SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996 COMMISSION FILE NUMBER: 0-22012
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GROW BIZ INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter.)
MINNESOTA 41-1622691
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4200 Dahlberg Drive, Minneapolis, MN 55422-4837
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 520-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Registrant's Common Stock
on January 31, 1997, as reported on the NASDAQ National Market System, was $19.9
million.
Shares of no par value Common Stock outstanding as of January 31, 1997:
6,257,044 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's Annual Meeting
of Shareholders to be held on April 30, 1997 have been incorporated by reference
into Part III of this report.
ITEM 1: BUSINESS
GENERAL
Grow Biz International, Inc., (the Company) is a franchise company that
franchises five retail concepts which buy, sell, trade and consign merchandise.
Each concept operates in a different industry and provides the consumer with
'ultra-high value' retailing. The Company began franchising the Play It Again
Sports store concept in 1988 and, through a series of acquisitions, has expanded
its operations.
* In January 1992, the Company purchased certain assets and the
operations of Sports Traders, Inc., a wholesaler to Play It
Again Sports retail stores, for aggregate consideration of
$1.9 million. Prior to this acquisition, Sports Traders, Inc.
operated as an independent wholesaler and priced its
merchandise at margins reflective of an independent
wholesaler. Subsequent to this acquisition, the Company
restructured the operations into a centralized buying group
with the goal of creating a cost-effective inventory
purchasing service to support the Company's franchise system.
The buying group negotiates favorable discount terms with
vendors and charges the franchisee a service fee, currently
set at 4%. The service fee on merchandise purchased through
the buying group is used to cover the cost of operating the
buying group.
* In March 1992, the Company purchased the assets and assumed
the obligations of three Play It Again Sports retail stores
for an aggregate purchase price of $908,000.
* In November 1992, the Company purchased from Once Upon A
Child, Inc. its franchising and royalty rights for an
aggregate purchase price of $325,000. There were 22 retail
stores in operation at the time of purchase, 11 of which have
been exempted from paying royalty fees as part of the purchase
agreement. The Company began franchising this concept in 1993.
* In February 1993, the Company purchased certain assets of the
retail operations of 'Hi Tech Consignments', which formed the
basis of the Company's Music Go Round store concept, for an
aggregate purchase price of $500,000. The Company began
franchising this concept in 1994.
* In April 1993, the Company purchased the retail and warehouse
operations and the franchising and royalty rights of Computer
Renaissance, Inc. for an aggregate purchase price of $672,000.
The Company began franchising this concept in 1993.
* In July 1994, the Company acquired certain assets and the
franchising and royalty rights of CDX Audio Development, Inc.,
which formed the basis for the Company's Disc Go Round store
concept, for an aggregate purchase price of $2,358,000. At the
time of acquisition, there were 43 stores in operation under
the name 'CD Exchange'. The Company changed the name and began
franchising this concept in 1994.
Each of the Company's retail store concepts emphasize consumer value by offering
quality used merchandise at substantial savings from the price of new
merchandise and by purchasing customers' used goods that have been outgrown or
are no longer used. The stores also offer new merchandise to supplement their
selection of used goods.
The Company's five store concepts are summarized as follows:
PLAY IT AGAIN SPORTS(R)
Play It Again Sports(R) stores sell, buy, trade and consign used and new
sporting goods, equipment and accessories for a variety of athletic activities
including hockey, in-line skating, golf and tennis. The stores offer a flexible
mix of merchandise that is adjusted to adapt to seasonal and regional
differences. Sales of used sporting goods are emphasized to provide the highest
value to the customer. New merchandise is offered to supplement available used
goods.
ONCE UPON A CHILD(R)
Once Upon A Child(R) stores sell and buy used and new children's clothing, toys,
furniture and accessories. The Once Upon A Child(R) store concept primarily
targets cost-conscious parents of children ages infant to twelve years with
emphasis on children ages seven years and under. These customers have the
opportunity to sell their used children's items to a Once Upon A Child(R) store
when outgrown and to purchase quality used children's clothing, toys, furniture
and accessories at prices lower than new merchandise.
COMPUTER RENAISSANCE(R)
Computer Renaissance(R) stores sell, buy, trade, consign and service used and
new personal computers, printers and other computer equipment and related
accessories. Customers of Computer Renaissance(R) are primarily individuals in
the market for home computer equipment and small businesses. These same
customers have the opportunity to sell their used computer equipment back to a
Computer Renaissance(R) store when they are ready to upgrade their equipment.
MUSIC GO ROUND(R)
Music Go Round(R) stores sell, buy, trade and consign used and new musical
instruments, speakers, amplifiers, music-related electronics and related
accessories for parents of children who play musical instruments and
professional and amateur musicians.
DISC GO ROUND(R)
Disc Go Round(R) stores sell and buy both used and new compact discs and related
accessories. The concept primarily targets consumers who actively trade and
collect compact discs. Most stores carry a variety of titles that appeal to all
ages and musical tastes.
Following is a summary of the Company's franchising and corporate store activity
for the fiscal year ended December 28, 1996:
<TABLE>
<CAPTION>
---------- ------------ ---------- ------------- ------------ ------------- -----------
STORES
TOTAL TOTAL AWARDED,
12/30/95 OPENED CLOSED CONVERTED 12/28/96 NOT OPEN TOTAL
---------- ------------ ---------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Play It Again Sports(R)
Franchised Stores - US and Canada 629 73 (26) 0 676 86 762
Franchised Stores - Other International 8 0 0 0 8 0 8
Corporate - Owned 4 0 0 0 4 0 4
Other 21 1 0 0 22 0 22
Once Upon A Child(R)
Franchised Stores - US and Canada 150 35 (3) 0 182 55 237
Corporate - Owned 7 0 0 (1) 6 0 6
Computer Renaissance(R)
Franchised Stores - US and Canada 39 68 0 1 108 82 190
Corporate - Owned 5 0 0 (1) 4 0 4
Music Go Round(R)
Franchised Stores - US and Canada 5 15 0 0 20 13 33
Corporate - Owned 3 0 0 1 4 0 4
Disc Go Round(R)
Franchised Stores - US and Canada 92 32 (10) 0 114 54 168
Corporate - Owned 2 0 0 0 2 0 2
----- ----- ----- ----- ----- ----- -----
Total 965 224 (39) 0 1,150 290 1,440
===== ===== ===== ===== ===== ===== =====
</TABLE>
FRANCHISING OVERVIEW
Franchising is a method of distributing goods and services. The franchisor
typically develops a business concept and an operating system for the franchised
business. Franchisees are granted rights to use the franchisor's service marks
and must operate their businesses in accordance with the systems,
specifications, standards and formats developed by the franchisor. Virtually all
types of retail businesses are currently franchised, including clothing,
computers and electronics, sporting goods and various specialty retail
businesses.
BUSINESS STRATEGY
The Company's business strategy is to develop value-oriented retail concepts
based on a mix of used and new merchandise and to implement these concepts
through a nationwide franchise system that provides comprehensive support
services to its franchisees. The key elements of this strategy include:
VALUE-ORIENTED MERCHANDISING
The Company's retail concepts provide value to consumers by purchasing and
reselling used merchandise that consumers have outgrown or no longer use at
substantial savings from the price of new merchandise. By offering a combination
of high quality used and value-priced new merchandise, the Company benefits from
consumer demand for value-oriented retailing. In addition, the Company believes
that among national retail operations its retail store concepts provide a unique
source of value to consumers by purchasing used merchandise. The Company also
believes that the strategy of buying used merchandise increases consumer
awareness of the Company's retail concepts.
FRANCHISE SUPPORT
The Company recognizes that its success depends on the economic success of its
franchisees. Accordingly, the Company provides a comprehensive package of
support services and assistance to franchisees, including advertising and
marketing programs, point-of-sale computerized information systems, management
training, store opening assistance and periodic field support visits. A central
element of this support system is television advertising designed to build
consumer awareness of the Company's used product concepts.
ACTIVE OWNER INVOLVEMENT
In the Company's experience, its retail concepts are most successful when the
owner of the franchise is integrally involved in the management of a store. As a
result, the Company generally grants franchises to someone who will directly
operate their store.
FRANCHISE OPERATIONS
As a franchisor, the Company's success depends upon its ability to develop and
support competitive and successful franchise concepts. The Company emphasizes
the following areas of franchise support and assistance:
TRAINING
Each franchisee must attend the Company's training program regardless of prior
experience. The training program is a two-part program. Soon after signing a
franchise agreement, the franchisee is required to attend a new owner
orientation training. This course covers basic management issues, such as
preparing a business plan, evaluating insurance needs and obtaining financing.
The Company's training staff assists each franchise in developing a business
plan for their store with financial and cash flow projections. The second
training session is centered on store operations. It covers, among other things,
point of sale computer training, inventory selection and acquisition, sales,
marketing and other topics selected by the Company. The franchisee is provided
with an operations manual that is updated periodically by the Company. The
Company provides, at a minimum, one operations person to assist the franchisee
on the day before and the day of opening of the franchisee's store and has a
field support program designed to assist franchisees in operating their stores.
PURCHASING
During training, each franchisee is taught how to evaluate, purchase and price
used goods. In addition to purchasing used products from customers who bring
used merchandise to the store, the franchisee is also encouraged to develop
sources for purchasing used merchandise in the community. Play It Again
Sports(R), Once Upon A Child(R), Music Go Round(R) and Disc Go Round(R)
franchisees typically do not repair or recondition used products, but rather,
purchase quality used merchandise that may be put directly on display for resale
on an 'AS IS' basis. Computer Renaissance(R) franchisees offer repair and
technical services. The Company has developed specialized computer point-of-sale
systems for Once Upon A Child(R) stores that provide the franchisee with
standardized pricing information to assist in the purchasing of used items.
Through 1996, the Company provided centralized buying for new products to the
Play It Again Sports(R), Once Upon A Child(R), Music Go Round(R) and Disc Go
Round(R) stores. The Company will continue to provide centralized buying
services including credit and billing for the Play It Again Sports(R)
franchisees. Upon credit approval, the Play It Again Sports(R) franchisees may
order through the buying group, in which case, product is drop-shipped directly
to the store by the vendor. The Company is then invoiced by the vendor and, in
turn, the Company invoices the franchisee adding a 4% service fee.
Through 1996, Play It Again Sports(R), Once Upon A Child(R) and Computer
Renaissance(R) franchisees had the option to purchase close-out and discontinued
inventory through the Company's warehouse operation. This warehouse operation
was phased out late in 1996. To provide each concept's franchisees a source of
affordable new product, the Company has developed relationships with its core
vendors and negotiated prices for our franchisees to take advantage of on a
direct basis.
RETAIL ADVERTISING AND MARKETING
The Company requires its franchisees to implement a marketing program that uses
television as a major, but not sole, medium to advertise both the buying and
selling aspects of the Company's retail concepts. Advertising materials,
in-store posters and pre-recorded 10, 15 and 30-second television commercials
are provided by the Company to franchisees. Each Play It Again Sports(R), Once
Upon A Child(R) and Disc Go Round(R) franchisee is required to spend at least 5%
of its gross sales on approved advertising and marketing. Computer
Renaissance(R) and Music Go Round(R) franchisees are required to spend at least
3% of gross sales on approved advertising and marketing. In addition to these
required advertising expenditures, all franchisees are required to pay the
Company an annual advertising production fee of $500. Franchisees are required
to participate in regional cooperative advertising groups as designated by the
Company.
COMPUTERIZED POINT-OF-SALE SYSTEMS
The Company requires franchisees to use a retail information management computer
system in each store. Stores which were opened prior to April 1992 were not
required to install the system. This computerized point-of-sale system is
designed specifically for use in the retail stores franchised by the Company.
This system includes a cash register, bar code printer and scanner, together
with software modules for inventory management, cash management and customer
information management. The system is designed to accommodate buying and
consigning of used merchandise. The Company believes that this system provides
franchisees with an important management tool that reduces errors, increases
efficiencies and enhances inventory control. The Company provides the software,
while the hardware is provided by a third-party vendor located on the Company's
premises.
OTHER SUPPORT SERVICES
The Company assists each new franchisee in site location. A third party vendor
provides design layouts and opening materials including pricing materials,
stationery, signage, fixtures, slatwall and carpeting.
Personnel from the Company visit each store periodically, and, in most cases, a
business appraisal is made to determine whether the franchisee is operating in
accordance with the Company's standards. Additional communication with
franchisees is made through weekly news updates, broadcast faxes and semi-annual
conferences, which include trade shows.
FRANCHISE MARKETING
The Company has a franchise marketing program which seeks to attract prospective
franchisees with experience in management and operations and an interest in
being the owner and operator of their own business. The Company seeks
franchisees who are college educated, who have a net worth of at least $300,000
and who have prior business experience.
DEVELOPMENT / FUTURE EXPANSION
The Company collects franchise fees when franchise agreements are consummated
and recognizes the franchise fees as revenue when substantially all initial
franchise services have been performed. Deferred franchise fee revenue was
$4,143,000 and $4,269,000 representing fees relating to 346 and 290 stores sold
but not open at December 30, 1995 and December 28, 1996, respectively. The
majority of this backlog represents stores to be opened in the future under
multiple store development agreements.
THE FRANCHISE AGREEMENT
The following summaries of certain provisions of the Company's current standard
franchise agreement do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
franchise agreement. A copy of the current agreement has been filed as an
exhibit to this Form 10-K. Except as noted, the franchise agreements used for
each of the Company's business concepts are the same.
Each franchisee must execute the Company's franchise agreement and pay an
initial franchise fee. At December 28, 1996, the franchise fee for Play It Again
Sports(R) and Computer Renaissance(R) was $25,000 for an initial store and
$20,000 for each subsequent store awarded to the same franchisee within the same
concept. At December 28, 1996, the franchise fee for Once Upon A Child(R), Music
Go Round(R) and Disc Go Round(R) was $20,000 for an initial store and $15,000
for each subsequent store awarded to the same franchisee within the same
concept. Typically, the franchisee's initial store is open for business within
150 to 210 days from the date the franchise agreement is signed. Multiple
franchise holders are generally required to open only one store per year. The
franchise agreement has an initial term of 10 years, with subsequent 10-year
renewal periods, and grants the franchisee an exclusive geographic area which
will vary in size depending upon population and demographics. A renewal fee
equal to the lesser of $5,000 or 25% of the then current initial franchise fee
is payable to the Company 30 days prior to any franchise renewal. Under current
franchise agreements, Play It Again Sports(R), Once Upon A Child(R) and Disc Go
Round(R) franchisees are required to pay the Company weekly royalties equal to
5% of gross sales; Play It Again Sports(R) franchise agreements signed prior to
April 1, 1992 require payment of a 3% royalty. The weekly royalties for Computer
Renaissance(R) and Music Go Round(R) franchisees are equal to 3% of gross sales.
Each franchisee is required to pay the Company an annual advertising production
fee of $500. Each Play It Again Sports(R), Once Upon A Child(R) and Disc Go
Round(R) franchisee is required to spend 5% of its gross sales for advertising
and promoting its franchised store. The Company has the option to increase the
minimum advertising expenditure requirement for these franchises to 6% of the
franchisee's gross sales, of which up to one-third, or 2%, would be paid to the
Company as an advertising fee for deposit in an advertising fund. This fund
would be managed by the Company and would be used for advertising and promotion
of the franchise system. The Company expects to initiate this advertising fund
when it determines that the respective franchise system warrants such an
advertising and promotion program. Computer Renaissance(R) and Music Go Round(R)
franchisees are required to spend at least 3% of gross sales for approved
advertising. The Company has the option to increase the minimum advertising
expenditure requirement for these franchises to 4% of the franchisee's gross
sales, of which up to one-third, or 1 1/2%, would be paid to the Company as an
advertising fee for deposit into an advertising fund.
Although the Company's franchise agreements contain provisions designed to
assure the quality of a franchisee's operations, the Company has less control
over a franchisee's operations than it would if it owned and operated the store.
Under the franchise agreement, the Company has a right of first refusal on the
sale of any franchised store, but is not obligated to repurchase any franchise.
INTERNATIONAL FRANCHISE EXPANSION
The Company began franchising the Play It Again Sports(R) concept
internationally in 1991 and as of December 28, 1996, had 64 franchised stores
open in Canada, eight in Germany and one in Australia. The Canadian stores are
operated by franchisees under agreements substantially similar to those used for
franchisees in the United States. In Europe, the Company has established a joint
venture which acts as a master franchisor of the Play It Again Sports(R)
concept.
During 1995, the Company also entered into a Master Franchise Agreement for
development of the Play It Again Sports(R) concept in certain portions of
Australia. Under this Master Franchise Agreement, the Company has granted to a
master franchisee the right to subfranchise to others who will directly operate
Play It Again Sports(R) stores.
COMPETITION
Retailing, including the sale of sporting goods, children's apparel, computer
equipment, musical instruments and compact discs, is highly competitive. Many
retailers have substantially greater financial and other resources than the
Company. The Company's franchisees compete with established locally owned retail
stores, discount chains and traditional retail stores for sales of new
merchandise. Full line retailers generally carry little or no used merchandise
and do not target the same markets as the Company's franchised stores. Resale,
thrift and consignment shops and garage and rummage sales offer some competition
to the Company's franchisees for the sale of used merchandise. The Company is
aware of, and competes with, one franchisor of stores which sell new and used
sporting equipment, one franchisor of stores which sell used and new children's
clothing, toys and accessories and at least one franchisor of stores which sell
used and new compact discs.
The Company and its franchisees may face additional competition as its franchise
systems expand, and from additional competitors that may enter the used
merchandise market. The Company believes that its franchisees will continue to
be able to compete favorably with other retailers based on the strength of the
Company's value oriented concepts, the name recognition associated with the
Company's service marks and the national recognition gained by the Company's
franchise concepts.
The Company also faces competition in connection with the sale of franchises.
Prospective franchisees of the Company frequently evaluate other franchise
opportunities before purchasing a franchise from the Company. The Company
believes that its franchise concepts compete favorably with other franchises
based on the fees charged by the Company, the Company's franchise support
services and the performance of its existing franchise concepts.
GOVERNMENT REGULATION
Fifteen states and the Federal Trade Commission impose pre-sale franchise
registration and/or disclosure requirements on franchisors. In addition, a
number of states and the District of Columbia have statutes which regulate
substantive aspects of the franchisor-franchisee relationship such as
termination, nonrenewal, transfer, discrimination among franchisees and
competition with franchisees.
Additional legislation, both at the federal and state levels, could expand
pre-sale disclosure requirements, further regulate substantive aspects of the
franchise relationship, and require the Company to file its franchise offering
circulars with additional states and the United States Department of laws. The
Company cannot predict the effect of future franchise legislation, but does not
believe there is any legislation currently under consideration which would have
a material adverse impact on its operations.
TRADEMARKS AND SERVICE MARKS
Grow Biz(R), Play It Again Sports(R), Once Upon A Child(R), Computer
Renaissance(R), Music Go Round(R) and Disc Go Round(R), among others, have been
registered as service marks by the Company with the United States Patent and
Trademark Office (the "USPTO"). The Company believes these marks are of
considerable value to its business and important to its marketing efforts. The
Company intends to protect its service marks by appropriate legal action where
and when necessary.
SEASONALITY
The Company's Play It Again Sports(R) and Once Upon A Child(R) franchise
concepts have experienced higher than average sales volume during the spring
months and during the back to school and holiday shopping seasons. This trend,
along with the related impact of Company-operated retail stores revenue, results
in higher than average royalty and merchandise revenue during the second, third
and fourth quarter for the Company.
EMPLOYEES
As of December 28, 1996, the Company employed 184 full-time employees, of which
13 are franchise salespersons, 58 are franchise support personnel, 49 are
administrative and 64 are retail sales staff. The Company also employs 64
part-time employees at its retail stores.
ITEM 2: PROPERTIES
The Company owns its headquarters facility. In December 1996, the Company closed
its warehouse activities previously located at an 18,000 square foot warehouse
facility in Bloomington, Minnesota. The lease for this facility expires in
January 1997. The Company believes that its executive space is sufficient to
meet its current needs and for the near future.
The Company leases space for its 20 retail stores, typically for a fixed monthly
rental and operating costs. One lease is due to expire in 1997, nine leases in
1998, six in 1999, one in 2000, one in 2001 and two in 2002.
ITEM 3: LEGAL PROCEEDINGS
In 1995, an early partner in the original Play It Again Sports store commenced
an action against the Company relating to, among other things, the development
of stores under a 1992 retail store agreement. The suit alleges breach of
contract, fraud and misrepresentation, and violation of federal and state
anti-racketeering (RICO) statutes. The plaintiff seeks monetary damages in
excess of $50,000, treble damages under the RICO claim and among other things,
injunctive an declaratory relief. The Company believes the suit is without merit
and intends to vigorously defend the action. When concluded, in the opinion of
management, based upon information it presently possesses, the action will not
have a material adverse affect on the Company's financial position.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1996.
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, who are elected by and serve at the
discretion of the Company's Board of Directors, are as follows:
NAME AGE POSITION
- ---- --- --------
K. Jeffrey Dahlberg 43 Chairman of the Board
Ronald G. Olson 56 President, Chief Executive Officer, Director
David J. Osdoba, Jr. 41 Vice President of Finance and Chief Financial
Officer
Gaylen L. Knack 37 Vice President and General Counsel
Charles V. Kanan 45 President / Play It Again Sports(R)
Ted R. Manley 47 President / Once Upon A Child(R)
Michael E. Flynn 48 President / Computer Renaissance(R)
William L. Shell II 40 President / Music Go Round(R)
Brad D. Tait 47 President / Disc Go Round(R)
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K. JEFFREY DAHLBERG has served as Chairman of the Board of Directors of the
Company since January 1990. Mr. Dahlberg served as President and Chief Executive
Officer of Dahlberg, Inc., a publicly-held manufacturer and distributor of
hearing aids and franchisor of hearing aid retail stores, from June 1988 to
December 1992 and as a director of Dahlberg, Inc. until July 1993. He has served
as Chairman of the Board of Franchise Business Systems, Inc., a franchise
consulting firm, since July 1988.
