SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997 COMMISSION FILE NUMBER: 0-22012
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GROW BIZ INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter.)
MINNESOTA 41-1622691
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4200 Dahlberg Drive, Minneapolis, MN 55422-4837
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 520-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Registrant's Common Stock
on January 31, 1998, as reported on the NASDAQ National Market System, was $27.8
million.
Shares of no par value Common Stock outstanding as of January 31, 1998:
5,951,134 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's Annual Meeting
of Shareholders to be held on May 6, 1998 have been incorporated by
reference into Part III of this report.
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
INDEX TO ANNUAL REPORT ON FORM 10-K
PART I PAGE
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Item 1. Business 4
General 4
Franchising Overview 6
Business Strategy 6
Franchise Operations 7
Franchise Marketing 8
Franchise Agreement 9
International Franchise Expansion 10
Competition 10
Government Regulations 10
Trademarks and Service Marks 11
Seasonality 11
Employees 11
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 4a. Executive Officers of the Registrant 12
PART II PAGE
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Item 5. Market for the Registrant's Common Equity and Related 14
Shareholder Matters
Item 6. Selected Consolidated Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition 21
and Results of Operations
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting 38
and Financial Disclosure
PART III PAGE
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Item 10. Directors and Executive Officers of the Registrants 38
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and 38
Management
Item 13. Certain Relationships and Related Transactions 38
<PAGE>
PART IV PAGE
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Item 14. Exhibits and Reports on Form 8-K 39
SIGNATURES 41
Exhibit 10.6 It's About Games(TM) Franchise Agreement
Exhibit 10.16 Amendment No. 3 to the 1992 Stock Option Plan
Exhibit 11.1 Statement of Computation of Per Share Earnings
Exhibit 21.1 Subsidiaries
Exhibit 23.1 Consent of Independent Public Accountants
Exhibit 27.1 Financial Data Schedule
Exhibit 99.1 Cautionary Statements for Purposes of the "Safe Harbor"
Provision of the Private Securities Litigation Reform Act
<PAGE>
ITEM 1: BUSINESS
GENERAL
Grow Biz International, Inc., (the Company) is a franchise company that
franchises six 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 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(R) 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(R) 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.
* In August 1997, Grow Biz Games, Inc., a wholly-owned subsidiary of
Grow Biz International, Inc., acquired certain assets and franchising
rights of Video Game Exchange, Inc. ("VGE") of Cleveland, Ohio for
total consideration of $6,579,700. VGE is a forty store retail
operation with stores in Ohio, Pennsylvania, Kentucky, Georgia and
Maryland and has become the nucleus of the It's About Games(TM)
concept. The Company began franchising this concept in 1997.
<PAGE>
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 six store concepts with their 1997 system-wide sales, defined as
revenues from all affiliated stores, are summarized as follows:
PLAY IT AGAIN SPORTS(R) - $284 million
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) - $61 million
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) - $115 million
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) - $16 million
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) - $27 million
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.
IT'S ABOUT GAMES(TM) - $8 million
It's About Games(TM) stores sell and buy both used and new video games, comics,
trading cards and accessories. The stores also offer game rental programs to
customers as well as several interactive stations that allow customers to play
the games prior to making a purchase.
<PAGE>
Following is a summary of the Company's franchising and corporate store activity
for the fiscal year ended December 27, 1997:
<TABLE>
<CAPTION>
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STORES
TOTAL OPENED/ TOTAL AWARDED,
12/28/96 PURCHASED CLOSED CONVERTED 12/27/97 NOT OPEN TOTAL
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<S> <C> <C> <C> <C> <C> <C> <C>
Play It Again Sports(R)
Franchised Stores - US and Canada 676 43 (63) (2) 654 62 716
Franchised Stores - Other International 8 0 (0) 0 8 0 8
Corporate - Owned 4 0 (1) 2 5 0 5
Other 22 0 (0) 0 22 0 22
Once Upon A Child(R)
Franchised Stores - US and Canada 182 26 (6) 2 204 39 243
Corporate - Owned 6 0 (0) (2) 4 0 4
Computer Renaissance(R)
Franchised Stores - US and Canada 108 76 (1) (3) 180 82 262
Corporate - Owned 4 0 (0) 3 7 0 7
Music Go Round(R)
Franchised Stores - US and Canada 20 18 (0) 0 38 14 52
Corporate - Owned 4 0 (0) 0 4 0 4
Disc Go Round(R)
Franchised Stores - US and Canada 114 31 (12) (1) 132 41 173
Corporate - Owned 2 0 (0) 1 3 0 3
It's About Games(TM)
Franchised Stores - US and Canada 0 0 (0) 0 0 2 2
Corporate - Owned 0 42 (0) 0 42 0 42
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Total 1,150 236 (83) 0 1,303 240 1,543
======================================================================================
</TABLE>
FRANCHISING OVERVIEW
Franchising is a method of distributing goods and services. The franchisor
typically develops a business concept and an operating system for the franchised
business. Franchisees are granted rights to use the franchisor's service marks
and must operate their businesses in accordance with the systems,
specifications, standards and formats developed by the franchisor. Virtually all
types of retail businesses are currently franchised, including clothing,
computers and electronics, sporting goods and various specialty retail
businesses.
BUSINESS STRATEGY
The Company's business strategy is to develop value-oriented retail concepts
based on a mix of used and new merchandise and to implement these concepts
through a nationwide franchise system that provides comprehensive support
services to its franchisees. The key elements of this strategy include:
VALUE-ORIENTED MERCHANDISING
The Company's retail concepts provide value to consumers by purchasing and
reselling used merchandise that consumers have outgrown or no longer use at
substantial savings from the price of new merchandise. By offering a combination
of high quality used and value-priced new merchandise, the Company benefits from
consumer demand for value-oriented retailing. In addition, the Company believes
that among national retail operations its retail store concepts provide a unique
source of value to consumers by purchasing used merchandise. The Company also
believes that the strategy of buying used merchandise increases consumer
awareness of the Company's retail concepts.
<PAGE>
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 multi-visit 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. Subsequent
training sessions are centered on store operations. They cover, 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.
FIELD SUPPORT
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.
It also has an ongoing field support program designed to assist franchisees in
operating their stores. 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.
The visit is also designed to assist franchisees with operational issues.
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.
<PAGE>
The Company provides 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. To provide the remaining five 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. Franchisees of the respective
concepts required to spend the following percentage of their gross sales on
approved advertising and marketing: Play It Again Sports(R) - 5%, Once Upon A
Child(R) - 5%, Computer Renaissance(R) - 3%, Music Go Round(R) - 3%, Disc Go
Round(R) - 5% and It's About Games(TM) - 4%. 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.
Beginning in 1998, Computer Renaissance(R) franchisees are required to pay the
Company 1/2% of their gross sales to fund a National Advertising Campaign in
lieu of the $500 annual advertising production fee.
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. 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.
<PAGE>
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
$4,269,000 and $3,588,000 representing fees relating to 290 and 240 stores sold
but not open at December 28, 1996 and December 27, 1997, 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 27, 1997, 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 27, 1997, the franchise fee for Once Upon A Child(R), Music
Go Round(R), Disc Go Round(R) and It's About Games(TM) 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 $5,000 is payable to the Company 30 days
prior to any franchise renewal. Under current franchise agreements, franchisees
of the respective concepts are required to pay the Company weekly royalties
equal to the following percentage of gross sales: Play It Again Sports(R) - 5%,
Once Upon A Child(R) - 5%, Computer Renaissance(R) - 3%, Music Go Round(R) - 3%,
Disc Go Round(R) - 5% and It's About Games(TM) - 4%. Play It Again Sports(R)
franchise agreements signed prior to April 1, 1992 require payment of a 3%
royalty.
Each franchisee is required to pay the Company an annual marketing fee of $500.
Beginning in 1998, Computer Renaissance(R) franchisees are required to pay the
Company 1/2% of their gross sales to fund a National Advertising Fund in lieu of
the $500 annual marketing fee. Each Play It Again Sports(R) and Once Upon A
Child(R) franchisee is required to spend 5%, each Disc Go Round(R) and It's
About Games(R) franchisee is required to spend 4% 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 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.
<PAGE>
INTERNATIONAL FRANCHISE EXPANSION
The Company began franchising the Play It Again Sports(R) concept
internationally in 1991 and as of December 27, 1997, had 97 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.
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, compact discs and video games, 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, one franchisor of stores which
sell used and new compact discs and three franchisors of stores which sell used
and new video games.
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 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. 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.
<PAGE>
TRADEMARKS AND SERVICE MARKS
Grow Biz(R), Play It Again Sports(R), Once Upon A Child(R), Computer
Renaissance(R), Music Go Round(R), Disc Go Round(R), VGE Video Game Exchange(R)
and It's About Games(TM), 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), Once Upon A Child(R) and It's About
Games(TM) 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 27, 1997, the Company employed 269 full-time employees, of which
14 are franchise salespersons, 68 are franchise support personnel, 38 are
administrative and 149 are retail sales staff. The Company also employs 243
part-time employees at its retail stores.
<PAGE>
ITEM 2: PROPERTIES
The Company owns its headquarters facility in Golden Valley, Minnesota and rents
a distribution warehouse in Cleveland, Ohio. The Company believes that its
facilities are sufficient to meet its current needs and for the near future
The Company leases space for its 65 retail stores, typically for a fixed monthly
rental and operating costs. Thirty-two leases are due to expire in 1998,
seventeen in 1999, five in 2000, three in 2001 and eight in 2002.
ITEM 3: LEGAL PROCEEDINGS
James D. Van Buskirk and Aravan, Inc. v. Grow Biz International, Inc. (United
States District Court, District of Minnesota, commenced December 21, 1995). The
case primarily concerns the interpretation and application of a Retail Store
Agreement entered into by the Company and the plaintiff, James D. Van Buskirk,
in January 1992. By their Complaint, plaintiffs assert claims against the
Company for beach of contract, fraud and misrepresentation, interference with
relationships and violation of federal anti-racketeering statutes. Plaintiffs
seek damages in an amount of approximately $5.7 million which the plaintiffs
seek to be trebled and seek approximately $2.0 million on separate claims in
addition to injunctive and declaratory relief. Grow Biz has denied each of
plaintiffs' claims and has filed counterclaim for breach of contract and other
claims resulting from plaintiffs' conduct under the 1992 Agreement. In January
1998, the Company was involved in discussions to purchase certain rights from
plaintiffs and settle all claims. Grow Biz believes these discussions did not
lead to a final or complete agreement. However, the court ruling on a motion on
February 26, 1998, entered an order finding that a settlement agreement had been
reached by the parties. Under the order, the Company is required to pay
plaintiffs $2.0 million to purchase certain development rights. The order
further directs that all claims be dismissed. Grow Biz plans to appeal certain
of the district court's rulings.
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 1997.
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 44 Chairman of the Board
Ronald G. Olson 57 President, Chief Executive Officer and Director
Ted R. Manley 48 Executive Vice President of Operations
David J. Osdoba, Jr. 42 Vice President of Finance and Chief Financial
Officer
Gaylen L. Knack 38 Vice President and General Counsel
Charles V. Kanan 46 President / Play It Again Sports(R)
Michael E. Flynn 49 President / Computer Renaissance(R)
William L. Shell II 41 President / Music Go Round(R)
Brad D. Tait 48 President / Disc Go Round(R)and President / It's
About Games(TM)
---------------
<PAGE>
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.
TED R. MANLEY has served as Executive Vice President of Operations since
September 1997. He 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.
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.
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 was the company founder of
Hi-Tech Consignments, the predecessor of Music Go Round(R) and served as its
President from November 1986 until February 1993.
BRADLEY D. TAIT has served as President of It's About Games(TM) since August
1997 while also serving as the President of Disc Go Round(R). He 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.
<PAGE>
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The stock is traded on the NASDAQ National Market System under the symbol GBIZ.
The table below sets forth the high and low bid prices of the Company's common
stock as reported by NASDAQ for the periods indicated:
<TABLE>
<CAPTION>
1997: First Second Third Fourth 1996: First Second Third Fourth
- -------------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HIGH 12 3/4 11 1/8 17 1/4 16 1/4 HIGH 11 1/4 8 1/8 9 3/4 10 1/2
LOW 8 3/4 10 1/2 10 7/16 11 7/8 LOW 7 5/8 7 32/35 6 27/32 8 3/4
</TABLE>
At March 9, 1998, there were 5,945,841 shares of common stock outstanding held
by 1,719 beneficial shareholders and 264 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 1997.
ITEM 6: SELECTED FINANCIAL DATA.
The following table sets forth selected financial information for the periods
indicated. The information should be read in conjunction with the financial
statements and related notes discussed in Item 14, and Management's Discussion
and Analysis of Financial Condition and Results of Operations discussed in Item
7.
<TABLE>
<CAPTION>
Fiscal Year Ended(1)
-------------------------------------------------------------------
December December December December December
25, 1993 31, 1994 30, 1995 28, 1996 27, 1997
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE: (in thousands, except per store data)
Merchandise sales $ 45,028 $ 71,425 $ 84,043 $ 71,737 $ 66,889
Royalties 3,689 7,645 11,560 14,965 17,329
Franchise fees 2,733 3,963 3,889 4,162 3,907
Advertising and other 353 553 721 686 710
--------- --------- --------- --------- ---------
Total revenue 51,803 83,586 100,213 91,550 88,835
Cost of merchandise sold 41,695 65,479 76,192 63,856 56,634
Selling, general and administrative expenses 9,331 15,889 20,980 23,636 24,990
--------- --------- --------- --------- ---------
Income from operations 777 2,218 3,041 4,058 7,211
Litigation settlement -- -- -- -- (2,000)
Interest income (expense), net (8) 478 296 195 103
Equity in net loss of unconsolidated affiliates (160) (416) -- -- --
--------- --------- --------- --------- ---------
Income before income taxes 609 2,280 3,337 4,253 5,314
Provision for income taxes 265 900 1,308 1,667 2,083
--------- --------- --------- --------- ---------
Net income $ 344 $ 1,380 $ 2,029 $ 2,586 $ 3,231
========= ========= ========= ========= =========
Net income per common share - diluted $ .06 $ .19 $ .28 $ .40 $ .52
========= ========= ========= ========= =========
Weighted average shares outstanding(4) 6,072 7,440 7,351 6,516 6,274
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Working capital $ 16,915 $ 12,441 $ 11,068 $ 8,516 $ 9,141
Total assets 31,784 39,564 34,024 29,177 37,755
Total debt 1,728 615 415 264 6,330
Shareholders' equity 19,848 21,685 21,192 17,698 17,451
SELECTED FINANCIAL RATIOS
Return on average assets 1.7% 3.9% 5.5% 8.2% 9.7%
Return on average equity 3.3% 6.6% 9.5% 13.3% 18.4%
</TABLE>
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA (continued):
<TABLE>
<CAPTION>
Pro Forma
Fiscal Year Ended
-------------------------------------------------------
December December December December
31, 1994 30, 1995 28, 1996 27, 1997
-------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE: (2) (3) (3) (3)
Merchandise sales $ 71,914 $ 97,430 $ 85,944 $ 75,284
Royalties 7,805 11,561 14,965 17,329
Franchise fees 4,015 3,888 4,162 3,907
Advertising and other 603 721 686 710
---------- ---------- ---------- ----------
Total revenue 84,337 113,600 105,757 97,230
Cost of merchandise sold 65,959 84,905 72,874 61,797
Selling, general and administrative expenses 16,430 26,523 27,869 27,577
---------- ---------- ---------- ----------
Income from operations 1,948 2,172 5,014 7,856
Litigation settlement -- -- -- (2,000)
Interest expense -- (550) (557) (206)
Interest income 437 345 252 103
Equity in net loss of unconsolidated affiliates (416) -- -- --
---------- ---------- ---------- ----------
Income before income taxes 1,969 1,967 4,709 5,753
Provision for income taxes 778 771 1,846 2,255
---------- ---------- ---------- ----------
Net income $ 1,191 $ 1,196 $ 2,863 $ 3,498
========== ========== ========== ==========
Net income per common share - diluted $ .16 $ .16 $ .44 $ .56
========== ========== ========== ==========
Weighted average shares outstanding - diluted (4) 7,440 7,351 6,516 6,274
========== ========== ========== ==========
</TABLE>
(1) The Company's fiscal year ends on the last Saturday in December, which
results in a 52 or 53-week year. Fiscal 1994 was 53 weeks. Fiscal 1995
and 1996 were 52 weeks.
(2) The Company acquired certain assets of CDX Audio Development, Inc.
(CDX) on July 1, 1994. The pro forma information is presented as if the
acquisitions occurred on December 26, 1993.
(3) The Company acquired certain assets of Video Game Exchange, Inc. (VGE )
on August 15, 1997. The pro forma information is presented as if the
acquisition occurred on December 31, 1994.
(4) See Note 2 of Notes to the Company's Financial Statements for an
explanation of the determination of weighted average shares
outstanding.
