<PAGE>
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended February 28, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________.
Commission file number: 0-4957
EDUCATIONAL DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 73-0750007
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10302 East 55th Place, Tulsa, Oklahoma 74146-6515
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (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 X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. [ ]
As of May 14, 1997, 5,217,129 shares of common stock were outstanding. The
aggregate market value of the voting shares held by non-affiliates of the
registrant, based on 3,882,293 shares (total outstanding less shares held by all
officers, directors and 401(k) Plan) extended at the closing market price on May
14, 1997, of these shares traded on the Nasdaq National Market, was
approximately $22,808,471.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated Document Location in Form 10-K
--------------------- ---------------------
All information under the caption Part III - Item 10(a) and Item 10(c)
"Election of Directors" and "Compliance
With Section 16(a)" in the Company's
definitive Proxy Statement to be filed
in connection with the Annual Meeting
of Shareholders to be held July 24, 1997.
All information under the caption Part III - Item 11
"Executive Compensation" in the
Company's definitive Proxy Statement
to be filed in connection with the
Annual Meeting of Shareholders to be
held July 24, 1997.
All information under the caption Part III - Item 12
"Voting Securities and Principal
Holders Thereof" in the Company's
definitive Proxy Statement to be
filed in connection with the Annual
Meeting of Shareholders to be held
July 24, 1997.
NOTE: Part III - Item 14 is located at pages 14 to 17 herein.
2
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED FEBRUARY 28, 1997
PART 1
------
Item 1. (a) General Development of Business
- ------- -------------------------------
Educational Development Corporation ("EDC" or the "Company"), a Delaware
corporation with its principal office in Tulsa, Oklahoma, is the sole United
States distributer of a line of children's books produced in the United Kingdom
by Usborne Publishing Limited. The Company's Home Business Division distributes
these books through independent sales consultants who hold book showings in
individual homes and through book fairs, fund raisers and directs sales. The
Home Business Division also distributes these titles to public and school
libraries. The Company's Publishing Division distributes these books to book
stores, toy stores, specialty stores and other retail outlets throughout the
United States.
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) 1997 the Company operated primarily two divisions:
Home Business Division and Publishing Division. The Home Business Division
distributes books through independent consultants who hold book showings in
individual homes, and through book fairs, fund raisers and direct sales. The
Home Business Division also distributes these titles to school and public
libraries. The Publishing Division markets books to book stores, toy stores,
specialty stores and other retail stores. The Library Division ceased
operations July 1, 1996.
Significant Events During Fiscal Year 1997
------------------------------------------
Effective July 1, 1996 the Company transferred the responsibility of sales
to school and public libraries from the Library Division to the Home Business
Division. Management believes that the strong consultant base, presently 5,700
active consultants, in the Home Business Division will greatly enhance the sales
to this market segment of the Company's business. The initial response to this
change from the Home Business consultants has been excellent. The Company has
developed a training program for those consultants who wish to sell in this
market. Approximately 850 consultants have gone through this program and earned
the designation of Educational Consultant. As a result of this change, the
Company will no longer represent other publishers of library books but is
confident that the larger base of potential sales representatives should provide
increased sales in the library market.
3
<PAGE>
Net Sales for each of the three divisions were as follows:
<TABLE>
<CAPTION>
NET SALES BY DIVISION
- ----------------------------------------------------------------------------------
FY 1997 FY 1996 FY 1995
- -------------------------------------- -------------------- --------------------
Percent Percent Percent
($ M) of Total ($ M) of Total ($ M) of Total
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Home Business $12,932.2 60.9 $ 9,516.0 49.4 $ 4,425.2 35.8
Publishing 7,864.9 37.0 8,191.1 42.5 6,502.1 52.6
Library 442.4 2.1 1,546.4 8.1 1,426.0 11.6
--------- ----- --------- ----- --------- -----
$21,239.5 100.0 $19,253.5 100.0 $12,353.3 100.0
========= ===== ========= ===== ========= =====
</TABLE>
As the table above indicates, the Home Business Division has experienced an
increase in sales in each of the last three years, and their percentage of sales
to the total sales has also increased in each of the last three years. The
Company sees this trend continuing as the Home Business Division continues to
grow at a greater rate than the Publishing Division. The Publishing Division's
sales declined somewhat during FY 1997, as discussed in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operation. The
decline in the Library Division sales was due to the closure of the division, as
previously discussed.
<TABLE>
<CAPTION>
OPERATING PROFIT BY DIVISION
- ---------------------------------------------------
FY 1997 FY 1996 FY 1995
- ----------------------------- --------- ---------
($ M) ($ M) ($ M)
- ---------------------------------------------------
<S> <C> <C> <C>
Home Business $3,150.7 $2,690.1 $1,275.1
Publishing $2,466.6 $3,151.0 $2,414.3
Library $ 178.3 $ 336.4 $ 319.9
</TABLE>
IDENTIFIABLE ASSETS BY DIVISION
- ---------------------------------------------------
(none)
(b) Financial Information about Industry Segments
---------------------------------------------
Marketing and distribution of books to the retail trade, including book
stores, toy stores, specialty stores and other retail outlets as well as school
and public libraries, is the principal industry segment in which the Company is
engaged. Reference is made to the financial information contained elsewhere in
this report for financial results of the Company's operations.
4
<PAGE>
(c) Narrative Description of Business
---------------------------------
(i) General
The principal product of both the Home Business Division and Publishing
Division is a line of children's books produced in the United Kingdom by Usborne
Publishing Limited. The Company is the United States distributor of these
books. The Company currently offers approximately 900 different titles. 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. There likewise 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 run out 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 approximately 98% of net sales from
the Usborne line. 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 and has no plans to sell any other line.
(ii) Home Business Division
The Home Business Division markets the Usborne line of approximately 900
titles through a combination of direct sales, home parties, fund raisers and
book fairs sold through a network marketing system. The Division also sells to
school and public libraries.
(iii) Publishing Division
The Publishing Division distributes the Usborne line to book stores, toy
stores, specialty stores and other retail outlets utilizing an inside telephone
sales force as well as independent sales representatives in the field.
(iv) Research and Development
The Company did not incur any research and development expenses during the
last three fiscal years.
(v) Marketing
(a) Home Business Division
The Home Business Division markets through commissioned consultants using a
combination of direct sales, home parties, fund raisers and book fairs. The
division had 5,340 consultants in 50 states at February 28, 1997.
(b) Publishing Division
The Publishing Division markets through commissioned trade representatives
who call on book, toy and specialty stores; and through marketing by telephone
to the trade as well as to school and public libraries. This Division markets
to approximately 12,000 book, toy and specialty stores. Significant orders have
been received from major book chains. During fiscal year 1997 the division
continued to make inroads into mass merchandising outlets such as drug,
department and discount stores.
5
<PAGE>
(vi) Competition
(a) Home Business Division
The Home Business Division faces stiff competition from several other direct
selling companies which have larger financial resources. Federal and state
funding cuts to schools affect 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 by Congress. Management believes its
superior product line 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 which have much larger financial resources. Industry
sales are over $2.3 billion annually. Publishing Division's sales are less than
1/2 of 1% of industry sales. Competitive factors include product quality, price
and deliverability. Possible funding cuts to schools would not impact the
Publishing Division as it does not sell to this market. Management believes it
can compete well in its market area.
(vii) Seasonality
(a) Home Business Division
The level of sales for Home Business Division is greatest during the Fall as
individuals prepare for the Holiday season.
(b) Publishing Division
The level of shipments of the Company's books is greatest in the Fall while
retailers are stocking up for Holiday sales.
(viii) Government Funding
Local, state and Federal funds are important to the Home Business Division
but not to the Publishing Division. In many cities and states in which the
Company does business, school funds have been severely cut.
(ix) Trademarks, Copyrights and Patents
(none)
(x) Employees
As of May 1, 1997, the Company had 53 full-time employees and 34 part-time
employees. The Company believes its relations with its employees to be good.
6
<PAGE>
Item 2. PROPERTIES
- ------- ----------
The Company moved its operations and executive offices on March 1, 1986, to
10302 E. 55th PL, Tulsa, Oklahoma. The Company leases approximately 94,000
square feet of office and warehouse space under a 5 year renewable lease which
expires February 28, 1999.
The Company's operating facility is maintained in good condition and is
adequately insured. Equipment items are well maintained and in good operating
condition consistent with the requirement of the Company's business. The
Company believes that its operating facility meets both its present need and its
needs for future expansion.
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 AND RELATED
- ------- -------------------------------------------------
STOCKHOLDER MATTERS
-------------------
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 1997 and 1996, as reported by the National Association of Securities
Dealers, Inc., as adjusted for the two-for-one stock split, were as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ---------------
Period High Low High Low
- ------ ------ ----- ------ -------
<S> <C> <C> <C> <C>
1st Qtr.. 12-3/4 8-3/4 7-9/16 5-5/8
2nd Qtr.. 9-7/8 6 9 5-1/2
3rd Qtr.. 8-1/8 4-7/8 11-7/8 7-1/2
4th Qtr.. 8-1/4 5-3/4 13-1/8 8-15/16
</TABLE>
The number of shareholders of record of EDC's common stock at May 13, 1997 was
1029.
No dividends were paid in fiscal years 1997 and 1996. In lieu of paying
dividends in the future, the Company intends to invest earnings in Company
growth.
7
<PAGE>
Item 6. SELECTED FINANCIAL DATA
- ------- -----------------------
<TABLE>
<CAPTION>
YEARS ENDED FEBRUARY 28 (29)
-------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales $21,239,507 $19,253,467 $12,353,257 $7,916,527 $6,225,751
----------- ----------- ----------- ---------- ----------
Income From Continuing
Operations $ 1,630,088 $ 1,805,335 $ 1,163,647 $ 631,350 $ 422,099
----------- ----------- ----------- ---------- ----------
Net Earnings $ 1,630,088 $ 1,478,714 $ 1,171,786 $ 893,651 $ 564,499
----------- ----------- ----------- ---------- ----------
Income From Continuing
Operations Per Common
Share (Primary and
Fully Diluted) $ .31 $ .34 $ .22 $ .13 $ .09
----------- ----------- ----------- ---------- ----------
Net Earnings Per Common
Share (Primary and
Fully Diluted) $ .31 $ .28 $ .22 $ .18 $ .12
----------- ----------- ----------- ---------- ----------
Total Assets $13,365,369 $16,422,068 $ 9,665,378 $5,438,709 $4,577,639
----------- ----------- ----------- ---------- ----------
Long Term Obligations -- -- $ 1,000,000 $ 7,673 $ 48,598
----------- ----------- ----------- ---------- ----------
</TABLE>
There were no cash dividends declared during fiscal years 1993 through 1997.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATION
----------------------------------
(a) General
-------
Certain statements contained in this Management Discussion and Analysis
are not based on historical facts, but are forward-looking statements that are
based upon numerous assumptions about future conditions that may ultimately
prove to be inaccurate. Actual events and results may materially differ from
anticipated results described in such statements. The Company's ability to
achieve such results is subject to certain risks and uncertainties. Such risks
and uncertainties include but are not limited to, product prices, continued
availability of capital and financing, and other factors affecting the Company's
business that may be beyond its control.
8
<PAGE>
FY 1997
- -------
The Home Business Division's sales increased 36% in FY 1997 compared with
FY 1996. This was due to the number of active consultants, presently 5,700, who
are actively selling the books through home shows, book fairs, fund raisers and
direct sales. The Division continued to offer new and exciting consultant
incentive programs during FY 1997, including several travel contests. These
programs combined with various specials offered during the year helped attract
and retain consultants. Regional training seminars are held throughout the
country to train supervisors and consultants and exchange new ideas with other
supervisors and consultants. The Division held its first National Seminar in
April, 1997 with approximately 300 consultants and top supervisors in
attendance. This 4-day event offered training and motivational sessions for
those in attendance and was an excellent beginning to FY 1998. Management
expects sales for FY 1998 to exceed those of FY 1997.
The Publishing Division's sales decreased 4% in FY 1997 over FY 1996.
Sales nationwide in the publishing industry have declined. Management believes
the Company has a superior product and can maintain its market share in this
competitive market. The Company has an aggressive in-house telephone sales
force which maintains contact with over 10,000 customers. The telemarketing
staff opened 580 new accounts during FY 1997 versus 609 new accounts in FY 1996.
The rack program continues to be popular with 369 new racks placed during FY
1997 versus 201 in FY 1996. There are now approximately 2,750 racks in place in
bookstores throughout the country. The Company offers special pricing with the
purchase of a display rack. This rack is 6 feet tall with a 21" x 21" base and
5 adjustable shelves. The rack holds approximately 220 books and offers the
retail merchant an excellent method of displaying many of the Company's titles.
These racks serve as a marketing tool for retail merchants. The Company attends
several major national trade shows to further enhance product visibility. For
these reasons, Management is optimistic that the Publishing Division can
maintain its market share.
As discussed under General Development of Business, the Library Division
was closed effective July 1, 1996 and the responsibility for these sales
transferred to the Home Business Division.
Cost of sales increased 2.9% for FY 1997 over FY 1996. Cost of sales as a
percent of gross sales was 26.6% in FY 1997 compared with 27.2% in FY 1996.
Cost of sales as a percentage of gross sales fluctuates depending upon the mix
of products sold during a given year. Management believes that its cost of
sales sold in FY 1998 will remain consistent with 1997 levels.
Operating and selling expenses increased 23.7% for FY 1997 over FY 1996.
As a percent of gross sales these costs were 12.3% in FY 1997 and 10.5% in FY
1996. Contributing to the increases in selling and operating expenses were
increased sales incentives in the Home Business Division and increased credit
card fees in the Home Business Division, both the direct result of increased
sales in this Division. Building rental costs and utilities also increased as
the Company added additional warehouse space during FY 1997. Management expects
operating and selling expense to be approximately 10% - 12% of gross sales for
FY 1998.
Sales commissions increased 22.9% during FY 1997 over FY 1996. As a
percent of gross sales, these costs were 14.9% in FY 1997 compared with 12.7% in
FY 1996. Sales commission as a percentage of gross sales is determined by the
product mix sold, as the commission rates vary with the product being sold and
the Division which makes the sale. The increase in sales by the Home Business
Division, which has a higher commission percentage, resulted in the increase in
commission expense during FY 1997. In October, the Home Business Division put
into place a revised and improved commission structure, which will reduce
commission expense as a percent of Home Business Division sales. Management
expects the full impact of this change to be reflected in FY 1998. Management
anticipates that sales commissions will be approximately 14% - 15% of gross
sales for FY 1998.
9
<PAGE>
General and administrative costs increased during FY 1997 by 42.8% when
compared with FY 1996. As a percentage of gross sales, these expenses were 4.2%
in FY 1997 and 3.1% in FY 1996. General and administrative costs are not always
directly affected by sales, so comparison of these expenses as a percentage of
gross sales can be misleading. Contributing to the increased general and
administrative costs was depreciation, due to the addition of new computer
equipment, and the addition of staff due to increased volumes. Management
expects general and administrative expenses for FY 1998 will be approximately
3.5% to 4.5% of gross sales.
Interest expense increased 15.8% during FY 1997 when compared with FY 1996.
As a percentage of gross sales, interest expense was 1.1% for both FY 1997 and
FY 1996. The increase in interest expense was due primarily to the increased
borrowing levels during FY 1997 when compared with FY 1996.
FY 1996
- -------
The Home Business Division's sales increased 117% in FY 1996 compared with
FY 1995. This was due to a 147% increase in the number of independent
consultants distributing the books. The Division continued to offer new and
exciting consultant incentive programs during FY 1996, including several travel
contests. These programs combined with various specials offered during the year
helped attract and retain consultants. The Division continued to hold several
training seminars during the year to train supervisors and to exchange ideas
with other supervisors.
The Publishing Division's sales increased 25% in FY 1996 over FY 1995. This
increase was attributable to an increase in volume and an increase in market
penetration. Orders continued to increase in size with larger quantities per
order as well as multiple titles being ordered. The rack program continued to
increase with 201 new racks placed during FY 1996 in bookstores throughout the
country. The Division had 2383 racks in place in bookstores. The Company offered
special pricing with the purchase of a display rack. The telemarketing staff
opened 609 new accounts during FY 1996 vs 811 new accounts in FY 1995.
