EDUCATIONAL DEVELOPMENT CORP — Interim / Quarterly Report 2009

Jul 15, 2008

10-Q 1 a08-19346_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

*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 May 31, 2008 |
| | 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)	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 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. (Check one):

Large accelerated filer o
(Do not check if a
smaller reporting company)

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 July 11, 2008 there were 3,826,371 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.

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PART I. FINANCIAL INFORMATION

ITEM 1

*EDUCATIONAL DEVELOPMENT CORPORATION*

*CONDENSED BALANCE SHEETS (UNAUDITED)*

	May 31, 2008		February 29, 2008
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents	$ 1,990,200		$ 2,440,300
Accounts
receivable, less allowance for doubtful accounts and sales returns $166,000
(May 31) and $158,400 (February 29)	2,895,800		2,611,800
Inventories—Net	10,802,600		11,818,700
Prepaid expenses
and other assets	160,900		112,000
Income taxes
receivable	24,500		—
Deferred income
taxes	224,800		197,100
Total current
assets	16,098,800		17,179,900
INVENTORIES—Net	555,000		459,000
PROPERTY, PLANT
AND EQUIPMENT—Net	2,360,200		2,382,800
DEFERRED INCOME
TAXES	46,700		43,300
TOTAL	$ 19,060,700		$ 20,065,000
LIABILITIES
AND SHAREHOLDERS’ EQUITY
CURRENT
LIABILITIES:
Accounts payable	$ 2,208,300		$ 2,456,900
Accrued salaries
and commissions	556,600		559,000
Income taxes
payable	—		56,200
Other current
liabilities	317,100		195,800
Total current
liabilities	3,082,000		3,267,900
COMMITMENTS
SHAREHOLDERS’
EQUITY:
Common stock,
$0.20 par value; Authorized 8,000,000 shares;
Issued 6,039,040
(May 31) and 5,806,840 (February 29) shares;
Outstanding
3,830,071 (May 31) and 3,706,745 (February 29) shares	1,207,800		1,161,400
Capital in
excess of par value	8,508,400		7,706,100
Retained
earnings	18,159,300		19,206,100
	27,875,500		28,073,600
Less treasury
stock, at cost	(11,896,800	)	(11,276,500	)
	15,978,700		16,797,100
TOTAL	$ 19,060,700		$ 20,065,000

See notes to condensed financial statements.

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*EDUCATIONAL DEVELOPMENT CORPORATION*

*CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)*

	Three Months Ended May 31, — 2008		2007
GROSS SALES	$ 9,816,200		$ 10,136,100
Less discounts
and allowances	(2,792,300	)	(2,905,600	)
Transportation
revenue	350,900		375,900
NET REVENUES	7,374,800		7,606,400
COST OF SALES	2,671,100		2,706,500
Gross margin	4,703,700		4,899,900
OPERATING
EXPENSES:
Operating and
selling	1,842,200		1,835,900
Sales
commissions	1,667,100		1,730,600
General and
administrative	440,800		408,800
	3,950,100		3,975,300
OTHER INCOME	14,400		13,200
EARNINGS BEFORE
INCOME TAXES	768,000		937,800
INCOME TAXES	288,300		352,500
NET EARNINGS	$ 479,700		$ 585,300
BASIC AND
DILUTED EARNINGS PER SHARE:
Basic	$ 0.13		$ 0.16
Diluted	$ 0.13		$ 0.15
WEIGHTED AVERAGE
NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING:
Basic	3,704,755		3,760,101
Diluted	3,706,015		3,878,975

See notes to condensed financial statements.

