##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION  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, 2004. [   ]
    
    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  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    73-0750007
(I.R.S. Employer
Identification No.)
 10302 East 55th Place, Tulsa Oklahoma 74146-6515
(Address of principal executive offices) Registrants telephone number: (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 [ ]
 Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ]
    No [X]
 As of May 31, 2004 there were 4,032,462 shares of Educational Development
Corporation Common Stock, $0.20 par value outstanding.




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1CONDENSED BALANCE SHEETSCONDENSED STATEMENTS OF EARNINGS (UNAUDITED)CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)NOTES TO CONDENSED FINANCIAL STATEMENTSITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 4 CONTROLS AND PROCEDURESPART II OTHER INFORMATIONItem 6 EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESEXHIBIT INDEXCertification of Randall W. White, President & CEOCertification of W. Curtis Fossett, CFOCertification of Randall W. White, President & CEOCertification of W. Curtis Fossett, CFO    Table of Contents  EDUCATIONAL DEVELOPMENT CORPORATION 
 PART I. FINANCIAL INFORMATION 
 ITEM 1 
 CONDENSED BALANCE SHEETS (UNAUDITED) May 31, 2004
    
    February 29, 2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    51,800
    
    
    $
    260,500Accounts receivable  (less
allowances for doubtful accounts
and returns: 05/31/04 - $156,800;
2/29/04 - $150,900)
    
    
    2,693,400
    
    
    
    2,135,300Inventories  Net
    
    
    12,356,400
    
    
    
    13,795,200Prepaid expenses and other assets
    
    
    139,100
    
    
    
    147,000Income taxes receivable
    
    
    
    
    
    
    44,900Deferred income taxes
    
    
    38,700
    
    
    
    30,200Total current assets
    
    
    15,279,400
    
    
    
    16,413,100INVENTORIES  Net
    
    
    430,300
    
    
    
    571,000PROPERTY AND EQUIPMENTat cost (less accumulated depreciation:05/31/04 - $1,718,600; 2/29/04 - $1,690,500)
    
    
    2,332,100
    
    
    
    2,046,100DEFERRED INCOME TAXES
    
    
    51,100
    
    
    
    56,800$
    18,092,900
    
    
    $
    19,087,000LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Note payable to bank
    
    $
    1,002,000
    
    
    $
    394,000Accounts payable
    
    
    2,093,000
    
    
    
    3,719,400Accrued salaries and commissions
    
    
    453,300
    
    
    
    445,500Income taxes payable
    
    
    136,400
    
    
    
    Dividends payable
    
    
    484,000
    
    
    
    Other current liabilities
    
    
    240,200
    
    
    
    310,200Total current liabilities
    
    
    4,408,900
    
    
    
    4,869,100COMMITMENTSSHAREHOLDERS EQUITY:Common Stock, $.20 par value (Authorized
8,000,000 shares; Issued 5,754,840
and 5,596,340 shares; Outstanding
4,032,462 and 4,025,773 shares)
    
    
    1,151,000
    
    
    
    1,119,300Capital in excess of par value
    
    
    6,135,900
    
    
    
    5,349,900Retained earnings
    
    
    13,775,500
    
    
    
    13,435,10021,062,400
    
    
    
    19,904,300Less treasury shares, at cost
    
    
    (7,378,400
    )
    
    
    (5,686,400
    )13,684,000
    
    
    
    14,217,900$
    18,092,900
    
    
    $
    19,087,000
 See notes to condensed financial statements. 2




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EDUCATIONAL DEVELOPMENT CORPORATION 
 CONDENSED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Ended May 31,2004
    
    2003REVENUES:Gross sales
    
    $
    10,975,000
    
    
    $
    9,761,200Less discounts & allowances
    
    
    (2,953,700
    )
    
    
    (2,836,400
    )Transportation revenue
    
    
    396,200
    
    
    
    338,200Net revenues
    
    
    8,417,500
    
    
    
    7,263,000COST OF SALES
    
    
    2,891,700
    
    
    
    2,582,300Gross margin
    
    
    5,525,800
    
    
    
    4,680,700OPERATING EXPENSES:Operating & selling
    
    
    1,637,400
    
    
    
    1,554,400Sales commissions
    
    
    2,110,900
    
    
    
