##### 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 August 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 August 31, 2004 there were 3,909,990 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 EARNINGSCONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITYCONDENSED STATEMENTS OF CASH FLOWSNOTES 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 Pursuant to Section 302-Randall W. WhiteCertification Pursuant to Section 302-W. Curtis FossettCertification Pursuant to Section 906-Randall W. WhiteCertification Pursuant to Section 906-W. Curtis Fosett    Table of Contents  EDUCATIONAL DEVELOPMENT CORPORATION 
 PART I. FINANCIAL INFORMATION 
 ITEM 1 
 CONDENSED BALANCE SHEETS (UNAUDITED) August 31, 2004
    
    February 29, 2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    334,600
    
    
    $
    260,500Accounts receivable  (less
allowances for doubtful accounts
and returns: 08/31/04 - $163,100;
2/29/04 - $150,900)
    
    
    2,663,400
    
    
    
    2,135,300Inventories  Net
    
    
    12,206,200
    
    
    
    13,795,200Prepaid expenses and other assets
    
    
    99,000
    
    
    
    147,000Income taxes receivable
    
    
    339,100
    
    
    
    44,900Deferred income taxes
    
    
    48,800
    
    
    
    30,200Total current assets
    
    
    15,691,100
    
    
    
    16,413,100INVENTORIES - Net
    
    
    527,100
    
    
    
    571,000PROPERTY AND EQUIPMENTat cost
(less accumulated depreciation: 08/31/04 - $1,746,400; 2/29/04 - $1,690,500)
    
    
    2,462,000
    
    
    
    2,046,100DEFERRED INCOME TAXES
    
    
    150,900
    
    
    
    56,800$
    18,831,100
    
    
    $
    19,087,000LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Note payable to bank
    
    $
    2,617,000
    
    
    $
    394,000Accounts payable
    
    
    2,727,500
    
    
    
    3,719,400Accrued salaries and commissions
    
    
    484,200
    
    
    
    445,500Other current liabilities
    
    
    286,300
    
    
    
    310,200Total current liabilities
    
    
    6,115,000
    
    
    
    4,869,100COMMITMENTSSHAREHOLDERS EQUITY:Common Stock, $.20 par value (Authorized
8,000,000 shares; Issued 5,762,340
and 5,596,340 shares; Outstanding
3,909,990 and 4,025,773 shares)
    
    
    1,152,500
    
    
    
    1,119,300Capital in excess of par value
    
    
    6,201,700
    
    
    
    5,349,900Retained earnings
    
    
    14,227,900
    
    
    
    13,435,10021,582,100
    
    
    
    19,904,300Less treasury shares, at cost
    
    
    (   8,866,000
    )
    
    
    (   5,686,400
    )12,716,100
    
    
    
    14,217,900$
    18,831,100
    
    
    $
    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 August 31,
    
    Six Months Ended August 31,2004
    
    2003
    
    2004
    
    2003REVENUES:Gross sales
    
    $
    9,260,700
    
    
    $
    9,716,400
    
    
    $
    20,235,700
    
    
    $
    19,477,600Less discounts & allowances
    
    
    (2,862,000
    )
    
    
    (3,202,800
    )
    
    
    (5,815,700
    )
    
    
    (6,039,200
    )Transportation revenue
    
    
    376,300
    
    
    
    380,900
    
    
    
    772,500
    
    
    
    719,100Net revenues
    
    
    6,775,000
    
    
    
    6,894,500
    
    
    
    15,192,500
    
    
    
    14,157,500COST OF SALES
    
    
    2,459,500
    
    
    
    2,568,800
    
    
    
    5,373,700
    
    
    
    5,157,100Gross margin
    
    
    4,315,500
    
    
    
    4,325,700
    
    
    
    9,818,800
    
    

    
    9,000,400OPERATING EXPENSES:Operating & selling
    
    
    1,492,300
    
    
    
    1,441,700
    
    
    
    3,129,700
    
    
    
    2,996,100Sales commissions
    
    
    1,640,300
    
    
    
    1,596,400
    
    
    
    3,751,200
    
    
    
    3,360,000General & administrative
    
    
    446,200
    
    
    
    431,400
    
    
    
    862,700
    
    
    
