Excelligence Learning Corporation Announces Fourth Quarter and FY 2004 Results

Business Wire, March 14, 2005

MONTEREY, Calif. -- Excelligence Learning Corporation (Nasdaq:LRNS)

--Total 2004 Revenues Reach Record $121.3 Million

--Fourth Quarter Revenues up 20.0% to $21.5 Million

Excelligence Learning Corporation (Nasdaq:LRNS), a leader in developing, manufacturing and distributing educational products to the early childhood and elementary school markets, today reported financial and operating results for the fourth quarter and fiscal year ending December 31, 2004.

Fourth Quarter 2004

Total revenues for the fourth quarter of 2004 increased 20.0% to $21.5 million, compared to $17.9 million for the same period last year. The Early Childhood division grew by 20.7% over the prior-year period, while the Elementary School division improved by 14.8% compared to 2003. The Company's gross profit for the quarter advanced by 14.0% to $6.8 million, as compared to $6.0 million for the same period a year earlier. Operating loss for the quarter narrowed to $(2.8) million, compared to $(2.9) million for the same period last year. Net loss for the fourth quarter was $(1.3) million, or $(0.15) per share, as compared to net income of $0.8 million, or $0.09 per share, for the prior year. Over $2.2 million in additional tax benefits in 2003 (described in detail below) masked the Company's improved operating performance for 2004.

Full Year 2004

Total revenues for 2004 increased 10.3% to $121.3 million from $109.9 million in 2003. The Early Childhood division's revenues grew by 16.1% to $91.1 million from $78.5 million in 2003, while revenues in the Elementary School division fell by 4.0% to $30.2 million, compared to $31.4 million in 2003. Operating income for 2004 was $3.1 million, compared to $4.6 million for last year. Net income for the year totaled $2.0 million, or $0.22 per share, as compared to $7.8 million, or $0.91 per share, for the prior year. As previously reported, the financial results for the fiscal year ended December 31, 2003 benefited from two non-recurring tax adjustments. The first adjustment resulted from a change in tax law (an Internal Revenue Service notice related to Section 382) that provided the Company with an adjustment of $2.4 million in fiscal year 2003 for additional net operating losses. The second tax adjustment was a $2.8 million change to the valuation allowance against net operating losses, which the Company expects to be able to utilize in the future.

"2004 was a positive year for the Company in terms of overall revenue growth," stated Ron Elliott, Excelligence's Chief Executive Officer. "Our total revenues for the year surpassed our 2004 full year guidance, and our operating income fell within our prior estimates and was consistent with historic trends for this time in our reporting cycle. Our Early Childhood segment showed strong growth throughout 2004, with its strongest performance in the fourth quarter, as a result of our consistent focus on developing and introducing new product offerings, increasing customer solicitation and improving the targeting and appeal of our sales and marketing strategies. While our Elementary School segment's 2004 performance was negatively impacted by warehouse order fulfillment challenges earlier in the year, the Company has since taken steps to right-size its distribution facilities and improve its fulfillment processes. Based on these efforts, we anticipate that our Elementary School division will return to being efficient and profitable in 2005."

"The competitive environment and increased freight and shipping costs continue to burden our industry. However, our competitive advantage in having four warehouses across the country allows us to exert pressure on our competitors by offering customers a lower threshold for free freight. Adopting a freight policy based on this advantage proved successful in 2004, as evidenced by the 16.1% growth in the Early Childhood segment. We will continue our initiative to grow market share, but we also plan to increase our margin by sourcing more product from China, introducing higher-margin proprietary products under our newly-redesigned Colorations(R) brand and making limited increases in pricing that still allow us to remain very competitive," said Mr. Elliott.

"We take our responsibility as a trusted educational resource for our nation's preschools very seriously, and we plan on delivering on our customers' trust by maintaining our superior customer service, record of timely delivery, and premier product assortment," explained Mr. Elliott.

The Company's gross profit for 2004 represented a 4.1% increase over the 2003 amount, reaching $41.2 million from $39.5 million in 2003. All of the increase in gross profit came from the Early Childhood division, which grew by 10.1%, or $2.9 million. Gross profit gains for the year did not keep pace with revenue gains because of the market share initiative mentioned above, as well as the significant growth in the Company's drop ship business, which operates at a lower gross profit percentage than the Company's traditional lines of business.