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Unaudited Pro Forma Condensed Statement of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Fiscal Year-Ended December 31,1994
--------------------------------------------------
CDX Adjustments
Grow Biz (Note a) (Note b) Pro Forma
--------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Merchandise sales $ 71,425 $ 489 $ -- $ 71,914
Royalties 7,645 160 -- 7,805
Franchise fees 3,963 52 -- 4,015
Advertising and other 553 50 -- 603
-------- -------- -------- --------
Total revenue 83,586 751 -- 84,337
COST OF MERCHANDISE SOLD 65,479 480 -- 65,959
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 15,889 371 170(1) 16,430
-------- -------- -------- --------
Income loss from operations 2,218 (100) (170) 1,948
INTEREST EXPENSE AND OTHER, net 62 -- (41)(2) 21
-------- -------- -------- --------
Income loss before income taxes 2,280 (100) (211) 1,969
PROVISION FOR INCOME TAXES 900 (40) (82)(3) 778
-------- -------- -------- --------
NET INCOME $ 1,380 $ (60) $ (129) $ 1,191
======== ======== ======== ========
NET INCOME PER COMMON SHARE -
DILUTED $ .19 $ .16
======== ========
SHARES USED IN PER COMMON
SHARE COMPUTATION 7,440 7,440
======== ========
</TABLE>
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Unaudited Pro Forma Condensed Statement of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Fiscal Year-Ended December 30, 1995
------------------------------------------------------
Adjustments
Grow Biz VGE (Note c) Pro Forma
------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Merchandise sales $ 84,043 $ 13,387 $ -- $ 97,430
Royalties 11,561 -- -- 11,561
Franchise fees 3,888 -- -- 3,888
Advertising and other 721 -- -- 721
--------- --------- --------- ---------
Total revenue 100,213 13,387 -- 113,600
COST OF MERCHANDISE SOLD 76,192 8,713 -- 84,905
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 20,980 5,401 174 (1) 26,523
25 (2)
(57)(3)
--------- --------- --------- ---------
Income (loss) from operations 3,041 (727) (142) 2,172
INTEREST EXPENSE (50) (24) 24 (4) (550)
(500)(5)
INTEREST INCOME 345 -- -- 345
OTHER INCOME -- 641 (641) --
--------- --------- --------- ---------
Income before income taxes 3,336 (110) (1,259) 1,967
PROVISION FOR INCOME TAXES 1,308 -- (537)(6) 771
--------- --------- --------- ---------
NET INCOME $ 2,028 $ (110) $ (722) $ 1,196
========= ========= ========= =========
NET INCOME PER COMMON SHARE -
DILUTED $ .28 $ .16
========= =========
SHARES USED IN PER COMMON
SHARE COMPUTATION 7,351 7,351
========= =========
</TABLE>
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Unaudited Pro Forma Condensed Statement of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Fiscal Year-Ended December 28, 1996
------------------------------------------------------
Adjustments
Grow Biz VGE (Note c) Pro Forma
------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Merchandise sales $ 71,737 $ 14,207 $ -- $ 85,944
Royalties 14,965 -- -- 14,965
Franchise fees 4,162 -- -- 4,162
Advertising and other 686 -- -- 686
--------- --------- --------- ---------
Total revenue 91,550 14,207 -- 105,757
COST OF MERCHANDISE SOLD 63,856 9,019 -- 72,875
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 23,636 4,090 174 (1) 27,868
25 (2)
(57)(3)
--------- --------- --------- ---------
Income from operations 4,058 1,098 (142) 5,014
INTEREST EXPENSE (57) (372) 372 (4) (557)
(500)(5)
INTEREST INCOME 252 41 (41)(4) 252
--------- --------- --------- ---------
Income before income taxes 4,253 767 (311) 4,709
PROVISION FOR INCOME TAXES 1,667 -- (179)(6) 1,846
--------- --------- --------- ---------
NET INCOME $ 2,586 $ 767 $ (490) $ 2,863
========= ========= ========= =========
NET INCOME PER COMMON SHARE -
DILUTED $ .40 $ .44
========= =========
SHARES USED IN PER COMMON
SHARE COMPUTATION 6,516 6,516
========= =========
</TABLE>
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Unaudited Pro Forma Condensed Statement of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Fiscal Year-Ended December 27, 1997
-----------------------------------------------------
Adjustments
Grow Biz VGE (Note c) Pro Forma
-----------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Merchandise sales $ 66,889 $ 8,395 $ -- $ 75,284
Royalties 17,329 -- -- 17,329
Franchise fees 3,907 -- -- 3,907
Advertising and other 710 -- -- 710
-------- -------- -------- --------
Total revenue 88,835 8,395 -- 97,230
COST OF MERCHANDISE SOLD 56,634 5,163 -- 61,797
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 24,990 2,498 109 (1) 27,577
16 (2)
(36)(3)
-------- -------- -------- --------
Income from operations 7,211 734 (89) 7,856
LITIGATION SETTLEMENT (2,000) -- -- (2,000)
INTEREST EXPENSE -- (298) 298 (4) --
-- -- (206)(5) (206)
INTEREST INCOME 103 37 (37)(4) 103
-------- -------- -------- --------
Income before income taxes 5,314 473 (34) 5,753
PROVISION FOR INCOME TAXES 2,083 -- 172 (6) 2,255
-------- -------- -------- --------
NET INCOME $ 3,231 $ 473 $ (206) $ 3,498
======== ======== ======== ========
NET INCOME PER COMMON SHARE -
DILUTED $ .52 $ .56
======== ========
SHARES USED IN PER COMMON
SHARE COMPUTATION 6,274 6,274
======== ========
</TABLE>
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Unaudited Pro Forma Condensed Statement of Operations
For the Fiscal Years Ended December 31, 1994, December 30, 1995,
December 28, 1996 and December 27, 1997
(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 CDX acquisition 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.
(c) The pro forma condensed statement of operations give effect to the
following pro forma VGE acquisition adjustments:
(1) Represents amortization of the $4.3 million of goodwill over
twenty-five years and amortization of covenants not to compete over
five years arising from the acquisition of VGE.
(2) Represents the net change in depreciation expense associated with the
write-up to fair market value of certain assets acquired.
(3) Represents the elimination of certain VGE salary costs which will not
recur.
(4) Represents the elimination of VGE interest expense and other income
derived from certain assets or liabilities which were not acquired or
assumed by the Company.
(5) Represents interest expense related to the acquisition debt.
(6) Represents pro forma provision for income taxes as if VGE was taxed as
a C Corporation as of the beginning of the period.
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
Grow Biz International, Inc. (the Company) is a franchise company that
franchises six retail concepts. In addition, the Company operates Company-owned
stores in selected markets.
In August 1997, Grow Biz Games, Inc., a wholly-owned subsidiary of Grow Biz
International, Inc., acquired certain assets and franchising rights of Video
Game Exchange, Inc. ("VGE") of Cleveland, Ohio. VGE is a forty store retail
operation with stores in Ohio, Pennsylvania, Kentucky, Georgia and Maryland.
These stores buy, sell and trade used and new video games and equipment.
RESULTS OF OPERATIONS
The following table sets forth selected information from the Company's
Consolidated Statements of Operation expressed as a percentage of total revenue
and the percentage changes in the dollar amounts from the prior period:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Fiscal Year Ended
December 30, December 28, December 27, Fiscal 1996 Fiscal 1997
1995 1996 1997 over 1995 over 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Merchandise sales 83.9% 78.4% 75.3% (14.6%) (6.8%)
Royalties 11.5 16.3 19.5 29.4 15.8
Franchise fees 3.9 4.6 4.4 7.0 (6.1)
Advertising and other 0.7 0.7 0.8 (4.8) 3.5
------- ------- ------- ------- -------
Total revenues 100.0 100.0 100.0 (8.6) (3.0)
Cost of merchandise sold 76.0 69.7 63.8 (16.2) (11.3)
Selling, general and
administrative expenses 20.9 25.9 28.1 12.7 5.7
------- ------- ------- ------- -------
Income from operations 3.1 4.4 8.1 33.4 77.8
Litigation settlement -- -- (2.2) -- --
Interest and other income
(expense), net 0.2 0.2 0.1 (34.1) (47.3)
------- ------- ------- ------- -------
Income before income taxes 3.3 4.6 6.0 27.5 25.0
Provision for income taxes 1.3 1.8 2.4 27.5 25.0
------- ------- ------- ------- -------
Net income 2.0% 2.8% 3.6% 27.5% 25.0%
======= ======= ======= ======= =======
</TABLE>
REVENUES
Merchandise sales include the sale of product to franchisees through the buying
group and retail sales at the Company-owned stores as follows:
1995 1996 1997
-----------------------------------------------
Buying Group $ 72,971,600 $ 58,437,100 $ 45,717,100
Retail Sales 11,071,500 13,299,700 21,172,000
------------ ------------ ------------
$ 84,043,100 $ 71,736,800 $ 66,889,100
The Play It Again Sports buying group revenue declined the past two years as
part of management's strategic decision to reduce the number of vendors offered
centralized billing and franchisees purchase more inventory on a direct basis.
Retail sales at Company-owned stores increased 59.2% in 1997 over 1996 primarily
as a result of the forty Company-owned Video Game Exchange stores acquired on
August 15, 1997 as well as a net increase of other Company-owned stores in 1997.
It is anticipated that buying group revenues will continue to decline as a
percent of total revenues in the upcoming year while retail sales are expected
to increase as the revenues from these Video Game Exchange stores are included
for the entire year and through other Company-owned store expansion.
<PAGE>
REVENUES (CONTINUED)
Revenue from franchising activity was as follows:
1995 1996 1997
----------------------------------------------
Royalties $11,565,500 $14,964,800 $17,328,500
Franchise Fees 3,888,500 4,161,600 3,907,200
Royalties are a derivative of system-wide retail sales and have increased by
$3.4 million and $2.4 million in 1996 and 1997, respectively, as a result of
opening additional franchise stores and increases in comparable store sales.
Comparable store sales increases and average store sales for stores open at
least one year at December 27, 1997 for the five franchised concepts are shown
in the following table:
Comparable Store Sales
Increase from 1996 Average Store Sales
------------------ -------------------
Play It Again Sports(R) 1.1% $ 441,000
Once Upon A Child(R) 13.4% 341,000
Computer Renaissance(R) 4.4% 837,000
Music Go Round(R) 11.6% 495,000
Disc Go Round(R) 2.4% 238,000
Franchise fees are recognized as revenue essentially when the related franchise
store opens. Store openings and related franchise fees have not changed
materially over the last three years. The Company anticipates that royalty
revenue will continue to grow as additional stores are opened and that franchise
fees will continue at the same level as the past three 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:
1995 1996 1997
----------------------------------------
Buying Group 95.1% 95.2% 95.0%
Retail Stores 61.4 61.7 62.4
SELLING, GENERAL AND ADMINISTRATIVE
The increase of $1.4 million, or 6%, in operating expenses from 1996 to 1997 is
primarily the additional costs related to operating the Company-owned retail
stores acquired during the year. From 1995 to 1996, operating expenses increased
$2.7 million, or 12.7%, due to an increased number of support personnel relating
to our franchise system. It is anticipated that future operating expenses as a
percent of revenue will be consistent with the 1997 results.
LITIGATION SETTLEMENT
In connection with an action filed by an early partner in the original Play It
Again Sports store, the Company received a court ruling on a motion filed by the
plaintiff stating that an enforceable agreement existed between the two parties.
Under the order, the Company is required to pay $2.0 million to purchase certain
development rights held by the plaintiff from a 1992 agreement. The order
further directed that all claims between the parties be dismissed. The Company
intends to appeal the court order.
<PAGE>
NET INTEREST
Net interest income was $295,500, $194,700 and $102,700 in 1995, 1996 and 1997,
respectively. Interest income was earned on investments in short-term,
high-grade investments and interest charges on accounts receivable balances. The
decrease in interest income in 1996 and 1997 was due to the Company having lower
cash balances as a result of the repurchase of shares of the Company's common
stock and the interest expense incurred on the notes payable related to the
Video Game Exchange, Inc. acquisition on August 15, 1997.
PROVISION FOR INCOME TAXES
The provision for income taxes was calculated at an effective rate of 39.2% for
fiscal 1995, 1996 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the year with $3.1 million cash and had a current ratio of 1.6
to 1.0.
During the year ended December 27, 1997, the Company's operating activities
provided $6.1 million of cash. Net income before depreciation and change in
deferred income tax provided $5.3 million, offset by changes in the operating
assets and liabilities. Prepaid assets increased by $1.0 million as a result of
income tax deposits made during the year and the renegotiated point-of-sale
software license agreement renegotiated in 1997. Inventory increased by $1.5
million as a result of the net addition of five Company-owned stores in 1997.
Accrued liabilities increased by $2.5 million primarily as a result of recording
the litigation settlement. The Company intends to appeal the court decision and
does not anticipate paying for the settlement until all post litigation motions
are concluded.
In August 1997, the Company purchased certain assets of Video Game Exchange,
Inc. (VGE) for total consideration of $6.6 million. Of this amount, $4.5 million
was financed through a five-year term loan, with a bank, payable in sixty equal
installments beginning in October 1997 plus accrued interest at prime plus
one-half of one percent. The former owners of VGE financed $2.0 million through
a two-year note payable in twenty-four equal installments beginning in September
1997 plus accrued interest at prime plus one-half of one percent.
In 1997, the Company renegotiated the terms of its point-of-sale software
license utilized by its franchisees from a per unit fee with a remaining minimum
liability of $666,800 to a set fee of $400,000. The Company paid $133,000 upon
signing the agreement and recorded the $267,000 note payable that is payable in
equal installments in January 1998 and January 1999.
Financing activities provided cash of $2.6 million in 1997 compared to utilizing
cash of $2.9 million and $6.2 million in 1995 and 1996, respectively. 1997
activity consisted primarily of the VGE notes offset by the repurchase of
386,819 shares of the Company's common stock. In July 1997, the buy back was
extended to include an additional 500,000 shares bringing the total shares the
Company is authorized to buy back to 2,000,000. As of March 9, 1998, 1,505,286
shares, at an average price of $9.37 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, 1998. Borrowings against the line are due
on demand and carry an interest rate of prime which was 8.5% at December 27,
1997. At December 27, 1997, 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.
<PAGE>
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement No. 128,
"Accounting for Earnings Per Share". The Company has adopted Statement No. 128
and has disclosed the impact of Statement No. 128 in the Statements of
Operations and in the footnotes to the financial statements.
FORWARD LOOKING STATEMENTS
The statements made in this report that are not historical facts are forward
looking statements. Such statements are based on current expectations but
involve risks, uncertainties and other factors which may cause actual results to
differ materially from those contemplated by such forward looking statements.
Important factors which may result in variations from results contemplated by
such forward looking statements include, but are not limited to: (1) the
Company's ability to attract qualified franchisees; (2) the Company's ability to
collect its receivables; (3) the Company's ability to open stores; (4) each
store's ability to acquire high-quality, used merchandise; (5) the Company's
ability to control selling, general and administrative expenses; and (6) the
Company's ability to obtain competitive financing to fund its growth.
The Company's strategy focuses on enhancing revenues and profits at all store
locations and the opening of additional stores. The Company's growth strategy is
premised on a number of assumptions concerning trends in each of the retail
industries as well as trends in franchising and the economy. To the extent that
the Company's assumptions with respect to any of these matters are inaccurate,
its results of operations and financial condition could be adversely affected.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Grow Biz International, Inc. and Subsidiary
Index to Financial Statements
Consolidated Balance Sheets Page 25
Consolidated Statements of Operations Page 26
Consolidated Statements of Changes in Shareholders' Equity Page 27
Consolidated Statements of Cash Flows Page 28
Consolidated Notes to Financial Statements Page 29
Report of Independent Public Accountants Page 37
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 28, December 27,
1996 1997
-----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,388,800 $ 3,088,000
Receivables, less allowance for doubtful accounts
of $930,000 and $880,000 13,171,400 12,880,700
Inventories 2,716,000 5,728,600
Prepaid expenses and other 862,900 1,987,300
Deferred income taxes (Note 8) 1,726,400 1,491,600
------------ ------------
Total current assets 19,865,500 25,176,200
------------ ------------
NOTES RECEIVABLE 339,800 184,000
PROPERTY AND EQUIPMENT:
Furniture and equipment 5,553,100 6,339,200
Building and building improvements 3,305,800 3,375,100
Less - accumulated depreciation and amortization (2,879,600) (4,096,400)
------------ ------------
Property and equipment, net 5,979,300 5,617,900
------------ ------------
OTHER ASSETS:
Noncompete agreements and other, net of accumulated
amortization of $2,788,600 and $3,258,300 1,855,200 1,507,000
Goodwill, net of accumulated amortization of $128,800
and $230,200 1,136,700 5,269,500
------------ ------------
Total other assets 2,991,900 6,776,500
------------ ------------
$ 29,176,500 $ 37,754,600
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,670,300 $ 6,604,800
Accrued liabilities 1,275,800 3,781,500
Current maturities of long-term debt (Note 7) 134,900 2,061,400
Deferred franchise fee revenue 4,269,000 3,588,000
------------ ------------
Total current liabilities 11,350,000 16,035,700
LONG TERM DEBT (Note 7) 129,000 4,268,200
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,
6,263,444 and 6,002,214 shares issued and outstanding 10,952,900 7,474,900
Retained earnings 6,744,600 9,975,800
------------ ------------
Total shareholders' equity 17,697,500 17,450,700
------------ ------------
$ 29,176,500 $ 37,754,600
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
December 30, December 28, December 27,
1995 1996 1997
-------------------------------------------------
<S> <C> <C> <C>
REVENUE
Merchandise sales $ 84,043,100 $ 71,736,800 $ 66,889,100
Royalties 11,560,500 14,964,800 17,328,500
Franchise fees 3,888,500 4,161,600 3,907,200
Advertising and other 720,700 686,400 710,500
------------- ------------- -------------
Total revenues 100,212,800 91,549,600 88,835,300
COST OF MERCHANDISE SOLD 76,191,400 63,855,600 56,633,700
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 20,980,300 23,636,200 24,989,900
------------- ------------- -------------
Income from operations 3,041,100 4,057,800 7,211,700
LITIGATION SETTLEMENT (Note 10) -- -- (2,000,000)
INTEREST EXPENSE (49,700) (56,900) (256,700)
INTEREST INCOME 345,200 251,600 359,400
------------- ------------- -------------
Income before income taxes 3,336,600 4,252,500 5,314,400
PROVISION FOR INCOME TAXES (Note 8) 1,308,000 1,667,000 2,083,200
------------- ------------- -------------
NET INCOME $ 2,028,600 $ 2,585,500 $ 3,231,200
------------- ------------- -------------
NET INCOME PER COMMON SHARE - Basic $ 0.28 $ 0.40 $ 0.53
------------- ------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING - Basic 7,212,600 6,428,500 6,116,200
------------- ------------- -------------
NET INCOME PER COMMON SHARE - Diluted $ 0.28 $ 0.40 $ 0.52
------------- ------------- -------------
WEIGHTED AVERAGE SHARES OUTSTANDING - Diluted 7,351,000 6,516,000 6,273,500
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Fiscal years ended December 30, 1995, December 28, 1996 and December 27, 1997
<TABLE>
<CAPTION>
Common Stock
------------ Retained
Shares Amount Earnings
-------------------------------------------
<S> <C> <C> <C>
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
Repurchase of common stock (Note 5) (386,819) (4,217,300) --
Stock options exercised and related tax benefits 125,589 739,300 --
Net income -- -- 3,231,200
--------- ------------ ------------
BALANCE, December 27, 1997 6,002,214 $ 7,474,900 $ 9,975,800
========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
December 30, December 28, December 27,
1995 1996 1997
-------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,028,600 $ 2,585,500 $ 3,231,200
Adjustments to reconcile net income to net cash
provided by (used for) operating activities -
Depreciation and amortization 1,765,400 1,785,000 1,878,100
Deferred income tax (378,100) (274,900) 234,800
Change in operating assets and liabilities:
Receivables 363,200 2,861,000 446,500
Inventories (1,302,000) 1,576,000 (1,461,900)
Prepaid expenses and other 263,300 122,800 (998,500)
Accounts payable (2,739,100) (1,408,200) 934,500
Accrued liabilities (1,219,000) 80,200 2,505,700
Deferred franchise fee revenue (747,000) 126,000 (681,000)
----------- ----------- -----------
Net cash provided by (used for) operating activities (1,964,700) 7,453,400 6,089,400
----------- ----------- -----------
INVESTING ACTIVITIES:
Redemption of short-term investments 6,337,300 420,000 --
Purchases of property and equipment, net (2,335,800) (297,000) (366,900)
Increase in other assets (164,900) (57,700) (31,300)
Acquisition of certain assets of Video Game Exchange, Inc. -- -- (6,579,700)
----------- ----------- -----------
Net cash provided by (used for) investing activities 3,836,600 65,300 (6,977,900)
----------- ----------- -----------
FINANCING ACTIVITIES:
Notes Payable -- -- 6,767,000
Payments on long-term debt, net (214,800) (151,300) (701,200)
Repurchase of common stock (2,939,700) (6,266,100) (4,217,300)
Proceeds from stock option and warrant exercises 277,200 186,000 739,200
----------- ----------- -----------
Net cash provided by (used for) financing activities (2,877,300) (6,231,400) 2,587,700
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,005,400) 1,287,300 1,699,200
CASH AND CASH EQUIVALENTS, beginning of period 1,106,900 101,500 1,388,800
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 101,500 $ 1,388,800 $ 3,088,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 47,600 $ 50,200 $ 196,600
----------- ----------- -----------
Cash paid for income taxes $ 2,978,300 $ 1,831,500 $ 2,744,300
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Notes to the Financial Statements
December 28, 1996 and December 27, 1997
1. ORGANIZATION AND BUSINESS:
Grow Biz International, Inc. (the Company) offers licenses to operate retail
stores using the service marks "Play It Again Sports", "Once Upon A Child",
"Music Go Round", "Computer Renaissance", "Disc Go Round" and "It's About
Games". 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.