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*EDUCATIONAL DEVELOPMENT CORPORATION*

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

*FOR THE THREE MONTHS ENDED MAY 31, 2008*

	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,
2008	5,806,840	$ 1,161,400	$ 7,706,100	$ 19,206,100		2,100,095		$ (11,276,500	)	$ 16,797,100
Purchases of
treasury stock	—	—	—	—		125,162		(702,400	)	(702,400	)
Sales of treasury
stock	—	—	—	—		(16,288	)	82,100		82,100
Exercise of
options	232,200	46,400	802,300							848,700
Dividends paid
($.40/share)	—	—	—	(1,526,500	)	—		—		(1,526,500	)
Net earnings	—	—	—	479,700		—		—		479,700
BALANCE-May 31,
2008	6,039,040	$ 1,207,800	$ 8,508,400	$ 18,159,300		2,208,969		$ (11,896,800	)	$ 15,978,700

See notes to condensed financial statements.

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*EDUCATIONAL DEVELOPMENT CORPORATION*

*CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)*

*FOR THE THREE MONTHS ENDED MAY 31,*

| CASH FLOWS FROM
OPERATING ACTIVITIES: | 2008 — $ 860,000 | | 2007 — $ 436,400 | |
| --- | --- | --- | --- | --- |
| CASH FLOWS FROM
INVESTING ACTIVITIES— | | | | |
| Purchases of
property and equipment | (12,000 | ) | (101,600 | ) |
| Net cash used in
investing activities | (12,000 | ) | (101,600 | ) |
| CASH FLOWS FROM
FINANCING ACTIVITIES: | | | | |
| Cash received
from exercise of stock options | 848,700 | | — | |
| Cash paid to
acquire treasury stock | (702,400 | ) | — | |
| Cash received
from sale of treasury stock | 82,100 | | 68,600 | |
| Dividends paid | (1,526,500 | ) | (826,000 | ) |
| Net cash used in
financing activities | (1,298,100 | ) | (757,400 | ) |
| NET DECREASE IN
CASH AND CASH EQUIVALENTS | (450,100 | ) | (422,600 | ) |
| CASH AND CASH
EQUIVALENTS—BEGINNING OF PERIOD | 2,440,300 | | 1,254,300 | |
| CASH AND CASH
EQUIVALENTS—END OF PERIOD | $ 1,990,200 | | $ 831,700 | |
| SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION: | | | | |
| Cash paid for
income taxes | $ 400,100 | | $ 76,500 | |

See notes to condensed financial statements.

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NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1 - The information shown with respect to the three months ended May 31, 2008, 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 months ended May 31, 2008 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 29, 2008.

Note 2 – Effective June 30, 2008 we signed a Tenth Amendment to the Credit and Security Agreement with Arvest Bank which provided a $5,000,000 line of credit through June 30, 2009. Interest is payable monthly at the Wall Street Journal prime-floating rate minus 0.75% (4.25% at May 31, 2008) and borrowings are collateralized by substantially all the assets of the Company. At May 31, 2008 the Company had no debt outstanding under this agreement. Available credit under the revolving credit agreement was $5,000,000 at May 31, 2008. No borrowings were outstanding under the agreement during the quarter ended May 31, 2008.

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 standby letters of credit provided that no letters of credit will have an expiry date later than June 30, 2009 and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time.

Note 3 - Inventories consist of the following:

	2008 — May 31,		February 29,
Current:
Book inventory	$ 10,827,300		$ 11,844,900
Inventory
valuation allowance	(24,700	)	(26,200	)
Inventories net–current	$ 10,802,600		$ 11,818,700
Noncurrent:
Book inventory	$ 875,000		$ 764,000
Inventory
valuation allowance	(320,000	)	(305,000	)
Inventories net–noncurrent	$ 555,000		$ 459,000

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 $1.8 million and $1.7 million for the three months ended May 31, 2008 and 2007, respectively. Total inventory purchases from all suppliers were approximately $2.0 million and $1.7 million for the three months ended May 31, 2008 and 2007, 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.

