Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

# **Washington, D.C. 20549**

# ** **

**FORM 10-K**

# ** **

**(MarkOne)**

 
| **x** | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**For the fiscal year ended February 28, 2009**

 

**OR**

 
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934** |
|-------|------------|--------------------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom          to          .**

 

**Commission file number: 0-4957**

 

**EDUCATIONALDEVELOPMENT CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **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**

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

**Common Stock, $.20 par value**

(Title of class)

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

 

| Yes o |   | No x |
|------------|--------|-----------|

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

 

| Yes o |   | No x |
|------------|--------|-----------|

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

| Yes x |   | No o |
|------------|--------|-----------|

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§ 229.405 of this chapter) during the preceding 12months (orfor such shorter period that the registrant was required to submit and postsuch files).

 

| Yes o |   | No o |
|------------|--------|-----------|

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See definitions of “largeaccelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

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

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)

 

| Yes o |   | No x |
|------------|--------|-----------|

 

The aggregate market value of the voting shares held by non-affiliatesof the registrant at the price at which the common stock was last sold on August 31,2008, on the NASDAQ Stock Market, LLC was $20,216,600.

 

As of May 22,2009, 3,841,369 shares of common stock were outstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE

Portionsof the Proxy Statement for fiscal year 2009 relating to our Annual Meeting ofShareholders to be held on July 23, 2009 are incorporated by referenceinto Part III of this Report on Form 10-K.

 

 

 

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TABLE OF CONTENTS

 
| FACTORS  AFFECTING FORWARD LOOKING STATEMENTS |                                                                                                                | 3      |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------|--------|
|                                          |                                                                                                                |   |   |
| PART I                                   |                                                                                                                |   |   |
|                                          |                                                                                                                |   |   |
| Item 1.                                       | Business                                                                                                            |   | 3 |
|                                          |                                                                                                                |   |   |
| Item 1A                                       | Risk Factors                                                                                                        |   | 5 |
|                                          |                                                                                                                |   |   |
| Item  1B                                      | Unresolved  Staff Comments                                                                                          |   | 5 |
|                                          |                                                                                                                |   |   |
| Item 2.                                       | Properties                                                                                                          |   | 5 |
|                                          |                                                                                                                |   |   |
| Item 3.                                       | Legal  Proceedings                                                                                                  |   | 5 |
|                                          |                                                                                                                |   |   |
| Item  4.                                      | Submission  of Matters to a Vote of Security Holders                                                                |   | 5 |
|                                          |                                                                                                                |   |   |
| PART II                                  |                                                                                                                |   |   |
|                                          |                                                                                                                |   |   |
| Item  5.                                      | Market For  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   | 5 |
|                                          |                                                                                                                |   |   |
| Item 6.                                       | Selected  Financial Data                                                                                            |   | 7 |
|                                          |                                                                                                                |   |   |
| Item  7.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |   | 7 |
|                                          |                                                                                                                |   |   |
| Item  7A.                                     | Quantitative  and Qualitative Disclosures About Market Risk                                                         |   | 17 |
|                                          |                                                                                                                |   |   |
| Item  8.                                      | Financial  Statements and Supplementary Data                                                                        |   | 17 |
|                                          |                                                                                                                |   |   |
| Item  9.                                      | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                               |   | 17 |
|                                          |                                                                                                                |   |   |
| Item 9A.                                      | Controls  and Procedures                                                                                            |   | 17 |
|                                          |                                                                                                                |   |   |
| Item 9B.                                      | Other Information                                                                                                   |   | 18 |
|                                          |                                                                                                                |   |   |
| PART III                                 |                                                                                                                |   |   |
|                                          |                                                                                                                |   |   |
| Item 10.                                      | Directors and Executive  Officers of the Registrant                                                                 |   | 18 |
|                                          |                                                                                                                |   |   |
| Item 11.                                      | Executive Compensation                                                                                              |   | 19 |
|                                          |                                                                                                                |   |   |
| Item 12.                                      | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                     |   | 19 |
|                                          |                                                                                                                |   |   |
| Item 13.                                      | Certain Relationships and  Related Transactions                                                                     |   | 19 |
|                                          |                                                                                                                |   |   |
| Item 14.                                      | Principal Accounting Fees and  Services                                                                             |   | 19 |
|                                          |                                                                                                                |   |   |
| PART IV                                  |                                                                                                                |   |   |
|                                          |                                                                                                                |   |   |
| Item 15.                                      | Exhibits, Financial Statement  Schedules                                                                            |   | 20 |

 

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**Part 1**

 

**FORWARD LOOKING STATEMENTS**

*This report contains statementsthat are forward-looking.  You shouldread the following discussion in connection with our consolidated financialstatements, including the notes to those statements, included in thisdocument.  These forward-lookingstatements are not historical facts but are expectations or projections basedon certain assumptions and analyses made by our senior management in light oftheir experience and perception of historical trends, current conditions,expected future developments and other factors. Actual events and results may be materially different from anticipated resultsdescribed in such statements.*

 

*Our ability to achieve suchresults is subject to certain risks and uncertainties which are not currentlyknown to us.  We caution you not to placeundue reliance on these forward-looking statements, which speak only as of thedate that they are made.  We do notundertake any obligation to publicly release any revisions to theseforward-looking statements to reflect events or circumstances after the date ofthis report.*

 

**Item 1.****    BUSINESS**

 

*(a)* *General Development of Business*

 

Educational DevelopmentCorporation (“EDC”) is the exclusive United States trade publisher of the lineof educational children’s books produced in the United Kingdom by UsbornePublishing Limited (“Usborne”).  We wereincorporated on August 23, 1965. Our fiscal years end on February 28(29).

 

In December 2008, wepurchased Kane/Miller Book Publishers and integrated them into our existingdistribution markets.  They areaward-winning publishers of International children’s books.

 

Our company motto is “Thefuture of our world depends on the education of our children.  EDC delivers educational excellence one bookat a time.  We provide economicopportunity while fostering strong family values.  We touch the lives of children for alifetime.”

 

*(b)  Financial Information about Industry Segments*

 

While selling children’sbooks is our only line of business, we sell them through two divisions:

 

·                  Home BusinessDivision (“Usborne Books and More” or “UBAM”) - This division distributes booksnationwide through independent consultants who hold book showings in individualhomes, and through book fairs, direct sales and Internet sales.  The UBAM Consultants also distribute thesetitles to school and public libraries.

 

·                  PublishingDivision (“Publishing”) – This division markets books to bookstores (includingmajor national chains), toy stores, specialty stores, museums and other retailoutlets throughout the country.

 

Percent Net Revenues byDivision

 
| ** **     | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Publishing     |       | 28       | %          | 27       | %          |
| UBAM           |       | 72       | %          | 73       | %          |
| Total revenues |       | 100      | %          | 100      | %          |

 

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*(c)  Narrative Description of Business*

 

*Products*

As the sole United Statestrade publisher of the Usborne line of books, we offer over 1,500 differenttitles.  Many are interactive in nature,including our Touchy-Feely board books, jigsaw puzzle books, activity andflashcards, adventure and search books, art books, sticker books and foreignlanguage books. Many titles are also published in Spanish.  We also own the line of books originallypublished by Kane/Miller Book Publishers, having purchased them in December 2008.  The majority of the titles in this lineoriginally were published in other countries in their native languages.

 

We have a broad line of ‘internet-linked’books which allow readers to expand their educational experience by referringthem to relevant non-Usborne websites. Our books include science and math titles, as well as chapter books andnovels.

 

We also produce anddistribute “Usborne Kid Kits”, which combine an Usborne book with specialtyitems/toys that complement the information contained in the book.

 

We continually introduce newtitles across all lines of our products.

 

UBAM markets the books through commissionedconsultants using a combination of direct sales, home parties, book fairs andthe Internet.  The division hadapproximately 8,400 consultants in 50 states at February 28, 2009.

 

Publishing markets through commissioned traderepresentatives who call on book, toy, specialty stores and other retailoutlets, as well as through in-house marketing by telephone to the trade.  This division markets to approximately 5,000book, toy and specialty stores. Significant orders totaling 34% of the Publishing Division’s sales havebeen received from major book chains. During fiscal year 2009, the division continued to expand into massmerchandising outlets such as drug, department and discount stores.

 

*Seasonality*

Sales for both divisions are greatest duringthe Fall due to the holiday season.

 

*Competition*

We face competition on twofronts for our UBAM Division from several other larger direct selling companies- for sales and consultants.  However, noother direct selling company exclusively sells children’s books.  Our school and library market faces strongcompetition from Scholastic Books for the book fair market.

 

Publishing faces strong competition fromlarge U.S. and international companies. Historically, this division’s sales are approximately 1.0% of industrysales of juvenile paperbacks.

 

*Employees*

As of April 1, 2009, 76 full-time and 2part-time employees worked at our Tulsa and LaJolla facilities; about half ofthose are in the assembly/distribution warehouse.  We believe our relations with our employees aregood.

 

*Company Reports*

Our annual and quarterly reports (Forms 10-K and 10-Q), current Form 8-K reports and amendments to those reports filed with the SEC are available for download from the Investor Relations portion of our Internet website at *www.edcpub.com*.

 

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Item1A.  RISK FACTORS

 

Notrequired by smaller reporting company.

 

Item 1B.  UNRESOLVEDSTAFF COMMENTS

 

None

 

Item 2.  PROPERTIES

 

We are located at 10302 E. 55th Pl., Tulsa,Oklahoma.  These facilities are owned byus and contain approximately 105,000 square feet of office and warehousespace.  All product distributions aremade from this warehouse.  We believethat our operating facility meets both present and future capacity needs.

 

In 2009, we leased 11,400 square feet ofadditional warehouse space two blocks from our main facilities.  This space is located at 5432 S. 103rd E. Ave., Tulsa, Oklahoma, and isused to store longer-term inventory requirements.

 

With the acquisition of Kane/Miller BookPublishers, we also lease a small office in LaJolla, California.

 

Item 3.  LEGALPROCEEDINGS

 

We are not a party to any material pendinglegal proceedings.

 

Item 4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

There were no matters submitted during thefourth quarter of fiscal year 2009 covered by this report to a vote of oursecurity holders.

 

### PART II

###  

Item5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

####  

The common stock of EDC is traded on theNASDAQ Stock Market, LLC (symbol—EDUC). The high and low closing quarterly common stock quotations for fiscalyears 2009 and 2008, as reported by the National Association of SecuritiesDealers, Inc., were as follows:

 
| ** ** | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------|------------|----------|------------|----------|------------|
| **Period** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| 1st Qtr    |       | 6.80     |       | 5.26     |       | 8.58 |   | 7.18 |   |
| 2nd Qtr    |       | 6.36     |       | 4.85     |       | 8.44 |   | 5.85 |   |
| 3rd Qtr    |       | 5.68     |       | 3.13     |       | 7.28 |   | 5.30 |   |
| 4th Qtr    |       | 4.47     |       | 3.11     |       | 6.59 |   | 5.19 |   |

 

The number of shareholdersof record of EDC’s common stock at May 8, 2009 was 725.

 

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We paid two $0.40 per sharedividends during fiscal year 2009 on May 19, 2008 and December 19,2008 and a $0.22 per share annual dividend during fiscal year 2008.  We paid a $0.40 per share annual dividend on May 15,2009 to shareholders of record as of May 8, 2009.

 

The following table showsrepurchases of our Common Stock which we made during the fourth quarter offiscal year 2009.

