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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The
Securities Exchange Act of 1934
Date of Report: June 26, 1998
CD WAREHOUSE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE
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(State or other jurisdiction of incorporation)
000-21887 73-1504999
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(Commission File Number) (I.R.S. Employer Identification No.)
1204 SOVEREIGN ROW, OKLAHOMA CITY, OK 73108
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(Address of principal executive offices) (Zip Code)
(405) 949-2422
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(Registrant's telephone, including area code)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
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Pursuant to an Asset Acquisition Agreement dated June 16, 1998 between the
Registrant and Grow Biz International, Inc. (NASDAQ: GBIZ) ("Grow Biz"), on June
26, 1998 the Registrant completed the purchase from Grow Biz of the franchise
rights for 134 Disc Go Round(R) retail music stores and the assets of 3 company-
owned stores for an aggregate cash purchase price of $7 million. In determining
the purchase price, which was negotiated on an arms' length basis with Grow Biz,
the Registrant took into consideration the discounted value of the future
revenue stream attributable to the franchise rights, as well as the fair market
value of the company-store assets. Consummation of the transaction added 137
stores to the CD Warehouse System, for an aggregate of 300 stores in 40 states
and five foreign countries. The audited Statement of Net Assets To Be Sold at
December 27, 1997 and December 28, 1996, as well as the audited Statement of
Revenues and Expenses for the fiscal years ended December 27, 1997 and December
28, 1996, and the report thereon of Arthur Andersen, LLP, independent public
accountants, together with the notes thereto; and the unaudited Statement of Net
Assets To Be Sold at March 28, 1998, and unaudited statement of revenues and
expenses for the three months ended March 28, 1998 and March 29, 1997, with
respect to the Disc Go Round(R) assets being acquired, are set forth below, as
well as the Registrant's pro forma combined balance sheet at March 31, 1998 and
pro forma combined statements of operations for the three months ended March 31,
1998 and the year ended December 31, 1997.
The Registrant financed the acquisition with working capital obtained from
the recent completion of a private placement offering of its Common Stock.
A press release of Registrant issued on June 17 1998, announcing the
completion of the above-described acquisition, is attached as an exhibit to this
Report and incorporated herein by reference.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
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(A) Financial statements of business acquired. The financial statements of
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the acquired business are presented in Exhibit 99.1 to this filing and
are incorporated herein by reference.
(b) Pro forma financial information. The pro forma financial information
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required by Article 11 of Regulation S- X, related to this acquisition
is presented in Exhibit 99.2 to this filing and is incorporated herein
by reference.
(c) Exhibits. The following exhibits are filed with this Report:
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10.1 Asset Purchase Agreement
99.1 Financial Statements of Business Acquired, consisting of:
(i) Statement of Net Assets To Be Sold at December 27, 1997 and
December 28, 1996, and Statement of Revenues and Expenses
for the fiscal years ended December 27, 1997 and December
28, 1996, and the report thereon of Arthur Andersen, LLP,
independent public accountants, together with the notes
thereto; and
(ii) Statement of Net Assets To Be Sold at March 28, 1998
(unaudited), and Statement of Revenues and Expenses for the
three months ended March 28, 1998 and March 29, 1997
(unaudited)
99.2 Pro Forma Financial Information, consisting of:
(i) Pro Forma Combined Balance Sheet of Registrant at March 31,
1998; and
(ii) Pro Forma Combined Statements of Operations of Registrant
for the three months ended March 31, 1998 and the year
ended December 31, 1997.
99.3 Press Release dated June 17, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CD WAREHOUSE, INC.
(Registrant)
Date: June 26, 1998 BY: /s/ Jerry W. Grizzle
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Jerry W. Grizzle,
President and Chief Executive Officer
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EXHIBIT 10.1
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
CD WAREHOUSE, INC.
AND
GROW BIZ INTERNATIONAL, INC.
DATED AS OF JUNE 16, 1998
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TABLE OF CONTENTS
ARTICLE I - TERMS OF PURCHASE AND SALE.................................... 1
1.1 Purchase and Sale of Assets....................................... 1
(a) Inventory.................................................... 1
(b) Receivables.................................................. 1
(c) Contracts.................................................... 1
(d) Trademarks; Copyrights....................................... 2
(e) Records...................................................... 2
(f) Software..................................................... 2
(g) Other Intangible Property.................................... 2
(h) Registrations................................................ 3
(i) Other Assets................................................. 3
1.2 Treatment of Certain Obligations.................................. 3
1.3 Transfer and Conveyance........................................... 3
ARTICLE II - PURCHASE PRICE............................................... 4
2.1 Purchase Price.................................................... 4
2.2 Allocation of Purchase Price...................................... 4
2.3 Cash Payable at Closing........................................... 4
2.4 Proration/Costs................................................... 4
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SELLER.................... 4
3.1 Due Organization and Qualification................................ 4
3.2 Title............................................................. 5
3.3 Inventory......................................................... 5
3.4 Physical Properties............................................... 5
3.5 Intellectual Property Rights...................................... 5
3.6 Compliance with Laws.............................................. 5
3.7 Contracts......................................................... 6
3.8 Contract Defaults................................................. 6
3.9 Litigation........................................................ 6
3.10 Corporate Power and Authority..................................... 7
3.11 Collective Bargaining............................................. 7
3.12 Employee Benefits................................................. 7
3.13 True, Correct and Complete Information............................ 7
3.14 Availability of Documents......................................... 8
3.15 Consents.......................................................... 8
3.16 Financial Condition and Result of Operations...................... 8
3.17 Insurance......................................................... 8
3.18 Taxes............................................................. 8
3.19 Absence of Certain Changes or Events.............................. 8
3.20 Broker's and Finder's Fees........................................ 9
3.21 Receivables....................................................... 9
3.22 Orders............................................................ 9
3.23 Leases and Corporate Store Contracts.............................. 9
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ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF BUYER...................... 9
4.1 Due Organization and Qualification................................ 9
4.2 Corporate Power and Authority..................................... 9
4.3 Consents.......................................................... 10
4.4 Litigation........................................................ 10
4.5 Compliance with Laws.............................................. 10
4.5 Compliance with Laws.............................................. 10
4.6 Financial Capability.............................................. 10
ARTICLE V - COVENANTS OF SELLER........................................... 11
5.1 Affirmative Covenants............................................. 11
5.2 Negative Covenants................................................ 11
5.3 Access to Properties and Records.................................. 11
5.4 Approvals of Third Parties........................................ 12
5.5 Notices........................................................... 12
5.6 Access to Books and Records After the Closing Date................ 12
5.7 Covenant Not to Compete........................................... 13
ARTICLE VI - COVENANTS OF BUYER........................................... 14
6.1 Furnishing of Information......................................... 14
6.2 Approvals of Third Parties........................................ 14
6.3 Buyer's Best Efforts.............................................. 14
6.4 Retention of Records.............................................. 14
6.5 Covenant Not to Compete........................................... 14
ARTICLE VII - COVENANTS OF BUYER.......................................... 15
7.1 Representations and Warranties of Seller.......................... 15
7.2 Covenants of Seller............................................... 15
7.3 Audited and Unaudited Financial Statements
for Disc Go Round Business........................................ 15
7.4 Certificate of Seller............................................. 15
7.5 No Casualty Losses................................................ 15
7.6 Certificate of Authorities........................................ 15
7.7 Litigation........................................................ 15
7.8 Legal Matters..................................................... 16
7.9 Opinion of Seller's Counsel....................................... 16
7.10 No Material Adverse Changes....................................... 16
7.11 Consents.......................................................... 16
7.12 Further Assurances................................................ 16
ARTICLE VIII - CONDITIONS TO OBLIGATIONS OF SELLER........................ 17
8.1 Representations and Warranties of Buyer........................... 17
8.2 Covenants of Buyer................................................ 17
8.3 Buyer's Certificate............................................... 17
8.4 Certificates of Authorities....................................... 17
8.5 Opinion of Counsel to Buyer....................................... 17
ARTICLE IX - DATE AND PLACE OF CLOSING.................................... 18
9.1 Date and Place of Closing......................................... 18
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ARTICLE X - CLOSING....................................................... 18
10.1 Seller's and Buyer's Performance.................................. 18
(a) Conveyances................................................. 18
(b) Records..................................................... 18
(c) Certificates................................................ 18
(d) Revised Inventory, Payables and Receivables................. 18
(e) Other Actions............................................... 18
(f) Certificates of Authorities................................. 18
(g) Opinion of Seller's Counsel................................. 18
(h) Consents.................................................... 19
(i) Subsidiary Documents........................................ 19
(j) Mutual Release.............................................. 19
10.2 Buyer's Performance............................................... 19
(a) Purchase Price.............................................. 19
(b) Assignment and Assumption Agreement......................... 19
(c) Opinion of Buyer's Counsel.................................. 19
(d) Certificates................................................ 19
(e) Mutual Release.............................................. 19
10.3 Expenses; Other Instruments....................................... 19
(a) Further Action by Seller.................................... 19
(b) Further Action by Buyer..................................... 19
ARTICLE XI - SURVIVAL AND INDEMNIFICATION................................. 20
11.1 Survival.......................................................... 20
11.2 Buyer's Losses.................................................... 20
11.3 Employee Compensation and Benefits................................ 20
11.4 Franchise Claims Against Buyer.................................... 20
11.5 Limitations....................................................... 20
11.6 Seller's Losses................................................... 21
11.7 Franchise Claims Against Seller................................... 21
11.8 Notice of Loss.................................................... 22
11.9 Right to Defend................................................... 22
11.10 Request to Allocate Responsibility................................ 22
11.11 Franchise Claims Against Both Seller and Buyer.................... 23
ARTICLE XII - POST-CLOSING COVENANTS...................................... 23
12.1 Transition Period................................................. 23
12.2 Insurance Policies................................................ 23
12.3 Audited and Unaudited Financial Statements for
Disc Go Round Business............................................ 23
12.4 Non-Solicitation.................................................. 23
ARTICLE XIII - TERMINATION................................................ 24
13.1 Termination....................................................... 24
13.2 No Further Force or Effect........................................ 24
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ARTICLE XIV - MISCELLANEOUS............................................... 24
14.1 Expenses........................................................... 24
14.2 Entire Agreement................................................... 24
14.3 Successors and Assigns............................................. 24
14.4 Identical Counterparts............................................. 25
14.5 Headings........................................................... 25
14.6 Use of Certain Terms............................................... 25
14.7 Modification and Waiver............................................ 25
14.8 Other Remedies..................................................... 25
14.9 Notices............................................................ 25
14.10 Governing Law...................................................... 26
14.11 No Agent's Fees.................................................... 26
14.12 Binding Arbitration................................................ 27
LIST OF SCHEDULES AND EXHIBITS............................................ 28
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of the 16th day of June, 1998, by and between CD WAREHOUSE, INC., a
Delaware corporation with its principal office located at 1204 Sovereign Row,
Oklahoma City, Oklahoma 73108 ("Buyer"), and GROW BIZ INTERNATIONAL, INC., a
Minnesota corporation with its principal office located at 4200 Dahlberg Drive,
Minneapolis, Minnesota 55422-4837 ("Seller").
WHEREAS, Seller is engaged, among other activities, in the business of:
(a) franchising retail stores (the "Disc Go Round Franchises") which buy, sell
and trade new and used audio compact discs, (b) buying, selling and trading new
and used audio compact discs on a retail basis through three (3) corporate or
subsidiary-owned stores (the "Corporate Stores"), and (c) selling new and used
audio compact discs to its Disc Go Round Franchises (collectively, the "Disc Go
Round Business"); and
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to buy from
Seller, substantially all of the assets of the Disc Go Round Business.
NOW THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements and upon the terms and subject to the
conditions hereinafter set forth, the parties hereby agree as follows:
ARTICLE I
TERMS OF PURCHASE AND SALE
1.1 Purchase and Sale of Assets. Subject to and upon the terms and
conditions contained herein, at the Closing (as defined in Section 9.1), Seller
will sell, transfer, assign, convey and deliver to Buyer, and Buyer will
purchase, accept and acquire from Seller, free and clear of all liens, claims
against assets, security interests and encumbrances of any nature
("Encumbrances"), except for the security interests on the new compact discs
inventory set forth on SCHEDULE 3.2, all of the following properties and assets
(whether real or personal, tangible or intangible) of Seller primarily used in
the Disc Go Round Business (collectively, the "Assets"):
(a) Inventory. All of the Seller's inventory of new and used audio
compact discs (the "Inventory");
Receivables. All of Seller's right, title and interest in and to all
receivables as of the Closing Date (as defined in Section 9.1) due from the Disc
Go Round Franchises, including, without limitation, accounts receivable, notes
receivable, and warranty receivables (collectively, the "Receivables");
(c) Contracts. All of Seller's right, title and interest in and to all (i)
franchise agreements, (ii) franchise and area development agreements,
(iii) mutual termination agreements relating to certain franchise
agreements and (iv) computer software license agreements with
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franchisees for the software defined in subsection (f) below, insofar
as such agreements relate to the Disc Go Round Franchises or the Disc
Go Round Business, as listed on SCHEDULE 3.7 (collectively, the
"Contracts");
(d) Trademarks / Copyrights. All of Seller's right, title and interest in
and to trademarks, patents, trade names, service marks, copyrights,
processes, trade secrets, proprietary and technical information,
know-how, other trade rights and other intangible assets, including
without limitation those identified on SCHEDULE 3.5, together with all
right to, and applications and licenses for, any of the foregoing,
primarily utilized in Seller's Disc Go Round Business (the
"Intellectual Property Rights"), with respect to which Seller agrees
to execute separate assignments of the forgoing suitable for recording
at the U.S. Patent and Trademark Office, the various Secretaries of
State and the Canadian Trade-marks Office; provided, however, that
Seller's right, title and interest in and to the "circling arrows"
logo (the "Grow Biz Logo") utilized by Seller in the Disc Go Round
Business and in Seller's other businesses is not being conveyed
hereunder. Rather, Seller will at Closing grant to Buyer a limited
license to utilize said logo (the "Limited License"). The license to
utilize the Grow Biz Logo will extend for a period equal to the
current and one renewal term for existing franchise agreements whose
underlying stores are currently open and operating and one term for
franchise agreements whose underlying stores have not yet opened, but
in any event such Limited License shall not exceed ten (10) years,
except as set forth in SCHEDULE 3.5.1. Regardless of the foregoing
Limited License right being granted by Seller, the Buyer agrees to use
its best efforts on a regularly recurring (semi-annual) basis to
encourage the Disc Go Round Franchises to modify their signage and
letterhead to replace the Grow Biz Logo with that of Buyer. If any
Disc Go Round franchisees agree to use the CD Warehouse name or any
other tradename or service mark of Buyer, Buyer shall make as a
condition of any such agreement that such franchisee cease use of the
Grow Biz Logo. The Limited License shall be in the form attached
hereto as EXHIBIT A.