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*Earnings Per Share:*

	Three Months Ended May 31 — 2008	2007
Net earnings
applicable to common shareholders	$ 479,700	$ 585,300
Shares:
Weighted average
shares outstanding - basic	3,704,755	3,760,101
Assumed exercise
of options	1,260	118,874
Weighted average
shares outstanding - diluted	3,706,015	3,878,975
Basic
Earnings Per Share	$ 0.13	$ 0.16
Diluted
Earnings Per Share	$ 0.13	$ 0.15

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 first quarter of fiscal year 2009, we repurchased 125,162 shares of common stock. The maximum number of shares that may be repurchased in the future is 451,349.

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 $569,600 and $593,400 for the three months ended May 31, 2008 and 2007, respectively.

Note 7 – We have two reportable segments: Publishing and Usborne Books at Home (“UBAH”). 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 UBAH 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” column. 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.

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Information by industry segment for the three months ended May 31, 2008 follows:

*NET REVENUES*

	Three Months Ended May 31, — 2008	2007
Publishing	$ 1,914,200	$ 2,031,400
UBAH	$ 5,460,600	$ 5,575,000
Other	$ —	$ —
Total	$ 7,374,800	$ 7,606,400

*EARNINGS (LOSS) BEFORE INCOME TAXES*

	Three Months Ended May 31, — 2008		2007
Publishing	$ 572,100		$ 615,100
UBAH	$ 1,154,400		$ 1,204,000
Other	$ (958,500	)	$ (881,300	)
Total	$ 768,000		$ 937,800

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 new accounting standards are applicable to us.

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

In December 2007, the FASB issued SFAS 141(revised 2007) “Business Combinations.” The statement requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This statement is effective for acquisition dates on or after the beginning of the first annual reporting period beginning after December 15, 2008. The adoption of this standard is not expected to have a material effect on our financial position or results of operations.

ITEM 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 may 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

We operate two separate divisions, Publishing and Usborne Books at Home (“UBAH”), to sell the Usborne line 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 UBAH Division markets its products to individual consumers as well as school and public libraries.

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

Earnings as a Percent of Net Revenues

For the quarter ended May 31,

	2008	2007
Net revenues	100.0 %	100.0 %
Cost of sales	36.2 %	35.6 %
Gross margin	63.8 %	64.4 %
Operating
expenses:
Operating &
selling	25.0 %	24.1 %
Sales
commissions	22.6 %	22.8 %
General &
administrative	6.0 %	5.4 %
Interest	0.0 %	0.0 %
Total operating
expenses	53.6 %	52.3 %
Income from
Operations	10.2 %	12.1 %
Other income	0.2 %	0.2 %
Earnings before
income taxes	10.4 %	12.3 %
Income taxes	3.9 %	4.6 %
Net earnings	6.5 %	7.7 %

*Operating Results for the Three Months Ended May 31, 2008*

We earned income before income taxes of $768,000 for the three months ended May 31, 2008 compared with $937,800 for the three months ended May 31, 2007.

*Revenues*

	For the Three Months Ended May 31 — 2008		2007		$ Increase/ — (decrease)		% Increase/ — (decrease)
Gross sales	$ 9,816,200		$ 10,136,100		$ (319,900	)	-3.2 %
Less
discounts & allowances	(2,792,300	)	(2,905,600	)	113,300		-3.9 %
Transportation
revenue	350,900		375,900		(25,000	)	-6.7 %
Net revenues	$ 7,374,800		$ 7,606,400		$ (231,600	)	-3.0 %

The UBAH Division’s gross sales decreased 1.0% or $58,800 during the three month period ending May 31, 2008 when compared with the same quarterly period a year ago. This decrease consists of a 9% decrease in home party sales and a 25% decrease in direct sales, offset by a 27% increase in Internet sales. The decline in home party sales is attributed to a 9% decline in the total number of home shows held. The decline in home party sales and direct sales occurred as more consultants replaced these with Internet orders.

The Publishing Division’s gross sales decreased 6.2% or $261,200 during the three month period ending May 31, 2008 when compared with the same quarterly period a year ago. We attribute this to an 8.1% decrease in inside sales accounts and a 2.2% decrease in sales to the national chains, offset by a 4.2% increase in sales to the smaller book stores.

