SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 25, 1999 COMMISSION FILE NUMBER: 0-22012
--------------------
GROW BIZ INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-1622691
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4200 Dahlberg Drive, Minneapolis, MN 55422-4837
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 520-8500
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Registrant's Common Stock
on March 13, 2000, as reported on the NASDAQ SmallCap Market, was $7.0 million.
Shares of no par value Common Stock outstanding as of March 13, 2000: 5,381,119
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's Annual Meeting
of Shareholders to be held on May 3, 2000 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
- --------------------------------------------------------------------------------
Item 1. Business 4
General 4
Franchising Overview 7
Business Strategy 7
Franchise Agreement 9
Competition 10
Government Regulations 10
Trademarks and Service Marks 10
Seasonality 10
Employees 11
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II PAGE
- --------------------------------------------------------------------------------
Item 5. Market for the Registrant's Common Equity and Related 11
Shareholder Matters
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting 33
and Financial Disclosure
PART III PAGE
- --------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners and Management 35
Item 13. Certain Relationships and Related Transactions 35
PART IV PAGE
- --------------------------------------------------------------------------------
Item 14. Exhibits and Reports on Form 8-K 35
Signatures 38
2
<PAGE>
EXHIBITS
- --------------------------------------------------------------------------------
Exhibit 10.6 Plato's Closet(R) Franchise Agreement
Exhibit 10.26 Consulting Agreement with Sheldon Fleck
Exhibit 10.27 Trademark Security Agreement
Exhibit 10.28 Amended and Restated Credit Agreement
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
3
<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(R) 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 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 was a forty store retail operation with
stores in Ohio, Pennsylvania, Kentucky, Georgia and Maryland and became the
nucleus of the It's About Games(TM) store concept. The Company began
franchising this concept in 1997.
* In April 1998, the Company acquired certain assets and franchising rights
of Tool Traders, Inc. of Detroit, Michigan, which formed the basis for the
Company's ReTool(R) store concept. The Company paid $380,200 plus a
percentage of future royalties for a period of seven years. The Company
began franchising this concept in 1998.
4
<PAGE>
* In June 1998, the Company completed the sale of the assets and franchising
rights of its Disc Go Round concept to CD Warehouse, Inc. (CD Warehouse)
for $7.0 million cash plus the assumption of $384,000 in deferred franchise
fees. At the time of the sale, there were 137 Disc Go Round stores in
operation, including 3 Company-owned stores, and an additional 37 franchise
agreements were awarded for stores that were not yet opened. The sale
resulted in a $5,231,500 operating gain in the second quarter ending June
27, 1998.
* In January 1999, the Company acquired certain assets and franchising rights
of Plato's Closet, Inc. of Columbus, Ohio for total consideration of
$400,000 plus a percentage of future royalties for a period of seven years.
The Company began franchising this concept in 1999.
* In December 1999, the Company completed the sale of the assets of the
Company's It's About Games(TM) concept. The Company undertook an orderly
liquidation of the inventory and other assets by conducting a liquidation
sale. Approximately 50% of the assets were disposed of in three main
transactions. The first sale, to an unrelated party, of substantially all
of the assets of fourteen stores in Kentucky, Maryland, Ohio and
Pennsylvania for $114,200 plus inventory valued at 40% of cost to be
received in cash and a promissory note. The second sale, to an unrelated
party, of substantially all of the assets of fourteen stores in Ohio for
$42,000 plus inventory at 40% of cost to be received in cash and a
promissory note. The third, a bulk inventory sale to an unrelated party for
$140,000 cash. The remaining assets of the It's About Games(TM)concept were
disposed of by abandonment or liquidation sale resulting in a total
restructuring charge of $11,345,500 for the year ended December 25, 1999.
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 continuing store concepts with their 1999 system-wide sales,
defined as revenues from all affiliated stores, are summarized as follows:
PLAY IT AGAIN SPORTS(R) - $270 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) - $82 MILLION
Once Upon A Child(R) stores sell and buy used and new children's clothing, toys,
furniture and accessories. This 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) - $145 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 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.
5
<PAGE>
MUSIC GO ROUND(R) - $33 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, as well as
professional and amateur musicians.
RETOOL(R) - $2 MILLION
ReTool(R) stores sell and buy both used and new hand tools, power tools and
accessories. The stores also offer to customers the opportunity to try out
equipment prior to making a purchase.
PLATO'S CLOSET(R) - $3 MILLION
Plato's Closet(R) stores sell and buy used and new clothing and accessories
geared toward the teenage market. Customers also have the opportunity to sell
their used items to a Plato's Closet(R) store when outgrown and to purchase
quality used clothing and accessories at prices lower than new merchandise.
Following is a summary of the Company's franchising and corporate store activity
for the fiscal year ended December 25, 1999:
<TABLE>
<CAPTION>
-------------------------------------------------------------
TOTAL OPENED/ TOTAL
12/26/98 PURCHASED CLOSED/SOLD CONVERTED 12/25/99
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Play It Again Sports(R)
- --------------------
Franchised Stores - US and Canada 622 16 (59) 1 580
Franchised Stores - Other International 8 0 0 0 8
Corporate - Owned 4 0 0 (1) 3
Other 23 0 0 0 23
Once Upon A Child(R)
- -----------------
Franchised Stores - US and Canada 209 25 (16) 2 220
Corporate - Owned 4 0 (1) (2) 1
Computer Renaissance(R)
- --------------------
Franchised Stores - US and Canada 224 23 (37) (2) 208
Corporate - Owned 2 0 (1) 2 3
Music Go Round(R)
- --------------
Franchised Stores - US and Canada 54 19 (1) 0 72
Corporate - Owned 8 0 0 0 8
It's About Games(TM)
- ----------------
Franchised Stores - US and Canada 3 0 (3) 0 0
Corporate - Owned 46 15 (61) 0 0
ReTool(R)
- ------
Franchised Stores - US and Canada 2 9 0 0 11
Corporate - Owned 3 0 (2) 0 1
Plato's Closet(R)
- --------------
Franchised Stores - US and Canada 0 4 (0) 0 4
Corporate - Owned 0 1 (0) 0 1
-------------------------------------------------------------
Total 1,212 112 (181) 0 1,143
=============================================================
</TABLE>
6
<PAGE>
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.
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 (1)
offering value-oriented retail concepts to prospective entrepreneurs, (2)
attracting new, qualified franchisees and (3) supporting existing franchisees.
1. OFFERING VALUE-ORIENTED MERCHANDISE CONCEPT OPPORTUNITIES
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.
2. ATTRACTING FRANCHISEES
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. The Company seeks owners who intend to
be integrally involved with the management of the store. At December 25, 1999,
the Company had 88 franchise agreements for stores that were not yet opened.
Typically, the franchisee's initial store is open for business within 180 to 270
days from the date the franchise agreement is signed.
The Company began franchising internationally in 1991 and, as of December 25,
1999, had 95 franchised stores open in Canada and an aggregate of approximately
6 stores in Germany, Austria and Switzerland. The Canadian stores are operated
by franchisees under agreements substantially similar to those used in the
United States.
3. FRANCHISE SUPPORT:
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, lease evaluation, evaluating insurance needs and
obtaining financing. The Company's training staff assists each franchise in
developing a business plan for their store with financial and cash flow
projections. The second training session is centered on store operations. It
covers, among other things, point-of-sale computer training, inventory selection
and acquisition, sales, marketing and other topics selected by the Company. The
franchisee is provided with an operations manual that is updated periodically by
the Company.
7
<PAGE>
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
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), ReTool(R) and Plato's Closet(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.
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
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 encourages 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 are required to spend the following minimum 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%,
ReTool(R) - 4% and Plato's Closet(R) - 4%. In addition, all franchisees, except
Computer Renaissance(R), are required to pay the Company an annual marketing fee
of $500. Beginning in 1998, Computer Renaissance(R) franchisees were required to
pay the Company 0.5% of their gross sales to an advertising fund in lieu of the
$500 annual marketing fee. Beginning in 1999, the Computer Renaissance(R)
franchisees were required to pay the Company 0.5% of their first $400,000 of
gross sales. In 2000, the Computer Renaissance(R) franchisees are required to
pay the Company 0.6% of their first $800,000 of gross sales. Franchisees are
required to participate in regional cooperative advertising groups as designated
by the Company.
COMPUTERIZED POINT-OF-SALE SYSTEMS
The Company requires franchisees to use a retail information management computer
system in each store. Stores which were opened prior to April 1992 were not
required to install the system. This computerized point-of-sale system is
designed specifically for use in the retail stores franchised by the Company.
This system includes a cash register, bar code printer and scanner, together
with software modules for inventory management, cash management and customer
information management. The system is designed to accommodate buying and
consigning of used merchandise. The Company believes that this system provides
franchisees with an important management tool that reduces errors, increases
efficiencies and enhances inventory control. The Company provides both the
software and the hardware for the system.
8
<PAGE>
OTHER SUPPORT SERVICES
The Company assists each new franchisee with site location. A third party vendor
provides design layouts and opening materials including pricing materials,
stationary, 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.
THE FRANCHISE AGREEMENT
The Company enters into franchise agreements with franchisees. 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 agreement has been filed by incorporation 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 25, 1999, the franchise fee for all concepts
was $20,000 for an initial store. In May 1999, the Company eliminated franchise
fees for additional stores for Grow Biz franchise owners. Once a franchisee
opens their initial store, they can open additional stores, in any concept,
without paying any additional fees, provided there is territory availability and
they meet minimum financial standards. Typically, the franchisee's initial store
is open for business within 180 to 270 days from the date the franchise
agreement is signed. 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 continuing
fees (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%, ReTool(R) - 4% and Plato's Closet(R) - 4%. Play It Again
Sports(R) franchise agreements signed prior to April 1, 1992 require payment of
a 3% royalty. Upon completion of the initial 10-year term, Play It Again
Sports(R) royalties will change to 4%. Play It Again Sports(R) franchisees
opening their second or additional store will pay a 4% royalty for that store.
Each franchisee is required to pay the Company an annual marketing fee of $500.
Beginning in 1998, Computer Renaissance(R) franchisees were required to pay the
Company 0.5% of their gross sales to fund an advertising fund in lieu of the
$500 annual marketing fee. Beginning in 1999, the Computer Renaissance(R)
franchisees were required to pay the Company 0.5% of their first $400,000 of
gross sales. In 2000, the Computer Renaissance(R) franchisees are required to
pay the Company 0.6% of their first $800,000 of gross sales. Each Play It Again
Sports(R) and Once Upon A Child(R) franchisee is required to spend 5% of its
gross sales for advertising and promoting its franchised store. The Company has
the option to increase the minimum advertising expenditure requirement for these
franchises to 6% of the franchisee's gross sales, of which up to 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 1.5%, 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.
9
<PAGE>
COMPETITION
Retailing, including the sale of sporting goods, children's apparel, computer
equipment, musical instruments, tools and teenage apparel, 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 and two franchisors of stores which sell used
and new children's clothing, toys and accessories.
The Company and its franchisees may face additional competition as its franchise
systems expand. This could include 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
Fourteen 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 imminent
legislation currently under consideration which would have a material adverse
impact on its operations.
TRADEMARKS AND SERVICE MARKS
Grow Biz(R), Play It Again Sports(R), Once Upon A Child(R), Computer
Renaissance(R), Music Go Round(R), Retool(R) and Plato's Closet(R), among
others, have been registered as service marks by the Company with the United
States Patent and Trademark Office (the "USPTO"). The Company believes these
marks are of considerable value to its business and important to its marketing
efforts. The Company intends to protect its service marks by appropriate legal
action where and when necessary.
SEASONALITY
The Company's Play It Again Sports(R) and Once Upon A Child(R) franchise
concepts have experienced higher than average sales volume during the spring
months and during the back to school and holiday shopping seasons. This trend,
along with the related impact of Company-operated retail stores revenue, results
in higher than average royalty and merchandise revenue during the second, third
and fourth quarter for the Company.
10
<PAGE>
EMPLOYEES
As of December 25, 1999, the Company employed 179 full-time employees, of which
6 were franchise salespersons, 73 were franchise support personnel, 31 were
administrative and 69 were retail sales staff. The Company also employed 41
part-time employees at its retail stores as of fiscal year end 1999.
ITEM 2: PROPERTIES
The Company owns its headquarters facility in Golden Valley, Minnesota. The
Company believes that its facilities are sufficient to meet its current needs
and its needs for the near future.
The Company leases space for its 17 retail store locations, typically for a
fixed monthly rental and operating costs. Two leases are due to expire in 2000,
three in 2001, one in 2002, nine in 2003, two in 2004 and none thereafter.
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware of any
threatened litigation that would have a material adverse effect on its business.
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 1999.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The Company's common stock was traded on the NASDAQ National Market System
through February 6, 2000 and is now traded on the NASDAQ SmallCap Market 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>
1999: First Second Third Fourth 1998: First Second Third Fourth
- ------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HIGH 13 10/32 12 5/16 8 1/2 5 1/8 HIGH 13 1/4 13 7/8 15 1/4 13 3/4
LOW 12 1/4 6 1/2 4 1/2 2 7/8 LOW 12 13 13 9 1/2
</TABLE>
At March 13, 2000, there were 5,381,119 shares of common stock outstanding held
by approximately 954 beneficial shareholders and 252 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.
11
<PAGE>
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
---------------------------------------------------------------------------
December 25, December 26, December 27, December 28, December 30,
1999 1998 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE: (1) (2) (3)
Merchandise sales $ 45,163 $ 73,306 $ 66,889 $ 71,737 $ 84,043
Royalties 19,085 19,473 17,329 14,965 11,560
Franchise fees 1,942 2,986 3,907 4,162 3,889
Advertising and other 368 586 710 686 721
------------ ------------ ------------ ------------ ------------
Total revenue 66,558 96,351 88,835 91,550 100,213
Cost of merchandise sold 39,387 60,325 56,634 63,856 76,192
Selling, general and administrative expenses 28,320 29,105 24,990 23,636 20,980
Restructuring and other 11,345 -- -- -- --
Gain on sale of Disc Go Round -- 5,232 -- -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (12,494) 12,153 7,211 4,058 3,041
Litigation settlement -- -- (2,000) -- --
Interest income (expense), net (1,293) (239) 103 195 296
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (13,787) 11,914 5,314 4,253 3,337
(Benefit) Provision for income taxes (5,198) 4,670 2,083 1,667 1,308
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (8,589) $ 7,244 $ 3,231 $ 2,586 $ 2,029
============ ============ ============ ============ ============
Net income (loss) per common share - diluted $ (1.65) $ 1.24 $ .52 $ .40 $ .28
============ ============ ============ ============ ============
Weighted average shares outstanding 5,206 5,833 6,274 6,516 7,351
============ ============ ============ ============ ============
BALANCE SHEET DATA:
Working capital $ 2,748 $ 1,103 $ 9,141 $ 8,516 $ 11,068
Total assets 29,642 43,141 37,755 29,177 34,024
Total debt 16,816 17,949 6,330 264 415
Shareholders' equity 2,889 10,165 17,451 17,698 21,192
SELECTED FINANCIAL RATIOS:
Return on average assets (23.6)% 17.9% 9.7% 8.2% 5.5%
Return on average equity (131.6)% 52.5% 18.4% 13.3% 9.5%
</TABLE>
(1) In November 1999, the Company completed the sale of the assets of the
It's About Games(TM) concept. Footnote 4 of the Consolidated Notes to
the Financial Statements.
(2) In June 1998, the Company completed the sale of Disc Go Round.
(3) In August 1997, the Company acquired certain assets and franchising
rights of Video Game Exchange, Inc. Footnote 4 of the Consolidated
Notes to the Financial Statements.