    1,763,600General & administrative
    
    
    439,000
    
    
    
    430,800Interest
    
    
    9,000
    
    
    
    1004,196,300
    
    
    
    3,748,900OTHER INCOME
    
    
    6,200
    
    
    
    6,600EARNINGS BEFORE INCOME TAXES
    
    
    1,335,700
    
    
    
    938,400INCOME TAXES
    
    
    511,300
    
    
    
    352,500NET EARNINGS
    
    $
    824,400
    
    
    $
    585,900BASIC AND DILUTED EARNINGS
PER SHARE:Basic
    
    $
    0.21
    
    
    $
    0.15Diluted
    
    $
    0.19
    
    
    $
    0.14WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:Basic
    
    
    4,001,449
    
    
    
    3,879,605Diluted
    
    
    4,230,286
    
    
    
    4,253,020DIVIDENDS DECLARED PER
COMMON SHARE
    
    $
    0.12
    
    
    $
    0.10
 See notes to condensed financial statements. 3




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EDUCATIONAL DEVELOPMENT CORPORATION 
 CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED) Common Stock(par value $.20 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    Treasury StockNumber of
    
    
    
    
    
    Capital in
    
    
    
    
    
    NumberShares
    
    
    
    
    
    Excess of
    
    Retained
    
    of
    
    
    
    
    
    ShareholdersIssued
    
    Amount
    
    Par Value
    
    Earnings
    
    Shares
    
    Amount
    
    EquityBALANCE, MAR. 1, 2004
    
    
    5,596,340
    
    
    $
    1,119,300
    
    
    $
    5,349,900
    
    
    $
    13,435,100
    
    
    
    1,570,567
    
    
    $
    (5,686,400
    )
    
    $
    14,217,900Purchases of treasury
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172,711
    
    
    
    (1,767,600
    )
    
    
    (1,767,600
    )Sales of treasury stock
    
    
    
    
    
    
    
    
    
    
    28,800
    
    
    
    
    
    
    
    (20,900
    )
    
    
    75,600
    
    
    
    104,400Exercise of options at
$2.1875 - $4.00/share
    
    
    158,500
    
    
    
    31,700
    
    
    
    466,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    498,500Tax benefit of stock
options
    
    
    
    
    
    
    
    
    
    
    290,400
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290,400Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (484,000
    )
    
    
    
    
    
    
    
    
    
    
    (484,000
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    824,400
    
    
    
    
    
    
    
    
    
    
    
    824,400BALANCE, MAY 31, 2004
    
    
    5,754,840
    
    
    $
    1,151,000
    
    
    $
    6,135,900
    
    
    $
    13,775,500
    
    
    
    1,722,378
    
    
    $
    (7,378,400
    )
    
    $
    13,684,000
 See notes to condensed financial statements. 4




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EDUCATIONAL DEVELOPMENT CORPORATION 
 CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended May 312004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES
    
    $
    662,100
    
    
    $
    (930,100
    )CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment
    
    
    (314,100
    )
    
    
    (17,200
    )Net cash used in investing activities
    
    
    (314,100
    )
    
    
    (17,200
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under revolving credit agreement
    
    
    4,123,000
    
    
    
    230,000Payments under revolving credit agreement
    
    
    (3,515,000
    )
    
    
    (230,000
    )Cash received from exercise of stock options
    
    
    498,500
    
    
    
    116,500Cash received from sale of treasury stock
    
    
    104,400
    
    
    
    388,500Cash paid to acquire treasury stock
    
    
    (1,767,600
    )
    
    
    (214,400
    )Net cash provided by (used in) financing activities
    
    
    (556,700
    )
    
    
    290,600Net Decrease in Cash and Cash Equivalents
    
    
    (208,700
    )
    
    
    (656,700
    )Cash and Cash Equivalents, Beginning of Period
    
    
    260,500
    
    
    
    1,433,000Cash and Cash Equivalents, End of Period
    
    $
    51,800
    
    
    $
    776,300Supplemental Disclosure of Cash Flow Information:Cash paid for interest
    
    $
    7,100
    
    
    $
    Cash paid for income taxes
    
    $
    42,500
    
    
    $
    132,000Supplemental Disclosure of Non Cash Financing Activities Dividends declared
    
