**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, 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-2 ofthe Exchange Act) Yes o No x

 

As of October 13,2010 there were 3,892,280 shares of Educational Development Corporation CommonStock, $0.20 par value outstanding.

 

 

 

----

 

PART I.  FINANCIAL INFORMATION

ITEM1

 

**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSED BALANCE SHEETS (UNAUDITED)**

 
| ** **                                                                                                                                                                                                   | ** ** | **August 31, 2010** | ** ** | **February 28, 2010** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                   |       |                          |       |                            |       |
|                                                                                                                                                                                                         |       |                          |       |                            |       |
| CURRENT  ASSETS:                                                                                                                                                                                             |       |                          |       |                            |       |
| Cash  and cash equivalents                                                                                                                                                                                   |       | $                             | 1,702,200  |                            | $          | 1,196,900 |   |
| Accounts  receivable, less allowance for doubtful accounts and sales returns $192,700  (August 31) and $231,300 (February 28)                                                                      |       | 3,474,300                     |       | 3,305,500                       |       |
| Inventories—Net                                                                                                                                                                                         |       | 10,165,100                    |       | 11,285,300                      |       |
| Prepaid  expenses and other assets                                                                                                                                                                           |       | 301,900                       |       | 268,400                         |       |
| Income  tax receivable                                                                                                                                                                                       |       | —                        |       | 8,000                           |       |
| Deferred  income taxes                                                                                                                                                                                       |       | 256,900                       |       | 256,900                         |       |
| Total  current assets                                                                                                                                                                                        |       | 15,900,400                    |       | 16,321,000                      |       |
|                                                                                                                                                                                                         |       |                          |       |                            |       |
| INVENTORIES—Net                                                                                                                                                                                         |       | 671,000                       |       | 659,000                         |       |
|                                                                                                                                                                                                         |       |                          |       |                            |       |
| PROPERTY,  PLANT AND EQUIPMENT—Net                                                                                                                                                                      |       | 2,088,800                     |       | 2,147,500                       |       |
|                                                                                                                                                                                                         |       |                          |       |                            |       |
| OTHER  ASSETS                                                                                                                                                                                                |       | 172,500                       |       | 172,500                         |       |
|                                                                                                                                                                                                         |       |                          |       |                            |       |
| DEFERRED  INCOME TAXES                                                                                                                                                                                       |       | 63,300                        |       | 60,400                          |       |
|                                                                                                                                                                                                         |       |                          |       |                            |       |
| TOTAL  ASSETS                                                                                                                                                                                                |       | $                             | 18,896,000 |                            | $          | 19,360,400 |   |
|                                                                                                                                                                                                         |       |                          |       |                            |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                |       |                          |       |                            |       |
|                                                                                                                                                                                                         |       |                          |       |                            |       |
| CURRENT  LIABILITIES:                                                                                                                                                                                        |       |                          |       |                            |       |
| Accounts  payable                                                                                                                                                                                            |       | $                             | 2,293,600  |                            | $          | 2,259,100 |   |
| Accrued  salaries and commissions                                                                                                                                                                            |       | 526,800                       |       | 531,600                         |       |
| Current  maturities of long-term debt                                                                                                                                                                        |       | 75,000                        |       | 75,000                          |       |
| Income  taxes payable                                                                                                                                                                                        |       | 59,900                        |       | —                          |       |
| Dividends  payable                                                                                                                                                                                           |       | 466,400                       |       | 466,400                         |       |
| Other  current liabilities                                                                                                                                                                                   |       | 588,700                       |       | 531,200                         |       |
| Total  current liabilities                                                                                                                                                                                   |       | 4,010,400                     |       | 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 6,041,040  (August 31 and February 28) shares; Outstanding 3,886,520  (August 31) and 3,887,030 (February 28) shares |       | 1,208,200                     |       | 1,207,800                       |       |
| Capital  in excess of par value                                                                                                                                                                              |       | 8,548,000                     |       | 8,544,000                       |       |
| Retained  earnings                                                                                                                                                                                           |       | 16,838,400                    |       | 17,391,700                      |       |
|                                                                                                                                                                                                         |       | 26,594,600                    |       | 27,143,500                      |       |
| Less  treasury stock, at cost                                                                                                                                                                                |       | (11,784,000                   | )          | (11,721,400                     | )          |
|                                                                                                                                                                                                         |       | 14,810,600                    |       | 15,422,100                      |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                             |       | $                             | 18,896,000 |                            | $          | 19,360,400 |   |