12
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
RESULTS OF OPERATIONS
The following table sets forth selected information from the Company's
Consolidated Statements of Operations expressed as a percentage of total revenue
and the percentage changes in the dollar amounts from the prior period:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Fiscal Year Ended
-------------------------------------------- Fiscal 1999 Fiscal 1998
December 25, December 26, December 27, over (under) over (under)
1999 1998 1997 1998 1997
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Merchandise sales 67.9% 76.1% 75.3% (38.4)% 9.6%
Royalties 28.7 20.2 19.5 (2.0) 12.4
Franchise fees 2.9 3.1 4.4 (35.0) (23.6)
Advertising and other 0.5 0.6 0.8 (37.2) (17.6)
---------- ---------- ---------- ---------- ----------
Total revenues 100.0 100.0 100.0 (30.9) 8.5
Cost of merchandise sold 59.2 62.6 63.8 (34.7) 6.5
Selling, general and administrative
expenses 42.6 30.2 28.1 (2.7) 16.5
Restructuring and other 17.0 -- -- -- --
Gain on sale of Disc Go Round -- 5.4 -- (100.0) --
---------- ---------- ---------- ---------- ----------
Income (loss) from operations (18.8) 12.6 8.1 (202.8) 68.5
Litigation settlement -- -- (2.2) -- --
Interest and other income (expense),
net (1.9) (0.2) 0.1 (441.0) (332.5)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (20.7) 12.4 6.0 (215.7) 124.2
(Benefit) Provision for income taxes (7.8) 4.9 2.4 (211.3) 124.2
---------- ---------- ---------- ---------- ----------
Net income (loss) (12.9)% 7.5% 3.6% (218.6)% 124.2%
========== ========== ========== ========== ==========
</TABLE>
REVENUES
Merchandise sales, which include the sale of product to franchisees through the
buying group and retail sales at the Company-owned stores, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Buying Group $ 24,554,500 $ 40,605,300 $ 45,717,100
Retail Sales 20,608,500 32,700,700 21,172,000
------------- ------------- -------------
$ 45,163,000 $ 73,306,000 $ 66,889,100
</TABLE>
The Play It Again Sports(R) buying group revenue declined the past two years as
part of management's strategic decision to reduce the number of vendors which
are offered centralized billing through the buying group and encouraging
franchisees to purchase more inventory on a direct basis. The decrease in retail
sales at Company-owned stores is a result of selling and closing all sixty-one
It's About Games(TM) stores in the fourth quarter of 1999 and the sale of nine
Company-owned stores in December 1998. It is anticipated that buying group
revenues will increase slightly as a percent of total revenues in the upcoming
year.
13
<PAGE>
Revenues from franchising activity were as follows:
1999 1998 1997
---- ---- ----
Royalties $ 19,085,100 $ 19,472,800 $ 17,328,500
Franchise Fees 1,942,200 2,986,400 3,907,200
Royalties are derived from retail sales at the franchise level and are 3% to 5%
of net sales. In 1999, royalties decreased $387,700 compared to 1998. This
decrease is due to the sale of Disc Go Round in June 1998. If the royalties
relating to Disc Go Round are excluded, 1999 royalties would have increased
$331,300 compared to 1998. This increase is due to an increase in retail sales
at the franchise level offset, in part, by a decrease in the total number of
franchise stores open.
Key franchise store sales information is included in the table below. Comparable
store sales information compares 1999 sales to 1998 sales and 1998 sales to 1997
sales. It is calculated utilizing all stores that were open for the entire
twenty-four month comparable period. Average store sales are computed utilizing
all stores open for the entire twelve-month period.
Comparable Store Sales
-------------------------------------------------------------
1999 Increase 1998 1999
(Decrease) from 1998 Increase from 1997 Average Store Sales
-------------------- ------------------ -------------------
Play It Again Sports(R) 1.0% 1.7% 485,400
Once Upon A Child(R) 4.7% 8.6% 394,700
Computer Renaissance(R) (7.2%) 4.9% 741,500
Music Go Round(R) 6.8% 12.9% 517,000
Franchise fee revenue is recognized when substantially all initial franchise
services have been performed by the Company. During 1999, the Company revised
its fee schedule by eliminating franchise fees for all stores other than the
first store opened by a franchisee. Franchise fees declined $1.1 million to $1.9
million in 1999 compared to $3.0 million in 1998. This decrease is a result of
opening fewer stores overall; 96 in 1999 compared to 125 in 1998; and the
elimination of franchise fees on all stores other than the first store opened by
a franchisee. By restructuring the fee schedule, we expect to encourage growth
of multi-store ownership. The reduction in franchise fees was offset, in part,
by the $200,000 master franchise fee paid by Duskin Company Ltd., a Japanese
company, in the third quarter of 1999. Franchise fees in 1998 declined $920,800,
or 23.6%, from 1997 as a result of opening 125 franchise stores in 1998 compared
to 194 in 1997. The Company expects franchise fee revenue to decline in 2000 as
a result of the change in the fee schedule.
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:
1999 1998 1997
---- ---- ----
Buying Group 95.1% 94.5% 95.0%
Retail Stores 77.8 65.6 62.4
The 12.2% increase in the 1999 retail store cost of goods sold is primarily the
result of the liquidation of It's About Games(TM) inventory sold at
significantly reduced prices. It also reflects a shift in the mix of sales from
used product to new product in the It's About Games(TM) concept which carry
lower gross margins. The 3.2% increase in the 1998 retail stores costs of goods
sold is a result of a shift in the mix of sales from used product to new product
which carry lower gross margins. It is anticipated that in the future, retail
store costs of goods sold will decrease
14
<PAGE>
as a result of closing the It's About Games(TM) stores and a renewed emphasis on
used product in the other concepts Company-owned retail stores.
SELLING, GENERAL AND ADMINISTRATIVE
The $784,800 decrease in 1999 selling, general and administrative expenses was
due to lower direct retail selling expenses for the Company-owned stores. This
is a result of selling nine Company-owned stores in December 1998, closing and
selling additional Company-owned stores during the fourth quarter of 1999 offset
by additional direct selling expenses of It's About Games(TM) and the new
concepts of Retool(R) and Plato's Closet(R). Franchising expenses in 1999 were
consistent with 1998.
RESTRUCTURING AND OTHER
In the third quarter of 1999, the Company made the decision to dispose of the
It's About Games(TM) concept. Accordingly, a restructuring charge and charge for
asset impairment was taken. Further investment in the business was not
consistent with the Company's strategy of reducing the number of Company-owned
stores and focusing on franchised store development. In December 1999, the
Company completed the sale of the assets of the It's About Games(TM) concept.
The Company undertook an orderly liquidation of the inventory and store assets
by conducting a liquidation sale resulting in a total restructuring charge and
charge for asset impairment of $11,345,500 for the year ended December 25, 1999.
NET INTEREST
Net interest (expense)/income was $(1,292,900), $(238,800) and $102,700 in 1999,
1998 and 1997, respectively. The increase in net interest expense in 1999 and
1998 was due to the Company having lower cash balances and drawing funds on
notes payable as a result of acquisitions, operations of It's About Games(TM)
and the repurchase of shares of the Company's common stock.
PROVISION FOR INCOME TAXES
The provision for income taxes was calculated at an effective rate of 37.7% for
fiscal 1999 and 39.2% for fiscal 1998 and 1997.
YEAR 2000
In preparation for the Year 2000, older personal computers were upgraded to new
systems that were Year 2000 compliant. Software updates were made to the
Company's systems and a complete analysis of its vendor relationships in which
the risk of each vendor's non-compliance with Year 2000 was assessed. Total
costs associated with the Year 2000 compliance project through December 25, 1999
were approximately $494,000. The Company did not experience any interruption or
failure as a result of the Year 2000 changeover.
Approximately 80 franchisees have not converted their point-of-sale hardware and
software to be Year 2000 compliant. A Year 2000 compliant version of the
point-of-sale software was completed in December 1998 and has been available and
ready for implementation.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the year with no cash balance and had a current ratio of 1.14
to 1.0.
During the year ended December 25, 1999 the Company's operating activities
provided $1.4 million of cash. The net loss before depreciation and the change
in deferred taxes utilized $6.7 million of cash. This was offset by the
liquidation of the It's About Games(TM) concept and activities relating to
ongoing operations.
15
<PAGE>
The restructuring charge relating to the liquidation of It's About Games(TM)
provided $9.2 million. In addition, $4.2 million cash was provided by the
reduction of inventory, $600,000 by the reduction in prepaids and $1.8 million
of cash was utilized reducing accounts payable relating to eliminating the It's
About Games(TM) concept.
Ongoing operating activities provided cash of $2.9 million relating to the
reduction of accounts receivable offset in part by a reduction in accounts
payable, as a result of reduced sales of new product through the Play It Again
Sports(R) buying group. In addition to the reduction in inventory relating to
the It's About Games(TM) liquidation, operating cash was provided by a reduction
of $1.5 million in inventory relating to the sale of Company-owned stores and
the reduction in overall inventory levels in the remaining Company-owned stores.
Prepaid expenses and other increased $4.4 million, therefore utilizing cash,
primarily because of the $5.5 million tax benefit recorded as a result of the
net operating loss. In addition to the $600,000 reduction in prepaids relating
to It's About Games(TM), the remaining change is a result of normal ongoing
operating activity.
The components of cash utilized by the reduction in accounts payable of $6.4
million consists primarily of three items: (1) $2.1 million relating to reduced
buying group activity, (2) $1.8 million relating to the liquidation of It's
About Games(TM) and (3) $2.5 million relating to ongoing operations.
Deferred franchise fee revenue utilized cash as a result of a reduction in the
number of stores awarded but not open from 147 at December 26, 1998 to 88 at
December 25, 1999. This decrease was primarily the result of a change in the fee
structure for additional stores. This change resulted in the refund of $746,761
in fees previously paid for additional stores by existing franchisees.
Investing activities used $3.2 million of cash in 1999 resulting from property
additions of $1.8 million related to the addition of fifteen It's About
Games(TM) Company-owned stores, $1.0 million for computer hardware and software
upgrades and $400,000 of goodwill recorded on the acquisition of Plato's
Closet(R).
Financing activities used $640,100 of cash in 1999. The Company received
proceeds from notes payable of $3.0 million drawn on the committed term loan.
The $4.2 million payments on long-term debt include $1.6 million related to the
installment payments on the notes payable entered with the purchase of Video
Game Exchange, Inc., $1.6 million payments on the line of credit, $858,000
payments on the settlement agreement and $149,000 on other debt. The Company
received $492,700 in cash from the options exercised and shares purchased
through the Employee Stock Purchase Plan in 1999.
As of December 25, 1999, the Company had a $7.5 million committed revolving line
of credit which is due for renewal on April 30, 2000. Borrowings against the
line carry an interest rate of the bank's base rate plus one-half of one
percent, which was 9.0% at December 25, 1999. At December 25, 1999, the Company
had borrowings of $6.2 million against the line. The Company expects to renew
this line of credit.
In addition to the line of credit, the Company had a $8.0 million converted bank
term note. Borrowings against the converted note carry an interest rate of the
bank's base rate plus one percent, which was 9.5% at December 25, 1999.
Borrowings could be made and repaid through March 31, 1999 on a revolving basis
at which date the total amount outstanding was converted to term debt, which
will be paid off in monthly installments that began May 1, 1999 and end March 4,
2004. At December 25, 1999, the Company had borrowings of $7.1 million against
the note.
A second bank term note bears interest at the bank's base rate plus one percent
which was 9.5% at December 25, 1999. It is due in monthly principal and interest
installments through September 2002. At December 25, 1999 the Company had
borrowings of $2.5 million against the note.
16
<PAGE>
The Company believes that its current cash position, cash generated from future
operations, availability of line of credit borrowings, assuming renewal, and tax
refunds available as a result of the net operating loss carryback will be
adequate to meet the Company's current obligations and operating needs.
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; (6) the
Company's ability to operate the Company-owned stores profitably; (7) the
Company's ability to negotiate acceptable lease terminations in connection with
the It's About Games(TM) restructuring; and (8) 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 matter are inaccurate,
its results of operations and financial condition could be adversely affected.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's Credit Agreements described in Footnote 6 to the financial
statements as well as in the Management's Discussion and Analysis carries
interest rate risk. Amounts borrowed under this Agreement are subject to
interest charges at a rate tied to the lender's base rate. This is generally the
prime rate. Should the lenders base rate change, the Company's interest expense
will increase or decrease accordingly. As of December 25, 1999, the Company had
borrowed approximately $15.7 million subject to interest rate risk. On this
amount, a 1% increase in the interest rate would cost the Company $157,000 in
additional gross interest cost on an annual basis.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Grow Biz International, Inc. and Subsidiary
Index to Financial Statements
Consolidated Balance Sheets Page 18
Consolidated Statements of Operations Page 19
Consolidated Statements of Shareholders' Equity Page 20
Consolidated Statements of Cash Flows Page 21
Consolidated Notes to Financial Statements Page 22
Report of Independent Public Accountants Page 32
17
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
<TABLE>
<CAPTION>
---------------------------------------
December 25, 1999 December 26, 1998
---------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 2,418,000
Receivables, less allowance for doubtful accounts of $1,044,000
and $1,053,000 (Note 3) 11,164,600 13,893,700
Inventories 1,959,600 10,124,400
Prepaid expenses and other 6,773,800 2,459,300
Deferred income taxes (Note 7) 2,074,200 1,699,100
------------ ------------
Total current assets 21,972,200 30,594,500
LONG-TERM RECEIVABLES (Note 3) 1,156,300 1,208,600
PROPERTY AND EQUIPMENT:
Furniture and equipment 6,280,800 7,131,000
Building and building improvements 3,681,800 3,765,300
Less - accumulated depreciation and amortization (5,593,500) (4,935,800)
------------ ------------
Property and equipment, net 4,369,100 5,960,500
OTHER ASSETS:
Noncompete agreements and other, net of accumulated
amortization of $2,531,600 and $2,388,800 329,800 554,500
Goodwill, net of accumulated amortization of $148,100 and
$339,600 1,814,400 4,822,800
------------ ------------
Total other assets 2,144,200 5,377,300
------------ ------------
$ 29,641,800 $ 43,140,900
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,350,700 $ 11,306,600
Accrued liabilities 3,707,000 1,818,700
Current maturities of long-term debt (Note 6) 9,287,600 14,464,300
Deferred franchise fee revenue 878,900 1,901,800
------------ ------------
Total current liabilities 19,224,200 29,491,400
COMMITMENTS AND CONTINGENCIES (Note 8)
LONG-TERM DEBT (Note 6) 7,528,500 3,484,600
SHAREHOLDERS' EQUITY (Note 5):
Common stock, no par, 10,000,000 shares authorized,
5,346,119 and 5,079,055 shares issued and outstanding 1,313,500 --
Retained earnings 1,575,600 10,164,900
------------ ------------
Total shareholders' equity 2,889,100 10,164,900
------------ ------------
$ 29,641,800 $ 43,140,900
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
18
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
------------------------------------------------------------
Fiscal Year Ended
-----------------
December 25, 1999 December 26, 1998 December 27, 1997
------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Merchandise sales $ 45,163,000 $ 73,306,000 $ 66,889,100
Royalties 19,085,100 19,472,800 17,328,500
Franchise fees 1,942,200 2,986,400 3,907,200
Advertising and other 368,100 585,700 710,500
------------ ------------ ------------
Total revenue 66,558,400 96,350,900 88,835,300
COST OF MERCHANDISE SOLD 39,386,800 60,324,600 56,633,700
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 28,320,200 29,105,000 24,989,900
RESTRUCTURING AND OTHER (Note 4) 11,345,500 -- --
GAIN ON SALE OF DISC GO ROUND -- 5,231,500 --
------------ ------------ ------------
Income (loss) from operations (12,494,100) 12,152,800 7,211,700
LITIGATION SETTLEMENT (Note 6) -- -- (2,000,000)
INTEREST EXPENSE (1,545,700) (710,500) (256,700)
INTEREST INCOME 252,800 471,700 359,400
------------ ------------ ------------
Income (loss) before income taxes (13,787,000) 11,914,000 5,314,400
(BENEFIT) PROVISION FOR INCOME TAXES (Note 7) (5,197,700) 4,670,200 2,083,200
------------ ------------ ------------
NET INCOME (LOSS) $ (8,589,300) $ 7,243,800 $ 3,231,200
============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE $ (1.65) $ 1.28 $ .53
============ ============ ============
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING 5,205,900 5,664,000 6,116,200
============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE $ (1.65) $ 1.24 $ .52
============ ============ ============
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 5,205,900 5,832,700 6,273,500
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
19
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Fiscal years ended December 25, 1999 December 26, 1998 and December 27, 1997
<TABLE>
<CAPTION>
------------------------------------------------------------
Common Stock
------------ Retained
Shares Amount Earnings Total
------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, December 28, 1996 6,263,444 $ 10,952,900 $ 6,744,600 $ 17,697,500
Repurchase of common stock (Note 5) (386,819) (4,217,300) -- (4,217,300)
Stock options exercised and related tax benefits 125,589 739,300 -- 739,300
Net income -- -- 3,231,200 3,231,200
------------ ------------ ------------ ------------
BALANCE, December 27, 1997 6,002,214 $ 7,474,900 $ 9,975,800 $ 17,450,700
Repurchase of common stock (Note 5) (1,111,915) (9,473,300) (7,054,700) (16,528,000)
Stock options exercised and related tax benefits 188,756 1,998,400 -- 1,998,400
Net income -- -- 7,243,800 7,243,800
------------ ------------ ------------ ------------
BALANCE, December 26, 1998 5,079,055 $ -- $ 10,164,900 $ 10,164,900
Issuance of common stock 182,991 820,800 -- 820,800
Stock options exercised and related tax benefits 84,073 492,700 -- 492,700
Net loss -- -- (8,589,300) (8,589,300)
------------ ------------ ------------ ------------
BALANCE, December 25, 1999 5,346,119 $ 1,313,500 $ 1,575,600 $ 2,889,100
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
20
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
-------------------------------------------------
Fiscal Year Ended
-----------------
December 25, December 26, December 27,
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (8,589,300) $ 7,243,800 $ 3,231,200
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 2,312,900 2,074,500 1,878,100
Restructuring and other 9,198,500 -- --
Loss on sale of retail stores -- (39,800) --
Deferred income tax (375,100) (207,500) 234,800
Change in operating assets and liabilities:
Receivables 2,878,300 (278,100) 446,500
Inventories 5,972,600 (6,298,300) (1,461,900)
Prepaid expenses and other (4,419,300) (476,000) (998,500)
Accounts payable (6,465,900) 4,701,800 934,500
Accrued liabilities 1,888,500 (2,143,300) 2,505,700
Deferred franchise fee revenue (1,022,900) (1,402,200) (681,000)
------------ ------------ ------------
Net cash provided by operating activities 1,378,300 3,174,900 6,089,400
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,805,700) (2,302,900) (366,900)
Increase in other assets (350,500) (400,200) (31,300)
Proceeds from sale of net assets of Disc Go Round -- 1,768,500 --
Acquisition of Video Game Exchange, Inc. (Note 4) -- -- (6,579,700)
------------ ------------ ------------
Net cash provided by (used for) investing activities (3,156,200) (934,600) (6,977,900)
------------ ------------ ------------
FINANCING ACTIVITIES:
Notes payable 3,044,000 13,772,100 6,767,000
Payments on long-term debt, net (4,176,800) (2,152,900) (701,200)
Repurchase of common stock (Note 5) -- (16,528,000) (4,217,300)
Proceeds from stock option and warrants exercises 492,700 1,998,500 739,200
------------ ------------ ------------
Net cash provided by (used for) financing activities (640,100) (2,910,300) 2,587,700
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (2,418,000) (670,000) 1,699,200
CASH AND CASH EQUIVALENTS, beginning of period 2,418,000 3,088,000 1,388,800
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ -- $ 2,418,000 $ 3,088,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 1,506,700 $ 682,200 $ 196,600
============ ============ ============
Cash paid for income taxes $ 350,400 $ 4,746,400 $ 2,744,300
============ ============ ============
NON CASH INVESTING AND FINANCING ACTIVITIES:
Note received in exchange for sale of inventory and property and
equipment $ 927,700 $ 1,974,500 $ --
============ ============ ============
Assets acquired through the issuance of stock $ 820,800 $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
21
<PAGE>
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Notes to the Financial Statements
December 25, 1999 and December 26, 1998
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",
"Computer Renaissance", "Music Go Round", "ReTool" and "Plato's Closet". The
initial franchise fee is $20,000 for all concepts. 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 in connection with the acquisition of Video Game Exchange, Inc.
