**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

# **FORM 10-Q**

 

**(Mark One)**

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

 

**For the quarterly period ended November 30,2009**

 

**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**

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o 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.

 

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

 

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 ofthe Exchange Act) Yes o No x

 

As of January 13, 2010 there were 3,878,307shares of Educational Development Corporation Common Stock, $0.20 par valueoutstanding.

 

 

 

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PART I. FINANCIAL INFORMATION

ITEM 1

 

**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSEDBALANCE SHEETS (UNAUDITED)**

 
| ** **                                                                                                                                                                                                                   | ** ** | **November 30, 2009** | ** ** | **February 28, 2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                   |       |                       |       |                       |       |
| ** **                                                                                                                                                                                                                   |       |                       |       |                       |       |
| CURRENT ASSETS:                                                                                                                                                                                                              |       |                       |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                                                                   |       | $                          | 1,756,800  |                       | $          | 2,896,200 |   |
| Accounts receivable,  less allowance for doubtful accounts and sales returns of $222,100 (November 30)  and $176,900 (February 28)                                                                                 |       | 4,197,300                  |       | 3,253,000                  |       |
| Inventories—Net                                                                                                                                                                                                         |       | 11,275,400                 |       | 10,302,600                 |       |
| Prepaid expenses and  other assets                                                                                                                                                                                           |       | 293,800                    |       | 306,800                    |       |
| Deferred income taxes                                                                                                                                                                                                        |       | 263,300                    |       | 225,500                    |       |
| Total current assets                                                                                                                                                                                                         |       | 17,786,600                 |       | 16,984,100                 |       |
|                                                                                                                                                                                                                         |       |                       |       |                       |       |
| INVENTORIES—Net                                                                                                                                                                                                         |       | 546,000                    |       | 568,000                    |       |
|                                                                                                                                                                                                                         |       |                       |       |                       |       |
| PROPERTY, PLANT AND  EQUIPMENT—Net                                                                                                                                                                                      |       | 2,177,700                  |       | 2,278,400                  |       |
|                                                                                                                                                                                                                         |       |                       |       |                       |       |
| OTHER ASSETS                                                                                                                                                                                                                 |       | 59,900                     |       | 60,400                     |       |
| DEFERRED INCOME TAXES                                                                                                                                                                                                        |       | 32,700                     |       | 50,500                     |       |
|                                                                                                                                                                                                                         |       |                       |       |                       |       |
| TOTAL ASSETS                                                                                                                                                                                                                 |       | $                          | 20,602,900 |                       | $          | 19,941,400 |   |
|                                                                                                                                                                                                                         |       |                       |       |                       |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                               |       |                       |       |                       |       |
|                                                                                                                                                                                                                         |       |                       |       |                       |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                         |       |                       |       |                       |       |
| Accounts payable                                                                                                                                                                                                             |       | $                          | 2,261,200  |                       | $          | 2,653,200 |   |
| Accrued salaries and  commissions                                                                                                                                                                                            |       | 820,300                    |       | 504,500                    |       |
| Current maturities of  long-term debt                                                                                                                                                                                        |       | 150,000                    |       | 150,000                    |       |
| Income taxes payable                                                                                                                                                                                                         |       | 602,200                    |       | 102,200                    |       |
| Dividends payable                                                                                                                                                                                                            |       | 581,700                    |       | —                     |       |
| Other current  liabilities                                                                                                                                                                                                   |       | 553,000                    |       | 486,200                    |       |
| Total current  liabilities                                                                                                                                                                                                   |       | 4,968,400                  |       | 3,896,100                  |       |
|                                                                                                                                                                                                                         |       |                       |       |                       |       |
| LONG-TERM NOTES  PAYABLE, net of current maturities                                                                                                                                                                          |       | 150,000                    |       | 150,000                    |       |
|                                                                                                                                                                                                                         |       |                       |       |                       |       |
| COMMITMENTS                                                                                                                                                                                                                  |       | —                     |       | —                     |       |
|                                                                                                                                                                                                                         |       |                       |       |                       |       |
| SHAREHOLDERS’ EQUITY:                                                                                                                                                                                                   |       |                       |       |                       |       |
| Common stock, $0.20 par  value; Authorized 8,000,000 shares; Issued 6,039,040 (November 30) and  6,039,040 (February 28) shares; Outstanding 3,878,307 (November 30)  and 3,838,461 (February 28) shares |       | 1,207,800                  |       | 1,207,800                  |       |
| Capital in excess of  par value                                                                                                                                                                                              |       | 8,508,400                  |       | 8,508,400                  |       |
| Retained earnings                                                                                                                                                                                                            |       | 17,510,400                 |       | 18,062,800                 |       |
|                                                                                                                                                                                                                         |       | 27,226,600                 |       | 27,779,000                 |       |
| Less treasury stock, at  cost                                                                                                                                                                                                |       | (11,742,100                | )          | (11,883,700                | )          |
|                                                                                                                                                                                                                         |       | 15,484,500                 |       | 15,895,300                 |       |
|                                                                                                                                                                                                                         |       |                       |       |                       |       |
| TOTAL LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                                                                                             |       | $                          | 20,602,900 |                       | $          | 19,941,400 |   |

 

Seenotes to condensed financial statements.