 

ISSUERPURCHASES OF EQUITY SECURITIES

 
| ** **                  | ** ** | ** **            | ** ** | ** **         | ** ** | **Total # of Shares**     | ** ** | **Maximum # of**    | ** ** |
|-----------------------------|------------|-----------------------|------------|--------------------|------------|---------------------------|------------|---------------------|------------|
| ** **                  | ** ** | ** **            | ** ** | ** **         | ** ** | **Purchased as**          | ** ** | **Shares that May** | ** ** |
| ** **                  | ** ** | **Total # of Shares** | ** ** | **Average Price**  | ** ** | **Part of Publicly** | ** ** | **be Repurchased**  | ** ** |
| **Period**                  | ** ** | **Purchased**         | ** ** | **Paid per Share** | ** ** | **Announced Plan (1)**    | ** ** | **under the Plan**  | ** ** |
|                        |       |                  |       |               |       |                      |       |                |       |
| December 1  - 31, 2008 |       | 2,909                 |       | $                  | 4.05       |                      | 2,909      |                | 437,657    |   |
| January 1 -  31, 2009  |       | 3,499                 |       | $                  | 4.06       |                      | 3,499      |                | 434,158    |   |
| February 1  - 28, 2009 |       | 6                     |       | $                  | 3.98       |                      | 6          |                | 434,152    |   |
| Total                       |       | 6,414                 |       | $                  | 5.68       |                      | 6,414      |                |       |   |

 

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(1) In April 2008 the Board of Directorsauthorized us to purchase up to 500,000 additional shares of our common stockunder a plan initiated in 1998.  Thisplan has no expiration date.

 

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Item 6.  SELECTEDFINANCIAL DATA

 

The registrant is a smaller reporting companyand is not required to provide this information.

 

Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

####  

# ***MD&A contains statementsthat are 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.***

# ** **

# **ManagementSummary**

# ** **

Educational Development Corporation is thesole distributor in the United States of the Usborne line of children’sbooks.  We operate two separatedivisions, Publishing and Usborne Books and More (“UBAM”), to sell thesebooks.  Our Corporate headquarters,including the distribution facility for both divisions, is located in Tulsa,Oklahoma.

 

These two divisions each have their owncustomer base.  The Publishing Divisionmarkets its products on a wholesale basis to various retail accounts.  The UBAM Division markets its products toindividual consumers as well as to school and public libraries throughdirect-selling consultants.

 

**Publishing Division**

 

The Publishing Division operates in a marketthat is highly competitive, with a large number of companies engaged in theselling of books.  Sales in the bookindustry were approximately $24.3 billion for calendar year 2008.  Sales in the trade industry, defined aswholesale sales to retailers, were approximately $8.1 billion for calendar year2008.

 

The Publishing Division’s customer baseincludes national book chains, regional and local bookstores, toy and giftstores, school supply stores and museums. To reach these markets, the Publishing Division utilizes a combinationof commissioned sales representatives located throughout the country and acommissioned telesales group located in our headquarters.  The Vice President of the Publishing Divisionmanages sales to the national chains.

 

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Publishing Division Sales by Market Type

 
| ** **             | ** ** | **FY 2009** | ** ** | **FY 2008** | ** ** |
|------------------------|------------|-------------|------------|-------------|------------|
| National chain  stores |       | 34          | %          | 32          | %          |
| All other              |       | 66          | %          | 68          | %          |
| Total net sales        |       | 100         | %          | 100         | %          |

 

The Publishing Division uses a variety ofmethods to attract potential new customers and maintain current customers.  Company personnel attend many of the nationaltrade shows held by the book selling industry each year, allowing us to makecontact with potential buyers who may be unfamiliar with our books.  We actively target the national chainsthrough joint promotional efforts and institutional advertising in tradepublications.  The Publishing Division also participates with certain customersin a cooperative advertising allowance program, under which we pay back up to2% of the net sales to that customer. Our products are then featured in promotions, such as catalogs, offeredby the vendor.

 

We mayalso acquire, for a fee, an end cap position in a bookstore (our products areplaced on the end of a shelf), which in the publishing industry is consideredan advantageous location in the bookstore. The costs of these promotions have been classified as reductions inrevenue in the statements of earnings.

 

The Publishing Division’sin-house telesales group targets the smaller independent book and gift storemarket.  Our semi-annual, full-color,160-page catalogs, are mailed to over 5,000 customers and potentialcustomers.  We also offer two displayracks to assist stores in displaying our products.

 

Net Revenues forPublishing Division

 
| ** **   | ** ** | **FY 2009** | ** ** | **FY 2008** | ** ** |
|--------------|------------|-------------|------------|-------------|------------|
| Net Revenues |       | $           | 8,126,000  |        | $          | 8,144,100 |   |
|              |            |             |            |             |            |  |  |

 

Publishing Division’s net revenues decreased$18,100 in fiscal year 2009 from fiscal year 2008, or 0.2%.  Net revenues were down 5% for inside sales,offset by an increase of 5% for national chain stores.

 

**Usborne Books and More (“UBAM”) Division**

 

The UBAM Division is a multi-level sellingorganization that markets its products through independent salesrepresentatives (“consultants”) located throughout the United States.  The customer base of UBAM consists ofindividual purchasers, as well as school and public libraries.  Revenues are generated through home shows,direct sales, Internet sales, book fairs and contracts with school and publiclibraries.

 

An important factor in the continued growthof the UBAM Division is the addition of new sales consultants and the retentionof existing consultants.  Current activeconsultants recruit new sales consultants. UBAM makes it easy to recruit by providing low-cost signing kits.  For one month, kits containing sampleproducts and supplies were free to new recruits when a minimum dollar home showwas submitted by the new recruit.  UBAMprovides an extensive handbook that is a valuable tool in explaining the variousprograms to the new recruit.

 

Consultants During Year

 
| ** **                                       | ** ** | **FY 2009** | ** ** | **FY 2008** | ** ** |
|--------------------------------------------------|------------|-------------|------------|-------------|------------|
| New Sales  Representatives                       |       | 6,000       |       | 5,500       |       |
| Active Sales  Representatives End of Fiscal Year |       | 8,400       |       | 7,900       |       |

 

The UBAM Division presently has six levels ofsales representatives:

·                  Consultants

·                  Supervisors

 

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·                  SeniorSupervisors

·                  ExecutiveSupervisors

·                  SeniorExecutive Supervisors

·                  Directors

 

Upon signing up, each individual isconsidered a consultant.  Consultantsreceive commissions from each sale they make; the commission rate beingdetermined by the marketing program under which the sale is made.  In addition, consultants receive a monthlysales bonus once their sales reach an established monthly goal.  Consultants who recruit other consultants andmeet certain established criteria are eligible to become supervisors.  Upon reaching this level, they receivemonthly override payments based upon the sales of their downline groups.

 

Once supervisors reach certain establishedcriteria, they become senior supervisors and are eligible to earn promotionbonuses on their consultants.  Oncesenior supervisors reach certain established criteria, they become executivesupervisors, senior executive supervisors or directors.  Executive supervisors and higher may receivean additional monthly override payment based upon the sales of their downlinegroups.

 

Percent of Net Revenuesby UBAM Marketing Program

 

| ** **                                      | ** ** | **FY 2009** | ** ** | **FY 2008** | ** ** |
|-------------------------------------------------|------------|-------------|------------|-------------|------------|
| Home Shows                                      |       | 37          | %          | 39          | %          |
| Direct Sales                                    |       | 2           | %          | 3           | %          |
| School &  Library, including Book Fair |       | 38          | %          | 36          | %          |
| Internet                                        |       | 13          | %          | 11          | %          |
| Transportation  Revenue                         |       | 10          | %          | 11          | %          |
| Totals                                          |       | 100         | %          | 100         | %          |

 

Number of Orders by UBAM Marketing Program

 
| ** **                 | ** ** | **FY 2009** | ** ** | **FY 2008** | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|
| Home Shows                 |       | 31,000      |       | 33,900      |       |
| Direct Sales               |       | 5,600       |       | 6,500       |       |
| School &  Library |       | 12,800      |       | 11,700      |       |
| Internet                   |       | 51,500      |       | 47,800      |       |
|                       |       | 100,900     |       | 99,900      |       |

 

Net revenues from home shows declined 14% or$895,600 during fiscal year 2009.  Thiswas a combination of per order averages which were down 6% and a lower numberof orders placed during the period. Homes shows were the original marketing program when UBAM began in 1989. Consultants contact individuals (“hostesses”)to hold book shows in their homes.  Theconsultant assists the hostess in setting up the details for the show and makesa presentation at the show and takes orders for the books.  The hostess earns free books based upon thetotal sales at the show.  Customerspecials are available for customers when they order a selected amount.  Additionally, home shows provide an excellentopportunity for recruiting new consultants.

 

Net revenues from direct sales declined 17%or $67,700 during fiscal year 2009.  Thisresulted from a 14% decrease in the number of orders placed during the year anda 3% decrease in the per order average. Direct sales are sales without a hostess being involved.  This program makes it possible forconsultants to work directly out of their homes by selling to friends,neighbors and other customers.  It is 

 

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especially convenient for those individuals who wish to order booksfrom a consultant but are unable to attend a home show.  TheUBAM Division offers many promotions (customer specials) throughout theyear.  These promotions offer thecustomer the opportunity to purchase selected items at a discount if thecustomer meets the defined criteria.  Thediscounts under these promotions are recorded in discounts and allowances.

 

The school and library marketing program,including book fairs, increased 1% or $61,100 during fiscal year 2009.  The number of orders placed during the yearwere up 9% while the per order average decreased 7%.  Our book fair program is comparable toScholastic’s program, which continues to dominate the book fair market.  Many schools hold joint book fairs with UBAMand our competitors, but in many cases, UBAM book fairs have been the onlyparticipant.

 

School and library sales are restricted toconsultants who have received additional, specialized training which allowsthem to sell to schools and libraries. The UBAM consultant is the only source that a library or school has forlibrary-bound Usborne books.  They arenot available through any of the school supply distribution companies.

 

Book fairs can be held with almost anyorganization as the sponsor.  Theconsultant provides promotional materials to acquaint parents with thebooks.  Parents turn in their orders at adesignated time.  The book fair programgenerates free books for the sponsoring organization.  UBAM also has a *Reach for the Stars* fundraiser program.  This is a pledge-based reading incentiveprogram that provides cash and books to the organization and books for thechildren.

 

Internet sales continue to show growth forUBAM, increasing 12% or $201,300 during fiscal year 2009.  Consultants utilize in-house-developed andhosted web sites in their businesses for a nominal monthly fee.  They can customize the web sites to their ownparticular needs or they can maintain the generic site.  Orders are transmitted to us through ashopping cart arrangement and the consultant receives sales credit andcommission on the sales.  Web-onlyspecials are changed frequently and have proved successful, contributing to thegrowth in this market.

 

The cost of free books provided under thevarious UBAM marketing programs is recorded as operating and selling expense inthe statements of earnings.

 

We believe that the UBAM Division has thegreatest growth potential for us.  Whilethere are many multi-level companies in the United States, UBAM is the only oneexclusively selling books.  We believethis is a fertile market with excellent opportunities for continuedgrowth.  The keys to future growth in theUBAM Division are recruiting and retaining consultants.

 

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**(1-2) Liquidity and Capital Resources**

 

EDC has ahistory of profitability and positive cash flow.  We can continue to grow with minimaladditional capital requirements.  Our primarysource of cash is generated from operations. Our primary uses of cash are to pay dividends, acquire treasury stock,purchase property and equipment, and repay borrowings on our line of credit.  We utilize our bank credit facility to meetour short-term cash requirements, when needed.

