##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended November 30, 2004. o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___to ___. Commission file number: 0-4957 EDUCATIONAL DEVELOPMENT CORPORATION  Delaware
    
    73-0750007(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    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 þ           No o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Act) Yes o           No þ As of November 30, 2004 there were 3,805,104 shares of Educational Development Corporation
Common Stock, $0.20 par value outstanding.




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EDUCATIONAL DEVELOPMENT CORPORATION


TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1NOTES 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 President and CEO Pursuant to Section 302Certification of Chief Financial Officer Pursuant to Section 302Certification of President and CEO Pursuant to Section 906Certification of Chief Financial Officer Pursuant to Section 906    Table of Contents  
 PART I. FINANCIAL INFORMATION 
 ITEM 1 CONDENSED BALANCE SHEETS (UNAUDITED) November 30, 2004
    
    
    February 29, 2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    405,100
    
    
    $
    260,500Accounts
receivable - (less
allowances for doubtful accounts
and returns: 11/30/04 - $132,800;
2/29/04 - $150,900)
    
    
    2,536,700
    
    
    
    2,135,300Inventories  Net
    
    
    11,491,700
    
    
    
    13,795,200Prepaid expenses and other assets
    
    
    96,500
    
    
    
    147,000Income taxes receivable
    
    
    
    
    
    
    44,900Deferred income taxes
    
    
    58,400
    
    
    
    30,200Total current assets
    
    
    14,588,400
    
    
    
    16,413,100INVENTORIES
- Net
    
    
    678,100
    
    
    
    571,000PROPERTY AND EQUIPMENTat cost (less accumulated depreciation:11/30/04 - $1,769,800; 2/29/04 - $1,690,500)
    
    
    2,434,300
    
    
    
    2,046,100DEFERRED INCOME TAXES
    
    
    146,100
    
    
    
    56,800$
    17,846,900
    
    
    $
    19,087,000LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Note payable to bank
    
    $
    695,000
    
    
    $
    394,000Accounts payable
    
    
    3,521,000
    
    
    
    3,719,400Accrued salaries and commissions
    
    
    763,300
    
    
    
    445,500Income taxes
    
    
    67,500
    
    
    
    Other current liabilities
    
    
    380,000
    
    
    
    310,200Total current liabilities
    
    
    5,426,800
    
    
    
    4,869,100COMMITMENTSSHAREHOLDERS EQUITY:Common Stock, $.20 par value (Authorized
8,000,000 shares; Issued 5,762,340
and 5,596,340 shares; Outstanding
3,805,104 and 4,025,773 shares)
    
    
    1,152,500
    
    
    
    1,119,300Capital in excess of par value
    
    
    6,214,400
    
    
    
    5,349,900Retained earnings
    
    
    15,037,300
    
    
    
    13,435,10022,404,200
    
    
    
    19,904,300Less treasury shares, at cost
    
    
    (9,984,100
    )
    
    
    (5,686,400
    )12,420,100
    
    
    
    14,217,900$
    17,846,900
    
    
    $
    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 November 30,
    
    
    Nine Months Ended November 30,2004
    
    
    2003
    
    
    2004
    
    
    2003REVENUES:Gross sales
    
    $
    11,528,100
    
    
    $
    12,420,300
    
    
    $
    31,763,800
    
    
    $
    31,897,900Less discounts & allowances
    
    
    (2,834,300
    )
    
    
    (2,994,100
    )
    
    
    (8,650,000
    )
    
    
    (9,033,300
    )Transportation revenue
    
    
    493,900
    
    
    
    550,500
    
    
    
    1,266,400
    
    
    
    1,269,600Net revenues
    
    
    9,187,700
    
    
    
    9,976,700
    
    
    
    24,380,200
    
    
    
    24,134,200COST OF SALES
    
    
    3,108,700
    
    
    
    3,350,300
    
    
    
    8,482,400
    
    
    
    8,507,400Gross margin
    
    
    6,079,000
    
    
    
    6,626,400
    
    
    
    15,897,800
    
    
    
    15,626,800OPERATING EXPENSES:Operating & selling
    
    
    1,837,700
    
    
    
    2,016,000
    
    
    
    4,967,400
    
    
    
    5,012,100Sales commissions
    
    
    2,526,700
    
    
    
    2,792,300
    
    
    
    6,277,900
    
    
    
    6,152,300General & administrative
    
    
    402,800
    
    
    
