**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 August 31,2009**

 

**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**

 

# **EDUCATIONALDEVELOPMENT 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-2of the Exchange Act)  Yes o  No x

 

As of October 12, 2009 there were 3,872,130 shares of EducationalDevelopment Corporation Common Stock, $0.20 par value outstanding.

 

 

 

----

 

PART I.  FINANCIAL INFORMATION

ITEM 1

 

**EDUCATIONALDEVELOPMENT CORPORATION**

**CONDENSED BALANCE SHEETS(UNAUDITED)**

 
| ** **                                                                                                                                                                                                               | ** ** | **August 31,  2009** | ** ** | **February 28,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                               |       |                      |       |                        |       |
|                                                                                                                                                                                                                     |       |                      |       |                        |       |
| CURRENT ASSETS:                                                                                                                                                                                                          |       |                      |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                |       | $                         | 257,600    |                        | $          | 2,896,200 |   |
| Accounts receivable, less allowance for  doubtful accounts and sales returns $211,800 (August 31) and $176,900  (February 28)                                                                                  |       | 3,551,400                 |       | 3,253,000                   |       |
| Inventories—Net                                                                                                                                                                                                     |       | 13,029,300                |       | 10,302,600                  |       |
| Prepaid expenses and other assets                                                                                                                                                                                        |       | 274,100                   |       | 306,800                     |       |
| Deferred income taxes                                                                                                                                                                                                    |       | 259,100                   |       | 225,500                     |       |
| Total current assets                                                                                                                                                                                                     |       | 17,371,500                |       | 16,984,100                  |       |
|                                                                                                                                                                                                                     |       |                      |       |                        |       |
| INVENTORIES—Net                                                                                                                                                                                                     |       | 554,000                   |       | 568,000                     |       |
|                                                                                                                                                                                                                     |       |                      |       |                        |       |
| PROPERTY, PLANT AND EQUIPMENT—Net                                                                                                                                                                                   |       | 2,209,500                 |       | 2,278,400                   |       |
|                                                                                                                                                                                                                     |       |                      |       |                        |       |
| OTHER ASSETS                                                                                                                                                                                                             |       | 60,400                    |       | 60,400                      |       |
| DEFERRED INCOME TAXES                                                                                                                                                                                                    |       | 32,700                    |       | 50,500                      |       |
|                                                                                                                                                                                                                     |       |                      |       |                        |       |
| TOTAL ASSETS                                                                                                                                                                                                             |       | $                         | 20,228,100 |                        | $          | 19,941,400 |   |
|                                                                                                                                                                                                                     |       |                      |       |                        |       |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                                                                                                           |       |                      |       |                        |       |
|                                                                                                                                                                                                                     |       |                      |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                     |       |                      |       |                        |       |
| Accounts payable                                                                                                                                                                                                         |       | $                         | 3,805,000  |                        | $          | 2,653,200 |   |
| Accrued salaries and commissions                                                                                                                                                                                         |       | 535,900                   |       | 504,500                     |       |
| Revolving credit agreement                                                                                                                                                                                               |       | 152,400                   |       | —                      |       |
| Current maturities of long-term debt                                                                                                                                                                                     |       | 150,000                   |       | 150,000                     |       |
| Income taxes payable                                                                                                                                                                                                     |       | 42,400                    |       | 102,200                     |       |
| Other current liabilities                                                                                                                                                                                                |       | 275,900                   |       | 486,200                     |       |
| Total current liabilities                                                                                                                                                                                                |       | 4,961,600                 |       | 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 (August 31) and 6,039,040  (February 28) shares; Outstanding 3,872,130 (August 31) and  3,838,461 (February 28) shares |       | 1,207,800                 |       | 1,207,800                   |       |
| Capital in excess of par value                                                                                                                                                                                           |       | 8,508,400                 |       | 8,508,400                   |       |
| Retained earnings                                                                                                                                                                                                        |       | 17,167,000                |       | 18,062,800                  |       |
|                                                                                                                                                                                                                     |       | 26,883,200                |       | 27,779,000                  |       |
| Less treasury stock, at cost                                                                                                                                                                                             |       | (11,766,700               | )          | (11,883,700                 | )          |
|                                                                                                                                                                                                                     |       | 15,116,500                |       | 15,895,300                  |       |
|                                                                                                                                                                                                                     |       |                      |       |                        |       |
| TOTAL LIABILITIES AND SHAREHOLDERS’  EQUITY                                                                                                                                                                         |       | $                         | 20,228,100 |                        | $          | 19,941,400 |   |

 

See notes tocondensed financial statements.

