-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q0v5Iup0Uoky9diWzou8Gx4Hxp0tPthb8T4tDZw/VfJtYdDCTV3H6BTzh7gahXXG VFaFviLRAEMjUulpW1Nm1g== 0000930661-00-001198.txt : 20000515 0000930661-00-001198.hdr.sgml : 20000515 ACCESSION NUMBER: 0000930661-00-001198 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDUCATIONAL DEVELOPMENT CORP CENTRAL INDEX KEY: 0000031667 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISCELLANEOUS NONDURABLE GOODS [5190] IRS NUMBER: 730750007 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-04957 FILM NUMBER: 627049 BUSINESS ADDRESS: STREET 1: 10302 E 55TH PL #B CITY: TULSA STATE: OK ZIP: 74146 BUSINESS PHONE: 9186224522 MAIL ADDRESS: STREET 1: PO BOX 470663 CITY: TULSA STATE: OK ZIP: 741460663 FORMER COMPANY: FORMER CONFORMED NAME: TUTOR TAPES INTERNATIONAL CORP DATE OF NAME CHANGE: 19701030 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL TEACHING TAPES INC DATE OF NAME CHANGE: 19701030 10-K 1 FORM 10K 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 29, 2000 [ ] 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 April 18, 2000, 4,076,752 shares of common stock were outstanding. The aggregate market value of the voting shares held by non- affiliates of the registrant, based on 2,947,978 shares (total outstanding less shares held by all officers, directors and 401(k) Plan) extended at the closing market price on April 18, 2000, of these shares traded on the Nasdaq National Market, was approximately $8,797,872. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Annual Report, to the extent not set forth herein, is incorporated herein by reference from the registrant's definitive proxy statement relating to the annual meeting of stockholders to be held on June 22, 2000. 1 TABLE OF CONTENTS
FACTORS AFFECTING FORWARD LOOKING STATEMENTS.......................................................... 3 PART I Item 1. Business.................................................................................... 3 Item 2. Properties.................................................................................. 6 Item 3. Legal Proceedings........................................................................... 6 Item 4. Submission of Matters to a Vote of Security Holders......................................... 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 6 Item 6. Selected Financial Data..................................................................... 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 11 Item 8. Financial Statements and Supplementary Data................................................. 11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 11 PART III Item 10. Directors and Executive Officers of the Registrant.......................................... 11 Item 11. Executive Compensation...................................................................... 12 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 12 Item 13. Certain Relationships and Related Transactions.............................................. 12 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 13
2 EDUCATIONAL DEVELOPMENT CORPORATION FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED FEBRUARY 29, 2000 FACTORS AFFECTING FORWARD LOOKING STATEMENTS - -------------------------------------------- This annual Report on Form 10-K contains certain "forward looking statements" within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain statements contained in "Item 7 - 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. Although Educational Development Corporation believes that the expectations reflected by such forward looking statements are reasonable based on information currently available to the Company, no assurances can be given that such exceptions will prove to have been correct. PART 1 ------ Item 1. BUSINESS - ------ -------- (a) General Development of Business ------------------------------- Educational Development Corporation ("EDC" or the "Company"), a Delaware corporation with its principal office in Tulsa, Oklahoma, is the exclusive trade publisher of a line of children's books produced in the United Kingdom by Usborne Publishing Limited. 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") 2000 the Company operated two divisions: Home Business Division ("Usborne Books at Home" or "UBAH") and Publishing Division. The Home Business Division distributes books through independent consultants who hold book showings in individual homes, and through book fairs and direct sales. The Home Business Division also distributes these titles to school and public libraries. The Publishing Division markets books to bookstores, toy stores, specialty stores and other retail outlets. Significant Events During Fiscal Year 2000 ------------------------------------------ There were no significant events during fiscal year 2000. (b) Financial Information about Industry Segments --------------------------------------------- See part II, Item 8 - Financial Statements and Supplementary Data 3 (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 sole United States trade publisher of these books. The Company currently offers approximately 1,000 different titles. The Company also distributes a product called "Usborne Kid Kits". These Kid Kits take an Usborne book and combine it with specially selected items and/or toys which complement the information contained in the book. The Kid Kits are packaged in a reusable vinyl bag. Presently 61 different Kid Kits are available. The Company considers the political risk of importing books from the United Kingdom to be negligible as the two countries have maintained excellent relations for many years. Likewise there is little direct economic risk to the Company in importing books from the United Kingdom as the Company pays for the books in U.S. dollars and is not directly subject to any currency fluctuations. There is risk of physical loss of the books should an accident occur while the books are in transit, which could cause the Company some economic loss due to lost sales should the supply of some titles be depleted in the event of a lost shipment. The Company considers this to be highly unlikely as this type of loss has yet to occur. There is some risk involved in having all sales tied to one source - Usborne Publishing Limited. The Company has an excellent working relationship with its foreign supplier Usborne Publishing Limited and can foresee no reason for this to change. Management believes that the Usborne line of books are the best available books of their type and currently has no plans to sell any other line. (ii) Industry Segments (a) Home Business Division The Home Business Division markets the Usborne line of approximately 1,000 titles and 61 Kid Kits through a combination of direct sales, home parties and book fairs sold through a network marketing system. The Division also sells to school and public libraries. (b) Publishing Division The Publishing Division distributes the Usborne line to bookstores, toy stores, specialty stores and other retail outlets utilizing an inside telephone sales force as well as independent field sales representatives. (iii) Research and Development During fiscal year 2000 the Company spent approximately $120,000 in development of a new product, "Make Reading Fun", a fully interactive reading and phonics program. The Company expects to begin sales of this product during the second quarter of FY 2001. (iv) Marketing (a) Home Business Division The Home Business Division markets through commissioned consultants using a combination of direct sales, home parties and book fairs. The division had approximately 3,600 consultants in 50 states at February 29, 2000. 4 (b) Publishing Division The Publishing Division markets through commissioned trade representatives who call on book, toy, specialty stores and other retail outlets; and through marketing by telephone to the trade. This Division markets to approximately 12,000 book, toy and specialty stores. Significant orders have been received from major book chains. During fiscal year 2000 the division continued to make further inroads into mass merchandising outlets such as drug, department and discount stores. (v) Competition (a) Home Business Division The Home Business Division faces significant competition from several other direct selling companies which have more 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 more financial resources. Industry sales of juvenile paperbacks are over $660 million annually. The Publishing Division's sales are approximately 1.2% 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 this Division can compete well in its market area. (vi) 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. (vii) 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, which impacts sales to school libraries. (viii) Trademarks, Copyrights and Patents (none) (ix) Employees As of April 1, 2000, the Company had 62 full-time employees and 1 part-time employee. The Company believes its relations with its employees to be good. 5 Item 2. PROPERTIES - ------ ---------- The Company is located at 10302 E. 55th PL, Tulsa, Oklahoma. The Company leases approximately 80,400 square feet of office and warehouse space under a five year renewable lease which expires June 30, 2004. The Company's operating facility is well 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 2000 and 1999, as reported by the National Association of Securities Dealers, Inc., were as follows:
2000 1999 ------------------ -------------------- Period High Low High Low - ------ ---- --- ---- --- 1st Qtr... 2.75 2.375 5.625 4.375 2nd Qtr... 3.0 2.50 4.375 2.625 3rd Qtr... 4.969 3.0 2.875 2.1875 4th Qtr... 4.0 2.625 3.0 2.1875
The number of shareholders of record of EDC's common stock at April 18, 2000 was 1184. The Company paid a $0.02 per share annual dividend during fiscal year 2000 and fiscal year 1999. The Company will pay a $0.02 annual dividend during fiscal year 2001. 6 Item 6. SELECTED FINANCIAL DATA - ------ -----------------------
YEARS ENDED FEBRUARY 28 (29) --------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- Net Sales $16,851,261 $16,671,385 $19,343,362 $21,239,507 $19,253,467 ----------- ----------- ----------- ----------- ----------- Earnings From Continuing Operations (1) $ 1,079.028 $ 1,297,493 $ 1,704,568 $ 1,630,088 $ 1,805,335 ----------- ----------- ----------- ----------- ----------- Net Earnings $ 1,079,028 $ 1,297,493 $ 1,704,568 $ 1,630,088 $ 1,478,714 ----------- ----------- ----------- ----------- ----------- Earnings From Continuing Operations Per Common Share Basic $ .25 $ .26 $ .33 $ .31 $ .40 ----------- ----------- ----------- ----------- ----------- Diluted $ .24 $ .26 $ .32 $ .31 $ .34 ----------- ----------- ----------- ----------- ----------- Net Earnings Per Common Share Basic $ .25 $ .26 $ .33 $ .31 $ .33 ----------- ----------- ----------- ----------- ----------- Diluted $ .24 $ .26 $ .32 $ .31 $ .28 ----------- ----------- ----------- ----------- ----------- Total Assets $12,340,022 $12,339,594 $13,597,500 $13,365,369 $16,422,068 ----------- ----------- ----------- ----------- ----------- Cash Dividends Declared Per Common Share $ .02 $ .02 $ .01 -- -- ----------- ----------- ----------- ----------- -----------