    406,700
    
    
    
    1,265,500
    
    
    
    1,262,900Interest
    
    
    21,500
    
    
    
    5,000
    
    
    
    51,100
    
    
    
    7,8004,788,700
    
    
    
    5,220,000
    
    
    
    12,561,900
    
    
    
    12,435,100OTHER INCOME
    
    
    7,800
    
    
    
    9,200
    
    
    
    23,300
    
    
    
    23,700EARNINGS BEFORE INCOME TAXES
    
    
    1,298,100
    
    
    
    1,415,600
    
    
    
    3,359,200
    
    
    
    3,215,400INCOME TAXES
    
    
    488,700
    
    
    
    544,500
    
    
    
    1,273,000
    
    
    
    1,224,000NET EARNINGS
    
    $
    809,400
    
    
    $
    871,100
    
    
    $
    2,086,200
    
    
    $
    1,991,400BASIC AND DILUTED EARNINGS
PER SHARE:Basic
    
    $
    0.21
    
    
    $
    0.22
    
    
    $
    0.53
    
    
    $
    0.51Diluted
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.50
    
    
    $
    0.46WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT
SHARES OUTSTANDING:Basic
    
    
    3,878,975
    
    
    
    3,974,715
    
    
    
    3,954,306
    
    
    
    3,933,728Diluted
    
    
    4,055,713
    
    
    
    4,322,308
    
    
    
    4,147,691
    
    
    
    4,292,120DIVIDENDS 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    409,569
    
    
    
    (4,382,400
    )
    
    
    (4,382,400
    )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
    
    
    
    
    
    
    
    
    
    
    318,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    318,500Dividends paid ($0.12/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (484,000
    )
    
    
    
    
    
    
    
    
    
    
    (484,000
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,086,200
    
    
    
    
    
    
    
    
    
    
    
    2,086,200BALANCE, NOV. 30, 2004
    
    
    5,762,340
    
    
    $
    1,152,500
    
    
    $
    6,214,400
    
    
    $
    15,037,300
    
    
    
    1,957,236
    
    
    $
    (9,984,100
    )
    
    $
    12,420,100
 See notes to condensed financial statements. 4




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EDUCATIONAL DEVELOPMENT CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended November 30,2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES
    
    $
    4,527,600
    
    
    $
    (782,200
    )CASH FLOWS
FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (481,500
    )
    
    
    (56,100
    )Net cash used in investing activities
    
    
    (481,500
    )
    
    
    (56,100
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under revolving credit agreement
    
    
    10,059,000
    
    
    
    6,790,000Payments under revolving credit agreement
    
    
    (9,758,000
    )
    
    
    (6,790,000
    )Cash received from exercise of stock options
    
    
    543,500
    
    
    
    171,400Cash received from sale of treasury stock
    
    
    120,400
    
    
    
    602,100Cash paid to acquire treasury stock
    
    
    (4,382,400
    )
    
    
    (376,300
    )Dividends paid
    
    
    (484,000
    )
    
    
    (394,000
    )Net cash provided by (used in) financing activities
    
    
    (3,901,500
    )
    
    
    3,200Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    144,600
    
    
    
    (835,100
    )Cash and Cash Equivalents, Beginning of Period
    
    
    260,500
    
    
    
    1,433,000Cash and Cash Equivalents, End of Period
    
    $
    405,100
    
    
    $
    597,900Supplemental Disclosure of Cash Flow Information:Cash paid for interest
    
    $
    47,700
    
    
    $
    6,700Cash paid for income taxes
    
    $
    959,700
    
    
    $
    1,081,500
 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 nine months ended
November 30, 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 nine months ended November 30, 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%
(4.75% at November 30, 2004) and borrowings are collateralized by substantially all the assets of
the Company. At November 30, 2004 the Company had $695,000 outstanding. Available
credit under the revolving credit agreement was $2,805,000 at November 30, 2004. Note 3 - Inventories consist of the following: November 30, 2004
    
    
    February 29, 2004Current:Book Inventory
    
    $
    11,575,700
    
    
    $
    13,824,600Reserve for Obsolescence
    
    
    (84,000
    )
    
    
    (29,400
    )Inventories net  current
    
    $
    11,491,700
    
    
    $
    13,795,200Non-current:Book Inventory
    
    $
    943,500
    
    
    $
    823,800Reserve for Obsolescence
    
    
    (265,400
    )
    