 

We expect our ongoing cash flow to continueto exceed cash required to operate the business.  Consequently, we expect short-term borrowingsto remain at a minimum during the current fiscal year.

 

During fiscal year 2009 weexperienced a positive cash flow from operations of $4,010,600.  Cash flow from operations was increased by adecrease in inventories of $2,095,700 and an increase in current liabilities of$105,000, offset by a decrease in other assets of $148,800.

 

Cash used in investingactivities was $740,300 primarily due to $709,800 related to the Kane/MillerBook Publishers acquisition as well as $30,500 for capital expenditures.  We estimate that cash used in investingactivities for fiscal year 2010 will be less than $500,000.  This would consist of software and hardwareenhancements to our existing data processing equipment, property improvementsand additional warehouse equipment.

 

Cashused in financing activities was $2,814,400 which was primarily due to dividendpayments of $3,055,900, and $802,800 paid to acquire treasury stock.  These were offset by cash received fromfinancing activities of $848,700 from the exercise of stock options and$195,600 from the sale of treasury stock. In September 2002, the Board of Directors authorized paying aminimum annual cash dividend of 20% of net earnings.  In fiscal years 2009 and 2008 we paid 160%and 36%, respectively, of net earnings as a cash dividend.

 

Our Boardof Directors adopted a stock repurchase plan in which we may purchase up to anadditional 500,000 shares as market conditions warrant.  Management believes the stock is undervaluedand when stock becomes available at an attractive price, we can utilize freecash flow to repurchase shares.  Managementbelieves this enhances the value to the remaining stockholders and that theserepurchases will have no adverse effect on our short-term and long-termliquidity.

 

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## **(3) Results of Operations**

 

Earnings as aPercent of Net Revenues

 
| ** **                        | ** ** | **FY 2009** | ** ** | **FY 2008** | ** ** |
|-----------------------------------|------------|-------------|------------|-------------|------------|
| Net revenues                      |       | 100.0       | %          | 100.0       | %          |
| Cost of sales                     |       | 36.0        | %          | 35.2        | %          |
| Gross margin                      |       | 64.0        | %          | 64.8        | %          |
| Operating expenses:               |       |        |       |        |       |
| Operating & selling      |       | 25.0        | %          | 24.3        | %          |
| Sales commissions                 |       | 22.6        | %          | 23.4        | %          |
| General & administrative |       | 6.3         | %          | 5.4         | %          |
| Total operating expenses          |       | 53.9        | %          | 53.1        | %          |
| Income from Operations            |       | 10.1        | %          | 11.7        | %          |
| Other income                      |       | 0.6         | %          | 0.5         | %          |
| Earnings before income taxes      |       | 10.7        | %          | 12.2        | %          |
| Income taxes                      |       | 4.2         | %          | 4.6         | %          |
| Net earnings                      |       | 6.5         | %          | 7.6         | %          |

 

## ***Fiscal Year 2009 Compared withFiscal Year 2008***

##  

The following presents anoverview of our results of operations for the years ended February 28,2009 and February 29, 2008.  We hadearnings before income taxes of $3,138,900 for fiscal year 2009 compared with$3,732,100 for fiscal year 2008.

 
| ** **                           | ** ** | **Revenues** | ** ** | **$ Increase/** | ** ** |
|--------------------------------------|------------|--------------|------------|----------------------|------------|
| ** **                           | ** ** | **FY 2009**  | ** ** | **FY 2008**          | ** ** | **(decrease)** | ** ** |
| Gross sales                          |       | $            | 40,283,500 |                 | $          | 40,600,300 |   | $ | (316,800 | ) |
| Less discounts & allowances |       | (12,462,200  | )          | (11,806,700          | )          | (655,500 | ) |
| Transportation revenue               |       | 1,577,100    |       | 1,727,100            |       | (150,000 | ) |
| Net revenues                         |       | $            | 29,398,400 |                 | $          | 30,520,700 |   | $ | (1,122,300 | ) |

 

The UBAMDivision’s gross sales decreased 1.1% or $257,600 during FY 2009 when comparedwith FY 2008.  This decrease isattributable to lower sales in the home party, direct sale market, and schooland library/book fair market, offset by increased sales in the internetmarkets.  Average sales per order forthis division were down 6.2%, while the overall number of orders was up 1.0%primarily due to additional book fair and internet sales orders.  The Publishing Division’s gross salesdecreased 0.4% or $59,200 during FY 2009 when compared with FY 2008.

 

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 Publishing Division’s discounts andallowances were $8.7 million in both fiscal years 2009 and 2008.  To becompetitive with other wholesale book distributors, the Publishing Divisionsells at discounts between 48% and 55% of the retail price, based upon thequantity of books ordered and the dollar amount of the order.  The Publishing Division’s discounts andallowances were 51.8% of Publishing’s gross sales in both fiscal year 2009 and2008.

 

TheUBAM Division’s discounts and allowances were $3.8 million in fiscal year 2009and $3.1 million in fiscal year 2008.  Most sales in the UBAM Division are at retail.  As a part of the UBAM 

 

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Division’s marketing programs, discountsbetween 40% and 50% of retail are offered on selected items at various timesthroughout the year.  The discounts andallowances in the UBAM Division will vary from year to year depending upon themarketing programs in place during any given year.  The UBAM Division’s discounts and allowanceswere 16.1% of UBAM’s gross sales in fiscal year 2009 and 13.0% in fiscal year2008.

 

Transportationrevenues decreased $150,000 in fiscal year 2009 relatively consistent with thedecrease in sales during the year.

 

## ** **

 
| ** **                        | ** ** | **Expenses** | ** ** | **$**       | ** Increase/** | ** **     |
|-----------------------------------|------------|--------------|------------|-------------|---------------------|----------------|
| ** **                        | ** ** | **FY 2009**  | ** ** | **FY 2008** | ** **          | **(decrease)** | ** ** |
| Cost of sales                     |       | $            | 10,581,600 |        | $                   | 10,750,200     |   | $ | (168,600 | ) |
| Operating & selling      |       | 7,358,300    |       | 7,424,500   |                | (66,200        | ) |
| Sales commissions                 |       | 6,645,100    |       | 7,137,600   |                | (492,500       | ) |
| General & administrative |       | 1,849,300    |       | 1,653,100   |                | 196,200        |   |
| Total                             |       | $            | 26,434,300 |        | $                   | 26,965,400     |   | $ | (531,100 | ) |

 

Cost of sales decreased approximately 1.6% infiscal year 2009 when compared with fiscal year 2008.  Our cost of products is 25% to 34% of thegross sales price, depending upon the product. In comparing the percentage change in gross sales with the percentagechange in cost of goods, consideration must be given to the mix of productssold.  Approximately 70% of our products come from one vendor, where the cost of theproducts is a fixed percentage of the retail price.

 

Cost ofsales is the inventory cost of product sold (including the cost of the productitself and inbound freight charges). Operating and selling expenses include purchasing and receiving,inspection, warehousing, and other costs of our distribution network.  These costs totaled $1,114,300 in FY2009 and$1,132,000 in FY2008.  When comparing ourgross margins with the gross margins of other companies, note that we do notinclude the costs of our distribution network in our cost of sales.

 

In addition to costs associated with our distribution network(noted above), operating and selling costs include expenses of the PublishingDivision, the UBAM Division and the order entry and customer servicefunctions.  Operatingand selling expenses as a percentage of gross sales were 18.3% for both fiscalyears 2009 and 2008.

 

Salescommissions in the Publishing Division increased $1,000 for the fiscal yearended 2009.  Sales commissions for thisdivision fluctuate depending upon the amount of sales made to our “house accounts,”which are our largest customers and do not have any commission expenseassociated with them, and sales made by the Company’s outside salesrepresentatives.  Publishing Divisionsales commissions are paid on net sales and were 1.7% of net sales in bothfiscal years 2009 and 2008.

 

Salescommissions in the UBAM Division decreased $493,500.  UBAM Division sales commissions are paid onretail sales and were 36.0% for fiscal year 2009 and 36.3% for fiscal year2008. The fluctuation in the percentages of commission expense to retail salesis the result of the type of sale.  Homeshows, book fairs, school and library sales and direct sales have differentcommission rates.  Also

 

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contributing to thefluctuations in the percentages is the payment of overrides and bonuses, bothdependent on consultants’ monthly sales and downline sales.  The decrease in sales commissions is theresult of lower sales in the UBAM Division.

 

General and administrative expensesinclude the executive department, accounting department, information servicesdepartment, general office management and building facilities management.  General and administrativeexpenses as a percentage of gross sales were 4.6% for fiscal year 2009 and 4.1%for fiscal year 2008.

 

The tax provision for fiscalyear 2009 was $1,226,300.  The effectiverate for fiscal year 2009 was 39.1% and for fiscal year 2008 was 37.7%.  Our effective tax rate is higher than theFederal statutory rate due to state income taxes.

 

**Contractual Obligations**

 

Theregistrant is a smaller reporting company and is not required to provide thisinformation.

 

**Critical Accounting Policies**

 

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

 

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

 

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**Stock-Based Compensation**

 

We account for stock-basedcompensation whereby share-based payment transactions with employees, such asstock options and restricted stock, are measured at estimated fair value atdate of grant and recognized as compensation expense over the vesting period.

 

**RevenueRecognition**

 

Sales are recognized andrecorded when products are shipped. Products are shipped FOB shipping point. The UBAM Division’s sales arepaid before the product is shipped. These sales accounted for 72% of net revenues in fiscal year 2009 and73% of net revenues in fiscal year 2008. The provisions of the SEC Staff Accounting Bulletin No.104, “RevenueRecognition in Financial Statements,” have been applied, and as a result, areserve is provided for estimated future sales returns.

 

Estimated allowances forsales returns 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 to the customer for shippingthe product, is recorded when products are shipped.  Management has estimated and included areserve for sales returns of $84,000 as of February 28, 2009 and February 29,2008.

 

**Allowance for Doubtful Accounts**

 

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments.  An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends.  Management has estimated allowance for doubtful accounts of $92,900 as of February 28, 2009 and $74,400 as of February 29, 2008.

 

**Inventory**

 

Management continuallyestimates and calculates the amount of non-current inventory.  The inventory arises due to occasionalpurchases of book inventory in quantities in excess of what will be sold withinthe normal operating cycle due to minimum order requirements of our primarysupplier.  Noncurrent 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 inventory balances were $913,000and $764,000 at February 28, 2009 and February 29, 2008,respectively.

 

Inventories are presentednet of a valuation allowance.  Managementhas estimated and included a valuation allowance for both current and noncurrentinventory.  This allowance is based onmanagement’s identification of slow moving inventory on hand.  Management has estimated a valuationallowance for both current and noncurrent inventory of $370,000 and $331,200 asof February 28, 2009 and February 29, 2008, respectively.

 

Ourproduct line contains approximately 1,500 titles, each with different rates ofsale, depending upon the nature and popularity of the title.  Almost all of our product line is saleable asthe books are not topical in nature and remain current in content today as wellas in the future.  Our products areprinted in Europe, China, Singapore, India, Malaysia and Dubai resulting in afour to six-month lead-time to have a title reprinted and delivered to us.

