UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x

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

For the quarterly period ended August 31,November 30, 2010


OR


o

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to .

____________.


Commission file number: 0-4957


EDUCATIONAL DEVELOPMENT CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

73-0750007

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

(I.R.S. Employer 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


Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x        No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o        No o


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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company x

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

As of October 13, 2010January 12, 2011 there were 3,892,2803,902,743 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.


TABLE OF CONTENTS
Page
PART I.FINANCIAL INFORMATION 
Item 1.Financial Statements 2 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 10 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 17 
Item 4.  Control and Procedures 17 
PART II. OTHER INFORMATION 
Item 1.  Legal Proceedings 18 
Item 1A. Risk Factors 18 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18 
Item 3.  Defaults Upon Senior Securities 19 
Item 4.  Submission of Matters to a Vote of Security Holders 19 
Item 5.  Other Information 19 
Item 6. Exhibits 19 
Signatures20 
PART I.  FINANCIAL INFORMATION

ITEM 1FINANCIAL STATEMENTS
ITEM 1

EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED BALANCE SHEETS (UNAUDITED)

 

 

August 31, 2010

 

February 28, 2010

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

1,702,200

 

$

1,196,900

 

Accounts receivable, less allowance for doubtful accounts and sales returns $192,700 (August 31) and $231,300 (February 28)

 

3,474,300

 

3,305,500

 

Inventories—Net

 

10,165,100

 

11,285,300

 

Prepaid expenses and other assets

 

301,900

 

268,400

 

Income tax receivable

 

—

 

8,000

 

Deferred income taxes

 

256,900

 

256,900

 

Total current assets

 

15,900,400

 

16,321,000

 

 

 

 

 

 

 

INVENTORIES—Net

 

671,000

 

659,000

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT—Net

 

2,088,800

 

2,147,500

 

 

 

 

 

 

 

OTHER ASSETS

 

172,500

 

172,500

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

63,300

 

60,400

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

18,896,000

 

$

19,360,400

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

2,293,600

 

$

2,259,100

 

Accrued salaries and commissions

 

526,800

 

531,600

 

Current maturities of long-term debt

 

75,000

 

75,000

 

Income taxes payable

 

59,900

 

—

 

Dividends payable

 

466,400

 

466,400

 

Other current liabilities

 

588,700

 

531,200

 

Total current liabilities

 

4,010,400

 

3,863,300

 

 

 

 

 

 

 

LONG-TERM NOTES PAYABLE, net of current maturities

 

75,000

 

75,000

 

 

 

 

 

 

 

COMMITMENTS

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Common stock, $0.20 par value; Authorized 8,000,000 shares; Issued 6,041,040 (August 31 and February 28) shares; Outstanding 3,886,520 (August 31) and 3,887,030 (February 28) shares

 

1,208,200

 

1,207,800

 

Capital in excess of par value

 

8,548,000

 

8,544,000

 

Retained earnings

 

16,838,400

 

17,391,700

 

 

 

26,594,600

 

27,143,500

 

Less treasury stock, at cost

 

(11,784,000

)

(11,721,400

)

 

 

14,810,600

 

15,422,100

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

18,896,000

 

$

19,360,400

 

ASSETS November 30, 2010  February 28, 2010 
       
CURRENT ASSETS:      
  Cash and cash equivalents $3,757,100  $1,196,900 
  Accounts receivable, less allowance for doubtful accounts and        
    sales returns $176,600 (November 30) and  $231,300 (February 28)  3,878,400   3,305,500 
  Inventories—Net  9,519,000   11,285,300 
  Prepaid expenses and other assets  307,500   268,400 
  Income tax receivable  -   8,000 
  Deferred income taxes  220,500   256,900 
             Total current assets  17,682,500   16,321,000 
         
INVENTORIES—Net  606,000   659,000 
         
PROPERTY, PLANT AND EQUIPMENT—Net  2,069,000   2,147,500 
         
OTHER ASSETS  172,500   172,500 
DEFERRED INCOME TAXES  60,900   60,400 
         
TOTAL ASSETS $20,590,900  $19,360,400 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
         
CURRENT LIABILITIES:        
  Accounts payable $2,800,900  $2,259,100 
  Accrued salaries and commissions  831,600   531,600 
  Current maturities of long-term debt  75,000   75,000 
  Income taxes payable  297,200   - 
  Dividends payable  584,400   466,400 
  Other current liabilities  873,600   531,200 
             Total current liabilities  5,462,700   3,863,300 
         
  LONG-TERM NOTES PAYABLE, net of current maturities  75,000   75,000 
         
COMMITMENTS        
         
SHAREHOLDERS’ EQUITY:        
  Common stock, $0.20 par value; Authorized 8,000,000 shares;        
    Issued 6,041,040 (November 30) and 6,039,040 (February 28) shares;        
    Outstanding 3,895,674 (November 30) and 3,887,030 (February 28) shares  1,208,200   1,207,800 
  Capital in excess of par value  8,548,000   8,544,000 
  Retained earnings  17,030,900   17,391,700 
   26,787,100   27,143,500 
  Less treasury stock, at cost  (11,733,900)  (11,721,400)
   15,053,200   15,422,100 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $20,590,900  $19,360,400 
See notes to condensed financial statements.