The Library Services Division's sales increased 8% in FY 1996 compared with
FY 1995. Management believed this increase was due primarily to increased
market penetration by the commissioned sales force. The Division represented 20
other publishers in addition to the Usborne line of titles. Sales in the
Library Division continue to increase yearly over the previous year, but the
percentage of total net sales produced by the Library Division declined in
fiscal year 1996 when compared with fiscal year 1995. As discussed earlier,
competition in this market is very competitive and subject to the availability
of government funding.
Cost of sales increased 46% for FY 1996 over FY 1995. Cost of sales as a
percent of gross sales was 27.2% in FY 1996 compared with 27.1% in FY 1995.
Cost of sales as a percentage of gross sales fluctuates depending upon the mix
of products sold.
Operating and selling expenses increased 37% for FY 1996 over FY 1995. As a
percent of gross sales these costs were 10.5% in FY 1996 compared to 11.1% in FY
1995. Sales incentives increased 167% in the Home Business Division as a result
of the increase in sales.
Sales commissions increased 101% during FY 1996 over FY 1995. As a percent
of gross sales, these costs were 12.7% in FY 1996 compared with 9.2% in FY 1995.
Sales commission as a percentage of gross sales is determined by the product mix
being sold, as the commission rates vary with the product being sold and the
Division which makes the sale. The increase in sales by the Home Business
Division, which has a higher commission percentage, resulted in higher
commission cost.
10
<PAGE>
General and administrative costs increased 20.5% in FY 1996 compared with FY
1995. As a percentage of gross sales, these costs were 3.1% in FY 1996 versus
3.7% in FY 1995. General and administrative costs are not always directly
affected by sales, so comparison of these costs as a percentage of sales can be
misleading. Salaries increased 23% as additional staff was added in the
financial and administrative areas.
Interest expense increased $287,897 during FY 1996 compared with FY 1995.
As a percentage of gross sales, interest expense was 1.1% in FY 1996 and
negligible in FY 1995. This increase was due primarily to the increased
borrowing levels during FY 1996 and a higher average interest rate.
FY 1995
- -------
The Home Business Division's sales increased 169% in FY 1995 compared with
FY 1994. This was due to a 110% increase in the number of independent
consultants distributing the books. The Division continued to offer new and
exciting consultant incentive programs during FY 1995, including several travel
contests. These programs combined with various specials offered during the year
helped attract and retain consultants. The Division held several training
seminars during the year to train supervisors and to exchange ideas with other
supervisors.
The Publishing Division's sales increased 24% in FY 1995 over FY 1994. This
increase was attributable to an increase in volume and an increase in market
penetration. Orders increased in size with larger quantities per order as well
as multiple titles being ordered. The rack program continued to increase with
266 new racks placed during FY 1995 in bookstores throughout the country. The
telemarketing staff opened 811 new accounts during FY 1995 vs 1,004 new accounts
in FY 1994.
The Library Services Division's sales increased 42% in FY 1995 compared with
FY 1994. Management believed this increase was due primarily to increased
market penetration by the commissioned sales force. The Division represented 20
other publishers in addition to the Usborne line of titles.
Cost of sales increased 49% for FY 1995 over FY 1994. Cost of sales as a
percent of gross sales was 27.1% in FY 1995 compared with 27.6% in FY 1994.
Cost of sales as a percentage of gross sales fluctuates depending upon the mix
of products sold.
Operating and selling expenses increased 34.4% for FY 1995 over FY 1994. As
a percent of gross sales these costs were 11.1% in FY 1995 compared to 12.6% in
FY 1994. Travel costs increased 96% as the Home Business Division sponsored
several consultant travel contests throughout the year.
Sales commissions increased 117% during FY 1995 over FY 1994. As a percent
of gross sales, these costs were 9.2% in FY 1995 compared with 6.5% in FY 1994.
Sales commission as a percentage of gross sales is determined by the product mix
being sold, as the commission rates vary with the product being sold and the
Division which makes the sale. The increase in sales by the Home Business
Division, which has a higher commission percentage, resulted in higher
commission cost.
General and administrative costs increased 24.7% in FY 1995 compared with FY
1994. As a percentage of gross sales, these costs were 3.7% in FY 1995 versus
4.5% in FY 1994. General and administrative costs are not always directly
affected by sales, so comparison of these costs as a percentage of sales can be
misleading.
Interest expense decreased 66% during FY 1995 compared with FY 1994. As a
percentage of gross sales, interest expense was negligible in FY 1995 and in FY
1994. This decline was due primarily to the decreased borrowing levels during
FY 1995.
11
<PAGE>
(b) Financial Position
------------------
Working capital increased 25% to $7.4 million at fiscal year end 1997 over
fiscal year end 1996. A reduction in payables and short term bank debt,
partially offset by reduced inventory and receivables were the principal
contributors to the increase in working capital. The Company pays interest on
its bank promissory note monthly from current cash flows. Management expects
its financial position to continue to improve during FY 1998 and to have
increased working capital at fiscal year end 1998.
(c) Liquidity and Capital Resources
-------------------------------
Management believes the Company's liquidity at February 28, 1997, to be
adequate. There are no known demands, commitments, events or uncertainties that
would result in a material change in the Company's liquidity during FY 1998.
Capital expenditures are expected to be less than $750,000 in FY 1998. These
expenditures would consist primarily of software and hardware enhancements to
the Company's existing data processing equipment, leasehold improvements and
additions to the warehouse shipping system.
Effective September 25, 1995 the Company signed a Restated Credit and
Security Agreement with State Bank which provided a $6,000,000 line of credit
and replaced the existing loan agreement. The line of credit matured June 30,
1996. The note bore interest at prime plus 1/2%, payable monthly and was
collateralized by substantially all of the assets of the Company. The Company
utilized this line of credit primarily to fund routine operations. Payments
were made from current cash flows.
Effective June 30, 1996 the Company signed a Restated Credit and Security
Agreement with State Bank which provides a $9,000,000 line of credit. The line
of credit is evidenced by a promissory note in the amount of $9,000,000 payable
June 30, 1997. The note bears interest at the Wall Street Journal prime
floating rate payable monthly (8.25% at February 28, 1997). The note is
collateralized by substantially all of the assets of the Company. The Company
utilizes this line of credit primarily to fund routine operations. At February
28, 1997 the Company had available $6,990,000 under this credit agreement.
The Company obtained and uses the credit facility to fund routine
operations. Payments are made from current cash flows. The Company is
negotiating to renew this facility when it matures June 30, 1997. The Company
believes its borrowing capacity under this line to be adequate for the next
several years.
The Company generated cash from operating activities during FY 1997.
Accounts receivable declined in FY 1997 as the Company placed emphasis on
collection efforts and the tightening of credit controls. The Company plans to
continue to maximize its collection efforts in order to maintain cash flows.
Inventories decreased during FY 1997 from the levels of FY 1996 as the
Company streamlined its purchasing procedures. The Company continues to
evaluate its purchasing system in order to ensure that adequate levels are on
hand to support increased sales as well as to meet the six to eight month
resupply requirements of its principal supplier. The Company expects inventory
levels to increase moderately each year as new titles are added to the product
line.
The major component of accounts payable is the amount due the Company's
principal supplier. The reduction in inventory purchases also reduces the
accounts payable to the suppler. As inventory levels increase moderately each
year, accounts payable will also increase moderately each year. Management
anticipates cash flows from operating activities to increase in the foreseeable
future.
Other current liabilities increased in FY 1997 as the direct result of
payments received for product which was not shipped until FY 1998. The revenue
for these products was recognized in FY 1998 when the product was shipped.
12
<PAGE>
Cash used in investing activities increased in FY 1997 as the Company made
enhancements to its computer system and added additional equipment to the
warehouse shipping system.
Net cash provided by financing activities declined in FY 1997 as the Company
was able to pay down the bank promissory note due to improved cash flows during
the year.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The information required by this item begins at page F-1, following
page 18 hereof.
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, 1997.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
(a) Identification of Directors
---------------------------
The information required by this item is furnished by incorporation by
reference to all 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 July 24, 1997.
(b) Identification of 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.
Office
Name Office Held Since Age
---- ------ ---------- ---
Randall W. White Chairman of the Board, 1986 55
President and Treasurer
W. Curtis Fossett Controller and 1989 51
Corporate Secretary
(c) Compliance With Section 16 (a) of the Exchange Act
--------------------------------------------------
The information required by this item is furnished by incorporation by
reference to all information under the caption "Compliance With Section 16 (a)"
in the Company's definitive Proxy Statement to be filed in connection with the
Annual Meeting of Shareholders to be held on July 24, 1997.
13
<PAGE>
Item 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information required by this item is furnished by incorporation by
reference to all 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 July 24, 1997.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------
MANAGEMENT
----------
The information required by this item is furnished by incorporation by
reference to all information under the caption "Voting Securities and Principal
Holders Thereof" in the Company's definitive Proxy Statement to be filed in
connection with the Annual Meeting of Shareholders to be held on July 24, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
There are no relationships or related transactions required to be
disclosed.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) The following documents are filed as part of this a report:
1. Financial Statements Page
-------------------- ----
Independent Auditors' Report F-1
Balance Sheets - February 28, 1997 and
February 29, 1996 F-2
Statements of Earnings - Years ended
February 28, 1997, February 29, 1996
and February 28, 1995 F-3
Statements of Changes in Shareholders' Equity -
Years ended February 28, 1997,
February 29, 1996 and February 28, 1995 F-4
Statements of Cash Flows -
Years ended February 28, 1997,
February 29, 1996 and February 28, 1995 F-5
Notes to Financial Statements F-6-F-14
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, Certificate of Amendment there to dated
June 21, 1968 and By-Laws of the Company are incorporated
herein by reference to Exhibit 1 to Registration Statement
on Form 10 (File No. 0-4957).
14
<PAGE>
3.2 Certificate of Amendment of Restated Certificate of
Incorporation of the Company dated August 27, 1977 and
By-Laws of the Company as amended are incorporated herein
by reference to Exhibits 20.1 and 20.2 to Form 10-K for fiscal
year ended February 28, 1981 (File No. 0-4957).
3.3 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).
3.4 Certificate of Amendment of Restated Certificate of Incorporation
of the Company dated March 22, 1996.
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).
10.1 Educational Development Corporation Incentive Stock Option Plan of
1981, is incorporated herein by reference to Exhibit 10.9 to Form
10-K for fiscal year ended February 28, 1982 (File No. 0-4957).
10.2 Agreement by and among the Company, Usborne Publishing Ltd., and
Hayes Books, Inc., dated May 17, 1983, is incorporated herein by
reference to Exhibit 10.16 to Form 10-K for fiscal year ended
February 29, 1984 (File No. 0-4957).
10.3 Settlement Agreement dated August 7, 1986, by and between the
Company and Hayes Publishing Ltd., Cyril Hayes Books, Inc.
(formerly named Hayes Books, Inc.), and Cyril Hayes is incorporated
herein by reference to Exhibit 10.1 to Form 8-K dated August 7,
1986 (File No. 0-4957).
10.4 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).
10.5 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).
10.6 Loan Agreement dated January 18, 1990, by and between the Company
and State Bank & Trust, N.A., Tulsa, OK (formerly WestStar Bank,
N.A., Bartlesville, OK), is incorporated herein by reference to
Exhibit 10.11 to Form 10-K dated February 28, 1990 (File No. 0-
4957).
15
<PAGE>
10.7 Lease Agreement by and between the Company and James D. Dunn dated
March 1, 1991, is incorporated herein by reference to Exhibit 10.12
to Form 10-K dated February 28, 1991 (File No. 0-4957).
10.8 Agreement for Exchange of Contract Rights and Securities by and
between the Company and Robert D. Berryhill dated October 1, 1990,
is incorporated herein by reference to Exhibit 10.1 to Form 10-K
dated February 28, 1991 (File No. 0-4957).
10.9 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).
10.10 First Amendment dated January 31, 1992 to Loan Agreement between
the Company and State Bank & Trust, N.A., Tulsa, OK, (formally
WestStar Bank, N.A., Bartlesville, OK,) is incorporated herein by
reference to Exhibit 10.14 to Form 10-K dated February 29, 1992
(File No. 0-4957).
10.11 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).
10.12 Second Amendment dated June 30, 1992 to Loan Agreement between the
Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar
Bank, N.A., Bartlesville, OK,) is incorporated herein by reference
to Exhibit 10.12 to Form 10-KSB dated February 28, 1994 (File No.
0-4957).
10.13 Third Amendment dated June 30, 1993 to Loan Agreement between the
Company and State Bank & Trust, N.A., Tulsa, OK, (formally WestStar
Bank, N.A., Bartlesville, OK,) is incorporated herein by reference
to Exhibit 10.13 to Form 10-KSB dated February 28, 1995 (File No.
0-4957).
10.14 Fourth Amendment dated June 30, 1994 to Loan Agreement between the
Company and State Bank & Trust, N.A, Tulsa, OK, is incorporated
herein by reference to Exhibit 10.13 to Form 10-KSB dated February
28, 1995 (File No. 0-4957).
10.15 Fifth Amendment dated March 13, 1995 to Loan Agreement between the
Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated
herein by reference to Exhibit 10.13 to Form 10-KSB dated February
28, 1995 (File No. 0-4957).
10.16 Sixth Amendment dated March 27, 1995 to Loan Agreement between the
Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated
herein by reference to Exhibit 10.13 to Form 10-KSB dated February
28, 1995 (File No. 0-4957).
16
<PAGE>
10.17 Seventh Amendment dated April 27, 1995 to Loan Agreement between
the Company and State Bank & Trust, N.A., Tulsa, OK, is
incorporated herein by reference to Exhibit 10.13 to Form 10-KSB
dated February 28, 1995 (File No. 0-4957).
10.18 Amendment dated February 28, 1995 to the Lease Agreement by and
between the Company and James D. Dunn, is incorporated herein by
reference to Exhibit 10.13 to Form 10-KSB dated February 28, 1995
(File No. 0-4957).
10.19 Eighth Amendment Dated July 27, 1995 to Loan Agreement between the
Company and State Bank & Trust, N.A., Tulsa, OK is incorporated
herein by reference to Exhibit 10.19 to Form 10-KSB dated February
29, 1996 (File No. 0-4957).
10.20 Restated Loan Agreement dated September 25, 1995 between the
Company and State Bank & Trust, N.A., Tulsa, OK is incorporated
herein by reference to Exhibit 10.20 to Form 10-KSB dated February
29, 1996 (File No. 0-4957).
*10.21 Restated Loan Agreement dated June 10, 1996 between the Company and
State Bank & Trust, N.A., Tulsa, OK.
*11. Earnings per share computation.
*23. Independent Auditors' Consent
- -------------------
*Filed Herewith
(b) No reports on Form 8-K were filed during
the last quarter of the period covered by
this report.
17
<PAGE>
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 CORPORATION
Date: May 28, 1997 By /s/ W. Curtis Fossett
------------------------------------
W. Curtis Fossett
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: May 28, 1997 /s/ Randall W. White
------------------------------------
Randall W. White
Chairman of the Board
President, Treasurer and
Director
May 28, 1997 /s/ Robert D. Berryhill
------------------------------------
Robert D. Berryhill, Director
May 28, 1997 /s/ G. Dean Cosgrove
------------------------------------
G. Dean Cosgrove, Director
May 28, 1997 /s/ James F. Lewis
------------------------------------
James F. Lewis, Director
May 28, 1997 /s/ John M. Lare
------------------------------------
John M. Lare, Director
May 28, 1997 By /s/ W. Curtis Fossett
------------------------------------
W. Curtis Fossett
Principal Financial
and Accounting Officer
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Educational Development Corporation:
We have audited the accompanying balance sheets of Educational Development
Corporation as of February 28, 1997 and February 29, 1996, and the related
statements of earnings, shareholders' equity and cash flows for each of the
three years in the period ended February 28, 1997. 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 generally accepted auditing
standards. 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 28, 1997 and
February 29, 1996, and the results of its operations and its cash flows for each
of the three years in the period ended February 28, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
May 2, 1997
Tulsa, Oklahoma
F - 1
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
BALANCE SHEETS
FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 82,153 $ 215,963
Accounts receivable, less allowances
for doubtful accounts and sales returns 2,032,688 2,755,484
Inventories - Net 10,048,457 11,999,873
Prepaid expenses 55,697 109,661
Income taxes receivable 124,092 352,323
Deferred income taxes 159,200 168,300
-------------- --------------
Total current assets 12,502,287 15,601,604
PROPERTY AND EQUIPMENT - Net 848,478 815,362
OTHER ASSETS - Net 14,604 5,102
-------------- --------------
$ 13,365,369 $ 16,422,068
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 2,010,000 $ 5,820,000
Accounts payable 2,305,067 3,215,691
Accrued salaries and commissions 214,198 270,864
Other current liabilities 563,059 383,625
-------------- --------------
Total current liabilities 5,092,324 9,690,180
SHAREHOLDERS' EQUITY:
Common stock, $.20 par value; Authorized 6,000,000 shares;
Issued 5,424,240 and 5,398,240 shares; Outstanding 5,200,697
and 5,191,498 shares 1,084,848 1,079,648
Capital in excess of par value 4,403,242 4,391,339
Retained earnings 3,418,431 1,788,343
-------------- --------------
8,906,521 7,259,330
Less treasury stock, at cost (633,476) (527,442)
-------------- --------------
8,273,045 6,731,888
-------------- --------------
$ 13,365,369 $ 16,422,068
============== ==============
</TABLE>
See notes to financial statements.