The UBAH Division’s discounts and allowances were $737,500 and $706,200 for the quarterly periods ended May 31, 2008 and 2007, respectively. The UBAH 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 UBAH Division are at retail. As a part of the UBAH 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 UBAH Division will vary from year to year depending upon the marketing programs in place during any given year. The UBAH Division’s discounts and allowances were 12.6% of UBAH’s gross sales for the quarterly period ended May 31, 2008 and 11.9% for the quarterly period ended May 31, 2007.

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The Publishing Division’s discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAH Division due to the different customer markets that each division targets. The Publishing Division’s discounts and allowances were $2,054,800 and $2,199,500 for the quarterly periods ended May 31, 2008 and 2007, 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 51.9% of Publishing’s gross sales for the quarterly period ended May 31, 2008 and 52.0% for the quarterly period ended May 31, 2007.

The decrease in transportation revenues for the three months ended May 31, 2008 was due in part to the decrease in sales for the period.

*Expenses*

	For Three Months Ended May 31, — 2008	2007	$ Increase/ — (decrease)		% Increase/ — (decrease)
Cost of sales	2,671,100	$ 2,706,500	$ (35,400	)	-1.3 %
Operating &
selling	1,842,200	1,835,900	6,300		0.3 %
Sales
commissions	1,667,100	1,730,600	(63,500	)	-3.7 %
General &
administrative	440,800	408,800	32,000		7.8 %
Total	$ 6,621,200	$ 6,681,800	$ (60,600	)	-0.9 %

Cost of sales decreased 1.3% for the three months ended May 31, 2008 when compared with the three months ended May 31, 2007. Cost of sales as a percentage of gross sales was 27.2% for the three months ended May 31, 2008 and for the three months ended May 31, 2007 was 26.7%. 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. These costs totaled $284,100 in the quarter ended May 31, 2008 and $293,100 in the quarter ended May 31, 2007. When comparing our gross margins with the gross margins of other companies, note that we do not include the costs of our distribution network in our cost of sales.

In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of the Publishing Division, the UBAH Division and the order entry and customer service functions. Operating and selling expenses as a percentage of gross sales were 18.8% for the quarter ended May 31, 2008 and 18.1% for the quarter ended May 31, 2007.

Sales commissions in the Publishing Division increased 1.4% to $35,500 for the three months ended May 31, 2008 . Publishing Division sales commissions are paid on net sales and were 1.9% of net sales for the three months ended May 31, 2008 and 1.7% of net sales for the three months ended May 31, 2007. Sales commissions in the Publishing Division will 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 UBAH Division decreased 3.8% to $1,631,600 for the three months ended May 31, 2008 as a result of decreased sales from home shows and direct sales, offset by increased internet sales. UBAH Division sales commissions are paid on retail sales and were 33.4% of retail sales for the three months ended May 31, 2008 and 32.6% of retail sales for the three months ended May 31, 2007. 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 37.5 % and 36.2% for the quarterly periods ended May 31, 2008 and 2007, respectively. These rates are higher than the federal statutory rate due to state income taxes.

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*Liquidity and Capital Resources*

Our primary sources of cash are operating cash flow and proceeds from the exercise of stock options. Our primary uses of cash are to repurchase outstanding shares of stock, purchase property and equipment and pay dividends. 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 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 125,162 shares at a cost of $702,400 during the quarter ended May 31, 2008.

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

Our primary source of liquidity is cash generated from operations. During the first three month period of fiscal year 2009, we experienced a positive cash flow from operating activities of $860,000. Cash flow from operating activities was increased primarily by net income after taxes of $479,700 and a decrease in inventory of $920,100. Offsetting these were increases in accounts receivable of $284,000 and prepaid expenses of $48,900, along with a decrease in current liabilities of $186,200. Fluctuations in accounts payable and accrued expenses involve timing of shipments received from our principal supplier and the payments associated with these shipments. They tend to be highest in the second quarter when holiday season shipments have arrived and prior to payments being made.