 

Seenotes to condensed 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,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                            | ** ** | **2010**                                              | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                  |       |                                                  |       |                                                |       |   |   |   |   |
| GROSS SALES                                                           |       | $                                                     | 9,112,200  |                                                | $          | 9,476,000 |   | $ | 17,888,200 |   | $ | 18,229,100 |   |
| Less discounts and allowances                                         |       | (3,616,800                                            | )          | (3,758,200                                          | )          | (6,361,200 | ) | (6,398,600 | ) |
| Transportation revenue                                                |       | 255,000                                               |       | 288,100                                             |       | 518,800 |   | 566,000 |   |
| NET REVENUES                                                          |       | 5,750,400                                             |       | 6,005,900                                           |       | 12,045,800 |   | 12,396,500 |   |
| COST OF SALES                                                         |       | 2,363,200                                             |       | 2,452,600                                           |       | 4,684,400 |   | 4,752,800 |   |
| Gross margin                                                          |       | 3,387,200                                             |       | 3,553,300                                           |       | 7,361,400 |   | 7,643,700 |   |
|                                                                  |       |                                                  |       |                                                |       |   |   |   |   |
| OPERATING EXPENSES:                                                   |       |                                                  |       |                                                |       |   |   |   |   |
| Operating and selling                                                 |       | 1,605,400                                             |       | 1,578,500                                           |       | 3,312,900 |   | 3,162,000 |   |
| Sales commissions                                                     |       | 998,700                                               |       | 1,088,100                                           |       | 2,303,200 |   | 2,450,100 |   |
| General and administrative                                            |       | 517,000                                               |       | 527,300                                             |       | 994,600 |   | 1,033,200 |   |
| Casualty loss                                                         |       | —                                                |       | —                                              |       | 188,500 |   | — |   |
|                                                                  |       | 3,121,100                                             |       | 3,193,900                                           |       | 6,799,200 |   | 6,645,300 |   |
|                                                                  |       |                                                  |       |                                                |       |   |   |   |   |
| OTHER INCOME (EXPENSE)                                                |       | 37,000                                                |       | (200                                                | )          | 41,200 |   | 26,800 |   |
|                                                                  |       |                                                  |       |                                                |       |   |   |   |   |
| EARNINGS BEFORE INCOME TAXES                                          |       | 303,100                                               |       | 359,200                                             |       | 603,400 |   | 1,025,200 |   |
|                                                                  |       |                                                  |       |                                                |       |   |   |   |   |
| INCOME TAXES                                                          |       | 112,900                                               |       | 133,800                                             |       | 225,000 |   | 384,400 |   |
|                                                                  |       |                                                  |       |                                                |       |   |   |   |   |
| NET EARNINGS                                                          |       | $                                                     | 190,200    |                                                | $          | 225,400 |   | $ | 378,400 |   | $ | 640,800 |   |
|                                                                  |       |                                                  |       |                                                |       |   |   |   |   |
| BASIC AND DILUTED EARNINGS PER SHARE:                                 |       |                                                  |       |                                                |       |   |   |   |   |
| Basic                                                                 |       | $                                                     | 0.05       |                                                | $          | 0.06 |   | $ | 0.10 |   | $ | 0.17 |   |
| Diluted                                                               |       | $                                                     | 0.05       |                                                | $          | 0.06 |   | $ | 0.10 |   | $ | 0.17 |   |
|                                                                  |       |                                                  |       |                                                |       |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT  SHARES OUTSTANDING: |       |                                                  |       |                                                |       |   |   |   |   |
| Basic                                                                 |       | 3,882,593                                             |       | 3,867,023                                           |       | 3,879,598 |   | 3,855,435 |   |
| Diluted                                                               |       | 3,883,505                                             |       | 3,868,155                                           |       | 3,881,818 |   | 3,856,507 |   |

 

See notes to condensed financial statements.

