UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 

 
(Mark One)
 
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended August 31, 2011
 
OR
 
oTRANSITION REPORT PURSUANT TO 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 incorporation or organization)  (I.R.S. Employer Identification No.)
  
10302 East 55th Place, Tulsa, Oklahoma74146-6515
(Address of principal executive offices)(Zip Code)
                                                                                              
Registrant’s telephone number, including area code (918) 622-4522

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o  
(Do not check if a smaller reporting company)
Smaller reporting company x
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  o    No x

As of July 13,October 12, 2011 there were 3,889,0733,896,422 shares of Educational Development Corporation Common Stock, $0.20 par value outstanding.
 
 
 
 
TABLE 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
1110
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
16
Item 4.
Control and Procedures
16
   
PART II. OTHER INFORMATION 
Item 1.
Legal Proceedings
17
Item 1A
Risk Factors
17
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17
Item 3.
Defaults Upon Senior Securities
18
Item 4.
Submission of Matters to a Vote of Security Holders
18
Item 5.
Other Information
18
Item 6.
Exhibits
18
Signatures
19

 
 
 
 
 
PART I.  FINANCIAL INFORMATION
 
ITEM1        FINANCIAL STATEMENTS
 
EDUCATIONAL DEVELOPMENT CORPORATION
CONDENSED BALANCE SHEETS (UNAUDITED)
 
ASSETS May 31, 2011  February 28, 2011  August 31, 2011  February 28, 2011 
            
CURRENT ASSETS:            
Cash and cash equivalents $1,843,900  $1,988,200  $932,000  $1,988,200 
Accounts receivable, less allowance for doubtful accounts and
sales returns $571,000 (May 31) and $562,800 (February 28)
  3,291,400   3,076,300 
Accounts receivable, less allowance for doubtful accounts and
sales returns $544,700 (Aug 31) and $562,800 (February 28)
  3,337,900   3,076,300 
Inventories—Net  10,023,200   10,010,100   10,195,900   10,010,100 
Prepaid expenses and other assets  301,900   315,500   279,400   315,500 
Income tax receivable  52,700   - 
Deferred income taxes  367,100   367,700   377,400   367,700 
Total current assets  15,827,500   15,757,800   15,175,300   15,757,800 
                
INVENTORIES—Net  492,000   593,000   500,000   593,000 
                
PROPERTY, PLANT AND EQUIPMENT—Net  2,013,300   2,042,400   2,045,700   2,042,400 
                
OTHER ASSETS  256,500   256,500   256,400   256,500 
DEFERRED INCOME TAXES  55,100   55,300   60,600   55,300 
                
TOTAL ASSETS $18,644,400  $18,705,000  $18,038,000  $18,705,000 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY                
                
CURRENT LIABILITIES:                
Accounts payable $2,593,100  $2,407,900  $2,517,300  $2,407,900 
Accrued salaries and commissions  481,400   398,700   359,500   398,700 
Current maturities of long-term debt  75,000   75,000   75,000   75,000 
Income taxes payable  122,500   23,800   -   23,800 
Dividends payable  466,700   468,700   466,700   468,700 
Other current liabilities  516,300   672,400   574,700   672,400 
Total current liabilities  4,255,000   4,046,500   3,993,200   4,046,500 
                
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 3,889,073 (May 31) and 3,905,898 (February 28) shares
  1,208,200   1,208,200 
Common stock, $0.20 par value; Authorized 8,000,000 shares;
Issued 6,041,040 (Aug 31 and February 28) shares;
Outstanding 3,888,971 (Aug 31) and 3,905,898 (February 28) shares
  1,208,200   1,208,200 
Capital in excess of par value  8,548,000   8,548,000   8,548,000   8,548,000 
Retained earnings  16,408,600   16,575,100   16,068,100   16,575,100 
  26,164,800   26,331,300   25,824,300   26,331,300 
Less treasury stock, at cost  (11,775,400)  (11,672,800)  (11,779,500)  (11,672,800)
  14,389,400   14,658,500   14,044,800   14,658,500 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $18,644,400  $18,705,000  $18,038,000  $18,705,000 
 
See notes to condensed financial statements.
 