In 1997, Grow Biz Games, Inc., a wholly-owned subsidiary of the Company, was
incorporated. Certain assets of the following entities were acquired by the
Company and its subsidiary with the respective 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
Video Game Exchange, Inc. (It's About Games) 1997
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.
INVENTORIES
The Company values its inventories at the lower of cost or market, as determined
by the average weighted cost 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.
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 three to ten years and goodwill which is being amortized on a straight-line
basis over fifteen to forty 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.
REVENUE RECOGNITION
The Company collects royalties from each franchise based on retail store gross
sales. The Company recognizes royalties as revenue when earned. 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
$4,269,000 and $3,588,000 at December 28, 1996 and December 27, 1997,
respectively.
NET INCOME PER COMMON SHARE
The Company calculates net income per share in accordance with FASB Statement
No. 128 by dividing net income by the weighted average number of shares of
common stock outstanding to arrive at the Net Income Per Common Share - Basic.
The Company calculates Net Income Per Share - Dilutive by dividing net income by
the weighted average number of shares of common stock and dilutive stock
equivalents from the exercise of stock options and warrants using the treasury
stock method. A reconciliation of basic weighted average number of shares
outstanding to dilutive average number of shares outstanding is as follows:
<TABLE>
<CAPTION>
December 30, 1995 December 28, 1996 December 27, 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding - Basic 7,212,600 6,428,500 6,116,200
Dilutive effect of stock options after application
of the treasury stock method 138,400 87,500 157,300
--------- --------- ---------
Weighted average shares outstanding - Dilutive 7,351,000 6,516,000 6,273,500
========= ========= =========
</TABLE>
RECLASSIFICATION
Certain 1995 and 1996 amounts in the financial statements have been reclassified
to conform with the 1997 financial statement presentation. These
reclassifications have no effect on net income or shareholders' equity as
previously reported.
<PAGE>
3. RECEIVABLES:
The Company's current receivables consisted of the following:
December 28, 1996 December 27, 1997
-------------------------------------------
Trade (Net) $ 11,591,500 $ 11,065,200
Royalty 1,709,000 1,718,500
Other 210,700 281,000
------------ ------------
13,511,200 13,064,700
Less: Long-term Notes (339,800) (184,000)
------------ ------------
Current Receivables $ 13,171,400 $ 12,880,700
============ ============
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 it
first-year and second-year stores.
4. ACQUISITIONS:
PURCHASE OF VIDEO GAME EXCHANGE, INC.
In August 1997, Grow Biz Games, Inc., a wholly-owned subsidiary of Grow Biz
International, Inc., acquired certain assets and franchising rights of Video
Game Exchange, Inc. ("VGE") a forty store retail chain headquartered in
Cleveland, Ohio for $6,579,700. The acquisition has been accounted for under the
purchase method of accounting. Pursuant to the purchase, the Seller and its
shareholders entered into agreements not to compete with the Company for five
years. Of the total purchase price, $4.5 million was financed through a
five-year bank term loan payable in sixty equal installments plus accrued
interest at prime plus one-half of one percent. The former owners of VGE
financed $2.0 million through a two-year note payable in twenty-four equal
installments plus accrued interest at prime plus one-half of one percent. The
$4.3 million cost in excess of net assets acquired was recorded as goodwill and
will be amortized over a twenty-five year period.
The following are the unaudited pro forma results of operations for 1996 and
1997, as if the above acquisition had occurred on December 30, 1995.
December 28, 1996 December 27, 1997
---------------------------------------
Revenue $105,756,600 $ 97,230,400
Net income 2,962,500 3,498,000
Net income per common share (Basic) $ .46 $ .57
Net income per common share (Diluted) $ .45 $ .56
5. SHAREHOLDERS' EQUITY:
REPURCHASE OF COMMON STOCK
Since November 1995, the Company's Board of Directors has authorized the
repurchase of up to 2,000,000 shares of the Company's common stock on the open
market. As of December 27, 1997, the Company had repurchased 1,448,913 shares of
its stock at an average price of $9.26 per share including 386,819 shares
repurchased at an average price of $10.90 per share in the year ended December
27, 1997.
<PAGE>
5. SHAREHOLDERS' EQUITY (CONTINUED):
STOCK OPTION PLAN
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, 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 27, 1997 are
as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Price Range Exercise Price
------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 30, 1995 588,575 $ 2.00 - $ 14.50 $ 8.35
Granted 357,000 7.25 - 9.00 7.95
Exercised (38,750) 2.00 - 10.00 2.75
Forfeited (190,700) 8.00 - 12.38 9.86
------------------------------------------------------------
Outstanding at December 28, 1996 716,125 2.00 - 14.50 8.68
Granted 145,750 10.50 - 12.25 11.31
Exercised (101,968) 2.00 - 12.19 4.79
Forfeited (61,045) 8.00 - 11.75 9.82
------------------------------------------------------------
Outstanding at December 27, 1997 698,862 $ 2.00 - $ 14.50 $ 9.88
============================================================
Exercisable at December 27, 1997 350,554 $ 2.00 - $ 14.50 $ 8.70
============================================================
</TABLE>
The stock options outstanding at December 27, 1997 have a weighted average
contractual life of 1.9 years.
EMPLOYEE STOCK PURCHASE PLAN
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. The Employee Plan operates in one-year phases and
stock may be purchased at the end of each phase. The stock price is 85% of the
fair market value of such common stock on the commencement date or termination
date of the phase, whichever is lower. During 1997, the Company issued 10,315
shares under the plan at a price of $6.85. As of December 27, 1997,
contributions have been received for the issuance of 6,697 shares under phase
four.
NONPLAN OPTIONS
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.
The Company has granted options to purchase the Company's common stock at $10.00
per share to four non-employee directors. Each option granted vests and becomes
exercisable in increments through 1998. There were 75,000 shares exercisable at
December 27, 1997.
<PAGE>
5. SHAREHOLDERS' EQUITY (CONTINUED):
The Company accounts for the above plans under APB Opinion No. 25, and
accordingly no compensation expense relating to the granting of options has been
recognized in the Statement of Operations. Had compensation cost for these plans
been determined consistent with Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation" (SFAS 123), the Company's proforma
net income and net income per common share would have changed to the following
proforma amounts:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------------------------------
<S> <C> <C> <C>
Net Income: As Reported $ 2,028,600 $ 2,585,500 $ 3,231,200
Pro Forma 1,889,900 2,293,000 2,964,300
Net Income Per Common Share (Diluted): As Reported $ .28 $ .40 $ .52
Pro Forma $ .26 $ .35 $ .47
</TABLE>
The fair value of each option granted subsequent to January 1, 1995 in
accordance with SFAS 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 7.90% in 1995, 6.01% to 6.81%
in 1996 and 5.77% to 6.83% in 1997, expected life of five years for 1995, two to
five years for 1996 and five years for 1997; expected volatility of 47.05% to
56.01% in 1995, 39.78% to 44.59% in 1996 and 20.11% to 36.85% in 1997.
WARRANTS
In connection with a 1992 private placement, options to purchase 37,500 shares
of the Company's common stock were exercised in 1997 under the net issuance
method resulting in 13,306 shares being issued. At December 27, 1997 there were
outstanding warrants remaining to purchase 37,500 shares of the Company's common
stock at $10.00 per share. The warrants expire in 1998.
6. LINE OF CREDIT:
The Company has a $5.0 million committed revolving line of credit agreement
which is due for renewal on July 31, 1998. Borrowings against the line are due
on demand and carry an interest rate of prime which was 8.5% at December 27,
1997. At December 27, 1997, the Company had no borrowings against the line.
7. LONG-TERM DEBT:
The Company's long-term debt consists of:
December 28, 1996 December 27, 1997
----------------------------------------
Bank Term Debt $ - $ 4,275,000
Note Payable - 1,666,700
Other 263,900 387,900
----------- ------------
Total 263,900 6,329,600
Less: Current Portion (134,900) (2,061,400)
----------- ------------
$ 129,000 $ 4,268,200
=========== ============
<PAGE>
7. LONG-TERM DEBT (CONTINUED):
Future maturities of long-term debt as of December 27, 1997 are as follows:
1998 $ 2,061,400
1999 1,700,600
2000 900,000
2001 1,022,100
2002 645,500
-----------
$ 6,329,600
===========
The bank term note bears interest at prime plus one-half of one percent. It is
due in monthly principal and interest installments through September 2002. This
note contains various restrictive covenants which, among other matters, require
the Company to maintain certain financial ratios. The Company was in compliance
with all these covenants as of December 27, 1997.
The note payable bears interest at prime plus one-half of one percent. It is due
in monthly principal and interest installments through September 1999.
8. INCOME TAXES:
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
December 30, 1995 December 28, 1996 December 27, 1997
---------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $ 1,511,100 $ 1,701,300 $ 1,423,400
State 175,000 240,600 425,000
------------ ------------ ------------
Subtotal 1,686,100 1,941,900 1,848,400
Deferred income tax benefit (378,100) (274,900) 234,800
------------ ------------ ------------
Total tax provision $ 1,308,000 $ 1,667,000 $ 2,083,200
============ ============ ============
</TABLE>
The effective tax rate differs from the federal statutory rate due primarily to
the following:
<TABLE>
<CAPTION>
December 30, 1995 December 28, 1996 December 27, 1997
---------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 3.4 3.7 5.3
Nondeductible meals and entertainment 1.1 0.8 0.7
Tax exempt interest income (0.9) - -
Other, net 1.6 0.7 (0.8)
---- ---- ----
39.2% 39.2% 39.2%
==== ==== ====
</TABLE>
Deferred income taxes are the result of provisions of the tax laws that either
require or permit certain items of income or expense to be reported for tax
purposes in different periods than they are reported for financial reporting.
The components of the deferred tax asset are as follows:
December 28, 1996 December 27, 1997
--------------------------------------
Deferred franchise fees $ 929,500 $ 614,600
Accounts receivable reserves 470,600 466,500
Other 326,300 410,500
----------- -----------
Net deferred tax asset $ 1,726,400 $ 1,491,600
=========== ===========
<PAGE>
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 1995, 1996 and 1997 were $205,100, $267,000 and $253,500,
respectively.
OPERATING LEASES
The Company conducts all of its retail operations in leased facilities that
expire over the next five years. A majority of these leases require the Company
to pay maintenance, insurance, taxes and other expenses in addition to minimum
annual rent. Total rent expense under these operating leases was $850,800 in
1995, $1,033,000 in 1996 and $1,468,100 in 1997. As of December 27, 1997,
minimum rental commitments under noncancelable operating leases are: $1,701,900
in 1998, $696,900 in 1999, $379,700 in 2000, $258,800 in 2001 and $144,100 in
2002.
The Company rents retail space from PIAS Holdings, a partnership of two of the
Company's officers, through an agreement that expires September 2000. Payments
under this agreement were approximately $59,000, $66,000 and $66,000 in 1995,
1996 and 1997, 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 consulting agreements with the former owners of Computer
Renaissance. The agreements require the Company to pay 1/2% of all receipts from
franchising Computer Renaissance retail stores through May 31, 1998.
10. LITIGATION SETTLEMENT:
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. In February 1998, the court ruled
that an enforceable settlement agreement was reached between the parties. The
terms of the settlement require the Company to pay $2.0 million to purchase
certain development rights and settle all claims. The Company has recorded the
$2.0 million non-operating expense in fiscal 1997. The likelihood of a favorable
ruling on an appeal cannot be determined at this time.
<PAGE>
11. QUARTERLY FINANCIAL DATA:
The Company's unaudited quarterly results for the years ended December 27, 1997
and December 28, 1996 are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Total Revenue $ 19,109,400 $ 20,679,000 $ 22,078,500 $26,968,400
Income from Operations 826,300 1,589,700 2,056,400 2,739,300
Net Income 545,200 994,000 1,269,000 423,000
Net Income Per Common Share - Basic $ .09 $ .16 $ .21 $ .07
Net Income Per Common Share - Diluted $ .09 $ .16 $ .20 $ .07
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 - Basic $ .05 $ .07 $ .14 $ .14
Net Income Per Common Share - Diluted $ .05 $ .07 $ .14 $ .14
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Grow Biz International, Inc.:
We have audited the accompanying consolidated balance sheets of Grow Biz
International, Inc. and Subsidiary (Minnesota corporations) as of December 27,
1997 and December 28, 1996, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 27, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grow Biz
International, Inc. and Subsidiary as of December 27, 1997 and December 28,
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 27, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 3, 1998
<PAGE>
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 May 6, 1998, 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 May 6,
1998, 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 May 6, 1998, 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 May 6, 1998, 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.
<PAGE>
PART IV
ITEM 14: EXHIBITS 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 24.
2. 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 Form of franchise agreement for It's About Games(TM) (Exhibit
10.6)
10.7 Lease for 3505 Hennepin Avenue, Minneapolis Minnesota (Exhibit
10.4) (1)
10.8 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)
10.9 Retail store agreement dated January 24, 1992 with Van Buskirk
(Exhibit 10.6 (b) ) (1)
10.10 Noncompetition and Consulting agreement dated January 1, 1990,
as amended January 24, 1992, with Martha Morris (Exhibit 10.7)
(1)
10.11 Asset Purchase Agreement dated April 1, 1993 concerning
purchase of assets of Computer Renaissance, Inc., including
stock option agreement (Exhibit 10.12) (1)
10.12 Asset Purchase Agreement dated July 1, 1994 for purchase of
assets of CDX Audio Development, Inc. (Exhibit 10.13) (3)
10.13 1992 Stock Option Plan, including forms of stock option
agreement (Exhibit 10.12) (1) (3)
10.14 Amendment No. 1 to the 1992 Stock Option Plan (Exhibit 10.15)
(2)
10.15 Amendment No. 2 to the 1992 Stock Option Plan (Exhibit 10.16)
(2)
10.16 Amendment No. 3 to the 1992 Stock Option Plan
10.17 Nonemployee Director Stock Option Plan, as amended, including
form of stock option agreement (Exhibit 10.16) (2) (3)
10.18 Employee Stock Purchase Plan of 1994 (Exhibit 10.17) (2) (3)
10.19 Real Estate Purchase Agreement for Purchase of the Company's
headquarters (Exhibit 10.18) (2)
<PAGE>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.20 Consulting and Noncompetition Agreement dated November 6, 1992
with Lynn and Dennis Blum (Exhibit 10.19) (3)
10.21 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)
10.22 Asset Purchase Agreement between Grow Biz Games, Inc. and
Video Game Exchange, Inc., dated August 15, 1997 (Exhibit
10.1) (5)
10.23 First Amendment to Credit Agreement and Revolving Note, dated
August 8, 1997 (Exhibit 10.2) (5)
10.24 Term Note, TCF, dated August 8, 1997 (Exhibit 10.3) (5)
10.25 Non-Negotiable Promissory Note, Video Game Exchange, Inc.,
dated August 15, 1997 (Exhibit 10.4) (5)
11.1 Statement of Computation of Per Share Earnings
21.1 Subsidiaries
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) Incorporated by reference to the specified exhibit to the Current
Report on Form 8-K, August 15, 1997.
(6) 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 27, 1997.
<PAGE>
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. AND SUBSIDIARY
By: /s/ RONALD G. OLSON Date: March 16, 1998
-------------------------------------
Ronald G. Olson
President and Chief Executive Officer
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints K. Jeffrey Dahlberg, Ronald G. Olson and David J.