 

Ourprincipal supplier, based in England, imposes minimum order requirements beforereprinting a title.  At the current timewe must reorder 7,500 or more of a title in order to get a solo print run.  If we order less than 7,500 of a title, thenwe must share a print run with the supplier’s other customers. Sharing

 

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aprint run has resulted in delays of up to twelve months in receiving theordered title.  Anticipating customerpreferences and purchasing habits requires historical analysis of similartitles in the same series. We then place the initial order or re-order basedupon this analysis.

 

Thesefactors and historical analysis have led Management to determine that 2 1⁄2 yearsrepresents a reasonable estimate of the normal operating cycle for ourproducts.

 

**New Accounting Pronouncements**

 

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.

 

In September 2006, theFASB issued SFAS No. 157 “Fair Value Measurements” (SFAS 157).  This Statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles (GAAP), and expands disclosures about fair valuemeasurements. This Statement applies under other accounting pronouncements thatrequire or permit fair value measurements, the Board having previouslyconcluded in those accounting pronouncements that fair value is the relevantmeasurement attribute. Accordingly, this Statement does not require any newfair value measurements.  This statementis effective for fiscal years beginning after November 15, 2007.  On March 1, 2008, we adopted SFAS157.  The adoption of this pronouncementdid not have a material effect on our financial position or results ofoperations.

 

In February 2007, theFASB issued SFAS No. 159 “TheFair Value Option for Financial Assets and Financial Liabilities” (SFAS159).  The fair value option establishedby this Statement permits all entities to choose to measure eligible items atfair value at specified election dates. A business entity shall reportunrealized gains and losses on items for which the fair value option has beenelected in earnings at each subsequent reporting date.  This statement is effective for fiscal yearsbeginning after November 15, 2007. We elected not to apply the fair value option permitted under SFAS 159to any financial assets or liabilities.

 

In December 2007, theFASB issued SFAS No. 160 “Noncontrolling Interests in ConsolidatedFinancial Statements” (SFAS 160).  Thisstatement amends Accounting Research Bulletin No. 51 “ConsolidatedFinancial Statements” to establish accounting and reporting standards fornoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary.  This statement is effective for fiscal years beginning after December 15,2008.  The adoption of this standard is not expected to have a materialeffect on our financial position or results of operations.

 

In December 2007, theFASB issued SFAS No. 141R (revised 2007) “Business Combinations” (SFAS141R).  The statement requires the acquiring entity in a businesscombination to recognize all the assets acquired and liabilities assumed in thetransaction; establishes the acquisition-date fair value as the measurementobjective for all assets acquired and liabilities assumed; and requires theacquirer to disclose to investors and other users all of the information theyneed to evaluate and understand the nature and financial effect of the businesscombination.  This statement is effective for acquisition dates on orafter the beginning of the first annual reporting period beginning after December 15,2008.  The adoption of this standard is not expected to have a materialeffect on our financial position or results of operations.

 

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In April 2009, the FASBissued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS No. 107, Disclosuresabout Fair Value of Financial Instruments, to require disclosures about fairvalue of financial instruments not measured on the balance sheet at fair valuein interim financial statements as well as in annual financial statements.Prior to this FSP, fair values for these assets and liabilities were onlydisclosed annually. This FSP applies to all financial instruments within thescope of SFAS 107 and requires all entities to disclose the method(s) andsignificant assumptions used to estimate the fair value of financialinstruments. This FSP shall be effective for interim periods ending after June 15,2009, with early adoption permitted for periods ending after March 15,2009. An entity may early adopt this FSP only if it also elects to early adoptFSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not requiredisclosures for earlier periods presented for comparative purposes at initialadoption. In periods after initial adoption, this FSP requires comparativedisclosures only for periods ending after initial adoption. The adoption ofthese provisions is not expected to have a material effect on our financialposition or results of operations.

 

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

The registrant is a smaller reporting companyand is not required to provide this information.

 

Item 8.          FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA

 

The information required bythis Item 8 begins at page 25.

 

Item 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE

#####  

There have been nodisagreements on any matter of accounting principles or practices or financialstatement disclosure within the twenty-four months prior to February 28,2009.

 

Item9.A       CONTROLS AND PROCEDURES

 

Anevaluation was performed of the effectiveness of the design and operation ofour disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and15d-15(e) as of February 28, 2009. This evaluation was conductedunder the supervision and with the participation of our management, includingour Chief Executive Officer and our Controller/CorporateSecretary (Principal Financial and Accounting Officer).

 

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Based on that evaluation, these officers concluded that our disclosurecontrols and procedures were effective to ensure that information required tobe disclosed in reports that we file or submit under the Securities ExchangeAct of 1934 is accumulated and communicated to them, as appropriate, to allowtimely decisions regarding required disclosure and is recorded, processed,summarized and reported in accordance within the time periods specified inSecurities and Exchange Commission rules and forms. It should be notedthat the design of any system of controls is based in part upon certainassumptions about the likelihood of future events.

 

During thefourth fiscal quarter of the fiscal year covered by this report on Form 10-K,there have been no changes in our internal control over financial reportingthat have materially affected or are reasonably likely to materially affect,our internal control over financial reporting.

 

**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVERFINANCIAL REPORTING**

 

Our managementis responsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Rule 13a-15(f) of theSecurities Exchange Act of 1934 (the “Exchange Act”). Under the supervision andwith the participation of our management, including our President and ourController, we evaluated the effectiveness of our internal control overfinancial reporting based on the framework in INTERNAL CONTROL-INTEGRATEDFRAMEWORK issued by the Committee of Sponsoring Organizations of the TreadwayCommission. All internal control systems, no matter how well designed, haveinherent limitations. Therefore, even those systems determined to be effectivecan provide only reasonable assurance with respect to financial statementpreparation and presentation. Projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate. Based on our evaluation under thatframework and applicable SEC rules, our management concluded that our internalcontrol over financial reporting was effective as of February 28, 2009.

 

This annualreport does not include an attestation report of our registered publicaccounting firm regarding internal control over financial reporting. Management’sreport was not subject to attestation by our registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit us to provide only management’s report in this annual report.

 
| Item 9.B | OTHER  INFORMATION |
|----------|--------------------|

 

None

 

### PART III

###  

| Item  10. | DIRECTORS AND EXECUTIVE  OFFICERS OF THE REGISTRANT |
|-----------|-----------------------------------------------------|

 

(a)  Identification of Directors

 

The information required by this Item 10 isfurnished by incorporation by reference to the information under the caption “Electionof Directors” in our definitive Proxy Statement to be filed in connection withthe Annual Meeting of Shareholders to be held on July 23, 2009.

 

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(b)  Identification of ExecutiveOfficers

 

Information regarding ourexecutive officers required by Item 401 of Regulation S-K is presented in Item1 hereof under the subcaption “Executive Officers” as permitted by GeneralInstruction G (3) to Form 10-K and Instruction 3 to Item 401(b) ofRegulation S-K.

 

(c)  Compliance with Section 16 (a) ofthe Exchange Act

 

The information required bythis Item 10 is furnished by incorporation by reference to the informationunder the caption “Section 16 (a) Beneficial Ownership ReportingCompliance” in our definitive Proxy Statement to be filed in connection withthe Annual Meeting of Shareholders to be held on July 23, 2009.

 
| Item  11. | EXECUTIVE COMPENSATION |
|-----------|------------------------|

 

The information required bythis Item 11 is furnished by incorporation by reference to the information underthe caption “Executive Compensation” in our definitive Proxy Statement to befiled in connection with the Annual Meeting of Shareholders to be held on July 23,2009.

 
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT  AND RELATED STOCKHOLDER MATTERS |
|----------|-------------------------------------------------------------------------------------------------|

#####  

The information required bythis Item 12 is furnished by incorporation by reference to the informationunder the captions “Security Ownership of Certain Beneficial Owners andManagement” and “Compensation Plans” in our definitive Proxy Statement to befiled in connection with the Annual Meeting of Shareholders to be held on July 23,2009.

 
| Item  13. | CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS |
|-----------|-------------------------------------------------|

 

None

 
| Item 14. | PRINCIPAL  ACCOUNTANT’S FEES AND SERVICES |
|----------|------------------------------------------------|

 

The information required bythis Item 14 is furnished by incorporation by reference to the informationunder the caption “Independent Registered Public Accountants” in our definitiveProxy Statement to be filed in connection with the Annual Meeting ofShareholders to be held on July 23, 2009.

 

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PART IV

 
| Item  15. | EXHIBITS AND FINANCIAL  STATEMENT SCHEDULES |
|-----------|---------------------------------------------|

 

(a)  The following documents are filedas part of this report:

 

1.               Financial Statements

 
| ** **                                                                                              | **Page** |
|---------------------------------------------------------------------------------------------------------|----------|
|                                                                                                    |     |
| Report of Independent Registered Public Accounting  Firm                                                | 24       |
|                                                                                                    |     |
| Balance Sheets  - February 28, 2009 and February 29, 2008                                     | 25       |
|                                                                                                    |     |
| Statements of Earnings - Years ended February 28,  2009 and February 29, 2008                 | 26       |
|                                                                                                    |     |
| Statements of Shareholders’ Equity -Years ended  February 28, 2009 and February 29, 2008 | 27       |
|                                                                                                    |     |
| Statements of Cash Flows - Years ended  February 28, 2009 and February 29, 2008               | 28       |
|                                                                                                    |     |
| Notes to Financial Statements                                                                           | 29-38    |

 

Schedules have been omitted as such informationis either not required or is included in the financial statements.

 

2.  Exhibits

 
|   | 3.1    | Restated Certificate of Incorporation dated April 26, 1968 and  Certificate of Amendment thereto dated June 21, 1968 are incorporated  herein by reference to Exhibit 1 to Registration Statement on  Form 10-K (File No. 0-4957). |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                        |
|   | 3.2    | Certificate of Amendment of Restated Certificate of Incorporation  dated August 27, 1977 is incorporated herein by reference to  Exhibit 20.1 to Form 10-K for fiscal year ended February 28,  1981 (File No. 0-4957).             |
|   |   |                                                                                                                                                                                                                                                        |
|   | 3.3    | By-Laws as amended are incorporated herein by reference to  Exhibit 20.2 to Form 10-K for fiscal year ended February 28,  1981 (File No. 0-4957).                                                                                       |
|   |   |                                                                                                                                                                                                                                                        |
|   | 3.4    | Certificate of Amendment of Restated Certificate of Incorporation  dated November 17, 1986 is incorporated herein by reference to exhibit  3.3 to Form 10-K for fiscal year ended February 28, 1987 (File  No. 0-4957).                 |
|   |   |                                                                                                                                                                                                                                                        |
|   | 3.5    | Certificate of Amendment of Restated Certificate of Incorporation  dated March 22, 1996 is incorporated herein by reference to  Exhibit 3.4 to Form 10-K for fiscal year ended February 28,  1997 (File No. 0-4957).               |
|   |   |                                                                                                                                                                                                                                                        |
|   | 3.6    | Certificate of Amendment of Restated Certificate of Incorporation  dated July 15, 2002 is incorporated herein by reference to Exhibit 10.30  to Form 10-K dated February 28, 2003 (File No. 0-4957).                               |
|   |   |                                                                                                                                                                                                                                                        |
|   | 4.1    | Specimens of Common Stock Certificates are incorporated herein by  reference to Exhibits 3.1 and 3.2 to Registration Statement on Form 10-K  (File No. 0-4957) filed June 29, 1970.                                                          |

 