(e) Records. All information of Seller with respect to the Disc Go Round
Franchises and all of Seller's records (but excluding accounting, tax
and corporate records) for the Disc Go Round Business, including,
without limitation, customer lists, vendor lists, prospective
franchisee lists, franchise files, and records concerning the same and
sales literature and promotional materials together with all manuals,
documents, records, files, computer tapes or discs, or other media on
or in which the same may be evidenced or documented;
(f) Software. All software programs, operating systems, source and object
codes, computer printouts, data bases and related items created,
originated or modified by Seller and primarily used in the Disc Go
Round Business, including, but not limited to, the Disc Go Round
point-of-sale software currently used by Seller in the operation of
the Disc Go Round Business. It is understood that the Wintegrity
software currently under development by Seller for use by franchisees
of all of Seller's businesses is not included in the assets conveyed
hereunder.
(g) Other Intangible Property. All Disc Go Round Business goodwill and all
of Seller's right title and interest in and to the Internet World Wide
Web site and address known as
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http://www.dgr1.com/ (the "DGR Web Site"). The DGR Web Site shall be
modified by Seller prior to Closing to remove any hyperlinks, metatags
or textual reference to Seller or Seller's other franchise concepts.
(h) Registrations. All registrations, approvals, licenses and permits of
governmental authorities primarily obtained by Seller in connection
with its operation of the Disc Go Round Business, including those set
forth on SCHEDULE 3.6 hereto (the "Registrations"), to the extent
assignable under applicable laws and regulations; and
(i) Other Assets. All equipment and tangible personal property of the
Corporate Stores, including, without limitation, furniture and
leasehold improvements, rights under leases listed on SCHEDULE 3.23
underlying the Corporate Stores ("Leases"), and rights under any other
contracts listed on SCHEDULE 3.23 underlying the Corporate Stores
("Corporate Store Contracts"). It is understood that the Assets shall
not include (i) any assets related to Seller's general corporate
operations and (ii) corporate-owned retail or franchised concepts of
Seller other than the Disc Go Round Business, including the Play It
Again Sports(R), Computer Renaissance(R), Once Upon A Child(R), Music
Go Round(R), It's About Games(R) and Retool(TM) corporate-owned retail
or franchised concepts; or (iii) any of the rights of the Seller under
this Agreement.
1.2 Treatment of Certain Obligations. At Closing, Buyer will assume the
Assumed Obligations (defined below) pursuant to an Assignment and Assumption
Agreement acceptable to Buyer and Seller effective as of the Closing Date, the
form of which is attached hereto as EXHIBIT C (the "Assignment and Assumption
Agreement"). Buyer will not assume or have any responsibility, however, with
respect to any other obligation or liability of the Seller not included within
the Assumed Obligations. The term "Assumed Obligations" means all of Seller's
obligations arising after the Closing Date under: the (i) Contracts listed on
SCHEDULE 3.7; (ii) Orders listed on SCHEDULE 3.22 and (iii) Leases and Corporate
Store Contracts, provided, however, the Assumed Obligations shall not include
any obligation for performance or obligation or liability of Seller for default
or nonperformance under the Contracts, Leases, Corporate Store Contracts or
Orders arising prior to the Closing Date. The term "Orders" means, with respect
to the Disc Go Round Business, all of Seller's outstanding orders for inventory
(i.e., inventory on order but not received or paid for) as of 12:01 a.m. on the
day preceding the Closing Date.
1.3 Transfer and Conveyance. Seller shall execute and deliver to Buyer at
the Closing (i) a Bill of Sale (the "Bill of Sale"), (ii) an Assignment and
Assumption Agreement, (iii) an Assignment of Intellectual Property Rights (the
"Assignment of Intellectual Property Rights"), including, without limitation an
assignment in a form complete and adequate for filing and assigning all of
Seller's right, title and interest in the Intellectual Property Rights, in each
case in substantially the forms attached hereto as EXHIBITS B, C AND D,
respectively, and (iv) all such other assignments, endorsements and instruments
of transfer as shall be necessary or appropriate to carry out the intent of this
Agreement and as shall be sufficient to vest in Buyer title to all of the Assets
and all right, title and interest of Seller thereto, including consents and
releases of any security interests in the Assets.
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ARTICLE II
PURCHASE PRICE
2.1 Purchase Price. The purchase price (the "Purchase Price") for the
Assets shall be Seven Million Dollars ($7,000,000) cash, plus assumption of the
"Assumed Obligations," subject to adjustments pursuant to Section 2.4 of this
Agreement.
2.2 Allocation of Purchase Price. The Purchase Price shall be allocated
among the Assets as set forth on SCHEDULE 2.2, which Schedule shall consist of
IRS Form 8594 only.
2.3 Cash Payable at Closing. At the Closing, Buyer shall deliver a
cashier's check to Seller or make payment by wire transfer, as designated by
Seller, in an amount equal to the Purchase Price.
2.4 Proration/Costs Buyer and Seller agree to the following prorations and
allocation of costs in connection with this Agreement and the transactions
contemplated hereby:
(a) Seller's rights in and to security deposits by Seller with lessors
pursuant to Leases assumed by Buyer shall be transferred to Buyer at
the closing.
(b) All other operating costs of the Assets, such as, but not limited to,
utilities and payments pursuant to Leases and Contracts, shall be
allocated between Seller and Buyer based upon the Closing Date, as of
the close of business on said Date, such that Seller shall pay that
portion of the operating costs pertaining to that period of time up to
and including the Closing Date, and Buyer shall pay that portion of
the operating costs from and after the Closing Date. In the event
certain costs cannot be determined until after Closing, such as
additional charges for taxes and rent under percentage rent clauses in
Leases, final adjustments shall be made when and as said amounts are
finally determined.
(c) Transfer taxes imposed, if any, shall be split equally between Buyer
and Seller. Recording fees, if any, shall be paid by Buyer.
(d) Buyer shall pay any lease transfer charges imposed by landlords
pursuant to the Leases and any DGR Web Site transfer charges.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrant as follows:
3.1 Due Organization and Qualification. Seller is a Minnesota corporation
duly organized, validly existing and in good standing under the laws of the
State of Minnesota, and has all requisite corporate power and corporate
authority to own or lease its properties and to carry on its business as it is
presently being operated and in the places where such properties are owned or
leased and such business is conducted.
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3.2 Title. Seller or its wholly owned subsidiary has, and upon conveyance
of the Assets to Buyer by Seller at the Closing, Buyer will acquire and hold,
good and marketable title in fee simple to all Assets, free and clear of any and
all Encumbrances, except as set forth on SCHEDULE 3.2.
3.3 Inventory. Set forth on SCHEDULE 3.3 is a description of all the
Inventory, which consists of items held in the ordinary course of the business
of Seller, which items are being acquired where is, as is, without warranty from
Seller.
3.4 Physical Properties. Set forth on SCHEDULE 3.4 is a description of all
physical properties, real, personal or mixed, owned and to be conveyed by Seller
and included among the Assets. Seller enjoys peaceable possession of all
properties included in the Assets owned or leased by it. No real property owned
by Seller is included in the Assets.
3.5 Intellectual Property Rights. Set forth on SCHEDULE 3.5 is a list of
all Intellectual Property Rights, which Intellectual Property Rights comprise
all such rights primarily utilized by Seller in connection with the operation of
the Disc Go Round Business (other than the Grow Biz Logo). The service mark
"Disc Go Round" (the "DGR Service Mark") does not infringe, involve or has
resulted in (i) infringement of, or (ii) any claim of infringement of, any
patent or patent application, trade name, trademark or service mark registration
or application, common law trademark, copyright or copyright registration or
application of any other person, firm or corporation and no proceedings have
been instituted, are pending, or threatened, which challenge the rights of
Seller in respect thereof. Except as disclosed on SCHEDULE 3.5, none of the
products, activities or operations of the Disc Go Round Business (other than the
DGR Service Mark addressed above) infringe, involve or have resulted in (i)
infringement of, or (ii) any claim of infringement of, any patent or patent
application, trade name, trademark or service mark registration or application,
common law trademark or trade dress right, copyright or copyright registration
or application of any other person, firm or corporation where such infringement
or claim of infringement would have a material adverse affect on the Disc Go
Round Business. Except as disclosed on SCHEDULE 3.5, to Seller's knowledge, none
of the Intellectual Property Rights are being infringed by the products,
activities, operations, trade names, trademarks, service marks, trade dress
rights or copyrights of any other person or persons and none are subject to any
outstanding order, judgment decree, stipulation or agreement restricting the use
thereof. Seller has not given and is not bound by an agreement of
indemnification for patent, trade name, service mark, trademark or copyright
infringement as to any property produced, used or sold by it.
3.6 Compliance with Laws. Except as disclosed on SCHEDULE 3.6, Seller (i)
has complied with all laws, regulations, licensing requirements and orders
applicable to its Disc Go Round Business or personnel, the breach or violation
of which could have a material adverse effect on the Disc Go Round Business,
(ii) has filed with the proper authorities all statements and reports required
for the Disc Go Round Business by the laws, regulations, licensing requirements
and orders to which it or any of its employees (because of their activities in
the Disc Go Round Business on behalf of their employer) is subject, and (iii)
possesses all necessary licenses, franchises, permits and governmental
authorizations to conduct its Disc Go Round Business in the manner in which and
in the jurisdictions and places where such Disc Go Round Business is now
conducted. Set forth on SCHEDULE 3.6 is a list of all material licenses,
franchises, permits and governmental authorizations for the Disc Go Round
Business and all applications pending before any agency or authority for the
issuance of any such licenses, franchises, permits or governmental
authorizations or the renewal thereof.
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3.7 Contracts. Set forth on SCHEDULE 3.7 is a list of all material
contracts, leases, arrangements, and commitments (whether oral or written) by
which any of the Assets are directly affected or are bound, including, without
limitation, all franchise and area development agreements for the Disc Go Round
Business which have been executed by Seller. Except as set forth in SCHEDULE
3.7, neither Seller nor any of the Assets is a party to or is bound or affected
by, with respect to the Disc Go Round Business, any material contract, lease,
arrangement or commitment (whether oral or written) relating to: (i) the
employment of any person other than personnel employed at will by Seller in the
ordinary course of its business at rates of compensation and on terms consistent
with past business practice; (ii) collective bargaining with, or any
representation of any employees by, any labor union or association; (iii) the
acquisition of services, supplies, equipment or other personal property
involving more than $5,000 or which is not terminable by Seller upon not more
than 30 days' notice without obligation on the part of Seller; (iv) the purchase
or sale of real property; (v) distribution, agency or construction; (vi) lease
of real or personal property as lessor or lessee or sublessor or sublessee;
(vii) lending or advancing of funds (other than the Receivables); (viii)
borrowing of funds or receipt of credit (other than with respect to Orders);
(ix) incurring of any material obligation or liability (except with respect to
Orders); (x) the sale of personal property other than sales of inventory in the
ordinary course of business); and (xi) any matter or transaction not in the
ordinary course of the business of Seller or inconsistent with the past business
practice of Seller. Material contract, lease, arrangement and commitments
(whether oral or written) shall, for purposes of the foregoing, be defined as
contracts, leases, arrangements and commitments (whether oral or written) which
involve obligations in excess of $10,000 and which could not be terminated with
sixty (60) days or less notice by Seller without liability to Seller. Similarly,
material obligations or liabilities shall, for purposes of the foregoing, be
defined as obligations or liabilities in excess of $10,000.
3.8 Contract Defaults. Except as disclosed on SCHEDULE 3.7, Seller is not
in default in any material respect under any of the Contracts, the Contracts are
legal, valid and binding obligations of the respective parties thereto in
accordance with their terms and have not been amended, no defenses, offsets or
counterclaims thereto have been asserted by any party thereto other than Seller,
and Seller has waived no substantial rights thereunder. To the knowledge of
Seller there are no unasserted defenses, offsets or counterclaims of substantial
merit that can be brought against Seller by the other parties to the Contracts,
based on matters arising prior to the date of this Agreement.
3.9 Litigation. Set forth on SCHEDULE 3.9 is a list of all actions, suits,
proceedings, investigations or grievances pending against Seller or to the
knowledge of Seller threatened against Seller with respect to the Disc Go Round
Franchises, Seller's Disc Go Round Business or any Assets, at law or in equity
or admiralty or before or by and court or federal, state municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign (each an "Agency"). Except as set forth on SCHEDULE 3.9,
none of the actions, suits, proceedings or investigations listed on SCHEDULE 3.9
either (i) results or would, if adversely determined, result in any material
adverse change in the business, operations or assets or the condition, financial
or otherwise, or results of operations of Seller's Disc Go Round Business, or
(ii) adversely affects or would, if adversely determined, adversely affect the
right or ability of Seller to carry on its Disc Go Round Business substantially
as now conducted. Seller is not subject to any continuing court or Agency order,
writ, injunction or decree applicable specifically to the Assets, the Disc Go
Round Business or the operations or employees of Seller with respect to the Disc
Go Round Business., or in default with respect to any order, writ, injunction or
decree of any court or Agency with
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respect to the Assets, the Disc Go Round Business or the operations or employees
of Seller with respect to the Disc Go Round Business.
