stores, schoolsupply stores and museums.  To becompetitive with other wholesale book distributors, the Publishing Divisionsells at discounts between 48% and 55% of the retail price, based upon thequantity of books ordered and the dollar amount of the order.  The Publishing Division’s discountsand allowances were 51.9% of Publishing’s gross sales for the six month periodended August 31, 2008 and 52.0% for the six month period ended August 31,2007.

 

11

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**Expenses**

** **
| ** **                         | ** ** | **For Six Months Ended August 31,** | ** ** | **$ Increase/** | ** ** | **% Increase/ ** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------|------------|----------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **2008**                                                     | ** ** | **2007**             | ** ** | **(decrease)**             | ** ** | **(decrease)** | ** ** |
| Cost of sales                      |       | 5,157,600                                                    |       | 5,008,500            |       | $                          | 149,100    |   | 3.0 | % |
| Operating &  selling      |       | 3,490,900                                                    |       | 3,429,100            |       | 61,800                     |       | 1.8 | % |
| Sales  commissions                 |       | 2,925,600                                                    |       | 3,047,700            |       | (122,100                   | )          | -4.0 | % |
| General &  administrative |       | 901,900                                                      |       | 817,300              |       | 84,600                     |       | 10.4 | % |
| Total                              |       | $                                                            | 12,476,000 |                 | $          | 12,302,600                 |       | $ | 173,400 |   | 1.4 | % |
|                                    |            |                                                              |            |                      |            |                            |            |  |  |  |  |  |

 

Cost of sales increased3.0% for the six months ended August 31, 2008 when compared with the sixmonths ended August 31, 2007, consistent with the increase in sales forthe period.  Cost of sales as apercentage of gross sales was 26.9% for the six months ended August 31,2008 and for the six months ended August 31, 2007 was 26.5%.  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 $557,800 in the six months ended August 31,2008 and $543,800 in the six months ended August 31, 2007.  When comparing our gross margins with thegross margins of other companies, note that we do not include the costs of ourdistribution network in our cost of sales.

 

In addition to costs associated with our distribution network(noted above), operating and selling costs include expenses of the PublishingDivision, the UBAH Division and the order entry and customer servicefunctions.  Operating and sellingexpenses as a percentage of gross sales were 18.2% for the six months ended August 31,2008 and 18.1% for the six months ended August 31, 2007.

 

Sales commissions in the Publishing Divisiondecreased 3.7% to $73,300 for the six months ended August 31, 2008. Publishing Division sales commissions are paid on net sales and were1.7% of net sales for the six months ended August 31, 2008 and 1.8% of net sales for the six monthsended August 31, 2007.  Sales commissions in the Publishing Divisionwill fluctuate depending upon the amount of sales made to our “house accounts,”which are the Publishing Division’s largest customers and do not have anycommission expense associated with them, and sales made by our outside salesrepresentatives.

 

Sales commissions in the UBAH Divisiondecreased 4.0% to $2,852,300 for the six months ended August 31,2008, the direct result ofdecreased sales from home shows and school and library sales in this division.  UBAH Division sales commissions are paid onretail sales and were 34.2% of retail sales for the six months ended August 31,2008 and 35.2% of retail sales for thesix months ended August 31, 2007.  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 thepercentages is the payment of overrides and bonuses, both dependent onconsultants’ monthly sales and downline sales.

 

Oureffective tax rate was 37.7% and 37.5% for the six month periods ended August 31,2008 and 2007,respectively.  These rates are higherthan the federal statutory rate due to state income taxes.

 

**Liquidity and Capital Resources**

 

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

 

Our Board of Directors has adopted a stock repurchase plan inwhich we may purchase up to 3,000,000 shares as market conditions warrant.  Management believes the stock is undervaluedand when stock becomes available at an attractive price, we will utilize freecash flow to repurchase shares. Management believes this enhances the value to the remainingstockholders and that these repurchases will have no adverse effect on ourshort-term and long-term liquidity.  Werepurchased 136,224 shares at a cost of $766,700 during the six month periodended August 31, 2008.

 

12

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We have a historyof profitability and positive cash flow. We can sustain planned growth levelswith minimal capital requirements. Consequently, cash generated from operationsis used to liquidate any existing debt and then to repurchase shares outstandingor capital distributions through dividends.

 

Our primary source of liquidity is cash generatedfrom operations. During the second three month period of fiscal year 2009, weexperienced a positive cash flow from operating activities of $1,180,800. Cashflow from operating activities was increased primarily by net income aftertaxes of $323,000, increases in current liabilities of $306,100 and incometaxes payable of $130,800 and a decrease in inventories of $148,800. Fluctuationsin accounts payable and accrued expenses involve timing of shipments receivedfrom our principal supplier and the payments associated with these shipments. Theytend to be highest in the second quarter when holiday season shipments havearrived and prior to payments being made.

 

Forthe six months ended August 31, 2008, we experienced a positive cash flowfrom operating activities of $2,040,800. Cash flow from operating activitieswas increased primarily by net income after taxes of $802,700, a decrease ininventory of $1,068,900 and increases in current liabilities of $176,400 andincome taxes payable of $74,600.

 

We believe that in fiscal year 2009 we willexperience a positive cash flow and that this positive cash flow along with thebank credit facility will be adequate to meet our liquidity requirements forthe foreseeable future.

 

We estimate that total cash used in investingactivities for fiscal year 2009 will be less than $200,000. This would consistof software and hardware enhancements to our existing data processing equipment,property improvements and additional warehouse equipment.