Osdoba, Jr., and each of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any amendments to this Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ K. JEFFREY DAHLBERG Chairman of the Board of Directors March 17, 1998
- ------------------------------
K. Jeffrey Dahlberg
President, Chief Executive Officer
/s/ RONALD G. OLSON and Director March 16, 1998
- ------------------------------ (principal executive officer)
Ronald G. Olson
Vice President of Finance and Chief Financial
/s/ DAVID J. OSDOBA, JR. Officer March 13, 1998
- ------------------------------ (principal financial and accounting officer)
David J. Osdoba, Jr.
/s/ GAYLEN L. KNACK Vice President and General Counsel March 16, 1998
- ------------------------------
Gaylen L. Knack
/s/ RANDEL S. CARLOCK Director March 13, 1998
- ------------------------------
Randel S. Carlock
/s/ DENNIS J. DOYLE Director March 13, 1998
- ------------------------------
Dennis J. Doyle
/s/ ROBERT C. POHLAD Director March 16, 1998
- ------------------------------
Robert C. Pohlad
/s/ BRUCE C. SANBORN Director March 13, 1998
- ------------------------------
Bruce C. Sanborn
</TABLE>
EXHIBIT 10.6
IT'S ABOUT GAMES(TM)
FRANCHISE AGREEMENT
BETWEEN
GROW BIZ INTERNATIONAL, INC.
4200 Dahlberg Drive
Minneapolis, Minnesota 55422-4837
(612) 520-8500
AND
------------------------------------------
------------------------------------------
------------------------------------------
Name(s) of Franchisee
------------------------------------------
Street
------------------------------------------
City State Zip Code
(-----)------------------------------------
Area Code Telephone
FRANCHISED LOCATION:
------------------------------------------
Street
------------------------------------------
City State Zip Code
(-----)------------------------------------
Area Code Telephone
<PAGE>
IT'S ABOUT GAMES(TM)
FRANCHISE AGREEMENT
INDEX
SECTION DESCRIPTION PAGE
- ------- ----------- ----
1. GRANT OF FRANCHISE; FRANCHISED LOCATION...........................1
2. TERM OF FRANCHISE; RENEWAL RIGHTS.................................2
3. OWNERSHIP AND USE OF MARKS........................................3
4. INITIAL FRANCHISE FEE.............................................4
5. CONTINUING FEE....................................................4
6. ADVERTISING AND PROMOTION.........................................4
7. FRANCHISOR'S OBLIGATIONS..........................................6
8. OPERATION OF THE FRANCHISEE'S BUSINESS............................7
9. CONFIDENTIAL INFORMATION.........................................10
10. INSURANCE; BONDING...............................................11
11. INDEPENDENT CONTRACTORS; INDEMNIFICATION.........................11
12. SALES REPORTS, FINANCIAL STATEMENTS AND AUDIT RIGHTS.............12
13. FRANCHISOR'S RIGHT OF FIRST REFUSAL TO PURCHASE..................12
14. ASSIGNMENT OF FRANCHISE AGREEMENT................................13
15. FRANCHISOR'S TERMINATION RIGHTS..................................14
16. FRANCHISEE'S TERMINATION RIGHTS; NOTICE REQUIRED.................15
17. FRANCHISEE'S OBLIGATIONS UPON TERMINATION........................15
18. FRANCHISEE'S COVENANTS NOT TO COMPETE............................16
19. ARBITRATION; ENFORCEMENT.........................................17
20. SEVERABILITY AND CONSTRUCTION....................................18
21. NOTICES..........................................................18
22. ACKNOWLEDGMENTS..................................................19
EXHIBITS A - FRANCHISEE'S DEVELOPMENT AREA AND EXCLUSIVE TERRITORY
B - COMPUTER SOFTWARE LICENSE AGREEMENT
C - PERSONAL GUARANTY
<PAGE>
01 GK082597
02 GK030698
IT'S ABOUT GAMES(TM)
FRANCHISE AGREEMENT
THIS FRANCHISE AGREEMENT is made and entered into this _______ day of
_______________, 19____, by and between GROW BIZ INTERNATIONAL, INC., a
Minnesota corporation ("Franchisor"), and ____________________________________
("Franchisee").
BACKGROUND:
A. Franchisor franchises video and computer game resale stores known as
"It's About Games" stores ("It's About Games(TM) Stores") which feature quality
used and new video and computer games and related accessories. Franchisor uses
and licenses certain trademarks, including "It's About Games," and may hereafter
adopt, use and license additional or substitute trademarks, service marks, logos
and commercial symbols in connection with the operation of It's About Games(TM)
Stores (collectively, the "Marks"). It's About Games(TM) Stores use Franchisor's
methods, procedures, standards, specifications and the Marks (all of which are
collectively referred to as the "Business System"), which Franchisor may
periodically improve, further develop or otherwise modify.
B. Franchisee has had an adequate opportunity to be thoroughly advised
of the provisions of this Agreement and Franchisor's Offering Circular and has
had sufficient time and opportunity to evaluate and investigate the Business
System and the procedures and financial requirements associated with the
Business System as well as the competitive market in which it operates.
C. Franchisee desires to operate an "It's About Games" Store which will
conform to the uniform requirements and quality standards of the Business
System.
AGREEMENTS:
The Franchisor and Franchisee agree as follows:
1. GRANT OF FRANCHISE; FRANCHISED LOCATION
A. Grant of Franchise. Subject to the provisions stated below,
Franchisor grants to Franchisee a personal license and franchise to operate an
It's About Games(TM) Store (the "Store") in conformity with Franchisor's
Business System at a location within the development area specified in Exhibit A
attached hereto. The specified area identified in Exhibit A is referred to as
the "Development Area." Franchisee will operate the Store under the Business
System in strict compliance with the provisions of this Agreement and only at a
location within the Development Area approved by Franchisor (the "Franchised
Location").
B. Franchisee's Protected Area; Rights Reserved By Franchisor. During
the term of this Agreement, Franchisor will not establish for its own account or
franchise others to operate an It's About Games(TM) Store or any other business
generally classified as a video and computer game retail business within the
exclusive area specified in Exhibit A. The exclusive area identified in Exhibit
A, which includes the Development Area, is referred to as the "Exclusive
Territory." Franchisee understands, however, that Franchisor may sell any
products or services under trademarks other than the Marks (subject to those
<PAGE>
restrictions described above). Franchisor also may sell products or services
under the Marks through other channels of distribution, provided any such
products or services Franchisor intends to sell directly within the Exclusive
Territory will first be offered to Franchisee on the same terms and conditions
as would otherwise be offered within the Exclusive Territory. The rights and
privileges granted to Franchisee under this Agreement are personal in nature,
and may not be used at any location other than the Franchised Location.
Franchisee will not relocate the Store without Franchisor's prior written
consent and will not open any other It's About Games(TM) Store in the Exclusive
Territory. Franchisee will not have the right to subfranchise or sublicense any
of its rights under this Agreement. Franchisee will not use the Franchised
Location for any purposes other than the operation of an It's About Games(TM)
Store.
2. TERM OF FRANCHISE; RENEWAL RIGHTS
A. Term. The term of this Agreement will be for ten (10) years
commencing on the date of this Agreement.
B. Renewal. Franchisee will have the right to renew its It's About
Games(TM) franchise for the Franchised Location for continuing ten (10) year
terms, provided Franchisee meets the following conditions:
1. Franchisee has given Franchisor written notice at least one
hundred eighty (180) days before the end of the term of this Agreement
of its intention to renew;
2. Franchisee has complied with all of the material provisions
of this Agreement, including the payment of all monetary obligations
owed by Franchisee to Franchisor, and has complied with Franchisor's
material operating and quality standards and procedures;
3. Franchisee has at its expense made such reasonable capital
expenditures necessary to remodel, modernize and redecorate the Store
premises and to replace and modernize the supplies, fixtures, and
equipment used in Franchisee's business so that Franchisee's business
reflects the then-current physical appearance of new It's About
Games(TM) Stores;
4. Franchisee has paid a Renewal Fee of Five Thousand Dollars
($5,000) to Franchisor at least thirty (30) days before the expiration
of the initial (and any renewal) term of this Agreement expires;
5. Franchisee executes the standard Franchise Agreement then
being used by Franchisor; provided that Franchisee will be required to
pay the Renewal Fee in lieu of the Initial Franchise Fee stated in the
then-current Franchise Agreement; and
6. Franchisee is able to secure a renewal or extension of the
lease for the Franchised Location or is able to secure a new location
within the Development Area which has been accepted by Franchisor, such
acceptance not to be unreasonably withheld.
<PAGE>
3. OWNERSHIP AND USE OF MARKS
A. Ownership. Franchisor is the owner of the Marks. Any and all
improvements by Franchisee relating to the Marks and Business System will become
the sole property of Franchisor who has the exclusive right to register and
protect all such improvements in its name.
B. Use. Franchisee's right to use and identify with the Marks and
Business System applies only to the operation of the Store at the Franchised
Location, and exists concurrently with the term of this Agreement and only so
long as Franchisee is in complete compliance with Franchisor's quality
standards. Franchisee will have the right to use the Marks and Business System
only in the manner Franchisor directs and approves in writing. Franchisee will
not have or acquire any rights in any of the Marks or Business System other than
the right of use as governed by this Agreement. If, in the judgment of
Franchisor, Franchisee's acts infringe upon or harm the goodwill, standards of
uniformity or quality, or business standing associated with the Marks and
Business System, Franchisee will immediately, upon written notice from
Franchisor, modify its use of the Marks and Business System in the manner
Franchisor directs in writing. Franchisee will not during or after the term of
this Agreement do anything directly or indirectly which would infringe upon,
harm, mislead or contest Franchisor's rights in the Marks or Business System.
Franchisee cannot advertise any liquidation sale or similar type of activity.
C. Promotion. Franchisee will operate the Store so that it is clearly
identified and advertised as an It's About Games(TM) Store. The style, form and
use of the words "It's About Games" in any advertising, written materials or
supplies must, however, have Franchisor's prior written approval, which approval
will not be unreasonably withheld. Franchisee will use the name "It's About
Games" and the other Marks which now or hereafter may form a part of the
Business System, on all paper supplies, business cards, letterhead, envelopes,
uniforms, advertising materials, signs or other articles in the identical
combination and manner as Franchisor may require in writing. Franchisee will
comply with all trademark, trade name, service mark and copyright notice marking
requirements.
D. Identity. Franchisee will not use the words "It's About Games" in
its corporate or partnership name. Franchisee will clearly indicate on its
business checks, purchase orders, business cards, receipts, promotional
materials and other written materials that Franchisee is the owner of the Store
and that Franchisee is an It's About Games(TM) franchisee. Franchisee will
display a sign which is clearly visible to the general public indicating that
the Store is independently owned and operated.
E. Substitutions. If any third party claims that its rights to use any
of the Marks are superior and if Franchisor determines that such claim is
legally meritorious, Franchisee will, upon receiving written notice from the
Franchisor, immediately use such changes and amendments to the Marks as
Franchisor may require. Franchisee will not make any changes or amendments in or
to the use of the Marks and Business System unless directed by Franchisor in
writing.
F. Litigation. Franchisee will have no obligation to and will not,
without Franchisor's prior written consent, defend or enforce any of the Marks
in any court or other proceedings for or against imitation, infringement, any
claim of prior use, or for any other allegation. Franchisee will, however,
immediately notify Franchisor of any claims or complaints made against
Franchisee respecting the Marks and will, at its expense, cooperate in all
respects with Franchisor in any court or other proceedings involving the Marks.
Franchisor will pay the cost and expense of all litigation Franchisor incurs,
including attorneys' fees, specifically relating to the Marks. Franchisor and
its legal counsel will have the right to control and conduct any litigation
relating to the Marks.
<PAGE>
4. INITIAL FRANCHISE FEE
A. Initial Franchisee Fee. Franchisee will pay Franchisor a
nonrefundable Initial Franchise Fee of _____________ Thousand Dollars ($______),
which will be due and payable on the date of this Agreement. The Initial Fee
payable by Franchisee is payment to Franchisor for the costs that it will incur
to get Franchisee into business including costs Franchisor incurs for training,
site evaluation, business overhead costs, travel costs, and for the other
initial services Franchisor provides hereunder.
B. Refund of Fee. If Franchisor subsequently determines that Franchisee
is not qualified to properly operate the Store, Franchisor will refund to
Franchisee the Initial Franchise Fee. Franchisor will notify Franchisee in
writing within one hundred eighty (180) days of the date of this Agreement if
this Agreement is subject to termination under this Section 4(B).
5. CONTINUING FEE
A. Continuing Fee. Franchisee will, for the term of this Agreement, pay
to Franchisor a Continuing Fee equal to four percent (4%) of Franchisee's Gross
Sales (as defined below). Franchisee's obligation to pay Franchisor the
Continuing Fee under the terms of this Agreement will remain in full force and
effect until this Agreement has expired or is terminated under the provisions
herein.
B. Payment. At Franchisor's request, Franchisee will promptly execute
and deliver to Franchisor appropriate pre-authorized check forms or such other
instruments or drafts Franchisor's bank requires payable against Franchisee's
bank account, so that Franchisor may electronically collect (draft on
Franchisee's account by electronic withdrawal) the Continuing Fee due pursuant
to Section 5(A) above. Franchisor will report to Franchisee on or before
Wednesday of each week its Gross Sales for the previous week. If Franchisee
fails to report its Gross Sales on a timely basis, Franchisor may estimate
Franchisee's Gross Sales to prepare a provisional estimate for billing purposes
for that week. On Thursday of each week, Franchisor will bill Franchisee for all
amounts due for the previous week and deposit into its account Franchisee's
pre-authorized check or other instrument for the amounts due either pursuant to
Franchisee's report or Franchisor's estimate. Any unpaid Continuing Fee or other
amounts past due and owing to Franchisor will bear interest at the rate of
eighteen percent (18%) per annum or the maximum rate permitted by law, whichever
is less. Franchisee will pay Franchisor for any and all costs Franchisor incurs
in collecting any unpaid and past due Continuing Fees, including reasonable
attorneys' fees.
C. Gross Sales. The term "Gross Sales" means the total amount of all
revenues Franchisee receives from the sale of goods and services, whether for
cash or by check, credit card or trade, in connection with the Store, less
customer refunds and returns. Gross Sales will include sales made through the
Internet and wholesale transactions involving any party other than an It's About
Games(TM) franchisee who is in good standing with Franchisor. Gross Sales will
not include sales tax collected from customers and paid to appropriate tax
authorities.
6. ADVERTISING AND PROMOTION
A. Cooperative Advertising. Franchisee will participate in, support and
contribute a proportionate share, but no more than an amount equal to four
percent (4%) of the Gross Sales for the Store, of the cost of regional
cooperative advertising programs either designated by Franchisor or approved by
a regional advertising council established by Franchisor or other It's About
Games(TM) franchisees in Franchisee's area. Franchisor reserves the right to
designate regional advertising markets, to establish regional advertising
councils and to establish the rules under which such councils will operate.
<PAGE>
B. Local Advertising Expenditures. To the extent Franchisee's annual
contributions to cooperative advertising programs described in Section 6(A)
above are less than four percent (4%) of the Gross Sales for the Store, or if
the Franchisee cannot participate in any regional cooperative advertising
program because such a program has not been established in Franchisee's
geographic area, Franchisee will then be obligated to conduct advertising and
promotional activities in Franchisee's local geographic area; provided that
Franchisee's local advertising activities will not reduce, eliminate or
otherwise impact Franchisee's obligations under Section 6(A) above. Franchisee's
local advertising expenditures will include advertising, merchandising, sales
promotion and other forms of advertising at the local level. Within thirty (30)
days following the end of each calendar quarter, Franchisee will provide
Franchisor with an accounting of the monies that it has spent for approved
regional cooperative advertising and local advertising for the preceding
calendar quarter. If Franchisee has failed to spend at least four percent (4%)
of its Gross Sales for the calendar quarter for approved regional cooperative
advertising or local advertising, Franchisee will deposit with Franchisor the
difference between what it should have spent for advertising during the calendar
quarter and what it actually spent for advertising during the calendar quarter.
Franchisor will spend such amount for any type of advertising or promotion that
Franchisor deems appropriate for Franchisee's business, although Franchisor will
use reasonable efforts to spend such amounts in Franchisee's local geographic
area.
C. Marketing Fee. In addition to Franchisee's local advertising
obligations described in Section 6(B) above, Franchisee will pay to Franchisor
an annual Marketing Fee of Five Hundred Dollars ($500) which will be payable in
two (2) installments of Two Hundred Fifty Dollars ($250) each on the first day
of January and July of each year. Franchisor will use the Marketing Fee to
develop marketing programs, produce advertising and/or promotional materials,
conduct advertising research, and implement advertising and promotional
campaigns.
D. Yellow Page Advertising. Franchisee will, at its expense, obtain an
annual yellow page listing in the primary yellow page directory serving the
geographic area in which the Store is located. At a minimum, this listing will
consist of a bold heading in such directory. Amounts spent for yellow page
advertising will be credited towards Franchisee's local advertising obligations
described in Section 6(B) above.
E. Future Advertising Programs. Franchisee acknowledges and agrees that
as the It's About Games(TM) franchise system continues to expand and mature, it
will be necessary to revise Franchisee's advertising obligations. Franchisee
therefore agrees that Franchisor may increase Franchisee's minimum advertising
expenditures (as described in Section 6(B) above) up to a total of five percent
(5%) of Franchisee's Gross Sales. Franchisee further agrees that of the five
percent (5%), up to two percent (2%) of Franchisee's Gross Sales will be paid in
the form of an "Advertising Fee" to Franchisor for deposit in an "Advertising
Fund." In such event, Franchisee's advertising obligations under Section 6(A)
(and, if appropriate, Section 6(B)) above will be reduced to three percent (3%)
of the Gross Sales for the Store. Franchisor will provide Franchisee with at
least sixty (60) days' written notice before the commencement of an Advertising
Fee. All Advertising Fees will be placed in an Advertising Fund managed by
Franchisor. Reasonable disbursements from the Advertising Fund will be made
solely for the payment of expenses incurred in connection with the general
promotion of the Marks and the Business System, including the cost of
formulating, developing and implementing advertising and promotional campaigns;
and the reasonable costs of administering the Advertising Fund, including
accounting expenses and the actual costs of salaries and fringe benefits paid to
Franchisor's employees engaged in administration of the Advertising Fund.