 

2

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)**

 
| ** **                                                            | ** ** | **Three  Months Ended August 31,** | ** ** | **Six  Months Ended August 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                | ** ** | **2008**                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                  |       |                                    |       |                                  |       |   |   |   |   |
| GROSS SALES                                                           |       | $                                       | 9,476,000  |                                  | $          | 9,327,100 |   | $ | 18,229,100 |   | $ | 19,143,300 |   |
| Less discounts and allowances                                         |       | (3,758,200                              | )          | (3,317,100                            | )          | (6,398,600 | ) | (6,109,400 | ) |
| Transportation revenue                                                |       | 288,100                                 |       | 357,500                               |       | 566,000 |   | 708,400 |   |
| NET REVENUES                                                          |       | 6,005,900                               |       | 6,367,500                             |       | 12,396,500 |   | 13,742,300 |   |
| COST OF SALES                                                         |       | 2,452,600                               |       | 2,486,500                             |       | 4,752,800 |   | 5,157,600 |   |
| Gross margin                                                          |       | 3,553,300                               |       | 3,881,000                             |       | 7,643,700 |   | 8,584,700 |   |
|                                                                  |       |                                    |       |                                  |       |   |   |   |   |
| OPERATING EXPENSES:                                                   |       |                                    |       |                                  |       |   |   |   |   |
| Operating and selling                                                 |       | 1,578,500                               |       | 1,648,700                             |       | 3,162,000 |   | 3,490,900 |   |
| Sales commissions                                                     |       | 1,088,100                               |       | 1,258,500                             |       | 2,450,100 |   | 2,925,600 |   |
| General and administrative                                            |       | 527,300                                 |       | 461,100                               |       | 1,033,200 |   | 901,900 |   |
|                                                                  |       | 3,193,900                               |       | 3,368,300                             |       | 6,645,300 |   | 7,318,400 |   |
|                                                                  |       |                                    |       |                                  |       |   |   |   |   |
| OTHER INCOME (EXPENSE)                                                |       | (200                                    | )          | 7,900                                 |       | 26,800 |   | 22,300 |   |
|                                                                  |       |                                    |       |                                  |       |   |   |   |   |
| EARNINGS BEFORE INCOME TAXES                                          |       | 359,200                                 |       | 520,600                               |       | 1,025,200 |   | 1,288,600 |   |
|                                                                  |       |                                    |       |                                  |       |   |   |   |   |
| INCOME TAXES                                                          |       | 133,800                                 |       | 197,600                               |       | 384,400 |   | 485,900 |   |
|                                                                  |       |                                    |       |                                  |       |   |   |   |   |
| NET EARNINGS                                                          |       | $                                       | 225,400    |                                  | $          | 323,000 |   | $ | 640,800 |   | $ | 802,700 |   |
|                                                                  |       |                                    |       |                                  |       |   |   |   |   |
| BASIC AND DILUTED EARNINGS PER SHARE:                                 |       |                                    |       |                                  |       |   |   |   |   |
| Basic                                                                 |       | $                                       | 0.06       |                                  | $          | 0.08 |   | $ | 0.17 |   | $ | 0.21 |   |
| Diluted                                                               |       | $                                       | 0.06       |                                  | $          | 0.08 |   | $ | 0.17 |   | $ | 0.21 |   |
|                                                                  |       |                                    |       |                                  |       |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF COMMON AND  EQUIVALENT SHARES OUTSTANDING: |       |                                    |       |                                  |       |   |   |   |   |
| Basic                                                                 |       | 3,867,023                               |       | 3,826,869                             |       | 3,855,435 |   | 3,765,812 |   |
| Diluted                                                               |       | 3,868,155                               |       | 3,828,075                             |       | 3,856,507 |   | 3,767,045 |   |

 

See notes to condensed financialstatements.

 

3

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**EDUCATIONALDEVELOPMENT CORPORATION**