 
3
 
EDUCATIONAL DEVELOPMENT CORPORATION
CONDENSED STATEMENTS OF EARNINGS (UNAUDITED)
 
 Three Months Ended May 31,  Three Months Ended Aug 31,  Six Months Ended August 31, 
 2011  2010  2011  2010  2011  2010 
                  
GROSS SALES $9,303,900  $8,776,000  $9,390,900  $9,112,200  $18,694,800  $17,888,200 
Less discounts and allowances  (3,265,300)  (2,744,400)  (4,132,400)  (3,616,800)  (7,397,700)  (6,361,200)
Transportation revenue  225,800   263,800   178,600   255,000   404,400   518,800 
NET REVENUES  6,264,400   6,295,400   5,437,100   5,750,400   11,701,500   12,045,800 
COST OF SALES  2,440,400   2,321,200   2,400,400   2,363,200   4,840,800   4,684,400 
Gross margin  3,824,000   3,974,200   3,036,700   3,387,200   6,860,700   7,361,400 
                        
OPERATING EXPENSES:                        
Operating and selling  1,645,800   1,707,500   1,488,100   1,605,400   3,133,900   3,312,900 
Sales commissions  1,224,500   1,304,500   841,400   998,700   2,065,900   2,303,200 
General and administrative  478,400   477,600   511,800   517,000   990,200   994,600 
Casualty loss  -   188,500   -   -   -   188,500 
  3,348,700   3,678,100   2,841,300   3,121,100   6,190,000   6,799,200 
                        
OTHER INCOME  5,400   4,200   4,700   37,000   10,100   41,200 
                        
EARNINGS BEFORE INCOME TAXES  480,700   300,300   200,100   303,100   680,800   603,400 
                        
INCOME TAXES  180,500   112,100   73,900   112,900   254,400   225,000 
                        
NET EARNINGS $300,200  $188,200  $126,200  $190,200  $426,400  $378,400 
                        
        
BASIC AND DILUTED EARNINGS PER SHARE:
                        
Basic $0.08  $0.05  $0.03  $0.05  $0.11  $0.10 
Diluted $0.08  $0.05  $0.03  $0.05  $0.11  $0.10 
                   
WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING:
                        
Basic  3,897,129   3,876,603   3,893,283   3,882,593   3,895,206   3,879,598 
Diluted  3,899,026   3,880,131   3,893,700   3,883,505   3,896,363   3,881,818 
 
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, 2011
 
 Common Stock                 Common Stock                
 (par value $0.20 per share)                 (par value $0.20 per share)                
 Number of     Capital in     Treasury Stock     Number of     Capital in     Treasury Stock    
 Shares     Excess of  Retained  Number of     Shareholders’  Shares     Excess of  Retained  Number of     Shareholders’ 
 Issued  Amount  Par Value  Earnings  Shares  Amount  Equity  Issued  Amount  Par Value  Earnings  Shares  Amount  Equity 
                                          
                                          
BALANCE—March 1, 2011  6,041,040  $1,208,200  $8,548,000  $16,575,100   2,135,141  $(11,672,800) $14,658,500   6,041,040  $1,208,200  $8,548,000  $16,575,100   2,135,141  $(11,672,800) $14,658,500 
Purchases of treasury stock  -   -   -   -   25,417   (154,200)  (154,200)  -   -   -   -   36,721   (214,300)  (214,300)
Sales of treasury stock  -   -   -   -   (8,591)  51,600   51,600   -   -   -   -   (19,793)  107,600   107,600 
Dividends declared ($.12/share)  -   -   -   (466,700)  -   -   (466,700)  -   -   -   (466,700)  -   -   (466,700)
Dividends declared and paid ($.12/share)  -   -   -   (466,700)  -   -   (466,700)
Net earnings  -   -   -   300,200   -   -   300,200   -   -   -   426,400   -   -   426,400 
BALANCE—May 31, 2011  6,041,040  $1,208,200  $8,548,000  $16,408,600   2,151,967  $(11,775,400) $14,389,400 
BALANCE—August 31, 2011  6,041,040  $1,208,200  $8,548,000  $16,068,100   2,152,069  $(11,779,500) $14,044,800 
 
 
See notes to condensed financial statements.
 
 
5
 
EDUCATIONAL DEVELOPMENT CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREESIX MONTHS ENDED MAYAUGUST 31,
 
 2011  2010  2011  2010 
            
CASH FLOWS FROM OPERATING ACTIVITIES: $427,000  $560,700  $46,900  $1,499,400 
                
CASH FLOWS FROM INVESTING ACTIVITIES:  -   -         
Purchases of property and equipment  (61,000)  (4,200)
        
Net cash used in investing activities  (61,000)  (4,200)
                
CASH FLOWS FROM FINANCING ACTIVITIES:                
Cash paid to acquire treasury stock  (154,200)  (165,200)  (214,300)  (186,700)
Cash received from sales of treasury stock  51,600   56,900   107,600   124,100 
Dividends paid  (468,700)  (466,400)  (935,400)  (931,700)
Stock options exercised  -   4,400 
                
Net cash used in financing activities  (571,300)  (574,700)  (1,042,100)  (989,900)
                
NET DECREASE IN CASH AND CASH EQUIVALENTS  (144,300)  (14,000)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  (1,056,200)  505,300 
                
CASH AND CASH EQUIVALENTS—BEGINNING OF PERIOD  1,988,200   1,196,900   1,988,200   1,196,900 
                
CASH AND CASH EQUIVALENTS—END OF PERIOD $1,843,900  $1,182,900  $932,000  $1,702,200 
                
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
                
Cash paid for income taxes $81,000  $-  $346,000  $160,000 
 
See notes to condensed financial statements.
 
