-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HIqok6h41QHVkDI95V7ICNYwr8C0WlETBUGamOR2Q9jWVncov0EC1MoB7esNoBbq dB8U0k1AIe6b5Ahl8CL+pA== 0000897101-98-000287.txt : 19980319 0000897101-98-000287.hdr.sgml : 19980319 ACCESSION NUMBER: 0000897101-98-000287 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971227 FILED AS OF DATE: 19980318 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GROW BIZ INTERNATIONAL INC CENTRAL INDEX KEY: 0000908315 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS RETAIL [5900] IRS NUMBER: 411622691 STATE OF INCORPORATION: MN FISCAL YEAR END: 1226 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22012 FILM NUMBER: 98568077 BUSINESS ADDRESS: STREET 1: 4200 DAHLBERG DR CITY: GOLDEN VALLEY STATE: MN ZIP: 55422-4837 BUSINESS PHONE: 6125208500 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997 COMMISSION FILE NUMBER: 0-22012 -------------------- GROW BIZ INTERNATIONAL, INC. (Exact name of Registrant as specified in its charter.) MINNESOTA 41-1622691 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 4200 Dahlberg Drive, Minneapolis, MN 55422-4837 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (612) 520-8500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Registrant's Common Stock on January 31, 1998, as reported on the NASDAQ National Market System, was $27.8 million. Shares of no par value Common Stock outstanding as of January 31, 1998: 5,951,134 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Registrant's Annual Meeting of Shareholders to be held on May 6, 1998 have been incorporated by reference into Part III of this report. 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 6 Business Strategy 6 Franchise Operations 7 Franchise Marketing 8 Franchise Agreement 9 International Franchise Expansion 10 Competition 10 Government Regulations 10 Trademarks and Service Marks 11 Seasonality 11 Employees 11 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 4a. Executive Officers of the Registrant 12 PART II PAGE - -------------------------------------------------------------------------------- Item 5. Market for the Registrant's Common Equity and Related 14 Shareholder Matters Item 6. Selected Consolidated Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition 21 and Results of Operations Item 8. Financial Statements and Supplementary Data 24 Item 9. Changes in and Disagreements with Accountants on Accounting 38 and Financial Disclosure PART III PAGE - -------------------------------------------------------------------------------- Item 10. Directors and Executive Officers of the Registrants 38 Item 11. Executive Compensation 38 Item 12. Security Ownership of Certain Beneficial Owners and 38 Management Item 13. Certain Relationships and Related Transactions 38 PART IV PAGE - -------------------------------------------------------------------------------- Item 14. Exhibits and Reports on Form 8-K 39 SIGNATURES 41 Exhibit 10.6 It's About Games(TM) Franchise Agreement Exhibit 10.16 Amendment No. 3 to the 1992 Stock Option Plan Exhibit 11.1 Statement of Computation of Per Share Earnings Exhibit 21.1 Subsidiaries Exhibit 23.1 Consent of Independent Public Accountants Exhibit 27.1 Financial Data Schedule Exhibit 99.1 Cautionary Statements for Purposes of the "Safe Harbor" Provision of the Private Securities Litigation Reform Act ITEM 1: BUSINESS GENERAL Grow Biz International, Inc., (the Company) is a franchise company that franchises six retail concepts which buy, sell, trade and consign merchandise. Each concept operates in a different industry and provides the consumer with 'ultra-high value' retailing. The Company began franchising the Play It Again Sports store concept in 1988 and, through a series of acquisitions, has expanded its operations. * In January 1992, the Company purchased certain assets and the operations of Sports Traders, Inc., a wholesaler to Play It Again Sports retail stores, for aggregate consideration of $1.9 million. Prior to this acquisition, Sports Traders, Inc. operated as an independent wholesaler and priced its merchandise at margins reflective of an independent wholesaler. Subsequent to this acquisition, the Company restructured the operations into a centralized buying group with the goal of creating a cost-effective inventory purchasing service to support the Company's franchise system. The buying group negotiates favorable discount terms with vendors and charges the franchisee a service fee, currently set at 4%. The service fee on merchandise purchased through the buying group is used to cover the cost of operating the buying group. * In November 1992, the Company purchased from Once Upon A Child, Inc. its franchising and royalty rights for an aggregate purchase price of $325,000. There were 22 retail stores in operation at the time of purchase, 11 of which have been exempted from paying royalty fees as part of the purchase agreement. The Company began franchising this concept in 1993. * In February 1993, the Company purchased certain assets of the retail operations of Hi Tech Consignments, which formed the basis of the Company's Music Go Round(R) store concept, for an aggregate purchase price of $500,000. The Company began franchising this concept in 1994. * In April 1993, the Company purchased the retail and warehouse operations and the franchising and royalty rights of Computer Renaissance, Inc. for an aggregate purchase price of $672,000. The Company began franchising this concept in 1993. * In July 1994, the Company acquired certain assets and the franchising and royalty rights of CDX Audio Development, Inc., which formed the basis for the Company's Disc Go Round(R) store concept, for an aggregate purchase price of $2,358,000. At the time of acquisition, there were 43 stores in operation under the name 'CD Exchange'. The Company changed the name and began franchising this concept in 1994. * In August 1997, Grow Biz Games, Inc., a wholly-owned subsidiary of Grow Biz International, Inc., acquired certain assets and franchising rights of Video Game Exchange, Inc. ("VGE") of Cleveland, Ohio for total consideration of $6,579,700. VGE is a forty store retail operation with stores in Ohio, Pennsylvania, Kentucky, Georgia and Maryland and has become the nucleus of the It's About Games(TM) concept. The Company began franchising this concept in 1997. Each of the Company's retail store concepts emphasize consumer value by offering quality used merchandise at substantial savings from the price of new merchandise and by purchasing customers' used goods that have been outgrown or are no longer used. The stores also offer new merchandise to supplement their selection of used goods. The Company's six store concepts with their 1997 system-wide sales, defined as revenues from all affiliated stores, are summarized as follows: PLAY IT AGAIN SPORTS(R) - $284 million Play It Again Sports(R) stores sell, buy, trade and consign used and new sporting goods, equipment and accessories for a variety of athletic activities including hockey, in-line skating, golf and tennis. The stores offer a flexible mix of merchandise that is adjusted to adapt to seasonal and regional differences. Sales of used sporting goods are emphasized to provide the highest value to the customer. New merchandise is offered to supplement available used goods. ONCE UPON A CHILD(R) - $61 million Once Upon A Child(R) stores sell and buy used and new children's clothing, toys, furniture and accessories. The Once Upon A Child(R) store concept primarily targets cost-conscious parents of children ages infant to twelve years with emphasis on children ages seven years and under. These customers have the opportunity to sell their used children's items to a Once Upon A Child(R) store when outgrown and to purchase quality used children's clothing, toys, furniture and accessories at prices lower than new merchandise. COMPUTER RENAISSANCE(R) - $115 million Computer Renaissance(R) stores sell, buy, trade, consign and service used and new personal computers, printers and other computer equipment and related accessories. Customers of Computer Renaissance(R) are primarily individuals in the market for home computer equipment and small businesses. These same customers have the opportunity to sell their used computer equipment back to a Computer Renaissance(R) store when they are ready to upgrade their equipment. MUSIC GO ROUND(R) - $16 million Music Go Round(R) stores sell, buy, trade and consign used and new musical instruments, speakers, amplifiers, music-related electronics and related accessories for parents of children who play musical instruments and professional and amateur musicians. DISC GO ROUND(R) - $27 million Disc Go Round(R) stores sell and buy both used and new compact discs and related accessories. The concept primarily targets consumers who actively trade and collect compact discs. Most stores carry a variety of titles that appeal to all ages and musical tastes. IT'S ABOUT GAMES(TM) - $8 million It's About Games(TM) stores sell and buy both used and new video games, comics, trading cards and accessories. The stores also offer game rental programs to customers as well as several interactive stations that allow customers to play the games prior to making a purchase. Following is a summary of the Company's franchising and corporate store activity for the fiscal year ended December 27, 1997:
-------------------------------------------------------------------------------------- STORES TOTAL OPENED/ TOTAL AWARDED, 12/28/96 PURCHASED CLOSED CONVERTED 12/27/97 NOT OPEN TOTAL -------------------------------------------------------------------------------------- Play It Again Sports(R) Franchised Stores - US and Canada 676 43 (63) (2) 654 62 716 Franchised Stores - Other International 8 0 (0) 0 8 0 8 Corporate - Owned 4 0 (1) 2 5 0 5 Other 22 0 (0) 0 22 0 22 Once Upon A Child(R) Franchised Stores - US and Canada 182 26 (6) 2 204 39 243 Corporate - Owned 6 0 (0) (2) 4 0 4 Computer Renaissance(R) Franchised Stores - US and Canada 108 76 (1) (3) 180 82 262 Corporate - Owned 4 0 (0) 3 7 0 7 Music Go Round(R) Franchised Stores - US and Canada 20 18 (0) 0 38 14 52 Corporate - Owned 4 0 (0) 0 4 0 4 Disc Go Round(R) Franchised Stores - US and Canada 114 31 (12) (1) 132 41 173 Corporate - Owned 2 0 (0) 1 3 0 3 It's About Games(TM) Franchised Stores - US and Canada 0 0 (0) 0 0 2 2 Corporate - Owned 0 42 (0) 0 42 0 42 -------------------------------------------------------------------------------------- Total 1,150 236 (83) 0 1,303 240 1,543 ======================================================================================
FRANCHISING OVERVIEW Franchising is a method of distributing goods and services. The franchisor typically develops a business concept and an operating system for the franchised business. Franchisees are granted rights to use the franchisor's service marks and must operate their businesses in accordance with the systems, specifications, standards and formats developed by the franchisor. Virtually all types of retail businesses are currently franchised, including clothing, computers and electronics, sporting goods and various specialty retail businesses. BUSINESS STRATEGY The Company's business strategy is to develop value-oriented retail concepts based on a mix of used and new merchandise and to implement these concepts through a nationwide franchise system that provides comprehensive support services to its franchisees. The key elements of this strategy include: VALUE-ORIENTED MERCHANDISING The Company's retail concepts provide value to consumers by purchasing and reselling used merchandise that consumers have outgrown or no longer use at substantial savings from the price of new merchandise. By offering a combination of high quality used and value-priced new merchandise, the Company benefits from consumer demand for value-oriented retailing. In addition, the Company believes that among national retail operations its retail store concepts provide a unique source of value to consumers by purchasing used merchandise. The Company also believes that the strategy of buying used merchandise increases consumer awareness of the Company's retail concepts. FRANCHISE SUPPORT The Company recognizes that its success depends on the economic success of its franchisees. Accordingly, the Company provides a comprehensive package of support services and assistance to franchisees, including advertising and marketing programs, point-of-sale computerized information systems, management training, store opening assistance and periodic field support visits. A central element of this support system is television advertising designed to build consumer awareness of the Company's used product concepts. ACTIVE OWNER INVOLVEMENT In the Company's experience, its retail concepts are most successful when the owner of the franchise is integrally involved in the management of a store. As a result, the Company generally grants franchises to someone who will directly operate their store. FRANCHISE OPERATIONS As a franchisor, the Company's success depends upon its ability to develop and support competitive and successful franchise concepts. The Company emphasizes the following areas of franchise support and assistance: TRAINING Each franchisee must attend the Company's training program regardless of prior experience. The training program is a multi-visit program. Soon after signing a franchise agreement, the franchisee is required to attend a new owner orientation training. This course covers basic management issues, such as preparing a business plan, evaluating insurance needs and obtaining financing. The Company's training staff assists each franchise in developing a business plan for their store with financial and cash flow projections. Subsequent training sessions are centered on store operations. They cover, among other things, point-of-sale computer training, inventory selection and acquisition, sales, marketing and other topics selected by the Company. The franchisee is provided with an operations manual that is updated periodically by the Company. FIELD SUPPORT The Company provides, at a minimum, one operations person to assist the franchisee on the day before and the day of opening of the franchisee's store. It also has an ongoing field support program designed to assist franchisees in operating their stores. Personnel from the Company visit each store periodically, and, in most cases, a business appraisal is made to determine whether the franchisee is operating in accordance with the Company's standards. The visit is also designed to assist franchisees with operational issues. PURCHASING During training, each franchisee is taught how to evaluate, purchase and price used goods. In addition to purchasing used products from customers who bring used merchandise to the store, the franchisee is also encouraged to develop sources for purchasing used merchandise in the community. Play It Again Sports(R), Once Upon A Child(R), Music Go Round(R) and Disc Go Round(R) franchisees typically do not repair or recondition used products, but rather, purchase quality used merchandise that may be put directly on display for resale on an 'AS IS' basis. Computer Renaissance(R) franchisees offer repair and technical services. The Company has developed specialized computer point-of-sale systems for Once Upon A Child(R) stores that provide the franchisee with standardized pricing information to assist in the purchasing of used items. The Company provides centralized buying services including credit and billing for the Play It Again Sports(R) franchisees. Upon credit approval, the Play It Again Sports(R) franchisees may order through the buying group, in which case, product is drop-shipped directly to the store by the vendor. The Company is then invoiced by the vendor and, in turn, the Company invoices the franchisee adding a 4% service fee. To provide the remaining five concept's franchisees a source of affordable new product, the Company has developed relationships with its core vendors and negotiated prices for our franchisees to take advantage of on a direct basis. RETAIL ADVERTISING AND MARKETING The Company requires its franchisees to implement a marketing program that uses television as a major, but not sole, medium to advertise both the buying and selling aspects of the Company's retail concepts. Advertising materials, in-store posters and pre-recorded 10, 15 and 30-second television commercials are provided by the Company to franchisees. Franchisees of the respective concepts required to spend the following percentage of their gross sales on approved advertising and marketing: Play It Again Sports(R) - 5%, Once Upon A Child(R) - 5%, Computer Renaissance(R) - 3%, Music Go Round(R) - 3%, Disc Go Round(R) - 5% and It's About Games(TM) - 4%. In addition to these required advertising expenditures, all franchisees are required to pay the Company an annual advertising production fee of $500. Franchisees are required to participate in regional cooperative advertising groups as designated by the Company. Beginning in 1998, Computer Renaissance(R) franchisees are required to pay the Company 1/2% of their gross sales to fund a National Advertising Campaign in lieu of the $500 annual advertising production fee. COMPUTERIZED POINT-OF-SALE SYSTEMS The Company requires franchisees to use a retail information management computer system in each store. Stores which were opened prior to April 1992 were not required to install the system. This computerized point-of-sale system is designed specifically for use in the retail stores franchised by the Company. This system includes a cash register, bar code printer and scanner, together with software modules for inventory management, cash management and customer information management. The system is designed to accommodate buying and consigning of used merchandise. The Company believes that this system provides franchisees with an important management tool that reduces errors, increases efficiencies and enhances inventory control. The Company provides the software, while the hardware is provided by a third-party vendor located on the Company's premises. OTHER SUPPORT SERVICES The Company assists each new franchisee in site location. A third party vendor provides design layouts and opening materials including pricing materials, stationery, signage, fixtures, slatwall and carpeting. Additional communication with franchisees is made through weekly news updates, broadcast faxes and semi-annual conferences, which include trade shows. FRANCHISE MARKETING The Company has a franchise marketing program which seeks to attract prospective franchisees with experience in management and operations and an interest in being the owner and operator of their own business. The Company seeks franchisees who are college educated, who have a net worth of at least $300,000 and who have prior business experience. DEVELOPMENT / FUTURE EXPANSION The Company collects