    
    (252,800
    )Inventories  non-current
    
    $
    678,100
    
    
    $
    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 $2.4
million and $3.5 million for the three months ended November 30, 2004 and 2003, respectively.
Total inventory purchases from all suppliers were approximately $3.1 million and $4.6 million for
the three months ended November 30, 2004 and 2003, respectively. Purchases from this England based publishing company were approximately $5.8 million and $10.0
million for the nine months ended November 30, 2004 and 2003, respectively. Total inventory
purchases from all suppliers were approximately $7.9 million and $12.3 million for the nine months
ended November 30, 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 November 30,
    
    
    Nine Months Ended November 30,2004
    
    

2003
    
    
    2004
    
    
    2003Net Earnings
    
    $
    809,400
    
    
    $
    871,100
    
    
    $
    2,086,200
    
    
    $
    1,991,400Basic EPS:Weighted Average Shares Outstanding
    
    
    3,878,975
    
    
    
    3,974,715
    
    
    
    3,954,306
    
    
    
    3,933,728Basic EPS
    
    $
    0.21
    
    
    $
    0.22
    
    
    $
    0.53
    
    
    $
    0.51Diluted EPS:Weighted Average Shares Outstanding
    
    
    3,878,975
    
    
    
    3,974,715
    
    
    
    3,954,306
    
    
    
    3,933,728Assumed Exercise of Options
    
    
    176,738
    
    
    
    347,593
    
    
    
    193,385
    
    
    
    358,392Shares Applicable to Diluted Earnings
    
    
    4,055,713
    
    
    
    4,322,308
    
    
    
    4,147,691
    
    
    
    4,292,120Diluted EPS
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.50
    
    
    $
    0.46
 Since March 1, 1998, when the Company began its stock repurchase program, 2,251,145 shares of the
Companys common stock at a total cost of $11,007,789 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 November 30,
2004. There were 1,000 options granted in the nine-month period ended November 30, 2004. Three Months Ended November 30,
    
    
    Nine Months Ended November 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Net Earnings  as reported
    
    $
    809,400
    
    
    $
    871,100
    
    
    $
    2,086,200
    
    
    $
    1,991,400Deduct: 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
    
    $
    809,400
    
    
    $
    871,100
    
    
    $
    2,082,700
    
    
    $
    1,991,400Earnings per share  as reported:Basic
    
    $
    0.21
    
    
    $
    0.22
    
    
    $
    0.53
    
    
    $
    0.51Diluted
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.50
    
    
    $
    0.46Earnings per share  pro forma:Basic
    
    $
    0.21
    
    
    $
    0.22
    
    
    $
    0.53
    
    
    $
    0.51Diluted
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.50
    
    
    $
    0.46
 In December 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment,which is effective for the Company beginning
September 1, 2005. Statement 123(R) will require the fair value of all stock option awards issued
to employees of the Company on or after September 1, 2005 to be recorded as an expense over the
related vesting period. Statement 123(R) also requires the recognition of compensation expense for
the fair value of any unvested stock option awards outstanding at the date of adoption. The
Company is evaluating these new regulations, but expects no impact upon adoption relating to
outstanding options since all awards under the existing incentive stock option plan are fully
vested at the date of grant. 7




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EDUCATIONAL DEVELOPMENT CORPORATION Note 6 Freight costs and handling costs incurred are included in operating & selling
expenses and were $601,700 and $607,900 for the three months ended November 30, 2004 and 2003,
respectively. Freight costs and handling costs were $1,587,200 and $1,522,100 for the nine months
ended November 30, 2004 and 2003, respectively. 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 nine months ended November 30, 2004 and
2003 is set forth below: Publishing
    
    
    UBAH
    
    
    Other
    
    
    
    
    
    
    TotalThree Months Ended November 30, 2004Net revenues from external customers
    
    $
    1,651,800
    
    
    $
    7,535,900
    
    
    $
    
    
    
    
    
    
    
    $
    9,187,700Earnings before income taxes
    
    $
    562,400
    
    
    $
    1,691,200
    
    
    $
    (  955,500
    )
    
    
    
    
    
    $
    1,298,100Three Months Ended November 30, 2003Net revenues from external customers
    
    $
    1,776,400
    
    
    $
    8,200,300
    
    
    $
    
    
    
    
    
    
    
    $
    9,976,700Earnings before income taxes
    
    $
    581,100
    
    
    $
    1,740,300
    
    
    $
    (  905,800
    )
    