F - 2
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF EARNINGS
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996, AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
GROSS SALES $ 31,547,007 $ 30,039,963 $ 20,616,152
Less discounts and allowances (10,307,500) (10,786,496) (8,262,895)
------------ ------------ ------------
Net sales 21,239,507 19,253,467 12,353,257
COST OF SALES 8,396,060 8,155,725 5,587,402
------------ ------------ ------------
Gross margin 12,843,447 11,097,742 6,765,855
------------ ------------ ------------
OPERATING EXPENSES:
Operating and selling 3,883,438 3,138,851 2,289,725
Sales commissions 4,699,279 3,824,500 1,899,317
General and administrative 1,315,012 920,786 764,351
Interest 344,966 297,849 9,952
------------ ------------ ------------
10,242,695 8,181,986 4,963,345
------------ ------------ ------------
OTHER INCOME 33,436 2,279 59,137
------------ ------------ ------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 2,634,188 2,918,035 1,861,647
INCOME TAXES 1,004,100 1,112,700 698,000
------------ ------------ ------------
EARNINGS FROM CONTINUING OPERATIONS 1,630,088 1,805,335 1,163,647
DISCONTINUED OPERATIONS, NET OF TAX:
Earnings (loss) from operations - (25,637) 8,139
Loss on disposal - (300,984) -
------------ ------------ ------------
- (326,621) 8,139
------------ ------------ ------------
NET EARNINGS $ 1,630,088 $ 1,478,714 $ 1,171,786
============ ============ ============
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Primary and fully diluted:
Earnings from continuing operations $ 0.31 $ 0.34 $ 0.22
Discontinued operations - (0.06) -
------------ ------------ ------------
Net earnings $ 0.31 $ 0.28 $ 0.22
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING -
Primary and fully diluted 5,353,938 5,338,834 5,223,490
============ ============ ============
</TABLE>
See notes to financial statements.
F - 3
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
(par value $.20 per share)
------------------------- Retained Treasury Stock
Number of Capital in Earnings --------------------------- Share-
Shares Excess of (Accumulated Number of holders'
Issued Amount Par Value Deficit) Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 1, 1994 2,329,120 $ 465,824 $ 4,449,767 $ (862,157) 96,299 $ (84,076) $ 3,969,358
Exercise of options at $1.875/share 10,000 2,000 16,750 - - - 18,750
Exercise of options at $0.625/share 5,000 1,000 2,125 - - - 3,125
Sales of treasury stock - - 100,483 - (10,426) 9,102 109,585
Net earnings - - - 1,171,786 - - 1,171,786
--------- ----------- ----------- ----------- -------- ----------- -----------
BALANCE, FEBRUARY 28, 1995 2,344,120 468,824 4,569,125 309,629 85,873 (74,974) 5,272,604
Exercise of options at $6.25/share 25,000 5,000 151,250 - - - 156,250
Exercise of options at $3.00/share 5,000 1,000 14,000 - - - 15,000
Exercise of options at $2.75/share 30,000 6,000 76,500 - - - 82,500
Exercise of options at $1.875/share 15,000 3,000 25,125 - - - 28,125
Exercise of options at $1.25/share 15,000 3,000 15,750 - - - 18,750
Exercise of options at $0.50/share 265,000 53,000 79,500 - - - 132,500
Issuance of treasury stock - - (87) - (100) 87 -
Purchase of treasury stock - - - - 22,575 (523,048) (523,048)
Sales of treasury stock - - - - (4,977) 70,493 70,493
Net earnings - - - 1,478,714 - - 1,478,714
Effect of two-for-one stock split
(Note 9) 2,699,120 539,824 (539,824) - 103,371 - -
--------- ----------- ----------- ----------- -------- ----------- -----------
BALANCE, FEBRUARY 29, 1996 5,398,240 1,079,648 4,391,339 1,788,343 206,742 (527,442) 6,731,888
Exercise of options at $0.25/share 20,000 4,000 1,000 - - - 5,000
Exercise of options at $1.50/share 6,000 1,200 7,800 - - - 9,000
Issuance of treasury stock - - 3,103 - (3,840) 10,738 13,841
Purchase of treasury stock - - - - 32,975 (242,730) (242,730)
Sales of treasury stock - - - - (12,334) 125,958 125,958
Net earnings - - - 1,630,088 - - 1,630,088
--------- ----------- ----------- ----------- -------- ----------- -----------
BALANCE, FEBRUARY 28, 1997 5,424,240 $ 1,084,848 $ 4,403,242 $ 3,418,431 223,543 $ (633,476) $ 8,273,045
========= =========== =========== =========== ======== =========== ===========
</TABLE>
See notes to financial statements.
F - 4
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996, AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,630,088 $ 1,478,714 $ 1,171,786
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 252,113 126,697 147,431
Deferred income taxes 9,100 88,700 (113,000)
Provision for doubtful accounts and sales returns 1,225,000 1,250,900 1,143,500
Provision for obsolete inventories -- -- 118,100
Stock issued for awards 4,251 -- --
Changes in assets and liabilities:
Accounts and income taxes receivable (273,973) (2,450,713) (1,567,653)
Inventories 1,951,416 (5,106,474) (3,320,267)
Prepaid expenses and other assets 44,462 (36,815) (111,285)
Accounts payable and accrued expenses (787,856) 320,979 1,964,348
------------ ------------ ------------
Total adjustments 2,424,513 (5,806,726) (1,738,826)
------------ ------------ ------------
Net cash provided by (used in) operating activities 4,054,601 (4,328,012) (567,040)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (275,639) (577,847) (273,129)
------------ ------------ ------------
Net cash used in investing activities (275,639) (577,847) (273,129)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 7,130,000 11,820,000 2,040,000
Payments under revolving credit agreement (10,940,000) (7,000,000) (1,040,000)
Principal payments on capital lease obligations -- (7,673) (40,925)
Cash received from exercise of stock options 14,000 64,952 21,875
Cash received from sale of stock 125,958 70,493 109,585
Cash paid to acquire treasury stock (242,730) (154,875) --
------------ ------------ ------------
Net cash provided by (used in) financing activities (3,912,772) 4,792,897 1,090,535
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (133,810) (112,962) 250,366
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 215,963 328,925 78,559
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 82,153 $ 215,963 $ 328,925
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 368,051 $ 264,462 $ 7,691
============ ============ ============
Cash paid for income taxes $ 766,769 $ 1,259,022 $ 836,500
============ ============ ============
</TABLE>
See notes to financial statements.
F - 5
<PAGE>
EDUCATIONAL DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996, AND FEBRUARY 28, 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Educational Development Corporation (the "Company")
distributes books and publications through its Publishing and Home Business
Divisions. In July 1996, the Company's Library Division ceased operations
and responsibility for sales to this market segment were taken over by the
Home Business Division. The Company is the United States ("U.S.")
distributor of books and related matters, published primarily in England, to
book, toy and gift stores, libraries and home educators. The Company is also
involved in the production and publishing of new book titles. The English
publishing company is the Company's primary supplier. The Company sells to
its customers, located throughout the U.S., primarily on standard credit
terms.
ESTIMATES - The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand
and cash on deposit in banks.
INVENTORIES - Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out ("FIFO") method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and
depreciated and amortized using the straight-line method over the estimated
useful lives of the related assets.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("SFAS No. 109"). SFAS No. 109 requires that deferred income taxes
are recorded for temporary differences between the financial reporting and
tax basis of the Company's assets and liabilities and for operating loss and
tax credit carryforwards.
INCOME RECOGNITION - Sales are recorded when products are shipped. At the
time sales are recognized for certain products under specified conditions,
allowances for returns are recorded based on prior experience.
ADVERTISING COSTS - The Company expenses advertising costs as incurred.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE - The computation of earnings
per common and common equivalent share is based on the weighted average
shares of common stock outstanding and, when the effect is dilutive, common
stock equivalents attributable to stock options and stock warrants.
FAIR VALUE OF FINANCIAL INSTRUMENTS - For cash and cash equivalents, accounts
receivable, and accounts payable, the carrying amount approximates fair value
because of the short maturity of those instruments. The fair value of the
Company's note payable to bank is estimated to approximate carrying value
based
F - 6
<PAGE>
on the borrowing rates currently available to the Company for bank loans with
similar terms and average maturities.
LONG-LIVED ASSET IMPAIRMENT - Effective March 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of,"
("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 121 also
requires that assets to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. The adoption of SFAS No. 121 did not
have an effect on the Company's financial statements.
STOCK-BASED COMPENSATION - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation." SFAS No. 123
establishes a fair value method and disclosure standards for stock-based
employee compensation arrangements, such as stock purchase plans and stock
options. It also applies to transactions in which an entity issues its
equity instruments to acquire goods or services from non-employees, requiring
that such transactions be accounted for based on fair value. As allowed by
SFAS No. 123, the Company will continue to follow the provisions of
Accounting Principles Board Opinion No. 25 and related interpretations for
its stock-based employee compensation arrangements.
NEW ACCOUNTING STANDARD - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128
("SFAS No. 128"), "Earnings per Share". SFAS No. 128 establishes standards
for computing and presenting earnings per share ("EPS") and requires
restatement of all prior-period EPS data presented. This statement is
effective for financial statements for periods ending after December 15,
1997. The Company does not anticipate that adoption of this standard will
have a significant effect on its financial statements.
RECLASSIFICATIONS - Reclassifications were made to certain 1995 and 1996
balances to conform with the 1997 presentation.
2. DISCONTINUED OPERATIONS
Effective February 29, 1996, the Company discontinued its School Division.
The remaining assets of this division were written off at February 29, 1996.
Accordingly, the operating results of the School Division are segregated and
reported as discontinued operations in the accompanying statements of
earnings for the years ended February 29, 1996 and February 28, 1995.
F - 7
<PAGE>
The condensed statements of operations relating to the discontinued School
Division operations for each of the years ended February 29, 1996 and February
28, 1995 are presented below:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
FEBRUARY 29, FEBRUARY 28,
1996 1995
<S> <C> <C>
Gross sales $ 43,085 $ 136,521
Less discounts and allowances (5,030) (9,871)
-------- ---------
Net sales 38,055 126,650
Cost of sales 8,271 (41,852)
-------- ---------
Gross margin 46,326 84,798
Operating expenses (87,963) (114,659)
-------- ---------
Loss before income taxes (41,637) (29,861)
Income tax benefit 16,000 38,000
-------- ---------
Earnings (loss) from operations $(25,637) $ 8,139
======== =========
</TABLE>
The estimated loss on disposal of $300,984, which is net of income tax
benefits of $169,000, includes the write-off of inventory, supplies and
other assets.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
<S> <C> <C>
Book inventory $ 10,349,557 $ 12,300,973
Reserve for obsolescence (301,100) (301,100)
------------ ------------
$ 10,048,457 $ 11,999,873
============ ============
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
<S> <C> <C>
Computer equipment $ 757,982 $ 733,036
Warehouse and office equipment 438,325 337,111
Furniture, fixtures and other 98,065 86,267
---------- ----------
1,294,372 1,156,414
Less accumulated depreciation
and amortization (445,894) (341,052)
---------- ----------
$ 848,478 $ 815,362
========== ==========
</TABLE>
F - 8
<PAGE>
During the year ended February 28, 1997, the Company acquired a vehicle
with a cost of $9,590 through the issuance of 3,390 shares of treasury
stock.
Depreciation expense was $252,113, $126,697, and $109,086 for the fiscal
years ended 1997, 1996, and 1995, respectively.
5. NOTE PAYABLE
At February 28, 1997 and February 29, 1996, the note payable to bank was
under a $9,000,000 and $6,000,000 revolving credit agreement,
respectively, with interest payable monthly at prime and prime plus 0.5%
(8.25 and 8.75%, respectively), collateralized by substantially all assets
of the Company. The revolving credit agreement matures on June 30, 1997.
At February 28, 1997, the Company had available credit of $6,990,000 under
the revolving credit agreement. The agreement contains provisions that
require the maintenance of specified financial ratios, restrict
transactions with related parties, prohibit mergers or consolidation,
prohibit declaration of dividends, disallow additional debt, and limit the
amount of compensation, salaries, investments, capital expenditures and
leasing transactions. The Company is in compliance with all restrictive
financial covenants. The Company intends to renew the bank agreement or
obtain other financing upon maturity.
For each of the three years in the period ended February 28, 1997, the
highest amount of short-term borrowings, the average amount of borrowings
under these short-term notes, and the weighted average interest rates are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
<S> <C> <C> <C>
Notes payable to bank:
Largest amount borrowed $ 5,850,000 $ 5,820,000 $ 1,000,000
Average amount borrowed 4,061,250 3,183,333 199,714
Weighted average interest rate 8.5 % 9.4 % 8.4 %
</TABLE>
6. 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, and
operating loss and tax credit carryforwards. The tax effects of
significant items comprising the Company's net deferred tax asset as of
February 28, 1997 and February 29, 1996 are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29,
1997 1996
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 35,200 $ 50,300
Inventories 118,000 118,000
Expenses deducted on the cash basis for income tax purposes 13,600 --
--------- ---------
166,800 168,300
Deferred tax liability -
Property and equipment (7,600) --
--------- ---------
Net deferred tax asset $ 159,200 $ 168,300
========= =========
</TABLE>
F - 9
<PAGE>
Management has determined that no valuation allowance is necessary to reduce
the value of deferred tax assets as it is more likely than not that such
assets are realizable.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
Income tax expense on continuing operations:
<S> <C> <C> <C>
Current:
Federal $ 845,800 $ 916,300 $ 655,400
State 149,200 161,700 115,600
----------- ----------- -----------
995,000 1,078,000 771,000
Deferred:
Federal 7,700 29,500 (62,100)
State 1,400 5,200 (10,900)
----------- ----------- -----------
9,100 34,700 (73,000)
----------- ----------- -----------
1,004,100 1,112,700 698,000
Income tax benefit on discontinued operations:
From operations -- (16,000) (38,000)
Loss on disposal -- (169,000) --
----------- ----------- -----------
Total income tax expense $ 1,004,100 $ 927,700 $ 660,000
=========== =========== ===========
</TABLE>
The following reconciles the Company's expected income tax expense on
continuing operations utilizing statutory tax rates to the actual tax
expense:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
<S> <C> <C> <C>
Tax expense at Federal statutory rate $ 896,000 $ 992,000 $ 633,000
State income tax, net of Federal tax benefit 105,000 114,700 74,000
Other 3,100 6,000 (9,000)
---------- ---------- ----------
$1,004,100 $1,112,700 $ 698,000
========== ========== ==========
</TABLE>
7. EMPLOYEE BENEFIT PLAN
The Company has a profit sharing plan which 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 $31,457, $30,118, and $24,558 in fiscal years 1997, 1996, and
1995, respectively.
F - 10
<PAGE>
8. COMMITMENTS
The Company leases its office and warehouse facilities under a noncancelable
operating lease which expires in February 1999. Future minimum rental
commitments at February 28, 1997 are payable as follows:
<TABLE>
<CAPTION>
YEAR
<S> <C>
1998 $225,960
1999 225,960
--------
Total minimum lease payments $451,920
========
</TABLE>
Total rent expense was approximately $219,000, $185,000, and $119,000 for the
fiscal years ended 1997, 1996, and 1995, respectively.
