##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 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 May 31, 2005 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, including area code (918) 622-4522 Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
þ                No o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act) Yes o                No þ As of July 8, 2005 there were 3,738,133 shares of Educational Development Corporation Common
Stock, $0.20 par value outstanding.




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONITEM 1ITEM 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 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSItem 6 EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESEXHIBIT INDEXCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906    Table of Contents  EDUCATIONAL DEVELOPMENT CORPORATION 
 PART I. FINANCIAL INFORMATION 
 ITEM 1 CONDENSED BALANCE SHEETS May 31, 2005
    
    
    February 28, 2005(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    268,000
    
    
    $
    364,000Accounts receivable  (less
allowances for doubtful accounts
and returns: 05/31/05 - $138,200;
2/28/05 - $140,400)
    
    
    2,634,700
    
    
    
    2,442,400Inventories  Net
    
    
    11,982,000
    
    
    
    11,749,200Prepaid expenses and other assets
    
    
    142,600
    
    
    
    103,400Income taxes receivable
    
    
    
    
    
    
    53,800Deferred income taxes
    
    
    52,800
    
    
    
    44,800Total current assets
    
    
    15,080,100
    
    
    
    14,757,600INVENTORIES  Net
    
    
    644,400
    
    
    
    723,300PROPERTY AND EQUIPMENTat cost (less accumulated depreciation: 05/31/05
- $1,836,500; 2/28/05 - $1,803,300)
    
    
    2,400,600
    
    
    
    2,402,800DEFERRED INCOME TAXES
    
    
    82,900
    
    
    
    96,800$
    18,208,000
    
    
    $
    17,980,500LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Note payable to bank
    
    $
    510,000
    
    
    $
    1,428,000Accounts payable
    
    
    3,620,200
    
    
    
    3,612,900Accrued salaries and commissions
    
    
    480,800
    
    
    
    463,400Income taxes
    
    
    324,200
    
    
    
    Dividends payable
    
    
    560,700
    
    
    
    Other current liabilities
    
    
    394,300
    
    
    
    344,100Total current liabilities
    
    
    5,890,200
    
    
    
    5,848,400COMMITMENTSSHAREHOLDERS EQUITY:Common Stock, $.20 par value (Authorized
8,000,000 shares; Issued 5,769,840 (5/31/05)
and 5,762,340 shares (02/28/05); Outstanding
3,738,133 (5/31/05) and 3,735,513 (2/28/05) shares)
    
    
    1,154,000
    
    
    
    1,152,500Capital in excess of par value
    
    
    7,532,500
    
    
    
    7,469,400Retained earnings
    
    
    14,398,600
    
    
    
    14,214,10023,085,100
    
    
    
    22,836,000Less treasury shares, at cost
    
    
    (10,767,300
    )
    
    
    (10,703,900
    )12,317,800
    
    
    
    12,132,100$
    18,208,000
    
    
    $
    17,980,500
 See notes to condensed financial statements. 2




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION CONDENSED STATEMENTS OF EARNINGS (UNAUDITED) Three Months Ended May 31,2005
    
    
    2004REVENUES:Gross sales
    
    $
    10,994,400
    
    
    $
    11,111,100Less discounts & allowances
    
    
    (3,111,500
    )
    
    
    (2,954,000
    )Transportation revenue
    
    
    343,800
    
    
    
    396,200Net revenues
    
    
    8,226,700
    
    
    
    8,553,300COST OF SALES
    
    
    3,004,800
    
    
    
    3,003,900Gross margin
    
    
    5,221,900
    
    
    
    5,549,400OPERATING EXPENSES:Operating & selling
    
    
    1,670,800
    
    
    
    1,683,400Sales commissions
    
    
    1,917,100
    
    
    
    2,110,900General & administrative
    
    
    424,700
    
    
    
    416,600Interest
    
    
    14,700
    
    
    
    9,0004,027,300
    
    
    
    4,219,900OTHER INCOME
    
    
    7,900
    
    
    
    6,200EARNINGS BEFORE INCOME TAXES
    
    
    1,202,500
    
    
    
    1,335,700INCOME TAXES
    
    
    457,300
    
    
    