    
    

    
    
    $
    1,415,600Nine Months Ended November 30, 2004Net revenues from external customers
    
    $
    5,603,600
    
    
    $
    18,776,600
    
    
    $
    
    
    
    
    
    
    
    $
    24,380,200Earnings before income taxes
    
    $
    1,885,200
    
    
    $
    4,265,400
    
    
    $
    (2,791,400
    )
    
    
    
    
    
    $
    3,359,200Nine Months Ended November 30, 2003Net revenues from external customers
    
    $
    5,919,900
    
    
    $
    18,214,300
    
    
    $
    
    
    
    
    
    
    
    $
    24,134,200Earnings before income taxes
    
    $
    2,002,500
    
    
    $
    3,822,500
    
    
    $
    (2,609,600
    )
    
    
    
    
    
    $
    3,215,400
 
 ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS 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 November 30,
    
    
    Nine Months Ended November 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    33.8
    %
    
    
    33.6
    %
    
    
    34.8
    %
    
    
    35.3
    %Gross margin
    
    
    66.2
    %
    
    
    66.4
    %
    
    
    65.2
    %
    
    
    64.7
    %Operating expenses:Operating & selling
    
    
    20.0
    %
    
    
    20.2
    %
    
    
    20.4
    %
    
    
    20.8
    %Sales commissions
    
    
    27.5
    %
    
    
    28.0
    %
    
    
    25.7
    %
    
    
    25.5
    %General & administrative
    
    
    4.4
    %
    
    
    4.1
    %
    
    
    5.2
    %
    
    
    5.2
    %Interest
    
    
    0.3
    %
    
    
    0.0
    %
    
    
    0.2
    %
    
    
    0.0
    %Total operating expenses
    
    
    52.2
    %
    
    
    52.3
    %
    
    
    51.5
    %
    
    
    51.5
    %Other income
    
    
    0.1
    %
    
    
    0.1
    %
    
    
    0.1
    %
    
    
    0.1
    %Earnings before income taxes
    
    
    14.1
    %
    
    
    14.2
    %
    
    
    13.8
    %
    
    
    13.3
    %Income taxes
    
    
    5.3
    %
    
    
    5.5
    %
    
    
    5.2
    %
    
    
    5.0
    %Net earnings
    
    
    8.8
    %
    
    
    8.7
    %
    
    
    8.6
    %
    
    
    8.3
    %
 Operating Results for the Three Months Ended November 30, 2004 The Company had income before income taxes of $1,298,100 for the three months ended November 30,
2004 compared with $1,415,600 for the three months ended November 30, 2003. Revenues Three Months Ended November 30,
    
    
    $ Increase/ % Increase/2004
    
    
    2003
    
    
    (decrease)
    
    
    (decrease)Gross sales
    
    $
    11,528,100
    
    
    $
    12,420,300
    
    
    $
    (892,200
    )
    
    
    (7.2
    %)Less discounts & allowances
    
    
    (2,834,300
    )
    
    
    (2,994,100
    )
    
    
    159,800
    
    
    
    5.3
    %Transportation revenue
    
    
    493,900
    
    
    
    550,500
    
    
    
    (56,600
    )
    
    
    (10.3
    %)Net revenues
    
    $
    9,187,700
    
    
    $
    9,976,700
    
    
    $
    (789,000
    )
    
    
    (7.9
    %)
 The UBAH Divisions gross sales decreased 7.1% during the three month period ending November 30,
2004 when compared with the same quarterly period a year ago. The Company attributes this decrease
primarily to a 6.5% decrease in the number of consultants who made sales during the quarter. The
Publishing Divisions gross sales decreased 7.4% during the three month period ending November 30,
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 third quarter last year but did not place a
similar order during the third quarter this year, leading to a 34% decline in sales by the
Publishing Divisions outside sales representatives. The Publishing Divisions house accounts were
down 1.4% for the quarter and the inside sales force accounts were down 3.0%. The UBAH Divisions discounts and allowances were $1,129,000 and $1,137,700 for the quarterly
periods ended November 30, 2004 and 2003, respectively. The Publishing Divisions discounts and
allowances were $1,705,300 and $1,856,400 for the quarterly periods ended November 30, 2004 and
2003, respectively. The UBAH Divisions discounts and allowances were 13.8% and 12.9% of UBAHs
gross sales for the quarterly periods ended November 30, 2004 and 2003, respectively, due to normal
fluctuations in promotional programs. The Publishing Divisions discounts and allowances were
51.1% and 51.2% of Publishings gross sales for the quarterly periods ended November 30, 2004 and
2003, respectively The decrease in transportation revenues for the three months ended November 30, 2004 is the result
of decreased sales in the UBAH Division. 9