At February 28, 1997, the Company had outstanding commitments to purchase
inventory from its primary vendor totaling approximately $1,072,000.
9. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS
On December 20, 1995, the Company's Board of Directors declared a two-for-one
split of the Company's common stock in the form of a stock dividend for
shareholders of record as of April 1, 1996. On March 13, 1996, in a special
meeting of the stockholders, an increase in the number of authorized shares
from 3,000,000 to 6,000,000 was approved. A total of 2,699,120 shares of
common stock were issued in connection with the split related to shares
outstanding at February 29, 1996. The stated par value of each share was not
changed from $.20. A total of $539,824 was reclassified from the Company's
capital in excess of par value account to the Company's common stock account.
Earnings per share, weighted average shares of common stock outstanding and
the stock option information for all periods presented reflect the stock
split.
In October 1981, the Board of Directors adopted an Incentive Stock Option
Plan which expired in 1991; accordingly, no additional options will be
granted under the 1981 Plan.
In June 1992, the Board of Directors adopted the 1992 Incentive Stock Option
Plan. A total of 1,000,000 stock options are authorized to be granted under
the 1992 Plan.
Options granted under either of the two Incentive Stock Option Plans,
collectively the "Incentive Plan," are exercisable up to ten years from the
date of grant. Options outstanding at February 28, 1997 expire in 2001
through 2006.
F - 11
<PAGE>
A summary of the status of the Company's Incentive Plan as of February 28,
1997, February 29, 1996 and February 28, 1995 and changes during the years
ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
Beginning of Year 206,000 $ 2.55 906,000 $ 1.00 780,000 $ 0.56
Granted 117,400 6.00 10,000 6.25 156,000 3.13
Exercised/Canceled (13,600) (4.01) (710,000) (0.62) (30,000) (0.73)
------- ------ -------- ------ ------- ------
Outstanding at End
of Year 309,800 $ 3.79 206,000 $ 2.55 906,000 $ 1.00
======= ====== ======== ====== ======= ======
</TABLE>
The following table summarizes information about stock options outstanding
at February 28, 1997:
<TABLE>
<CAPTION>
NUMBER
RANGE OF OUTSTANDING WEIGHTED
EXERCISE AT FEBRUARY 28, AVERAGE REMAINING WEIGHTED AVERAGE
PRICES 1997 CONTRACTUAL LIFE (YEARS) EXERCISE PRICE
-------- -------------- ------------------------ ----------------
<S> <C> <C> <C>
$1.375-$1.50 84,000 6 $ 1.41
3.13 106,000 7 3.13
$6.00-$6.25 119,800 9 6.02
------- ------- -------
309,800 8 $ 3.79
======= ======== =======
</TABLE>
All options outstanding are exercisable at February 28, 1997.
The Company applies Accounting Principals Board Opinion No. 25 and related
Interpretations in accounting for its Incentive Plan. Accordingly, no
compensation cost has been recognized for its Incentive Plan. Had
compensation cost for the Company's Incentive Plan been determined based on
the fair value at the grant dates for awards under the Incentive Plan
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share for the year ended February 28, 1997 would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997
<S> <C>
Net earnings - as reported $ 1,630,088
=============
Net earnings - pro forma $ 1,375,088
=============
Earnings per share - as reported $ 0.31
=============
Earnings per share - pro forma $ 0.26
=============
</TABLE>
The fair value of options granted under the Incentive Plan during the year
ended February 28, 1997 was estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted
F - 12
<PAGE>
average assumptions used: no dividend yield, expected volatility of 76%,
risk free interest rate of 6% and expected lives of 4 years. The use of the
fair value method of SFAS No. 123 would not have had a significant impact on
reported net earnings and earnings per share for the year ended February 29,
1996.
Of the 710,000 option shares exercised in fiscal 1996, 660,000 shares with a
total option price of $368,173 were exercised by the transfer to the Company
of 28,596 outstanding shares held by the option holders.
Additionally, at February 1992, options to purchase 80,000 shares of the
Company's common stock were outstanding. These options were issued to
directors and a stockholder who were not officers of the Company at exercise
prices of $0.25-$.625. During August 1992, 40,000 of these options were
exercised at an option price of $.625 per share, and the Company
simultaneously reacquired the common stock issued at a net cost to the
Company of $7,500. During February 1996, 20,000 of these options were
exercised at an option price of $0.25. The remaining 20,000 of these options
were exercised at an option price of $0.25 in March 1996.
10. SUPPLEMENTARY INFORMATION
The activity in the allowances for doubtful accounts receivable, sales
returns and inventory valuation for each of the three years in the period
ended February 28, 1997 is as follows:
Doubtful accounts receivable:
<TABLE>
<CAPTION>
BALANCE AT AMOUNTS AMOUNTS BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
YEAR OF YEAR EXPENSE RESERVE OF YEAR
<S> <C> <C> <C> <C>
1995 $ 75,000 $58,000 $(28,000) $105,000
1996 105,000 60,000 (38,000) 127,000
1997 127,000 60,000 (95,100) 91,900
</TABLE>
Sales returns:
<TABLE>
<CAPTION>
BALANCE AT AMOUNTS AMOUNTS BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
YEAR OF YEAR EXPENSE RESERVE OF YEAR
<S> <C> <C> <C> <C>
1995 $ 66,000 $1,085,500 $(1,050,500) $101,000
1996 101,000 1,190,900 (1,190,900) 101,000
1997 101,000 1,165,000 (1,165,000) 101,000
</TABLE>
Inventory valuation:
<TABLE>
<CAPTION>
BALANCE AT AMOUNTS AMOUNTS BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
YEAR OF YEAR EXPENSE RESERVE OF YEAR
<S> <C> <C> <C> <C>
1995 $183,000 $118,100 $ -- $301,100
1996 301,100 -- -- 301,100
1997 301,100 -- -- 301,100
</TABLE>
F - 13
<PAGE>
Charges to certain expense accounts in continuing operations for each of the
three years in the period ended February 28, 1997 are shown below:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
<S> <C> <C> <C>
Maintenance and repairs $ 34,435 $ 48,199 $ 24,545
Taxes other than payroll and income taxes 20,805 12,143 10,553
Advertising costs 84,501 170,573 107,565
</TABLE>
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended February 28, 1997 and February 29, 1996:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED FEBRUARY 28, 1997 QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Net Sales $ 5,685,100 $ 5,029,700 $ 6,279,200 $ 4,245,507
----------- ----------- ----------- -----------
Gross Profit $ 3,396,200 $ 3,001,700 $ 3,923,400 $ 2,522,147
----------- ----------- ----------- -----------
Net Earnings $ 303,100 $ 357,700 $ 655,100 $ 314,188
=========== =========== =========== ===========
Earnings Per Share -
Net Earnings $ 0.06 $ 0.07 $ 0.12 $ 0.06
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED FEBRUARY 29, 1996 QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Net Sales $ 3,985,100 $ 4,711,200 $ 5,905,300 $ 4,651,867
----------- ----------- ----------- -----------
Gross Profit $ 2,299,300 $ 2,691,100 $ 3,546,400 $ 2,560,942
----------- ----------- ----------- -----------
Earnings from Continuing
Operations $ 434,900 $ 549,700 $ 553,400 $ 267,335
Discontinued Operations, Net (4,200) (9,900) (10,500) (302,021)
----------- ----------- ----------- -----------
Net Earnings (Loss) $ 430,700 $ 539,800 $ 542,900 $ (34,686)
=========== =========== =========== ===========
Earnings Per Share:
Earnings from Continuing
Operations $ 0.08 $ 0.10 $ 0.10 $ 0.06
Discontinued Operations -- -- -- (0.06)
----------- ----------- ----------- -----------
Net Earnings $ 0.08 $ 0.10 $ 0.10 $ --
=========== =========== =========== ===========
</TABLE>
* * * * * *
F - 14
<PAGE>
EXHIBIT 10.21
RESTATED
CREDIT AND SECURITY AGREEMENT
-----------------------------
THIS RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT dated effective as of
the tenth (10th) day of June, 1996, is entered into by EDUCATIONAL DEVELOP MENT
CORPORATION, a Delaware corporation whose address is 10302 East 55th Place,
Tulsa, Oklahoma 74146, (the "Company"), and STATE BANK & TRUST, N.A., whose
address is 4500 South Garnett Avenue, Tulsa, Oklahoma 74146 (the "Bank").
WITNESSETH:
WHEREAS, the Company has applied to the Bank to increase and modify its
existing revolving line of credit established pursuant to that certain Restated
Credit and Security Agreement dated as of September 25, 1995 as well as the
Existing Credit Agreement therein described and defined (collectively the
"Current Credit Agreement") to the maximum principal amount outstanding at any
one time not in excess of NINE MILLION DOLLARS ($9,000,000), including extension
of the maturity date to June 30, 1997, the proceeds of which are to be used for
the Company's general corporate and working capital purposes; and the Bank is
willing to extend such revolving line of credit to the Company subject to the
terms, limitations and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Bank agree as
follows:
ARTICLE I
---------
DEFINITIONS
-----------
The terms defined in this Article I (except as otherwise expressly provided
in this Agreement) for all purposes shall have the following meanings:
1.1 "Business Day" shall mean a day other than a Saturday, Sunday or a day
------------
upon which national banks in the State of Oklahoma are closed to business
generally.
1.2 "Closing Date" shall mean the effective date of this Agreement.
------------
1.3 "Event of Default" shall mean any of the events specified in Section
----------------
8.1 of this Agreement; any "Default" shall mean any event, which together with
-------
any lapse of time or giving of any notice, or both, would constitute an Event of
Default.
1.4 "GAAP" shall mean generally accepted accounting principles applied on
----
a consistent basis, set forth in the Opinions of the Accounting Principles Board
of the American Institute of Certified Public Accountants and/or statements of
the Financial Accounting Standards Board and/or in such other statements by such
other entity as the Bank may approve, which are applicable in the circumstances
as to the date in question, and the requisite that such principles be applied on
a consistent basis shall mean that the accounting principles observed in a
current period are comparable in all material respects to those applied in the
preceding period except as stated in the financial statements or notes thereto.
Unless otherwise indicated herein, all accounting terms will be defined
according to GAAP.
<PAGE>
1.5 "Indebtedness" shall mean and include any and all: (i) indebtedness,
------------
obligations and liabilities of Company to the Bank pursuant to the terms of this
Agreement, including the obligations of the Company as evidenced by the Note and
all lawful interest and other charges and all court costs, reasonable attorneys'
fees and other collection costs or charges incurred with respect thereto and any
and all future revolving credit loan advances made hereunder, including that
certain letter of credit issued (and renewed from time to time) by the Bank on
behalf of the Company to Usborne, as beneficiary; (ii) costs and expenses paid
or incurred by the Bank in enforcing or attempting to enforce collection of any
Indebtedness and in preserving, enforcing or realizing upon or attempting to
preserve, enforce or realize upon any collateral or security for any
Indebtedness, including interest on all sums so expended by the Bank from the
date of such expenditure at an annual rate equal to the applicable Default Rate
as defined in Section 8.2 hereof; and (iii) sums expended by the Bank in curing
any Event of Default or Default of Company under the terms of this Agreement or
any other security agreement or other writing evidencing or securing the payment
of the Note together with interest on the amount of each such expenditure from
the respective dates thereof at an annual rate equal to the Default Rate.
1.6 "Laws" shall mean all statutes, laws, ordinances, regulations, orders,
----
writs, injunctions, or decrees of the United States, any state or commonwealth,
any municipality, and foreign country, any territory or possession, or any
Tribunal.
1.7 "Lien" shall mean any mortgage, pledge, security interest, purchase
----
money security interest, encumbrance, lien or charge of any kind (including any
agreement to give any of the foregoing, any conditional sale or other title
retention agreement, any lease in the nature thereof, and the filing of or
agreement to give any financing statement or other similar form of public notice
under the Laws of any jurisdiction).
1.8 "Loan Documents" shall mean this Agreement, the Note, the Security
--------------
Agreement and all other documents, instruments and certificates to be executed
by or on behalf of the Company pursuant to the terms of this Agreement.
1.9 "Loans" shall mean the Revolving Credit Loans made from time to time
-----
by the Bank pursuant to Section 2.1 of this Agreement.
1.10 "Material Adverse Effect" shall mean any set of circumstances or
-----------------------
events which (i) prevents, will prevent, or may reasonably be expected to
prevent the Company from performing its obligations (including, without
limitation, payment obligations hereunder) under the Loan Documents or (ii) will
or may reasonably be expected to cause a Default or an Event of Default.
1.11 "Net Capital Expenditures" shall mean the gross amount of all
------------------------
expenditures made and obligations incurred by Company and its Subsidiaries, if
any, for the purchase or acquisition of capital assets (i.e., equipment, land,
----
buildings and other "property used in the trade or business" of Company and its
Subsidiaries as defined in Section 1231(b) of the Internal Revenue Code of 1986,
as amended) less "allowable recoveries" and excluding capitalized labor costs.
Allowable recoveries shall mean credit received by Company and its Subsidiaries
against the purchase price of capital assets or cash payments or equivalent
value received for capital assets which are being replaced, essentially in each
case as part of the transaction in which the acquisition of the capital asset
occurs and which are received by the Company within 120 days from the date on
which the expenditure is made or obligations incurred for the acquisition of the
related capital asset.
1.12 "Note" shall mean the promissory note described and defined in Section
----
2.2 of this Agreement as the Revolving Credit Note, together with each and every
extension, renewal,
-2-
<PAGE>
modification, substitution, replacement and change in form thereof which may be
from time to time and for any term or terms effected.
1.13 "Person" shall mean and include an individual, a partnership, a joint
------
venture, a corporation, a trust, an unincorporated organization and a government
or any department, agency or political subdivision thereof.
1.14 "Prime Rate" shall mean the annual rate of interest published in the
----------
Money Rates Column of the Southwest Edition of the Wall Street Journal from time
-------------------
to time as the prime rate.
1.15 "Subsidiaries" shall include any corporation in which the Company owns
------------
or controls (directly or indirectly) in the aggregate fifty percent (50%) or
more of the outstanding capital stock.
1.16 "Taxes" shall mean all taxes, assessments, fees or other charges or
-----
levies from time to time or at any time imposed by any laws or by any Tribunal.
1.17 "Tribunal" shall mean any municipal, state, commonwealth, federal,
--------
foreign, territorial or other sovereign, governmental entity, governmental
department, court, commission, board, bureau, agency or instrumentality.
ARTICLE II
----------
TERMS AND CONDITIONS OF
-----------------------
REVOLVING CREDIT LOANS
----------------------
2.1 Revolving Credit Loans. The Bank agrees, upon the terms and subject
----------------------
to the conditions hereinafter set forth, to make loans ("Revolving Credit
Loans") to the Company from the Closing Date until June 30, 1997, in such
amounts as may from time to time be requested by the Company so long as the
aggregate principal amount of all Revolving Credit Loans outstanding and unpaid
at any time does not exceed the lesser of the Borrowing Base (hereinafter
------
defined) or $9,000,000.
2.2 Revolving Credit Note. On the Closing Date the Company shall execute
---------------------
and deliver to the order of the Bank its Revolving Credit Note, the form of
which is annexed hereto as Exhibit A and made a part hereof, in the original
---------
principal amount of $9,000,000, dated as of the Closing Date, and bearing
interest (from and including June 10, 1996) payable monthly on the last day of
each calendar month commencing June 30, 1996, on unpaid balances of principal
from time to time outstanding at a variable annual rate equal from day to day to
the Prime Rate (the "Revolving Credit Note").
2.3 Revolving Credit - Advances, Payments. Each Revolving Credit Loan
-------------------------------------
requested by the Company from the Bank shall be made on the form of Loan
Request, Certification and Confirmatory Security Agreement annexed hereto as
Exhibit B (the "Loan Request"). The Company may submit such a loan request from
- ---------
time to time to the Bank on any Business Day but not more frequently than once
per calendar week. Such loan request shall establish the Company's Borrowing
Base as of the date on which it is submitted to the Bank. The Company may
however, submit a Loan Request on any Business Day, provided that such Loan
Request shall not cause the aggregate principal amount of all Revolving Credit
Loans outstanding and unpaid to exceed the Borrowing Base as established by the
Loan Request and as supported by the most recent Monthly Reports submitted by
the Company to the Bank in compliance with the provisions of Section 4.5 below.
