UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)FORM 10-Q

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

For the quarterly period ended MayAugust 31, 2014

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)
 
Delaware73-0750007
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization) Identification No.)
  
10302 East 55th Place, Tulsa, Oklahoma74146-6515
(Address  (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 x        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  ooAccelerated filer  o
Non-accelerated filer   ooSmaller 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 JulyOctober 10, 2014, there were 4,000,3164,011,306 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.
 
 
 
 
TATABLE BLE OF CONTENTS

  Page
PART I. FINANCIAL INFORMATION 
Item 1.
Financial Statements
3
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
1011
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
1417
Item 4.
Controls and Procedures
1417
   
PART II.  OTHER INFORMATION 
Item 1.
Legal Proceedings
1518
Item 1A.
Risk Factors
1518
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
1518
Item 3.
Defaults Upon Senior Securities
1518
Item 4.
Mine Safety Disclosures
1518
Item 5.
Other Information
1518
Item 6.
Exhibits
1519
Signatures
1620
 
 
 
 
PART I.  FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
EDUCATIONAL DEVELOPMENT CORPORATION
CONDENSED BALANCE SHEETS (Unaudited)

ASSETS August 31, 2014  February 28, 2014 
       
CURRENT ASSETS:      
  Cash and cash equivalents $79,900  $680,000 
  Accounts receivable, less allowance for doubtful accounts and
    sales returns of $290,200 (August 31) and $333,900 (February 28)
  4,263,900   3,000,800 
  Inventories—Net  11,695,500   9,869,400 
  Prepaid expenses and other assets  264,500   262,200 
  Income tax receivable  13,400   - 
  Deferred income taxes  263,400   259,300 
             Total current assets  16,580,600   14,071,700 
         
INVENTORIES—Net  430,400   470,200 
         
PROPERTY, PLANT AND EQUIPMENT—Net  1,928,700   1,877,600 
         
OTHER ASSETS  267,400   267,400 
DEFERRED INCOME TAXES  79,400   71,400 
TOTAL ASSETS $19,286,500  $16,758,300 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
         
CURRENT LIABILITIES:        
  Accounts payable $3,196,700  $2,543,700 
  Line of credit  2,500,000   - 
  Accrued salaries and commissions  537,600   514,900 
  Income taxes payable  -   140,900 
  Dividends payable  320,200   318,200 
  Other current liabilities  472,100   658,200 
             Total current liabilities  7,026,600   4,175,900 
         
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 4,002,478 (August 31) and 3,977,943 (February 28) shares
  1,208,200   1,208,200 
  Capital in excess of par value  8,548,000   8,548,000 
  Retained earnings  13,876,900   14,280,500 
   23,633,100   24,036,700 
  Less treasury stock, at cost  (11,373,200)  (11,454,300)
             Total shareholders' equity  12,259,900   12,582,400 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $19,286,500  $16,758,300 
 
ASSETS      
  May 31, 2014  February 28, 2014 
       
CURRENT ASSETS:      
Cash and cash equivalents $303,400  $680,000 
Accounts receivable, less allowance for doubtful accounts and
sales returns of $298,300 (May 31) and $333,900 (February 28)
  3,514,800   3,000,800 
Inventories—Net  10,856,200   9,869,400 
Prepaid expenses and other assets  303,000   262,200 
Deferred income taxes  263,400   259,300 
Total current assets  15,240,800   14,071,700 
         
INVENTORIES—Net  360,000   470,200 
         
PROPERTY, PLANT AND EQUIPMENT—Net  1,934,100   1,877,600 
         
OTHER ASSETS  267,400   267,400 
DEFERRED INCOME TAXES  79,400   71,400 
TOTAL ASSETS $17,881,700  $16,758,300 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
         
CURRENT LIABILITIES:        
Accounts payable $3,371,800  $2,543,700 
Line of credit  475,000   - 
Accrued salaries and commissions  597,300   514,900 
Income taxes payable  95,200   140,900 
Dividends payable  319,200   318,200 
Other current liabilities  482,400   658,200 
Total current liabilities  5,340,900   4,175,900 
         
COMMITMENTS        
         
SHAREHOLDERS’ EQUITY:        
Common stock, $0.20 par value; Authorized 8,000,000 shares;
Issued 6,041,040 (May 31 and February 28) shares;
Outstanding 3,990,445 (May 31) and 3,977,943 (February 28) shares
  1,208,200   1,208,200 
Capital in excess of par value  8,548,000   8,548,000 
Retained earnings  14,201,000   14,280,500 
   23,957,200   24,036,700 
Less treasury stock, at cost  (11,416,400)  (11,454,300)
Total shareholders' equity  12,540,800   12,582,400 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $17,881,700  $16,758,300 
See notes to condensed financial statements.
 