Although Franchisor will strive to manage the Advertising Fund in such a manner
that benefits franchisees uniformly, taking into account regional and/or local
advertising costs and forms of media available,
<PAGE>
Franchisor cannot insure that any individual franchisee will benefit directly or
on a pro rata basis from the future placement of any such advertising in its
local market. The methods of advertising, media employed and contents, terms and
conditions of advertising campaigns and promotional programs will be within
Franchisor's sole discretion. Franchisor will provide Franchisee an annual
unaudited statement of the receipts and disbursements of the Advertising Fund.
F. Approved Advertising Materials. Franchisee will use only approved
advertising and promotional materials. If Franchisee desires to use any
unapproved advertising or promotional materials bearing the name "It's About
Games" or other Marks, Franchisee must obtain written approval from Franchisor
before using any such materials, which approval will not be unreasonably
withheld.
G. Promotion. Franchisee will use its best efforts to promote and
advertise its It's About Games(TM) business and will participate in all
advertising and promotional programs Franchisor establishes. Franchisee will
have the right to advertise and sell its products at whatever prices Franchisee
determines.
7. FRANCHISOR'S OBLIGATIONS
A. Location. Franchisor will provide Franchisee with assistance
respecting site location and evaluation for the Store. Franchisee acknowledges
that Franchisor's assistance in site location and acceptance of the premises
does not constitute a representation or guaranty by Franchisor that the location
will be a successful location for Franchisee's It's About Games(TM) Store.
B. Lay-Out and Design. Franchisor will designate the standard design,
lay-out and motif for Franchisee's premises and will furnish prototype
specifications for the premises.
C. Equipment, Supplies and Inventory. Franchisor will designate the
standard fixtures, equipment, supplies, signs and initial inventory for use in
the Store. Franchisee will purchase only such types, models or brands of
fixtures, furniture, equipment, signs and supplies that Franchisor approves for
It's About Games(TM) Stores as meeting its specifications and standards,
including specifications and standards for quality, design, warranties,
appearance, function and performance.
D. Training. Franchisor will, at its expense, provide a three-part
training program in Minneapolis, Minnesota or other location Franchisor
designates to educate, familiarize and acquaint Franchisee with the business of
operating an It's About Games(TM) Store. The first session of the training
program will include instruction on general business issues related to the
ownership of a privately-owned retail business, including real estate matters,
business plan development, inventory management and point-of-sales systems. The
period of this session will be at Franchisor's discretion but generally will be
for not less than two and one-half (2 1/2) days and will be scheduled by
Franchisor at its discretion. The second session of the training program will
address personnel issues, store buildout, used product purchasing, Franchisor's
preferred vendor program and other topics Franchisor selects. The period of this
session will be at Franchisor's discretion but generally will be for not less
than two and one-half (2 1/2) days and will be scheduled by Franchisor in its
sole discretion. The third session of the training program will include
instruction on sales and marketing, inventory purchasing, computer operation,
store management and other topics Franchisor selects. The period of this session
will be at Franchisor's discretion but generally will be for not less than five
(5) days and will be scheduled by Franchisor in its sole discretion. Franchisee
must successfully complete all sessions of the training program. If Franchisee
fails to successfully complete all sessions, he/she will not be permitted or
authorized to manage Franchisee's business and Franchisor may terminate this
Agreement pursuant to Section 15(A)(2) below. Franchisee will be responsible for
travel
<PAGE>
costs, room and board, the salaries, fringe benefits and other expenses
Franchisee and its employees incur in attending all sessions of the training
program.
E. Opening Assistance. Franchisor will assist in scheduling the opening
of the Store. Franchisee will not open or commence business operations until
Franchisor has approved the opening. Franchisor will, at no charge, provide at
least one (1) person to assist Franchisee with the opening of the Store for at
least two (2) days around the time of opening. If Franchisee is opening its
second or subsequent Store, Franchisee will provide this assistance only at
Franchisee's request.
F. Operations Manual. Franchisor will loan Franchisee one copy of the
Operations Manual wherein Franchisor will describe its operational policies,
standards, requirements and practices. Franchisee will comply with all
provisions of the Operations Manual. Franchisor reserves the right to revise the
Operations Manual at any time.
G. Additional Initial Assistance. Franchisor will assist Franchisee in
the development of a business plan. Franchisor and Franchisee may also agree
that Franchisor provide management assistance and other services, in addition to
the usual initial assistance and supervision Franchisor provides to all
franchisees, for additional agreed upon compensation.
H. Ongoing Assistance. During the operation of Franchisee's business,
Franchisor will: (1) inspect the Store as often as Franchisor deems necessary
and provide written reports to Franchisee on operations; (2) provide, upon the
written request of Franchisee, advisory services pertaining to operation of
Franchisee's business; (3) periodically make available to Franchisee all
changes, improvements and additions to the Business System to the same extent as
made available to other franchisees; (4) provide Franchisee with all supplements
and modifications to the Operations Manual; and (5) develop advertising and
marketing materials.
8. OPERATION OF THE FRANCHISEE'S BUSINESS
The Marks and Business System licensed to Franchisee represent valuable
goodwill distinctive of Franchisor's business and reputation. Franchisor will
periodically develop uniform standards of quality and service regarding the
business operations of the Store so as to protect (for the benefit of all
franchisees and Franchisor) the distinction, valuable goodwill and uniformity
represented and symbolized by the Marks and Business System. To insure that all
franchisees will maintain the uniform requirements and quality standards for
goods and services associated with the It's About Games(TM) Stores and with the
Marks and Business System, Franchisee will maintain the uniformity and quality
standards Franchisor reasonably requires for all products and services and
agrees to the following provisions:
A. Managerial Responsibility. During the term of this Agreement, the
parties who have signed this Agreement on behalf of Franchisee will personally
manage and operate Franchisee's business and will not, without Franchisor's
prior written consent, delegate its authority and responsibility with respect to
management and operation. If Franchisee is a corporate entity or a partnership,
one individual will retain at least fifty percent (50%) of the equity and voting
interest in such corporation or partnership and will be obligated to personally
manage and operate the Franchisee's business.
B. Design and Appearance of Premises. The design and appearance of the
exterior and interior of the Store, including signage, are part of the Business
System. It is essential to the integrity of Franchisor's Business System that as
great a degree of uniformity as possible be maintained among the various
premises of It's About Games(TM) franchisees. Franchisee agrees that: (1) no
material alteration or
<PAGE>
addition will be made to the premises without Franchisor's prior written
consent; (2) the painting and decor will be maintained in such manner and form
as Franchisor may reasonably require; (3) Franchisee will follow Franchisor's
reasonable instructions with respect to layout and character of interior
fixtures and furnishings; and (4) only such signs, emblems, logos, lettering,
and artwork as Franchisor may reasonably require or periodically provide will be
displayed on the Store premises.
C. General Operation. Franchisee will use the Marks and Business System
in strict compliance with the standards, operating procedures, specifications,
requirements and instructions required of all It's About Games(TM) franchisees,
which Franchisor may periodically amend and supplement.
D. Products and Services. Franchisee will sell only those categories of
products and services Franchisor approves in writing and will offer for sale all
products and services required by Franchisor. Franchisee will conform to all
quality and customer service standards Franchisor requires in writing.
FRANCHISOR DISCLAIMS ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING ANY
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE IN CONNECTION
WITH FRANCHISOR'S (AND/OR AN AFFILIATE'S) SALE OF ANY GOODS, EQUIPMENT,
FURNITURE, SIGNS OR SUPPLIES TO FRANCHISEE. Franchisee agrees to execute any and
all documents Franchisor reasonably requests, including letters of credit,
security agreements, and financing statements, to provide collateral for amounts
due to Franchisor for purchases of inventory and other items used in
Franchisee's business. Franchisor's approval is not required with respect to new
and used video and computer games and other accessories Franchisee purchases
from its customers or places in the Store on a consignment basis, provided,
however, that Franchisee may not sell or offer for sale any goods which would be
determined unsafe upon reasonable inspection.
E. Maintenance of Premises; Modernization. Franchisee will, at its
expense, repair, paint and keep in an attractive, clean and sanitary condition
the interior and exterior of the Store premises. Franchisee will insure that all
equipment will be kept in good working order and will meet Franchisor's quality
standards. Franchisee will periodically make reasonable capital expenditures to
remodel, modernize and redecorate the Store and to replace and modernize the
furniture, fixtures, signs, supplies and equipment used in the Store so that the
Store will reflect the then-current physical appearance of new It's About
Games(TM) Stores. All remodeling, modernization or redecoration of the Store
must be done pursuant to Franchisor's then-current standards and specifications
and only with Franchisor's prior written approval. Franchisee agrees to commence
remodeling activities within ninety (90) days after written notice from
Franchisor, although Franchisee will not be required to remodel, modernize and
redecorate the Store more than once every five (5) years during the term of this
Agreement.
F. Compliance with Laws. Franchisee will, at its expense, comply with
all applicable local, state, federal and municipal laws, ordinances, rules and
regulations pertaining to the operation of the Store, including any and all
licensing and bonding requirements.
G. Payment of Liabilities. Franchisee will timely pay all of its
obligations and liabilities due and payable to Franchisor, suppliers, lessors
and creditors.
H. Taxes. Franchisee will promptly pay all federal, state and local
taxes arising out of the operation of Franchisee's business. Franchisor will not
be liable for these or any other taxes and Franchisee will indemnify Franchisor
for any such taxes that may be assessed or levied against Franchisor which arise
or result from Franchisee's business.
<PAGE>
I. Standardization. Franchisee will require its employees to wear such
uniforms as Franchisor may designate and will comply with such programs of
standardization as Franchisor may periodically develop to promote the common
business image and to protect the goodwill associated with the Marks and
Business System.
J. Personnel. Franchisee will, at all times when open for business,
have a person designated as a management person on duty who will be responsible
for the business operations of Franchisee's business. Franchisee will employ and
maintain a sufficient number of adequately trained and competent employees to
provide efficient service to Franchisee's customers.
K. Hours of Operation. Franchisee's business will be open for business
for such days and hours as Franchisor may reasonably designate.
L. Additional Training Seminars. Franchisor may periodically conduct
refresher courses, seminars and other programs for all It's About Games(TM)
franchisees. Franchisee and/or its employees will be required to attend any such
programs and will be responsible for any expenses incurred by them in attending
such programs including the cost of transportation, lodging, meals and any
wages.
M. Photographs. Franchisor will have the right to photograph the Store
premises and, with prior written consent, Store employees at all reasonable
times.
N. Operations Manual. To protect Franchisor's reputation and goodwill
and to maintain uniform operating standards under the Marks and Business System,
Franchisee will conduct its business in accordance with Franchisor's Operations
Manual, one copy of which Franchisee will have on loan from Franchisor.
Franchisee will treat the Operations Manual as confidential, and will use all
reasonable efforts to maintain the Operations Manual as secret and confidential.
The Operations Manual will remain Franchisor's sole property. Franchisor may
periodically revise the contents of the Operations Manual. Franchisee agrees to
comply with each new or changed standard. Franchisee will insure that its copy
of the Operations Manual is kept current. In the event of any dispute as to the
contents of the Operations Manual, the terms of the master copy of the
Operations Manual maintained by Franchisor will be controlling.
O. Lease. Franchisee's lease or sublease for the Store premises must be
approved by Franchisor before its execution, but such approval will not be
unreasonably withheld. Franchisee must provide Franchisor with an executed copy
of any lease for the Store. Franchisor makes no guarantees concerning the
success of the Store located on any site consented to by Franchisor. Franchisor
recommends that Franchisee employ an independent real estate broker to assist
Franchisee in locating a suitable site and negotiating a lease for such site.
Franchisee's lease must contain provisions requiring that: (i) so long as this
Agreement remains in effect, the premises will be used only for an It's About
Games(TM) business; (ii) Franchisor will be granted the right (but not the duty)
to take possession of the premises and assume the lease in the event of a
termination of this Agreement or a threatened termination of the lease as a
result of a breach by Franchisee; (iii) the landlord will provide Franchisor
written notice of any Franchisee default and/or right to cure; and (iv) upon
termination of this Agreement or the Lease, Franchisee must remove all signs and
materials bearing the name "It's About Games" and other Marks.
P. Point-of-Sale System. Franchisee will utilize in the Store the
point-of-sale system (the "POS System") which Franchisor has developed and/or
selected for the Business System, including all future updates, supplements and
modifications. The computer software package developed for use in Franchisee's
business will include a proprietary software program owned by Franchisor or
developed for Franchisor by a third party (the "Third Party Developer").
Franchisee must lease the proprietary software
<PAGE>
from Franchisor or the Third Party Developer. Franchisee and Franchisor will
enter into Franchisor's standard form of Computer Software License Agreement
attached hereto as Exhibit B ("the Software License Agreement") in connection
with Franchisee's use of such software. Franchisor reserves the right to assign
its rights, title and interest in the Proprietary Software or the Software
License Agreement to the Third Party Developer. In such event, Franchisee may be
required to enter into a separate computer software license agreement specified
by the Third Party Developer. Franchisor also reserves the right, upon prior
written notice to Franchisee, to access information and data produced by
Franchisee's POS System. The computer hardware component of the POS System must
conform with specifications Franchisor or the Third Party Developer develops and
must be configured as a package unit as Franchisor or the Third Party Developer
designates. If Franchisor or a third party designee is requested to configure
Franchisee's computer hardware component to conform with the designated computer
software component of the POS System, Franchisor or the third party designee may
provide such assistance for additional agreed upon compensation. Franchisee will
be required to utilize and, at Franchisor's discretion, pay for all future
updates, supplements and modifications to the POS System.
Q. Participation in Internet Web Site. Franchisee acknowledges that the
Internet is a powerful, expanding medium through which business is conducted.
Franchisee must have an e-mail address. In addition, Franchisor may, upon ninety
(90) days' prior written notice, require Franchisee, at Franchisee's expense, to
participate in an It's About Games(TM) World Wide Web Site listed on the
Internet. Franchisor will, at its discretion, determine the content and use of
an It's About Games(TM) Web Site and will establish the rules under which
franchisees may or will participate in such Web Site or separately use the
Internet. Franchisor will retain all rights relating to the It's About Games(TM)
Web Site and may alter or terminate the Web Site upon thirty (30) days' notice
to Franchisee. Franchisee's general conduct on the Internet and specifically its
use of the Marks on the Internet (including the domain name and any other Marks
Franchisor may develop as a result of participation in the Internet) will be
subject to the provisions of this Agreement. Franchisee acknowledges that
certain information obtained through its participation in the It's About
Games(TM) Web Site may be considered Confidential Information (as defined in
Section 9 below), including access codes and identification codes. Franchisee's
right to participate in the It's About Games(TM) Web Site or otherwise use the
Marks or Business System on the Internet will terminate when this Agreement
expires or terminates.
9. CONFIDENTIAL INFORMATION
A. Non-Disclosure of Confidential Information. Franchisee and those
individuals who have signed the Personal Guaranty attached hereto as Exhibit C
will not, during or after the term of this Agreement, communicate, disclose or
use for the benefit of any other person or entity any confidential information,
knowledge or know-how concerning the Business System which may be communicated
to Franchisee. Franchisee will disclose such confidential information only to
such of its employees as must have access to it in order to operate Franchisee's
business. Any and all information, knowledge and know-how, including the
Operations Manual, any other manuals created for use in the operation of the
Store, methods, supplier lists, procedures, specifications, techniques, computer
programs and other data which Franchisor copyrights or designates as
confidential will be deemed confidential for purposes of this Agreement.
B. Confidentiality Agreements. All of Franchisee's employees who have
managerial duties respecting the Store and who have access to confidential
information of Franchisor, as well as all corporate officers, directors and
shareholders if Franchisee is a corporation (all partners if Franchisee is a
partnership), must sign agreements in a form satisfactory to Franchisor,
agreeing to maintain the confidentiality, during the course of their agreement
and thereafter, of all information Franchisor copyrights or designates as
<PAGE>
confidential and proprietary. Copies of the executed agreements will be provided
to Franchisor upon request.
10. INSURANCE; BONDING
A. Insurance. Franchisee will obtain and maintain in force (under
policies of insurance issued by solvent and reputable carriers) and pay the
premiums for public liability insurance with complete operations coverage with
minimum limits of $1,000,000 per person and $1,000,000 per occurrence, bailee
insurance protecting Franchisee's consignment goods and other insurance in such
types and amounts as Franchisor may reasonably require. Such insurance policies
will expressly protect both Franchisee and Franchisor and will require the
insurer to defend both Franchisee and Franchisor in any action. Franchisee will
furnish to Franchisor a certificate of insurance as stated above, naming
Franchisor as an additional insured, and providing that such policy will not be
canceled, amended or modified except upon thirty (30) days' prior written notice
to Franchisor. Maintenance of the insurance requirement will not relieve
Franchisee of the obligations of indemnification stated in Section 11 below. If
Franchisee fails to obtain or maintain in force any insurance as required by
this Section or to furnish any certificate of insurance required hereunder,
Franchisor may, in addition to all other available remedies, obtain such
insurance or certificates, and Franchisee will promptly reimburse Franchisor for
all insurance premiums and other costs incurred in obtaining such insurance.
B. Bonding. Franchisee will comply with any and all bonding
requirements which may be applicable to its It's About Games(TM) business,
including bonding requirements resulting from the consignment portion of
Franchisee's business.