2


EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)

 

 

Three Months Ended August 31,

 

Six Months Ended August 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

GROSS SALES

 

$

9,112,200

 

$

9,476,000

 

$

17,888,200

 

$

18,229,100

 

Less discounts and allowances

 

(3,616,800

)

(3,758,200

)

(6,361,200

)

(6,398,600

)

Transportation revenue

 

255,000

 

288,100

 

518,800

 

566,000

 

NET REVENUES

 

5,750,400

 

6,005,900

 

12,045,800

 

12,396,500

 

COST OF SALES

 

2,363,200

 

2,452,600

 

4,684,400

 

4,752,800

 

Gross margin

 

3,387,200

 

3,553,300

 

7,361,400

 

7,643,700

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Operating and selling

 

1,605,400

 

1,578,500

 

3,312,900

 

3,162,000

 

Sales commissions

 

998,700

 

1,088,100

 

2,303,200

 

2,450,100

 

General and administrative

 

517,000

 

527,300

 

994,600

 

1,033,200

 

Casualty loss

 

—

 

—

 

188,500

 

—

 

 

 

3,121,100

 

3,193,900

 

6,799,200

 

6,645,300

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

37,000

 

(200

)

41,200

 

26,800

 

 

 

 

 

 

 

 

 

 

 

EARNINGS BEFORE INCOME TAXES

 

303,100

 

359,200

 

603,400

 

1,025,200

 

 

 

 

 

 

 

 

 

 

 

INCOME TAXES

 

112,900

 

133,800

 

225,000

 

384,400

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS

 

$

190,200

 

$

225,400

 

$

378,400

 

$

640,800

 

 

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED EARNINGS PER SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

$

0.06

 

$

0.10

 

$

0.17

 

Diluted

 

$

0.05

 

$

0.06

 

$

0.10

 

$

0.17

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

3,882,593

 

3,867,023

 

3,879,598

 

3,855,435

 

Diluted

 

3,883,505

 

3,868,155

 

3,881,818

 

3,856,507

 

  
Three Months Ended
November 30,
  
Nine Months Ended
November 30,
 
  2010  2009  2010  2009 
             
GROSS SALES $13,227,000  $13,401,900  $31,115,200  $31,631,000 
  Less discounts and allowances  (4,234,400)  (3,932,500)  (10,595,600)  (10,331,100)
  Transportation revenue  492,000   547,000   1,010,800   1,113,000 
NET REVENUES  9,484,600   10,016,400   21,530,400   22,412,900 
COST OF SALES  3,478,600   3,534,800   8,163,000   8,287,600 
           Gross margin  6,006,000   6,481,600   13,367,400   14,125,300 
                 
OPERATING EXPENSES:                
  Operating and selling  2,128,800   2,105,000   5,441,700   5,267,000 
  Sales commissions  2,165,500   2,410,500   4,468,700   4,860,600 
  General and administrative  472,000   487,100   1,466,600   1,520,300 
  Casualty loss  -   -   188,500   - 
   4,766,300   5,002,600   11,565,500   11,647,900 
                 
OTHER INCOME  8,600   4,200   49,800   31,000 
                 
EARNINGS BEFORE INCOME TAXES  1,248,300   1,483,200   1,851,700   2,508,400 
                 
INCOME TAXES  471,400   558,100   696,400   942,500 
                 
NET EARNINGS $776,900  $925,100  $1,155,300  $1,565,900 
                 
BASIC AND DILUTED EARNINGS                
  PER SHARE:                
  Basic $0.20  $0.24  $0.30  $0.41 
  Diluted $0.20  $0.24  $0.30  $0.41 
                 
WEIGHTED AVERAGE NUMBER OF                
COMMON AND EQUIVALENT SHARES             
  OUTSTANDING:                
  Basic  3,891,065   3,872,134   3,883,420   3,861,001 
  Diluted  3,893,301   3,873,296   3,885,646   3,862,104 
See notes to condensed financial statements.

3


EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

FOR THE SIXNINE MONTHS ENDED AUGUST 31,NOVEMBER 30, 2010

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(par value $0.20 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of

 

 

 

Capital in

 

 

 

Treasury Stock

 

 

 

 

 

Shares

 

 

 

Excess of

 

Retained

 

Number of

 

 

 

Shareholders’

 

 

 

Issued

 

Amount

 

Par Value

 

Earnings

 

Shares

 

Amount

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE—March 1, 2010

 

6,039,040

 

$

1,207,800

 

$

8,544,000

 

$

17,391,700

 

2,152,010

 

$

(11,721,400

)

$

15,422,100

 

Purchases of treasury stock

 

—

 

—

 

—

 

—

 

28,720

 

(186,700

)

(186,700

)

Sales of treasury stock

 

—

 

—

 

—

 

—

 

(26,210

)

124,100

 

124,100

 

Exercise of options at $2.1875

 

2,000

 

400

 

4,000

 

—

 

—

 

—

 

4,400

 

Dividends declared ($.24/share)

 

—

 

—

 

—

 

(931,700

)

—

 

—

 

(931,700

)

Net earnings

 

—

 

—

 

—

 

378,400

 

—

 

—

 

378,400

 

BALANCE—August 31, 2010

 

6,041,040

 

$

1,208,200

 

$

8,548,000

 

$

16,838,400

 

2,154,520

 

$

(11,784,000

)

$

14,810,600

 

  Common Stock                
  (par value $0.20 per share)                
  Number of     Capital in     Treasury Stock    
  Shares     Excess of  Retained  Number of     Shareholders’ 
  Issued  Amount  Par Value  Earnings  Shares  Amount  Equity 
                      
                      
BALANCE—March 1, 2010  6,039,040  $1,207,800  $8,544,000  $17,391,700   2,152,010  $(11,721,400) $15,422,100 
  Purchases of treasury stock  -   -   -   -   29,191   (189,600)  (189,600)
  Sales of treasury stock  -   -   -   -   (35,835)  177,100   177,100 
  Exercise of options at $2.1875  2,000   400   4,000   -   -   -   4,400 
  Dividends declared ($.39/share)  -   -   -   (1,516,100)  -   -   (1,516,100)
  Net earnings  -   -   -   1,155,300   -   -   1,155,300 
BALANCE—November 30, 2010  6,041,040  $1,208,200  $8,548,000  $17,030,900   2,145,366  $(11,733,900) $15,053,200 
See notes to condensed financial statements.