 
6
 
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Note 1 – The information shown with respect to the three and six months ended MayAugust 31, 2011 and 2010, respectively, which is unaudited, includes all adjustments which in the opinion of Management are considered to be necessary for a fair presentation of earnings for such periods.  The adjustments reflected in the financial statements represent normal recurring adjustments.  The results of operations for the three and six months ended MayAugust 31, 2011 and 2010, respectively, are not necessarily indicative of the results to be expected at year end due to seasonality of the product sales.

These financial statements and notes are prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and should be read in conjunction with the Financial Statements and accompanying notes contained in our Annual Report to Shareholders for the Fiscal Year ended February 28, 2011.

Note 2 – Effective June 30, 2011, we signed a Thirteenth Amendment to the Credit and Security Agreement with Arvest Bank which provided a $2,500,000 line of credit through June 30, 2012.  Interest is payable monthly at the greater of (a) prime-floating rate minus 0.75% or (b) 4.00%.  At MayAugust 31, 2011, the rate in effect was 5.00%4.00%.  Borrowings are collateralized by substantially all the assets of the Company.  At MayAugust 31, 2011, we had no debt outstanding under this agreement. Available credit under the revolving credit agreement was $2,500,000 at MayAugust 31, 2011.

This agreement also contains a provision for our use of the Bank’s letters of credit.  The Bank agrees to issue commercial or standby letters of credit provided that none will have an expiry date later than June 30, 2012 and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time.  For the quarter ended MayAugust 31, 2011, we had no letters of credit outstanding.

Note 3 – Inventories consist of the following:
 
 2011  2011 
 May 31,  February 28,  August 31,  February 28, 
Current:            
Book inventory $10,045,400  $10,030,800  $10,219,600  $10,030,800 
Inventory valuation allowance  (22,200)  (20,700)  (23,700)  (20,700)
                
Inventories net–current $10,023,200  $10,010,100  $10,195,900  $10,010,100 
                
Noncurrent:                
Book inventory $807,000  $903,000  $825,000  $903,000 
Inventory valuation allowance  (315,000)  (310,000)  (325,000)  (310,000)
                
Inventories net–noncurrent $492,000  $593,000  $500,000  $593,000 

7
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 $2.0$2.3 million and $1.2$1.9 million for the three months ended MayAugust 31, 2011 and 2010, respectively.  Total inventory purchases from all suppliers were approximately $2.6$2.7 million and $1.6$2.5 million for the three months ended MayAugust 31, 2011 and 2010, respectively.
7
For the six months ended August 31, 2011 and 2010, respectively, purchases from this company were approximately $4.3 million and $3.1 million.  Total inventory purchases from all suppliers were approximately $5.4 million and $4.1 million for the same respective periods.

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

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 May 31, 
  2011  2011 
       
  Net earnings applicable to common shareholders $300,200  $188,200 
         
Shares:        
         
  Weighted average shares outstanding - basic  3,897,129   3,876,603 
  Assumed exercise of options  1,897   3,528 
         
  Weighted average shares outstanding - diluted  3,899,026   3,880,131 
         
Basic Earnings Per Share $0.08  $0.05 
Diluted Earnings Per Share $0.08  $0.05 
Earnings Per Share:            
  Three Months Ended August 31,  Six Months Ended August 31, 
  2011  2010  2011  2010 
             
  Net earnings applicable to common shareholders $126,200  $190,200  $426,400  $378,400 
                 
Shares:                
                 
  Weighted average shares outstanding - basic  3,893,283   3,882,593   3,895,206   3,879,598 
  Assumed exercise of options  417   912   1,157   2,220 
                 
  Weighted average shares outstanding - diluted  3,893,700   3,883,505   3,896,363   3,881,818 
                 
Basic Earnings Per Share $0.03  $0.05  $0.11  $0.10 
Diluted Earnings Per Share $0.03  $0.05  $0.11  $0.10 

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 firstsecond quarter of fiscal year 2012, we repurchased 25,41711,304 shares of common stock.  The maximum number of shares that can be repurchased in the future is 371,423.360,119.