 
3
EDUCATIONAL DEVELOPMENT CORPORATION
CONDENSED STATEMENTS OF EARNINGS (Unaudited)OPERATIONS (UNAUDITED)
  Three Months Ended May 31, 
  2014  2013 
       
GROSS SALES $10,720,400  $8,929,200 
Less discounts and allowances  (3,801,900)  (3,131,800)
Transportation revenue  259,800   193,100 
NET REVENUES  7,178,300   5,990,500 
COST OF SALES  2,843,500   2,476,200 
Gross margin  4,334,800   3,514,300 
         
OPERATING EXPENSES:        
Operating and selling  2,058,600   1,735,800 
Sales commissions  1,419,900   1,159,600 
General and administrative  472,300   518,700 
Total operating expenses  3,950,800   3,414,100 
         
OTHER INCOME  3,600   4,600 
         
EARNINGS BEFORE INCOME TAXES  387,600   104,800 
         
INCOME TAXES  147,900   38,200 
         
NET EARNINGS $239,700  $66,600 
         
BASIC AND DILUTED EARNINGS
PER SHARE:
        
Basic $0.06  $0.02 
Diluted $0.06  $0.02 
         
         
DIVIDENDS PER SHARE $0.08  $0.08 
         
WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT SHARES
OUTSTANDING:
        
Basic  3,986,561   3,967,517 
Diluted  3,986,561   3,967,517 
 
  Three Months Ended August 31,  Six Months Ended August 31, 
  2014  2013  2014  2013 
             
GROSS SALES $11,335,200  $9,513,000  $22,055,600  $18,442,200 
  Less discounts and allowances  (4,811,200)  (3,990,700)  (8,613,100)  (7,122,500)
  Transportation revenue  284,200   192,800   544,000   385,900 
NET REVENUES  6,808,200   5,715,100   13,986,500   11,705,600 
COST OF SALES  3,013,100   2,661,000   5,856,600   5,137,200 
           Gross margin  3,795,100   3,054,100   8,129,900   6,568,400 
                 
OPERATING EXPENSES:                
  Operating and selling  2,065,700   1,601,700   4,124,300   3,337,500 
  Sales commissions  1,177,200   866,200   2,597,100   2,025,800 
  General and administrative  532,800   501,800   1,005,100   1,020,500 
           Total operating expenses  3,775,700   2,969,700   7,726,500   6,383,800 
                 
OTHER INCOME (EXPENSE)  (11,100)  1,800   (7,500)  6,400 
                 
EARNINGS BEFORE INCOME TAXES  8,300   86,200   395,900   191,000 
                 
INCOME TAXES  12,200   29,800   160,100   68,000 
                 
NET INCOME (LOSS) $(3,900) $56,400  $235,800  $123,000 
                 
BASIC AND DILUTED EARNINGS
  PER SHARE:
                
  Basic $(0.00) $0.01  $0.06  $0.03 
  Diluted $(0.00) $0.01  $0.06  $0.03 
                 
                 
DIVIDENDS PER SHARE $0.08  $0.08  $0.16  $0.16 
                 
WEIGHTED AVERAGE NUMBER OF
  COMMON AND EQUIVALENT SHARES
  OUTSTANDING:
                
  Basic  3,998,170   3,968,930   3,992,365   3,968,223 
  Diluted  3,998,170   3,968,930   3,992,365   3,968,223 
See notes to condensed financial statements.
 
 
4
 
EDUCATIONAL DEVELOPMENT CORPORATION
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREESIX MONTHS ENDED MAYAUGUST 31, 2014
 
  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, 2014  6,041,040  $1,208,200  $8,548,000  $14,280,500   2,063,097  $(11,454,300) $12,582,400 
Purchases of treasury stock  -   -   -   -   1,180   (4,400)  (4,400)
Sales of treasury stock  -   -   -   -   (13,682)  42,300   42,300 
Dividends declared ($.08/share)  -   -   -   (319,200)  -   -   (319,200)
Net earnings  -   -   -   239,700   -   -   239,700 
BALANCE— May 31, 2014  6,041,040  $1,208,200  $8,548,000  $14,201,000   2,050,595  $(11,416,400) $12,540,800 
  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, 2014  6,041,040  $1,208,200  $8,548,000  $14,280,500   2,063,097  $(11,454,300) $12,582,400 
  Purchases of treasury stock  -   -   -   -   1,180   (4,400)  (4,400)
  Sales of treasury stock  -   -   -   -   (25,715)  85,500   85,500 
  Dividends declared ($.08/share)  -   -   -   (320,200)  -   -   (320,200)
  Dividends paid ($.08/share)  -   -   -   (319,200)  -   -   (319,200)
  Net earnings  -   -   -   235,800   -   -   235,800 
BALANCE— August 31, 2014  6,041,040  $1,208,200  $8,548,000  $13,876,900   2,038,562  $(11,373,200) $12,259,900 
 
See notes to condensed financial statements.
 