We believe that in fiscal year 2009 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 2009 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.

Cash used in financing activities was $1,298,100 from the payment of $1,526,500 in dividends and purchase of $702,400 of treasury stock, offset by the sale of $82,100 in treasury stock and stock option exercises totaling $848,700.

As of May 31, 2008 we did not have any commitments in excess of one year.

*Bank Credit Agreement*

Effective June 30, 2008 we signed a Tenth Amendment to the Credit and Security Agreement with Arvest Bank which provided a $5,000,000 line of credit through June 30, 2009. Interest is payable monthly at the Wall Street Journal prime-floating rate minus 0.75% (4.25% at May 31, 2008) and borrowings are collateralized by substantially all of our assets. At May 31, 2008 we had no debt outstanding under this agreement. Available credit under the revolving credit agreement was $5,000,000 at May 31, 2008. No borrowings were outstanding under the agreement during the quarter ended May 31, 2008.

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 standby letters of credit provided that no letters of credit will have an expiry date later than June 30, 2009 and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time.

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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 UBAH Division’s sales are paid before the product is shipped. These sales accounted for 72.9% of net revenues for the quarter ended May 31, 2008 and 72.0% for the quarter ended May 31, 2007. The provisions of the SEC Staff Accounting Bulletin No.104, “Revenue Recognition in Financial Statements,” have been applied, and as a result, a reserve is provided for estimated future sales returns.

Our sales return policy allows the customer to return all purchases for an exchange or refund for up to 30 days after the customer receives the item. 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 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 $84,000 as of May 31, 2008 and $84,000 as of February 29, 2008.

*Allowance for Doubtful Accounts*

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, 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 $82,000 and $74,400 as of May 31, 2008 and February 29, 2008, 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 due to minimum order requirements of our primary supplier. Non-current inventory was estimated by management using the c urrent 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 $875,000 at May 31, 2008 and $764,000 at February 29, 2008.

Inventories are presented net of a valuation allowance. Management has estimated and included a valuation allowance for both current and noncurrent inventory. This reserve is based on management’s identification of slow moving inventory on hand at May 31, 2008 and February 29, 2008. Management has estimated a valuation allowance for both current and noncurrent inventory of $344,700 and $331,200 as of May 31, 2008 and February 29, 2008, 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.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not have any material market risk.

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 May 31, 2008. 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 to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported in accordance within the time periods specified in Securities and Exchange Commission rules and forms. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

During the fiscal quarter covered by this report on Form 10-Q, we made changes to our controls over accounts receivable. Processes involving communications related to accounts receivable collection activities have been established to improve the timeliness thereof, accuracy of postings, and follow-up for items needing correction.

PART II OTHER INFORMATION

Item 1A RISK FACTORS

No material changes occurred in the risk factors discussed in our Fiscal Year 2008 Form 10-K.

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Item 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table shows repurchases of our Common Stock during the quarter ended May 31, 2008.

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
March 1 -
31, 2008	47,350	$ 5.61	47,350	29,161
April 1 -
30, 2008	77,149	$ 5.61	77,149	452,012
May 1 - 31,
2008	663	$ 5.62	663	451,349
Total	125,162	$ 5.61	125,162

(1) All of the shares of common stock set forth in this column (a) 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 451,349 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 5 OTHER INFORMATION

None.

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Item 6 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 . |

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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:
Randall
W. White
President

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EXHIBIT INDEX

Exhibit No.	Description
31.1	Certification of the
Chief Executive Officer of Educational Development Corporation pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.
31.2	Certification of
Controller and Corporate Secretary (Principal Financial and Accounting
Officer) of Educational Development Corporation pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 furnished herewith.
32.1	Certification
pursuant to 18 U.S.C Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 .

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