8
Note 5 – We account for stock-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at date of grant and recognized as compensation expense over the vesting period.

Note 6 – Freight costs and handling costs incurred are included in operating & selling expenses and were $500,100 and $505,700 for both the three months ended MayAugust 31, 2011 and 2010, respectively.

For the six months ended August 31, 2011 and 2010, respectively, freight and handling costs incurred are included in operating & selling expenses and were $1,000,200 and $1,005,800.

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

8
The accounting policies of the segments are the same as those of the rest of the Company.  We evaluate segment performance based on earnings (loss) before income taxes of the segments, which is defined as segment net sales reduced by direct cost of sales and direct expenses.  Corporate expenses, depreciation, interest expense and income taxes are not allocated to the segments, but are listed in the “other” row.  Corporate expenses include the executive department, accounting department, information services department, general office management and building facilities management.  Our assets and liabilities are not allocated on a segment basis.


Information by industry segment for the three and six months ended MayAugust 31, 2011 and 2010 follows:

NET REVENUES 
  Three Months Ended May 31, 
  2011  2010 
Publishing $2,403,200  $2,099,600 
UBAM  3,861,200   4,195,800 
Other  -   - 
Total $6,264,400  $6,295,400 
         
EARNINGS (LOSS) BEFORE INCOME TAXES 
  Three Months Ended May 31, 
   2011   2010 
Publishing $759,900  $603,600 
UBAM  700,000   884,000 
Other  (979,200)  (1,187,300)
Total $480,700  $300,300 
NET REVENUES
 
  Three Months Ended August 31,  Six Months Ended August 31, 
  2011  2010  2011  2010 
Publishing $2,832,900  $2,709,300  $5,236,100  $4,808,900 
UBAM  2,604,200   3,041,100   6,465,400   7,236,900 
Other  -   -   -   - 
Total $5,437,100  $5,750,400  $11,701,500  $12,045,800 
                 
EARNINGS (LOSS) BEFORE INCOME TAXES
 
9
Table of Contents
  Three Months Ended August 31,  Six Months Ended August 31, 
   2011   2010   2011   2010 
Publishing $910,300  $843,500  $1,670,200  $1,447,100 
UBAM  291,600   456,900   991,600   1,340,900 
Other  (1,001,800)  (997,300)  (1,981,000)  (2,184,600)
Total $200,100  $303,100  $680,800  $603,400 

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

Note 9 - During fiscal year ended February 28, 2011, we determined that amounts paid to a third party for travel deposits had not been used to reserve travel for the Company.  As a result of this, we had to pay approximately $188,500 in additional travel expenses, which was reported in operating expenses as a casualty loss for fiscal year ended February 28, 2011.
 
Note 10 - At February 28, 2011, we had a receivable in the amount of $364,500 due from a customer who has filed for protection from its creditors under Chapter 11 of the Bankruptcy Reform Act of 1978 ("Act").  TheIn July 2011, the debtor has presented restructuringannounced plans to obtain additionalsell itself to a group of liquidators.  It had been unable to secure further financing from various sources to enable it to satisfy the claims of its creditors but, as of May 31, 2011, has been unable to obtain financing in an amount sufficient to satisfy these claims.creditors.  At MayAugust 31, 2011, this receivable remains $364,500, of which, $340,000 is reserved.

Note 11 –- On June 17,September 16, 2011, we paid the previously declared $0.12 dividend per share to shareholders of record as of June 10,September 9, 2011.
Note 12 - On October 13, 2011, we signed a Stock Purchase Agreement to acquire a position with Demibooks, Inc.  Demibooks provides a publishing platform for interactive books.  Their Demibooks® Composer product is a code-free way for publishers and self-published authors and illustrators to create interactive books for the iPad on the device itself. We will utilize the Composer platform to create our proprietary interactive products. The Stock Purchase Agreement allows for an additional investment upon the completion of specified milestones.
 
 
109

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 can also materially and adversely affect our business.   You should read the following discussion in connection with our financial statements, including the notes to those statements, included in this document.  Our fiscal years end on February 28.29(28).

Overview

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

The following table shows consolidated statements of income data as a percentage of net revenues.
 
