##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended February 28, 2005
 o
    
    TRANSITION REPORT PURSUANT TO 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)
    
    (Zip Code)Registrants telephone number, including area code
    
    (918) 622-4522
 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.20 par value
(Title of class) Indicate by check mark whether the registrant (1) has filed all reports required 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Act) Yes
o     No
þ The aggregate market value of the voting shares held by non-affiliates of the registrant at
the price at which the common stock was last sold on August 31, 2004, on the Nasdaq National Market
was $29,767,796. As of June 6, 2005, 3,738,133 shares of common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE     1




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TABLE OF CONTENTS FACTORS AFFECTING FORWARD LOOKING STATEMENTS
    
    
    3PART IItem 1. Business
    
    
    3Item 2. Properties
    
    
    7Item 3. Legal Proceedings
    
    
    7Item 4. Submission of Matters to a Vote of Security Holders
    
    
    7PART IIItem 5. Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    7Item 6. Selected Financial Data
    
    
    9Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 8. Financial Statements and Supplementary Data
    
    
    22Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    22Item 9A. Controls and Procedures
    
    
    23Item 9B. Other Information
    
    
    23PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    23Item 11. Executive Compensation
    
    
    23Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    24Item 13. Certain Relationships and Related Transactions
    
    
    24Item 14. Principal Accountants Fees and Services
    
    
    24PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    25Employment Agreement - Randall W. WhiteFifth Amendment to Restated Loan AgreementConsent of Current Independent Registered Public Accounting FirmConsent of Prior Independent Registered Public Accounting FirmCertification of CEO Pursuant to Section 302Certification of the Controller and Corporate Secretary Pursuant to Section 302Certification Pursuant to Section 906
  2




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EDUCATIONAL DEVELOPMENT CORPORATION FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED FEBRUARY 28, 2005 
 FACTORS AFFECTING FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K, 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. 
 PART 1 
 Item 1. BUSINESS (a) General Development of Business Educational Development Corporation (EDC or the Company), a Delaware corporation with its
principal office in Tulsa, Oklahoma, is the exclusive trade publisher of a line of childrens books
produced in the United Kingdom by Usborne Publishing Limited (Usborne). The Company was incorporated on August 23, 1965. The Companys original corporate name was
Tutor Tapes International Corporation of Delaware. Its name was changed to International Teaching
Tapes, Inc. on November 24, 1965, and changed again to the present name on June 24, 1968. During Fiscal Year (FY) 2005 the Company operated two divisions: Home Business Division
(Usborne Books at Home or UBAH) and Publishing Division. The Home Business Division
distributes books through independent consultants who hold book showings in individual homes, and
through book fairs, direct sales and Internet sales. The Home Business Division also distributes
these titles to school and public libraries. The Publishing Division markets books to bookstores,
toy stores, specialty stores and other retail outlets. (b) Financial Information about Industry Segments See part II, Item 8  Financial Statements and Supplementary Data 3




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(c) Narrative Description of Business General The principal product of both the Usborne Books at Home Division and Publishing Division is a
line of childrens books produced in the United Kingdom by Usborne Publishing Limited. The Company
is the sole United States trade publisher of these books. The Company currently offers
approximately 1,400 different titles. The Company also distributes a product called Usborne Kid
Kits. These Kid Kits take an Usborne book and combine it with specially selected items and/or
toys that complement the information contained in the book. The Kid Kits are packaged in a
reusable vinyl bag. Alternatively, 18 Kid Kits are also available in an attractive box package.
Currently 59 different Kid Kits are available. The Company considers the political risk of importing books from the United Kingdom to be
negligible as the two countries have maintained excellent relations for many years. Likewise there
is little direct economic risk to the Company in importing books from the United Kingdom as the
Company pays for the books in U.S. dollars and is not directly subject to any currency
fluctuations. There is risk of physical loss of the books should an accident occur while the books
are in transit, which could cause the Company some economic loss due to lost sales should the
supply of some titles be depleted in the event of a lost shipment. The Company considers this to be
highly unlikely as this type of loss has yet to occur. There is some risk involved in having only one source for its products  Usborne Publishing
Limited. The Company has an excellent working relationship with its foreign supplier Usborne
Publishing Limited and can foresee no reason for this to change. Management believes that the
Usborne line of books are the best available books of their type. Local, state and federal funds are important to the Usborne Books at Home Division but not to
the Publishing Division. In many cities and states in which the Company does business, school
funds have been severely cut, which impacts sales to school libraries. Industry Segments (a) Usborne Books at Home Division The Usborne Books at Home Division markets the Usborne line of approximately 1,400 titles and
59 Kid Kits through a combination of direct sales, home parties, book fairs and the Internet, sold
through a network marketing system. The division also sells to schools and public libraries. (b) Publishing Division The Publishing Division distributes the Usborne line to bookstores, toy stores, specialty
stores and other retail outlets utilizing an inside telephone sales force as well as independent
field sales representatives. Marketing (a) Usborne Books at Home Division The Usborne Books at Home Division markets through commissioned consultants using a
combination of direct sales, home parties, book fairs and the Internet. The division had
approximately 8,300 consultants in 50 states at February 28, 2005. 4




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(b) Publishing Division The Publishing Division markets through commissioned trade representatives who call on book,
toy, specialty stores and other retail outlets and through marketing by telephone to the trade.
This division markets to approximately 5,100 book, toy and specialty stores. Significant orders
totaling 36% of the Publishing Divisions sales have been received from major book chains. During
fiscal year 2005 the division continued to expand into mass merchandising outlets such as drug,
department and discount stores. Competition (a) Usborne Books at Home Division The Usborne Books at Home Division faces significant competition from several other direct
selling companies that have more financial resources. In addition, federal and state funding cuts
will also impact the availability of funds to the school libraries. The Company is unable to
estimate the effect of these funding cuts on the divisions future sales to school libraries
because the magnitude of funding cuts has yet to be determined. Management believes its superior
product line and consultant network will enable this division to be highly competitive in its
market area. (b) Publishing Division The Publishing Division faces strong competition from large U.S. and international companies
that have more financial resources. Industry sales of juvenile paperbacks approached $466 million
annually for calendar year 2004, up 3.8% from the previous year. The Publishing Divisions sales
are approximately 1.6% of industry sales. Competitive factors include product quality, price and
deliverability. Management believes its product line will enable this division to compete well in
its market area. Seasonality (a) Usborne Books at Home Division The level of sales for Usborne Books at Home Division is greatest during the Fall as
individuals prepare for the holiday season. (b) Publishing Division The level of sales for the Publishing Division is greatest in the Fall while retailers are
stocking up for the holiday season. 5




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Executive Officers The following information is furnished with respect to each of the executive officers of the
Company, each of whom is elected by and serves at the pleasure of the Board of Directors. OfficeName
    
    Office
    
    Held Since
    
    AgeRandall W. White
    
    Chairman of the Board,
President and Treasurer
    
    
    1986
    
    
    
    63W. Curtis Fossett
    
    Controller and Corporate Secretary
(Principal Financial and Accounting Officer)
    
    
    1989
    
    
    
    59Craig M. White*
    
    Vice President  Information Systems
    
    
    2001
    
    
    
    36Ronald T. McDaniel*
    
    Vice President  Publishing Division
    
    
    2002
    
    
    
    67
   * The prior business experience for these executive officers who have been employed by the
Company for less than five years is as follows: In April 2001, Craig M. White, son of Randall W. White, Chairman of the Board, President and
Chief Executive Officer, was elected Vice President of Information Systems. Craig White graduated
from Oklahoma State University in December 1994 with a BS degree in Electrical and Computer
Engineering. He joined EDC in December 1994 as an Inventory Analyst. In July 1995 he was named
Manager  Information Systems. In July 2002, Ronald T. McDaniel was elected Vice President of the Publishing Division.
Ronald McDaniel joined EDC on September 25, 2000 as National Sales Manager of the Publishing
Division. Prior to that he was affiliated with Prudential Detrick Realty, serving as a Residential
and Light Commercial Sales Associate. In addition, he was President of The McDaniel Company, a
residential management and rehabilitation company. Employees As of April 1, 2005, the Company had 76 full-time employees and 2 part-time employees. The
Company believes its relations with its employees to be good. Company Reports The Company makes available free of charge through the Investor Relations portion of its
Internet website at www.edcpub.comits annual reports on Form 10-K, its quarterly reports on Form
10-Q, its current reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after it electronically files such material with, or furnishes it to, the
Securities and Exchange Commission. The information on this website other than these reports is
not considered to be part of these reports. 6




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Item 2. PROPERTIES The Company is located at 10302 E. 55th Pl., Tulsa, Oklahoma. These facilities are owned by
the Company and contain approximately 105,000 square feet of office and warehouse space, including
a 22,000 square foot addition to the warehouse, which was completed in August 2004 at a total cost
of $584,700. The Company believes that its operating facility meets both its present and future capacity
needs. 
 Item 3. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings. 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of the fiscal year covered by this
report to a vote of security holders of the Company. 
 PART II 
  Item 5.
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The common stock of EDC is traded on the Nasdaq National Market (symbolEDUC). The high and
low closing quarterly common stock quotations for fiscal years 2005 and 2004, as reported by the
National Association of Securities Dealers, Inc., were as follows: 2005
    
    
    2004Period
    
    High
    
    
    Low
    
    
    High
    
    
    Low1st Qtr
    
    
    10.98
    
    
    
    10.00
    
    
    
    10.63
    
    
    
    9.382nd Qtr
    
    
    11.56
    
    
    
    10.80
    
    
    
    13.58
    
    
    
    9.903rd Qtr
    
    
    13.49
    
    
    
    10.00
    
    
    
    13.05
    
    
    
    10.134th Qtr
    
    
    10.83
    
    
    
    10.06
    
    
    
    11.18
    
    
    
    10.35
 The number of shareholders of record of EDCs common stock at April 25, 2005 was 929. The Company paid a $0.12 per share annual dividend during fiscal year 2005 and a $0.10 per
share annual dividend during fiscal year 2004. The Company will pay a $0.15 per share dividend on
June 10, 2005 to shareholders of record as of June 3, 2005. 7




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The following table sets forth certain information concerning the repurchase of the Companys
Common Stock made by the Company during the fourth quarter of the fiscal year ended February 28,
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 ProgramsDecember 1, 2004 
December 31, 2004
    
    
    69,791
    
    
    
    $10.33
    
    
    
    69,791
    
    
    
