** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

# **FORM 10-Q**

# ** **

**(MarkOne)**

 
| **x**  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|--------|------------|---------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                    |   |   |
|   |       | **For the  quarterly period ended May 31, 2008**                                                   |
|   |       |                                                                                                    |   |   |
|   |       | **OR**                                                                                                  |
|   |       |                                                                                                    |   |   |
| **o**  | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**      |

 

**For the transition period from              to                .**

 

**Commission file number: 0-4957**

 

# **EDUCATIONAL 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 the Exchange Act. (Check one):

 

| Large accelerated filer  o | Accelerated filer o | Non-accelerated filer x                         | Smaller reporting  company o |
|----------------------------|--------------------------|-------------------------------------------------|-----------------------------------|
|                       |                     | (Do not check if a  smaller  reporting company) |                              |

 

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 July 11,2008 there were 3,826,371 shares of Educational Development Corporation CommonStock, $0.20 par value outstanding.

 

 

 

----

 

PART I. FINANCIAL INFORMATION

ITEM 1

 

**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSEDBALANCE SHEETS (UNAUDITED)**

 
| ** **                                                                                                                           | ** ** | **May 31, 2008** | ** ** | **February 29, 2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                           |       |                       |       |                            |       |
|                                                                                                                                 |       |                       |       |                            |       |
| CURRENT ASSETS:                                                                                                                      |       |                       |       |                            |       |
| Cash and cash  equivalents                                                                                                           |       | $                          | 1,990,200  |                            | $          | 2,440,300 |   |
| Accounts  receivable, less allowance for doubtful accounts and sales returns $166,000  (May 31) and $158,400 (February 29) |       | 2,895,800                  |       | 2,611,800                       |       |
| Inventories—Net                                                                                                                 |       | 10,802,600                 |       | 11,818,700                      |       |
| Prepaid expenses  and other assets                                                                                                   |       | 160,900                    |       | 112,000                         |       |
| Income taxes  receivable                                                                                                             |       | 24,500                     |       | —                          |       |
| Deferred income  taxes                                                                                                               |       | 224,800                    |       | 197,100                         |       |
| Total current  assets                                                                                                                |       | 16,098,800                 |       | 17,179,900                      |       |
|                                                                                                                                 |       |                       |       |                            |       |
| INVENTORIES—Net                                                                                                                 |       | 555,000                    |       | 459,000                         |       |
|                                                                                                                                 |       |                       |       |                            |       |
| PROPERTY, PLANT  AND EQUIPMENT—Net                                                                                              |       | 2,360,200                  |       | 2,382,800                       |       |
|                                                                                                                                 |       |                       |       |                            |       |
| DEFERRED INCOME  TAXES                                                                                                               |       | 46,700                     |       | 43,300                          |       |
|                                                                                                                                 |       |                       |       |                            |       |
| TOTAL                                                                                                                                |       | $                          | 19,060,700 |                            | $          | 20,065,000 |   |
|                                                                                                                                 |       |                       |       |                            |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                       |       |                       |       |                            |       |
|                                                                                                                                 |       |                       |       |                            |       |
| CURRENT  LIABILITIES:                                                                                                                |       |                       |       |                            |       |
| Accounts payable                                                                                                                     |       | $                          | 2,208,300  |                            | $          | 2,456,900 |   |
| Accrued salaries  and commissions                                                                                                    |       | 556,600                    |       | 559,000                         |       |
| Income taxes  payable                                                                                                                |       | —                     |       | 56,200                          |       |
| Other current  liabilities                                                                                                           |       | 317,100                    |       | 195,800                         |       |
| Total current  liabilities                                                                                                           |       | 3,082,000                  |       | 3,267,900                       |       |
|                                                                                                                                 |       |                       |       |                            |       |
| COMMITMENTS                                                                                                                          |       |                       |       |                            |       |
|                                                                                                                                 |       |                       |       |                            |       |
| SHAREHOLDERS’  EQUITY:                                                                                                          |       |                       |       |                            |       |
| Common stock,  $0.20 par value; Authorized 8,000,000 shares;                                                                         |       |                       |       |                            |       |
| Issued 6,039,040  (May 31) and 5,806,840 (February 29) shares;                                                             |       |                       |       |                            |       |
| Outstanding  3,830,071 (May 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                                                                                                                   |       | 18,159,300                 |       | 19,206,100                      |       |
|                                                                                                                                 |       | 27,875,500                 |       | 28,073,600                      |       |
| Less treasury  stock, at cost                                                                                                        |       | (11,896,800                | )          | (11,276,500                     | )          |
|                                                                                                                                 |       | 15,978,700                 |       | 16,797,100                      |       |
|                                                                                                                                 |       |                       |       |                            |       |
| TOTAL                                                                                                                                |       | $                          | 19,060,700 |                            | $          | 20,065,000 |   |