RONALD G. OLSON has served as President, Chief Executive Officer and a Director
of the Company since January 1990. Mr. Olson has been President and Chief
Executive Officer of Franchise Business Systems, Inc. since July 1988.
DAVID J. OSDOBA, JR. has served as Vice President of Finance and Chief Financial
Officer of the Company since August 1996. From August 1993 through August 1996,
Mr. Osdoba served as Corporate Controller of the Company. Mr. Osdoba was an
independent financial and business consultant from January 1991 through July
1993. He was Chief Financial Officer for Harold Corporation, a Minneapolis based
women's specialty retailer, from September 1987 to December 1990.
GAYLEN L. KNACK has served as Vice President and General Counsel of the Company
since August 1996. From April 1991 through July 1996, Mr. Knack was a Principal
in the Minneapolis law firm of Gray, Plant, Mooty, Mooty and Bennett, P.A.
CHARLES V. KANAN has served as President of Play It Again Sports(R) since
January 1994. From December 1990 to December 1991 Mr. Kanan served as Vice
President of Marketing, and from January 1992 to December 1993, he served as
Executive Vice President, of Dahlberg, Inc.
TED R. MANLEY has served as President of Once Upon A Child(R) since December
1996 and General Manager since July 1994. Mr. Manley was Senior Vice President
of Braun's Fashions Corporation, a women's retail clothing store chain, from
November 1989 to June 1994.
MICHAEL E. FLYNN has served as President of Computer Renaissance(R) since
December 1996 and General Manager since March 1995. Mr. Flynn was a divisional
merchandise manager of electronics and luggage for the department store division
of Dayton Hudson Corporation from August 1986 to March 1995.
WILLIAM L. SHELL II has served as President of Music Go Round(R) since December
1996 and General Manager since March 1996. From February 1993 to March 1996, Mr.
Shell served as a member of the Company's management team focused on the
development of the Computer Renaissance(R) and Music Go Round(R) concepts as
well as Corporate-owned retail stores. Mr. Shell served as President and founder
of Hi-Tech Consignments, the predecessor of Music Go Round(R) from November 1986
until February 1993. Prior to Hi-Tech Consignments, Mr. Shell was a marketing
and sales executive in AT&T's computer division.
BRADLEY D. TAIT has served as President of Disc Go Round(R) since December 1996
and General Manager since March 1996. From February 1995 through February 1996,
Mr. Tait was divisional Vice President of Merchandising for the mall store
division of the Musicland Stores Corporation and Vice President of stores
operations from January 1993 through January 1995.
The term of office of each executive officer is from one annual meeting of
directors until the next annual meeting of directors or until a successor for
each is elected.
There are no arrangements or understandings among any of the executive officers
of the Registrant and any other person (not an officer or director of the
Registrant acting as such) pursuant to which any of the executive officers were
selected as an officer of the Registrant.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The stock is traded on the NASDAQ National Market System under the symbol GBIZ.
The table below sets forth the high and low bid prices of the Company's common
stock as reported by NASDAQ for the periods indicated:
<TABLE>
<CAPTION>
1996: First Second Third Fourth 1995: First Second Third Fourth
- ---------- ----------- ----------- ------------ ----------- --------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HIGH 11 1/4 8 1/8 9 3/4 10 1/2 HIGH 13 5/16 12 13/16 11 10 1/8
LOW 7 5/8 7 32/35 6 27/32 8 3/4 LOW 10 10 1/2 9 1/4 9
</TABLE>
At March 5, 1997, there were 6,286,569 shares of common stock outstanding held
by 296 shareholders of record. The Company has not paid any cash dividends on
its common stock and does not anticipate paying cash dividends in the
foreseeable future. There were no unregistered sales of the Company's common
stock in fiscal year ended 1996.
ITEM 6: SELECTED FINANCIAL DATA.
The following table sets forth selected financial information for the periods
indicated. The information should be read in conjunction with the financial
statements and related notes discussed in Item 14, and Management's Discussion
and Analysis of Financial Condition and Results of Operations discussed in Item
7.
<TABLE>
<CAPTION>
Pro Forma
Fiscal Year Ended(1) Fiscal Year Ended(2)
----------- ---------- ---------- ----------- ---------- -----------
December December December December December December
26, 1992 25, 1993 31, 1994 30, 1995 28, 1996 31, 1994
----------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE: (in thousands, except per store data)
Merchandise sales $23,175 $45,028 $ 71,425 $ 84,043 $ 71,737 $ 71,914
Royalties 1,613 3,689 7,645 11,560 14,965 7,805
Franchise fees 2,344 2,733 3,963 3,889 4,162 4,015
Advertising and other 248 353 553 721 686 603
------- ------- -------- -------- -------- --------
Total revenue 27,380 51,803 83,586 100,213 91,550 84,337
Cost of merchandise sold 21,686 41,695 65,479 76,192 63,856 65,959
Selling, general and
administrative expenses 4,920 9,331 15,889 20,980 23,636 16,430
------- ------- -------- -------- -------- --------
Income from operations 774 777 2,218 3,041 4,058 1,948
Interest income (expense), net (84) (8) 478 296 195 437
Equity in net loss of
unconsolidated affiliates - (160) (416) - - (416)
------- ------- -------- -------- -------- --------
Income before income
taxes 690 609 2,280 3,337 4,253 1,969
Provision for income taxes 283 265 900 1,308 1,667 778
------- ------- -------- -------- -------- --------
Net income $ 407 $ 344 $ 1,380 $ 2,029 $ 2,586 $ 1,191
======= ======= ======== ======== ======== ========
Net income per common share $ .08 $ .06 $ .19 $ .28 $ .40 $ .16
======= ======= ======== ======== ======== ========
Weighted average shares
outstanding(3) 5,018 6,072 7,440 7,351 6,516 7,440
======= ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 149 $ 16,915 $ 12,441 $ 11,068 $ 8,516
Total assets 9,709 31,784 39,564 34,024 29,177
Total debt 2,431 1,728 615 415 264
Shareholders' equity 1,109 19,848 21,685 21,192 17,698
SELECTED FINANCIAL RATIOS
Return on average assets 7.5% 1.7% 3.9% 5.5% 8.2%
Return on average equity 67.1% 3.3% 6.6% 9.5% 13.3%
</TABLE>
(1) The Company's fiscal year ends on the last Saturday in December, which
results in a 52 or 53-week year. Fiscal 1994 was 53 weeks. Fiscal 1995
and 1996 were 52 weeks.
(2) The Company acquired certain assets of CDX Audio Development, Inc. (CDX)
on July 1, 1994. The pro forma information is presented as if these
acquisitions occurred on December 26, 1993.
(3) See Note 2 of Notes to the Company's Financial Statements for an
explanation of the determination of weighted average shares outstanding.
GROW BIZ INTERNATIONAL, INC.
Unaudited Pro Forma Condensed Statement of Operations
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Fiscal Year-Ended December 31,1994
--------------------------------------------------
CDX Adjustments
Grow Biz (Note a ) (Note b) Pro Forma
----------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
REVENUE:
Merchandise sales $ 71,425 $ 489 $ -- $ 71,914
Royalties 7,645 160 -- 7,805
Franchise fees 3,963 52 -- 4,015
Advertising and other 553 50 -- 603
---------- ---------- ---------- ----------
Total revenue 83,586 751 -- 84,337
COST OF MERCHANDISE SOLD 65,479 480 -- 65,959
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 15,889 371 170(1) 16,430
---------- ---------- ---------- ----------
Income loss from operations 2,218 (100) (170) 1,948
INTEREST EXPENSE AND OTHER, net 62 -- (41)(2) 21
---------- ---------- ---------- ----------
Income loss before income taxes 2,280 (100) (211) 1,969
PROVISION FOR INCOME TAXES 900 (40) (82)(3) 778
---------- ---------- ---------- ----------
NET INCOME $ 1,380 $ (60) $ (129) $ 1,191
========== ========== ========== ==========
NET INCOME PER COMMON SHARE $ .19 $ .16
========== ==========
SHARES USED IN PER COMMON
SHARE COMPUTATION 7,440,000 7,440,000
========== ==========
</TABLE>
GROW BIZ INTERNATIONAL, INC.
Notes to Unaudited Pro Forma Condensed Statement of Operations
For the Fiscal Year Ended December 31, 1994
(a) Operations are for the period January 1, 1994 through the acquisition date
(June 30, 1994).
(b) The pro forma condensed statement of operations gives effect to the
following pro forma adjustments:
(1) Represents amortization charges related to the intangible assets
acquired as a part of the purchase.
(2) Represents interest costs associated with the acquisition debt
incurred.
(3) Represents adjustments to reflect the necessary estimated net
tax effects of the transactions and pro forma adjustments
described herein using current tax rates.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following table sets forth selected information from the Company's
Consolidated Statements of Operation expressed as a percentage of total revenue
and the percentage changes in the dollar amounts from the prior period:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Fiscal Year Ended
December 31, December 30, December 28, Fiscal 1995 Fiscal 1996
1994 1995 1996 over 1994 over 1995
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Merchandise sales 85.5% 83.9% 78.4% 17.7% (14.6%)
Royalties 9.1 11.5 16.3 51.2 29.4
Franchise fees 4.7 3.9 4.6 (1.9) 7.0
Advertising and other 0.7 0.7 0.7 30.3 (4.8)
----- ----- ----- ----- ----
Total revenues 100.0 100.0 100.0 19.9 (8.6)
Cost of merchandise sold 78.3 76.0 69.7 16.4 (16.2)
Selling, general and
administrative expenses 19.0 20.9 25.9 32.7 12.7
----- ----- ----- ----- ----
Income from operations 2.7 3.1 4.4 37.1 33.4
Interest and other income
(expense), net -- 0.2 0.2 377.4 (34.1)
----- ----- ----- ----- ----
Income before income taxes 2.7 3.3 4.6 46.4 27.5
Provision for income taxes 1.1 1.3 1.8 45.3 27.5
----- ----- ----- ----- ----
Net income 1.6% 2.0% 2.8% 47.1% 27.5%
===== ===== ===== ===== ====
</TABLE>
RESULTS OF OPERATIONS
REVENUES
Merchandise sales includes the sale of product to franchisees through the buying
group and retail sales at the Company-owned stores as follows:
1994 1995 1996
---------------------------------------------------
Buying Group $ 63,708,400 $ 72,971,600 $ 58,437,100
Retail Sales 7,716,700 11,071,500 13,299,700
Buying group sales decreased 19.9% in 1996 from 1995 after several years of
revenue increases. This coincides with the strategic change initiated in 1995 of
franchisees sourcing more new product directly from our suppliers. Buying group
sales in 1997 are expected to remain consistent with the 1996 results as the
Company will continue to provide the Play It Again Sports(R) franchisees with a
source for purchasing new product. Retail sales at Company-owned stores
increased 43.5% in 1995 over 1994 and 20.1% in 1996 over 1995 primarily as a
result of opening or acquiring five Company-owned stores in 1995 and comparable
store sales increase in 1996.
Royalties and franchise fees from franchising activities were as follows:
1994 1995 1996
---------------------------------------------------
Royalties $ 7,644,600 $ 11,565,500 $ 14,964,800
Franchise Fees 3,963,000 3,888,500 4,161,600
Royalties are a derivative of system wide retail sales and have increased by
$3.9 million and $3.4 million in 1995 and 1996, respectively, as a result of
opening additional franchise stores and of increases in comparable store sales.
Comparable store sales increases (decreases) and average store sales for stores
open at least one year at December 28, 1996 for each of the five retail concepts
are shown in the following table:
<TABLE>
<CAPTION>
Comparable Store Sales
Increase (Decrease) from 1995 Average Store Sales
----------------------------- -------------------
<S> <C> <C>
Play It Again Sports(R) (.6%) $ 437,000
Once Upon A Child(R) 13.8% 303,000
Computer Renaissance(R) 31.4% 880,000
Music Go Round(R) 4.6% 570,000
Disc Go Round(R) .5% 235,000
</TABLE>
Franchise fees are recognized as revenue essentially when the related franchise
store opens. Store openings and related franchise fees have not changed
drastically over the last three years. The 1996 increase is due to a higher
average per store fee and the recognition of more transfer fees than in prior
years.
COST OF MERCHANDISE SOLD
Cost of merchandise sold includes the cost of merchandise sold through the
buying group and at Company-owned retail stores. Over the past three years, cost
of merchandise sold as a percentage of the related revenue is shown in the
following table:
1994 1995 1996
-------------------------------------------
Buying Group 95.4% 95.1% 95.2%
Retail Stores 60.4 61.4 61.7
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $5.1 million from 1994 to
1995 and $2.7 million from 1995 to 1996. These increases are primarily the
result of an increase in the number of personnel needed to support the growing
franchise system and to related costs such as facilities, computer systems and
travel expenses. As a percentage of revenue, selling, general and administrative
expenses were 19.0% and 20.9% in 1994 and 1995, respectively, and increased to
25.9% of revenue in 1996 as a result of the reduction in merchandise sales.
Operating expense increases in 1997 are anticipated to be more moderate than the
increases experienced in the previous two years and as a percentage of revenue
should be consistent with 1996.
NET INTEREST
Net interest income was $477,800, $295,500 and $194,700 in 1994, 1995 and 1996,
respectively. Interest income was earned on investments in short-term,
high-grade investments and interest received on accounts receivable balances.
Also included in interest income for 1994 is a gain of $62,000 resulting from
early repayment of debt. The decrease in interest income in 1995 and 1996 was
due to the Company having lower cash balances as a result of the repurchase of
shares of the Company's common stock.
EQUITY IN NET LOSS OF UNCONSOLIDATED AFFILIATES
During 1994, the Company wrote-off its investment in joint venture agreements in
Mexico and Germany, resulting in a $416,000 loss.
PROVISION FOR INCOME TAXES
The provision for income taxes was at an effective rate of 39.5% for fiscal
1994, 39.2% for fiscal 1995 and 39.2% for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the year with $1.4 million cash.
During the year ended December 28, 1996, the Company's operating activities
provided $7.5 million of cash. This increase in cash available from operations,
other than net income and depreciation, is primarily due to a $2.9 million
reduction in receivables as franchisees source more product on a direct basis
and a $1.6 million reduction in inventory as the Company has reduced its
warehouse inventory levels, offset by a $1.4 million decrease in accounts
payable.
During the year ended December 28, 1996, the Company's investing activities
provided $65,300 in cash due to the redemption of $420,000 of short term
investments offset by a nominal amount of capital expenditures.
The Company's use of $6.3 million from financing activities during 1996 was
primarily due to the repurchase of 740,194 shares of the Company's common stock.
In 1995, the Company announced its intention to buy back up to 500,000 shares of
its common stock on the open market. In February 1996 and again in June 1996 the
buy back was extended to include an additional 500,000 shares bringing the total
shares the Company is authorized to buy back to 1,500,000. As of March 5, 1997
1,073,204 shares, at an average price of $8.68 per share had been purchased.
The Company has a $5.0 million committed revolving line of credit agreement
which is due for renewal on July 31, 1997. Borrowings against the line are due
on demand and carry an interest rate of prime which was 8.25% at December 28,
1996. At December 28, 1996, the Company had no borrowings against the line.
The Company believes that its current cash position, cash generated from future
operations, availability of line of credit borrowings and additional capacity
for debt will be adequate to meet the Company's current obligations and
operating needs.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" and Statement No. 123, "Accounting for Stock-Based Compensation".
The Company has adopted statement No. 121 and has disclosed the impact of
statement No. 123 in the footnotes to the financial statements.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Grow Biz International, Inc.
Index to Financial Statements
Balance Sheet Page 19
Statement of Operations Page 20
Statement of Changes in Shareholders' Equity Page 21
Statements of Cash Flows Page 22
Notes to Financial Statements Page 23
Report of Independent Public Accountants Page 31
<TABLE>
<CAPTION>
GROW BIZ INTERNATIONAL, INC.
Balance Sheets
December 30, December 28,
1995 1996
---------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 101,500 $ 1,388,800
Short-term investments 420,000 --
Receivables, less allowance for doubtful accounts
of $678,000 and $930,000 16,372,200 13,171,400
Inventories 4,292,000 2,716,000
Prepaid expenses and other 985,700 862,900
Deferred income taxes (Note 8) 1,451,500 1,726,400
------------ ------------
Total current assets 23,622,900 19,865,500
------------ ------------
NOTES RECEIVABLE -- 339,800
PROPERTY AND EQUIPMENT:
Furniture and equipment 5,418,100 ,553,100
Building and building improvements 3,230,900 3,305,800
Less - accumulated depreciation and amortization (1,798,000) (2,879,600)
------------ ------------
Property and equipment, net 6,851,000 5,979,300
------------ ------------
OTHER ASSETS:
Noncompete agreements and other, net of accumulated
amortization of $2,228,200 and $2,788,600 2,415,500 1,855,200
Goodwill, net of accumulated amortization of $78,200
and $128,800 1,135,000 1,136,700
------------ ------------
Total other assets 3,550,500 2,991,900
------------ ------------
$ 34,024,400 $ 29,176,500
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,078,500 $ 5,670,300
Accrued liabilities 1,195,600 1,275,800
Current maturities of long-term debt (Note 7) 137,500 134,900
Deferred franchise fee revenue 4,143,000 4,269,000
------------ ------------
Total current liabilities 12,554,600 11,350,000
LONG TERM DEBT (Note 7) 277,700 129,000
COMMITMENTS AND CONTINGENCIES (Notes 5 and 9) -- --
SHAREHOLDERS' EQUITY (Note 5)
Undesignated stock, no par, 5,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, no par, 10,000,000 shares authorized,
6,958,468 shares issued and outstanding 1995
6,263,444 shares issued and outstanding 1996 17,033,000 10,952,900
Retained earnings 4,159,100 6,744,600
------------ ------------
Total shareholders' equity 21,192,100 17,697,500
------------ ------------
$ 34,024,400 $ 29,176,500
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
GROW BIZ INTERNATIONAL, INC.
Statements of Operations
Fiscal Year Ended
-----------------
December 31, December 30, December 28,
1994 1995 1996
------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Merchandise sales $ 71,425,100 $ 84,043,100 $ 71,736,800
Royalties 7,644,600 11,560,500 14,964,800
Franchise fees 3,963,000 3,888,500 4,161,600
Advertising and other 553,100 720,700 686,400
------------- ------------- -------------
Total revenues 83,585,800 100,212,800 91,549,600
COST OF MERCHANDISE SOLD 65,478,600 76,191,400 63,855,600
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 15,889,500 20,980,300 23,636,200
------------- ------------- -------------
Income from operations 2,217,700 3,041,100 4,057,800
INTEREST EXPENSE (101,300) (49,700) (56,900)
INTEREST INCOME 579,100 345,200 251,600
EQUITY IN NET LOSS OF UNCONSOLIDATED
AFFILIATES (Note 10) (416,000) -- --
------------- ------------- -------------
Income before income taxes 2,279,500 3,336,600 4,252,500
PROVISION FOR INCOME TAXES (Note 8) 900,000 1,308,000 1,667,000
------------- ------------- -------------
NET INCOME $ 1,379,500 $ 2,028,600 $ 2,585,500
============= ============= =============
NET INCOME PER COMMON SHARE $ 0.19 $ 0.28 $ 0.40
============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 7,440,000 7,351,000 6,516,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
GROW BIZ INTERNATIONAL, INC.
Statements of Changes in Shareholders' Equity
Fiscal years ended December 31, 1994, December 30, 1995 and December 28, 1996
Common Stock
------------ Retained
Shares Amount Earnings
---------------------------------------------------
<S> <C> <C> <C>
BALANCE, December 25, 1993 7,079,250 $ 19,096,500 $ 751,000
Stock options exercised and related tax benefits 73,500 347,000 -
Stock warrants exercised, net (Note 5) 51,112 111,000 -
Net income - - 1,379,500
--------- ------------ ------------
BALANCE, December 31, 1994 7,203,862 19,554,500 2,130,500
Repurchase of common stock (Note 5) (321,900) (2,939,700) -
Stock options exercised and related tax benefits 76,506 418,200 -
Net income - - 2,028,600
--------- ------------ ------------
BALANCE, December 30, 1995 6,958,468 17,033,000 4,159,100
Repurchase of common stock (Note 5) (740,194) (6,266,100) -
Stock options exercised and related tax benefits 45,170 186,000 -
Net income - - 2,585,500
--------- ------------ ------------
BALANCE, December 28, 1996 6,263,444 $ 10,952,900 $ 6,744,600
========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
GROW BIZ INTERNATIONAL, INC.
Statements of Cash Flows
Fiscal Year Ended
-----------------
December 31, December 30, December 28,
1994 1995 1996
-------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,379,500 $ 2,028,600 $ 2,585,500
Adjustments to reconcile net income to net cash
provided by (used for) operating activities -
Depreciation and amortization 1,319,400 1,765,400 1,785,000
Deferred income tax (794,400) (378,100) (274,900)
Equity in net loss of affiliates (Note 10) 416,000 -- --
Change in operating assets and liabilities:
Receivables (5,630,700) 363,200 2,861,000
Inventories (874,300) (1,302,000) 1,576,000
Prepaid expenses and other (218,800) 263,300 122,800
Accounts payable 3,762,000 (2,739,100) (1,408,200)
Accrued liabilities 1,919,900 (1,219,000) 116,700
Deferred franchise fee revenue 1,305,500 (747,000) 126,000
----------- ----------- -----------
Net cash provided by (used for)
operating activities 2,584,100 (1,964,700) 7,489,900
----------- ----------- -----------
INVESTING ACTIVITIES:
Redemption of short-term investments 1,246,400 6,337,300 420,000
Purchases of property and equipment, net (4,017,700) (2,335,800) (297,000)
Increase in other assets (459,900) (164,900) (57,700)
Acquisitions (Note 4) (2,358,000) -- --
----------- ----------- -----------
Net cash provided by (used for)
investing activities (5,589,200) 3,836,600 65,300
----------- ----------- -----------
FINANCING ACTIVITIES:
Payments on long-term debt, net (1,136,900) (214,800) (151,300)
Repurchase of common stock (Note 5) -- (2,939,700) (6,266,100)
Proceeds from stock option and warrant exercises 331,000 277,200 149,500
----------- ----------- -----------
Net cash used for financing activities (805,900) (2,877,300) (6,267,900)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,811,000) (1,005,400) 1,287,300
CASH AND CASH EQUIVALENTS, beginning of period 4,917,900 1,106,900 101,500
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,106,900 $ 101,500 $ 1,388,800
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 111,900 $ 47,600 $ 50,200
=========== =========== ===========
Cash paid for income taxes $ 151,000 $ 2,978,300 $ 1,831,500
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
GROW BIZ INTERNATIONAL, INC.