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION Expenses Three Months Ended November 30,
    
    
    $ Increase/
    
    
    % Increase/2004
    
    
    2003
    
    
    (decrease)
    
    
    (decrease)Cost of sales
    
    $
    3,108,700
    
    
    $
    3,350,300
    
    
    $
    (241,600
    )
    
    
    (7.2
    %)Operating & selling
    
    
    1,837,700
    
    
    
    2,016,000
    
    
    
    (178,300
    )
    
    
    (8.8
    %)Sales commissions
    
    
    2,526,700
    
    
    
    2,792,300
    
    
    
    (265,600
    )
    
    
    (9.5
    %)General & administrative
    
    
    402,800
    
    
    
    406,700
    
    
    
    (3,900
    )
    
    
    (1.0
    %)Interest
    
    
    21,500
    
    
    
    5,000
    
    
    
    16,500
    
    
    
    330.0
    %Other income
    
    
    (7,800
    )
    
    
    (9,200
    )
    
    
    1,400
    
    
    
    15.2
    %Total
    
    $
    7,889,600
    
    
    $
    8,561,100
    
    
    $
    (671,500
    )
    
    
    7.8
    %
 Cost of sales decreased approximately 7.2% for the three months ended November 30, 2004 when
compared with the three months ended November 30, 2003. The 7.2% decrease in cost of sales is
consistent with the percent decrease in gross sales of approximately 7.2% for the same two
three-month periods. 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 Companys cost of its
products is 25% to 32% of the gross sales price, depending upon the product. Cost of sales as a
percentage of gross sales for the three months ended November 30, 2004 and 2003 was 27.0% for each
period. Operating and selling expenses decreased 8.8% for the three months ended November 30, 2004 in part
due a decrease in damaged goods returned for both divisions combined of $47,400. Payroll and
benefit costs for both divisions combined increased $19,600, the result of annual wage increases
and the addition of employees. The UBAH Division also incurred decreases of $136,600 in customer
sales incentive costs, primarily the direct result of decreased sales. Reductions in other items
aggregating $13,900 contributed to the decrease in operating and selling expenses. Operating and
selling expenses as a percentage of net revenues were 20.0% for the three months ended November 30,
2004 and 20.2% for the three months ended November 30, 2003. Sales commissions in the Publishing Division decreased 29.3% for the three months ended November
30, 2004. Publishing Division sales commissions are paid on net sales and were 1.1% of net sales
for the three months ended November 30, 2004 and 1.5% for the three months ended November 30, 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 decreased 9.3% for the three months
ended November 30, 2004, the direct result of decreased sales in this division. UBAH Division
sales commissions are paid on retail sales and were 38.5% of retail sales for the three months
ended November 30, 2004 and 39.3% of retail sales for the three months ended November 30, 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 November 30, 2004 decreased 1.0%
over the same period last year. General and administrative expenses as a percentage of net
revenues were 4.4% for the three months ended November 30 , 2004 and 4.1% for the three
months ended November 30, 2003. Interest expense increased $16,500 due to increased borrowings throughout the three months ended
November 30, 2004. Interest expense as a percentage of net revenues was 0.3% for the three months
ended November 30, 2004 and was nominal for the three months ended November 30, 2003. The Companys effective tax rate was 37.6% and 38.5% for the quarterly periods ended November 30,
2004 and 2003, respectively. Operating Results for the Nine Months Ended November 30, 2004 The Company had income before income taxes of $3,359,200, for the nine months ended November 30,
2004 compared with $3,215,400 for the nine months ended November 30, 2003. 10




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION Revenues Nine Months Ended November 30,
    
    
    $ Increase/
    
    
    % Increase/2004
    
    
    2003
    
    
    (decrease)
    
    
    (decrease)Gross sales
    
    $
    31,763,800
    
    
    $
    31,897,900
    
    
    $
    (134,100
    )
    
    
    ( 0.4
    %)Less discounts & allowances
    
    
    ( 8,650,000
    )
    
    
    ( 9,033,300
    )
    
    
    383,300
    
    
    