-3-
<PAGE>
Each such Loan Request shall constitute the Company's continuing
representation to the Bank that the Company is in compliance with all of the
Borrowing Base provisions of Sections 2.4 hereof. Each such Loan Request shall
be presented at the offices of the Bank, and, subject to strict compliance with
the provisions of Sections 2.3, 2.4, 2.8 and 4.5 hereof, each such loan
requested by the Company from the Bank shall be advanced by the Bank not later
than the second (2nd) Business Day immediately following the Bank's actual
receipt of such request. All advances made by the Bank shall be deposited to
account #502-71-56 of the Company with the Bank. The Company may from time to
time make prepayments of principal without premium or penalty, provided that
interest on the amount prepaid, accrued to the prepayment date, shall be paid on
such prepayment date. The Company may reborrow subject to the limitations and
conditions for Revolving Credit Loans contained herein. On or before the fifth
(5th) day of each month Bank shall mail, telecopy or hand deliver invoices
evidencing Company's interest obligation for the immediately preceding calendar
month at the address set forth above by first class mail (or by telecopy #918-
663-4509). Such invoice shall be deemed received by Company (unless sent by
telecopy) upon the earlier of actual receipt thereof or two (2) Business Days
after deposit in the United States mail by Bank.
All Revolving Credit Loans made by the Bank and all payments or prepayments
of principal and interest thereon made by the Company shall be recorded by the
Bank in its records, and such records shall be presumptive evidence as to the
respective amount owing on the Note. Any payments or prepayments on the
Revolving Credit Note received by the Bank after 2:00 o'clock P.M. (applicable
current time in Tulsa, Oklahoma) shall be deemed to have been made on the next
succeeding Business Day. All outstanding principal of and accrued interest on
the Note not previously paid hereunder shall be due and payable at final
maturity on June 30, 1997.
2.4 Borrowing Base. The Company will not request or accept the proceeds
--------------
of any Revolving Credit Loan or advance hereunder at any time when the amount
thereof, together with the unpaid amount of all other Revolving Credit Loans
then outstanding shall exceed the "Borrowing Base." As used herein the term
"Borrowing Base" shall mean an amount equal to the lesser of (i) the sum of (a)
------
sixty-five percent (65%) of the uncollected amount of Eligible Accounts (as
hereinafter defined) at book value held by and due and owing to Company as shown
by the books and records thereof plus (b) thirty-five percent (35%) of the
amount of Eligible Inventories of the Company, the respective amounts of which
Eligible Accounts and Eligible Inventories will be determined as of a date not
more than ten (10) days prior to the date on which the amount of the Borrowing
Base is determined, or (ii) the lesser of $9,000,000 or the maximum principal
------
amount of Revolving Credit Loans to which Usborne, as herein defined, has
subordinated pursuant to the Subordination Agreement referenced herein.
2.5 Variance from Borrowing Base. Any Revolving Credit Loan shall be
----------------------------
conclusively presumed to have been made to the Company by the Bank under the
terms and provisions hereof and shall be secured by all of the collateral and
security described or referred to herein, whether or not such loan conforms in
all respects to the terms and provisions hereof. It is contemplated that the
Bank may from time to time (for the convenience of the Company or for other
reasons) make loan advances which would cause the total amount of Revolving
Credit Loans to exceed the amount of the Borrowing Base or permit the inclusion
of ineligible accounts or ineligible inventory in the determination of the
Borrowing Base. No such variance, change or departure shall prevent any such
loan or loans from being secured by the collateral and security herein created
or intended to be created. The Borrowing Base is established for administrative
purposes and shall not in any manner limit the extent or scope of the collateral
and security herein granted to Eligible Accounts, Eligible Inventory or to the
Indebtedness within the amount of the Borrowing Base.
-4-
<PAGE>
2.6 Eligible Account. For the purposes of this Agreement, an "Eligible
----------------
Account" shall mean an Account (as defined in Article 9 of the Oklahoma Uniform
Commercial Code) which meets the following standards until the same is collected
in full:
(a) The Account is owned by and payable to Company and represents a
sum of money (exclusive of interest, late charges or carrying charges)
unconditionally due and owing to Company from an account debtor ("Account
Debtor") thereof for services rendered or goods sold or leased by Company
to such Account Debtor in the ordinary course of business and which
services or goods have been accepted by the Account Debtor and do not
remain unpaid for a period in excess of ninety (90) days beyond the earlier
of the invoice date or the first due date of such Account and if the
aggregate accounts of any one Account Debtor constitute more than twenty
percent (20%) of the total accounts of the Company at any one time, the
amount of all such accounts thereof in excess of twenty percent (20%) shall
be deemed automatically ineligible for Borrowing Base purposes;
(b) The Account is not a contra account and is not otherwise subject
to any dispute, set-off, recoupment, counterclaim or other claim which
would reduce the amount to be paid by the Account Debtor to Company and the
Account Debtor has not received or requested permission to pay the same in
deferred installments;
(c) None of such Accounts shall result from the sale or lease of any
goods held by Company on consignment including, without limitation, goods
held on consignment for Usborne Publishing Limited ("Usborne");
(d) The Account Debtor is a Person (including a partnership of which
all partners are residents of the continental United States of America)
domiciled in, a resident of or duly organized under and in good standing
pursuant to the laws of one of the states of the United States of America
or the District of Columbia;
(e) The Account Debtor has not ceased business, made an assignment for
the benefit of creditors or attempted to make a composition with its
creditors and no trustee, receiver, liquidator, conservator, custodian or
like officer has been appointed to take custody, possession or control of
the Account Debtor or any substantial portion of the assets in general of
such Account Debtor. The Account Debtor has not become or been adjudged to
be insolvent, requested or consented to the appointment of any receiver,
trustee, custodian, liquidator or like officer or become subject to the
control or supervision of any court or other governmental body or officer
for the purpose of liquidating its assets, winding up its affairs or for
the purpose of any financial reorganization, rehabilitation or other relief
under any law or statute now or hereafter in force affording relief to
debtors from their obligations;
(f) Company has in its possession and under its control shipping
tickets, bills of lading, invoices, delivery receipts and other written
business records and memoranda sufficient to document and verify Company's
accounts and the amount thereof and to enforce collection thereof;
(g) The Account Debtor has neither attempted to return the goods, the
sale of which created or gave rise to the Account, nor refused to accept
the goods, nor attempted to revoke any acceptance thereof or requested any
allowance in adjustment with respect to such goods, nor made partial
payment on a specific invoice which is being disputed;
-5-
<PAGE>
(h) The Bank shall not have notified Company in writing that the
Account or the Account Debtor is unsatisfactory for reasons deemed by the
Bank in good faith to be valid reasons for rejecting such Account or
Account Debtor;
(i) The Account is not evidenced by any promissory note, trade
acceptance, negotiable instrument or judgment and does not constitute
Chattel Paper (as defined in Article 9 of the Oklahoma Uniform Commercial
Code);
(j) All claims required to be filed in any public office or with any
public officer in connection with the Account have been duly filed with and
accepted by the appropriate public office or officer;
(k) The Account Debtor is neither a parent, Subsidiary nor a corporate
affiliate of the Company nor a corporation, partnership or other entity
controlled directly or indirectly by the Company or the Guarantors, nor a
foreign country or alien corporation with whom the Company does export
business;
(l) The Account Debtor is neither a director, officer nor an employee
of the Company or a member of the family of any director or officer of any
of the Company or any proprietorship or partnership owned in whole or in
part by any such director or officer of any of the Company or by any member
of the family of any such person; and
(m) The Account is not subject to the federal statutes prohibiting
assignment of claims against the United States of America.
The above specifications with respect to the term "Eligible Account" are special
specifications adopted for the purpose of determining the Borrowing Base and the
designation of such specifications shall not be interpreted or implied to limit
the security interest granted to the Bank to such Eligible Accounts.
2.7 Eligible Inventory. For the purposes of computing the Borrowing Base,
-------------------
Eligible Inventory shall mean Inventory (as defined in Article 9 of the Oklahoma
Uniform Commercial Code), including (without limitation) all educational books,
kits, programs and supplies as well as all work in progress and finished goods
of whatever nature or type owned by the Company and held for resale to its
customers in the ordinary course of business, and (i) in which the Bank holds a
first and prior perfected security interest and (ii) concerning which the Bank
has not received any notice of a purchase money security interest claimed by any
---
manufacturer, vendor or supplier of Company. The value assigned to each item of
Inventory shall be the cost of such item of Inventory to the Company less a
reasonable reserve for obsolescence. The Bank's receipt of any notice of a
purchase money security interest (whether asserted pursuant to (S)9-312 of the
Uniform Commercial Code or otherwise) shall automatically render all such
inventory covered or purportedly covered thereby ineligible for inclusion in the
Borrowing Base and the Bank shall have no obligation hereunder to advance funds
against any of such Inventory or Accounts resulting from the sale thereof unless
such asserted purchase money security interest therein is expressly subordinated
to the Indebtedness as evidenced by the Revolving Credit Note.
ARTICLE III
-----------
CONDITIONS PRECEDENT TO LOANS
-----------------------------
3.1 Conditions Precedent to Initial Revolving Credit Loan. The obligation
-----------------------------------------------------
of the Bank to make the initial Revolving Credit Loan is subject to the
satisfaction of the following conditions on or prior to the Closing Date (in
addition to the other terms and conditions set forth herein):
-6-
<PAGE>
(a) No Default. There shall exist no Event of Default or Default on
----------
the Closing Date.
(b) Representations and Warranties. The representations, warranties
------------------------------
and covenants set forth herein shall be true and correct on and as of the
Closing Date, with the same effect as though made on and as of the Closing
Date.
(c) Certificate. The Company shall have delivered to the Bank a
-----------
Certificate, dated as of the Closing Date, and signed by the President and
Secretary thereof certifying (i) to the matters covered by the conditions
specified in subparagraphs (a) and (b) of this Section 3.1, (ii) that the
Company has performed and complied with all agreements and conditions
required to be performed or complied with by them prior to or on the
Closing Date, (iii) to the name and signature of each officer of the
Company authorized to execute and deliver this Agreement, the Security
Agreement, the Note and any other notes, certifi cates or writings and to
borrow under this Agreement, and (iv) to such other matters in connection
with this Agreement which the Bank shall determine to be advisable. The
Bank may conclusively rely on such Certificate until it receives notice in
writing to the contrary.
(d) Proceedings. All corporate proceedings and resolutions of the
-----------
Company taken in connection with the transactions contemplated by this
Agreement and all documents incidental thereto shall be satisfactory in
form and substance to the Bank and its counsel; and the Bank shall have
received certified copies of the Company's Articles of Incorporation, By-
Laws and Certificate of Good Standing from the Company's state of
incorporation. The Bank shall also have received copies of all documents,
or other evidence which the Bank or its legal counsel may reasonably
request in connection with said transactions, and copies of records and all
corporate proceedings and resolutions in connection therewith, in form and
substance satisfactory to the Bank and its legal counsel.
(e) Loan Documents. The Company shall have delivered or caused to be
--------------
delivered the Note, this Agreement, the Security Agreement, applicable
financing statements and the other Loan Documents to the Bank dated as of
the Closing Date, appropriately executed, with all blanks appropriately
filled.
(f) Key Man Life Insurance Policy. The Company shall have delivered
-----------------------------
to the Bank assignments of key man life insurance policy, designating the
Bank as assignee of all proceeds thereof in the aggregate amount of
$500,000 on the life of Randall White, which certificate of insurance and
the assignment thereof shall be in form and substance satisfactory to the
Bank and its legal counsel.
(g) UCC Terminations and Other Information. The Bank shall have
--------------------------------------
received acceptable UCC termination statements from Borrower's existing
lenders claiming a security interest in any of the Collateral and such
other information, documents and assurances as shall be reasonable
requested by the Bank or its legal counsel or, only insofar as Usborne is
concerned, an amendment Subordination Agreement between Usborne and the
Bank dated as of May 9, 1991, is entered into satisfactory in form and
content to the Bank and its legal counsel subordinating the asserted
purchase money security interest of Usborne to the Bank's security interest
in and liens against the Collateral securing the Indebtedness.
3.2 Conditions Precedent to Additional Revolving Credit Loans. The Bank
---------------------------------------------------------
shall not be obligated to make any Revolving Credit Loan after the initial
Revolving Credit Loan (i) if at such time any Event of Default shall have
occurred or any Default shall have occurred and be continuing; (ii) if any of
the representations, warranties and covenants contained in this Agreement
-7-
<PAGE>
shall be false or untrue in any material respect on the date of such loan, as if
made on such date; or (iii) unless the Borrower shall have provided to the Bank
a Revolving Loan Request duly executed by authorized officers and in proper
form, establishing that the Borrowing Base will support the additional Revolving
Credit Loan being requested and such other information as shall be requested by
the Bank in support thereof, all in conformity with Section 2.3 hereof. Each
request by the Borrower for a Revolving Credit Loan (whether initial or
thereafter) shall constitute a continuing representation by the Borrower to the
Bank that there is not at the time of such request an Event of Default or a
Default, and that all representations, warranties and covenants in this
Agreement are true and correct on and as of the date of each such Loan Request.
From and after the Bank's receipt of notice of any claimed or asserted purchase
money security interest in any of the Collateral (as hereinafter defined)
pursuant to the applicable provisions of the Oklahoma Uniform Commercial Code by
any vendor or supplier of the Company, the Bank shall have no further obligation
hereunder to advance any Revolving Credit Loans to the Company and its lending
commitment hereunder shall be automatically extinguished without any notice
whatsoever to the Company.
ARTICLE IV
----------
AFFIRMATIVE COVENANTS
---------------------
From the date hereof, and so long as this Agreement is in effect (by
extension, amendment or otherwise) the Company covenants and agrees with the
Bank and until payment in full of all Indebtedness and the performance of all
other obligations of the Company, under this Agreement, unless the Bank shall
otherwise consent in writing:
4.1 Payment of Taxes and Claims. The Company will pay and discharge or
---------------------------
cause to be paid and discharged all lawful Taxes imposed upon the income or
profits of the Company or upon any property, real, personal or mixed, or upon
any part thereof, belonging to the Company before the same shall be in default;
provided, however, that the Company shall not be required to pay and discharge
- -------- -------
or to cause to be paid or discharged any such Tax, assessment or claim so long
as the validity thereof shall be contested in good faith by appropriate
proceedings, and adequate book reserves shall be established with respect
thereto; further, provided, that in each event the Company shall pay such Tax,
charge or claim before any property subject thereto shall become subject to a
execution or Lien.
4.2 Maintenance of Corporate Existence. The Company will do or cause to
----------------------------------
be done all things necessary to preserve and keep in full force and effect the
corporate existence, rights and franchises of the Company and its Subsidiaries
and continue to conduct and operate the business of the Company and its
Subsidiaries substantially as conducted and operated during the present. The
Company will become and remain qualified to conduct business in each
jurisdiction where the nature of the business or the ownership of property by
the Company may require such qualification and shall remain in good standing
with the Oklahoma Tax Commission and the Oklahoma Employment Security
Commission.
4.3 Insurance/Bonding. The Company will maintain adequate insurance
-----------------
coverage by reputable insurance companies or associations in such form and
against such hazards as is customarily carried by companies in the same or
similar businesses, including, without limitation, comprehensive general
liability insurance, broad form property damage coverage, automotive liability
insurance and worker's compensation insurance in amounts satisfactory to the
Bank.
4.4 Financial Statements, Reports and Field Audits. The Company shall
----------------------------------------------
maintain standard systems of accounting in accordance with GAAP, and the Company
and its Parent shall
-8-
<PAGE>
furnish to the Bank, as soon as practicable after each calendar month, and in
any event within forty-five (45) days thereafter, copies of:
(i) Balance sheets of the Company at the end of such month, and
(ii) Statements of income and surplus of the Company for such month,
all in such reasonable detail as may be requested by the Bank and certified to
be true and correct by the President or controller of the Company (such
certification to be a part of the monthly borrowing base certification submitted
by the Company).