**CONDENSED STATEMENT OFCHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)**

**FOR THE SIX MONTHS ENDEDAUGUST 31, 2009**

 
| ** **                        | ** ** | **Common Stock**                 | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **         | ** ** | ** ** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|------------|------------|----------------|------------|--------------|------------|--------------------|------------|------------|------------|
| ** **                        | ** ** | **(par value $0.20 per  share)** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Number of**                    | ** ** | ** ** | ** ** | **Capital in** | ** ** | ** **   | ** ** | **Treasury Stock** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Shares**                       | ** ** | ** ** | ** ** | **Excess of**  | ** ** | **Retained** | ** ** | **Number of**      | ** ** | ** ** | ** ** | **Shareholders’** | ** ** |
| ** **                        | ** ** | **Issued**                       | ** ** | **Amount** | ** ** | **Par Value**  | ** ** | **Earnings** | ** ** | **Shares**         | ** ** | **Amount** | ** ** | **Equity** | ** ** |
|                              |       |                             |       |       |       |           |       |         |       |               |       |       |       |   |   |
| BALANCE—March 1, 2009   |       | 6,039,040                        |       | $          | 1,207,800  |           | $          | 8,508,400    |       | $                  | 18,062,800 |       | 2,200,579  |   | $ | (11,883,700 | ) | $ | 15,895,300 |   |
| Purchases of treasury stock       |       | —                           |       | —     |       | —         |       | —       |       | 810                |       | (3,700     | )          | (3,700 | ) |
| Sales of treasury stock           |       | —                           |       | —     |       | —         |       | —       |       | (34,479            | )          | 120,700    |       | 120,700 |   |
| Dividends paid ($.40/share)       |       | —                           |       | —     |       | —         |       | (1,536,600   | )          | —             |       | —     |       | (1,536,600 | ) |
| Net earnings                      |       | —                           |       | —     |       | —         |       | 640,800      |       | —             |       | —     |       | 640,800 |   |
| BALANCE—August 31, 2009 |       | 6,039,040                        |       | $          | 1,207,800  |           | $          | 8,508,400    |       | $                  | 17,167,000 |       | 2,166,910  |   | $ | (11,766,700 | ) | $ | 15,116,500 |   |

 

See notes tocondensed financial statements.

 

4

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSED STATEMENTS OFCASH FLOWS (UNAUDITED)**

**FOR THE SIX MONTHS ENDEDAUGUST 31,**

 
| ** **                                            | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                 |       | $          | (1,371,400 | )          | $          | 2,040,800 |   |
|                                                  |       |       |       |       |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                 |       |       |       |       |       |
| Purchases of property and equipment                   |       | —     |       | (29,900    | )          |
|                                                  |       |       |       |       |       |
| Net cash used in investing activities                 |       | —     |       | (29,900    | )          |
|                                                  |       |       |       |       |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                 |       |       |       |       |       |
| Cash received from exercise of stock  options         |       | —     |       | 848,700    |       |
| Cash paid to acquire treasury stock                   |       | (3,700     | )          | (766,700   | )          |
| Cash received from sale of treasury  stock            |       | 120,700    |       | 95,400     |       |
| Borrowings under revolving credit  agreement          |       | 1,000,000  |       | —     |       |
| Payments under revolving credit  agreement            |       | (847,600   | )          | —     |       |
| Dividends paid                                        |       | (1,536,600 | )          | (1,526,500 | )          |
|                                                  |       |       |       |       |       |
| Net cash used in financing activities                 |       | (1,267,200 | )          | (1,349,100 | )          |
|                                                  |       |       |       |       |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS |       | (2,638,600 | )          | 661,800    |       |
|                                                  |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS—BEGINNING OF  PERIOD   |       | 2,896,200  |       | 2,440,300  |       |
|                                                  |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS—END OF PERIOD          |       | $          | 257,600    |       | $          | 3,102,100 |   |
|                                                  |       |       |       |       |       |
|                                                  |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:     |       |       |       |       |       |
| Cash paid for income taxes                            |       | $          | 460,000    |       | $          | 440,100 |   |

 

See notes to condensed financialstatements.

 

5

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NOTES TO CONDENSEDFINANCIAL STATEMENTS (Unaudited)

 

Note 1 – The information shown withrespect to the three and six months ended August 31, 2009 and 2008,respectively, which is unaudited, includes all adjustments which in the opinionof Management are considered to be necessary for a fair presentation ofearnings for such periods.  Theadjustments reflected in the financial statements represent normal recurringadjustments.  The results of operationsfor the three and six months ended August 31, 2009 and 2008, respectively,are not necessarily indicative of the results to be expected at year end due toseasonality of the product sales.  Wehave evaluated all subsequent events through October 15, 2009, 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 Bankwhich 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 August 31, 2009) and borrowings are collateralized bysubstantially all the assets of the Company. At August 31, 2009the Company had $152,400 outstanding underthis agreement. Available credit under the revolving credit agreement was$2,347,600 at August 31, 2009.

 

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

 

Note 3 – Inventories consist of the following:

 
| ** **                      | ** ** | **2009**            | ** ** |
|---------------------------------|------------|---------------------|------------|
| ** **                      | ** ** | **August 31,** | ** ** | **February 28,** | ** ** |
| Current:                        |       |                |       |   |   |
| Book inventory                  |       | $                   | 13,057,300 |   | $ | 10,327,600 |   |
| Inventory valuation allowance   |       | (28,000             | )          | (25,000 | ) |
|                            |       |                |       |   |   |
| Inventories net—current    |       | $                   | 13,029,300 |   | $ | 10,302,600 |   |
|                            |       |                |       |   |   |
| Noncurrent:                     |       |                |       |   |   |
| Book inventory                  |       | $                   | 854,000    |   | $ | 913,000 |   |
| Inventory valuation allowance   |       | (300,000            | )          | (345,000 | ) |
|                            |       |                |       |   |   |
| Inventories net—noncurrent |       | $                   | 554,000    |   | $ | 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 $3.1 million and $2.0 million for the three monthsended August 31, 2009 and 2008, respectively.  Total inventory purchases from all supplierswere approximately $4.4 million and $2.7 million for the three months ended August 31,2009 and 2008, respectively.

