**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 May 31, 2010**

 

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

 

As of July 13,2010 there were 3,884,020 shares of Educational Development Corporation CommonStock, $0.20 par value outstanding.

 

 

 

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PART I.  FINANCIAL INFORMATION

ITEM 1

 

**EDUCATIONALDEVELOPMENT CORPORATION**

**CONDENSEDBALANCE SHEETS (UNAUDITED)**

 
| ** **                                                                                                                                                                                             | ** ** | **May 31, 2010** | ** ** | **February 28, 2010** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                                                                             |       |                  |       |                       |       |
| ** **                                                                                                                                                                                             |       |                  |       |                       |       |
| CURRENT  ASSETS:                                                                                                                                                                                       |       |                  |       |                       |       |
| Cash  and cash equivalents                                                                                                                                                                             |       | $                     | 1,182,900  |                       | $          | 1,196,900 |   |
| Accounts  receivable, less allowance for doubtful accounts and sales returns $216,400  (May 31) and $231,300 (February 28)                                                                   |       | 3,155,800             |       | 3,305,500                  |       |
| Inventories—Net                                                                                                                                                                                   |       | 10,300,600            |       | 11,285,300                 |       |
| Prepaid  expenses and other assets                                                                                                                                                                     |       | 276,100               |       | 268,400                    |       |
| Income  tax receivable                                                                                                                                                                                 |       | —                |       | 8,000                      |       |
| Deferred  income taxes                                                                                                                                                                                 |       | 256,900               |       | 256,900                    |       |
| Total  current assets                                                                                                                                                                                  |       | 15,172,300            |       | 16,321,000                 |       |
|                                                                                                                                                                                                   |       |                  |       |                       |       |
| INVENTORIES—Net                                                                                                                                                                                   |       | 621,000               |       | 659,000                    |       |
|                                                                                                                                                                                                   |       |                  |       |                       |       |
| PROPERTY,  PLANT AND EQUIPMENT—Net                                                                                                                                                                |       | 2,115,700             |       | 2,147,500                  |       |
|                                                                                                                                                                                                   |       |                  |       |                       |       |
| OTHER  ASSETS                                                                                                                                                                                          |       | 172,500               |       | 172,500                    |       |
|                                                                                                                                                                                                   |       |                  |       |                       |       |
| DEFERRED  INCOME TAXES                                                                                                                                                                                 |       | 61,900                |       | 60,400                     |       |
|                                                                                                                                                                                                   |       |                  |       |                       |       |
| TOTAL  ASSETS                                                                                                                                                                                          |       | $                     | 18,143,400 |                       | $          | 19,360,400 |   |
|                                                                                                                                                                                                   |       |                  |       |                       |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                          |       |                  |       |                       |       |
|                                                                                                                                                                                                   |       |                  |       |                       |       |
| CURRENT  LIABILITIES:                                                                                                                                                                                  |       |                  |       |                       |       |
| Accounts  payable                                                                                                                                                                                      |       | $                     | 1,540,900  |                       | $          | 2,259,100 |   |
| Accrued  salaries and commissions                                                                                                                                                                      |       | 400,900               |       | 531,600                    |       |
| Current  maturities of long-term debt                                                                                                                                                                  |       | 75,000                |       | 75,000                     |       |
| Income  taxes payable                                                                                                                                                                                  |       | 105,600               |       | —                     |       |
| Dividends  payable                                                                                                                                                                                     |       | 465,300               |       | 466,400                    |       |
| Other  current liabilities                                                                                                                                                                             |       | 444,000               |       | 531,200                    |       |
| Total  current liabilities                                                                                                                                                                             |       | 3,031,700             |       | 3,863,300                  |       |
|                                                                                                                                                                                                   |       |                  |       |                       |       |
| LONG-TERM  NOTES PAYABLE, net of current maturities                                                                                                                                                    |       | 75,000                |       | 75,000                     |       |
|                                                                                                                                                                                                   |       |                  |       |                       |       |
| COMMITMENTS                                                                                                                                                                                            |       |                  |       |                       |       |
|                                                                                                                                                                                                   |       |                  |       |                       |       |
| SHAREHOLDERS’  EQUITY:                                                                                                                                                                            |       |                  |       |                       |       |
| Common  stock, $0.20 par value; Authorized 8,000,000 shares; Issued 6,039,040  (May 31 and February 28) shares; Outstanding 3,874,804 (May 31)  and 3,887,030 (February 28) shares |       | 1,207,800             |       | 1,207,800                  |       |
| Capital  in excess of par value                                                                                                                                                                        |       | 8,544,000             |       | 8,544,000                  |       |
| Retained  earnings                                                                                                                                                                                     |       | 17,114,600            |       | 17,391,700                 |       |
|                                                                                                                                                                                                   |       | 26,866,400            |       | 27,143,500                 |       |
| Less  treasury stock, at cost                                                                                                                                                                          |       | (11,829,700           | )          | (11,721,400                | )          |
|                                                                                                                                                                                                   |       | 15,036,700            |       | 15,422,100                 |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                       |       | $                     | 18,143,400 |                       | $          | 19,360,400 |   |

 

Seenotes to financial statements.