4


EDUCATIONAL DEVELOPMENT CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIXNINE MONTHS ENDED AUGUST 31,

 

 

2010

 

2009

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

$

1,499,400

 

$

(1,371,400

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property and equipment

 

(4,200

)

—

 

 

 

 

 

 

 

Net cash used in investing activities

 

(4,200

)

—

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Cash paid to acquire treasury stock

 

(186,700

)

(3,700

)

Cash received from sales of treasury stock

 

124,100

 

120,700

 

Borrowings under revolving credit agreement

 

—

 

1,000,000

 

Payments under revolving credit agreement

 

—

 

(847,600

)

Dividends paid

 

(931,700

)

(1,536,600

)

Stock options exercised

 

4,400

 

—

 

 

 

 

 

 

 

Net cash used in financing activities

 

(989,900

)

(1,267,200

)

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

505,300

 

(2,638,600

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD

 

1,196,900

 

2,896,200

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS—END OF PERIOD

 

$

1,702,200

 

$

257,600

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash paid for income taxes

 

$

160,000

 

$

460,000

 

NOVEMBER 30,

  2010  2009 
       
CASH FLOWS FROM OPERATING ACTIVITIES: $3,982,100  $258,100 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
  Purchases of property and equipment  (15,700)  (2,500)
         
             Net cash used in investing activities  (15,700)  (2,500)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
  Cash paid to acquire treasury stock  (189,600)  (4,400)
  Cash received from sales of treasury stock  177,100   146,000 
  Borrowings under revolving credit agreement  -   2,200,000 
  Payments under revolving credit agreement  -   (2,200,000)
  Dividends paid  (1,398,100)  (1,536,600)
  Stock options exercised  4,400   - 
         
             Net cash used in financing activities  (1,406,200)  (1,395,000)
         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  2,560,200   (1,139,400)
         
CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD  1,196,900   2,896,200 
         
CASH AND CASH EQUIVALENTS—END OF PERIOD $3,757,100  $1,756,800 
         
SUPPLEMENTAL DISCLOSURE OF CASH  FLOW        
  INFORMATION:        
  Cash paid for interest $-  $7,300 
  Cash paid for income taxes $330,300  $462,500 
See notes to condensed financial statements.

5


NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)


Note 1 — – The information shown with respect to the three and sixnine months ended August 31,November 30, 2010 and 2009, respectively, which is unaudited, includes all adjustments which in the opinion of Management are considered to be necessary for a fair presentation of earnings for such periods.  The adjustments reflected in the financial statements represent normal recurring adjustments.  The results of operations for the three and sixnine months ended August 31,November 30, 2010 and 2009, respectively, are not necessarily indicative of the results to be expected at year end due to seasonality of the product sales.


These financial statements and notes are prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and should be read in conjunction with the Financial Statements and accompanying notes contained in our Annual Report to Shareholders for the Fiscal Year ended February 28, 2010.


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


This agreement also contains a provision for our use of the Bank’s letters of credit.  The Bank agrees to issue commercial or standby letters of credit provided that none will have an expiry date later than June 30, 2011 and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time.  For the quarter ended August 31,November 30, 2010, we had no letters of credit outstanding.


Note 3 — – Inventories consist of the following:

 

 

2010

 

 

 

August 31,

 

February 28,

 

Current:

 

 

 

 

 

Book inventory

 

$

10,193,100

 

$

11,310,300

 

Inventory valuation allowance

 

(28,000

)

(25,000

)

 

 

 

 

 

 

Inventories net–current

 

$

10,165,100

 

$

11,285,300

 

 

 

 

 

 

 

Noncurrent:

 

 

 

 

 

Book inventory

 

$

1,006,000

 

$

989,000

 

Inventory valuation allowance

 

(335,000

)

(330,000

)

 

 

 

 

 

 

Inventories net–noncurrent

 

$

671,000

 

$

659,000

 

  2010 
  November 30,  February 28, 
Current:      
  Book inventory $9,548,500  $11,310,300 
  Inventory valuation allowance  (29,500)  (25,000)
         
Inventories net–current $9,519,000  $11,285,300 
         
Noncurrent:        
  Book inventory $926,000  $989,000 
  Inventory valuation allowance  (320,000)  (330,000)
         
Inventories net–noncurrent $606,000  $659,000 
6
We occasionally purchase book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of our primary supplier.  These amounts are included in non-current inventory.


Significant portions of our inventory purchases are concentrated with an England-based publishing company.  Purchases from this company were approximately $1.9$2.6 million and $3.1$1.8 million for the three months ended August 31,November 30, 2010 and 2009, respectively.  Total inventory purchases from all suppliers were approximately $2.5$3.2 million and $4.4$2.2 million for the three months ended August 31,November 30, 2010 and 2009, respectively.


For the sixnine months ended August 31,November 30, 2010 and 2009, respectively, purchases from this company were approximately $3.1$5.6 million and $6.5$8.3 million.  Total inventory purchases from all suppliers were approximately $4.1$7.3 million and $8.6$10.8 million for the same respective periods.

Note 4 — – Basic earnings per share (“EPS”) is computed by dividing net earnings by the weighted average number of common shares outstanding during the period.  Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options. In computing diluted EPS we have utilized the treasury stock method.

6



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


Earnings Per Share:            
  
Three Months Ended
November 30,
  
Nine Months Ended
November 30,
 
  2010  2009  2010  2009 
             
  Net earnings applicable to common shareholders $776,900  $925,100  $1,155,300  $1,565,900 
                 
Shares:                
                 
  Weighted average shares outstanding - basic  3,891,065   3,872,134   3,883,420   3,861,001 
  Assumed exercise of options  2,236   1,162   2,226   1,103 
                 
  Weighted average shares outstanding - diluted  3,893,301   3,873,296   3,885,646   3,862,104 
                 
Basic Earnings Per Share $0.20  $0.24  $0.30  $0.41 
Diluted Earnings Per Share $0.20  $0.24  $0.30  $0.41 
7
Earnings Per Share:Table of Contents

 

 

Three Months Ended August 31,

 

Six Months Ended August 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net earnings applicable to common shareholders

 

$

190,200

 

$

225,400

 

$

378,400

 

$

640,800

 

 

 

 

 

 

 

 

 

 

 

Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

3,882,593

 

3,867,023

 

3,879,598

 

3,855,435

 

Assumed exercise of options

 

912

 

1,132

 

2,220

 

1,072

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - diluted

 

3,883,505

 

3,868,155

 

3,881,818

 

3,856,507

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share

 

$

0.05

 

$

0.06

 

$

0.10

 

$

0.17

 

Diluted Earnings Per Share

 

$

0.05

 

$

0.06

 

$

0.10

 

$

0.17

 

In April 2008, our Board of Directors authorized us to purchase up to 500,000 additional shares of our common stock under a plan initiated in 1998. This plan has no expiration date. During the secondthird quarter of fiscal year 2010,2011, we repurchased 3,720471 shares of common stock.  The maximum number of shares that can be repurchased in the future is 397,513.