 

For the six monthsended August 31, 2009 and 2008, respectively, purchases from this companywere approximately $6.5 million and $3.8 million.  Total inventory purchases from all supplierswere approximately $8.6 million and $4.7 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 August 31,** | ** ** | **Six Months Ended August 31,** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **2009**                          | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                     |       |                              |       |                            |       |   |   |   |   |
| **Earnings Per Share:**                        |       |                              |       |                            |       |   |   |   |   |
|                                           |       |                              |       |                            |       |   |   |   |   |
| Net earnings applicable to common shareholders |       | $                                 | 225,400    |                            | $          | 323,000 |   | $ | 640,800 |   | $ | 802,700 |   |
| ** **                                     | ** ** | ** **                        | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Shares:**                                    | ** ** | ** **                        | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                           |       |                              |       |                            |       |   |   |   |   |
| Weighted average shares outstanding - basic    |       | 3,867,023                         |       | 3,826,869                       |       | 3,855,435 |   | 3,765,812 |   |
| Assumed exercise of options                    |       | 1,132                             |       | 1,206                           |       | 1,072 |   | 1,233 |   |
|                                           |       |                              |       |                            |       |   |   |   |   |
| Weighted average shares outstanding - diluted  |       | 3,868,155                         |       | 3,828,075                       |       | 3,856,507 |   | 3,767,045 |   |
| ** **                                     | ** ** | ** **                        | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic Earnings Per Share**                   |       | $                                 | 0.06       |                            | $          | 0.08 |   | $ | 0.17 |   | $ | 0.21 |   |
| **Diluted Earnings Per Share**                 |       | $                                 | 0.06       |                            | $          | 0.08 |   | $ | 0.17 |   | $ | 0.21 |   |

 

In April 2008, ourBoard of Directors authorized us to purchase up to 500,000 additional shares ofour common stock under a plan initiated in 1998. This plan has no expirationdate. During the second quarter of fiscal year 2010, we repurchased 173 sharesof common stock.  The maximum number ofshares that may be repurchased in the future is 433,342.

 

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$509,100 and $537,400 for the three months ended August 31, 2009 and 2008,respectively.

 

For the six monthsended August 31, 2009 and 2008, respectively, freight and handling costsincurred are included in operating & selling expenses and were$987,700 and $1,106,900.

 

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 six months ended August 31,2009 and 2008 follows:

 

**NET REVENUES**

 
| ** **     | ** ** | **Three  Months Ended August 31,** | ** ** | **Six  Months Ended August 31,** | ** ** |
|----------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **     | ** ** | **2009**                                | ** ** | **2008**                              | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Publishing** |       | $                                       | 2,642,100  |                                  | $          | 2,322,400 |   | $ | 4,623,900 |   | $ | 4,236,600 |   |
| **UBAM**       |       | $                                       | 3,363,800  |                                  | $          | 4,045,100 |   | $ | 7,772,600 |   | $ | 9,505,700 |   |
| **Other**      |       | $                                       | —     |                                  | $          | — |   | $ | — |   | $ | — |   |
| **Total**      |       | $                                       | 6,005,900  |                                  | $          | 6,367,500 |   | $ | 12,396,500 |   | $ | 13,742,300 |   |

 

**EARNINGS(LOSS) BEFORE INCOME TAXES**

 
| ** **     | ** ** | **Three  Months Ended August 31,** | ** ** | **Six  Months Ended August 31,** | ** ** |
|----------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **     | ** ** | **2009**                                | ** ** | **2008**                              | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Publishing** |       | $                                       | 873,800    |                                  | $          | 767,100 |   | $ | 1,535,500 |   | $ | 1,339,200 |   |
| **UBAM**       |       | $                                       | 516,400    |                                  | $          | 704,600 |   | $ | 1,530,500 |   | $ | 1,859,000 |   |
| **Other**      |       | $                                       | (1,031,000 | )                                     | $          | (951,100 | ) | $ | (2,040,800 | ) | $ | (1,909,600 | ) |
| **Total**      |       | $                                       | 359,200    |                                  | $          | 520,600 |   | $ | 1,025,200 |   | $ | 1,288,600 |   |

 

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 May 2009,FASB issued SFAS No. 165, “SubsequentEvents” (SFAS 165), to establish general standards of accounting for anddisclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued. SFAS 165 iseffective for financial statements issued for interim and annual periods endingafter June 15, 2009.  On June 1,2009, we adopted SFAS 165.  The adoptionof this pronouncement did not have a material effect on our financial positionor results of operations.

