-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GHfN8r1HT6gw+pPsqg7azhniPomwWh02zsXr2FY8D5TXRPEBR6hamoG2wRbThhlH 0QXUDdaYPwkD9k9ixC9elA== 0000897101-97-000292.txt : 19970320 0000897101-97-000292.hdr.sgml : 19970320 ACCESSION NUMBER: 0000897101-97-000292 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970319 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GROW BIZ INTERNATIONAL INC CENTRAL INDEX KEY: 0000908315 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS RETAIL [5900] IRS NUMBER: 411622691 STATE OF INCORPORATION: MN FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22012 FILM NUMBER: 97559339 BUSINESS ADDRESS: STREET 1: 4200 DAHLBERG DR CITY: GOLDEN VALLEY STATE: MN ZIP: 55422-4837 BUSINESS PHONE: 6125208500 10-K 1 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 ----------- 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:
---------- ------------ ---------- ------------- ------------ ------------- ----------- STORES TOTAL TOTAL AWARDED, 12/30/95 OPENED CLOSED CONVERTED 12/28/96 NOT OPEN TOTAL ---------- ------------ ---------- ------------- ------------ ------------- ----------- 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 ===== ===== ===== ===== ===== ===== =====
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) --------------- 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:
1996: First Second Third Fourth 1995: First Second Third Fourth - ---------- ----------- ----------- ------------ ----------- --------- ----------- ----------- ------------ ----------- 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
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.
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 ----------- ---------- ---------- ----------- ---------- ----------- 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 ======= ======= ======== ======== ======== ========
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%
(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)
For the Fiscal Year-Ended December 31,1994 -------------------------------------------------- CDX Adjustments Grow Biz (Note a ) (Note b) Pro Forma ----------- ---------- ------------ ------------- 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 ========== ==========
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:
----------------------------------------------------------------------------------------- Fiscal Year Ended December 31, December 30, December 28, Fiscal 1995 Fiscal 1996 1994 1995 1996 over 1994 over 1995 ----------------------------------------------------------------------------------------- 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% ===== ===== ===== ===== ====
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:
Comparable Store Sales Increase (Decrease) from 1995 Average Store Sales ----------------------------- ------------------- 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
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
GROW BIZ INTERNATIONAL, INC. Balance Sheets December 30, December 28, 1995 1996 --------------------------------------- ASSETS 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 ============ ============
The accompanying notes are an integral part of these financial statements.
GROW BIZ INTERNATIONAL, INC. Statements of Operations Fiscal Year Ended ----------------- December 31, December 30, December 28, 1994 1995 1996 ------------------------------------------------------------ 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 ============= ============= =============
The accompanying notes are an integral part of these financial statements.
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 --------------------------------------------------- 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 ========= ============ ============
The accompanying notes are an integral part of these financial statements.
GROW BIZ INTERNATIONAL, INC. Statements of Cash Flows Fiscal Year Ended ----------------- December 31, December 30, December 28, 1994 1995 1996 ------------------------------------------------------- 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 =========== =========== ===========
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:
December 30, December 28, 1995 1996 ------------------------------------ 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 ============ ============
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:
December 31, December 30, December 28, 1994 1995 1996 ---------------------------------------------------------- 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 ============ ============ ============
The effective tax rate differs from the federal statutory rate due primarily to the following:
December 31, December 30, December 28, 1994 1995 1996 ------------------------------------------------------------- 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% ==== ==== ====
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:
First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------------------------------- 1996 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
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.
EXHIBIT NUMBER DESCRIPTION -------------- ----------- 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
(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
BALANCE AT CHARGED TO BALANCE BEGINNING COSTS/ WRITE-OFFS AT END OF PERIOD EXPENSES OF PERIOD 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 ============ ============ ========== ===========
BALANCE AT CHARGED TO BALANCE BEGINNING COSTS/ WRITE-OFFS AT END OF PERIOD EXPENSES OF PERIOD 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 ========= ========= ========= =========
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.
SIGNATURE TITLE DATE --------- ----- ---- /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
EX-10.22 2 CREDIT AGREEMENT 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 OF CONTENTS 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
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:
COMBINED BASIS: ACTUAL FINANCIAL COVENANTS (AS OF / /) COVENANT 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: ______________________________________
EXHIBIT B SCHEDULE OF PERMITTED LIENS, INDEBTEDNESS AND GUARANTIES 1. Permitted Liens.
Secured Party Description of Filing Date Jurisdiction Filing No. - ------------- -------------- ----------- ------------ ---------- Collateral ---------- 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
2. Permitted Indebtedness. Lender Amount of Indebtedness - ------ ---------------------- Clarklift of Minnesota $_________________ First Bank $_________________ IBM $_________________ 3. Permitted Guaranties. None. EX-10.23 3 REVOLVING PROMISSORY NOTE 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 -------------------- EX-11 4 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 GROW BIZ INTERNATIONAL, INC. Statement of Computation of Per Share Earnings
FISCAL YEAR ENDED ----------------------------------------------------------------- DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996 --------------------- --------------------- --------------------- 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 ========== ========== ==========
EX-23.1 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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 EX-99.1 6 CAUTIONARY STATEMENTS 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. EX-27 7 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-28-1996 DEC-28-1996 1,389 0 14,101 (930) 2,716 19,866 8,859 (2,880) 29,177 11,350 0 0 0 10,953 6,745 29,177 71,737 91,550 63,856 87,492 0 664 (195) 4,253 1,667 2,586 0 0 0 2,586 .40 0
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