 

3

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY(UNAUDITED)**

**FOR THE SIX MONTHS ENDED AUGUST 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       |       | —                                              |       | —     |       | —              |       | —       |       | 28,720                  |       | (186,700   | )          | (186,700 | ) |
| Sales of treasury stock           |       | —                                              |       | —     |       | —              |       | —       |       | (26,210                 | )          | 124,100    |       | 124,100 |   |
| Exercise of options at $2.1875    |       | 2,000                                               |       | 400        |       | 4,000               |       | —       |       | —                  |       | —     |       | 4,400 |   |
| Dividends declared ($.24/share)   |       | —                                              |       | —     |       | —              |       | (931,700     | )          | —                  |       | —     |       | (931,700 | ) |
| Net earnings                      |       | —                                              |       | —     |       | —              |       | 378,400      |       | —                  |       | —     |       | 378,400 |   |
| BALANCE—August 31, 2010 |       | 6,041,040                                           |       | $          | 1,208,200  |                | $          | 8,548,000    |       | $                       | 16,838,400 |       | 2,154,520  |   | $ | (11,784,000 | ) | $ | 14,810,600 |   |

 

See notes to condensed financial statements.

 

4

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**EDUCATIONALDEVELOPMENT CORPORATION**

**CONDENSEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**

**FOR THE SIXMONTHS ENDED AUGUST 31,**

 
| ** **                                            | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                 |       | $          | 1,499,400  |       | $          | (1,371,400 | ) |
|                                                  |       |       |       |       |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                 |       |       |       |       |       |
| Purchases of property and equipment                   |       | (4,200     | )          | —     |       |
|                                                  |       |       |       |       |       |
| Net cash used in investing activities                 |       | (4,200     | )          | —     |       |
|                                                  |       |       |       |       |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                 |       |       |       |       |       |
| Cash paid to acquire treasury stock                   |       | (186,700   | )          | (3,700     | )          |
| Cash received from sales of treasury stock            |       | 124,100    |       | 120,700    |       |
| Borrowings under revolving credit agreement           |       | —     |       | 1,000,000  |       |
| Payments under revolving credit agreement             |       | —     |       | (847,600   | )          |
| Dividends paid                                        |       | (931,700   | )          | (1,536,600 | )          |
| Stock options exercised                               |       | 4,400      |       | —     |       |
|                                                  |       |       |       |       |       |
| Net cash used in financing activities                 |       | (989,900   | )          | (1,267,200 | )          |
|                                                  |       |       |       |       |       |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS |       | 505,300    |       | (2,638,600 | )          |
|                                                  |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD    |       | 1,196,900  |       | 2,896,200  |       |
|                                                  |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS—END OF PERIOD          |       | $          | 1,702,200  |       | $          | 257,600 |   |
|                                                  |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:     |       |       |       |       |       |
| Cash paid for income taxes                            |       | $          | 160,000    |       | $          | 460,000 |   |

 

See notes to condensed financial statements.

 

5

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NOTESTO CONDENSED FINANCIAL STATEMENTS (Unaudited)

 

Note1 — The information shown with respect to the three and six months endedAugust 31, 2010 and 2009, respectively, which is unaudited, includes alladjustments which in the opinion of Management are considered to be necessaryfor a fair presentation of earnings for such periods.  The adjustments reflected in the financialstatements represent normal recurring adjustments.  The results of operations for the three andsix months ended August 31, 2010 and 2009, respectively, are notnecessarily 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 August 31, 2010, the rate in effectwas 5.00%.  Borrowings are collateralizedby substantially all the assets of the Company. At August 31, 2010, we had no debt outstanding under thisagreement. Available credit under the revolving credit agreement was $2,500,000at August 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 August 31, 2010, we had no letters of credit outstanding.

 

Note3 — Inventories consist of the following:

 
| ** **                      | ** ** | **2010**            | ** ** |
|---------------------------------|------------|---------------------|------------|
| ** **                      | ** ** | **August 31,** | ** ** | **February 28,** | ** ** |
| Current:                        |       |                |       |   |   |
| Book inventory                  |       | $                   | 10,193,100 |   | $ | 11,310,300 |   |
| Inventory valuation allowance   |       | (28,000             | )          | (25,000 | ) |
|                            |       |                |       |   |   |
| Inventories net–current    |       | $                   | 10,165,100 |   | $ | 11,285,300 |   |
|                            |       |                |       |   |   |
| Noncurrent:                     |       |                |       |   |   |
| Book inventory                  |       | $                   | 1,006,000  |   | $ | 989,000 |   |
| Inventory valuation allowance   |       | (335,000            | )          | (330,000 | ) |
|                            |       |                |       |   |   |
| Inventories net–noncurrent |       | $                   | 671,000    |   | $ | 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 $1.9 million and $3.1million for the three months ended August 31, 2010 and 2009,respectively.  Total inventory purchasesfrom all suppliers were approximately $2.5 million and $4.4 million for thethree months ended August 31, 2010 and 2009, respectively.