 

2

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**EDUCATIONALDEVELOPMENT CORPORATION**

**CONDENSED STATEMENTS OF EARNINGS(UNAUDITED)**

 
| ** **                                                            | ** ** | **Three  Months Ended May 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                            | ** ** | **2010**                             | ** ** | **2009** | ** ** |
|                                                                  |       |                                 |       |   |   |
| GROSS  SALES                                                          |       | $                                    | 8,776,000  |   | $ | 8,753,100 |   |
| Less  discounts and allowances                                        |       | (2,744,400                           | )          | (2,640,400 | ) |
| Transportation  revenue                                               |       | 263,800                              |       | 277,900 |   |
| NET  REVENUES                                                         |       | 6,295,400                            |       | 6,390,600 |   |
| COST  OF SALES                                                        |       | 2,321,200                            |       | 2,300,200 |   |
| Gross  margin                                                         |       | 3,974,200                            |       | 4,090,400 |   |
|                                                                  |       |                                 |       |   |   |
| OPERATING  EXPENSES:                                                  |       |                                 |       |   |   |
| Operating  and selling                                                |       | 1,707,500                            |       | 1,583,500 |   |
| Sales  commissions                                                    |       | 1,304,500                            |       | 1,362,000 |   |
| General  and administrative                                           |       | 477,600                              |       | 505,900 |   |
| Casualty  loss                                                        |       | 188,500                              |       | — |   |
|                                                                  |       | 3,678,100                            |       | 3,451,400 |   |
|                                                                  |       |                                 |       |   |   |
| OTHER  INCOME                                                         |       | 4,200                                |       | 27,000 |   |
|                                                                  |       |                                 |       |   |   |
| EARNINGS  BEFORE INCOME TAXES                                         |       | 300,300                              |       | 666,000 |   |
|                                                                  |       |                                 |       |   |   |
| INCOME  TAXES                                                         |       | 112,100                              |       | 250,600 |   |
|                                                                  |       |                                 |       |   |   |
| NET  EARNINGS                                                         |       | $                                    | 188,200    |   | $ | 415,400 |   |
|                                                                  |       |                                 |       |   |   |
| BASIC  AND DILUTED EARNINGS PER SHARE:                                |       |                                 |       |   |   |
| Basic                                                                 |       | $                                    | 0.05       |   | $ | 0.11 |   |
| Diluted                                                               |       | $                                    | 0.05       |   | $ | 0.11 |   |
|                                                                  |       |                                 |       |   |   |
| WEIGHTED  AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: |       |                                 |       |   |   |
| Basic                                                                 |       | 3,876,603                            |       | 3,843,847 |   |
| Diluted                                                               |       | 3,880,131                            |       | 3,844,859 |   |

 

Seenotes to condensed financial statements.

 

3

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**EDUCATIONALDEVELOPMENT CORPORATION**

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

**FOR THETHREE MONTHS ENDED MAY 31, 2010**

 
| ** **                       | ** ** | **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,  2010 |       | 6,039,040                                           |       | $          | 1,207,800  |           | $          | 8,544,000    |       | $                  | 17,391,700 |       | 2,152,010  |   | $ | (11,721,400 | ) | $ | 15,422,100 |   |
| Purchases of treasury  stock     |       | —                                              |       | —     |       | —         |       | —       |       | 25,000             |       | (165,200   | )          | (165,200 | ) |
| Sales of treasury stock          |       | —                                              |       | —     |       | —         |       | —       |       | (12,774            | )          | 56,900     |       | 56,900 |   |
| Dividends declared  ($.12/share) |       | —                                              |       | —     |       | —         |       | (465,300     | )          | —             |       | —     |       | (465,300 | ) |
| Net earnings                     |       | —                                              |       | —     |       | —         |       | 188,200      |       | —             |       | —     |       | 188,200 |   |
| BALANCE—May 31,  2010  |       | 6,039,040                                           |       | $          | 1,207,800  |           | $          | 8,544,000    |       | $                  | 17,114,600 |       | 2,164,236  |   | $ | (11,829,700 | ) | $ | 15,036,700 |   |

 

Seenotes to condensed financial statements.