(1) Effective February 29, 1996 the Company discontinued its School Division. The operating results of the School Division were reported as discontinued operations in 1996 and 1995. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ------ ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- (a) Results of Operations --------------------- FY 2000 - ------- The Home Business Division's net sales increased slightly during FY 2000 when compared with FY 1999. The months of January and February 2000 were especially strong when compared with the same two months last year. During the past two years, this division has experienced sales declines which the Company believes was primarily due to a reduction in the compensation structure made in October 1996. This change was not well received by the field sales force. In June 1997 and May 1998 the Company made enhancements to the compensation program. The Company believes its compensation program is competitive with industry leaders. The division will offer during FY 2001 new and exciting incentive programs as well as several travel contests and regional training seminars throughout the country. The Company believes these programs will help attract new consultants as well as retain existing consultants. The Home Business Division has also introduced a leadership skills program for supervisors. The Home Business Division's fourth National Seminar will be held in June 2000. Management is hopeful that the current year increase in net sales indicates that recent improvements in the compensation programs have brought a halt to the two year decline in net sales. 7 The Publishing Division's net sales increased 2.1% in FY 2000 when compared with FY 1999. Increased volumes and increased market penetration contributed to the increase in net sales. The Company has an aggressive in-house telephone sales force which maintains contact with over 12,000 customers. During FY 2000 the telesales force opened up 675 new accounts compared with 637 new accounts opened in FY 1999. The Company offers two display racks to assist stores in displaying the Company's products. One is a six-foot rack with five adjustable shelves which can hold approximately 220 titles. The second rack is a four-sided rack with three levels which will hold between 50 and 60 of the Company's Kid Kits. There were 3,307 of these attractive racks in retail stores throughout the country at the end of FY 2000 compared with 3,098 at the end of FY 1999. National chains continue to dominate the bookstore market, resulting in fewer independent bookstores. The closing of these independent bookstores, an important market to the Company, has a negative impact on sales. To counter this, the Company last year restructured sales and marketing coverage on the national chains in order to increase market share. Independent toy retailers have also experienced increased competition from national chains, resulting in lower sales in this market segment. The gift market has considerable potential for the Company and the Company continues to develop its presence in this segment of the book market. The Company attends many major national trade shows throughout the country to further enhance product visibility. For these reasons management is optimistic that the Publishing Division can maintain its market share. Cost of sales increased 3.9% for FY 2000 when compared with FY 1999. Cost of sales as a percentage of gross sales was 26.2% in FY 2000 versus 26.0% for FY 1999. Cost of sales as a percentage of gross sales fluctuates with the mix of products sold during a given year. Management believes its percentage of cost of sales in FY 2001 will remain consistent with FY 2000. Operating and selling expenses increased 3.4% during FY 2000 when compared with FY 1999. As a percent of gross sales, these costs were 12.1% for FY 2000 compared with 12.0% in FY 1999. Higher freight costs, the result of increases in sales and an increase in rates by the delivery carrier, contributed to increased operating and selling costs for both the Publishing Division and the Home Business Division. Increased credit card fees in the Home Business Division, the direct result of increased sales, also contributed to the increase in operating and selling expenses. Management expects operating and selling expenses to be approximately 11% to 13% of gross sales in FY 2001. Sales commissions declined 1.3% during FY 2000 when compared with FY 1999. As a percentage of gross sales, these costs were 12.3% in FY 2000 compared to 12.8% for FY 1999. Sales commissions as a percentage of gross sales is determined by the product mix sold and the division that makes the sale. While net sales in the Publishing Division increased during FY 2000, the Division's commission expense decreased 45%, the result of the changing sales market from independent bookstores to the national chains. Offsetting this decline in commission expense was an increase in sales commission expense in the Home Business Division, the result of an increase in sales and a higher commission structure than offered in the Publishing Division. General and administrative expenses increased less than 1.0% during FY 2000 when compared with FY 1999. As a percentage of gross sales, these expenses were 6.1% and 6.3% for FY 2000 and FY 1999 respectively. General and administrative expenses are not always directly affected by sales, so comparison of these expenses as a percentage of gross sales can be misleading. An increase in depreciation expense in the MIS department contributed to the increase in general and administrative expenses. Interest expense declined 52.9% in FY 2000 when compared with FY 1999. As a percentage of gross sales, interest expense was 0.2% in FY 2000 versus 0.4% for FY 1999. The decrease in interest expense during FY 2000 was the result of lower borrowing levels due to improved cash flows during the year. 8 FY 1999 - ------- The Home Business Division's sales decreased 17.3% during FY 1999 when compared with FY 1998. The Company believed this decrease was primarily the result of a reduction in the compensation structure, which was effective October 1, 1996, and was not well received by the field sales force. The compensation structure was enhanced in June 1997 and the downturn in sales was slowed. In May 1998 the Company made additional enhancements to the compensation structure. The new program created an additional level of compensation and was designed to encourage participation at all levels of the organization. Several travel contests were conducted and regional training seminars were held throughout the country. The Home Business Division's third National Seminar was held in June 1999. The Publishing Division's net sales decreased 9.4% in FY 1999 when compared with FY 1998. This decline in net sales was attributed to changing market conditions. National chains increasingly dominate the bookstore market, which in turn has resulted in fewer independent bookstores. The closings of these independent bookstores, an important market for the Company, have led to lower sales. The Company restructured sales and marketing coverage on the national chains in order to increase market share. Independent toy retailers have also experienced increased competition from national discount chains, resulting in lower sales in this market segment. An increase in the number of front list titles increased sales opportunities in FY 2000. The gift market has considerable potential for the Company and the Company increased its gift trade show schedule by 50% to take advantage of this opportunity. The Company's aggressive in-house telephone sales force maintained contact with over 11,000 customers. During FY 1999 the telesales force opened up 637 new accounts compared with 525 during FY 1998. The Company offered two display racks to assist stores in displaying the Company's products. One is a six-foot rack with five adjustable shelves which can hold approximately 220 titles. The second rack is a four-sided rack with three levels which will hold between 50 and 60 of the Kid Kits. There were 3,098 of these attractive racks in retail stores throughout the country at the end of FY 1999 compared with 3,000 in FY 1998. The Company attends several major national trade shows throughout the year to further enhance product visibility. Cost of sales decreased 13.5% for FY 1999 compared with FY 1998. Cost of sales as a percentage of gross sales was 26.0% for FY 1999 versus 26.1% for FY 1998. Cost of sales as a percentage of gross sales fluctuates depending upon the mix of products sold during a given year. Operating and selling expenses decreased 8.0% during FY 1999 when compared with FY 1998. As a percent of gross sales, these costs were 12.0% for FY 1999 and 11.4% for FY 1998. Contributing to the decrease in operating and selling expenses were lower credit card fees and reduced sales incentives in the Home Business Division, both the direct result of decreased sales in the Home Business Division. In addition, payroll and benefit costs related to selling and operating expenses declined due to a decrease in headcount. Sales commissions decreased 12.9% for FY 1999 compared with FY 1998. As a percentage of gross sales, these costs were 12.8% in FY 1999 compared to 12.8% for FY 1998. Sales commissions 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 Home Business Division had a higher commission percentage and the lower sales in this division contributed to the decrease in FY 1999 sales commissions. The revised marketing plan which went into effect in June 1997 for the Home Business Division partially offset the decrease in sales commissions. Effective May 1, 1998 management added a recruiting bonus program in the Home Business Division which resulted in increased commission expense for FY 1999, offset by a decline in total commission expense as a result of decreased sales. 9 General and administrative expenses increased 4.9% during FY 1999 when compared with FY 1998. As a percentage of gross sales, these expenses were 6.3% and 5.2% for FY 1999 and FY 1998 respectively. General and administrative expenses are not always directly affected by sales, so comparison of these expenses as a percentage of gross sales can be misleading. Contributing to the increase in general and administrative expenses were increased salaries and benefits, primarily to existing employees. Interest expense declined 38.3% in FY 1999 compared with FY 1998. As a percentage of gross sales, interest expense was 0.4% in FY 1999 versus 0.5% for FY 1998. The decrease in interest expense during FY 1999 was the result of lower borrowing levels due to improved cash flows during the year. (b) Financial Position ------------------ Working capital was $7.6 million for fiscal year end 2000 and $8.7 million for fiscal year end 1999. Increases in payables and short-term bank debt contributed to the decrease in working capital at fiscal year end 2000. The Company pays interest on its bank promissory note monthly from current cash flows. Management expects its financial position to remain strong and to increase working capital during the next fiscal year. (c) Liquidity and Capital Resources ------------------------------- Management believes the Company's liquidity at February 29, 2000, 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 fiscal year 2001. Capital expenditures are expected to be less than $750,000 in fiscal year 2001. 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 June 30, 1999 the Company signed a Restated Credit and Security Agreement with State Bank which provides a $3,500,000 line of credit. The line of credit is evidenced by a promissory note in the amount of $3,500,000 payable June 30, 2000. The note bears interest at the Wall Street Journal prime floating rate minus 0.25% payable monthly (8.5% at February 29, 2000). The note is collateralized by substantially all of the assets of the Company. At February 29, 2000 the Company had $1,278,000 in borrowings. Available credit under the revolving credit agreement was $2,222,000 at February 29, 2000. The Company obtained and uses the credit facility to fund routine operations. Payments are made from current cash flows. The Company plans to renew this facility when it matures June 30, 2000. 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 fiscal year 2000. Accounts receivable increased during fiscal year 2000, the result of higher sales in the Publishing Division. The Company plans to continue to maximize its collection efforts in order to maintain cash flows. Inventory levels increased 1.0% from fiscal year end 1999 to fiscal year end 2000, the result of the Company's continued efforts of monitoring inventory levels to ensure that adequate inventory is on hand to support 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. Increases and decreases in inventory levels directly affect the level of accounts payable. Also the timing of the purchases and the payment terms offered by the suppliers affect the year end levels of accounts payable. As inventory levels increase moderately each year, the Company expects accounts payable will also increase moderately each year. Management anticipates cash flows from operating activities to increase in the foreseeable future. 