The Company shall also furnish to the Bank as soon as practicable after the
end of each fiscal year of the Company, and in any event within one hundred
twenty (120) days thereafter, financial statements for the Company and the
annual audit thereof. Such financial statements shall be prepared by a
reputable and independent firm of certified public accountants of recognized
standing selected by the Company and acceptable to the Bank. Such firm shall
issue a report and an unqualified opinion prepared in conformity with GAAP and
otherwise satisfactory in form and content to the Bank.
Bank shall be entitled to conduct field audits of the Company during each
fiscal year, the cost of which shall be borne solely by the Bank.
4.5 Monthly Account and Inventory Reports. Within forty-five (45) days
-------------------------------------
of each calendar month end, the Company will deliver to the Bank schedules
(certified to be true and correct by the President or controller of the Company
as a part of the monthly borrowing base certification) showing, as of the close
of business on the last Business Day of the immediately preceding calendar month
(i) the name and current mailing address of the Company's Account Debtors and
others with like obligations payable to the Company, (ii) the amounts due and
owing to the Company from each Account Debtor thereof, (iii) "aging" of each
Account dating from the date of first invoice and shown by categories, as
follows:
One day to and including thirty days,
Thirty-one days to and including sixty days,
Sixty-one days to and including ninety days, and
Over ninety days,
(iv) any modification of the customary due date of any Account, (v) the amount
of all obligations of the Company and to whom such obligations are owed
(excluding obligations to the Bank), (vi) "aging" of each such obligation as set
forth in (iii) above, and (vii) or modification of the due date of such
obligations.
Within forty-five (45) days of each calendar month end, the Company shall
deliver to the Bank schedules of inventory (itemized pursuant to the Company's
monthly statements) indicating the value at which such inventory is carried on
the books and records of the Company as of the close of business on the last
Business Day of the immediately preceding calendar month, which value shall be
determined according to the perpetual method of inventory accounting and,
additionally, the Company will promptly notify the Bank of any material
reduction in the market value of any of such inventory. Such Monthly Account
Reports and Monthly Inventory Reports described in this Section 4.5 are
collectively referred to herein as the "Monthly Reports".
The Company will not open or establish any office, storage yard, warehouse
or other shipping or holding facility other than at Company's business address
of 10302 East 55th Place in Tulsa, Oklahoma (except only for certain book
binding operations in the State of Illinois)
-9-
<PAGE>
without obtaining the Bank's prior written consent and executing such additional
or supplemental security agreements and/or financing statements as the Bank and
its legal counsel deem necessary to perfect or more fully perfect its security
interest therein. The Company represents to the Bank that all of its inventories
are and will continue to be located at its current business location in Tulsa,
Oklahoma as described above.
4.6 Requested Information/Inspection. With reasonable promptness, the
--------------------------------
Company will give the Bank such other data and information as from time to time
may be reasonably requested by the Bank. The Company will permit any
representatives of the Bank to visit and inspect any of the properties of the
Company, to examine all books of account, records, reports and other papers, to
make copies and extracts thereof, and to discuss the Company's financial affairs
and accounts with its officers at all such reasonable times and as often as may
be reasonably requested to, among other things, enable the Bank to conduct field
audits of the Company.
4.7 Notice of Default. Immediately upon the happening of any condition or
-----------------
event which constitutes a Default or an Event of Default or any default or event
of default under any other loan or financing or security agreement, the Company
will give the Bank a written notice thereof specifying the nature and period of
existence thereof and what action the Company is taking and propose to take with
respect thereto.
4.8 Notice of Litigation. Immediately upon becoming aware of the
--------------------
existence of any action, suit or proceeding at law or in equity before any
Tribunal, an adverse outcome in which would materially impair the right of the
Company or any of its Subsidiaries to carry on their respective businesses
substantially as now conducted, or would materially and adversely affect
Company's or any Subsidiary's condition (financial or otherwise), the Company
will give the Bank a written notice specifying the nature thereof and what
action the Company is taking and propose to take with respect thereto.
4.9 Purposes. The Company is not engaged principally, or as one of its
--------
important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System) and no part of the proceeds of
any Loan made hereunder will be used to purchase or carry any margin stock or to
extend credit to others for the purpose of purchasing or carrying margin stock.
4.10 Maintenance of Employee Benefit Plans. The Company will maintain and
-------------------------------------
cause each of its Subsidiaries to maintain, each employee benefit plan as to
which it may have any liability or responsibility in compliance with the
Employee's Retirement and Income Security Act, as amended from time to time
("ERISA") and all other Laws applicable thereto.
4.11 Compliance with Fair Labor Standards Act. Company shall comply at all
-----------------------------------------
times will all minimum wage, overtime requirements and other statutory and
regulatory provisions of the Fair Labor Standards Act, 29 U.S.C. (S) 206-207
("FLSA") and shall promptly and fully pay all salaries, wages and other
remuneration to its officers and employees covered by FLSA as they become due.
Company shall comply with the provisions of FLSA in all respects including
(without limitation) FLSA (S)15(a)(1) in connection with introduction of any
goods into interstate commerce and Company shall promptly notify the Bank in
writing of any violation of or non-compliance with FLSA.
4.12 Payment of Indebtedness and Accounts Payable. The Company hereby
--------------------------------------------
agrees to pay, when due and owing, all Indebtedness, whether or not evidenced by
the Note. Company also agrees to pay its accounts payable obligations and trade
creditors and suppliers, including (without limitation) Usborne Publishing
Limited ("Usborne"), in accordance with the terms of such account
-10-
<PAGE>
arrangements and, in any event, Company shall maintain its accounts with Usborne
in such manner as to avoid the filing of any purchase money security interest by
Usborne in any inventory sold thereby to Company unless fully and expressly
subordinated to the Bank's security interest therein in form and content
acceptable to the Bank and its legal counsel.
ARTICLE V
---------
NEGATIVE COVENANTS
------------------
The Company covenants and agrees with the Bank that from the date hereof
and so long as this Agreement is in effect (by extension, amendment or
otherwise) and until payment in full of all Indebtedness and the performance of
all other obligations of the Company under this Agreement, unless the Bank shall
otherwise consent in writing:
5.1 Limitation on Liens. The Company will not create or suffer to exist
-------------------
any Lien upon any of its accounts, inventories, instruments, documents, chattel
paper or general intangibles (as those terms are defined in Article 9 of the
Oklahoma Uniform Commercial Code) except (i) Liens in favor of the Bank, (ii)
deposits to secure payment of workmen's compensation, unemployment insurance and
other similar benefits and Liens for property taxes not yet due or (iii) liens
existing on the date hereof as set forth on Exhibit C annexed hereto.
---------
5.2 Disposition of Assets. The Company will not sell, lease, transfer or
---------------------
otherwise dispose of assets unless such sale or disposition shall be in the
ordinary course of business and for a full and fair consideration, except for
assets which in the good faith judgment of the Company is no longer useful or of
productive value or which may be advantageously surrendered, sold or otherwise
disposed of by the Company without constituting or creating a Material Adverse
Effect.
5.3 Merger, Consolidation and Acquisition. Except for internal
-------------------------------------
reorganization, merger or consolidation between or among the Company and its
respective Subsidiaries only, the Company will not merge or consolidate with or
into any other Person; or permit any other Person to consolidate with or merge
into it or acquire all or substantially all of the assets or properties or
capital stock of any other Person or adopt or effect any plan of reorganization,
recapitalization, liquidation or dissolution.
5.4 Articles of Incorporation and By-Laws. The Company will not amend,
-------------------------------------
alter, modify or restate its Articles of Incorporation or By-Laws in any way
which would in any manner constitute a Material Adverse Effect.
5.5 Limitation on Other Indebtedness. During any fiscal year thereof the
--------------------------------
Company will not create, incur, assume, become or be liable in any manner in
respect of, or suffer to exist, any indebtedness whether evidenced by a note,
bond, debenture, letter of credit, lease financing or similar or other
obligation in the aggregate in excess of $500,000 or accept any deposits or
advances of any kind, except (i) trade payables and current indebtedness (other
than for borrowed money) incurred in, and deposits and advances accepted in, the
ordinary course of business and (ii) Indebtedness created pursuant to this
Agreement.
5.6 Dividends, Stock Redemptions and Stock Sales. The Company will not
--------------------------------------------
declare or pay or become obligated to declare or pay any dividends on, or apply
or become obligated to apply any of its properties or assets to the purchase,
redemption or other retirement of, or set apart any sum for the payment of any
dividends on, for the purchase, redemption or retirement of, or make any other
distribution, by reduction or retirement of, or make any other distribution, by
reduction of capital or otherwise, in respect of, any shares of any class of
capital stock of the Company except only for treasury stock acquired by the
Company.
-11-
<PAGE>
5.7 Loans to Affiliates, Subsidiaries or Insiders. The Company will not
---------------------------------------------
make, guarantee or endorse any loans (howsoever evidenced) to any of its
respective corporate officers, directors or stockholders or to any of its
respective corporate affiliates or Subsidiaries in excess of or in addition to
such loans or indebtedness currently outstanding, which existing loans and
indebtedness are described on Exhibit D annexed hereto.
---------
5.8 Net Capital Expenditures. Company will not, nor will Company permit
------------------------
any Subsidiary thereof to, make Net Capital Expenditures in any fiscal year
commencing on or after March 1, 1995, in excess of $500,000 in the aggregate
during such fiscal year.
5.9 Current Ratio. Company will not at any time permit its Current Ratio
-------------
(Current Liabilities shall include the Revolving Credit Loans) to be less than
1.0 to 1 until maturity hereof.
5.10 Debt to Worth Ratio. Company will not at any time permit its Debt to
-------------------
Tangible Net Worth ratio to be greater than 1.7 to 1 through the maturity
hereof.
5.11 Contingent Liabilities; Advances. The Company will not, nor will it
--------------------------------
permit any Subsidiary, either directly or indirectly, to (i) guarantee, become
surety for, discount, endorse, agree (contingently or otherwise) to purchase,
repurchase or otherwise acquire or supply or advance funds in respect of, or
otherwise become or be contingently liable upon the indebtedness, obligation or
liability of any Person, (ii) guarantee the payment of any dividends or other
distributions upon the stock of any corporation, (iii) discount or sell with
recourse or for less than the face value thereof, any of its notes receivable,
accounts receivable or chattel paper; (iv) loan, agree to loan, or advance money
to any Person in an aggregate amount of $25,000 or more at any time; or (v)
enter into any agreement for the purchase or other acquisition of any goods,
products, materials or supplies, or for the making of any shipments or for the
payment of services, if in any such case payment therefor is to be made
regardless of the non-delivery of such goods, products, materials or supplies or
the non-furnishing of the transportation of services; provided, however that the
foregoing shall not be applicable to endorsement of negotiable instruments
presented to or deposited with a bank for collection or deposit in the ordinary
course of business.
5.12 Limitation on Investments. The Company will not, nor will it permit
-------------------------
any Subsidiary to, make any investment in any Person, except for investments
which consist of:
(a) trade or customer accounts receivable for inventory sold or services
rendered in the ordinary course of business;
(b) obligations issued or guaranteed as to principal and interest by the
United States of America and having a maturity of not more than one
year from the date of acquisition;
(c) certificates of deposit issued by the Bank or any other bank organized
under the laws of the United States of America or any state thereof,
the payment of which is insured by the Federal Deposit Insurance
Corporation;
(d) repurchase agreements secured by any one or more of the foregoing; and
(e) Investments existing on the date hereof which are described on Exhibit
-------
E attached hereto.
-
5.13 Other Agreements. The Company will not, nor will it permit any
----------------
Subsidiary to, enter into or permit to exist any agreement (i) which would cause
an Event of Default or a Default
-12-
<PAGE>
hereunder; or (ii) which contains any provision which would be violated or
breached by the performance of Company's obligations hereunder or under any of
the other Loan Documents.
ARTICLE VI
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
To induce the Bank to enter into this Agreement and to make the Loans to
the Company under the provisions hereof, and in consideration thereof, the
Company represents, warrants and covenants that:
6.1 Organization and Qualification. The Company is duly organized and
------------------------------
validly existing under and pursuant to the Laws of the State of Delaware and is
in good standing thereunder. The Company is duly licensed and in good standing
as a foreign corporation in Oklahoma and all other states in which the nature of
the business transacted or the property owned is such as to require licensing or
qualification as such. The Company is in good standing with the Oklahoma Tax
Commission and the Oklahoma Employment Security Commission.
6.2 Financial Statements. The financial statements of the Company
--------------------
heretofore furnished to the Bank are complete and correct and prepared in
accordance with GAAP, and fairly present the financial condition of the Company
as of the dates indicated and for the periods involved and show all of their
material liabilities, direct and contingent. As of the date of the latest of
those financial statements there were no contingent liabilities, liabilities for
Taxes, unusual forward or long-term commitments or unrealized or anticipated
losses from any unfavorable commitments which are substantial in amount in
relation to the financial condition of the Company, except as referred to or
reflected or provided for in the latest of said financial statements. Since the
date of the latest of said financial statements, there has been no material
adverse change in the business, condition or operations of the Company or any of
its Subsidiaries.
6.3 Corporate Authorization. The Board of Directors of the Company has
-----------------------
duly and validly authorized the execution and delivery of this Agreement, the
Note and the other Loan Documents and the performance of their respective terms.
No consent of the respective stockholders of the Company is required as a
prerequisite to the validity and enforceability of this Agreement, the Note or
any other Loan Document contemplated herein.
6.4 Collateral Unencumbered. No financing statement or other writing is
-----------------------
or shall be on file in any public filing or recording office covering (or
purporting to create, confirm, establish or maintain any lien, security
interest, purchase money security interest, conditional title, levy, attachment,
consignment or other encumbrance upon) any property of the Company or that of
any of its Subsidiaries which would constitute "Inventory," "Equipment,"
"Accounts," "Contract Rights", "Chattel Paper", "Instruments" or "General
Intangibles" (as such terms are defined in Article 9 of the Oklahoma Uniform
Commercial Code) or proceeds or products thereof, except those in favor of the
Bank or Usborne (but only if and to the extent fully subordinated to the Bank's
security interest).
6.5 Litigation. There is no action, suit, investigation or proceedings
----------
pending or, to the knowledge of Company threatened against the Company or any
properties or rights thereof before any Tribunal, which involves the possibility
of any final judgment or liability which may result in any material adverse
change in Company's business or its financial condition. The Company is not
subject to any litigation, injunction, temporary restraining order or other
order or decree issued by any court or Tribunal concerning the validity,
legality or effectiveness of Company's proposed revolving line of credit with
the Bank as contemplated hereby.
-13-
<PAGE>
6.6 Conflicting Agreements and Other Matters. Neither the Company nor any
----------------------------------------
Subsidiary is in default in the performance of any obligation, covenant, or
condition in any agreement to which it is a party or by which it is bound.
Neither the Company nor any Subsidiary is a party to any contract or agreement
or subject to any charter or other corporate restriction which materially and
adversely affects its business, property or assets, or financial condition.
Neither the Company nor any Subsidiary is a party to or otherwise subject to any
contract or agreement which restricts or otherwise affects the right or ability
of the Company to execute the Loan Documents or the performance of any of their
respective terms. Neither the execution nor delivery of any of the Loan
Documents, nor fulfillment of nor compliance with their respective terms and
provisions will conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default under, or result in any violation of, or
result in the creation of any Lien upon any of the properties or assets of the
Company or any Subsidiary pursuant to, or require any consent, approval or other
action by or any notice to or filing with any Tribunal (other than routine
filings after the Closing Date with the Securities and Exchange Commission, any
securities exchange and/or state blue sky authorities) pursuant to, the charter
or By-Laws of the Company or any Subsidiary, any award of any arbitrator, or any
agreement, instrument or Law to which the Company or any Subsidiary is subject.
6.7 Purposes. Neither the Company nor any Subsidiary is engaged
--------
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System)
and no part of the proceeds of any borrowing hereunder will be used to purchase
or carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock. If requested by the Bank, the Company
will furnish to the Bank a statement in conformity with the requirements of
Federal Reserve Form U-1, referred to in Regulation U, to the foregoing effect.
Neither the Company nor any agent acting on its behalf has taken or will take
any action which might cause this Agreement or the Note to violate any
regulation of the Board of Governors of the Federal Reserve System (including
Regulations G, T, U and X) or to violate any securities laws, state or federal,
in each case as in effect now or as the same may hereafter be in effect.