    179,064January 1, 2005 
January 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,064February 1, 2005 
February 28, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,064Total
    
    
    69,791
    
    
    
    $10.33
    
    
    
    69,791
   (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 through open-market transactions, except for 285 shares purchased
during the period of December 1, 2004  December 31, 2004, which 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. 8




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Item 6. SELECTED FINANCIAL DATA YEARS ENDED FEBRUARY 28 (29)2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Total Revenues
    
    $
    31,650,779
    
    
    $
    31,127,268
    
    
    $
    26,869,681
    
    
    $
    22,065,957
    
    
    $
    18,823,682Earnings From Continuing
Operations
    
    $
    2,406,074
    
    
    $
    2,373,450
    
    
    $
    1,996,615
    
    
    $
    1,531,274
    
    
    $
    1,090,262Earnings From Continuing Operations
Per Common ShareBasic
    
    $
    .62
    
    
    $
    .60
    
    
    $
    .52
    
    
    $
    .40
    
    
    
    .28Diluted
    
    $
    .59
    
    
    $
    .55
    
    
    $
    .48
    
    
    $
    .38
    
    
    $
    .27Total Assets
    
    $
    17,980,506
    
    
    $
    19,112,694
    
    
    $
    17,587,725
    
    
    $
    14,156,798
    
    
    $
    12,471,650Cash Dividends Declared
Per Common Share
    
    $
    .12
    
    
    $
    .10
    
    
    $
    .06
    
    
    $
    .04
    
    
    $
    .02
 
  Item 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company operates two separate divisions, Publishing and Usborne Books at Home to sell
the Usborne line of childrens books. These two divisions each has its 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 to school and public libraries. Publishing Division The Publishing Division operates in a market that is highly competitive, with a large number
of companies engaged in the selling of books. The Publishing Division is in direct competition
with all of these other companies. Sales in the book industry were approximately $23.7 billion for
calendar year 2004. Sales in the trade industry, defined as wholesale sales to retailers, were
approximately $5.2 billion for calendar year 2004. Sales in the juvenile paperback market, the
Companys market segment, were approximately $466 million for calendar year 2004. The Companys
market share in the juvenile paperback market has remained between 1.6% and 1.7% during the last
three years. 9




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The following table sets forth the annual sales in the book industry for the last three
calendar years and compares these sales to the Publishing Divisions net sales. Table of Book Industry Sales (1)
(amounts in millions) 2004
    
    
    2003
    
    
    2002Sales  Total Industry
    
    $
    23,715.4
    
    
    $
    23,420.6
    
    
    $
    22,398.1Sales  Total Trade
    
    $
    5,159.8
    
    
    $
    5,063.8
    
    
    $
    5,002.3Sales  Juvenile Paperback
    
    $
    465.6
    
    
    $
    448.6
    
    
    $
    473.2Publishing Divisions Sales (2)
    
    $
    7.3
    
    
    $
    7.5
    
    
    $
    7.6Publishing Divisions Market Share
of Total Book Industry
    
    
    0.03
    %
    
    
    0.03
    %
    
    
    0.03
    %Publishing Divisions Market Share
of Total Trade Market
    
    
    0.14
    %
    
    
    0.15
    %
    
    
    0.15
    %Publishing Divisions Market Share
of Juvenile Paperback Market
    
    
    1.6
    %
    
    
    1.7
    %
    
    
    1.6
    %
   (1)
    
    Source: Association of American Publishers(2)
    
    Reported on fiscal year basis The Publishing Divisions customer base includes national book chains, regional and local
bookstores, toy and gift stores, school supply stores and museums. To reach these markets, the
Publishing Division utilizes a combination of commissioned sales representatives located throughout
the country and a commissioned telesales group located in the Companys headquarters. The Vice
President of the Publishing Division manages sales to the national chains. The following table sets forth the percentages of net revenues earned by sales to the national
chains and sales to other markets for the Publishing Division for the past three fiscal years. FY 2005
    
    
    FY 2004
    
    
    FY 2003National chain stores
    
    
    36
    %
    
    
    32
    %
    
    
    35
    %All other
    
    
    64
    %
    
    
    68
    %
    
    
    65
    %Total net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Sales to national chain stores increased in fiscal year 2005 primarily due to special
promotions run by the major chains involving certain themes or subjects for which the Companys
books were particularly suited. The Publishing Division follows several avenues in order to attract potential new customers
and maintain current customers. Company personnel attend many of the national trade shows held by
the book selling industry each year. These shows allow the Company to make contact with potential
buyers who may be unfamiliar with the Companys books. The Company actively targets the national
chains through joint promotional efforts and institutional advertising in trade publications. The
Publishing Division also participates with certain customers in a cooperative advertising allowance
program, under which the Company pays back to the customer up to 2% of the net sales to that
customer. The Companys products are then featured in promotions, such as catalogs, offered by the
vendor. The Company may also acquire, for a fee, an end cap position in a bookstore (the Companys
products are placed on the end of a shelf), which in the publishing industry is considered an
advantageous location in the bookstore. The costs of these promotions have been classified as
reductions in revenue in the statements of earnings. In January 2005 the Company launched the most
comprehensive marketing and promotion program in its history. The program consists of additional
promotional sales aids and strategies to increase market penetration. 10




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The Publishing Divisions in-house telesales group targets the smaller independent book and
gift store market. They maintain contact with approximately 5,100 customers. During fiscal year
2005 the telesales group opened 346 new accounts. The Companys full color, 130-page catalogs,
which are revised twice a year, are mailed to nearly 5,100 customers and potential customers. The
Company also offers two display racks to assist stores in displaying the Companys products. One is a six-foot rack with five adjustable
shelves that can hold approximately 250 titles. The second rack is a four-sided rack with three
levels that will hold between 50 and 60 of the Companys Kid Kits. There were 3,942 of these
attractive racks in retail stores throughout the country at the end of fiscal year 2005. Publishing Divisions revenues have remained constant during the last three fiscal years, with
net revenues between $7.3 million  $7.6 million each fiscal year. Management expects that in
fiscal year 2006 the Publishing Division will achieve revenues in the $7.5 million  $8.0 million
range. Usborne Books at Home (UBAH) Division The UBAH Division is a multi-level selling organization that markets its products through
independent sales representatives (consultants) located throughout the United States. The
customer base of UBAH consists of individual purchasers and school and public libraries. Revenues
are generated through home shows, direct sales, Internet sales, book fairs and contracts with
school and public libraries. An important factor in the continued growth of the UBAH Division is the addition of new sales
consultants and the retention of existing sales consultants. Current active consultants recruit
new sales consultants. UBAH makes it easy to recruit by providing low sign-up costs. Kits
containing sample products and supplies can be purchased for as little as $29. UBAH provides an
extensive handbook that is a valuable tool in explaining the various programs to the new recruit. The following table sets forth the number of new consultants added during the last three
fiscal years and the number of active sales consultants at the end of the last three fiscal years. FY 2005
    
    
    FY 2004
    
    
    FY 2003New Consultants
    
    
    5,646
    
    
    
    6,964
    
    
    
    5,715Active Consultants End of Fiscal Year
    
    
    8,273
    
    
    
    8,800
    
    
    
    7,000
 The UBAH Division presently has six levels of sales representatives: consultants; supervisors;
senior supervisors; executive supervisors; senior executive supervisors; directors. Upon signing
up, each individual is considered a consultant. A consultant receives commissions from each sale
the consultant makes, the commission rate being determined by the marketing program under which the
sale is made. In addition, consultants receive a monthly sales bonus once the consultants sales
reach an established monthly goal. Consultants who recruit other consultants and meet certain
established criteria are eligible to become supervisors. Upon reaching this level, they receive
monthly override payments based upon the sales of their downline groups. The marketing program
under which the sales are made determines the rate for the override payments. Once supervisors
reach certain established criteria, they become senior supervisors and are eligible to earn
promotion bonuses on their consultants. Once senior supervisors reach certain established
criteria, they become executive supervisors, senior executive supervisors or directors. Executive
supervisors and higher may receive an additional monthly override payment based upon the sales of
their downline groups. 11




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The table below sets forth the different types of marketing programs UBAH offers and the
percentage of net UBAH revenues, including transportation revenue, that each marketing program has
generated for the last three fiscal years. FY 2005
    
    
    FY 2004
    
    
    FY 2003Home Shows
    
    
    51
    %
    
    
    54
    %
    
    
    57
    %Direct Sales
    
    
    3
    %
    
    
    4
    %
    
    
    4
    %Book Fair
    
    
    24
    %
    
    
    21
    %
    
    
    16
    %School & Library
    
    
    9
    %
    
    
    8
    %
    
    
    11
    %Internet
    
    
    3
    %
    
    
    3
    %
    
    
    2
    %Transportation Revenue
    
    
    10
    %
    
    
    10
    %
    
    
    10
    %Totals
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 The table below sets forth a comparison of the percentage increase (decrease) between fiscal
years in the net revenue generated by the different types of marketing programs offered by UBAH,
along with the percentage increase (decrease) in transportation revenue. FY 2005
    
    
    FY 2004Compared With
    
    
    Compared WithFY 2004
    
    
    FY 2003Home Shows
    
    
    (2
    %)
    
    
    17
    %Direct Sales
    
    
    (8
    %)
    
    
    19
    %Book Fair
    
    
    16
    %
    
    
    64
    %School & Library
    
    
    7
    %
    
    
    0
    %Internet
    
    
    32
    %
    
    
    94
    %Transportation Revenue
    
    
    0
    %
    
    
    17
    %
 Home shows are the largest generator of revenue for the UBAH Division and will continue as
such for the foreseeable future. Home shows declined 2% or $180,000 during fiscal year 2005. This
can be attributed to the decline in the number of new consultants signed up during the year. The direct sales market declined 8% or $48,000 during fiscal year 2005. This can be
attributed to the decline in the number of new consultants signed up during the year. The book fair marketing program continues to grow. Scholastic dominates the book fair market.
The Companys book fair program is comparable to Scholastics program and the Company is making
inroads into their market share. Many schools will hold joint book fairs with UBAH and our
competitors and the Company does well at these events. In many cases, UBAH book fairs have been
the only allowed participant. The Company looks forward to continued growth in this market area as
the Companys book fair program gains wider acceptance. The school and library market is affected by the budget constraints of the various state
school budgets. Cuts in schools budgets affect the ability of UBAH to be more effective in this
market. However, increased numbers of consultants have entered this section of the market place
and sales in fiscal year 2005 increased 7% over fiscal year 2004. The Internet market is a relatively new market for UBAH. The revenues from this market, when
compared with the other markets, are quite small. However, Internet sales have increased
significantly year to year. This is the result of more consultants purchasing Company developed
web sites. 12