10 Cash used in investing activities during fiscal year 2000 was primarily for additional computer equipment and software and additions to the warehouse flow rack shipping system. The short-term bank loan increased during fiscal year 2000 as the Company continued its stock buyback program. During the year the Company continued the stock buyback program by purchasing 874,087 shares of its common stock at a cost of $2,516,232. The Company paid a divided of $0.02 per share or $86,311. (d) New Accounting Standards ------------------------ Recent pronouncements of the Financial Accounting Standards Board, which are not required to be adopted at this date, include SFAS No 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and be measured at fair value. SFAS No. 133 is effective for the Company beginning March 1, 2001. The Company is currently evaluating SFAS No. 133, but does not expect its adoption will have a material impact on its consolidated financial statements. (e) Year 2000 Matters ----------------- The Company encountered only minor problems with the date change from 1999 to 2000 and experienced no business disruptions. The total costs involved in preparation for the year 2000 date change was $45,000, comprised of $40,000 software costs and $5,000 labor costs. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- The Company does not have any material market risk. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ ------------------------------------------- The information required by this Item 8 begins at page F-1, following page 17 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 29, 2000. PART III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- -------------------------------------------------- (a) Identification of Directors --------------------------- The information required by this Item 10 is furnished by incorporation by reference to 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 June 22, 2000. 11 (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 58 President and Treasurer W. Curtis Fossett Controller and 1989 54 Corporate Secretary Michael L. Puhl* Vice President - Operations 1998 44
*The prior business experience for those executive officers who have been employed by the Company for less than five years is as follows: Michael L. Puhl joined EDC on September 3, 1996. Prior to that he was Controller of the Aftermarket Division of Mark IV Industries. During that time he was in charge of all accounting functions of the combined Purolater/Dayco Aftermarket sales division. Prior to being appointed as controller of the Aftermarket Division, he was Vice President/Finance of Purodenso, a joint venture between Purolater Products and Nippondenso LTD of Japan. (c) Compliance With Section 16 (a) of the Exchange Act -------------------------------------------------- The information required by this Item 10 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 June 22, 2000. Item 11. EXECUTIVE COMPENSATION - ------- ---------------------- The information required by this Item 11 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 June 22, 2000. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - ------- --------------------------------------------------- MANAGEMENT ---------- The information required by this Item 12 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 June 22, 2000. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ---------------------------------------------- The information required by this Item 13 is furnished by incorporation by reference to all information under the caption "Transactions with Management and Others" in the Company's definitive Proxy Statement to be filed in connection with the Annual Meeting of Shareholders to be held on June 22, 2000. 12 PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------- ---------------------------------------------------------------- (a) The following documents are filed as part of this report: 1. Financial Statements Page -------------------- ------ Independent Auditors' Report F-1 Balance Sheets - February 28, 1999 and 1998 F-2 Statements of Earnings - Years ended February 28, 1999, 1998 and 1997 F-3 Statements of Shareholders' Equity - Years ended February 28, 1999, 1998 and 1997 F-4 Statements of Cash Flows - Years ended February 28, 1999, 1998 and 1997 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). 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). 13 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). 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). 14 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 10.14 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 10.15 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 10.16 to Form 10-KSB dated February 28, 1995 (File No. 0-4957). 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 10.17 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 10.18 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). 15 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, is incorporated herein by reference to Exhibit 10.21 to Form 10-K dated February 28, 1997 (File No. 0-4957). 10.22 First Amendment dated June 30, 1997 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.22 to Form 10-K dated February 28, 1998 (File No. 0-4957). 10.23 Second Amendment dated June 30, 1998 to Restated Loan Agreement between the Company and State Bank & Trust, N.A., Tulsa, OK, is incorporated herein by reference to Exhibit 10.23 to Form 10-K dated February 28, 1999 (File No. 0-4957). *10.24 Restated Loan Agreement dated June 30, 1999 between the Company and State Bank & Trust, N.A., Tulsa, OK. *10.25 Lease agreement by and between the Company and James D. Dunn dated July 1, 1999. *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. 16 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 12, 2000 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 12, 2000 /s/ Randall W. White ---------------------------------- Randall W. White Chairman of the Board President, Treasurer and Director May 12, 2000 /s/ Robert D. Berryhill ---------------------------------- Robert D. Berryhill, Director May 12, 2000 /s/ Dean Cosgrove ---------------------------------- G. Dean Cosgrove, Director May 12, 2000 /s/ James F. Lewis ---------------------------------- James F. Lewis, Director May 12, 2000 /s/ John M. Lare ---------------------------------- John M. Lare, Director May 12, 2000 /s/ W. Curtis Fossett ---------------------------------- W. Curtis Fossett Principal Financial and Accounting Officer 17 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 29, 2000 and February 28, 1999, and the related statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended February 29, 2000. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at February 29, 2000 and February 28, 1999, and the results of its operations and its cash flows for each of the three years in the period ended February 29, 2000 in conformity with accounting principles generally accepted in the United States of America. Tulsa, Oklahoma April 4, 2000 F-1 EDUCATIONAL DEVELOPMENT CORPORATION BALANCE SHEETS FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 - --------------------------------------------------------------------------------
ASSETS 2000 1999 CURRENT ASSETS: Cash and cash equivalents $ 214,321 $ 210,931 Accounts receivable, less allowances for doubtful accounts and sales returns $209,466 (2000) and $189,556 (1999) 2,020,454 1,842,616 Inventories - Net 8,364,096 8,486,674 Prepaid expenses and other assets 220,381 220,032 Income taxes receivable - 55,077 Deferred income taxes 137,700 121,800 ----------- ----------- Total current assets 10,956,952 10,937,130 INVENTORIES 1,280,000 1,060,000 PROPERTY AND EQUIPMENT - Net 85,270 342,464 DEFERRED INCOME TAXES 17,800 - ----------- ----------- $12,340,022 $12,339,594 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Note payable to bank $ 1,278,000 $ 756,000 Accounts payable 1,681,601 1,095,771 Accrued salaries and commissions 258,123 243,030 Other current liabilities 102,966 149,115 Income tax payable 46,923 - ----------- ----------- Total current liabilities 3,367,613 2,243,916 DEFERRED INCOME TAXES - 56,300 COMMITMENTS SHAREHOLDERS' EQUITY: Common stock, $0.20 par value; Authorized 6,000,000 shares; Issued 5,429,240 shares; Outstanding 4,167,389 (2000) and 4,873,254 (1999) shares 1,085,848 1,085,848 Capital in excess of par value 4,410,066 4,410,066 Retained earnings 7,259,141 6,266,424 ----------- ----------- 12,755,055 11,762,338 Less treasury stock, at cost (3,782,646) (1,722,960) ----------- ----------- 8,972,409 10,039,378 ----------- ----------- $12,340,022 $12,339,594 =========== ===========
See notes to financial statements. F-2 EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF EARNINGS YEARS ENDED FEBRUARY 29, 2000, FEBRUARY 28, 1999 AND 1998 - --------------------------------------------------------------------------------
2000 1999 1998 GROSS SALES $26,613,943 $25,889,212 $ 29,764,345 Less discounts and allowances (9,762,682) (9,217,827) (10,420,983) ----------- ----------- ------------ Net sales 16,851,261 16,671,385 19,343,362 COST OF SALES 6,984,387 6,724,539 7,771,311 ----------- ----------- ------------ Gross margin 9,866,874 9,946,846 11,572,051 ----------- ----------- ------------ OPERATING EXPENSES: Operating and selling 3,224,442 3,118,179 3,389,317 Sales commissions 3,266,733 3,308,551 3,797,145 General and administrative 1,634,027 1,619,635 1,543,348 Interest 45,401 96,427 156,149 ----------- ----------- ------------ 8,170,603 8,142,792 8,885,959 ----------- ----------- ------------ OTHER INCOME 51,757 117,339 127,376 ----------- ----------- ------------ EARNINGS BEFORE INCOME TAXES 1,748,028 1,921,393 2,813,468 INCOME TAXES 669,000 623,900 1,108,900 ----------- ----------- ------------ NET EARNINGS $ 1,079,028 $ 1,297,493 $ 1,704,568 =========== =========== ============ BASIC AND DILUTED EARNINGS PER SHARE: Basic $ 0.25 $ 0.26 $ 0.33 =========== =========== ============ Diluted $ 0.24 $ 0.26 $ 0.32 =========== =========== ============ WEIGHTED AVERAGE NUMBER OF COMMON AND EQUIVALENT SHARES OUTSTANDING: Basic 4,364,608 5,036,574 5,216,076 =========== =========== ============ Diluted 4,426,836 5,098,167 5,338,188 =========== =========== ============
See notes to financial statements. F-3 EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED FEBRUARY 29, 2000, FEBRUARY 28, 1999 AND 1998 - -------------------------------------------------------------------------------
Common Stock (par value $.20 per share) ------------------------------- Number of Capital in Shares Excess of Retained Issued Amount Par Value Earnings BALANCE, MARCH 1, 1997 5,424,240 $1,084,848 $4,403,242 $3,418,431 Issuance of treasury stock - - 324 - Purchases of treasury stock - - - - Sales of treasury stock - - - - Dividends paid ($0.01/share) - - - (52,176) Net earnings - - - 1,704,568 ------------- ----------- ----------- ---------- BALANCE, FEBRUARY 28, 1998 5,424,240 1,084,848 4,403,566 5,070,823 Exercise of options at $1.50/share 5,000 1,000 6,500 - Issuance of treasury stock - - - - Purchases of treasury stock - - - - Sales of treasury stock - - - - Dividends paid ($0.02/share) - - - (101,892) Net earnings - - - 1,297,493 ------------- ----------- ----------- ---------- BALANCE, FEBRUARY 28, 1999 5,429,240 1,085,848 4,410,066 6,266,424 Issuance of treasury stock - - - - Purchases of treasury stock - - - - Sales of treasury stock - - - - Dividends paid ($0.02/share) - - - (86,311) Net earnings - - - 1,079,028 ------------- ----------- ----------- ---------- BALANCE, FEBRUARY 29, 2000 5,429,240 $1,085,848 $4,410,066 $7,259,141 ============= =========== =========== ========== Treasury Stock ---------------------------- Number of Shareholders' Shares Amount Equity BALANCE, MARCH 1, 1997 223,543 $ (633,476) $ 8,273,045 Issuance of treasury stock (700) 2,069 2,393 Purchases of treasury stock 15,900 (85,364) (85,364) Sales of treasury stock (46,641) 223,739 223,739 Dividends paid ($0.01/share) - - (52,176) Net earnings - - 1,704,568 --------- ----------- ----------- BALANCE, FEBRUARY 28, 1998 192,102 (493,032) 10,066,205 Exercise of options at $1.50/share - - 7,500 Issuance of treasury stock (400) 1,240 1,240 Purchases of treasury stock 376,832 (1,277,186) (1,277,186) Sales of treasury stock (12,548) 46,018 46,018 Dividends paid ($0.02/share) - - (101,892) Net earnings - - 1,297,493 --------- ----------- ----------- BALANCE, FEBRUARY 28, 1999 555,986 (1,722,960) 10,039,378 Issuance of treasury stock (200) 600 600 Purchases of treasury stock 874,087 (2,516,232) (2,516,232) Sales of treasury stock (168,022) 455,946 455,946 Dividends paid ($0.02/share) - - (86,311) Net earnings - - 1,079,028 --------- ----------- ----------- BALANCE, FEBRUARY 29, 2000 1,261,851 $(3,782,646) $ 8,972,409 ========= =========== ===========