 

For the six months ended August 31, 2010 and 2009, respectively,purchases from this company were approximately $3.1 million and $6.5million.  Total inventory purchases fromall suppliers were approximately $4.1 million and $8.6 million for the same respectiveperiods.

 

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 shares outstandingand dilutive potential common shares issuable which include, where appropriate,the assumed exercise of options. In computing diluted EPS we have utilized thetreasury stock method.

 

6

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

 

**Earnings Per Share:**

 
| ** **                                     | ** ** | **Three Months Ended August 31,** | ** ** | **Six Months Ended August 31,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **2010**                                              | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                           |       |                                                  |       |                                                |       |   |   |   |   |
| Net earnings applicable to common shareholders |       | $                                                     | 190,200    |                                                | $          | 225,400 |   | $ | 378,400 |   | $ | 640,800 |   |
|                                           |       |                                                  |       |                                                |       |   |   |   |   |
| **Shares:**                                    |       |                                                  |       |                                                |       |   |   |   |   |
|                                           |       |                                                  |       |                                                |       |   |   |   |   |
| Weighted average shares outstanding - basic    |       | 3,882,593                                             |       | 3,867,023                                           |       | 3,879,598 |   | 3,855,435 |   |
| Assumed exercise of options                    |       | 912                                                   |       | 1,132                                               |       | 2,220 |   | 1,072 |   |
|                                           |       |                                                  |       |                                                |       |   |   |   |   |
| Weighted average shares outstanding - diluted  |       | 3,883,505                                             |       | 3,868,155                                           |       | 3,881,818 |   | 3,856,507 |   |
|                                           |       |                                                  |       |                                                |       |   |   |   |   |
| **Basic Earnings Per Share**                   |       | $                                                     | 0.05       |                                                | $          | 0.06 |   | $ | 0.10 |   | $ | 0.17 |   |
| **Diluted Earnings Per Share**                 |       | $                                                     | 0.05       |                                                | $          | 0.06 |   | $ | 0.10 |   | $ | 0.17 |   |

 

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 second quarter of fiscalyear 2010, we repurchased 3,720 shares of common stock.  The maximum number of shares that can berepurchased in the future is 397,513.

 

Note 5 — We account for stock-based compensation wherebyshare-based payment transactions with employees, such as stock options and restrictedstock, are measured at estimated fair value at date of grant and recognized ascompensation expense over the vesting period.

 

Note6 — Freight costs and handling costs incurred are included in operating &selling expenses and were $500,100 and $509,100 for the three months ended August 31,2010 and 2009, respectively.

 

Forthe six months ended August 31, 2010 and 2009, respectively, freight andhandling costs incurred are included in operating & selling expensesand were $1,005,800 and $987,700.

 

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 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.

 

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 and six months ended August 31, 2010 and2009 follows:

 

**NET REVENUES**

 
| ** **     | ** ** | **Three Months Ended August 31,** | ** ** | **Six Months Ended August 31** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **     | ** ** | **2010**                                              | ** ** | **2009**                                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Publishing** |       | $                                                     | 2,709,300  |                                               | $          | 2,642,100 |   | $ | 4,808,900 |   | $ | 4,623,900 |   |
| **UBAM**       |       |                                                  | 3,041,100  |                                               |       | 3,363,800 |   |   | 7,236,900 |   |   | 7,772,600 |   |
| **Other**      |       |                                                  | —     |                                               |       | — |   |   | — |   |   | — |   |
| **Total**      |       | $                                                     | 5,750,400  |                                               | $          | 6,005,900 |   | $ | 12,045,800 |   | $ | 12,396,500 |   |

 

**EARNINGS (LOSS) BEFORE INCOME TAXES**

 
| ** **     | ** ** | **Three Months Ended August 31,** | ** ** | **Six Months Ended August 31** | ** ** |
|----------------|------------|-------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **     | ** ** | **2010**                                              | ** ** | **2009**                                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Publishing** |       | $                                                     | 843,500    |                                               | $          | 873,800 |   | $ | 1,447,100 |   | $ | 1,535,500 |   |
| **UBAM**       |       |                                                  | 456,900    |                                               |       | 516,400 |   |   | 1,340,900 |   |   | 1,530,500 |   |
| **Other**      |       |                                                  | (997,300   | )                                                  |       | (1,031,000 | ) |   | (2,184,600 | ) |   | (2,040,800 | ) |
| **Total**      |       | $                                                     | 303,100    |                                               | $          | 359,200 |   | $ | 603,400 |   | $ | 1,025,200 |   |

 

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 recently issued accounting standards are not applicableto us.