 
5
 
EDUCATIONAL DEVELOPMENT CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREESIX MONTHS ENDED MAYAUGUST 31
 
  2014  2013 
       
CASH FLOWS FROM OPERATING ACTIVITIES: $(484,200) $999,100 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchases of property, plant and equipment  (87,100)  (8,900)
         
Net cash used in investing activities  (87,100)  (8,900)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Cash paid to acquire treasury stock  (4,400)  (2,400)
Cash received from sales of treasury stock  42,300   43,600 
Borrowings under revolving credit agreement  475,000   75,000 
Payments under revolving credit agreement  -   (900,000)
Dividends paid  (318,200)  (317,900)
         
Net cash provided by (used in) financing activities  194,700   (1,101,700)
         
NET DECREASE IN CASH AND CASH EQUIVALENTS  (376,600)  (111,500)
         
CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD  680,000   469,100 
         
CASH AND CASH EQUIVALENTS—END OF PERIOD $303,400  $357,600 
         
SUPPLEMENTAL DISCLOSURE OF CASH  FLOW
INFORMATION:
        
Cash paid for interest $1,300  $18,100 
Cash paid for income taxes $205,700  $- 
  2014  2013 
       
CASH FLOWS FROM OPERATING ACTIVITIES: $(2,429,500) $460,100 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
  Purchases of property, plant and equipment  (114,300)  (43,700)
         
             Net cash used in investing activities  (114,300)  (43,700)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
  Cash paid to acquire treasury stock  (4,400)  (57,600)
  Cash received from sales of treasury stock  85,500   86,800 
  Borrowings under revolving credit agreement  2,900,000   900,000 
  Payments under revolving credit agreement  (400,000)  (900,000)
  Dividends paid  (637,400)  (635,700)
         
             Net cash provided by (used in) financing activities  1,943,700   (606,500)
         
NET DECREASE IN CASH AND CASH EQUIVALENTS  (600,100)  (190,100)
         
CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD  680,000   469,100 
         
CASH AND CASH EQUIVALENTS—END OF PERIOD $79,900  $279,000 
         
SUPPLEMENTAL DISCLOSURE OF CASH  FLOW INFORMATION:
        
  Cash paid for interest $20,000  $20,400 
  Cash paid for income taxes $326,500  $- 
 
See notes to condensed financial statements.
 

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)(UNAUDITED)

Note 1 –  The information shown with respect to the three and six months ended MayAugust 31, 2014 and 2013, 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 six months ended MayAugust 31, 2014 and 2013 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 ExchangeEx-change Commission for interim reporting and should be read in conjunction with the audited financial statements and accompanying notes contained in our annual report on Form 10-K for the fiscal year ended February 28, 2014.

Note 2 – We haveAt August 31, 2014, we had a $2,500,000 revolving credit agreement, with interest payable monthly at the greater of (a) prime rate minus 0.75% or (b) 4.00%. At MayAugust 31, 2014, the rate in effect was 4.00%.  Effective June 30,September 19, 2014, we signed a SixteenthSeventeenth Amendment to the Credit and Security Agreement with Arvest Bank (the Bank) which extendsincreases our revolving credit to $3,200,000 and continues this agreement with ourthe Bank through June 30, 2015.  The revolving credit agreement is collateralized by substantially all of our assets.  We had $475,000$2,500,000 in borrowings outstanding on the above revolving credit agreement at MayAugust 31, 2014 and no borrowings at February 28, 2014. Available credit under the previous revolving credit agreement was $2,025,000$0 at MayAugust 31, 2014.

This agreement also contains a provision for our use of the Bank’s letters of credit. The Bank agrees to issue, or obtain issuance of commercial or stand-by letters of credit provided that no letters of credit will have an expiry date later than June 30, 2015 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. The agreement contains 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. We intend to renew the bank agreement or obtain other financing upon maturity.maturity of the revolving credit agreement.  For the quarter ended MayAugust 31, 2014, we had no letters of credit outstanding.

Note 3 – Inventories consist of the following:
 
 2014  2014 
 May 31,  February 28,  August 31,  February 28, 
Current:            
Book inventory $10,881,200  $9,894,400  $11,720,500  $9,894,400 
Inventory valuation allowance  (25,000)  (25,000)  (25,000)  (25,000)
                
Inventories net–current $10,856,200  $9,869,400  $11,695,500  $9,869,400 
                
Non-current:                
Book inventory $735,000  $824,000  $791,000  $824,000 
Inventory valuation allowance  (375,000)  (353,800)  (360,600)  (353,800)
                
Inventories net–non-current $360,000  $470,200  $430,400  $470,200 
 
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 $3.3$3.4 million and $1.5$2.7 million for the three months ended MayAugust 31, 2014 and 2013, respectively.  Total inventory purchases from all suppliers were approximately $4.0$4.1 million and $2.1$3.3 million for the three months ended MayAugust 31, 2014 and 2013, respectively.
 
 
7
Purchases from this company were approximately $6.7 million and $4.1 million for the six-month periods ended August 31, 2014 and 2013, respectively.  Total inventory purchases from all suppliers were approximately $8.1 million and $5.5 million for the six-month periods ended August 31, 2014 and 2013, respectively.