397,042.

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


Note 6 — – Freight costs and handling costs incurred are included in operating & selling expenses and were $500,100$828,600 and $509,100$793,500 for the three months ended August 31,November 30, 2010 and 2009, respectively.


For the sixnine months ended August 31,November 30, 2010 and 2009, respectively, freight and handling costs incurred are included in operating & selling expenses and were $1,005,800$1,834,400 and $987,700.

$1,781,200.


Note 7 — – We have two reportable segments:  Publishing and Usborne Books and More (“UBAM”).  These reportable segments are business units that offer different methods of distribution to different types of customers.  They are managed separately based on the fundamental differences in their operations.  The Publishing Division markets its products to retail accounts, which include book, school supply, toy and gift stores and museums, through commissioned sales representatives, trade and specialty wholesalers and an internal telesales group.  The UBAM Division markets its product line through a network of independent sales consultants through a combination of direct sales, home shows, book fairs and the Internet.

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

7

Information by industry segment for the three and sixnine months ended August 31,November 30, 2010 and 2009 follows:


NET REVENUES
  
Three Months Ended
November 30,
 
Nine Months Ended
November 30,
 
  2010  2009  2010  2009 
Publishing $2,822,700  $2,756,800  $7,631,600  $7,380,700 
UBAM  6,661,900   7,259,600   13,898,800   15,032,200 
Other  -   -   -   - 
Total $9,484,600  $10,016,400  $21,530,400  $22,412,900 
                 
EARNINGS (LOSS) BEFORE INCOME TAXES
  
Three Months Ended
November 30,
 
Nine Months Ended
November 30,
 
   2010   2009   2010   2009 
Publishing $1,045,300  $1,048,900  $2,492,400  $2,584,400 
UBAM  1,257,000   1,496,800   2,597,900   3,027,300 
Other  (1,054,000)  (1,062,500)  (3,238,600)  (3,103,300)
Total $1,248,300  $1,483,200  $1,851,700  $2,508,400 
NET REVENUES

 

 

Three Months Ended August 31,

 

Six Months Ended August 31

 

 

 

2010

 

2009

 

2010

 

2009

 

Publishing

 

$

2,709,300

 

$

2,642,100

 

$

4,808,900

 

$

4,623,900

 

UBAM

 

 

3,041,100

 

 

3,363,800

 

 

7,236,900

 

 

7,772,600

 

Other

 

 

—

 

 

—

 

 

—

 

 

—

 

Total

 

$

5,750,400

 

$

6,005,900

 

$

12,045,800

 

$

12,396,500

 

EARNINGS (LOSS) BEFORE INCOME TAXES

 

 

Three Months Ended August 31,

 

Six Months Ended August 31

 

 

 

2010

 

2009

 

2010

 

2009

 

Publishing

 

$

843,500

 

$

873,800

 

$

1,447,100

 

$

1,535,500

 

UBAM

 

 

456,900

 

 

516,400

 

 

1,340,900

 

 

1,530,500

 

Other

 

 

(997,300

)

 

(1,031,000

)

 

(2,184,600

)

 

(2,040,800

)

Total

 

$

303,100

 

$

359,200

 

$

603,400

 

$

1,025,200

 

Note 8 - – The Financial Accounting Standards Board (“FASB”) periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. We have reviewed the recently issued pronouncements and concluded that the recently issued accounting standards are not applicable to us.


Note 9 — – During the sixnine month period ended August 31,November 30, 2010, we determined that amounts paid to a third party for travel deposits had not been used to reserve travel for the Company.  As a result of this, we had to pay and/or will have to pay approximately $188,500 in additional travel expenses, which is reported in operating expenses as a casualty loss.

Note 10 — On September –On December 17, 2010, we paid the previously declared $0.12$0.15 dividend per share to shareholders of record as of SeptemberDecember 10, 2010.

9
ITEM 2   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSTable of Contents

ITEM 2MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factors Affecting Forward Looking Statements


MD&A contains statements that are forward-looking and include numerous risks which you should carefully consider.  Additional risks and uncertainties can also materially and adversely affect our business.   You should read the following discussion in connection with our financial statements, including the notes to those statements, included in this document.  Our fiscal years end on February 28.


Overview

Overview

We operate two separate divisions, Publishing and Usborne Books and More (“UBAM”), to sell the Usborne and Kane/Miller lines of children’s books.  These two divisions each have their own customer base.  The Publishing Division markets its products on a wholesale basis to various retail accounts.  The UBAM Division markets its products to individual consumers as well as school and public libraries.

The following table shows consolidated statements of income data as a percentage of net revenues.