6.8 Compliance with Applicable Laws. The Company and each Subsidiary are
-------------------------------
in compliance with all Laws, ordinances, rules, regulations and other legal
requirements applicable to them and the business conducted by them, the
violation of which could or would have a material adverse effect on their
business or condition, financial or otherwise. Neither the ownership of any
capital stock of the Company or any of its Subsidiaries, nor any continued role
of any Person in the management or other affairs of the Company or any of its
Subsidiaries (i) results or could result in the Company's noncompliance with any
Laws, ordinances, rules, regulations and other legal requirements applicable to
the Company or its Subsidiaries, or (ii) could or would have a material adverse
effect on the business or condition, financial or otherwise, of the Company and
its Subsidiaries.
6.9 Possession of Franchises and Licenses. The Company and each
-------------------------------------
Subsidiary possess all franchises, certificates, licenses, permits and other
authorizations from governmental political subdivisions or regulatory
authorities, free from burdensome restrictions, that are necessary in any
material respect for the ownership, maintenance and operation of their
respective properties and assets, and neither the Company nor any Subsidiary is
in violation of any thereof in any material respect.
6.10 Leases. The Company and each Subsidiary enjoy peaceful and
------
undisturbed possession of all leases necessary in any material respect for the
operation of their respective properties and assets, none of which contains any
unusual or burdensome provisions which might
-14-
<PAGE>
materially affect or impair the operation of such properties and assets. All
such leases are valid and subsisting and are in full force and effect.
6.11 Taxes. The Company and each Subsidiary have filed all Federal, state
-----
and other income tax returns which are required to be filed and have paid all
Taxes, as shown on said returns, and all Taxes due or payable without returns
and all assessments received to the extent that such Taxes or assessments have
become due. All Tax liabilities of the Company and the Subsidiaries are
adequately provided for on the books of the Company and the Subsidiaries,
including interest and penalties. No income tax liability of a material nature
has been asserted by taxing authorities for Taxes in excess of those already
paid.
6.12 Disclosure. Neither this Agreement nor any other Loan Document or
----------
writing furnished to the Bank by or on behalf of the Company in connection
herewith contains any untrue statement of a material fact nor do such Loan
Documents and writings, taken as a whole, omit to state a material fact
necessary in order to make the statements contained herein and therein not
misleading. There is no fact known to the Company which materially adversely
affects or in the future may materially adversely affect the business, property,
or assets, or financial condition of the Company or any Subsidiary which has not
been set forth in this Agreement, in the Loan Documents or in other documents
furnished to the Bank by or on behalf of the Company prior to the date hereof in
connection with the transactions contemplated hereby.
6.13 Subsidiaries. Exhibit G attached hereto states the name of each of
------------ ---------
the Subsidiaries, if any, its jurisdiction of incorporation, and the percentage
of stock owned by the Company and each other Subsidiary if any.
6.14 Investment Company Act Representation. Neither the Company nor any
-------------------------------------
Subsidiary is an "investment company" or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
6.15 ERISA. Since the effective date of Title IV of ERISA, no Reportable
-----
Event has occurred with respect to any Plan. For the purposes of this section
the term "Reportable Event" shall mean an event described in Section 4043(b) of
ERISA. For the purposes hereof the term "Plan" shall mean any plan subject to
Title IV of ERISA and maintained for employees of the Company or any Subsidiary,
or of any member of a controlled group of corporations, as the term "controlled
group of corporations" is defined in Section 1563 of the Internal Revenue Code
of 1986, as amended (the "Code"), of which the Company is a part. Each Plan
established or maintained by the Company is in material compliance with the
applicable provisions of ERISA, and the Company has filed all reports required
by ERISA and the Code to be filed with respect to each Plan. The Company has
met all requirements with respect to funding Plans imposed by ERISA or the Code.
Since the effective date of Title IV of ERISA there have not been any nor are
there now existing any events or conditions that would permit any Plan to be
terminated under circumstances which would cause the lien provided under Section
4068 of ERISA to attach to the assets of the Company or any Subsidiary. The
value of each Plan's benefits guaranteed under Title IV of ERISA on the date
hereof does not exceed the value of such Plan's assets allocable to such
benefits on the date hereof.
6.16 Fiscal Year. The fiscal year of the Company ends February 28.
-----------
-15-
<PAGE>
ARTICLE VII
-----------
COLLATERAL AND SECURITY FOR INDEBTEDNESS
----------------------------------------
7.1 Creation of Continuing Security Interest. To secure the payment of
----------------------------------------
all Indebtedness, howsoever and whensoever created hereunder, as and when the
same shall become due and payable (whether by extension, renewal, acceleration
or otherwise), the Company hereby grants, mortgages, pledges, hypothecates and
assigns to the Bank a continuing and continuous first and prior security
interest in and to all of the following (the "Collateral"):
(a) All accounts (including contract rights) (as defined in Article 9
of the Oklahoma Uniform Commercial Code) now owned by the Company and which
may be owned, held, created or acquired by the Company at any time
hereafter until this Agreement shall be terminated (as provided herein) and
thereafter until all Indebtedness shall be fully paid and discharged;
(b) All inventory (as such term is defined in Article 9 of the
Oklahoma Uniform Commercial Code) including, without limitation, all
educational books, programs, kits and supplies and work in progress and
goods in process now owned or created by Company and which may be owned,
held, created or acquired by Company at any time hereafter until this
Agreement shall be terminated (as provided herein) and thereafter until all
---
Indebtedness shall be fully paid and discharged;
(c) All books, records, ledgers, journals, delivery receipts, sales
memoranda, shipping tickets, correspondence and other written records, data
and memoranda of the Company relating to any and all of their respective
present or future accounts, contract rights, and/or inventory;
(d) All general intangibles, instruments, documents and chattel paper
now owned or hereafter owned, acquired or created by Company;
(e) All demand deposits, time deposits or certificates of deposit with
the Bank including (without limitation) the Collection Account; and
(f) All proceeds and products of all of the items and types of
Collateral described above;
which security interests shall be more fully evidenced by that certain Restated
Security Agreement and Assignment dated as of even date herewith (the "Security
Agreement").
7.2 Collection of Accounts. Until otherwise provided herein, the Company
----------------------
at its own expense, will diligently attempt to collect upon all sums due the
Company upon its accounts and contract rights. Although the Bank does not
contemplate immediate efforts on its part to effect direct collection of any
such accounts, the Bank shall, however, upon the occurrence of a Default or an
Event of Default, be entitled at any time and from time to time to make or
attempt to make direct collection of any one or more or all accounts or contract
rights of the Company, and the Company will from time to time and as often as
requested by the Bank, promptly execute and deliver to the Bank one or more
specific written assignments of any one or more accounts or contract rights the
Bank may select or designate, assigning the same to the Bank. Such assignments
shall be upon such form or forms the Bank may hereafter regularly employ for the
purpose of evidencing the assignment to it, as collateral or security, of one or
more specific accounts or contract rights. In each instance in which the Bank
may elect hereunder to effect direct collection of any one or more accounts or
contract rights of the Company, the Bank shall also be entitled to take
possession of all books and records of the Company relating to such
-16-
<PAGE>
account(s) or contract right(s) and the Company will not in any manner take or
suffer any action to be taken to hinder, delay or interfere with the Bank's
attempts to effect collection.
7.3 Lockbox Agreement. Upon five (5) days' prior written notice to the
-----------------
Company, the Bank shall have the right, at the Bank's sole option, to require
that the Company proceed to immediately establish and maintain a special lock
box account with the Bank ("Collection Account") for and on behalf of the Bank
and Company shall execute all such agreements, signature cards, resolutions and
other documents as is customary for the establishment of such an account with
the Bank. The Company shall thereafter direct all Account Debtors thereof to
remit all accounts payable to the Company to the Collection Account, concerning
which the Company shall have no access or rights of withdrawal with respect to
such Collection Account. Upon effecting such five (5) days' notice to the
Company, Bank will be authorized and empowered by the Company to notify any such
Account Debtors of the lockbox arrangement and to verify the notification
process utilized by the Company. All net collected funds in any Collection
Account shall be applied by the Bank on Friday of each calendar week (or the
next succeeding Business Day if Friday is a day other than a Business Day) to
the indebtedness evidenced by the Note in the order as specified in Section 2.2
above and may be reborrowed by the Company pursuant to the provisions of this
Agreement. The Bank shall be entitled and is hereby authorized by the Company
to apply all such lockbox funds to the payment of accrued interest on the Note
to the date of such payment and the balance, if any, in reduction of the
outstanding principal balance of the Note. All funds on deposit in the
Collection Account shall be continuously pledged to the Bank as security for all
Indebtedness and shall constitute part of the Collateral described in Section
7.1 hereof. Notwithstanding the foregoing, the Bank is hereby absolved from all
liability for failure to enforce collection of any such payments or collection
of instruments of payment directed to the Collection Account, for failure to
apply any proceeds in accordance with this Section 7.3, and from all other
responsibility in connection therewith, except the responsibility to account to
the Company for funds actually received.
7.4 Additional Documents or Instruments. The Company will from time to
-----------------------------------
time and as often as the Bank may request, execute and deliver to the Bank such
financing statements, additional and supplemental security agreements and other
reports, certificates, data and writings the Bank may request to evidence,
perfect, more fully evidence or perfect or evaluate the Bank's continuing
security interest in the collateral and security referred to herein.
ARTICLE VIII
------------
EVENTS OF DEFAULT
-----------------
8.1 Events of Default. If any one or more of the following events (herein
-----------------
called "Events of Default") shall occur and be continuing for any reason
whatsoever (and whether such occurrence shall be voluntary or involuntary or
come about or be effected by operation of Law or otherwise):
(a) The Company shall fail to pay any principal or interest upon the
Note or any other note issued or purportedly issued hereunder or any other
Indebtedness incurred or created or purportedly incurred or created
hereunder or pursuant hereto within five (5) days after the same shall
become due and payable (whether by extension, renewal, acceleration or
otherwise); or
(b) The Company shall fail to duly observe, perform or comply with any
covenant or agreement contained in this Agreement and such default or
breach shall not have been cured or remedied the earlier of thirty (30)
days after the Company shall know (or should have known) of its occurrence
(except that such grace or curative periods shall
-17-
<PAGE>
neither be deemed applicable to the payment provisions hereof nor the
default provisions of subparagraph (a) hereof); or
(c) Any representation or warranty of the Company made herein or in
any writing furnished in connection with or pursuant to this Agreement
shall have been false or misleading in any material respect on the date
when made; or
(d) The Company shall default in the payment of principal or of
interest on any other obligation for money borrowed or received as an
advance (or any obligation under any conditional sale or other title
retention agreement or any obligation issued or assumed as full or partial
payment for property whether or not secured by purchase money Lien or any
obligation under notes payable or drafts accepted representing extensions
of credit) beyond any grace period provided with respect thereto, or shall
default in the performance of any other agreement, term or condition
contained in any agreement under which such obligation is created (or if
any other default under any such agreement shall occur and be continuing
beyond any period of grace provided with respect thereto) if the effect of
such default is to cause, or to permit, the holder or holders of such
obligation (or a trustee on behalf of such holder or holders) to cause such
obligation to become due prior to its date of maturity; or
(e) Any of the following: (i) Company or any of its Subsidiaries,
shall make an assignment for the benefit of creditors, become insolvent or
admit in writing their inability to pay their debts generally as they
become due; or (ii) an order for relief under the United States Bankruptcy
Code, as amended, shall be entered against a Company and shall remain in
effect and unstayed for thirty (30) days; or (iii) Company or any
Subsidiary shall petition or apply to any Tribunal for the appointment of a
trustee, custodian, receiver or liquidator of Company or any Subsidiary or
of any substantial part of the assets of Company or any Subsidiary or shall
commence any proceedings relating to a Company or any Subsidiary under any
bankruptcy, reorganization, compromise, arrangement, insolvency,
readjustment of debts, dissolution, or liquidation Law of any jurisdiction,
whether now or hereafter in effect; or (iv) any petition or application
shall be filed, or any such proceedings shall be commenced, against Company
or any Subsidiary and Company or any Subsidiary by any act shall indicate
its approval thereof, consent thereto or acquiescence therein, or an order,
judgment or decree shall be entered appointing any such trustee, receiver
or liquidator, or approving the petition in any such proceedings, and such
order, judgment or decree shall remain unstayed and in effect for more than
thirty (30) days; or (v) any order, judgment or decree shall be entered in
any proceedings against Company or any Subsidiary decreeing the dissolution
of Company or Subsidiary and such order, judgment or decree shall remain
unstayed and in effect for more than thirty (30) days; or (vi) any order,
judgment or decree shall be entered in any proceedings against Company or
any Subsidiary decreeing a split-up of Company or Subsidiary which requires
the divestiture of a substantial part of the assets of Company or
Subsidiary and such order, judgment or decree shall remain unstayed and in
effect for more than thirty (30) days; or (vii) any final judgment on the
merits for the payment of money in excess of $10,000 shall be outstanding
against Company or any Subsidiary, and such judgment shall remain unstayed
and in effect and unpaid for more than thirty (30) days; or (viii) any
default by Company under any real property lease agreement to which Company
is a party or by which it is bound that constitutes a Material Adverse
Effect; or (ix) Company shall fail to make timely payment or deposit of any
material amount of tax required to be withheld by Company and paid to or
deposited to or to the credit of the United States of America pursuant to
the provisions of the Internal Revenue Code of 1986, as amended, in respect
of any and all wages and salaries paid to employees of Company; or
-18-
<PAGE>
(f) Any material vacancies shall occur in the executive management of
Company and the same shall not be filled with a replacement reasonably
satisfactory to the Bank (in its good faith judgment) within thirty (30)
days of the occurrence of such vacancy(ies); or
(g) Any Reportable Event described in Section 6.14 hereof which the
Bank determines in good faith might constitute grounds for the termination
of a Plan therein described or for the appointment by the appropriate
United States District Court of a trustee to administer any such Plan shall
have occurred and be continuing thirty (30) days after written notice to
such effect shall have been given to the Company by the Bank, or any such
Plan shall be terminated, or a trustee shall be appointed by a United
States District Court to administer any such Plan or the Pension Benefit
Guaranty Corporation shall institute proceedings to terminate any such Plan
or to appoint a trustee to administer any such Plan;
then, and in every such event, the Bank may declare the principal of and
interest on all Indebtedness of the Company hereunder to be immediately due and
payable, without presentment, demand, protest, notice of protest, or other
notice of any kind, all of which are hereby expressly waived by the Company.
8.2 Interest After Default. All past due obligations or Indebtedness of
----------------------
the Company to the Bank, whether principal, interest, costs or expenses, shall
bear interest at a variable annual rate equal from day to day to Chase Prime
Rate plus four and one-half percentage points (4 1/2%) during such period of
delinquency until paid, but not higher than the then applicable highest federal
or state lawful rate (the "Default Rate").
8.3 Remedies. If any one or more Events of Default shall occur and be
--------
continuing, the Bank may, without any period of grace, proceed to protect and
enforce all or any of the rights with respect thereto contained in this
Agreement or any other Loan Documents, or may proceed to enforce payment of
Indebtedness due or enforce any other legal or equitable rights or exercise any
other legal or equitable remedies, or cure or remedy any default by Company for
the purpose of preserving its assets and properties. All rights, remedies or
powers conferred upon the Bank shall be cumulative and not exclusive of any
other rights, remedies or powers available. No delay or omission to exercise
any right, remedy or power, shall impair any such right, remedy or power, or
shall be construed to be a waiver of any Event of Default or an acquiescence
therein. Any such right, remedy or power may by exercised from time to time,
independently or concurrently, and as often as shall be deemed expedient. No
waiver of any Event of Default shall extend to any subsequent Event of Default.
No single or partial exercise of any right, remedy or power shall preclude other
or further exercise thereof. The Company covenant that if an Event of Default
shall happen and be continuing they will pay costs of court and other out-of-
pocket expenses and fees paid or incurred by the Bank in collecting the amounts
due pursuant to this Agreement, including attorneys' fees, together with
interest on amounts so expended from the respective dates of each expenditure at
an annual rate equal to the Default Rate.
ARTICLE IX
----------
MISCELLANEOUS
-------------
9.1 Notices. Unless otherwise provided herein, all notices, requests,
-------
consents and demands shall be in writing and shall be mailed, postage prepaid,
to the respective addresses specified herein, or, as to either party, to such
other address as may be designated by it by written notice to the other party.