3.10 Corporate Power and Authority. The execution, delivery and performance
of this Agreement by Seller, and all other agreements executed in connection
herewith, and the consummation by it of the transactions contemplated hereby and
thereby, have been duly authorized by all requisite corporate action and no
further action or approval is required in order to permit Seller to consummate
the transactions contemplated hereby and thereby. This Agreement constitutes,
and all other agreements by and between the parties, when executed and delivered
in accordance with the terms thereof, will constitute the legal, valid and
binding obligations of Seller, enforceable in accordance with their terms
(subject, as to the enforcement of remedies, to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting creditors'
rights from time to time in effect). Seller has full power, authority and legal
right to enter into this Agreement, and all other agreements by and among the
parties, and to consummate the transactions contemplated hereby and thereby.
Except as set forth in SCHEDULE 3.10, the making and performance of this
Agreement, and all other agreements by and among the parties, and the
consummation of the transactions contemplated hereby and thereby in accordance
with the terms hereof and thereof will not (i) conflict with the Certificate of
Incorporation or Bylaws of Seller, (ii) result in any breach or termination of,
or constitute a default under, or constitute an event which with notice or lapse
of time, or both, would become a default under, or result in the creation of any
Encumbrance upon any of the Assets under, or create any rights of termination,
cancellation or acceleration in any person under any contract, lease,
arrangement or commitment (except as may arise from territorial conflicts or
objections to Buyer as franchisor), or violate any order, writ, injunction or
decree, to which Seller is a party, by which any of the Assets, business or
operations of Seller may be bound or affected or under which any of the Assets,
business or operations of Seller receive benefits, (iii) result in the loss or
adverse modification of any material license, franchise, permit or other
authorization granted to or otherwise held by Seller for the Disc Go Round
Business or otherwise used in connection with the operation of the Disc Go Round
Business, or (iv) result in the violation of any provision of law applicable to
Seller, the violation of which could have a material adverse effect upon the
Assets or the Disc Go Round Business.
3.11 Collective Bargaining. Seller is not a party to any collective
bargaining agreements with respect to any employees of Seller who work in the
Disc Go Round Business. There are no labor disturbances, or to the knowledge of
the Seller any threats thereof, with respect to its Disc Go Round Business
operations.
3.12 Employee Benefits. Seller's Disc Go Round Business operations are not
subject to any Employee Benefits and/or plans which would be required by law or
contract to be assumed by Buyer pursuant to the terms hereof.
3.13 True, Correct and Complete Information. The information furnished to
Buyer by Seller prior to or on the date of this Agreement in any Schedule
referred to herein is true, correct and complete in all material respects. Such
information states all material facts required to be stated therein or with
respect thereto or necessary to make the statements therein or with respect
thereto, in light of the circumstances under which such statements are made,
true correct and complete.
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3.14 Availability of Documents. Seller has made available for inspection by
Buyer, at the offices of Seller, true, correct and complete copies of its
Certificate of Incorporation and Bylaws and all contracts, leases, arrangements,
commitments and documents referred to herein or in any Schedule referred to
herein, in each case together with all amendments and supplements thereto.
3.15 Consents. Except as set forth in SCHEDULE 3.15, no consent, approval,
authorization or order of any court, Agency or any other person is required in
order to permit Seller to consummate the transactions contemplated by this
Agreement.
3.16 Financial Condition and Result of Operations. Seller has previously
delivered to Buyer true, correct and complete copies of the balance sheet of
Seller as of December 27, 1997 and the related statement of cash flows for the
year then ended and the related statement of shareholders' equity for the year
then ended. The foregoing financial statements at and as of December 27, 1997
have been examined and reported upon to the extent noted in the report thereon
dated February 3, 1998, by Arthur Andersen, LLP, independent public accountants
(the "1997 Audited Financial Statements"). Seller has previously delivered to
Buyer true, correct and complete copies of the audited balance sheet of Seller
as of December 28, 1996 and the related statement of cash flows for the year
then ended and the audited related statement of shareholders' equity for the
year then ended (the "1996 Audited Financial Statements" and, collectively along
with the 1997 Audited Financial Statements, the "Financial Statements"). The
1996 Audited Financial Statements have been examined and reported upon by Arthur
Andersen, LLP. The Financial Statements, together with the notes thereto, (i)
are in accordance with the books and records and accounting methods of Seller,
(ii) present fairly the financial position and results of operations of Seller
as of the dates and for the periods indicated and (iii) have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved except as noted therein.
3.17 Insurance. Set forth on SCHEDULE 3.17 is a brief description of all
policies of fire, casualty, liability and other forms of insurance and all
fidelity bonds currently held by Seller in connection with the Disc Go Round
Business.
3.18 Taxes. Except as disclosed on SCHEDULE 3.18, Seller has duly filed all
federal, state, county, local and other excise, franchise, property, payroll,
income, capital stock, sales and use and other tax returns which are required to
be filed by it and such returns are true, correct and complete in all material
respects. Seller has paid all taxes, which have become due or have been assessed
against it and all taxes, penalties and interest which any taxing authority has
proposed or asserted to be owing. All tax liabilities to which the Assets may
have been subjected have been discharged except for taxes assessed but not yet
payable. There are no tax claims presently being asserted against Seller and
Seller knows of no basis for any such claim which would have a material adverse
effect on the Assets or the Disc Go Round Business.
3.19 Absence of Certain Changes or Events. Except as provided on SCHEDULE
3.19, since December 31, 1997, Seller has not with respect to the Disc Go Round
Business (i) suffered any extraordinary losses or waived any rights of
substantial value; (ii) made any change in its mode of management or any change
in its method of operation or method of accounting; (iii) made or become
obligated to make any capital expenditures other than such expenditures or
commitments not exceeding $50,000 in the aggregate; (iv) experienced or suffered
any adverse change in its business, operations or assets (whether or not covered
by insurance) condition, financial or otherwise, or results of operations; (v)
entered into any material
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transaction, except in the ordinary course of its business consistent with past
business practice; (vi) received any notice of any claim asserted against it by
any Agency which could have a material adverse effect on the Disc Go Round
Business or the Assets; or (vii) incurred or agreed to incur any material
obligation outside the ordinary course of business which has not heretofore been
disclosed in writing to Buyer.
3.20 Broker's and Finder's Fees. Seller has not made any agreement with any
person, or taken any action which would cause any person, to become entitled to
an agent's, broker's or finder's fee or commission in connection with the
transactions contemplated by this Agreement.
3.21 Receivables. Set forth on SCHEDULE 3.21 is a list of all Receivables
showing the name of the account debtor, maker or obligor, the unpaid balance,
the age of the Receivable and, if applicable, the maturity date, the interest
rate and the collateral securing the obligation. Buyer is acquiring the
Receivables on a non-recourse basis and will have no claim against Seller to the
extent that the Receivables are not paid in full. Correspondingly, Seller will
have no claim against Buyer in the event that Buyer's collections on the
Receivables exceed the price paid therefor.
3.22 Orders. Set forth on SCHEDULE 3.22 is a list of all Orders as of the
date shown on such Schedule, showing the name of the vendor, the amount on order
and the invoice amounts, if known.
3.23 Leases and Corporate Store Contracts. Set forth on SCHEDULE 3.23 is a
list of the Leases and Corporate Store Contracts, showing the name of the
respective parties thereto, effective date, term and monthly lease payments or
description of the contractual obligation. Seller and/or its wholly owned
subsidiary are not in arrears with any lease payment due under the Leases or
with any contractual obligation under the Corporate Store Contracts and, to the
best of Seller's and/or its Subsidiary's knowledge, each of the Leases and
Corporate Store Contracts remain in full force and effect and, except as set
forth in SCHEDULE 3.15, are assignable.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby makes the following representations and warranties to Seller:
4.1 Due Organization and Qualification. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own or lease
its properties and to carry on its business as it is presently being operated
and in the place where such properties are owned or leased and such business is
conducted.
4.2 Corporate Power and Authority. The execution, delivery and performance
of this Agreement by Buyer, and all other agreements referred to herein or
executed in connection herewith, and the consummation by it of the transactions
contemplated hereby and thereby, have been duly authorized by all requisite
corporate action and no further action or approval is required in order to
permit Buyer to consummate the transactions contemplated hereby and thereby.
This Agreement constitutes, and all other agreements by and among the parties,
when executed and delivered in accordance with the terms thereof, will
constitute, the legal, valid and binding obligations of Buyer, enforceable in
accordance with their terms (subject, as to the enforcement of remedies, to
applicable bankruptcy, insolvency, reorganization,
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moratorium and similar laws affecting creditor's rights from time to time in
effect). Buyer has full power, authority and legal right to enter into this
Agreement and all other agreements by and among the parties and to consummate
the transactions contemplated hereby and thereby. The making and performance of
this Agreement, and all other agreements by and among the parties and the
consummation of the transactions contemplated hereby and thereby in accordance
with the terms hereof and thereof will not (i) conflict with the Certificate of
Incorporation or by the Bylaws of Buyer, (ii) result in any breach or
termination of, or constitute a default under, or constitute an event which with
notice or lapse of time, or both, would become a default under, or result in the
creation of any Encumbrance upon any asset of Buyer under, or create any rights
of termination, cancellation or acceleration in any person under, any contract,
lease, arrangement or commitment, or violate any order, writ, injunction or
decree, to which Buyer is a party or by which Buyer or its assets, business or
operations may be bound or affected or under which Buyer or its assets, business
or operations receive benefits, (ii) result in the loss or adverse modification
of any material license, franchise, permit or other authorization granted to or
otherwise held by Buyer which is material to the business or financial condition
of Buyer or (iv) result in the violation of any provisions of law applicable to
Buyer, the violation of which could have a material adverse effect upon the
business, operations or assets of Buyer.
4.3 Consents. No consent, approval, authorization or order of any court,
Agency or any other person is required in order to permit Buyer to consummate
the transactions contemplated by this Agreement.
4.4 Litigation. There is no pending or to the knowledge of the Buyer
threatened litigation in any court or any proceeding before any Agency (i) in
which it is sought to restrain, prohibit, invalidate or obtain damages in
respect of the consummation of the purchase and sale of the Assets or the other
transactions contemplated hereby, (ii) which could, if adversely determined,
result in any material adverse change in the business, operations or assets or
the condition, financial or otherwise, or results of operations of Buyer or
(iii) which could, if adversely determined, have a material adverse effect on
the right or ability of Buyer to carry on its business substantially as now
conducted.
4.5 Compliance with Laws. Buyer (i) has complied with all laws,
regulations, licensing requirements and orders applicable to its business the
breach or violation of which could have a material adverse effect on said
business, (ii) has filed with the proper authorities all statements and reports
required by the laws, regulations, licensing requirements and order to which it
is subject, and (iii) possesses all necessary licenses, franchises, permits and
governmental authorizations to conduct its business in the manner in which and
in the jurisdictions and places where such business is now conducted.
4.6 Financial Capability. Buyer has the financial capability to consummate
the transactions contemplated by this Agreement.
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ARTICLE V
COVENANTS OF SELLER
Seller hereby covenants and agrees with Buyer as follows:
5.1 Affirmative Covenants. Prior to the Closing Date (as hereinafter
defined), Seller will operate its Disc Go Round Business in the usual, regular
and ordinary course of business consistent with past business practices, and
will use its best efforts to (i) preserve intact the business organization of
the Disc Go Round Business and the Assets; (ii) maintain the properties and
equipment of the Disc Go Round Business in good operating condition and repair;
(iii) continue all existing policies of insurance for the Disc Go Round Business
(or comparable insurance) in full force and effect up to and including the
Closing Date (and will not cancel any such insurance or take (or fail to take)
any action that would enable the insurers under such policies to avoid liability
for claims arising out of any occurrence on or prior to the Closing Date without
the prior written consent of Buyer); (iv) preserve the present relationships of
the Disc Go Round Business with suppliers, customers, and franchisees of the
Disc Go Round Business; and (v) maintain the books, accounts and records related
to the Disc Go Round Business in the usual, regular and ordinary manner on a
basis consistently applied.
5.2 Negative Covenants. Prior to the Closing Date Seller will operate its
Disc Go Round Business in the usual, regular and ordinary course of business
consistent with past business practices, and will not, without the prior written
consent of Buyer: (i) make any increase in the compensation payable or to become
payable by it to any employee primarily employed in the Disc Go Round Business
or contribute or make any commitment to contribute or represent that it will
contribute any amounts to any bonus or other employee benefit plan for employees
of Seller except as required by law or by the terms of any such plan in the
ordinary course of business; (ii) make any material change in the character of
its Disc Go Round Business; (iii) incur any obligation or liability of the Disc
Go Round Business (fixed or contingent) except in the ordinary course of
business; (iv) discharge or satisfy any Encumbrance on the Assets or pay any
obligation or liability (fixed or contingent) of the Disc Go Round Business
other than in the ordinary course of business; (v) mortgage, pledge, transfer or
otherwise dispose of or subject to any Encumbrance any of the Assets, except in
the ordinary course of business; (vi) acquire any assets or properties for the
Disc Go Round Business, except in the ordinary course of business; (vii) cancel
or compromise any material debt or claim that comprises a part of the Assets;
(viii) waive or release any rights of material value that comprise a part of the
Assets; (ix) with respect to the Disc Go Round Business transfer, grant or
terminate contract, lease, arrangement or commitment rights under any
concessions, leases, licenses, agreements, patents, patent licenses, inventions,
trademarks, trade names, service marks, trade dress or copyrights or
registrations or licenses thereof or applications therefore or with respect to
any know-how or other proprietary or trade rights; (x) modify or change in any
material respect or terminate any Contract; (xi) make or become obligated to
make any capital expenditures for the Disc Go Round Business or enter into
commitments therefor exceeding $50,000, and (xii) sell, discount or otherwise
dispose of any Receivables.