    856,200Interest
    
    
    20,600
    
    
    
    2,700
    
    
    
    29,600
    
    
    
    2,8003,599,400
    
    
    
    3,472,200
    
    
    
    7,773,200
    
    
    
    7,215,100OTHER INCOME
    
    
    9,300
    
    
    
    7,900
    
    
    
    15,500
    
    
    
    14,500EARNINGS BEFORE INCOME TAXES
    
    
    725,400
    
    
    
    861,400
    
    
    
    2,061,100
    
    
    
    1,799,800INCOME TAXES
    
    
    273,000
    
    
    
    327,000
    
    
    
    784,300
    
    
    
    679,500NET EARNINGS
    
    $
    452,400
    
    
    $
    534,400
    
    
    $
    1,276,800
    
    
    $
    1,120,300BASIC AND DILUTED EARNINGS
PER SHARE:Basic
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.32
    
    
    $
    0.29Diluted
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.30
    
    
    $
    0.26WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT
SHARES OUTSTANDING:Basic
    
    
    3,982,493
    
    
    
    3,946,866
    
    
    
    3,991,971
    
    
    
    3,913,235Diluted
    
    
    4,157,072
    
    
    
    4,301,033
    
    
    
    4,193,679
    
    
    
    4,277,027DIVIDENDS 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    304,683
    
    
    
    (3,264,300
    )
    
    
    (3,264,300
    )Sales of treasury stock
    
    
    
    
    
    
    
    
    
    
    35,700
    
    
    
    
    
    
    
    ( 22,900
    )
    
    
    84,700
    
    
    
    120,400Exercise of options at
$2.1875 - $6.00/share
    
    
    166,000
    
    
    
    33,200
    
    
    
    510,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    543,500Tax benefit of stock options
    
    
    
    
    
    
    
    
    
    
    305,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    305,800Dividends paid ($0.12/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (484,000
    )
    
    
    
    
    
    
    
    
    
    
    (484,000
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,276,800
    
    
    
    
    
    
    
    
    
    
    
    1,276,800BALANCE, AUGUST 31, 2004
    
    
    5,762,340
    
    
    $
    1,152,500
    
    
    $
    6,201,700
    
    
    $
    14,227,900
    
    
    
    1,852,350
    
    
    $
    (8,866,000
    )
    
    $
    12,716,100
 See notes to condensed financial statements. 4




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EDUCATIONAL DEVELOPMENT CORPORATION 
 CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended August 312004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES
    
    $
    1,407,300
    
    
    $
    (1,489,400
    )CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment
    
    
    (471,800
    )
    
    
    (50,000
    )Net cash used in investing activities
    
    
    (471,800
    )
    
    
    (50,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under revolving credit agreement
    
    
    7,702,000
    
    
    
    2,515,000Payments under revolving credit agreement
    
    
    (5,479,000
    )
    
    
    (2,032,000
    )Cash received from exercise of stock options
    
    
    543,500
    
    
    
    128,600Cash received from sale of treasury stock
    
    
    120,400
    
    
    
    519,500Cash paid to acquire treasury stock
    
    
    (3,264,300
    )
    
    
    (229,400
    )Dividends paid
    
    
    (484,000
    )
    
    
    (394,000
    )Net cash provided by (used in) financing activities
    
    
    (861,400
    )
    
    
    507,700Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    74,100
    
    
    
    (1,031,700
    )Cash and Cash Equivalents, Beginning of Period
    
    
    260,500
    
    
    
    1,433,000Cash and Cash Equivalents, End of Period
    
    $
    334,600
    
    
    $
    401,300Supplemental Disclosure of Cash Flow Information:Cash paid for interest
    
    $
    22,400
    
    
    $
    1,000Cash paid for income taxes
    
    $
    885,500
    
    
    $
    806,000
 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 and six months
ended August 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 and six months ended August 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. Certain reclassifications have been made to the fiscal 2004 financial
statements to conform with the fiscal 2005 presentation. Note 2  Effective June 30, 2004 the Company signed a Fifth Amendment to the
Credit and Security Agreement with Arvest Bank which provided a $3,500,000 line
of credit through June 30, 2005. Interest is payable monthly at the Wall
Street Journal prime floating rate minus 0.25% (4.25% at August 31, 2004) and
borrowings are collateralized by substantially all the assets of the Company.
At August 31, 2004 the Company had $2,617,000 outstanding. Available credit
under the revolving credit agreement was $883,000 at August 31, 2004. Note 3 - Inventories consist of the following: August 31, 2004
    