 

2

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**EDUCATIONALDEVELOPMENT CORPORATION**

**CONDENSED STATEMENTS OF EARNINGS(UNAUDITED)**

 
| ** **                                                            | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                 | ** ** | **2008**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| GROSS SALES                                                           |       | $                                        | 13,401,900 |                                    | $          | 12,301,200 |   | $ | 31,631,000 |   | $ | 31,444,500 |   |
| Less discounts and  allowances                                        |       | (3,932,500                               | )          | (3,447,600                              | )          | (10,331,100 | ) | (9,557,000 | ) |
| Transportation revenue                                                |       | 547,000                                  |       | 534,600                                 |       | 1,113,000 |   | 1,243,000 |   |
| NET REVENUES                                                          |       | 10,016,400                               |       | 9,388,200                               |       | 22,412,900 |   | 23,130,500 |   |
| COST OF SALES                                                         |       | 3,534,800                                |       | 3,424,000                               |       | 8,287,600 |   | 8,581,600 |   |
| Gross margin                                                          |       | 6,481,600                                |       | 5,964,200                               |       | 14,125,300 |   | 14,548,900 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| OPERATING EXPENSES:                                                   |       |                                     |       |                                    |       |   |   |   |   |
| Operating and selling                                                 |       | 2,105,000                                |       | 2,149,800                               |       | 5,267,000 |   | 5,640,700 |   |
| Sales commissions                                                     |       | 2,410,500                                |       | 2,371,300                               |       | 4,860,600 |   | 5,296,900 |   |
| General and  administrative                                           |       | 487,100                                  |       | 416,500                                 |       | 1,520,300 |   | 1,318,400 |   |
|                                                                  |       | 5,002,600                                |       | 4,937,600                               |       | 11,647,900 |   | 12,256,000 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| OTHER INCOME                                                          |       | 4,200                                    |       | 18,200                                  |       | 31,000 |   | 40,500 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| EARNINGS BEFORE INCOME  TAXES                                         |       | 1,483,200                                |       | 1,044,800                               |       | 2,508,400 |   | 2,333,400 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| INCOME TAXES                                                          |       | 558,100                                  |       | 395,300                                 |       | 942,500 |   | 881,200 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| NET EARNINGS                                                          |       | $                                        | 925,100    |                                    | $          | 649,500 |   | $ | 1,565,900 |   | $ | 1,452,200 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| BASIC AND DILUTED  EARNINGS PER SHARE:                                |       |                                     |       |                                    |       |   |   |   |   |
| Basic                                                                 |       | $                                        | 0.24       |                                    | $          | 0.17 |   | $ | 0.41 |   | $ | 0.38 |   |
| Diluted                                                               |       | $                                        | 0.24       |                                    | $          | 0.17 |   | $ | 0.41 |   | $ | 0.38 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| WEIGHTED AVERAGE NUMBER  OF COMMON AND EQUIVALENT SHARES OUTSTANDING: |       |                                     |       |                                    |       |   |   |   |   |
| Basic                                                                 |       | 3,872,134                                |       | 3,820,864                               |       | 3,861,001 |   | 3,784,163 |   |
| Diluted                                                               |       | 3,873,296                                |       | 3,821,860                               |       | 3,862,104 |   | 3,785,317 |   |

 

See notes to condensedfinancial statements.

 

3

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**EDUCATIONAL DEVELOPMENT CORPORATION**

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

**FOR THENINE MONTHS ENDED NOVEMBER 30, 2009**

 
| ** **                           | ** ** | **Common  Stock**                | ** ** | ** ** | ** ** | ** **      | ** ** | ** **   | ** ** | ** **          | ** ** | ** ** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|------------|------------|-----------------|------------|--------------|------------|---------------------|------------|------------|------------|
| ** **                           | ** ** | **(par  value $0.20 per share)** | ** ** | ** ** | ** ** | ** **      | ** ** | ** **   | ** ** | ** **          | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Number  of**                   | ** ** | ** ** | ** ** | **Capital  in** | ** ** | ** **   | ** ** | **Treasury  Stock** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Shares**                       | ** ** | ** ** | ** ** | **Excess  of**  | ** ** | **Retained** | ** ** | **Number  of**      | ** ** | ** ** | ** ** | **Shareholders’** | ** ** |
| ** **                           | ** ** | **Issued**                       | ** ** | **Amount** | ** ** | **Par  Value**  | ** ** | **Earnings** | ** ** | **Shares**          | ** ** | **Amount** | ** ** | **Equity** | ** ** |
|                                 |       |                             |       |       |       |            |       |         |       |                |       |       |       |   |   |
| BALANCE—March 1,  2009     |       | 6,039,040                        |       | $          | 1,207,800  |            | $          | 8,508,400    |       | $                   | 18,062,800 |       | 2,200,579  |   | $ | (11,883,700 | ) | $ | 15,895,300 |   |
| Purchases of treasury  stock         |       | —                           |       | —     |       | —          |       | —       |       | 958                 |       | (4,400     | )          | (4,400 | ) |
| Sales of treasury stock              |       | —                           |       | —     |       | —          |       | —       |       | (40,804             | )          | 146,000    |       | 146,000 |   |
| Dividends ($.55/share)               |       | —                           |       | —     |       | —          |       | (2,118,300   | )          | —              |       | —     |       | (2,118,300 | ) |
| Net earnings                         |       | —                           |       | —     |       | —          |       | 1,565,900    |       | —              |       | —     |       | 1,565,900 |   |
| BALANCE—November 30,  2009 |       | 6,039,040                        |       | $          | 1,207,800  |            | $          | 8,508,400    |       | $                   | 17,510,400 |       | 2,160,733  |   | $ | (11,742,100 | ) | $ | 15,484,500 |   |

 

Seenotes to condensed financial statements.