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.  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 August 31,  Six Months Ended August 31, 
  2014  2013  2014  2013 
             
  Net income (loss) $(3,900) $56,400  $235,800  $123,000 
                 
Shares:                
                 
  Weighted average shares outstanding - basic  3,998,170   3,968,930   3,992,365   3,968,223 
  Assumed exercise of options  -   -   -   - 
                 
  Weighted average shares outstanding - diluted  3,998,170   3,968,930   3,992,365   3,968,223 
                 
Basic Earnings Per Share $(0.00) $0.01  $0.06  $0.03 
Diluted Earnings Per Share $(0.00) $0.01  $0.06  $0.03 
                 
Stock options not considered above because
they were antidilutive
  10,000   11,000   10,000   11,000 
 
Earnings Per Share:      
  Three Months Ended May 31, 
  2014  2013 
       
Net earnings $239,700  $66,600 
         
Shares:        
         
Weighted average shares outstanding - basic  3,986,561   3,967,517 
Assumed exercise of options  -   - 
         
Weighted average shares outstanding - diluted  3,986,561   3,967,517 
         
Basic Earnings Per Share $0.06  $0.02 
Diluted Earnings Per Share $0.06  $0.02 
         
Stock options not considered above because
they were antidilutive
  10,000   16,000 
In April 2008, ourOur Board of Directors authorized us tohas adopted a stock repurchase plan in which we may purchase up to 500,000 additionala total of 3,000,000 shares of our common stock under a plan initiated in 1998.as market conditions warrant.  This plan has no expiration date. During the current quarter of fiscal yearthree months ended August 31, 2014, we purchased 1,180did not purchase any shares of common stock.  The maximum number of shares that can be repurchased in the future is 303,474.

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.  No such transactions occurred in the three-monththree and six-month periods ended MayAugust 31, 2014 and 2013.

Note 6 – Freight costs and handling costs incurred are included in operating and selling expenses and were $740,700$799,200 and $605,600$540,900 for the three months ended MayAugust 31, 2014 and 2013, respectively.  These costs were $1,539,900 and $1,146,500 for the six-month period ended August 31, 2014 and 2013, respectively.

Note 7 – We have two reportable segments:  EDC Publishing (“Publishing”) and Usborne Books & 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 internet web sales.

The accounting policies of the segments are the same as those of the rest of the Company.  We evaluate segment performance based on earnings before income taxes of the segments, which is defined as segment net sales reduced by 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.row below.  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.
 

Information by industry segment for the three-month periodthree and six-month periods ended MayAugust 31, 2014 and 2013 follows:
NET REVENUES

NET REVENUES 
 Three Months Ended May 31,  Three Months Ended August 31,  Six Months Ended August 31, 
 2014  2013  2014  2013  2014  2013 
Publishing $2,763,900  $2,367,000  $3,260,100  $3,197,400  $6,024,000  $5,564,400 
UBAM  4,414,400   3,623,500   3,548,100   2,517,700   7,962,500   6,141,200 
Total $7,178,300  $5,990,500  $6,808,200  $5,715,100  $13,986,500  $11,705,600 
EARNINGS BEFORE INCOME TAXES
 
EARNINGS BEFORE INCOME TAXES 
  Three Months Ended May 31, 
  2014  2013 
Publishing $809,300  $701,500 
UBAM  615,400   485,600 
Other  (1,037,100)  (1,082,300)
Total $387,600  $104,800 
  Three Months Ended August 31,  Six Months Ended August 31, 
   2014   2013   2014   2013 
Publishing $965,400  $998,500  $1,774,700  $1,700,000 
UBAM  154,100   117,700   769,500   603,300 
Other  (1,111,200)  (1,030,000)  (2,148,300)  (2,112,300)
Total $8,300  $86,200  $395,900  $191,000 
 
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 following recently issued accounting standards apply to us.

In April 2014, the FASB issued guidance that changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. The change is effective for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2014, which means the first quarter of our fiscal year 2016, with early adoption permitted. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. This new guidance will not affect our financial position, results of operations or cash flows.

In May 2014, the Financial Accounting Standards Board (FASB)FASB issued revised guidance on revenue recognition. The standard provides a single revenue recognition model which is intended to improve comparability over a range of industries, companies and geographical boundaries and will also result in enhanced disclosures. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, which means the first quarter of our fiscal year 2018. We are currently reviewing the revised guidance and assessing the potential impact on our financial statements.

Note 9 - The valuation hierarchy included in U.S. GAAP considers the transparency of inputs used to value assets and liabilities as of the measurement date. The less transparent or observable the inputs used to value assets and liabilities, the lower the classification of the assets and liabilities in the valuation hierarchy. A financial instrument's classification within the valuation hierarchy is based on the lowest level of input that is significant to its fair value measurement. The three levels of the valuation hierarchy and the classification of our financial assets and liabilities within the hierarchy are as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
 
Level 2 - Observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly. If an asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability.
 
Level 3 - Unobservable inputs for the asset or liability.
 
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We do not report any assets or liabilities at fair value in the financial statements. However, the estimated fair value of our line of credit is estimated by management to approximate the carrying value of $475,000$2,500,000 at MayAugust 31, 2014 and $0 at February 28, 2014. Management's estimates are based on the obligations' characteristics, including a floating interest rate, maturity, and collateral. Such valuation inputs are considered a Level 2 measurement in the fair value valuation hierarchy.

Note 10 – On June 20,September 19, 2014 we paid the previously declared $0.08 dividend per share to shareholders of record as of June 13,September 12, 2014.
 
 
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ITEM 2.2.  MANAGEMENT'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 condensed financial statements, including the notes to those statements, included in this document.  Our fiscal years end on February 28.