    $
    484,000
    
    
    $
    394,000
 See notes to condensed financial statements. 5




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EDUCATIONAL DEVELOPMENT CORPORATION 
 NOTES TO CONDENSED FINANCIAL STATEMENTS Note 1 - The information shown with respect to the three months ended May 31,
2004 and 2003, 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 accruals. The results of operations for
the three months ended May 31, 2004 and 2003, 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 the Companys Annual Report to Shareholders for the Fiscal
Year ended February 29, 2004. Note 2 - Effective June 30, 2003 the Company signed a Fourth Amendment to the
Credit and Security Agreement with Arvest Bank which provided a $3,500,000 line
of credit through June 30, 2004. Interest is payable monthly at the Wall
Street Journal prime floating rate minus 0.25% (3.75% at May 31, 2004 ) and
borrowings are collateralized by substantially all the assets of the Company.
At May 31, 2004 the Company had $1,002,000 outstanding. Available credit under
the revolving credit agreement was $2,498,000 at May 31, 2004. This agreement
was renewed under similar terms through June 30, 2005. Note 3 - Inventories consist of the following: May 31, 2004
    
    February 29, 2004Current:Book Inventory
    
    $
    12,402,300
    
    
    $
    13,824,600Reserve for Obsolescence
    
    
    (45,900
    )
    
    
    (29,400
    )Inventories net  current
    
    $
    12,356,400
    
    
    $
    13,795,200Non-current:Book Inventory
    
    $
    689,100
    
    
    $
    823,800Reserve for Obsolescence
    
    
    (258,800
    )
    
    
    (252,800
    )Inventories  non-current
    
    $
    430,300
    
    
    $
    571,000
 The Company occasionally purchases book inventory in quantities in excess of
what will be sold within the normal operating cycle due to minimum order
requirements of the Companys primary supplier. These amounts are included in
non-current inventory. Significant portions of inventory purchases by the Company are concentrated
with an England based publishing company. Purchases from this England based
publishing company were approximately $1.3 million and $2.7 million for the
three months ended May 31, 2004 and 2003, respectively. Total inventory
purchases from all suppliers were approximately $1.8 million and $3.3 million
for the three months ended May 31, 2004 and 2003, 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 the
Company has utilized the treasury stock method. 6




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EDUCATIONAL DEVELOPMENT CORPORATION 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. Three Months Ended May 31,2004
    
    2003Net Earnings
    
    $
    824,400
    
    
    $
    585,900Basic EPS:Weighted Average Shares Outstanding
    
    
    4,001,449
    
    
    
    3,879,605Basic EPS
    
    $
    0.21
    
    
    $
    0.15Diluted EPS:Weighted Average Shares Outstanding
    
    
    4,001,449
    
    
    
    3,879,605Assumed Exercise of Options
    
    
    228,837
    
    
    
    373,415Shares Applicable to Diluted Earnings
    
    
    4,230,286
    
    
    
    4,253,020Diluted EPS
    
    $
    0.19
    
    
    $
    0.14
 Since March 1, 1998, when the Company began its stock repurchase program,
2,014,287 shares of the Companys common stock at a total cost of $8,393,037
have been acquired. The Board of Directors previously authorized purchasing up
to 2,000,000 shares as market conditions warrant, and in April 2004 authorized
the repurchase of up to 500,000 additional shares. Note 5 - The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Compensation cost for stock options,
if any, is measured as the excess of the quoted market price of the Companys
stock at the date of grant over the amount an employee must pay to acquire the
stock. The following table illustrates the effects on net income and earnings
per share if the Company had applied the fair value recognition provisions of
Statement of Financial Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended, to stock-based employee compensation. There were
1,000 options granted in the three-month period ended May 31, 2004. Three Months Ended May 31,2004
    
    2003Net Earnings  as reported
    
    $
    824,400
    
    
    $
    585,900Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related
tax effects
    
    
    (3,500
    )
    
    
    0Net earnings  pro forma
    
    $
    820,900
    
    
    $
    585,900Earning per share  as reported:Basic
    
    $
    0.21
    
    
    $
    0.15Diluted
    
    $
    0.19
    
    
    $
    0.14Earning per share  pro forma:Basic
    
    $
    0.21
    
    
    $
    0.15Diluted
    
    $
    0.19
    
    
    $
    0.14
 Note 6 - Freight costs and handling costs incurred are included in operating &
selling expenses and were $505,000 and $445,100, respectively, for the three
months ended May 31, 2004 and 2003, respectively. 7