 

In June 2009,FASB issued SFAS No. 168, “TheFASB Accounting Standard Codification and the Hierarchy of the GenerallyAccepted Accounting Principles — a replacement of SFAS No. 162”(SFAS 168), to become the source of authoritative U.S. generally acceptedaccounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmentalentities. SFAS 168 is effective for financial statements issued for interim andannual periods ending after September 15, 2009. Management is currentlyassessing the impact of the adoption of SFAS 168 but does not expect theadoption to have a material effect on our financial position or results ofoperations.

 

ITEM 2  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

# ***MD&Acontains statements that are forward-looking and include numerous risks whichyou should carefully consider. Additional risks and uncertainties may also materially and adverselyaffect our business.   You should readthe following discussion in connection with our 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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**Earnings as a Percent of Total Revenues**

 
| ** **                        | ** ** | **Three  Months Ended August 31,** | ** ** | **Six  Months Ended August 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **2009**                                | ** ** | **2008**                              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net revenues                      |       | 100.0                                   | %          | 100.0                                 | %          | 100.0 | % | 100.0 | % |
| Cost of sales                     |       | 40.8                                    | %          | 39.0                                  | %          | 38.3 | % | 37.5 | % |
| Gross margin                      |       | 59.2                                    | %          | 61.0                                  | %          | 61.7 | % | 62.5 | % |
| Operating expenses:               |       |                                    |       |                                  |       |   |   |   |   |
| Operating & selling      |       | 26.3                                    | %          | 25.9                                  | %          | 25.5 | % | 25.4 | % |
| Sales commissions                 |       | 18.1                                    | %          | 19.8                                  | %          | 19.8 | % | 21.3 | % |
| General & administrative |       | 8.8                                     | %          | 7.2                                   | %          | 8.3 | % | 6.6 | % |
| Total operating expenses          |       | 53.2                                    | %          | 52.9                                  | %          | 53.6 | % | 53.3 | % |
| Income from operations            |       | 6.0                                     | %          | 8.1                                   | %          | 8.1 | % | 9.2 | % |
| Other income                      |       | 0.0                                     | %          | 0.1                                   | %          | 0.2 | % | 0.2 | % |
| Earnings before income taxes      |       | 6.0                                     | %          | 8.2                                   | %          | 8.3 | % | 9.4 | % |
| Income taxes                      |       | 2.2                                     | %          | 3.1                                   | %          | 3.1 | % | 3.5 | % |
| Net earnings                      |       | 3.8                                     | %          | 5.1                                   | %          | 5.2 | % | 5.9 | % |

 

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

 

Weearned income before income taxes of $359,200 for the three months ended August 31,2009 compared with $520,600 for the three months ended August 31, 2008.

 

**Revenues**

 
| ** **                           | ** ** | **For the Three Months Ended  August 31,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                           | ** ** | **2009**                                        | ** ** | **2008**             | ** ** | **(decrease)**  | ** ** | **(decrease)** | ** ** |
| Gross sales                          |       | $                                               | 9,476,000  |                 | $          | 9,327,100       |       | $ | 148,900 |   | 1.6 | % |
| Less discounts & allowances |       | (3,758,200                                      | )          | (3,317,100           | )          | (441,100        | )          | 13.3 | % |
| Transportation revenue               |       | 288,100                                         |       | 357,500              |       | (69,400         | )          | (19.4 | )% |
| Net revenues                         |       | $                                               | 6,005,900  |                 | $          | 6,367,500       |       | $ | (361,600 | ) | (5.7 | )% |

 

The UBAM Division’s gross sales decreased $522,800 during the three monthperiod ending August 31,2009 when compared with the same quarterly period a year ago.  This decrease consists of decreases ininternet sales of 27%, 11% in home party sales, 13% school and library sales,and a 14% decrease in direct sales.  Thedecline in home party sales is attributed to a 18% decline in the total numberof home shows held offset by a 2% increase in the average order size.

 

The Publishing Division’s gross sales increased $671,700 during thethree month period ending August 31,2009 when compared with the same quarterly period a year ago.  We attribute this to a 27.8% increase insales to major national accounts, a 26.4% increase in sales to smaller retailstores and a 9.7% increase in inside sales accounts.

 

TheUBAM Division’s discounts and allowances were $921,000 and $831,300 for thequarterly periods ended August 31, 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 23.0% and 18.3% ofUBAM’s gross sales for the quarterly periods ended August 31, 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 $2,837,200 and $2,485,800 for the quarterlyperiods ended August 31, 2009 and 2008, respectively.  ThePublishing Division sells to retail book chains, regional and local bookstores,toy and gift stores, school supply stores and museums.  To be competitive with other wholesale bookdistributors, the Publishing Division sells at discounts between 48% and 55% ofthe retail price, based upon the quantity of books ordered and the dollaramount of the 

 

9

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order.  The Publishing Division’s discounts andallowances were 51.9% of Publishing’s gross sales for the quarterly periodended August 31, 2009 and 51.8% for the quarterly period ended August 31,2008.