 

See notes to condensedfinancial statements.

 

2

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSEDSTATEMENTS OF EARNINGS (UNAUDITED)**

 
| ** **                                                            | ** ** | **Three Months Ended May 31,** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
|                                                                  |       |                                               |       |   |   |
| GROSS SALES                                                           |       | $                                                  | 9,816,200  |   | $ | 10,136,100 |   |
| Less discounts  and allowances                                        |       | (2,792,300                                         | )          | (2,905,600 | ) |
| Transportation  revenue                                               |       | 350,900                                            |       | 375,900 |   |
| NET REVENUES                                                          |       | 7,374,800                                          |       | 7,606,400 |   |
| COST OF SALES                                                         |       | 2,671,100                                          |       | 2,706,500 |   |
| Gross margin                                                          |       | 4,703,700                                          |       | 4,899,900 |   |
|                                                                  |       |                                               |       |   |   |
| OPERATING  EXPENSES:                                                  |       |                                               |       |   |   |
| Operating and  selling                                                |       | 1,842,200                                          |       | 1,835,900 |   |
| Sales  commissions                                                    |       | 1,667,100                                          |       | 1,730,600 |   |
| General and  administrative                                           |       | 440,800                                            |       | 408,800 |   |
|                                                                  |       | 3,950,100                                          |       | 3,975,300 |   |
|                                                                  |       |                                               |       |   |   |
| OTHER INCOME                                                          |       | 14,400                                             |       | 13,200 |   |
|                                                                  |       |                                               |       |   |   |
| EARNINGS BEFORE  INCOME TAXES                                         |       | 768,000                                            |       | 937,800 |   |
|                                                                  |       |                                               |       |   |   |
| INCOME TAXES                                                          |       | 288,300                                            |       | 352,500 |   |
|                                                                  |       |                                               |       |   |   |
| NET EARNINGS                                                          |       | $                                                  | 479,700    |   | $ | 585,300 |   |
|                                                                  |       |                                               |       |   |   |
| BASIC AND  DILUTED EARNINGS PER SHARE:                                |       |                                               |       |   |   |
| Basic                                                                 |       | $                                                  | 0.13       |   | $ | 0.16 |   |
| Diluted                                                               |       | $                                                  | 0.13       |   |   | $ | 0.15 |   |
|                                                                  |       |                                               |       |   |   |
| WEIGHTED AVERAGE  NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: |       |                                               |       |   |   |
| Basic                                                                 |       | 3,704,755                                          |       | 3,760,101 |   |
| Diluted                                                               |       | 3,706,015                                          |       | 3,878,975 |   |
|                                                                       |            |                                                    |            |  |  |  |  |  |

 

See notes to condensedfinancial statements.