8


Earnings as a Percent of Net Revenues
  
Three Months Ended
November 30,
  
Nine Months Ended
November 30,
 
  2010  2009  2010  2009 
Net revenues  100.0%  100.0%  100.0%  100.0%
Cost of sales  36.7%  35.3%  37.9%  37.0%
  Gross margin  63.3%  64.7%  62.1%  63.0%
Operating expenses:                
  Operating & selling  22.4%  21.0%  25.3%  23.5%
  Sales commissions  22.8%  24.1%  20.7%  21.7%
  General & administrative  5.0%  4.9%  6.8%  6.8%
  Casualty loss  0.0%  0.0%  0.9%  0.0%
  Total operating expenses  50.2%  50.0%  53.7%  52.0%
Income from operations  13.1%  14.7%  8.4%  11.0%
Other income  0.1%  0.0%  0.2%  0.2%
Earnings before income taxes  13.2%  14.7%  8.6%  11.2%
Income taxes  5.0%  5.5%  3.2%  4.2%
Net earnings  8.2%  9.2%  5.4%  7.0%
10

Earnings as a PercentTable of Net RevenuesContents

 

 

Three Months Ended August 31,

 

Six Months Ended August 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of sales

 

41.1

%

40.8

%

38.9

%

38.3

%

Gross margin

 

58.9

%

59.2

%

61.1

%

61.7

%

Operating expenses:

 

 

 

 

 

 

 

 

 

Operating & selling

 

27.9

%

26.3

%

27.5

%

25.5

%

Sales commissions

 

17.4

%

18.1

%

19.1

%

19.8

%

General & administrative

 

9.0

%

8.8

%

8.2

%

8.3

%

Casualty loss

 

0.0

%

0.0

%

1.6

%

0.0

%

Total operating expenses

 

54.3

%

53.2

%

56.4

%

53.6

%

Income from operations

 

4.6

%

6.0

%

4.7

%

8.1

%

Other income

 

0.7

%

0.0

%

0.3

%

0.2

%

Earnings before income taxes

 

5.3

%

6.0

%

5.0

%

8.3

%

Income taxes

 

2.0

%

2.2

%

1.9

%

3.1

%

Net earnings

 

3.3

%

3.8

%

3.1

%

5.2

%

Operating Results for the Three Months Ended August 31,November 30, 2010


We earned income before income taxes of $303,100$1,248,300 for the three months ended August 31,November 30, 2010 compared with $359,200$1,483,200 for the three months ended August 31,November 30, 2009.


Revenues

 

 

For the Three Months Ended August 31,

 

$ Increase/

 

% Increase/

 

 

 

2010

 

2009

 

(decrease)

 

(decrease)

 

Gross sales

 

$

9,112,200

 

$

9,476,000

 

$

(363,800

)

(3.8

)

Less discounts & allowances

 

(3,616,800

)

(3,758,200

)

141,400

 

(3.8

)

Transportation revenue

 

255,000

 

288,100

 

(33,100

)

(11.5

)

Net revenues

 

$

5,750,400

 

$

6,005,900

 

$

(255,500

)

(4.3

)

  For the Three Months Ended November 30,  $ Increase/  % Increase/ 
  2010  2009  
(decrease)
  (decrease) 
Gross sales $13,227,000  $13,401,900  $(174,900)  (1.3)
Less discounts & allowances  (4,234,400)  (3,932,500)  (301,900)  7.7 
Transportation revenue  492,000   547,000   (55,000)  (10.1)
Net revenues $9,484,600  $10,016,400  $(531,800)  (5.3)
The UBAM Division’s gross sales decreased $590,500$297,800 during the three month period ending August 31,November 30, 2010 when compared with the same quarterly period a year ago.  This decrease consists primarily of decreases in internetdirect sales of 10%27%, 16%15% in home parties and 15%10% in directinternet sales, offset by a 12%2% increase in school and library sales.  The decline in home party sales is attributed to a 27%15% decline in the total number of orders offset by a 16% increase in the average order size.

orders.


The Publishing Division’s gross sales increased $226,700$122,900 during the three month period ending August 31,November 30, 2010 when compared with the same quarterly period a year ago.  We attribute this to an 11.0%a 13.7% increase in sales to smaller retail stores and a 3.1% increase in inside sales, offset by a 1.9% decrease in inside sales and a 1.7%1.2% decrease in sales to major national accounts.


The UBAM Division’s discounts and allowances were $621,700$1,255,500 and $921,000$1,008,500 for the quarterly periods ended August 31,November 30, 2010 and 2009, respectively.  The UBAM Division is a multi-level selling organization that markets its products through independent sales representatives (“consultants”). Sales are made to individual purchasers and school and public libraries.  Most sales in the UBAM Division are at retail.  As a part of the UBAM Division’s marketing programs, discounts between 40% and 50% of retail are offered on selected items at various times throughout the year.  The discounts and allowances in the UBAM Division will vary from year to year depending upon the marketing programs in place during any given year.  The UBAM Division’s discounts and allowancesal lowances were 18.2%16.9% and 23.0%13.0% of UBAM’s gross sales for the quarterly periods ended August 31,November 30, 2010 and 2009, respectively.


The Publishing Division’s discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAM Division due to the different customer markets that each division targets.  The Publishing Division’s discounts and allowances were $2,995,100$2,978,900 and $2,837,200$2,924,000 for the quarterly periods ended August 31,November 30, 2010 and 2009, respectively.  The Publishing Division sells to retail book chains, regional and local bookstores, toy and gift stores, school supply stores and museums.  To be competitive with other wholesale book distributors, the Publishing Division sells at

9


discounts between 48% and 55% of the retail price, based upon the quantity of books ordered and the dollar amount of the order.  The Publishing Division’s discounts and allowances were 52.6%we re 51.4% of Publishing’s gross sales for the quarterly period ended August 31,November 30, 2010 and 51.9%51.6% for the quarterly period ended August 31,November 30, 2009.


Expenses

 

 

For Three Months Ended August 31,

 

$ Increase/

 

% Increase/

 

 

 

2010

 

2009

 

(decrease)

 

(decrease)

 

Cost of sales

 

$

2,363,200

 

2,452,600

 

$

(89,400

)

(3.6

)

Operating & selling

 

1,605,400

 

1,578,500

 

26,900

 

1.7

 

Sales commissions

 

998,700

 

1,088,100

 

(89,400

)

(8.2

)

General & administrative

 

517,000

 

527,300

 

(10,300

)

(2.0

)

Total

 

$

5,484,300

 

$

5,646,500

 

$

(162,200

)

(2.9

)