11. INDEPENDENT CONTRACTORS; INDEMNIFICATION
A. Relationship. Franchisor and Franchisee are independent contractors.
Neither Franchisor nor Franchisee will make any agreements, representations or
warranties in the name of or for the other or that their relationship is other
than franchisor and franchisee. Neither Franchisor nor Franchisee will be
obligated by or have any liability under any agreements, representations or
warranties made by the other. Franchisee alone will be responsible for all loss
or damage arising out of or relating to the operation of Franchisee's business
or arising out of the acts or omissions of Franchisee or any of its agents,
employees or contractors in connection with the preparation and sale of products
by Franchisee, and for all claims for damage to property or for injury or death
of any persons directly or indirectly resulting therefrom. Franchisee will
indemnify Franchisor against and will reimburse Franchisor for all obligations
and damages arising out of the operation of Franchisee's business, including all
costs Franchisor reasonably incurs in the defense of any such claim brought
against it or in any action in which it is named as a party (including
reasonable attorneys' fees). Franchisor will have the right to defend any such
claim against it. Franchisor will indemnify Franchisee against and reimburse
Franchisee for any obligations or liability for damages attributable to
agreements, representations or warranties of Franchisor, or caused by
Franchisor's negligence or willful action, and for costs Franchisee reasonably
incurs in the defense of any such claim brought against it or in any action in
which it is named as a party, provided that Franchisor will have the right to
participate in and, to the extent Franchisor deems necessary, to control any
litigation or proceeding which might result in liability of or expense to
Franchisee subject to such indemnification. The indemnities and assumptions of
liabilities and obligations stated in this Agreement will continue in full force
and effect following the expiration or termination of this Agreement.
<PAGE>
B. Enforcement. The non-prevailing party will pay all costs and
expenses, including reasonable attorneys' fees, incurred by the prevailing party
in any action or proceeding brought to enforce any provision of this Agreement
or to enjoin any violation of this Agreement.
12. SALES REPORTS, FINANCIAL STATEMENTS AND AUDIT RIGHTS
A. Sales Reports. Franchisee will maintain an accurate written record
of daily Gross Sales and will deliver to Franchisor a signed and verified
statement of the weekly Gross Sales of Franchisee's business using such forms as
Franchisor may require in writing. The weekly statement of Gross Sales must be
provided to Franchisor on or before Wednesday of each week for the preceding
week. Franchisor reserves the right to modify or substitute the required forms
and impose additional recordkeeping procedures.
B. Financial Statements. Franchisee will, at its expense, provide
Franchisor with quarterly and annual financial statements and such other
financial reports as Franchisor specifies using the forms and chart of accounts
Franchisor requires. All financial information provided to Franchisor under this
Section must be presented in the form Franchisor periodically requires in
writing. Franchisee will deliver the quarterly financial information to
Franchisor by the thirtieth (30th) day of the month following the end of the
preceding quarter. The annual financial statement must be provided on or before
March 1 of each year for the preceding calendar year.
C. Audit Rights. Franchisee will make all of its financial books and
records available to Franchisor or its designated representative at all
reasonable times for review and audit by Franchisor or its designee.
Franchisee's financial books and records for each fiscal and calendar year will
be kept in a secure place and will be available for audit by Franchisor for at
least five (5) years. If an audit conducted by Franchisor results in a
determination that the Continuing Fees paid to Franchisor are deficient
(underpaid) by more than two percent (2%), Franchisee will pay Franchisor for
the reasonable costs and expenses that it has incurred as a result of the audit.
If pursuant to audits, the Continuing Fees have been deficient by more than two
percent (2%) twice or more within any five (5) year period, this will be
considered a material breach of this Agreement.
13. FRANCHISOR'S RIGHT OF FIRST REFUSAL TO PURCHASE
A. Restrictions. Franchisee will not sell, assign, trade, transfer,
lease, sublease, or otherwise dispose of: (1) any interest in or any part of the
Franchised Location or this Agreement, or (2) any controlling interest (whether
through one or more related transactions) in Franchisee's business or the assets
of Franchisee's business to any third party, without first offering the same to
Franchisor in writing, at the same price and on the same terms as stated in the
proposed third-party offer. Franchisee's written offer to Franchisor must
contain all material provisions of the proposed sale or transfer. Upon
Franchisor's receipt of written notice specifying the proposed price and terms
of a proposed sale or transfer of Franchisee's business or interest therein,
Franchisor will give Franchisee written notice within ten (10) business days
thereafter if Franchisor has an interest in negotiating to purchase the business
or interest being offered according to the proposed terms. If Franchisor
commences negotiations to purchase Franchisee's business or interest therein as
described herein, Franchisee may not sell the business or interest being offered
to a third party for at least thirty (30) days or until Franchisor and
Franchisee agree in writing that the negotiations have terminated, whichever
comes first. If Franchisor waives its right to purchase, Franchisee may complete
the sale or transfer of the business or interest therein according to the terms
described in the written notice to Franchisor but not upon more favorable terms.
Any such sale, transfer or assignment to a
<PAGE>
third party is subject to the provisions stated in Section 14 of this Agreement.
Franchisor's nonacceptance of Franchisee's written offer will not affect or
change Franchisee's obligations under this Agreement.
B. Corporate Franchisee. If Franchisee is a corporation, the
shareholders cannot sell, assign, pledge or otherwise dispose of a controlling
interest in the capital stock of Franchisee ("Capital Stock") (except to
immediate family members of the controlling shareholder(s) or to a trust
established for their benefit) until the Capital Stock has been first offered to
Franchisor in writing under the same terms and conditions offered to any third
party. A shareholder of Franchisee may, however, bequeath, sell, assign, trade
or transfer his/her Capital Stock to the other shareholders of Franchisee
corporation because of death or permanent disability without first offering it
to Franchisor, provided Franchisee provides Franchisor with written notice of
all such transactions. All shares of Capital Stock issued by Franchisee's
corporation to its shareholders must bear the following legend on the reverse
side of each issued and outstanding stock certificate:
The shares of capital stock represented by this certificate
are subject to a written Franchise Agreement which grants
Grow Biz International, Inc. a right of first refusal to
purchase these shares of capital stock from the shareholder.
Nothing in this Section will be construed as prohibiting the shares of Capital
Stock of a corporate Franchisee from being pledged as security to an
institutional lender who has provided financing to or for the Store; provided
the institutional lender accepts such security interest subject to Franchisor's
reasonable conditions.
14. ASSIGNMENT OF FRANCHISE AGREEMENT
A. By Franchisor. This Agreement may be assigned and transferred by
Franchisor and will benefit Franchisor's successors and assigns. Any such
assignment or transfer will require the assignee to fulfill Franchisor's
obligations under this Agreement.
B. Corporate Franchisee. This Agreement may be transferred or assigned
by Franchisee to a corporation which is owned or controlled by Franchisee,
provided: (i) Franchisee and all other shareholders of the assignee corporation
owning at least ten percent (10%) of the Capital Stock thereof sign the Personal
Guaranty attached hereto as Exhibit C and agree to be bound by the provisions of
this Agreement; and (ii) Franchisee furnishes prior written proof to Franchisor
substantiating that the corporation will be financially able to perform all of
the provisions of this Agreement. Franchisee will give Franchisor fifteen (15)
days written notice before the proposed date of assignment or transfer of this
Agreement to a corporation owned or controlled by Franchisee; however, the
transfer or assignment of this Agreement will not be valid or effective until
Franchisor has received the legal documents which its legal counsel deems
necessary to properly document such transfer or assignment.
C. Conditions to Other Transfer or Assignment. Franchisee (and its
partners and shareholders, if any) will not transfer (whether voluntary or
involuntary), assign or otherwise dispose of, in one or more transactions,
Franchisee's business, the Franchised Location, substantially all or all of the
assets of Franchisee's business, this Agreement or any controlling interest in
Franchisee (a "controlling" interest will include a proposed transfer of fifty
percent (50%) or more of the Capital Stock of a corporate Franchisee) without
Franchisor's prior written consent, except to trusts established for
Franchisee's benefit. Franchisor will not unreasonably withhold its consent to a
transfer, subject to any or all of the following conditions described below
which Franchisor may, in its sole discretion, deem necessary:
<PAGE>
1. All of Franchisee's accrued monetary obligations to
Franchisor will have been satisfied, and Franchisee is not in default
under this Agreement;
2. Franchisee executes a written agreement in a form
satisfactory to Franchisor, in which Franchisee covenants to observe
all applicable post-term obligations and covenants contained in this
Agreement;
3. The transferee-franchisee enters into a written agreement
in a form satisfactory to Franchisor assuming and agreeing to discharge
all of Franchisee's obligations and covenants under this Agreement for
the remainder of its term or, at Franchisor's option, execute
Franchisor's then-current standard form of franchise agreement (which
may provide for different royalties, advertising contributions,
duration, and other rights and obligations from those provided in this
Agreement);
4. The transferee-franchisee is approved by Franchisor and
demonstrates to Franchisor's satisfaction that he/she meets
Franchisor's managerial, financial, and business standards for new
franchisees, possesses a good business reputation and credit rating,
and has the aptitude and ability to conduct the franchised business.
Franchisee understands that Franchisor may communicate directly with
the transferee-franchisee during the transfer process to respond to
inquiries, as well as to ensure that the transferee-franchisee meets
Franchisor's qualifications; and
5. The transferee-franchisee successfully completes
Franchisor's training program.
D. Transfer Fee. If this Agreement is assigned or transferred pursuant
to Section 14(C) above, Franchisee will pay Franchisor a transfer fee of Five
Thousand Dollars ($5,000) for the costs Franchisor incurs, including the costs
of any required training. There will be no transfer fee payable with respect to
transfers to immediate family members.
15. FRANCHISOR'S TERMINATION RIGHTS
A. Grounds. Franchisee will be in default, and Franchisor may, at its
option, terminate this Agreement, as provided herein, if: (1) Franchisee fails
to open and commence operations of the Store at such time as the premises are
ready for occupancy or within nine (9) months of the execution of this
Agreement, whichever occurs first; (2) Franchisee violates any material
provision or obligation of this Agreement; (3) Franchisee or any of its
managers, directors, officers or majority shareholders are convicted of, or
plead guilty to or no contest to (a) a charge of violating any law which
adversely impacts upon the reputation of the franchised business or (b) any
felony; (4) Franchisee fails to conform to the material requirements of the
Business System or the material standards of uniformity and quality for the
products and services Franchisor has established in connection with the Business
System; (5) Franchisee fails to timely pay Continuing Fees, Marketing or
Advertising Fees, buying group (inventory) obligations or any other obligations
or liabilities due and owing to Franchisor or fails to timely pay any
advertising cooperative obligations; (6) Franchisee is insolvent within the
meaning of any applicable state or federal law; (7) Franchisee makes an
assignment for the benefit of creditors or enters into any similar arrangement
for the disposition of its assets for the benefit of creditors; (8) Franchisee
voluntarily or otherwise "abandons" (as defined below) the franchised business;
(9) Franchisee is involved in any act or conduct which materially impairs the
goodwill associated with the name "It's About Games" or any of the Marks or the
Business
<PAGE>
System; or (10) Franchisee's lease for the Store premises expires or is
terminated for any reason (unless, through no fault of Franchisee, the lessor of
the premises in which the Store is located refuses to renew Franchisee's lease
and Franchisee relocates within the Development Area to a site approved by
Franchisor within sixty (60) days thereafter). The term "abandon" means
Franchisee's failure to operate the Store during regular business hours for a
period of ten (10) consecutive days without Franchisor's prior written consent
unless such failure is due to an act of God, war, strikes or riots.
B. Procedure. Except as described below, Franchisee will have thirty
(30) days, or such longer period as applicable law may require, after its
receipt from Franchisor of a written Notice of Termination within which to
remedy any default hereunder, and to provide evidence thereof to Franchisor. If
Franchisee fails to correct the alleged default within that time (or such longer
period of time as applicable law may require), this Agreement will terminate
without further notice to Franchisee effective immediately when the thirty (30)
day period (or such longer period as applicable law may require) expires.
Franchisor may terminate this Agreement immediately upon delivery of written
notice to Franchisee, with no opportunity to cure, if the termination results
from any of the following: (1) Franchisee repeatedly fails to comply with one or
more material requirements of this Agreement; (2) the nature of Franchisee's
breach makes it not curable; (3) Franchisee willfully and repeatedly deceives
customers relative to the source, nature or quality of goods sold; (4) any
default under items (3), (6), (8) or (9) in Section 15(A) above; or (5)
Franchisee willfully and materially falsifies any report, statement, or other
written data furnished to Franchisor either during the franchise application
process or after Franchisee is awarded a franchise. Any report submitted
pursuant to Section 12 will be conclusively deemed to be materially false if it
understates Gross Sales by more than four percent (4%).
C. Applicable Law. If the provisions of this Section 15 are
inconsistent with applicable law, the applicable law will apply. Franchisor's
ability to terminate or fail to renew a Wisconsin franchise will be governed by
the Wisconsin Fair Dealership Law, Chap. 135, Wisc. Stats. Minnesota law
provides franchisees with certain termination and non-renewal rights. As of the
date of this Agreement, Minn. Stat. Section 80C.14, Subd. 3, 4 and 5 require
that, except in certain specified cases, a franchisee be given 90 days notice of
termination (with 60 days to cure) and 180 days notice for non-renewal of the
Agreement.
16. FRANCHISEE'S TERMINATION RIGHTS; NOTICE REQUIRED
A. Termination. Franchisee may terminate this Agreement if Franchisor
violates any material obligation of Franchisor to Franchisee and fails to cure
such violation within thirty (30) days after Franchisor's receipt of written
notice from Franchisee; provided, however, that Franchisee is in substantial
compliance with the Agreement at the time of giving such notice of termination.
Franchisee's written notice will identify the violation and demand that it be
cured.
B. Required Notice. A party must give the other party written notice of
an alleged default under or violation of this Agreement after it has knowledge
of, determines, or is of the opinion that there has been an alleged default
under or violation of this Agreement. If there is failure to give written notice
of an alleged default under this Agreement within one (1) year from the date
that the nonbreaching party has knowledge of, determines or is of the opinion
that there has been an alleged default, the alleged default will be deemed to be
approved and waived, and the alleged default or violation will not be deemed to
be a default under or violation of this Agreement.
17. FRANCHISEE'S OBLIGATIONS UPON TERMINATION
<PAGE>
A. Post-Term Duties. If this Agreement is terminated for any reason
other than a termination as a result of a breach by Franchisor, Franchisee will:
(1) within five (5) days after termination, pay all amounts due and owing to
Franchisor under this Agreement; (2) return to Franchisor by first class prepaid
United States mail the Operations Manual and any other manuals, advertising
materials, and all other printed materials relating to the operation of the
franchised business; (3) assign to Franchisor the telephone number for the
Store; and (4) remove all signs and other materials bearing the name "Its About
Games" and other Marks; (5) comply with all post-termination obligations under
the Software License Agreement, including the return of all copies of
Franchisor's proprietary software; and (6) comply with all other applicable
provisions of this Agreement, including the non-compete provisions. Upon
termination of this Franchise Agreement for any reason, Franchisee's right to
use the name "It's About Games" and the other Marks and the Business System will
immediately terminate. If Franchisee fails to remove all signs and other
materials bearing the Marks, Franchisor may do so at Franchisee's expense.
B. Redecoration. If this Agreement is terminated for any reason, and
Franchisor permits Franchisee to remain in possession of the Franchised
Location, Franchisee will, at its expense modify, both the exterior and interior
appearance of the business premises so that they will be easily distinguished
from the standard appearance of It's About Games(TM) Stores. At a minimum, such
changes and modifications to the premises will include: (1) repainting the
premises with totally different colors; (2) removing all signs and other
materials bearing the name "It's About Games" and other Marks; (3) removing from
the premises all fixtures which are indicative of It's About Games(TM) Stores;
(4) discontinuing use of the approved employee uniforms and refraining from
using any uniforms which are confusingly similar; and (5) discontinuing use of
all packaging and confidential information regarding the operation of the Store.
18. FRANCHISEE'S COVENANTS NOT TO COMPETE
A. During Term. Franchisee (and the Personal Guarantors) will not,
during the term of this Agreement, on their own account or as an employee,
agent, consultant, partner, officer, director, or shareholder of any other
person, firm, entity, partnership or corporation, own, operate, lease,
franchise, conduct, engage in, be connected with, have any interest in, or
assist any person or entity engaged in any business involving the selling,
leasing, renting or exchanging of new or used video or computer games or related
accessories, or any other related business that is competitive with or similar
to an It's About Games(TM) Store, except with Franchisor's prior written
consent. Separately, Franchisee cannot offer or sell new or used musical
instruments, amplifiers, audio compact discs, or music-related equipment or
electronics (other than equipment or electronics used in connection with video
games) in the Store or elsewhere.
B. After Termination. Franchisee (and the Personal Guarantors) will
not, for a period of one (1) year after this Agreement expires or is terminated
(except for a termination as a result of a Franchisor's breach), on their own
account or as an employee, agent, consultant, partner, officer, director, or
shareholder of any other person, firm, entity, partnership or corporation, own,
operate, lease, franchise, conduct, engage in, be connected with, have any
interest in or assist any person or entity engaged in any business involving the
selling, leasing, renting or exchanging of new or used video or computer games
or related accessories, or any other related business that is competitive with
or similar to an It's About Games(TM) Store which is located at the Franchised
Location or within a six (6) mile radius of the Franchised Location or any It's
About Games(TM) Store. Franchisee expressly agrees that the one (1) year period
and the six (6) mile radius are the reasonable and necessary time and distance
needed to protect Franchisor if this Agreement expires or is terminated for any
reason.
<PAGE>
C. Injunctive Relief. Franchisee agrees that damages alone cannot
adequately compensate Franchisor if there is a violation of these noncompetitive
covenants and that injunctive relief is essential for the protection of
Franchisor. Franchisee therefore agrees that in case of any alleged breach or
violation of this Section by it, Franchisor may seek injunctive relief without
posting any bond or security, in addition to all other remedies that may be
available to Franchisor at equity or law.
19. ARBITRATION; ENFORCEMENT
A. Arbitration Process. Except to the extent Franchisor elects to
enforce the provisions of this Agreement by judicial process and injunction as
provided herein, all disputes, claims and controversies between the parties
arising under or in connection with this Agreement or the making, performance or
interpretation thereof (including claims of fraud in the inducement and other
claims of fraud and the arbitrability of any matter) will be settled by
arbitration under the authority of the Federal Arbitration Act in Minneapolis,
Minnesota. The arbitrator will have the right to award specific performance of
this Agreement. The proceedings will be conducted under the commercial
arbitration rules of the American Arbitration Association, to the extent such
Rules are not inconsistent with the provisions of this arbitration provision.