 

4

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**EDUCATIONAL DEVELOPMENT CORPORATION**

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

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

 
| ** **                                          | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:              |       | $          | 560,700    |       | $          | (254,300 | ) |
|                                                |       |       |       |       |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES:              |       | —     |       | —     |       |
|                                                |       |       |       |       |       |
| CASH  FLOWS FROM FINANCING ACTIVITIES:              |       |       |       |       |       |
| Cash  paid to acquire treasury stock                |       | (165,200   | )          | (3,100     | )          |
| Cash  received from sales of treasury stock         |       | 56,900     |       | 102,100    |       |
| Dividends  paid                                     |       | (466,400   | )          | (1,536,600 | )          |
|                                                |       |       |       |       |       |
| Net  cash used in financing activities              |       | (574,700   | )          | (1,437,600 | )          |
|                                                |       |       |       |       |       |
| NET  DECREASE IN CASH AND CASH EQUIVALENTS          |       | (14,000    | )          | (1,691,900 | )          |
|                                                |       |       |       |       |       |
| CASH  AND CASH EQUIVALENTS—BEGINNING OF PERIOD |       | 1,196,900  |       | 2,896,200  |       |
|                                                |       |       |       |       |       |
| CASH  AND CASH EQUIVALENTS—END OF PERIOD       |       | $          | 1,182,900  |       | $          | 1,204,300 |   |
|                                                |       |       |       |       |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:  |       |       |       |       |       |
| Cash  paid for income taxes                         |       | $          | —     |       | $          | 410,000 |   |

 

Seenotes to condensed financial statements.

 

5

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NOTESTO CONDENSED FINANCIAL STATEMENTS (Unaudited)

 

Note1 — The information shown with respect to the three months ended May 31,2010 and 2009, respectively, which is unaudited, includes all adjustments whichin the opinion of Management are considered to be necessary for a fairpresentation of earnings for such periods. The adjustments reflected in the financial statements represent normalrecurring adjustments.  The results ofoperations for the three months ended May 31, 2010 and 2009, respectively,are not necessarily indicative of the results to be expected at year end due toseasonality of the product sales.

 

Thesefinancial 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 28,2010.

 

Note2 — Effective June 30, 2010 we signed a Twelfth Amendment to theCredit and Security Agreement with Arvest Bank which provided a reduced$2,500,000 line of credit through June 30, 2011.  Interest is payable monthly at the greater of(a) prime-floating rate minus 0.75% or (b) 5.00%.  At May 31, 2010, the rate in effect was5.00%.  Borrowings are collateralized bysubstantially all the assets of the Company. At May 31, 2010, we had no debt outstanding under this agreement.Available credit under the revolving credit agreement was $2,500,000 at May 31,2010.

 

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, 2011 and that the sum of theline of credit plus the letters of credit would not exceed the borrowing basein effect at the time.  For the quarterended May 31, 2010, we had no letters of credit outstanding.

 

Note3 — Inventories consist of the following:

 
| ** **                       | ** ** | **2010**         | ** ** |
|----------------------------------|------------|------------------|------------|
| ** **                       | ** ** | **May 31,** | ** ** | **February 28,** | ** ** |
| Current:                         |       |             |       |   |   |
| Book  inventory                  |       | $                | 10,327,100 |   | $ | 11,310,300 |   |
| Inventory  valuation allowance   |       | (26,500          | )          | (25,000 | ) |
|                             |       |             |       |   |   |
| Inventories  net–current    |       | $                | 10,300,600 |   | $ | 11,285,300 |   |
|                             |       |             |       |   |   |
| Noncurrent:                      |       |             |       |   |   |
| Book  inventory                  |       | $                | 946,000    |   | $ | 989,000 |   |
| Inventory  valuation allowance   |       | (325,000         | )          | (330,000 | ) |
|                             |       |             |       |   |   |
| Inventories  net–noncurrent |       | $                | 621,000    |   | $ | 659,000 |   |

 

We occasionally purchase book inventory in quantities in excess of whatwill be sold within the normal operating cycle due to minimum orderrequirements of our primary supplier. These amounts are included in non-current inventory.

 

Significant portions of our inventory purchases are concentrated withan England-based publishing company. Purchases from this company were approximately $1.2 million and $3.4million for the three months ended May 31, 2010 and 2009,respectively.  Total inventory purchasesfrom all suppliers were approximately $1.6 million and $4.2 million for thethree months ended May 31, 2010 and 2009, respectively.