Notes to the Financial Statements
December 30, 1995 and December 28, 1996
1. ORGANIZATION AND BUSINESS:
Grow Biz International, Inc. (the Company) offers licenses to operate retail
stores using the service marks "Play It Again Sports(R)", "Once Upon A
Child(R)", "Music Go Round(R)", "Computer Renaissance(R)" and "Disc Go
Round(R)". In addition, the Company sells inventory to its franchisees through
its "Buying Group" and operates retail stores. The Company has a 52/53-week
fiscal year which ends on the last Saturday in December.
Since 1992, the Company acquired certain assets of the following entities with
operating results included in the financial statements from the date of
acquisition:
Entity Acquisition Year
------ ----------------
Sports Traders, Inc. (Buying Group) 1992
Play It Again Sports retail stores (3) 1992
Once Upon A Child, Inc. 1992
Hi Tech Consignments, Inc. (Music Go Round) 1993
Computer Renaissance, Inc. 1993
CDX Audio Development, Inc. (Disc Go Round) 1994
2. SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS SEGMENT INFORMATION
The Company is engaged in principally one business segment -- developing,
licensing, franchising and servicing a system of retail stores which buy, sell,
trade and consign used and new products.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with an original maturity
of three months or less. Cash equivalents are stated at cost which approximates
fair value.
SHORT-TERM INVESTMENTS
Short-term investments consist primarily of short-term marketable securities
which are stated at cost, which approximates market.
INVENTORIES
The Company values its inventories at the lower of cost or market, as determined
by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization for
financial reporting purposes is provided on the straight-line method. Estimated
useful lives used in calculating depreciation and amortization are: five years
for furniture and equipment, thirty-five years for building and building
improvements 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 expense as incurred.
OTHER ASSETS
Other assets consist primarily of covenants not to compete which are being
amortized on a straight-line basis over the terms of the agreements which range
from 3 to 10 years. Goodwill is being amortized on a straight-line basis over 15
to 40 years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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. The most significant area
which requires the use of management's estimates relates to the determination of
the allowance for doubtful accounts.
REVENUE RECOGNITION
The Company collects franchise fees when franchise agreements are consummated
and recognizes the franchise fees as revenue when substantially all initial
franchise services have been performed. The Company had deferred franchise fee
revenue of $4,143,000 and $4,269,000 at December 30, 1995 and December 28, 1996,
respectively. The Company collects royalties from each franchise based on retail
store gross sales. The Company recognizes royalties as revenue when earned.
Through July 1, 1995, the Company paid commissions when franchise agreements
were consummated. The Company deferred recognition of the commission expense
until the corresponding revenue was recognized. Deferred commission expense was
$347,800 and $133,100 at December 30, 1995 and December 28, 1996, respectively,
and is included in prepaid expenses and other in the accompanying balance
sheets. Subsequent to July 1, 1995, compensation consists of a base salary and a
non-refundable commission that is paid and expensed one-half upon awarding a
franchise and one-half when the store opens.
NET INCOME PER COMMON SHARE
Net income per common share was computed by dividing net income by the weighted
average number of shares of common stock and dilutive common stock equivalents
from the exercise of stock options and warrants using the treasury stock method.
RECLASSIFICATION
Certain 1994 and 1995 amounts in the financial statements have been reclassified
to conform with the 1996 financial statement presentation. These
reclassifications have no effect on net income or shareholders' equity as
previously reported.
3. RECEIVABLES:
The Company's receivables consisted of the following:
December 30, 1995 December 28, 1996
----------------------------------------------
Trade (Net) $ 15,092,000 $ 10,848,600
Royalty 1,077,100 1,709,000
Other 203,100 612,800
------------ ------------
$ 16,372,200 $ 13,171,400
============ ============
As part of its normal course of business, the Company requires Standby Letters
of Credit as collateral for a portion of its trade receivables from its
first-year and second-year stores.
4. ACQUISITIONS:
PURCHASE OF CERTAIN ASSETS OF CDX AUDIO DEVELOPMENT, INC.
In 1994, the Company purchased certain assets and the franchising rights and
assumed certain obligations of CDX Audio Development, Inc., a Company which
offered licenses to operate retail stores under the "CD Exchange" service marks.
At the time of acquisition there were 43 stores in operation. The Company paid
cash of $2,358,000. This included assets of $2,559,500 and the assumption of
liabilities totaling $201,500 associated with future obligations to provide
services to open additional franchise locations. Of the $2,358,000 total
purchase price, $1,209,000 was allocated to the value of existing franchise
agreements and $1,149,000 to goodwill and other intangible assets. The
statements of operations include the operations of certain assets of CDX Audio
Development, Inc. from the acquisition date. The following are the unaudited pro
forma results of operations for 1994, as if the above acquisition had occurred
at the beginning of the year:
December 31,
1994
-----------------
Revenue $ 84,337,000
Net income 1,191,000
Net income per common share $ .16
5. SHAREHOLDERS' EQUITY:
REPURCHASE OF COMMON STOCK
Since November 1995, the Company's Board of Directors authorized the repurchase
of up to 1,500,000 shares of the Company's common stock on the open market. As
of December 28, 1996, the Company had repurchased 1,062,094 shares of its stock
at an average price of $8.67 per share including 740,194 shares repurchased at
an average price of $8.47 per share in the year ended December 28, 1996.
STOCK OPTION PLANS
The Company has authorized up to 1,100,000 shares of common stock be reserved
for granting either nonqualified or incentive stock options to officers and key
employees under the Company's 1992 Stock Option Plan (the Plan). Grants can be
made by the board of directors or a board-designated committee at a price of not
less than 100% of the fair market value on the date of grant. If an incentive
stock option is granted to an individual who owns more than 10% of the voting
rights of the Company's common stock, the option exercise price may not be less
than 110% of the fair market value on the date of grant. The term of the options
may not exceed ten years after the date of grant, except in the case of
nonqualified stock options, whereby the terms are established by the board of
directors or a board-designated committee. Options may be exercisable in whole
or in installments, as determined by the board of directors or a
board-designated committee.
Stock options granted and exercised under the plan as of December 28, 1996 are
as follows:
Number of Shares Price Range
Outstanding at December 31, 1994 567,375 $ 2.00 - $ 14.50
Granted 96,000 10.50 - 12.38
Exercised (68,300) 2.00 - 10.00
Forfeited (6,500) 2.00 - 10.63
------- --------- ---------
Outstanding at December 30, 1995 588,575 2.00 - 14.50
Granted 357,000 7.25 - 9.00
Exercised (38,750) 2.00 - 10.00
Forfeited (190,700) 8.00 - 12.38
------- --------- ---------
Outstanding at December 28, 1996 716,125 2.00 - 14.50
======= ========= =========
Exercisable at December 28, 1996 358,750 $ 2.00 - $ 14.50
======= ========= =========
The Company sponsors a Stock Option Plan for Nonemployee Directors (the
`Nonemployee Directors Plan') and reserved a total of 100,000 common shares for
issuance to directors of the Company who are not employees. The Nonemployee
Directors Plan provides that each director who is not an employee of the Company
will receive an option to purchase 25,000 common shares upon initial election as
a director at a price equal to the fair market value on the date of grant. Each
option granted under the Nonemployee Directors Plan vests and becomes
exercisable in five equal increments of 5,000 shares, beginning one year after
the date of grant. During 1995, these options were cancelled and reissued as
described below.
The Company sponsors an Employee Stock Purchase Plan (`Employee Plan') and
reserved 100,000 shares of the Company's common stock for issuance to employees
who elect to participate. Under the Employee Plan, options are granted in
one-year phases which may be exercised at the end of each phase. The option
price will be 85% of the fair market value of such common stock on the
commencement date or termination date of the phase, whichever is lower. During
1996, the Company issued 6,420 shares under the plan at a price of $6.85. As of
December 28, 1996, contributions have been received for the issuance of 8,550
shares under phase three.
NONPLAN OPTIONS
The Company has granted options to four non-employee directors. Each director
received an option to purchase 25,000 shares of the Company's common stock at
$10 per share. Each option granted vests and becomes exercisable in increments
through 1998. During 1994, options were exercised for 5,000 shares; of the
remaining options 55,000 were exercisable at December 28, 1996.
SFAS NO. 123
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized in the Statement of Operations.
The fair value of each option granted subsequent to January 1, 1995, in
accordance with FASB Statement No. 123, was estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rates of 6.07% to 7.93% in 1995 and 6.01% to
6.81% in 1996, expected life of five years for 1995 and two to five years for
1996; expected volatility of 47.05% to 56.01% in 1995 and 39.78% to 44.59% in
1996.
Based on the above assumptions, the Company's net income and net income per
common share would have been reduced to the following pro forma amounts:
1995 1996
--------------------------------
Net Income: As Reported $ 2,028,600 $ 2,585,500
Pro Forma 1,876,500 2,269,984
Net Income Per Common Share: As Reported $ .28 $ .40
Pro Forma .26 .35
WARRANTS
In connection with a 1992 private placement, there are outstanding warrants to
purchase 75,000 shares of the Company's common stock at $10.00 per share. The
warrants expire in 1998.
6. NOTE PAYABLE:
The Company has a $5.0 million committed revolving line of credit agreement
which is due for renewal on July 31, 1997. Borrowings against the line are due
on demand and carry an interest rate of prime which was 8.25% at December 28,
1996. At December 28, 1996, the Company had no borrowings against the line.
7. LONG-TERM DEBT:
The Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 30, December 28,
1995 1996
------------------------------------
<S> <C> <C>
Note payable, interest imputed at 8.0%
four quarterly payments of $40,688 due beginning
April of 2001 through January 2002 $ 92,600 $ 92,600
Other notes payable 322,600 71,300
------------ ------------
Total debt 415,200 263,900
Less - current maturities 137,500 134,900
------------ ------------
Total long-term debt $ 277,700 $ 129,000
============ ============
</TABLE>
Future maturities of total debt are $134,900 in 1997, $36,400 in 1998 and
$92,600 thereafter.
8. INCOME TAXES:
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
December 31, December 30, December 28,
1994 1995 1996
----------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $ 1,553,400 $ 1,511,100 $ 1,701,300
State 141,000 175,000 240,600
------------ ------------ ------------
Subtotal 1,694,400 1,686,100 1,941,900
Deferred income tax benefit (794,400) (378,100) (274,900)
------------ ------------ ------------
Total tax provision $ 900,000 $ 1,308,000 $ 1,667,000
============ ============ ============
</TABLE>
The effective tax rate differs from the federal statutory rate due primarily to
the following:
<TABLE>
<CAPTION>
December 31, December 30, December 28,
1994 1995 1996
-------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 4.1 3.4 3.7
Nondeductible meals and entertainment 2.1 1.1 0.8
Tax exempt interest income (3.1) (0.9) -
Other, net 2.4 1.6 0.7
---- ---- ----
39.5% 39.2% 39.2%
==== ==== ====
</TABLE>
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 they are reported for financial reporting.
The components of the deferred tax asset are as follows:
December 30, December 28,
1995 1996
------------------------------------
Deferred franchise fees $ 902,800 $ 929,500
Accounts receivable reserves 373,200 470,600
Inventory reserves 123,100 35,500
Other 52,400 290,800
----------- -----------
Net deferred tax asset $ 1,451,500 $ 1,726,400
=========== ===========
9. COMMITMENTS AND CONTINGENCIES:
EMPLOYEE BENEFIT PLAN
The Company provides a 401(k) Savings Incentive Plan which covers substantially
all employees. The plan provides for matching contributions and optional
profit-sharing contributions at the discretion of the board of directors.
Employee contributions are fully vested; matching and profit-sharing
contributions are subject to a five-year service vesting schedule. Contributions
to the plan for 1994, 1995 and 1996 were $139,300, $205,100 and $267,000,
respectively.
OPERATING LEASES
The Company conducts all of its retail operations in leased facilities that
expire over the next six 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 these operating leases was $1,033,000 in
1996, $850,800 in 1995, and $590,500 in 1994. As of December 28, 1996, minimum
rental commitments under noncancelable operating leases are: $1,013,700 in 1997,
$857,300 in 1998, $306,600 in 1999, $178,900 in 2000, $97,500 in 2001 and
$47,200 thereafter.
The Company rents retail space from PIAS Holdings, a partnership of two of the
Company's officers, through an agreement that expires September 30, 2000.
Payments under this agreement were approximately $47,000, $59,000 and $66,000 in
1994, 1995 and 1996, respectively.
CONSULTING AGREEMENTS
The Company has a consulting agreement with a former shareholder in which the
Company is required to pay $35,000 per year through 1999.
The Company has a consulting agreement with the former owners of Once Upon A
Child, Inc. The agreement requires the Company to pay $3,000 per month through
December 1997.
The Company has consulting agreements with the former owners of Computer
Renaissance, Inc. The agreements require the Company to pay the following
percentage of all receipts from franchising Computer Renaissance retail stores
during the following periods: June 1, 1996 through May 31, 1997 - 2%; June 1,
1997 through May 31, 1998 - 1%.
POINT OF SALE SOFTWARE
In 1995, the Company purchased for $260,000 the point-of-sale software which it
licenses for use in its retail franchise stores. In addition, the Company is
required to pay a fee for each system installed in franchise or Company-owned
stores through December 31, 1999; the minimum required fees relating to the
acquisition was $1,150,000. The Company has incurred fees of $360,000 for
systems installed through 1996.
LITIGATION
In 1995, an early partner in the original Play It again Sports store commenced
an action against the Company relating to, among other things, the development
of stores under a 1992 retail store agreement. The suit alleges breach of
contract, fraud and misrepresentation, and violation of federal and state
anti-racketeering (RICO) statutes. The plaintiff seeks monetary damages in
excess of $50,000, treble damages under the RICO claim and among other things,
injunctive and declaratory relief. The Company believes the suit is without
merit and intends to vigorously defend the action. When concluded, in the
opinion of management, based upon information it presently possesses, the action
will not have a material adverse effect on the Company's financial position.
10. INVESTMENTS IN AFFILIATED COMPANIES:
In 1994, the Company recognized a loss of $416,000 in connection with the
write-off of its investment in Play It Again Sports(R) joint venture agreements
in Mexico and Germany.
11. QUARTERLY FINANCIAL DATA:
The Company's unaudited quarterly results for the years ended December 28, 1996
and December 30, 1995 are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C>
Total Revenue $ 25,126,400 $ 25,008,800 $ 21,573,900 $19,840,500
Income from Operations 543,000 725,300 1,385,000 1,404,500
Net Income 330,200 467,500 887,700 900,100
Net Income Per Common Share $ .05 $ .07 $ .14 $ .14
1995
Total Revenue $ 25,414,000 $ 27,782,100 $ 25,095,300 $21,921,400
Income from Operations 553,100 1,106,900 854,500 526,600
Net Income 372,200 718,300 583,900 354,200
Net Income Per Common Share $ .05 $ .10 $ .08 $ .05
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Grow Biz International, Inc.:
We have audited the accompanying balance sheets of Grow Biz International, Inc.
(a Minnesota corporation) as of December 30, 1995 and December 28, 1996, and the
related statements of operations, changes in shareholders' equity and cash flows
for each of the three years in the period ended December 28, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Grow Biz International, Inc. as
of December 30, 1995 and December 28, 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 28,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 4, 1997
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The section entitled "Election of Directors" appearing in the Registrant's proxy
statement for the annual meeting of stockholders to be held on April 30, 1997,
sets forth certain information with respect to the directors of the Registrant
and the required information is incorporated herein by reference. Certain
information with respect to persons who are or may be deemed to be executive
officers of the Registrant is set forth under the caption "Executive Officers of
the Registrant" in Part I of this report.
ITEM 11: EXECUTIVE COMPENSATION.
The section entitled "Executive Compensation" appearing in the Registrant's
proxy statement for the annual meeting of stockholders to be held on April 30,
1997, sets forth certain information with respect to the compensation of
management of the Registrant and the required information is incorporated herein
by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The sections entitled "Security Ownership of Certain Beneficial Owners,
Directors and Executive Officers" appearing in the Registrant's proxy statement
for the annual meeting of stockholders to be held on April 30, 1997, set forth
certain information with respect to the ownership of the Registrant's
Common Stock and the required information is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section entitled "Certain Transactions" appearing in the Registrant's proxy
statement for the annual meeting of stockholders to be held on April 30, 1997,
sets forth certain information with respect to certain business
relationships and transactions between the Registrant and its directors and
officers and the required information is incorporated herein by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a.) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS.
The financial statements filed as part of this report are listed on
the Index to Financial Statements on page 18.
2. FINANCIAL STATEMENT SCHEDULES.
Index to Financial Statement Schedules
Page
Report of Independent Public Accountants on schedule ......... 35
II. Valuation and Qualifying Accounts ................... 36
3. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
3.1 Articles of Incorporation, as amended (Exhibit 3.1)(1)
3.2 By-laws, as amended and restated to date (Exhibit 3.2)(1)
4.1 Form of Stock Purchase Warrant to Hayne, Miller & Farni, Inc. (1992) (Exhibit 4.2)(1)
4.2 Revised form of Stock Purchase Warrant to Hayne, Miller & Farni, Inc. (1992) (Exhibit 4.3)(1)
10.1 Form of franchise agreement for Play It Again Sports(R)(Exhibit 10.1)(3)
10.2 Form of franchise agreement for Once Upon A Child(R)(Exhibit 10.2)(3)
10.3 Form of franchise agreement for Computer Renaissance(R)(Exhibit 10.3) (3)
10.4 Form of franchise agreement for Music Go Round(R)(Exhibit 10.4)(3)
10.5 Form of franchise agreement for Disc Go Round(R)(Exhibit 10.5)(3)
10.6 Lease for 3505 Hennepin Avenue, Minneapolis Minnesota (Exhibit 10.4)(1)
10.7 Asset Purchase Agreement dated January 24, 1992 with Sports Traders, Inc. and James D.
Van Buskirk ("Van Buskirk") concerning acquisition of wholesale business, including
amendment dated March 11, 1992 (Exhibit 10.6(a))(1)
10.8 Retail store agreement dated January 24, 1992 with Van Buskirk (Exhibit 10.6(b))(1)
10.9 Noncompetition and Consulting agreement dated January 1, 1990, as amended
January 24, 1992, with Martha Morris (Exhibit 10.7)(1)
10.10 Asset Purchase Agreement dated April 1, 1993 concerning purchase of assets of Computer
Renaissance, Inc., including stock option agreement (Exhibit 10.12)(1)
10.11 Asset Purchase Agreement dated July 1, 1994 for purchase of assets of CDX Audio
Development, Inc. (Exhibit 10.13)(3)
10.12 1992 Stock Option Plan, including forms of stock option agreement (Exhibit 10.12)(1)(3)
10.13 Amendment No. 1 to the 1992 Stock Option Plan (Exhibit 10.15) (2)
10.14 Amendment No. 2 to the 1992 Stock Option Plan (Exhibit 10.16) (2)
10.15 Nonemployee Director Stock Option Plan, as amended, including form of stock option
agreement (Exhibit 10.16)(2)(3)
10.16 Employee Stock Purchase Plan of 1994 (Exhibit 10.17)(2)(3)
10.17 Real Estate Purchase Agreement for Purchase of the Company's headquarters (Exhibit 10.18)(2)
10.18 Consulting and Noncompetition Agreement dated November 6, 1992 with Lynn and Dennis Blum
(Exhibit 10.19)(3)
10.19 Noncompetition Agreements dated April 1, 1993 with Charles G. Welle and Richard C. Frost
related to the purchase of assets of Computer Renaissance (Exhibit 10.20)(3)
10.20 Separation Agreement and Release - Robert E. Thiner (Exhibit 10.20)(4)(5)
10.21 Separation Agreement and Release - Steven A. Gemlo (Exhibit 10.21)(4)(5)
10.22 Revolving Credit Agreement with TCF Bank FSB, dated July 31, 1996 (Exhibit 10.22)
10.23 Revolving Promissory Note with TCF Bank FSB, dated July 31, 1996 (Exhibit 10.23)
11.1 Statement of Computation of Per Share Earnings
23.1 Consent of Arthur Andersen LLP Independent Public Accountants
27.1 Financial Data Schedule
99.1 Cautionary Statements
</TABLE>
(1) Incorporated by reference to the specified exhibit to
the Registration Statement on Form S-1, effective
August 24, 1993 (Reg. No. 33-65108).
(2) Incorporated by reference to the specified exhibit to
the Annual Report on Form 10-K for the fiscal year
ended December 30, 1995.
(3) Incorporated by reference to the specified exhibit to
the Annual Report on Form 10-K for the fiscal year
ended December 28, 1996.
(4) Incorporated by reference to the specified exhibit to
the Quarterly Report on Form 10-Q for the quarter
ended September 28, 1996.
(5) Indicates management contracts, compensation plans or
arrangements required to be filed as exhibits.