 

4

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**

**FOR THENINE MONTHS ENDED NOVEMBER 30,**

 
| ** **                                            | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                |       | $          | 258,100    |       | $          | 3,989,600 |   |
|                                                  |       |       |       |       |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                |       |       |       |       |       |
| Purchases of property  and equipment                  |       | (2,500     | )          | (29,900    | )          |
|                                                  |       |       |       |       |       |
| Net cash used in  investing activities                |       | (2,500     | )          | (29,900    | )          |
|                                                  |       |       |       |       |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                |       |       |       |       |       |
| Cash received from  exercise of stock options         |       | —     |       | 848,700    |       |
| Cash paid to acquire  treasury stock                  |       | (4,400     | )          | (776,800   | )          |
| Cash received from sales  of treasury stock           |       | 146,000    |       | 109,000    |       |
| Borrowings under  revolving credit agreement          |       | 2,200,000  |       | —     |       |
| Payments under  revolving credit agreement            |       | (2,200,000 | )          | —     |       |
| Dividends paid                                        |       | (1,536,600 | )          | (1,526,500 | )          |
|                                                  |       |       |       |       |       |
| Net cash used in  financing activities                |       | (1,395,000 | )          | (1,345,600 | )          |
|                                                  |       |       |       |       |       |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS |       | (1,139,400 | )          | 2,614,100  |       |
|                                                  |       |       |       |       |       |
| CASH AND CASH  EQUIVALENTS—BEGINNING OF PERIOD   |       | 2,896,200  |       | 2,440,300  |       |
|                                                  |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS—END  OF PERIOD         |       | $          | 1,756,800  |       | $          | 5,054,400 |   |
|                                                  |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOWINFORMATION:     |       |       |       |       |       |
| Cash paid for interest                                |       | $          | 7,300      |       | $          | — |   |
| Cash paid for income  taxes                           |       | $          | 462,500    |       | $          | 1,215,100 |   |

 

5

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NOTES TO CONDENSEDFINANCIAL STATEMENTS (Unaudited)

 

Note 1 — The information shown with respect tothe three and nine months ended November 30, 2009 and 2008, respectively,which is unaudited, includes all adjustments which in the opinion of Managementare considered 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 andnine months ended November 30, 2009 and 2008, respectively, are notnecessarily indicative of the results to be expected at year end due toseasonality of the product sales.  Wehave evaluated all subsequent events through January 14, 2010, the datethe financial statements were issued and there is no material impact on ourfinancial statements.

 

These financial statements and notes are prepared pursuant to the rules andregulations of the Securities and Exchange Commission for interim reporting andshould be read in conjunction with the Financial Statements and accompanyingnotes contained in our Annual Report to Shareholders for the Fiscal Year ended February 28,2009.

 

Note 2 — Effective June 30, 2009 we signedan Eleventh Amendment to the Credit and Security Agreement with Arvest Bank whichprovided a reduced $2,500,000 line of credit through June 30, 2010.  Interest is payable monthly at the greater of5.00% or the Wall Street Journal prime-floating rate minus 0.75% (3.25%at November 30,2009) and borrowings are collateralized by substantially all the assets of theCompany.  At November 30, 2009the Company had no debtoutstanding under this agreement. Available credit under the revolving creditagreement was $2,500,000 at November 30, 2009.

 

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

 

Note 3 — Inventories consist of the following:

 
| ** **                      | ** ** | **2009**              | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **November 30,** | ** ** | **February 28,** | ** ** |
| Current:                        |       |                  |       |   |   |
| Book inventory                  |       | $                     | 11,304,900 |   | $ | 10,327,600 |   |
| Inventory valuation  allowance  |       | (29,500               | )          | (25,000 | ) |
|                            |       |                  |       |   |   |
| Inventories net–current    |       | $                     | 11,275,400 |   | $ | 10,302,600 |   |
|                            |       |                  |       |   |   |
| Noncurrent:                     |       |                  |       |   |   |
| Book inventory                  |       | $                     | 873,000    |   | $ | 913,000 |   |
| Inventory valuation  allowance  |       | (327,000              | )          | (345,000 | ) |
|                            |       |                  |       |   |   |
| Inventories net–noncurrent |       | $                     | 546,000    |   | $ | 568,000 |   |

 

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

 

Significantportions of our inventory purchases are concentrated with an England-basedpublishing company.  Purchases from thiscompany were approximately $1.8 million and $1.7 million for the three monthsended November 30, 2009 and 2008, respectively.  Total inventory purchases from all supplierswere approximately $2.2 million and $2.4 million for the three months ended November 30,2009 and 2008, respectively.

 

For the ninemonths ended November 30, 2009 and 2008, respectively, purchases from thiscompany were approximately $8.3 million and $5.6 million.  Total inventory purchases from all supplierswere approximately $10.8 million and $7.1 million for the same respectiveperiods.