  For Three Months Ended November 30,  $ Increase/  % Increase/ 
  2010  2009  (decrease)  (decrease) 
Cost of sales $3,478,600  $3,534,800  $(56,200)  (1.6)
Operating & selling  2,128,800   2,105,000   23,800   1.1 
Sales commissions  2,165,500   2,410,500   (245,000)  (10.2)
General & administrative  472,000   487,100   (15,100)  (3.1)
Total $8,244,900  $8,537,400  $(292,500)  (3.4)
Cost of sales decreased 3.6%1.6% for the three months ended August 31,November 30, 2010 when compared with the three months ended August 31,November 30, 2009.  Cost of sales as a percentage of gross sales was 25.9%26.3% and 26.4%, respectively, for botheach of the three monthsmonth periods ended August 31,November 30, 2010 and the three months ended August 31,November 30, 2009.  Cost of sales is the inventory cost of the product sold, which includes the cost of the product itself and inbound freight charges.  Purchasing and receiving costs, inspection costs, warehousing costs, and other costs of our distribution network are included in operating and selling expenses, not in cost of sales.  These costs totaled $277,300$310,200 in the quarter ended August 31,November 30, 2010 and $274,700$306,000 in the quarter ended August 31,November 30, 2009.


In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of the Publishing Division, the UBAM Division and the order entry and customer service functions.  Operating and selling expenses as a percentage of gross sales were 17.6%16.1% for the quarter ended August 31,November 30, 2010 and 16.7%15.7% for the quarter ended August 31,November 30, 2009.

Sales commissions in the Publishing Division increased 20.4%17.4% to $56,600$56,100 for the three months ended August 31,November 30, 2010.  Publishing Division sales commissions are paid on net sales and were 2.1%2.0% of net sales for the three months ended August 31,November 30, 2010 and 1.8%1.7% of net sales for the three months ended August 31,November 30, 2009.  Sales commissions in the Publishing Division fluctuate depending upon the amount of sales made to our “house accounts,” which are the Publishing Division’s largest customers and do not have any commission expense associated with them, and sales made by our outside sales representatives.


Sales commissions in the UBAM Division decreased to $942,100$2,109,400 for the three months ended August 31,November 30, 2010 as a result of decreases in direct sales, home show sales, direct sales and internet sales, offset by ana small increase in school and library sales.  UBAM Division sales commissions are paid on retail sales and were 41.7%39.7% of retail sales for the three months ended August 31,November 30, 2010 and 40.3%40.1% of retail sales for the three months ended August 31,November 30, 2009.  The fluctuation in the percentages of commission expense to retail sales is the result of the type of sale.  Home shows, book fairs, school and library sales and direct sales have different commission rates.  Also contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants’ monthly sales and downline sales.


Our effective tax rate was 37.2%37.8% and 37.6 for the quarterly periods ended August 31,November 30, 2010 and 2009.2009, respectively.  These rates are higher than the federal statutory rate due to state income taxes.


Operating Results for the SixNine Months Ended August 31,November 30, 2010


We earned income before income taxes of $603,400$1,851,700 for the sixnine months ended August 31,November 30, 2010 compared with $1,025,200$2,508,400 for the sixnine months ended August 31,November 30, 2009.

10


Revenues

Revenues

 

 

For the Six Months Ended August 31,

 

$ Increase/

 

% Increase/

 

 

 

2010

 

2009

 

(decrease)

 

(decrease)

 

Gross sales

 

$

17,888,200

 

$

18,229,100

 

$

(340,900

)

(1.9

)

Less discounts & allowances

 

(6,361,200

)

(6,398,600

)

37,400

 

(0.6

)

Transportation revenue

 

518,800

 

566,000

 

(47,200

)

(8.3

)

Net revenues

 

$

12,045,800

 

$

12,396,500

 

$

(350,700

)

(2.8

)

  For the Nine Months Ended November 30,  $ Increase/  % Increase/ 
  2010  2009  
(decrease)
  (decrease) 
Gross sales $31,115,200  $31,631,000  $(515,800)  (1.6)
Less discounts & allowances  (10,595,600)  (10,331,100)  (264,500)  2.6 
Transportation revenue  1,010,800   1,113,000   (102,200)  (9.2)
Net revenues $21,530,400  $22,412,900  $(882,500)  (3.9)

The UBAM Division’s gross sales decreased $915,800$1,213,600 during the sixnine month period ending August 31,November 30, 2010 when compared with the same sixnine month period a year ago.  This decrease consists primarily of decreases of 19% in direct sales, 16% in home parties 11% in direct sales and 2%6% in internet sales, offset by an increase in school and library sales of 6%4%.  The decline in home party sales is attributed to a 27%21% decline in the total number of orders offset by a 15%7% increase in the average order size.


The Publishing Division’s gross sales increased $574,900$697,800 during the sixnine month period ending August 31,November 30, 2010 when compared with the same sixnine month period a year ago.  We attribute this to an 11.8%12.5% increase in sales to smaller retail stores and a 6.7%5.6% increase in inside sales, offset by a 6.0%3.8% decrease in sales to major national accounts.


The UBAM Division’s discounts and allowances were $1,091,900$2,347,400 and $1,518,800$2,527,300 for the sixnine month periods ended August 31,November 30, 2010 and 2009, respectively.  The UBAM Division is a multi-level selling organization that markets its products through independent sales representatives (“consultants”). Sales are made to individual purchasers and school and public libraries.  Most sales in the UBAM Division are at retail.  As a part of the UBAM Division’s marketing programs, discounts between 40% and 50% of retail are offered on selected items at various times throughout the year.  The discounts and allowances in the UBAM Division will vary from year to year depending upon the marketing programs in place during any given year.  The UBAM Division’s discounts and allowancesa llowances were 13.9%15.4% and 17.4%15.3% of UBAM’s gross sales for the sixnine month periods ended August 31,November 30, 2010 and 2009, respectively.