    February 29, 2004Current:Book Inventory
    
    $
    12,272,600
    
    
    $
    13,824,600Reserve for Obsolescence
    
    
    (       66,400
    )
    
    
    (       29,400
    )Inventories
net  current
    
    $
    12,206,200
    
    
    $
    13,795,200Non-current:Book Inventory
    
    $
    791,900
    
    
    $
    823,800Reserve for Obsolescence
    
    
    (     264,800
    )
    
    
    (     252,800
    )Inventories
 non-current
    
    $
    527,100
    
    
    $
    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 $2.1 million and $3.8 million for the
three months ended August 31, 2004 and 2003, respectively. Total inventory
purchases from all suppliers were approximately $2.9 million and $4.5 million
for the three months ended August 31, 2004 and 2003, respectively. Purchases from this England based publishing company were approximately $3.4
million and $6.5 million for the six months ended August 31, 2004 and 2003,
respectively. Total inventory purchases from all suppliers were approximately
$4.8 million and $7.8 million for the six months ended August 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 August 31,
    
    Six Months Ended August 31,2004
    
    2003
    
    2004
    
    2003Net Earnings
    
    $
    452,400
    
    
    $
    534,400
    
    
    $
    1,276,800
    
    
    $
    1,120,300Basic EPS:Weighted Average Shares Outstanding
    
    
    3,982,493
    
    
    
    3,946,866
    
    
    
    3,991,971
    
    
    
    3,913,235Basic EPS
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.32
    
    
    $
    0.29Diluted EPS:Weighted Average Shares Outstanding
    
    
    3,982,493
    
    
    
    3,946,866
    
    
    
    3,991,971
    
    
    
    3,913,235Assumed Exercise of Options
    
    
    174,579
    
    
    
    354,167
    
    
    
    201,708
    
    
    
    363,792Shares Applicable to Diluted Earnings
    
    
    4,157,072
    
    
    
    4,301,033
    
    
    
    4,193,679
    
    
    
    4,277,027Diluted EPS
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.30
    
    
    $
    0.26
 Since March 1, 1998, when the Company began its stock repurchase program,
2,146,259 shares of the Companys common stock at a total cost of $9,889,756
have been acquired. The Board of Directors has authorized purchasing up to
2,500,000 shares as market conditions warrant. 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 no
options granted in the three month period ended August 31, 2004. There were
1,000 options granted in the six-month period ended August 31, 2004. Three Months Ended August 31,
    
    Six Months Ended August 31,2004
    
    2003
    
    2004
    
    2003Net Earnings
 as reported
    
    $
    452,400
    
    
    $
    534,400
    
    
    $
    1,276,800
    
    
    $
    1,120,300Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related
tax effects
    
    
    
    
    
    
    
    
    
    
    (       3,500
    )
    
    
    Net earnings
 pro forma
    
    $
    452,400
    
    
    $
    534,400
    
    
    $
    1,273,300
    
    
    $
    1,120,300Earnings per
share  as reported:Basic
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.32
    
    
    $
    0.29Diluted
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.30
    
    
    $
    0.26Earnings per
share  pro forma:Basic
    
    $
    0.11
    
    
    $
    0.14
    
    
    $
    0.32
    
    
    $
    0.29Diluted
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.30
    
    
    $
    0.26
 Note 6  Freight costs and handling costs incurred are included in operating &
selling expenses and were $480,500 and $469,000 for the three months ended
August 31, 2004 and 2003, respectively. Freight costs and handling costs were
$985,500 and $914,200 for the six months ended August 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 and six months ended
August 31, 2004 and 2003 is set forth below: Publishing
    
    UBAH
    
    Other
    
    TotalThree Months Ended August 31, 2004Net revenues from external customers
    
    $
    1,933,600
    
    
    $
    4,841,400
    
    
    $
    
    
    
    $
    6,775,000Earnings before income taxes
    
    $
    581,200
    
    
    $
    1,081,600
    
    
    $
    (  937,400
    )
    