 

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

 

6

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

#####  

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

 
| ** **                                      | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2009**                            | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Earnings  Per Share:**                        |       |                                |       |                               |       |   |   |   |   |
| Net earnings  applicable to common shareholders |       | $                                   | 925,100    |                               | $          | 649,500 |   | $ | 1,565,900 |   | $ | 1,452,200 |   |
|                                            |       |                                |       |                               |       |   |   |   |   |
| **Shares:**                                     |       |                                |       |                               |       |   |   |   |   |
|                                            |       |                                |       |                               |       |   |   |   |   |
| Weighted average  shares outstanding - basic    |       | 3,872,134                           |       | 3,820,864                          |       | 3,861,001 |   | 3,784,163 |   |
| Assumed exercise  of options                    |       | 1,162                               |       | 996                                |       | 1,103 |   | 1,154 |   |
|                                            |       |                                |       |                               |       |   |   |   |   |
| Weighted average  shares outstanding - diluted  |       | 3,873,296                           |       | 3,821,860                          |       | 3,862,104 |   | 3,785,317 |   |
|                                            |       |                                |       |                               |       |   |   |   |   |
| **Basic  Earnings Per Share**                   |       | $                                   | 0.24       |                               | $          | 0.17 |   | $ | 0.41 |   | $ | 0.38 |   |
| **Diluted  Earnings Per Share**                 |       | $                                   | 0.24       |                               | $          | 0.17 |   | $ | 0.41 |   | $ | 0.38 |   |

 

In April 2008, ourBoard of Directors authorized us to purchase up to 500,000 additional shares ofour common stock under a plan initiated in 1998. This plan has no expirationdate. During the third quarter of fiscal year 2010, we repurchased 148 sharesof common stock.  The maximum number ofshares that may be repurchased in the future is 433,194.

 

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

 

Note 6 — Freight costs and handling costsincurred are included in operating & selling expenses and were$793,500 and $801,300 for the three months ended November 30, 2009 and2008, respectively.

 

For the ninemonths ended November 30, 2009 and 2008, respectively, freight andhandling costs incurred are included in operating & selling expensesand were $1,781,200 and $1,908,300.

 

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

 

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

 

7

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Information by industry segment for the three and nine months ended November 30,2009 and 2008 follows:

 

**NET REVENUES**

 
| ** **     | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|----------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **     | ** ** | **2009**                                 | ** ** | **2008**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Publishing** |       | $                                        | 2,756,800  |                                    | $          | 2,030,800 |   | $ | 7,380,700 |   | $ | 6,267,400 |   |
| **UBAM**       |       | $                                        | 7,259,600  |                                    | $          | 7,357,400 |   | $ | 15,032,200 |   | $ | 16,863,100 |   |
| **Other**      |       | $                                        | —     |                                    | $          | — |   | $ | — |   | $ | — |   |
| **Total**      |       | $                                        | 10,016,400 |                                    | $          | 9,388,200 |   | $ | 22,412,900 |   | $ | 23,130,500 |   |

 

**EARNINGS (LOSS) BEFORE INCOME TAXES**

** **
| ** **     | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|----------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **     | ** ** | **2009**                                 | ** ** | **2008**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Publishing** |       | $                                        | 1,048,900  |                                    | $          | 671,700 |   | $ | 2,584,400 |   | $ | 2,010,900 |   |
| **UBAM**       |       | $                                        | 1,496,800  |                                    | $          | 1,326,500 |   | $ | 3,027,300 |   | $ | 3,185,500 |   |
| **Other**      |       | $                                        | (1,062,500 | )                                       | $          | (953,400 | ) | $ | (3,103,300 | ) | $ | (2,863,000 | ) |
| **Total**      |       | $                                        | 1,483,200  |                                    | $          | 1,044,800 |   | $ | 2,508,400 |   | $ | 2,333,400 |   |

 

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 June 2009 the Financial Accounting StandardsBoard (“FASB”) issued Accounting Standards Codification (“ASC”) 105, “GenerallyAccepted Accounting Principles”.  ASC 105 establishes the Codification asthe sole source of authoritative accounting principles to be applied in thepreparation of financial statements in conformity with GAAP.  The adoptionof this statement did not have a material impact on the Company’s financialposition 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 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 and More (“UBAM”), to sell theUsborne and Kane/Miller lines of children’s books.  These two divisions each have their owncustomer base.  The Publishing Divisionmarkets its products on a wholesale basis to various retail accounts.  The UBAM Division markets its products toindividual consumers as well as school and public libraries.

 

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

 

8

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**Earningsas a Percent of Net Revenues**

 
| ** **                         | ** ** | **Three Months Ended November 30,** | ** ** | **Nine Months Ended November 30,** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                         | ** ** | **2009**                                 | ** ** | **2008**                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net revenues                       |       | 100.0                                    | %          | 100.0                                   | %          | 100.0 | % | 100.0 | % |
| Cost of sales                      |       | 35.3                                     | %          | 36.5                                    | %          | 37.0 | % | 37.1 | % |
| Gross margin                       |       | 64.7                                     | %          | 63.5                                    | %          | 63.0 | % | 62.9 | % |
| Operating expenses:                |       |                                     |       |                                    |       |   |   |   |   |
| Operating &  selling      |       | 21.0                                     | %          | 22.9                                    | %          | 23.5 | % | 24.4 | % |
| Sales commissions                  |       | 24.1                                     | %          | 25.3                                    | %          | 21.7 | % | 22.9 | % |
| General &  administrative |       | 4.9                                      | %          | 4.4                                     | %          | 6.8 | % | 5.7 | % |
| Total operating  expenses          |       | 50.0                                     | %          | 52.6                                    | %          | 52.0 | % | 53.0 | % |
| Income from operations             |       | 14.7                                     | %          | 10.9                                    | %          | 11.0 | % | 9.9 | % |
| Other income                       |       | 0.0                                      | %          | 0.2                                     | %          | 0.2 | % | 0.2 | % |
| Earnings before income  taxes      |       | 14.7                                     | %          | 11.1                                    | %          | 11.2 | % | 10.1 | % |
| Income taxes                       |       | 5.5                                      | %          | 4.2                                     | %          | 4.2 | % | 3.8 | % |
| Net earnings                       |       | 9.2                                      | %          | 6.9                                     | %          | 7.0 | % | 6.3 | % |