Overview

We operate two separate divisions, EDC Publishing (“Publishing”) and Usborne Books & 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.  We have implemented electronic publishing capabilities to enhance our existing products.

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

Earnings as a Percent of Net Revenues    
  Three Months Ended May 31, 
  2014  2013 
Net revenues  100.0%  100.0%
Cost of sales  39.6%  41.3%
Gross margin  60.4%  58.7%
Operating expenses:        
Operating and selling  28.7%  29.0%
Sales commissions  19.8%  19.3%
General and administrative  6.6%  8.7%
Total operating expenses  55.1%  57.0%
Other income  0.1%  0.1%
Earnings before income taxes  5.4%  1.8%
Income taxes  2.1%  0.6%
Net earnings  3.3%  1.2%
Earnings as a Percent of Net Revenues

  Three Months Ended August 31,  Six Months Ended August 31, 
  2014  2013  2014  2013 
Net revenues  100.0%  100.0%  100.0%  100.0%
Cost of sales  44.3%  46.5%  41.9%  43.9%
  Gross margin  55.7%  53.5%  58.1%  56.1%
Operating expenses:                
  Operating and selling  30.3%  28.0%  29.5%  28.5%
  Sales commissions  17.3%  15.2%  18.6%  17.3%
  General and administrative  7.9%  8.8%  7.2%  8.7%
  Total operating expenses  55.5%  52.0%  55.3%  54.5%
Other income  -0.1%  0.0%  0.0%  0.0%
Earnings before income taxes  0.1%  1.5%  2.8%  1.6%
Income taxes  0.2%  0.5%  1.1%  0.6%
Net earnings  -0.1%  1.0%  1.7%  1.0%

Operating Results for the Three Months Ended MayAugust 31, 2014

We earned income before income taxes of $387,600$8,300 for the three months ended MayAugust 31, 2014 compared with $104,800$86,200 for the three months ended MayAugust 31, 2013.

Revenues
 
  For the Three Months Ended May 31,       
  2014  2013  $ Change  % Change 
Gross sales $10,720,400  $8,929,200  $1,791,200   20.1 
Less discounts and allowances  (3,801,900)  (3,131,800)  (670,100)  21.4 
Transportation revenue  259,800   193,100   66,700   34.5 
Net revenues $7,178,300  $5,990,500  $1,187,800   19.8 
  For the Three Months Ended August 31,       
  2014  2013  $ Change  % Change 
Gross sales $11,335,200  $9,513,000  $1,822,200   19.2 
Less discounts and allowances  (4,811,200)  (3,990,700)  (820,500)  20.6 
Transportation revenue  284,200   192,800   91,400   47.4 
Net revenues $6,808,200  $5,715,100  $1,093,100   19.1 
 
The UBAM Division’s gross sales increased $931,900$1,651,300 during the three-month period ending MayAugust 31, 2014 when compared with the same quarterly period a year ago.  This increase resulted from increases of 87%168% in internet sales, 25%54% in school and library sales, 22% in direct sales, 19%26% in home party sales, 7% in direct sales and 14%4% in fundraiser sales.  The increase is also attributed to a 25% increase in the number of active consultants at August 31, 2014 when compared to August 31, 2013.
 
 
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The increase in internet sales is attributed to an 80%a 137% increase in the total number of orders and a 3%14% increase in average order size.  This significant increase in the total number of orders is a result of the growth in the use of social media by sales consultants to conduct online events such as virtual home parties.  The increase in school and library sales is attributed to an 18%a 37% increase in the total number of orders, andoffset by a 6% increase4% decrease in average size of orders.

The increase in home party sales is attributed to a 42% increase in the total number of orders, offset by an 11% decrease in average order size.  The increase in direct sales is attributed to a 37%15% increase in the average order size, partially offset by a 12%7% decrease in the total number of orders.  The increase in home party sales is attributed to a 30% increase in the total number of orders, offset by a 9% decrease in average order size.  The increase in fundraiser sales is attributed to a 22%54% increase in average order size, offset by a 7%32% decrease in the total number of orders.

The Publishing Division’s gross sales increased $859,300$170,900 during the three-month period ending MayAugust 31, 2014 when compared with the same quarterly period a year ago.  We attribute this to a 63% increase in sales to major national accounts, a 13%7% increase in sales to smaller retail stores, andoffset by a 2% increase19% decrease in inside sales.sales to major national accounts.

The UBAM Division’s discounts and allowances were $748,700$1,232,400 and $540,200$520,800 for the quarterly periods ended MayAugust 31, 2014 and 2013, 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. Gross sales in the UBAM Division are based on the retail sales prices of the products.  As a part of the UBAM Division’s varied marketing programs, discounts relevant to the particular program are offered.  The discounts and allowances in the UBAM Division will vary from year-to-year depending on the marketing programs in place during any given period.  The UBAM Division’s discounts and allowances were 15.2%27.3% and 13.6%18.2% of UBAM’s gross sales for the quarterly periods ended MayAugust 31, 2014 and 2013, 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 $3,053,200$3,578,800 and $2,591,600$3,469,900 for the quarterly periods ended MayAugust 31, 2014 and 2013, 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 sales prices of the products, based upon the quantity of books ordered and the dollar amount of the order.  The Publishing Division’s discounts and allowances were 52.6%52.4% and 52.4%52.1% of Publishing’s gross sales for the quarterly periods ended MayAugust 31, 2014 and MayAugust 31, 2013, respectively.