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EDUCATIONAL DEVELOPMENT CORPORATION Note 7 - The Company has 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 Company.
The Company evaluates segment performance based on operating profits of the
segments which is defined as segment net revenues reduced by direct cost of
sales and direct expenses. Corporate expenses, including interest and
depreciation, and income taxes are not allocated to the segments. The
Companys assets are not allocated on a segment basis. Information by industry segment for the three months ended May 31, 2004 and
2003 is set forth below: Publishing
    
    UBAH
    
    Other
    
    TotalThree Months Ended May 31, 2004Net revenues from external customers
    
    $
    2,018,200
    
    
    $
    6,399,300
    
    
    $
    
    
    
    $
    8,417,500Earnings before income taxes
    
    $
    752,900
    
    
    $
    1,503,900
    
    
    $
    (921,100
    )
    
    $
    1,335,700Three Months Ended May 31, 2003Net revenues from external customers
    
    $
    1,980,100
    
    
    $
    5,282,900
    
    
    $
    
    
    
    $
    7,263,000Earnings before income taxes
    
    $
    701,700
    
    
    $
    1,083,700
    
    
    $
    (847,000
    )
    
    $
    938,400
 
 ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this Management Discussion and Analysis are not
based on historical facts, but are forward-looking statements that are based
upon numerous assumptions about future conditions that may ultimately prove to
be inaccurate. Actual events and results may materially differ from anticipated
results described in such statements. The Companys ability to achieve such
results is subject to certain risks and uncertainties. Such risks and
uncertainties include but are not limited to, product prices, continued
availability of capital and financing, and other factors affecting the
Companys business that may be beyond its control. Overview The Company operates 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. 8




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EDUCATIONAL DEVELOPMENT CORPORATION The following table sets forth consolidated statement of income data as a
percentage of total revenues. Three Months Ended May 31,2004
    
    2003Net revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    34.4
    %
    
    
    35.6
    %Gross margin
    
    
    65.6
    %
    
    
    64.4
    %Operating expenses:Operating & selling
    
    
    19.4
    %
    
    
    21.4
    %Sales commissions
    
    
    25.1
    %
    
    
    24.3
    %General & administrative
    
    
    5.2
    %
    
    
    5.9
    %Interest
    
    
    0.1
    %
    
    
    0.0
    %Total operating expenses
    
    
    49.8
    %
    
    
    51.6
    %Other income
    
    
    0.1
    %
    
    
    0.1
    %Earnings before income taxes
    
    
    15.9
    %
    
    
    12.9
    %Income taxes
    
    
    6.1
    %
    
    
    4.8
    %Net earnings
    
    
    9.8
    %
    
    
    8.1
    %
 Operating Results The Company had income before income taxes of $1,335,700 for the three months
ended May 31, 2004 compared with $938,400 for the three months ended May 31,
2003. Revenues Three Months Ended May 31,
    
    $ Increase/
    
    % Increase/2004
    
    2003
    
    (decrease)
    
    (decrease)Gross sales
    
    $
    10,975,000
    
    
    $
    9,761,200
    
    
    $
    1,213,800
    
    
    
    12.4
    %Less discounts & allowances
    
    
    ( 2,953,700
    )
    
    
    (2,836,400
    )
    
    
    (117,300
    )
    
    
    4.1
    %Transportation revenue
    
    
    396,200
    
    
    
    338,200
    
    
    
    58,000
    
    
    
    17.1
    %Net revenues
    
    $
    8,417,500
    
    
    $
    7,263,000
    
    
    $
    1,154,500
    
    
    