    $
    725,400Three Months Ended August 31, 2003Net revenues from external customers
    
    $
    2,163,300
    
    
    $
    4,731,200
    
    
    $
    
    
    
    $
    6,894,500Earnings before income taxes
    
    $
    722,700
    
    
    $
    1,001,500
    
    
    $
    (  862,800
    )
    
    $
    861,400Six Months Ended August 31, 2004Net revenues from external customers
    
    $
    3,951,800
    
    
    $
    11,240,700
    
    
    $
    
    
    
    $
    15,192,500Earnings before income taxes
    
    $
    1,322,800
    
    
    $
    2,574,200
    
    
    $
    (1,835,900
    )
    
    $
    2,061,100Six Months Ended August 31, 2003Net revenues from external customers
    
    $
    4,143,500
    
    
    $
    10,014,000
    
    
    $
    
    
    
    $
    14,157,500Earnings before income taxes
    
    $
    1,421,400
    
    
    $
    2,082,200
    
    
    $
    (1,703,800
    )
    
    $
    1,799,800
 
 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 net revenues. Three Months Ended August 31,
    
    Six Months Ended August 31,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    36.3
    %
    
    
    37.3
    %
    
    
    35.4
    %
    
    
    36.4
    %Gross margin
    
    
    63.7
    %
    
    
    62.7
    %
    
    
    64.6
    %
    
    
    63.6
    %Operating expenses:Operating & selling
    
    
    22.0
    %
    
    
    20.9
    %
    
    
    20.6
    %
    
    
    21.2
    %Sales commissions
    
    
    24.2
    %
    
    
    23.2
    %
    
    
    24.7
    %
    
    
    23.7
    %General & administrative
    
    
    6.6
    %
    
    
    6.2
    %
    
    
    5.6
    %
    
    
    6.1
    %Interest
    
    
    0.3
    %
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.0
    %Total operating expenses
    
    
    53.1
    %
    
    
    50.3
    %
    
    
    51.1
    %
    
    
    51.0
    %Other income
    
    
    0.1
    %
    
    
    0.1
    %
    
    
    0.1
    %
    
    
    0.1
    %Earnings before income taxes
    
    
    10.7
    %
    
    
    12.5
    %
    
    
    13.6
    %
    
    
    12.7
    %Income taxes
    
    
    4.0
    %
    
    
    4.7
    %
    
    
    5.2
    %
    
    
    4.8
    %Net earnings
    
    
    6.7
    %
    
    
    7.8
    %
    
    
    8.4
    %
    
    
    7.9
    %
 Operating Results for the Three Months Ended August 31, 2004 The Company had income before income taxes of $725,400 for the three months
ended August 31, 2004 compared with $861,400 for the three months ended August
31, 2003. Revenues Three Months Ended August 31,
    
    $ Increase/
    
    % Increase/2004
    
    2003
    
    (decrease)
    
    (decrease)Gross sales
    
    $
    9,260,700
    
    
    $
    9,716,400
    
    
    $
    (  455,700
    )
    
    
    (  4.7
    %)Less discounts & allowances
    
    
    (2,862,000
    )
    
    
    (3,202,800
    )
    
    
    340,800
    
    
    
    (10.6
    %)Transportation revenue
    
    
    376,300
    
    
    
    380,900
    
    
    
    (      4,600
    )
    
    
    (  1.2
    %)Net revenues
    
    $
    6,775,000
    
    
    $
    6,894,500
    
    
    $
    (  119,500
    )
    
    
    (  1.7
    %)
 The UBAH Divisions gross sales increased 0.5% during the three month period
ending August 31, 2004 when compared with the same quarterly period a year ago.
The Company attributes this increase primarily to a 1.6% increase in the
number of consultants who made sales during the quarter. The Publishing
Divisions gross sales decreased 10.7% during the three month period ending
August 31, 2004 when compared with the same quarterly period a year ago. The
Company attributes this decline to a major customer who placed a large order in
the second quarter last year but did not place a similar order during the
second quarter this year, leading to a 30% decline in sales by the Publishing
Divisions outside sales representatives. The Publishing Divisions house
accounts were down 3.4% for the quarter, offset by a 6.3% increase in the sales
by the inside sales force. The UBAH Divisions discounts and allowances were $793,000 and $889,000 for the
quarterly periods ended August 31, 2004 and 2003, respectively. The Publishing
Divisions discounts and allowances were $2,069,000 and $2,313,800 for the
quarterly periods ended August 31, 2004 and 2003, respectively. The UBAH
Divisions discounts and allowances were 15.0% and 16.9% of UBAHs gross sales
for the quarterly periods ended August 31, 2004 and 2003, respectively. The
Publishing Divisions discounts and allowances were 51.8% and 51.8% of
Publishings gross sales for the quarterly periods ended August 31, 2004 and
2003, respectively 9