 

3

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**EDUCATIONAL DEVELOPMENT CORPORATION**

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

**FOR THETHREE MONTHS ENDED MAY 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     |       | —                                                    |       | —     |       | —              |       | —       |       | 125,162                 |       | (702,400   | )          | (702,400 | ) |
| Sales of treasury  stock         |       | —                                                    |       | —     |       | —              |       | —       |       | (16,288                 | )          | 82,100     |       | 82,100 |   |
| Exercise of  options             |       | 232,200                                                   |       | 46,400     |       | 802,300             |       |         |       |                    |       |       |       | 848,700 |   |
| Dividends paid  ($.40/share)     |       | —                                                    |       | —     |       | —              |       | (1,526,500   | )          | —                  |       | —     |       | (1,526,500 | ) |
| Net earnings                     |       | —                                                    |       | —     |       | —              |       | 479,700      |       | —                  |       | —     |       | 479,700 |   |
| BALANCE-May 31,  2008       |       | 6,039,040                                                 |       | $          | 1,207,800  |                | $          | 8,508,400    |       | $                       | 18,159,300 |       | 2,208,969  |   | $ | (11,896,800 | ) | $ | 15,978,700 |   |

 

See notes to condensed financial statements.

 

4

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**

**FOR THETHREE MONTHS ENDED MAY 31,**

** **
| ** **                                          | ** ** | **2008**   | ** ** | **2007**  | ** ** |
|-----------------------------------------------------|------------|------------|------------|-----------|------------|
|                                                |       |       |       |      |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES:              |       | $          | 860,000    |      | $          | 436,400 |   |
|                                                |       |       |       |      |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES—         |       |       |       |      |       |
| Purchases of  property and equipment                |       | (12,000    | )          | (101,600  | )          |
|                                                |       |       |       |      |       |
| Net cash used in  investing activities              |       | (12,000    | )          | (101,600  | )          |
|                                                |       |       |       |      |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:              |       |       |       |      |       |
| Cash received  from exercise of stock options       |       | 848,700    |       | —    |       |
| Cash paid to  acquire treasury stock                |       | (702,400   | )          | —    |       |
| Cash received  from sale of treasury stock          |       | 82,100     |       | 68,600    |       |
| Dividends paid                                      |       | (1,526,500 | )          | (826,000  | )          |
|                                                |       |       |       |      |       |
| Net cash used in  financing activities              |       | (1,298,100 | )          | (757,400  | )          |
|                                                |       |       |       |      |       |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS          |       | (450,100   | )          | (422,600  | )          |
|                                                |       |       |       |      |       |
| CASH AND CASH  EQUIVALENTS—BEGINNING OF PERIOD |       | 2,440,300  |       | 1,254,300 |       |
|                                                |       |       |       |      |       |
| CASH AND CASH  EQUIVALENTS—END OF PERIOD       |       | $          | 1,990,200  |      | $          | 831,700 |   |
|                                                |       |       |       |      |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:  |       |       |       |      |       |
| Cash paid for  income taxes                         |       | $          | 400,100    |      | $          | 76,500 |   |

 

See notes to condensedfinancial statements.

 

5

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NOTES TO CONDENSEDFINANCIAL STATEMENTS

 

Note 1-  The information shown with respect tothe three months ended May 31, 2008, which is unaudited, includes alladjustments which in the opinion of Management are considered to be necessaryfor a fair presentation of earnings for such periods. The adjustments reflectedin the financial statements represent normal recurring adjustments. The resultsof operations for the three months ended May 31, 2008 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 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 is payable monthly at the Wall StreetJournal prime-floating rate minus 0.75% (4.25% at May 31, 2008) andborrowings are collateralized by substantially all the assets of the Company. At May 31, 2008 the Company had no debt outstanding underthis agreement. Available credit under the revolving credit agreement was$5,000,000 at May 31, 2008. No borrowings were outstanding under theagreement during the quarter ended May 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.