    15.9
    %
 The UBAH Divisions gross sales increased 21% during the three month period
ending May 31, 2004 when compared with the same quarterly period a year ago.
The Company attributes these increases primarily to a 12% increase in the
number of consultants who made sales during the quarter. The Publishing
Divisions gross sales increased 1% during the three month period ending May
31, 2004 when compared with the same quarterly period a year ago. Increases in
sales to national chains as well as sales made by the Companys inside sales
force generated the increase in the Publishing Divisions sales. The UBAH Divisions discounts and allowances were $830,000 and $723,700 for the
quarterly periods ended May 31, 2004 and 2003, respectively. The Publishing
Divisions discounts and allowances were $2,123,700 and $2,112,700 for the
quarterly periods ended May 31, 2004 and 2003, respectively. The UBAH
Divisions discounts and allowances were 12.1% and 12.8% of UBAHs gross sales
for the quarterly periods ended May 31, 2004 and 2003, respectively. The
Publishing Divisions discounts and allowances were 51.4% and 51.7% of
Publishings gross sales for the quarterly periods ended May 31, 2004 and 2003,
respectively The increase in transportation revenues is the result of increased sales in the
UBAH Division. 9




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EDUCATIONAL DEVELOPMENT CORPORATION Expenses Three Months Ended May 31,
    
    $ Increase/
    
    % Increase/2004
    
    2003
    
    (decrease)
    
    (decrease)Cost of sales
    
    $
    2,891,700
    
    
    $
    2,582,300
    
    
    $
    309,400
    
    
    
    12.0
    %Operating & selling
    
    
    1,637,400
    
    
    
    1,554,400
    
    
    
    83,000
    
    
    
    5.3
    %Sales commissions
    
    
    2,110,900
    
    
    
    1,763,600
    
    
    
    347,300
    
    
    
    19.7
    %General & administrative
    
    
    439,000
    
    
    
    430,800
    
    
    
    8,200
    
    
    
    1.9
    %Interest
    
    
    9,000
    
    
    
    100
    
    
    
    8,900
    
    
    
    Other income
    
    
    (6,200
    )
    
    
    (6,600
    )
    
    
    400
    
    
    
    (6.1
    %)Total
    
    $
    7,081,800
    
    
    $
    6,324,600
    
    
    $
    757,200
    
    
    
    12.0
    %
 Cost of sales increased approximately 12% for the three months ended May 31,
2004 when compared with the three months ended May 31, 2003. The Companys
cost of its products is 25% to 32% of the gross sales price, depending upon the
product. In comparing the percentage increase in sales with the percentage
increase in cost of goods, consideration must be given to the mix of products
sold. The 12% increase in cost of sales is consistent with the percent
increase in gross sales of approximately 12% for the same two quarterly
periods. Operating and selling expenses increased for the three months ended May 31,
2004 in part due to an increase in freight expense for both divisions combined
of $59,900, offset by a decrease in damaged returns for both divisions combined
of $18,300. The UBAH Division also incurred increases of $57,100 in customer
sales incentive costs and $16,200 in credit card fees, both of which are
directly attributable to the increase in sales. Reductions in other items
aggregating $31,900 helped offset the increase in operating and selling
expenses. Operating and selling expenses as a percentage of net revenues were
19.4% for the three months ended May 31, 2004 and 21.4% for the three months
ended May 31, 2003. Sales commissions in the Publishing Division decreased 1.6% for the three
months ended May 31, 2004. Publishing Division sales commissions are paid on
net sales and were 1.2% of net sales for the three months ended May 31, 2004
and 1.3% for the three months ended May 31, 2003. Sales commissions in the
Publishing Division will fluctuate depending upon the amount of sales made to
the Companys house accounts, which are the Publishing Divisions largest
customers and do not have any commission expense associated with them, and
sales made by the Companys outside sales representatives. Sales commissions
in the UBAH Division increased 20.0% for the three months ended May 31, 2004,
the direct result of increased sales in this division. UBAH Division sales
commissions are paid on retail sales and were 37.4% of retail sales for the
three months ended May 31, 2004 and 38.0% of retail sales for the three months
ended May 31, 2003. 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 commissions 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. General and administrative expenses for the three months ended May 31, 2004
increased 1.9% over the same period last year. General and administrative
expenses as a percentage of net revenues were 5.2% for the three months ended
May 31, 2004 and 5.9% for the three months ended May 31, 2003. Interest expense increased $8,900 due to increased borrowings throughout the
three months ended May 31, 2004. Interest expense as a percentage of net
revenues was 0.1% for the three months ended May 31, 2004 and was nominal for
the three months ended May 31, 2003. The Companys effective tax rate was 38.3% and 37.6% for the quarterly periods
ended May 31, 2004 and 2003, respectively. Liquidity and Capital Resources The Companys primary uses of cash are for purchases of treasury stock under
the stock buyback program, capital expenditures associated with the
construction of additional warehouse space and for working capital. The
Company utilizes its bank credit facility to meet its short-term cash needs. The Company expects its ongoing cash flow to exceed cash required to operate
the business. During the first quarter of fiscal year 2005 the Company
repurchased 172,711 shares of its common stock under the stock repurchase
program at a cost of $1,767,600. The Company is completing construction of a
22,000 square foot addition to its warehouse and will have costs of
approximately $110,000 to pay during the second quarter of fiscal year 2005. 10