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|   | 10.1   | Usborne Agreement-Contractual agreement by and between the Company  and Usborne Publishing Limited dated November 25, 1988 is incorporated  herein by reference to Exhibit 10.12 to Form 10-K dated  February 28, 1989 (File No. 0-4957).              |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.2   | Party Plan-Contractual agreement by and between the Company and  Usborne Publishing Limited dated March 14, 1989 is incorporated herein  by reference to Exhibit 10.13 to Form 10-K dated February 28,  1989 (File No. 0-4957).                        |
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.3   | Amendment dated January 1, 1992 to Usborne Agreement -  Contractual agreement by and between the Company and Usborne Publishing  Limited is incorporated herein by reference to Exhibit 10.13 to  Form 10-K dated February 29, 1992 (File No. 0-4957). |
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.4   | Educational Development Corporation 1992 Incentive Stock Option Plan  is incorporated herein by reference to Exhibit 4(c) to Registration  Statement on Form S-8 (File No. 33-60188).                                                                       |
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.5   | Restated Loan Agreement dated June 30, 1999 between the Company  and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by  reference to Exhibit 10.24 to Form 10-K dated February 29,  2000 (File No. 0-4957).                      |
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.6   | Educational Development Corporation 2002 Incentive Stock Option Plan  is incorporated herein by reference to Exhibit A to definitive proxy  statement on Schedule 14A dated May 23, 2002 (File No. 0-4957).                                                      |
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.7   | Amendment dated November 12, 2002 to Usborne Agreement —  Contractual agreement by and between we and Usborne Publishing Limited is  incorporated herein by reference to Exhibit 10.24 to Form 10-K  dated February 28, 2003 (File No. 0-4957).   |
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.8   | Employment Agreement between Randall W. White and the Company dated  February 28, 2004.                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.9   | Fifth Amendment dated June 30, 2004 to Restated Loan Agreement  between the Company and Arvest Bank, Tulsa, OK.                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.10  | Sixth Amendment dated June 30, 2005 to Restated Loan Agreement  between the Company and Arvest Bank, Tulsa, OK.                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.11  | Seventh Amendment dated September 2, 2005 to Restated Loan  Agreement between the Company and Arvest Bank, Tulsa, OK.                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.12  | Eighth Amendment dated June 30, 2006 to Restated Loan Agreement  between the Company and Arvest Bank, Tulsa, OK.                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.13  | Ninth Amendment dated June 30, 2007 to Restated Loan Agreement  between the Company and Arvest Bank, Tulsa, OK.                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                            |
|   | 10.14  | Tenth Amendment dated June 30, 2008 to Restated Loan Agreement  between the Company and Arvest Bank, Tulsa, OK.                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                            |
|   | *23.1  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                        |

 

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

 

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SIGNATURES

 

Pursuant to the requirementsof Section 13 or 15(b) of the Securities Exchange Act of 1934, theCompany has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

EDUCATIONAL DEVELOPMENT CORPORATION

 
| Date:  | May 29, 2009 | By     | /s/ Marilyn Welborn                          |
|--------|-------------------|--------|----------------------------------------------|
|   |              |   | Marilyn Welborn                              |
|   |              |   | Controller and Corporate Secretary           |
|   |              |   | (Principal Financial and Accounting Officer) |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe date indicated.

 

 
| Date:  | May 29, 2009 |   | /s/ Randall W. White                         |
|--------|-------------------|--------|----------------------------------------------|
|   |              |   | Randall W. White                             |
|   |              |   | Chairman of the Board                        |
|   |              |   | President, Treasurer and Director            |
|   |              |   |                                         |
|   |              |   |                                         |
|   | May 29, 2009 |   | /s/ John A. Clerico                          |
|   |              |   | John A. Clerico, Director                    |
|   |              |   |                                         |
|   |              |   |                                         |
|   | May 29, 2009 |   | /s/ Dean Cosgrove                            |
|   |              |   | G. Dean Cosgrove, Director                   |
|   |              |   |                                         |
|   |              |   |                                         |
|   | May 29, 2009 |   | /s/ James F. Lewis                           |
|   |              |   | James F. Lewis, Director                     |
|   |              |   |                                         |
|   |              |   |                                         |
|   | May 29, 2009 |   | /s/ Marilyn Welborn                          |
|   |              |   | Marilyn Welborn                              |
|   |              |   | Controller and Corporate Secretary           |
|   |              |   | (Principal Financial and Accounting Officer) |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

To the Board of Directors and Stockholders of

Educational Development Corporation

 

We have audited the accompanying balance sheets ofEducational Development Corporation as of February 28, 2009 and February 29,2008, and the related statements of earnings, stockholders’ equity and cashflows for each of the two years in the period ended February 28, 2009.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits. Tullius Taylor Sartain & Sartain LLP audited the financialstatements of Educational Development Corporation as of and for the year ended February 29,2008, and merged with Hogan & Slovacek P.C. to form HoganTaylor LLPeffective January 7, 2009.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position ofEducational Development Corporation as of February 28, 2009 and February 29,2008, and the results of its operations and its cash flows for each of the twoyears in the period ended February 28, 2009, in conformity with U.S.generally accepted accounting principles.

 

/s/ HOGANTAYLOR LLP

Tulsa, Oklahoma

May 29, 2009

 

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**BALANCE SHEETS**

**AS OF FEBRUARY 28(29)**

 
| ** **                                                                                                       | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                       |       |        |       |        |       |
| CURRENT ASSETS:                                                                                                  |       |        |       |        |       |
| Cash and cash equivalents                                                                                        |       | $           | 2,896,200  |        | $          | 2,440,300 |   |
| Accounts receivable, less allowance for  doubtful accounts and sales returns $176,900 (2009) and $158,400 (2008) |       | 3,253,000   |       | 2,611,800   |       |
| Inventories—Net                                                                                             |       | 10,302,600  |       | 11,818,700  |       |
| Prepaid expenses and other assets                                                                                |       | 306,800     |       | 112,000     |       |
| Deferred income taxes                                                                                            |       | 225,500     |       | 197,100     |       |
| Total current assets                                                                                             |       | 16,984,100  |       | 17,179,900  |       |
|                                                                                                             |       |        |       |        |       |
| INVENTORIES—Net                                                                                             |       | 568,000     |       | 459,000     |       |
|                                                                                                             |       |        |       |        |       |
| PROPERTY, PLANT AND EQUIPMENT—Net                                                                           |       | 2,278,400   |       | 2,382,800   |       |
|                                                                                                             |       |        |       |        |       |
| OTHER ASSETS                                                                                                     |       | 60,400      |       | —      |       |
|                                                                                                             |       |        |       |        |       |
| DEFERRED INCOME TAXES                                                                                            |       | 50,500      |       | 43,300      |       |
|                                                                                                             |       |        |       |        |       |
| TOTAL                                                                                                            |       | $           | 19,941,400 |        | $          | 20,065,000 |   |
|                                                                                                             |       |        |       |        |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                    |       |        |       |        |       |
|                                                                                                             |       |        |       |        |       |
| CURRENT LIABILITIES:                                                                                             |       |        |       |        |       |
| Accounts payable                                                                                                 |       | $           | 2,653,200  |        | $          | 2,456,900 |   |
| Accrued salaries and commissions                                                                                 |       | 504,500     |       | 559,000     |       |
| Current maturities of long-term debt                                                                             |       | 150,000     |       |        |       |
| Income taxes payable                                                                                             |       | 102,200     |       | 56,200      |       |
| Other current liabilities                                                                                        |       | 486,200     |       | 195,800     |       |
| Total current liabilities                                                                                        |       | 3,896,100   |       | 3,267,900   |       |
|                                                                                                             |       |        |       |        |       |
| LONG-TERM NOTES PAYABLE, net of current maturities                                                               |       | 150,000     |       | —      |       |
|                                                                                                             |       |        |       |        |       |
| COMMITMENTS (Note 7)                                                                                             |       |        |       |        |       |
|                                                                                                             |       |        |       |        |       |
| SHAREHOLDERS’ EQUITY:                                                                                       |       |        |       |        |       |
| Common stock, $0.20 par value; Authorized  8,000,000 shares;                                                     |       |        |       |        |       |
| Issued 6,039,040 (2009) and 5,806,840  (2008) shares;                                                            |       |        |       |        |       |
| Outstanding 3,838,461 (2009) and 3,706,745  (2008) shares                                                        |       | 1,207,800   |       | 1,161,400   |       |
| Capital in excess of par value                                                                                   |       | 8,508,400   |       | 7,706,100   |       |
| Retained earnings                                                                                                |       | 18,062,800  |       | 19,206,100  |       |
|                                                                                                             |       | 27,779,000  |       | 28,073,600  |       |
| Less treasury stock, at cost                                                                                     |       | (11,883,700 | )          | (11,276,500 | )          |
|                                                                                                             |       | 15,895,300  |       | 16,797,100  |       |
|                                                                                                             |       |        |       |        |       |
| TOTAL                                                                                                            |       | $           | 19,941,400 |        | $          | 20,065,000 |   |

 

Seenotes to financial statements.

 

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**EDUCATIONALDEVELOPMENT CORPORATION**

**STATEMENTS OF EARNINGS**

**FOR THEYEARS ENDED FEBRUARY 28(29),**

 
| ** **                                                            | ** ** | **2009**    | ** **       | **2008**    | ** ** |
|-----------------------------------------------------------------------|------------|-------------|------------------|-------------|------------|
|                                                                  |       |        |             |        |       |
| GROSS SALES                                                           |       | $           |  40,283,500 |        | $          |  40,600,300 |   |
| Less discounts and allowances                                         |       | (12,462,200 | )                | (11,806,700 | )          |
| Transportation revenue                                                |       | 1,577,100   |             | 1,727,100   |       |
| NET REVENUES                                                          |       | 29,398,400  |             | 30,520,700  |       |
| COST OF SALES                                                         |       | 10,581,600  |             | 10,750,200  |       |
| Gross margin                                                          |       | 18,816,800  |             | 19,770,500  |       |
|                                                                  |       |        |             |        |       |
| OPERATING EXPENSES:                                                   |       |        |             |        |       |
| Operating and selling                                                 |       | 7,358,300   |             | 7,424,500   |       |
| Sales commissions                                                     |       | 6,645,100   |             | 7,137,600   |       |
| General and administrative                                            |       | 1,849,300   |             | 1,653,100   |       |
|                                                                  |       | 15,852,700  |             | 16,215,200  |       |
|                                                                  |       |        |             |        |       |
| OTHER INCOME                                                          |       | 174,800     |             | 176,800     |       |
|                                                                  |       |        |             |        |       |
| EARNINGS BEFORE INCOME TAXES                                          |       | 3,138,900   |             | 3,732,100   |       |
|                                                                  |       |        |             |        |       |
| INCOME TAXES                                                          |       | 1,226,300   |             | 1,407,700   |       |
|                                                                  |       |        |             |        |       |
| NET EARNINGS                                                          |       | $           |  1,912,600  |        | $          |  2,324,400 |   |
|                                                                  |       |        |             |        |       |
| BASIC AND DILUTED EARNINGS PER SHARE:                                 |       |        |             |        |       |
| Basic                                                                 |       | $           |  0.50       |        | $          |  0.62 |   |
| Diluted                                                               |       | $           |  0.50       |        | $          |  0.60 |   |
|                                                                  |       |        |             |        |       |
| WEIGHTED AVERAGE NUMBER OF COMMON AND  EQUIVALENT SHARES OUTSTANDING: |       |        |             |        |       |
| Basic                                                                 |       | 3,796,709   |             | 3,748,121   |       |
| Diluted                                                               |       | 3,797,785   |             | 3,859,937   |       |

 

See notes to financialstatements.