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##### Table of Contents



The UBAH Marketing Programs Homes shows were the original marketing program when UBAH began in 1989 and continues today to
generate the greatest percentage of revenue for UBAH. Consultants contact individuals
(hostesses) to hold book shows in their homes. The consultant assists the hostess in setting up the details for
the show. The consultant makes a presentation at the show and takes orders for the books. The
hostess earns free books based upon the total sales at the show. Customer specials are available
for customers when they order a selected amount. Additionally, home shows provide an excellent
opportunity for recruiting new consultants. Direct sales are sales without a hostess being involved. This program makes it possible for
the consultant to work directly out of her home selling to friends, neighbors and other customers.
It is especially convenient for those individuals who wish to order books from a consultant but are
unable to attend a home show. The UBAH Division offers many promotions (customer specials)
throughout the year. These promotions offer the customer the opportunity to purchase selected
items at a discount if the customer meets the defined criteria. The discounts under these
promotions are recorded in discounts and allowances. Book fairs can be held with almost any organization as the sponsor. The consultant provides
promotional materials to acquaint parents with the books. Parents turn in their orders at a
designated time. The book fair program generates free books for the sponsoring organization. UBAH
also has a Reach For The Starsfundraiser program. This is a pledge-based reading incentive
program that provides cash and books to the organization and books for the children. School and library sales are restricted to consultants who have received additional training
in order to allow them to sell to schools and libraries. The UBAH consultant is the only source
that a library or school has for library bound Usborne books. They are not available through any
of the school supply distribution companies. The UBAH Division offers individual web sites to the consultants. These sites are hosted by
the Company and are available for a nominal price. The consultants can customize the web sites to
their own particular needs or they can maintain the generic site. These web sites provide access
to the Companys 1,400 plus titles. Orders can be processed on line through a shopping cart
arrangement. The orders are transmitted to the Company and the consultant receives sales credit and
commission on the sales. The cost of the free books provided under the various UBAH marketing programs is recorded as
operating and selling expense in the statements of earnings. The table below sets forth the number of orders for each UBAH marketing program. FY 2005
    
    
    FY 2004
    
    
    FY 2003Home Shows
    
    
    41,237
    
    
    
    41,763
    
    
    
    35,489Direct Sales
    
    
    10,140
    
    
    
    10,928
    
    
    
    9,366Book Fair
    
    
    7,243
    
    
    
    6,503
    
    
    
    4,208School & Library
    
    
    4,251
    
    
    
    4,842
    
    
    
    6,435Internet
    
    
    17,609
    
    
    
    13,532
    
    
    
    7,01780,480
    
    
    
    77,568
    
    
    
    62,515
 The Company monitors the trends displayed in the above table in order to judge how the five
marketing programs are performing. This table shows strong growth in two of the five categories.
Home shows and direct sales suffered declines due to the lower number of new recruits signed up
during FY2005. Despite a lower number of orders, the average size per order in the school and
library division increased 22%, accounting for the increased sales in this market segment. As
addressed above, the school and library market is impacted by the budget cuts undertaken by many
schools. Internet orders increased as more consultants took advantage of the Company sponsored web
sites. 13




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##### Table of Contents



UBAHs revenues and profits for fiscal year 2005 increased for the sixth consecutive year.
The Company believes that the UBAH Division has the greatest growth potential for the Company.
While there are many multi-level companies in the United States, UBAH is the only one exclusively
selling books. The Company believes this is a fertile market with excellent opportunities for
continued growth. The keys to future growth in the UBAH Division are recruiting new consultants and retaining existing consultants. In
January 2005 the Company launched the most comprehensive marketing and promotion program in its
history. The program consists of additional promotional sales aids and strategies designed to
increase sales and recruiting. Results of Operations The following table sets forth statements of earnings data as a percentage of total
revenues FY 2005
    
    
    FY 2004
    
    
    FY 2003Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    35.8
    %
    
    
    36.3
    %
    
    
    37.6
    %Gross margin
    
    
    64.2
    %
    
    
    63.7
    %
    
    
    62.4
    %Operating expenses:Operating & selling
    
    
    21.7
    %
    
    
    21.6
    %
    
    
    21.4
    %Sales commissions
    
    
    24.9
    %
    
    
    24.8
    %
    
    
    23.5
    %General & administrative
    
    
    5.4
    %
    
    
    5.3
    %
    
    
    5.7
    %Interest
    
    
    0.2
    %
    
    
    0.0
    %
    
    
    0.0
    %Total operating expenses
    
    
    52.2
    %
    
    
    51.7
    %
    
    
    50.6
    %Other income
    
    
    0.3
    %
    
    
    0.3
    %
    
    
    0.2
    %Earnings before income taxes
    
    
    12.3
    %
    
    
    12.3
    %
    
    
    12.0
    %Income taxes
    
    
    4.7
    %
    
    
    4.7
    %
    
    
    4.6
    %Net earnings
    
    
    7.6
    %
    
    
    7.6
    %
    
    
    7.4
    %
 Fiscal Year 2005 Compared with Fiscal Year 2004 Operating Results The
Company had earnings before income taxes of $3,885,074 for fiscal year 2005 compared
with $3,832,450 for fiscal year 2004. Revenues FY 2005
    
    
    FY 2004
    
    

$ IncreaseGross sales
    
    $
    41,361,612
    
    
    $
    40,940,822
    
    
    $
    420,790Less discounts & allowances
    
    
    (11,324,165
    )
    
    
    (11,424,127
    )
    
    
    99,962Transportation revenue
    
    
    1,613,332
    
    
    
    1,610,573
    
    
    
    2,759Net revenues
    
    $
    31,650,779
    
    
    $
    31,127,268
    
    
    $
    523,511
 The UBAH Divisions gross sales increased 2.6% or $676,800 during FY 2005 when compared with
FY 2004. The Company attributes this increase to the book fair market and school and library
market, which both recorded increased sales during FY 2005. The Publishing Divisions gross sales
declined 1.8% or $256,000 during FY 2005 when compared with FY 2004. The Company attributes this
decline to the loss last year of a major customer due to bankruptcy. 14




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##### Table of Contents



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 $7.8 million and $7.9
million in fiscal years 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 52% of Publishings gross sales for both fiscal years 2005 and 2004. The UBAH Divisions discounts and allowances were $3.5 million in fiscal years 2005 and 2004.
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 14% of UBAHs gross sales for both fiscal years 2005
and 2004. The increase in transportation revenues is the result of increased sales in the UBAH Division. Expenses FY 2005
    
    
    FY 2004
    
    

$ IncreaseCost of sales
    
    $
    11,338,039
    
    
    $
    11,295,738
    
    
    $
    42,301Operating & selling
    
    
    6,860,540
    
    
    
    6,730,548
    
    
    
    129,992Sales commissions
    
    
    7,875,891
    
    
    
    7,712,408
    
    
    
    163,483General & administrative
    
    
    1,719,240
    
    
    
    1,639,141
    
    
    
    80,099Interest
    
    
    67,620
    
    
    
    9,762
    
    
    
    57,858Total
    
    $
    27,861,330
    
    
    $
    27,387,597
    
    
    $
    473,733
 Cost of sales increased approximately 0.4% in fiscal year 2005 when compared with fiscal year
2004. The Companys cost of its products is 25% to 32% of the gross sales price, depending upon
the product. In comparing the percentage increase in gross sales with the percentage increase in
cost of goods, consideration must be given to the mix of products sold. Approximately 97% of the
Companys products come from one vendor, where the cost of the products is a fixed percentage of
the retail price. The mix of products sold has not materially changed in recent years. We expect
the percentage increases in year-to-year gross sales and the percentage increases in year-to-year
cost of sales to be similar in movement in the foreseeable future. The 0.4% increase in cost of
sales for fiscal year 2005 over fiscal year 2004 is consistent with the percent increase in gross
sales of approximately 1.0% for the same periods. 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
$1,196,915 in FY2005, $1,110,634 in FY2004 and $999,450 in FY2003. 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 increased because of higher payroll
and benefits costs of $175,900 and increases in sales incentives offered by the UBAH Division
totaling $64,900. Offsetting the increase in operating and selling expenses were decreases in
damaged returns for both divisions of $109,300. 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 16.6% and 16.4% for fiscal year 2005 and fiscal year 2004,
respectively. 15




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##### Table of Contents



Sales commissions in the Publishing Division decreased $19,700 for the fiscal year ended 2005,
due to the decrease in net sales. Publishing Division sales commissions are paid on net sales and
were 1.2% of net sales in fiscal year 2005 and 1.4% of net sales in fiscal year 2004. Publishing
Division sales commissions will fluctuate as a percentage of net sales, depending upon the type of
customer. Sales to the major chains are handled by the Publishing Division Vice President and no
sales commissions are paid on these sales. Sales commissions in the UBAH Division increased $183,200. UBAH Division sales commissions are paid on retail
sales and were 38.2% for fiscal year 2005 and 38.9% for fiscal year 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. The increase in sales commissions is
the result of increased sales in the UBAH Division. General and administrative costs include the executive department, accounting department,
information services department, general office management and building facilities management.
General and administrative expenses increased because of higher payroll and benefits costs
and increased maintenance costs. Payroll and benefits increased $76,600, due to annual salary
adjustments necessary to keep the Company competitive in the local job market and the addition of
new personnel. Routine maintenance and repair costs to the Companys facility increased $13,800.
General and administrative expenses as a percentage of gross sales were 4.2% for fiscal year 2005
and 4.0% for fiscal year 2004. Interest expense increased $57,858 due to increased borrowings throughout fiscal year 2005 and
higher interest rates. The Federal Reserve increased interest rates six times during fiscal year
2005, which in turn caused the Companys rate to increase. Interest expense as a percentage of
gross sales was 0.16% in fiscal year 2005 and .02% in fiscal year 2004. The tax provision for fiscal year 2005 was $1,479,000. The effective rate for fiscal year
2005 was 38.0%, which is consistent with fiscal year 2004. The Companys current tax liability was
reduced by $399,200 as a result of the benefit obtained from several Company officers and former
officers exercising stock options. Fiscal Year 2004 Compared with Fiscal Year 2003 Operating Results The Company had earnings before income taxes of $3,832,450 for fiscal year 2004 compared
with $3,223,315 for fiscal year 2003. Revenues $ Increase/FY 2004
    