franchise fees when franchise agreements are consummated and recognizes the franchise fees as revenue when substantially all initial franchise services have been performed. Deferred franchise fee revenue was $4,269,000 and $3,588,000 representing fees relating to 290 and 240 stores sold but not open at December 28, 1996 and December 27, 1997, respectively. The majority of this backlog represents stores to be opened in the future under multiple store development agreements. THE FRANCHISE AGREEMENT The following summaries of certain provisions of the Company's current standard franchise agreement do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the franchise agreement. A copy of the current agreement has been filed as an exhibit to this Form 10-K. Except as noted, the franchise agreements used for each of the Company's business concepts are the same. Each franchisee must execute the Company's franchise agreement and pay an initial franchise fee. At December 27, 1997, the franchise fee for Play It Again Sports(R) and Computer Renaissance(R) was $25,000 for an initial store and $20,000 for each subsequent store awarded to the same franchisee within the same concept. At December 27, 1997, the franchise fee for Once Upon A Child(R), Music Go Round(R), Disc Go Round(R) and It's About Games(TM) was $20,000 for an initial store and $15,000 for each subsequent store awarded to the same franchisee within the same concept. Typically, the franchisee's initial store is open for business within 150 to 210 days from the date the franchise agreement is signed. Multiple franchise holders are generally required to open only one store per year. The franchise agreement has an initial term of 10 years, with subsequent 10-year renewal periods, and grants the franchisee an exclusive geographic area which will vary in size depending upon population and demographics. A renewal fee equal to $5,000 is payable to the Company 30 days prior to any franchise renewal. Under current franchise agreements, franchisees of the respective concepts are required to pay the Company weekly royalties equal to the following percentage of gross sales: Play It Again Sports(R) - 5%, Once Upon A Child(R) - 5%, Computer Renaissance(R) - 3%, Music Go Round(R) - 3%, Disc Go Round(R) - 5% and It's About Games(TM) - 4%. Play It Again Sports(R) franchise agreements signed prior to April 1, 1992 require payment of a 3% royalty. Each franchisee is required to pay the Company an annual marketing fee of $500. Beginning in 1998, Computer Renaissance(R) franchisees are required to pay the Company 1/2% of their gross sales to fund a National Advertising Fund in lieu of the $500 annual marketing fee. Each Play It Again Sports(R) and Once Upon A Child(R) franchisee is required to spend 5%, each Disc Go Round(R) and It's About Games(R) franchisee is required to spend 4% of its gross sales for advertising and promoting its franchised store. The Company has the option to increase the minimum advertising expenditure requirement for these franchises to 6% of the franchisee's gross sales, of which up to 2%, would be paid to the Company as an advertising fee for deposit in an advertising fund. This fund would be managed by the Company and would be used for advertising and promotion of the franchise system. The Company expects to initiate this advertising fund when it determines that the respective franchise system warrants such an advertising and promotion program. Computer Renaissance(R) and Music Go Round(R) franchisees are required to spend at least 3% of gross sales for approved advertising. The Company has the option to increase the minimum advertising expenditure requirement for these franchises to 4% of the franchisee's gross sales, of which up to one-third, or 1 1/2%, would be paid to the Company as an advertising fee for deposit into an advertising fund. Although the Company's franchise agreements contain provisions designed to assure the quality of a franchisee's operations, the Company has less control over a franchisee's operations than it would if it owned and operated the store. Under the franchise agreement, the Company has a right of first refusal on the sale of any franchised store, but is not obligated to repurchase any franchise. INTERNATIONAL FRANCHISE EXPANSION The Company began franchising the Play It Again Sports(R) concept internationally in 1991 and as of December 27, 1997, had 97 franchised stores open in Canada, eight in Germany and one in Australia. The Canadian stores are operated by franchisees under agreements substantially similar to those used for franchisees in the United States. During 1995, the Company also entered into a Master Franchise Agreement for development of the Play It Again Sports(R) concept in certain portions of Australia. Under this Master Franchise Agreement, the Company has granted to a master franchisee the right to subfranchise to others who will directly operate Play It Again Sports(R) stores. COMPETITION Retailing, including the sale of sporting goods, children's apparel, computer equipment, musical instruments, compact discs and video games, is highly competitive. Many retailers have substantially greater financial and other resources than the Company. The Company's franchisees compete with established locally owned retail stores, discount chains and traditional retail stores for sales of new merchandise. Full line retailers generally carry little or no used merchandise and do not target the same markets as the Company's franchised stores. Resale, thrift and consignment shops and garage and rummage sales offer some competition to the Company's franchisees for the sale of used merchandise. The Company is aware of, and competes with, one franchisor of stores which sell new and used sporting equipment, one franchisor of stores which sell used and new children's clothing, toys and accessories, one franchisor of stores which sell used and new compact discs and three franchisors of stores which sell used and new video games. The Company and its franchisees may face additional competition as its franchise systems expand, and from additional competitors that may enter the used merchandise market. The Company believes that its franchisees will continue to be able to compete favorably with other retailers based on the strength of the Company's value oriented concepts, the name recognition associated with the Company's service marks and the national recognition gained by the Company's franchise concepts. The Company also faces competition in connection with the sale of franchises. Prospective franchisees of the Company frequently evaluate other franchise opportunities before purchasing a franchise from the Company. The Company believes that its franchise concepts compete favorably with other franchises based on the fees charged by the Company, the Company's franchise support services and the performance of its existing franchise concepts. GOVERNMENT REGULATION Fifteen states and the Federal Trade Commission impose pre-sale franchise registration and/or disclosure requirements on franchisors. In addition, a number of states have statutes which regulate substantive aspects of the franchisor-franchisee relationship such as termination, nonrenewal, transfer, discrimination among franchisees and competition with franchisees. Additional legislation, both at the federal and state levels, could expand pre-sale disclosure requirements, further regulate substantive aspects of the franchise relationship, and require the Company to file its franchise offering circulars with additional states. The Company cannot predict the effect of future franchise legislation, but does not believe there is any legislation currently under consideration which would have a material adverse impact on its operations. TRADEMARKS AND SERVICE MARKS Grow Biz(R), Play It Again Sports(R), Once Upon A Child(R), Computer Renaissance(R), Music Go Round(R), Disc Go Round(R), VGE Video Game Exchange(R) and It's About Games(TM), among others, have been registered as service marks by the Company with the United States Patent and Trademark Office (the "USPTO"). The Company believes these marks are of considerable value to its business and important to its marketing efforts. The Company intends to protect its service marks by appropriate legal action where and when necessary. SEASONALITY The Company's Play It Again Sports(R), Once Upon A Child(R) and It's About Games(TM) franchise concepts have experienced higher than average sales volume during the spring months and during the back to school and holiday shopping seasons. This trend, along with the related impact of Company-operated retail stores revenue, results in higher than average royalty and merchandise revenue during the second, third and fourth quarter for the Company. EMPLOYEES As of December 27, 1997, the Company employed 269 full-time employees, of which 14 are franchise salespersons, 68 are franchise support personnel, 38 are administrative and 149 are retail sales staff. The Company also employs 243 part-time employees at its retail stores. ITEM 2: PROPERTIES The Company owns its headquarters facility in Golden Valley, Minnesota and rents a distribution warehouse in Cleveland, Ohio. The Company believes that its facilities are sufficient to meet its current needs and for the near future The Company leases space for its 65 retail stores, typically for a fixed monthly rental and operating costs. Thirty-two leases are due to expire in 