 

Cash used in financing activities was $51,000 fromthe purchase of $64,300 of treasury stock, offset by the sale of $13,300 intreasury stock.

 

As of August 31, 2008 we did not have anycommitments in excess of one year.

 

## **Bank Credit Agreement**

##  

EffectiveJune 30, 2008 we signed a Tenth Amendment to the Credit and SecurityAgreement with Arvest Bank which provided a $5,000,000 line of credit through June 30,2009. Interest is payable monthly at the Wall Street Journalprime-floating rate minus 0.75% (4.25% at August 31, 2008) and borrowingsare collateralized by substantially all of our assets. At August 31, 2008 we had no debt outstanding under this agreement.Available credit under the revolving credit agreement was $5,000,000 at August 31,2008. No borrowings were outstandingunder the agreement during the quarter ended August 31, 2008.

 

This agreement also contains a provision for our useof the Bank’s letters of credit. The Bank agrees to issue, or obtain issuanceof commercial or standby letters of credit provided that no letters of creditwill have an expiry date later than June 30, 2009 and that the sum of theline of credit plus the letters of credit would not exceed the borrowing basein effect at the time. As of August 31, 2008, we had no letters of creditoutstanding.

 

13

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**Critical Accounting 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.*

 

**Revenue Recognition**

 

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 63.5% of net revenues for the quarter ended August 31, 2008 and 63.8% for the quarter ended August 31, 2007. The provisions of the SEC Staff Accounting Bulletin No.104, “Revenue Recognition in Financial Statements,” have been applied, and as a result, a reserve is provided for estimated future sales returns.

 

Our sales return policy allows the customer to return all purchases for an exchange or refund for up to 30 days after the customer receives the item. Estimated allowances for sales returns are recorded as sales are recognized and recorded. Management uses a moving average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged returns are primarily from the retail stores. The damages occur in the stores, not in shipping to the stores. It is industry practice to accept returns from wholesale customers. Transportation revenue, the amount billed to the customer for shipping the product, is recorded when products are shipped. Management has estimated and included a reserve for sales returns of $84,000 as of August 31, 2008 and February 29, 2008.

 

**Allowance for Doubtful Accounts**

 

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends. If the actual uncollected amounts significantly exceed the estimated allowance, then our operating results would be significantly adversely affected. Management has estimated and included an allowance for doubtful accounts of $75,000 and $74,400 as of August 31, 2008 and February 29, 2008, respectively.

 

**Inventory**

 

Management continuallyestimates and calculates the amount of non-current inventory. Non-currentinventory arises due to occasionally purchasing book inventory in quantities inexcess of what will be sold within the normal operating cycle due to minimumorder requirements of our primary supplier. Non-current inventory was estimatedby management using the current year turnover ratio by title. All inventory in excess of 2 1⁄2years of anticipated sales was classified as noncurrent inventory. Noncurrentinventory balances, before valuation allowance, were $882,000 at August 31,2008 and $764,000 at February 29, 2008.

 

Inventories are presented net of a valuation allowance.Management has estimated and included a valuation allowance for both currentand noncurrent inventory. This reserve is based on management’s identificationof slow moving inventory on hand at August 31, 2008 and February 29,2008. Management has estimated a valuation allowance for both current andnoncurrent inventory of $361,200 and $331,200 as of August 31, 2008 and February 29,2008, respectively.

 

14

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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.    QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We donot have any material market risk.

 

Item 4     CONTROLS AND PROCEDURES

 

Anevaluation was performed of the effectiveness of the design and operation ofour disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and15d-15(e) as of August 31, 2008. This evaluation was conducted underthe supervision and with the participation of our management, including ourChief Executive Officer and our Controller/Corporate Secretary (Principal Financialand Accounting Officer).

 

Basedon that evaluation, 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 and forms. Itshould be noted that the design of any system of controls is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote.

 

PART II  OTHER INFORMATION

 

Item 1A  RISK FACTORS

 

No material changes occurred in the risk factorsdiscussed in our Fiscal Year 2008 Form 10-K.

 

Item 2     UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS

 

The following table shows repurchases of our CommonStock during the quarter ended August 31, 2008.

 

ISSUERPURCHASES OF 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** | ** ** |
|---------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
|                      |       |                                            |       |                                             |       |                                                                                                              |       |                                                                                                 |       |
| June 1 -  30, 2008   |       | 2,888                                           |       | $                                                | 5.92       |                                                                                                              | 2,888      |                                                                                                 | 448,461    |   |
| July 1 -  31, 2008   |       | 1,095                                           |       | $                                                | 6.01       |                                                                                                              | 1,095      |                                                                                                 | 447,366    |   |
| August 1 -  31, 2008 |       | 7,079                                           |       | $                                                | 5.74       |                                                                                                              | 7,079      |                                                                                                 | 440,287    |   |
| Total                     |       | 11,062                                          |       | $                                                | 5.81       |                                                                                                              | 11,062     |                                                                                                 |       |   |

 

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(1)             Allof the shares of common stock set forth in this column (a) were purchasedpursuant to a publicly announced plan as described in footnote 2 below.

 

(2)             InApril 2008 the Board of Directors authorized us to purchase up to anadditional 500,000 shares of our common stock under a repurchase plan. Pursuantto the plan, we may purchase a total of 440,287 additional shares of our commonstock until 3,000,000 shares have been repurchased.

 

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(3)             Thereis no expiration date for the repurchase plan.

 

Item 5     OTHER INFORMATION

 

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**

 

 

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:  |  October 15, 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.                                                                                             |

 

18

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