    
    FY 2003
    
    
    (decrease)Gross sales
    
    $
    40,940,822
    
    
    $
    36,715,349
    
    
    $
    4,225,473Less discounts & allowances
    
    
    (11,424,127
    )
    
    
    (11,223,231
    )
    
    
    (200,896
    )Transportation revenue
    
    
    1,610,573
    
    
    
    1,377,563
    
    
    
    233,010Net revenues
    
    $
    31,127,268
    
    
    $
    26,869,681
    
    
    $
    4,257,587
 16




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##### Table of Contents



The UBAH Divisions gross sales increased 21% or $4.4 million during fiscal year 2004 when
compared with fiscal year 2003. Each quarter of fiscal year 2004 recorded a sales increase when
compared with the same quarter of fiscal year 2003. A quarterly comparison of fiscal year 2004
versus fiscal year 2003 shows the first quarter up 20%, the second quarter up 28%, the third
quarter up 23% and the fourth quarter up 11%. The Company attributes these increases primarily as
a result of a 22% increase in the number of new consultants. In addition, the Company continued to
offer leadership skills seminars throughout fiscal year 2004. These seminars are designed to help supervisors build their business and the seminars proved to be very
popular with these supervisors. The Publishing Divisions gross sales declined 1% or $157,000
during fiscal year 2004 when compared with fiscal year 2003. The Company attributes this decline
to the loss of a major customer due to bankruptcy. 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 $7.9 million and $8.0
million in fiscal years 2004 and 2003, 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 52% and 51% of
Publishings gross sales for the fiscal years 2004 and 2003, respectively. The UBAH Divisions discounts and allowances were $3.5 million and $3.2 million in fiscal
years 2004 and 2003, 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 14% and 15% of
UBAHs gross sales for the fiscal years 2004 and 2003 respectively. The increase in transportation revenues is the result of increased sales in the UBAH Division. Expenses FY 2004
    
    
    FY 2003
    
    

$ IncreaseCost of sales
    
    $
    11,295,738
    
    
    $
    10,103,532
    
    
    $
    1,192,206Operating & selling
    
    
    6,730,548
    
    
    
    5,754,324
    
    
    
    976,224Sales commissions
    
    
    7,712,408
    
    
    
    6,327,058
    
    
    
    1,385,350General & administrative
    
    
    1,639,141
    
    
    
    1,537,775
    
    
    
    101,366Interest
    
    
    9,762
    
    
    
    884
    
    
    
    8,878Total
    
    $
    27,387,597
    
    
    $
    23,723,573
    
    
    $
    3,664,024
 17




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##### Table of Contents



Cost of sales increased approximately 12% in fiscal year 2004 when compared with fiscal year
2003. The Companys cost of its products is 25% to 32% of the gross sales price, depending upon
the product. In comparing the percentage increase in sales with the percentage increase in cost of
goods, consideration must be given to the mix of products sold. Approximately 97% of the Companys
products come from one vendor, where the cost of the products is a fixed percentage of the retail
price. The mix of products sold has not materially changed in recent years. We expect the
percentage increases in year-to-year gross sales and the percentage increases in year-to-year cost of sales to be similar in movement in the foreseeable future.
The 12% increase in cost of sales is consistent with the percent increase in gross sales of
approximately 12% for the same two fiscal years. 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 $1,110,634 in fiscal year
2004, $999,450 in fiscal year 2003 and $813,694 in fiscal year 2002. 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 network 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 increased because of an
increase in freight expense for both divisions combined of $310,000 and an increase in damaged
returns for both divisions combined of $68,000. The UBAH Division incurred increases of $452,000
in customer sales incentive costs and an increase in credit card fees in the UBAH Division of
$98,000. These increases are directly attributable to the increase in sales. Operating and
selling expenses as a percentage of gross sales were 16.4% for fiscal year 2004 and 15.7% for
fiscal year 2003. Sales commissions in the Publishing Division remained flat for the fiscal years ended 2004 and
2003. Publishing Division sales commissions are paid on net sales and were 1.4% of net sales in
fiscal years 2004 and 2003. Sales commissions in the UBAH Division increased $1,385,000. UBAH
Division sales commissions are paid on retail sales and were 38.9% for fiscal year 2004 and 39.4%
for fiscal year 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.
The increase in sales commissions is the result of increased sales in the UBAH Division. General and administrative costs include the executive department, accounting department,
information services department, general office management and building facilities management.
General and administrative expenses increased primarily due to higher payroll costs. Payroll costs
increased $60,700 due to annual salary adjustments necessary to keep the Company competitive in the
local job market. Other items contributing to the increase in general and administrative costs were
increases to the reserve for bad debts of $12,000, an increase in the accrual for audit and tax
fees of $14,700 and other items aggregating $14,000. General and administrative expenses as a
percentage of gross sales were 4.0% for fiscal year 2004 and 4.2% for fiscal year 2003. Interest expense increased $8,900 due to increased borrowings throughout fiscal year 2004.
Interest expense as a percentage of gross sales was 0.02% in fiscal year 2004 and was nominal in
fiscal year 2003. The tax provision for fiscal year 2004 was $1,459,000. The effective rate for fiscal year
2004 was 38.0%, which is consistent with fiscal year 2003. The Companys current tax liability was
reduced by $87,900 as a result of the benefit obtained from several Company officers exercising
stock options. 18




---



##### Table of Contents



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.
Consequently, the Company expects that it will be able to reduce short-term borrowings during the
year. The Companys primary source of liquidity is cash generated from operations. During fiscal
year 2005 the Company experienced a positive cash flow from operations of $4,075,001. Cash flow
from operations was enhanced by the reduction of inventory in the amount of $1,893,700. The
Company believes that inventory is adequate to meet sales requirements and does not foresee
increasing inventory during fiscal year 2006. 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 $483,400. 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
included $23,800 in property improvements, $29,300 for warehouse equipment and $25,400 for data
processing equipment. The Company estimates that cash used in investing activities for fiscal year
2006 will be less than $1,000,000. This would consist of software and hardware enhancements to the
Companys existing data processing equipment, property improvements and additional warehouse
equipment. Cash received in financing activities was $122,500 from the sale of treasury stock, $543,500
from the exercise of stock options, a net $1,034,000 in borrowings under the bank credit agreement
and $399,200 reduced income taxes from exercise of stock options. Cash used in financing
activities included $5,103,300 paid to acquire treasury stock and the annual dividend totaling
$484,000. 19




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##### Table of Contents



Contractual Obligations The table below summarizes the maturity dates of our contractual obligations by period. Payments due by periodLess
    
    
    
    
    
    
    
    
    
    
    Morethan
    
    
    
    
    
    
    
    
    
    
    thenContractual
    
    
    
    
    
    1
    
    
    1-3
    
    
    3-5
    
    
    5obligations
    
    Total
    
    
    year
    
    
    years
    
    
    years
    
    
    yearsLong-Term Debt
Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital Lease
Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease
Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase
Obligations
    
    $
    4,053,900
    
    
    $
    4,053,900
    
    
    
    
    
    
    
    
    
    
    
    Other Long-
Term Liabilities
Reflected on the
Registrants
Balance Sheet
under GAAP
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,053,900
    
    
    $
    4,053,900
    
    
    
    
    
    
    
    
    
    
    
    
 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. The line of credit is
evidenced by a promissory note in the amount of $3,500,000 payable June 30, 2005. The note bears
interest at the Wall Street Journalprime floating rate minus 0.25% payable monthly (5.25% at
February 28, 2005). The note is collateralized by substantially all of the assets of the Company.
At February 28, 2005 the Company had $1,428,000 outstanding. Available credit under the revolving
credit agreement was $2,072,000 at February 28, 2005. The Company intends to renew the credit line
prior to the maturity date and extend the maturity date to June 30, 2006. 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 elsewhere in
this report. However, the Company considers the following accounting policies to be more significantly dependent on the use of
estimates and assumptions. 20




---



##### Table of Contents



Stock Based Compensation The Company early adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised
2004) Share Based Payment, which requires fair-value measurement and recognition of stock-based
compensation. The Company adopted SFAS No. 123R on the modified retrospective application method to
all prior years for which SFAS No. 123 was effective. For the Company, this begins with its fiscal
year ended February 28, 1997. Historically, the Company has accounted for stock-based compensation
using the intrinsic value method under APB 25. No stock-based compensation cost was reflected in
net earnings, as all options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. 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 February 28, 2005 and $101,100 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 allowance for doubtful
accounts of $77,391 and $49,919 as of February 28, 2005 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 were $1,111,700 and $823,751 at
February 28, 2005 and February 29, 2004, respectively. Inventories are presented net of a valuation allowance. Management has estimated and included
a valuation allowance for both current and noncurrent inventory. This allowance is based on
managements identification of slow moving inventory on hand at February 28, 2005 and February 29,
2004. Management has estimated a valuation allowance for both current and noncurrent inventory of
$424,870 and $282,165 as of February 28, 2005 and February 29, 2004, respectively. 21




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##### Table of Contents



The Companys product line contains approximately 1,400 titles, each with different rates of
sale, depending upon the popularity of the various titles. Almost all of the Companys product
line is saleable as the books are not topical in nature and remain current in content today as well
as in the future. A few of the titles, less than 50, have a limited time when they remain current
in content, i.e. computer books, and these few titles are fully reserved as warranted. The
Companys products are printed in Europe, China and the Middle East, resulting in a six-month
lead-time to have a title reprinted and delivered to the Company. The Companys principal
supplier, based in England, imposes minimum order requirements before reprinting a title. At the
current time the Company must reorder 7,500 or more of a title in order to get a solo print run.
If the Company orders less than 7,500 of a title, then it must share a print run with the suppliers
other customers. Sharing a print run has resulted in delays of up to twelve months in the Company
receiving the ordered title. Anticipating customer preferences and purchasing habits requires
historical analysis of similar titles in the same series. The Company then places the initial
order or re-order based upon this analysis. These factors and historical analysis have led
Management to determine that 2.5 years represents a reasonable estimate of the normal operating
cycle for the Companys products. Deferred Tax Assets As discussed in Note 4 of the consolidated financial statements, 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 7A.
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have any material market risk. 
  Item 8.
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The
information required by this Item 8 begins at page 29. 
  Item 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements on any matter of accounting principles or practices or
financial statement disclosure within the twenty-four months prior to February 28, 2005. The Audit Committee dismissed the Companys independent registered public accounting firm,
Deloitte & Touche LLP, as of February 22, 2005. The Audit Committee selected Tullius Taylor
Sartain & Sartain LLP (Tullius Taylor) headquartered in Tulsa, Oklahoma, as the Companys new
independent registered public accounting firm for the fiscal year ended February 28, 2005. 22