(b.) Reports on Form 8-K No reports on Form 8-K were filed by the
Registrant during the fiscal quarter
ended December 28, 1996.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Grow Biz International, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
financial statements included in this Form 10-K and have issued our report
thereon dated February 4, 1997. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in Item
14(a)(2) is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 4, 1997
GROW BIZ INTERNATIONAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS/ WRITE-OFFS AT END
OF PERIOD EXPENSES OF PERIOD
<S> <C> <C> <C> <C>
1994
Accounts receivable reserves $ 375,400 $ 256,400 $ (146,500) $ 485,300
============ ============ ========== ===========
1995
Accounts receivable reserves $ 485,300 $ 324,242 $ (179,570) $ 630,000
============ ============ ========== ===========
1996
Accounts receivable reserves $ 630,000 $ 681,000 $ (381,000) $ 930,000
============ ============ ========== ===========
</TABLE>
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS/ WRITE-OFFS AT END
OF PERIOD EXPENSES OF PERIOD
<S> <C> <C> <C> <C>
1994
Inventory reserves $ 0 $ 0 $ (0) $ 0
========= ========= ========= =========
1995
Inventory reserves $ 0 $ 773,500 $(447,100) $ 326,400
========= ========= ========= =========
1996
Inventory reserves $ 326,400 $ 436,600 $(669,000) $ 94,000
========= ========= ========= =========
</TABLE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GROW BIZ INTERNATIONAL, INC.
By: /s/ RONALD G. OLSON Date: March 19, 1997
Ronald G. Olson
President and Chief Executive Officer
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints K. Jeffrey Dahlberg, Ronald G. Olson and David J.
Osdoba, Jr., and each of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any amendments to this Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ K. JEFFREY DAHLBERG Chairman of the Board of Directors March 18, 1997
- ------------------------------------------------
K. Jeffrey Dahlberg
President, Chief Executive Officer
/s/ RONALD G. OLSON and Director March 19, 1997
- ------------------------------------------------ (principal executive officer)
Ronald G. Olson
Vice President of Finance and Chief Financial
/s/ DAVID J. OSDOBA, JR. Officer March 19, 1997
- ------------------------------------------------ (principal financial and accounting officer)
David J. Osdoba, Jr.
/s/ GAYLEN L. KNACK Vice President and General Counsel March 14, 1997
- ------------------------------------------------
Gaylen L. Knack
/s/ RANDEL S. CARLOCK Director March 11, 1997
- ------------------------------------------------
Randel S. Carlock
/s/ DENNIS J. DOYLE Director March 11, 1997
- ------------------------------------------------
Dennis J. Doyle
/s/ ROBERT C. POHLAD Director March 13, 1997
- ------------------------------------------------
Robert C. Pohlad
/s/ BRUCE C. SANBORN Director March 11, 1997
- ------------------------------------------------
Bruce C. Sanborn
/s/ ROBERT E. THINER Director March 11, 1997
- ------------------------------------------------
Robert E. Thiner
</TABLE>
EXHIBIT 10.22
================================================================================
CREDIT AGREEMENT
between
TCF BANK MINNESOTA FSB, as Bank
and
GROW BIZ INTERNATIONAL, INC., as Borrower
Dated as of
July 31, 1996
================================================================================
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
I General Assumptions......................................................................................1
II Scope of Agreement.......................................................................................1
III Credit Facilities........................................................................................2
3.1 The Revolving Loan..............................................................................2
(a) General Terms and Conditions...........................................................2
(b) Conditions Precedent...................................................................2
(c) Revolving Note.........................................................................2
(d) Normal Rate of Interest................................................................2
(e) Use of Proceeds........................................................................2
(f) Other Prepayments; Prepayment Premium..................................................2
IV Terms and Conditions Applicable to all Credit Facilities.................................................3
4.1 Procedures for Requesting Advances..............................................................3
4.2 Payments........................................................................................3
4.3 Application of Payments.........................................................................4
4.4 Computation of Interest and Fees................................................................4
4.5 Default Rate of Interest........................................................................4
4.6 Late Fees.......................................................................................4
V Conditions Precedent to Advances.........................................................................4
5.1 Condition Precedent to Initial Advance..........................................................4
5.2 Conditions Precedent to All Advances............................................................6
VI Representations and Warranties...........................................................................6
6.1 Existence and Power.............................................................................7
6.2 Authorization of Borrowing; No Conflict as to Law or Agreements.................................7
6.3 Legal Agreements................................................................................7
6.4 Subsidiaries....................................................................................7
6.5 Financial Condition.............................................................................7
6.6 Adverse Change..................................................................................8
6.7 Litigation......................................................................................8
6.8 Regulation G....................................................................................8
6.9 Taxes...........................................................................................8
6.10 Titles and Liens................................................................................8
6.11 Plans...........................................................................................9
6.12 Default.........................................................................................9
6.13 Environmental Protection........................................................................9
6.14 Submissions to Bank............................................................................10
VII Affirmative Covenants...................................................................................10
7.1 Financial Statements...........................................................................10
7.2 Books and Records; Inspection and Examination..................................................11
7.3 Compliance with Laws...........................................................................12
7.4 Payment of Taxes and Other Claims..............................................................12
7.5 Maintenance of Properties, Rights to Intellectual Property.....................................12
7.6 Preservation of Existence......................................................................13
7.7 Insurance......................................................................................13
7.8 Current Ratio..................................................................................13
7.9 Capital Base...................................................................................13
7.10 Total Liabilities to Capital Base Ratio........................................................13
VIII Negative Covenants......................................................................................14
8.1 Liens..........................................................................................14
8.2 Indebtedness...................................................................................15
8.3 Guaranties.....................................................................................15
8.4 Investments....................................................................................15
8.5 Consolidation and Merger.......................................................................16
8.6 Hazardous Substances...........................................................................16
8.7 Restrictions on Nature of Business.............................................................16
8.8 Transactions with Affiliates...................................................................16
8.9 Sale or Transfer of Assets; Suspension of Business Operations..................................17
8.10 Sale and Leaseback.............................................................................17
8.11 Defined Benefit Pension Plans..................................................................17
IX Events of Default, Rights and Remedies..................................................................17
9.1 Events of Default..............................................................................17
9.2 Rights and Remedies............................................................................19
X Miscellaneous...........................................................................................20
10.1 Amendments, Etc................................................................................20
10.2 Notices, Etc...................................................................................20
10.3 No Waiver; Remedies............................................................................21
10.4 Indemnification by Borrower....................................................................21
10.5 Costs and Expenses.............................................................................22
10.6 Severability of Provisions.....................................................................22
10.7 Binding Effect.................................................................................23
10.8 Execution in Counterparts......................................................................23
10.9 Headings.......................................................................................23
</TABLE>
APPENDIX
Glossary of Terms
EXHIBITS
Exhibit A Compliance Certificate
Exhibit B Schedule of Permitted Liens, Indebtedness and Guaranties
CREDIT AGREEMENT
Dated as of July 31, 1996
Grow Biz International, Inc., a Minnesota corporation (herein
called the "Borrower"), and TCF Bank Minnesota fsb, a federally chartered stock
savings bank (the "Bank") agree as follows:
ARTICLE I
General Assumptions
For all purposes of this Agreement, except as otherwise
expressly provided or unless the context otherwise requires:
(a) ALL TERMS DEFINED IN THIS AGREEMENT INCLUDE THE PLURAL AS WELL AS THE
SINGULAR;
(b) ALL ACCOUNTING TERMS NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS
ASSIGNED TO THEM IN ACCORDANCE WITH GAAP;
(c) INVENTORY SHALL BE VALUED AT THE LOWER OF COST, COMPUTED ON A FIRST IN,
FIRST OUT BASIS, OR FAIR MARKET VALUE; AND
(d) ALL TERMS DEFINED IN THE GLOSSARY OF TERMS SET FORTH IN THE APPENDIX TO
THIS AGREEMENT HAVE THE MEANINGS ASSIGNED TO THEM IN THE GLOSSARY OF TERMS.
ARTICLE II
Scope of Agreement
The Bank may, in its sole discretion, from time to time make
one or more loans, advances or other financial accommodations available to or
for the benefit of the Borrower in addition to such loans, advances or other
financial accommodations initially made available to or for the benefit of the
Borrower and provided for in this Agreement. Any such additional Obligations
shall, to the extent applicable, except as otherwise explicitly set forth in any
promissory note or written agreement accepted by or entered into with the Bank
in connection with such Obligations, be governed by and subject to the terms set
forth herein. Nothing herein shall obligate the Bank to make or permit any such
additional loans, advances, accommodations or Obligations.
ARTICLE III
Credit Facilities
SECTION 3.1 THE REVOLVING LOAN.
(a) GENERAL TERMS AND CONDITIONS. THE BANK AGREES, ON THE TERMS AND
CONDITIONS HEREIN SET FORTH, TO MAKE REVOLVING ADVANCES TO THE BORROWER
FROM TIME TO TIME FROM THE DATE HEREOF TO AND INCLUDING, JULY 31, 1997,
OR THE EARLIER TERMINATION OF THE COMMITMENT TO MAKE REVOLVING ADVANCES
PURSUANT TO SECTION 9.2 HEREOF, IN AN AGGREGATE AMOUNT NOT TO EXCEED AT
ANY TIME OUTSTANDING $5,000,000. THE MINIMUM AMOUNT OF EACH REVOLVING
ADVANCE SHALL BE $50,000. WITHIN THE ABOVE LIMITS, THE BORROWER MAY
BORROW, PREPAY AND REBORROW REVOLVING ADVANCES UNDER THIS SECTION 3.1.
(b) CONDITIONS PRECEDENT. THE OBLIGATION OF THE BANK TO MAKE EACH
REVOLVING ADVANCE SHALL BE SUBJECT TO THE CONDITIONS PRECEDENT THAT ON
OR BEFORE THE DATE OF THE REQUESTED REVOLVING ADVANCE (I) THE BANK
SHALL HAVE RECEIVED ALL FINANCIAL REPORTS REQUIRED TO BE DELIVERED TO
THE BANK PURSUANT TO THE TERMS OF THIS AGREEMENT, AND (II) ALL
CONDITIONS PRECEDENT IN ARTICLE V HEREOF SHALL HAVE BEEN SATISFIED.
(c) REVOLVING NOTE. THE REVOLVING ADVANCES MADE BY THE BANK SHALL BE
EVIDENCED BY, AND PAYABLE WITH INTEREST IN ACCORDANCE WITH, A SINGLE
PROMISSORY NOTE OF THE BORROWER OF EVEN DATE HEREWITH, PAYABLE TO THE
ORDER OF THE BANK IN THE MAXIMUM PRINCIPAL AMOUNT OF $5,000,000 AND
OTHERWISE IN SUBSTANCE AND FORM ACCEPTABLE TO THE BANK IN ITS SOLE
DISCRETION (AS THE SAME MAY HEREAFTER BE EXTENDED, RENEWED, AMENDED OR
REPLACED FROM TIME TO TIME, THE "REVOLVING NOTE").
(d) NORMAL RATE OF INTEREST. THE PRINCIPAL BALANCE OF THE REVOLVING
NOTE OUTSTANDING FROM TIME TO TIME SHALL BEAR INTEREST FROM THE DATE
HEREOF UNTIL PAID IN FULL AT AN ANNUAL RATE WHICH SHALL AT ALL TIMES BE
EQUAL TO THE BASE RATE, WHICH ANNUAL RATE SHALL CHANGE WHEN AND AS THE
BASE RATE CHANGES; SUBJECT, HOWEVER, TO IMPOSITION OF THE DEFAULT RATE
PURSUANT TO SECTION 4.5.
(e) USE OF PROCEEDS. THE BORROWER SHALL USE THE PROCEEDS OF THE
REVOLVING ADVANCES FOR GENERAL WORKING CAPITAL PURPOSES AND FOR
PURCHASE OF THE OUTSTANDING SHARES OF THE BORROWER'S COMMON STOCK.
(f) OTHER PREPAYMENTS; PREPAYMENT PREMIUM. THE BORROWER MAY, UPON AT
LEAST ONE BUSINESS DAY'S PRIOR NOTICE TO THE BANK, PREPAY THE PRINCIPAL
BALANCE OF THE REVOLVING ADVANCES VOLUNTARILY IN WHOLE OR IN PART AT
ANY TIME, WITHOUT PREMIUM OR PENALTY. ANY PREPAYMENT OF THE FULL AMOUNT
OF THE REVOLVING ADVANCES AT A TIME WHEN THE BANK HAS NO FURTHER
COMMITMENT TO MAKE REVOLVING ADVANCES SHALL INCLUDE ACCRUED INTEREST
THEREON.
ARTICLE IV
Terms and Conditions Applicable to all Credit Facilities
SECTION 4.1 PROCEDURES FOR REQUESTING ADVANCES. THE BANK MUST
RECEIVE NOTICE OF THE BORROWER'S REQUEST FOR EACH ADVANCE NOT LATER THAN 12:00
NOON (MINNEAPOLIS TIME) ON THE BUSINESS DAY OF A PROPOSED REVOLVING ADVANCE.
EACH SUCH REQUEST FOR AN ADVANCE MAY BE MADE IN WRITING OR BY TELEPHONE, SHALL
BE EFFECTIVE UPON RECEIPT BY THE BANK AND SHALL SPECIFY THE PROPOSED DATE FOR
THE REQUESTED ADVANCE (WHICH SHALL BE A BUSINESS DAY) AND THE AMOUNT OF THE
REQUESTED ADVANCE. UNLESS THE BANK DETERMINES THAT ANY CONDITION SET FORTH IN
ARTICLE III, IV, OR V HAS NOT BEEN SATISFIED, THE BANK WILL MAKE THE PROCEEDS OF
THE ADVANCE AVAILABLE TO THE BORROWER ON THE PROPOSED DATE OF SUCH ADVANCE BY
DEPOSITING THE SAME TO THE BORROWER'S DEMAND DEPOSIT ACCOUNT MAINTAINED WITH THE
BANK OR IN SUCH OTHER MANNER AS THE BANK AND THE BORROWER MAY FROM TIME TO TIME
AGREE. THE BORROWER SHALL BE OBLIGATED TO REPAY ALL ADVANCES NOTWITHSTANDING THE
FACT THAT THE PERSON REQUESTING SAME WAS NOT IN FACT AUTHORIZED SO TO DO. ANY
REQUEST FOR AN ADVANCE, WHETHER WRITTEN OR TELEPHONIC, SHALL BE DEEMED TO BE A
REPRESENTATION THAT THE STATEMENTS SET FORTH IN SECTION 5.2 ARE CORRECT.
SECTION 4.2 PAYMENTS. WHENEVER ANY PAYMENT TO BE MADE UNDER
THIS AGREEMENT, THE NOTE OR ANY OTHER EVIDENCE OF AN OBLIGATION SHALL BE STATED
TO BE DUE ON ANY DAY OTHER THAN A BUSINESS DAY, SUCH PAYMENT MAY BE MADE ON THE
NEXT SUCCEEDING BUSINESS DAY, AND SUCH EXTENSION OF TIME SHALL IN SUCH CASE BE
INCLUDED IN THE COMPUTATION OF INTEREST AND FEES. ALL PAYMENTS OF PRINCIPAL,
INTEREST, FEES AND OTHER AMOUNTS DUE UNDER THIS AGREEMENT, THE NOTE AND ANY
OTHER EVIDENCE OF AN OBLIGATION SHALL BE MADE TO THE BANK IN IMMEDIATELY
AVAILABLE FUNDS. THE AMOUNT SHOWN ON THE BOOKS AND RECORDS OF THE BANK AS BEING
THE UNPAID BALANCE OF PRINCIPAL, ACCRUED INTEREST AND OTHER CHARGES, FEES AND
EXPENSES UNDER THIS AGREEMENT, THE NOTE AND ANY OTHER EVIDENCE OF AN OBLIGATION
SHALL BE PRIMA FACIE EVIDENCE THEREOF. THE BORROWER HEREBY IRREVOCABLY
AUTHORIZES THE BANK, IF AND TO THE EXTENT ANY PAYMENT FROM THE BORROWER TO THE
BANK IS NOT MADE WHEN DUE, TO CHARGE AGAINST ANY AMOUNT OWING BY THE BANK TO THE
BORROWER AN AMOUNT EQUAL TO THE PRINCIPAL, ACCRUED INTEREST AND OTHER CHARGES,
FEES AND EXPENSES THEN DUE. WITHOUT LIMITING THE FOREGOING, THE BORROWER HEREBY
IRREVOCABLY AUTHORIZES THE BANK TO COLLECT INTEREST, REQUIRED PRINCIPAL
PAYMENTS, OTHER CHARGES, FEES AND EXPENSES UNDER THIS AGREEMENT OR THE NOTE WHEN
DUE FROM TIME TO TIME BY CHARGING ANY DEMAND DEPOSIT ACCOUNT MAINTAINED BY THE
BORROWER WITH THE BANK.
SECTION 4.3 APPLICATION OF PAYMENTS. SO LONG AS NO DEFAULT OR
EVENT OF DEFAULT SHALL BE CONTINUING HEREUNDER, ANY PAYMENT HEREUNDER MAY BE
APPLIED FIRST TO PAYMENT OF ANY LATE CHARGES, FEES, COSTS AND EXPENSES UNDER
SECTION 10.5 OR OTHER AMOUNTS DUE, THEN TO UNPAID ACCRUED INTEREST AND THE
BALANCE, IF ANY, TO THE PRINCIPAL OUTSTANDING UNDER THE NOTE. DURING THE
CONTINUANCE OF ANY DEFAULT OR EVENT OF DEFAULT, THE BANK MAY APPLY PAYMENTS
HEREUNDER IN SUCH ORDER AS THE BANK, IN ITS DISCRETION, SHALL DETERMINE.
SECTION 4.4 COMPUTATION OF INTEREST AND FEES. INTEREST UNDER
THE NOTE AND ALL OTHER FEES HEREUNDER OR IN RESPECT OF ANY OBLIGATIONS SHALL BE
COMPUTED ON THE BASIS OF THE ACTUAL NUMBER OF DAYS ELAPSED AND A 360-DAY YEAR.
SECTION 4.5 DEFAULT RATE OF INTEREST. IF AN EVENT OF DEFAULT
SHALL OCCUR AND CONTINUE FOR A PERIOD OF 30 DAYS AFTER THE BANK HAS GIVEN NOTICE
TO THE BORROWER SPECIFYING SUCH EVENT OF DEFAULT AND STATING THE BANK'S INTENT
TO IMPLEMENT THE DEFAULT RATE (IT BEING UNDERSTOOD THAT SUCH GRACE PERIOD AND
NOTICE REQUIREMENT ARE CONDITIONS ONLY TO IMPOSING THE DEFAULT RATE), THE
BORROWER SHALL PAY INTEREST ON THE UNPAID PRINCIPAL BALANCE OF THE OBLIGATIONS,
FROM THE FIRST DAY IMMEDIATELY FOLLOWING THE EXPIRATION OF SUCH 30-DAY PERIOD
UNTIL THE EARLIER OF PAYMENT IN FULL OF THE OBLIGATIONS OR THE DAY ON WHICH SUCH
EVENT OF DEFAULT IS CURED TO THE WRITTEN SATISFACTION OF THE BANK, AT AN ANNUAL
RATE AT ALL TIMES EQUAL TO TWO PERCENT (2%) OVER THE ANNUAL RATE OR RATES OF
INTEREST THAT WOULD OTHERWISE BE IN EFFECT FROM TIME TO TIME WITH RESPECT TO
SUCH OBLIGATIONS HAD THERE BEEN NO OCCURRENCE OF AN EVENT OF DEFAULT (THE
"DEFAULT RATE").
SECTION 4.6 LATE FEES. IF ANY AMOUNT DUE HEREUNDER OR UNDER
THE NOTES OR OTHER OBLIGATIONS (WHETHER PRINCIPAL, INTEREST, FEES, COSTS,
EXPENSES OR OTHERWISE) IS PAID MORE THAN THIRTY (30) DAYS AFTER THE STATED DUE
DATE FOR SUCH PAYMENT, THE BORROWER SHALL PAY TO THE BANK, ON DEMAND, A LATE
PAYMENT FEE EQUAL TO FIVE PERCENT (5%) OF THE PAST DUE AMOUNT.
ARTICLE V
Conditions Precedent to Advances
SECTION 5.1 CONDITION PRECEDENT TO INITIAL ADVANCE. THE
OBLIGATION OF THE BANK TO MAKE ITS INITIAL ADVANCE IS SUBJECT TO THE CONDITION
PRECEDENT THAT THE BANK SHALL HAVE RECEIVED ON OR BEFORE THE DAY OF MAKING SUCH
ADVANCE THE FOLLOWING, EACH IN FORM AND SUBSTANCE SATISFACTORY TO THE BANK IN
ITS SOLE DISCRETION:
(a) THE REVOLVING NOTE, DULY EXECUTED ON BEHALF OF THE BORROWER.
(b) A LENDING LIMIT CERTIFICATION, DATED THE DATE HEREOF, DULY EXECUTED
ON BEHALF OF THE BORROWER IN FORM AND SUBSTANCE SATISFACTORY TO THE
BANK.
(c) AN ACKNOWLEDGMENT, DATED THE DATE HEREOF, DULY EXECUTED ON BEHALF
OF THE BORROWER IN FAVOR OF THE BANK, UNDER WHICH THE BORROWER
ACKNOWLEDGES THAT THE LOAN DOCUMENTS DELIVERED PURSUANT TO THIS SECTION
5.1 AND ALL OTHER DOCUMENTS EXECUTED IN CONNECTION WITH THIS AGREEMENT
SET FORTH THE ENTIRE AGREEMENT BETWEEN THE BORROWER AND THE BANK WITH
RESPECT TO THE MATTERS COVERED THEREIN AND THAT THERE ARE NO ORAL
AGREEMENTS BINDING ON THE BANK.