    511,300NET EARNINGS
    
    $
    745,200
    
    
    $
    824,400BASIC AND DILUTED EARNINGS
PER SHARE:Basic
    
    $
    0.20
    
    
    $
    0.21Diluted
    
    $
    0.19
    
    
    $
    0.19WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:Basic
    
    
    3,738,133
    
    
    
    4,001,449Diluted
    
    
    3,901,588
    
    
    
    4,230,286DIVIDENDS DECLARED PER
COMMON SHARE
    
    $
    0.15
    
    
    $
    0.12
 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, 2005
    
    
    5,762,340
    
    
    $
    1,152,500
    
    
    $
    7,469,400
    
    
    $
    14,214,100
    
    
    
    2,026,827
    
    
    $
    (10,703,900
    )
    
    $
    12,132,100Purchases of treasury
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,500
    
    
    
    (77,300
    )
    
    
    (77,300
    )Sales of treasury stock
    
    
    
    
    
    
    
    
    
    
    7,300
    
    
    
    
    
    
    
    (2,620
    )
    
    
    13,900
    
    
    
    21,200Exercise of options at
$6.00/share
    
    
    7,500
    
    
    
    1,500
    
    
    
    43,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,000Tax benefit of stock options
    
    

    
    
    
    
    
    
    
    
    12,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,300Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (560,700
    )
    
    
    
    
    
    
    
    
    
    
    (560,700
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    745,200
    
    
    
    
    
    
    
    
    
    
    
    745,200BALANCE, MAY 31, 2005
    
    
    5,769,840
    
    
    $
    1,154,000
    
    
    $
    7,532,500
    
    
    $
    14,398,600
    
    
    
    2,031,707
    
    
    $
    (10,767,300
    )
    
    $
    12,317,800
 See notes to condensed financial statements. 4




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EDUCATIONAL DEVELOPMENT CORPORATION CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended May 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES
    
    $
    851,800
    
    
    $
    371,700CASH FLOWS FROM INVESTING ACTIVITIES -Purchases of property and equipment
    
    
    (31,000
    )
    
    
    (314,100
    )Net cash used in investing activities
    
    
    (31,000
    )
    
    
    (314,100
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings under revolving credit agreement
    
    
    3,159,000
    
    
    
    4,123,000Payments under revolving credit agreement
    
    
    (4,077,000
    )
    
    
    (3,515,000
    )Cash received from exercise of stock options
    
    
    45,000
    
    
    
    498,500Tax benefit of stock options exercised
    
    
    12,300
    
    
    
    290,400Cash received from sale of treasury stock
    
    
    21,200
    
    
    
    104,400Cash paid to acquire treasury stock
    
    
    (77,300
    )
    
    
    (1,767,600
    )Net cash used in financing activities
    
    
    (916,800
    )
    
    
    (266,300
    )Net Decrease in Cash and Cash Equivalents
    
    
    (96,000
    )
    
    
    (208,700
    )Cash and Cash Equivalents, Beginning of Period
    
    
    364,000
    
    
    
    260,500Cash and Cash Equivalents, End of Period
    
    $
    268,000
    
    
    $
    51,800Supplemental Disclosure of Cash Flow Information:Cash paid for interest
    
    $
    17,700
    
    
    $
    7,100Cash paid for income taxes
    
    $
    61,200
    
    
    $
    42,500Supplemental Disclosure of Non-Cash Financing Activities -Dividend declared
    
    $
    560,700
    
    
    $
    484,000
 See notes to condensed financial statements. 5




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EDUCATIONAL DEVELOPMENT CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS Note 1  The information shown with respect to the three months ended May 31, 2005 and
2004, which is unaudited, includes all adjustments which in the opinion of Management are
considered to be necessary for a fair presentation of earnings for such periods. The adjustments
reflected in the financial statements represent normal recurring adjustments. The results of
operations for the three months ended May 31, 2005 and 2004, 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 28, 2005. Certain reclassifications have been made to the fiscal 2005 financial statements to conform with
the fiscal 2006 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% (5.75% at May 31, 2005) and borrowings are collateralized by substantially all the assets of
the Company. At May 31, 2005 the Company had $510,000 outstanding. Available credit under the
revolving credit agreement was $2,990,000 at May 31, 2005. This agreement was renewed under
similar terms through June 30, 2006. Note 3  Inventories consist of the following: May 31, 2005
    