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##### Table of Contents



Item 9.A
    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
February 28, 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. During
the fourth fiscal quarter of the fiscal year covered by this report on Form 10-K, 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. 
  Item 9.B
    OTHER INFORMATION None 
 PART III 
  Item 10.
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Identification of Directors The information required by this Item 10 is furnished by incorporation by reference to the
information under the caption Election of Directors in the Companys definitive Proxy Statement
to be filed in connection with the Annual Meeting of Shareholders to be held on August 9, 2005. (b) Identification of Executive Officers Information regarding our executive officers required by Item 401 of Regulation S-K is
presented in Item 1 hereof under the subcaption Executive Officers as permitted by General
Instruction G (3) to Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K. (c) Compliance With Section 16 (a) of the Exchange Act The information required by this Item 10 is furnished by incorporation by reference to the
information under the caption Section 16 (a) Beneficial Ownership Reporting Compliance in the
Companys definitive Proxy Statement to be filed in connection with the Annual Meeting of
Shareholders to be held on August 9, 2005. 
  Item 11.
    EXECUTIVE COMPENSATION The information required by this Item 11 is furnished by incorporation by reference to the
information under the caption Executive Compensation in the Companys definitive Proxy Statement
to be filed in connection with the Annual Meeting of Shareholders to be held on August 9, 2005. 23




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##### Table of Contents



Item 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item 12 is furnished by incorporation by reference to the
information under the captions Security Ownership of Certain Beneficial Owners and Management and
Compensation Plans in the Companys definitive Proxy Statement to be filed in connection with the
Annual Meeting of Shareholders to be held on August 9, 2005. 
  Item 13.
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 
  Item 14.
    PRINCIPAL ACCOUNTANTS FEES AND SERVICES The information required by this Item 14 is furnished by incorporation by reference to the
information under the caption Independent Registered Public Accountants in the Companys
definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be
held on August 9, 2005. 24




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##### Table of Contents



PART IV 
  Item 15.
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: 1. Financial Statements PageReport of Current Independent Registered Public
Accounting Firm
    
    29Report of Prior Independent Registered Public
Accounting Firm
    
    30Balance
Sheets - February 28, 2005 and February 29, 2004
    
    31Statements
of Earnings - Years ended February 28, 2005, February 29, 2004
and February 28, 2003
    
    32Statements of Shareholders Equity -
Years ended February 28, 2005,
February 29, 2004 and February 28, 2003
    
    33Statements of Cash Flows -
Years ended February 28, 2005,
February 29, 2004 and February 28, 2003
    
    34Notes to Financial Statements
    
    35-43
  Schedules have been omitted as such information is either not required or is
included in the financial statements.  2.
    Exhibits 3.1
    
    Restated Certificate of Incorporation of the Company dated
April 26, 1968, and Certificate of Amendment thereto dated
June 21, 1968 are incorporated herein by reference to Exhibit 1
to Registration Statement on Form 10 (File No. 0-4957).3.2
    
    Certificate of Amendment of Restated Certificate of Incorporation
of the Company dated August 27, 1977 are incorporated herein by
reference to Exhibit 20.1 to Form 10-K for fiscal year ended
February 28, 1981 (File No. 0-4957).3.3
    
    By-Laws of the Company as amended are incorporated herein
by reference to Exhibit 20.2 to Form 10-K for fiscal year ended
February 28, 1981 (File No. 0-4957).
 25




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##### Table of Contents



3.4
    
    Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated November 17, 1986,
is incorporated herein by reference to Exhibit 3.3 to Form
10-K for fiscal year ended February 28, 1987 (File No. 0-4957).3.5
    
    Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated March 22, 1996.
is incorporated herein by reference to Exhibit 3.4 to Form
10-K for fiscal year ended February 28, 1997 (File No. 0-4957).3.6
    
    Certificate of Amendment of Restated Certificate of Incorporation
of the Company dated July 15, 2002 is incorporated herein by reference to
Exhibit 10.30 to Form 10-K dated February 28, 2003 (File No. 0-4957)4.1
    
    Specimens of Common Stock Certificates are incorporated
herein by reference to Exhibits 3.1 and 3.2 to Registration
Statement on Form 10-K (File No. 0-4957) filed June 29, 1970.10.1
    
    Usborne Agreement-Contractual agreement by and between
the Company and Usborne Publishing Limited dated
November 25, 1988, is incorporated herein by reference to
Exhibit 10.12 to Form 10-K dated February 28, 1989
(File No. 0-4957).10.2
    
    Party Plan-Contractual agreement by and between the
Company and Usborne Publishing Limited dated March 14,
1989, is incorporated herein by reference to Exhibit 10.13 to
Form 10-K dated February 28, 1989 (File No. 0-4957).10.3
    
    Amendment dated January 1, 1992 to Usborne Agreement -
Contractual agreement by and between the Company and
Usborne Publishing Limited is incorporated herein by reference to
Exhibit 10.13 to Form 10-K dated February 29, 1992 (File No.
0-4957).10.4
    
    Educational Development Corporation 1992 Incentive Stock
Option Plan is incorporated herein by reference to Exhibit 4(c)
to Registration Statement on Form S-8 (File No. 33-60188)10.5
    
    Restated Loan Agreement dated June 30, 1999 between the Company
and State Bank & Trust, N.A., Tulsa, OK, is incorporated
herein by reference to Exhibit 10.24 to Form 10-K dated
February 29, 2000 (File No. 0-4957).10.6
    
    Educational Development Corporation 2002 Incentive Stock
Option Plan is incorporated herein by reference to Exhibit A
to definitive proxy statement of the Company on Schedule 14A
dated May 23, 2002 (File No. 0-4957)10.7
    
    Amendment dated November 12, 2002 to Usborne Agreement -
Contractual agreement by and between the Company and
Usborne Publishing Limited is incorporated herein by reference to
Exhibit 10.24 to Form 10-K dated February 28, 2003 (File No. 0-4957).
 26




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##### Table of Contents



*10.8
    
    Employment Agreement between Randall W. White and the Company
dated February 28, 2004.*10.9
    
    Fifth Amendment dated June 30, 2004 to Restated Loan Agreement
between the Company and Arvest Bank, Tulsa, OK*23.1
    
    Consent of current Independent Registered Public Accounting Firm*23.2
    
    Consent of prior Independent Registered Public Accounting Firm*31.1
    
    Certification of the Chief Executive Officer of Educational Development
Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification of the Controller and Corporate Secretary (Principal Financial
and Accounting Officer) of Educational Development Corporation pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Filed Herewith 27




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(b) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. EDUCATIONAL DEVELOPMENT CORPORATIONDate: June 10, 2005
    
    
    
    By
    
    /s/ W. Curtis FossettW. Curtis FossettController and Corporate Secretary(Principal Financial and Accounting Officer)
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
date indicated. Date:
    
    June 10, 2005
    
    /s/ Randall W. WhiteRandall W. WhiteChairman of the Board
President, Treasurer and
DirectorJune 10, 2005
    
    /s/ Robert D. BerryhillRobert D. Berryhill, DirectorJune 10, 2005
    
    /s/ John A. ClericoJohn A. Clerico, DirectorJune 10, 2005
    
    /s/ Dean CosgroveG. Dean Cosgrove, DirectorJune 10, 2005
    
    /s/ James F. LewisJames F. Lewis, DirectorJune 10, 2005
    
    /s/ W. Curtis FossettW. Curtis FossettController and Corporate Secretary(Principal Financial and Accounting Officer)
 28




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##### Table of Contents



Report of Independent
Registered Public Accounting Firm To the Board of Directors and Shareholders
Educational Development Corporation We have audited the balance sheet of Educational Development Corporation as of
February 28, 2005, and the related statements of earnings, shareholders equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Educational Development
Corporation as of February 28, 2005, and the results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for stock based compensation with the election to early
adopt Statement of Financial Accounting Standards No. 123 (revised 2004) Share
Based Payment. We also audited the adjustments described in Note 1 that were
applied to restate the financial statements as of and for the year ended
February 29, 2004 and February 28, 2003. In our opinion, such adjustments are
appropriate and have been properly applied. /s/ Tullius Taylor Sartain & Sartain LLP Tulsa, Oklahoma
June 9, 2005 29




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of
Educational Development Corporation We have audited the balance sheet of Educational Development Corporation (the Company) as of
February 29, 2004, and the related statements of earnings, shareholders equity, and cash flows for
the years ended February 29, 2004 and February 28, 2003 (none of which are presented herein). These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial
position of the Company at February 29, 2004, and the results of its operations and its cash flows
for the years ended February 29, 2004 and February 28, 2003 in conformity with accounting
principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Tulsa, Oklahoma
May 19, 2004 30




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION 
 BALANCE SHEETS
FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 
 2005
    
    
    2004ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    364,024
    
    
    $
    260,505Accounts receivable, less allowance for doubtful accounts and
sales returns $140,391 (2005) and $150,919 (2004)
    
    
    2,442,436
    
    
    
    2,135,237InventoriesNet
    
    
    11,749,238
    
    
    
    13,795,235Prepaid expenses and other assets
    
    
    103,346
    
    
    
    147,024Income taxes receivable
    
    
    53,805
    
    
    
    44,855Deferred income taxes
    
    
    44,800
    
    
    
    30,200Total current assets
    
    
    14,757,649
    
    
    
    16,413,056INVENTORIESNet
    
    
    723,290
    
    
    
    570,996PROPERTY, PLANT AND EQUIPMENTNet
    
    
    2,402,767
    
    
    
    2,046,142DEFERRED INCOME TAXES
    
    
    96,800
    
    
    
    82,500TOTAL
    
    $
    17,980,506
    
    
    $
    19,112,694LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Note payable to bank
    
    $
    1,428,000
    
    
    $
    394,000Accounts payable
    
    
    3,612,877
    
    
    
    3,719,428Accrued salaries and commissions
    
    
    463,423
    
    
    
    445,507Other current liabilities
    
    
    344,060
    
    
    
    310,202Total current liabilities
    
    
    5,848,360
    
    
    