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EDUCATIONAL DEVELOPMENT CORPORATION The Companys primary source of liquidity is cash generated from operations.
During the first quarter of fiscal year 2005 the Company experienced a positive
cash flow from operating activities of $662,100. Cash flows from operating
activities was increased by a reduction in inventory of $1,579,500 and was
reduced by a decrease in accounts payable and accrued expenses of $1,688,600.
The Company believes that the inventory levels are at an adequate level to meet
sales requirements and does not foresee increasing inventory during fiscal year
2005. The Companys current tax liability was reduced by $290,400 as a result
of the benefit obtained from several Company officers exercising stock options.
Fluctuations in accounts payable and accrued expenses involve timing of
shipments received from the Companys principal supplier and the payments
associated with these shipments. The Company believes that in fiscal year 2005 it will experience a positive
cash flow and that this positive cash flow along with the bank credit facility
will be adequate to meet its liquidity requirements for the foreseeable future. Cash used in investing activities was $314,100. The principal use of cash in
investing activities was for progress payments, totaling $295,200, on the
construction of the 22,000 square foot addition to the Companys warehouse
facility. Additional cash used in investing activities included $12,400 in
property improvements and $6,500 in other additions. The Company estimates
that cash used in investing activities for fiscal year 2005 will be less than
$1,000,000. This would consist of $110,000 remaining due on the construction
of the warehouse addition, with the balance to be used for software and
hardware enhancements to the Companys existing data processing equipment,
property improvements and additional warehouse equipment. Cash used in financing activities was $556,700, comprised of $1,767,600 paid to
acquire treasury stock, $104,400 received from the sale of treasury stock,
$498,500 received from the exercise of stock options and a net $608,000
received from borrowings under the bank credit agreement. As of February 29, 2004 the Company did not have any commitments in excess of
one year. Bank Credit Agreement Effective June 30, 2003 the Company signed a Fourth Amendment to the Credit and
Security Agreement with Arvest Bank which provided a $3,500,000 line of credit
through June 30, 2004. Interest is payable monthly at the Wall Street Journal
prime floating rate minus 0.25% (3.75% at May 31, 2004) and borrowings are
collateralized by substantially all the assets of the Company. At May 31, 2004
the Company had $1,002,000 outstanding. Available credit under the revolving
credit agreement was $2,498,000 at May 31, 2004. The Company has renewed the
credit line and extended the maturity date to June 30, 2005. Critical Accounting Policies Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated 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
uncollectable 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. The Companys significant accounting policies are
described in the notes accompanying the financial statements included in the
Companys Annual Report to Shareholders for the Fiscal Year ended February 29,
2004. However, the Company considers the following accounting policies to be
more dependent on the use of estimates and assumptions 11