(d) AN AGREEMENT AND WAIVER, DATED THE DATE HEREOF, DULY EXECUTED ON
BEHALF OF THE BORROWER, PROVIDING THE STATE LAW TO GOVERN THE LOAN
DOCUMENTS DELIVERED PURSUANT TO THIS SECTION 5.1 AND ALL OTHER
DOCUMENTS EXECUTED IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE
OBLIGATIONS, CONSENTING TO PERSONAL JURISDICTION AND VENUE IN
CONNECTION WITH ANY CONTROVERSY INVOLVING ANY SUCH DOCUMENTS AND
WAIVING THE RIGHT TO TRIAL BY JURY IN CONNECTION WITH ANY SUCH
CONTROVERSY.
(e) CURRENT SEARCHES OF APPROPRIATE FILING OFFICES SHOWING THAT (I) NO
STATE OR FEDERAL TAX LIENS HAVE BEEN FILED AND REMAIN IN EFFECT AGAINST
THE BORROWER, AND (II) NO FINANCING STATEMENTS HAVE BEEN FILED AND
REMAIN IN EFFECT AGAINST THE BORROWER EXCEPT FINANCING STATEMENTS
PERFECTING ONLY SECURITY INTERESTS PERMITTED UNDER SECTION 8.1, IF ANY.
(f) CURRENT FINANCIAL STATEMENTS/PROJECTIONS FOR THE BORROWER FOR THE
12-MONTH PERIOD ENDING DECEMBER 31, 1996, ACCEPTABLE TO THE BANK.
(g) A CERTIFIED COPY OF THE RESOLUTIONS OF THE BOARD OF DIRECTORS OF
THE BORROWER EVIDENCING APPROVAL OF THE LOAN DOCUMENTS DELIVERED
PURSUANT TO THIS SECTION 5.1 AND OTHER MATTERS CONTEMPLATED HEREBY,
CERTIFIED BY THE SECRETARY OR ASSISTANT SECRETARY OF THE BORROWER AS
BEING A TRUE, CORRECT AND COMPLETE COPY THEREOF WHICH HAS BEEN DULY
ADOPTED AND IS IN FULL FORCE AND EFFECT, TOGETHER WITH A CERTIFICATE OF
SUCH SECRETARY OR ASSISTANT SECRETARY OF THE BORROWER CERTIFYING THE
NAMES AND TRUE SIGNATURES OF THE OFFICERS OF THE BORROWER AUTHORIZED TO
SIGN EACH LOAN DOCUMENT TO WHICH THE BORROWER IS A PARTY AND THE OTHER
DOCUMENTS, CERTIFICATES AND REQUESTS FOR ADVANCES TO BE DELIVERED BY
THE BORROWER HEREUNDER.
(h) COPIES OF THE ARTICLES OF INCORPORATION AND BY-LAWS OF THE
BORROWER, CERTIFIED BY THE SECRETARY OR ASSISTANT SECRETARY OF THE
BORROWER AS BEING TRUE, CORRECT AND COMPLETE COPIES THEREOF.
(i) A CURRENT CERTIFICATE OF GOOD STANDING FROM THE STATE OF MINNESOTA
AND CURRENT EVIDENCE OF QUALIFICATION TO DO BUSINESS AS A FOREIGN
CORPORATION FROM EACH OTHER STATE IN WHICH THE NATURE OF THE BUSINESS
TRANSACTED BY THE BORROWER OR THE PROPERTIES OWNED BY IT WOULD MAKE
SUCH QUALIFICATION NECESSARY.
(j) A SIGNED COPY OF AN OPINION OF COUNSEL FOR THE BORROWER ADDRESSED
TO THE BANK, AS TO THE MATTERS SET FORTH IN SECTIONS 6.1, 6.2, 6.3,
6.7, AND 6.8 HEREOF AND AS TO SUCH OTHER MATTERS AS THE BANK AND ITS
COUNSEL SHALL REQUIRE.
(k) CERTIFICATES OF THE INSURANCE REQUIRED UNDER SECTION 7.7 HEREOF,
WITH A LENDER'S LOSS PAYABLE ENDORSEMENT IN FAVOR OF THE BANK.
(l) AN ENVIRONMENTAL QUESTIONNAIRE ON THE BANK'S STANDARD FORM,
APPROPRIATELY COMPLETED BY THE BORROWER.
(m) SUCH DULY EXECUTED UCC-3 TERMINATION STATEMENTS AND OTHER
INSTRUMENTS AS SHALL BE NECESSARY TO TERMINATE AND SATISFY ALL LIENS
AND SECURITY INTERESTS EXCEPT THOSE LIENS AND SECURITY INTERESTS
PERMITTED UNDER SECTION 8.1 HEREOF.
(n) PAYMENT OF ALL ORIGINATION FEES REQUIRED TO BE PAID ON THE DATE
HEREOF UNDER ARTICLE III AND THE COSTS AND EXPENSES DESCRIBED IN
SECTION 10.5.
(o) SUCH OTHER ITEMS AS THE BANK MAY REQUEST.
SECTION 5.2 CONDITIONS PRECEDENT TO ALL ADVANCES. THE BANK'S
OBLIGATION TO MAKE EACH ADVANCE (INCLUDING THE INITIAL ADVANCE) SHALL BE SUBJECT
TO THE FURTHER CONDITIONS PRECEDENT THAT ON THE DATE OF MAKING SUCH ADVANCE THE
STATEMENTS SET FORTH IN (A) AND (B) BELOW SHALL BE TRUE (AND THE BORROWER'S
RECEIPT OF THE PROCEEDS OR BENEFIT OF SUCH ADVANCE SHALL BE DEEMED TO CONSTITUTE
A REPRESENTATION AND WARRANTY BY THE BORROWER THAT SUCH STATEMENTS ARE TRUE ON
SUCH DATE):
(a) THE REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE VI OF THIS
AGREEMENT ARE CORRECT ON AND AS OF THE DATE OF SUCH ADVANCE AS THOUGH
MADE ON AND AS OF SUCH DATE;
(b) NO EVENT HAS OCCURRED AND IS CONTINUING, OR WOULD RESULT FROM THE
MAKING OF SUCH ADVANCE WHICH CONSTITUTES A DEFAULT OR AN EVENT OF
DEFAULT.
ARTICLE VI
Representations and Warranties
The Borrower represents and warrants to the Bank as follows:
SECTION 6.1 EXISTENCE AND POWER. THE BORROWER IS A
CORPORATION, DULY FORMED, VALIDLY EXISTING AND IN GOOD STANDING UNDER THE LAWS
OF THE STATE OF MINNESOTA AND IS DULY LICENSED OR QUALIFIED TO TRANSACT BUSINESS
IN ALL JURISDICTIONS WHERE THE CHARACTER OF THE PROPERTY OWNED OR LEASED OR THE
NATURE OF THE BUSINESS TRANSACTED BY IT MAKES SUCH LICENSING OR QUALIFICATION
NECESSARY AND WHERE THE FAILURE TO BE DULY LICENSED OR QUALIFIED WOULD BE
MATERIALLY ADVERSE TO THE BORROWER. THE BORROWER HAS ALL REQUISITE POWER AND
AUTHORITY, CORPORATE OR OTHERWISE, TO CONDUCT ITS BUSINESS, TO OWN ITS
PROPERTIES AND TO EXECUTE AND DELIVER, AND TO PERFORM ALL OF ITS OBLIGATIONS
UNDER, THE LOAN DOCUMENTS.
SECTION 6.2 AUTHORIZATION OF BORROWING; NO CONFLICT AS TO LAW
OR AGREEMENTS. THE EXECUTION, DELIVERY AND PERFORMANCE BY THE BORROWER OF THE
LOAN DOCUMENTS AND THE BORROWINGS FROM TIME TO TIME HEREUNDER HAVE BEEN DULY
AUTHORIZED BY ALL NECESSARY CORPORATE ACTION AND DO AND WILL NOT (I) REQUIRE ANY
CONSENT OR APPROVAL OF THE STOCKHOLDERS OF THE BORROWER, OR ANY AUTHORIZATION,
CONSENT OR APPROVAL BY ANY GOVERNMENTAL DEPARTMENT, COMMISSION, BOARD, BUREAU,
AGENCY OR INSTRUMENTALITY, DOMESTIC OR FOREIGN, (II) VIOLATE ANY PROVISION OF
ANY LAW, RULE OR REGULATION OR OF ANY ORDER, WRIT, INJUNCTION OR DECREE
PRESENTLY IN EFFECT HAVING APPLICABILITY TO THE BORROWER OR OF THE ARTICLES OF
INCORPORATION OR BYLAWS OF THE BORROWER, (III) RESULT IN A BREACH OF OR
CONSTITUTE A DEFAULT UNDER ANY INDENTURE OR LOAN OR CREDIT AGREEMENT OR ANY
OTHER AGREEMENT, LEASE OR INSTRUMENT TO WHICH THE BORROWER IS A PARTY OR BY
WHICH IT OR ITS PROPERTIES MAY BE BOUND OR AFFECTED, OR (IV) RESULT IN, OR
REQUIRE, THE CREATION OR IMPOSITION OF ANY MORTGAGE, DEED OF TRUST, PLEDGE,
LIEN, SECURITY INTEREST OR OTHER CHARGE OR ENCUMBRANCE OF ANY NATURE UPON OR
WITH RESPECT TO ANY OF THE PROPERTIES NOW OWNED OR HEREAFTER ACQUIRED BY THE
BORROWER.
SECTION 6.3 LEGAL AGREEMENTS. THIS AGREEMENT AND THE NOTE,
WHEN EXECUTED AND DELIVERED BY THE BORROWER HEREUNDER, WILL CONSTITUTE, THE
LEGAL, VALID AND BINDING OBLIGATIONS OF THE BORROWER ENFORCEABLE AGAINST THE
BORROWER IN ACCORDANCE WITH THEIR RESPECTIVE TERMS.
SECTION 6.4 SUBSIDIARIES. THE BORROWER HAS ONE SUBSIDIARY,
GROW BIZ WORLDWIDE, LLP.
SECTION 6.5 FINANCIAL CONDITION. THE BORROWER HAS HERETOFORE
FURNISHED TO THE BANK ITS AUDITED FINANCIAL STATEMENTS AS OF AND FOR ITS FISCAL
YEAR ENDED DECEMBER 31, 1995 AND ITS INTERIM MONTHLY FINANCIAL STATEMENTS AS OF
AND FOR THE FISCAL YEAR-TO-DATE PERIOD ENDED JUNE 30, 1996. THOSE FINANCIAL
STATEMENTS FAIRLY PRESENT THE FINANCIAL CONDITION OF THE BORROWER ON THE DATES
THEREOF AND THE RESULTS OF ITS OPERATIONS FOR THE PERIODS THEN ENDED, AND, IN
THE CASE OF SUCH ANNUAL FINANCIAL STATEMENTS, ITS CASH FLOWS FOR THE FISCAL YEAR
THEN ENDED, AND ALL SUCH FINANCIAL STATEMENTS WERE PREPARED IN ACCORDANCE WITH
GAAP WITHOUT FOOTNOTES AND YEAR-END ADJUSTMENTS.
SECTION 6.6 ADVERSE CHANGE. THERE HAS BEEN NO MATERIAL ADVERSE
CHANGE IN THE BUSINESS, PROPERTIES OR CONDITION (FINANCIAL OR OTHERWISE) OF THE
BORROWER SINCE THE DATE OF THE LATEST FINANCIAL STATEMENT REFERRED TO IN SECTION
6.5.
SECTION 6.7 LITIGATION. EXCEPT AS LISTED IN SCHEDULE 6.7
HERETO, THERE ARE NO ACTIONS, SUITS OR PROCEEDINGS PENDING OR, TO THE KNOWLEDGE
OF THE BORROWER, THREATENED AGAINST OR AFFECTING THE BORROWER OR THE PROPERTIES
OF THE BORROWER BEFORE ANY COURT OR GOVERNMENTAL DEPARTMENT, COMMISSION, BOARD,
BUREAU, AGENCY OR INSTRUMENTALITY, DOMESTIC OR FOREIGN, WHICH, IF DETERMINED
ADVERSELY TO THE BORROWER, WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE FINANCIAL
CONDITION, PROPERTIES, OR OPERATIONS OF THE BORROWER.
SECTION 6.8 REGULATION G. THE BORROWER IS NOT ENGAGED IN THE
BUSINESS OF EXTENDING CREDIT FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN
STOCK (WITHIN THE MEANING OF REGULATION G OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM), AND NO PART OF THE PROCEEDS OF ANY ADVANCE OR PROCEEDS
RELATED TO ANY OTHER OBLIGATIONS WILL BE USED TO PURCHASE OR CARRY ANY MARGIN
STOCK OR TO EXTEND CREDIT TO OTHERS FOR THE PURPOSE OF PURCHASING OR CARRYING
ANY MARGIN STOCK EXCEPT AS SPECIFIED IN SECTION 3.1(e).
SECTION 6.9 TAXES. THE BORROWER HAS PAID OR CAUSED TO BE PAID
TO THE PROPER AUTHORITIES WHEN DUE ALL FEDERAL, STATE AND LOCAL TAXES REQUIRED
TO BE WITHHELD BY THE BORROWER. THE BORROWER HAS FILED ALL FEDERAL, STATE AND
LOCAL TAX RETURNS WHICH ARE REQUIRED TO BE FILED, AND THE BORROWER HAS PAID OR
CAUSED TO BE PAID TO THE RESPECTIVE TAXING AUTHORITIES ALL TAXES AS SHOWN ON
SAID RETURNS OR ON ANY ASSESSMENT RECEIVED BY IT TO THE EXTENT SUCH TAXES HAVE
BECOME DUE AND TO THE EXTENT THE FAILURE TO MAKE SUCH PAYMENTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE FINANCIAL CONDITION, PROPERTIES OR OPERATIONS OF
THE BORROWER.
SECTION 6.10 TITLES AND LIENS. THE BORROWER HAS GOOD TITLE TO
EACH OF THE PROPERTIES AND ASSETS REFLECTED IN THE LATEST BALANCE SHEET REFERRED
TO IN SECTION 6.5, FREE AND CLEAR OF ALL MORTGAGES, SECURITY INTERESTS, LIENS
AND ENCUMBRANCES, EXCEPT FOR MORTGAGES, SECURITY INTERESTS AND LIENS PERMITTED
BY SECTION 8.1 AND COVENANTS, RESTRICTIONS, RIGHTS, EASEMENTS AND MINOR
IRREGULARITIES IN TITLE WHICH DO NOT MATERIALLY INTERFERE WITH THE BUSINESS OR
OPERATIONS OF THE BORROWER AS PRESENTLY CONDUCTED. NO FINANCING STATEMENT NAMING
THE BORROWER AS DEBTOR IS ON FILE IN ANY OFFICE EXCEPT TO PERFECT ONLY SECURITY
INTERESTS PERMITTED BY SECTION 8.1.
SECTION 6.11 PLANS. NEITHER THE BORROWER NOR ANY OF ITS
AFFILIATES MAINTAINS OR HAS MAINTAINED ANY PLAN EXCEPT AS PREVIOUSLY DISCLOSED
TO THE BANK. NEITHER THE BORROWER NOR ANY AFFILIATE HAS RECEIVED ANY NOTICE OR
HAS ANY KNOWLEDGE TO THE EFFECT THAT IT IS NOT IN FULL COMPLIANCE WITH ANY OF
THE REQUIREMENTS OF ERISA. NO REPORTABLE EVENT OR OTHER FACT OR CIRCUMSTANCE
WHICH MAY HAVE A MATERIALLY ADVERSE EFFECT ON THE PLAN'S TAX QUALIFIED STATUS
EXISTS IN CONNECTION WITH ANY PLAN. NEITHER THE BORROWER NOR ANY OF ITS
AFFILIATES HAS:
(a) ANY ACCUMULATED FUNDING DEFICIENCY WITHIN THE MEANING OF ERISA; OR
(b) ANY LIABILITY OR KNOWS OF ANY FACT OR CIRCUMSTANCES WHICH COULD
RESULT IN ANY LIABILITY TO THE PENSION BENEFIT GUARANTY CORPORATION,
THE INTERNAL REVENUE SERVICE, THE DEPARTMENT OF LABOR OR ANY
PARTICIPANT IN CONNECTION WITH ANY PLAN (OTHER THAN ACCRUED BENEFITS
WHICH OR WHICH MAY BECOME PAYABLE TO PARTICIPANTS OR BENEFICIARIES OF
ANY SUCH PLAN).
SECTION 6.12 DEFAULT. THE BORROWER IS IN COMPLIANCE WITH ALL
PROVISIONS OF ALL AGREEMENTS, INSTRUMENTS, DECREES AND ORDERS TO WHICH IT IS A
PARTY OR BY WHICH IT OR ITS PROPERTY IS BOUND OR AFFECTED, THE BREACH OR DEFAULT
OF WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON THE FINANCIAL CONDITION,
PROPERTIES OR OPERATIONS OF THE BORROWER.
SECTION 6.13 ENVIRONMENTAL PROTECTION. THE BORROWER HAS
OBTAINED AND DELIVERED TO THE BANK ALL PERMITS, LICENSES AND OTHER
AUTHORIZATIONS WHICH ARE REQUIRED UNDER FEDERAL, STATE AND LOCAL ENVIRONMENTAL
LAWS AT THE BORROWER'S FACILITIES OR IN CONNECTION WITH THE OPERATION OF ITS
FACILITIES. THE BORROWER AND ALL ACTIVITIES OF THE BORROWER AT ITS FACILITIES
COMPLY WITH ALL ENVIRONMENTAL LAWS AND WITH ALL TERMS AND CONDITIONS OF ANY
REQUIRED PERMITS, LICENSES AND AUTHORIZATIONS APPLICABLE TO THE BORROWER WITH
RESPECT THERETO TO THE EXTENT THE FAILURE TO SO COMPLY COULD HAVE A MATERIALLY
ADVERSE EFFECT ON THE FINANCIAL CONDITION, PROPERTIES OR OPERATIONS OF THE
BORROWER. THE BORROWER IS ALSO IN COMPLIANCE WITH ALL LIMITATIONS, RESTRICTIONS,
CONDITIONS, STANDARDS, PROHIBITIONS, REQUIREMENTS, OBLIGATIONS, SCHEDULES AND
TIMETABLES CONTAINED IN ENVIRONMENTAL LAWS OR CONTAINED IN ANY PLAN, ORDER,
DECREE, JUDGMENT OR NOTICE OF WHICH THE BORROWER IS AWARE TO THE EXTENT THE
FAILURE TO SO COMPLY COULD HAVE A MATERIALLY ADVERSE EFFECT ON THE FINANCIAL
CONDITION, PROPERTIES OR OPERATIONS OF THE BORROWER. THE BORROWER IS NOT AWARE
OF, NOR HAS THE BORROWER RECEIVED NOTICE OF, ANY EVENTS, CONDITIONS,
CIRCUMSTANCES, ACTIVITIES, PRACTICES, INCIDENTS, ACTIONS OR PLANS WHICH MAY
INTERFERE WITH OR PREVENT CONTINUED COMPLIANCE WITH, OR WHICH MAY GIVE RISE TO
ANY LIABILITY UNDER, ANY ENVIRONMENTAL LAWS.
SECTION 6.14 SUBMISSIONS TO BANK. ALL FINANCIAL AND OTHER
INFORMATION PROVIDED TO THE BANK BY OR ON BEHALF OF THE BORROWER IN CONNECTION
WITH THE BORROWER'S REQUEST FOR THE CREDIT FACILITIES CONTEMPLATED HEREBY IS
TRUE AND CORRECT IN ALL MATERIAL RESPECTS AND, AS TO PROJECTIONS, VALUATIONS OR
PROFORMA FINANCIAL STATEMENTS, PRESENT A GOOD FAITH OPINION AS TO SUCH
PROJECTIONS, VALUATIONS AND PROFORMA CONDITION AND RESULTS.
ARTICLE VII
Affirmative Covenants
So long as the Note or other Obligation shall remain unpaid or
any Commitment shall be outstanding, the Borrower will comply with the following
requirements, unless the Bank shall otherwise consent in writing:
SECTION 7.1 FINANCIAL STATEMENTS. THE BORROWER WILL DELIVER OR
CAUSE TO BE DELIVERED TO THE BANK:
(a) AS SOON AS AVAILABLE, AND IN ANY EVENT WITHIN 90 DAYS AFTER THE
END OF EACH FISCAL YEAR OF THE BORROWER, A COPY OF THE ANNUAL AUDIT
REPORT FOR THE BORROWER WITH THE UNQUALIFIED OPINION ISSUED BY
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS SELECTED BY THE BORROWER AND
ACCEPTABLE TO THE BANK, WHICH ANNUAL REPORT SHALL INCLUDE THE BALANCE
SHEET OF THE BORROWER AS AT THE END OF SUCH FISCAL YEAR AND THE RELATED
STATEMENTS OF INCOME, RETAINED EARNINGS AND CASH FLOWS OF THE BORROWER
FOR THE FISCAL YEAR THEN ENDED, ALL IN REASONABLE DETAIL AND ALL
PREPARED IN ACCORDANCE WITH GAAP APPLIED ON A BASIS CONSISTENT WITH THE
ACCOUNTING PRACTICES APPLIED IN THE ANNUAL FINANCIAL STATEMENTS
REFERRED TO IN SECTION 6.5, TOGETHER WITH (A) A REPORT SIGNED BY SUCH
ACCOUNTANTS STATING THAT THEY UNDERSTAND THAT THE BANK IS RELYING ON
SUCH REPORT AND (B) A COMPLIANCE CERTIFICATE DULY COMPLETED AND SIGNED
BY AN OFFICER OF THE BORROWER BASED ON SUCH FINANCIAL STATEMENTS FOR
SUCH FISCAL YEAR.