    4,869,137COMMITMENTS (Note 7)SHAREHOLDERS EQUITY:Common stock, $0.20 par value; Authorized 8,000,000 shares;Issued 5,762,340 (2005) and 5,596,340 (2004) shares;Outstanding 3,735,513 (2005) and 4,025,773 (2004) shares
    
    
    1,152,468
    
    
    
    1,119,268Capital in excess of par value
    
    
    7,469,486
    
    
    
    6,518,669Retained earnings
    
    
    14,214,093
    
    
    
    12,292,06622,836,047
    
    
    
    19,930,003Less treasury stock, at cost
    
    
    (10,703,901
    )
    
    
    (5,686,446
    )12,132,146
    
    
    
    14,243,557TOTAL
    
    $
    17,980,506
    
    
    $
    19,112,694
 See notes to financial statements. 31




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION 
 STATEMENTS OF EARNINGS
YEARS ENDED FEBRUARY 28, 2005, FEBRUARY 29, 2004 AND FEBRUARY 28, 2003 
 2005
    
    
    2004
    
    
    2003GROSS SALES
    
    $
    41,361,612
    
    
    $
    40,940,822
    
    
    $
    36,715,349Less discounts and allowances
    
    
    (11,324,165
    )
    
    
    (11,424,127
    )
    
    
    (11,223,231
    )Transportation revenue
    
    
    1,613,332
    
    
    
    1,610,573
    
    
    
    1,377,563NET REVENUES
    
    
    31,650,779
    
    
    
    31,127,268
    
    
    
    26,869,681COST OF SALES
    
    
    11,338,039
    
    
    
    11,295,738
    
    
    
    10,103,532Gross margin
    
    
    20,312,740
    
    
    
    19,831,530
    
    
    
    16,766,149OPERATING EXPENSES:Operating and selling
    
    
    6,860,540
    
    
    
    6,730,548
    
    
    
    5,754,324Sales commissions
    
    
    7,875,891
    
    
    
    7,712,408
    
    
    
    6,327,058General and administrative
    
    
    1,719,240
    
    
    
    1,639,141
    
    
    
    1,537,775Interest
    
    
    67,620
    
    
    
    9,762
    
    
    
    88416,523,291
    
    
    
    16,091,859
    
    
    
    13,620,041OTHER INCOME
    
    
    95,625
    
    
    
    92,779
    
    
    
    77,207EARNINGS BEFORE INCOME TAXES
    
    
    3,885,074
    
    
    
    3,832,450
    
    
    
    3,223,315INCOME TAXES
    
    
    1,479,000
    
    
    
    1,459,000
    
    
    
    1,226,700NET EARNINGS
    
    $
    2,406,074
    
    
    $
    2,373,450
    
    
    $
    1,996,615BASIC AND DILUTED EARNINGS
PER SHARE:Basic
    
    $
    0.62
    
    
    $
    0.60
    
    
    $
    0.52Diluted
    
    $
    0.59
    
    
    $
    0.55
    
    
    $
    0.48WEIGHTED AVERAGE NUMBER OF
COMMON AND EQUIVALENT SHARES
OUTSTANDING:Basic
    
    
    3,902,075
    
    
    
    3,948,193
    
    
    
    3,835,411Diluted
    
    
    4,088,130
    
    
    
    4,293,802
    
    
    
    4,158,781
 See notes to financial
statements. 32




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION 
 STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED FEBRUARY 28, 2005, FEBRUARY 29, 2004 AND FEBRUARY 28, 2003 
 Common Stock(par value $0.20 per share)Number of
    
    
    
    
    
    
    Capital in
    
    
    
    
    
    
    Treasury StockShares
    
    
    
    
    
    
    Excess of
    
    
    Retained
    
    
    Number of
    
    
    
    
    
    
    ShareholdersIssued
    
    
    Amount
    
    
    Par Value
    
    
    Earnings
    
    
    Shares
    
    
    Amount
    
    
    EquityBALANCEMarch 1, 2002
    
    
    5,429,240
    
    
    $
    1,085,848
    
    
    $
    4,417,507
    
    
    $
    9,647,723
    
    
    
    1,607,123
    
    
    $
    (5,035,737
    )
    
    $
    10,115,341Cumulative SFAS 123 retroactive adjustments
    
    
    
    
    
    
    
    
    
    
    1,127,328
    
    
    
    (1,101,628
    )
    
    
    
    
    
    
    
    
    
    
    25,700Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    41,470
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,470Purchases of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107,498
    
    
    
    (765,227
    )
    
    
    (765,227
    )Sales of treasury stock
    
    
    
    
    
    
    
    
    
    
    138,286
    
    
    
    
    
    
    
    (90,201
    )
    
    
    321,566
    
    
    
    459,852Exercise of options ($1.50$5.50/share)
    
    
    12,400
    
    
    
    2,480
    
    
    
    63,613
    
    
    
    
    
    
    
    (10,400
    )
    
    
    32,607
    
    
    
    98,700Dividends paid ($0.06/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (230,146
    )
    
    
    
    
    
    
    
    
    
    
    (230,146
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,996,615
    
    
    
    
    
    
    
    
    
    
    
    1,996,615BALANCEFebruary 28, 2003
    
    
    5,441,640
    
    
    
    1,088,328
    
    
    
    5,788,204
    
    
    
    10,312,564
    
    
    
    1,614,020
    
    
    
    (5,446,791
    )
    
    
    11,742,305Purchases of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,304
    
    
    
    (575,820
    )
    
    
    (575,820
    )Sales of treasury stock
    
    
    
    
    
    
    
    
    
    
    301,525
    
    
    
    
    
    
    
    (97,757
    )
    
    
    336,165
    
    
    
    637,690Exercise of options ($1.375$4.00/share)
    
    
    154,700
    
    
    
    30,940
    
    
    
    341,040
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    371,980Tax benefitstock options
    
    
    
    
    
    
    
    
    
    
    87,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,900Dividends paid ($0.10/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (393,948
    )
    
    
    
    
    
    
    
    
    
    
    (393,948
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,373,450
    
    
    
    
    
    
    
    
    
    
    
    2,373,450BALANCEFebruary 29, 2004
    
    
    5,596,340
    
    
    
    1,119,268
    
    
    
    6,518,669
    
    
    
    12,292,066
    
    
    
    1,570,567
    
    
    
    (5,686,446
    )
    
    
    14,243,557Purchases of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    479,360
    
    
    
    (5,103,255
    )
    
    
    (5,103,255
    )Sales of treasury stock
    
    
    
    
    
    
    
    
    
    
    36,700
    
    
    
    
    
    
    
    (23,100
    )
    
    
    85,800
    
    
    
    122,500Exercise of options ($2.1875$6.00/share)
    
    
    166,000
    
    
    
    33,200
    
    
    
    510,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    543,500Tax benefitstock options
    
    
    
    
    
    
    
    
    
    
    399,178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    399,178Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    4,639
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,639Dividends paid ($0.12/share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (484,047
    )
    
    
    
    
    
    
    
    
    
    
    (484,047
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,406,074
    
    
    
    
    
    
    
    
    
    
    
    2,406,074BALANCEFebruary 28, 2005
    
    
    5,762,340
    
    
    $
    1,152,468
    
    
    $
    7,469,486
    
    
    $
    14,214,093
    
    
    
    2,026,827
    
    
    $
    (10,703,901
    )
    
    $
    12,132,146
 33




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION 
 STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 2005, FEBRUARY 29, 2004 AND FEBRUARY 28, 2003 
 2005
    
    
    2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net earnings
    
    $
    2,406,074
    
    
    $
    2,373,450
    
    
    $
    1,996,615Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    125,570
    
    
    
    167,500
    
    
    
    165,910Stock-based compensation
    
    
    4,639
    
    
    
    
    
    
    
    41,470Deferred income taxes
    
    
    (28,900
    )
    
    
    44,800
    
    
    
    (24,100
    )Provision for doubtful accounts and sales returns
    
    
    1,210,272
    
    
    
    1,009,645
    
    
    
    1,057,803Loss on disposal of property, plant and equipment
    
    
    1,163
    
    
    
    
    
    
    
    Changes in assets and liabilities:Accounts and income tax receivable
    
    
    (1,526,421
    )
    
    
    (1,052,325
    )
    
    
    (1,154,792
    )Inventories
    
    
    1,893,703
    
    
    
    (2,610,636
    )
    
    
    (2,779,765
    )Prepaid expenses and other assets
    
    
    43,678
    
    
    
    (20,868
    )
    
    
    11,846Accounts payable, accrued salaries and commissions,
and other current liabilities
    
    
    (54,777
    )
    
    
    (1,209,688
    )
    
    
    1,707,121Income tax payable
    
    
    
    
    
    
    (160,303
    )
    
    
    96,550Total adjustments
    
    
    1,668,927
    
    
    
    (3,831,875
    )
    
    
    (877,957
    )Net cash provided by (used in) operating activities
    
    
    4,075,001
    
    
    
    (1,458,425
    )
    
    
    1,118,658CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (483,358
    )
    
    
    (235,854
    )
    
    
    (155,744
    )Net cash used in investing activities
    
    
    (483,358
    )
    
    
    (235,854
    )
    
    
    (155,744
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowings on revolving credit agreement
    
    
    13,235,000
    
    
    
    8,192,000
    
    
    
    1,317,000Payments on revolving credit agreement
    
    
    (12,201,000
    )
    
    
    (7,798,000
    )
    
    
    (1,317,000
    )Cash received from exercise of stock options
    
    
    543,500
    
    
    
    371,980
    
    
    
    98,700Tax benefit of stock options exercised
    
    
    399,178
    
    
    
    87,900
    
    
    
    Cash received from sale of treasury stock
    
    
    122,500
    
    
    
    637,690
    
    
    
    459,852Cash paid to acquire treasury stock
    
    
    (5,103,255
    )
    
    
    (575,820
    )
    
    
    (765,227
    )Dividends paid
    
    
    (484,047
    )
    
    
    (393,948
    )
    
    
    (230,146
    )Net cash provided by (used in) financing activities
    
    
    (3,488,124
    )
    
    
    521,802
    
    
    
    (436,821
    )NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    103,519
    
    
    
    (1,172,477
    )
    
    
    526,093CASH AND CASH EQUIVALENTSBEGINNING OF YEAR
    
    
    260,505
    
    
    
    1,432,982
    
    
    
    906,889CASH AND CASH EQUIVALENTSEND OF YEAR
    
    $
    364,024
    
    
    $
    260,505
    
    
    $
    1,432,982SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:Cash paid for interest
    