 

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

 

In computing diluted EPS we have utilized thetreasury stock method.

 

The computation of weighted average common and common equivalent sharesused in the calculation of basic and diluted earnings per share (“EPS”) isshown below.

 

6

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**Earnings Per Share:**

 
| ** **                                      | ** ** | **Three Months Ended May 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **2010**                            | ** ** | **2009** | ** ** |
|                                            |       |                                |       |   |   |
| Net  earnings applicable to common shareholders |       | $                                   | 188,200    |   | $ | 415,400 |   |
|                                            |       |                                |       |   |   |
| **Shares:**                                     |       |                                |       |   |   |
|                                            |       |                                |       |   |   |
| Weighted  average shares outstanding - basic    |       | 3,876,603                           |       | 3,843,847 |   |
| Assumed  exercise of options                    |       | 3,528                               |       | 1,012 |   |
|                                            |       |                                |       |   |   |
| Weighted  average shares outstanding - diluted  |       | 3,880,131                           |       | 3,844,859 |   |
|                                            |       |                                |       |   |   |
| **Basic Earnings Per Share**                    |       | $                                   | 0.05       |   | $ | 0.11 |   |
| **Diluted Earnings Per Share**                  |       | $                                   | 0.05       |   | $ | 0.11 |   |

 

In April 2008, our Board of Directors authorized us to purchase upto 500,000 additional shares of our common stock under a plan initiated in1998. This plan has no expiration date. During the first quarter of fiscal year2010, we repurchased 25,000 shares of common stock.  The maximum number of shares that may berepurchased in the future is 401,233.

 

Note 5 — 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.

 

Note6 — Freight costs and handling costs incurred are included in operating &selling expenses and were $505,700 and $478,600 for the three months ended May 31,2010 and 2009, respectively.

 

Note7 — We have two reportable segments: Publishing and Usborne Books and More (“UBAM”).  These reportable segments are business unitsthat offer different methods of distribution to different types ofcustomers.  They are managed separatelybased on the fundamental differences in their operations.  The Publishing Division markets its products toretail accounts, which include book, school supply, toy and gift stores andmuseums, through commissioned sales representatives, trade and specialtywholesalers and an internal telesales group. The UBAM Division markets its product line through a network ofindependent sales consultants through a combination of direct sales, homeshows, book fairs and the Internet.

 

Theaccounting policies of the segments are the same as those of the rest of theCompany.  We evaluate segment performancebased on earnings (loss) before income taxes of the segments, which is definedas segment net sales reduced by direct cost of sales and direct expenses.  Corporate expenses, depreciation, interestexpense and income taxes are not allocated to the segments, but are listed inthe “other” row.  Corporate expenses include the executive department, accountingdepartment, information services department, general office management andbuilding facilities management.  Our assets and liabilities are not allocatedon a segment basis.

 

7

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Informationby industry segment for the three months ended May 31, 2010 and 2009follows:

 

**NET REVENUES**

 
| ** **     | ** ** | **Three Months Ended May 31, 2010** | ** ** |
|----------------|------------|------------------------------------------|------------|
| ** **     | ** ** | **2010**                                 | ** ** | **2009** | ** ** |
| **Publishing** |       | $                                        | 2,099,600  |   | $ | 1,981,800 |   |
| **UBAM**       |       | $                                        | 4,195,800  |   | $ | 4,408,800 |   |
| **Other**      |       | $                                        | —     |   | $ | — |   |
| **Total**      |       | $                                        | 6,295,400  |   | $ | 6,390,600 |   |

 

**EARNINGS (LOSS) BEFORE INCOME TAXES**

 
| ** **     | ** ** | **Three Months Ended May 31, 2010** | ** ** |
|----------------|------------|--------------------------------------------------------------|------------|
| ** **     | ** ** | **2010**                                                     | ** ** | **2009** | ** ** |
| **Publishing** |       | $                                                            | 603,600    |   | $ | 661,700 |   |
| **UBAM**       |       | $                                                            | 884,000    |   | $ | 1,014,100 |   |
| **Other**      |       | $                                                            | (1,187,300 | ) | $ | (1,009,800 | ) |
| **Total**      |       | $                                                            | 300,300    |   | $ | 666,000 |   |

 

Note 8 —TheFinancial Accounting Standards Board (“FASB”) periodically issues newaccounting standards in a continuing effort to improve standards of financialaccounting and reporting. We have reviewed the recently issued pronouncementsand concluded that the following new accounting standards are applicable to us.