 

Note 3- Inventories consist of the following:

 
| ** **                      | ** ** | **2008**         | ** ** |
|---------------------------------|------------|------------------|------------|
| ** **                      | ** ** | **May 31,** | ** ** | **February 29,** | ** ** |
| Current:                        |       |             |       |   |   |
| Book inventory                  |       | $                | 10,827,300 |   | $ | 11,844,900 |   |
| Inventory  valuation allowance  |       | (24,700          | )          | (26,200 | ) |
|                            |       |             |       |   |   |
| Inventories net–current    |       | $                | 10,802,600 |   | $ | 11,818,700 |   |
|                            |       |             |       |   |   |
| Noncurrent:                     |       |             |       |   |   |
| Book inventory                  |       | $                | 875,000    |   | $ | 764,000 |   |
| Inventory  valuation allowance  |       | (320,000         | )          | (305,000 | ) |
|                            |       |             |       |   |   |
| Inventories net–noncurrent |       | $                | 555,000    |   | $ | 459,000 |   |

 

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

 

Significantportions of our inventory purchases are concentrated with an England-basedpublishing company. Purchases from this company were approximately $1.8 millionand $1.7 million for the three months ended May 31, 2008 and 2007,respectively. Total inventory purchases from all suppliers were approximately$2.0 million and $1.7 million for the three months ended May 31, 2008 and2007, respectively.

 

Note 4 - Basic earnings per share (“EPS”)is computed by dividing net earnings by the weighted average number of commonshares outstanding during the period. Diluted EPS is based on the combinedweighted average number of common shares outstanding and dilutive potentialcommon shares issuable which include, where appropriate, the assumed exerciseof options.

 

In computing diluted EPS we have utilized the treasury stock method.

 

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

 

6

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**EarningsPer Share:**
| ** **                                      | ** ** | **Three Months Ended May 31** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                                            |       |                                              |       |   |   |
| Net earnings  applicable to common shareholders |       | $                                                 | 479,700    |   | $ | 585,300 |   |
|                                            |       |                                              |       |   |   |
| **Shares:**                                     |       |                                              |       |   |   |
|                                            |       |                                              |       |   |   |
| Weighted average  shares outstanding - basic    |       | 3,704,755                                         |       | 3,760,101 |   |
| Assumed exercise  of options                    |       | 1,260                                             |       | 118,874 |   |
|                                            |       |                                              |       |   |   |
| Weighted average  shares outstanding - diluted  |       | 3,706,015                                         |       | 3,878,975 |   |
|                                            |       |                                              |       |   |   |
| **Basic  Earnings Per Share**                   |       | $                                                 | 0.13       |   | $ | 0.16 |   |
| **Diluted  Earnings Per Share**                 |       | $                                                 | 0.13       |   | $ | 0.15 |   |

 

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 2009, we repurchased 125,162shares of common stock. The maximum number of shares that may be repurchased inthe future is 451,349.

 

Note 5 –Weaccount for stock-based compensation whereby share-based payment transactionswith employees, such as stock options and restricted stock, are measured atestimated fair value at date of grant and recognized as compensation expenseover the vesting period.

 

Note 6 —Freight costs and handling costs incurred are included in operating &selling expenses and were $569,600 and $593,400 for the three months ended May 31,2008 and 2007, respectively.

 

Note 7 –We have two reportable segments: Publishing and Usborne Books at Home (“UBAH”).These reportable segments are business units that offer different methods ofdistribution to different types of customers. They are managed separately basedon the fundamental differences in their operations. The Publishing Divisionmarkets its products to retail accounts, which include book, school supply, toyand gift stores and museums, through commissioned sales representatives, tradeand specialty wholesalers and an internal telesales group. The UBAH Divisionmarkets its product line through a network of independent sales consultantsthrough a combination of direct sales, home shows, 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 onearnings (loss) before income taxes of the segments, which is defined as segmentnet sales reduced by direct cost of sales and direct expenses. Corporateexpenses, depreciation, interest expense and income taxes are not allocated tothe segments, but are listed in the “other” column. Corporateexpenses include the executive department, accounting department, informationservices department, general office management and building facilitiesmanagement. Our assets andliabilities are not allocated on a segment basis.