    4.2
    %Transportation revenue
    
    
    1,266,400
    
    
    
    1,269,600
    
    
    
    (3,200
    )
    
    
    ( 0.3
    %)Net revenues
    
    $
    24,380,200
    
    
    $
    24,134,200
    
    
    $
    246,000
    
    
    
    1.0
    %
 The UBAH Divisions gross sales increased 2.9% during the nine month period ending November 30,
2004 when compared with the same period a year ago. The Company attributes this increase primarily
to a 5.0% increase in the average order size and an 18.9% increase in book fair sales. The
Publishing Divisions gross sales decreased 5.7% during the nine month period ending November 30,
2004 when compared with the same period a year ago. The Company attributes this decline to a major
customer who placed large orders in the second and third quarters last year but did not place a
similar order during the second and third quarters this year, leading to a 24.0% decline in sales
by the Publishing Divisions outside sales representatives for the nine months ended November 30,
2004. Offsetting this decline was a 0.3% increase in sales by the Divisions inside sales force
and a 2.3% increase in sales from the house accounts. The UBAH Divisions discounts and allowances were $2,752,000 and $2,750,300 for the nine months
ended November 30, 2004 and 2003, respectively. The Publishing Divisions discounts and allowances
were $5,898,000 and $6,283,000 for the nine months ended November 30, 2004 and 2003, respectively.
The UBAH Divisions discounts and allowances were 13.6% and 14.0% of UBAHs gross sales for the
nine months ended November 30, 2004 and 2003, respectively. The Publishing Divisions discounts
and allowances were 51.4% and 51.6% of Publishings gross sales for the nine months ended November
30, 2004 and 2003, respectively. The decrease in transportation revenues for the nine months ended November 30, 2004 is the result
of decreased sales in the UBAH Division.  Expenses Nine Months Ended November 30,
    
    
    $ Increase/
    
    
    % Increase/2004
    
    
    2003
    
    
    (decrease)
    
    
    (decrease)Cost of sales
    
    $
    8,482,400
    
    
    $
    8,507,400
    
    
    $
    (25,000
    )
    
    
    (   0.3
    %)Operating & selling
    
    
    4,967,400
    
    
    
    5,012,100
    
    
    
    (44,700
    )
    
    
    (   0.9
    %)Sales commissions
    
    
    6,277,900
    
    
    
    6,152,300
    
    
    
    125,600
    
    
    
    2.0
    %General & administrative
    
    
    1,265,500
    
    
    
    1,262,900
    
    
    
    2,600
    
    
    
    0.2
    %Interest
    
    
    51,100
    
    
    
    7,800
    
    
    
    43,300
    
    
    
    555.1
    %Other income
    
    
    (   23,300
    )
    
    
    (   23,700
    )
    
    
    400
    
    
    
    1.7
    %Total
    
    $
    21,021,000
    
    
    $
    20,918,800
    
    
    $
    102,200
    
    
    
    0.5
    %
 Cost of sales decreased approximately 0.3% for the nine months ended November 30, 2004 when
compared with the nine months ended November 30, 2003. The 0.3% decrease in cost of sales is
consistent with the percent decrease in gross sales of approximately 0.4% for the same two
nine-month periods. 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 Companys cost of its
products is 25% to 32% of the gross sales price, depending upon the product. Cost of sales as a
percentage of gross sales for the nine months ended November 30, 2004 and 2003 was 26.7% for each
period. Operating and selling expenses decreased 0.9% for the nine months ended November 30, 2004 in part
due to a decrease in damaged returns for both divisions combined of $58,500. Payroll and benefit
costs for both divisions increased $73,600, the result of annual wage increases and the addition of
employees. Freight costs and handling costs for both divisions increased $65,100, which can be
attributed to tariff increases. The UBAH Division incurred a decrease of $138,600 in customer
sales incentive costs which can be directly attributable to the decrease in sales. Increases in
other items aggregating $13,700 helped offset the decrease in operating and selling expenses.
Operating and selling expenses as a percentage of net revenues were 20.4% for the nine months ended
November 30, 2004 and 20.8% for the nine months ended November 30, 2003. 11