    
    February 28, 2005Current:Book inventory
    
    $
    12,028,000
    
    
    $
    11,785,700Inventory valuation allowance
    
    
    (46,000
    )
    
    
    (36,500
    )Inventories net  current
    
    $
    11,982,000
    
    
    $
    11,749,200Non-current:Book inventory
    
    $
    992,500
    
    
    $
    1,111,700Inventory valuation allowance
    
    
    (348,100
    )
    
    
    (388,400
    )Inventories  non-current
    
    $
    644,400
    
    
    $
    723,300
 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 $3.0
million and $1.3 million for the three months ended May 31, 2005 and 2004, respectively. Total
inventory purchases from all suppliers were approximately $3.6 million and $1.8 million for the
three months ended May 31, 2005 and 2004, 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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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION The computation of weighted average common and common equivalent shares used in the calculation of
basic and diluted earnings per share (EPS) is shown below. Three Months Ended May 31,2005
    
    
    2004Net Earnings
    
    $
    745,200
    
    
    $
    824,400Basic EPS:Weighted Average Shares Outstanding
    
    
    3,738,133
    
    
    
    4,001,449Basic EPS
    
    $
    0.20
    
    
    $
    0.21Diluted EPS:Weighted Average Shares Outstanding
    
    
    3,738,133
    
    
    
    4,001,449Assumed Exercise of Options
    
    
    163,455
    
    
    
    228,837Shares Applicable to Diluted Earnings
    
    
    3,901,588
    
    
    
    4,230,286Diluted EPS
    
    $
    0.19
    
    
    $
    0.19
 Since March 1, 1998, when the Company began its stock repurchase program, 2,328,436 shares of the
Companys common stock at a total cost of $11,805,937 have been acquired. The Board of Directors
has authorized purchasing up to 2,500,000 shares as market conditions warrant. Note 5  In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (revised 2004) Share Based Payment. This
Statement replaces SFAS No. 123, Accounting for Stock Compensation, and supersedes Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. In the fourth
quarter of fiscal year 2005, the Company early adopted SFAS No. 123R which eliminates the
alternative of applying the intrinsic value measurement provision of APB 25 to stock compensation
awards and requires that share-based payment transactions with employees, such as stock options and
restricted stock, be measured at fair value and recognized as compensation expense over the vesting
period. The Company adopted SFAS No. 123R on the modified retrospective application method to all
prior years for which SFAS No. 123R was effective. For the Company, this began with its fiscal
year ended February 28, 1997. There were no stock options granted during the quarter ended May 31,
2005. Note 6 Freight costs and handling costs incurred are included in operating & selling
expenses and were $533,300 and $505,000 for the three months ended May 31, 2005 and 2004,
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 earnings (loss) before income taxes of the segments, which
is defined as segment net sales reduced by direct cost of sales and direct expenses. Corporate
expenses, depreciation, interest expense and income taxes are not allocated to the segments, but
are listed in the other column. Corporate expenses include the executive department, accounting
department, information services department, general office management and building facilities
management. The Companys assets and liabilities are not allocated on a segment basis. 7




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EDUCATIONAL DEVELOPMENT CORPORATION Information by industry segment for the three months ended May 31, 2005 and 2004 is set forth
below: Publishing
    
    
    UBAH
    
    
    Other
    
    
    TotalThree Months Ended May 31, 2005Net revenues from external customers
    
    $
    2,160,100
    
    
    $
    6,066,600
    
    
    $
    
    
    
    $
    8,226,700Earnings before income taxes
    
    $
    769,500
    
    
    $
    1,343,000
    
    
    $
    (  910,000
    )
    
    $
    1,202,500Three Months Ended May 31, 2004Net revenues from external customers
    
    $
    2,018,300
    
    
    $
    6,535,000
    
    
    $
    
    
    
    $
    8,553,300Earnings before income taxes
    
    $
    741,600
    
    
    $
    1,492,700
    
    
    $
    (  898,600
    )
    