 

Note 9 — During the six month period ended August 31,2010, we determined that amounts paid to a third party for travel deposits hadnot been used to reserve travel for the Company.  As a result of this, we had to pay and/orwill have to pay approximately $188,500 in additional travel expenses, which isreported in operating expenses as a casualty loss.

 

Note 10 —On September 17, 2010, we paid the previously declared$0.12 dividend per share to shareholders of record as of September 10,2010.

 

ITEM2   MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL 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 can 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.*

 

**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.

 

8

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**Earnings as a Percent of Net Revenues**

 
| ** **                        | ** ** | **Three Months Ended August 31,** | ** ** | **Six Months Ended August 31,** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2010**                                              | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net revenues                      |       | 100.0                                                 | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| Cost of sales                     |       | 41.1                                                  | %          | 40.8                                                | %          | 38.9 | % | 38.3 | % |
| Gross margin                      |       | 58.9                                                  | %          | 59.2                                                | %          | 61.1 | % | 61.7 | % |
| Operating expenses:               |       |                                                  |       |                                                |       |   |   |   |   |
| Operating & selling      |       | 27.9                                                  | %          | 26.3                                                | %          | 27.5 | % | 25.5 | % |
| Sales commissions                 |       | 17.4                                                  | %          | 18.1                                                | %          | 19.1 | % | 19.8 | % |
| General & administrative |       | 9.0                                                   | %          | 8.8                                                 | %          | 8.2 | % | 8.3 | % |
| Casualty loss                     |       | 0.0                                                   | %          | 0.0                                                 | %          | 1.6 | % | 0.0 | % |
| Total operating expenses          |       | 54.3                                                  | %          | 53.2                                                | %          | 56.4 | % | 53.6 | % |
| Income from operations            |       | 4.6                                                   | %          | 6.0                                                 | %          | 4.7 | % | 8.1 | % |
| Other income                      |       | 0.7                                                   | %          | 0.0                                                 | %          | 0.3 | % | 0.2 | % |
| Earnings before income taxes      |       | 5.3                                                   | %          | 6.0                                                 | %          | 5.0 | % | 8.3 | % |
| Income taxes                      |       | 2.0                                                   | %          | 2.2                                                 | %          | 1.9 | % | 3.1 | % |
| Net earnings                      |       | 3.3                                                   | %          | 3.8                                                 | %          | 3.1 | % | 5.2 | % |

 

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

 

Weearned income before income taxes of $303,100 for the three months ended August 31,2010 compared with $359,200 for the three months ended August 31, 2009.

 

**Revenues**

 
| ** **                           | ** ** | **For the Three Months Ended August 31,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                           | ** ** | **2010**                                                                | ** ** | **2009**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Gross sales                          |       | $                                                                       | 9,112,200  |                 | $          | 9,476,000            |       | $ | (363,800 | ) | (3.8 | ) |
| Less discounts & allowances |       | (3,616,800                                                              | )          | (3,758,200           | )          | 141,400              |       | (3.8 | ) |
| Transportation revenue               |       | 255,000                                                                 |       | 288,100              |       | (33,100              | )          | (11.5 | ) |
| Net revenues                         |       | $                                                                       | 5,750,400  |                 | $          | 6,005,900            |       | $ | (255,500 | ) | (4.3 | ) |

 

TheUBAM Division’s gross sales decreased $590,500 during the three month periodending August 31, 2010 when compared with the same quarterly period a yearago.  This decrease consists primarily ofdecreases in internet sales of 10%, 16% in home parties and 15% in directsales, offset by a 12% 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 16% increase in theaverage order size.

 

ThePublishing Division’s gross sales increased $226,700 during the three monthperiod ending August 31, 2010 when compared with the same quarterly perioda year ago.  We attribute this to an11.0% increase in sales to smaller retail stores, offset by a 1.9% decrease ininside sales and a 1.7% decrease in sales to major national accounts.