 

## **Operating Results for the ThreeMonths Ended November 30, 2009**

##  

Weearned income before income taxes of $1,483,200 for the three months ended November 30,2009 compared with $1,044,800 for the three months ended November 30,2008.

 

## **Revenues**

 
| ** **                            | ** ** | **For  the Three Months Ended November 30,** | ** ** | **$ Increase/** | ** ** | **%  Increase/** | ** ** |
|---------------------------------------|------------|---------------------------------------------------|------------|----------------------|------------|------------------|------------|
| ** **                            | ** ** | **2009**                                          | ** ** | **2008**             | ** ** | **(decrease)**   | ** ** | **(decrease)** | ** ** |
| Gross sales                           |       | $                                                 | 13,401,900 |                 | $          | 12,301,200       |       | $ | 1,100,700 |   | 8.9 | % |
| Less  discounts & allowances |       | (3,932,500                                        | )          | (3,447,600           | )          | (484,900         | )          | 14.1 | % |
| Transportation revenue                |       | 547,000                                           |       | 534,600              |       | 12,400           |       | 2.3 | % |
| Net revenues                          |       | $                                                 | 10,016,400 |                 | $          | 9,388,200        |       | $ | 628,200 |   | 6.7 | % |

 

The UBAM Division’s gross sales decreased $402,300 during the threemonth period ending November 30,2009 when compared with the same quarterly period a year ago.  This decrease consists primarily of decreasesin 12% school and library sales, offset by an increase in internet sales of 19%and a 5% increase in direct sales.  Homeparties remained flat between periods. The decline in school and library sales is attributed to a 27% declinein the total number of orders offset by a 10% increase in the average ordersize.

 

The Publishing Division’s gross sales increased $1,503,000 during thethree month period ending November 30,2009 when compared with the same quarterly period a year ago.  We attribute this to a 54.5% increase insales to major national accounts, a 28.4% increase in inside sales accounts anda 27.9% increase in sales to smaller retail stores.

 

TheUBAM Division’s discounts and allowances were $1,008,500 and $1,303,300 for thequarterly periods ended November 30, 2009 and 2008, respectively.  The UBAM Divisionis a multi-level selling organization that markets its products throughindependent sales representatives (“consultants”). Sales are made to individualpurchasers and school and public libraries. Most sales in the UBAM Division are at retail.  As a part of the UBAM Division’s marketingprograms, discounts between 40% and 50% of retail are offered on selected itemsat various times throughout the year. The discounts and allowances in the UBAM Division will vary from year toyear depending upon the marketing programs in place during any given year. The UBAM Division’s discounts and allowances were 13.0% and 16.0% ofUBAM’s gross sales for the quarterly periods ended November 30, 2009 and2008, respectively.

 

The Publishing Division’s discounts and allowances are a muchlarger percentage of gross sales than discounts and allowances in the UBAMDivision due to the different customer markets that each division targets.  The Publishing Division’sdiscounts and allowances were $2,924,000 and $2,144,300 for the quarterlyperiods ended November 30, 2009 and 2008, 

 

9

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respectively. The PublishingDivision sells to retail book chains, regional and local bookstores, toy andgift stores, school supply stores and museums. To be competitive with other wholesale book distributors, the PublishingDivision sells at discounts between 48% and 55% of the retail price, based uponthe quantity of books ordered and the dollar amount of the order.  The Publishing Division’s discounts and allowanceswere 51.6% of Publishing’s gross sales for the quarterly period ended November 30,2009 and 51.5% for the quarterly period ended November 30, 2008.

 

## **Expenses**

 
| ** **                         | ** ** | **For  Three Months Ended November 30,** | ** ** | **$ Increase/** | ** ** | **%  Increase/** | ** ** |
|------------------------------------|------------|-----------------------------------------------|------------|----------------------|------------|------------------|------------|
| ** **                         | ** ** | **2009**                                      | ** ** | **2008**             | ** ** | **(decrease)**   | ** ** | **(decrease)** | ** ** |
| Cost of sales                      |       | $                                             | 3,534,800  |                 | 3,424,000  |             | $          | 110,800 |   | 3.2 | % |
| Operating &  selling      |       | 2,105,000                                     |       | 2,149,800            |       | (44,800          | )          | (2.1 | )% |
| Sales commissions                  |       | 2,410,500                                     |       | 2,371,300            |       | 39,200           |       | 1.7 | % |
| General &  administrative |       | 487,100                                       |       | 416,500              |       | 70,600           |       | 17.0 | % |
| Total                              |       | $                                             | 8,537,400  |                 | $          | 8,361,600        |       | $ | 175,800 |   | 2.1 | % |
|                                    |            |                                               |            |                      |            |                  |            |  |  |  |  |  |

 

Cost of sales increased3.2% for the three months ended November 30, 2009 when compared with thethree months ended November 30, 2008. Cost of sales as a percentage of gross sales was 26.4% for the threemonths ended November 30, 2009 and for the three months ended November 30,2008 was 27.8%.  Cost of sales is the inventory costof the product sold, which includes the cost of the product itself and inboundfreight charges.  Purchasing andreceiving costs, inspection costs, warehousing costs, and other costs of ourdistribution network are included in operating and selling expenses, not incost of sales.  These costs totaled$306,000 in the quarter ended November 30, 2009 and $289,200 in thequarter ended November 30, 2008.