    $
    1,335,700
 
 ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Factors Affecting Forward Looking Statements This Quarterly Report on Form 10-Q, including the documents incorporated herein by reference,
contains certain forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These
statements are not historical facts but are expectations or projections based on certain
assumptions and analyses made by our senior management in light of their experience and perception
of historical trends, current conditions, expected future developments and other factors. Actual
events and results may be materially different 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. The words estimate, project, intend, expect, anticipate, believe and similar
expressions are intended to identify forward-looking statements. These forward-looking statements
are found at various places throughout this report and the documents incorporated in this report by
reference as well as in other written materials, press releases and oral statements issued by us or
on our behalf. We caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date that they are made. We do not undertake any obligation to publicly
release any revisions to these forward-looking statements to reflect events or circumstances after
the date of this report. 8




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EDUCATIONAL DEVELOPMENT CORPORATION 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. The following table sets forth consolidated statement of income data as a percentage of total
revenues. Three Months Ended May 31,2005
    
    
    2004Net revenues
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    36.5
    %
    
    
    35.1
    %Gross margin
    
    
    63.5
    %
    
    
    64.9
    %Operating expenses:Operating & selling
    
    
    20.3
    %
    
    
    19.7
    %Sales commissions
    
    
    23.3
    %
    
    
    24.7
    %General & administrative
    
    
    5.1
    %
    
    
    4.9
    %Interest
    
    
    0.2
    %
    
    
    0.1
    %Total operating expenses
    
    
    48.9
    %
    
    
    49.4
    %Other income
    
    
    0.1
    %
    
    
    0.1
    %Earnings before income taxes
    
    
    14.7
    %
    
    
    15.6
    %Income taxes
    
    
    5.6
    %
    
    
    6.0
    %Net earnings
    
    
    9.1
    %
    
    
    9.6
    %
 Operating Results for the Three Months Ended May 31, 2005 The Company had income before income taxes of $1,202,500 for the three months ended May 31, 2005
compared with $1,335,700 for the three months ended May 31, 2004. Revenues Three Months Ended May 31,
    
    
    $ Increase/
    
    
    % Increase/2005
    
    
    2004
    
    
    (decrease)
    
    
    (decrease)Gross sales
    
    $
    10,994,400
    
    
    $
    11,111,100
    
    
    $
    (116,700
    )
    
    
    (1.1
    %)Less discounts & allowances
    
    
    (3,111,500
    )
    
    
    (2,954,000
    )
    
    
    (157,500
    )
    
    
    5.3
    %Transportation revenue
    
    
    343,800
    
    
    
    396,200
    
    
    
    (52,400
    )
    
    
    (13.2
    %)Net revenues
    
    $
    8,226,700
    
    
    $
    8,553,300
    
    
    $
    (326,600
    )
    
    
    (3.8
    %)
 The UBAH Divisions gross sales decreased 6.6% or $463,400 during the three month period ending May
31, 2005 when compared with the same quarterly period a year ago. The Company attributes this
decrease primarily to a 3.2% decrease in the number of consultants who made sales during the
quarter ended May 31, 2005 when compared with the same period last year. Another contributing
factor to the decline in UBAHs gross sales was a 12.9% decline in the number of new recruits for
the three months ended May 31, 2005 versus May 31, 2004. The Publishing Divisions gross sales
increased 8.4% or $346,700 during the three month period ending May 31, 2005 when compared with the
same quarterly period a year ago. The Company attributes this to increased buying by the national
chains. 9




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EDUCATIONAL DEVELOPMENT CORPORATION The UBAH Divisions discounts and allowances were $784,600 and $830,300 for the quarterly periods
ended May 31, 2005 and 2004, respectively. The UBAH Division is a multi-level selling organization
that markets its products through independent sales representatives (consultants). Sales are made
to individual purchasers and school and public libraries. Most sales in the UBAH Division are at
retail. As a part of the UBAH Divisions marketing programs, discounts between 40% and 50% of
retail are offered on selected items at various times throughout the year. The discounts and
allowances in the UBAH Division will vary from year to year depending upon the marketing programs
in place during any given year. The UBAH Divisions discounts and allowances were 12.0% of UBAHs
gross sales for the quarterly period ended May 31, 2005 and 11.9% for the quarterly period ended
May 31, 2004. The Publishing Divisions discounts and allowances are a much larger percentage of gross sales than
discounts and allowances in the UBAH Division due to the different customer markets that each
division targets. The Publishing Divisions discounts and allowances were $2,326,900 and
$2,123,700 for the quarterly periods ended May 31, 2005 and 2004, respectively. The Publishing
Division sells to retail book chains, regional and local bookstores, toy and gift stores, school
supply stores and museums. To be competitive with other wholesale book distributors, the
Publishing Division sells at discounts between 48% and 55% of the retail price, based upon the
quantity of books ordered and the dollar amount of the order. The Publishing Divisions discounts
and allowances were 51.9% of Publishings gross sales for the quarterly period ended May 31, 2005
and 51.4% for the quarterly period ended May 31, 2004. The decrease in transportation revenues for the three months ended May 31, 2005 is the result of
decreased sales in the UBAH Division. Expenses Three Months Ended May 31,
    