  Three Months Ended May 31, 
  2011  2010 
Net revenues  100.0%  100.0%
Cost of sales  39.0%  36.9%
  Gross margin  61.0%  63.1%
Operating expenses:        
  Operating & selling  26.3%  27.1%
  Sales commissions  19.5%  20.7%
  General & administrative  7.6%  7.6%
  Casualty loss  0.0%  3.0%
  Total operating expenses  53.4%  58.4%
Income from operations  7.6%  4.7%
Other income  0.1%  0.1%
Earnings before income taxes  7.7%  4.8%
Income taxes  2.9%  1.8%
Net earnings  4.8%  3.0%
11
  Three Months Ended August 31,  Six Months Ended August 31, 
  2011  2010  2011  2010 
Net revenues  100.0%  100.0%  100.0%  100.0%
Cost of sales  44.1%  41.1%  41.4%  38.9%
  Gross margin  55.9%  58.9%  58.6%  61.1%
Operating expenses:                
  Operating & selling  27.4%  27.9%  26.8%  27.5%
  Sales commissions  15.5%  17.4%  17.6%  19.1%
  General & administrative  9.4%  9.0%  8.5%  8.2%
  Casualty loss  0.0%  0.0%  0.0%  1.6%
  Total operating expenses  52.3%  54.3%  52.9%  56.4%
Other income  0.1%  0.7%  0.1%  0.3%
Earnings before income taxes  3.7%  5.3%  5.8%  5.0%
Income taxes  1.4%  2.0%  2.2%  1.9%
Net earnings  2.3%  3.3%  3.6%  3.1%
 
Operating Results for the Three Months Ended MayAugust 31, 2011

We earned income before income taxes of $480,700$200,100 for the three months ended MayAugust 31, 2011 compared with $300,300$303,100 for the three months ended MayAugust 31, 2010.

10
Revenues
Earnings as a Percent of Net Revenues
 
  For the Three Months Ended August 31,       
  2011  2010  $ Change  % Change 
Gross sales $9,390,900  $9,112,200  $278,700   3.1 
Less discounts & allowances  (4,132,400)  (3,616,800)  (515,600)  14.3 
Transportation revenue  178,600   255,000   (76,400)  (30.0)
Net revenues $5,437,100  $5,750,400  $(313,300)  (5.4)
  For the Three Months Ended May 31,       
  2011  2010  $ Change  % Change 
Gross sales $9,303,900  $8,776,000  $527,900   6.0 
Less discounts & allowances  (3,265,300)  (2,744,400)  (520,900)  19.0 
Transportation revenue  225,800   263,800   (38,000)  (14.4)
Net revenues $6,264,400  $6,295,400  $(31,000)  (0.5)
 
The UBAM Division’s gross sales decreased $162,200increased $88,400 during the three month period ending MayAugust 31, 2011 when compared with the same quarterly period a year ago.  This decreaseincrease consists primarily of decreases in direct salesthe addition of 16%, 11%  in school and library sales, 6% in home parties and 1% in interneta new fund-raiser category of sales.  The decline in direct sales is attributed to a 31% decline in the total number of orders, offset by a 22% increase in average order size.  The decline in home party sales is attributed to a 15% decline in the total number of orders, offset by a 10% increase in average order size.

The Publishing Division’s gross sales increased $690,100$190,300 during the three month period ending MayAugust 31, 2011 when compared with the same quarterly period a year ago.  We attribute this to a 39.0% increase in sales to major national accounts, a 16.7%an 18.4% increase in sales to smaller retail stores and a 1.4%an 8.0% increase in inside sales.sales to major national accounts.

The UBAM Division’s discounts and allowances were $607,700$1,071,000 and $470,200$621,700 for the quarterly periods ended MayAugust 31, 2011 and 2010, respectively.  The UBAM Division is a multi-level selling organization that markets its products through independent sales representatives (“consultants”). Sales are made to individual purchasers and school and public libraries.  Most sales in the UBAM Division are at retail.  As a part of the UBAM Division’s marketing programs, discounts between 40% and 50% of retail are offered on selected items at various times throughout the year.  The discounts and allowances in the UBAM Division will vary from year to year depending upon the marketing programs in place during any given year.  The UBAM Division’s discounts and allowances were 14.3%30.5% and 10.7%18.2% of UBAM’s gross sales for the quarterly periods ended MayAugust 31, 2011 and 2010, respectively.  This increase in discounts and allowances is primarily due to new incentives added at the beginning of the fourth quarter of fiscal year 2011.

The Publishing Division’s discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAM Division due to the different customer markets that each division targets.  The Publishing Division’s discounts and allowances were $2,657,600$3,061,400 and $2,274,200$2,995,100 for the quarterly periods ended MayAugust 31, 2011 and 2010, respectively.  The Publishing Division sells to retail book chains, regional and local bookstores, toy and gift stores, school supply stores and museums.  To be competitive with other wholesale book distributors, the Publishing Division sells at discounts between 48% and 55% of the retail price, based upon the quantity of books ordered and the dollar amount of the order.  The Publishing Division’s discounts and allowances were 52.6%52.0% of Publishing’s gross sales for the quarterly period ended MayAugust 31, 2011 and 52.1%52.6% for the quarterly period ended MayAugust 31, 2010.