    $
    62,533
    
    
    $
    8,102
    
    
    $
    884Cash paid for income taxes
    
    $
    1,117,672
    
    
    $
    1,531,458
    
    
    $
    1,154,250
 See notes to financial statements. 34




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##### Table of Contents



EDUCATIONAL DEVELOPMENT CORPORATION 
 NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 2005, FEBRUARY 29, 2004 AND FEBRUARY 28, 2003 
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of BusinessEducational Development Corporation (the Company) distributes books and
publications through its Publishing and Usborne Books at Home (UBAH) Divisions to book, toy and
gift stores, libraries and home educators located throughout the United States (U.S.). The
Company is the sole U.S. distributor of books and related items, which are published by an England
based publishing company. The England based publishing company is the Companys primary supplier. EstimatesThe Companys financial statements were prepared in conformity with accounting
principles generally accepted in the United States of America, which requires management to make
estimates and assumptions that affect the amounts and disclosures in the financial statements.
Actual results could differ from these estimates. Business ConcentrationA significant portion of inventory purchases by the Company are
concentrated with an England based publishing company. Purchases from this England based
publishing company were approximately $8.0 million, $12.7 million and $11.1 million for the fiscal
years ended February 28, 2005, February 29, 2004 and February 28, 2003, respectively. Total
inventory purchases were approximately $11.2 million, $15.3 million and $13.9 million for the
fiscal years ended February 28, 2005, February 29, 2004 and February 28, 2003, respectively. Cash and Cash EquivalentsCash and cash equivalents include cash on hand and cash on deposit
in banks. The Company maintains bank accounts that are insured by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. At times, cash balances may be in excess of the FDIC insurance
limit. The Company believes no significant concentrations of risk exist with respect to its cash. Accounts ReceivableAccounts receivable are uncollateralized customer obligations due under
normal trade terms generally requiring payment within thirty days from the invoice date. Trade
accounts are stated at the amount management expects to collect from outstanding balances.
Delinquency fees are not assessed. Payments of accounts receivable are allocated to the specific
invoices identified on the customers remittance advice. Accounts receivable are carried at
original invoice amount less an estimated reserve made for returns and discounts based on quarterly
review of historical rates of returns and expected discounts to be taken. The carrying amount of
accounts receivable is reduced, if needed, by a valuation allowance that reflects managements best
estimate of the amounts that will not be collected. Management individually reviews all accounts
receivable balances that exceed sixty days from invoice date and based on an assessment of current
creditworthiness, estimates the portion, if any, of the balance that will not be collected.
Management provides for probable uncollectible amounts through a charge to earnings and a credit to
a valuation account based on its assessment of the current status of the individual accounts.
Balances that remain outstanding after management has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit to trade accounts receivable.
Changes in the valuation allowance have not been material to the financial statements. Recoveries
of trade receivables previously written off are recorded when received. 35




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##### Table of Contents



InventoriesInventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method. The Company presents a portion of its inventory as a
noncurrent asset. Occasionally the Company 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 excess quantities were included in noncurrent inventory.
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. Inventories are presented net of a valuation allowance. Management has estimated and included
an allowance for slow moving inventory for both current and noncurrent inventory. This allowance
is based on managements analysis of inventory on hand at February 28, 2005 and February 29, 2004. Property, Plant and EquipmentProperty, plant and equipment are stated at cost and depreciated
on a straight-line basis over the estimated useful lives, as follows: Building
    
    30 yearsMachinery & equipment
    
    3 - 10 yearsFurniture & fixtures
    
    3 years
 Income TaxesThe Company records deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, using the regular tax rate expected
to be in effect when the taxes are actually paid or recovered. The Company records net deferred
tax assets related to the recognition of future tax benefits, to the extent that realization of
such benefits is considered more likely than not to occur. Revenue RecognitionSales are recognized and recorded when products are shipped. Products are
shipped FOB shipping point. The UBAH Divisions sales are paid before the product is shipped.
These sales accounted for 77% of net revenues in FY2005, 76% in FY2004 and 72% in FY2003. Estimated
allowances for sales returns are recorded as sales are recognized and recorded. Management uses a
moving average calculation to estimate the allowance for sales returns. Management approves sales
returns on a case-by-case basis. The Company is not responsible for product damaged in transit.
Damaged returns are primarily from the retail stores. The damages occur in the stores, not in
shipping to the stores. It is industry practice to accept returns from wholesale customers.
Transportation revenue, the amount billed to the customer for shipping the product, is recorded
when products are shipped. Advertising CostsThe Company expenses advertising costs as incurred. Advertising expenses,
included in selling and operating expenses in the statements of earnings, were $11,573 in FY2005,
$6,795 in FY2004 and $11,460 in FY2003. Shipping and Handling CostsThe Company classifies shipping and handling costs as operating
and selling expenses in the statements of earnings. Shipping and handling costs were $2,108,565
for FY 2005, $1,995,038 for FY2004 and $1,685,072 for FY2003. Earnings Per ShareBasic earnings per share (EPS) is computed by dividing net income 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. 36




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##### Table of Contents



The following reconciles the diluted earnings per share: Year Ended
    
    
    Year Ended
    
    
    Year EndedFebruary 28,
    
    
    February 29,
    
    
    February 28,2005
    
    
    2004
    
    
    2003Diluted Earnings Per Share:Net earnings applicable to
common shareholders
    
    $
    2,406,074
    
    
    $
    2,373,450
    
    
    $
    1,996,615Shares:Weighted average shares
outstandingbasic
    
    
    3,902,075
    
    
    
    3,948,193
    
    
    
    3,835,411Assumed exercise of options
    
    
    186,055
    
    
    
    345,609
    
    
    
    323,370Weighted average shares
outstandingdiluted
    
    
    4,088,130
    
    
    
    4,293,802
    
    
    
    4,158,781Diluted Earnings Per Share
    
    $
    0.59
    
    
    $
    0.55
    
    
    $
    0.48
 There were no stock options for the fiscal years ended February 28, 2005, February 29, 2004
and February 28, 2003 excluded from the diluted earnings per share calculation. Fair Value of Financial InstrumentsFor cash and cash equivalents, accounts receivable,
accounts payable and notes payable to the bank, the carrying amount approximates fair value because
of the short maturity of those instruments. Long-Lived Asset ImpairmentThe Company reviews the value of long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable based on estimated future cash flows. No impairment was noted as a result of such
review during the years ended February 28, 2005, February 29, 2004 and February 28, 2003. Stock-Based Compensation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
begins with its fiscal year ended February 28, 1997. As a result of the adoption, retained
earnings as of March 1, 2003 was reduced by $1,101,628; deferred tax assets were increased by
$25,700; and capital in excess of par value was increased by $1,127,328. The accounting change
increased earnings by approximately $198,000 in fiscal year 2005 ($.05 per diluted share) and
decreased earnings by approximately $41,000 in fiscal year 2003 ($.01 per diluted share.) ReclassificationsCertain prior year amounts have been reclassified to conform with the 2005
presentation. 37




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##### Table of Contents



2. INVENTORIES Inventories consist of the following: February 28,
    
    
    February 29,2005
    
    
    2004Current:Book inventory
    
    $
    11,785,698
    
    
    $
    13,824,645Inventory valuation allowance
    
    
    (36,460
    )
    
    
    (29,410
    )Inventories netcurrent
    
    $
    11,749,238
    
    
    $
    13,795,235Noncurrent:Book inventory
    
    $
    1,111,700
    
    
    $
    823,751Inventory valuation allowance
    
    
    (388,410
    )
    
    
    (252,755
    )Inventories netnoncurrent
    
    $
    723,290
    
    
    $
    570,996
 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: February 28,
    
    
    February 29,2005
    
    
    2004Land
    
    $
    250,000
    
    
    $
    250,000Building
    
    
    2,124,712
    
    
    
    1,540,000Machinery and equipment
    
    
    1,765,552
    
    
    
    1,710,070Furniture and fixtures
    
    
    65,807
    
    
    
    56,8154,206,071
    
    
    
    3,556,885Less accumulated depreciation and amortization
    
    
    (1,803,304
    )
    
    
    (1,690,519
    )Construction in progress
    
    
    
    
    
    
    179,776$
    2,402,767
    
    
    $
    2,046,142
 38




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##### Table of Contents



4. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. The tax effects of significant items comprising the Companys net
deferred tax assets and liabilities as of February 28, 2005 and February 29, 2004 are as follows: February 28,
    
    
    February 29,2005
    
    
    2004Current:Deferred tax assets:Allowance for doubtful accounts
    
    $
    29,400
    
    
    $
    19,000Allowance for slow moving inventory
    
    
    13,900
    
    
    
    11,200Stock based compensation
    
    
    1,500
    
    
    
    Deferred tax assets
    
    
    44,800
    
    
    
    30,200Deferred tax assetNet
    
    $
    44,800
    
    
    $
    30,200Noncurrent:Deferred tax assets:Allowance for slow moving inventory
    
    $
    154,500
    
    
    $
    103,000Stock based compensation
    
    
    4,200
    
    
    
    25,700Deferred tax assets
    
    
    158,700
    
    
    
    128,700Deferred tax liabilities:Property and equipment
    
    
    (61,900
    )
    
    
    (46,200
    )Deferred tax liabilities
    
    
    (61,900
    )
    
    
    (46,200
    )Deferred tax assetNet
    
    $
    96,800
    
    
    $
    82,500
 Management has determined that no valuation allowance is necessary to reduce the deferred tax
assets as it is more likely than not that such assets are realizable. 39




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##### Table of Contents



The components of income tax expense are as follows: February 28
    
    
    February 29
    
    
    February 282005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    1,300,000
    
    
    $
    1,202,200
    
    
    $
    1,063,200State
    
    
    229,400
    
    
    
    212,000
    
    
    
    187,6001,529,400
    
    
    
    1,414,200
    
    
    
    1,250,800Deferred:Federal
    
    
    (43,100
    )
    
    
    37,800
    
    
    
    (20,500
    )State
    
    
    (7,300
    )
    
    
    7,000
    
    
    
    (3,600
    )(50,400
    )
    
    
    44,800
    
    
    
    (24,100
    )Total income tax expense
    
    $
    1,479,000
    
    
    $
    1,459,000
    
    
    $
    1,226,700
 The following reconciles the Companys expected income tax expense utilizing statutory tax
rates to the actual tax expense: February 28,
    