Expenses
 
 For the Three Months Ended May 31,        For the Three Months Ended August 31,       
 2014  2013  $ Change  % Change  2014  2013  $ Change  % Change 
Cost of sales $2,843,500  $2,476,200  $367,300   14.8  $3,013,100  $2,661,000  $352,100   13.2 
Operating and selling  2,058,600   1,735,800   322,800   18.6   2,065,700   1,601,700   464,000   29.0 
Sales commissions  1,419,900   1,159,600   260,300   22.4   1,177,200   866,200   311,000   35.9 
General and administrative  472,300   518,700   (46,400)  (8.9)  532,800   501,800   31,000   6.2 
Total $6,794,300  $5,890,300  $904,000   15.3  $6,788,800  $5,630,700  $1,158,100   20.6 
 
Cost of sales increased 14.8%13.2% for the three months ended MayAugust 31, 2014 when compared with the three months ended MayAugust 31, 2013.  Cost of sales as a percentage of gross sales were 26.5%26.6% and 27.7%28.0%, respectively, for each of the three-month periods ended MayAugust 31, 2014 and 2013, respectively.  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 $301,200$288,600 in the quarter ended MayAugust 31, 2014 and $291,400$280,800 in the quarter ended MayAugust 31, 2013.

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 19.2%18.2% for the quarter ended MayAugust 31, 2014 and 19.4%16.8% for the quarter ended MayAugust 31, 2013.
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Sales commissions in the Publishing Division increased 13.5%14.7% to $82,200$102,300 for the three months ended MayAugust 31, 2014.2014 when compared with the same quarterly period a year ago.  Publishing Division sales commissions are paid on net sales and were 3.0%3.1% of net sales for the quarter ended MayAugust 31, 2014 and 3.1%2.8% for the quarter ended MayAugust 31, 2013.  Sales commissions in the Publishing Division fluctuate depending upon the amount of sales made to our house accounts, which are the Publishing division’sDivision’s largest customers and do not have any commission expense associated with them, and sales made by our outside sales representatives.
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Sales commissions in the UBAM Division increased 23.0%38.3% to $1,337,700$1,074,900 for the three months ended MayAugust 31, 2014 when compared with the same quarterly period a year ago, primarily due to the increase in net sales for the same period.  UBAM Division sales commissions were 23.8% of gross sales for the three months ended August 31, 2014 and 27.2% of gross sales for the three months ended May 31, 2014 and 27.3% of gross sales for the three months ended MayAugust 31, 2013.  The fluctuation in the percentages of commission expense to gross 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 38.2%147.0% for the quarter ended MayAugust 31, 2014 and 36.4%34.6% for the quarter ended MayAugust 31, 2013.  These rates are higher than the federal statutory rate due to the inclusion of state income and franchise taxes, which was partially offset by the Federal Indian Employment Credit in the quarter ended MayAugust 31, 2013.  This credit has expired for fiscal years beginning January 1, 2014 and after.

Operating Results for the Six-Month Period Ended August 31, 2014

We earned income before income taxes of $395,900 for the six months ended August 31, 2014 compared with $191,000 for the six months ended August 31, 2013.

Revenues
  For the Six Months Ended August 31,       
  2014  2013  $ Change  % Change 
Gross sales $22,055,600  $18,442,200  $3,613,400   19.6 
Less discounts and allowances  (8,613,100)  (7,122,500)  (1,490,600)  20.9 
Transportation revenue  544,000   385,900   158,100   41.0 
Net revenues $13,986,500  $11,705,600  $2,280,900   19.5 
The UBAM Division’s gross sales increased $2,583,200 during the six-month period ending August 31, 2014 when compared with the same six-month period a year ago.  This increase resulted from increases of 125% in internet sales, 33% in school and library sales, 23% in home party sales, 14% in direct sales and 10% in fundraiser sales.  The increase in internet sales is attributed to a 107% increase in the total number of orders and an 8% increase in average order size.  This significant increase in the total number of orders is a result of the growth in the use of social media by sales consultants to conduct online events such as virtual home parties.  The increase in school and library sales is attributed to a 24% increase in the total number of orders and an 8% increase in average size of orders.  The increase in home party sales is attributed to a 36% increase in the total number of orders, offset by a 10% decrease in average order size.  The increase in direct sales is attributed to a 27% increase in the average order size, partially offset by a 10% decrease in the total number of orders.  The increase in fundraiser sales is attributed to a 31% increase in average order size, offset by a 16% decrease in the total number of orders.