 

InJanuary 2010, the FASB issued a new standard related to fair valuemeasurements and disclosures, which amends the earlier FASB standard to add newrequirements for disclosures about transfers into and out of Levels 1 and 2fair value measurements and separate disclosures about purchases, sales,issuances, and settlements relating to Level 3 fair value measurements. The newstandard also clarifies existing fair value disclosures about the level ofdisaggregation and about inputs and valuation techniques used to measure thefair value. The Company adopted the new accounting standard which becameeffective for the interim reporting period ended May 31, 2010, except forthe requirement to provide the Level 3 activity of purchases, sales, issuances,and settlements on a gross basis, which will be effective for fiscal yearsbeginning after December 15, 2010, and for interim periods within thosefiscal years. The adoption of the new standard did not have a material impacton the financial statements.

 

Note 9 — During the quarter ended May 31, 2010, wedetermined that amounts paid to a third party for travel deposits had not beenused to reserve travel for the Company. As a result of this, we had to pay and/or will have to pay approximately$188,500 in additional travel expenses, which is reported in operating expensesas a casualty loss.

 

Note 10 — On June 18, 2010, we paid the previouslydeclared $0.12 dividend per share to shareholders of record as of June 11,2010.

 

ITEM2  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

**Factors Affecting Forward Looking Statements**

 

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

 

8

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**Overview**

 

We operate two separate divisions, Publishing and Usborne Books andMore (“UBAM”), to sell the Usborne and Kane/Miller lines of children’sbooks.  These two divisions each havetheir own customer base.  The PublishingDivision markets its products on a wholesale basis to various retailaccounts.  The UBAM Division markets itsproducts to individual consumers as well as school and public libraries.

 

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

 

**Earnings asa Percent of Net Revenues**

 
| ** **                         | ** ** | **Three Months Ended May 31,** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| Net  revenues                      |       | 100.0                               | %          | 100.0 | % |
| Cost  of sales                     |       | 36.9                                | %          | 36.0 | % |
| Gross  margin                      |       | 63.1                                | %          | 64.0 | % |
| Operating  expenses:               |       |                                |       |   |   |
| Operating &  selling      |       | 27.1                                | %          | 24.8 | % |
| Sales  commissions                 |       | 20.7                                | %          | 21.3 | % |
| General &  administrative |       | 7.6                                 | %          | 7.9 | % |
| Casualty  loss                     |       | 3.0                                 | %          | 0.0 | % |
| Total  operating expenses          |       | 58.4                                | %          | 54.0 | % |
| Income  from operations            |       | 4.7                                 | %          | 10.0 | % |
| Other  income                      |       | 0.1                                 | %          | 0.4 | % |
| Earnings  before income taxes      |       | 4.8                                 | %          | 10.4 | % |
| Income  taxes                      |       | 1.8                                 | %          | 3.9 | % |
| Net  earnings                      |       | 3.0                                 | %          | 6.5 | % |

 

**Operating Results for theThree Months Ended May 31, 2010**

 

Weearned income before income taxes of $300,300 for the three months ended May 31,2010 compared with $666,000 for the three months ended May 31, 2009.

 

**Revenues**

 
| ** **                            | ** ** | **For  the Three Months Ended May 31,** | ** ** | **$ Increase/** | ** ** | **%  Increase/** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|----------------------|------------|------------------|------------|
| ** **                            | ** ** | **2010**                                     | ** ** | **2009**             | ** ** | **(decrease)**   | ** ** | **(decrease)** | ** ** |
| Gross  sales                          |       | $                                            | 8,776,000  |                 | $          | 8,753,100        |       | $ | 22,900 |   | 0.3 |   |
| Less  discounts & allowances |       | (2,744,400                                   | )          | (2,640,400           | )          | (104,000         | )          | 3.9 |   |
| Transportation  revenue               |       | 263,800                                      |       | 277,900              |       | (14,100          | )          | (5.1 | ) |
| Net  revenues                         |       | $                                            | 6,295,400  |                 | $          | 6,390,600        |       | $ | (95,200 | ) | (1.5 | ) |

 

TheUBAM Division’s gross sales decreased $325,300 during the three month periodending May 31, 2010 when compared with the same quarterly period a yearago.  This decrease consists primarily ofdecreases of 16% in home parties and 8% in direct sales, offset by an increasein internet sales of 6% and a 3% increase in school and library sales.  The decline in home party sales is attributedto a 27% decline in the total number of orders offset by a 15% increase in theaverage order size.