 

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**STATEMENTS OF SHAREHOLDERS’ EQUITY**

**FOR THE YEARS ENDED FEBRUARY 28(29),**

 
| ** **                           | ** ** | **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—February 28,  2007 |       | 5,791,840                       |       | $          | 1,158,400  |           | $          | 7,649,100    |       | $                  | 17,707,700 |       | 2,034,517  |   | $ | (10,853,900 | ) | $ | 15,661,300 |   |
|                                 |       |                            |       |       |       |           |       |         |       |               |       |       |       |   |   |
| Purchases of  treasury stock         |       |                            |       |       |       |           |       |         |       | 81,059             |       | (504,900   | )          | (504,900 | ) |
| Sales of treasury  stock             |       |                            |       |       |       |           |       |         |       | (15,481            | )          | 82,300     |       | 82,300 |   |
| Exercise of  options($4.00/sh)       |       | 15,000                          |       | 3,000      |       | 57,000         |       |         |       |               |       |       |       | 60,000 |   |
| Dividends paid  ($0.22/share)        |       |                            |       |       |       |           |       | (826,000     | )          |               |       |       |       | (826,000 | ) |
| Net earnings                         |       |                            |       |       |       |           |       | 2,324,400    |       |               |       |       |       | 2,324,400 |   |
| BALANCE—February 29,  2008 |       | 5,806,840                       |       | $          | 1,161,400  |           | $          | 7,706,100    |       | $                  | 19,206,100 |       | 2,100,095  |   | $ | (11,276,500 | ) | $ | 16,797,100 |   |
|                                 |       |                            |       |       |       |           |       |         |       |               |       |       |       |   |   |
| Purchases of  treasury stock         |       |                            |       |       |       |           |       |         |       | 144,848            |       | (802,800   | )          | (802,800 | ) |
| Sales of treasury  stock             |       |                            |       |       |       |           |       |         |       | (44,364            | )          | 195,600    |       | 195,600 |   |
| Exercise of  options($3.66/sh)       |       | 232,200                         |       | 46,400     |       | 802,300        |       |         |       |               |       |       |       | 848,700 |   |
| Dividends paid  ($0.80/share)        |       |                            |       |       |       |           |       | (3,055,900   | )          |               |       |       |       | (3,055,900 | ) |
| Net earnings                         |       |                            |       |       |       |           |       | 1,912,600    |       |               |       |       |       | 1,912,600 |   |
| BALANCE—February 28,  2009 |       | 6,039,040                       |       | $          | 1,207,800  |           | $          | 8,508,400    |       | $                  | 18,062,800 |       | 2,200,579  |   | $ | (11,883,700 | ) | $ | 15,895,300 |   |

 

Seenotes to financial statements.

 

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**EDUCATIONALDEVELOPMENT CORPORATION**

 

**STATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED FEBRUARY 28(29)**

 

 
| ** **                                                                           | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                 |       |       |       |       |       |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                |       |       |       |       |       |
| Net earnings                                                                         |       | $          | 1,912,600  |       | $          | 2,324,400 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities: |       |       |       |       |       |
| Depreciation                                                                         |       | 139,800    |       | 139,400    |       |
| Deferred income taxes                                                                |       | (35,600    | )          | 26,700     |       |
| Provision for doubtful accounts and sales  returns                                   |       | 1,070,600  |       | 1,527,200  |       |
| Changes in assets and liabilities:                                                   |       |       |       |       |       |
| Accounts receivable                                                                  |       | (1,174,700 | )          | (1,286,300 | )          |
| Inventories                                                                          |       | 2,095,700  |       | 569,400    |       |
| Prepaid expenses and other assets                                                    |       | (148,800   | )          | (16,600    | )          |
| Accounts payable, accrued salaries and  commissions, and other current liabilities   |       | 105,000    |       | (828,900   | )          |
| Income tax payable                                                                   |       | 46,000     |       | 56,200     |       |
| Total adjustments                                                                    |       | 2,098,000  |       | 187,100    |       |
|                                                                                 |       |       |       |       |       |
| Net cash provided by operating activities                                            |       | 4,010,600  |       | 2,511,500  |       |
|                                                                                 |       |       |       |       |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                |       |       |       |       |       |
| Payment to acquire Kane/Miller                                                       |       | (50,000    | )          | —     |       |
| Payment on Kane/Miller obligation at  closing, net of cash received                  |       | (659,800   | )          | —     |       |
| Purchases of property and equipment                                                  |       | (30,500    | )          | (136,900   | )          |
|                                                                                 |       |       |       |       |       |
| Net cash used in investing activities                                                |       | (740,300   | )          | (136,900   | )          |
|                                                                                 |       |       |       |       |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                |       |       |       |       |       |
| Cash received from exercise of stock  options                                        |       | 848,700    |       | 60,000     |       |
| Cash received from sale of treasury stock                                            |       | 195,600    |       | 82,300     |       |
| Cash paid to acquire treasury stock                                                  |       | (802,800   | )          | (504,900   | )          |
| Dividends paid                                                                       |       | (3,055,900 | )          | (826,000   | )          |
|                                                                                 |       |       |       |       |       |
| Net cash used in financing activities                                                |       | (2,814,400 | )          | (1,188,600 | )          |
|                                                                                 |       |       |       |       |       |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                            |       | 455,900    |       | 1,186,000  |       |
|                                                                                 |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR                                     |       | 2,440,300  |       | 1,254,300  |       |
|                                                                                 |       |       |       |       |       |
| CASH AND CASH EQUIVALENTS—END OF YEAR                                           |       | $          | 2,896,200  |       | $          | 2,440,300 |   |
|                                                                                 |       |       |       |       |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                    |       |       |       |       |       |
| Cash paid for income taxes                                                           |       | $          | 1,215,100  |       | $          | 1,321,500 |   |
| SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING  & FINANCING ACTIVITIES             |       |       |       |       |       |
| Promissory Note to former Shareholders of Kane/Miller                                |       | $          | 300,000    |       | —     |   |

 

See notes to financialstatements.

 

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**EDUCATIONAL DEVELOPMENT CORPORATION**

 

**NOTES TO FINANCIAL STATEMENTS**

**YEARS ENDED FEBRUARY 28, 2009 ANDFEBRUARY 29, 2008**

** **

**1.**                      SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

** **

***Nature of Business*****—**We distributebooks and publications through our Publishing and Usborne Books and More (“UBAM”)Divisions to book, toy and gift stores, libraries and home educators locatedthroughout the United States (“U.S.”). We are the sole U.S. distributor of books and related items, which arepublished by an England-based publishing company, Usborne, our primarysupplier.  In December 2008, weacquired Kane/Miller Publishers and entered the direct publishing market.

 

***Estimates*****—**Our financialstatements were prepared in conformity with accounting principles generallyaccepted in the United States of America, which requires management to makeestimates and assumptions that affect the amounts and disclosures in thefinancial statements.  Actual resultscould differ from these estimates.

 

***Business Concentration*****—**A significantportion of our inventory purchases are concentrated with an England-basedpublishing company.  Purchases from thiscompany were approximately $7.3 million and $9.7 million for the fiscal yearsended February 28, 2009 and February 29, 2008, respectively.  Total inventory purchases for those sameperiods were approximately $10.6 million and $12.3 million, respectively.

 

***Cash and Cash Equivalents*****—**Cash and cashequivalents include cash on hand and cash on deposit in banks.  We maintain bank accounts that are insured by theFederal Deposit Insurance Corporation (FDIC) up to $250,000.  At times, cash balances may be in excess ofthe FDIC insurance limit.  The majorityof payments due from banks for third party credit card transactions processwithin two business days.  Amounts dueare classified as cash and cash equivalents at February 28, 2009 and February 29,2008.

 

***Accounts Receivable*****—** Accountsreceivable are uncollateralized customer obligations due under normal tradeterms generally requiring payment within thirty days from the invoicedate.  Trade accounts are stated at theamount management expects to collect from outstanding balances.  Delinquency fees are not assessed.  Payments of accounts receivable are allocatedto the specific invoices identified on the customers’ remittance advice.  Accounts receivable are carried at originalinvoice amount less an estimated reserve made for returns and discounts basedon quarterly review of historical rates of returns and expected discounts to betaken.  The carrying amount of accountsreceivable is reduced, if needed, by a valuation allowance that reflectsmanagement’s best estimate of the amounts that will not be collected.

 

Managementperiodically reviews accounts receivable balances and, based on an assessmentof current creditworthiness, estimates the portion, if any, of the balance thatwill not be collected.  Managementprovides for probable uncollectible amounts through a charge to earnings and acredit to a valuation account based on its assessment of the current status ofthe individual accounts.  Balances whichremain outstanding after management has used reasonable collection efforts arewritten off through a charge to the valuation allowance and a credit to tradeaccounts receivable.  Recoveries of tradereceivables previously written off are recorded when received.

 

***Inventories*****—**Inventories arestated at the lower of cost or market. Cost is determined using the FIFO method.  We present a portion of our inventory as anoncurrent asset.  Occasionally wepurchase book inventory in quantities in excess of what will be sold within thenormal operating cycle due to minimum order requirements of our primarysupplier.  These excess quantities areincluded in noncurrent inventory.  Weestimate noncurrent inventory using the current year turnover ratio bytitle.  All inventory in excess of 21⁄2years of anticipated sales is classified as noncurrent inventory.

 

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Inventories are presentednet of a valuation allowance.  Managementhas estimated and included an allowance for slow moving inventory for both currentand noncurrent inventory.  This allowanceis based on management’s analysis of inventory on hand at February 28,2009 and February 29, 2008.

 

***Property, Plant and Equipment*****—**Property, plantand equipment are stated at cost and depreciated on a straight-line basis overthe estimated useful lives, as follows:

 
| Building                       |   | 30 years     |
|--------------------------------|--------|--------------|
| Machinery & equipment |   | 3 - 10 years |
| Furniture & fixtures  |   | 3 years      |

 

***Income Taxes*****—**Deferred tax assets and liabilities are recorded for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases, using the regular tax rate expected to be in effect when the taxes areactually paid or recovered.  Net deferredtax assets related to the recognition of future tax benefits are recorded tothe extent that realization of such benefits is considered more likely than notto occur.

 

The Financial AccountingStandards Board issued Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes — an interpretation of FASB Statement 109, Accounting forIncome Taxes” (“FIN No. 48”) which was effective for us on March 1,2007.  FIN No. 48 addresses thedetermination of whether tax benefits claimed or expected to be claimed on atax return should be recorded in the financial statements.  Under FIN No. 48, we may recognize thetax benefit from an uncertain tax position only if it is more likely than notthat the tax position will be sustained on examination by the taxingauthorities based on the technical merits of the position.  The tax benefits recognized in the financialstatements from such position should be measured based on the largest benefitthat has a greater than fifty percent likelihood of being realized uponultimate settlement.  FIN No. 48also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods and disclosure requirements.

 

We classify interest andpenalties associated with income taxes as a component of income tax expense onthe statement of earnings.

 

***Revenue Recognition*****—**Sales arerecognized and recorded when products are shipped.  Products are shipped FOB shipping point.  The UBAM Division’s sales are paid before theproduct is shipped.  These salesaccounted for 72% of net revenues in FY 2009 and 73% of net revenues in FY2008. The provisions of the SEC Staff Accounting Bulletin No.104, “RevenueRecognition in Financial Statements,” have been applied, and as a result, areserve is provided for estimated future sales returns.