 

TheUBAM Division’s discounts and allowances were $621,700 and $921,000 for thequarterly periods ended August 31, 2010 and 2009, respectively.  TheUBAM Division 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.  TheUBAM Division’s discounts and allowances were 18.2% and 23.0% of UBAM’s grosssales for the quarterly periods ended August 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 $2,995,100 and $2,837,200 for thequarterly periods ended August 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 

 

9

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discountsbetween 48% and 55% of the retail price, based upon the quantity of booksordered and the dollar amount of the order. The Publishing Division’s discounts and allowances were 52.6% ofPublishing’s gross sales for the quarterly period ended August 31, 2010and 51.9% for the quarterly period ended August 31, 2009.

 

**Expenses**

 
| ** **                        | ** ** | **For Three Months Ended August 31,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                        | ** ** | **2010**                                                       | ** ** | **2009**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Cost of sales                     |       | $                                                              | 2,363,200  |                 | 2,452,600  |                 | $          | (89,400 | ) | (3.6 | ) |
| Operating & selling      |       | 1,605,400                                                      |       | 1,578,500            |       | 26,900               |       | 1.7 |   |
| Sales commissions                 |       | 998,700                                                        |       | 1,088,100            |       | (89,400              | )          | (8.2 | ) |
| General & administrative |       | 517,000                                                        |       | 527,300              |       | (10,300              | )          | (2.0 | ) |
| Total                             |       | $                                                              | 5,484,300  |                 | $          | 5,646,500            |       | $ | (162,200 | ) | (2.9 | ) |
|                                   |            |                                                                |            |                      |            |                      |            |  |  |  |  |  |

 

Cost of sales decreased 3.6% for the three months ended August 31,2010 when compared with the three months ended August 31, 2009.  Cost of sales as a percentage of gross saleswas 25.9% for both the three months ended August 31, 2010 and the threemonths ended August 31, 2009.  Cost of sales is the inventory cost of the product sold, whichincludes the cost of the product itself and inbound freight charges.  Purchasing and receiving costs, inspectioncosts, warehousing costs, and other costs of our distribution network areincluded in operating and selling expenses, not in cost of sales.  These costs totaled $277,300 in the quarterended August 31, 2010 and $274,700 in the quarter ended August 31,2009.

 

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.  Operating and selling expenses as a percentageof gross sales were 17.6% for the quarter ended August 31, 2010 and 16.7%for the quarter ended August 31, 2009.

 

Salescommissions in the Publishing Division increased 20.4% to $56,600 for the threemonths ended August 31, 2010. Publishing Division sales commissions are paid on net sales and were2.1% of net sales for the three months ended August 31, 2010 and 1.8% ofnet sales for the three months ended August 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 $942,100 for the three monthsended August 31, 2010 as a result of decreases in home show sales, directsales and internet sales, offset by an increase in school and library sales.  UBAM Division sales commissions are paid onretail sales and were 41.7% of retail sales for the three months ended August 31,2010 and 40.3% of retail sales for the three months ended August 31,2009.  The fluctuation in the percentagesof commission 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.

 

Oureffective tax rate was 37.2% for the quarterly periods ended August 31,2010 and 2009.  These rates are higherthan the federal statutory rate due to state income taxes.

 

**Operating Results for theSix Months Ended August 31, 2010**

 

Weearned income before income taxes of $603,400 for the six months ended August 31,2010 compared with $1,025,200 for the six months ended August 31, 2009.

 

10

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**Revenues**

 
| ** **                           | ** ** | **For the Six Months Ended August 31,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                           | ** ** | **2010**                                                              | ** ** | **2009**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Gross sales                          |       | $                                                                     | 17,888,200 |                 | $          | 18,229,100           |       | $ | (340,900 | ) | (1.9 | ) |
| Less discounts & allowances |       | (6,361,200                                                            | )          | (6,398,600           | )          | 37,400               |       | (0.6 | ) |
| Transportation revenue               |       | 518,800                                                               |       | 566,000              |       | (47,200              | )          | (8.3 | ) |
| Net revenues                         |       | $                                                                     | 12,045,800 |                 | $          | 12,396,500           |       | $ | (350,700 | ) | (2.8 | ) |

 

TheUBAM Division’s gross sales decreased $915,800 during the six month periodending August 31, 2010 when compared with the same six month period a yearago.  This decrease consists primarily ofdecreases of 16% in home parties, 11% in direct sales and 2% in internet sales,offset by an increase in school and library sales of 6%.  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 $574,900 during the six monthperiod ending August 31, 2010 when compared with the same six month perioda year ago.  We attribute this to an11.8% increase in sales to smaller retail stores and a 6.7% increase in insidesales, offset by a 6.0% decrease in sales to major national accounts.