 

ThePublishing Division’s gross sales increased $348,200 during the three monthperiod ending May 31, 2010 when compared with the same quarterly period ayear ago.  We attribute this to an 18.3%increase in inside sales and a 12.8% increase in sales to smaller retailstores, offset by a 12.6% decrease in sales to major national accounts.

 

TheUBAM Division’s discounts and allowances were $470,200 and $597,800 for thequarterly periods ended May 31, 2010 and 2009, respectively.  TheUBAM Division is a multi-level selling organization that markets its productsthrough 

 

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independent sales representatives (“consultants”).Sales are made to individual purchasers and school and public libraries.  Most sales in the UBAM Division are atretail.  As a part of the UBAM Division’smarketing programs, discounts between 40% and 50% of retail are offered onselected items at various times throughout the year.  The discounts and allowances in the UBAMDivision will vary from year to year depending upon the marketing programs inplace during any given year.  TheUBAM Division’s discounts and allowances were 10.7% and 12.6% of UBAM’s grosssales for the quarterly periods ended May 31, 2010 and 2009, respectively.

 

The Publishing Division’s discounts andallowances are a much larger percentage of gross sales than discounts andallowances in the UBAM Division due to the different customer markets that eachdivision targets.  The PublishingDivision’s discounts and allowances were $2,274,200 and $2,042,600 for thequarterly periods ended May 31, 2010 and 2009, respectively.  ThePublishing Division sells to retail book chains, regional and local bookstores,toy and gift stores, school supply stores and museums.  To be competitive with other wholesale bookdistributors, the Publishing Division sells at discounts between 48% and 55% ofthe retail price, based upon the quantity of books ordered and the dollaramount of the order.  The PublishingDivision’s discounts and allowances were 52.1% of Publishing’s gross sales forthe quarterly period ended May 31, 2010 and 50.9% for the quarterly periodended May 31, 2009.

 

**Expenses**

 
| ** **                         | ** ** | **For  Three Months Ended May 31,** | ** ** | **$ Increase/** | ** ** | **%  Increase/** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|----------------------|------------|------------------|------------|
| ** **                         | ** ** | **2010**                                 | ** ** | **2009**             | ** ** | **(decrease)**   | ** ** | **(decrease)** | ** ** |
| Cost  of sales                     |       | $                                        | 2,321,200  |                 | 2,300,200  |             | $          | 21,000 |   | 0.9 |   |
| Operating &  selling      |       | 1,707,500                                |       | 1,583,500            |       | 124,000          |       | 7.8 |   |
| Sales  commissions                 |       | 1,304,500                                |       | 1,362,000            |       | (57,500          | )          | (4.2 | ) |
| General &  administrative |       | 477,600                                  |       | 505,900              |       | (28,300          | )          | (5.6 | ) |
| Casualty  loss                     |       | 188,500                                  |       | —               |       | 188,500          |       | 100.0 |   |
| Total                              |       | $                                        | 5,999,300  |                 | $          | 5,751,600        |       | $ | 247,700 |   | 4.3 |   |
|                                    |            |                                          |            |                      |            |                  |            |  |  |  |  |  |

 

Cost of sales increased 0.9% for the three months ended May 31,2010 when compared with the three months ended May 31, 2009.  Cost of sales as a percentage of gross saleswas 26.4% for the three months ended May 31, 2010 and for the three monthsended May 31, 2009 was 26.3%.  Cost of sales is the inventory cost of the product sold, whichincludes the cost of the product itself and inbound freight charges.  Purchasing and receiving costs, inspectioncosts, warehousing costs, and other costs of our distribution network are includedin operating and selling expenses, not in cost of sales.  These costs totaled $293,500 in the quarterended May 31, 2010 and $286,500 in the quarter ended May 31, 2009.

 

In addition to costs associated with ourdistribution network (noted above), operating and selling costs include expensesof the Publishing Division, the UBAM Division and the order entry and customerservice functions.  Operating andselling expenses as a percentage of gross sales were 19.5% for the quarterended May 31, 2010 and 18.1% for the quarter ended May 31, 2009.

 

Salescommissions in the Publishing Division increased 18.4% to $46,400 for the threemonths ended May 31, 2010. Publishing Division sales commissions are paid on net sales and were2.2% of net sales for the three months ended May 31, 2010 and 2.0% of netsales for the three months ended May 31, 2009.  Sales commissions in the Publishing Divisionfluctuate depending upon the amount of sales made to our “house accounts,”which are the Publishing Division’s largest customers and do not have anycommission expense associated with them, and sales made by our outside salesrepresentatives.