 

7

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

 

**NET REVENUES**

 
| ** **     | ** ** | **Three Months Ended May 31,** | ** ** |
|----------------|------------|----------------------------------------------------|------------|
| ** **     | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
| **Publishing** |       | $                                                  | 1,914,200  |   | $ | 2,031,400 |   |
| **UBAH**       |       | $                                                  | 5,460,600  |   | $ | 5,575,000 |   |
| **Other**      |       | $                                                  | —     |   | $ | — |   |
| ** **     |       |                                               |       |   |   |
| **Total**      |       | $                                                  | 7,374,800  |   | $ | 7,606,400 |   |

 

**EARNINGS (LOSS) BEFORE INCOME TAXES**

 
| ** **     | ** ** | **Three Months Ended May 31,** | ** ** |
|----------------|------------|----------------------------------------------------|------------|
| ** **     | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
| **Publishing** |       | $                                                  | 572,100    |   | $ | 615,100 |   |
| **UBAH**       |       | $                                                  | 1,154,400  |   | $ | 1,204,000 |   |
| **Other**      |       | $                                                  | (958,500   | ) | $ | (881,300 | ) |
| ** **     |       |                                               |       |   |   |
| **Total**      |       | $                                                  | 768,000    |   | $ | 937,800 |   |

 

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 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 fiscal yearsbeginning after December 15, 2008. The adoption of this standard is notexpected to have a material effect on our financial position or results ofoperations.

 

In December 2007,the FASB issued SFAS 141(revised 2007) “Business Combinations.” The statementrequires the acquiring entity in a business combination to recognize all the assetsacquired and liabilities assumed in the transaction; establishes theacquisition-date fair value as the measurement objective for all assetsacquired and liabilities assumed; and requires the acquirer to disclose toinvestors and other users all of the information they need to evaluate andunderstand the nature and financial effect of the business combination. Thisstatement is effective for acquisition dates on or after the beginning of thefirst annual reporting period beginning after December 15, 2008. Theadoption of this standard is not expected to have a material effect on ourfinancial position or results of operations.

 

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 alsomaterially and adversely affect our business. You should read the followingdiscussion in connection with our financial statements, including the notes tothose 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. These two divisions each have their owncustomer base. The Publishing Division markets its products on a wholesalebasis to various retail accounts. The UBAH Division markets its products toindividual consumers as well as school and public libraries.

 

8

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

 

Earnings as a Percent of Net Revenues

For the quarter ended May 31,

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Net revenues                       |       | 100.0    | %          | 100.0    | %          |
| Cost of sales                      |       | 36.2     | %          | 35.6     | %          |
| Gross margin                       |       | 63.8     | %          | 64.4     | %          |
| Operating  expenses:               |       |     |       |     |       |
| Operating &  selling      |       | 25.0     | %          | 24.1     | %          |
| Sales  commissions                 |       | 22.6     | %          | 22.8     | %          |
| General &  administrative |       | 6.0      | %          | 5.4      | %          |
| Interest                           |       | 0.0      | %          | 0.0      | %          |
| Total operating  expenses          |       | 53.6     | %          | 52.3     | %          |
| Income from  Operations            |       | 10.2     | %          | 12.1     | %          |
| Other income                       |       | 0.2      | %          | 0.2      | %          |
| Earnings before  income taxes      |       | 10.4     | %          | 12.3     | %          |
| Income taxes                       |       | 3.9      | %          | 4.6      | %          |
| Net earnings                       |       | 6.5      | %          | 7.7      | %          |

 

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

##  

Weearned income before income taxes of $768,000 for the three months ended May 31,2008 compared with $937,800 for the three months ended May 31, 2007.