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION Expenses Three Months Ended August 31,
    
    $ Increase/
    
    % Increase/2004
    
    2003
    
    (decrease)
    
    (decrease)Cost of sales
    
    $
    2,459,500
    
    
    $
    2,568,800
    
    
    $
    ( 109,300
    )
    
    
    (    4.3
    %)Operating & selling
    
    
    1,492,300
    
    
    
    1,441,700
    
    
    
    50,600
    
    
    
    3.5
    %Sales commissions
    
    
    1,640,300
    
    
    
    1,596,400
    
    
    
    43,900
    
    
    
    2.7
    %General & administrative
    
    
    446,200
    
    
    
    431,400
    
    
    
    14,800
    
    
    
    3.4
    %Interest
    
    
    20,600
    
    
    
    2,700
    
    
    
    17,900
    
    
    
    663.0
    %Other income
    
    
    (       9,300
    )
    
    
    (       7,900
    )
    
    
    (     1,400
    )
    
    
    (  17.7
    %)Total
    
    $
    6,049,600
    
    
    $
    6,033,100
    
    
    $
    16,500
    
    
    
    0.3
    %
 Cost of sales decreased approximately 4.3% for the three months ended August
31, 2004 when compared with the three months ended August 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 decrease in sales with
the percentage decrease in cost of goods, consideration must be given to the
mix of products sold. The 4.3% decrease in cost of sales is consistent with
the percent decrease in gross sales of approximately 4.7% for the same two
quarterly periods. Operating and selling expenses increased for the three months ended August 31,
2004 in part due to royalty expense for both divisions combined of $19,300 and
an increase in damaged returns for both divisions combined of $7,300. Payroll
and benefit costs increased $43,100, the result of annual wage increases and
the addition of employees. The UBAH Division also incurred increases of $7,400
in customer sales incentive costs and $7,600 in credit card fees, both of which
are directly attributable to the increase in sales. Reductions in other items
aggregating $34,100 helped offset the increase in operating and selling
expenses. Operating and selling expenses as a percentage of net revenues were
22.0% for the three months ended August 31, 2004 and 20.9% for the three months
ended August 31, 2003. Sales commissions in the Publishing Division decreased 30.0% for the three
months ended August 31, 2004. Publishing Division sales commissions are paid
on net sales and were 1.2% of net sales for the three months ended August 31,
2004 and 1.6% for the three months ended August 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 3.5% for the three months ended August 31, 2004,
the direct result of increased sales in this division. UBAH Division sales
commissions are paid on retail sales and were 39.8% of retail sales for the
three months ended August 31, 2004 and 39.6% of retail sales for the three
months ended August 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 August 31, 2004
increased 3.4% over the same period last year. General and administrative
expenses as a percentage of net revenues were 6.6% for the three months ended
August 31, 2004 and 6.2% for the three months ended August 31, 2003. Interest expense increased $17,900 due to increased borrowings throughout the
three months ended August 31, 2004. Interest expense as a percentage of net
revenues was 0.3% for the three months ended August 31, 2004 and was nominal
for the three months ended August 31, 2003. The Companys effective tax rate was 37.6% and 38.0% for the quarterly periods
ended August 31, 2004 and 2003, respectively. Operating Results for the Six Months Ended August 31, 2004 The Company had income before income taxes of $2,061,100 for the six months
ended August 31, 2004 compared with $1,799,800 for the six months ended August
31, 2003.  10




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION Revenues Six Months Ended August 31,
    
    $ Increase/
    
    % Increase/2004
    
    2003
    
    (decrease)
    