 

TheUBAM Division’s discounts and allowances were $1,091,900 and $1,518,800 for thesix month periods ended August 31, 2010 and 2009, respectively.  TheUBAM Division 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.  TheUBAM Division’s discounts and allowances were 13.9% and 17.4% of UBAM’s grosssales for the six month periods ended August 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 $5,269,300 and $4,879,800 for the sixmonth periods ended August 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 52.4% of Publishing’s gross sales forthe six month period ended August 31, 2010 and 51.5% for the six monthperiod ended August 31, 2009.

 

**Expenses**

 
| ** **                        | ** ** | **For Six Months Ended August 31,** | ** ** | **$ Increase/** | ** ** | **% Increase/** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                        | ** ** | **2010**                                                     | ** ** | **2009**             | ** ** | **(decrease)**       | ** ** | **(decrease)** | ** ** |
| Cost of sales                     |       | $                                                            | 4,684,400  |                 | $          | 4,752,800            |       | $ | (68,400 | ) | (1.4 | ) |
| Operating & selling      |       | 3,312,900                                                    |       | 3,162,000            |       | 150,900              |       | 4.8 |   |
| Sales commissions                 |       | 2,303,200                                                    |       | 2,450,100            |       | (146,900             | )          | (6.0 | ) |
| General & administrative |       | 994,600                                                      |       | 1,033,200            |       | (38,600              | )          | (3.7 | ) |
| Casualty loss                     |       | 188,500                                                      |       | —               |       | 188,500              |       | 100.0 |   |
| Total                             |       | $                                                            | 11,483,600 |                 | $          | 11,398,100           |       | $ | 85,500 |   | 0.8 |   |

 

Cost of sales decreased 1.4% for the six months ended August 31,2010 when compared with the six months ended August 31, 2009.  Cost of sales as a percentage of gross saleswas 26.2% for the six months ended August 31, 2010 and for the six monthsended August 31, 2009 was 26.1%.  Cost of sales is the inventory cost of the product sold, whichincludes the cost of the product itself and inbound freight charges.  Purchasing and receiving costs, inspectioncosts, warehousing costs, and other costs of our distribution network areincluded in operating and selling expenses, not in cost of sales.  These costs totaled $570,800 in the six monthsended August 31, 2010 and $561,200 in the six months ended August 31,2009.

 

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.  Operating and

 

11

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selling expenses as a percentage of grosssales were 18.5% for the six months ended August 31, 2010 and 17.3% forthe six months ended August 31, 2009.

 

Salescommissions in the Publishing Division increased 19.5% to $103,000 for the sixmonths ended August 31, 2010. Publishing Division sales commissions are paid on net sales and were2.1% of net sales for the six months ended August 31, 2010 and 1.9% of netsales for the six months ended August 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 any commissionexpense associated with them, and sales made by our outside salesrepresentatives.

 

Salescommissions in the UBAM Division decreased to $2,200,200 for the six monthsended August 31, 2010 as a result of decreases in home show sales, directsales and internet sales, offset by an increase in school and librarysales.  UBAM Division sales commissionsare paid on retail sales and were 40.2% of retail sales for the six monthsended August 31, 2010 and 38.2% of retail sales for the six months ended August 31,2009.  The fluctuation in the percentagesof commission 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.

 

During the six months ended August 31, 2010, we determined thatamounts paid to a third party for travel deposits had not been used to reservetravel for the Company.  As a result ofthis, we had to pay and/or will have to pay approximately $188,500 inadditional travel expenses, which is reported in operating expenses as acasualty loss.

 

Oureffective tax rate was 37.3% and 37.5% for the six month periods ended August 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 adopted astock 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 3,720 shares at a cost of$21,500 during the quarter ended August 31, 2010.