The Publishing Division’s gross sales increased $1,030,200 during the six-month period ending August 31, 2014 when compared with the same six-month period a year ago.  We attribute this to a 9% increase in sales to smaller retail stores and a 7% increase in sales to major national accounts.
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The UBAM Division’s discounts and allowances were $1,981,100 and $1,061,000 for the six-month period ending August 31, 2014 and 2013, 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. Gross sales in the UBAM Division are based on the retail sales prices of the products.  As a part of the UBAM Division’s varied marketing programs, discounts relevant to the particular program are offered.  The discounts and allowances in the UBAM Division will vary from year-to-year depending on the marketing programs in place during any given period.  The UBAM Division’s discounts and allowances were 21.0% and 15.5% of UBAM’s gross sales for the six-month periods ended August 31, 2014 and 2013, 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 $6,632,000 and $6,061,500 for the six-month periods ending August 31, 2014 and 2013, 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 sales prices of the products, based upon the quantity of books ordered and the dollar amount of the order.  The Publishing Division’s discounts and allowances were 52.5% and 52.2% of Publishing’s gross sales for the six-month periods ended August 31, 2014 and August 31, 2013, respectively.

Expenses
  For the Six Months Ended August 31,       
  2014  2013  $ Change  % Change 
Cost of sales $5,856,600  $5,137,200  $719,400   14.0 
Operating and selling  4,124,300   3,337,500   786,800   23.6 
Sales commissions  2,597,100   2,025,800   571,300   28.2 
General and administrative  1,005,100   1,020,500   (15,400)  (1.5)
Total $13,583,100  $11,521,000  $2,062,100   17.9 
Cost of sales increased 14.0% for the six months ended August 31, 2014 when compared with the six months ended August 31, 2013.  Cost of sales as a percentage of gross sales were 26.6% and 27.9%, respectively, for each of the six-month periods ended August 31, 2014 and 2013, respectively.  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 $589,800 in the six-month period ended August 31, 2014 and $571,000 in the six-month period ended August 31, 2013.

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 18.7% for the six-month period ended August 31, 2014 and 18.1% for the six-month period ended August 31, 2013.
Sales commissions in the Publishing Division increased 14.2% to $184,500 for the six months ended August 31, 2014 when compared with the six months ended August 31, 2013.  Publishing Division sales commissions are paid on net sales and were 3.1% of net sales for the six-month period ended August 31, 2014 and 2.9% for the six-month period ended August 31, 2013.  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 increased 29.4% to $2,412,600 for the six months ended August 31, 2014 when compared with the six months ended August 31, 2013, primarily due to the increase in net sales for the same period.  UBAM Division sales commissions were 25.6% of gross sales for the six months ended August 31, 2014 and 27.3% of gross sales for the six months ended August 31, 2013.  The fluctuation in the percentages of commission expense to gross 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 40.4% for the six-month period ended August 31, 2014 and 35.6% for the six-month period ended August 31, 2013.  These rates are higher than the federal statutory rate due to the inclusion of state income and franchise taxes, which was partially offset by the Federal Indian Employment Credit in the six-month period ended August 31, 2013.  This credit has expired for fiscal years beginning January 1, 2014 and after.
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Liquidity and Capital Resources

Our primary source of cash is typically operating cash flow.  Typically, our primary uses of cash are to pay dividends, repurchase outstanding shares of stock, and purchase property and equipment.  We utilize our bank credit facility to meet our short-term cash needs when necessary.
 
For the three-monthsix-month period ended MayAugust 31, 2014, we experienced a negative cash flow from operating activities of $484,200.$2,429,500.  Cash outflow from operating activities resulted primarily from an increase in inventory of $876,600,$1,786,300, in anticipation of the fall selling season and a larger than normal addition of new titles.  Cash outflow also resulted from an increase in accounts receivable of $514,000,$1,263,100, a decrease in income taxes payablepayable/receivable of $45,700,$154,300, an increase in deferred income taxes of $12,100 and an increase in certain prepaid expenses and other current assets of $40,800, and an increase in deferred income taxes of $12,100.$2,300.  These were offset by an increase in certain current liabilities of $734,700$489,600 and net income after taxes of $239,700.$235,800.

Cash used in investing activities was $114,300 for the six-month period ended August 31, 2014.  This was for capital expenditures related to remodeling/repairs of our office facilities, parking lot and new office equipment.  We estimate that total cash used in investing activities for fiscal year 2015 will be less than $250,000.  This would consist primarily of software and hardware enhancements to our existing data processing systems.

For the six-month period ended August 31, 2014, cash provided by financing activities was $1,943,700, resulting from borrowings under our revolving credit agreement of $2,900,000 and the sale of $85,500 of treasury stock, offset by dividend payments of $637,400, payments under our revolving credit agreement of $400,000, and the purchase of $4,400 of treasury stock.

We believe that in fiscal year 20142015 we will experience aoverall 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 have a history of profitability and positive cash flow.  We can sustain planned operating levels with minimal capital requirements.  Consequently, cash generated from operations is used to liquidate any existing debt, pay capital distributions through dividends or repurchase shares outstanding.

Cash used in investing activities was $87,100 for the three-month period ended May 31, 2014.  This was for capital expenditures related to remodeling/repairs of our office facilities, parking lot and new office equipment.  We estimate that total cash used in investing activities for fiscal year 2015 will be less than $250,000.  This would consist of software and hardware enhancements to our existing data processing equipment and further property improvements.