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EDUCATIONAL DEVELOPMENT CORPORATION Revenue Recognition Revenue from merchandise sales is net of returns and allowances. The
provisions of the SEC Staff Accounting Bulletin No.101, Revenue Recognition in
Financial Statements, have been applied, and as a result, a reserve is
provided for estimated future sales returns. The Companys 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. Management has estimated and
included a reserve for sales returns of $101,000 as of May 31, 2004 and
February 29, 2004. The reserve for sales returns is estimated by management
using historical sales returns data. Allowance for Doubtful Accounts The Company maintains an allowance for estimated losses resulting from the
inability of its 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 the
Companys operating results would be significantly adversely affected.
Management has estimated allowance for doubtful accounts of $55,800 and $49,900
as of May 31, 2004 and February 29, 2004, respectively. Inventory Management continually estimates and calculates the amount of non-current
inventory. The inventory arises due to the Company occasionally purchasing
book inventory in quantities in excess of what will be sold within the normal
operating cycle due to minimum order requirements of the Companys primary
supplier. Noncurrent inventory was estimated by management using the current
year turnover ratio by title. All inventory in excess of 2 1/2 years of
anticipated sales was classified as noncurrent inventory. Noncurrent inventory
balances, before obsolete inventory reserves, were $689,100 and $823,800 at May
31, 2004 and February 29, 2004, respectively. Inventories are presented net of a reserve for obsolete inventory. Management
has estimated and included a reserve for obsolescence for both current and
noncurrent inventory. This reserve is based on managements identification of
obsolete inventory on hand at May 31, 2004 and February 29, 2004. Management
has estimated reserves for both current and noncurrent inventory of $304,700
and $282,200 as of May 31, 2004 and February 29, 2004, respectively. Deferred Tax Assets The Company does not currently have a valuation allowance recorded against its
deferred tax assets. If management determines it is more likely than not that
its deferred tax assets would not be realizable in the future, a valuation
allowance would be recorded to reduce the deferred tax asset to its net
realizable value. Long-lived Assets In evaluating the fair value and future benefits of long-lived assets, we
perform an analysis of the anticipated undiscounted future net cash flows of
the related long-lived assets and reduce their carrying value by the excess, if
any, of the result of such calculation. We believe at this time that the
long-lived assets carrying values and useful lives continues to be
appropriate. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any material market risk. 12




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EDUCATIONAL DEVELOPMENT CORPORATION 
 Item 4 CONTROLS AND PROCEDURES As of the end of the period covered by this report, an evaluation was performed
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14(c) and 15d-14(c).
This evaluation was conducted under the supervision and with the participation
of the Companys management, including its Chief Executive Officer and its
Chief Financial Officer. Based on that evaluation, the Companys Chief
Executive Officer and its Chief Financial Officer concluded that the Companys
disclosure controls 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 with the
rules and forms of the SEC. 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. There have been no significant changes in the Companys internal
controls or in other factors that could significantly affect these controls
since the date controls were evaluated. 
 PART II OTHER INFORMATION 
 Item 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits  31.1
    
    Certification of Randall W. White, President and Chief Executive Officer
of Educational Development Corporation, dated July 1, 2004 pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.31.2
    
    Certification of W. Curtis Fossett, Chief Financial Officer of
Educational Development Corporation, dated July 1, 2004, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.32.1
    
    Certification of Randall W. White, President and Chief Executive Officer
of Educational Development Corporation, dated July 1, 2004 pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith.32.2
    
    Certification of W. Curtis Fossett, Chief Financial Officer of
Educational Development Corporation, dated July 1, 2004, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith. (b) Reports on Form 8-K A Form 8-K was filed on March 11, 2004 to submit to the Securities and Exchange
Commission a press release announcing record sales for fiscal year 2004. A Form 8-K was filed on April 1, 2004 to submit to the Securities and Exchange
Commission a press release announcing March 2004 revenues. A Form 8-K was filed on April 8, 2004 to submit to the Securities and Exchange
Commission a press release announcing earnings and sales for the fiscal year
2004. The press release contained the following financial information for
fiscal year 2004 and fiscal year 2003: (1) net sales; (2) pre tax earnings; (3)
income taxes; (4) net earnings; (5) earnings per share, (6) announced $0.12 per
share annual dividend. A Form 8-K was filed on May 25, 2004 to submit to the Securities and Exchange
Commission a press release announcing forecast record 1st quarter sales and
earnings 13




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EDUCATIONAL DEVELOPMENT CORPORATION 
 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 1, 2004
    
    By
    
    /s/ Randall W. WhiteRandall W. WhitePresident
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EDUCATIONAL DEVELOPMENT CORPORATION 
 EXHIBIT INDEX Exhibit No.
    
    Description31.1
    
    Certification of Randall W. White, President and Chief Executive Officer
of Educational Development Corporation, dated July 1, 2004, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.31.2
    
    Certification of W. Curtis Fossett, Chief Financial Officer of
Educational Development Corporation, dated July 1, 2004, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.32.1
    
    Certification of Randall W. White, President and Chief Executive Officer
of Educational Development Corporation, dated July 1, 2004, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith.32.2
    
    Certification of W. Curtis Fossett, Chief Financial Officer of
Educational Development Corporation, dated July 1, 2004, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith.
 15