 

## **Revenues**

 
| ** **                            | ** ** | **For the Three Months Ended May 31** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2008**                                                            | ** ** | **2007**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Gross sales                           |       | $                                                                   | 9,816,200  |                 | $          | 10,136,100           |       | $ | (319,900 | ) | -3.2 | % |
| Less  discounts & allowances |       | (2,792,300                                                          | )          | (2,905,600           | )          | 113,300              |       | -3.9 | % |
| Transportation  revenue               |       | 350,900                                                             |       | 375,900              |       | (25,000              | )          | -6.7 | % |
| Net revenues                          |       | $                                                                   | 7,374,800  |                 | $          | 7,606,400            |       | $ | (231,600 | ) | -3.0 | % |

 

The UBAH Division’s gross sales decreased 1.0% or $58,800 during thethree month period ending May 31,2008 when compared with the same quarterly period a year ago. Thisdecrease consists of a 9% decrease in home party sales and a 25% decrease indirect sales, offset by a 27% increase in Internet sales. The decline in homeparty sales is attributed to a 9% decline in the total number of home showsheld. The decline in home party sales and direct sales occurred as moreconsultants replaced these with Internet orders.

 

The Publishing Division’s gross sales decreased 6.2% or $261,200 duringthe three month period ending May 31, 2008 when compared with the same quarterly period ayear ago. We attribute this to an 8.1% decrease in inside sales accounts and a2.2% decrease in sales to the national chains, offset by a 4.2% increase insales to the smaller book stores.

 

TheUBAH Division’s discounts and allowances were $737,500 and $706,200 for thequarterly periods ended May 31, 2008 and 2007, respectively. The UBAH Division is a multi-levelselling organization that markets its products through independent salesrepresentatives (“consultants”). Sales are made to individual purchasers andschool and public libraries. Most sales in the UBAH Division are at retail. Asa part of the UBAH Division’s marketing programs, discounts between 40% and 50%of retail are offered on selected items at various times throughout the year. Thediscounts and allowances in the UBAH Division will vary from year to yeardepending upon the marketing programs in place during any given year. TheUBAH Division’s discounts and allowances were 12.6% of UBAH’s gross sales forthe quarterly period ended May 31, 2008 and 11.9% for the quarterly periodended May 31, 2007.

 

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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 andallowances were $2,054,800 and $2,199,500 for the quarterly periods ended May 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 withother wholesale book distributors, the Publishing Division sells at discountsbetween 48% and 55% of the retail price, based upon the quantity of booksordered and the dollar amount of the order. The Publishing Division’sdiscounts and allowances were 51.9% of Publishing’s gross sales for thequarterly period ended May 31, 2008 and 52.0% for the quarterly periodended May 31, 2007.

 

Thedecrease in transportation revenues for the three months ended May 31,2008 was due in part to the decrease in sales for the period.

 

## **Expenses**

 
| ** **                         | ** ** | **For Three Months Ended May 31,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2008**                                                    | ** ** | **2007**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Cost of sales                      |       | 2,671,100                                                   |       | $                    | 2,706,500  |                 | $          | (35,400 | ) | -1.3 | % |
| Operating &  selling      |       | 1,842,200                                                   |       | 1,835,900            |       | 6,300                |       | 0.3 | % |
| Sales  commissions                 |       | 1,667,100                                                   |       | 1,730,600            |       | (63,500              | )          | -3.7 | % |
| General &  administrative |       | 440,800                                                     |       | 408,800              |       | 32,000               |       | 7.8 | % |
| Total                              |       | $                                                           | 6,621,200  |                 | $          | 6,681,800            |       | $ | (60,600 | ) | -0.9 | % |
|                                    |            |                                                             |            |                      |            |                      |            |  |  |  |  |  |

 

Cost of sales decreased1.3% for the three months ended May 31, 2008 when compared with the threemonths ended May 31, 2007. Cost of sales as a percentage of gross saleswas 27.2% for the three months ended May 31, 2008 and for the three monthsended May 31, 2007 was 26.7%. Cost of sales is the inventory cost of the product sold, whichincludes the cost of the product itself and inbound freight charges. Purchasingand receiving costs, inspection costs, warehousing costs, and other costs ofour distribution network are included in operating and selling expenses. Thesecosts totaled $284,100 in the quarter ended May 31, 2008 and $293,100 inthe quarter ended May 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 service functions.Operating and selling expenses as a percentage of gross sales were 18.8%for the quarter ended May 31, 2008 and 18.1% for the quarter ended May 31,2007.