 

## **Expenses**

 
| ** **                        | ** ** | **For the Three Months Ended  August 31,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|-----------------------------------|------------|-------------------------------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                        | ** ** | **2009**                                        | ** ** | **2008**             | ** ** | **(decrease)**  | ** ** | **(decrease)** | ** ** |
| Cost of sales                     |       | $                                               | 2,452,600  |                 | $          | 2,486,500       |       | $ | (33,900 | ) | (1.4 | )% |
| Operating & selling      |       | 1,578,500                                       |       | 1,648,700            |       | (70,200         | )          | (4.3 | )% |
| Sales commissions                 |       | 1,088,100                                       |       | 1,258,500            |       | (170,400        | )          | (13.5 | )% |
| General & administrative |       | 527,300                                         |       | 461,100              |       | 66,200          |       | 14.4 | % |
| Total                             |       | $                                               | 5,646,500  |                 | $          | 5,854,800       |       | $ | (208,300 | ) | (3.6 | )% |

 

Cost of sales decreased1.4% for the three months ended August 31, 2009 when compared with thethree months ended August 31, 2008. Cost of sales as a percentage of gross sales was 25.9% for the threemonths ended August 31, 2009 and for the three months ended August 31,2008 was 26.7%.  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$274,700 in the quarter ended August 31, 2009 and $265,900 in the quarterended August 31, 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 16.7% for the quarter ended August 31, 2009 and 17.7%for the quarter ended August 31, 2008.

 

Sales commissions in the Publishing Divisionincreased 24.3% to $47,000 for the three months ended August 31,2009.  Publishing Division sales commissions arepaid on net sales and were 1.8% of net sales for the three months ended August 31,2009 and 1.6% of net sales for thethree months ended August 31, 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 Divisiondecreased 14.7% to $1,041,100 for the three months ended August 31,2009 as a result of decreases ininternet sales, home show sales, school and library sales and directsales.  UBAM Division sales commissionsare paid on retail sales and were 40.3% of retail sales for the three monthsended August 31, 2009 and35.3% of retail sales for the three months ended August 31, 2008.  Thefluctuation in the percentages of commission expense to retail sales is theresult of the type of sale.  Home shows,book fairs, school and library sales and direct sales have different commissionrates.  Also contributing to thefluctuations in the percentages is the payment of overrides and bonuses, bothdependent on consultants’ monthly sales and downline sales.

 

Oureffective tax rate was 37.2 % and 38.0% for the quarterly periods ended August 31, 2009 and 2008,respectively.  These rates are higherthan the federal statutory rate due to state income taxes.

 

**Operating Results for the Six Months Ended August 31,2009**

 

We earned income before income taxes of $1,025,200for the six months ended August 31, 2009 compared with $1,288,600 for thesix months ended August 31, 2008.

 

10

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**Revenues**

 
| ** **                           | ** ** | **For the Six Months Ended  August 31,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                           | ** ** | **2009**                                      | ** ** | **2008**             | ** ** | **(decrease)**  | ** ** | **(decrease)** | ** ** |
| Gross sales                          |       | $                                             | 18,229,100 |                 | $          | 19,143,300      |       | $ | (914,200 | ) | (4.8 | )% |
| Less discounts & allowances |       | (6,398,600                                    | )          | (6,109,400           | )          | (289,200        | )          | 4.7 | % |
| Transportation revenue               |       | 566,000                                       |       | 708,400              |       | (142,400        | )          | (20.1 | )% |
| Net revenues                         |       | $                                             | 12,396,500 |                 | $          | 13,742,300      |       | $ | (1,345,800 | ) | (9.8 | )% |

 

The UBAM Division’s gross sales decreased 15.8% or$1,641,100 during the six month period ending August 31, 2009 whencompared with the same six month period a year ago.  This decrease consists of a 28% decrease inInternet sales, a 16% decrease in home party sales, a 13% decrease in schooland library sales and a 10% decrease in direct sales.  The decline in home party sales is attributedprimarily to a 15.2% decline in the total number of home shows held and a 1.1%decrease in average per order sales.

 

The Publishing Division’s gross sales increased by8.3% or $726,900 during the six month period ending August 31, 2009 whencompared with the same six month period a year ago.  We attribute this to a 27.5% increase insales to the national chains, a 18.2% increase in sales to smaller retailstores and a 2.3% increase in inside sales accounts.