1998, seventeen in 1999, five in 2000, three in 2001 and eight in 2002. ITEM 3: LEGAL PROCEEDINGS James D. Van Buskirk and Aravan, Inc. v. Grow Biz International, Inc. (United States District Court, District of Minnesota, commenced December 21, 1995). The case primarily concerns the interpretation and application of a Retail Store Agreement entered into by the Company and the plaintiff, James D. Van Buskirk, in January 1992. By their Complaint, plaintiffs assert claims against the Company for beach of contract, fraud and misrepresentation, interference with relationships and violation of federal anti-racketeering statutes. Plaintiffs seek damages in an amount of approximately $5.7 million which the plaintiffs seek to be trebled and seek approximately $2.0 million on separate claims in addition to injunctive and declaratory relief. Grow Biz has denied each of plaintiffs' claims and has filed counterclaim for breach of contract and other claims resulting from plaintiffs' conduct under the 1992 Agreement. In January 1998, the Company was involved in discussions to purchase certain rights from plaintiffs and settle all claims. Grow Biz believes these discussions did not lead to a final or complete agreement. However, the court ruling on a motion on February 26, 1998, entered an order finding that a settlement agreement had been reached by the parties. Under the order, the Company is required to pay plaintiffs $2.0 million to purchase certain development rights. The order further directs that all claims be dismissed. Grow Biz plans to appeal certain of the district court's rulings. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1997. ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers of the Company, who are elected by and serve at the discretion of the Company's Board of Directors, are as follows: NAME AGE POSITION - ---- --- -------- K. Jeffrey Dahlberg 44 Chairman of the Board Ronald G. Olson 57 President, Chief Executive Officer and Director Ted R. Manley 48 Executive Vice President of Operations David J. Osdoba, Jr. 42 Vice President of Finance and Chief Financial Officer Gaylen L. Knack 38 Vice President and General Counsel Charles V. Kanan 46 President / Play It Again Sports(R) Michael E. Flynn 49 President / Computer Renaissance(R) William L. Shell II 41 President / Music Go Round(R) Brad D. Tait 48 President / Disc Go Round(R)and President / It's About Games(TM) --------------- K. JEFFREY DAHLBERG has served as Chairman of the Board of Directors of the Company since January 1990. Mr. Dahlberg served as President and Chief Executive Officer of Dahlberg, Inc., a publicly-held manufacturer and distributor of hearing aids and franchisor of hearing aid retail stores, from June 1988 to December 1992 and as a director of Dahlberg, Inc. until July 1993. He has served as Chairman of the Board of Franchise Business Systems, Inc., a franchise consulting firm, since July 1988. RONALD G. OLSON has served as President, Chief Executive Officer and a Director of the Company since January 1990. Mr. Olson has been President and Chief Executive Officer of Franchise Business Systems, Inc. since July 1988. TED R. MANLEY has served as Executive Vice President of Operations since September 1997. He served as President of Once Upon A Child(R) since December 1996 and General Manager since July 1994. Mr. Manley was Senior Vice President of Braun's Fashions Corporation, a women's retail clothing store chain, from November 1989 to June 1994. DAVID J. OSDOBA, JR. has served as Vice President of Finance and Chief Financial Officer of the Company since August 1996. From August 1993 through August 1996, Mr. Osdoba served as Corporate Controller of the Company. Mr. Osdoba was an independent financial and business consultant from January 1991 through July 1993. He was Chief Financial Officer for Harold Corporation, a Minneapolis based women's specialty retailer, from September 1987 to December 1990. GAYLEN L. KNACK has served as Vice President and General Counsel of the Company since August 1996. From April 1991 through July 1996, Mr. Knack was a Principal in the Minneapolis law firm of Gray, Plant, Mooty, Mooty and Bennett, P.A. CHARLES V. KANAN has served as President of Play It Again Sports(R) since January 1994. From December 1990 to December 1991 Mr. Kanan served as Vice President of Marketing, and from January 1992 to December 1993, he served as Executive Vice President, of Dahlberg, Inc. MICHAEL E. FLYNN has served as President of Computer Renaissance(R) since December 1996 and General Manager since March 1995. Mr. Flynn was a divisional merchandise manager of electronics and luggage for the department store division of Dayton Hudson Corporation from August 1986 to March 1995. WILLIAM L. SHELL II has served as President of Music Go Round(R) since December 1996 and General Manager since March 1996. From February 1993 to March 1996, Mr. Shell served as a member of the Company's management team focused on the development of the Computer Renaissance(R) and Music Go Round(R) concepts as well as Corporate-owned retail stores. Mr. Shell was the company founder of Hi-Tech Consignments, the predecessor of Music Go Round(R) and served as its President from November 1986 until February 1993. BRADLEY D. TAIT has served as President of It's About Games(TM) since August 1997 while also serving as the President of Disc Go Round(R). He has served as President of Disc Go Round(R) since December 1996 and General Manager since March 1996. From February 1995 through February 1996, Mr. Tait was divisional Vice President of Merchandising for the mall store division of the Musicland Stores Corporation and Vice President of stores operations from January 1993 through January 1995. The term of office of each executive officer is from one annual meeting of directors until the next annual meeting of directors or until a successor for each is elected. There are no arrangements or understandings among any of the executive officers of the Registrant and any other person (not an officer or director of the Registrant acting as such) pursuant to which any of the executive officers were selected as an officer of the Registrant. PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The stock is traded on the NASDAQ National Market System under the symbol GBIZ. The table below sets forth the high and low bid prices of the Company's common stock as reported by NASDAQ for the periods indicated:
1997: First Second Third Fourth 1996: First Second Third Fourth - -------------------------------------------------- --------------------------------------------------- HIGH 12 3/4 11 1/8 17 1/4 16 1/4 HIGH 11 1/4 8 1/8 9 3/4 10 1/2 LOW 8 3/4 10 1/2 10 7/16 11 7/8 LOW 7 5/8 7 32/35 6 27/32 8 3/4
At March 9, 1998, there were 5,945,841 shares of common stock outstanding held by 1,719 beneficial shareholders and 264 shareholders of record. The Company has not paid any cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. There were no unregistered sales of the Company's common stock in fiscal year ended 1997. ITEM 6: SELECTED FINANCIAL DATA. The following table sets forth selected financial information for the periods indicated. The information should be read in conjunction with the financial statements and related notes discussed in Item 14, and Management's Discussion and Analysis of Financial Condition and Results of Operations discussed in Item 7.
Fiscal Year Ended(1) ------------------------------------------------------------------- December December December December December 25, 1993 31, 1994 30, 1995 28, 1996 27, 1997 ------------------------------------------------------------------- REVENUE: (in thousands, except per store data) Merchandise sales $ 45,028 $ 71,425 $ 84,043 $ 71,737 $ 66,889 Royalties 3,689 7,645 11,560 14,965 17,329 Franchise fees 2,733 3,963 3,889 4,162 3,907 Advertising and other 353 553 721 686 710 --------- --------- --------- --------- --------- Total revenue 51,803 83,586 100,213 91,550 88,835 Cost of merchandise sold 41,695 65,479 76,192 63,856 56,634 Selling, general and administrative expenses 9,331 15,889 20,980 23,636 24,990 --------- --------- --------- --------- --------- Income from operations 777 2,218 3,041 4,058 7,211 Litigation settlement -- -- -- -- (2,000) Interest income (expense), net (8) 478 296 195 103 Equity in net loss of unconsolidated affiliates (160) (416) -- -- -- --------- --------- --------- --------- --------- Income before income taxes 609 2,280 3,337 4,253 5,314 Provision for income taxes 265 900 1,308 1,667 2,083 --------- --------- --------- --------- --------- Net income $ 344 $ 1,380 $ 2,029 $ 2,586 $ 3,231 ========= ========= ========= ========= ========= Net income per common share - diluted $ .06 $ .19 $ .28 $ .40 $ .52 ========= ========= ========= ========= ========= Weighted average shares outstanding(4) 6,072 7,440 7,351 6,516 6,274 ========= ========= ========= ========= ========= BALANCE SHEET DATA: Working capital $ 16,915 $ 12,441 $ 11,068 $ 8,516 $ 9,141 Total assets 31,784 39,564 34,024 29,177 37,755 Total debt 1,728 615 415 264 6,330 Shareholders' equity 19,848 21,685 21,192 17,698 17,451 SELECTED FINANCIAL RATIOS Return on average assets 1.7% 3.9% 5.5% 8.2% 9.7% Return on average equity 3.3% 6.6% 9.5% 13.3% 18.4%
ITEM 6: SELECTED FINANCIAL DATA (continued):