See notes to financial statements. F-4 EDUCATIONAL DEVELOPMENT CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 AND 1998 - --------------------------------------------------------------------------------
2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 1,079,028 $ 1,297,493 $ 1,704,568 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 299,179 308,805 296,803 Loss on disposal 1,199 535 - Deferred income taxes (90,000) (7,200) 100,900 Provision for doubtful accounts and sales returns 984,575 1,277,201 862,900 Recovery of obsolete inventory reserve - - (150,913) Stock issued for awards 600 1,240 2,393 Changes in assets and liabilities: Accounts and income taxes receivable (1,107,336) (995,790) (885,224) Inventories (97,422) 855,556 (202,860) Prepaid expenses and other assets (349) (124,353) (25,378) Accounts payable, accrued salaries and commissions, and other current liabilities 554,774 (1,072,379) (522,029) Income tax payable 46,923 - - ----------- ----------- ----------- Total adjustments 592,143 243,615 (523,408) ----------- ----------- ----------- Net cash provided by operating activities 1,671,171 1,541,108 1,181,160 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES - Purchases of property and equipment (43,184) (56,166) (43,963) ----------- ----------- ----------- Net cash used in investing activities (43,184) (56,166) (43,963) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit agreement 6,899,000 7,000,000 8,484,900 Payments under revolving credit agreement (6,377,000) (7,120,000) (9,618,900) Cash received from exercise of stock options - 7,500 - Cash received from sale of stock 455,946 46,018 223,739 Cash paid to acquire treasury stock (2,516,232) (1,277,186) (85,364) Dividends paid (86,311) (101,892) (52,176) ----------- ----------- ----------- Net cash used in financing activities (1,624,597) (1,445,560) (1,047,801) ----------- ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 3,390 39,382 89,396 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 210,931 171,549 82,153 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 214,321 $ 210,931 $ 171,549 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 41,251 $ 98,482 $ 164,519 =========== =========== =========== Cash paid for income taxes $ 657,000 $ 779,000 $ 935,000 =========== =========== ===========
See notes to financial statements. F-5 EDUCATIONAL DEVELOPMENT CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 AND 1998 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business - Educational Development Corporation (the "Company") distributes books and publications through its Publishing and Usborne Books at Home Divisions. The Company is the United States ("U.S.") trade publisher 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 accounting principles generally accepted in the United States of America 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. Accounts Receivable - Accounts receivable at February 29, 2000 and February 28, 1999, include approximately $151,000 and $148,000, respectively, due from directors of the Company. 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. Estimated useful lives range from two to five years. During the fourth quarter of fiscal year 2000, the Company changed the estimated life on certain property and equipment. This resulted in an increase in depreciation expense in the fourth quarter of approximately $30,000. Management expects that the book value of the property and equipment on hand as of February 29, 2000 will be fully depreciated by the end of the first quarter of fiscal year 2001. Income Taxes - The Company records deferred income taxes for temporary differences between the financial reporting and tax bases 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. F-6 Earnings Per Share - Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is based on the combined weighted average number of common shares outstanding and dilutive potential common shares issuable which include, where appropriate, the assumed exercise of options. In computing diluted EPS the Company has utilized the treasury stock method. The following reconciles the diluted earnings per share:
Year Ended February 29, Year Ended February 28, ----------------------- 2000 1999 1998 Diluted Earnings Per Share: Net earnings applicable to common shareholders $1,079,028 $1,297,493 $1,704,568 ========== ========== ========== Shares: Weighted average shares outstanding - basic 4,364,608 5,036,574 5,216,076 Assumed exercise of options 62,228 61,593 122,112 ---------- ---------- ---------- Weighted average shares outstanding - diluted 4,426,836 5,098,167 5,338,188 ========== ========== ========== Diluted Earnings Per Share $ 0.24 $ 0.26 $ 0.32 ========== ========== ==========
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 on the borrowing rates currently available to the Company for bank loans with similar terms and maturities. Long-Lived Asset Impairment - The Company reviews the value of long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future cash flows. Stock-Based Compensation - The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." New Accounting Standards - SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and be measured at fair value. SFAS No. 133 is effective for the Company beginning March 1, 2001. The Company is currently evaluating SFAS No. 133, but does not expect its adoption will have a material impact on its financial statements. Reclassifications - Reclassifications were made to certain 1999 balances to conform with the 2000 presentation. F-7 2. INVENTORIES Inventories consist of the following: February 29, February 28, 2000 1999 Current: Book inventory $8,487,828 $8,610,406 Reserve for obsolescence (123,732) (123,732) ---------- ---------- Inventories net - current $8,364,096 $8,486,674 ========== ========== Inventories - non-current $1,280,000 $1,060,000 ========== ========== The Company occasionally purchases book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of the Company's primary supplier. These amounts are included in non-current inventory. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following: February 29, February 28, 2000 1999 Computer equipment $ 838,075 $ 802,899 Warehouse and office equipment 476,324 471,438 Furniture, fixtures and other 101,335 101,335 ----------- ----------- 1,415,734 1,375,672 Less accumulated depreciation and amortization (1,330,464) (1,033,208) ----------- ----------- $ 85,270 $ 342,464 =========== =========== 4. NOTE PAYABLE The note payable to bank is under a $3,500,000 revolving credit agreement, with interest payable monthly at prime minus .25% (8.5% and 7.75% at February 29, 2000 and February 28, 1999, respectively), collateralized by substantially all assets of the Company, maturing on June 30, 2000. At February 29, 2000 and February 28, 1999, the Company had $1,278,000 and $756,000, respectively, in borrowings under the revolving credit agreement. Available credit under the revolving credit agreement was $2,222,000 at February 29, 2000. The agreement contains provisions that require the maintenance of specified financial ratios, restrict transactions with related parties, prohibit mergers or consolidation, disallow additional debt, and limit the amount of compensation, salaries, investments, capital expenditures and leasing transactions. The Company is in compliance with or has obtained waivers for all restrictive covenants. The Company intends to renew the bank agreement or obtain other financing upon maturity. F-8 For each of the three years in the period ended February 29, 2000, 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:
Year Ended February 29, Year Ended February 28, ---------------------------- 2000 1999 1998 Note payable to bank: Largest amount borrowed $1,369,000 $2,306,000 $2,860,000 Average amount borrowed 650,702 1,343,549 1,766,813 Weighted average interest rate 8.0% 8.3% 8.5%
5. 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 assets and liabilities as of February 29, 2000 and February 28, 1999 are as follows:
February 29, February 28, 2000 1999 Current: Deferred tax assets: Allowance for doubtful accounts $ 42,300 $ 34,600 Inventories 72,000 48,300 Expenses deducted on the cash basis for income tax purposes 23,400 23,400 Change in accounting method - 15,500 -------- -------- Deferred tax asset $137,700 $121,800 ======== ======== Noncurrent: Deferred tax asset - Property and equipment $ 17,800 $ - Deferred tax liability - Property and equipment - (56,300) -------- -------- Deferred tax asset (liability) $ 17,800 $(56,300) ======== ========
Management has determined that no valuation allowance is necessary to reduce the deferred tax assets as it is more likely than not that such assets are realizable. F-9 The components of income tax expense are as follows: February 29, February 28, ----------------------- 2000 1999 1998 Current: Federal $645,200 $536,500 $ 856,900 State 113,800 94,600 151,100 -------- -------- ---------- 759,000 631,100 1,008,000 Deferred: Federal (76,500) (6,100) 85,800 State (13,500) (1,100) 15,100 -------- -------- ---------- (90,000) (7,200) 100,900 -------- -------- ---------- Total income tax expense $669,000 $623,900 $1,108,900 ======== ======== ========== The following reconciles the Company's expected income tax expense utilizing statutory tax rates to the actual tax expense:
Year Ended February 29, Year Ended February 28, -------------------------- 2000 1999 1998 Tax expense at federal statutory rate $594,000 $653,000 $ 957,000 State income tax, net of federal tax benefit 70,000 66,000 116,000 Other 5,000 (95,100) 35,900 -------- -------- ---------- $669,000 $623,900 $1,108,900 ======== ======== ==========
6. 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 $33,477, $27,291 and $27,113 in fiscal years 2000, 1999 and 1998, respectively. 7. COMMITMENTS The Company leases its office and warehouse facilities under a noncancelable operating lease which expires in June 2004. Total rent expense related to these facilities was $232,980 in fiscal 2000 and $225,960, in both fiscal 1999 and 1998. Future minimum lease payments are as follows: Year Ending February 28, 2001 $ 240,000 2002 240,000 2003 240,000 2004 240,000 2005 80,000 ---------- $1,040,000 ========== F-10 At February 29, 2000, the Company had outstanding commitments to purchase inventory from its primary vendor totaling approximately $1,868,000. 8. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS In June 1992, the Board of Directors adopted the 1992 Incentive Stock Option Plan "Incentive Plan." A total of 1,000,000 stock options are authorized to be granted under the 1992 Plan. Options granted under the Incentive Plan vest at date of grant and are exercisable up to ten years from the date of grant. The exercise price on options granted is equal to the market price at the date of grant. Options outstanding at February 29, 2000 expire in 2003 through 2009. A summary of the status of the Company's Incentive Plan as of February 29, 2000 and February 28, 1999 and 1998 and changes during the years ended on those dates is presented below:
2000 1999 1998 ----------------------- ------------------------ ------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at Beginning of Year 490,000 $ 3.51 328,500 $ 3.06 309,800 $ 3.79 Granted 40,000 2.50 171,700 4.34 140,600 4.03 Exercised/canceled (22,600) (3.77) (10,200) (2.77) (121,900) (6.02) ------- ------ ------- ------ -------- ------ Outstanding at End of Year 507,400 $ 3.42 490,000 $ 3.51 328,500 $ 3.06 ======= ====== ======= ====== ======== ======
The following table summarizes information about stock options outstanding at February 29, 2000:
Number Range of Outstanding Weighted Exercise at February 29, Average Remaining Weighted Average Prices 2000 Contractual Life (Years) Exercise Price ------ ---- ----------------------- -------------- $1.375 - $1.50 79,000 3 $1.41 $ 2.50 55,000 9 2.50 $ 3.13 100,000 4 3.13 $ 3.81 21,500 8 3.81 $ 4.00 116,700 7 4.00 $ 4.63 135,200 8 4.63 ------- --- ----- 507,400 6 $3.42 ======= === =====
All options outstanding are exercisable at February 29, 2000. F-11 The Company applies APB 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 prescribed by SFAS No. 123, the Company's net earnings and earnings per share for the years ended February 29, 2000 and February 28, 1999 and 1998 would have been reduced to the pro forma amounts indicated below: 2000 1999 1998 Net earnings - as reported $1,079,028 $1,297,493 $1,704,568 ========== ========== ========== Net earnings - pro forma $1,038,582 $1,104,347 $1,636,618 ========== ========== ========== Earnings per share - as reported: Basic $ 0.25 $ 0.26 $ 0.33 ========== ========== ========== Diluted $ 0.24 $ 0.26 $ 0.32 ========== ========== ========== Earnings per share - pro forma: Basic $ 0.24 $ 0.22 $ 0.31 ========== ========== ========== Diluted $ 0.24 $ 0.22 $ 0.31 ========== ========== ==========
The fair value of options granted under the Incentive Plan was estimated on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for options granted in 2000; no dividend yield, expected volatility of 45%, risk free interest rate of 5.7% and expected lives of ten years; the following assumptions were used for options granted in 1999; no dividend yield, expected volatility of 50%, risk free interest rate of 5.06% and expected lives of four years; 1998, no dividend yield, expected volatility of 54%, risk free interest rate of 6.2% and expected lives of four years. 9. 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 29, 2000 is as follows: Doubtful accounts receivable:
Balance at Amounts Amounts Balance Beginning Charged to Charged to at End Year of Year Expense Reserve of Year 1998 $ 91,900 $ 60,000 $ (10,200) $141,700 1999 141,700 66,000 (119,144) 88,556 2000 88,556 52,000 (32,090) 108,466 Sales returns: Balance at Amounts Amounts Balance Beginning Charged to Charged to at End Year of Year Expense Reserve of Year 1998 $101,000 $ 802,900 $ (802,900) $101,000 1999 101,000 1,211,201 (1,211,201) 101,000 2000 101,000 932,575 (932,575) 101,000
F-12 Inventory valuation:
Balance at Amounts Amounts Balance Beginning Charged to Charged to at End Year of Year Expense Reserve of Year 1998 $301,100 $ - $(150,913) $150,187 1999 150,187 33,545 (60,000) 123,732 2000 123,732 - - 123,732
Charges to certain expense accounts for each of the three years in the period ended February 29, 2000 are shown below:
Year Ended February 29, Year Ended February 28, ------------------------ 2000 1999 1998 Maintenance and repairs $27,043 $33,515 $30,919 Taxes other than payroll and income taxes 30,110 31,079 30,093 Advertising costs 69,001 51,730 83,865
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended February 29, 2000 and February 28, 1999:
Basic Diluted Earnings Earnings Net Sales Gross Margin Net Earnings Per Share Per Share 2000 First quarter $ 4,122,100 $2,395,600 $ 290,300 $0.06 $0.06 Second quarter 4,202,500 2,397,400 313,600 0.07 0.07 Third quarter 5,012,800 3,029,400 419,800 0.10 0.10 Fourth quarter 3,513,861 2,044,474 55,328 0.02 0.01 ----------- ---------- ---------- ----- ----- Total year $16,851,261 $9,866,874 $1,079,028 $0.25 $0.24 =========== ========== ========== ===== ===== 1999 First quarter $ 4,160,700 $2,484,200 $ 350,000 $0.07 $0.07 Second quarter 3,950,400 2,253,900 307,000 0.06 0.06 Third quarter 5,453,700 3,391,000 537,600 0.11 0.11 Fourth quarter 3,106,585 1,817,746 102,893 0.02 0.02 ----------- ---------- ---------- ----- ----- Total year $16,671,385 $9,946,846 $1,297,493 $0.26 $0.26 =========== ========== ========== ===== =====
F-13 11. BUSINESS SEGMENTS The Company has two reportable segments: Publishing and Usborne Books at Home ("UBAH"). These reportable segments are business units that offer different methods of distribution to different types of customers. They are managed separately based on the fundamental differences in their operations. The Publishing Division markets its products to retail accounts, which include book, school supply, toy and gift stores and museums, through commissioned sales representatives, trade and specialty wholesalers and an internal telesales group. The UBAH Division markets its product line through a network of independent sales consultants through a combination of direct sales, home shows and book fairs. The UBAH Division also distributes to school and public libraries. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on operating profits of the segments which is defined as segment net sales reduced by direct cost of sales and direct expenses. Corporate expenses, including interest and depreciation, and income taxes are not allocated to the segments. The Company's assets are not allocated on a segment basis. Information by industry segment for the years ended February 29, 2000 and February 28, 1999 and 1998 is set forth below:
Publishing UBAH Other Total 2000 Net sales to external customers $7,960,891 $ 8,890,370 $ - $16,851,261 Earnings before income taxes 2,811,887 2,181,300 (3,245,159) 1,748,028 1999 Net sales to external customers $7,794,702 $ 8,876,683 $ - $16,671,385 Earnings before income taxes 2,848,749 2,365,204 (3,292,560) 1,921,393 1998 Net sales to external customers $8,604,096 $10,739,266 $ - $19,343,362 Earnings before income taxes 3,309,603 2,894,612 (3,390,747) 2,813,468 * * * * * *
F-14 EX-10.24 2 RESTATED LOAN AGREEMENT EXHIBIT 10.24 RESTATED CREDIT AND SECURITY AGREEMENT ----------------------------- THIS RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT dated effective as of the thirtieth (30th) day of June, 1999, is entered into by EDUCATIONAL DEVELOPMENT CORPORATION, a Delaware corporation whose address is 10302 East 55th Place, Tulsa, Oklahoma 74146, (the "Company"), and STATE BANK & TRUST, whose address is 4500 South Garnett Avenue, Tulsa, Oklahoma 74146 (the "Bank"). WITNESSETH: WHEREAS, the Company has applied to the Bank to extend and renew for twelve (12) months its existing revolving line of credit established pursuant to that certain Restated Credit and Security Agreement dated as of June 10, 1996, as amended by the First Amendment thereto dated as of June 30, 1997, and the Second Amendment thereto dated as of June 30, 1998 (collectively the "Current Credit Agreement") in the maximum principal amount outstanding at any one time not in excess of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000), including extension of the maturity date to June 30, 2000, 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. 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- 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, 2000, 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 $3,500,000. 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 $3,500,000, dated as of the Closing Date, and bearing interest payable monthly on the last day of each calendar month commencing July 30, 1999, 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- 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, 2000. 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 $3,500,000 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- 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- (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- (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, certificates 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- 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- 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- 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- 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 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. --------- -11- 5.7 Net Capital Expenditures. Company will not, nor will Company permit ------------------------ any Subsidiary thereof to, make Net Capital Expenditures in any fiscal year in excess of $500,000 in the aggregate during such fiscal year. 5.8 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. 5.9 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. 5.10 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. 5.11 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. - 5.12 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 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. -12- 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. 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 -13- 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 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. -14- 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. ----------- 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 -15- 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 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 -16- 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 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 -17- (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 (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 -18- 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 percentage points (4.0%) 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. 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. -19- 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 Indebtedness 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, 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 -20- 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. 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 By__________________________________________ Dennis Colvard, Vice President "Bank" -21- EXHIBIT A --------- REVOLVING CREDIT NOTE --------------------- $3,500,000 Tulsa, Oklahoma June 30, 1999 FOR VALUE RECEIVED, the undersigned (the "Maker") promises to pay to the order of STATE BANK & TRUST (the "Payee"), at the Payee's main banking office in Tulsa, Oklahoma, the principal sum of THREE MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($3,500,000), or so much thereof as shall have been advanced by Payee to Maker and remains unpaid, on June 30, 2000, 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 July 31, 1999, and at final maturity on June 30, 2000. 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 collection 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 percentage points (4.0%). 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 extension and renewal of that certain $3,500,000 Revolving Credit Note dated June 30, 1998. Reference is made to the Credit Agreement and to the Security Agreement and Assignment dated as of June 10, 1996 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, 2000 2 EXHIBIT B --------- LOAN REQUEST, CERTIFICATION AND CONFIRMATORY SECURITY AGREEMENT ------------------------------- ___________, 19__ STATE BANK & TRUST 4500 South Garnett Tulsa, Oklahoma 74146 Gentlemen: Pursuant to the provisions of the Restated Credit and Security Agreement dated as of June 30, 1999, as amended and extended from time to time (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 laspe 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 $3,500,000 per (S) 2.4 of the Credit Agreement) EDUCATIONAL DEVELOPMENT CORPORATION By_____________________ (Title) "Company" 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. EXHIBIT D --------- EDUCATIONAL DEVELOPMENT CORPORATION Notes Receivable Officers, Directors and Shareholders June 30, 1999 NONE EXHIBIT E --------- Investments NONE EXHIBIT F --------- Existing Leases 1. Commercial 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. EXHIBIT G --------- Subsidiaries NONE EDUCATIONAL DEVELOPMENT CORPORATION CERTIFICATE ----------- THE UNDERSIGNED do hereby certify that we are, respectively, the duly elected and acting President and Secretary of EDUCATIONAL DEVELOPMENT CORPORATION, a Delaware corporation (the "Corporation"), and as such are authorized to execute and deliver this Certificate on behalf of the Corporation, and we further certify as follows: 1. The Articles of Incorporation of the Corporation, as in effect on the date hereof, have not been amended or modified since June 10, 1996, and remain in full force and effect to and including the date hereof. 