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EDUCATIONAL DEVELOPMENT CORPORATION Sales commissions in the Publishing Division decreased 21.4% for the nine months ended November 30,
2004. Publishing Division sales commissions are paid on net sales and were 1.2% of net sales for
the nine months ended November 30, 2004 and 1.4% for the nine months ended November 30, 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 2.3% for the nine months ended
November 30, 2004, the direct result of increased sales in this division. UBAH Division sales
commissions are paid on retail sales and were 38.5% of retail sales for the nine months ended
November 30, 2004 and 39.0% of retail sales for the nine months ended November 30, 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 nine months ended November 30, 2004 increased 0.2% over
the same period last year. General and administrative expenses as a percentage of net revenues were
5.2% for both the nine month periods ended November 30, 2004 and 2003. Interest expense increased $43,300 due to increased borrowings throughout the nine months ended
November 30, 2004. Interest expense as a percentage of net revenues was 0.2% for the nine months
ended November 30, 2004 and was nominal for the nine months ended November 30, 2003. The Companys effective tax rate was 37.9% and 38.1% for the nine months ended November 30, 2004
and 2003, respectively. Liquidity and Capital Resources The Companys primary uses of cash are for working capital, purchases of treasury stock under the
stock buyback program, the annual dividend and capital expenditures associated with the
construction of additional warehouse space. The Company utilizes operating cash flows and 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 nine months of fiscal year 2005 the Company repurchased 409,569 shares of its common
stock under the stock repurchase program at a cost of $4,382,400. The Companys construction of a
22,000 square foot addition to its warehouse is completed and is now being utilized in the
Companys normal operations. The Companys primary source of liquidity is cash generated from operations. During the first nine
months of fiscal year 2005 the Company experienced a positive cash flow from operating activities
of $4,527,600. Cash flows from operating activities was increased by a reduction in inventory of
$2,196,400 and was reduced by an increase in accounts receivable of $401,400. 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 $318,500 as a result of the benefit obtained from
the exercise of 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 $481,500. The principal use of cash in investing activities
was for progress payments, totaling $404,900, 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 $9,100 in other additions. The Company estimates that cash used in investing
activities for fiscal year 2005 will be less than $750,000. This would consist of software and
hardware enhancements to the Companys existing data processing equipment, property improvements
and additional warehouse equipment. Cash used in financing activities was $3,901,500, comprised of $4,382,400 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 $301,000 received from borrowings under
the bank credit agreement. As of November 30, 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% (4.75% at November 30,
2004) and borrowings are collateralized by substantially all the assets of the Company. At November
30, 2004 the Company had $695,000 outstanding. Available credit under the revolving credit
agreement was $2,805,000 at November 30, 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 $63,000 as of November 30, 2004 and $101,000 as of 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 $69,800 and $49,900 as of November 30, 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
$943,500 and $823,800 at November 30, 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 November 30, 2004 and
February 29, 2004. Management has estimated reserves for both current and noncurrent inventory of
$349,400 and $282,200 as of November 30, 2004 and February 29, 2004, respectively. 13




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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. New Accounting Standard In December 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment,which is effective for the Company beginning
September 1, 2005. Statement 123(R) will require the fair value of all stock option awards issued
to employees of the Company on or after September 1, 2005 to be recorded as an expense over the
related vesting period. Statement 123(R) also requires the recognition of compensation expense for
the fair value of any unvested stock option awards outstanding at the date of adoption. The
Company is evaluating these new regulations, but expects no impact upon adoption relating to
outstanding options since all awards under the existing incentive stock option plan are fully
vested at the date of grant. 
 Item 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKThe 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 January 14, 2005 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 January 14, 2005, 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 January 14, 2005 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 January 14, 2005, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
furnished herewith. 14




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION (b) Reports on Form 8-K A Form 8-K was filed on October 15, 2004 to submit to the Securities and Exchange Commission a
press release announcing earnings and sales for the second quarter of fiscal year 2005. The press
release contained the following financial information for the second quarter of fiscal year 2005
and the second quarter of fiscal year 2004: (1) net sales; (2) pre tax earnings; (3) income taxes;
(4) net earnings; (5) earnings per share. 
 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:January 14, 2005
    
    By
    
    /s/ Randall W. WhiteRandall W. WhitePresident
 15




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EDUCATIONAL DEVELOPMENT CORPORATION 
 EXHIBIT INDEXExhibit No.
    
    
    
    Description
  31.1
    Certification of Randall W. White, President and Chief Executive Officer of Educational
Development Corporation, dated January 14, 2005, 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 January 14, 2005, 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 January 14, 2005, 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 January 14, 2005, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
furnished herewith.