 

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

 

Forthe six months ended August 31, 2010, we experienced a positive cash flowfrom operating activities of $1,499,400. Cash flow from operating activities resulted from net income after taxesof $378,400, a decrease in inventory of $1,108,200, an increase in currentliabilities of $87,200 and a decrease in net taxes receivable/payable of$67,900, offset by a small increase in prepaid expenses of $33,500.

 

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 six months ended August 31, 2010, cash used in financing activitieswas $989,900 from dividend payments of $931,700 and the purchase of $186,700 oftreasury stock, offset by the sale of $124,100 of treasury stock.

 

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

 

12

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**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 August 31, 2010, the rate ineffect was 5.00%. Borrowings are collateralized by substantially all the assetsof the Company.  At August 31, 2010 theCompany had no debt outstanding under this agreement. Available credit underthe revolving credit agreement was $2,500,000 at August 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 the lineof credit plus the letters of credit would not exceed the borrowing base ineffect at the time.  For the quarterended August 31, 2010, we had no letters of credit outstanding.

 

**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 makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosures of contingent assetsand liabilities.  On an on-going basis,we evaluate our estimates, including those related to our valuation ofinventory, allowance for uncollectible accounts receivable, allowance for salesreturns, long-lived assets and deferred income taxes.  We base our estimates on historical experienceand on various other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom 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 52.9% of net revenues for the quarter ended August 31, 2010 and 56.0%for the quarter ended August 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 August 31, 2010 andFebruary 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 $92,700 and $131,300 as of August 31, 2010and 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 

 

13

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due to minimum order requirements of our primarysupplier.  Non-current inventory wasestimated by management using the current year turnover ratio by title.  All inventory in excess of 2 1⁄2 years ofanticipated sales was classified as noncurrent inventory. Noncurrent inventorybalances, before valuation allowance, were $1,006,000 at August 31, 2010 and $989,000at 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 $363,000 and $355,000 asof August 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.

 

Item3     QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Notapplicable.

 

Item4     CONTROLS ANDPROCEDURES

 

An evaluation was performed of the effectiveness of the design andoperation of our disclosure controls and procedures pursuant to Exchange ActRule 13a-15(e) and 15d-15(e) as of August 31, 2010. This evaluation wasconducted under the supervision and with the participation of our management,including our Chief Executive Officer and our Controller/Corporate Secretary(Principal Financial and Accounting Officer).

 

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

 

PARTII. 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 thequarter ended August 31, 2010.

 

14

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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)** | ** ** |
|---------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | ** **                                      | ** ** | ** **                                       | ** ** | ** **                                                                                                              | ** ** | ** **                                                                                                                           | ** ** |
| June 1 - 30, 2010   |       | 233                                             |       | $                                                | 5.74       |                                                                                                                    | 233        |                                                                                                                                 | 401,000    |   |
| July 1 - 31, 2010   |       | 1,000                                           |       | $                                                | 5.62       |                                                                                                                    | 1,000      |                                                                                                                                 | 400,000    |   |
| August 1 - 31, 2010 |       | 2,487                                           |       | $                                                | 5.84       |                                                                                                                    | 2,487      |                                                                                                                                 | 397,513    |   |
| Total               |       | 3,720                                           |       | $                                                | 5.78       |                                                                                                                    | 3,720      |                                                                                                                                 |       |   |

 

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(1)    All of the shares of commonstock set forth in this column were purchased pursuant to a publicly announcedplan as described in footnote 2 below.

 

(2)    In April 2008 the Board ofDirectors authorized us to purchase up to an additional 500,000 shares of ourcommon stock under a repurchase plan. Pursuant to the plan, we may purchase a total of 397,513 additional sharesof our common stock until 3,000,000 shares have been repurchased.

 

(3)    There is no expiration datefor the repurchase plan.

 

Item3     DEFAULTS UPONSENIOR SECURITIES

NotApplicable.

 

Item4     SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

NotApplicable.

 

Item5     OTHERINFORMATION

 

None

 

Item6     EXHIBITS

 

31.1     Certification of the ChiefExecutive Officer of Educational Development Corporation pursuant to Section302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

 

31.2     Certification of Controllerand Corporate Secretary (Principal Financial and Accounting Officer) ofEducational Development Corporation pursuant to Section 302 of theSarbanes-Oxley Act of 2002 furnished herewith.

 

32.1     Certification pursuant to 18U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

 

15

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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:  | October  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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