2. The By-Laws of the Corporation, in effect on the date hereof, have not been amended or modified since June 10, 1996, and remain in full force and effect to and including the date hereof. 3. Attached hereto as Exhibit A is a true and correct copy of the --------- Resolutions duly and regularly adopted by the Board of Directors of the Corporation which Resolutions have not been revoked, modified, amended or rescinded and remain in full force and effect to and including the date hereof. 4. The individuals named below are duly elected, qualified and acting officers of the Corporation (to and including the date hereof), holding the respective offices or positions shown below opposite their names, and the signatures shown below opposite their names and offices are their genuine signatures: NAME OFFICE SIGNATURE ---- ------ --------- Randall White President _____________________ Curtis Fossett Secretary/Controller _____________________ 5. No Event of Default or Default as specified in Article VIII of the Restated Credit and Security Agreement dated as of June 30, 1999 (the "Credit Agreement") between the Corporation and State Bank & Trust (the "Bank") exists as of the date hereof. 6. The representations, covenants and warranties set forth in the Credit Agreement are true and correct as of the date hereof. 7. The Corporation has performed and complied with all agreements and conditions required to be performed and complied with by it under or pursuant to the Credit Agreement on or prior to the date hereof. IN WITNESS WHEREOF, we have hereunto set our hands and the seal of the Corporation on this 30th day of June, 1999. __________________________________ Randall White, President EDUCATIONAL DEVELOPMENT CORPORATION __________________________________ Curtis Fossett, Secretary EDUCATIONAL DEVELOPMENT CORPORATION [SEAL] 2 EXHIBIT A --------- RESOLUTIONS OF THE BOARD OF DIRECTORS OF EDUCATIONAL DEVELOPMENT CORPORATION FURTHER RESOLVED, that the Corporation be, and it is hereby authorized and empowered to extend and renew in the maximum principal amount of Three Million Five Hundred Thousand and No/100 Dollars ($3,500,000) until June 30, 2000, its existing revolving line of credit with State Bank & Trust, Tulsa, Oklahoma (the "Bank") upon the terms and conditions of the Credit Agreement, which such borrowings will be evidenced by the $3,500,000 Revolving Credit Note described and defined in the Credit Agreement from the Corporation and payable to the order of the Bank (the "Revolving Credit Note" annexed as Exhibit A to the Credit Agreement), copies of which Credit Agreement and Revolving Credit Note have been submitted to and reviewed by this Board of Directors; FURTHER RESOLVED, that the form, terms and provisions of the Credit Agreement, the Revolving Credit Note and all other Loan Documents and exhibits attached to or referenced in the Credit Agreement, are hereby approved and that the president, any vice president and the secretary of the Corporation be and each of them hereby is singly authorized, empowered and directed in the name and on behalf of the Corporation to execute and deliver the Credit Agreement, the Revolving Credit Note and all other Loan Documents as described therein or in the Credit Agreement, all in substantially the form attached hereto with such changes and insertions therein or additions thereto as the officer executing the same may approve, such approval to be conclusively evidenced by execution and delivery thereof; FURTHER RESOLVED, that the president, any vice president and the controller/secretary of the Corporation be, and each of them hereby is singly authorized, directed and empowered for and on behalf and in the name of the Corporation to borrow from the Bank such amount or amounts of money and request loans as may be made available to the Corporation from the Bank pursuant to the Credit Agreement, as amended, at this time or any other time and to extend or renew any loan or loans or any installment of principal or interest thereof, or any other indebtedness or obligation owing thereunder to the Bank; and FURTHER RESOLVED, that the president, any vice president, the controller/secretary and the assistant secretary be, and each of them hereby is, singly authorized, empowered and directed from time to time to execute, attest and deliver, in the name and on behalf of the Corporation and under its seal, any and all security agreements, assignments and financing statements, as well as all loan requests, monthly reports, documents, certificates, instruments, reports, supplemental agreements and papers as each or all of them may deem necessary or advisable in order to grant and perfect any and all security interests in the collateral and security described in the Credit Agreement, as amended, and to carry out and consummate the purposes and intent of the foregoing resolutions, and each of them, and to fully perform and effectuate the provisions of the Credit Agreement, the $3,500,000 Revolving Credit Note and any and all other related documents, certificates or instruments. REVOLVING CREDIT NOTE --------------------- $3,500,000 Tulsa, Oklahoma June 30, 1999 FOR VALUE RECEIVED, the undersigned (the "Maker") promises to pay to the order of STATE BANK & TRUST (the "Payee"), at the Payee's main banking office in Tulsa, Oklahoma, the principal sum of THREE MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($3,500,000), or so much thereof as shall have been advanced by Payee to Maker and remains unpaid, on June 30, 2000, 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 July 31, 1999, and at final maturity on June 30, 2000. 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 collection 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 percentage points (4.0%). 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 extension and renewal of that certain $3,500,000 Revolving Credit Note dated June 30, 1998. Reference is made to the Credit Agreement and to the Security Agreement and Assignment dated as of June 10, 1996 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, 2000 2 EX-10.25 3 LEASE AGREEMENT EXHIBIT 10.25 "This is a legally binding Contract; if not understood seek advice from an attorney." COMMERCIAL/INDUSTRIAL LEASE (GROSS) THIS LEASE is entered into by and between Landlord and Tenant and upon approval by both Landlord and Tenant, as evidenced by their signatures hereto, a valid and binding Lease shall exist, the terms and conditions of which are as follows: 1. DEFINITIONS AND BASIC PROVISIONS. The following definitions and basic provisions shall be construed as follows when used elsewhere in this Lease: a) Effective Date: The Effective Date shall be the latest date for approval by all parties as indicated below. b) Landlord: James D. Dunn c/o Address P.O. 4770, Tulsa, OK 74159 Phone No. 918-747-2000 Fax No. 918-747-1325 c) Tenant: Educational Development Corporation c/o Randall White Address 10302 East 55th Place, Tulsa, OK 74146 Phone No. 918-622-4522 Fax No. 1-800-747-4509 d) Third Party Guarantor: N/A Guarantor Agreement attached hereto as Exhibit c/o Address Phone No. Fax No. e) Leased Premises: Approximately 80,405 sq.ft. gross leasable area, Suite ------ No. N/A in the building located at 10302 East 55/th/ Place in Tulsa County --- ----------------- ----- Oklahoma, such premises being shown and outlined on the plan attached hereto as Exhibit N/A. --- f) Project: N/A g) Lease Term: A period of five (5) years commencing on July 1, 1999 -------------- ------------ ("Commencement Date") and ending on June 30, 2004 ("Expiration Date"). ------------- h) Base Rental: A total of $1,200,000.00 payable in monthly installments ------------- in advance as follows:
---------------------------------------------------------------------------------------------------------- From To Monthly Rate ---------------------------------------------------------------------------------------------------------- Years 1-5 July 1, 1999 June 30, 2004 $20,000.00 ---------------------------------------------------------------------------------------------------------- Years ---------------------------------------------------------------------------------------------------------- Year ---------------------------------------------------------------------------------------------------------- Year ---------------------------------------------------------------------------------------------------------- Year ----------------------------------------------------------------------------------------------------------
i) Prepaid Rental: $20,000.00 representing payment of rental for the first month of the Lease Term. j) Security Deposit: $7,000.00 transferred from previous lease and is not applicable towards the last month's rent. k) Use: Educational Development Corporation administration, sales & warehouse Tenant, as evidenced by his signature below, has determined and represents that the stated use is consistent with all local, State and Federal regulations applicable to said use. l) Legal Use. Tenant shall use the Leased Premises only for the Use stated and for no other purposes. Tenant shall not use, nor permit the use of, anything in the Leased Premises (I) which would violate any of the agreements of the Lease, (ii) for any unlawful purpose or in any unlawful manner, or (iii) that would substantially increase cost of the Landlord's insurance. m) Tenant's Public Liability Insurance Limits $1,000,000 combined single limit bodily injury and property damage as described in paragraph 8(c). 2. GRANTING CLAUSE. Landlord hereby covenants and warrants that it has rightful possession to, and hereby leases, lets, and demises unto Tenant, together with all improvements, appurtenances, easements, and privileges thereunto belonging, the Leased Premises for the Permitted Use, together with on-site parking, if any. ________ __________ Page 1 of 6 Tenant Landlord 3. PAYMENT OF RENT/ADDITIONAL RENT. Tenant agrees to pay to Landlord the total minimum base rental, with such monthly installments to be paid in advance, on or before the first day of each calendar month during the term, without demand. Tenant shall pay the first monthly installment as "prepaid-rental" concurrently with the execution of this Lease. The rent for a portion of the calendar month during which rent might begin to accrue or terminate shall be prorated. Tenant's covenant to pay rent shall be independent of every other covenant set forth in this Lease, and Tenant shall have no right of deduction or setoff whatsoever. All rents herein provided for shall be paid to Landlord at the Landlord's address or at such other place as shall be designated by Landlord, in writing, furnished to Tenant at least ten (10) days prior to the next ensuing rent payment due date. 4. LATE PAYMENT OF RENT. Any rents received on the 11th day after the due date, or thereafter, shall be assessed the maximum late fee amount allowable by law. 5. GENERAL PROVISIONS. a) Possession. Unless otherwise agreed to in writing, possession shall be delivered on the Commencement Date of this Lease. If Landlord is unable to deliver possession of the premises at the commencement hereof, Landlord shall not be liable for any damage caused thereby, nor shall this lease be void or voidable, but Tenant shall not be liable for any rent until possession is delivered. Tenant may terminate this lease if possession is not delivered within 5 days of the commencement of the term hereof. - b) Assignment, Subletting, and Encumbering. This