(b) AT LEAST 30 DAYS PRIOR TO THE BEGINNING OF EACH FISCAL YEAR OF THE
BORROWER, FINANCIAL PROJECTIONS OF THE BORROWER FOR SUCH FISCAL YEAR,
WHICH FINANCIAL PROJECTIONS SHALL BE ON A MONTH BY MONTH BASIS AND
SHALL BE IN SUCH DETAIL AND FORMAT AS IS SATISFACTORY TO THE BANK, AND
SHALL BE CERTIFIED BY THE CHIEF FINANCIAL OFFICER OF THE BORROWER AS
BEING THE MOST ACCURATE FINANCIAL PROJECTIONS AVAILABLE AND IDENTICAL
TO THE FINANCIAL PROJECTIONS USED INTERNALLY BY THE BORROWER, TOGETHER
WITH SUCH SUPPORTING SCHEDULES AND INFORMATION AS THE BANK MAY IN ITS
SOLE DISCRETION REQUIRE.
(c) AS SOON AS AVAILABLE AND IN ANY EVENT WITHIN 60 DAYS AFTER THE END
OF EACH FISCAL QUARTER OF THE BORROWER, THE BALANCE SHEET OF THE
BORROWER AS AT THE END OF SUCH MONTH AND RELATED STATEMENTS OF EARNINGS
OF THE BORROWER FOR SUCH QUARTER AND FOR THE YEAR TO DATE, IN
REASONABLE DETAIL AND STATING IN COMPARATIVE FORM THE FIGURES FOR THE
CORRESPONDING DATE AND PERIOD IN THE PREVIOUS YEAR, ALL PREPARED IN
ACCORDANCE WITH GAAP APPLIED ON A BASIS CONSISTENT WITH THE ACCOUNTING
PRACTICES REFLECTED IN THE ANNUAL FINANCIAL STATEMENTS REFERRED TO IN
SECTION 6.5 AND SUBJECT TO YEAR-END AUDIT ADJUSTMENTS, AND ACCOMPANIED
BY A COMPLIANCE CERTIFICATE DULY COMPLETED AND SIGNED BY AN OFFICER OF
THE BORROWER BASED ON SUCH FINANCIAL STATEMENTS.
(d) WITHIN 90 DAYS AFTER THE END OF EACH FISCAL YEAR OF THE BORROWER,
A CERTIFICATION REPORT SIGNED BY AN OFFICER OF THE BORROWER AS TO THE
BORROWER'S COMPLIANCE WITH SECTION 8.6 HEREOF, IN SUCH FORM AND
CONTAINING SUCH DETAIL AND SUPPORT AS THE BANK MAY REQUIRE.
(e) IMMEDIATELY AFTER THE COMMENCEMENT THEREOF, NOTICE IN WRITING OF
ALL LITIGATION AND OF ALL PROCEEDINGS BEFORE ANY GOVERNMENTAL OR
REGULATORY AGENCY AFFECTING THE BORROWER OF THE TYPE DESCRIBED IN
SECTION 6.7.
(f) AS PROMPTLY AS PRACTICABLE (BUT IN ANY EVENT NOT LATER THAN FIVE
BUSINESS DAYS) AFTER AN OFFICER OF THE BORROWER OBTAINS KNOWLEDGE OF
THE OCCURRENCE OF ANY DEFAULT OR EVENT OF DEFAULT, NOTICE OF SUCH
OCCURRENCE, TOGETHER WITH A DETAILED STATEMENT BY A RESPONSIBLE OFFICER
OF THE BORROWER OF THE STEPS BEING TAKEN BY THE BORROWER TO CURE THE
EFFECT OF SUCH EVENT.
(g) AS PROMPTLY AS PRACTICABLE (BUT IN ANY EVENT NOT LATER THAN FIVE
BUSINESS DAYS) AFTER AN OFFICER OF THE BORROWER OBTAINS KNOWLEDGE OF
THE OCCURRENCE OF ANY EVENT OR SERIES OF EVENTS WHICH IS OR ARE, TAKEN
TOGETHER, REASONABLY LIKELY TO HAVE A MATERIAL ADVERSE EFFECT ON THE
BORROWER OR ITS OPERATIONS, OR TO CAUSE THE OCCURRENCE OF AN EVENT OF
DEFAULT, NOTICE OF SUCH OCCURRENCE, TOGETHER WITH SUCH INFORMATION
CONCERNING SUCH OCCURRENCE AND THE EFFECT THEREOF AS THE BANK SHALL
REQUIRE.
(h) PROMPTLY AFTER THE FILING THEREOF, COPIES OF ALL FORMS 10-K, 10-Q
AND ALL OTHER REGULAR AND PERIODIC FINANCIAL REPORTS, REGISTRATION
STATEMENTS, PROSPECTUSES OR FILINGS WHICH THE BORROWER SHALL FILE WITH
THE SECURITIES AND EXCHANGE COMMISSION OR ANY NATIONAL SECURITIES
EXCHANGE.
(i) SUCH OTHER INFORMATION RESPECTING THE FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND PROPERTY OF THE BORROWER AS THE BANK MAY FROM TIME TO
TIME REASONABLY REQUEST.
SECTION 7.2 BOOKS AND RECORDS; INSPECTION AND EXAMINATION.
THE BORROWER WILL KEEP ACCURATE BOOKS OF RECORD AND ACCOUNT FOR ITSELF IN WHICH
TRUE AND COMPLETE ENTRIES WILL BE MADE IN ACCORDANCE WITH GAAP CONSISTENTLY
APPLIED AND, AT ANY TIME FROM THE OCCURRENCE AND DURING THE CONTINUANCE OF AN
EVENT OF DEFAULT HEREUNDER, UPON REQUEST OF THE BANK, WILL GIVE ANY
REPRESENTATIVE OF THE BANK ACCESS TO, AND PERMIT SUCH REPRESENTATIVE TO EXAMINE,
COPY OR MAKE EXTRACTS FROM, ANY AND ALL BOOKS, RECORDS AND DOCUMENTS IN ITS
POSSESSION, TO INSPECT ANY OF ITS PROPERTIES AND TO DISCUSS ITS AFFAIRS,
FINANCES AND ACCOUNTS WITH ANY OF ITS PRINCIPAL OFFICERS, ALL AT SUCH TIMES
DURING NORMAL BUSINESS HOURS AND AS OFTEN AS THE BANK MAY REASONABLY REQUEST,
AND, AT ANY TIME FROM THE OCCURRENCE AND DURING THE CONTINUANCE OF AN EVENT OF
DEFAULT, WILL PERMIT THE BANK TO SEND AND DISCUSS WITH BORROWER'S ACCOUNT
DEBTORS REQUESTS FOR VERIFICATION OF AMOUNTS OWED TO THE BORROWER, AS OFTEN AS
THE BANK SHALL DESIRE.
SECTION 7.3 COMPLIANCE WITH LAWS. THE BORROWER WILL (A)
COMPLY WITH THE REQUIREMENTS OF APPLICABLE LAWS AND REGULATIONS, THE
NONCOMPLIANCE WITH WHICH WOULD MATERIALLY AND ADVERSELY AFFECT ITS BUSINESS OR
FINANCIAL CONDITION, (B) COMPLY WITH ALL APPLICABLE ENVIRONMENTAL LAWS, AND
OBTAIN ANY PERMITS, LICENSES OR SIMILAR APPROVALS REQUIRED BY ANY SUCH
ENVIRONMENTAL LAWS, THE NONCOMPLIANCE WITH WHICH WOULD MATERIALLY AND ADVERSELY
AFFECT ITS BUSINESS OR FINANCIAL CONDITION, AND (C) USE AND KEEP THE BORROWER'S
PROPERTY, AND WILL REQUIRE THAT OTHERS USE AND KEEP SUCH PROPERTY, ONLY FOR
LAWFUL PURPOSES, WITHOUT VIOLATION OF ANY FEDERAL, STATE OR LOCAL LAW, STATUTE
OR ORDINANCE TO THE EXTENT THE FAILURE TO SO USE AND KEEP SUCH PROPERTY WOULD
MATERIALLY AND ADVERSELY AFFECT THE BORROWER'S BUSINESS OR FINANCIAL CONDITION.
SECTION 7.4 PAYMENT OF TAXES AND OTHER CLAIMS. THE BORROWER
WILL PAY OR DISCHARGE, WHEN DUE, (A) ALL TAXES, ASSESSMENTS AND GOVERNMENTAL
CHARGES LEVIED OR IMPOSED UPON IT OR UPON ANY PROPERTIES BELONGING TO IT, PRIOR
TO THE DATE ON WHICH PENALTIES ATTACH THERETO, (B) ALL FEDERAL, STATE AND LOCAL
TAXES REQUIRED TO BE WITHHELD BY IT, AND (C) ALL LAWFUL CLAIMS FOR LABOR,
MATERIALS AND SUPPLIES WHICH, IF UNPAID MIGHT BY LAW BECOME A LIEN OR CHARGE
UPON ANY PROPERTIES OF THE BORROWER; PROVIDED THAT THE BORROWER SHALL NOT BE
REQUIRED TO PAY ANY SUCH TAX, ASSESSMENT, CHARGE OR CLAIM WHOSE AMOUNT,
APPLICABILITY OR VALIDITY IS BEING CONTESTED IN GOOD FAITH BY APPROPRIATE
PROCEEDINGS.
SECTION 7.5 MAINTENANCE OF PROPERTIES, RIGHTS TO INTELLECTUAL
PROPERTY. THE BORROWER WILL KEEP AND MAINTAIN ALL OF ITS PROPERTIES NECESSARY OR
USEFUL IN ITS BUSINESS IN GOOD CONDITION, REPAIR AND WORKING ORDER. THE BORROWER
WILL AT ALL TIMES OWN OR HOLD A VALID, IRREVOCABLE AND EXCLUSIVE LICENSE TO USE
ALL PATENTS, TRADEMARKS, COPYRIGHTS AND OTHER INTELLECTUAL PROPERTY INTERESTS
WHICH ARE UTILIZED IN THE BORROWER'S OPERATIONS OR WHICH ARE BEING DEVELOPED BY
OR ON BEHALF OF THE BORROWER OR FOR USE IN THE BORROWER'S OPERATIONS, AND THE
BORROWER WILL HAVE THE FULL AND EXCLUSIVE RIGHT TO CONTROL AND MANAGE ALL SUCH
INTELLECTUAL PROPERTY INTERESTS. THE BORROWER WILL PROTECT, DEFEND AND MAINTAIN
ALL SUCH INTELLECTUAL PROPERTY INTERESTS, INCLUDING WITHOUT LIMITATION
PROSECUTION OF ALL PATENT, TRADEMARK AND COPYRIGHT APPLICATIONS AND TIMELY
PAYMENT OF ALL NECESSARY MAINTENANCE AND OTHER FEES; PROVIDED, HOWEVER, THAT THE
BORROWER SHALL NOT BE REQUIRED TO PROTECT, DEFEND AND MAINTAIN SUCH INTELLECTUAL
PROPERTY INTERESTS IF ITS BOARD OF DIRECTORS SHALL DETERMINE THAT THE
PRESERVATION THEREOF IS NO LONGER DESIRABLE IN THE CONDUCT OF THE BUSINESS OF
THE BORROWER AND THAT THE LOSS THEREOF IS NOT DISADVANTAGEOUS IN ANY MATERIAL
RESPECT TO THE BANK AS A HOLDER OF THE NOTE OR AS THE OBLIGEE OF ANY OTHER
OBLIGATIONS.
SECTION 7.6 PRESERVATION OF EXISTENCE. THE BORROWER WILL
PRESERVE AND MAINTAIN ITS PRESENT LEGAL EXISTENCE AND ALL OF ITS RIGHTS,
PRIVILEGES AND FRANCHISES; PROVIDED, HOWEVER, THAT THE BORROWER SHALL NOT BE
REQUIRED TO PRESERVE ANY OF ITS RIGHTS, PRIVILEGES AND FRANCHISES IF ITS BOARD
OF DIRECTORS SHALL DETERMINE THAT THE PRESERVATION THEREOF IS NO LONGER
DESIRABLE IN THE CONDUCT OF THE BUSINESS OF THE BORROWER AND THAT THE LOSS
THEREOF IS NOT DISADVANTAGEOUS IN ANY MATERIAL RESPECT TO THE BANK AS A HOLDER
OF THE NOTE OR AS THE OBLIGEE OF ANY OTHER OBLIGATIONS.
SECTION 7.7 INSURANCE. THE BORROWER WILL OBTAIN AND AT ALL
TIMES MAINTAIN INSURANCE WITH INSURERS BELIEVED BY THE BORROWER TO BE
RESPONSIBLE AND REPUTABLE, IN SUCH AMOUNTS AND AGAINST SUCH RISKS AS MAY FROM
TIME TO TIME BE REQUIRED BY THE BANK AND AS IS USUALLY CARRIED BY COMPANIES
ENGAGED IN SIMILAR BUSINESS AND OWNING SIMILAR PROPERTIES IN THE SAME GENERAL
AREAS IN WHICH THE BORROWER OPERATES.
SECTION 7.8 CURRENT RATIO. THE BORROWER WILL MAINTAIN AT ALL
TIMES THE RATIO OF ITS CURRENT ASSETS TO CURRENT LIABILITIES AT NOT LESS THAN
1.15 TO 1.
SECTION 7.9 CAPITAL BASE PLUS REPURCHASED STOCK AMOUNT. FOR
EACH PERIOD BELOW, THE BORROWER WILL MAINTAIN AT ALL TIMES ITS CAPITAL BASE PLUS
THE REPURCHASED STOCK AMOUNT IN AN AMOUNT NOT LESS THAN THE AMOUNT SET FORTH
OPPOSITE SUCH PERIOD:
PERIOD MINIMUM CAPITAL BASE
------ --------------------
The date hereof
through December 30, 1996 $13,100,000
December 31, 1996
and thereafter $14,100,000
SECTION 7.10 TOTAL LIABILITIES TO CAPITAL BASE RATIO. THE
BORROWER WILL MAINTAIN AT ALL TIMES THE RATIO OF ITS TOTAL LIABILITIES, OTHER
THAN SUBORDINATED DEBT, TO CAPITAL BASE AT NOT MORE THAN 2.00 TO 1.00.
ARTICLE VIII
Negative Covenants
So long as any Note or other Obligation shall remain unpaid or
any Commitment shall be outstanding, the Borrower agrees that, without the prior
written consent of the Bank:
SECTION 8.1 LIENS. THE BORROWER WILL NOT CREATE, INCUR,
ASSUME OR SUFFER TO EXIST ANY MORTGAGE, DEED OF TRUST, PLEDGE, LIEN, SECURITY
INTEREST, OR OTHER CHARGE OR ENCUMBRANCE OF ANY NATURE ON ANY OF ITS ASSETS, NOW
OWNED OR HEREAFTER ACQUIRED, OR ASSIGN OR OTHERWISE CONVEY ANY RIGHT TO RECEIVE
INCOME OR GIVE ITS CONSENT TO THE SUBORDINATION OF ANY RIGHT OR CLAIM OF THE
BORROWER TO ANY RIGHT OR CLAIM OF ANY OTHER PERSON; EXCLUDING, HOWEVER, FROM THE
OPERATION OF THE FOREGOING:
(a) LIENS FOR TAXES, ASSESSMENTS OR OTHER GOVERNMENTAL CHARGES,
MATERIALMEN'S, MERCHANTS', CARRIERS', WORKER'S, REPAIRER'S OR OTHER
LIKE LIENS ARISING IN THE ORDINARY COURSE OF BUSINESS, TO THE EXTENT
NOT REQUIRED TO BE PAID BY SECTION 7.4.
(b) PLEDGES OR DEPOSITS TO SECURE OBLIGATIONS UNDER WORKER'S
COMPENSATION LAWS, UNEMPLOYMENT INSURANCE AND SOCIAL SECURITY LAWS, OR
TO SECURE THE PERFORMANCE OF BIDS, TENDERS, CONTRACTS (OTHER THAN FOR
THE REPAYMENT OF BORROWED MONEY) OR LEASES OR TO SECURE STATUTORY
OBLIGATIONS OR SURETY OR APPEAL BONDS, OR TO SECURE INDEMNITY,
PERFORMANCE OR OTHER SIMILAR BONDS IN THE ORDINARY COURSE OF BUSINESS.
(c) ZONING RESTRICTIONS, EASEMENTS, LICENSES, RESTRICTIONS ON THE USE
OF REAL PROPERTY OR MINOR IRREGULARITIES IN TITLE THERETO, WHICH DO NOT
MATERIALLY IMPAIR THE USE OF SUCH PROPERTY IN THE OPERATION OF THE
BUSINESS OF THE BORROWER OR THE VALUE OF SUCH PROPERTY FOR THE PURPOSE
OF SUCH BUSINESS.
(d) MORTGAGES, LIENS, PLEDGES AND SECURITY INTERESTS ON ANY PROPERTY OF
THE BORROWER SECURING ANY INDEBTEDNESS FOR BORROWED MONEY IN EXISTENCE
ON THE DATE HEREOF AND LISTED IN EXHIBIT B HERETO.
(e) LIENS ARISING OUT OF A JUDGMENT AGAINST THE BORROWER FOR THE
PAYMENT OF MONEY WITH RESPECT TO WHICH AN APPEAL IS BEING PROSECUTED
AND A STAY OF EXECUTION PENDING SUCH APPEAL HAS BEEN ISSUED.
(f) PURCHASE MONEY MORTGAGES, LIENS, OR SECURITY INTERESTS (WHICH TERM
FOR PURPOSES OF THIS SUBSECTION SHALL INCLUDE CONDITIONAL SALE
AGREEMENTS OR OTHER TITLE RETENTION AGREEMENTS AND LEASES IN THE NATURE
OF TITLE RETENTION AGREEMENTS) UPON OR IN PROPERTY ACQUIRED AFTER THE
DATE HEREOF, OR MORTGAGES, LIENS OR SECURITY INTERESTS EXISTING IN SUCH
PROPERTY AT THE TIME OF ACQUISITION THEREOF, PROVIDED THAT NO SUCH
MORTGAGE, LIEN OR SECURITY INTEREST EXTENDS OR SHALL EXTEND TO OR COVER
ANY PROPERTY OF THE BORROWER OTHER THAN THE PROPERTY THEN BEING
ACQUIRED AND FIXED IMPROVEMENTS THEN OR THEREAFTER ERECTED THEREON.
SECTION 8.2 INDEBTEDNESS. THE BORROWER WILL NOT INCUR,
CREATE, ASSUME OR PERMIT TO EXIST ANY INDEBTEDNESS FOR BORROWED MONEY, OR ANY
OTHER INDEBTEDNESS OR LIABILITY EVIDENCED BY NOTES, BONDS, DEBENTURES OR SIMILAR
OBLIGATIONS, EXCEPT:
(a) INDEBTEDNESS OWED TO THE BANK.
(b) INDEBTEDNESS OF THE BORROWER IN EXISTENCE ON THE DATE HEREOF AND
LISTED IN EXHIBIT B HERETO AND RENEWALS THEREOF.
(c) INDEBTEDNESS FOR BORROWED MONEY INCURRED BY THE BORROWER AFTER THE
DATE OF THIS AGREEMENT WHICH HAS BEEN PERMITTED BY THE BANK IN WRITING.
(d) PURCHASE MONEY INDEBTEDNESS OF THE BORROWER, SECURED BY MORTGAGES,
SECURITY INTERESTS OR LIENS PERMITTED UNDER SECTION 8.1(f) HEREOF.
SECTION 8.3 GUARANTIES. THE BORROWER WILL NOT ASSUME,
GUARANTEE, ENDORSE OR OTHERWISE BECOME DIRECTLY OR CONTINGENTLY LIABLE IN
CONNECTION WITH ANY OBLIGATIONS OF ANY OTHER PERSON, EXCEPT:
(a) THE ENDORSEMENT OF NEGOTIABLE INSTRUMENTS BY THE BORROWER FOR
DEPOSIT OR COLLECTION OR SIMILAR TRANSACTIONS IN THE ORDINARY COURSE OF
BUSINESS.
(b) GUARANTIES, ENDORSEMENTS AND OTHER DIRECT OR CONTINGENT LIABILITIES
IN CONNECTION WITH THE OBLIGATIONS OF OTHER PERSONS IN EXISTENCE ON THE
DATE HEREOF AND LISTED IN EXHIBIT B HERETO.
SECTION 8.4 INVESTMENTS. THE BORROWER WILL NOT (A) CREATE OR
PERMIT TO EXIST ANY SUBSIDIARY OR (B) PURCHASE OR HOLD BENEFICIALLY ANY STOCK OR
OTHER SECURITIES OR EVIDENCE OF INDEBTEDNESS OF, MAKE OR PERMIT TO EXIST ANY
LOANS OR ADVANCES TO, OR MAKE ANY INVESTMENT OR ACQUIRE ANY INTEREST WHATSOEVER
IN, ANY OTHER PERSON, EXCEPT:
(i) investments in direct obligations of the United States of
America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of
America having a maturity of one year or less, commercial paper issued
by U.S. corporations rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service,
certificates of deposit or bankers' acceptances having a maturity of
one year or less issued by members of the Federal Reserve System having
deposits in excess of $100,000,000 (which certificates of deposit or
bankers' acceptances are fully insured by the Federal Deposit Insurance
Corporation), deposits with the Bank or other financial institutions
which are fully insured by the Federal Deposit Insurance Corporation or
money market mutual funds which invest exclusively in any of the
investments listed in this Section 8.4(b)(i) hereof;
(ii) reasonable travel advances to officers and employees of
the Borrower in the ordinary course of business;
(iii) advances in the form of progress payments, prepaid rent
or security deposits;
(iv) loans to account debtors which are obligations
previously evidenced as accounts receivable and are converted into
notes in the Borrower's ordinary course of business provided that such
loans mature in twelve (12) months or less; and
(v) loans to franchisees of the Borrower, provided that such
loans mature in twelve (12) months or
less.