Pro Forma Fiscal Year Ended ------------------------------------------------------- December December December December 31, 1994 30, 1995 28, 1996 27, 1997 ------------------------------------------------------- REVENUE: (2) (3) (3) (3) Merchandise sales $ 71,914 $ 97,430 $ 85,944 $ 75,284 Royalties 7,805 11,561 14,965 17,329 Franchise fees 4,015 3,888 4,162 3,907 Advertising and other 603 721 686 710 ---------- ---------- ---------- ---------- Total revenue 84,337 113,600 105,757 97,230 Cost of merchandise sold 65,959 84,905 72,874 61,797 Selling, general and administrative expenses 16,430 26,523 27,869 27,577 ---------- ---------- ---------- ---------- Income from operations 1,948 2,172 5,014 7,856 Litigation settlement -- -- -- (2,000) Interest expense -- (550) (557) (206) Interest income 437 345 252 103 Equity in net loss of unconsolidated affiliates (416) -- -- -- ---------- ---------- ---------- ---------- Income before income taxes 1,969 1,967 4,709 5,753 Provision for income taxes 778 771 1,846 2,255 ---------- ---------- ---------- ---------- Net income $ 1,191 $ 1,196 $ 2,863 $ 3,498 ========== ========== ========== ========== Net income per common share - diluted $ .16 $ .16 $ .44 $ .56 ========== ========== ========== ========== Weighted average shares outstanding - diluted (4) 7,440 7,351 6,516 6,274 ========== ========== ========== ==========
(1) The Company's fiscal year ends on the last Saturday in December, which results in a 52 or 53-week year. Fiscal 1994 was 53 weeks. Fiscal 1995 and 1996 were 52 weeks. (2) The Company acquired certain assets of CDX Audio Development, Inc. (CDX) on July 1, 1994. The pro forma information is presented as if the acquisitions occurred on December 26, 1993. (3) The Company acquired certain assets of Video Game Exchange, Inc. (VGE ) on August 15, 1997. The pro forma information is presented as if the acquisition occurred on December 31, 1994. (4) See Note 2 of Notes to the Company's Financial Statements for an explanation of the determination of weighted average shares outstanding. GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY Unaudited Pro Forma Condensed Statement of Operations (in thousands, except per share amounts)
For the Fiscal Year-Ended December 31,1994 -------------------------------------------------- CDX Adjustments Grow Biz (Note a) (Note b) Pro Forma -------------------------------------------------- REVENUE: Merchandise sales $ 71,425 $ 489 $ -- $ 71,914 Royalties 7,645 160 -- 7,805 Franchise fees 3,963 52 -- 4,015 Advertising and other 553 50 -- 603 -------- -------- -------- -------- Total revenue 83,586 751 -- 84,337 COST OF MERCHANDISE SOLD 65,479 480 -- 65,959 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 15,889 371 170(1) 16,430 -------- -------- -------- -------- Income loss from operations 2,218 (100) (170) 1,948 INTEREST EXPENSE AND OTHER, net 62 -- (41)(2) 21 -------- -------- -------- -------- Income loss before income taxes 2,280 (100) (211) 1,969 PROVISION FOR INCOME TAXES 900 (40) (82)(3) 778 -------- -------- -------- -------- NET INCOME $ 1,380 $ (60) $ (129) $ 1,191 ======== ======== ======== ======== NET INCOME PER COMMON SHARE - DILUTED $ .19 $ .16 ======== ======== SHARES USED IN PER COMMON SHARE COMPUTATION 7,440 7,440 ======== ========
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY Unaudited Pro Forma Condensed Statement of Operations (in thousands, except per share amounts)
For the Fiscal Year-Ended December 30, 1995 ------------------------------------------------------ Adjustments Grow Biz VGE (Note c) Pro Forma ------------------------------------------------------ REVENUE: Merchandise sales $ 84,043 $ 13,387 $ -- $ 97,430 Royalties 11,561 -- -- 11,561 Franchise fees 3,888 -- -- 3,888 Advertising and other 721 -- -- 721 --------- --------- --------- --------- Total revenue 100,213 13,387 -- 113,600 COST OF MERCHANDISE SOLD 76,192 8,713 -- 84,905 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 20,980 5,401 174 (1) 26,523 25 (2) (57)(3) --------- --------- --------- --------- Income (loss) from operations 3,041 (727) (142) 2,172 INTEREST EXPENSE (50) (24) 24 (4) (550) (500)(5) INTEREST INCOME 345 -- -- 345 OTHER INCOME -- 641 (641) -- --------- --------- --------- --------- Income before income taxes 3,336 (110) (1,259) 1,967 PROVISION FOR INCOME TAXES 1,308 -- (537)(6) 771 --------- --------- --------- --------- NET INCOME $ 2,028 $ (110) $ (722) $ 1,196 ========= ========= ========= ========= NET INCOME PER COMMON SHARE - DILUTED $ .28 $ .16 ========= ========= SHARES USED IN PER COMMON SHARE COMPUTATION 7,351 7,351 ========= =========
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY Unaudited Pro Forma Condensed Statement of Operations (in thousands, except per share amounts)
For the Fiscal Year-Ended December 28, 1996 ------------------------------------------------------ Adjustments Grow Biz VGE (Note c) Pro Forma ------------------------------------------------------ REVENUE: Merchandise sales $ 71,737 $ 14,207 $ -- $ 85,944 Royalties 14,965 -- -- 14,965 Franchise fees 4,162 -- -- 4,162 Advertising and other 686 -- -- 686 --------- --------- --------- --------- Total revenue 91,550 14,207 -- 105,757 COST OF MERCHANDISE SOLD 63,856 9,019 -- 72,875 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 23,636 4,090 174 (1) 27,868 25 (2) (57)(3) --------- --------- --------- --------- Income from operations 4,058 1,098 (142) 5,014 INTEREST EXPENSE (57) (372) 372 (4) (557) (500)(5) INTEREST INCOME 252 41 (41)(4) 252 --------- --------- --------- --------- Income before income taxes 4,253 767 (311) 4,709 PROVISION FOR INCOME TAXES 1,667 -- (179)(6) 1,846 --------- --------- --------- --------- NET INCOME $ 2,586 $ 767 $ (490) $ 2,863 ========= ========= ========= ========= NET INCOME PER COMMON SHARE - DILUTED $ .40 $ .44 ========= ========= SHARES USED IN PER COMMON SHARE COMPUTATION 6,516 6,516 ========= =========
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY Unaudited Pro Forma Condensed Statement of Operations (in thousands, except per share amounts)
For the Fiscal Year-Ended December 27, 1997 ----------------------------------------------------- Adjustments Grow Biz VGE (Note c) Pro Forma ----------------------------------------------------- REVENUE: Merchandise sales $ 66,889 $ 8,395 $ -- $ 75,284 Royalties 17,329 -- -- 17,329 Franchise fees 3,907 -- -- 3,907 Advertising and other 710 -- -- 710 -------- -------- -------- -------- Total revenue 88,835 8,395 -- 97,230 COST OF MERCHANDISE SOLD 56,634 5,163 -- 61,797 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 24,990 2,498 109 (1) 27,577 16 (2) (36)(3) -------- -------- -------- -------- Income from operations 7,211 734 (89) 7,856 LITIGATION SETTLEMENT (2,000) -- -- (2,000) INTEREST EXPENSE -- (298) 298 (4) -- -- -- (206)(5) (206) INTEREST INCOME 103 37 (37)(4) 103 -------- -------- -------- -------- Income before income taxes 5,314 473 (34) 5,753 PROVISION FOR INCOME TAXES 2,083 -- 172 (6) 2,255 -------- -------- -------- -------- NET INCOME $ 3,231 $ 473 $ (206) $ 3,498 ======== ======== ======== ======== NET INCOME PER COMMON SHARE - DILUTED $ .52 $ .56 ======== ======== SHARES USED IN PER COMMON SHARE COMPUTATION 6,274 6,274 ======== ========
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY Notes to Unaudited Pro Forma Condensed Statement of Operations For the Fiscal Years Ended December 31, 1994, December 30, 1995, December 28, 1996 and December 27, 1997 (a) Operations are for the period January 1, 1994 through the acquisition date (June 30, 1994). (b) The pro forma condensed statement of operations gives effect to the following pro forma CDX acquisition adjustments: (1) Represents amortization charges related to the intangible assets acquired as a part of the purchase. (2) Represents interest costs associated with the acquisition debt incurred. (3) Represents adjustments to reflect the necessary estimated net tax effects of the transactions and pro forma adjustments described herein using current tax rates. (c) The pro forma condensed statement of operations give effect to the following pro forma VGE acquisition adjustments: (1) Represents amortization of the $4.3 million of goodwill over twenty-five years and amortization of covenants not to compete over five years arising from the acquisition of VGE. (2) Represents the net change in depreciation expense associated with the write-up to fair market value of certain assets acquired. (3) Represents the elimination of certain VGE salary costs which will not recur. (4) Represents the elimination of VGE interest expense and other income derived from certain assets or liabilities which were not acquired or assumed by the Company. (5) Represents interest expense related to the acquisition debt. (6) Represents pro forma provision for income taxes as if VGE was taxed as a C Corporation as of the beginning of the period. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. Grow Biz International, Inc. (the Company) is a franchise company that franchises six retail concepts. In addition, the Company operates Company-owned stores in selected markets. In August 1997, Grow Biz Games, Inc., a wholly-owned subsidiary of Grow Biz International, Inc., acquired certain assets and franchising rights of Video Game Exchange, Inc. ("VGE") of Cleveland, Ohio. VGE is a forty store retail operation with stores in Ohio, Pennsylvania, Kentucky, Georgia and Maryland. These stores buy, sell and trade used and new video games and equipment. RESULTS OF OPERATIONS The following table sets forth selected information from the Company's Consolidated Statements of Operation expressed as a percentage of total revenue and the percentage changes in the dollar amounts from the prior period:
- -------------------------------------------------------------------------------------------------------------- Fiscal Year Ended December 30, December 28, December 27, Fiscal 1996 Fiscal 1997 1995 1996 1997 over 1995 over 1996 - -------------------------------------------------------------------------------------------------------------- Revenues Merchandise sales 83.9% 78.4% 75.3% (14.6%) (6.8%) Royalties 11.5 16.3 19.5 29.4 15.8 Franchise fees 3.9 4.6 4.4 7.0 (6.1) Advertising and other 0.7 0.7 0.8 (4.8) 3.5 ------- ------- ------- ------- ------- Total revenues 100.0 100.0 100.0 (8.6) (3.0) Cost of merchandise sold 76.0 69.7 63.8 (16.2) (11.3) Selling, general and administrative expenses 20.9 25.9 28.1 12.7 5.7 ------- ------- ------- ------- ------- Income from operations 3.1 4.4 8.1 33.4 77.8 Litigation settlement -- -- (2.2) -- -- Interest and other income (expense), net 0.2 0.2 0.1 (34.1) (47.3) ------- ------- ------- ------- ------- Income before income taxes 3.3 4.6 6.0 27.5 25.0 Provision for income taxes 1.3 1.8 2.4 27.5 25.0 ------- ------- ------- ------- ------- Net income 2.0% 2.8% 3.6% 27.5% 25.0% ======= ======= ======= ======= =======
REVENUES Merchandise sales include the sale of product to franchisees through the buying group and retail sales at the Company-owned stores as follows: 1995 1996 1997 ----------------------------------------------- Buying Group $ 72,971,600 $ 58,437,100 $ 45,717,100 Retail Sales 11,071,500 13,299,700 21,172,000 ------------ ------------ ------------ $ 84,043,100 $ 71,736,800 $ 66,889,100 The Play It Again Sports buying group revenue declined the past two years as part of management's strategic decision to reduce the number of vendors offered centralized billing and franchisees purchase more inventory on a direct basis. Retail sales at Company-owned stores increased 59.2% in 1997 over 1996 primarily as a result of the forty Company-owned Video Game Exchange stores acquired on August 15, 1997 as well as a net increase of other Company-owned stores in 1997. It is anticipated that buying group revenues will continue to decline as a percent of total revenues in the upcoming year while retail sales are expected to increase as the revenues from these Video Game Exchange stores are included for the entire year and through other Company-owned store expansion. REVENUES (CONTINUED) Revenue from franchising activity was as follows: 1995 1996 1997 ---------------------------------------------- Royalties $11,565,500 $14,964,800 $17,328,500 Franchise Fees 3,888,500 4,161,600 3,907,200 Royalties are a derivative of system-wide retail sales and have increased by $3.4 million and $2.4 million in 1996 and 1997, respectively, as a result of opening additional franchise stores and increases in comparable store sales. Comparable store sales increases and average store sales for stores open at least one year at December 27, 1997 for the five franchised concepts are shown in the following table: Comparable Store Sales Increase from 1996 Average Store Sales ------------------ ------------------- Play It Again Sports(R) 1.1% $ 441,000 Once Upon A Child(R) 13.4% 341,000 Computer Renaissance(R) 4.4% 837,000 Music Go Round(R) 11.6% 495,000 Disc Go Round(R) 2.4% 238,000 Franchise fees are recognized as revenue essentially when the related franchise store opens. Store openings and related franchise fees have not changed materially over the last three years. The Company anticipates that royalty revenue will continue to grow as additional stores are opened and that franchise fees will continue at the same level as the past three years. COST OF MERCHANDISE SOLD Cost of merchandise sold includes the cost of merchandise sold through the buying group and at Company-owned retail stores. Over the past three years, cost of merchandise sold as a percentage of the related revenue is shown in the following table: 1995 1996 1997 ---------------------------------------- Buying Group 95.1% 95.2% 95.0% Retail Stores 61.4 61.7 62.4 SELLING, GENERAL AND ADMINISTRATIVE The increase of $1.4 million, or 6%, in operating expenses from 1996 to 1997 is primarily the additional costs related to operating the Company-owned retail stores acquired during the year. From 1995 to 1996, operating expenses increased $2.7 million, or 12.7%, due to an increased number of support personnel relating to our franchise system. It is anticipated that future operating expenses as a percent of revenue will be consistent with the 1997 results. LITIGATION SETTLEMENT In connection with an action filed by an early partner in the original Play It Again Sports store, the Company received a court ruling on a motion filed by the plaintiff stating that an enforceable agreement existed between the two parties. Under the order, the Company is required to pay $2.0 million to purchase certain development rights held by the plaintiff from a 1992 agreement. The order further directed that all claims between the parties be dismissed. The Company intends to appeal the court order. NET INTEREST Net interest income was $295,500, $194,700 and $102,700 in 1995, 1996 and 1997, respectively. Interest income was earned on investments in short-term, high-grade investments and interest charges on accounts receivable balances. The decrease in interest income in 1996 and 1997 was due to the Company having lower cash balances as a result of the repurchase of shares of the Company's common stock and the interest expense incurred on the notes payable related to the Video Game Exchange, Inc. acquisition on August 15, 1997. PROVISION FOR INCOME TAXES The provision for income taxes was calculated at an effective rate of 39.2% for fiscal 1995, 1996 and 1997. LIQUIDITY AND CAPITAL RESOURCES The Company ended the year with $3.1 million cash and had a current ratio of 1.6 to 1.0. During the year ended December 27, 1997, the Company's operating activities provided $6.1 million of cash. Net income before depreciation and change in deferred income tax provided $5.3 million, offset by changes in the operating assets and liabilities. Prepaid assets increased by $1.0 million as a result of income tax deposits made during the year and the renegotiated point-of-sale software license agreement renegotiated in 1997. Inventory increased by $1.5 million as a result of the net addition of five Company-owned stores in 1997. Accrued liabilities increased by $2.5 million primarily as a result of recording the litigation settlement. The Company intends to appeal the court decision and does not anticipate paying for the settlement until all post litigation motions are concluded. In August 1997, the Company purchased certain assets of Video Game Exchange, Inc. (VGE) for total consideration of $6.6 million. Of this amount, $4.5 million was financed through a five-year term loan, with a bank, payable in sixty equal installments beginning in October 1997 plus accrued interest at prime plus one-half of one percent. The former owners of VGE financed $2.0 million through a two-year note payable in twenty-four equal installments beginning in September 1997 plus accrued interest at prime plus one-half of one percent. In 1997, the Company renegotiated the terms of its point-of-sale software license utilized by its franchisees from a per unit fee with a remaining minimum liability of $666,800 to a set fee of $400,000. The Company paid $133,000 upon signing the agreement and recorded the $267,000 note payable that is payable in equal installments in January 1998 and January 1999. Financing activities provided cash of $2.6 million in 1997 compared to utilizing cash of $2.9 million and $6.2 million in 1995 and 1996, respectively. 1997 activity consisted primarily of the VGE notes offset by the repurchase of 386,819 shares of the Company's common stock. In July 1997, the buy back was extended to include an additional 500,000 shares bringing the total shares the Company is authorized to buy back to 2,000,000. As of March 9, 1998, 1,505,286 shares, at an average price of $9.37 per share had been purchased. The Company has a $5.0 million committed revolving line of credit agreement which is due for renewal on July 31, 1998. Borrowings against the line are due on demand and carry an interest rate of prime which was 8.5% at December 27, 1997. At December 27, 1997, the Company had no borrowings against the line. The Company believes that its current cash position, cash generated from future operations, availability of line of credit borrowings and additional capacity for debt will be adequate to meet the Company's current obligations and operating needs. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) has issued Statement No. 128, "Accounting for Earnings Per Share". The Company has adopted Statement No. 128 and has disclosed the impact of Statement No. 128 in the Statements of Operations and in the footnotes to the financial statements. FORWARD LOOKING STATEMENTS The statements made in this report that are not historical facts are forward looking statements. Such statements are based on current expectations but involve risks, uncertainties and other factors which may cause actual results to differ materially from those contemplated by such forward looking statements. Important factors which may result in variations from results contemplated by such forward looking statements include, but are not limited to: (1) the Company's ability to attract qualified franchisees; (2) the Company's ability to collect its receivables; (3) the Company's ability to open stores; (4) each store's ability to acquire high-quality, used merchandise; (5) the Company's ability to control selling, general and administrative expenses; and (6) the Company's ability to obtain competitive financing to fund its growth. The Company's strategy focuses on enhancing revenues and profits at all store locations and the opening of additional stores. The Company's growth strategy is premised on a number of assumptions concerning trends in each of the retail industries as well as trends in franchising and the economy. To the extent that the Company's assumptions with respect to any of these matters are inaccurate, its results of operations and financial condition could be adversely affected. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Grow Biz International, Inc. and Subsidiary Index to Financial Statements Consolidated Balance Sheets Page 25 Consolidated Statements of Operations Page 26 Consolidated Statements of Changes in Shareholders' Equity Page 27 Consolidated Statements of Cash Flows Page 28 Consolidated Notes to Financial Statements Page 29 Report of Independent Public Accountants Page 37 GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY Consolidated Balance Sheets