Lease shall not be assigned, sublet, or transferred by Tenant without Landlord's prior written consent. Tenant shall not sublet, or offer or advertise for subletting, the Leased Premises, or any portion thereof, without the prior written consent of Landlord. Any assignment or subletting shall not relieve Tenant of its obligations hereunder or release Tenant from the further performance of all covenants herein contained. c) Estoppel Certificate. Tenant shall, at any time so requested, execute and deliver to Landlord such estoppel certificates as Landlord shall reasonably require, stating length of Tenant's lease, amount of rent, deposits, and other terms. d) Subordination. This Lease shall be subject and subordinate, at all times, to the lien of existing mortgages and of mortgages which hereafter may be made on the Leased Premises. Tenant will execute and deliver such further instruments subordinating this Lease to the lien of any such mortgages as may be desired by Landlord. e) Rules and Regulations. Tenant agrees to observe and comply with the Rules and Regulations presently existing and such other and further reasonable rules and regulations as Landlord may, from time to time, adopt, a copy of which is attached to this Lease as Exhibit N/A. f) Toxic or Hazardous Materials. Tenant shall not store, use, or dispose of any toxic or hazardous materials in, on, or about the Premises, without the prior written consent of Landlord. Tenant, at its sole cost, will comply with all laws relating to Tenant's storage, use, and disposal of hazardous or toxic materials. g) Holding Over. In the event Tenant remains In possession of the Premises after the expiration or termination of the Lease, Tenant shall occupy the premises as a Tenant from month-to-month at 150% of the rental due for the last full calendar month during the term of the Lease and subject to all other provisions and obligations of the Lease applicable to a month-to- month tenancy. h) Signs. Landlord retains the right to approve any and all exterior signs. See attached Exhibit N/A "Sign Criteria", if any. i) Destruction of Premises. In the event of a partial destruction of the building in which the Leased Premises are contained, during the term, Landlord shall make any repairs that can be made under existing governmental regulations within one hundred and twenty (120) days of such destruction, but such partial destruction shall not terminate this Lease, except that Tenant shall be entitled to a proportionate reduction of rent while repairs are being made, based upon the extent to which the making of such repairs shall interfere with the business of Tenant on the Premises. If repairs cannot be made within one hundred and twenty (120) days, this Lease may be terminated, at the option of either party, by delivering written notice. j) Right of Entry. Landlord reserves the right, for itself, and its employees, or contractors, and Tenant covenants to permit Landlord, or its agents, employees, or contractors to enter any and all portions of the Leased Premises at any time; provided, that Landlord shall give Tenant reasonable notice prior to any entry for the purpose of showing the space to prospective tenants. During the progress of any repairs or other work, Landlord may keep and store on the Leased Premises all necessary materials, tools, and equipment, and Landlord shall, in no event, be liable for disturbance, inconvenience, annoyance, loss of business, or other damage to Tenant, or any assignee, or sublessee under the Lease, by making such repairs or performing any such work on or in the Leased Premises, or due to bringing materials, supplies, and equipment into or through the Premises during the course of such work. Tenant shall permit Landlord at any time within sixty (60) days prior to expiration of this lease to place upon the premises the usual "For Lease" or "For Sale" signs, and permit persons desiring to lease or purchase the same to inspect the premises thereafter. k) Condemnation. If the Leased Premises is totally condemned by any lawful authority under the power of eminent domain, or shall, during the continuance of the Lease, be totally destroyed by the action of public authorities, then this Lease and the term leased shall terminate, and Tenant shall be liable for rent only up to the date of such termination. l) Quiet Enjoyment. Landlord grants to Tenant, in exchange for continued payment of rent and performance of each and every covenant hereof, the right to peacefully and quietly hold, occupy, and enjoy the Leased Premises throughout the term. Further, Tenant shall not commit any waste upon the premises, or any nuisance or act which may disturb the quiet enjoyment of any tenant. 6. MAINTENANCE. a) Landlord. Landlord shall maintain and make necessary replacement of the roof, exterior walls, floor slabs, parking lot and other common facilities of the building. b) Tenant. Tenant shall keep the Leased Premises neat and clean and in such repair, order, and condition as received on Commencement Date (or Occupancy Date, whichever is earliest) or may be put in during the term hereof, reasonable use and wear and damage by fire or by unavoidable casualty excepted. Tenant shall maintain (including necessary replacement) all fixtures and equipment relating to plumbing, electrical, heating, ventilation, air conditioning (HVAC). Tenant shall maintain (including necessary replacement) exterior doors, windows, and all plate ________ __________ Page 2 of 6 Tenant Landlord glass, floor covering, carpet, paint, wallpaper, and other coverings. Unless otherwise provided in paragraph 7 below, Tenant is responsible for cleaning the parking lot (including sweeping and snow and ice removal) and providing lawn and landscaping maintenance. Tenant shall not damage or abuse the Leased Premises, nor shall Tenant permit the damage or abuse of the Leased Premises. Tenant shall not overload the floor and shall abide by Landlord's instructions with respect to care and avoidance of abuse. c) Utilities. Tenant shall be responsible for arranging, and contracting in its own name if necessary, all utility services necessary for the operation of the Property, including establishment of any required deposits, and payment of any and all utility charges incurred during the term. Such utility charges shall include water, natural gas, telephone, cable television, sanitary sewer, electricity and storm water management fees. Tenant shall also be responsible for the maintenance of any on-site sewage disposal system (septic tank, etc.). Further, in the event of any interruption of utility services, the Landlord shall neither be responsible for, nor shall any rent be abated due to, such interruption. 7. COMMON AREA MAINTENANCE (CAM). In addition to monthly rental obligations, Tenant shall pay a monthly sum identified in Paragraph 1(n) for the provision of common area maintenance, including, but not limited to: exterior lighting; parking lot and sidewalks (repair, including necessary replacement, sweeping, striping, snow and ice removal); landscape and lawn maintenance (mowing, watering, plant replacements); janitorial service to common hallways, and applicable insurance and utilities charges, including storm water management fees if any. Such monthly CAM payment shall be adjusted annually based upon the actual total annual CAM expense allocated proportionately to Tenant, based upon the floor area rented by Tenant in relation to the total gross leasable floor area of the project or building served by the common area. 8. TAXES, INDEMNITY AND INSURANCE. a) Taxes. Landlord pays all ad valorem taxes, special assessments, and bond indentures based on base year of 1992. If taxes increase above base year during the term of lease because of increase rate or valuation, proportionate share of increase shall be paid by Tenant, or if single Tenant, Tenant shall pay total increase, upon presentation of paid tax receipt(s) by Landlord. b) Indemnity, Liability, and Loss or Damage. Tenant agrees to defend, indemnify, and hold Landlord harmless from any loss, cost, or expense, whatsoever, resulting from (1) personal injury, loss of life, or loss of property relating to the use and occupancy by Tenant, or (2) from damage to, or destruction of, the Project structure, or any part thereof, or of any abutting real property caused by, or attributable to, the negligent act or acts, or omission or omissions to act, of Tenant, or caused by, or attributable to, the Tenant's failure to perform its obligations under this Lease. Likewise, Landlord agrees to defend, indemnify, and hold Tenant harmless from any loss, whatsoever, resulting from personal injury, loss of life or property relating to the use of Landlord and use and occupancy by other Tenants, or caused by, or attributable to, the negligent act or acts, omission or omissions to act, of Landlord, or caused by, or attributable to, Landlord's failure to perform its obligations under this Lease. c) Tenants Insurance. Tenant shall procure, keep in force, and pay for comprehensive public liability insurance, in amounts reasonably required by Landlord, with reputable, responsible, licensed companies, indemnifying Landlord and Tenant against all claims and demands for injury to, or death of, persons, or damage to property, which may be claimed to have occurred on the Leased Premises. Certificates of the same shall be provided to the Landlord. Further, Tenant shall insure all of Tenant's contents. d) Landlord's Insurance. Landlord agrees to insure the Leased Premises for fire, casualty, and public liability. In the event that Tenant's occupancy or use of the Leased Premises results in any increase in cost of Landlord's fire and casualty or public liability insurance, Tenant shall reimburse Landlord for such increase as additional rent. Further, if cost of Landlord's fire and casualty or public liability insurance increases above base year rate during the term of the lease, a proportionate share of such increase shall be paid by Tenant, or if a single Tenant, Tenant shall pay total increase. 9. LANDLORD'S LIEN. In consideration of the mutual benefits arising under this Lease, Tenant hereby grants to Landlord a lien and security interest in and on all property Tenant now, or hereafter, may place in or upon the Premises, and the property shall be, and remain, subject to such lien and security interest of Landlord for payment of all rental and other sums agreed to be paid by Tenant. The lien and security interest shall be in addition to and cumulative of the Landlord's liens existing or to exist under statute, in law, or in equity, none of which are waived by Landlord. The provisions of this paragraph relating to the lien and security interest shall constitute a Security Agreement under the Uniform Commercial Code, so that Landlord shall have, and may enforce, a security interest on all property of Tenant now, or hereafter, placed in or on the Premises, including, but not limited to, all fixtures, machinery, equipment, furnishings, and other articles of personal property now, or hereafter, placed in or upon the Premises by Tenant. Landlord may, at its election at any time, file a copy or memorandum of this Lease as a financing statement. Landlord, as secured party, shall be entitled to all rights and remedies afforded a secured party under the Uniform Commercial Code, which rights and remedies shall be in addition to and cumulative of the Landlord's liens and rights provided by law, or by the other terms and provisions of this Lease. 10. ADDITIONS AND ALTERATIONS. Tenant shall not make any additions, alterations or improvements to the Leased Premises without the prior written consent of the Landlord. At Landlord's option, any and all additions, alterations and improvements to the Leased Premises, including built-ins, shall belong to the Landlord. 