 

In addition to costs associated with our distribution network(noted above), operating and selling costs include expenses of the PublishingDivision, the UBAM Division and the order entry and customer service functions. Operating and selling expenses as a percentageof gross sales were 15.7% for the quarter ended November 30, 2009 and17.5% for the quarter ended November 30, 2008.

 

Sales commissions in the Publishing Divisionincreased 41.4% to $47,800 for the three months ended November 30,2009.  Publishing Division sales commissions arepaid on net sales and were 1.7% of net sales for the three months ended November 30,2009 and 1.7% of net sales for thethree months ended November 30, 2008.  Sales commissions in thePublishing Division fluctuate depending upon the amount of sales made to our “houseaccounts,” which are the Publishing Division’s largest customers and do nothave any commission expense associated with them, and sales made by our outsidesales representatives.

 

Sales commissions in the UBAM Divisionincreased minimally to $2,362,700 for the three months ended November 30,2009 as a result of increases ininternet sales, home show sales and direct sales.  UBAM Division sales commissions are paid onretail sales and were 40.1% of retail sales for the three months ended November 30,2009 and 36.3% of retail sales for thethree months ended November 30, 2008.  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 37.6% and 37.8% for the quarterly periods ended November 30, 2009 and 2008,respectively.  These rates are higherthan the federal statutory rate due to state income taxes.

 

**Operating Results for the Nine Months Ended November 30,2009**

 

We earned income before income taxes of $2,508,400for the nine months ended November 30, 2009 compared with $2,333,400 forthe nine months ended November 30, 2008.

 

10

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**Revenues**

 
| ** **                            | ** ** | **For  the Nine Months Ended November 30,** | ** ** | **$ Increase/** | ** ** | **%  Increase/** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|----------------------|------------|------------------|------------|
| ** **                            | ** ** | **2009**                                         | ** ** | **2008**             | ** ** | **(decrease)**   | ** ** | **(decrease)** | ** ** |
| Gross sales                           |       | $                                                | 31,631,000 |                 | $          | 31,444,500       |       | $ | 186,500 |   | 0.6 | % |
| Less  discounts & allowances |       | (10,331,100                                      | )          | (9,557,000           | )          | (774,100         | )          | 8.1 | % |
| Transportation revenue                |       | 1,113,000                                        |       | 1,243,000            |       | (130,000         | )          | (10.5 | )% |
| Net revenues                          |       | $                                                | 22,412,900 |                 | $          | 23,130,500       |       | $ | (717,600 | ) | (3.1 | )% |

 

The UBAM Division’s gross sales decreased 11.0% or$2,043,400 during the nine month period ending November 30, 2009 whencompared with the same nine month period a year ago.  This decrease consists of a 12% decrease inschool and library sales, an 8% decrease in each of home party sales andInternet sales and a 4% decrease in direct sales.  The decline in home party sales is attributedprimarily to a 6.0% decline in the total number of home show orders and a 2.2%decrease in average per order sales.

 

The Publishing Division’s gross sales increased by17.3% or $2,229,900 during the nine month period ending November 30, 2009when compared with the same nine month period a year ago.  We attribute this to a 38.3% increase insales to the national chains, a 21.4% increase in sales to smaller retailstores and a 9.3% increase in inside sales accounts.

 

The UBAM Division’s discounts and allowances were$2,527,300 and $2,872,100 for the nine month periods ended November 30,2009 and 2008, respectively.  The UBAMDivision is a multi-level selling organization that markets its productsthrough independent sales representatives (“consultants”). Sales are made toindividual purchasers and school and public libraries.  Most sales in the UBAM Division are atretail.  As a part of the UBAM Division’smarketing programs, discounts between 40% and 50% of retail are offered on selecteditems at various times throughout the year. The discounts and allowances in the UBAM Division will vary from year toyear depending upon the marketing programs in place during any given year.  The UBAM Division’s discounts and allowanceswere 15.3% of UBAM’s gross sales for the nine month period ended November 30,2009 and 15.5% for the nine month period ended November 30, 2008.

 

The Publishing Division’s discounts and allowancesare a much larger percentage of gross sales than discounts and allowances inthe UBAM Division due to the different customer markets that each divisiontargets.  The Publishing Division’sdiscounts and allowances were $7,803,800 and $6,684,900 for the nine monthperiods ended November 30, 2009 and 2008, respectively.  The Publishing Division sells to retail bookchains, regional and local bookstores, toy and gift stores, school supplystores and museums.  To be competitivewith other wholesale book distributors, the Publishing Division sells atdiscounts between 48% and 55% of the retail price, based upon the quantity ofbooks ordered and the dollar amount of the order.  The Publishing Division’s discounts andallowances were 51.5% of Publishing’s gross sales for the nine month periodended November 30, 2009 and 51.7% for the nine month period ended November 30,2008.