5.3 Access to Properties and Records. Seller will keep Buyer advised of all
material developments relevant to the consummation of the transactions
contemplated hereby and will cooperate fully in permitting Buyer to make a full
investigation of the business, properties, financial condition and investments
of Seller related to the Disc Go Round Business during regular business hours
and upon reasonable notice and in bringing about the consummation of the
transactions contemplated hereby. Seller
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will, during regular business hours and upon reasonable notice, afford to Buyer
and its representatives full access to the offices, buildings, real properties,
machinery and equipment, inventory and supplies, records, files, books of
account, tax returns, agreements and commitments, corporate record books and
personnel of Seller which relate to the Disc Go Round Business. Seller will,
upon request by Buyer, provide reasonable access to Buyer's auditors with
respect to the records of the Disc Go Round Business and will encourage Seller's
auditors to allow Buyer and Buyer's auditors access to the working papers for
all audits of the Financial Statements. Seller will furnish to Buyer all such
further information concerning the Disc Go Round Business and affairs of Seller
as Buyer may reasonably request. Seller will update by amendment or supplement
each of the Schedules referred to herein and any other disclosure in writing
from Seller required by this Agreement to be disclosed in writing by Seller to
Buyer promptly upon any change in the information set forth in such Schedules or
other disclosures, and Seller hereby represents and warrants that such Schedules
and such written disclosures, as so amended or supplemented, shall be true,
correct and complete as of the date or dates thereof; provided, however, that
the inclusion of any information in any such amendment or supplement, not
included in the original Schedule or other disclosure at or prior to the date of
this Agreement, shall not limit or impair (except as provided in Section 11.5)
any right which Buyer might otherwise have respecting the representations or
warranties of Seller contained in this Agreement. No investigation pursuant to
this Section 5.3 shall affect any representations or warranties or the
conditions to the obligations of Buyer to consummate the transactions
contemplated hereby. In the event of the termination of this Agreement, Buyer
will deliver to Seller all documents, work papers and other material (including
copies thereof) obtained by Buyer or on its behalf from Seller as a result of
this Agreement or in connection herewith, whether so obtained before or after
the execution hereof and, if the transactions contemplated hereby are not
consummated, Buyer will hold such information in strictest confidence and will
not use or disclose, or permit any other person or entity to use or disclose,
such information until such time as such information is otherwise publicly
available.
5.4 Approvals of Third Parties. As soon as practicable after the date
hereof, Seller will use its reasonable best efforts to secure all necessary
consents, approvals and clearances of third parties that shall be required to
consummate the transactions contemplated hereby.
5.5 Notices. Seller will timely give all notices required to be given
relating to the transactions contemplated hereby, including without limitation,
(i) notices to employees, (ii) any notices required or requested to be given to
all creditors and claimants against Seller and (iii) any notices required or
requested to be provided to the Disc Go Round Franchises.
5.6 Access to Books and Records After the Closing Date. Seller agrees to
provide Buyer, its accountants, counsel and other representatives, during normal
business hours and upon reasonable notice, for a period of six years after the
Closing Date, access to the books, records, income tax returns, contracts and
other underlying data and the documentation of Seller relating to the period
prior to the Closing Date and to make available to Buyer personnel of Seller in
Buyer's review thereof for the purpose of enabling them to determine and
calculate any tax liabilities in connection with the Assets. Seller agrees that,
for such six-year period, it will preserve and keep intact all such books and
records.
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5.7 Covenant Not to Compete. Seller covenants and agrees that except with
the prior written consent of Buyer (i) it will not, at any time during the
period of three (3) years from the Closing Date, directly or indirectly, in or
pertaining to any location in the United States or worldwide, own, manage,
operate, join, control or participate in the ownership, management, operation or
control of, any business which, or any business organization any part of which,
engages in the business of buying, selling or trading of new and/or used audio
compact discs, audio (including music video) digital versatile discs ("DVD's")
or other prerecorded music media (collectively, the "Competitive Products"),
including without limitation the selling of franchises which engage in the
business of buying, selling or trading any Competitive Products in the United
States, except as a franchisee of Buyer, and (ii) it will not, at any time
during the period of three (3) years from the Closing Date, directly or
indirectly own, manage, operate join, control or participate in the ownership,
management, operation or control of any business which, or any business
organization any part of which, engages in the business of buying, selling or
trading Competitive Products via the "Internet," "World Wide Web," or any other
"on-line" computer communication networks, except as a franchisee of the Buyer.
The Seller will not be precluded from offering or selling new or used musical
instruments, computer software, amplifiers, video games or music related
equipment or electronics through one or more of Seller's other business concepts
or future business concepts. Further, Seller will not be precluded from offering
or selling, through a store operated by Seller or franchised under Seller's
other business concepts or future business concepts, Competitive Products to the
extent such Competitive Products offered or sold at any store directly owned or
franchised by the Seller: (i) may be utilized and/or sold solely or
coincidentally with and/or as a part of Seller's other business concepts' or
future business concepts' products and not as a separate department or
classification; and (ii) constitute only a portion, representing less than 10%
of the value, on the average, of such store's total inventory. The remedy at law
for any breach or attempted breach by Seller of the provisions of this Section
5.7 will be inadequate and Buyer shall be entitled to temporary or permanent
injunctive relief against any breach or attempted breach of such provision
without the necessity of posting bond or proving actual damages. It is the
express intention of the parties hereto to comply with all laws, which may be
applicable to this Section 5.7. Should any restriction contained in this Section
5.7 be found to exceed in duration or scope the restriction permitted by law, it
is expressly agreed that the covenant not to compete contained in this Section
5.7 may be reformed or modified by the final judgment of a court of competent
jurisdiction to reflect a lawful and enforceable duration or scope. If any one
or more of the provisions contained in this Section 5.7 shall for any reason be
held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement, but any inconsistency in the provisions of this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein. The terms and conditions of this Section 5.7 will be governed
by and construed in accordance with the laws of the State of Delaware; the
foregoing clause will not, however, affect the forum or venue of any dispute
resolution proceeding arising in connection with this Agreement or any other
term or condition of this Agreement whatsoever. Notwithstanding anything to the
contrary set forth above, if any franchisee of Seller takes action which results
in a breach of the foregoing covenant by Seller, Seller shall not be deemed to
be in breach of the foregoing covenant unless and until Seller has first been
provided written notice of the breach by Buyer and has been afforded the
opportunity to cure said breach during the thirty (30) day period (or such
greater period of time as may be allotted to franchisee under any applicable
federal, state or local law, rule or regulation) following such notice; if such
cure is effectuated in all material respects, no breach shall be deemed to have
occurred.
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ARTICLE VI
COVENANTS OF BUYER
Buyer hereby covenants and agrees with Seller as follows:
6.1 Furnishing of Information. Buyer will keep Seller advised of all
material developments relevant to the consummation of the transactions
contemplated hereby and will cooperate fully with Seller in bringing about the
consummation of the transactions contemplated hereby. In the event of the
termination of this Agreement, Seller will deliver to the Buyer all documents,
work papers and other material (including copies thereof) obtained by Seller or
on its behalf from Buyer as a result of this Agreement or in connection
herewith, whether so obtained before or after the execution hereof and, if the
transactions contemplated hereby are not consummated, Seller will hold such
information in confidence until such time as such information is otherwise
publicly available.
6.2 Approvals of Third Parties. As soon as practicable after the date
hereof, Buyer will use its reasonable best efforts to secure all necessary
consents, approvals and clearances of third parties that shall be required to
enable it to consummate the transactions contemplated hereby and will otherwise
use its reasonable best efforts to cause the consummation of such transactions
in accordance with the terms and conditions of this Agreement.
6.3 Buyer's Best Efforts. Buyer will use its best efforts, acting in good
faith, to cause the consummation of the transactions contemplated by this
Agreement in accordance with their terms and conditions.
6.4 Retention of Records. For a period of six years after the Closing,
Buyer will retain all books and records that Buyer receives from Seller. During
such period, Seller and its representatives will have access to all such books
and records during normal Disc Go Round Business hours. Buyer will, upon request
of Seller, furnish to Seller, without charge, copies of any such books or
records.
6.5 Covenant Not to Compete. Buyer will agree not to compete with Seller by
engaging, directly or indirectly, in the franchising, licensing or retail sale
of new or used computer software, video games, musical instruments, amplifiers,
or music-related equipment or electronics (except for the sales of music-related
equipment or electronics manufactured for the purpose of playing or listening to
precorded music) (collectively, the "Grow Biz Concept Products"), except with
Seller's prior written consent, for a period of three (3) years following the
date of closing. Buyer will not be precluded from offering or selling the
Competitive Products, as defined in Section 5.7, through one or more of Buyer's
franchise concepts or future concepts. Further, Buyer will not be precluded from
offering or selling, through a store under Buyer's existing or future franchise
concepts, the Grow Biz Concept Products to the extent such Grow Biz Concept
Products offered or sold at any store directly owned or franchised by Buyer: (i)
may be utilized and/or sold solely or coincidentally with and/or as a part of
Buyer's existing or future franchise concepts' products and not as a separate
department or classification; and (ii) constitute only a portion, representing
less than ten percent (10%) of the value, on the average, of such store's total
inventory.
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ARTICLE VII
CONDITIONS TO OBLIGATIONS OF BUYER
The obligations of Buyer hereunder shall be subject to the satisfaction of
each of the following conditions precedent on or prior to the Closing Date,
except such conditions as Buyer may waive in writing.
7.1 Representations and Warranties of Seller. All of the representations
and warranties of Seller contained in this Agreement and in any Schedule hereof
were true and correct when made, and, as so made (and without consideration of
any amendment or supplement thereto required by Section 5.3 hereof), shall be
true and correct in all material respects on and as of the Closing Date with the
same force and effect as though such representations and warranties had been
made on and as of the Closing Date.
7.2 Covenants of Seller. All of the covenants and agreements herein on the
part of Seller to be complied with or performed on or before the Closing Date
shall have been complied in all material respects with and performed.
7.3 Audited and Unaudited Financial Statements for Disc Go Round Business.
On or before June 23,1998, Seller shall provide Buyer with financial statements
for the Disc Go Round Business, audited in accordance with generally accepted
accounting principles, for the last two fiscal years and unaudited financial
statements for the Disc Go Round Business for the first fiscal quarter of 1998.
7.4 Certificate of Seller. There shall be delivered to Buyer a certificate
dated as of the Closing Date and signed by an executive officer of Seller to the
effect set forth in Sections 7.1 and 7.2, which certificate shall have the
effect of a representation and warranty made by Seller on and as of the Closing
Date (subject to Section 11.5(c)).
7.5 No Casualty Losses. The Assets shall not have suffered any destruction
or damage by fire, explosion or other casualty or any taking by eminent domain
which has materially impaired the operation of the Assets or otherwise had a
material adverse effect upon the Disc Go Round Business conducted by Seller.
7.6 Certificate of Authorities. Seller shall deliver to Buyer at Closing
(i) a certificate of the Secretary of State of Minnesota, dated as of a date not
more than five (5) days prior to the Closing Date, attesting to the organization
and good standing of Seller, (ii) a copy, certified by the Secretary of State of
Minnesota as of a date not more than five (5) days prior to the Closing Date, of
Seller's Certificate of Incorporation and all amendments thereto, (iii) a copy,
certified by the Secretary of Seller of the Bylaws of Seller, as amended and in
effect at the Closing Date and (iv) a copy, certified by an authorized officer
of Seller, of resolutions duly adopted by the Board of Directors of Seller duly
authorizing the transactions contemplated in this Agreement.
7.7 Litigation. At the Closing Date, except as set forth in Schedule 3.9,
there shall not be pending or threatened any litigation in any court or any
proceeding before any Agency, (i) in which it is sought to restrain, invalidate,
set aside or obtain damages in respect of the consummation of the purchase and
sale of the Assets or the other transactions contemplated hereby, (ii) which
could, if adversely determined, result in any material adverse change in the
business, operations or Assets or the condition,
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financial, or otherwise, or results of operations of Seller's Disc Go Round
Business, or (iii) which could, if adversely determined, have a material adverse
effect on the right or ability of Seller to carry on the Disc Go Round Business
as now conducted.
7.8 Legal Matters. All legal actions, proceedings, instruments and
documents required to carry out this Agreement or incidental thereto and all
other related matters shall be satisfactory to Day, Edwards, Federman, Propester
& Christensen, P.C., counsel for Buyer, who shall act reasonably in making any
such determination.
7.9 Opinion of Seller's Counsel. Buyer shall have received an opinion of
counsel for Seller, dated the Closing Date to the effect that: (i) the Seller is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Minnesota; (ii) Seller has full corporate power, and
corporate authority to enter into this Agreement and all other agreements by and
among the parties and to consummate the transactions contemplated hereby and
thereby; (iii) all corporate action required to be taken by Seller to approve
this Agreement and all other agreements by and among the parties and the
transactions contemplated hereby and thereby and to authorize execution and
delivery of this Agreement and all other agreements by and among the parties and
the performance by Seller of its obligations hereunder and thereunder, have been
duly and properly taken, and no further corporate action or approval is required
in order to permit Seller to consummate the transactions contemplated by this
Agreement and all other agreements by and among the parties; and (iv) this
Agreement and all other agreements contemplated hereby or executed in connection
herewith by and among the parties have been duly executed and delivered by
Seller and are legal, valid and binding obligations of Seller enforceable in
accordance with their terms.