 

Estimated allowances forsales returns are recorded as sales are recognized and recorded. Managementuses a moving average calculation to estimate the allowance for sales returns.  We are not responsiblefor product damaged in transit. Damaged returns are primarily from the retailstores related to damages which occur in the stores, not in shipping to thestores.  It is industry practice toaccept returns from wholesale customers.  Management has estimated andincluded a reserve for sales returns of $84,000 as of February 28, 2009and February 29, 2008.

 

Transportation revenue, theamount billed to the customer for shipping the product, is recorded whenproducts are shipped.

 

***Advertising Costs*****—**Advertising costs are expensed as incurred.  Advertisingexpenses, included in selling and operating expenses in the statements ofearnings, were $106,200 in FY 2009 and $127,900 in FY 2008.

 

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***Shipping and Handling Costs*****—** We classify shipping and handling costs as operatingand selling expenses in the statements of earnings.  Shippingand handling costs were $2,438,800 for FY 2009 and $2,548,700 for FY 2008.

 

***Earnings per Share*****—**Basic earningsper share (“EPS”) is computed by dividing net income by the weighted averagenumber of common shares outstanding during the period.  Diluted EPS is based on the combined weightedaverage number of common shares outstanding and dilutive potential commonshares issuable which include, where appropriate, the assumed exercise ofoptions.  In computing Diluted EPS wehave utilized the treasury stock method.

 

Thefollowing reconciles the diluted earnings per share:

 
| ** **                                       | ** ** | **Year Ended February 28(29),** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| **Diluted Earnings Per Share:**                  |       |                            |       |   |   |
| Net earnings applicable to common shareholders   |       | $                               | 1,912,600  |   | $ | 2,324,400 |   |
|                                             |       |                            |       |   |   |
| **Shares:**                                      |       |                            |       |   |   |
| Weighted average shares outstanding–basic   |       | 3,796,709                       |       | 3,748,121 |   |
| Assumed exercise of options                      |       | 1,076                           |       | 111,816 |   |
|                                             |       |                            |       |   |   |
| Weighted average shares outstanding–diluted |       | 3,797,785                       |       | 3,859,937 |   |
|                                             |       |                            |       |   |   |
| **Diluted Earnings Per Share**                   |       | $                               | 0.50       |   | $ | 0.60 |   |
|                                                  |            |                                 |            |  |  |  |  |  |  |

 

There were no stock optionsfor the fiscal years ended February 28, 2009 and February 29, 2008excluded from the diluted earnings per share calculation.

 

***Fair Value of Financial Instruments*****—**For cash and cash equivalents, accounts receivable, and accountspayable, the carrying amount approximates fair value because of the shortmaturity of those instruments.

 

***Long-Lived Asset Impairment*****—** We review the value of long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable based on estimated future cash flows.  No impairment was noted as a result of suchreview during the years ended February 28, 2009 and February 29,2008.

 

***Stock-Based Compensation*****—S**hare-basedpayment 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.

 

***New accounting pronouncements*****—**The Financial 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.

 

In September 2006, the FASB issued SFAS No. 157 “Fair ValueMeasurements” (SFAS 157).  This Statementdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (GAAP), and expands disclosures aboutfair value measurements. This Statement applies under other accountingpronouncements that require or permit fair value measurements, the Board

 

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havingpreviously concluded in those accounting pronouncements that fair value is therelevant measurement attribute. Accordingly, this Statement does not requireany new fair value measurements.  Thisstatement is effective for fiscal years beginning after November 15,2007.  On March 1, 2008, we adoptedSFAS 157.  The adoption of thispronouncement did not have a material effect on our financial position orresults of operations.

 

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assetsand Financial Liabilities” (SFAS 159). The fair value option established by this Statement permits all entitiesto choose to measure eligible items at fair value at specified election dates.A business entity shall report unrealized gains and losses on items for whichthe fair value option has been elected in earnings at each subsequent reportingdate.  This statement is effective forfiscal years beginning after November 15, 2007.  We elected not to apply the fair value optionpermitted under SFAS 159 to any financial assets or liabilities.

 

In December 2007, the FASB issued SFAS No. 160 “NoncontrollingInterests in Consolidated Financial Statements” (SFAS 160).  This statement amends Accounting ResearchBulletin No. 51 “Consolidated Financial Statements” to establishaccounting and reporting standards for noncontrolling interest in a subsidiaryand for the deconsolidation of a subsidiary.  This statement is effectivefor fiscal years beginning after December 15, 2008.  The adoption ofthis standard is not expected to have a material effect on our financialposition or results of operations.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007) “BusinessCombinations” (SFAS 141).  The statement requires the acquiring entity ina business combination to recognize all the assets acquired and liabilitiesassumed in the transaction; establishes the acquisition-date fair value as themeasurement objective for all assets acquired and liabilities assumed; andrequires the acquirer to disclose to investors and other users all of theinformation they need to evaluate and understand the nature and financialeffect of the business combination.  This statement is effective foracquisition dates on or after the beginning of the first annual reportingperiod beginning after December 15, 2008.  The adoption of thisstandard is not expected to have a material effect on our financial position orresults of operations.

 

In April 2009,the FASB issued FSP FAS 107-1 and APB 28-1. This FSP amends SFAS No. 107,Disclosures about Fair Value of Financial Instruments, to require disclosuresabout fair value of financial instruments not measured on the balance sheet atfair value in interim financial statements as well as in annual financialstatements. Prior to this FSP, fair values for these assets and liabilitieswere only disclosed annually. This FSP applies to all financial instrumentswithin the scope of SFAS 107 and requires all entities to disclose the method(s) andsignificant assumptions used to estimate the fair value of financialinstruments. This FSP shall be effective for interim periods ending after June 15,2009, with early adoption permitted for periods ending after March 15,2009. An entity may early adopt this FSP only if it also elects to early adoptFSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP does not requiredisclosures for earlier periods presented for comparative purposes at initialadoption. In periods after initial adoption, this FSP requires comparativedisclosures only for periods ending after initial adoption. The adoption ofthese provisions is not expected to have a material effect on our financialposition or results of operations.

 

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**2.   INVENTORIES**

 

Inventoriesconsist of the following:

 
| ** **                      | ** ** | **February 28(29),** | ** ** |
|---------------------------------|------------|----------------------|------------|
| ** **                      | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Current:                        |       |                 |       |   |   |
| Book inventory                  |       | $                    | 10,327,600 |   | $ | 11,844,900 |   |
| Inventory valuation allowance   |       | (25,000              | )          | (26,200 | ) |
|                            |       |                 |       |   |   |
| Inventories net–current    |       | $                    | 10,302,600 |   | $ | 11,818,700 |   |
|                            |       |                 |       |   |   |
| Noncurrent:                     |       |                 |       |   |   |
| Book inventory                  |       | $                    | 913,000    |   | $ | 764,000 |   |
| Inventory valuation allowance   |       | (345,000             | )          | (305,000 | ) |
|                            |       |                 |       |   |   |
| Inventories net–noncurrent |       | $                    | 568,000    |   | $ | 459,000 |   |
|                                 |            |                      |            |  |  |  |  |  |  |

 

 

 

**3.**                      PROPERTY, PLANTAND EQUIPMENT

** **

Property,plant and equipment consist of the following:

 
| ** **                    | ** ** | **February 28(29),** | ** ** |
|-------------------------------|------------|---------------------------|------------|
| ** **                    | ** ** | **2009**                  | ** ** | **2008** | ** ** |
| Land                          |       | $                         | 250,000    |   | $ | 250,000 |   |
| Building                      |       | 2,124,700                 |       | 2,124,700 |   |
| Machinery and equipment       |       | 2,157,300                 |       | 2,129,100 |   |
| Furniture and fixtures        |       | 74,100                    |       | 66,900 |   |
|                          |       | 4,606,100                 |       | 4,570,700 |   |
| Less accumulated depreciation |       | (2,327,700                | )          | (2,187,900 | ) |
|                          |       | $                         | 2,278,400  |   | $ | 2,382,800 |   |

 

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**4.       INCOME TAXES**

** **

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. The tax effects of significant items comprising our net deferred taxassets and liabilities as of February 28, 2009 and February 29, 2008are as follows:

 
| ** **                          | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|
| Current:                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deferred tax assets:                |       |       |       |       |       |
| Allowance for doubtful accounts     |       | $          | 35,300     |       | $          | 28,300 |   |
| Inventory overhead capitalization   |       | 79,200     |       | 90,400     |       |
| Allowance for slow moving inventory |       | 9,500      |       | 10,000     |       |
| Allowance for sales returns         |       | 31,900     |       | 31,900     |       |
| Accruals                            |       | 69,600     |       | 36,500     |       |
|                                |       |       |       |       |       |
| Deferred tax assets                 |       | 225,500    |       | 197,100    |       |
|                                |       |       |       |       |       |
| Deferred tax asset–Net         |       | $          | 225,500    |       | $          | 197,100 |   |
|                                |       |       |       |       |       |
| Noncurrent:                         |       |       |       |       |       |
| Deferred tax assets:                |       |       |       |       |       |
| Allowance for slow moving inventory |       | $          | 131,800    |       | $          | 115,900 |   |
|                                |       |       |       |       |       |
| Deferred tax assets                 |       | 131,800    |       | 115,900    |       |
|                                |       |       |       |       |       |
| Deferred tax liabilities:           |       |       |       |       |       |
| Property and equipment              |       | (81,300    | )          | (72,600    | )          |
|                                |       |       |       |       |       |
| Deferred tax liabilities            |       | (81,300    | )          | (72,600    | )          |
|                                |       |       |       |       |       |
| Deferred tax asset–Net         |       | $          | 50,500     |       | $          | 43,300 |   |

 

Management has determinedthat no valuation allowance is necessary to reduce the carrying value ofdeferred tax assets as it is more likely than not that such assets arerealizable.

 

The components of income taxexpense are as follows:

 
| ** **               | ** ** | **As of February 28(29),** | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| Current:                 |       |                            |       |   |   |
| Federal                  |       | $                               | 1,066,500  |   | $ | 1,160,000 |   |
| State                    |       | 195,400                         |       | 220,000 |   |
|                     |       | 1,261,900                       |       | 1,380,000 |   |
|                     |       |                            |       |   |   |
| Deferred:                |       |                            |       |   |   |
| Federal                  |       | (30,000                         | )          | 23,200 |   |
| State                    |       | (5,600                          | )          | 4,500 |   |
|                     |       | (35,600                         | )          | 27,700 |   |
|                     |       |                            |       |   |   |
| Total income tax expense |       | $                               | 1,226,300  |   | $ | 1,407,700 |   |

 

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The following reconciles ourexpected income tax expense utilizing statutory tax rates to the actual taxexpense:

 
| ** **                                       | ** ** | **As of Fiscal Year End February 28(29),** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Tax expense at federal statutory rate            |       | $                                               | 1,067,600  |   | $ | 1,270,500 |   |
| State income tax–net of federal tax benefit |       | 124,000                                         |       | 147,600 |   |
| Other                                            |       | 34,700                                          |       | (10,400 | ) |
|                                             |       |                                            |       |   |   |
| Total income tax expense                         |       | $                                               | 1,226,300  |   | $ | 1,407,700 |   |

 

We file our tax returns in theUS and certain state jurisdictions. The federal and state returns open forexamination include the years ended February 28, 2006, February 28,2007, February 29, 2008 and February 28, 2009.