    
    $ Increase/
    
    
    % Increase/2005
    
    
    2004
    
    
    (decrease)
    
    
    (decrease)Cost of sales
    
    $
    3,004,800
    
    
    $
    3,003,900
    
    
    $
    900
    
    
    
    0.0
    %Operating & selling
    
    
    1,670,800
    
    
    
    1,683,400
    
    
    
    (12,600
    )
    
    
    (0.7
    %)Sales commissions
    
    
    1,917,100
    
    
    
    2,110,900
    
    
    
    (193,800
    )
    
    
    (9.2
    %)General & administrative
    
    
    424,700
    
    
    
    416,600
    
    
    
    8,100
    
    
    
    1.9
    %Interest
    
    
    14,700
    
    
    
    9,000
    
    
    
    5,700
    
    
    
    63.3
    %Total
    
    $
    7,032,100
    
    
    $
    7,223,800
    
    
    $
    (191,700
    )
    
    
    (2.7
    %)
 Cost of sales increased nominally for the three months ended May 31, 2005 when compared with the
three months ended May 31, 2004. The nominal increase in cost of sales is inconsistent with the
decrease in gross sales of approximately $116,700 or 1.1% for the same two three-month periods. In
comparing the percentage decrease in gross sales with the flat cost of sales, consideration must be
given to the mix of products sold. During the three months ended May 31, 2005, sales of
consignment titles increased 95% or $186,900 over the same period last year. Consignment titles
cost the Company 34% of gross sales price. The Companys cost of products it sells from inventory
ranges from 25% to 34% of the gross sales price, depending upon the product. Cost of sales as a
percentage of gross sales for the three months ended May 31, 2005 was 27.3% and for the three
months ended May 31, 2004 was 27.0%. Cost of sales is the inventory cost of the product sold,
which includes the cost of the product itself and inbound freight charges. Purchasing and
receiving costs, inspection costs, warehousing costs, and other costs of our distribution network
are included in operating and selling expenses. These costs totaled $267,400 in the quarter ended
May 31, 2005 and $282,900 in the quarter ended May 31, 2004. Readers are advised to be cautious
when comparing our gross margins with the gross margins of other companies, since some companies
include the costs of their distribution networks in cost of sales. In addition to costs associated with our distribution network (noted above), operating and selling
costs include expenses of the Publishing Division, the UBAH Division and the order entry and
customer service functions. Operating and selling expenses decreased because of a $60,000
reduction in the estimated costs of the travel contests held by the UBAH Division, offset by higher
payroll and benefits costs of $13,800, increased postage costs of $11,700, increases in costs of
attending trade shows by the Publishing Division of $7,500 and increases in sales incentives
offered by the UBAH Division totaling $10,600. Payroll and benefits costs increased because of
additional personnel added to the order fulfillment areas and annual wage increases necessary to
keep the Company competitive in the local job market. Operating and selling expenses as a
percentage of gross sales were 15.2% for both quarterly periods ended May 31, 2005 and 2004. 10