 

**Expenses**

 
| ** **                         | ** ** | **For  the Nine Months Ended November 30,** | ** ** | **$ Increase/** | ** ** | **%  Increase/** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|----------------------|------------|------------------|------------|
| ** **                         | ** ** | **2009**                                         | ** ** | **2008**             | ** ** | **(decrease)**   | ** ** | **(decrease)** | ** ** |
| Cost of sales                      |       | 8,287,600                                        |       | $                    | 8,581,600  |             | $          | (294,000 | ) | (3.4 | )% |
| Operating &  selling      |       | 5,267,000                                        |       | 5,640,700            |       | (373,700         | )          | (6.6 | )% |
| Sales commissions                  |       | 4,860,600                                        |       | 5,296,900            |       | (436,300         | )          | (8.2 | )% |
| General &  administrative |       | 1,520,300                                        |       | 1,318,400            |       | 201,900          |       | 15.3 | % |
| Total                              |       | $                                                | 19,935,500 |                 | $          | 20,837,600       |       | $ | (902,100 | ) | (4.3 | )% |
|                                    |            |                                                  |            |                      |            |                  |            |  |  |  |  |  |

 

Cost of sales decreased 3.4% for the nine monthsended November 30, 2009 when compared with the nine months ended November 30,2008, consistent with the decrease in net sales for the period.  Cost of sales as a percentage of gross saleswas 26.2% for the nine months ended November 30, 2009 and for the ninemonths ended November 30, 2008 was 27.8%. Cost of sales is the inventory cost of the product sold, which includesthe 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 $867,200 in the nine months ended November 30,2009 and $847,000 in the nine months ended November 30, 2008.  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.

 

11

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In addition to costs associated with ourdistribution network (noted above), operating and selling costs includeexpenses of the Publishing Division, the UBAM Division and the order entry andcustomer service functions.  Operatingand selling expenses as a percentage of gross sales were 16.7% for the ninemonths ended November 30, 2009 and 17.9% for the nine months ended November 30,2008.

 

Sales commissions in the Publishing Divisionincreased 25.1% to $134,000 for the nine months ended November 30,2009.  Publishing Division salescommissions are paid on net sales and were 1.8% of net sales for the ninemonths ended November 30, 2009 and 1.7% of net sales for the nine monthsended November 30, 2008.  Salescommissions in the Publishing Division will fluctuate depending upon the amountof sales made to our “house accounts,” which are the Publishing Division’slargest customers and do not have any commission expense associated with them,and sales made by our outside sales representatives.

 

Sales commissions in the UBAM Division decreased8.9% to $4,726,600 for the nine months ended November 30, 2009, the directresult of decreased sales from home shows and school and library sales in thisdivision.  UBAM Division salescommissions are paid on retail sales and were 39.1% of retail sales for thenine months ended November 30, 2009 and 35.1% of retail sales for the ninemonths ended November 30, 2008.  Thefluctuation in the percentages of commission expense to retail sales is theresult of the type of sale.  Home shows,book fairs, school and library sales and direct sales have different commissionrates.  Also contributing to thefluctuations in the percentages is the payment of overrides and bonuses, bothdependent on consultants’ monthly sales and downline sales.

 

Our effective tax rate was 37.6% for the nine monthperiod ended November 30, 2009 and 37.7% for the nine month period ended November 30,2008.  These rates are higher than thefederal statutory rate due to state income taxes.

 

**Liquidity and Capital Resources**

 

Our primary sourceof cash is typically operating cash flow. Typically, our primary uses of cash are to repurchase outstanding sharesof stock, pay dividends and purchase property and equipment.  We utilize our bank credit facility to meetour short-term cash needs when necessary.

 

Our Board of Directors has adopted a stock repurchase plan inwhich we may purchase up to a total of 3,000,000 shares as market conditionswarrant.  Management believes the stockis undervalued and when stock becomes available at an attractive price, we willutilize free cash flow to repurchase shares. Management believes this enhances the value to the remainingstockholders and that these repurchases will have no adverse effect on ourshort-term and long-term liquidity.  Werepurchased 148 shares at a cost of $700 during the quarter ended November 30,2009.

 

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

 

Forthe nine months ended November 30, 2009, we experienced a positive cashflow from operating activities of $258,100. Cash flow from operating activities resulted from net income after taxesof $1,565,900 and increases in current liabilities of $470,600, offset byincreases in inventory of $950,800 and accounts receivable of $944,300.

 

Webelieve that in fiscal year 2010 we will experience a positive cash flow andthat this positive cash flow along with the bank credit facility will beadequate to meet our liquidity requirements for the foreseeable future.

 

Weestimate that total cash used in investing activities for fiscal year 2010 willbe less than $200,000.  This wouldconsist of software and hardware enhancements to our existing data processingequipment, property improvements and additional warehouse equipment.

 

Forthe nine months ended November 30, 2009, cash used in financing activitieswas $1,395,000 from dividend payments of $1,536,600, revolving credit paymentsof $2,200,000 and the purchase of $4,400 of treasury stock, offset by revolvingcredit borrowings of $2,200,000 and the sale of $146,000 in treasury stock.

 

Asof November 30, 2009 we did not have any commitments in excess of oneyear.