 

**5.**                    EMPLOYEE BENEFIT PLAN

** **

Wehave a profit sharing plan that incorporates the provisions of Section 401(k) ofthe Internal Revenue Code.  The 401(k) plancovers substantially all employees meeting specific age and length of servicerequirements.  Matching contributions arediscretionary and amounted to $80,700 and $64,700 in the fiscal years ended February 28,2009 and February 29, 2008, respectively.

 

**6.**                    DEBT

** **

We have a $5,000,000revolving credit agreement, with interest payable monthly at prime minus 0.75%(2.50% at February 28, 2009), collateralized by substantially all of ourassets and maturing on June 30, 2009. Available credit under the revolving credit agreement was $5,000,000 at February 28,2009.  This agreement also contains a provision for our use of the Bank’sletters of credit.  The Bank agrees toissue, or obtain issuance of commercial or stand-by letters of credit providedthat no letters of credit will have an expiry date later than June 30,2009 and that the sum of the line of credit plus the letters of credit wouldnot exceed the borrowing base in effect at the time. The agreementcontains provisions that require us to maintain specified financial ratios,restrict transactions with related parties, prohibit mergers or consolidation,disallow additional debt, and limit the amount of compensation, salaries,investments, capital expenditures and leasing transactions.  Weintend to renew the bank agreement or obtain other financing uponmaturity.

 

We had no borrowingsoutstanding on the above revolving credit agreement at February 28, 2009and February 29, 2008.

 

The following table provides a summary of ournotes payable as of February 28:

 
| ** **                                                                             | ** ** | **2009** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|
| Notes payable to former Kane/Miller shareholders, payments due  annually maturing 2011 |       | $        | 300,000    |   |
| Less current maturities                                                                |       | (150,000 | )          |
|                                                                                   |       |     |       |
| Long-term notes payable, less current maturities                                       |       | $        | 150,000    |   |

 

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**7.**                    COMMITMENTS

** **

At February 28, 2009, wehad outstanding purchase commitments for inventorytotaling approximately $4,713,000.

 

The following table provides a summary of ourfuture lease obligations as of February 28, 2009:

 
| ** **               | ** ** | **Total** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** |
|--------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Total lease payments due |       | $         | 162,000    |     | $          | 63,700   |       | $        | 51,300     |     | $          | 47,000   |       | $ | — |   | $ | — |   |
|                          |            |           |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

**8.**                    CAPITAL STOCK, STOCK OPTIONSAND WARRANTS

** **

The Board of Directors adopted the 1992Incentive Stock Option Plan (the “1992 Plan”) in June of 1992, whichauthorized us to grant up to 1,000,000stock options.  The 1992 Plan expired in June of2002 upon which the Board of Directors adopted the 2002 Stock Option Plan (the“2002 Plan”).  The 2002 Plan alsoauthorized us to grant up to 1,000,000stock options.

 

Options granted under the 1992 Plan and 2002Plan (collectively the “Incentive Plans”) vest at date of grant and areexercisable up to ten years from the date of grant.  The exercise price on options granted isequal to the market price at the date of grant. Options outstanding at February 28, 2009 expire beginning in July 2010through March 2014.

 

A summary of the status ofour Incentive Plans as of February 28, 2009 and February 29, 2008,and changes during the years then ended is presented below:

 
| ** **                       | ** ** | **February 28, 2009** | ** ** | **February 29, 2008** | ** ** |
|----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | ** **                      | ** ** | **Weighted**                    | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                       | ** ** | ** **                      | ** ** | **Average**                     | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                       | ** ** | ** **                      | ** ** | **Exercise**                    | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                       | ** ** | **Shares**                      | ** ** | **Price**                       | ** ** | **Shares** | ** ** | **Price** | ** ** |
|                             |       |                            |       |                            |       |   |   |   |   |
| Outstanding at Beginning of Year |       | 235,200                         |       | $                               | 3.67       |   | 250,200 |   | $ | 3.69 |   |
|                             |       |                            |       |                            |       |   |   |   |   |
| Granted                          |       | —                          |       | —                          |       | — |   | — |   |
|                             |       |                            |       |                            |       |   |   |   |   |
| Exercised/canceled               |       | (232,200                        | )          | (3.66                           | )          | (15,000 | ) | (4.00 | ) |
|                             |       |                            |       |                            |       |   |   |   |   |
| Outstanding at End of Year       |       | 3,000                           |       | $                               | 4.79       |   | 235,200 |   | $ | 3.67 |   |

 

Thefollowing table summarizes information about stock options outstanding at February 28,2009:

 
| ** **                | ** ** | **Number**                    | ** ** | **Weighted Average** | ** ** |
|---------------------------|------------|-------------------------------|------------|---------------------------|------------|
| ** **                | ** ** | **Outstanding**               | ** ** | **Remaining**             | ** ** |
| **Weighted Average** | ** ** | **at February 29,** | ** ** | **Contractual**           | ** ** |
| **Exercise Price**   | ** ** | **2008**                      | ** ** | **Life (Years)**     | ** ** |
|                      |       |                          |       |                      |       |
| $                         | 2.19       |                          | 2,000      |                      | 1.4        |   |
| $                         | 10.00      |                          | 1,000      |                      | 5.0        |   |
|                      |       | 3,000                         |       |                      |       |

 

All options outstanding are exercisable at February 28,2009.

 

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No options were granted during the threefiscal years ended February 28, 2009.

 

**9.**                    QUARTERLY RESULTS OFOPERATIONS (UNAUDITED)

** **

The following is a summaryof the quarterly results of operations for the years ended February 28,2009 and February 29, 2008.

** **
| ** **     | ** ** | ** **   | ** ** | ** **            | ** ** | ** **            | ** ** | **Basic**          | ** ** | **Diluted**        | ** ** |
|----------------|------------|--------------|------------|-----------------------|------------|-----------------------|------------|--------------------|------------|--------------------|------------|
| ** **     | ** ** | **Net**      | ** ** | ** **            | ** ** | ** **            | ** ** | **Earnings**       | ** ** | **Earnings**       | ** ** |
| ** **     | ** ** | **Revenues** | ** ** | **Gross Margin** | ** ** | **Net Earnings** | ** ** | **Per Share** | ** ** | **Per Share** | ** ** |
| **2009**       | ** ** | ** **   | ** ** | ** **            | ** ** | ** **            | ** ** | ** **         | ** ** | ** **         | ** ** |
| First quarter  |       | $            | 7,374,800  |                  | $          | 4,703,700             |       | $                  | 479,700    |               | $          | 0.13 |   | $ | 0.13 |   |
| Second quarter |       | 6,367,500    |       | 3,881,000             |       | 323,000               |       | 0.08               |       | 0.08               |       |
| Third quarter  |       | 9,388,200    |       | 5,964,200             |       | 649,500               |       | 0.17               |       | 0.17               |       |
| Fourth quarter |       | 6,267,900    |       | 4,267,900             |       | 460,400               |       | 0.12               |       | 0.12               |       |
|           |       |         |       |                  |       |                  |       |               |       |               |       |
| Total year     |       | $            | 29,398,400 |                  | $          | 18,816,800            |       | $                  | 1,912,600  |               | $          | 0.50 |   | $ | 0.50 |   |
|           |       |         |       |                  |       |                  |       |               |       |               |       |
| **2008**       | ** ** | ** **   | ** ** | ** **            | ** ** | ** **            | ** ** | ** **         | ** ** | ** **         | ** ** |
| First quarter  |       | $            | 7,606,400  |                  | $          | 4,899,900             |       | $                  | 585,300    |               | $          | 0.16 |   | $ | 0.15 |   |
| Second quarter |       | 6,218,500    |       | 3,916,500             |       | 379,800               |       | 0.10               |       | 0.10               |       |
| Third quarter  |       | 9,903,500    |       | 6,514,600             |       | 876,800               |       | 0.23               |       | 0.23               |       |
| Fourth quarter |       | 6,792,300    |       | 4,439,500             |       | 482,500               |       | 0.13               |       | 0.12               |       |
|           |       |         |       |                  |       |                  |       |               |       |               |       |
| Total year     |       | $            | 30,520,700 |                  | $          | 19,770,500            |       | $                  | 2,324,400  |               | $          | 0.62 |   | $ | 0.60 |   |

 

**10.**             BUSINESS SEGMENTS

** **

We have two reportablesegments: Publishing and Usborne Books and More (“UBAM”) which are businessunits that 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 to retail accounts, which include book,  toy and gift stores, school supply stores and museums, through commissioned  sales representatives, trade and specialty wholesalers and an internal  telesales group. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                         |
| · |   | UBAM  markets its product line through a nationwide network of independent sales  consultants using a combination of direct sales, home shows and book fairs.  The UBAM Division also distributes to school and public libraries.                            |

 

The accounting policies of the segments arethe same as those described in the summary of significant accountingpolicies.  Weevaluate segment performance based on earnings (loss) before incometaxes of the segments, which is defined as segment net sales reduced by directcost of sales and direct expenses. Corporate expenses, depreciation, interestexpense and income taxes are not allocated to the segments, but are listed inthe “other” column.  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.

 

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Information by industrysegment for the years ended February 28, 2009 and February 29, 2008is set forth below:

 

**NET REVENUES**

 
| ** **     | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| **Publishing** |       | $        | 8,126,000  |     | $          | 8,144,100 |   |
| **UBAH**       |       | $        | 21,272,400 |     | $          | 22,376,600 |   |
| **Other**      |       | $        | —     |     | $          | — |   |
| **Total**      |       | $        | 29,398,400 |     | $          | 30,520,700 |   |

 

**EARNINGS(LOSS) BEFORE INCOME TAXES**

 
| ** **     | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| **Publishing** |       | $        | 2,609,700  |     | $          | 2,507,600 |   |
| **UBAH**       |       | $        | 4,277,100  |     | $          | 4,856,800 |   |
| **Other**      |       | $        | (3,747,900 | )        | $          | (3,632,300 | ) |
| **Total**      |       | $        | 3,138,900  |     | $          | 3,732,100 |   |

 

**11.**             STOCK REPURCHASE PLAN

** **

In April 2004 the Board of Directorsauthorized usto purchase upto 500,000 additional shares of our common stock under a plan initiated in1998.  In April 2008, we reached therepurchase limit and the Board of Directors authorized us to purchase up to an additional500,000 shares of our common stock under the plan initiated in 1998.  This plan has no expiration date.  During fiscal year 2009, we purchased 144,848shares of common stock at an average price of $5.54 per share totaling approximately$802,800.  The maximum number of sharesthat may be repurchased in the future is 434,152.

 

**12.**             BUSINESS COMBINATION

** **

On December 11, 2008, we acquired all ofthe outstanding shares of Kane/Miller Book Publishers, Inc.  Kane/Miller’s operations were absorbed intoour existing lines of business and have been included in the financialstatements since that date.  Kane/Milleris a publisher of international children’s books.  The aggregate purchase price was $125,000, ofwhich $50,000 was paid at closing.  Inaddition, we paid approximately $705,000 at closing consisting primarily ofpayments to liquidate a Kane/Miller line of credit and notes toshareholders.  The transaction wasaccounted for in accordance with SFAS No. 141, Business Combinations.  No goodwill was recognized as a result of thisacquisition.

 

**13.**             SUBSEQUENT EVENT

** **

On April 23, 2009, we announced that wewould pay a $0.40 per share regular dividend to shareholders of record as of May 5,2009.  This dividend was paid on May 15,2009.

 

******

 

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