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION Sales commissions in the Publishing Division increased 1.4% to $25,100 for the three months ended
May 31, 2005. Publishing Division sales commissions are paid on net sales and were 1.2% of net
sales for the three months ended May 31, 2005 and May 31, 2004. 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% to $1,892,000 for the three months ended May 31,
2005, the direct result of decreased sales in this division. UBAH Division sales commissions are
paid on retail sales and were 35.6% of retail sales for the three months ended May 31, 2005 and
37.4% of retail sales for the three months ended May 31, 2004. 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 costs include the executive department, accounting department,
information services department, general office management and building facilities management.
General and administrative expenses for the three months ended May 31, 2005 increased 1.9% over the
same period last year. Depreciation expense increased $6,100 due to the addition on the new
warehouse building. General and administrative expenses as a percentage of gross sales were 3.9%
for the three months ended May 31, 2005 and 3.7% for the three months ended May 31, 2004. Interest expense increased $5,700 due to increased borrowings throughout the three months ended May
31, 2005. Interest expense as a percentage of gross sales was 0.1% for the three months ended May
31, 2005 and was nominal for the three months ended May 31, 2004. The Companys effective tax rate was 38.0% and 38.3% for the quarterly periods ended May 31, 2005
and 2004, respectively. These rates are higher than the federal statutory rate due to state income
taxes. Liquidity and Capital Resources The Companys primary uses of cash are for purchases of treasury stock under the stock buyback
program and for working capital. The Company utilizes its bank credit facility to meet its
short-term cash needs. The Companys Board of Directors has adopted a stock repurchase plan in which the Company may
purchase up to 2,500,000 shares as market conditions warrant. Management believes the stock is
undervalued and when stock becomes available at an attractive price, the Company will utilize free
cash flow to repurchase shares. Management believes this enhances the value to the remaining
stockholders and that these repurchases will have no adverse effect on the Companys short-term and
long-term liquidity. The Company has a history of profitability and positive cash flow. The
Company can sustain planned growth levels with minimal capital requirements. Consequently, cash
generated from operations is used to liquidate any existing debt and then to repurchase shares
outstanding or capital distributions through dividends. The Company expects its ongoing cash flow
to exceed cash required to operate the business. During the first three months of fiscal year 2006
the Company repurchased 7,500 shares of its common stock under the stock repurchase program at a
cost of $77,300. The Companys primary source of liquidity is cash generated from operations. During the first
three months of fiscal year 2006 the Company experienced a positive cash flow from operating
activities of $851,800. Cash flows from operating activities was increased by increases of
$324,200 in income taxes payable and $74,900 in accounts payable and accrued expenses, offset by
increases in inventory of $153,900 and a net increase in accounts receivable and income taxes
receivable of $138,500. The Company believes that the inventory levels are at an adequate level to
meet sales requirements and does not foresee increasing inventory significantly during fiscal year
2006. 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 2006 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 $31,000. The principal use of cash in investing activities
was $29,000 in property improvements and $2,000 in computer equipment. The Company estimates that
cash used in investing activities for fiscal year 2006 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. 11




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION Cash used in financing activities was $916,800, comprised of $77,300 paid to acquire treasury
stock, $21,200 received from the sale of treasury stock, $45,000 received from the exercise of
stock options, $12,300 tax benefit of stock options exercised and a net reduction of $918,000 in
borrowings under the bank credit agreement. As of May 31, 2005 the Company did not have any commitments in excess of one year. Bank Credit Agreement Effective June 30, 2004 the Company signed a Fifth Amendment to the Credit and Security Agreement
with Arvest Bank which provides 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% (5.75% at May
31, 2005) and borrowings are collateralized by substantially all the assets of the Company. At May
31, 2005 the Company had $510,000 outstanding. Available credit under the revolving credit
agreement was $2,990,000 at May 31, 2005. The Company has renewed the credit line and extended the
maturity to June 30, 2006. Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to our valuation of inventory, allowance for
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 28, 2005. 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.104, 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 May 31, 2005 and February 28, 2005. 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 $75,200 and $77,400 as of May 31, 2005 and February 28, 2005,
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 valuation allowance, were $992,500 at
May 31, 2005 and$1,111,700 at February 28, 2005. 12