 

Sales commissions in the Publishing Divisionincreased 1.4% to $35,500 for the three months ended May 31, 2008. Publishing Division sales commissions arepaid on net sales and were 1.9% of net sales for the three months ended May 31,2008 and 1.7% of net sales for thethree months ended May 31, 2007. Sales commissions in the Publishing Division will fluctuate dependingupon the amount of sales made to our “house accounts,” which are the PublishingDivision’s largest customers and do not have any commission expense associatedwith them, and sales made by our outside sales representatives.

 

Sales commissions in the UBAH Divisiondecreased 3.8% to $1,631,600 for the three months ended May 31,2008 as a result of decreasedsales from home shows and direct sales, offset by increased internet sales. UBAHDivision sales commissions are paid on retail sales and were 33.4% of retailsales for the three months ended May 31, 2008 and 32.6% of retail sales for the threemonths ended May 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 salesand direct sales have different commission rates. 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 37.5 % and 36.2% for the quarterly periods ended May 31,2008 and 2007, respectively. Theserates are higher than the federal statutory rate due to state income taxes.

 

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**Liquidity and Capital Resources**

 

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

 

Our Board of Directors has adopted a stock repurchase plan inwhich we may purchase up to 3,000,000 shares as market conditions warrant.  Management believes the stock is undervaluedand when stock becomes available at an attractive price, we will utilize freecash flow to repurchase shares. Management believes this enhances the value to the remainingstockholders and that these repurchases will have no adverse effect on ourshort-term and long-term liquidity.  Werepurchased 125,162 shares at a cost of $702,400 during the quarter ended May 31,2008.

 

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

 

Ourprimary source of liquidity is cash generated from operations.  During the first three month period of fiscalyear 2009, we experienced a positive cash flow from operating activities of$860,000.  Cash flow from operatingactivities was increased primarily by net income after taxes of $479,700 and adecrease in inventory of $920,100. Offsetting these were increases in accounts receivable of $284,000 andprepaid expenses of $48,900, along with a decrease in current liabilities of$186,200.  Fluctuations in accountspayable and accrued expenses involve timing of shipments received from ourprincipal supplier and the payments associated with these shipments.  They tend to be highest in the second quarterwhen holiday season shipments have arrived and prior to payments being made.

 

Webelieve that in fiscal year 2009 we will experience a positive cash flow 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 2009 willbe less than $200,000.  This wouldconsist of software and hardware enhancements to our existing data processingequipment, property improvements and additional warehouse equipment.

 

Cashused in financing activities was $1,298,100 from the payment of $1,526,500 individends and purchase of $702,400 of treasury stock, offset by the sale of$82,100 in treasury stock and stock option exercises totaling $848,700.

 

Asof May 31, 2008 we did not have any commitments in excess of one year.

 

## **Bank Credit Agreement**

##  

Effective June 30,2008 we signed a Tenth Amendment to the Credit and Security Agreement withArvest Bank which provided a $5,000,000 line of credit through June 30,2009.  Interest is payable monthly at theWall Street Journal prime-floating rate minus 0.75% (4.25% at May 31,2008) and borrowings are collateralized by substantially all of our assets. At May 31, 2008 we had no debt outstanding under thisagreement.  Available credit under therevolving credit agreement was $5,000,000 at May 31, 2008.  Noborrowings were outstanding under the agreement during the quarter ended May 31,2008.

 

This agreement also contains a provision for our use of the Bank’sletters of credit.  The Bank agrees toissue, or obtain issuance of commercial or standby letters of credit providedthat no letters of credit will have an expiry date later than June 30,2009 and that the sum of the line of credit plus the letters of credit wouldnot exceed the borrowing base in effect at the time.