    (decrease)Gross sales
    
    $
    20,235,700
    
    
    $
    19,477,600
    
    
    $
    758,100
    
    
    
    3.9
    %Less discounts & allowances
    
    
    ( 5,815,700
    )
    
    
    ( 6,039,200
    )
    
    
    223,500
    
    
    
    ( 3.7
    %)Transportation revenue
    
    
    772,500
    
    
    
    719,100
    
    
    
    53,400
    
    
    
    7.4
    %Net revenues
    
    $
    15,192,500
    
    
    $
    14,157,500
    
    
    $
    1,035,000
    
    
    
    7.3
    %
 The UBAH Divisions gross sales increased 10.9% during the six month period
ending August 31, 2004 when compared with the same period a year ago. The
Company attributes this increase primarily to a 5.2% increase in the number of
consultants who made sales during the period and a 12.6% increase in the
average order size. The Publishing Divisions gross sales decreased 5.0%
during the six month period ending August 31, 2004 when compared with the same
period a year ago. The Company attributes this decline to a major customer who
placed a large order in the second quarter last year but did not place a
similar order during the second quarter this year, leading to a 19.7% decline
in sales by the Publishing Divisions outside sales representatives for the six
months ended August 31, 2004. Offsetting this decline was a 1.8% increase in
sales by the Divisions inside sales force and a 4.6% increase in sales from
the house accounts. The UBAH Divisions discounts and allowances were $1,623,000 and $1,612,700 for
the six months ended August 31, 2004 and 2003, respectively. The Publishing
Divisions discounts and allowances were $4,192,700 and $4,426,500 for the six
months ended August 31, 2004 and 2003, respectively. The UBAH Divisions
discounts and allowances were 13.4% and 14.8% of UBAHs gross sales for the six
months ended August 31, 2004 and 2003, respectively. The Publishing Divisions
discounts and allowances were 51.6% and 51.7% of Publishings gross sales for
the six months ended August 31, 2004 and 2003, respectively. The increase in transportation revenues for the six months ended August 31,
2003 is the result of increased sales in the UBAH Division. Expenses Six Months Ended August 31,
    
    $ Increase/
    
    % Increase/2004
    
    2003
    
    (decrease)
    
    (decrease)Cost of sales
    
    $
    5,373,700
    
    
    $
    5,157,100
    
    
    $
    216,600
    
    
    
    4.2
    %Operating & selling
    
    
    3,129,700
    
    
    
    2,996,100
    
    
    
    133,600
    
    
    
    4.5
    %Sales commissions
    
    
    3,751,200
    
    
    
    3,360,000
    
    
    
    391,200
    
    
    
    11.6
    %General & administrative
    
    
    862,700
    
    
    
    856,200
    
    
    
    6,500
    
    
    
    0.8
    %Interest
    
    
    29,600
    
    
    
    2,800
    
    
    
    26,800
    
    
    
    957.1
    %Other income
    
    
    (15,500
    )
    
    
    (14,500
    )
    
    
    (1,000
    )
    
    
    (6.9
    %)Total
    
    $
    13,131,400
    
    
    $
    12,357,700
    
    
    $
    773,700
    
    
    
    6.3
    %
 Cost of sales increased approximately 4.2% for the six months ended August 31,
2004 when compared with the six months ended August 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 4.2% increase in cost of sales is consistent with the percent
increase in gross sales of approximately 4.4% for the same two six month
periods. Operating and selling expenses increased for the six months ended August 31,
2004 in part due to royalty expense in the second quarter for both divisions
combined of $19,300, offset by a decrease in damaged returns for both divisions
combined of $11,100. Payroll and benefit costs increased $63,500, the result
of annual wage increases and the addition of employees. The UBAH Division also
incurred increases of $65,200 in customer sales incentive costs and $23,800 in
credit card fees, both of which are directly attributable to the increase in
sales. Reductions in other items aggregating $27,100 helped offset the
increase in operating and selling expenses. Operating and selling expenses as
a percentage of net revenues were 20.6% for the six months ended August 31,
2004 and 21.2% for the six months ended August 31, 2003. Sales commissions in the Publishing Division decreased 18.0% for the six months
ended August 31, 2004. Publishing Division sales commissions are paid on net
sales and were 1.2% of net sales for the six months ended August 31, 2004 and
1.4% for the six months ended August 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 11