The Publishing Division’s discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAM Division due to the different customer markets that each division targets.  The Publishing Division’s discounts and allowances were $5,269,300$8,248,200 and $4,879,800$7,803,800 for the sixnine month periods ended August 31,November 30, 2010 and 2009, respectively.  The Publishing Division sells to retail book chains, regional and local bookstores, toy and gift stores, school supply stores and museums.  To be competitive with other wholesale book distributors, the Publishing Division sells at discounts between 48% and 55% of the retail price, based upon the quantity of books ordered and the dollar amount of the order.  The Publishing Division’s discounts and allowances were 52.4%w ere 52.0% of Publishing’s gross sales for the sixnine month period ended August 31,November 30, 2010 and 51.5% for the sixnine month period ended August 31,November 30, 2009.

Expenses

 

 

For Six Months Ended August 31,

 

$ Increase/

 

% Increase/

 

 

 

2010

 

2009

 

(decrease)

 

(decrease)

 

Cost of sales

 

$

4,684,400

 

$

4,752,800

 

$

(68,400

)

(1.4

)

Operating & selling

 

3,312,900

 

3,162,000

 

150,900

 

4.8

 

Sales commissions

 

2,303,200

 

2,450,100

 

(146,900

)

(6.0

)

General & administrative

 

994,600

 

1,033,200

 

(38,600

)

(3.7

)

Casualty loss

 

188,500

 

—

 

188,500

 

100.0

 

Total

 

$

11,483,600

 

$

11,398,100

 

$

85,500

 

0.8

 

  For Nine Months Ended November 30,  $ Increase/  % Increase/ 
  2010  2009  (decrease)  (decrease) 
Cost of sales $8,163,000   8,287,600  $(124,600)  (1.5)
Operating & selling  5,441,700   5,267,000   174,700   3.3 
Sales commissions  4,468,700   4,860,600   (391,900)  (8.1)
General & administrative  1,466,600   1,520,300   (53,700)  (3.5)
Casualty loss  188,500   -   188,500   100.0 
Total $19,728,500  $19,935,500  $(207,000)  (1.0)
Cost of sales decreased 1.4%1.5% for the sixnine months ended August 31,November 30, 2010 when compared with the sixnine months ended August 31,November 30, 2009.  Cost of sales as a percentage of gross sales was 26.2% for the sixnine months ended August 31,November 30, 2010 and for the six months ended August 31, 2009 was 26.1%.  2009.  Cost of sales is the inventory cost of the product sold, which includes the cost of the product itself and inbound freight charges.  Purchasing and receiving costs, inspection costs, warehousing costs, and other costs of our distribution network are included in operating and selling expenses, not in cost of sales.  These costs totaled $570,800$881,000 in the sixnine months ended August 31,November 30, 2010 and $561,200$867,200 in the sixnine months ended August 31,November 30, 2009.


In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of the Publishing Division, the UBAM Division and the order entry and customer service functions.  Operating and

11


selling expenses as a percentage of gross sales were 18.5%17.5% for the sixnine months ended August 31,November 30, 2010 and 17.3%16.7% for the sixnine months ended August 31,November 30, 2009.

Sales commissions in the Publishing Division increased 19.5%18.7% to $103,000$159,100 for the sixnine months ended August 31,November 30, 2010.  Publishing Division sales commissions are paid on net sales and were 2.1% of net sales for the sixnine months ended August 31,November 30, 2010 and 1.9%1.8% of net sales for the sixnine months ended August 31,November 30, 2009.  Sales commissions in the Publishing Division fluctuate depending upon the amount of sales made to our “house accounts,” which are the Publishing Division’s largest customers and do not have any commission expense associated with them, and sales made by our outside sales representatives.


Sales commissions in the UBAM Division decreased to $2,200,200$ 4,309,600 for the sixnine months ended August 31,November 30, 2010 as a result of decreases in home show sales, direct sales and internet sales, offset by an increase in school and library sales.  UBAM Division sales commissions are paid on retail sales and were 40.2%40.0% of retail sales for the sixnine months ended August 31,November 30, 2010 and 38.2%39.1% of retail sales for the sixnine months ended August 31,November 30, 2009.  The fluctuation in the percentages of commission expense to retail sales is the result of the type of sale.  Home shows, book fairs, school and library sales and direct sales have different commission rates.  Also contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants’ monthly sales anda nd downline sales.

During the sixnine months ended August 31,November 30, 2010, we determined that amounts paid to a third party for travel deposits had not been used to reserve travel for the Company.  As a result of this, we had to pay and/or will have to pay approximately $188,500 in additional travel expenses, which is reported in operating expenses as a casualty loss.

Our effective tax rate was 37.3% and 37.5%37.6% for the sixnine month periods ended August 31,November 30, 2010 and 2009, respectively.2009.  These rates are higher than the federal statutory rate due to state income taxes.


Liquidity and Capital Resources


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


Our Board of Directors has adopted a stock repurchase plan in which we may purchase up to a total of 3,000,000 shares as market conditions warrant.  Management believes the stock is undervalued and when stock becomes available at an attractive price, we will utilize free cash flow to repurchase shares.  Management believes this enhances the value to the remaining stockholders and that these repurchases will have no adverse effect on our short-term and long-term liquidity.  We repurchased 3,720471 shares at a cost of $21,500$2,900 during the quarter ended August 31,November 30, 2010.


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


For the sixnine months ended August 31,November 30, 2010, we experienced a positive cash flow from operating activities of $1,499,400.$3,982,100.  Cash flow from operating activities resulted from net income after taxes of $378,400, a decrease in inventory of $1,108,200,$1,819,300, an increase in current liabilities of $87,200$1,184,200, net income after taxes of $1,155,300 and  a decrease in net taxes receivable/payable of $67,900,$305,200, offset by a small increase in prepaid expenses of $33,500.

$39,100.


We believe that in fiscal year 2011 we will experience a positive cash flow and that this positive cash flow along with the bank credit facility will be adequate to meet our liquidity requirements for the foreseeable future.


We estimate that total cash used in investing activities for fiscal year 2011 will be less than $200,000.  This would consist of software and hardware enhancements to our existing data processing equipment, property improvements and additional warehouse equipment.


For the sixnine months ended August 31,November 30, 2010, cash used in financing activities was $989,900$1,406,200 from dividend payments of $931,700$1,398,100 and the purchase of $186,700$189,600 of treasury stock, offset by the sale of $124,100$177,100 of treasury stock.