 

Salescommissions in the UBAM Division decreased to $1,258,100 for the three monthsended May 31, 2010 as a result of decreases in home show sales and directsales, offset by an increase in internet sales. UBAM Division sales commissions are paid on retail sales and were 39.3%of retail sales for the three months ended May 31, 2010 and 36.8% ofretail sales for the three months ended May 31, 2009.  The fluctuation in the percentages ofcommission expense to retail sales is the result of the type of sale.  Home shows, book fairs, school and librarysales 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.

 

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During the quarter ended May 31, 2010, we determined that amountspaid to a third party for travel deposits had not been used to reserve travelfor the Company.  As a result of this, wehad to pay and/or will have to pay approximately $188,500 in additional travelexpenses, which is reported in operating expenses as a casualty loss.

 

Oureffective tax rate was 37.3% and 37.6% for the quarterly periods ended May 31,2010 and 2009, respectively.  These ratesare higher than the federal statutory rate due to state income taxes.

 

**Liquidity and Capital Resources**

 

Our primary source of cash is typically operating cash flow.  Typically, our primary uses of cash are torepurchase outstanding shares of stock, pay dividends and purchase property andequipment.  We utilize our bank creditfacility to meet our short-term cash needs when necessary.

 

Our Board of Directors has adopteda stock repurchase plan in which we may purchase up to a total of 3,000,000shares as market conditions warrant. Management believes the stock is undervalued and when stock becomesavailable at an attractive price, we will utilize free cash flow to repurchaseshares.  Management believes thisenhances the value to the remaining stockholders and that these repurchaseswill have no adverse effect on our short-term and long-term liquidity.  We repurchased 25,000 shares at a cost of$165,200 during the quarter ended May 31, 2010.

 

We have a history of profitabilityand positive cash flow.  We can sustainplanned growth levels with minimal capital requirements.  Consequently, cash generated from operationsis used to liquidate any existing debt and then to repurchase sharesoutstanding or capital distributions through dividends.

 

Forthe three months ended May 31, 2010, we experienced a positive cash flowfrom operating activities of $560,700. Cash flow from operating activities resulted from net income after taxesof $188,200, a decrease in inventory of $1,022,700 and a change in taxesreceivable/payable of $113,600, offset by a decrease in current liabilities of$936,100 and an increase in prepaid expenses of $7,700.

 

Webelieve that in fiscal year 2011 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 2011 willbe less than $200,000.  This wouldconsist of software and hardware enhancements to our existing data processingequipment, property improvements and additional warehouse equipment.

 

Forthe three months ended May 31, 2010, cash used in financing activities was$574,700 from dividend payments of $466,400 and the purchase of $165,200 oftreasury stock, offset by the sale of $56,900 in treasury stock.

 

Asof May 31, 2010 we did not have any commitments in excess of one year.

 

**Bank Credit Agreement**

 

EffectiveJune 30, 2010 we signed a Twelfth Amendment to the Credit and SecurityAgreement with Arvest Bank which provided a reduced $2,500,000 line of creditthrough June 30, 2011.  Interest ispayable monthly at the greater of (a) prime-floating rate minus 0.75% or (b) 5.00%.  At May 31, 2010, the rate in effect was5.00%. Borrowings are collateralized by substantially all the assets of theCompany.  At May 31, 2010 theCompany had no debt outstanding under this agreement. Available credit underthe revolving credit agreement was $2,500,000 at May 31, 2010.

 

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, 2011 and that the sum of theline of credit plus the letters of credit would not exceed the borrowing basein effect at the time.  For the quarterended May 31, 2010, we had no letters of credit outstanding.

 

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**Critical Accounting Policies**

 

*Our discussion and analysis ofour financial condition and results of operations are based upon our financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financial statements requires us to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosures of contingent assets andliabilities.  On an on-going basis, weevaluate 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 otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.*

 

*Actual results may materiallydiffer from these estimates under different assumptions or conditions.  Historically, however, actual results havenot differed materially from those determined using required estimates. Oursignificant accounting policies are described in the notes accompanying thefinancial statements included elsewhere in this report.  However, we consider the following accountingpolicies to be more significantly dependent on the use of estimates andassumptions.*

 

**Revenue Recognition**

 

Sales are recognized and recordedwhen products are shipped.  Products areshipped FOB shipping point. The UBAM Division’s sales are paid before theproduct is shipped.  These salesaccounted for 66.6% of net revenues for the quarter ended May 31, 2010 and69.0% for the quarter ended May 31, 2009. The provisions of the Accounting Standards Codification 605 “RevenueRecognition” (ASC 605) have been applied, and as a result, a reserve isprovided for estimated future sales returns.