 

The UBAM Division’s discounts and allowances were$1,518,800 and $1,568,800 for the six month periods ended August 31, 2009and 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 onselected items at various times throughout the year.  The discounts and allowances in the UBAMDivision will vary from year to year depending upon the marketing programs inplace during any given year.  The UBAMDivision’s discounts and allowances were 17.4% of UBAM’s gross sales for thesix month period ended August 31, 2009 and 15.1% for the six month periodended August 31, 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 $4,879,800 and $4,540,600 for the six monthperiods ended August 31, 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 six month periodended August 31, 2009 and 51.9% for the six month period ended August 31,2008.

 

**Expenses**

 
| ** **                        | ** ** | **For the Six Months Ended  August 31,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                        | ** ** | **2009**                                      | ** ** | **2008**             | ** ** | **(decrease)**  | ** ** | **(decrease)** | ** ** |
| Cost of sales                     |       | 4,752,800                                     |       | $                    | 5,157,600  |            | $          | (404,800 | ) | (7.8 | )% |
| Operating & selling      |       | 3,162,000                                     |       | 3,490,900            |       | (328,900        | )          | (9.4 | )% |
| Sales commissions                 |       | 2,450,100                                     |       | 2,925,600            |       | (475,500        | )          | (16.3 | )% |
| General & administrative |       | 1,033,200                                     |       | 901,900              |       | 131,300         |       | 14.6 | % |
| Total                             |       | $                                             | 11,398,100 |                 | $          | 12,476,000      |       | $ | (1,077,900 | ) | (8.6 | )% |
|                                   |            |                                               |            |                      |            |                 |            |  |  |  |  |  |

 

Cost of sales decreased 7.8% for the six monthsended August 31, 2009 when compared with the six months ended August 31,2008, consistent with the decrease in sales for the period.  Cost of sales as a percentage of gross saleswas 26.1% for the six months ended August 31, 2009 and for the six monthsended August 31, 2008 was 26.9%. 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 $561,200 in the six months ended August 31,2009 and $557,800 in the six months ended August 31, 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 17.3% for the sixmonths ended August 31, 2009 and 18.2% for the six months ended August 31,2008.

 

Sales commissions in the Publishing Divisionincreased 17.6% to $86,200 for the six months ended August 31, 2009.  Publishing Division sales commissions arepaid on net sales and were 1.9% of net sales for the six months ended August 31,2009 and 1.7% of net sales for the six months ended August 31, 2008.  Sales commissions in the Publishing Divisionwill fluctuate depending upon the amount of sales made to our “house accounts,”which are the Publishing Division’s largest customers and do not have anycommission expense associated with them, and sales made by our outside salesrepresentatives.

 

Sales commissions in the UBAM Division decreased17.1% to $2,363,900 for the six months ended August 31, 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 38.2% of retail sales for the sixmonths ended August 31, 2009 and 34.2% of retail sales for the six monthsended August 31, 2008.  Thefluctuation in the percentages of commission expense to retail sales is theresult of the type of sale.  Home shows,book fairs, school and library sales and direct sales have different commissionrates.  Also contributing to thefluctuations in the percentages is the payment of overrides and bonuses, bothdependent on consultants’ monthly sales and downline sales.

 

Our effective tax rate was 37.5% and 37.7% for thesix month periods ended August 31, 2009 and 2008, respectively.  These rates are higher than the federalstatutory 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 173 shares at a cost of $600 during the quarter ended August 31,2009.

 

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

 

Forthe six months ended August 31, 2009, we experienced a negative cash flowfrom operating activities of $1,371,400. Cash flow from operating activities was decreased primarily by anincrease in inventory of $2,712,700 and accounts receivable of $298,400, offsetby net income after taxes of $640,800 and increases in current liabilities of$913,100.

 

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 six months ended August 31, 2009, cash used in financing activitieswas $1,267,200 from dividend payments of $1,536,600, revolving credit paymentsof $847,600 and the purchase of $3,700 of treasury stock, offset by revolvingcredit borrowings of $1,000,000 and the sale of $120,700 in treasury stock.

 

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

 

12

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##  

## **Bank Credit Agreement**

##  

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 August 31, 2009) and borrowings are collateralized bysubstantially all of our assets. At August 31, 2009 we had $152,400outstanding under this agreement. Available credit under the revolving credit agreement was $2,347,600 at August 31, 2009.

 

This agreement also contains a provision for our useof the Bank’s letters of credit.  The Bankagrees to issue commercial or standby letters of credit provided that none willhave an expiry date later than June 30, 2010 and that the sum of the lineof credit plus the letters of credit would not exceed the borrowing base ineffect at the time.  For the quarterended August 31, 2009, we had no letters of credit outstanding.