Expenses
 
  For Three Months Ended August 31,       
  2011  2010  $ Change  % Change 
Cost of sales $2,400,400  $2,363,200  $37,200   1.6 
Operating & selling  1,488,100   1,605,400   (117,300)  (7.3)
Sales commissions  841,400   998,700   (157,300)  (15.8)
General & administrative  511,800   517,000   (5,200)  (1.0)
Total $5,241,700  $5,484,300  $(242,600)  (4.4)
  For Three Months Ended May 31,       
  2011  2010  $ Change  % Change 
Cost of sales $2,440,400  $2,321,200  $119,200   5.1 
Operating & selling  1,645,800   1,707,500   (61,700)  (3.6)
Sales commissions  1,224,500   1,304,500   (80,000)  (6.1)
General & administrative  478,400   477,600   800   0.2 
Casualty loss  -   188,500   (188,500)  (100.0)
Total $5,789,100  $5,999,300  $(210,200)  (3.5)

Cost of sales increased 5.1%1.6% for the three months ended MayAugust 31, 2011 when compared with the three months ended MayAugust 31, 2010.  Cost of sales as a percentage of gross sales was 26.2%25.6% and 26.4%25.9%, respectively, for each of the three month periods ended MayAugust 31, 2011 and MayAugust 31, 2010.  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 $272,000$239,900 in the quarter ended MayAugust 31, 2011 and $293,500$277,300 in the quarter ended MayAugust 31, 2010.

In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of the Publishing Division, the UBAM Division and the order entry and customer service functions.  Operating and selling expenses as a percentage of gross sales were 17.7%15.8% for the quarter ended MayAugust 31, 2011 and 19.5%17.6% for the quarter ended MayAugust 31, 2010.
 
Sales commissions in the Publishing Division increased 12.1%18.2% to $52,000$66,900 for the three months ended MayAugust 31, 2011.  Publishing Division sales commissions are paid on net sales and were 2.2%2.4% of net sales for both the three monthsquarter ended MayAugust 31, 2011 and 2.1% for the quarter ended August 31, 2010.  Sales commissions in the Publishing Division fluctuate depending upon the amount of sales made to our “house accounts,” which are the Publishing Division’s largest customers and do not have any commission expense associated with them, and sales made by our outside sales representatives.

Sales commissions in the UBAM Division decreased 6.8%17.8% to $1,172,500$774,500 for the three months ended MayAugust 31, 2011, which corresponds withprimarily due to the decrease in net sales for the same period.  UBAM Division sales commissions are paid on retail sales and were 38.0%40.4% of retail sales for the three months ended MayAugust 31, 2011 and 39.3%41.7% of retail sales for the three months ended MayAugust 31, 2010.  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%36.9% and 37.3%37.2% for the quarterly periods ended MayAugust 31, 2011 and 2010, respectively.  These rates are higher than the federal statutory rate due to state income taxes.

Operating Results for the Six Months Ended August 31, 2011

We earned income before income taxes of $680,800 for the year-to-date period ended August 31, 2011 compared with $603,400 for the year-to-date period ended August 31, 2010.

Revenues
  For the Six Months Ended August 31,       
  2011  2010  $ Change  % Change 
Gross sales $18,694,800  $17,888,200  $806,600   4.5 
Less discounts & allowances  (7,397,700)  (6,361,200)  (1,036,500)  16.3 
Transportation revenue  404,400   518,800   (114,400)  (22.1)
Net revenues $11,701,500  $12,045,800  $(344,300)  (2.9)
The UBAM Division’s gross sales decreased $73,800 during the six month period ending August 31, 2011 when compared with the same year-to-date period a year ago.  This decrease consists primarily of decreases in direct sales of 19%, 12%  in school and library sales, 14% in home parties and 9% in internet sales.  The decline in direct sales is attributed to a 29% decline in the total number of orders, offset by a 15% increase in average order size.  The decline in home party sales is attributed to a 17% decline in the total number of orders, offset by a 4% increase in average order size.

The Publishing Division’s gross sales increased $880,400 during the six month period ending August 31, 2011 when compared with the same year-to-date period a year ago.  We attribute this to a 19.4% increase in sales to major national accounts and a 17.6% increase in sales to smaller retail stores.