 

Estimated allowances for salesreturns are recorded as sales are recognized and recorded.  Management uses a moving average calculationto estimate the allowance for sales returns.  We are not responsible for product damaged intransit.  Damaged returns are primarilyfrom the retail stores.  The damagesoccur in the stores, not in shipping to the stores.  It is industry practice to accept returnsfrom wholesale customers.  Transportation revenue, the amount billed tothe customer for shipping the product, is recorded when products areshipped.  Management has estimated andincluded a reserve for sales returns of $100,000 as of May 31 and February 28,2010.

 

**Allowance forDoubtful Accounts**

 

We maintain an allowance forestimated losses resulting from the inability of our customers to make requiredpayments. An estimate of uncollectable amounts is made by management based uponhistorical bad debts, current customer receivable balances, age of customerreceivable balances, the customer’s financial condition and current economictrends.  If the actual uncollectedamounts significantly exceed the estimated allowance, then our operatingresults would be significantly adversely affected.  Management has estimated and included anallowance for doubtful accounts of $116,400 and $131,300 as of May 31,2010 and February 28, 2010, respectively.

 

**Inventory**

 

Management continually estimates and calculates theamount of non-current inventory. Non-current inventory arises due to occasionally purchasing bookinventory in quantities in excess of what will be sold within the normaloperating cycle due to minimum order requirements of our primary supplier.  Non-current inventory was estimated bymanagement using the current year turnover ratio by title.  All inventory in excess of 2 1⁄2 years ofanticipated sales was classified as noncurrent inventory. Noncurrent inventorybalances, before valuation allowance, were $946,000 at May 31, 2010 and$989,000 at February 28, 2010.

 

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 $351,500 and $355,000 asof May 31, 2010 and February 28, 2010, respectively.

 

**Stock-BasedCompensation**

 

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.

 

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Item3     QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Wedo not have any material market risk.

 

Item4     CONTROLS ANDPROCEDURES

 

An evaluation was performed of the effectiveness of the design andoperation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and15d-15(e) as of May 31, 2010. This evaluation was conducted under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Controller/Corporate Secretary (Principal Financialand Accounting Officer).

 

Based on that evaluation, these officers concluded that our disclosurecontrols and procedures were effective pursuant to Exchange Act Rule 13a-15(e).

 

PART II.OTHER INFORMATION

 

Item1     LEGALPROCEEDINGS

 

NotApplicable.

 

Item 1A  RISK FACTORS

 

Notrequired by smaller reporting company.

 

Item2     UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table shows repurchases of our Common Stock during the quarterended May 31, 2010.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 
| **Period**               | ** ** | **Total  # of Shares  Purchased** | ** ** | **Average  Price  Paid per Share** | ** ** | **Total  # of Shares  Purchased as  Part of Publicly  Announced Plan (1)** | ** ** | **Maximum  # of  Shares that May  be Repurchased  under the Plan  (2) (3)** | ** ** |
|--------------------------|------------|-----------------------------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
|                     |       |                              |       |                               |       |                                                                            |       |                                                                             |       |
| March 1  - 31, 2010 |       | 15,000                            |       | $                                  | 6.91       |                                                                            | 15,000     |                                                                             | 411,233    |   |
| April 1  - 30, 2010 |       | 10,000                            |       | $                                  | 6.16       |                                                                            | 10,000     |                                                                             | 401,233    |   |
| May 1  - 31, 2010   |       | —                            |       | N/A                                |       | —                                                                          |       | 401,233                                                                          |       |
| Total                    |       | 25,000                            |       | $                                  | 6.61       |                                                                            | 25,000     |                                                                             |       |   |

 

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

 

(2)             In April 2008the Board of Directors authorized us to purchase up to an additional 500,000shares of our common stock under a repurchase plan.  Pursuant to the plan, we may purchase a totalof 401,233 additional shares of our common stock until 3,000,000 shares havebeen repurchased.

 

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

 

Item3     DEFAULTS UPONSENIOR SECURITIES

 

NotApplicable.

 

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Item4     SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

 

NotApplicable.

 

Item5     OTHERINFORMATION

 

None

 

Item6     EXHIBITS

 

31.1     Certificationof the Chief Executive Officer of Educational Development Corporation pursuantto Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

 

31.2     Certificationof Controller and Corporate Secretary (Principal Financial and AccountingOfficer) of Educational Development Corporation pursuant to Section 302 ofthe Sarbanes-Oxley Act of 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**

 

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

 

 

EDUCATIONALDEVELOPMENT CORPORATION

(Registrant)

 

 
| Date:  | July 15,  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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