All notices, requests, consents and demands hereunder will be effective when
mailed by certified or registered mail, postage prepaid, addressed as aforesaid.
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<PAGE>
9.2 Place of Payment. All sums payable hereunder shall be paid at the
----------------
Bank's principal banking office in Tulsa, Oklahoma, or at such other place as
the Bank shall notify Company in writing, in immediately available funds
constituting lawful currency of the United States of America. If any interest
or principal falls due on other than a Business Day, then such due date shall be
extended to the next succeeding Business Day, and such extension of time will in
such case be included in computing interest, if any, in connection with such
payment.
9.3 Waivers and Consents. Company may take any action prohibited in this
--------------------
Agreement, or omit to perform any act required herein to be performed by it,
upon receipt by the Bank of the written request of Company, and receipt by
Company of the subsequent written consent thereto by the Bank.
9.4 Survival of Agreements. All covenants, agreements, representations
----------------------
and warranties made herein shall survive the execution and the delivery of this
Agreement and the other Loan Documents. All statements contained in any
certificate or other instrument delivered by the Company hereunder shall be
deemed to constitute representations and warranties made by the Company.
9.5 Parties in Interest. All covenants and agreements contained in this
-------------------
Agreement, the Note and the other Loan Documents shall bind and inure to the
benefit of the respective successors and assigns of the parties hereto.
9.6 Governing Law. This Agreement and all Loan Documents shall be deemed
-------------
to have been made under the Laws of the State of Oklahoma and shall be construed
and enforced in accordance with and governed by the Laws of the State of
Oklahoma. Without excluding any other jurisdiction, the Company expressly
agrees and stipulates that the courts of Oklahoma will have jurisdiction over
all proceedings in connection herewith. The Company agrees that for purposes of
enforcement of the Bank's rights and remedies pertaining to the Note and the
other Loan Documents, venue and personal jurisdiction are proper in courts
situated in Tulsa County, Oklahoma.
9.7 Maximum Interest Rate. Regardless of any provision herein or in any
---------------------
of the Loan Documents, the Bank shall never be entitled to receive, collect or
apply, as interest on the Indebt edness any amount in excess of the maximum
rate of interest permitted to be charged by then applicable federal or state
Law, and, in the event the Bank shall ever receive, collect or apply, as
interest, any such excess, such amount which would be excessive interest shall
be applied to the reduction of principal; and, if the principal is paid in full,
then any remaining excess shall forthwith be paid to the Company.
9.8 Participations. The Company recognizes and acknowledges that the Bank
--------------
reserves the right to sell concurrently herewith participating interests in the
Note to one or more financial institutions (the "Participants") and to appoint
an agent for the Bank and such Participants in order to administer the Loan
Documents, advances and payments, the collateral and all other matters and/or
obligations set forth herein or in the other Loan Documents contemplated hereby
(the "Agent"). The Company shall thereafter supply the Participants with the
same information and reports communicated to the Bank, whether written or oral.
The Company hereby acknowledges that each Participant shall be deemed a holder
of the Note to the extent of its participation, and the Company hereby waives
its rights, if any, to offset amounts owing to the Company from the Bank against
Participant's participation interest in the Note.
9.9 Legal Fees/Expenses of Bank. The Company agrees to pay all expenses
---------------------------
and costs incurred by the Bank, including, without limitation, the legal fees of
counsel for the Bank in connection with the negotiation, preparation and closing
of this transaction and any extension,
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<PAGE>
renewal, amendment or refinancing thereof. The Company agrees that all such fees
and expenses shall be paid regardless of whether or not the transactions
provided for in this Agreement are eventually closed and regardless of whether
any sums are advanced to the Company by the Bank.
9.10 Releases/Waivers. Upon full payment and satisfaction of the Loans
----------------
evidenced by the Note and interest thereon together with any other obligations
or duties hereunder, the parties hereto shall thereupon automatically each be
fully, finally and forever released and discharged from any further claim,
liability or obligation in connection with such Loans and all transactions
relating thereto.
9.11 Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not constitute a part of the text hereof nor alter or
otherwise affect the meaning hereof.
9.12 Severability. The unenforceability or invalidity as determined by a
------------
Tribunal of competent jurisdiction, of any provision or provisions of this
Agreement shall not render unenforceable or invalid any other provision or
provisions hereof.
9.13 Full Agreement. This Agreement and the other Loan Documents contain
--------------
the full agreement of the parties and supersede all negotiations and agreements
prior to the date hereof.
9.14 Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument.
9.15 WAIVER OF JURY TRIAL. COMPANY HEREBY EXPRESSLY WAIVES ANY RIGHT TO A
--------------------
TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS
HEREUNDER OR UNDER THE NOTE, THE SECURITY AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT, AGREEMENT OR AMENDMENT DELIVERED (OR WHICH IN THE FUTURE MAY BE
DELIVERED) IN CONNECTION HEREWITH OR ARISING FROM ANY BANKING OR LENDING
RELATIONSHIP EXISTING IN CONNECTION HEREWITH. COMPANY AGREES THAT ANY SUCH
ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
-21-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Restated Revolving
Credit and Security Agreement to be duly executed and delivered in Tulsa,
Oklahoma, as of the day and year first above written.
EDUCATIONAL DEVELOPMENT
CORPORATION, a Delaware corporation
By__________________________________________
Randall White, President
"Company"
STATE BANK & TRUST, N.A.
By__________________________________________
Dennis Colvard, Vice President
"Bank"
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<PAGE>
EXHIBIT A
---------
REVOLVING CREDIT NOTE
---------------------
$9,000,000 Tulsa, Oklahoma
June 10, 1996
FOR VALUE RECEIVED, the undersigned (the "Maker") promises to pay to the
order of STATE BANK & TRUST, N.A. (the "Payee"), at the Payee's main banking
office in Tulsa, Oklahoma, the principal sum of NINE MILLION AND NO/100 DOLLARS
($9,000,000), or so much thereof as shall have been advanced by Payee to Maker
and remains unpaid, on June 30, 1997, together with interest thereon from the
date funds are initially advanced hereon on the unpaid balances of principal
from time to time outstanding, at the variable annual rate of interest
hereinafter specified, which interest is payable in monthly installments due and
payable on the last day of each calendar month commencing June 30, 1996, and at
final maturity on June 30, 1997.
The rate of interest payable upon the indebtedness evidenced by this note
shall be a variable annual rate of interest equal from day to day to Prime Rate
of interest, as hereinafter defined. Prime Rate of interest shall be effective
with respect to this note as of the date upon which any change in such rate of
interest shall occur. Interest shall be computed on the basis of a year of 360
days but assessed only for the actual number of days elapsed.
For the purposes of this note Prime Rate shall mean, as of the date upon
which such rate of interest is to be determined, the prime rate of interest
published in the Money Rates column of the Wall Street Journal (Southwest
Edition) or a similar rate as determined by Payee if such rate ceases to be
published.
All parties (maker, endorsers, sureties, guarantors and all others now or
hereafter liable for payment of the indebtedness evidenced by this note) waive
presentment and diligence in col lection and agree that without notice to, and
without discharging the liability of any party, this note may be extended or
renewed from time to time and for any term or terms by agreement between the
holder of this note and any of such parties and all parties shall remain liable
on each such extension or renewal.
If the principal or any installment of interest due upon this note is not
paid as and when the same becomes due and payable (whether by extension,
acceleration or otherwise), or any party now or hereafter liable (directly or
indirectly) for payment of this note makes an assignment for benefit of
creditors, becomes insolvent, has an order for relief under the United States
Bankruptcy Code, as amended, entered against it, or any receiver, trustee,
custodian or like officer is appointed to take custody, possession or control of
any property of any such party, the holder hereof may, without notice, declare
all of the unpaid balance hereof to be immediately due and payable. Such right
of acceleration is cumulative and in addition to any other right or rights of
acceleration under the Restated Credit and Security Agreement between the Maker
and the Payee dated as of even date herewith (the "Credit Agreement") and any
other writing now or hereafter evidencing or securing payment of any of the
indebtedness evidenced hereby. After maturity, whether by acceleration,
extension or otherwise, this note shall bear interest at a variable annual rate
equal to Prime Rate plus four and one-half percentage points (4.5%). Maker and
all other parties liable hereon shall pay all reasonable attorney fees and all
court costs and other costs and expenses of collection incurred by the holder
hereof.
This is the Revolving Credit Note defined in the Credit Agreement and
constitutes an increase and renewal of that certain $6,000,000 Revolving Credit
Note dated September 18, 1995. Reference is made to the Credit Agreement and to
the Security Agreement and Assignment dated
<PAGE>
Revolving Credit Note
Page Two
January 18, 1990, as amended and restated from time to time, including that
certain Restated Security Agreement and Assignment dated as of even date
herewith, for the provisions with respect to acceleration, description of
collateral securing payment of the indebtedness evidenced hereby, rights and
remedies in respect thereof and other matters. This note is executed and
delivered to the order of the Payee in Tulsa, Oklahoma, by the undersigned duly
authorized corporate officer of the Maker pursuant to all necessary corporate
action and shall be governed by and construed in accordance with the laws of the
State of Oklahoma.
EDUCATIONAL DEVELOPMENT
CORPORATION
By
--------------------------------------
Randall White, President
"Maker"
Due: June 30, 1997
<PAGE>
EXHIBIT B
---------
LOAN REQUEST, CERTIFICATION AND
CONFIRMATORY SECURITY AGREEMENT
-------------------------------
________________, 19___
STATE BANK & TRUST, N.A.
4500 South Garnett
Tulsa, Oklahoma 74146
Gentlemen:
Pursuant to the provisions of the Restated Credit and Security
Agreement dated as of June 10, 1996 (the "Credit Agreement"), the undersigned
"Company" hereby (i) confirms and ratifies your continuing first and prior
security interest in and to all of its present and future accounts, contract
rights, general intangibles, inventory, instruments, documents and chattel paper
(including proceeds and products thereof) described or referred to in the Credit
Agreement; (ii) applies to you for a loan in the amount shown hereinbelow; (iii)
certifies that no Event of Default or Default under the Credit Agreement has
occurred and is continuing as of the date hereof or exists or would continue to
exist but for the lapse of time or notice, or both; (iv) represents and warrants
to you that the representations, covenants and warranties set forth or referred
to in the Credit Agreement are true and correct on and as of this date and that
Company has been in strict and continuing compliance with the borrowing base
provisions of the Credit Agreement since the date of the last Loan Request
submitted to you; (v) certifies to you the accuracy of the following information
concerning the Borrowing Base of the Company; (vi) and further certifies to you
the accuracy and completeness of the financial reports and Monthly Reports
annexed hereto as required by Sections 4.4 and 4.5 of the Credit Agreement:
1. Total Company Accounts per last certificate $___________
2. Plus: New Invoices generated by Companies $___________
3. Less: Collections and Credit Memos $___________
4. Total Company Accounts as of _______________ $__________
5. Less:
(a) Invoices over 90 days past due $___________
(b) COD Invoices $___________
(c) Contra Accounts $___________
(d) Freight Invoices/Late Charges $___________
(e) Foreign Accounts $___________
(f) Due From Affiliates/Officers, Employees $___________
(g) Other Ineligibles $___________
(Specify) _____________________________
(h) Total Ineligibles (Sum of a thru g) $__________
6. Eligible Accounts (Line 4 less Line 5 h) $__________
7. Account Borrowing Base (Line 6 x .65) $__________
8. Total Eligible Inventories $__________
9. Inventory Borrowing Base (Line 8 x .35) $__________
10. Borrowing Base (Line 7 plus Line 9) $___________
11. Revolving Loan Balance $__________
12. Plus: Advance requested $__________
OR
13. Less: Additional Payment $___________
14. New Aggregate Revolving Credit Loan Balance
(Line 11 plus Line 12 or less Line 13,
but not to exceed the lesser of Line 10 $__________
------
or $9,000,000 per (S) 2.4 of the Credit
Agreement)
EDUCATIONAL DEVELOPMENT
CORPORATION
By
_____________________________________
(Title)
"Company"
<PAGE>
EXHIBIT C
---------
Existing Liens
1. Roselius Computer Corp. (assigned to The First National Bank of Midwest
City) - Lease Agreement No. 12356 re computer, processing and printing
equipment listed therein. Filing #603337 in Tulsa County, Oklahoma and
#N04573 in Oklahoma County, Oklahoma.
2. Usborne Publishing Ltd. re consignment of present and future listed books -
filing #598083 in Tulsa County, Oklahoma and filing #010740 and 021326 in
Oklahoma County, Oklahoma.
26
<PAGE>
EXHIBIT D
---------
EDUCATIONAL DEVELOPMENT CORPORATION
Notes Receivable
Officers, Directors and Shareholders
June 10, 1996
NONE
27
<PAGE>
EXHIBIT E
---------
Investments
NONE
28
<PAGE>
EXHIBIT F
---------
Existing Leases
1. Commerical Lease and Deposit Receipt dated January 22, 1986 between James
D. Dunn, as lessor, and the Company, as lessee, covering the premises
located at 10302 East 55th Place, which lease expires on ________________.
2. Equipment Lease Agreement dated November 6, 1989 between Roselius Computer
Corporation, as lessor, and the Company, as lessee, covering computer
equipment, which lease has an initial term of 36 months.
29
<PAGE>
EXHIBIT G
---------
Subsidiaries
NONE
30
<PAGE>
EXHIBIT 11
EDUCATIONAL DEVELOPMENT CORPORATION
EARNINGS PER SHARE COMPUTATION (b)
YEARS ENDED FEBRUARY 28, 1997,
FEBRUARY 29, 1996, AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Earnings from continuing operations (a) $ 1,630,088 $ 1,805,335 $ 1,163,647
Discontinued operations, net of tax (a):
Earnings (loss) from operations -- (25,637) 8,139
Loss on disposal -- (300,984) --
----------- ----------- -----------
-- (326,621) 8,139
----------- ----------- -----------
Net earnings (a) $ 1,630,088 $ 1,478,714 $ 1,171,786
=========== =========== ===========
Weighted average number of common shares outstanding 5,199,251 4,553,658 4,474,520
Add common share equivalents 154,687 785,176 748,970
----------- ----------- -----------
Weighted average number of common and common
equivalent shares outstanding 5,353,938 5,338,834 5,223,490
Add common share equivalents to compute fully diluted
earnings per share 8,907 10,590 18,812
----------- ----------- -----------
5,362,845 5,349,424 5,242,302
=========== =========== ===========
Earnings (loss) per share (a):
Earnings from continuing operations $ 0.31 $ 0.34 $ 0.22
Discontinued operations -- (0.06) --
----------- ----------- -----------
Net earnings per share $ 0.31 $ 0.28 $ 0.22
=========== =========== ===========
</TABLE>
(a) Agrees to the related amounts shown on the statements of earnings.
(b) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB No.
15 because it results in dilution of less than 3% or is antidilutive.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-60188 of Educational Development Corporation on Form S-8 of our report dated
May 2, 1997, appearing in this Annual Report on Form 10-K of Educational
Development Corporation for the year ended February 28, 1997.
DELOITTE & TOUCHE LLP
May 23, 1997
Tulsa, Oklahoma
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM *
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 82,153
<SECURITIES> 0
<RECEIVABLES> 2,225,588
<ALLOWANCES> 192,900
<INVENTORY> 10,048,457
<CURRENT-ASSETS> 12,502,287
<PP&E> 1,294,372
<DEPRECIATION> 445,894
<TOTAL-ASSETS> 13,365,369
<CURRENT-LIABILITIES> 5,092,324
<BONDS> 0
0
0
<COMMON> 1,084,848
<OTHER-SE> 7,188,197
<TOTAL-LIABILITY-AND-EQUITY> 13,365,369
<SALES> 21,239,507
<TOTAL-REVENUES> 21,239,507
<CGS> 8,396,060
<TOTAL-COSTS> 16,945,341
<OTHER-EXPENSES> 1,255,012
<LOSS-PROVISION> 60,000
<INTEREST-EXPENSE> 344,966
<INCOME-PRETAX> 2,634,188
<INCOME-TAX> 1,004,100
<INCOME-CONTINUING> 1,630,088
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,630,088
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
</TABLE>