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
Tool Traders, Inc. (ReTool) 1998
Plato's Closet 1999
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. The Company's revenue by retail store
concept was as follows:
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Play It Again Sports(R) $ 36,864,100 $ 54,347,400 $ 58,520,000
Once Upon A Child(R) 5,372,300 5,305,700 5,005,400
Computer Renaissance(R) 6,569,500 12,279,700 10,566,500
Music Go Round(R) 4,015,000 5,503,400 4,598,200
Disc Go Round(R) -- 1,426,700 2,532,000
It's About Games(TM) 12,856,900 17,376,700 7,613,200
ReTool(R) 655,400 111,300 --
Plato's Closet(R) 225,200 -- --
------------ ------------ ------------
$ 66,558,400 $ 96,350,900 $ 88,835,300
============ ============ ============
</TABLE>
The Company's significant assets are located within the United States and it
generates all revenues from United States operations other than 1999 franchising
revenues from Canadian operations of $1.6 million.
22
<PAGE>
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments approximates
their carrying values as of December 1999 and 1998. The carrying amounts for
cash and trade receivables approximate fair value due to the maturity of the
instruments. The fair values of borrowings and notes receivable are estimated by
discounting future cash flow payment streams using rates that approximate those
of comparable borrowings and notes receivable.
INVENTORIES
The Company values its inventories at the lower of cost, as determined by the
average weighted cost method, or market.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has a policy of periodically reviewing for potential impairment of
long-lived assets. During 1999, the Company recognized a pre-tax impairment loss
of $275,500 related to the fixed assets of Music Go Round(R). The impairment was
identified through the exploration of sale opportunities and resulted in an
increase in selling, general and administrative expenses.
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.
STORE OPENING COSTS
All start-up costs associated with the opening of new stores are expensed as
incurred.
23
<PAGE>
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 $878,900
and $1,901,800 at December 25, 1999 and December 26, 1998, respectively.
NET INCOME (LOSS) PER COMMON SHARE
The Company calculates net income (loss) 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 (Loss) Per Common
Share - Basic. The Company calculates Net Income (Loss) 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 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Weighted average shares outstanding - Basic 5,205,900 5,664,000 6,116,200
Dilutive effect of stock options after application
of the treasury stock method -- 168,700 157,300
--------- --------- ---------
Weighted average shares outstanding - Dilutive 5,205,900 5,832,700 6,273,500
========= ========= =========
</TABLE>
3. RECEIVABLES:
The Company's current receivables consisted of the following:
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998
----------------- -----------------
<S> <C> <C>
Trade (Net) $ 7,068,800 $ 10,620,900
Royalty 3,188,500 2,041,300
Notes Receivable 2,013,500 2,258,300
Other 50,100 181,800
------------ ------------
12,320,900 15,102,300
Less: Long-term Notes (1,156,300) (1,208,600)
------------ ------------
Current Receivables $ 11,164,600 $ 13,893,700
============ ============
</TABLE>
As part of its normal operating procedures, the Company requires Standby Letters
of Credit as collateral for a portion of its trade receivables from its
first-year and second-year stores.
Included in accounts receivable above are notes receivable consisting of the
following:
In December 1998, the Company sold certain assets of nine Company-owned retail
stores to the former president of Music Go Round(R) for $2.0 million. In
connection with the sale, the Company received (1) a short-term note of
$700,000, collected in January 1999, (2) a $1.0 million note secured by certain
assets of the stores bearing interest of 8% and payable in monthly principal and
interest installments until January 2006 and (3) a $274,500 note payable in
eighteen equal monthly principal installments beginning February 15, 1999.
The remaining notes receivable resulted from the sale of Company-owned retail
stores bearing interest ranging from 8% to 9.75%, payable in monthly principal
and interest installments and maturing at various dates from 2000 to 2006.
24
<PAGE>
4. ACQUISITIONS AND DISPOSITIONS:
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 was 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 the bank's base rate plus one-half of one percent. The former owner
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.
The following are the unaudited pro forma results of operations for 1997, as if
the above acquisition had occurred on December 28, 1996:
December 27, 1997
-----------------
Revenue $ 97,230,400
Net income 3,498,000
Net income per common share (basic) $ .57
Net income per common share (diluted) $ .56
DISPOSITION OF IT'S ABOUT GAMES(TM)
In the third quarter of 1999, the Company made the decision to dispose of the
It's About Games(TM) concept. Accordingly, a restructuring charge and charge for
asset impairment was taken. In December 1999, the Company completed the sale of
the assets of the Company's It's About Games(TM) concept. The Company undertook
an orderly liquidation of the inventory and other assets by conducting a
liquidation sale. Approximately 50% of the assets were disposed of in three main
transactions.
The first sale, of substantially all of the assets of fourteen stores in
Kentucky, Maryland, Ohio and Pennsylvania, was for $114,200 plus inventory
valued at 40% of cost, to be received in cash and a promissory note. The second
sale, of substantially all of the assets of fourteen stores in Ohio, was for
$42,000 plus inventory at 40% of cost, to be received in cash and a promissory
note. The third sale, was a bulk inventory sale for $140,000 cash. The remaining
assets of the It's About Games(TM) concept were disposed of by abandonment or
liquidation sale resulting in a total restructuring charge of $11,345,500 for
the year ended December 25, 1999.
Restructuring Reserve:
<TABLE>
<CAPTION>
Facility Costs Employee Costs Other Costs Total
-------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at September 25, 1999 $ 2,247,000 $ -- $ 75,000 $ 2,322,000
Additional Provisions -- 175,000 -- 175,000
Amounts Paid (30,500) (149,800) (155,300) (335,600)
Amounts Reclassed (80,300) -- 80,300 --
Amounts Reversed (350,000) -- -- (350,000)
----------- ----------- ----------- -----------
Balance at December 25, 1999 $ 1,786,200 $ 25,200 $ -- $ 1,811,400
=========== =========== =========== ===========
</TABLE>
PURCHASE OF TOOL TRADERS, INC.
In April 1998, the Company announced the acquisition of certain assets and
franchising rights of Tool Traders, Inc. of Detroit, Michigan. The Company paid
$380,200 plus a percentage of future royalties for a period of seven years.
25
<PAGE>
PURCHASE OF PLATO'S CLOSET, INC.
In January 1999, the Company announced the acquisition of certain assets and
franchising rights of Plato's Closet, Inc. of Columbus, Ohio for total
consideration of $400,000 plus a percentage of future royalties for a period of
seven years.
5. SHAREHOLDERS' EQUITY:
REPURCHASE OF COMMON STOCK
Since November 1995, the Company's Board of Directors has authorized the
repurchase of up to 3,000,000 shares of the Company's common stock on the open
market. As of December 25, 1999, the Company had repurchased 2,560,828 shares of
its stock at an average price of $11.70 per share. No shares were repurchased in
the year ended December 25, 1999.
STOCK OPTION PLAN
The Company has authorized up to 1,400,000 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 25, 1999 were
as follows:
Weighted Average
Number of Shares Exercise Price
---------------- --------------
Outstanding at December 28, 1996 716,125 $ 8.68
Granted 145,750 11.31
Exercised (101,968) 4.79
Forfeited (61,045) 9.82
---------- --------
Outstanding at December 27, 1997 698,862 9.88
Granted 87,750 12.42
Exercised (170,051) 9.52
Forfeited (66,624) 11.35
---------- --------
Outstanding at December 26, 1998 549,937 $ 9.54
Granted 150,000 4.25
Exercised (76,500) 7.58
Forfeited (192,061) 10.92
---------- --------
Outstanding at December 25, 1999 431,376 $ 7.43
========== ========
26
<PAGE>
Options outstanding as of December 25, 1999 are exercisable as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------
Weighted
Average Weighted
Remaining Weighted Average
Range of Number Contractual Life Average Number Exercisable
Exercise Price Outstanding (Years) Exercise Price Exercisable Price
-------------- ----------- ------- -------------- ----------- -----
<S> <C> <C> <C> <C> <C>
$2.00 - $2.00 35,000 .08 $ 2.00 35,000 $ 2.00
4.25 - 4.25 150,000 4.92 4.25 -- 4.25
7.75 - 8.065 60,813 1.05 7.92 44,252 7.92
9.00 - 10.625 109,375 .79 9.95 65,750 10.06
11.875 - 12.25 76,188 .88 12.20 23,002 12.17
--------- ---------
431,376 168,004
========= =========
</TABLE>
All unexercised options at December 25, 1999 have an exercise price equal to the
fair market value on the date of the initial grant.
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 purchase 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. In April 1999, the Company
issued 7,573 shares under the plan at a price of $9.67. As of December 25, 1999,
contributions had been received for the issuance of 5,012 shares to be issued in
April 2000.
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 (loss) and net income (loss) per common share
would have changed to the following proforma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Income (Loss): As Reported $ (8,589,300) $ 7,243,800 $ 3,231,200
Pro Forma (8,786,600) 7,066,300 3,080,000
Net Income (Loss) Per Common Share
(Diluted): As Reported $ (1.65) $ 1.24 $ .52
Pro Forma $ (1.69) $ 1.21 $ .49
</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 5.98% in 1999, 5.549% in 1998 and 5.77%
to 6.83% in 1997, expected life of five years for 1999, 1998 and 1997, expected
volatility of 64.13% in 1999, 30.69% in 1998 and 20.11% to 36.85% in 1997.
27
<PAGE>
NONPLAN OPTIONS
The Company sponsors a Stock Option Plan for Nonemployee Directors (the
"Nonemployee Directors Plan") and reserved a total of 100,000 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 granted 50,000 options in 1993 and 50,000 options in 1995 to
purchase the Company's common stock at $10.00 per share to four non-employee
directors. All options granted to non-employee directors expired in 1999. There
were no shares outstanding and exercisable at December 25, 1999.
The Company accounts for nonplan options in accordance with SFAS 123 estimated
on the date of grant using the Black-Scholes option pricing model.
6. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT:
The Company's revolving credit and long-term debt consisted of the following:
December 25, 1999 December 26, 1998
----------------- -----------------
Revolving Line of Credit $ 6,165,900 $ 11,955,900
Bank Term Debt 9,575,000 3,375,000
Note Payable 859,600 2,353,800
Other 215,600 264,200
------------ ------------
Total 16,816,100 17,948,900
Less: Current Portion (9,287,600) (14,464,300)
------------ ------------
$ 7,528,500 $ 3,484,600
============ ============
The Company has a $8.5 million committed revolving line of credit which is due
for renewal on April 30, 2000. Borrowings against the line carry an interest
rate of the bank's base rate plus one-half of one percent which was 9.0% at
December 25, 1999. At December 25, 1999 the Company had borrowings of $6.2
million against the line.
In addition to the line of credit, the Company has a $8.0 million converted bank
term note. Borrowings against the converted note carry an interest rate of the
bank's base rate plus one percent, which was 9.5% at December 25, 1999.
Borrowings could be made and repaid through March 31, 1999 on a revolving basis
at which date the total amount outstanding was converted to term debt, which
will be paid off in monthly installments that began May 1, 1999 and end March 4,
2004. At December 25, 1999, the Company had borrowings of $7.1 million against
the note.
A second bank term note bears interest at the bank's base rate plus one percent
which was 9.5% at December 25, 1999. It is due in monthly principal and interest
installments through September 2002. At December 25, 1999 the Company had
borrowings of $2.5 million against the note.
The debt facilities listed above are secured by all tangible and intangible
assets of the Company. The notes contain various restrictive covenants which,
among other matters, require the Company to maintain a minimum capital base,
liabilities to capital base ratio and debt service coverage ratio. As of
December 25, 1999, the Company was not in compliance with all of the covenants,
but has received a waiver from the bank. The Company amended the existing debt
agreements effective December 25, 1999 and intends to be in full compliance of
the new covenants for the forth-coming year.