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION Division increased 12.2% for the six months ended August 31, 2004,
the direct result of increased sales in this division. UBAH Division sales
commissions are paid on retail sales and were 38.4% of retail sales for the six
months ended August 31, 2004 and 38.7% of retail sales for the six months ended
August 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 six months ended August 31, 2004
increased 0.8% over the same period last year. General and administrative
expenses as a percentage of net revenues were 5.6% for the six months ended
August 31, 2004 and 6.1% for the six months ended August 31, 2003. Interest expense increased $26,800 due to increased borrowings throughout the
six months ended August 31, 2004. Interest expense as a percentage of net
revenues was 0.2% for the six months ended August 31, 2004 and was nominal for
the six months ended August 31, 2003. The Companys effective tax rate was 38.1% and 37.8% for the six months ended
August 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, the annual dividend, 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 six months of fiscal year 2005 the Company
repurchased 304,683 shares of its common stock under the stock repurchase
program at a cost of $3,264,300. The Companys construction of a 22,000 square
foot addition to its warehouse is near completion and the Company will have
costs of approximately $10,000 to pay during the third quarter of fiscal year
2005. The Companys primary source of liquidity is cash generated from operations.
During the first six months of fiscal year 2005 the Company experienced a
positive cash flow from operating activities of $1,407,300. Cash flows from
operating activities was increased by a reduction in inventory of $1,583,900
and was reduced by an increase in accounts receivable and income taxes
receivable of $834,500 and a decrease in accounts payable and accrued expenses
of $977,100. 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 amount of income tax the Company will have to pay
on fiscal year 2005 earnings was reduced by $305,800 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 $471,800. The principal use of cash in
investing activities was for progress payments, totaling $397,300, on the
construction of the 22,000 square foot addition to the Companys warehouse
facility. Additional cash used in investing activities includes $38,000 for
warehouse equipment, $14,700 for computer equipment, $14,800 in property
improvements and $7,000 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 $10,000 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 $861,400, comprised of $3,264,300 paid to
acquire treasury stock, $120,400 received from the sale of treasury stock,
$543,500 received from the exercise of stock options, $484,000 annual dividend
payment and a net $2,223,000 received from borrowings under the bank credit
agreement. As of August 31, 2004 the Company did not have any commitments in excess of one
year. 12




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION Bank Credit Agreement Effective June 30, 2004 the Company signed a Fifth Amendment to the Credit and
Security Agreement with Arvest Bank which provided a $3,500,000 line of credit
through June 30, 2005. Interest is payable monthly at the Wall Street Journal
prime floating rate minus 0.25% (4.25% at August 31, 2004) and borrowings are
collateralized by substantially all the assets of the Company. At August 31,
2004 the Company had $2,617,000 outstanding. Available credit under the
revolving credit agreement was $883,000 at August 31, 2004. 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 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 August 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 and included an allowance for doubtful accounts of
$62,100 and $49,900 as of August 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 $791,900 and $823,800 at
August 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 August 31, 2004 and February 29, 2004.
Management has estimated reserves for both current and noncurrent inventory of
$331,200 and $282,200 as of August 31, 2004 and February 29, 2004,
respectively. 13




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION 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 continue to be appropriate. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any material market risk. 
 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 October 15, 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 October 15, 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 October 15, 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 October 15, 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 June 23, 2004 to submit to the Securities and Exchange
Commission a press release announcing earnings and sales for the first quarter
of fiscal year 2005. The press release contained the following financial
information for the first quarter of fiscal year 2005 and the first quarter of
fiscal year 2004: (1) net sales; (2) pre tax earnings; (3) income taxes; (4)
net earnings; (5) earnings per share. 14




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##### Table of Contents



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 October 15, 2004
    
    By      /s/ Randall W. WhiteRandall W. WhitePresident
 15




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION 
 EXHIBIT INDEX Exhibit No.
    
    Description31.1
    
    Certification of Randall W. White, President and Chief Executive Officer
of Educational Development Corporation, dated October 15, 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 October 15, 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 October 15, 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 October 15, 2004, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 furnished herewith.
 16