11. BREACH AND DEFAULT. This Lease may be deemed by Landlord as being in default if any of the following occur: a) Tenant fails to make any payment of rent, or any other amount due, and such failure continues for fifteen (15) days after the payment due date; b) Tenant fails to keep in force insurance as required by Paragraph 8(c) of the Lease and such failure continues for ten (10) days after written notice to Tenant; c) Tenant materially breaches any other covenant and the same shall not have been cured within ten (10) days after notice thereof by Landlord; d) Tenant files any voluntary petition in bankruptcy, or for corporate reorganization, or any similar relief, or if any involuntary petition in bankruptcy shall be filed against the Tenant; e) A receiver is appointed for Tenant or Tenant's property by any Court; f) Tenant makes an assignment for benefit of creditors; g) Tenant abandons or vacates the Leased Premises during the term hereof; h) Tenant fails to operate its business in material compliance with all applicable laws; ________ __________ Page 3 of 6 Tenant Landlord i) Tenant transfers a portion, or all, of its assets to another entity or individual without written notification and consent of the Landlord. 12. LANDLORD'S REMEDIES. Upon the occurrence of any event of default by Tenant, and the failure by Tenant to remedy such default within the time permitted by Landlord, Tenant hereby grants the Landlord the following rights: a) To change the locks, exclude Tenant from the Leased Premises, re-enter ---------------------------------------------------------------------- Leased Premises and enforce security against Tenant's entry. ----------------------------------------------------------- b) To relet Leased Premises and recover cost of alterations and damages. Upon any reletting, Tenant shall be immediately liable to pay to Landlord, without further demand or process of law, the cost and expense of reletting, including, without limitation, any brokerage fees, the cost of any alterations and repairs deemed necessary by Landlord to effect reletting, and the full amount, if any, by which the rental reserved in this Lease for the period of reletting (but not beyond the terms of this Lease) exceeds the amount agreed to be paid as rent for the Premises for the period of reletting. If Tenant has been credited with any rent to be received by reletting and the rent shall not be promptly paid to Landlord by the new Tenant, Tenant shall immediately be liable to pay the deficiency to Landlord. If the Landlord elects to terminate this Lease, Landlord may recover from Tenant all damages Landlord may incur by reason of Tenant's failure to pay rental, including the cost of recovering the Premises, and including the excess of the rental reserved in this Lease for the remainder of the stated term over the then reasonable rental value of the Premises for the remainder of the term, all of which amount shall be immediately due and payable by Tenant to Landlord. Landlord shall be under no obligation to attempt to re-lease the Leased Premises before it leases its other properties. c) To remove, store, and dispose of Tenant's property. Any property belonging to Tenant, or to any person holding by, through, or under Tenant, or otherwise found upon the Premises at the time of re-entry or termination by the Landlord, may be removed and stored in any warehouse, at the cost of, and for the account of, Tenant, or, in Landlord's sole discretion, deemed to be abandoned by Tenant and disposed of accordingly. d) Additional Remedies. In the event of any breach or threatened breach by Tenant of any covenants, agreements, terms, or conditions of this Lease, Landlord shall be entitled to enjoin the breach or threatened breach, and in addition to the rights and remedies provided hereunder, shall have any other right or remedy allowed at law or equity, by statute, or otherwise. The provisions of this Section shall be construed consistent with the laws of the State of Oklahoma, so that remedies of Landlord herein described shall be available to Landlord to the full extent, but only to the extent that they are valid or enforceable under the laws of the State of Oklahoma. e) To Recover Attorney's Fees. If suit shall be brought for recovery of possession of the Premises, for the recovery of rental, or any other amount due under the provisions of this Lease, or because of the breach of any other covenant herein contained on the part of either party to be kept or performed, and a breach shall be established, the non-prevailing party shall pay to the prevailing party all expenses incurred, including a reasonable attorney's fee. The prevailing party shall be determined by the Court which shall also approve the amount of reimbursed expenses. The foregoing rights and remedies given to Landlord are, and shall be, deemed to be cumulative and the exercise of any of them shall not be deemed to be an election excluding the exercise by the Landlord, at any time, of a different or inconsistent remedy, and shall be deemed to be given to Landlord in addition to any other right and further rights granted to the Landlord by the terms hereof, or by law. The failure of Landlord at any time to exercise any right or remedy herein granted or established by law shall not be deemed to operate as a waiver of its right to exercise such right or remedy at any other future time. 13. EFFECT AND SEVERABILITY. This Lease shall be executed in duplicate originals and, when executed by both Landlord and Tenant, shall be binding upon and inure to the benefit of Landlord and Tenant, their heirs, legal representatives, successors, and assigns. This Lease sets forth the complete understanding of Landlord and Tenant and supersedes all previous negotiations, representations, and agreements between them and their agents. This Lease can only be amended or modified by a written agreement signed by Landlord and Tenant. Should any clause or provision of this Agreement be adjudged, or otherwise rendered, unenforceable, all provisions not so affected shall remain in full force and effect. In the event of any transfer of title or interest of the Leased Premises, the Landlord named herein shall be relieved of all liability related to Landlord's obligations to be performed after such transfer. Provided, however, that any funds in the hands of Landlord at the time of such transfer shall be delivered to Landlord's Grantee. Landlord's obligations hereunder shall be binding upon Landlord's successors and assigns only during their respective periods of ownership. 14. EXHIBITS. Exhibits "A" through --- plus Addendum are attached to, and by --- ----- this reference made a part of, this Lease. 15. AGENCY DISCLOSURE. The parties to this transaction hereby acknowledge that, prior to the parties entering into this Lease, the following disclosures were clearly made to each of the parties: The Listing Broker, as defined below, is acting as the agent of: X The Landlord _______ Both the Landlord and Tenant (Consensual Dual --- Limited Agent) ___ The Listing Broker is not acting as an agent for the Landlord or Tenant. The Leasing Broker, as defined below, is acting as the agent of: X The Landlord _____ The Tenant _____ Both (Consensual Dual Limited --- Agent) ___ The Leasing Broker is not acting as an agent for the Tenant or Landlord. 16. BROKER'S COMMISSION. The Tenant and Landlord mutually warrant and represent that the undersigned Broker(s) is/are the only Broker(s) involved in this transaction. It is further acknowledged and agreed by the parties that the _____ Landlord will pay the Listing Broker -- % of the total Lease Value as a - -------- ---- commission for services rendered in this real estate transaction. The total Lease Value shall be the Base Rental, plus CAM, if any, and the value of any and all renewals, extensions, and expansions when executed. The initial commission shall be payable as follows: Per Separate Agreement - -------------------------------------------------------------------------------- In the event Tenant shall purchase the property from Landlord during the term of this Lease or within 180 days of the ________ __________ Page 4 of 6 Tenant Landlord expiration or termination of this Lease or any extensions, or holdover, Landlord agrees to pay the Listing Broker a sales commission of -- % of the sales price. 17. SPECIAL CONDITIONS. NONE -------------------------------------------------------- - -------------------------------------------------------------------------------- 18. RECEIPT. By execution of this Lease, Landlord acknowledges receipt of Prepaid Rent and Security Deposit. 19. SECURITY DEPOSIT. The Security Deposit set forth in paragraph 1(j) of this Lease, if any, shall secure the performance of the Tenant's obligations hereunder. Landlord may, but shall not be obligated to apply all or portions of said deposit on account of Tenant's obligations hereunder. Any balance remaining upon termination shall be returned to Tenant. Tenant shall not have the right to apply the Security Deposit in payment of the last month's rent. APPROVED AND AGREED TO BY TENANT: APPROVED AND AGREED TO BY LANDLORD: This _____ day of ______________, 19__ This ______ day of _____________ ,19__ EDUCATIONAL DEVELOPMENT CORPORATION JAMES D. DUNN - ------------------------------------------------- ---------------------------------------------- By: By: - ------------------------------------------------- ---------------------------------------------- Name: Randall White Name: James D. Dunn - ------------------------------------------------- ---------------------------------------------- Title: President Title: Owner - ------------------------------------------------- ---------------------------------------------- ATTEST:__________________________________________ ATTEST:_______________________________________ LEASING BROKER: LISTING BROKER: This ______ day of ______________________ , 19__ This _______ day of ____________________ ,19__ TULSA PROPERTIES, INC. TULSA PROPERTIES, INC. - ------------------------------------------------- ---------------------------------------------- By: By: ---------------------------------------------- -------------------------------------------- Thomas J. O'Brien, Broker Associate Thomas J. O'Brien, Broker Associate
________ __________ Page 5 of 6 Tenant Landlord EXHIBIT "A" ADDENDUM TO COMMERCIAL/INDUSTRIAL LEASE (GROSS) BY AND BETWEEN JAMES D. DUNN ("LANDLORD") AND EDUCATIONAL DEVELOPMENT CORPORATION ("TENANT") 20. Exterior Painting: Landlord agrees to power wash, seal, caulk and paint the north, east, west and southeast exterior walls of the north building within one- hundred twenty (120) days following the Lease execution date. The accent stripe shall be painted in a blue color that corresponds to the existing stripe and the smooth concrete panels will be painted gray from the ground up to the aggregate facing. The budget for completing this work shall not exceed $20,000.00. 21. Lease Termination: Tenant may terminate this Lease after July 1, 2001 by providing Landlord with one hundred eighty (180) days advance written notice of Tenant's intention to terminate the Lease and vacate the Premises. 22. Holding Over: Any holding over after the expiration of this Lease, with the consent of Owner, shall be construed as a month-to-month tenancy at a rental of $23,500.00 per month payable in advance and otherwise subject to the terms of this Lease, as applicable, until either party terminates the same by giving the other party thirty (30) days written notice. 23. Time: Time is of the essence of this Lease. LANDLORD: TENANT: JAMES D. DUNN EDUCATIONAL DEVELOPMENT CORPORATION By:__________________________ By:________________________________ Date:________________________ Date:______________________________ EX-23 4 INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' 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 April 4, 2000, appearing in this Annual Report on Form 10-K of Educational Development Corporation for the year ended February 29, 2000. May 12, 2000 Tulsa, Oklahoma EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR FEB-29-2000 MAR-01-1999 FEB-29-2000 214,321 0 2,229,920 209,466 8,364,096 10,956,952 1,415,734 1,330,464 12,340,022 3,367,613 0 0 0 1,085,848 7,886,561 12,340,022 16,851,261 16,851,261 6,984,387 13,423,805 1,582,027 52,000 45,401 1,748,028 669,000 1,079,028 0 0 0 1,097,028 .25 .24
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