28
<PAGE>
In November 1998, the Company entered into a Repurchase of Rights and Settlement
Agreement and dropped its appeal of a February 1998 court ruling requiring the
Company to pay $2.0 million to an early partner in the original Play It Again
Sports store. Under the agreement, the Company paid $400,000 and signed a
three-year note in which the Company is required to pay monthly principal and
interest payments at 8%. At December 25, 1999 the balance, including accrued
interest of $87,100, was $859,600.
Future maturities of long-term debt as of December 25, 1999 are as follows:
2000 $ 9,287,600
2001 3,194,000
2002 2,506,400
2003 1,734,000
2004 36,700
Thereafter 57,400
------------
$ 16,816,100
============
7. INCOME TAXES:
Components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Currently payable:
Federal $ (4,217,600) $ 4,052,700 $ 1,423,400
State (605,000) 825,000 425,000
------------ ------------ ------------
Subtotal (4,822,600) 4,877,700 1,848,400
Deferred income tax (benefit)/expense (375,100) (207,500) 234,800
------------ ------------ ------------
Total tax provision $ (5,197,700) $ 4,670,200 $ 2,083,200
============ ============ ============
</TABLE>
The effective tax rate differs from the federal statutory rate due primarily to
the following:
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 2.9 4.6 5.3
Nondeductible meals and entertainment (0.2) 0.3 0.7
Other, net 1.0 0.3 (0.8)
------- ------- --------
37.7% 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 were as follows:
<TABLE>
<CAPTION>
December 25, 1999 December 26, 1998
----------------- -----------------
<S> <C> <C>
Deferred settlement expense $ 336,900 $ 627,200
Deferred franchise fees 101,900 431,400
Accounts receivable reserves 409,200 412,800
Accrued restructuring charge 710,000 --
Other 516,200 227,700
------------ ------------
Net deferred tax asset $ 2,074,200 $ 1,699,100
============ ============
</TABLE>
29
<PAGE>
8. 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. Company
contributions to the plan for 1999, 1998 and 1997 were $332,300, $279,500 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 $2,834,200 in
1999, $2,531,600 in 1998 and $1,468,100 in 1997. As of December 25, 1999,
minimum rental commitments under noncancelable operating leases are: $701,000 in
2000, $563,800 in 2001, $467,000 in 2002, $453,700 in 2003, $83,000 in 2004 and
none thereafter.
The Company rents a 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 $66,000 in 1999, 1998 and 1997.
LITIGATION
The Company is exposed to a number of asserted and unasserted legal claims
encountered in the normal course of business. Management believes that the
ultimate resolution of these matters will not have a material adverse effect on
the financial position or results of operations of the Company.
CONSULTING AGREEMENTS
The Company has a consulting agreement with the former owner of Tool Traders,
Inc. The agreement requires the Company to pay the following percentages of
receipts from franchising ReTool(R) stores during the following periods:
September 14, 1999 through September 13, 2001 - 5%; September 14, 2001 through
September 13, 2003 - 4%; September 14, 2003 through September 13, 2004 - 3%;
September 14, 2004 through September 13, 2005 - 2% and September 14, 2005
through September 13, 2006 - 1%.
The Company has a consulting agreement with the former owner of Plato's Closet,
Inc. The agreement requires the Company to pay the following percentages of
receipts from franchising Plato's Closet(R) stores during the following periods:
January 1, 1999 through December 31, 2000 - 5%; January 1, 2001 through December
31, 2002 - 4%; January 1, 2003 through December 31, 2003 - 3%; January 1, 2004
through December 31, 2004 - 2% and January 1, 2005 through December 31, 2005 -
1%.
9. RELATED PARTY TRANSACTION:
In November 1999, the Company engaged a shareholder of the Company to act as a
non-exclusive financial advisor to the Company. Under the engagement agreement,
the shareholder provided services to the Company in the areas of strategic
planning and business development through February 29, 2000. In the event that a
significant strategic transaction occurs that was initiated by the shareholder,
and subject to a number of other conditions, the Company will issue to the
shareholder a warrant to purchase up to 200,000 shares of the Company's common
stock, exercisable over eight years at an exercise price of $6.00 per share. The
shareholder owns approximately 8.9% of the outstanding shares of the Company's
common stock as of March 13, 2000.
30
<PAGE>
10. QUARTERLY FINANCIAL DATA:
The Company's unaudited quarterly results for the years ended December 25, 1999
and December 26, 1998 were as follows:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
1999
Total Revenue $ 18,535,400 $ 15,264,800 $ 16,673,600 $ 16,084,600
Income (loss) from Operations (17,300) 88,200 (11,909,000) (656,000)
Net Income (loss) (175,200) (121,300) (7,440,900) (851,900)
Net Income (Loss) Per Common Share - Basic $ (.03) $ (.02) $ (1.43) $ (.16)
Net Income (Loss) Per Common Share - Diluted $ (.03) $ (.02) $ (1.43) $ (.16)
1998
Total Revenue $ 25,623,400 $ 23,497,800 $ 22,484,000 $ 24,745,800
Income from Operations 1,175,600 6,877,900 2,490,700 1,608,800
Net Income 690,900 4,213,000 1,503,100 836,800
Net Income Per Common Share - Basic $ .12 $ .70 $ .27 $ .17
Net Income Per Common Share - Diluted $ .11 $ .68 $ .26 $ .16
</TABLE>
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Grow Biz International, Inc.:
We have audited the accompanying consolidated balance sheets of Grow Biz
International, Inc. and Subsidiary (Minnesota corporations) as of December 25,
1999 and December 26, 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 25, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 25, 1999 and December 26,
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 25, 1999, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 28, 2000
32
<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 directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
K. Jeffrey Dahlberg 46 Chairman of the Board and Chief Executive
Officer
Ronald G. Olson 59 Vice Chairman
Ted R. Manley 50 President and Chief Operating Officer
David J. Osdoba, Jr. 44 Vice President of Finance and Chief Financial
Officer
Charles V. Kanan 48 President / Play It Again Sports(R)
Taylor Bond 38 President / Computer Renaissance(R)
Randel S. Carlock 51 Director
Dennis J. Doyle 47 Director
Bruce C. Sanborn 47 Director
Robert C. Pohlad 45 Director
----------------------------
K. JEFFREY DAHLBERG has served as Chief Executive Officer of the Company since
May 1999 and Chairman of the Board of Directors 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 Vice Chairman of the Company since May 1999. He
served as President and Chief Executive Officer of the Company from January 1990
until May 1999. Mr. Olson has been President and Chief Executive Officer of
Franchise Business Systems, Inc., a franchise consulting firm, since July 1988.
TED R. MANLEY has served as President and Chief Operating Office of the Company
since July 1999. From September 1997 until July 1999 he served as Executive Vice
President of Operations. He served as President of Once Upon A Child(R) from
January 1997 until January 1999 and General Manager from July 1994 to January
1997. 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 1984 to December 1990.
33
<PAGE>
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.
TAYLOR BOND has served as President of Computer Renaissance(R) since July 1999.
He was President and a director of Syzygy Corporation, an Ann Arbor,
Michigan-based company that owned and operated a Computer Renaissance(R)
franchise from October 1993 to September 1999. From February 1987 through May
1994 Mr. Bond worked for Dominos Pizza, Inc., most recently as National Director
of Market Research.
RANDEL S. CARLOCK has served as a Director of the Company since September 1993.
He currently serves as an OPUS Professor of Family Enterprise at the University
of St. Thomas Graduate School of Business, a position held since 1990. He also
served as Chairman of the Board of Audio King, Inc., a Minneapolis consumer
electronics company, from March 1990 to June 1997.
DENNIS J. DOYLE has served as a Director of the Company since June 1993. Since
1978, he has served as President and Chief Executive Officer of Welsh Companies,
Inc., a real estate development and management firm, and Chairman of the Board
of Welsh Construction Corp. Mr. Doyle also serves as a director of the Rottlund
Company.
BRUCE C. SANBORN has served as a Director of the Company since June 1993. From
1990 until 1999 he served as Chairman of the Board for the North Central Life
Insurance Company and Financial Life Companies, Inc. He is currently working as
an independent investor and business advisor.
ROBERT C. POHLAD has served as a Director of the Company since September 1993.
Since 1987, he has served as President and Director of Pohlad Companies, a
Minneapolis based holding company active in investments and soft drink
manufacturing and distribution. Mr. Pohlad also currently serves as a Director
of Mesaba Holdings, Inc., Delta Beverage Group, Inc. and Pepsi-Cola Puerto Rico
Bottling Company.
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.
COMPLIANCE WITH SECTION 16(a)
Section 16(a) of the 1934 Act requires the Company's directors, executive
officers and persons who own more than ten percent of the Common Stock of the
Company to file with the Securities and Exchange Commission ("Commission")
initial reports of beneficial ownership and reports of changes in beneficial
ownership of common shares of the Company. Directors, officers and greater than
ten percent shareholders are required by the regulations of the Commission to
furnish the Company with copies of all Section 16(a) reports they file. The
Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, during the fiscal year ended December 25, 1999, all Form 3, Form 4 and
Form 5 filing requirements were met, except Form 4s were filed late for K.
Jeffrey Dahlberg for the months of February 1999 and May 1999 and a Form 4 was
filed late for Taylor Bond for the month of September 1999.
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 3,
2000, sets forth certain information with respect to the compensation of
management of the Registrant and the required information is incorporated herein
by reference.
34
<PAGE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section 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 3, 2000, sets 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 Relationships and Related Transactions" appearing
in the Registrant's proxy statement for the annual meeting of stockholders to be
held on May 3, 2000, sets forth certain information with respect to certain
business relationships and transactions between the Registrant and its directors
and officers and the required information is incorporated herein by reference.
PART IV
ITEM 14: EXHIBITS 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 17.
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)
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 ReTool(R)(Exhibit 10.6) (8)
10.6 Form of franchise agreement for Plato's Closet(R)(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 1992 Stock Option Plan, including forms of stock option
agreement (Exhibit 10.12) (1) (3) (7)
35
<PAGE>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.13 Amendment No. 1 to the 1992 Stock Option Plan (Exhibit 10.15)
(2)
10.14 Amendment No. 2 to the 1992 Stock Option Plan (Exhibit 10.16)
(2)
10.15 Amendment No. 3 to the 1992 Stock Option Plan (Exhibit 10.16)
(6)
10.16 Nonemployee Director Stock Option Plan, as amended, including
form of stock option agreement (Exhibit 10.16) (2) (7)
10.17 Employee Stock Purchase Plan of 1994 (Exhibit 10.17) (2) (3)
10.18 Real Estate Purchase Agreement for Purchase of the Company's
headquarters (Exhibit 10.18) (2)
10.19 Consulting and Noncompetition Agreement dated November 6,
1992 with Lynn and Dennis Blum (Exhibit 10.19) (3)
10.20 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)
10.21 Asset Purchase Agreement between Grow Biz Games, Inc. and
Video Game Exchange, Inc., dated August 15, 1997 (Exhibit
10.1) (4)
10.22 Term Note, TCF, dated August 8, 1997 (Exhibit 10.3) (4)
10.23 Non-Negotiable Promissory Note, Video Game Exchange, Inc.,
dated August 15, 1997 (Exhibit 10.4) (4)
10.24 Asset Purchase Agreement related to the disposition of Disc
Go Round to CD Warehouse, Inc., dated June 16, 1998 (Exhibit
10.1) (5)
10.25 Letter of Agreement between the Company and Sheldon & Terry
Fleck related to the purchase of stock, dated July 3, 1999
(Exhibit 10.1) (9)
10.26 Consulting Agreement with Sheldon Fleck, dated November 17,
1999
10.27 Trademark Security Agreement, dated November 24, 1999
10.28 Amended and Restated Credit Agreement, dated December 25,
1999
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 Current
Report on Form 8-K, August 15, 1997.
(5) Incorporated by reference to the specified exhibit to the Current
Report on Form 8-K, June 16, 1998.
(6) Incorporated by reference to the specified exhibit to the Annual Report
on Form 10-K for the fiscal year ended December 27, 1997.
(7) Indicates management contracts, compensation plans or arrangements
required to be filed as exhibits.
(8) Incorporated by reference to the specified exhibit to the Annual Report
on Form 10-K for the fiscal year ended December 26, 1998.
(9) Incorporated by reference to the specified exhibit to the Quarterly
Report on Form 10-Q for the quarter ended June 26, 1999.
36
<PAGE>
(b.) Reports on Form 8-K: On October 14, 1999, the Company filed an 8-K related
to the restructuring charge related to the discontinuing of operations of the
It's About Games(TM) concept.
On December 10, 1999, the Company filed an 8-K related to disposition of
assets of the It's About Games(TM) concept.
37
<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/ K. JEFFREY DAHLBERG Date: March 22, 2000
------------------------------------------
K. Jeffrey Dahlberg
Chairman and Chief Executive Officer
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints K. Jeffrey Dahlberg, Ronald G. Olson and David J.
Osdoba, Jr., and each of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any amendments to this Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact or his substitute or
substitutes, may do or cause to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ K. JEFFREY DAHLBERG Chairman of the Board and March 22, 2000
- ------------------------------ Chief Executive Officer
K. Jeffrey Dahlberg (principal executive officer)
/s/ RONALD G. OLSON Vice Chairman March 22, 2000
- ------------------------------
Ronald G. Olson
/s/ TED R. MANLEY President and Chief Operating March 22, 2000
- ------------------------------ Officer
Ted R. Manley
/s/ DAVID J. OSDOBA, JR. Vice President of Finance and March 22, 2000
- ------------------------------ Chief Financial Officer
David J. Osdoba, Jr. (principal financial and
accounting officer)
/s/ RANDEL S. CARLOCK Director March 13, 2000
- ------------------------------
Randel S. Carlock
/s/ DENNIS J. DOYLE Director March 9, 2000
- ------------------------------
Dennis J. Doyle
/s/ ROBERT C. POHLAD Director March 10, 2000
- ------------------------------
Robert C. Pohlad
/s/ BRUCE C. SANBORN Director March 14, 2000
- ------------------------------
Bruce C. Sanborn
38
EXHIBIT 10.6
PLATO'S CLOSET(R)
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>
PLATO'S CLOSET(R)
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...............................................2
4. INITIAL FRANCHISE FEE....................................................3
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......................................................10
11. INDEPENDENT CONTRACTORS; INDEMNIFICATION................................11
12. SALES REPORTS, FINANCIAL STATEMENTS AND AUDIT RIGHTS....................11
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................................................16
20. SEVERABILITY AND CONSTRUCTION...........................................17
21. NOTICES.................................................................18
22. ACKNOWLEDGMENTS.........................................................18
EXHIBITS A - FRANCHISEE'S DEVELOPMENT AREA AND EXCLUSIVE TERRITORY
B - COMPUTER SOFTWARE LICENSE AGREEMENT
C - PERSONAL GUARANTY
D - ADDITIONAL STORE ADDENDUM
<PAGE>
01GK052199
02GK101599
PLATO'S CLOSET(R)
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 teen clothing resale stores known as "Plato's
Closet" stores ("Plato's Closet(R) Stores") which feature quality used and new
teen clothing. Franchisor uses and licenses certain trademarks, including
"Plato's Closet," and may hereafter adopt, use and license additional or
substitute trademarks, service marks, logos and commercial symbols in connection
with the operation of Plato's Closet(R) Stores (collectively, the "Marks").
Plato's Closet(R) 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 a "Plato's Closet" 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 a
Plato's Closet(R) 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 a Plato's Closet(R) Store or any other business
generally classified as a teen clothing 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 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
<PAGE>
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 Plato's Closet(R)
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 a Plato's Closet(R) 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 Plato's
Closet(R)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 Plato's Closet(R)
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.
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.
-2-
<PAGE>
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 a Plato's Closet(R) Store. The style, form and use
of the words "Plato's Closet" 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 "Plato's Closet" 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 "Plato's Closet" 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 a Plato's Closet(R) 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.