 

**CriticalAccounting Policies**

 

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

 

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

 

**RevenueRecognition**

 

Sales are recognized and recorded when products are shipped.  Products are shipped FOB shipping point. The UBAM Division’s sales are paid before the product is shipped.  These sales accounted for 56.0% of net revenues for the quarter ended August 31, 2009 and 63.5% for the quarter ended August 31, 2008.  The provisions of the SEC Staff Accounting Bulletin No.104, “Revenue Recognition in Financial Statements,” have been applied, and as a result, a reserve is provided for estimated future sales returns.

 

Estimated allowances for sales returns are recorded as sales are recognized and recorded.  Management uses a moving average calculation to estimate the allowance for sales returns.  We are not responsible for product damaged in transit.  Damaged returns are primarily from the retail stores.  The damages occur in the stores, not in shipping to the stores.  It is industry practice to accept returns from wholesale customers.  Transportation revenue, the amount billed to the customer for shipping the product, is recorded when products are shipped.  Management has estimated and included a reserve for sales returns of $100,000 as of August 31, 2009 and $84,000 as of February 28, 2009.

 

**Allowance for Doubtful Accounts**

 

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends.  If the actual uncollected amounts significantly exceed the estimated allowance, then our operating results would be significantly adversely affected.  Management has estimated and included an allowance for doubtful accounts of $111,800 and $92,900 as of August 31, 2009 and February 28, 2009, respectively.

 

**Inventory**

 

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

 

13

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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 $854,000 at August 31, 2009 and$913,000 at February 28, 2009.

 

Inventories are presented net of a valuationallowance.  Management has estimated andincluded a valuation allowance for both current and noncurrent inventory.  This allowance is based on management’sidentification of slow moving inventory on hand.  Management has estimated a valuationallowance for both current and noncurrent inventory of $328,000 and $370,000 asof August 31, 2009 and February 28, 2009, respectively.

 

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**Stock-Based Compensation**

 

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

 

Item 3               QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK

 

We do not have anymaterial market risk.

 

Item 4               CONTROLS ANDPROCEDURES

 

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 August 31, 2009. This evaluation was conducted underthe supervision and with the participation of our management, including ourChief Executive Officer and our Controller/Corporate Secretary (PrincipalFinancial and 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.

 

PART II.  OTHER INFORMATION

 

Item 1               LEGAL PROCEEDINGS

 

Not Applicable.

 

Item 1A     RISK FACTORS

 

Not required bysmaller reporting company.

 

Item 2               UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS

 

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

 

ISSUER PURCHASESOF EQUITY SECURITIES

 
| **Period**               | ** ** | **Total # of Shares  Purchased** | ** ** | **Average Price********Paid per Share** | ** ** | **Total # of Shares********Purchased as********Part of Publicly  Announced Plan (1)** | ** ** | **Maximum # of  Shares that May********be Repurchased  under the Plan  (2) (3)** | ** ** |
|--------------------------|------------|----------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | ** **                       | ** ** | ** **                              | ** ** | ** **                                                                                 | ** ** | ** **                                                                            | ** ** |
| June 1 - 30, 2009   |       | —                           |       | N/A                                     |       | 0                                                                                          |       | 433,515                                                                               |       |
| July 1 - 31, 2009   |       | —                           |       | N/A                                     |       | 0                                                                                          |       | 433,515                                                                               |       |
| August 1 - 31, 2009 |       | 173                              |       | $                                       | 3.29       |                                                                                       | 173        |                                                                                  | 433,342    |   |
| Total                    |       | 173                              |       | $                                       | 3.29       |                                                                                       | 173        |                                                                                  |       |   |
|                     |       |                             |       |                                    |       |                                                                                       |       |                                                                                  |       |

 

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

 

15

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(2)             In April 2008the Board of Directors authorized us to purchase up to an additional 500,000shares of our common stock under a repurchase plan.  Pursuant to the plan, we may purchase a totalof 433,342 additional shares of our common stock until 3,000,000 shares havebeen repurchased.

 

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

 

Item 3               DEFAULTS UPON SENIOR SECURITIES

 

Not Applicable.

 

Item 4               SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Not Applicable.

 

Item 5               OTHER INFORMATION

 

None

 

Item 6               EXHIBITS

 

31.1             Certification of the Chief ExecutiveOfficer of Educational Development Corporation pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002 furnished herewith.

 

31.2             Certification of Controller and CorporateSecretary (Principal Financial and Accounting Officer) of EducationalDevelopment Corporation pursuant to Section 302 of the Sarbanes-Oxley Actof 2002 furnished herewith.

 

32.1             Certificationpursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

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#### ** **

#### **SIGNATURES**

#### ** **

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

 

 

EDUCATIONAL DEVELOPMENTCORPORATION

(Registrant)

 

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

 

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EXHIBIT INDEX

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

 

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