As of August 31,November 30, 2010 we did not have any commitments in excess of one year.

12



Bank Credit Agreement


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


This agreement also contains a provision for our use of the Bank’s letters of credit.  The Bank agrees to issue commercial or standby letters of credit provided that none will have an expiry date later than June 30, 2011 and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time.  For the quarter ended August 31,November 30, 2010, we had no letters of credit outstanding.


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 uncollectible accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.


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


Revenue Recognition


Sales are recognized and recorded when products are shipped.  Products are shipped FOB shipping point. The UBAM Division’s sales are paid before the product is shipped.  These sales accounted for 52.9%70.2% of net revenues for the quarter ended August 31,November 30, 2010 and 56.0%72.5% for the quarter ended August 31,November 30, 2009.  The provisions of the Accounting Standards Codification 605 “Revenue"Revenue Recognition” (ASC 605) have been applied, and as a result, a reserve is provided for estimated future sales returns.


Estimated allowances for sales returns are recorded as sales are recognized and recorded.  Management uses a moving average calculation to estimate the allowance for sales returns.returns.  We are not responsible for product damaged in transit.  Damaged returns are primarily from the retail stores.  The damages occur in the stores, not in shipping to the stores.  It is industry practice to accept returns from wholesale customers.  Transportation revenue, the amount billed to the customer for shipping the product, is recorded when products are shipped.  Management has estimated and included a reserve for sales returns of $100,000 as of August 31,November 30, 2010 and February 28, 2010.


Allowance for Doubtful Accounts


We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer’scustomer's financial condition and current economic trends.  If the actual uncollected amounts significantly exceed the estimated allowance, then our operating results would be significantly adversely affected.  Management has estimated and included an allowance for doubtful accounts of $92,700$76,600 and $131,300 as of August 31,November 30, 2010 and February 28, 2010, respectively.


Inventory


Management continually estimates and calculates the amount of non-current inventory.  Non-current inventory arises due to occasionally purchasing book inventory in quantities in excess of what will be sold within the normal operating cycle

13


due to minimum order requirements of our primary supplier.  Non-current inventory was estimated by management using the current year turnover ratio by title.  All inventory in excess of 2 ½ years of anticipated sales was classified as noncurrent inventory. Noncurrent inventory balances, before valuation allowance, were $1,006,000$926,000 at August 31,November 30, 2010 and $989,000 at February 28, 2010.


Inventories are presented net of a valuation allowance.  Management has estimated and included a valuation allowance for both current and noncurrent inventory.  This allowance is based on management’s identification of slow moving inventory on hand.  Management has estimated a valuation allowance for both current and noncurrent inventory of $363,000$349,500 and $355,000 as of August 31,November 30, 2010 and February 28, 2010, respectively.


Stock-BasedStock-Based Compensation


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

ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.


ITEM 4CONTROLS AND PROCEDURES
Item 4CONTROLS AND PROCEDURES

An evaluation was performed of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of August 31,November 30, 2010. This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and our Controller/Corporate Secretary (Principal Financial and Accounting Officer).


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

PART II. OTHER INFORMATION
Item 1LEGAL PROCEEDINGS

Item 1LEGAL PROCEEDINGS

Not Applicable.

Item 1ARISK FACTORS

Item 1ARISK FACTORS

Not required by smaller reporting company.


Item 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Item 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table shows repurchases of our Common Stock during the quarter ended August 31,November 30, 2010.

14


ISSUER PURCHASES OF EQUITY SECURITIES

Period

 

Total # of Shares
Purchased

 

Average Price
Paid per Share

 

Total # of Shares
Purchased as
Part of Publicly 
Announced Plan (1)

 

Maximum # of 
Shares that May
be Repurchased 
under the Plan 
(2) (3)

 

 

 

 

 

 

 

 

 

 

 

June 1 - 30, 2010

 

233

 

$

5.74

 

233

 

401,000

 

July 1 - 31, 2010

 

1,000

 

$

5.62

 

1,000

 

400,000

 

August 1 - 31, 2010

 

2,487

 

$

5.84

 

2,487

 

397,513

 

Total

 

3,720

 

$

5.78

 

3,720

 

 

 


Period 
Total # of Shares
Purchased
  
Average Price
Paid per Share
  
Total # of Shares
Purchased as
Part of Publicly Announced Plan (1)
  
Maximum # of Shares that May
be Repurchased under the Plan (2) (3)
 
              
September 1 - 30, 2010  203  $6.12   203   397,310 
October 1 - 31, 2010  268  $6.10   268   397,042 
November 1 - 30, 2010  -  $0.00   -   397,042 
Total  471  $6.11   471     
(1)  All of the shares of common stock set forth in this column were purchased pursuant to a publicly announced plan as described in footnote 2 below.

(2)  In April 2008 the Board of Directors authorized us to purchase up to an additional 500,000 shares of our common stock under a repurchase plan.  Pursuant to the plan, we may purchase a total of 397,042 additional shares of our common stock until 3,000,000 shares have been repurchased.

(3)  There is no expiration date for the repurchase plan.


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

(3)There is no expiration date for the repurchase plan.

Item 3DEFAULTS UPON SENIOR SECURITIES

Not Applicable.


Item 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Item 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

Item 5OTHER INFORMATION

None

Item 5OTHER INFORMATION

None.

Item 6EXHIBITS

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

31.2Certification of Controller and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

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

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Item 6EXHIBITS

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

31.2
Certification of Controller and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.

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

SIGNATURES

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EDUCATIONAL DEVELOPMENT CORPORATION

(Registrant)

Date:

October 15, 2010

EDUCATIONAL DEVELOPMENT CORPORATION

By

(Registrant)

Date:  January 14, 2011
By:/s/ Randall W. White

Randall W. White

President

President

16

EXHIBIT INDEX


Exhibit No.         Description

Exhibit No.

31.1

Description

31.1

Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.


31.2

31.2

Certification of Controller and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.


32.1

32.1

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

17