4. INITIAL FRANCHISE FEE
A. Initial Franchise Fee. Franchisee will pay Franchisor an Initial
Franchise Fee of __________________________ 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.
-3-
<PAGE>
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
Franchisor will terminate this Agreement 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. Franchisee will report to Franchisor 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 any sales permitted
through the Internet and wholesale transactions involving any party other than a
Plato's Closet(R) 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 Plato's
Closet(R) 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.
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
-4-
<PAGE>
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 Plato's Closet(R) franchise system continues to expand and mature, it
will be necessary to revise Franchisee's advertising obligations. Franchisee
therefore agrees that Franchisor may, upon sixty (60) days' written notice,
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 and
require Franchisee to pay Franchisor for deposit in an "Advertising Fund" an
"Advertising Fee" of up to two percent (2%) of Franchisee's Gross Sales. 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, 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
-5-
<PAGE>
bearing the name "Plato's Closet" 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 Plato's Closet(R) 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. Unless Franchisor and Franchisee previously executed a
Site Selection Agreement relating to the site of the Store, 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
Plato's Closet(R) 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
Plato's Closet(R) 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 two-part
training program in Minneapolis, Minnesota or other location Franchisor
designates to educate, familiarize and acquaint Franchisee with the business of
operating a Plato's Closet(R) 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, point-of-sales systems, used product
purchasing, Franchisor's preferred vendor program, and other topics Franchisor
may select. 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 at its discretion. The second session of the training program will
include instruction on sales and marketing, inventory purchasing, computer
operation, store management, personnel issues and other topics Franchisor may
select. The period of this session will be at Franchisor's discretion but
generally will be for at least five (5) days and will be scheduled by Franchisor
in its sole discretion. Franchisee must successfully complete both sessions of
the training program. If Franchisee fails to successfully complete both
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 costs, room and board,
the salaries, fringe benefits and other expenses Franchisee and its employees
incur in attending both 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
-6-
<PAGE>
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 Plato's Closet(R) 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 Plato's Closet(R) franchisees. Franchisee agrees that: (1) no
material alteration or 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 Plato's Closet(R)franchisees,
which Franchisor may periodically amend and supplement.
-7-
<PAGE>
D. Products and Services. Franchisee will sell only those categories of
products and services Franchisor approves in writing and will offer for sale all
categories of 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 teen clothing and related 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 Plato's Closet(R)
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.
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.
-8-
<PAGE>
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 Plato's Closet(R)
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 according to 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 Franchisor maintains will control.
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 a Plato's
Closet(R) 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 "Plato's Closet" 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 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
-9-
<PAGE>
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 Internet access and an e-mail address. In addition,
Franchisor may, upon ninety (90) days' prior written notice, require Franchisee,
at Franchisee's expense, to participate in a Plato's Closet(R) World Wide Web
Site listed on the Internet. Franchisor will, at its discretion, determine the
content and use of a Plato's Closet(R) 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 Plato's
Closet(R) 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
Plato's Closet(R) 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 Plato's Closet(R) 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
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
-10-
<PAGE>
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 Plato's Closet(R)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.
B. Enforcement. The non-prevailing party will pay all costs and
expenses, including reasonable attorneys' fees, the prevailing party incurs 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.
-11-
<PAGE>
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
will keep its financial books and records for each fiscal and calendar year in a
secure place and will make them 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 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:
-12-
<PAGE>
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 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. 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:
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
-13-
<PAGE>
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;
5. The transferee-franchisee successfully completes
Franchisor's training program; and
6. Franchisee pays 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 for
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 "Plato's Closet" or any of the Marks or the
Business 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
-14-
<PAGE>
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
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 "Plato's
Closet" 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; (6) disconnect any Internet web site
Franchisee has established in connection with Franchisee's operation of the
Store; and (7) 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 "Plato's Closet"
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
Franchisee either remains in possession of the Franchised Location to operate a
separate business not in violation of Section 18 below or enters into an
agreement with a third party to allow such third party to directly operate
business at 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 Plato's
-15-
<PAGE>
Closet(R) 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 "Plato's Closet" and
other Marks; (3) removing from the premises all fixtures which are indicative of
Plato's Closet(R) 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 wholesale or
retail teen or children's clothing or related accessories, or any other related
business that is competitive with or similar to a Plato's Closet(R)Store, except
with Franchisor's prior written consent.
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
wholesale or retail teen clothing or related accessories or any other related
business that is competitive with or similar to a Plato's Closet(R) Store which
is located at the Franchised Location or within a six (6) mile radius of the
Franchised Location or any Plato's Closet(R) 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.
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 a minimum of five (5) years experience in
franchising or distribution law and 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
-16-
<PAGE>
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 Plato's Closet(R) franchise
agreement could cause irreparable damage to Franchisor or to some or all other
Plato's Closet(R) 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.
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.
-17-
<PAGE>
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 certified or registered United States mail,
return receipt requested, addressed to Franchisor at its principal place of
business, or at such other address as Franchisor may designate in writing. All
notices to Franchisee will be made by prepaid certified or registered United
States mail, return receipt requested, 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.
-18-
<PAGE>
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.
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
-----------------------------------------
-19-
<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
COMPUTER SOFTWARE LICENSE AGREEMENT
<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>
EXHIBIT D
TO FRANCHISE AGREEMENT
ADDITIONAL STORE ADDENDUM TO
PLATO'S CLOSET(R) FRANCHISE AGREEMENT
<PAGE>
ADDITIONAL STORE ADDENDUM TO
PLATO'S CLOSET(R) FRANCHISE AGREEMENT
This Addendum is entered into as of the _____ day of _______________,
199__, by and among Grow Biz International, Inc. ("Franchisor"), and
______________________________ ("Franchisee").
BACKGROUND:
Franchisor and Franchisee are, on this day, entering into a Plato's
Closet(R) Franchise Agreement (the "Franchise Agreement"), whereby Franchisee
will be granted the right to develop and operate a Plato's Closet(R) store at
the location stated in the Franchise Agreement (the "Store"). Franchisee
currently owns one or more existing stores franchised under one of Franchisor's
concepts. Franchisor and Franchisee agree to the following modifications to the
Franchise Agreement.
AGREEMENTS:
In consideration of the foregoing, the parties agree as follows:
1. Initial Franchise Fee. Subject to the provisions stated herein,
Section 4 of the Franchise Agreement is amended to provide that Franchisee will
not pay an Initial Franchise Fee. If Franchisee transfers the Franchise
Agreement (as described in Section 14(c) therein) before the Store commences
operation, Franchisee will pay a supplemental transfer fee of Fifteen Thousand
Dollars ($15,000).
2. Franchisor's Obligations. Franchisor and Franchisee agree that
Franchisor may, but will not be required to, provide location, training or
opening assistance as described in Sections 7(A), (D) and (E) of the Franchise
Agreement.
3. Store Opening Period. Section 15(A)(1) of the Franchise Agreement is
amended by replacing the phrase "nine (9) months" in such Section with the
phrase "three (3) months."
4. Construction. In all other respects, the Franchise Agreement will be
construed and enforced with its terms.
IN WITNESS WHEREOF, the parties have executed this Addendum as of the
day and year first above written.
FRANCHISOR: FRANCHISEE:
GROW BIZ INTERNATIONAL, INC.
-----------------------------------------
(Name of Corporation)
By By
--------------------------------- ---------------------------------------
Its Its
----------------------------- -----------------------------------
or
(Individuals)
By
---------------------------------------
By
---------------------------------------
EXHIBIT 10.26
CONFIDENTIAL
November 17, 1999
Mr. K. Jeffrey Dahlberg
Chief Executive Officer
Grow Biz International, Inc.
4200 Dahlberg Drive
Minneapolis, MN 55422-4837
Dear Mr. Dahlberg:
The purpose of this letter is to confirm the engagement of Sheldon
Fleck ("Advisor") to act as a non-exclusive financial advisor during the term of
this Agreement to Grow Biz International, Inc. (the "Company") in connection
with a potential Strategic Transaction involving the Company. For purposes
hereof, a "Strategic Transaction" shall mean whether in one or a series of
transactions, directly or indirectly, (i) the sale or other transfer of 5% or
more of the common stock of the Company owned beneficially or of record by K.
Jeffrey Dahlberg or Ronald Olson in connection with a change in the management
positions of Dahlberg or Olson which transaction is determined by the Board of
Directors to be in the best interests of the Company, or (ii) the sale or other
transfer of all or a significant portion of the assets or business of the
Company or any significant concept of the Company in connection with a change in
the management positions of Dahlberg or Olson which transaction is determined by
the Board of Directors to be in the best interests of the Company. The term
Strategic Transaction shall not include a sale or other transfer of all or a
significant portion of the assets or business of the Company's concepts,
provided that such sale or other transfer is not part of a larger transaction
which taken as a whole meets the definition of "Strategic Transaction" set forth
above.
1. In connection with his engagement hereunder, Advisor will advise and
assist the Company in the areas of strategic planning, corporate
reorganization, management restructuring and business development.
Advisor will also provide such other financial advisory services as may
be mutually agreed upon by the Company and Advisor.
2. As compensation for Advisor's services hereunder, the Company shall
issue to Advisor a warrant for the purchase of 200,000 shares of the
Company's common stock (the "Warrant") upon closing and consummation of
a Strategic Transaction which meets both of the following conditions:
(a) The Strategic Transaction involves a party with whom the
Advisor or the Company or their respective representatives had
discussions or negotiations during the term of this Agreement.
(b) A letter of intent or definitive agreement with respect to the
Strategic Transaction is entered into during the term of this
Agreement or during the six months thereafter.
<PAGE>
Mr. K. Jeffrey Dahlberg, CEO
Grow Biz International, Inc.
November 17, 1999
Page 2
The Warrant shall be exercisable at a price of $6.00 per share for a
term of eight years and include a cashless exercise provision as well
as permitting exercise by surrender of Company common stock by the
holder. In addition, the Warrant shall include registration rights (one
demand right, unlimited piggy back rights and other customary
provisions) and typical anti-dilution protection in the event of
splits, combinations and recapitalizations.
Notwithstanding the foregoing, in the event Advisor has taken
reasonable efforts to consummate a Strategic Transaction, but the
Strategic Transaction causing the issuance of the Warrant is closed and
consummated on or before February 29, 2000 with a person or entity who
without any prior contact or discussion with Advisor was introduced to
the Company by an investment banking firm or other advisor to which the
Company is obligated to pay a fee as a result of such Strategic
Transaction, then the number of shares purchasable by Advisor under the
Warrant shall be reduced to 100,000 shares of the Company's common
stock.
3. In addition to the Warrant that may be issuable to Advisor hereunder
(and regardless of whether a Strategic Transaction occurs), the Company
hereby agrees from time to time upon Advisor providing Company with
receipts and other documentation requested by Company, to reimburse
Advisor promptly for reasonable travel and other out-of-pocket expenses
incurred by Advisor in performing its services hereunder, including,
but not limited to, all attorney's fees incurred in connection with
this letter and the services provided hereunder. Company's obligation
for reimbursement of Advisor's expenses shall not exceed $25,000 in the
aggregate, unless approved by the Company.
4. The term of Advisor's engagement as financial advisor to the Company
shall commence on the date hereof and continue until the earlier of the
consummation of a Strategic Transaction or February 29, 2000, unless
extended by mutual, written consent of the parties hereto. Termination
of the engagement shall not affect the indemnification, contribution
and confidentiality obligations of the Company and Advisor, the right
of Advisor to receive the Warrant or the right of Advisor to receive
reimbursement for its reasonable out-of pocket expenses as described
above.
5. The Company agrees to indemnify Advisor and related persons to the
extent of the indemnification letter attached hereto as Schedule A, the
provisions of which are incorporated herein in their entirety.
6. The Company recognizes and confirms that Advisor in acting pursuant to
this engagement will be using information in reports and other
information provided or approved in writing by the Company, and that
Advisor does not assume responsibility for and may rely, without
independent verification, on the accuracy and completeness of any such
reports and information. The Company agrees that any information or
advice rendered by Advisor or his representatives in connection with
this engagement is for the use of Advisor in rendering his services
hereunder or confidential use of the Company's Board of Directors only
in its evaluation of a transaction and, except as otherwise required by
law, the Company will not, and will not permit any third party to,
disclose or
<PAGE>
Mr. K. Jeffrey Dahlberg, CEO
Grow Biz International, Inc.
November 17, 1999
Page 3
otherwise refer to such, advice or information in any manner without
Advisor's prior written consent.
7. Advisor agrees to keep confidential all material nonpublic information
provided to it by the Company ("Information"), except as required by
law or securities regulators, or to the extent such Information is
already in public domain, has been obtained by a third party without
violating any duty of confidentiality to the Company, is independently
discovered by Advisor. Notwithstanding anything to the contrary herein,
Advisor may disclose nonpublic Information to its agents, advisors and
potential parties to a Strategic Transaction whenever Advisor
determines that such disclosure is necessary to provide the service
contemplated hereunder but shall inform them and bind them by written
agreement to Advisor's confidential obligation and to their obligation
to refrain from trading in the Company's securities while in possession
of material, nonpublic information about the Company.
8. This Agreement (a) shall be governed by and construed in accordance
with the laws of the State of Minnesota, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law
thereof, (b) incorporates the entire understanding of the parties with
respect to the subject matter hereof and supersedes all previous
agreements should they exist with respect thereto, (c) may not be
amended or modified except in writing executed by the Company and
Advisor, and (d) shall be binding upon and inure to the benefit of the
Company, Advisor, and other Indemnified Parties and their respective
successors and assigns. The Company acknowledges that Advisor in
connection with its engagement hereunder is acting as an independent
contractor with duties owing solely to the Company and that nothing in
this Agreement is intended to confer upon any other person any rights
or remedies hereunder or by reason hereof.
This agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement. Please confirm that the foregoing is in accordance with
your understanding of our agreement by signing and returning to us a copy of
this letter.
Very truly yours,
/s/ Sheldon Fleck
- --------------------------------
Sheldon Fleck
<PAGE>
Mr. K. Jeffrey Dahlberg, CEO
Grow Biz International, Inc.
November 17, 1999
Page 4
Accepted and agreed to as of the date set forth above:
GROW BIZ INTERNATIONAL, NC.