The UBAM Division’s discounts and allowances were $1,678,700 and $1,091,900 for the year-to-date periods ended August 31, 2011 and 2010, respectively.  The UBAM Division is a multi-level selling organization that markets its products through independent sales representatives (“consultants”). Sales are made to individual purchasers and school and public libraries.  Most sales in the UBAM Division are at retail.  As a part of the UBAM Division’s marketing programs, discounts between 40% and 50% of retail are offered on selected items at various times throughout the year.  The discounts and allowances in the UBAM Division will vary from year to year depending upon the marketing programs in place during any given year.  The UBAM Division’s discounts and allowances were 21.6% and 13.9% of UBAM’s gross sales for the year-to-date periods ended August 31, 2011 and 2010, respectively.

The Publishing Division’s discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAM Division due to the different customer markets that each division targets.  The Publishing Division’s discounts and allowances were $5,719,000 and $5,269,300 for the year-to-date periods ended August 31, 2011 and 2010, respectively.  The Publishing Division sells to retail book chains, regional and local bookstores, toy and gift stores, school supply stores and museums.  To be competitive with other wholesale book distributors, the Publishing Division sells at discounts between 48% and 55% of the retail price, based upon the quantity of books ordered and the dollar amount of the order.  The Publishing Division’s discounts and allowances were 52.3% of Publishing’s gross sales for the year-to-date period ended August 31, 2011 and 52.4% for the year-to-date period ended August 31, 2010.

Expenses
  For the Six Months Ended August 31,       
  2011  2010  $ Change  % Change 
Cost of sales $4,840,800  $4,684,400  $156,400   3.3 
Operating & selling  3,133,900   3,312,900   (179,000)  (5.4)
Sales commissions  2,065,900   2,303,200   (237,300)  (10.3)
General & administrative  990,200   994,600   (4,400)  (0.4)
Casualty loss  -   188,500   (188,500)  (100.0)
Total $11,030,800  $11,483,600  $(452,800)  (3.9)
Cost of sales increased 3.3% for the year-to-date period ended August 31, 2011 when compared with the year-to-date period ended August 31, 2010.  Cost of sales as a percentage of gross sales was 25.9% and 26.2%, respectively, for each of the year-to-date periods ended August 31, 2011 and August 31, 2010.  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 $511,900 in the year-to-date period ended August 31, 2011 and $570,800 in the year-to-date period ended August 31, 2010.

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 16.7% for the year-to-date period ended August 31, 2011 and 18.5% for the year-to-date period ended August 31, 2010.
Sales commissions in the Publishing Division increased 15.4% to $118,900 for the year-to-date period ended August 31, 2011.  Publishing Division sales commissions are paid on net sales and were 2.3% and 2.1% of net sales, respectively, for each of the year-to-date periods ended August 31, 2011 and 2010.  Sales commissions in the Publishing Division fluctuate depending upon the amount of sales made to our “house accounts,” which are the Publishing Division’s largest customers and do not have any commission expense associated with them, and sales made by our outside sales representatives.
Sales commissions in the UBAM Division decreased 11.5% to $1,947,000 for the year-to-date period ended August 31, 2011 which corresponds with the decrease in net sales for the same period.  UBAM Division sales commissions are paid on retail sales and were 38.9% of retail sales for the year-to-date period ended August 31, 2011 and 40.2% of retail sales for the year-to-date period ended August 31, 2010.  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 37.4% and 37.3% for the year-to-date periods ended August 31, 2011 and 2010, respectively.  These rates are higher than the federal statutory rate due to state income taxes.

During fiscal year ended February 28, 2011, we determined that amounts paid to a third party for travel deposits had not been used to reserve travel for the Company.  As a result of this, we had to pay approximately $188,500 in additional travel expenses, which was reported in operating expenses as a casualty loss for fiscal year ended February 28, 2011.


Liquidity and Capital Resources

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

Our Board of Directors has adopted a stock repurchase plan in which we may purchase up to a total of 3,000,000 shares as market conditions warrant.  Management believes the stock is undervalued and when stock becomes available at an attractive price, we will utilize free cash flow to repurchase shares.  Management believes this enhances the value to the remaining stockholders and that these repurchases will have no adverse effect on our short-term and long-term liquidity.  We repurchased 25,41736,721 shares at a cost of $154,200$214,300 during the quartersix month period ended MayAugust 31, 2011.

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

For the three monthsyear-to-date period ended MayAugust 31, 2011, we experienced a positive cash flow from operating activities of $427,000.$46,900.  Cash flow from operating activities resulted from net income after taxes of $300,200,$426,400 and a decrease in prepaid expenses of $36,100, offset by an increase in certain current liabilitiesinventory of $111,800,$92,800, an increase in net taxes receivable/payable of $98,700,$76,500 and a decrease in inventorycertain current liabilities of $87,900, and a small decrease in prepaid expenses of $13,600.$27,500.