For the three-month period ended May 31, 2014, cash provided by financing activities was $194,700, resulting from borrowings under our revolving credit agreement of $475,000 and the sale of $42,300 of treasury stock, offset by dividend payments of $318,200 and the purchase of $4,400 of treasury stock.

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 1,180 shares at a cost of $4,400 during the three-monthsix-month period ended MayAugust 31, 2014.

Effective June 30, 2014, we signed a Sixteenth Amendment to the Credit and Security Agreement with Arvest Bank (the Bank) which provides a $2,500,000 line of credit through June 30, 2015.  Interest is payable monthly at the greater of (a) prime-floating rate minus 0.75% or (b) 4.00%.  At MayAugust 31, 2014, the rate in effect was 4.00%.  Borrowings are collateralized by substantially all the assets of the Company.  Subsequent to the quarter ended August 31, 2014, we signed a Seventeenth Amendment to the Credit and Security Agreement with the Bank on September 19, 2014, which increased the line of credit to $3,200,000 through June 30, 2015.  Interest is payable monthly at the greater of (a) prime-floating rate minus 0.75% or (b) 4.00%.

We had $475,000$2,500,000 in borrowings outstanding on the above revolving credit agreement at MayAugust 31, 2014 and none at February 28, 2014.  Available credit under the revolving credit agreement was $2,025,000$0 at MayAugust 31, 2014. ThisThe agreement also contains a provision for our use of the Bank’s letters of credit.  The Bank agrees to issue, or obtain issuance of, commercial or stand-by letters of credit provided that no letters of credit will have an expiry date later than June 30, 2015 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. The agreement contains 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.  We intend to renew the bank agreement or obtain other financing upon maturity.maturity of the revolving credit agreement.  For the quartersix-month period ended MayAugust 31, 2014, we had no letters of credit outstanding.
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As of MayAugust 31, 2014 we did not have any commitments in excess of one year.

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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 at the time the product is shipped.  These sales accounted for 61.5%56.9% of net revenues for the three-monthsix-month period ended MayAugust 31, 2014 and 60.5%52.5% for the three-monthsix-month period ended MayAugust 31, 2013.  The provisions of the Accounting Standards Codification 605 "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.  We are not responsible for product damaged in transit.  Damaged returns are primarily from retail stores.  These returns relate to damage that occurs 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 MayAugust 31, 2014 and February 28, 2014.

Allowance for Doubtful Accounts

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer's financial condition and current economic trends.  If the actual uncollected amounts significantly exceed the estimated allowance, then our operating results would be significantly adversely affected.  Management has estimated and included an allowance for doubtful accounts of $198,300$165,200 at MayAugust 31, 2014 and $233,900$153,900 at February 28, 2014.

Inventory

Management continually estimates and calculates the amount of non-current inventory.  Non-current inventory arises due to the purchase of 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.  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 is classified as non-current inventory. Non-current inventory balances, before valuation allowance, were $735,000$791,000 at MayAugust 31, 2014 and $824,000 at February 28, 2014.

Inventories are presented net of a valuation allowance.  Management has estimated and included a valuation allowance for both current and non-current 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 non-current inventory of $400,000$385,600 and $378,800 as of MayAugust 31, 2014 and February 28, 2014, respectively.

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Stock-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.
13

Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Item 4.CONTROLS 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 MayAugust 31, 2014. 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).

 
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PART II. OTHER INFORMATION

Item 1.      LEGAL PROCEEDINGS
 
Not Applicable.

Item 1A.RISK1A.   RISK FACTORS
 
Not required by smaller reporting company.

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

The following table shows repurchases of our Common Stock during the quarter ended MayAugust 31, 2014:

ISSUER PURCHASES OF EQUITY SECURITIES

Period 
Total # of Shares
Purchased
  
Average Price
Paid per Share
  
Total # of Shares
Purchased as
Part of Publicly Announced Plan (1)
  
Maximum # of Shares that May
be Repurchased under the Plan
(2) (3)
 
              
March 1 - 31, 2014  -   N/A   -   304,654 
April 1 - 30, 2014  -   N/A   -   304,654 
May 1 - 31, 2014  1,180  $3.75   1,180   303,474 
Total  1,180  $3.75   1,180     
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, 2014  0   N/A   0   303,474 
July 1 - 31, 2014  0   N/A   0   303,474 
August 1 - 31, 2014  0   N/A   0   303,474 
Total  0   N/A   0     
 
(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 303,474 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 3.      DEFAULTS UPON SENIOR SECURITIES
 
Not Applicable.

Item 4.      MINE SAFETY DISCLOSURES
 
None.

Item 55.      .    OTHER INFORMATION

None.
 
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Item6.EXHIBITS

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.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
 
 
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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:  JulyOctober 15, 2014
By:/s/ Randall W. White 
  Randall W. White 
  President 
    
 
 
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EXHIBIT INDEX
Exhibit No.Description
31.1
Certification of the Chief Executive Officer of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.
  
31.2
Certification of Controller and Corporate Secretary (Principal Financial and Accounting Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.
  
32.1
Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
 

 
 
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