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION Inventories are presented net of a valuation allowance. Management has estimated and included a
valuation allowance for both current and noncurrent inventory. This reserve is based on
managements identification of slow moving inventory on hand at May 31, 2005 and February 28, 2005.
Management has estimated a valuation allowance for both current and noncurrent inventory of
$394,100 and $424,900 as of May 31, 2005 and February 28, 2005, respectively. Deferred Tax Assets The Company does not currently have a valuation allowance recorded against its deferred tax assets.
If management determines it is more likely than not that its deferred tax assets would not be
realizable in the future, a valuation allowance would be recorded to reduce the deferred tax asset
to its net realizable value. Long-lived Assets In evaluating the fair value and future benefits of long-lived assets, we perform an analysis of
the anticipated undiscounted future net cash flows of the related long-lived assets and reduce
their carrying value by the excess, if any, of the result of such calculation. We believe at this
time that the long-lived assets carrying values and useful lives 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 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-15(e) and 15d-15(e) as of May
31, 2005. This evaluation was conducted under the supervision and with the participation of the
Companys management, including its Chief Executive Officer and its Controller and Corporate
Secretary (Principal Financial and Accounting Officer). Based on that evaluation, the Companys
Chief Executive Officer and its Controller and Corporate Secretary (Principal Financial and
Accounting Officer) concluded that the Companys disclosure controls and procedures 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
within the time periods specified in Securities and Exchange Commission rules and forms. 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 changes in the Companys internal control over financial reporting that have
materially affected or are reasonably likely to materially affect, its internal control over
financial reporting, since the date these controls were evaluated. 13




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION 
 PART II OTHER INFORMATION 
 Item 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table sets forth certain information concerning the repurchase of the Companys
Common Stock made by the Company during the first quarter ended May 31, 2005. ISSUER PURCHASES OF EQUITY SECURITIES (d) Maximum(c) Total Number
    
    
    Number (orof Shares (or
    
    
    ApproximateUnits) Purchased
    
    
    Dollar Value)as Part of
    
    
    of Shares (orPublicly
    
    
    Units) that May(a) Total Number
    
    
    (b) Average
    
    
    Announced
    
    
    Yet Be Purchasedof Shares (or
    
    
    Price Paid per
    
    
    Plans
    
    
    Under thePeriod
    
    Units Purchased (1)
    
    
    Share (or Unit)
    
    
    or Programs (2)
    
    
    Plans or ProgramsMarch 1, 2005 -
March 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,064April 1, 2005 -
April 30, 2005
    
    
    7,500
    
    
    $
    10.30
    
    
    
    7,500
    
    
    
    171,564May 1, 2005 -
May 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171,564Total
    
    
    7,500
    
    
    $
    10.30
    
    
    
    7,500
 
 (1)
    
    All of the shares of common stock set forth in this column (a) were purchased
pursuant to a publicly announced plan as described in footnote 2 below and all of such
shares were purchased privately.(2)
    
    In July 1998, the Board of Directors authorized the Company to purchase up to
1,000,000 shares of the Companys common stock pursuant to a plan that was announced
publicly on October 14, 1998. In May 1999, the Board of Directors authorized the Company
to purchase up to an additional 1,000,000 shares of its common stock under this plan,
which was announced publicly on May 19, 1999. In April 2004 the Board of Directors
authorized the Company to purchase up to an additional 500,000 shares of its common stock
under this plan. Pursuant to the plan, the Company may purchase such 2,500,000 shares of
the Companys common stock until 2,500,000 shares have been repurchased. There is no
expiration date for the repurchase plan. 
 Item 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits  31.1
    
    Certification of the Chief Executive Officer of Educational Development Corporation pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.31.2
    
    Certification of Controller and Corporate Secretary (Principal Financial and Accounting
Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 furnished herewith.32.1
    
    Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. 14




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION (b) Reports on Form 8-K A Form 8-K was filed on May 26, 2005 to submit to the Securities and Exchange Commission a press
release announcing earnings and sales for the fiscal year ended February 28, 2005. The press
release contained the following financial information for the fiscal year ended February 28, 2005
and the fiscal year ended February 29, 2004: (1) net sales; (2) pre tax earnings; (3) income taxes;
(4) net earnings; (5) earnings per share; (6) announced a $0.15 per share dividend; (7) announced
early adoption of FASB No. 123R. 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. EDUCATIONAL DEVELOPMENT CORPORATION
(Registrant) Date July 14, 2005
    
    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 the Chief Executive Officer of Educational Development Corporation pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 furnished herewith.31.2
    
    Certification of Controller and Corporate Secretary (Principal Financial and Accounting
Officer) of Educational Development Corporation pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 furnished herewith.32.1
    
    Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 16