SECTION 8.5 CONSOLIDATION AND MERGER. THE BORROWER WILL NOT
CONSOLIDATE WITH OR MERGE INTO ANY PERSON OR PERMIT ANY OTHER PERSON TO MERGE
INTO IT OR ACQUIRE (IN A TRANSACTION ANALOGOUS IN PURPOSE OR EFFECT TO A
CONSOLIDATION OR MERGER) ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF ANY OTHER
PERSON.
SECTION 8.6 HAZARDOUS SUBSTANCES. THE BORROWER WILL NOT CAUSE
OR PERMIT ANY HAZARDOUS SUBSTANCE TO BE DISPOSED OF IN ANY MANNER WHICH MIGHT
RESULT IN ANY MATERIAL LIABILITY TO THE BORROWER.
SECTION 8.7 RESTRICTIONS ON NATURE OF BUSINESS. THE BORROWER
WILL NOT ENGAGE IN ANY LINE OF BUSINESS MATERIALLY DIFFERENT FROM THAT PRESENTLY
ENGAGED IN BY THE BORROWER.
SECTION 8.8 TRANSACTIONS WITH AFFILIATES. EXCEPT AS PERMITTED
BY SECTION 8.4, THE BORROWER SHALL NOT MAKE ANY LOAN OR CAPITAL CONTRIBUTION TO,
OR ANY OTHER INVESTMENT IN, ANY AFFILIATE, OR MAKE ANY DISTRIBUTION OR OTHER
CASH TRANSFER OF ANY KIND TO, ANY AFFILIATE, PROVIDED, HOWEVER, THAT THE
BORROWER MAY PAY SALARIES AND BONUSES TO ITS EMPLOYEES, DIRECTORS, AND OFFICERS.
THE BORROWER SHALL NOT ENGAGE IN ANY OTHER TRANSACTION (INCLUDING BUT NOT
LIMITED TO PURCHASES AND SALES OF GOODS AND SERVICES) WITH ANY AFFILIATE OTHER
THAN THE PURCHASE AND SALE OF GOODS AND SERVICES IN THE ORDINARY COURSE OF
BUSINESS, ON ORDINARY BUSINESS TERMS, AT FAIR MARKET PRICES DETERMINED FOR
TRANSACTIONS ENTERED ON AN ARM'S LENGTH BASIS.
SECTION 8.9 SALE OR TRANSFER OF ASSETS; SUSPENSION OF
BUSINESS OPERATIONS. THE BORROWER WILL NOT SELL, LEASE, ASSIGN, TRANSFER OR
OTHERWISE DISPOSE OF ALL OR A SUBSTANTIAL PART OF ITS ASSETS (WHETHER IN ONE
TRANSACTION OR IN A SERIES OF TRANSACTIONS) TO ANY OTHER PERSON OTHER THAN IN
THE ORDINARY COURSE OF BUSINESS AND WILL NOT IN ANY MANNER TRANSFER ANY PROPERTY
WITHOUT PRIOR OR PRESENT RECEIPT OF FULL AND ADEQUATE CONSIDERATION. THE
BORROWER WILL NOT LIQUIDATE, DISSOLVE OR SUSPEND ITS BUSINESS OPERATIONS.
SECTION 8.10 SALE AND LEASEBACK. THE BORROWER WILL NOT ENTER
INTO ANY ARRANGEMENT, DIRECTLY OR INDIRECTLY, WITH ANY OTHER PERSON WHEREBY THE
BORROWER SHALL SELL OR TRANSFER ANY REAL OR PERSONAL PROPERTY, WHETHER NOW OWNED
OR HEREAFTER ACQUIRED, AND THEN OR THEREAFTER RENT OR LEASE AS LESSEE SUCH
PROPERTY OR ANY PART THEREOF OR ANY OTHER PROPERTY WHICH THE BORROWER INTENDS TO
USE FOR SUBSTANTIALLY THE SAME PURPOSE OR PURPOSES AS THE PROPERTY BEING SOLD OR
TRANSFERRED.
SECTION 8.11 DEFINED BENEFIT PENSION PLANS. THE BORROWER WILL
NOT ADOPT, CREATE, ASSUME OR BECOME A PARTY TO ANY DEFINED BENEFIT PENSION PLAN
WHICH IS NOT IN EXISTENCE ON THE DATE HEREOF AND DISCLOSED TO THE BANK.
ARTICLE IX
Events of Default, Rights and Remedies
SECTION 9.1 EVENTS OF DEFAULT. "EVENT OF DEFAULT", WHEREVER
USED HEREIN, MEANS ANY ONE OF THE FOLLOWING EVENTS:
(a) DEFAULT IN THE PAYMENT OF ANY PRINCIPAL OF THE NOTE WHEN DUE.
(b) DEFAULT IN THE PAYMENT OF ANY INTEREST ON THE NOTE OR ANY FEES,
COSTS, EXPENSES OR OTHER AMOUNTS PAYABLE UNDER THIS AGREEMENT (OTHER
THAN AMOUNTS DEALT WITH IN SECTION 9.1(a)) OR ANY OTHER LOAN DOCUMENT
WHEN DUE AND THE CONTINUANCE OF SUCH DEFAULT FOR A PERIOD OF 5 DAYS.
(c) DEFAULT IN THE PERFORMANCE, OR BREACH, OF ANY COVENANT OR AGREEMENT
ON THE PART OF THE BORROWER CONTAINED IN SECTION 7.8, 7.9, 7.10 OR
ARTICLE VIII HEREOF.
(d) DEFAULT IN THE PERFORMANCE, OR BREACH, OF ANY COVENANT OR AGREEMENT
ON THE PART OF THE BORROWER CONTAINED IN SECTION 7.1(a) THROUGH 7.1(c)
HEREOF AND THE CONTINUANCE OF SUCH DEFAULT OR BREACH FOR A PERIOD OF 5
DAYS AFTER THE BANK SHALL HAVE GIVEN WRITTEN NOTICE THEREOF TO THE
BORROWER.
(e) DEFAULT IN THE PERFORMANCE, OR BREACH, OF ANY COVENANT OR AGREEMENT
ON THE PART OF THE BORROWER CONTAINED IN THIS AGREEMENT (OTHER THAN
THOSE SPECIFICALLY DEALT WITH IN OTHER SUBSECTIONS OF THIS SECTION) AND
THE CONTINUANCE OF SUCH DEFAULT OR BREACH FOR A PERIOD OF 30 DAYS.
(f) ANY STATEMENT, REPRESENTATION OR WARRANTY MADE BY THE BORROWER IN
THIS AGREEMENT OR BY THE BORROWER (OR ANY OF ITS OFFICERS) TO THE BANK
AT ANY TIME, INCLUDING WITHOUT LIMITATION IN ANY CERTIFICATE,
INSTRUMENT, OR STATEMENT CONTEMPLATED BY OR MADE OR DELIVERED PURSUANT
TO OR IN CONNECTION WITH THIS AGREEMENT, SHALL PROVE TO HAVE BEEN
INCORRECT IN ANY MATERIAL RESPECT WHEN MADE.
(g) A DEFAULT UNDER ANY BOND, DEBENTURE, NOTE OR OTHER EVIDENCE OF
INDEBTEDNESS OF THE BORROWER WITH A FACE OBLIGATION IN EXCESS OF
$50,000 (OTHER THAN TO THE BANK) OR UNDER ANY INDENTURE OR OTHER
INSTRUMENT WITH A FACE OBLIGATION IN EXCESS OF $50,000 UNDER WHICH ANY
SUCH EVIDENCE OF INDEBTEDNESS HAS BEEN ISSUED OR BY WHICH IT IS
GOVERNED AND THE EXPIRATION OF THE APPLICABLE PERIOD OF GRACE, IF ANY,
SPECIFIED IN SUCH EVIDENCE OF INDEBTEDNESS, INDENTURE OR OTHER
INSTRUMENT.
(h) DEFAULT IN THE PAYMENT WHEN DUE OF ANY AMOUNT OWED BY THE BORROWER
TO THE BANK UNDER ANY OBLIGATIONS OTHER THAN HEREUNDER OR UNDER THE
NOTE.
(i) THE BORROWER SHALL BE ADJUDICATED A BANKRUPT OR INSOLVENT, OR ADMIT
IN WRITING ITS OR HIS OR HER INABILITY TO PAY ITS OR HIS OR HER DEBTS
AS THEY MATURE, OR MAKE AN ASSIGNMENT FOR THE BENEFIT OF CREDITORS; OR
THE BORROWER SHALL APPLY FOR OR CONSENT TO THE APPOINTMENT OF ANY
RECEIVER, TRUSTEE, OR SIMILAR OFFICER FOR IT OR HIM OR HER OR FOR ALL
OR ANY SUBSTANTIAL PART OF ITS OR HIS OR HER PROPERTY; OR SUCH
RECEIVER, TRUSTEE OR SIMILAR OFFICER SHALL BE APPOINTED WITHOUT THE
APPLICATION OR CONSENT OF THE BORROWER AND SUCH APPOINTMENT SHALL
CONTINUE UNDISCHARGED FOR A PERIOD OF 60 DAYS; OR THE BORROWER SHALL
INSTITUTE (BY PETITION, APPLICATION, ANSWER, CONSENT OR OTHERWISE) ANY
BANKRUPTCY, INSOLVENCY, REORGANIZATION, ARRANGEMENT, READJUSTMENT OF
DEBT, DISSOLUTION, LIQUIDATION OR SIMILAR PROCEEDING RELATING TO IT
UNDER THE LAWS OF ANY JURISDICTION; OR ANY SUCH PROCEEDING SHALL BE
INSTITUTED AND CONTINUING (BY PETITION, APPLICATION OR OTHERWISE)
AGAINST THE BORROWER; OR ANY JUDGMENT, WRIT, WARRANT OF ATTACHMENT OR
EXECUTION OR SIMILAR PROCESS SHALL BE ISSUED OR LEVIED AGAINST A
SUBSTANTIAL PART OF THE PROPERTY OF THE BORROWER AND SUCH JUDGMENT,
WRIT, OR SIMILAR PROCESS SHALL NOT BE RELEASED, VACATED OR FULLY BONDED
WITHIN 60 DAYS AFTER ITS ISSUE OR LEVY.
(j) A PETITION SHALL BE FILED UNDER THE UNITED STATES BANKRUPTCY CODE
NAMING THE BORROWER AS DEBTOR.
(k) THE RENDERING AGAINST THE BORROWER OF A FINAL JUDGMENT, DECREE OR
ORDER FOR THE PAYMENT OF MONEY IN EXCESS OF $100,000 AND THE
CONTINUANCE OF SUCH JUDGMENT, DECREE OR ORDER UNSATISFIED AND IN EFFECT
FOR ANY PERIOD OF 30 CONSECUTIVE DAYS WITHOUT A STAY OF EXECUTION.
(l) A WRIT OF ATTACHMENT, GARNISHMENT, LEVY OR SIMILAR PROCESS SHALL BE
ISSUED AGAINST OR SERVED UPON THE BANK WITH RESPECT TO (I) ANY PROPERTY
OF THE BORROWER IN THE POSSESSION OF THE BANK, OR (II) ANY INDEBTEDNESS
OF THE BANK TO THE BORROWER, AND SHALL REMAIN UNCURED FOR A PERIOD OF
30 DAYS.
(m) ANY REPORTABLE EVENT WHICH CONSTITUTES GROUNDS FOR THE TERMINATION
OF ANY PLAN OR FOR THE APPOINTMENT BY THE APPROPRIATE UNITED STATES
DISTRICT COURT OF A TRUSTEE TO ADMINISTER ANY PLAN, SHALL HAVE OCCURRED
AND BE CONTINUING 30 DAYS AFTER WRITTEN NOTICE TO SUCH EFFECT SHALL
HAVE BEEN GIVEN TO THE BORROWER BY THE BANK; OR A TRUSTEE SHALL HAVE
BEEN APPOINTED BY AN APPROPRIATE UNITED STATES DISTRICT COURT TO
ADMINISTER ANY PLAN; OR THE PENSION BENEFIT GUARANTY CORPORATION SHALL
HAVE INSTITUTED PROCEEDINGS TO TERMINATE ANY PLAN OR TO APPOINT A
TRUSTEE TO ADMINISTER ANY PLAN; OR THE BORROWER SHALL HAVE FILED FOR A
DISTRESS TERMINATION OF ANY PLAN UNDER TITLE IV OF ERISA; OR THE
BORROWER SHALL HAVE FAILED TO MAKE ANY QUARTERLY CONTRIBUTION REQUIRED
WITH RESPECT TO ANY PLAN UNDER SECTION 412(m) OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED, WHICH THE BANK DETERMINES IN GOOD FAITH MAY
BY ITSELF, OR IN COMBINATION WITH ANY SUCH FAILURES THAT THE BANK MAY
DETERMINE ARE LIKELY TO OCCUR IN THE FUTURE, RESULT IN THE IMPOSITION
OF A LIEN ON THE ASSETS OF THE BORROWER IN FAVOR OF THE PLAN.
(n) K. JEFFREY DAHLBERG AND RONALD G. OLSON, IN THE AGGREGATE, SHALL
FAIL TO HOLD AND OWN MORE THAN 50% OF ALL IMMEDIATE AND OUTSTANDING
VOTING STOCK OF THE BORROWER.
SECTION 9.2 RIGHTS AND REMEDIES. IF ANY EVENT OF DEFAULT SHALL
OCCUR AND BE CONTINUING, THE BANK MAY EXERCISE ANY ONE OR MORE OF THE RIGHTS AND
REMEDIES SET FORTH BELOW:
(a) THE BANK MAY, BY NOTICE TO THE BORROWER, DECLARE ITS COMMITMENT TO
BE TERMINATED, WHEREUPON THE SAME SHALL FORTHWITH TERMINATE.
(b) THE BANK MAY, BY NOTICE TO THE BORROWER, DECLARE ALL INDEBTEDNESS,
INTEREST, FEES AND OTHER AMOUNTS DUE AND PAYABLE UNDER THIS AGREEMENT
AND/OR THE NOTE AND/OR ANY OTHER OBLIGATIONS TO BE FORTHWITH DUE AND
PAYABLE, WHEREUPON THE SAME SHALL BE FORTHWITH DUE AND PAYABLE, WITHOUT
PRESENTMENT, NOTICE OF DISHONOR, PROTEST, OR FURTHER NOTICE OF ANY
KIND, ALL OF WHICH ARE HEREBY EXPRESSLY WAIVED BY THE BORROWER.
(c) THE BANK MAY, WITHOUT NOTICE TO THE BORROWER AND WITHOUT FURTHER
ACTION, APPLY ANY AND ALL MONEY OWING BY THE BANK TO THE BORROWER
(WHETHER OR NOT THEN DUE) TO THE PAYMENT OF THE NOTE THEN OUTSTANDING,
INCLUDING INTEREST ACCRUED THEREON, AND TO THE PAYMENT OF ALL OTHER
OBLIGATIONS THEN OWING TO THE BANK.
(d) THE BANK MAY EXERCISE AND ENFORCE ANY AND ALL RIGHTS AND REMEDIES
AVAILABLE TO IT UNDER THE LOAN DOCUMENTS OR OTHERWISE AVAILABLE BY LAW
OR AGREEMENT..
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in Section 9.1(j), the Commitment shall be automatically terminated
and the entire unpaid principal amount of the Note and all other Obligations
then outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this Agreement or otherwise payable to the Bank shall be
immediately due and payable without presentment, demand, protest or notice of
any kind, all of which are hereby expressly waived by the Borrower.
ARTICLE X
Miscellaneous
SECTION 10.1 AMENDMENTS, ETC. NO AMENDMENT OR WAIVER OF ANY
PROVISION OF ANY LOAN DOCUMENT, NOR CONSENT TO ANY DEPARTURE BY THE BORROWER
THEREFROM SHALL IN ANY EVENT BE EFFECTIVE UNLESS THE SAME SHALL BE IN WRITING
AND SIGNED BY THE BANK AND, IN THE CASE OF AN AMENDMENT, BY THE BORROWER, AND
THEN SUCH AMENDMENT, WAIVER OR CONSENT SHALL BE EFFECTIVE ONLY IN THE SPECIFIC
INSTANCE AND FOR THE SPECIFIC PURPOSE FOR WHICH GIVEN.
SECTION 10.2 NOTICES, ETC. ALL NOTICES AND OTHER
COMMUNICATIONS PROVIDED FOR UNDER ANY LOAN DOCUMENT SHALL BE IN WRITING AND
MAILED, TELECOPIED, PERSONALLY DELIVERED OR DELIVERED BY OVERNIGHT CARRIER, TO
THE APPLICABLE PARTY AT ITS ADDRESS INDICATED BELOW:
If to the Borrower:
Grow Biz International, Inc.
4200 Dahlberg Drive
Golden Valley, Minnesota 55422
Attention: Robert Thiner
Telecopier: (612) 520-8410
If to the Bank:
TCF Bank Minnesota fsb
801 Marquette Avenue
Minneapolis, Minnesota 55402
Attention: R. James Hancock
Vice President
Telecopier: (612) 661-8504
or, as to each party, at such other address or telecopy number as shall be
designated in a written notice to the other party. Each such notice or
communication shall be effective (i) if given by mail, two Business Days after
such notice or communication is deposited in the mail with first class postage
prepaid, addressed as aforesaid, (ii) if given by telecopy, when sent, (iii) if
personally delivered, when personally delivered and (iv) if delivered by
overnight carrier, one Business Day after deposit with the overnight carrier for
next Business Day delivery, addressed as aforesaid; except that notices to the
Bank pursuant to the provisions of Article III or Article IV hereof shall not be
effective until received by the Bank.
SECTION 10.3 NO WAIVER; REMEDIES. NO FAILURE ON THE PART OF
THE BANK TO EXERCISE, AND NO DELAY IN EXERCISING, ANY RIGHT UNDER ANY LOAN
DOCUMENT SHALL OPERATE AS A WAIVER THEREOF; NOR SHALL ANY SINGLE OR PARTIAL
EXERCISE OF ANY RIGHT UNDER ANY LOAN DOCUMENT PRECLUDE ANY OTHER OR FURTHER
EXERCISE THEREOF OR THE EXERCISE OF ANY OTHER RIGHT. THE REMEDIES PROVIDED IN
THE LOAN DOCUMENTS ARE CUMULATIVE AND NOT EXCLUSIVE OF ANY REMEDIES PROVIDED BY
LAW.
SECTION 10.4 INDEMNIFICATION BY BORROWER. IN ADDITION TO THE
PAYMENT OF EXPENSES PURSUANT TO SECTION 10.5 HEREOF, THE BORROWER HEREBY AGREES
TO INDEMNIFY, DEFEND AND HOLD HARMLESS THE BANK AND ANY OF ITS PARTICIPANTS,
PARENT CORPORATIONS, SUBSIDIARY CORPORATIONS, AFFILIATED CORPORATIONS, SUCCESSOR
CORPORATIONS, AND ALL PRESENT AND FUTURE OFFICERS, DIRECTORS, EMPLOYEES AND
AGENTS OF THE FOREGOING (THE "INDEMNITEES"), FROM AND AGAINST ANY AND ALL
LIABILITIES, LOSSES, DAMAGES, PENALTIES, JUDGMENTS, SUITS, CLAIMS, TRANSFER AND
DOCUMENTARY TAXES, ASSESSMENTS OR CHARGES, COSTS AND EXPENSES OF ANY KIND OR
NATURE WHATSOEVER (INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND
DISBURSEMENTS OF COUNSEL) WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED
AGAINST SUCH INDEMNITEE, IN ANY MANNER RELATING TO OR ARISING OUT OF OR IN
CONNECTION WITH THE MAKING OF LOANS OR FINANCIAL ACCOMMODATIONS CONSTITUTING
OBLIGATIONS, THIS AGREEMENT AND ALL OTHER LOAN DOCUMENTS, OR THE USE OR INTENDED
USE OF THE PROCEEDS OF ANY SUCH LOANS OR FINANCIAL ACCOMMODATIONS, OR ANY PAST,
PRESENT OR FUTURE EXISTENCE, USE, HANDLING, STORAGE, TRANSPORTATION OR DISPOSAL
OF ANY HAZARDOUS SUBSTANCE BY THE BORROWER OR ON PROPERTY OWNED, LEASED OR
CONTROLLED BY THE BORROWER (THE "INDEMNIFIED LIABILITIES"), EXCEPT FOR ANY
PORTION OF SUCH LIABILITIES, LOSSES, DAMAGES, PENALTIES, JUDGMENTS, SUITS,
CLAIMS, COSTS OR EXPENSES INCURRED SOLELY AS A RESULT OF THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF SUCH INDEMNITEE. UPON WRITTEN NOTICE FROM AN INDEMNITEE
STATING THAT A CLAIM FOR AN INDEMNIFIED LIABILITY HAS BEEN MADE UPON AN
INDEMNITEE, THE BORROWER, OR COUNSEL DESIGNATED BY THE BORROWER AND SATISFACTORY
TO THE INDEMNITEE, WILL RESIST AND DEFEND ANY ACTION, SUIT OR PROCEEDING BROUGHT
AGAINST SUCH INDEMNITEE AND ARISING FROM ANY OF THE FOREGOING, TO THE EXTENT AND
IN THE MANNER DIRECTED BY THE INDEMNITEE, AT THE BORROWER'S SOLE COST AND
EXPENSE. IF THE FOREGOING UNDERTAKING TO INDEMNIFY, DEFEND AND HOLD HARMLESS IS
HELD TO BE UNENFORCEABLE BECAUSE IT VIOLATES ANY LAW OR PUBLIC POLICY, THE
BORROWER SHALL NEVERTHELESS MAKE THE MAXIMUM CONTRIBUTION TO THE PAYMENT AND
SATISFACTION OF EACH OF THE INDEMNIFIED LIABILITIES WHICH IS PERMISSIBLE UNDER
APPLICABLE LAW. THE OBLIGATION OF THE BORROWER UNDER THIS SECTION 10.4 SHALL
SURVIVE THE TERMINATION OF THIS AGREEMENT AND THE DISCHARGE OF THE OBLIGATIONS.