By: /s/ K. Jeffrey Dahlberg
-------------------------------
K. Jeffrey Dahlberg
Its: Chief Executive Officer
<PAGE>
SCHEDULE A
INDEMNIFICATION
In the event that Advisor (which term includes Advisor's legal counsel,
Advisor's accountant, Lee Javorski and Advisor's assistant, Marilyn Hall)
becomes involved in any capacity in any action, proceeding or investigation
(pending or threatened) brought by or against any person, including shareholders
of the Company, related to, arising out of or in connection with Advisor's
engagement as provided in this letter, the Company will reimburse Advisor for
his reasonable, out of pocket legal and other expenses (including the cost of
any investigation and preparation) as such expenses are incurred in connection
therewith, except to the extent that Advisor directly or indirectly commences
such action, proceeding or investigation or Advisor's involvement in such
action, proceeding or investigation results from the gross negligence or willful
misconduct of Advisor (as determined by the judgment of a court of competent
jurisdiction no longer subject to appeal or further review). The Company also
will indemnify and hold Advisor harmless against any and all losses, claims,
damages or liabilities to any such person related to, arising out of or in
connection with the engagement of Advisor hereunder, except to the extent that
any such loss, claim, damage or liability results from the gross negligence or
willful misconduct of Advisor (as determined by the judgment of a court of
competent jurisdiction no longer subject to appeal or further review). If for
any reason (other than the gross negligence or willful misconduct of Advisor)
the foregoing indemnification is unavailable to Advisor or insufficient to hold
it harmless, then the Company shall contribute to the amount paid or payable by
Advisor as a result of such loss, claim, damage or liability in such proportion
as is appropriate to reflect the relative economic interests of the Company and
its shareholders on the one hand and Advisor on the other hand in the matters
contemplated by this letter as well as the relative fault of the Company and
Advisor with respect to such loss, claim, damage or liability and any other
relevant equitable considerations; provided that, in no event will the aggregate
contributions of Advisor hereunder exceed the amount of fees (or the value of
the Warrant) actually received by Advisor pursuant to this letter. The
reimbursement, indemnity and contribution obligations of the Company under this
paragraph shall be in addition to any liability which the Company may otherwise
have, and shall be binding upon and inure to the benefit of any successors,
assigns, heirs and personal representatives of the Company and Advisor. The
Company also agrees that Advisor shall not have any liability to the Company or
any third person asserting claims on behalf of or in right of the Company
related to, arising out of or in connection with the engagement of Advisor
hereunder except to the extent that any losses, claims, damages, liabilities or
expenses incurred by the Company are caused by the gross negligence or willful
misconduct of Advisor (as determined by the judgment of a court of competent
jurisdiction no longer subject to appeal or further review). The Company agrees
that it will not, without the prior written consent of Advisor, settle,
compromise, consent to the entry of any judgment in or otherwise seek to
terminate any action, claims, suits or proceeding in respect to which
indemnification may be sought pursuant to this letter agreement unless such
settlement, compromise, consent or termination includes a release of Advisor
from any liabilities arising out of such action, claim, suit or proceeding. The
indemnity and contribution obligations of the Company as set forth herein shall
be in addition to any liability or obligation the Company may otherwise have to
Advisor. Prior to entering into any agreement or arrangement with respect to, or
effecting, any proposed sale, exchange, dividend or other distribution or
liquidation of all or a significant portion of its assets in one or a series of
transactions or any significant recapitalization or reclassification of its
outstanding securities that does not directly or indirectly provide for the
assumption of the obligations of the Company set forth in this Schedule A, the
Company will notify Advisor in writing thereof (if not previously so notified)
and, if requested by Advisor, shall use its best efforts to arrange in
connection therewith alternative means of providing for the obligations of the
Company set forth in this paragraph upon terms and conditions reasonably
satisfactory to Advisor. The provisions of this Schedule A shall survive any
termination or completion of the engagement provided by this letter agreement.
EXHIBIT 10.27
TRADEMARK SECURITY AGREEMENT
This Agreement, dated as of October __, 1999, is made by and between
GROW BIZ INTERNATIONAL, INC. and GROW BIZ GAMES, INC., each a Minnesota
corporation whose address and principal place of business is 4200 Dahlberg
Drive, Golden Valley, Minnesota 55422 (each a "Debtor" and collectively the
"Debtors"), on the one hand, and TCF NATIONAL BANK MINNESOTA, a national banking
association whose address and principal place of business is 801 Marquette
Avenue, Minneapolis, Minnesota 55402 (the "Secured Party"), on the other hand.
Recitals
The Debtors and the Secured Party have entered into an Amended and
Restated Credit Agreement dated as of October 14, 1998, as amended by a letter
agreement amendment dated as of July 29, 1999, and as amended by Second
Amendment to Amended and Restated Credit Agreement (the "Second Amendment"),
dated as of August 31, 1999 (as so amended, and as it may hereafter from time to
time be amended, restated or otherwise modified, the "Credit Agreement") setting
forth the terms on which the Secured Party has made and may hereafter make
certain loans or other financial accommodations to or for the account of the
Debtors.
Pursuant to the Second Amendment, the Credit Agreement now requires
as a condition to each Advance from and after October 31, 1999, that, among
other things, the Debtors execute and deliver to the Secured Party such
documents as may be necessary in order for the Secured Party to possess first
and prior security interest in the Debtors' trademarks. Accordingly, the Secured
Party has required the execution and delivery of this Agreement by the Debtors.
ACCORDINGLY, in consideration of the mutual covenants contained in
the Credit Agreement and herein, the parties hereby agree as follows:
1. DEFINITIONS. ALL TERMS DEFINED IN THE RECITALS HERETO OR IN THE CREDIT
AGREEMENT THAT ARE NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN TO
THEM THEREIN. IN ADDITION, THE FOLLOWING TERMS HAVE THE MEANINGS SET FORTH
BELOW:
"Obligations" means each and every debt, liability and
obligation of every type and description arising under or in
connection with any Loan Document (as defined in the Credit
Agreement) which the Debtors may now or at any time hereafter owe to
the Secured Party, whether such debt, liability or obligation now
exists or is hereafter created or incurred and whether it is or may
be direct or indirect, due or to become due, absolute or contingent,
primary or secondary, liquidated or unliquidated, independent,
joint, several or joint and several, and including specifically, but
not limited to, the Obligations (as defined in the Credit
Agreement).
"Trademarks" means all of each Debtor's right, title and
interest in and to trademarks, service marks, collective membership
marks, the respective goodwill associated with each, the
registrations and applications for each, and licenses thereunder,
and including without limitation (i) the right to sue for past
infringement and damages therefor, (ii) licenses thereunder and
(iii) all proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty
payable in respect of the foregoing, all as presently existing or
hereafter arising or acquired, including, without limitation, the
marks listed on Exhibit A.
-1-
<PAGE>
2. GRANT OF SECURITY INTEREST. AS COLLATERAL SECURITY FOR THE PROMPT AND
COMPLETE PAYMENT AND PERFORMANCE OF THE OBLIGATIONS, THE DEBTORS HEREBY GRANT TO
THE SECURED PARTY A SECURITY INTEREST IN THE TRADEMARKS.
3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. THE DEBTORS HEREBY REPRESENT,
WARRANT AND AGREE AS FOLLOWS:
(a) EXISTENCE; AUTHORITY. EACH DEBTOR IS A CORPORATION, HAVING FULL POWER AND
AUTHORITY TO MAKE AND DELIVER THIS AGREEMENT. THE EXECUTION, DELIVERY AND
PERFORMANCE OF THIS AGREEMENT BY THE DEBTORS HAS BEEN DULY AUTHORIZED BY ALL
NECESSARY ACTION OF EACH DEBTOR'S BOARD OF DIRECTORS, AND, IF NECESSARY, ITS
STOCKHOLDERS, AND DOES NOT AND WILL NOT VIOLATE THE PROVISIONS OF, OR CONSTITUTE
A DEFAULT UNDER, ANY PRESENTLY APPLICABLE LAW OR EITHER DEBTOR'S ARTICLES OF
INCORPORATION OR BYLAWS OR ANY AGREEMENT PRESENTLY BINDING ON EITHER DEBTOR.
THIS AGREEMENT HAS BEEN DULY EXECUTED AND DELIVERED BY THE DEBTORS AND
CONSTITUTES EACH DEBTOR'S LAWFUL, BINDING AND LEGALLY ENFORCEABLE OBLIGATION.
THE CORRECT NAMES OF THE DEBTORS ARE GROW BIZ INTERNATIONAL, INC. AND GROW BIZ
GAMES, INC. THE AUTHORIZATION, EXECUTION, DELIVERY AND PERFORMANCE OF THIS
AGREEMENT DO NOT REQUIRE NOTIFICATION TO, REGISTRATION WITH, OR CONSENT OR
APPROVAL BY, ANY FEDERAL, STATE OR LOCAL REGULATORY BODY OR ADMINISTRATIVE
AGENCY.
(b) TRADEMARKS. EXHIBIT A ACCURATELY LISTS ALL TRADEMARKS OWNED OR CONTROLLED BY
THE DEBTORS AS OF THE DATE HEREOF AND ACCURATELY REFLECTS THE EXISTENCE AND
STATUS OF TRADEMARKS AND ALL REGISTRATIONS PERTAINING THERETO AS OF THE DATE
HEREOF. EACH DEBTOR AGREES TO GIVE THE SECURED PARTY PROMPT WRITTEN NOTICE OF
EACH APPLICATION FOR REGISTRATION OF A TRADEMARK (IF ANY) SUCH DEBTOR FILES
DURING THE EFFECTIVENESS OF THIS AGREEMENT.
(c) TITLE. WITH RESPECT TO EACH TRADEMARK LISTED ON EXHIBIT A, ONE OR THE OTHER
OF THE DEBTORS HAS ABSOLUTE TITLE, FREE AND CLEAR OF ALL SECURITY INTERESTS,
LIENS AND ENCUMBRANCES, EXCEPT THE SECURITY INTEREST. EACH DEBTOR (i) WILL HAVE,
AT THE TIME SUCH DEBTOR ACQUIRES ANY RIGHTS IN TRADEMARKS HEREAFTER ARISING,
ABSOLUTE TITLE TO EACH SUCH TRADEMARK FREE AND CLEAR OF ALL SECURITY INTERESTS,
LIENS AND ENCUMBRANCES, EXCEPT THE SECURITY INTEREST, AND (ii) WILL KEEP ALL
TRADEMARKS FREE AND CLEAR OF ALL SECURITY INTERESTS, LIENS AND ENCUMBRANCES
EXCEPT THE SECURITY INTEREST.
(d) NO SALE. THE DEBTORS WILL NOT SELL, ABANDON OR OTHERWISE DISPOSE OF THE
TRADEMARKS, OR ANY INTEREST THEREIN, WITHOUT THE SECURED PARTY'S PRIOR WRITTEN
CONSENT.
(e) DEFENSE. THE DEBTORS WILL AT THEIR OWN EXPENSE, AND USING THEIR BEST
EFFORTS, PROTECT AND DEFEND THE TRADEMARKS AGAINST ALL CLAIMS OR DEMANDS OF ALL
PERSONS OTHER THAN THE SECURED PARTY.
(f) MAINTENANCE. THE DEBTORS WILL AT THEIR OWN EXPENSE MAINTAIN THE TRADEMARKS
TO THE EXTENT REASONABLY ADVISABLE IN THEIR BUSINESS INCLUDING, BUT NOT LIMITED
TO, USING THE TRADEMARKS IN ACTIVE COMMERCE IN THE GOODS TO WHICH
-2-
<PAGE>
THE TRADEMARKS PERTAIN, FILING ALL APPLICATIONS TO REGISTER AND ALL AFFIDAVITS
AND RENEWALS POSSIBLE WITH RESPECT TO ISSUED REGISTRATIONS. EACH DEBTOR
COVENANTS THAT IT WILL NOT ABANDON NOR FAIL TO PAY ANY MAINTENANCE FEE OR
ANNUITY DUE AND PAYABLE ON ANY TRADEMARK, NOR FAIL TO FILE ANY REQUIRED
AFFIDAVIT OR OTHER DOCUMENT IN SUPPORT THEREOF, WITHOUT FIRST PROVIDING THE
SECURED PARTY: (i) SUFFICIENT WRITTEN NOTICE, AS PROVIDED IN THE CREDIT
AGREEMENT, TO ALLOW THE SECURED PARTY TO TIMELY PAY ANY SUCH MAINTENANCE FEES OR
ANNUITY WHICH MAY BECOME DUE ON ANY OF SAID TRADEMARKS, OR TO FILE ANY AFFIDAVIT
OR OTHER DOCUMENT WITH RESPECT THERETO, AND (ii) A SEPARATE WRITTEN POWER OF
ATTORNEY OR OTHER AUTHORIZATION TO PAY SUCH FEES, OR ANNUITIES, OR TO FILE SUCH
AFFIDAVIT OR OTHER DOCUMENTS, SHOULD SUCH BE NECESSARY OR DESIRABLE.
(g) SECURED PARTY'S RIGHT TO TAKE ACTION. IF EITHER DEBTOR FAILS TO PERFORM OR
OBSERVE ANY OF ITS COVENANTS OR AGREEMENTS SET FORTH IN THIS SECTION 3, AND IF
SUCH FAILURE CONTINUES FOR A PERIOD OF TEN (10) CALENDAR DAYS AFTER THE SECURED
PARTY GIVES SUCH DEBTOR WRITTEN NOTICE THEREOF (OR, IN THE CASE OF THE
AGREEMENTS CONTAINED IN SUBSECTION (f), IMMEDIATELY UPON THE OCCURRENCE OF SUCH
FAILURE, WITHOUT NOTICE OR LAPSE OF TIME), OR IF EITHER DEBTOR NOTIFIES THE
SECURED PARTY THAT IT INTENDS TO ABANDON A TRADEMARK, THE SECURED PARTY MAY (BUT
NEED NOT) PERFORM OR OBSERVE SUCH COVENANT OR AGREEMENT ON BEHALF AND IN THE
NAME, PLACE AND STEAD OF SUCH DEBTOR (OR, AT THE SECURED PARTY'S OPTION, IN THE
SECURED PARTY'S OWN NAME) AND MAY (BUT NEED NOT) TAKE ANY AND ALL OTHER ACTIONS
WHICH THE SECURED PARTY MAY REASONABLY DEEM NECESSARY TO CURE OR CORRECT SUCH
FAILURE.
(h) COSTS AND EXPENSES. EXCEPT TO THE EXTENT THAT THE EFFECT OF SUCH PAYMENT
WOULD BE TO RENDER ANY LOAN OR FORBEARANCE OF MONEY USURIOUS OR OTHERWISE
ILLEGAL UNDER ANY APPLICABLE LAW, EITHER DEBTOR SHALL PAY THE SECURED PARTY ON
DEMAND THE AMOUNT OF ALL MONEYS EXPENDED AND ALL COSTS AND EXPENSES (INCLUDING
REASONABLE ATTORNEYS' FEES) INCURRED BY THE SECURED PARTY IN CONNECTION WITH OR
AS A RESULT OF THE SECURED PARTY'S TAKING ACTION UNDER SUBSECTION (g) OR
EXERCISING ITS RIGHTS UNDER SECTION 6 OF THIS AGREEMENT, TOGETHER WITH INTEREST
THEREON FROM THE DATE EXPENDED OR INCURRED BY THE SECURED PARTY AT THE HIGHEST
RATE THEN APPLICABLE TO ANY OF THE OBLIGATIONS.
(i) POWER OF ATTORNEY. TO FACILITATE THE SECURED PARTY'S TAKING ACTION UNDER
SUBSECTION (g) AND EXERCISING ITS RIGHTS UNDER SECTION 6, EACH DEBTOR HEREBY
IRREVOCABLY APPOINTS (WHICH APPOINTMENT IS COUPLED WITH AN INTEREST) THE SECURED
PARTY, OR ITS DELEGATE, AS THE ATTORNEY-IN-FACT OF SUCH DEBTOR WITH THE RIGHT
(BUT NOT THE DUTY) FROM TIME TO TIME TO CREATE, PREPARE, COMPLETE, EXECUTE,
DELIVER, ENDORSE OR FILE, IN THE NAME AND ON BEHALF OF SUCH DEBTOR, ANY AND ALL
INSTRUMENTS, DOCUMENTS, APPLICATIONS, FINANCING STATEMENTS, AND OTHER AGREEMENTS
AND WRITINGS REQUIRED TO BE OBTAINED, EXECUTED, DELIVERED OR ENDORSED BY SUCH
DEBTOR UNDER THIS SECTION 3, OR, NECESSARY FOR THE SECURED PARTY, AFTER AN EVENT
OF DEFAULT, TO ENFORCE OR USE THE TRADEMARKS OR TO GRANT OR ISSUE ANY EXCLUSIVE
OR NON-EXCLUSIVE LICENSE UNDER THE TRADEMARKS TO ANY THIRD PARTY, OR TO SELL,
ASSIGN, TRANSFER, PLEDGE, ENCUMBER OR OTHERWISE TRANSFER TITLE IN OR DISPOSE OF
THE
-3-
<PAGE>
TRADEMARKS TO ANY THIRD PARTY. THE DEBTORS HEREBY RATIFY ALL THAT SUCH ATTORNEY
SHALL LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. THE POWER OF ATTORNEY
GRANTED HEREIN SHALL TERMINATE UPON THE TERMINATION OF THE CREDIT AGREEMENT AS
PROVIDED THEREIN AND THE PAYMENT AND PERFORMANCE OF ALL OBLIGATIONS (AS DEFINED
THEREIN).