We believe that in fiscal year 2012 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.

Cash used in investing activities was $61,000 for capital expenditures to repair a significant section of our warehouse roof.  We estimate that total cash used in investing activities for fiscal year 2012 will be less than $200,000.  This would consist of software and hardware enhancements to our existing data processing equipment, property improvements and additional warehouse equipment.

For the three monthsyear-to-date period ended MayAugust 31, 2011, cash used in financing activities was $571,300$1,042,100 from dividend payments of $468,700$935,400 and the purchase of $154,200$214,300 of treasury stock, offset by the sale of $51,600$107,600 of treasury stock.

As of MayAugust 31, 2011 we did not have any commitments in excess of one year.

Bank Credit Agreement

Effective June 30, 2011 we signed a Thirteenth Amendment to the Credit and Security Agreement with Arvest Bank which provides a $2,500,000 line of credit through June 30, 2012.  Interest is payable monthly at the greater of (a) prime-floating rate minus 0.75% or (b) 4.00%.  At MayAugust 31, 2011, the rate in effect was 5.00%4.00%. Borrowings are collateralized by substantially all the assets of the Company.  At MayAugust 31, 2011 the Company had no debt outstanding under this agreement. Available credit under the revolving credit agreement was $2,500,000 at MayAugust 31, 2011.

This agreement also contains a provision for our use of the Bank’s letters of credit.  The Bank agrees to issue commercial or standby letters of credit provided that none will have an expiry date later than June 30, 2012 and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time.  For the quarter ended MayAugust 31, 2011, we had no letters of credit outstanding.

Critical Accounting Policies

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

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

Revenue Recognition

Sales are recognized and recorded when products are shipped.  Products are shipped FOB shipping point. The UBAM Division’s sales are paid before the product is shipped.  These sales accounted for 61.6%47.9% of net salesrevenues for the quarter ended MayAugust 31, 2011 and 66.6%52.9% for the quarter ended MayAugust 31, 2010.  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 the retail stores.  The damages occur in the stores, not in shipping to the stores.  It is industry practice to accept returns from wholesale customers.  Transportation revenue, the amount billed to the customer for shipping the product, is recorded when products are shipped.  Management has estimated and included a reserve for sales returns of $100,000 as of MayAugust 31, 2011 and February 28, 2011.

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 $471,000$444,700 and $462,800 as of MayAugust 31, 2011 and February 28, 2011, 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 current year turnover ratio by title.  All inventory in excess of 2 ½ years of anticipated sales was classified as noncurrent inventory. Noncurrent inventory balances, before valuation allowance, were $807,000$825,000 at MayAugust 31, 2011 and $903,000 at February 28, 2011.

Inventories are presented net of a valuation allowance.  Management has estimated and included a valuation allowance for both current and noncurrent inventory.  This allowance is based on management’s identification of slow moving inventory on hand.  Management has estimated a valuation allowance for both current and noncurrent inventory of $337,200$348,700 and $330,700 as of MayAugust 31, 2011 and February 28, 2011, respectively.

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

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, 2011. This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and our Controller/Corporate Secretary (Principal Financial and Accounting Officer).

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


PART II.     OTHER INFORMATION

ITEM 1         LEGAL PROCEEDINGS
 
Not Applicable.

ITEM 1A     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, 2011.

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, 2011  845  $6.37   845   395,995 
April 1 - 30, 2011  23,120  $6.05   23,120   372,875 
May 1 - 31, 2011  1,452  $6.19   1,452   371,423 
Total  25,417  $6.07   25,417     
                 
(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 371,423 additional shares of our common stock until 3,000,000 shares have been repurchased.
 
(3)  There is no expiration date for the repurchase plan.
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)
            371423 
June 1 - 30, 2011  30  $5.57   30   371,393 
July 1 - 31, 2011  204  $5.57   204   371,189 
August 1 - 31, 2011  11,070  $5.31   11,070   360,119 
Total  11,304  $5.31   11,304     
(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 360,119 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         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSREMOVED AND RESERVED
Not Applicable.

ITEM 5         OTHER INFORMATION

None

ITEM 6         EXHIBITS

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
 

 
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:  July 14,October 17, 2011
By:/s/ Randall W. White 
  Randall W. White 
  President 
    
                          


EXHIBIT INDEX

Exhibit No.                                                          Description

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.
20
Table of Contents
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