SECTION 10.5 COSTS AND EXPENSES. THE BORROWER AGREES TO PAY
ON DEMAND ALL REASONABLE OUT-OF-POCKET COSTS, EXPENSES AND FEES RELATED TO THE
PREPARATION, EXECUTION, DELIVERY, FILING, RECORDING AND ADMINISTRATION OF THE
LOAN DOCUMENTS AND THE OTHER DOCUMENTS TO BE DELIVERED UNDER THE LOAN DOCUMENTS,
INCLUDING WITHOUT LIMITATION THE COSTS, EXPENSES AND FEES PAYABLE OR DETERMINED
TO BE PAYABLE IN CONNECTION WITH ANY AUDITS, INSPECTIONS, EXAMINATIONS DESCRIBED
IN SECTIONS 5.1(l) AND 7.2 HEREOF, ANY WAIVER OR CONSENT HEREUNDER OR ANY
AMENDMENT HEREOF, INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND
OUT-OF-POCKET EXPENSES OF OUTSIDE OR IN-HOUSE COUNSEL FOR THE BANK WITH RESPECT
THERETO AND WITH RESPECT TO ADVISING THE BANK AS TO ITS RIGHTS AND
RESPONSIBILITIES UNDER THE LOAN DOCUMENTS, AND ALL COSTS AND EXPENSES (INCLUDING
REASONABLE OUTSIDE OR IN-HOUSE COUNSEL FEES AND EXPENSES) IN CONNECTION WITH THE
PERFORMANCE, COLLECTION AND ENFORCEMENT OF THE LOAN DOCUMENTS AND THE OTHER
DOCUMENTS TO BE DELIVERED UNDER THE LOAN DOCUMENTS.
SECTION 10.6 SEVERABILITY OF PROVISIONS. ANY PROVISION OF
THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT WHICH IS PROHIBITED OR
UNENFORCEABLE IN ANY JURISDICTION SHALL, AS TO SUCH JURISDICTION, BE INEFFECTIVE
TO THE EXTENT OF SUCH PROHIBITION OR UNENFORCEABILITY WITHOUT INVALIDATING THE
REMAINING PROVISIONS HEREOF OR THEREOF OR AFFECTING THE VALIDITY OR
ENFORCEABILITY OF SUCH PROVISION IN ANY OTHER JURISDICTION.
SECTION 10.7 BINDING EFFECT. THIS AGREEMENT SHALL BE BINDING
UPON AND INURE TO THE BENEFIT OF THE BORROWER AND THE BANK AND THEIR RESPECTIVE
SUCCESSORS AND ASSIGNS, EXCEPT THAT THE BORROWER SHALL NOT HAVE THE RIGHT TO
ASSIGN ITS RIGHTS HEREUNDER OR ANY INTEREST HEREIN WITHOUT THE PRIOR WRITTEN
CONSENT OF THE BANK.
SECTION 10.8 EXECUTION IN COUNTERPARTS. THIS AGREEMENT MAY BE
EXECUTED IN ANY NUMBER OF COUNTERPARTS, EACH OF WHICH WHEN SO EXECUTED SHALL BE
DEEMED TO BE AN ORIGINAL AND ALL OF WHICH WHEN TAKEN TOGETHER SHALL CONSTITUTE
BUT ONE AND THE SAME AGREEMENT.
SECTION 10.9 HEADINGS. ARTICLE AND SECTION HEADINGS IN THIS
AGREEMENT ARE INCLUDED HEREIN FOR CONVENIENCE OF REFERENCE ONLY AND SHALL NOT
CONSTITUTE A PART OF THIS AGREEMENT FOR ANY OTHER PURPOSE.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURES TO FOLLOW]
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
GROW BIZ INTERNATIONAL, INC.
By /s/ Robert E. Thiner
----------------------
Robert Thiner
Its EVP Finance
---------------------
TCF BANK MINNESOTA fsb
By /s/ R. James Hancock
----------------------
R. James Hancock
Its President
And
By /s/ K. Robert Lee
-------------------
Its Senior Vice President
-------------------------------
APPENDIX
Glossary of Terms
"Advances" means Revolving Advances.
"Affiliate" means (i) any Person that, either directly or
indirectly, is in control of, is controlled by, or is under common control with
the Borrower, or (ii) any Person who is a (A) shareholder, director, officer or
employee of the Borrower, or (B) any Person who is a director, officer or
employee of any Person described in clause (i) above. For purposes of this
definition, control of a Person shall mean the power, direct or indirect, (X) to
vote more than 50% of the securities having ordinary voting power for the
election of directors of such Person, or (Y) to direct or cause the direction of
the management and policies of such Person, whether by contract or otherwise.
"Agreement" means this Credit Agreement, as the same may from
time to time be supplemented or amended.
"Base Rate" means the variable rate of interest established by
the Bank from time to time as its "base rate" or, if the Bank ceases to
establish a rate so designated, any similar successor rate designated by the
Bank. The Bank may lend to its customers at rates that are at, above or below
the Base Rate.
"Business Day" means any day other than a Saturday, Sunday or
any other day on which banks are required by law or authorized to close in
Minneapolis, Minnesota.
"Capital Base" means, at any date, the sum of Tangible Net
Worth plus Subordinated Debt at such date.
"Commitment" means any obligation of the Bank to make loans,
advances or other financial accommodations to or for the benefit of the
Borrower, including without limitation, the Bank's obligation to make Advances
to the Borrower under Section 3.1 hereof.
"Compliance Certificate" means a certificate of an officer of
the Borrower in the form of Exhibit A hereto setting forth in reasonable detail
all relevant information and the calculations necessary to determine the
Borrower's compliance with its covenants set forth in Sections 7.8, 7.9 and 7.10
hereof.
"Current Assets" means, at any date, the aggregate amount of
all assets of the Borrower which would be classified as current assets at such
date, computed in accordance with GAAP.
"Current Liabilities" means, at any date, the aggregate amount
of all liabilities of the Borrower (including proper accruals) which would be
classified as current liabilities at such date, computed in accordance with
GAAP.
"Default" means any event or condition that, with notice or
lapse of time or both, would become an Event of Default.
"Default Rate" has the meaning given in Section 4.5 hereof.
"Environmental Law" means the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. ss. 9601 et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. ss. 6901 et seq., the
Hazardous Materials Transportation Act, 49 U.S.C. ss. 1802 et seq., the Toxic
Substances Control Act, 15 U.S.C. ss. 2601 et seq., the Federal Water Pollution
Control Act, 33 U.S.C. ss. 1251 et seq., the Clean Water Act, 33 U.S.C. ss. 1321
et seq., the Clean Air Act, 42 U.S.C. ss. 7401 et seq., and any other federal,
state, county, municipal, local or other statute, law, ordinance or regulation
which may relate to or deal with the environment, including such as protect
human health and natural resources, all as may be from time to time amended.
"ERISA" means Title IV of the Employee Retirement Income
Security Act of 1974, as amended.
"Event of Default" has the meaning specified in Section 9.1
hereof.
"GAAP" means, at any particular time, generally accepted
accounting principles in the United States in effect at such time.
"Hazardous Substances" means asbestos, ureaformaldehyde,
polychlorinated biphenyls ("PCBs"), nuclear fuel or material, chemical waste,
radioactive material, explosives, known carcinogens, petroleum products and
by-products and other dangerous, toxic or hazardous pollutants, contaminants,
chemicals, materials or substances listed or identified in, or regulated by, any
Environmental Law.
"Loan Documents" means this Agreement, the Note, the
acknowledgment delivered pursuant to Section 5.1(c) and the agreement and waiver
delivered pursuant to Section 5.1(d).
"Note" means the Revolving Note and any other promissory note
now or hereafter evidencing any Obligation.
"Obligations" means each and every debt, liability and
obligation of every type and description which the Borrower may now or at any
time hereafter owe to the Bank, whether such debt, liability or obligation now
exists or is hereafter created or incurred, whether it arises in a transaction
involving the Bank alone or in a transaction involving other creditors of the
Borrower, and whether it is direct or indirect, due or to become due, absolute
or contingent, primary or secondary, liquidated or unliquidated, or sole, joint,
several or joint and several, and including specifically, but not limited to,
all indebtedness of the Borrower arising under this Agreement or any other loan
or credit agreement or guaranty between the Borrower and the Bank, whether now
in effect or hereafter entered into.
"Person" means any individual, corporation, limited liability
company, limited liability partnership, partnership, joint venture, association,
joint-stock company, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained
for employees of the Borrower and covered by ERISA.
"Reportable Event" means (i) a "reportable event" described in
Section 4043 of ERISA and the regulations issued thereunder, (ii) a withdrawal
from any Plan, as described in Section 4063 of ERISA, (iii) an action to
terminate a Plan for which a notice is required to be filed under Section 4041
of ERISA, (iv) any other event or condition that might constitute grounds for
termination of, or the appointment of a trustee to administer, any Plan, or (v)
a complete or partial withdrawal from a Multiemployer Plan as described in
Sections 4203 and 4205 of ERISA.
"Repurchased Stock Amount" means, at any date, the aggregate
amount paid by the Borrower for the repurchase of its stock during the period
commencing June 30, 1996 and ending as of the date of determination.
"Revolving Advance" means an advance made by the Bank to the
Borrower pursuant to Section 3.1 hereof.
"Revolving Note" has the meaning given in Section 3.1(c)
hereof.
"Subordinated Debt" means indebtedness of the Borrower which
has been subordinated in right of payment to the Borrower's Obligations to the
Bank on terms accepted in writing by the Bank.
"Subsidiary" means any corporation of which more than 50% of
the outstanding shares of capital stock having general voting power under
ordinary circumstances to elect a majority of the board of directors of such
corporation, irrespective of whether or not at the time stock of any other class
or classes shall have or might have voting power by reason of the happening of
any contingency, is at the time directly or indirectly owned by the Borrower, by
the Borrower and one or more other Subsidiaries, or by one or more other
Subsidiaries.
"Tangible Net Worth" means, at any date, the excess of:
(a) the tangible assets of the Borrower
which, in accordance with GAAP, are tangible assets, after
deducting adequate reserves in each case where, in accordance
with GAAP, a reserve is proper, over
(b) Total Liabilities of the Borrower;
provided, however, that (i) inventory shall be taken into account on the basis
of the cost or current market value, whichever is lower, (ii) in no event shall
there be included as such tangible assets, patents, trademarks, trade names,
copyrights, good will, deferred charges or any securities unless the same are
readily marketable in the United States of America or entitled to be used as a
credit against Federal income tax liabilities, (iii) securities included as such
tangible assets shall be taken into account at their current market price or
cost, whichever is lower, and (iv) any write-up in the book value of any assets
shall not be taken into account.
"Total Liabilities" means, at any date, the aggregate amount
of all liabilities of the Borrower (including proper accruals and deferrals)
which would be included as liabilities on the balance sheet of the Borrower at
such date, computed in accordance with GAAP.
SCHEDULE 6.7
Permitted Actions, Suits or Proceedings
Pending:
1. VAN BUSKIRK AND ARAVAN, INC. V. GROW BIZ INTERNATIONAL, INC., United
States District Court, District of Minnesota, Case No. 3-96-CV-26.
2. STEVEN D. MUCKEY, D.D.S., ET AL. V. MARC EVON ENTERPRISES, INC. ET AL.,
Circuit Court of the Seventeenth Judicial Circuit for Broward County,
Florida, Case No. 93-27185 (13).
3. PRECISE EXERCISE EQUIPMENT, INC. V. ICON HEALTH & FITNESS, INC., ET
AL., United States District Court, Central District of California, Case
No. .96-3637 (SHx).
Threatened:
Letter dated June 7, 1996 from Attorney representing Alien Sport, Inc. alleging
possible infringement of patent held by Alien Sport, Inc.
EXHIBIT A
COMPLIANCE CERTIFICATE
Dated ______________, 199__
This Certificate relates to that certain Credit Agreement dated as of July 31,
1996 (as amended and supplemented to date, the "Agreement") executed by and
among the undersigned and TCF Bank Minnesota fsb. Capitalized terms not defined
herein have the same meaning as specified in the Agreement.
The undersigned, after due investigation by the officer executing this
Certificate, hereby warrants and certifies, as of the date set forth above, (i)
no Default or Event of Default exists under the Agreement, and (ii) to the best
knowledge of officer executing this Certificate, no material adverse change has
occurred in the amounts or ratios indicated below since any of the computation
dates indicated below. Without limiting the generality of the foregoing, the
undersigned hereby certifies the following:
<TABLE>
<CAPTION>
COMBINED BASIS:
ACTUAL
FINANCIAL COVENANTS (AS OF / /) COVENANT
<S> <C> <C> <C>
7.8 MINIMUM CURRENT RATIO:
Current Assets $______________
Current Liabilities $______________
CURRENT RATIO _____ to 1.00 1.15 to 1.00
7.9 MINIMUM CAPITAL BASE PLUS
REPURCHASED STOCK AMOUNT:
Total Assets $______________ From July 31,
- Intangible Assets ($_____________) 1996 through
Total Liabilities $______________ December 30,
+ Subordinated Debt $______________ 1996:
= Capital Base $______________ $13,100,000.
+ Repurchased Stock $______________ From December
(after 6/30/96) 31, 1996 and
= CAPITAL BASE PLUS Thereafter:
REPURCHASE OF STOCK $______________ $14,100,000
7.10 MAXIMUM TOTAL LIABILITIES TO
CAPITAL BASE RATIO:
Total Liabilities $______________
- Subordinate Debt ($_____________)
$______________
Capital Base $______________
CAPITAL BASE RATIO _____ to 1.00 2.00 to 1.00
Borrower: GROW BIZ INTERNATIONAL, INC.
By: ______________________________________
Its: ______________________________________
</TABLE>
EXHIBIT B
SCHEDULE OF PERMITTED LIENS, INDEBTEDNESS
AND GUARANTIES
1. Permitted Liens.
<TABLE>
<CAPTION>
Secured Party Description of Filing Date Jurisdiction Filing No.
- ------------- -------------- ----------- ------------ ----------
Collateral
----------
<S> <C> <C> <C> <C>
Clarklift of Minnesota Specific Equipment 2/25/94 MN Secretary of State 1653538
First Bank Fixtures 9/15/94 MN Secretary of State 1702484
First Bank Specific Equipment 9/15/94 MN Secretary of State 1702485
Clarklift of Minnesota Specific Equipment 2/03/95 MN Secretary of State 1735314
IBM All IBM Equipment 4/20/95 MN Secretary of State 1754455
First Bank 5/15/95 MN Secretary of State 1761654
</TABLE>
2. Permitted Indebtedness.
Lender Amount of Indebtedness
- ------ ----------------------
Clarklift of Minnesota $_________________
First Bank $_________________
IBM $_________________
3. Permitted Guaranties.
None.
EXHIBIT 10.23
REVOLVING PROMISSORY NOTE
$5,000,000 Minneapolis, Minnesota
July 31, 1996
For Value Received, GROW BIZ INTERNATIONAL, INC., a Minnesota
corporation (hereinafter the "Borrower"), promises to pay to the order of TCF
BANK MINNESOTA fsb, a federally chartered stock savings bank (hereinafter the
"Bank"), at its main office at 801 Marquette Avenue in Minneapolis, Minnesota,
or at such other place as the holder hereof may from time to time in writing
designate, on July 31, 1997 (the "Maturity Date"), in lawful money of the United
States of America, the principal sum of Five Million and No/100 Dollars
($5,000,000) or, if less, the aggregate unpaid principal amount of all Revolving
Advances under and as defined in the Credit Agreement dated as of July 31, 1996,
by and between the Borrower and the Bank (as the same may hereafter be amended,
supplemented or restated, the "Credit Agreement"), together with interest on the
principal balance of this Note outstanding from time to time from the date
hereof until paid in full at an annual rate determined, and calculated, pursuant
to the Credit Agreement.
From and after the date of the first Revolving Advance
hereunder, interest accruing on the principal balance hereof shall be due and
payable monthly, commencing on the first day of the month following the date of
the first Revolving Advance, and on the same day of each month thereafter until
payment in full of the indebtedness evidenced by this Note.
This Note is the "Revolving Note" defined in and is subject to
the terms and provisions of the Credit Agreement. The Credit Agreement provides
for the mandatory prepayment and the acceleration of the principal balance
hereof upon the occurrence of certain events stated therein.
This Note is issued in and shall be governed by the
substantive laws (but not conflicts laws) of the State of Minnesota.
No delay or omission on the part of the holder in exercising
any right hereunder shall operate as a waiver of such right or of any other
remedy under this Note. A waiver on any one occasion shall not be construed as a
waiver of any such right or remedy on a future occasion.
All makers, endorsers, sureties, guarantors and other
accommodation parties hereby waive presentment for payment, protest and notice
of nonpayment and consent, without affecting their liability hereunder, to any
and all extensions, renewals, substitutions and alterations of any of the terms
of this Note and to the release of or failure by the Bank to exercise any rights
against any party liable for or any property securing payment thereof.
GROW BIZ INTERNATIONAL, INC.
By /s/ Robert E. Thiner
----------------------
Robert Thiner
Its EVP Finance
--------------------
EXHIBIT 11.1
GROW BIZ INTERNATIONAL, INC.
Statement of Computation of Per Share Earnings
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE:
Net income $1,379,500 $2,028,600 $2,585,500
========== ========== ==========
SHARES USED IN PER COMMON SHARE COMPUTATION:
Weighted average common shares outstanding 7,118,400 7,212,600 6,428,500
Dilutive effect of stock options after
application of the treasury stock method 321,600 138,400 87,500
--------- --------- ---------
7,440,000 7,351,000 6,516,000
--------- --------- ---------
Net income per common share $ .19 $ .28 $ .40
========== ========== ==========
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included (or incorporated by reference) in this Form 10-K, into the
Company's previously filed Registration Statement File Numbers 33-85972,
33-85960, 33-85956, 33-79176, 33-71772, 333-3236, 333-3068 and 333-3066.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 19, 1997
EXHIBIT 99.1
GROW BIZ INTERNATIONAL, INC.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
Grow Biz International, Inc. (the "Company") desires to take advantage of the
new "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and is filing this Exhibit to its Annual Report on Form 10-K in order to do
so. When used in this Annual Report on Form 10-K and in future filings by the
Company with the Securities and Exchange Commission in the Company's annual
report, quarterly reports, press releases and in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "look for", "may result", "will continue", "is anticipated", "expect",
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. The Company cautions readers that the
following important factors, among others, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any forward-looking statements made by, or on behalf of,
the Company:
DEPENDENCE ON NEW FRANCHISEES
The Company's ability to generate increased revenue and achieve higher levels of
profitability depends on increasing the number of franchised stores open. While
management believes that a number of major metropolitan markets have reached or
are nearing the saturation point for certain concepts, management also believes
that many larger and smaller markets will continue to provide significant
opportunities for sales of franchises and that the Company can sustain
approximately its current annual level of store openings. However, there can be
no assurance that the Company will sustain this level of store openings.
INABILITY TO COLLECT ACCOUNTS RECEIVABLE
In the event that the Company's ability to collect accounts receivable
significantly declines from current rates, additional charges that affect
earnings may be incurred.
UNOPENED STORES
The Company believes that a substantial majority of stores sold but not opened
will open within the time period permitted by the applicable franchise agreement
or the Company will be able to resell the territories for most of the terminated
or expired franchises. However, there can be no assurance that substantially all
of the currently sold but unopened franchises will open and commence paying
royalties to the Company. To the extent the Company is required to refund any
franchise fees for stores that do not open, the Company believes that it will be
able to repay these fees out of available cash.
DEPENDENCE ON SUPPLY OF USED MERCHANDISE
The Company's store concepts are based on offering customers a mix of used and
new merchandise. As a result, obtaining continuing supplies of high quality used
merchandise is essential to the success of the Company's store concepts. To
date, supplies of used merchandise have been adequate and the Company's training
programs emphasize methods for locating and purchasing used goods. There can be
no assurance, however, that supply problems will not be encountered in the
future.
COMPETITION
Retailing, including the sale of sporting goods, children's apparel, computer
equipment, compact disks and musical instruments, is highly competitive. Many
retailers have significantly greater financial and other resources than the
Company and its franchisees. Individual franchisees face competition in their
markets from retailers of new merchandise and, in certain instances, resale,
thrift and other stores that sell used merchandise. To date, the Company's
franchisees and its Company-owned stores have not faced a high degree of
competition in the sale of used merchandise. However, the Company may face
additional competition as its franchise systems expand and additional
competitors may enter the used merchandise market.
S, G & A EXPENSE
The Company's ability to control the amount, and rate of growth in, selling,
general and administrative expenses; and the impact of unusual items resulting
from the Company's ongoing evaluation of its business strategies, asset
valuations and organizational structures.
FINANCING
The Company's ability to obtain competitive financing to fund its growth.
QUARTERLY FLUCTUATIONS
The Company's quarterly results of operations have fluctuated as a result of the
timing of recognition of franchise fees, receipt of royalty payments, timing of
merchandise shipments, timing of expenditures and other factors. There can be no
assurance that results in future periods will not fluctuate on a quarterly
basis.
GOVERNMENT REGULATION
As a franchisor, the Company is subject to various federal and state franchise
laws and regulations. Although the Company believes it is currently in material
compliance with existing federal and state laws, there is a trend toward
increasing government regulation of franchising. The promulgation of new
franchising laws and regulations could adversely affect the Company.
The Company does not undertake and specifically declines any obligations to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
<CASH> 1,389
<SECURITIES> 0
<RECEIVABLES> 14,101
<ALLOWANCES> (930)
<INVENTORY> 2,716
<CURRENT-ASSETS> 19,866
<PP&E> 8,859
<DEPRECIATION> (2,880)
<TOTAL-ASSETS> 29,177
<CURRENT-LIABILITIES> 11,350
<BONDS> 0
0
0
<COMMON> 10,953
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<EPS-PRIMARY> .40
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</TABLE>