The decision of the arbitrator will be final and binding on all parties. This
Section will survive termination or non-renewal of this Agreement under any
circumstances. Judgment upon the award of the arbitrator may be entered in any
court having jurisdiction thereof. During the pendency of any arbitration
proceeding, Franchisee and Franchisor will fully perform their respective
obligations under this Agreement.
B. Additional Proceedings. If, after Franchisor or Franchisee
institutes an arbitration proceeding, one or the other asserts a claim,
counterclaim or defense, the subject matter of which, under statute or current
judicial decision is nonarbitrable for public policy reasons, the party against
whom the claim, counterclaim or defense is asserted may elect to proceed with
the arbitration of all arbitrable claims, counterclaims or defenses or to
proceed to litigate all claims, counterclaims or defenses in a court having
competent jurisdiction.
C. Punitive Damages. Franchisor and Franchisee acknowledge that
judgment upon an arbitration award may be entered in any court of competent
jurisdiction and will be binding, final and nonappealable. Franchisor and
Franchisee (and their respective owners and guarantors, if applicable) agree to
waive, to the fullest extent permitted by law, the right to or claim for any
punitive or exemplary damages against the other and agree that in the event of a
dispute between them, each will be limited to the recovery of actual damages
sustained by it.
D. Enforcement of Franchise Agreement. Notwithstanding the other
provisions of this Section 19, Franchisee recognizes that the failure of a
single franchisee to comply with the terms of its It's About Games(TM) franchise
agreement could cause irreparable damage to Franchisor or to some or all other
It's About Games(TM) franchisees. Franchisor and Franchisee, therefore agree
that, in the event of a breach or threatened breach of Sections 3, 8, 9, 12, 13,
14, 17 and/or 18 of this Agreement by Franchisee or in the event of any conduct
by Franchisee which is illegal or is dishonest or misleading to Franchisee's
customers or prospective customers or may impair the goodwill associated with
the Marks, Franchisor may seek an injunction restraining such breach or obtain a
decree of specific performance, without showing or proving any actual damage,
until such time as a final and binding determination is made by the arbitrator.
The foregoing equitable remedy will be in addition to, and not in lieu of, all
other remedies or rights which Franchisor might otherwise have by virtue of any
breach of this Agreement by Franchisee.
<PAGE>
20. SEVERABILITY AND CONSTRUCTION
A. Severability. All provisions of this Agreement are severable and
this Agreement will be interpreted and enforced as if all completely invalid or
unenforceable provisions were not contained herein and partially valid and
enforceable provisions will be enforced to the extent valid and enforceable. If
any applicable law or rule of any jurisdiction requires a greater prior notice
period than is required hereunder, or if under any applicable law or rule of any
jurisdiction, any provision of this Agreement is invalid or unenforceable, the
prior notice required by such law or rule will be substituted for the notice
requirements hereof, or such invalid or unenforceable provision will be modified
to the extent required to be valid and enforceable. Such modifications to this
Agreement will be effective only in such jurisdiction and will be enforced as
originally made and entered into in all other jurisdictions.
B. Waiver. Franchisor and Franchisee may by written instrument
unilaterally waive any obligation of or restriction upon the other under this
Agreement. No acceptance by Franchisor of any payment by Franchisee and no
failure, refusal or neglect of Franchisor or Franchisee to exercise any right
under this Agreement or to insist upon full compliance by the other with its
obligations hereunder, including any mandatory specification, standard or
operating procedure, will constitute a waiver of any provision of this
Agreement.
C. Cumulative Rights. The rights of Franchisor and Franchisee hereunder
are cumulative and no exercise or enforcement by Franchisor or Franchisee of any
right or remedy hereunder will preclude the exercise or enforcement by
Franchisor or Franchisee of any other right or remedy hereunder or which
Franchisor or Franchisee is entitled by law to enforce.
D. Governing Law. Except to the extent governed by the United States
Trademark Act of 1946 (Lanham Act, 15 U.S.C. Section 1051 et seq.), this
Agreement and the franchise relationship will be governed by the laws of the
state in which the Franchised Location is located.
E. Binding Effect. This Agreement is binding upon the parties hereto
and their respective executors, administrators, heirs, assigns and successors in
interest.
F. Consents. Whenever a party's consent or approval is required under
this Agreement, such consent or approval will not be unreasonably withheld or
delayed.
G. Entire Agreement. The "Background" section is a part of this
Agreement which, together with exhibits, represents the entire agreement of the
parties. This Agreement supersedes and terminates any prior oral or written
understandings or agreements between Franchisor and Franchisee relating to the
subject matter of this Agreement. No modification of this Agreement will be
effective unless it is in writing and signed by Franchisor and Franchisee. The
term "Franchisee" as used herein is applicable (where relevant) to one or more
persons, a corporation or a partnership. References to "Franchisee," "assignees"
and "transferees" which are applicable to an individual or individuals mean the
principal owner or owners of the equity or operating control of Franchisee or
any such assignee or transferee if Franchisee or such assignee or transferee is
a corporation or partnership. If Franchisee consists of more than one
individual, all individuals will be bound jointly and severally by the
provisions of this Agreement.
21. NOTICES
All notices to Franchisor will be in writing and will be made by
personal service or sent by prepaid first class United States mail addressed to
Franchisor at its principal place of business, or at such other
<PAGE>
address as Franchisor may designate in writing. All notices to Franchisee will
be made by prepaid first class United States mail addressed to Franchisee at the
Franchised Location, or such other address as Franchisee may designate in
writing. Any notice under this Agreement may also be made by a recognized
delivery service that requires a written receipt.
22. ACKNOWLEDGMENTS
A. Independent Investigation. Franchisee acknowledges that it has
conducted an independent investigation of the business franchised hereunder, and
recognizes that the business venture contemplated by this Agreement involves
business risks and that its success will largely depend on Franchisee's ability
as an independent business person. Franchisor expressly disclaims the making of,
and Franchisee acknowledges that it has not received, any warranty or guarantee,
express or implied, as to the potential volume, profits or success of the
business venture contemplated by this Agreement.
B. Franchise Agreement. Franchisee acknowledges that it has received,
read, and understood this Agreement and that Franchisor has fully and adequately
explained the provisions of it to Franchisee's satisfaction and that Franchisee
has had sufficient time and opportunity to consult with advisors of its own
choosing about the potential benefits and risks of entering into this Agreement.
C. Other Franchises. Franchisee acknowledges that other franchisees of
Franchisor have or will be granted franchises at different times and in
different situations, and further acknowledges that the provisions of such
franchises may vary substantially from those contained in this Agreement.
D. Receipt of Documents. Franchisee acknowledges that it received a
copy of this Agreement at least five (5) business days before the date on which
this Agreement was executed. Franchisee further acknowledges that he/she has
received a Franchise Offering Circular at least ten (10) business days before
the date on which this Agreement was executed.
IN WITNESS WHEREOF, Franchisor and Franchisee have signed this
Agreement as of the day and year first above written.
FRANCHISOR DISCLAIMS ANY WARRANTY OR REPRESENTATION AS TO THE POTENTIAL SUCCESS
OF FRANCHISEE'S BUSINESS OPERATIONS UNDER THIS AGREEMENT.
<PAGE>
This is a legal document which grants specific rights to and imposes certain
obligations upon Franchisor and Franchisee. Consult legal counsel to be sure
that you understand your rights and duties. Please insert the name and address
of your attorney: _____________________________________________________________.
"FRANCHISOR" "FRANCHISEE"
GROW BIZ INTERNATIONAL, INC. If "Franchisee" is a corporation,
-------------------------------------------
(Print Corporate Name)
By By
-------------------------------- ----------------------------------------
Its Its
-------------------------- ----------------------------------
If "Franchisee" is one or more individuals,
-------------------------------------------
(Print Individual Name)
By
----------------------------------------
-------------------------------------------
(Print Individual Name)
By
----------------------------------------
-------------------------------------------
(Print Individual Name)
By
----------------------------------------
<PAGE>
EXHIBIT A
TO FRANCHISE AGREEMENT
FRANCHISEE'S DEVELOPMENT AREA AND EXCLUSIVE TERRITORY
1. Description of Development Area:
2. Description of Exclusive Territory:
----------------------------- --------------------------------
Franchisor Franchisee
<PAGE>
EXHIBIT B
TO FRANCHISE AGREEMENT
IT'S ABOUT GAMES(TM)
COMPUTER SOFTWARE LICENSE AGREEMENT
This AGREEMENT is made and entered into as of the _____ day of _______________,
199__, by and between GROW BIZ INTERNATIONAL, INC. ("Grow Biz"), and
____________________________ ("Licensee").
BACKGROUND:
Grow Biz owns certain software and related documentation. Licensee is an It's
About Games(TM) franchisee pursuant to a franchise agreement Licensee entered
into with Grow Biz (the "Franchise Agreement"). Licensee wishes to use certain
software in its franchised business under the provisions stated below.
AGREEMENTS:
1. SOFTWARE LICENSE.
A. Grant of License. Grow Biz grants Licensee a nonexclusive license to
use the software identified on Schedule A attached to this Agreement.
Collectively, all software licensed under this Agreement, and all modifications,
updates and other works derivative of or to such software, and any related
documentation or materials provided, is referred to as the "Software."
B. Initial Software License Fee. Licensee will pay Grow Biz an Initial
Software License Fee of Three Thousand Dollars ($3,000). This fee must be paid
before Grow Biz delivers the Software to Licensee. Licensee will be solely
responsible for all taxes relating to the Initial Software License Fee,
excluding taxes measured by Grow Biz' net income.
C. Scope of License. Licensee may use the Software only on a single
computer or on a network of computers at the franchised business site or sites
identified on Schedule A attached hereto or in Grow Biz' acceptance of
Licensee's order. Unless Grow Biz otherwise agrees in writing, a single license
fee entitles Licensee to use the Software on a network at one site with no more
than five users. Licensee will be charged an additional license fee for use of
the Software on a network at one site with more than five users or for use at
more than one site.
D. Licensee's Agreements. Licensee agrees:
1. Not to disassemble, decompile or otherwise reverse engineer
the Software, nor to create, access or generate the source code of the
Software.
2. Not to modify the Software, nor to develop or create, or
assist any other party in developing or creating, any computer programs
which are derived from, based upon, or contain features or functions
similar to, the Software.
<PAGE>
3. To use the Software only in Licensee's internal operation
of the franchise business under the terms of the Franchise Agreement
and not for the business needs of any third parties.
4. Not to disclose to any other party any part of or any
information relating to the Software, nor to permit access to the
Software except by Licensee's employees in the operation of the
franchised business.
5. Not to assign, sublicense, loan or otherwise provide to any
third party the Software, whether or not merged into other programs or
materials.
6. Not to copy the Software, although Licensee may make one
copy of the Software for backup purposes if Licensee reproduces all
copyright and other proprietary notices in such copy.
E. Repairs; Updates; Etc.
1. For so long as Grow Biz owns and requires Licensee to use
the Software, Grow Biz will provide ongoing maintenance and repair
services for the Software owned by Grow Biz so that the Software will
perform substantially as described in documentation Grow Biz has
provided. Such maintenance and repair services include Licensee's right
to receive any fixes and minor enhancements to the Grow Biz Software
which Grow Biz may periodically develop, as well as any other
maintenance or repair services Grow Biz offers in its discretion. Grow
Biz does not warrant that the operation of the Grow Biz Software will
be uninterrupted or error free, that all defects will be corrected or
that the Software will meet Licensee's requirements.
2. Grow Biz may, in its sole discretion, periodically release
updates, modifications and enhancements respecting the Software.
Licensee will install any fixes, updates, modifications or enhancements
which Grow Biz designates as mandatory.
3. Grow Biz is not obligated to provide Licensee with other
services, including installation, support, training or other services
relating to the Software. Further, Grow Biz is not obligated to provide
maintenance or repair services for Software distributed, but not owned,
by Grow Biz.
4. Grow Biz may charge a reasonable fee for its services,
including its maintenance and repair services, as well as for any
updates, modifications and enhancements to the Software which it elects
to release.
2. PROPRIETARY RIGHTS.
A. Confidentiality. The Software is the confidential and proprietary
property of Grow Biz or its vendors. Licensee will hold the Software in
confidence and safeguard it from disclosure to third parties and will use the
Software only as intended by this Agreement. Licensee will notify Grow Biz
promptly of any unauthorized access, copying or use of the Software and will
reasonably assist Grow Biz in prosecuting any resulting claims or proceedings.
<PAGE>
B. Ownership. Grow Biz or its vendors retain all title and rights,
including all copyright rights, to the Software, including all modifications,
updates and other works derivative of or to the Software, all of which will be
subject to the provisions of this Agreement.
3. TERM AND TERMINATION.
A. Term and Termination. This Agreement will continue until terminated.
Grow Biz may terminate this Agreement upon written notice to Licensee if
Licensee breaches any term of this Agreement, the Franchise Agreement or any
other agreement with Grow Biz, or if Licensee becomes insolvent. This Agreement
will automatically terminate, without any further action of the parties, upon
termination of the Franchise Agreement for any reason. Finally, this Agreement
will automatically terminate if and when Grow Biz assigns all of its rights,
title and interest in the Software or this Agreement to a third-party assignee.
If such an assignment occurs, Licensee acknowledges and agrees that, to continue
to use the Software, the third-party assignee may require Licensee to enter into
a separate computer software license agreement. If Grow Biz assigns its interest
in the Software or this Agreement to a third-party assignee, and the third-party
assignee replaces the Software, Licensee may incur additional costs related to
the conversion of such replacement software.
B. Consequences of Termination. Upon termination of this Agreement, all
licenses and rights Grow Biz has granted under this Agreement will terminate and
Licensee will have no rights to use, sell or transfer its interest in, the
Software. Licensee agrees to immediately return to Grow Biz all copies of the
Software, or to destroy all Software.
4. LIMITED WARRANTY; DISCLAIMERS.
Grow Biz warrants to Licensee that magnetic diskette or other media on
which the Software is recorded will be free from material defects in materials
or workmanship under normal use for a period of ninety (90) days after delivery
of the media. If during such period the media should be defective, Licensee may
return the media for replacement without charge. Licensee's sole remedy in the
event of a defect is expressly limited to replacement of the media. ALL
SOFTWARE, INCLUDING ALL GROW BIZ SOFTWARE, IS PROVIDED ON AN "AS IS" BASIS.
However, Grow Biz acknowledges its Software maintenance and repair obligations
stated in Section 1 (E). THESE WARRANTIES ARE IN LIEU OF, AND GROW BIZ EXPRESSLY
DISCLAIMS, ALL OTHER WARRANTIES RELATING TO THIS AGREEMENT OR THE SOFTWARE,
WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF TITLE,
NONINFRINGEMENT, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5. LIMITATION OF LIABILITY.
GROW BIZ' LIABILITY FOR ANY CLAIM RELATED TO ANY SOFTWARE OR SERVICE
PROVIDED WILL BE LIMITED TO THE LESSOR OF LICENSEE'S ACTUAL DAMAGE OR LOSS OR
THE INITIAL FEE PAID FOR THE SOFTWARE. GROW BIZ WILL NOT BE LIABLE FOR ANY
INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, INCLUDING LOST
PROFITS OR LOSS OF OR DAMAGE TO DATA.
6. INFRINGEMENT.
A. Infringement Claims. Grow Biz does not have actual knowledge of any
claim that the Grow Biz Software infringes upon a third party's patent,
copyright or other proprietary right. If a third
<PAGE>
party asserts such an infringement claim against Licensee, Licensee will
immediately notify Grow Biz in writing. Grow Biz will have the right (but not
the obligation) to defend any such claim, at Grow Biz' expense, and Licensee
will cooperate with Grow Biz with respect to such defense. In the event of any
such claim, Licensee will, at Grow Biz' direction, immediately discontinue using
the Software. Grow Biz will either modify the Software so as to render it
non-infringing or replace the Software with such other non-infringing Software
as Grow Biz may furnish to Licensee. In either case, Grow Biz will do so only if
the modified or replacement Software performs substantially the same functions
as the infringing Software. So long as Licensee complies with the terms hereof,
Grow Biz will indemnify Licensee for any loss, damage, cost or expense related
to such claim.
B. Limitations. Grow Biz will not be liable to Licensee if an
infringement claim is based on use of the Software in combination with any
product, software or system not delivered by Grow Biz, or Licensee's
unauthorized use or modification of the Software. Grow Biz will not have any
obligations regarding any infringement of any non-Grow Biz Software.
7. GENERAL.
A. Governing Law. This Agreement will be governed by Minnesota law. Any
action related to this Agreement may be brought in any court located in
Minneapolis, Minnesota, and the parties consent and submit to the personal
jurisdiction and venue of any such court. Grow Biz will be entitled to temporary
and permanent injunctive relief, without posting a bond or other security, to
restrain any actual or threatened violation of the provisions of this Agreement,
in addition to any other remedies Grow Biz may have. Grow Biz may recover its
costs and expenses (including reasonable attorneys' fees) incurred in enforcing
its rights under this Agreement.
B. Scope of Agreement; Conflicting Terms. This Agreement will govern
all orders for Software, and all Software Grow Biz provides. No purchase order,
invoice or other similar form may vary the terms of this Agreement. Any term
thereof that is inconsistent with or additional to the terms of this Agreement
will not be binding on Grow Biz.
C. Binding Effect. This Agreement will be binding upon and will benefit
the parties hereto and their respective successors and assigns, subject to the
limitations provided herein. Licensee may not assign or transfer this Agreement
without Grow Biz' prior written consent.
D. Waivers. The failure of either party to enforce or exercise any term
of or any right under this Agreement does not represent a waiver of such term or
right and will not affect that party's right later to enforce or exercise it. No
modification or waiver of any of the provisions of this Agreement will be
binding upon Grow Biz or Licensee unless it is in writing and is executed by the
party against whom such modification or waiver is sought to be enforced.
E. Severability. If any provision contained in this Agreement is held
invalid, such provision will not affect any other provision and the remainder of
this Agreement will continue in full force and effect.