 

12

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## **Bank CreditAgreement**

 

Effective June 30,2009, we signed an Eleventh Amendment to the Credit and Security Agreement withArvest Bank which provided a reduced $2,500,000 line of credit through June 30,2010.  Interest is payable monthly at thegreater of 5.00% or the Wall Street Journal prime-floating rate minus0.75% (3.25% at November 30, 2009) and borrowings are collateralized bysubstantially all of our assets. At November 30, 2009 we had no debtoutstanding under this agreement. Available credit under the revolving credit agreement was $2,500,000 at November 30, 2009.

 

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

 

**Critical AccountingPolicies**

 

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

 

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

 

**RevenueRecognition**

 

Sales are recognized and recorded when products are shipped.  Products are shipped FOB shipping point. The UBAM Division’s sales are paid before the product is shipped.  These sales accounted for 72.5% of net revenues for the quarter ended November 30, 2009 and 78.4% for the quarter ended November 30, 2008.  The provisions of the Accounting Standards Codification 605 “Revenue Recognition” (ASC 605) have been applied, and as a result, a reserve is provided for estimated future sales returns.

 

Estimated allowances for sales returns are recorded as sales are recognized and recorded.  Management uses a moving average calculation to estimate the allowance for sales returns.  We are not responsible for product damaged in transit.  Damaged returns are primarily from the retail stores.  The damages occur in the stores, not in shipping to the stores.  It is industry practice to accept returns from wholesale customers.  Transportation revenue, the amount billed to the customer for shipping the product, is recorded when products are shipped.  Management has estimated and included a reserve for sales returns of $100,000 as of November 30, 2009 and $84,000 as of February 28, 2009.

 

**Allowance for Doubtful Accounts**

 

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends.  If the actual uncollected amounts significantly exceed the estimated allowance, then our operating results would be significantly adversely affected.  Management has estimated and included an allowance for doubtful accounts of $122,100 and $92,900 as of November 30, 2009 and February 28, 2009, respectively.

 

**Inventory**

 

Management continuallyestimates and calculates the amount of non-current inventory.  Non-current inventory arises due tooccasionally purchasing book inventory in quantities in excess of what will besold within the normal operating cycle due to minimum order requirements of ourprimary supplier.  Non-current inventorywas estimated by management using the current year 

 

13

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turnover ratio by title.  All inventory in excess of 2 1/2 years of anticipated sales was classified asnoncurrent inventory. Noncurrent inventory balances, before valuationallowance, were $873,000 at November 30, 2009 and $913,000 at February 28,2009.

 

Inventories are presented net of a valuationallowance.  Management has estimated andincluded a valuation allowance for both current and noncurrent inventory.  This allowance is based on management’sidentification of slow moving inventory on hand.  Management has estimated a valuationallowance for both current and noncurrent inventory of $356,500 and $370,000 asof November 30, 2009 and February 28, 2009, respectively.

 

**Stock-Based Compensation**

 

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

 

Item 3     QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We do not have anymaterial market risk.

 

Item 4     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 November 30, 2009. This evaluation was conductedunder the supervision and with the participation of our management, includingour Chief Executive Officer and our Controller/Corporate Secretary (PrincipalFinancial and Accounting Officer).

 

Based on thatevaluation, these officers concluded that our disclosure controls andprocedures were effective pursuant to Exchange Act Rule 13a-15(e).

 

PART II. OTHERINFORMATION

 

Item 1     LEGALPROCEEDINGS

 

Not Applicable.

 

Item 1A  RISKFACTORS

 

Notrequired by smaller reporting company.

 

14

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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 November 30,2009.

 

ISSUER PURCHASESOF EQUITY SECURITIES

 
| **Period**                   | ** ** | **Total  # of Shares  Purchased** | ** ** | **Average  Price  Paid per Share** | ** ** | **Total  # of Shares  Purchased as  Part of Publicly  Announced Plan (1)** | ** ** | **Maximum  # of  Shares that May  be Repurchased  under the Plan  (2) (3)** | ** ** |
|------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
|                         |       |                              |       |                               |       |                                                                            |       |                                                                             |       |
| September 1 - 30,  2009 |       | —                            |       | N/A                                |       | —                                                                          |       | 433,342                                                                          |       |
| October 1 - 31,  2009   |       | 148                               |       | $                                  | 5.05       |                                                                            | 148        |                                                                             | 433,194    |   |
| November 1 - 30,  2009  |       | —                            |       | N/A                                |       | —                                                                          |       | 433,194                                                                          |       |
| Total                        |       | 148                               |       | $                                  | 5.05       |                                                                            | 148        |                                                                             |       |   |

 

----

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

 

(2)             In April 2008the Board of Directors authorized us to purchase up to an additional 500,000shares of our common stock under a repurchase plan.  Pursuant to the plan, we may purchase a totalof 433,194 additional shares of our common stock until 3,000,000 shares havebeen repurchased.

 

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

 

Item 3     DEFAULTSUPON SENIOR SECURITIES

 

Not Applicable.

 

Item 4     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Not Applicable.

 

Item 5     OTHERINFORMATION

 

None

 

Item 6     EXHIBITS

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

 

15

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#### **SIGNATURES**

 

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

 

 

EDUCATIONAL DEVELOPMENTCORPORATION

(Registrant)

 

 
| Date:  | January 14, 2010 |   | By               | /s/ Randall W. White |
|--------|-----------------------|--------|------------------|----------------------|
|   |                  |   | Randall W. White |
|   |                  |   | President        |

 

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EXHIBIT INDEX

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

 

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