Educational Development Corporation is the United States trade publisher of a line of children's books produced in the United Kingdom by Usborne Publishing Limited. The Home Business Division distributes these books through independent sales consultants who hold book showings in individual homes and through book fairs fund raisers and direct sales. The Home Business Division is also responsible for sales to school and public libraries. The company's Publishing Division distributes the books to book stores toy stores specialty stores and other retail outlets. Educational Development Corp. has a market cap of $20.1 million; its shares were traded at around $5.25 with a P/E ratio of 10.5 and P/S ratio of 0.7. The dividend yield of Educational Development Corp. stocks is 7.6%. Educational Development Corp. had an annual average earning growth of 10.5% over the past 10 years. GuruFocus rated Educational Development Corp. the business predictability rank of 2.5-star. Highlight of Business Operations: Operating Results for the Three Months Ended May 31, 2009 We earned income before income taxes of $666,000 for the three months ended May 31, 2009 compared with $768,000 for the three months ended May 31, 2008.
Cost of sales decreased 13.9% for the three months ended May 31, 2009 when compared with the three months ended May 31, 2008. Cost of sales as a percentage of gross sales was 26.3% for the three months ended May 31, 2009 and for the three months ended May 31, 2008 was 27.2%. 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 $286,500 in the quarter ended May 31, 2009 and $284,100 in the quarter ended May 31, 2008.
Our primary source of liquidity is cash generated from operations. During the first three months of fiscal year 2010, we experienced a negative cash flow from operating activities of $254,300. Cash flow from operating activities was decreased primarily due to an increase in inventories of $999,800, an increase in accounts receivable of $389,800 and an increase in income taxes payable/receivable of $152,600, offset by net income after taxes of $415,400, an increase in current liabilities of $774,500 and a decrease in prepaid expenses and other current assets of $70,300. 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 third quarter when holiday season shipments have arrived and prior to payments being made, although in fiscal year 2010, we received a larger volume of shipments during the first quarter due to our inventory stock being down at fiscal year end.
Cash used in financing activities was $1,437,600 from dividend payments of $1,536,600, the purchase of $3,100 of treasury stock, offset by the sale of $102,100 in treasury stock.
Bank Credit Agreement Effective June 30, 2009, we signed an Eleventh Amendment to the Credit and Security Agreement with Arvest Bank which provided a reduced $2,500,000 line of credit through June 30, 2010. Interest is payable monthly at the greater of 5.00% or the Wall Street Journal prime-floating rate minus 0.75% (3.25% at May 31, 2009) and borrowings are collateralized by substantially all of our assets. At May 31, 2009 we had no debt outstanding under this agreement. Available credit under the revolving credit agreement was $5,000,000 at May 31, 2009. No borrowings were outstanding under the agreement during the quarter ended May 31, 2009.
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 managements identification of slow moving inventory on hand. Management has estimated a valuation allowance for both current and noncurrent inventory of $332,500 and $370,000 as of May 31, 2009 and February 28, 2009, respectively.
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