F. Entire Agreement. This Agreement is the complete and exclusive
statement of the agreement of the parties regarding the subject matter hereof,
and supersedes all prior or contemporaneous agreements, oral or written, and all
other communications between the parties relating to the subject matter hereof.
<PAGE>
G. Survival. The provisions of this Agreement which by their nature
extend beyond the termination hereof will survive and remain in effect until all
obligations are satisfied.
"GROW BIZ" "LICENSEE"
GROW BIZ INTERNATIONAL, INC. If "Licensee" is a corporation,
(Print Corporate Name)
By By
------------------------------- ----------------------------------------
Its Its
------------------------- ----------------------------------
If "Licensee" is one or more individuals,
-------------------------------------------
(Print Individual Name)
By
----------------------------------------
-------------------------------------------
(Print Individual Name)
By
----------------------------------------
-------------------------------------------
(Print Individual Name)
By
----------------------------------------
<PAGE>
Schedule A
Software
Software Site
- ------------------------------------------- ---------------------------------
Data Recycling System (DRS) point-of-sale Store #: ________________________
and inventory management software (the
Proprietary Software) - Grow Biz' Address:
proprietary software which is specifically _________________________________
designed to track various aspects of your _________________________________
store, including inventory, customer _________________________________
tracking, vendor purchase orders and daily _________________________________
sales reports.
- ----------------------------------------------
For Office Use Only
Grow Biz International, Inc.
By
-----------------------------------
Its
-----------------------------
- ----------------------------------------------
Licensee:
- --------------------------------------
(Name of Individual or Corporation)
By
-----------------------------------
(Signature)
Its
-----------------------------
(Title, if applicable)
<PAGE>
EXHIBIT C
TO FRANCHISE AGREEMENT
PERSONAL GUARANTY AND AGREEMENT TO BE BOUND
PERSONALLY BY THE PROVISIONS OF THE FRANCHISE AGREEMENT
In consideration of Franchisor's execution of this Franchise Agreement,
and for other good and valuable consideration, the undersigned jointly and
severally: (1) guarantee Franchisee's payment of all amounts due Franchisor and
Franchisee's performance of the covenants and obligations in this Franchise
Agreement; and (2) agree to be personally bound by every provision contained in
this Franchise Agreement including the non-compete provisions and agree that
this Personal Guaranty will be construed as though the undersigned executed a
Franchise Agreement containing the identical provisions of this Franchise
Agreement.
A. Each of the undersigned waives:
(1) notice of demand for payment of any indebtedness or
nonperformance of any obligations hereby guaranteed;
(2) protest and notice of default to any party respecting the
indebtedness or nonperformance of any obligations hereby guaranteed;
and
(3) any right he/she may have to require that an action be
brought against Franchisee or any other person as a condition of
liability.
B. Each of the undersigned consents and agrees that:
(1) he/she will provide any payment or performance required
under the Agreement upon demand if Franchisee fails or refuses to do
so;
(2) such liability will not be contingent or conditioned upon
Franchisor's pursuit of any remedies against Franchisee or any other
person; and
(3) such liability will not be diminished, relieved or
otherwise affected by Franchisee's insolvency, bankruptcy or
reorganization, the invalidity, illegality or unenforceability of all
or any part of the Agreement, or the amendment or extension of the
Agreement with or without notice to the undersigned.
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has signed this Guaranty on
the same day and year as the Franchise Agreement was signed.
In the Presence of: PERSONAL GUARANTORS
- ------------------------------------ --------------------------------------
Individually
--------------------------------------
Address
- ------------------------------------ --------------------------------------
Individually
--------------------------------------
Address
- ------------------------------------ --------------------------------------
Individually
--------------------------------------
Address
- ------------------------------------ --------------------------------------
Individually
--------------------------------------
Address
<PAGE>
1 GK 082597
2 GK 030698
IT'S ABOUT GAMES(TM)
MULTIPLE STORE DEVELOPMENT AGREEMENT
THIS AGREEMENT made and entered into as of the ______ day of
_____________________, 19_____, by and between GROW BIZ INTERNATIONAL, INC., a
Minnesota corporation ("Franchisor") and ("Franchisee").
BACKGROUND:
Franchisor and Franchisee are, on this day, entering into an It's About
Games(TM) Franchise Agreement (the "Initial Franchise Agreement"), whereby
Franchisee will be granted the right to operate an It's About Games(TM) Store in
the area described in Section 1 of the Initial Franchise Agreement. Franchisee
desires to obtain the right to develop more than one It's About Games(TM) retail
store pursuant to Franchisor's standard Franchise Agreement within one or more
specified territories. Franchisor is willing to grant such rights pursuant to
the provisions stated below.
AGREEMENTS:
The Franchisor and Franchisee agree as follows:
1. Development Rights. Subject to the provisions stated below,
Franchisor grants to Franchisee the right to establish and operate for its own
account, but not to subfranchise, sublicense or resell, It's About Games(TM)
retail stores (the "Stores") pursuant to an individual It's About Games(TM)
Franchise Agreement ("Franchise Agreement") in the form then-currently used by
Franchisor at the time of issuance, as amended by Section 2 of this Agreement.
Franchisee's rights to establish and operate Stores under this Agreement will be
limited to the area or areas described on Exhibit A attached hereto (the
"Exclusive Development Territory"). So long as Franchisee is in compliance with
the terms of this Agreement, and in compliance with the terms of the individual
Franchise Agreement for each Store developed hereunder, Franchisor will not, for
the term of this Agreement, establish for its own account or franchise others to
operate an It's About Games(TM) Store within the Exclusive Development Territory
other than to Franchisee pursuant to this Agreement.
2. Fees.
A. Initial Fees. For the rights described in Section 1 above,
Franchisee will pay Franchisor an Initial Fee of _____________________
Thousand Dollars ($_______) for each Store (in addition to the Store
being developed pursuant to the Initial Franchise Agreement) to be
developed pursuant to this Agreement. All Initial Fees will be payable
when Franchisee executes this Agreement.
B. Continuing Fees; Advertising Fees. For each Franchise
Agreement to be executed hereunder, Franchisee will be obligated to pay
Franchisor Continuing Fees and Advertising Fees at the same percentage
rate as provided in the Initial Franchise Agreement.
<PAGE>
3. Conditions to Development of Additional Stores. Franchisor will be
obligated to enter into a Franchise Agreement for the development of a Store
under this Agreement only if, at the time Franchisee intends to enter into a
Franchise Agreement for such Store: (1) Franchisee meets the minimum financial
standards stated in Exhibit B attached hereto; (2) All amounts owed by
Franchisee to Franchisor or its affiliates under or relating to the Initial
Franchise Agreement or any Store Franchise Agreement are paid in full and
Franchisee otherwise is in good standing under such Agreements; and (3)
Franchisee is not in default for any reason stated in Section 7 below for which
Franchisee has received written notice. Should Franchisee fail to meet the
minimum development schedule stated in Section 5 below for any Store because it
failed to satisfy the conditions stated in provisions (1) or (2) above,
Franchisor will refund to Franchisee one-half (1/2) of the Initial Franchise Fee
paid to Franchisor for such Store.
4. Development Procedure. Each It's About Games(TM) Store to be
developed pursuant to this Agreement will be governed by the terms of the
Franchise Agreement executed or to be executed by Franchisor and Franchisee for
such Store. Franchisee will not develop any It's About Games(TM) Store at any
site which Franchisor has not evaluated in writing or for which there is no
Franchise Agreement between the parties. Subject only to Franchisor's evaluation
of a proposed site (which evaluation is not a guaranty that the proposed site
will be successful), Franchisee is solely responsible for locating and securing
acceptable sites. If Franchisee fails to provide Franchisor with an executed
Franchise Agreement before Franchisee commences construction or leasehold
improvements on the premises for a Store, Franchisee will be in default under
this Agreement and Franchisor may terminate this Agreement under Section 7
below.
5. Minimum Development Schedule.
A. Franchisee's rights under this Agreement are conditioned
upon its active development of the Exclusive Development Territory.
Franchisee agrees to open for business and thereafter maintain in
operation within the Exclusive Development Territory not less than the
following number of It's About Games(TM) Stores within the time frame
stated below:
____ Store opened and operating within ____ months
from the date of this Agreement.
____ Stores opened and operating within ____ months
from the date of this Agreement.
____ Stores opened and operating within ____ months
from the date of this Agreement.
B. The minimum development schedule described above will be
satisfied only if the required number of Stores are open for business
by the last day before the respective anniversary date of this
Agreement.
C. Franchisee may develop additional Stores within the
Exclusive Development Territory only if: (1) Franchisee is in good
standing under this Agreement, the Initial Franchise Agreement and each
Store Franchise Agreement; (2) the Exclusive Development Territory
described in Section 1(A) of Exhibit A is a general territory within
which all Stores are to be located; and (3) Franchisee and Franchisor
execute Franchisor's then-current form of standard Franchise Agreement
for each additional Store.
<PAGE>
6. Term. Subject to Section 7 below, the term of this
Agreement will be for a ____________ (____) years commencing on the
date of this Agreement.
7. Default and Termination.
A. Franchisee may terminate this Agreement at any time with or
without cause by delivering written notice thereof to Franchisor.
Franchisee will be in default, and Franchisor may at its option,
terminate this Agreement, as provided herein, if: (1) Franchisee fails
to meet the minimum development schedule stated herein, (2) Franchisee
violates any other material provision of this Agreement, (3) Franchisee
violates any material provision of the Initial Franchise Agreement or
any Store Franchise Agreement issued hereunder, (4) Franchisee is
declared bankrupt or becomes insolvent, (5) Franchisee is convicted of
violating any law, ordinance or regulation relating to Franchisee's
operation of any Store referenced herein or developed hereunder, or (6)
Franchisee attempts to subfranchise in any manner all or part of its
rights under this Agreement.
B. Except as described below, Franchisee will have thirty (30)
days, or such longer period as applicable law may require, after its
receipt from Franchisor of a written Notice of Termination within which
to remedy any default hereunder, and to provide evidence thereof to
Franchisor. If Franchisee fails to correct the alleged default within
that time (or such longer period of time as applicable law may
require), this Agreement will terminate without further notice to
Franchisee effective immediately upon the expiration of the thirty (30)
day period (or such longer period as applicable law may require).
Franchisor may terminate this Agreement immediately upon delivery of
written notice to Franchisee, with no opportunity to cure, if the
termination results from any of the following: (1) Franchisee
repeatedly fails to comply with one or more material requirements of
this Agreement; (2) the nature of Franchisee's breach makes it not
curable; or (3) any default under items (4), (5) or (6) in Section 7(A)
above.
C. During the period from the date Franchisor sends a notice
of default until all violations and defaults specified therein are
cured by Franchisee or this Agreement is terminated, Franchisor will
not be obligated to enter into any Store Franchise Agreement with
Franchisee or otherwise perform pursuant to this Agreement. Upon
termination or expiration of this Agreement, all rights licensed herein
will automatically revert to Franchisor and Franchisee's exclusive
right to develop It's About Games(TM) Stores within the Exclusive
Development Territory will cease. Termination or expiration of this
Agreement will not affect Franchisee's rights under any individual
Store Franchise Agreements in effect at that time.
8. Transfers. Store Franchise Agreements may be transferred only
pursuant to their respective terms. Franchisee represents and warrants to
Franchisor that it intends to develop, manage, and operate all of the Stores to
be developed hereunder for its own benefit and not for the purpose of or with a
view towards resale or redistribution of the franchises to be issued hereunder.
This Agreement cannot be pledged, transferred or sold in whole or in part by
Franchisee without Franchisor's prior written consent. Franchisor may impose
conditions to any proposed transfer or assignment including the following:
A. Franchisee is in complete compliance with the terms of this
Agreement and all other agreements between the parties;
<PAGE>
B. The proposed transferee has been approved by Franchisor as
meeting Franchisor's then-current standards for multiple store
franchisees (if applicable);
C. The proposed transferee has completed Franchisor's training
program;
D. Franchisee assigns to the proposed transferee its interest
in the individual franchise agreements for all Stores located in the
Territory; and
E. Franchisee pays a transfer fee of Five Thousand Dollars
($5,000).
This Agreement may be assigned and transferred by Franchisor and will
benefit Franchisor's successors and assigns. Any such assignment or transfer
will require the assignee to fulfill Franchisor's obligations under this
Agreement.
9. Enforcement. This Agreement, and any dispute arising hereunder, will
be governed by those provisions found in the Initial Franchise Agreement
respecting arbitration, governing law and injunctive relief.
10. Miscellaneous. This Agreement represents the entire Agreement of
the parties relative to its subject and cannot be waived, altered or rescinded
in whole or in part except by an express writing by the parties. The provisions
of this Agreement are severable and the invalidity or unenforceability of any of
them will not affect the remainder of this Agreement.
<PAGE>
IN WITNESS WHEREOF, Franchisor and Franchisee have executed this
Agreement as of the date first written above.
"FRANCHISOR" "FRANCHISEE"
GROW BIZ INTERNATIONAL, INC. If "Franchisee" is a corporation,
(Print Corporate Name)
By By
------------------------------- ----------------------------------------
Its Its
------------------------- ----------------------------------
If "Franchisee" is one or more individuals,
-------------------------------------------
(Print Individual Name)
By
----------------------------------------
-----------------------------------------
(Print Individual Name)
By
----------------------------------------
-----------------------------------------
(Print Individual Name)
By
----------------------------------------
<PAGE>
EXHIBIT A
TO DEVELOPMENT AGREEMENT
FRANCHISEE'S DEVELOPMENT AREA AND EXCLUSIVE TERRITORY
1. Description of Development Area (Select A or B):
_________ A. General Development Area within which all Stores will be
developed:
OR
_________ B. Development Area for each Store to be developed:
Store 1:
Store 2 (if applicable):
Store 3 (if applicable):
2. Description of Exclusive Territory (for each Store to be developed)
Store 1:
Store 2 (if applicable):
Store 3 (if applicable):
By: By:
------------------------------- ------------------------------
Franchisor Franchisee
<PAGE>
EXHIBIT B
TO DEVELOPMENT AGREEMENT
MINIMUM FINANCIAL STANDARDS
FOR MULTIPLE STORE DEVELOPMENT
To develop a store under the Multiple Store Development Agreement, Franchisee
will need to satisfy the following requirements at the time Franchisee desires
to proceed with development of that store:
AVERAGE INVESTMENT: $160,000
MINIMUM FOR ONE STORE;
CASH (1/3 of Investment) $ 53,000
FINANCING (Secured through
Bank or other means) $107,000
Franchisee agrees to provide all appropriate financial documentation Franchisor
requests to insure that Franchisee satisfies these requirements.
By: By:
----------------------------------- ---------------------------------
Franchisor's Initials Franchisee's Initials
EXHIBIT 10.16
AMENDMENT NO. 3
TO THE
GROW BIZ INTERNATIONAL, INC.
1992 STOCK OPTION PLAN
The following resolution was adopted by the Board of Directors of Grow Biz
International, Inc. effective February 18, 1998.
Increase in Number of Shares Reserved Under 1992 Stock Option Plan
RESOLVED, that the number of shares reserved for issuance under the
1992 Stock Option Plan ("1992 Plan") shall be increased from 1,100,000
to 1,400,000 shares of the Corporation's Common Stock, such increase in
the number of shares reserved for issuance shall be submitted for
approval by the shareholders at the next meeting of the shareholders of
the Corporation.
RESOLVED FURTHER, that the officers of the Corporation be, and they
each hereby are, authorized and directed to take or cause the
Corporation's transfer agent to take such action as they may deem
necessary or advisable to accomplish the foregoing, and, subject to the
approval of the shareholders, all such actions as heretofore may have
been taken by the officers and directors for such purposes are hereby
ratified and confirmed.
EXHIBIT 11.1
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Statement of Computation of Per Share Earnings
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------
DECEMBER 30, 1995 DECEMBER 28, 1996 DECEMBER 27, 1997
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Net Income $ 2,028,600 $ 2,585,500 $ 3,231,200
============ ============ ============
Weighted average shares outstanding - Basic 7,212,600 6,428,500 6,116,200
Dilutive effect of stock options after
application of the treasury stock method 138,400 87,500 157,300
------------ ------------ ------------
Weighted average shares outstanding - Dilutive 7,351,000 6,516,000 6,273,500
============ ============ ============
Net income per common share - Basic $ .28 $ .40 $ .53
============ ============ ============
Net income per common share - Dilutive $ .28 $ .40 $ .52
============ ============ ============
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES
GROW BIZ GAMES, INC.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included 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 16, 1998
EXHIBIT 99.1
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
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.
<PAGE>
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.
INSURANCE
The Company maintains liability insurance in amounts it believes to be adequate
based on the nature of its business. While the Company believes that Grow Biz
operates its business safely and prudently, there can be no assurance that
liabilities incurred with respect to a particular claim will be covered by
insurance or, if covered that the dollar amount of such liabilities will not
exceed coverage limits.
GOVERNMENT REGULATION
As a franchisor, the Company is subject to various federal and state franchise
laws and regulations. Although the Company believes it is currently in material
compliance with existing federal and state laws, there is a trend toward
increasing government regulation of franchising. The promulgation of new
franchising laws and regulations could adversely affect the Company.
The Company does not undertake and specifically declines any obligations to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> DEC-27-1997
<CASH> 3,089
<SECURITIES> 0
<RECEIVABLES> 13,945
<ALLOWANCES> 880
<INVENTORY> 5,729
<CURRENT-ASSETS> 25,176
<PP&E> 9,714
<DEPRECIATION> 4,096
<TOTAL-ASSETS> 37,755
<CURRENT-LIABILITIES> 16,036
<BONDS> 0
<COMMON> 7,475
0
0
<OTHER-SE> 11,009
<TOTAL-LIABILITY-AND-EQUITY> 37,755
<SALES> 66,889
<TOTAL-REVENUES> 88,835
<CGS> 56,634
<TOTAL-COSTS> 83,624
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 257
<INCOME-PRETAX> 5,314
<INCOME-TAX> 2,083
<INCOME-CONTINUING> 3,231
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,231
<EPS-PRIMARY> .53
<EPS-DILUTED> .52
</TABLE>