 

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**CriticalAccounting Policies**

 

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

 

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

 

**RevenueRecognition**

 

Sales are recognized and recorded when products are shipped.  Products are shipped FOB shipping point. The UBAH Division’s sales are paid before the product is shipped.  These sales accounted for 72.9% of net revenues for the quarter ended May 31, 2008 and 72.0% for the quarter ended May 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 May 31, 2008 and $84,000 as of 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 $82,000 and $74,400 as of May 31, 2008 and February 29, 2008, respectively.

 

**Inventory**

 

Management continuallyestimates and calculates the amount of non-current inventory.  Non-current inventory arises due tooccasionally purchasing book inventory in quantities in excess of what will besold within the normal operating cycle due to minimum order requirements of ourprimary supplier.  Non-current inventorywas estimated by management using the current year turnover ratio by title.  All inventory in excess of 2 1⁄2 years ofanticipated sales was classified as noncurrent inventory. Noncurrent inventorybalances, before valuation allowance, were $875,000 at May 31, 2008 and$764,000 at February 29, 2008.

 

Inventories are presented net of a valuationallowance.  Management has estimated andincluded a valuation allowance for both current and noncurrent inventory.  This reserve is based on management’sidentification of slow moving inventory on hand at May 31, 2008 and February 29,2008.  Management has estimated avaluation allowance for both current and noncurrent inventory of $344,700 and$331,200 as of May 31, 2008 and February 29, 2008, respectively.

 

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**Stock-Based Compensation**

 

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

 

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

We do not have anymaterial market risk.

 

Item 4     CONTROLS AND PROCEDURES

 

An evaluation wasperformed of the effectiveness of the design and operation of our disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-15(e) and15d-15(e) as of May 31, 2008. This evaluation was conducted under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Controller/Corporate Secretary (Principal Financialand Accounting Officer).

 

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

 

During the fiscalquarter covered by this report on Form 10-Q, we made changes to ourcontrols over accounts receivable. Processes involving communications related to accounts receivablecollection activities have been established to improve the timeliness thereof,accuracy of postings, and follow-up for items needing correction.

 

PART II  OTHER INFORMATION

 

Item 1A  RISK FACTORS

 

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

 

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Item 2     UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table showsrepurchases of our Common Stock during the quarter ended May 31, 2008.

 

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** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
|                     |       |                                            |       |                                             |       |                                                                                                              |       |                                                                                                 |       |
| March 1 -  31, 2008 |       | 47,350                                          |       | $                                                | 5.61       |                                                                                                              | 47,350     |                                                                                                 | 29,161     |   |
| April 1 -  30, 2008 |       | 77,149                                          |       | $                                                | 5.61       |                                                                                                              | 77,149     |                                                                                                 | 452,012    |   |
| May 1 - 31,  2008   |       | 663                                             |       | $                                                | 5.62       |                                                                                                              | 663        |                                                                                                 | 451,349    |   |
| Total                    |       | 125,162                                         |       | $                                                | 5.61       |                                                                                                              | 125,162    |                                                                                                 |       |   |

 

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

 

(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 451,349 additional shares of our common stock until 3,000,000 shares havebeen repurchased.

 

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

 

Item 5     OTHER INFORMATION

 

None.

 

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Item 6     EXHIBITS

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

 

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#### ** **

#### **SIGNATURES**

#### ** **

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

 

 

EDUCATIONAL DEVELOPMENTCORPORATION

(Registrant)

 

 
| Date:  | July 15, 2008 |   | By                                        |     /s/  Randall W. White |
|--------|--------------------|--------|-------------------------------------------|-----------------------------------------------|
|   |               |   |     Randall  W. White |
|   |               |   |     President         |

 

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                                                                                      EXHIBITINDEX

 
| **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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