4. DEBTORS' USE OF THE TRADEMARKS. THE DEBTORS SHALL BE PERMITTED TO CONTROL AND
MANAGE THE TRADEMARKS, INCLUDING THE RIGHT TO EXCLUDE OTHERS FROM MAKING, USING
OR SELLING ITEMS COVERED BY THE TRADEMARKS AND ANY LICENSES THEREUNDER, IN THE
SAME MANNER AND WITH THE SAME EFFECT AS IF THIS AGREEMENT HAD NOT BEEN ENTERED
INTO, SO LONG AS NO EVENT OF DEFAULT OCCURS AND REMAINS UNCURED.
5. EVENTS OF DEFAULT. EACH OF THE FOLLOWING OCCURRENCES SHALL CONSTITUTE AN
EVENT OF DEFAULT UNDER THIS AGREEMENT (HEREIN CALLED "EVENT OF DEFAULT"): (a) AN
EVENT OF DEFAULT, AS DEFINED IN THE CREDIT AGREEMENT, SHALL OCCUR; OR (b) EITHER
DEBTOR SHALL FAIL PROMPTLY TO OBSERVE OR PERFORM ANY COVENANT OR AGREEMENT
HEREIN BINDING ON IT; OR (c) ANY OF THE REPRESENTATIONS OR WARRANTIES CONTAINED
IN SECTION 3 SHALL PROVE TO HAVE BEEN INCORRECT IN ANY MATERIAL RESPECT WHEN
MADE.
6. REMEDIES. UPON THE OCCURRENCE OF AN EVENT OF DEFAULT AND AT ANY TIME
THEREAFTER, THE SECURED PARTY MAY, AT ITS OPTION, TAKE ANY OR ALL OF THE
FOLLOWING ACTIONS:
(a) THE SECURED PARTY MAY EXERCISE ANY OR ALL REMEDIES AVAILABLE UNDER THE
CREDIT AGREEMENT.
(b) THE SECURED PARTY MAY SELL, ASSIGN, TRANSFER, PLEDGE, ENCUMBER OR OTHERWISE
DISPOSE OF THE TRADEMARKS.
(c) THE SECURED PARTY MAY ENFORCE THE TRADEMARKS AND ANY LICENSES THEREUNDER,
AND IF SECURED PARTY SHALL COMMENCE ANY SUIT FOR SUCH ENFORCEMENT, EACH DEBTOR
SHALL, AT THE REQUEST OF SECURED PARTY, DO ANY AND ALL LAWFUL ACTS AND EXECUTE
ANY AND ALL PROPER DOCUMENTS REQUIRED BY SECURED PARTY IN AID OF SUCH
ENFORCEMENT.
7. COUNTERPARTS. THIS ASSIGNMENT MAY BE EXECUTED IN TWO OR MORE COUNTERPARTS,
EACH OF WHICH SHALL BE DEEMED AN ORIGINAL BUT ALL OF WHICH TOGETHER SHALL
CONSTITUTE THE SAME INSTRUMENT.
8. MISCELLANEOUS. THIS AGREEMENT HAS BEEN DULY AND VALIDLY AUTHORIZED BY ALL
NECESSARY ACTION, CORPORATE OR OTHERWISE. THIS AGREEMENT CAN BE WAIVED,
MODIFIED, AMENDED, TERMINATED OR DISCHARGED, AND THE SECURITY INTEREST CAN BE
RELEASED, ONLY EXPLICITLY IN A WRITING SIGNED BY THE SECURED PARTY. A WAIVER
SIGNED BY THE SECURED PARTY SHALL BE EFFECTIVE ONLY IN THE SPECIFIC INSTANCE AND
FOR THE SPECIFIC PURPOSE GIVEN. MERE DELAY OR FAILURE TO ACT SHALL NOT PRECLUDE
THE EXERCISE OR ENFORCEMENT OF ANY OF THE SECURED PARTY'S RIGHTS OR REMEDIES.
ALL RIGHTS AND REMEDIES OF THE SECURED PARTY SHALL BE CUMULATIVE AND MAY BE
-4-
<PAGE>
EXERCISED SINGULARLY OR CONCURRENTLY, AT THE SECURED PARTY'S OPTION, AND THE
EXERCISE OR ENFORCEMENT OF ANY ONE SUCH RIGHT OR REMEDY SHALL NEITHER BE A
CONDITION TO NOR BAR THE EXERCISE OR ENFORCEMENT OF ANY OTHER. THE SECURED PARTY
SHALL NOT BE OBLIGATED TO PRESERVE ANY RIGHTS THE DEBTORS MAY HAVE AGAINST PRIOR
PARTIES, TO REALIZE ON THE TRADEMARKS AT ALL OR IN ANY PARTICULAR MANNER OR
ORDER, OR TO APPLY ANY CASH PROCEEDS OF TRADEMARKS IN ANY PARTICULAR ORDER OF
APPLICATION. THIS AGREEMENT SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF
THE DEBTORS AND THE SECURED PARTY AND THEIR RESPECTIVE PARTICIPANTS, SUCCESSORS
AND ASSIGNS AND SHALL TAKE EFFECT WHEN SIGNED BY THE DEBTORS AND DELIVERED TO
THE SECURED PARTY, AND THE DEBTORS WAIVE NOTICE OF THE SECURED PARTY'S
ACCEPTANCE HEREOF. THE SECURED PARTY MAY EXECUTE THIS AGREEMENT IF APPROPRIATE
FOR THE PURPOSE OF FILING, BUT THE FAILURE OF THE SECURED PARTY TO EXECUTE THIS
AGREEMENT SHALL NOT AFFECT OR IMPAIR THE VALIDITY OR EFFECTIVENESS OF THIS
AGREEMENT. A CARBON, PHOTOGRAPHIC OR OTHER REPRODUCTION OF THIS AGREEMENT OR OF
ANY FINANCING STATEMENT SIGNED BY THE DEBTORS SHALL HAVE THE SAME FORCE AND
EFFECT AS THE ORIGINAL FOR ALL PURPOSES OF A FINANCING STATEMENT. THIS AGREEMENT
SHALL BE GOVERNED BY THE INTERNAL LAW OF MINNESOTA WITHOUT REGARD TO CONFLICTS
OF LAW PROVISIONS. IF ANY PROVISION OR APPLICATION OF THIS AGREEMENT IS HELD
UNLAWFUL OR UNENFORCEABLE IN ANY RESPECT, SUCH ILLEGALITY OR UNENFORCEABILITY
SHALL NOT AFFECT OTHER PROVISIONS OR APPLICATIONS WHICH CAN BE GIVEN EFFECT AND
THIS AGREEMENT SHALL BE CONSTRUED AS IF THE UNLAWFUL OR UNENFORCEABLE PROVISION
OR APPLICATION HAD NEVER BEEN CONTAINED HEREIN OR PRESCRIBED HEREBY. ALL
REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT SHALL SURVIVE THE
EXECUTION, DELIVERY AND PERFORMANCE OF THIS AGREEMENT AND THE CREATION AND
PAYMENT OF THE OBLIGATIONS.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-5-
<PAGE>
THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED
ON OR PERTAINING TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have executed this Trademark
Security Agreement as of the date written above.
GROW BIZ INTERNATIONAL, INC.
By /s/ David J. Osdoba, Jr.
------------------------
David J. Osdoba, Jr.
Its Vice President of Finance and Chief
Financial Officer
GROW BIZ GAMES, INC.
By /s/ David J. Osdoba, Jr.
------------------------
David J. Osdoba, Jr.
Its Vice President of Finance and Chief
Financial Officer
TCF NATIONAL BANK MINNESOTA
By
----------------------------------------
Its
------------------------------------
By
----------------------------------------
Its
------------------------------------
-6-
<PAGE>
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this __ day of
October, 1999, by David J. Osdoba, the Vice President of Finance and Chief
Financial Officer of Grow Biz International, Inc., a Minnesota corporation, on
behalf of the corporation.
----------------------------------
Notary Public
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this __ day of
October, 1999, by David J. Osdoba, the Vice President of Finance and Chief
Financial Officer of Grow Biz Games, Inc., a Minnesota corporation, on behalf of
the corporation.
----------------------------------
Notary Public
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this __ day of
October, 1999, by _________________________________, a ______________________ of
TCF National Bank Minnesota, a national banking association, on behalf of the
association.
----------------------------------
Notary Public
STATE OF MINNESOTA )
)
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this __ day of
October, 1999, by _________________________________, a ______________________ of
TCF National Bank Minnesota, a national banking association, on behalf of the
association.
----------------------------------
Notary Public
-7-
<PAGE>
EXHIBIT A
UNITED STATES ISSUED TRADEMARKS
REGISTRATIONS
Mark Registration Number Registration Date
---- ------------------- -----------------
*Computer Renaissance 1,856,440 09/27/94
*Computer Renaissance and design 1,975,949 05/28/96
*Plato's Closet 2,211,282 12/15/98
ABC Once Upon A Child A Children's 1,573,973 12/26/89
Resale Shop and design
*Once Upon a Child and design 1,856,930 10/04/94
Kids' Stuff with Previous Experience 1,926,022 10/10/95
Play It Again Kids 1,956,690 02/13/96
*Play It Again Sports 1,562,785 10/24/89
*Play It Again Sports and design 1,738,778 12/08/92
Sports Equipment That's Used. 1,874,326 01/17/95
But Not Used Up.
Play Safe. Play Hard. Play It Again. 1,950,617 01/23/96
Play It Again Sports
Pro Custom 1,216,009 11/09/82
*Music Go Round 1,857,397 10/04/94
Music Equipment That's Used But Not 2,164,203 06/09/98
Used Up
*Music Go Round and design 1,938,398 11/28/95
ReTool logo 2,267,043 08/3/99
Design - person 2,264,554 07/27/99
Design - person 2,264,553 07/27/99
Value to the Extreme 2,235,090 03/23/99
Design - jack-in-the-box 2,101,003 09/30/97
Grow Biz 1,953,197 01/30/96
*Computer Renaissance 1,918,636 09/12/95
*Music Go Round 1,933,637 11/07/95
Grow Biz 1,897,696 06/06/95
*Once Upon A Child 1,668,930 12/17/91
*Once Upon A Child and design 1,872,459 01/10/95
Grow Biz 1,859,937 10/25/94
*Once Upon A Child and design 1,821,841 02/15/94
Sports Traders 1,811,232 12/14/93
Grow Biz and design 1,968,686 04/16/96
-1-
<PAGE>
*ReTool 2,267,043 08/03/99
UNITED STATES TRADEMARK APPLICATIONS
*Plato's Closet and design Serial No. 75/709,530 Date of filing: 05/19/99
We Keep the Music Moving Serial No. 75/461,860 Date of filing:
04/3/98
*Design - recycle logo Serial No. 74/662,893 Date of filing:
4/19/95
Pro Custom Serial No. 74/638,321 Date of filing:
2/27/95
-2-
<PAGE>
CANADIAN ISSUED TRADEMARKS
REGISTRATIONS
Registration Number (or Other
Mark Identification Number) Registration Date
---- ---------------------- -----------------
*Play It Again Sports 407,459 1/29/93
*Music Go Round 472,787 3/18/97
*Computer Renaissance 496,479 6/19/98
*Computer Renaissance & 474,198 4/7/97
Design
Family Golf Shop 496,825
Grow Biz 473,728
Grow Biz & Design 503,283
Kids' Stuff With Previous Experience 515,845
*O Logo Design (Chasing Arrows) 890,859
*Once Upon A Child & Design 447,287 9/8/98
*Once Upon A Child A Children's 406,110
Resale Shop & Design
*Plato's Closet Brand Name 1017819
Teen Wear & Design
Play Safe Play Hard Play It 463206
Again Play It Again Sports
CANADIAN TRADEMARK APPLICATIONS
*ReTool and Design Appl. #882,608 6/26/98
*ReTool Appl. #882,609 6/26/98
PRINCIPAL TRADEMARKS ARE INDICATED BY "*"
-3-
EXHIBIT 10.28
THIRD AMENDMENT TO AMENDED AND RESTATED
CREDIT AGREEMENT
This Third Amendment to Amended and Restated Credit Agreement (this
"Amendment"), effective as of December 25, 1999, is made by and between GROW BIZ
INTERNATIONAL, INC. and GROW BIZ GAMES, INC., each a Minnesota corporation (each
a "Borrower" and collectively the "Borrowers"), and TCF NATIONAL BANK MINNESOTA,
a national banking association (the "Bank").
RECITALS
The Borrowers and the Bank have entered into an Amended and Restated
Credit Agreement dated as of October 14, 1998, as amended by a letter agreement
amendment dated as of July 29, 1999 and by a Second Amendment dated as of August
31, 1999 (as so amended, the "Credit Agreement").
The Borrowers are in default of certain provisions of the Credit
Agreement and have requested a waiver of such defaults. In addition, the
Borrowers have requested that certain amendments be made to the Credit
Agreement. The Bank is willing to waive such defaults and make such amendments
pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. DEFINED TERMS. CAPITALIZED TERMS USED IN THIS AMENDMENT WHICH ARE DEFINED IN
THE CREDIT AGREEMENT SHALL HAVE THE SAME MEANINGS AS DEFINED THEREIN, UNLESS
OTHERWISE DEFINED HEREIN. IN ADDITION, THE GLOSSARY OF TERMS APPEARING AS THE
APPENDIX TO THE CREDIT AGREEMENT IS AMENDED BY ADDING OR AMENDING, AS THE CASE
MAY BE, THE FOLLOWING DEFINITIONS:
"Third Amendment" means that certain Third Amendment to Amended and
Restated Credit Agreement effective as of December 25, 1999.
2. CURRENT RATIO. THE TEXT OF SECTION 7.9 OF THE CREDIT AGREEMENT IS HEREBY
DELETED AND REPLACED WITH THE FOLLOWING:
"Section 7.9 - RESERVED."
All references to "Section 7.9" elsewhere in the Credit Agreement are hereby
accordingly deleted.
3. CAPITAL BASE. SECTION 7.10 OF THE CREDIT AGREEMENT IS HEREBY AMENDED IN ITS
ENTIRETY TO READ AS FOLLOWS:
<PAGE>
"Section 7.10 Capital Base. For each period described below,
International will maintain at all times, on a consolidated basis, its
Capital Base in an amount not less than:
Period Capital Base
------ ------------
12/25/99 to 1/28/00 $1,470,000
1/29/00 to 2/25/00 $1,650,000
2/26/00 to 3/24/00 $1,775,000
3/25/00 to 4/30/00 $1,900,000"
4. TOTAL LIABILITIES TO CAPITAL BASE RATIO. SECTION 7.11 OF THE CREDIT AGREEMENT
IS HEREBY AMENDED IN ITS ENTIRETY TO READ AS FOLLOWS:
"Section 7.11 Total Liabilities to Capital Base Ratio. For each
period described below, International will maintain at all times, on a
consolidated basis, the ratio of its Total Liabilities, other than
Subordinated Debt, to Capital Base of not more than:
Period Liabilities to Capital Base
------ ---------------------------
12/25/99 to 1/28/00 18.00 to 1.00
1/29/00 to 2/25/00 16.00 to 1.00
2/26/00 to 3/24/00 16.00 to 1.00
3/25/00 to 4/30/00 16.00 to 1.00"
5. MINIMUM DEBT SERVICE COVERAGE RATIO. SECTION 7.12 OF THE CREDIT AGREEMENT IS
HEREBY AMENDED IN ITS ENTIRETY TO READ AS FOLLOWS:
"Section 7.12 Minimum Debt Service Coverage Ratio. On each date
specified below, International will maintain, on a consolidated basis, the
ratio of its Cash Flow Available for Debt Service to its Debt Service
Requirements at not less than:
Determination Date Debt Service Coverage Ratio
------------------ ---------------------------
3/25/00 0.90 to 1.00;
provided, however, that for purposes of the foregoing computations, both
Cash Flow Available for Debt Service and Debt Service Requirements will be
determined based solely and exclusively on the financial results of the
fiscal quarter ending on such specified determination date."
-2-
<PAGE>
For purposes of clarity, as a result of this amendment there shall be no
determination of this Minimum Debt Service Coverage Ratio covenant for the
former determination date of December 26, 1999.