7.10 No Material Adverse Changes. There shall not have occurred (i) any
material adverse change in the business or the operations of Seller's Disc Go
Round Business or the Assets or (ii) any material loss or damage to any of the
Assets (whether or not covered by insurance) of Seller. Buyer shall receive a
certificate from Seller, dated as of the Closing Date and in form and substance
satisfactory to Buyer, as to fulfillment of the conditions set forth in this
Section 7.10.
7.11 Consents. Except for landlord's consents with respect to the Leases,
Seller shall have obtained all orders, approvals or consents of third parties,
including without limitation, any consents or approvals deemed necessary by
counsel to Buyer that shall be required to consummate the transactions
contemplated hereby.
7.12 Further Assurances. Seller shall take all such further action as may
be reasonably requested by Buyer in order to effect the consummation of the
transactions contemplated by this Agreement. If Buyer shall reasonably determine
that any further conveyance, assignment or other document or any further action
is necessary to vest in it full title to the Assets, Seller shall cause the
appropriate person or entity to execute and deliver all such instruments and
take all such action as Buyer may reasonably determine to be necessary.
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ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of Seller to cause the sale of the Assets and the other
transactions contemplated hereby to occur at Closing shall be subject to the
satisfaction on or prior to the Closing Date of all of the following conditions,
except such conditions as Seller may waive in writing:
8.1 Representations and Warranties of Buyer. All of the representations and
warranties of Buyer contained in this Agreement and in any Schedule or other
disclosure in writing from Buyer shall have been true and correct when made, and
shall be true and correct in all material respects on and as of the Closing Date
with the same force and effect as though such representations and warranties had
been made on and as of the Closing Date.
8.2 Covenants of Buyer. All of the covenants and agreements herein on the
part of the Buyer to be complied with or performed on or before the Closing Date
shall have been fully complied with and performed in all material respects.
8.3 Buyer's Certificate. There shall be delivered to Seller a certificate
dated as of the Closing Date and signed by the President or a Vice President of
Buyer to the effect set forth in Sections 8.1 and 8.2, which certificate shall
have the effect of a representation and warranty made by Buyer on and as of the
Closing Date.
8.4 Certificates of Authorities. Buyer shall have furnished to Seller (i) a
certificate of the Secretary of State of Delaware, dated as of a date not more
than five (5) days prior to the Closing Date, attesting to the organization and
good standing of Buyer, (ii) a copy, certified by the Secretary of State of
Delaware as of a date not more than five (5) days prior to the Closing Date, of
Buyer's Certificate of Incorporation and all amendments thereto, (iii) a copy,
certified by the Secretary of Buyer of the Bylaws of Buyer, as amended and in
effect at the Closing Date and (iv) a copy, certified by an authorized officer
of Buyer, of resolutions duly adopted by the Board of Directors of Buyer duly
authorizing the transactions contemplated in this Agreement.
8.5 Opinion of Counsel to Buyer. Seller shall have received an opinion
from, counsel for Buyer, dated the Closing Date to the effect that: (i) Buyer is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware; (ii) Buyer has full power, authority and legal
right to enter into this Agreement and all other agreements by and among the
parties and to consummate the transactions contemplated hereby and thereby;
(iii) the execution and delivery of this Agreement and all other agreements by
and among the parties and the performance by Buyer of its obligations hereunder
and thereunder, have been fully authorized by all requisite corporate action,
and no further action or approval is required in order to permit Buyer to
consummate the transactions contemplated by this Agreement and all other
agreements by and among the parties; (iv) this Agreement and all other
agreements contemplated hereby or executed in connection herewith by and among
the parties have been duly executed and delivered by Buyer and are legal, valid
and binding obligations of Buyer enforceable in accordance with their terms.
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ARTICLE IX
DATE AND PLACE OF CLOSING
9.1 Date and Place of Closing. Subject to satisfaction or waiver of the
conditions to the obligations of the parties, the purchase and sale of the
Assets pursuant to this Agreement shall be consummated at a closing (the
"Closing") to be held in the offices of Gray, Plant, Mooty, Mooty & Bennett,
P.A., at 3400 City Center, 33 South 6th Street, Minneapolis, MN or such other
place as is mutually agreed to by the parties, at 9 A.M., Central Standard Time,
on June 26, 1998 (the "Closing Date"). Title to the Assets shall pass from
Seller to Buyer as of 12:01 A.M., Central Standard Time, on the day following
the Closing Date.
ARTICLE X
CLOSING
10.1 Seller's and Buyer's Performance. At the Closing, concurrently with
performance by Buyer of its obligations to be performed at the Closing:
(a) Conveyances. Seller shall execute and deliver to Buyer, in form and
substance acceptable to Buyer (i) the Bill of Sale; (ii) the
Assignment and Assumption Agreement; (iii) the Assignment of
Intellectual Property Rights; and (iv) all other assignments,
endorsements and instruments of transfer as shall be necessary or
appropriate to carry out the intent of this Agreement and as shall be
sufficient to vest in Buyer title to all of the Assets and all right,
title and interest of Seller thereto. If requested by Buyer, such
documents shall be in form suitable for recording.
(b) Records. Seller shall deliver to Buyer or make available upon request
all documents, agreements, reports, books, records and accounts
pertaining specifically to the Assets which are in Seller's
possession, including without limitation any and all files and
documents or copies thereof, relating to any litigation described in
SCHEDULE 3.9.
(c) Certificates. Seller shall execute and deliver the certificates
referred to in Sections 7.4 and 7.10.
(d) Revised Inventory, Orders and Receivables Seller shall deliver revised
and updated schedules of SCHEDULE 3.3 (Inventory), SCHEDULE 3.21
(Receivables), SCHEDULE 3.22 (Orders) and any other Schedules that
must be updated or revised.
(e) Other Actions. Seller shall take all such other steps as may be
necessary or reasonably appropriate to put Buyer in actual and
complete ownership and possession of the Assets.
(f) Certificates of Authorities. Seller shall deliver to Buyer the
certificates of authority referred to in Section 7.6.
(g) Opinion of Seller's Counsel. Seller shall deliver to Buyer the opinion
of its counsel, dated the Closing Date, as to the matters specified in
Section 7.9.
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(h) Consents. Seller shall deliver to Buyer the consents and approvals
required by Section 7.11.
(i) Subsidiary Documents. Seller shall deliver to Buyer a bill of sale,
assignment of lease and all other documents as may be reasonably
required in order to vest in and confirm to Buyer full and complete
title to, possession of, and the right to use and enjoy, those Assets
related to the Huntsville Disc Go Round(R) store owned and operated by
Seller's wholly-owned subsidiary, Grow Biz Games, Inc.
(j) Mutual Release. Seller shall execute and deliver to Buyer a Mutual
Release of Claims respecting that certain law suit between Seller and
Buyer in the form attached hereto as EXHIBIT E (the "Mutual Release").
10.2 Buyer's Performance. At the Closing, concurrently with the performance
by Seller of its obligations to be performed at the Closing:
(a) Purchase Price. Buyer shall deliver to Seller the wire transfer or
cashier's check specified in Section 2.3;
(b) Assignment and Assumption Agreement. Buyer shall execute and deliver
to Seller the Assignment and Assumption Agreement.
(c) Opinion of Buyer's Counsel. Buyer shall deliver the opinion of
counsel, dated the Closing Date, as to the matters specified in
Section 8.5.
(d) Certificates. Buyer shall execute and deliver the certificate referred
to in Section 8.3.
(e) Mutual Release. Buyer shall execute and deliver to Seller the Mutual
Release.
10.3 Expenses; Other Instruments. In addition to the foregoing, Buyer and
Seller agree as follows:
(a) Further Action by Seller. At any time and from time to time, at or
after the Closing, upon request of Buyer, Seller shall do, execute,
acknowledge and deliver or shall cause to be done, executed,
acknowledged and delivered all such further acts, deeds, assignments,
transfers, conveyances, powers of attorney and assurances as may
reasonably be required in order to vest in and confirm to Buyer full
and complete title to, possession of, and the right to use and enjoy,
the Assets.
(b) Further Action by Buyer. At any time and from time to time, at or
after the Closing, upon request of Seller, Buyer shall do, execute,
acknowledge and deliver or shall cause to be done, executed,
acknowledged and delivered all such further acts and assurances as may
reasonably be required in order to better assure and confirm to Seller
the assumption by Buyer of the obligations to render performance which
are to be assumed by Buyer pursuant to this Agreement.
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ARTICLE XI
SURVIVAL AND INDEMNIFICATION
11.1 Survival. Subject to any limitations set forth herein, all
representations, warranties, covenants and agreements made in the Agreement
shall survive and shall not be extinguished by the Closing or any investigation
made by or on behalf of any party hereto.
11.2 Buyer's Losses. Seller hereby agrees, subject to Section 11.7 below,
to indemnify Buyer and save and hold Buyer harmless from, against, for and in
respect of any and all damages (including, without limitation, amounts paid in
settlement with Seller's consent), losses, obligations, liabilities, liens,
deficiencies, costs and expenses, including, without limitation, reasonable
attorneys' fees and other costs and expenses incident to any suit, action,
investigation, claim or proceeding (hereinafter referred to collectively as
"Buyer's Losses"), suffered, sustained, incurred or required to be paid by Buyer
by reason of (i) the breach by Seller of any provisions of this Agreement,
including any representation or warranty made by Seller in or pursuant to this
Agreement being untrue or incorrect in any material respect; (ii) any material
failure by Seller to observe or perform its covenants and agreements set forth
in this Agreement; (iii) any liability for product warranties or defective
products arising from sales of Inventory of the Disc Go Round Business by Seller
prior to the Closing Date. Indemnification by the Seller of Buyers Losses under
this Section shall be limited in the aggregate to the Purchase Price paid to
Seller by the Buyer pursuant to Section 2, less any federal and state taxes paid
by the Seller thereon.
11.3 Employee Compensation and Benefits. Seller hereby agrees to indemnify
and hold Buyer harmless from and against any and all claims made by employees of
Seller, regardless of when made, for workmen's compensation, medical insurance,
disability, vacation, severance, sick benefits or other compensation
arrangements to the extent the same are based on injury or sickness occurring
prior to the Closing Date or based on employment service rendered to Seller
prior the Closing Date.
11.4 Franchise Claims Against Buyer. Seller hereby agrees to indemnify
Buyer and save and hold Buyer harmless from, against, for and in respect of any
damages, losses, obligations, liabilities, deficiencies, costs, or expenses
resulting from any and all claims made by any past or existing franchisee or
purported franchisee of Buyer or Seller to the extent such acts, omissions or
occurrences giving rise to the claim occurs prior to the Closing Date and have
not otherwise been disclosed in this Agreement or in any schedule thereto, but
excluding any claim of a Disc Go Round franchisee involving territorial
conflicts relating to the location of a Disc Go Round store in relation to the
location of any company-owned or franchised store of Buyer, objections to Buyer
as franchisor (including without limitation Buyer's financial or support
capabilities or future direction or policies regarding the Disc Go Round
Franchises, or other claims or matters arising under the Contracts as a result
of the consummation of the transactions contemplated hereby. Any damages,
losses, obligations, liabilities, deficiencies, costs, or expense incurred by
Buyer as a result of any claims made by existing franchisees or purported
franchisees of Buyer or Seller arising from any act, omission or occurrence
prior to the Closing Date are included within the definition of the term
"Buyer's Losses."
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11.5 Limitations. Notwithstanding anything to the contrary elsewhere
contained herein, all indemnification obligations of Seller under this Agreement
are subject to the following conditions, limitations and qualifications:
(a) Except for claims for breach of the Covenant not to Compete in Section
5.7, all claims for indemnification by Buyer must be made within two
years of the Closing Date or shall be forever barred; provided,
however, that claims first made in good faith and in writing in
reasonable detail prior to said date may be pursued until they are
finally resolved. All claims for breach of the Covenant Not to Compete
must be made within three and one-half years after the Closing Date.
(b) No claim for indemnification by Buyer can be pursued until the
aggregate of all of Buyer's Losses exceed $100,000, and then such
claims may be pursued only to the extent that they exceed said amount.
(c) No claim for indemnification by Buyer can be pursued with respect to a
breach of a representation or warranty made by Seller herein and
disclosed in an amendment or supplement to a Schedule supporting such
representation or warranty prepared pursuant to Section 5.3.;
provided, however, nothing in this Section 11.5(c) shall prevent Buyer
from bringing a claim for indemnification to the extent that any such
amendment or supplement proves to be untrue when made; and provided,
further, that nothing in this provision shall affect Buyer's right not
to consummate the Agreement if a condition to Buyer's obligation to
close is not satisfied.
The foregoing conditions, limitations, and qualifications shall apply to all
claims made under or in connection with this Agreement and the transactions
contemplated hereby whether or not such claims are styled as claims for
indemnification hereunder.
11.6 Seller's Losses. Buyer agrees to indemnify Seller and save and hold
Seller harmless from, against, for and in respect of any and all damages
(including, without limitation, amounts paid in settlement with Buyer's
consent), losses, obligations, liabilities, claims, deficiencies, cost and
expenses, including, without limitation, reasonable attorneys' fees and other
costs and expenses incident to any suit, action, investigation, claim or
proceeding (hereinafter referred to collectively as "Seller's Losses") suffered,
sustained, incurred or required to be paid by Seller by reason of (i) any
representation or warranty made by Buyer in or pursuant to this Agreement being
untrue or incorrect in any material respect; (ii) any material failure by Buyer
to observe or perform its covenants and agreements set forth in this Agreement;
(iii) any liability for product warranties or defective products arising from
sales of Inventory sold by Buyer after the Closing Date; (iv) any failure by
Buyer to satisfy and discharge any liability or obligation expressly assumed by
Buyer pursuant to this Agreement; or (v) any and all claims made by employees of
Buyer who are former employees of Seller, for workmen's compensation, medical
insurance, disability, vacation, severance, sick benefits or other compensation
arrangements to the extent the same are based on injury or sickness occurring
after the Closing Date or based on employment service rendered to Buyer after
the Closing Date.