    
    February 29,
    
    
    February 28,2005
    
    
    2004
    
    
    2003Tax expense at federal statutory rate
    
    $
    1,321,000
    
    
    $
    1,303,000
    
    
    $
    1,096,000State income taxnet of federal tax benefit
    
    
    156,000
    
    
    
    153,000
    
    
    
    130,000Other
    
    
    2,000
    
    
    
    3,000
    
    
    
    700$
    1,479,000
    
    
    $
    1,459,000
    
    
    $
    1,226,700
 5. EMPLOYEE BENEFIT PLAN The Company has a profit sharing plan that incorporates the provisions of Section 401(k) of
the Internal Revenue Code. The 401(k) plan covers substantially all employees meeting specific age
and length of service requirements. Matching contributions from the Company are discretionary and
amounted to $70,280, $29,474 and $60,412 in the fiscal years ended February 28, 2005, February 29,
2004 and February 28, 2003. 6. NOTE PAYABLE TO BANK The Company has a $3,500,000 revolving credit agreement, with interest payable monthly at
prime minus 0.25% (5.25% at February 28, 2005), collateralized by substantially all assets of the
Company and maturing on June 30, 2005. Available credit under the revolving credit agreement was
$2,072,000 at February 28, 2005, and $3,106,000 at February 29, 2004. The agreement contains
provisions that require the Company to maintain specified financial ratios, restrict transactions
with related parties, prohibit mergers or consolidation, disallow additional debt, and limit the
amount of compensation, salaries, investments, capital expenditures and leasing transactions. The
Company intends to renew the bank agreement or obtain other financing upon maturity. The Company had $1,428,000 of borrowings outstanding on the above revolving credit agreement
at February 28, 2005 and $394,000 of borrowings outstanding at February 29, 2004. 7. COMMITMENTS At February 28, 2005, the Company had outstanding commitments to purchase inventory from its
primary vendor totaling approximately $4,053,900. 40




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##### Table of Contents



8. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS The Board of Directors adopted the 1992 Incentive Stock Option Plan (the 1992 Plan) in June
of 1992, which authorized the Company to grant up to 1,000,000 stock options. The 1992 Plan
expired in June of 2002 upon which the Board of Directors adopted the 2002 Stock Option Plan (the
2002 Plan). The 2002 Plan also authorized the Company to grant up to 1,000,000 stock options. Options granted under the 1992 Plan and 2002 Plan (collectively the Incentive Plans) vest at
date of grant and are exercisable up to ten years from the date of grant. The exercise price on
options granted is equal to the market price at the date of grant. Options outstanding at February
28, 2005 expire beginning in December 2007 through March 2014. A summary of the status of the Companys Incentive Plans as of February 28, 2005, February 29,
2004 and February 28, 2003, and changes during the years then ended is presented below: 2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at
Beginning of Year
    
    
    424,700
    
    
    $
    3.57
    
    
    
    579,400
    
    
    $
    3.26
    
    
    
    590,600
    
    
    $
    3.24Granted
    
    
    1,000
    
    
    
    10.00
    
    
    
    
    
    
    
    
    
    
    
    15,000
    
    
    
    6.00Exercised/canceled
    
    
    (166,000
    )
    
    
    (3.27
    )
    
    
    (154,700
    )
    
    
    (2.40
    )
    
    
    (26,200
    )
    
    
    (4.29
    )Outstanding at End of Year
    
    
    259,700
    
    
    $
    3.79
    
    
    
    424,700
    
    
    $
    3.57
    
    
    
    579,400
    
    
    $
    3.26
 The following table summarizes information about stock options outstanding at February 28,
2005: Number
    
    Weighted AverageRange of
    
    Outstanding
    
    RemainingExercise
    
    at February 28,
    
    Contractual
    
    Weighted AveragePrices
    
    2005
    
    Life (Years)
    
    Exercise Price$2.19 - $2.50
    
    
    91,000
    
    
    5
    
    $
    2.26$   3.81
    
    
    5,000
    
    
    3
    
    $
    3.81$   4.00
    
    
    20,000
    
    
    3
    
    $
    4.00$   4.63
    
    
    135,200
    
    
    3
    
    $
    4.63$   6.00
    
    
    7,500
    
    
    8
    
    $
    6.00$ 10.00
    
    
    1,000
    
    
    9
    
    $
    10.00259,700
 All options outstanding are exercisable at February 28, 2005. Options totaling 1,000 shares were granted in the fiscal year ended February 28, 2005. The
fair value of options granted under the Incentive Plan was estimated on the date of grant using the
Black-Scholes option-pricing model. The following assumptions were used for options granted in the
fiscal year ended February 28, 2005: 1% dividend yield, expected volatility of 26.49%, risk free
interest rate of 4.06%, and expected life of ten years; and the following assumptions were used for
options granted in the fiscal year ended February 28, 2003: no dividend yield, expected volatility
of 27.64%, risk free interest rate of 3.68%, and expected life of ten years. Compensation
expense was increased by $4,639 and $41,471 for 2005 and 2003, respectively, and the income tax
provision was decreased by $1,500 for 2005. 41




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##### Table of Contents



9. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended February
28, 2005, February 29, 2004 and February 28, 2003. Basic
    
    
    DilutedNet
    
    
    
    
    
    
    
    
    
    
    Earnings
    
    
    EarningsRevenues
    
    
    Gross Margin
    
    
    Net Earnings
    
    
    Per Share
    
    
    Per Share2005First quarter
    
    $
    8,553,300
    
    
    $
    5,549,400
    
    
    $
    824,400
    
    
    $
    0.21
    
    
    $
    0.19Second quarter
    
    
    6,992,200
    
    
    
    4,373,100
    
    
    
    452,400
    
    
    
    0.11
    
    
    
    0.11Third quarter
    
    
    9,331,100
    
    
    
    6,110,600
    
    
    
    809,400
    
    
    
    0.21
    
    
    
    0.20Fourth quarter
    
    
    6,774,179
    
    
    
    4,279,640
    
    
    
    319,874
    
    
    
    0.09
    
    
    
    0.09Total year
    
    $
    31,650,779
    
    
    $
    20,312,740
    
    
    $
    2,406,074
    
    
    $
    0.62
    
    
    $
    0.592004First quarter
    
    $
    7,384,200
    
    
    $
    4,701,900
    
    
    $
    585,900
    
    
    $
    0.15
    
    
    $
    0.14Second quarter
    
    
    7,142,100
    
    
    
    4,341,600
    
    
    
    534,400
    
    
    
    0.14
    
    
    
    0.12Third quarter
    
    
    10,168,900
    
    
    
    6,653,700
    
    
    
    871,100
    
    
    
    0.22
    
    
    
    0.20Fourth quarter
    
    
    6,432,068
    
    
    
    4,134,330
    
    
    
    382,050
    
    
    
    0.09
    
    
    
    0.09Total year
    
    $
    31,127,268
    
    
    $
    19,831,530
    
    
    $
    2,373,450
    
    
    $
    0.60
    
    
    $
    0.552003First quarter
    
    $
    6,547,700
    
    
    $
    4,002,400
    
    
    $
    547,700
    
    
    $
    0.14
    
    
    $
    0.13Second quarter
    
    
    6,100,100
    
    
    
    3,644,900
    
    
    
    454,000
    
    
    
    0.12
    
    
    
    0.11Third quarter
    
    
    8,432,900
    
    
    
    5,451,800
    
    
    
    764,900
    
    
    
    0.20
    
    
    
    0.19Fourth quarter
    
    
    5,788,981
    
    
    
    3,667,049
    
    
    
    230,015
    
    
    
    0.06
    
    
    
    0.05Total year
    
    $
    26,869,681
    
    
    $
    16,766,149
    
    
    $
    1,996,615
    
    
    $
    0.52
    
    
    $
    0.48
 The February 28, 2003 quarterly results reflect the reclassification of freight revenue
which aggregated $1,377,563. The February 28, 2005, February 29, 2004 and February 28, 2003 fiscal
year quarterly results reflect the reclassification of supplies revenue which aggregated $721,237,
$870,752 and $678,563 respectively. These reclassifications had no effect on net earnings for any
period presented. The retroactive restatements to adopt SFAS No. 123R described in Note 1,
Stock-Based Compensation, were not material to net earnings of the fiscal years affected. Such
adjustments were recorded in the fourth fiscal quarter of the years ended February 28, 2005 and
2003. 10. BUSINESS SEGMENTS 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,
toy and gift stores, school supply 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 and book fairs. The UBAH Division also distributes to school and public
libraries. 42




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##### Table of Contents



The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. 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. Information by industry segment for the years ended February 28, 2005, February 29, 2004 and
February 28, 2003 is set forth below: Net revenues Publishing
    
    
    UBAH
    
    
    Other
    
    
    Total2005Net revenues
    
    $
    7,362,717
    
    
    $
    24,288,062
    
    
    $
    
    
    
    $
    31,650,779Earnings (loss) before income taxes
    
    
    2,447,035
    
    
    
    5,172,271
    
    
    
    (3,734,232
    )
    
    
    3,885,0742004Net revenues
    
    $
    7,465,762
    
    
    $
    23,661,506
    
    
    $
    
    
    
    $
    31,127,268Earnings (loss) before income taxes
    
    
    2,454,742
    
    
    
    4,757,742
    
    
    
    (3,380,034
    )
    
    
    3,832,4502003Net revenues
    
    $
    7,583,204
    
    
    $
    19,286,477
    
    
    $
    
    
    
    $
    26,869,681Earnings (loss) before income taxes
    
    
    2,552,156
    
    
    
    3,828,388
    
    
    
    (3,157,229
    )
    
    
    3,223,315
 11. STOCK REPURCHASE PLAN In July 1998, the Board of Directors authorized the Company to purchase up to 1,000,000 shares
of the Companys common stock. In May 1999, the Board of Directors authorized the Company to
purchase up to an additional 1,000,000 shares of its common stock. In April 2004 the Board of
Directors authorized the Company to purchase up to an additional 500,000 shares of its common
stock. During fiscal year 2005 the Company continued the stock buyback program by purchasing
479,360 shares of common stock at an average price of $10.65 per share totaling approximately
$5,103,300. The cumulative shares purchased under the share repurchase program, as of February 28,
2005, were 2,320,936 shares at a cost totaling approximately $11,728,700. 12. SUBSEQUENT EVENT On May 26, 2005 the Company announced that it would pay a $0.15 per share dividend on June 10,
2005 to shareholders of record as of June 3, 2005. ****** 43