6. MINIMUM EBIT. SECTION 7.13 OF THE CREDIT AGREEMENT IS HEREBY AMENDED IN ITS
ENTIRETY TO READ AS FOLLOWS:
"Section 7.13 Minimum EBIT. For each fiscal quarter ending on the
date specified below, International will have, on a consolidated basis,
Minimum EBIT for such fiscal quarter at not less than:
Determination Date Minimum EBIT
------------------ ------------
3/25/00 $ 900,000"
For purposes of clarity, as a result of this amendment there shall be no
determination of this Minimum EBIT covenant for the former determination date of
December 26, 1999.
7. APPLICATION OF TAX REFUND TO OBLIGATIONS. A NEW SECTION 7.14 IS HEREBY ADDED
TO THE CREDIT AGREEMENT WHICH READS AS FOLLOWS:
"SECTION 7.14 APPLICATION OF TAX REFUND. THE BORROWERS HEREBY
ACKNOWLEDGE AND AGREE THAT ANY AND ALL TAX REFUNDS TO BE RECEIVED BY
EITHER OF THEM ARE SUBJECT TO THE BANK'S FIRST PRIOR SECURITY INTEREST
THEREIN AND FURTHER AGREE TO DELIVER TO THE BANK, PROPERLY ENDORSED, ANY
CHECK AND DIRECT TO THE BANK ANY WIRE TRANSFER, IN EACH CASE, FOR
APPLICATION TO THE OBLIGATIONS IN ACCORDANCE WITH ARTICLE II OF THIS
AGREEMENT, WITH RESPECT TO ANY TAX REFUND OR OTHER PAYMENT MADE BY A
TAXING AUTHORITY (FEDERAL, STATE OR OTHERWISE) TO OR FOR THE BENEFIT OF
EITHER OF THE BORROWERS, AND TO TAKE SUCH OTHER STEPS AS THE BANK SHALL
REQUEST REGARDING ANY SUCH TAX REFUND OR OTHER PAYMENT IN ORDER TO GIVE
EFFECT TO THIS SECTION 7.14."
8. WAIVER OF DEFAULTS. THE BORROWERS ARE IN DEFAULT OF THE FOLLOWING PROVISIONS
OF THE CREDIT AGREEMENT (COLLECTIVELY, THE "DEFAULTS"):
(a) FINANCIAL COVENANTS. THE BORROWERS ARE IN DEFAULT OF THE FINANCIAL COVENANTS
SET FORTH IN SECTIONS 7.10, 7.11, 7.12 AND 7.13 OF THE CREDIT AGREEMENT FOR
PERIODS AS OF THE DATE HEREOF.
(b) CERTAIN PERFORMANCE COVENANTS. THE BORROWERS ARE IN DEFAULT OF THE
CONDITIONS SUBSEQUENT UNDER SECTION 5.3 OF THE CREDIT AGREEMENT (MADE EVENTS OF
DEFAULT UNDER SECTION 9.1(o) OF THE CREDIT AGREEMENT) RELATING TO THE MORTGAGE
AND THE TRADEMARK SECURITY AGREEMENT TO BE GRANTED TO THE BANK.
-3-
<PAGE>
Upon the terms and subject to the conditions set forth in this Amendment, the
Bank hereby waives the Defaults. This waiver shall be effective only in this
specific instance and for the specific purpose for which it is given, and this
waiver shall not entitle either Borrower to any other or further waiver in any
similar or other circumstances.
9. NO OTHER CHANGES. EXCEPT AS EXPLICITLY AMENDED BY THIS AMENDMENT, ALL OF THE
TERMS AND CONDITIONS OF THE CREDIT AGREEMENT SHALL REMAIN IN FULL FORCE AND
EFFECT AND SHALL APPLY TO ANY ADVANCE OR LETTER OF CREDIT THEREUNDER.
10. REPRESENTATIONS AND WARRANTIES. THE BORROWERS HEREBY REPRESENT AND WARRANT
TO THE BANK AS FOLLOWS:
(a) The Borrowers have all requisite power and authority to execute
this Amendment and to perform all of their obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrowers and
constitutes the legal, valid and binding obligation of the Borrowers,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrowers of this
Amendment have been duly authorized by all necessary corporate action and
do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrowers or the articles
of incorporation or by-laws of the Borrowers, or (iii) result in a breach
of or constitute a default under any indenture or loan or credit agreement
or any other agreement, lease or instrument to which either Borrower is a
party or by which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article
VI of the Credit Agreement are true and correct on and as of the date
hereof as though made on and as of such date, except to the extent that
such representations and warranties relate solely to an earlier date.
11. CERTIFICATE OF AUTHORITY. THE BORROWERS COVENANT AND AGREE TO PROVIDE TO THE
BANK A CERTIFICATE OF AUTHORITY OF EACH OF THE BORROWERS CERTIFYING AS TO (a)
THE RESOLUTIONS OF THE BOARD OF DIRECTORS OF SUCH BORROWER APPROVING THE
EXECUTION AND DELIVERY OF THIS AMENDMENT AS WELL AS THE MORTGAGE, THE TRADEMARK
SECURITY AGREEMENT, AND CERTAIN OTHER DOCUMENTS REQUIRED UNDER SECTION 5.3 OF
THE CREDIT AGREEMENT, (b) THE FACT THAT THE ARTICLES OF INCORPORATION AND BYLAWS
OF SUCH BORROWER, WHICH WERE CERTIFIED TO THE BANK PURSUANT TO THE CERTIFICATE
OF AUTHORITY OF SUCH BORROWER'S SECRETARY OR ASSISTANT SECRETARY IN CONNECTION
WITH THE EXECUTION AND DELIVERY OF THE CREDIT AGREEMENT CONTINUE IN FULL FORCE
AND EFFECT AND HAVE NOT BEEN AMENDED OR OTHERWISE MODIFIED EXCEPT AS SET FORTH
IN THE CERTIFICATE TO BE DELIVERED, AND (c) CERTIFYING THAT THE OFFICERS AND
AGENTS OF SUCH BORROWER WHO HAVE BEEN CERTIFIED TO THE BANK, PURSUANT TO THE
CERTIFICATE OF AUTHORITY OF SUCH BORROWER'S SECRETARY OR ASSISTANT SECRETARY
DATED AS OF OCTOBER
-4-
<PAGE>
14, 1998 (AS MODIFIED BY A SUPPLEMENTAL SECRETARY'S CERTIFICATE DATED AS OF JULY
29, 1999) AS BEING AUTHORIZED TO SIGN AND TO ACT ON BEHALF OF SUCH BORROWER
CONTINUE TO BE SO AUTHORIZED OR SETTING FORTH THE SAMPLE SIGNATURES OF EACH OF
THE OFFICERS AND AGENTS OF SUCH BORROWER AUTHORIZED TO EXECUTE AND DELIVER THIS
AMENDMENT AND ALL OTHER DOCUMENTS, AGREEMENTS AND CERTIFICATES ON BEHALF OF SUCH
BORROWER.
12. REFERENCES. ALL REFERENCES IN THE CREDIT AGREEMENT TO "THIS AGREEMENT" SHALL
BE DEEMED TO REFER TO THE CREDIT AGREEMENT AS AMENDED HEREBY; AND ANY AND ALL
REFERENCES IN THE SECURITY DOCUMENTS TO THE CREDIT AGREEMENT SHALL BE DEEMED TO
REFER TO THE CREDIT AGREEMENT AS AMENDED HEREBY.
13. NO OTHER WAIVER. EXCEPT AS SET FORTH IN SECTION 8 OF THIS AMENDMENT, ABOVE,
THE EXECUTION OF THIS AMENDMENT SHALL NOT BE DEEMED TO BE A WAIVER OF ANY
DEFAULT OR EVENT OF DEFAULT UNDER THE CREDIT AGREEMENT OR BREACH, DEFAULT OR
EVENT OF DEFAULT UNDER ANY SECURITY DOCUMENT OR OTHER DOCUMENT HELD BY THE BANK,
WHETHER OR NOT KNOWN TO THE BANK AND WHETHER OR NOT EXISTING ON THE DATE OF THIS
AMENDMENT.
14. RELEASE. EACH BORROWER HEREBY ABSOLUTELY AND UNCONDITIONALLY RELEASES AND
FOREVER DISCHARGES THE BANK, AND ANY AND ALL PARTICIPANTS, PARENT CORPORATIONS,
SUBSIDIARY CORPORATIONS, AFFILIATED CORPORATIONS, INSURERS, INDEMNITIES,
SUCCESSORS AND ASSIGNS THEREOF, TOGETHER WITH ALL OF THE PRESENT AND FORMER
DIRECTORS, OFFICERS, AGENTS AND EMPLOYEES OF ANY OF THE FOREGOING, FROM ANY AND
ALL CLAIMS, DEMANDS OR CAUSES OF ACTION OF ANY KIND, NATURE OR DESCRIPTION,
WHETHER ARISING IN LAW OR EQUITY OR UPON CONTRACT OR TORT OR UNDER ANY STATE OR
FEDERAL LAW OR OTHERWISE, WHICH SUCH BORROWER HAS HAD, NOW HAS OR HAS MADE CLAIM
TO HAVE AGAINST ANY SUCH PERSON FOR OR BY REASON OF ANY ACT, OMISSION, MATTER,
CAUSE OR THING WHATSOEVER ARISING FROM THE BEGINNING OF TIME TO AND INCLUDING
THE DATE OF THIS AMENDMENT, WHETHER SUCH CLAIMS, DEMANDS AND CAUSES OF ACTION
ARE MATURED OR UNMATURED OR KNOWN OR UNKNOWN.
15. COSTS AND EXPENSES. EACH BORROWER HEREBY REAFFIRMS ITS AGREEMENT UNDER THE
CREDIT AGREEMENT TO PAY OR REIMBURSE THE BANK ON DEMAND FOR ALL COSTS AND
EXPENSES INCURRED BY THE BANK IN CONNECTION WITH THE CREDIT AGREEMENT, THE
SECURITY DOCUMENTS AND ALL OTHER DOCUMENTS CONTEMPLATED THEREBY, INCLUDING
WITHOUT LIMITATION ALL REASONABLE FEES AND DISBURSEMENTS OF LEGAL COUNSEL.
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EACH BORROWER SPECIFICALLY
AGREES TO PAY ALL FEES AND DISBURSEMENTS OF COUNSEL TO THE BANK FOR THE SERVICES
PERFORMED BY SUCH COUNSEL IN CONNECTION WITH THE PREPARATION OF THIS AMENDMENT
AND THE DOCUMENTS AND INSTRUMENTS INCIDENTAL HERETO. EACH BORROWER HEREBY AGREES
THAT THE BANK MAY, AT ANY TIME OR FROM TIME TO TIME IN ITS SOLE DISCRETION AND
WITHOUT FURTHER AUTHORIZATION BY EITHER BORROWER, MAKE A LOAN TO THE BORROWERS
UNDER THE CREDIT AGREEMENT, OR APPLY THE PROCEEDS OF ANY LOAN, FOR THE PURPOSE
OF PAYING ANY SUCH FEES, DISBURSEMENTS, COSTS AND EXPENSES.
-5-
<PAGE>
16. MISCELLANEOUS. THIS AMENDMENT MAY BE EXECUTED IN ANY NUMBER OF COUNTERPARTS,
EACH OF WHICH WHEN SO EXECUTED AND DELIVERED SHALL BE DEEMED AN ORIGINAL AND ALL
OF WHICH COUNTERPARTS, TAKEN TOGETHER, SHALL CONSTITUTE ONE AND THE SAME
INSTRUMENT.
[SIGNATURE PAGE FOLLOWS]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first written above.
GROW BIZ INTERNATIONAL, INC.
By /s/ David J. Osdoba, Jr.
------------------------
David J. Osdoba, Jr.
Its Vice President of Finance and Chief
Financial Officer
GROW BIZ GAMES, INC.
By /s/ David J. Osdoba, Jr.
------------------------
David J. Osdoba, Jr.
Its Vice President of Finance and Chief
Financial Officer
TCF NATIONAL BANK MINNESOTA
By
----------------------------------------
Its
------------------------------------
By
----------------------------------------
Its
------------------------------------
[SIGNATURE PAGE TO THIRD AMENDMENT TO
CREDIT AGREEMENT]
EXHIBIT 11.1
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Statement of Computation of Per Share Earnings
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
December 25, December 26, December 27,
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Net Income (loss) $ (8,589,300) $ 7,243,800 $ 3,231,200
============= ============= =============
Weighted average shares outstanding - Basic 5,205,900 5,664,000 6,116,200
Dilutive effect of stock options after
application of the treasury stock method -- 168,700 157,300
------------- ------------- -------------
Weighted average shares outstanding - Dilutive 5,205,900 5,832,700 6,273,500
============= ============= =============
Net income (loss) per common share - Basic $ (1.65) $ 1.28 $ .53
============= ============= =============
Net income (loss) per common share - Dilutive $ (1.65) $ 1.24 $ .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, 33-85956, 33-79176, 33-71772,
333-3236, and 333-3066.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
March 22, 2000
EXHIBIT 99.1
GROW BIZ INTERNATIONAL, INC.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
Grow Biz International, Inc. (the "Company") desires to take advantage of the
new "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and is filing this Exhibit to its Annual Report on Form 10-K in order to do
so. When used in this Annual Report on Form 10-K and in future filings by the
Company with the Securities and Exchange Commission in the Company's annual
report, quarterly reports, press releases and in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "look for", "may result", "will continue", "is anticipated", "expect",
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. The Company cautions readers that the
following important factors, among others, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any forward-looking statements made by, or on behalf of,
the Company:
DEPENDENCE ON NEW FRANCHISEES
The Company's ability to generate increased revenue and achieve higher levels of
profitability depends on increasing the number of franchised stores open. While
management believes that a number of major metropolitan markets have reached or
are nearing the saturation point for certain concepts, management also believes
that many larger and smaller markets will continue to provide significant
opportunities for sales of franchises and that the Company can sustain
approximately its current annual level of store openings. However, there can be
no assurance that the Company will sustain this level of store openings.
INABILITY TO COLLECT ACCOUNTS RECEIVABLE
In the event that the Company's ability to collect accounts receivable
significantly declines from current rates, additional charges that affect
earnings may be incurred.
UNOPENED STORES
The Company believes that a substantial majority of stores sold but not opened
will open within the time period permitted by the applicable franchise agreement
or the Company will be able to resell the territories for most of the terminated
or expired franchises. However, there can be no assurance that substantially all
of the currently sold but unopened franchises will open and commence paying
royalties to the Company. To the extent the Company is required to refund any
franchise fees for stores that do not open, the Company believes that it will be
able to repay these fees out of available cash.
DEPENDENCE ON SUPPLY OF USED MERCHANDISE
The Company's store concepts are based on offering customers a mix of used and
new merchandise. As a result, obtaining continuing supplies of high quality used
merchandise is essential to the success of the Company's store concepts. To
date, supplies of used merchandise have been adequate and the Company's training
programs emphasize methods for locating and purchasing used goods. There can be
no assurance, however, that supply problems will not be encountered in the
future.
<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.
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-25-1999
<PERIOD-END> DEC-25-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 12,209
<ALLOWANCES> 1,044
<INVENTORY> 1,960
<CURRENT-ASSETS> 21,972
<PP&E> 9,963
<DEPRECIATION> 5,594
<TOTAL-ASSETS> 29,642
<CURRENT-LIABILITIES> 19,224
<BONDS> 0
0
0
<COMMON> 1,313
<OTHER-SE> 1,576
<TOTAL-LIABILITY-AND-EQUITY> 29,642
<SALES> 45,163
<TOTAL-REVENUES> 66,558
<CGS> 39,387
<TOTAL-COSTS> 67,707
<OTHER-EXPENSES> 11,346
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,293
<INCOME-PRETAX> (13,787)
<INCOME-TAX> (5,198)
<INCOME-CONTINUING> (8,589)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,589)
<EPS-BASIC> (1.65)
<EPS-DILUTED> (1.65)
</TABLE>