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11.7 Franchise Claims Against Seller. Buyer agrees to indemnify Seller and
save and hold Seller harmless from, against, for and in respect of any damages,
losses, obligations, liabilities, deficiencies, costs, or expenses resulting
from any and all claims made by any past or existing franchisee or purported
franchisee of Buyer or Seller to the extent such acts, omissions or occurrences
giving rise to the claim: (i) occurs after the Closing Date; or (ii) relates to
a claim of a Disc Go Round franchisee involving territorial conflicts relating
to the location of a Disc Go Round store in relation to the location of any
company-owned or franchised store of Buyer, objections to Buyer as franchisor
(including without limitation Buyer's financial or support capabilities or
future direction or policies regarding the Disc Go Round Franchises), or other
claims or matters arising under the Contracts as a result of the consummation of
the transactions contemplated hereby. Any damages, losses, obligations,
liabilities, deficiencies, costs, or expenses incurred by Seller as a result of
any claims made by past or existing franchisees or purported franchisees of
Buyer or Seller arising from any act, omission or occurrence after the Closing
Date are included within the definition of the term "Seller's Losses."
11.8 Notice of Loss. Notwithstanding anything herein contained, Buyer and
Seller shall not have any liability under the indemnity provisions of this
Agreement with respect to a particular matter unless a notice setting forth in
reasonable detail the breach which is asserted has been given to the
Indemnifying Party (hereafter defined) and, in addition, if such matter arises
out of a suit, action, investigation or proceeding, such notice is given
promptly after the Indemnified Party (hereafter defined) shall have been given
notice of the commencement of a suit, action, investigation or proceeding. With
respect to Buyer's Losses hereof, Seller shall be the Indemnifying Party and
Buyer shall be the Indemnified Party. With respect to Seller's Losses, Buyer
shall be the Indemnifying Party and Seller shall be the Indemnified Party.
11.9 Right to Defend. Upon receipt of notice of any suit, action,
investigation, claim or proceeding for which indemnification might be claimed by
an Indemnified Party, the Indemnifying Party shall be entitled promptly to
defend, contest or otherwise protect against such suit, action, investigation,
claim or proceeding or its own cost and expense, including the right to invoke
any arbitration proceeding available in the dispute. The Indemnified Party shall
have the right, but not the obligation, to participate at its own expense in a
defense thereof by counsel of its own choosing, but the Indemnifying Party shall
be entitled to control the defense unless the Indemnified party has relieved the
Indemnifying Party from liability with respect to the particular matter or the
Indemnifying Party fails to assume defense of the matter. In the event the
Indemnifying Party shall fail to defend, contest or otherwise protect in a
timely manner against any such suit, action, investigation, claim or proceeding,
the Indemnified Party shall have the right, but not the obligation, to defend,
contest or otherwise protect against the same and make any compromise or
settlement thereof and recover the entire cost thereof from the Indemnifying
Party including reasonable attorneys' fees, disbursements and all amounts paid
as a result of such suit, action, investigation, claim or proceeding or the
compromise or settlement thereof. However, if the Indemnifying Party undertakes
the defense of such matters, the Indemnified Party shall not be entitled to
recover from the Indemnifying Party any legal or other expenses substantially
incurred by the Indemnifying Party in connection with the defense thereof other
than the reasonable costs of investigation undertaken by the Indemnified Party
with the prior written consent of the Indemnifying Party. If Buyer and Seller
are named jointly as defendants by a past, existing or purported franchisee in a
court or arbitration proceeding and Buyer based on its evaluation of the
franchisee's claim provides notice to Seller of an indemnification claim against
Seller pursuant to Section 11.8 as to any liability arising out of the
Franchisee's claim, Seller reserves the right in its sole discretion to fully
settle and compromise the franchisee's claim as to both Seller and Buyer at any
time during the proceeding.
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11.10 Request to Allocate Responsibility. Buyer and Seller agree that if
they are jointly named as parties after Closing in any suit, claim or proceeding
by a past, existing or purported franchisee of Buyer or Seller that they will
jointly request that the panel of arbitrators or court specify in their judgment
or order in the event that any liability is determined as to the Buyer and
Seller whether the liability is attributable to an act, omission or occurrence
before or after the Closing Date or if the liability is attributable to acts,
omissions or occurrences both before and after the Closing Date the
proportionate degree of fault and damages reflected in the judgment or order,
attributable to the Buyer or Seller in accordance with the provisions of this
Agreement.
11.11 Franchise Claims Against Both Seller and Buyer. Subject to the
remaining provisions of this Agreement, to the extent that any damages, losses,
obligations, liabilities, deficiencies, costs, or expenses result from any
claims made by any past or existing franchise or purported franchise of Buyer or
Seller for acts, omissions or occurrences occurring both before and after the
Closing Date, such damages, losses, obligations, liabilities, deficiencies,
costs, and expenses will be borne by Buyer and Seller in proportion to their
respective degree of fault.
ARTICLE XII
POST-CLOSING COVENANTS
12.1 Transition Period. Seller shall use good-faith efforts for a period
of up to one hundred eighty (180) days after the Closing to cooperate and assist
Buyer, on a reasonable basis, in connection with the operations of the Disc Go
Round Business and the Assets purchased by Buyer under this Agreement.
12.2 Insurance Policies. Seller hereby agrees to maintain and keep in
force all current insurance policies that may or could provide coverage for the
Disc Go Round Business through the Closing Date.
12.3 Audited and Unaudited Financial Statements for Disc Go Round
Business. Seller shall provide Buyer with the unaudited financial statements for
the Disc Go Round Business for the second fiscal quarter for 1998 on or before
July 30, 1998.
12.4 Non-Solicitation.
(a) Each of Buyer and Seller agrees that, for a period of two (2) years
from the Closing Date, or two (2) years from the date of termination
of this Agreement, whichever occurs first, it will not knowingly, as
a result of information obtained hereunder or otherwise obtained in
connection with the transactions contemplated hereunder:
(i) other than Buyer's acquisition of the Disc Go Round Business
contemplated by the terms of this Agreement, divert or attempt to
divert any business, franchisee or customer of the other party to
this Agreement, or
(ii) except for Buyer's possible employment of the employees of the
Corporate Stores, employ or attempt to employ any employee of the
other party to this Agreement.
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(b) The remedy at law for any breach or attempted breach by a party of the
provisions of this Section 12.4 will be inadequate and the
non-breaching party shall be entitled to temporary or permanent
injunctive relief against any breach or attempted breach of such
provision without the necessity of posting bond or proving actual
damages. It is the express intention of the parties hereto to comply
with all laws, which may be applicable to this Section 12.4. If any
one or more of the provisions contained in this Section 12.4 shall for
any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not
affect any other provision of this Agreement, but any inconsistency in
the provisions of this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained
herein. The terms and conditions of this Section 12.4 will be governed
by and construed in accordance with the laws of the State of Delaware;
the foregoing clause will not, however, affect the forum or venue of
any dispute resolution proceeding arising in connection with this
Agreement or any other term or condition of this Agreement whatsoever.
ARTICLE XIII
TERMINATION
13.1 Termination. This Agreement may be terminated and abandoned at any
time on or prior to the Closing Date:
(a) By the mutual consent in writing of Buyer and Seller;
(b) By Buyer in writing if any of the material conditions to the
obligations of Buyer contained herein shall not have been satisfied
or, if unsatisfied, waived as of the Closing Date;
(c) By Seller in writing if any of the material conditions to the
obligations of Seller contained herein shall not have been satisfied
or, if unsatisfied, waived as of the Closing Date;
(d) By Buyer or Seller in writing if the Closing shall not have occurred
by July 15, 1998, except that no party shall have the right to
terminate this Agreement if the failure to close shall be the result
of such party's failure to perform, in any material respect, its
obligations hereunder.
13.2 No Further Force or Effect. In the event of termination and
abandonment of this Agreement pursuant to the provisions of Section 13.1, this
Agreement shall be of no further force or effect, except for Section 12.4 and
the last sentences of Section 5.3, Section 6.1, and Section 14.1, which shall
not be affected by termination of this Agreement.
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ARTICLE XIV
MISCELLANEOUS
14.1 Expenses. Except as otherwise expressly provided herein, Seller and
Buyer shall each pay their own expenses in connection with the preparation of
this Agreement, and the consummation of the transactions contemplated hereby,
including, without limitation, fees of its own counsel, auditors and other
experts, whether or not such transactions be consummated.
14.2 Entire Agreement. This Agreement, together with the Schedules and
other agreements contemplated herein, constitutes the entire contract and shall
supersede all prior agreements and understandings, both written and oral,
between the parties hereto with respect to the subject matter hereof and no
party shall be liable or bound to the other in any manner by any representations
or warranties except as specifically set forth herein or in any Schedule hereto
or agreement executed in connection herewith or expressly required to be made or
delivered pursuant thereto.
14.3 Successors and Assigns. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties hereto. Nothing in this Agreement, express or implied, is
intended to confer upon any party, other than the parties and their respective
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of such agreements.
14.4 Identical Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument, but only one of which
need be produced.
14.5 Headings. The headings of the paragraphs and subparagraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
14.6 Use of Certain Terms. As used in this Agreement, the words "herein,"
"hereof" and "hereunder" and other words of similar import refer to this
Agreement as a whole and not to any particular paragraph, subparagraph or other
subdivision.
14.7 Modification and Waiver. Any of the terms or conditions of this
Agreement may be waived in writing at any time, whether before or after action
thereon by the party which is entitled to the benefits thereof; and this
Agreement may be modified or amended at any time, whether before or after action
thereon by the parties. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by all of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provision hereof (whether or not similar)
nor shall such waiver constitute a continuing waiver.
14.8 Other Remedies. Except as otherwise provided herein, any and all
remedies expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby or by law on such party, and the
exercise of any one remedy will not preclude the exercise of any other.
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14.9 Notices. All notices, consents, requests, instructions, approvals
and/or communications provided for herein, shall be validly given, made or
served if in writing and delivered personally or sent by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
(i) If to Seller: Grow Biz International, Inc.
4200 Dahlberg Drive
Minneapolis, Minnesota 55422-4837
Attn: Gaylen L. Knack, Vice President
with copy to: John Brower, Esquire
Gray, Plant, Mooty, Mooty & Bennett, P.A.
3400 City Center
33 South 6thStreet
Minneapolis, MN 55402
(ii) If to Buyer: CD Warehouse, Inc.
1204 Sovereign Row
Oklahoma City, Oklahoma 73108
Attn: Jerry W. Grizzle, President and
Chief Executive Officer
with copy to: Bruce W. Day, Esq.
Day, Edwards, Federman, Christensen
& Propester, P.C.
210 Park Avenue
29th Floor Oklahoma Tower
Oklahoma City, Oklahoma 73102
The designation of the person to be so notified or the address of such person
for the purposes of such notice may be changed from time to time by a similar
notice. Any notice which is delivered personally in the manner provided herein
shall be deemed to have been duly given to the party to whom it is directed upon
actual receipt by such party (or its agent for notices hereunder). Any notice
which is addressed and mailed in the manner herein provided shall be
conclusively presumed to have been duly given to the party to which it is
addressed at the close of business, local time of the recipient, on the third
business day after the day it is so placed in the mail.
14.10 Governing Law. This Agreement will be construed and enforced in
accordance with and governed by the laws of the State of Delaware. This
Agreement will not be construed for or against a party merely because that party
prepared it, but will at all times be construed according to its fair meaning.
26
<PAGE>
14.11 No Agent's Fees. Buyer represents to Seller, and Seller represents to
Buyer, that there is no agent's broker's or finder's fees or commission payable
or that will be payable in connection with the transactions contemplated hereby
by virtue of or resulting from any action or agreement by it. Buyer hereby
agrees to indemnify and hold harmless Seller, and Seller agrees to indemnify and
hold harmless Buyer, from and against any claim, demand, liability, loss, cost
or expense (including reasonable attorneys' fees and expenses) on account of or
in connection with any agent's, broker's or finder's fees or commissions payable
or alleged to be payable in connection with this Agreement or the transactions
contemplated hereby virtue of or resulting from any action or agreement on the
part of such indemnifying party.
14.12 BINDING ARBITRATION. EXCEPT AS PROVIDED IN SECTION 5.7 AND SECTION
12.4 OF THIS AGREEMENT AND THE LIMITED LICENSE, EACH PARTY TO THIS AGREEMENT
AGREES THAT ANY DISPUTE OR CONTROVERSY ARISING BETWEEN ANY OF THE PARTIES TO
THIS AGREEMENT, OR ANY PERSON OR ENTITY IN PRIVITY THEREWITH, OUT OF THE
TRANSACTIONS EFFECTED AND RELATIONSHIPS CREATED PURSUANT TO THIS AGREEMENT AND
EACH OTHER AGREEMENT CREATED IN CONNECTION HEREWITH, INCLUDING ANY DISPUTE OR
CONTROVERSY REGARDING THE FORMATION, TERMS, OR CONSTRUCTION OF THIS AGREEMENT,
REGARDLESS OF KIND OR CHARACTER, MUST BE RESOLVED THROUGH BINDING ARBITRATION.
EACH PARTY TO THIS AGREEMENT AGREES TO SUBMIT SUCH DISPUTE OR CONTROVERSY TO
ARBITRATION BEFORE THE AMERICAN ARBITRATION ASSOCIATION IN OKLAHOMA CITY,
OKLAHOMA, AND FURTHER AGREES TO BE BOUND BY THE DETERMINATION OF AN ARBITRATION
PANEL CONSISTING OF THREE (3) PERSONS OF WHICH AT LEAST ONE (1) ARBITRATOR WILL
BE AN ATTORNEY WITH NO FEWER THAN THEN (10) YEARS OF EXPERIENCE IN FRANCHISE
LAW. JUDGMENT ON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT OF COMPETENT
JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A
SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY SUCH DISPUTE OR
CONTROVERSY IN A COURT OF COMPETENT JURISDICTION AND, FURTHER, MAY SEEK
PROVISIONAL OR ANCILLARY REMEDIES INCLUDING TEMPORARY OR INJUNCTIVE RELIEF IN
CONNECTION WITH SUCH DISPUTE OR CONTROVERSY IN A COURT OF COMPETENT
JURISDICTION, PROVIDED THAT THE DISPUTE OR CONTROVERSY IS ULTIMATELY RESOLVED
THROUGH BINDING ARBITRATION CONDUCTED IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THIS SECTION.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be signed in counterparts all as of the date first above written.
SELLER:
GROW BIZ INTERNATIONAL, INC.
BY:
------------------------------------------
Gaylen L. Knack, Vice President
BUYER:
CD WAREHOUSE, INC.
By:
------------------------------------------
Jerry W. Grizzle, President and
Chief Executive Officer
27
<PAGE>
ASSET PURCHASE AGREEMENT
DATED JUNE 15, 1998
BETWEEN CD WAREHOUSE AND GROW BIZ INTERNATIONAL, INC.
LIST OF SCHEDULES AND EXHIBITS
SCHEDULES
2.2 Allocation of Purchase Price
3.2 Encumbrances
3.3 Inventory
3.4 Physical Properties
3.5 Intellectual Property Rights
3.5.1 Exception to Limited License Term
3.6 Compliance with Laws; Licenses, Franchises Permits and
Governmental Authorizations
3.7 Material Contracts
3.9 Litigation
3.10 Conflicts, Breaches and Defaults
3.15 Consents and Authorizations
3.17 Insurance
3.18 Taxes
3.19 Certain Changes or Events
3.21 Receivables
3.22 Orders
3.23 Leases and Corporate Store Contracts
EXHIBITS
A Form of Limited License Agreement
B Bill of Sale
C Assignment and Assumption Agreement
D Assignment of Intellectual Property Rights
E Mutual Release
28
<PAGE>
EXHIBIT 99.1
Financial Statements of Business Acquired
<PAGE>
DISC GO ROUND
FINANCIAL STATEMENTS
AS OF
DECEMBER 28, 1996 AND DECEMBER 27, 1997
AND FOR THE THREE-MONTHS PERIOD
ENDED MARCH 29, 1997 AND MARCH 28, 1998
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE>
DISC GO ROUND
Index to Financial Statements and Schedules
Page
------
Report of Independent Public Accountants 1
Audited Financial Statements:
Statements of Net Assets to be Sold 2
Statements of Revenues and Expenses 3
Statements of Cash Flows 4
Notes to Financial Statements 5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Grow Biz International, Inc.:
We have audited the statements of net assets to be sold of Disc Go Round (a
division of Grow Biz International, Inc. and Subsidiaries--Minnesota
corporations) as of December 28, 1996 and December 27, 1997, and the related
statements of revenues and expenses and cash flows for each of the two years in
the period ended December 27, 1997. The financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, these financial statements have been prepared to reflect
the net assets, revenues and expenses and cash flows to be sold of Disc Go Round
and are not intended to be a complete presentation of Disc Go Round.
In our opinion, the special purpose financial statements referred to above
present fairly, in all material respects, the net assets to be sold of Disc Go
Round as of December 28, 1996 and December 27, 1997, and its revenues and
expenses and its cash flows for each of the two years in the period ended
December 27, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
June 12, 1998
-1-
<PAGE>
DISC GO ROUND
(A DIVISION OF GROW BIZ INTERNATIONAL INC. AND SUBSIDIARIES)
Statements of Net Assets to be Sold
<TABLE>
<CAPTION>
Fiscal Year Ended Three-Month
-------------------------------------- Period Ended
December 28 December 27, March 28,
1996 1997 1998
--------------- --------------- ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Receivables, less allowance for doubtful
accounts of $50,400, $62,500 and $37,500 $ 126,600 $ 121,000 $ 101,000
Inventories 191,200 224,000 257,000
Prepaid expenses and other 26,200 8,700 13,100
--------------- --------------- ------------
Total current assets 344,000 353,700 371,100
--------------- --------------- ------------
PROPERTY AND EQUIPMENT, less accumulated
depreciation of $52,400, $85,200 and $95,600 102,300 101,200 96,600
OTHER ASSETS:
Franchise agreements, less accumulated
amortization of $377,500, $528,500 and $566,300 830,500 679,500 641,800
Goodwill, less accumulated amortization of
$73,800, $103,300 and $110,700 663,700 634,300 626,900
Noncompete agreements and trademarks, less
accumulated amortization of $409,300,
$521,900 and $537,300 204,700 92,100 76,800
--------------- --------------- ------------
Total noncurrent assets 1,801,200 1,507,100 1,442,100
--------------- --------------- ------------
Total assets 2,145,200 1,860,800 1,813,200
--------------- --------------- ------------
LIABILITIES
CURRENT LIABILITIES:
Accounts payable 11,600 39,700 17,500
Accrued liabilities 13,000 2,800 3,100
Deferred franchise fee revenue 583,000 440,000 445,000
--------------- --------------- ------------
Total current liabilities 607,600 482,500 465,600
--------------- --------------- ------------
COMMITMENTS
AND CONTINGENCIES (Note 4)
Net assets to be sold $ 1,537,600 $ 1,378,300 $ 1,347,600
=============== ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
DISC GO ROUND
(A DIVISION OF GROW BIZ INTERNATIONAL INC. AND SUBSIDIARIES)
Statements of Revenues and Expenses
<TABLE>
<CAPTION>
Three-Month Perid Ended
Fiscal Year Ended ----------------------------
--------------------------------
December 28, December 27, March 29, March 28,
1996 1997 1997 1998
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE:
Company operations-
Retail store sales $ 486,900 $ 522,100 $ 112,300 $ 164,300
Wholesale merchandise sales 246,800 293,700 30,800 121,400
Franchise operations-
Royalty income 877,900 1,108,600 237,100 309,600
Franchise fees 338,000 527,500 70,000 85,300
-------------- -------------- ------------- -------------
Total revenue 1,949,600 2,451,900 450,200 680,600
-------------- -------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Cost of sales--retail store sales 256,400 275,500 58,900 86,900
Cost of sales--wholesale
merchandise sales 210,400 209,800 24,700 105,900
Selling, general and
administrative 1,611,500 1,717,000 434,700 433,000
Depreciation and amortization 373,700 324,500 98,600 70,800
-------------- -------------- ------------- -------------
Total cost and expenses 2,452,000 2,526,800 616,900 696,600
-------------- -------------- ------------- -------------
LOSS FROM OPERATIONS (502,400) (74,900) (166,700) (16,000)
PROVISION FOR INCOME TAXES - 3,600 - -
-------------- -------------- ------------- -------------
EXPENSES OVER REVENUES (502,400) $ (78,500) $ (166,700) $ (16,000)
============== ============== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
DISC GO ROUND
(A DIVISION OF GROW BIZ INTERNATIONAL INC. AND SUBSIDIARIES)
Statements of Cash Flows
<TABLE>
<CAPTION>
Three-Month Period Ended
Fiscal Year Ended --------------------------------
---------------------------------------
December 28, 1996 December 27, 1997 March 29, 1997 March 28, 1998
----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Expenses over revenues $(502,400) $ (78,500) $(166,700) $(16,000)
Adjustments to reconcile expenses
over revenues to net cash provided
by (used for) operating activities-
Depreciation and amortization 373,700 324,500 98,600 70,800
Change in operating assets
and liabilities:
Receivables (35,800) 5,600 55,400 20,000
Inventories 44,500 (32,800) 4,200 (33,000)
Prepaids 43,100 17,500 (800) (4,400)
Accounts payable (16,400) 28,100 (9,700) (22,200)
Accrued liabilities 9,800 (10,200) 1,000 300
Deferred franchise fee revenue (178,500) (143,000) 30,000 5,000
----------------- ----------------- --------------- ---------------
Net cash provided by (used for)
operating activities (262,000) 111,200 12,000 20,500
----------------- ----------------- --------------- ---------------
INVESTING ACTIVITIES:
Purchases of property and equipment (15,400) (30,400) - (5,800)
----------------- ----------------- --------------- ---------------
FINANCING ACTIVITIES:
Advances from (payments to) Parent 277,400 (80,800) (12,000) (14,700)
----------------- ----------------- --------------- ---------------
INCREASE (DECREASE) IN CASH
AND EQUIVALENTS:
Cash and cash equivalents,
beginning of period - - - -
----------------- ----------------- --------------- ---------------
Cash and cash equivalents,
end of period $ - $ - $ - $ -
================= ================= =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
DISC GO ROUND
(A DIVISION OF GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARIES)
Notes to Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION:
During the periods presented, Disc Go Round (the Company) was a division of Grow
Biz International, Inc. and Subsidiaries (Grow Biz or the Parent). On June 16,
1998, CD Warehouse, Inc. agreed to acquire and assume substantially all of the
assets and certain of the liabilities of the Company (the Acquisition). Terms of
the agreement provided for the payment of cash consideration of approximately $7
million, subject to certain adjustments. The accompanying financial statements
reflect the assets and liabilities, revenues and expenses and cash flows of the
operations conducted by Disc Go Round to be acquired by CD Warehouse. This
presentation is intended to provide a reasonable representation of the
historical financial information of the acquired operations and is not intended
to represent a presentation of the financial position and results of operations
of Disc Go Round. The operations included in the accompanying financial
statements are referred to herein as Disc Go Round or the Company. The
accompanying financial statements have not been adjusted to reflect the effects
of the Acquisition.
The Company offers licenses to operate retail stores using the service mark
"Disc Go Round." These retail stores buy and sell new and previously owned
musical compact discs. Most stores carry a variety of titles that appeal to all
ages and musical tastes. The Company is engaged in principally one business
segment that includes developing, licensing, franchising and servicing a system
of retail stores which buy, sell, trade and consign used and new compact discs.
In addition to Disc Go Round, Grow Biz offers licenses to operate retail stores
using the service marks "Play It Again Sports," "Once Upon A Child," "Computer
Renaissance," "Music Go Round," "It's About Games" and "ReTool."
2. SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS
The statements of net assets to be acquired as of March 28, 1998 and the related
statements of revenues and expenses and cash flows for the three months ended
March 28, 1998 and March 29, 1997, are unaudited. However, in the opinion of
management, these interim financial statements include all adjustments
(consisting of only normal recurring adjustments) which are necessary for the
fair presentation of the results for the interim periods presented. The results
of operations for the unaudited three-month period ended March 28, 1998 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
INVENTORIES
Inventories are valued at the lower of cost or market, as determined by the
average weighted cost method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization for
financial reporting purposes are provided using the straight-line method.
Estimated useful lives used in calculating depreciation and amortization are
five years for furniture and equipment and the shorter of the lease term or
useful life for leasehold improvements. Major repairs, refurbishments and
improvements which significantly extend the useful lives of the related assets
are capitalized. Maintenance and repairs, supplies and accessories are charged
to expenses as incurred.
- 5 -
<PAGE>
OTHER ASSETS
Other assets are amortized using the straight-line method over the following
estimated useful lives:
Franchisee agreements 8 years
Goodwill 25 years
Noncompete agreements 3 years
Trademarks 5 years
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
ultimate results could differ from those estimates.
REVENUE RECOGNITION
The Company collects royalties from each franchisee based on retail store gross
sales. The Company recognizes royalties on revenue when earned. The Company
collects franchisee fees when the franchise agreements are consummated and
recognizes the franchise fees on revenue when substantially all initial
franchise services have been performed.
COST ALLOCATION FROM GROW BIZ
Costs incurred that are direct expenses of the Company have been included in the
accompanying statements of revenues and expenses. Additionally, the Parent has
historically provided various services to Disc Go Round and its other operating
units, including certain costs of personnel, employee benefits, corporate
technology and legal, strategic, occupancy and accounting-related services.
Specific determination of the costs associated with these services that relate
directly to the Company is not practicable; accordingly, the amounts represented
in the accompanying financial statements related to these services reflect
estimates, which management believes were reasonable and appropriate in the
circumstances. These costs have been charged to the Company using various
allocation criteria such as the relative levels and amounts of revenue, the
number of employees and the number of stores. Management does not believe that
such estimates differ materially from actual amounts had it been practicable to
specifically identify such actual amounts. Additionally, certain corporate
executive costs have been allocated to the Company based primarily on revenues.
Historically, the Company has not allocated interest expense and interest income
to its operating divisions, accordingly, interest expense and income
allocations have not been included in the accompanying financial statements. The
total amount of allocated expense included selling, general and administrative
expense in the accompanying statements of revenues and expenses for the fiscal
years 1996 and 1997 was $424,500 and $347,200, respectively, and the three
months ended March 29, 1997 and March 28, 1998 was $68,000 and $120,800,
respectively. There can be no assurances that the Company could replace the
services provided by Grow Biz at a comparable cost.
3. INCOME TAXES:
The accompanying financial statements reflect income taxes accounted for under
the liability method whereby deferred income taxes are recognized at currently
enacted income tax rates to reflect the tax. The Company's results of operations
have historically been in the consolidated federal income tax returns of Grow
Biz. As a result, all tax payments were made by Grow Biz. The provisions for
income taxes in the accompanying statements of operations for the years ended
December 28, 1996 and December 27, 1997 were computed as if the Company had
filed separate tax returns.
For the years presented, the Company recorded no tax benefit for operating
losses due to losses being recorded since the date of acquisition (1994)
associated with start-up costs and rapid growth strategies. In 1997, there was a
tax liability of $3,600 due to nondeductible expenses recorded for financial
reporting purposes.
- 6 -
<PAGE>
Deferred income taxes are the result of provisions of the tax laws that either
require or permit certain items of income or expense to be reported for tax
purposes in different periods than in which they are reported for financial
reporting. The components of the deferred tax asset are as follows:
December 28, December 27,
1996 1997
------------ ------------
Deferred franchise fees $ 126,600 $ 109,800
Amortization lives and methods 164,300 213,200
Other 4,700 5,500
Valuation reserve (295,600) (328,500)
------------ ------------
$ - $ -
============ ============
4. COMMITMENTS AND CONTINGENCIES:
The Company operates several Company-owned retail stores. These retail
operations are conducted in leased facilities under leases that expire over the
next five years. A majority of these leases require the Company to pay
maintenance, insurance, taxes and other expenses in addition to minimum annual
rent. Total rent expense under operating leases was $62,700 in 1996 and $69,600
in 1997 and $16,000 and $21,000 for the three months ended March 29, 1997 and
March 28, 1998, respectively. As of December 27, 1997, minimum rental
commitments under noncancelable operating leases were $86,000 in 1998, $55,400
in 1999, $35,400 in 2000, $35,400 in 2001 and $23,600 in 2002.
- 7 -
<PAGE>
EXHIBIT 99.2
Pro Forma Financial Information
<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS
The accompanying Pro Forma Combined Financial Statements reflect the
historical financial position of CD Warehouse, Inc. (the "Company") adjusted for
the private placement ("Offering") on May 28, 1998 of 1,624,300 shares of its
Common Stock and for the acquisition on June 26, 1998 of the net assets of Disc
Go Round in a purchase transaction.
The Pro Forma Combined Balance Sheet as of March 31, 1998 assumes the
Offering and the acquisition of Disc Go Round had each occurred as of March 31,
1998. The Pro Forma Combined Statements of Operations for the year ended
December 31, 1997 and for the three months ended March 31, 1998 have been
prepared assuming the Offering and the acquisition of Disc Go Round were
completed on January 1, 1997.
The pro forma adjustments are based upon available information and
assumptions that management of the Company believes are reasonable. The Pro
Forma Combined Financial Statements do not purport to represent the financial
position or results of operations which would have occurred had such
transactions been consummated on the dates indicated or the Company's financial
position or results of operations for any future date or period. These Pro Forma
Combined Financial Statements should be read in conjunction with the historical
financial statements of the Company included in its 1997 Annual Report on Form
10KSB and in its Form 10QSB for the three months ended March 31, 1998 and with
the historical financial statements of Disc Go Round included elsewhere herein.
<PAGE>
CD WAREHOUSE, INC.
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
----------------------
CD PRO FORMA PRO FORMA
WAREHOUSE, DISC GO OFFERING ACQUISITION PRO FORMA
INC. ROUND ADJUSTMENTS ADJUSTMENTS TOTAL
---------- --------- ----------- ------------ -----------
Current assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 816,176 $ - $14,858,560 (A) $(7,000,000) (B) $ 8,674,736
Accounts receivable, net 477,909 101,000 - - 578,909
Merchandise inventory 2,158,557 257,000 - - 2,415,557
Prepaid expenses and other 84,890 13,100 - - 97,990
---------- ---------- ----------- ------------ -----------
Total current assets 3,537,532 371,100 14,858,560 (7,000,000) 11,767,192
Furniture, fixtures and equipment, net 671,465 96,600 - - 768,065
Investment in partnerships 17,080 - - - 17,080
Intangible and other assets, net 3,632,768 1,345,500 - (1,345,500) (B)
6,717,300 (B) 10,350,068
---------- ---------- ----------- ------------ -----------
Total assets $7,858,845 $1,813,200 $14,858,560 $(1,628,200) $22,902,405
========== ========== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C> <C> <C> <C>
Accounts payable $1,100,474 $ 17,500 $ - $ (17,500) (B) $ 1,100,474
Accrued liabilities 180,585 3,100 - (3,100) (B)
185,000 (B) 365,585
--------- ---------- ---------- ---------- -----------
Advances and deposits 107,052 445,000 - (445,000) (B) 107,052
Income taxes payable 101,385 - - - 101,385
Total current liabilities 1,489,496 465,600 - (280,600) 1,674,496
Deferred income tax 25,000 - - - 25,000
Minority interest in partnerships 68,413 - - - 68,413
Stockholders' equity
Common stock 19,200 - 16,243 (A) - 35,443
Additional paid-in-capital 5,710,043 - 14,842,317 (A) - 20,552,360
Retained earnings 546,693 - - - 546,693
Net assets being acquired 1,347,600 - (1,347,600) (B) -
--------- ---------- ---------- ---------- -----------
6,275,936 1,347,600 14,858,560 (1,347,600) 21,134,496
--------- ---------- ---------- ----------- -----------
Total liabilities and stockholders' e i $7,858,845 $1,813,200 $14,858,560 $(1,628,200) $22,902,405
========== ========== =========== =========== ===========
</TABLE>
<PAGE>
CD WAREHOUSE, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
------------------------
CD PRO FORMA
WAREHOUSE, DISC GO ACQUISITION PRO FORMA
INC. ROUND ADJUSTMENTS TOTAL
------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales $1,655,701 $164,300 $ - $1,820,001
Wholesale merchandise sales 1,069,518 121,400 - 1,190,918
Software income, net 8,595 - - 8,595
Franchise operations:
Royalty income 478,540 309,600 - 788,140
Management fee 18,725 - - 18,725
Franchise and development fees 33,000 85,300 - 118,300
---------- -------- --------- ----------
Total revenues 3,264,079 680,600 - 3,944,679
Operating costs and expenses:
Cost of sales - retail store sales 962,235 86,900 - 1,049,135
Cost of sales - wholesale merchandise sales 966,541 105,900 - 1,072,441
Retail store operating expenses 568,980 - 76,300 (C) 645,280
General and administrative 443,352 433,000 (76,300) (C)
- (187,200) (E) 612,852
Depreciation and amortization 73,115 70,800 51,600 (D) 195,515
Minority interest in partnerships' income 8,880 - - 8,880
---------- -------- --------- ----------
Total cost & expenses 3,023,103 696,600 (135,600) 3,584,103
---------- -------- --------- ----------
Operating income (loss) 240,976 (16,000) 135,600 360,576
Other income:
Equity in income of unconsolidated partnerships 17,273 - - 17,273
Other income (1,457) - - (1,457)
---------- -------- --------- ----------
15,816 - - 15,816
---------- -------- --------- ----------
Income (loss) before income taxes 256,792 (16,000) 135,600 376,392
Provision for income taxes 96,000 - 44,800 (F) 140,800
---------- -------- --------- ----------
Net income (loss) $ 160,792 $(16,000) $ 90,800 $ 235,592
========== ======== ========= ==========
Net income per share - basic $ 0.09 $ 0.07
========== ==========
Net income per share - diluted $ 0.08 $ 0.07
========== ==========
Shares used in computation - basic 1,887,778 1,624,300 3,512,078
========== ========= ==========
Shares used in computation - diluted 1,917,448 1,624,300 3,541,748
========== ========= ==========
</TABLE>
<PAGE>
CD WAREHOUSE, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTRORICAL
------------------------
CD PRO FORMA
WAREHOUSE, DISC GO ACQUISITION PRO FORMA
INC. ROUND ADJUSTMENTS TOTAL
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Company operations:
Retail store sales $3,352,433 $ 522,100 $ - $ 3,874,533
Wholesale merchandise sales 3,902,729 293,700 - 4,196,429
Software income, net 60,939 - - 60,939
Franchise operations:
Royalty income 1,393,717 1,108,600 - 2,502,317
Management fees 115,728 - - 115,728
Franchise and development fees 263,500 527,500 - 791,000
------------ ---------- ----------- ------------
Total revenues 9,089,046 2,451,900 - 11,540,946
Operating costs and expenses:
Cost of sales - retail store sales 1,998,536 275,500 - 2,274,036
Cost of sales - wholesale merchandise sales 3,608,480 209,800 - 3,818,280
Retail store operating expenses 1,225,987 - 258,900 (C) 1,484,887
General and administrative 1,509,672 1,717,000 (258,900) (C)
(588,600) (E) 2,379,172
Depreciation and amortization 238,600 324,500 156,100 (D) 719,200
Minority interest in partnerships' income 40,428 - - 40,428
------------ ---------- ----------- ------------
Total cost & expenses 8,621,703 2,526,800 (432,500) 10,716,003
------------ ---------- ----------- ------------
Operating income (loss) 467,343 (74,900) 432,500 824,943
Other income:
Equity in income of unconsolidated partnerships 119,819 - - 119,819
Other income 29,037 - - 29,037
148,856 - - 148,856
------------ ---------- ----------- ------------
Income (loss) before income taxes 616,199 (74,900) 432,500 973,799
Provision for income taxes 230,000 3,600 134,100 (F) 367,700
------------ ---------- ----------- ------------
Net income (loss) $ 386,199 $ (78,500) $ 298,400 $ 606,099
============ ========== =========== ============
Net income per share - basic and diluted $ 0.23 $ 0.18
============ ============
Shares used in computation - basic and diluted 1,714,790 1,624,300 3,339,090
============ =========== ============
</TABLE>
<PAGE>
ADJUSTMENTS TO PRO FORMA FINANCIAL STATEMENTS
(A) Record the issuance of 1,624,300 shares of the Company's Common Stock
through a private placement on May 28, 1998:
<TABLE>
<CAPTION>
<S> <C>
Offering proceeds $16,243,000
Estimated expenses of offering 1,384,440
-----------
Net cash proceeds $14,858,560
===========
</TABLE>
(B) Record the acquisition of the net assets of Disc Go Round and allocation
of the excess of the purchase price over fair value of the net assets
acquired to franchise operating rights and other intangibles:
<TABLE>
<CAPTION>
<S> <C> <C>
Cash purchase price $ 7,000,000
Estimated expenses of
acquisition and liabilities
assumed related to franchise
store openings in process 185,000
-----------
Total purchase price $ 7,185,000
Historical basis of net
assets acquired 1,347,600
Deposits retained by seller and
current liabilities not assumed
by Company in acquisition 465,600
Historical carrying value of
intangible assets (1,345,500)
Allocation to current assets
and store fixtures and equipment 467,700
-----------
Excess purchase price allocated
to franchise operating rights
and other intangibles $ 6,717,300
===========
(C) Reclassify retail store operating expenses of Disc Go Round to conform to
Company's presentation:
Year ended December 31, 1997 $ 258,900
===========
Three months ended March 31, 1998 $ 76,300
===========
</TABLE>
(D) Record amortization of additional carrying value of intangibles
acquired:
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, 1997 March 31, 1998
------------------- --------------------
<S> <C> <C>
Amortization of intangible
assets acquired over 15 year life $447,800 $112,000
Historical amortization of
Disc Go Round 291,700 60,400
-------- --------
Incremental amortization $156,100 $ 51,600
======== ========
</TABLE>
<PAGE>
(E) Reduce historical allocated administrative charges to Disc Go Round by
its prior parent for corporate and divisional personnel and facilities
charges not acquired nor retained by the Company:
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, 1997 March 31, 1998
------------------- --------------------
<S> <C> <C>
Divisional officers and managers $324,500 $ 86,100
Corporate officers 113,000 59,100
Warehouse facility 151,100 42,000
-------- --------
$588,600 $187,200
======== ========
</TABLE>
<TABLE>
(F) Pro forma income tax effect at 37.5% of adjustments:
<S> <C>
Year ended December 31, 1997 $134,100
========
Three months ended March 31, 1998 $ 44,800
========
</TABLE>
<PAGE>
EXHIBIT 99.3
Press Release dated June 17, 1998
<PAGE>
CD WAREHOUSE, INC.
1204 Sovereign Row
Oklahoma City, Oklahoma 73108
FOR IMMEDIATE RELEASE,
CONTACT:
Doyle E. Motley Bob Schu
Senior Vice President Desmond Towey
& Chief Financial Officer Desmond Towey & Associates
CD Warehouse, Inc. Tel: (212) 888-7600
Tel: (405) 949-2422
CD WAREHOUSE, INC. ACQUIRES DISC GO ROUND STORES
*ADDITION OF 137 STORES BRINGS CD WAREHOUSE CHAIN TOTAL TO 300 STORES*
Oklahoma City, OK - June 17, 1998 - CD Warehouse, Inc. (NASDAQ Small Cap:CDWI)
announced today that it has agreed to acquire the franchise rights for 134 Disc
Go Round retail music stores and the assets of 3 company-owned stores from Grow
Biz International, Inc. (NASDAQ:GBIZ) for the purchase price of $7 million.
Grow Biz International, Inc. reported that Disc Go Round had system-wide sales
of $27 million in 1997. CD Warehouse, Inc. had system wide sales of $36 million
in 1997. The addition of the 137 Disc Go Round stores increases the number of
stores in the CD Warehouse system to a total of 300 stores in 40 states and five
foreign countries.
Jerry Grizzle, Chairman and CEO of CD Warehouse said, "By consolidating the
operations of our two concepts, CD Warehouse becomes the leader in the secondary
market for compact discs. Additionally, it makes us the fifth largest music
retailer in the United States in number of stores whose primary business is the
sale of pre-recorded music. Our development plan has now been accelerated and
we look forward to continuing our growth with our existing franchisees, as well
as other merger or acquisition opportunities."
Mr. Grizzle went on to say, "It is especially gratifying to be able to report
continued growth for CD Warehouse at a time when a number of traditional
recorded music outlets have either downsized or gone out of business altogether.
The CD Warehouse concept is redefining how pre-recorded music is sold to the
consumer and the emerging market for pre-owned CDs continues to expand."
CD Warehouse stores buy, sell and trade pre-owned compact discs (CDs) with their
customers. CD Warehouse stores also offers a full complement of new release
CDs.
Statements made in this press release, other than those concerning historical
information, should be considered forward-looking and subject to various risks
and uncertainties. Such forward-looking statements are made based on
management's belief as well as assumptions made by, and information currently
available to, management pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements as a result of a variety of factors.
###
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(405) 949-2422 (405) 949-2566 FAX