December 28, December 27, 1996 1997 ----------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,388,800 $ 3,088,000 Receivables, less allowance for doubtful accounts of $930,000 and $880,000 13,171,400 12,880,700 Inventories 2,716,000 5,728,600 Prepaid expenses and other 862,900 1,987,300 Deferred income taxes (Note 8) 1,726,400 1,491,600 ------------ ------------ Total current assets 19,865,500 25,176,200 ------------ ------------ NOTES RECEIVABLE 339,800 184,000 PROPERTY AND EQUIPMENT: Furniture and equipment 5,553,100 6,339,200 Building and building improvements 3,305,800 3,375,100 Less - accumulated depreciation and amortization (2,879,600) (4,096,400) ------------ ------------ Property and equipment, net 5,979,300 5,617,900 ------------ ------------ OTHER ASSETS: Noncompete agreements and other, net of accumulated amortization of $2,788,600 and $3,258,300 1,855,200 1,507,000 Goodwill, net of accumulated amortization of $128,800 and $230,200 1,136,700 5,269,500 ------------ ------------ Total other assets 2,991,900 6,776,500 ------------ ------------ $ 29,176,500 $ 37,754,600 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 5,670,300 $ 6,604,800 Accrued liabilities 1,275,800 3,781,500 Current maturities of long-term debt (Note 7) 134,900 2,061,400 Deferred franchise fee revenue 4,269,000 3,588,000 ------------ ------------ Total current liabilities 11,350,000 16,035,700 LONG TERM DEBT (Note 7) 129,000 4,268,200 SHAREHOLDERS' EQUITY (Note 5) Undesignated stock, no par, 5,000,000 shares authorized, no shares issued and outstanding -- -- Common stock, no par, 10,000,000 shares authorized, 6,263,444 and 6,002,214 shares issued and outstanding 10,952,900 7,474,900 Retained earnings 6,744,600 9,975,800 ------------ ------------ Total shareholders' equity 17,697,500 17,450,700 ------------ ------------ $ 29,176,500 $ 37,754,600 ============ ============
The accompanying notes are an integral part of these financial statements. GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY Consolidated Statements of Operations
Fiscal Year Ended ----------------- December 30, December 28, December 27, 1995 1996 1997 ------------------------------------------------- REVENUE Merchandise sales $ 84,043,100 $ 71,736,800 $ 66,889,100 Royalties 11,560,500 14,964,800 17,328,500 Franchise fees 3,888,500 4,161,600 3,907,200 Advertising and other 720,700 686,400 710,500 ------------- ------------- ------------- Total revenues 100,212,800 91,549,600 88,835,300 COST OF MERCHANDISE SOLD 76,191,400 63,855,600 56,633,700 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 20,980,300 23,636,200 24,989,900 ------------- ------------- ------------- Income from operations 3,041,100 4,057,800 7,211,700 LITIGATION SETTLEMENT (Note 10) -- -- (2,000,000) INTEREST EXPENSE (49,700) (56,900) (256,700) INTEREST INCOME 345,200 251,600 359,400 ------------- ------------- ------------- Income before income taxes 3,336,600 4,252,500 5,314,400 PROVISION FOR INCOME TAXES (Note 8) 1,308,000 1,667,000 2,083,200 ------------- ------------- ------------- NET INCOME $ 2,028,600 $ 2,585,500 $ 3,231,200 ------------- ------------- ------------- NET INCOME PER COMMON SHARE - Basic $ 0.28 $ 0.40 $ 0.53 ------------- ------------- ------------- WEIGHTED AVERAGE SHARES OUTSTANDING - Basic 7,212,600 6,428,500 6,116,200 ------------- ------------- ------------- NET INCOME PER COMMON SHARE - Diluted $ 0.28 $ 0.40 $ 0.52 ------------- ------------- ------------- WEIGHTED AVERAGE SHARES OUTSTANDING - Diluted 7,351,000 6,516,000 6,273,500 ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY Consolidated Statements of Changes in Shareholders' Equity Fiscal years ended December 30, 1995, December 28, 1996 and December 27, 1997
Common Stock ------------ Retained Shares Amount Earnings ------------------------------------------- BALANCE, December 31, 1994 7,203,862 $ 19,554,500 $ 2,130,500 Repurchase of common stock (Note 5) (321,900) (2,939,700) -- Stock options exercised and related tax benefits 76,506 418,200 -- Net income -- -- 2,028,600 --------- ------------ ------------ BALANCE, December 30, 1995 6,958,468 $ 17,033,000 $ 4,159,100 Repurchase of common stock (Note 5) (740,194) (6,266,100) -- Stock options exercised and related tax benefits 45,170 186,000 -- Net income -- -- 2,585,500 --------- ------------ ------------ BALANCE, December 28, 1996 6,263,444 $ 10,952,900 $ 6,744,600 Repurchase of common stock (Note 5) (386,819) (4,217,300) -- Stock options exercised and related tax benefits 125,589 739,300 -- Net income -- -- 3,231,200 --------- ------------ ------------ BALANCE, December 27, 1997 6,002,214 $ 7,474,900 $ 9,975,800 ========= ============ ============
The accompanying notes are an integral part of these financial statements. GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows
Fiscal Year Ended ----------------- December 30, December 28, December 27, 1995 1996 1997 ------------------------------------------- OPERATING ACTIVITIES: Net income $ 2,028,600 $ 2,585,500 $ 3,231,200 Adjustments to reconcile net income to net cash provided by (used for) operating activities - Depreciation and amortization 1,765,400 1,785,000 1,878,100 Deferred income tax (378,100) (274,900) 234,800 Change in operating assets and liabilities: Receivables 363,200 2,861,000 446,500 Inventories (1,302,000) 1,576,000 (1,461,900) Prepaid expenses and other 263,300 122,800 (998,500) Accounts payable (2,739,100) (1,408,200) 934,500 Accrued liabilities (1,219,000) 80,200 2,505,700 Deferred franchise fee revenue (747,000) 126,000 (681,000) ----------- ----------- ----------- Net cash provided by (used for) operating activities (1,964,700) 7,453,400 6,089,400 ----------- ----------- ----------- INVESTING ACTIVITIES: Redemption of short-term investments 6,337,300 420,000 -- Purchases of property and equipment, net (2,335,800) (297,000) (366,900) Increase in other assets (164,900) (57,700) (31,300) Acquisition of certain assets of Video Game Exchange, Inc. -- -- (6,579,700) ----------- ----------- ----------- Net cash provided by (used for) investing activities 3,836,600 65,300 (6,977,900) ----------- ----------- ----------- FINANCING ACTIVITIES: Notes Payable -- -- 6,767,000 Payments on long-term debt, net (214,800) (151,300) (701,200) Repurchase of common stock (2,939,700) (6,266,100) (4,217,300) Proceeds from stock option and warrant exercises 277,200 186,000 739,200 ----------- ----------- ----------- Net cash provided by (used for) financing activities (2,877,300) (6,231,400) 2,587,700 ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,005,400) 1,287,300 1,699,200 CASH AND CASH EQUIVALENTS, beginning of period 1,106,900 101,500 1,388,800 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 101,500 $ 1,388,800 $ 3,088,000 =========== =========== =========== SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 47,600 $ 50,200 $ 196,600 ----------- ----------- ----------- Cash paid for income taxes $ 2,978,300 $ 1,831,500 $ 2,744,300 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY Consolidated Notes to the Financial Statements December 28, 1996 and December 27, 1997 1. ORGANIZATION AND BUSINESS: Grow Biz International, Inc. (the Company) offers licenses to operate retail stores using the service marks "Play It Again Sports", "Once Upon A Child", "Music Go Round", "Computer Renaissance", "Disc Go Round" and "It's About Games". In addition, the Company sells inventory to its franchisees through its "Buying Group" and operates retail stores. The Company has a 52/53-week fiscal year which ends on the last Saturday in December. In 1997, Grow Biz Games, Inc., a wholly-owned subsidiary of the Company, was incorporated. Certain assets of the following entities were acquired by the Company and its subsidiary with the respective operating results included in the financial statements from the date of acquisition: Entity Acquisition Year ------ ---------------- Sports Traders, Inc. (Buying Group) 1992 Play It Again Sports retail stores (3) 1992 Once Upon A Child, Inc. 1992 Hi Tech Consignments, Inc. (Music Go Round) 1993 Computer Renaissance, Inc. 1993 CDX Audio Development, Inc. (Disc Go Round) 1994 Video Game Exchange, Inc. (It's About Games) 1997 2. SIGNIFICANT ACCOUNTING POLICIES: BUSINESS SEGMENT INFORMATION The Company is engaged in principally one business segment -- developing, licensing, franchising and servicing a system of retail stores which buy, sell, trade and consign used and new products. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with an original maturity of three months or less. Cash equivalents are stated at cost which approximates fair value. INVENTORIES The Company values its inventories at the lower of cost or market, as determined by the average weighted cost method. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation and amortization for financial reporting purposes is provided on the straight-line method. Estimated useful lives used in calculating depreciation and amortization are: five years for furniture and equipment, thirty-five years for building and building improvements and the shorter of the lease term or useful life for leasehold improvements. Major repairs, refurbishments and improvements which significantly extend the useful lives of the related assets are capitalized. Maintenance and repairs, supplies and accessories are charged to expense as incurred. 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): OTHER ASSETS Other assets consist primarily of covenants not to compete which are being amortized on a straight-line basis over the terms of the agreements which range from three to ten years and goodwill which is being amortized on a straight-line basis over fifteen to forty years. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The ultimate results could differ from those estimates. REVENUE RECOGNITION The Company collects royalties from each franchise based on retail store gross sales. The Company recognizes royalties as revenue when earned. The Company collects franchise fees when franchise agreements are consummated and recognizes the franchise fees as revenue when substantially all initial franchise services have been performed. The Company had deferred franchise fee revenue of $4,269,000 and $3,588,000 at December 28, 1996 and December 27, 1997, respectively. NET INCOME PER COMMON SHARE The Company calculates net income per share in accordance with FASB Statement No. 128 by dividing net income by the weighted average number of shares of common stock outstanding to arrive at the Net Income Per Common Share - Basic. The Company calculates Net Income Per Share - Dilutive by dividing net income by the weighted average number of shares of common stock and dilutive stock equivalents from the exercise of stock options and warrants using the treasury stock method. A reconciliation of basic weighted average number of shares outstanding to dilutive average number of shares outstanding is as follows:
December 30, 1995 December 28, 1996 December 27, 1997 ----------------------------------------------------------- Weighted average shares outstanding - Basic 7,212,600 6,428,500 6,116,200 Dilutive effect of stock options after application of the treasury stock method 138,400 87,500 157,300 --------- --------- --------- Weighted average shares outstanding - Dilutive 7,351,000 6,516,000 6,273,500 ========= ========= =========
RECLASSIFICATION Certain 1995 and 1996 amounts in the financial statements have been reclassified to conform with the 1997 financial statement presentation. These reclassifications have no effect on net income or shareholders' equity as previously reported. 3. RECEIVABLES: The Company's current receivables consisted of the following: December 28, 1996 December 27, 1997 ------------------------------------------- Trade (Net) $ 11,591,500 $ 11,065,200 Royalty 1,709,000 1,718,500 Other 210,700 281,000 ------------ ------------ 13,511,200 13,064,700 Less: Long-term Notes (339,800) (184,000) ------------ ------------ Current Receivables $ 13,171,400 $ 12,880,700 ============ ============ As part of its normal course of business, the Company requires Standby Letters of Credit as collateral for a portion of its trade receivables from it first-year and second-year stores. 4. ACQUISITIONS: PURCHASE OF VIDEO GAME EXCHANGE, INC. In August 1997, Grow Biz Games, Inc., a wholly-owned subsidiary of Grow Biz International, Inc., acquired certain assets and franchising rights of Video Game Exchange, Inc. ("VGE") a forty store retail chain headquartered in Cleveland, Ohio for $6,579,700. The acquisition has been accounted for under the purchase method of accounting. Pursuant to the purchase, the Seller and its shareholders entered into agreements not to compete with the Company for five years. Of the total purchase price, $4.5 million was financed through a five-year bank term loan payable in sixty equal installments plus accrued interest at prime plus one-half of one percent. The former owners of VGE financed $2.0 million through a two-year note payable in twenty-four equal installments plus accrued interest at prime plus one-half of one percent. The $4.3 million cost in excess of net assets acquired was recorded as goodwill and will be amortized over a twenty-five year period. The following are the unaudited pro forma results of operations for 1996 and 1997, as if the above acquisition had occurred on December 30, 1995. December 28, 1996 December 27, 1997 --------------------------------------- Revenue $105,756,600 $ 97,230,400 Net income 2,962,500 3,498,000 Net income per common share (Basic) $ .46 $ .57 Net income per common share (Diluted) $ .45 $ .56 5. SHAREHOLDERS' EQUITY: REPURCHASE OF COMMON STOCK Since November 1995, the Company's Board of Directors has authorized the repurchase of up to 2,000,000 shares of the Company's common stock on the open market. As of December 27, 1997, the Company had repurchased 1,448,913 shares of its stock at an average price of $9.26 per share including 386,819 shares repurchased at an average price of $10.90 per share in the year ended December 27, 1997. 5. SHAREHOLDERS' EQUITY (CONTINUED): STOCK OPTION PLAN The Company has authorized up to 1,100,000 shares of common stock be reserved for granting either nonqualified or incentive stock options to officers and key employees under the Company's 1992 Stock Option Plan (the Plan). Grants can be made by the board of directors or a board-designated committee at a price of not less than 100% of the fair market value on the date of grant. If an incentive stock option is granted to an individual who owns more than 10% of the voting rights of the Company's common stock, the option exercise price may not be less than 110% of the fair market value on the date of grant. The term of the options may not exceed ten years, except in the case of nonqualified stock options, whereby the terms are established by the board of directors or a board-designated committee. Options may be exercisable in whole or in installments, as determined by the board of directors or a board-designated committee. Stock options granted and exercised under the plan as of December 27, 1997 are as follows:
Weighted Average Number of Shares Price Range Exercise Price ------------------------------------------------------------ Outstanding at December 30, 1995 588,575 $ 2.00 - $ 14.50 $ 8.35 Granted 357,000 7.25 - 9.00 7.95 Exercised (38,750) 2.00 - 10.00 2.75 Forfeited (190,700) 8.00 - 12.38 9.86 ------------------------------------------------------------ Outstanding at December 28, 1996 716,125 2.00 - 14.50 8.68 Granted 145,750 10.50 - 12.25 11.31 Exercised (101,968) 2.00 - 12.19 4.79 Forfeited (61,045) 8.00 - 11.75 9.82 ------------------------------------------------------------ Outstanding at December 27, 1997 698,862 $ 2.00 - $ 14.50 $ 9.88 ============================================================ Exercisable at December 27, 1997 350,554 $ 2.00 - $ 14.50 $ 8.70 ============================================================
The stock options outstanding at December 27, 1997 have a weighted average contractual life of 1.9 years. EMPLOYEE STOCK PURCHASE PLAN The Company sponsors an Employee Stock Purchase Plan ('Employee Plan') and reserved 100,000 shares of the Company's common stock for issuance to employees who elect to participate. The Employee Plan operates in one-year phases and stock may be purchased at the end of each phase. The stock price is 85% of the fair market value of such common stock on the commencement date or termination date of the phase, whichever is lower. During 1997, the Company issued 10,315 shares under the plan at a price of $6.85. As of December 27, 1997, contributions have been received for the issuance of 6,697 shares under phase four. NONPLAN OPTIONS The Company sponsors a Stock Option Plan for Nonemployee Directors (the 'Nonemployee Directors Plan') and reserved a total of 100,000 common shares for issuance to directors of the Company who are not employees. The Nonemployee Directors Plan provides that each director who is not an employee of the Company will receive an option to purchase 25,000 common shares upon initial election as a director at a price equal to the fair market value on the date of grant. Each option granted under the Nonemployee Directors Plan vests and becomes exercisable in five equal increments of 5,000 shares, beginning one year after the date of grant. The Company has granted options to purchase the Company's common stock at $10.00 per share to four non-employee directors. Each option granted vests and becomes exercisable in increments through 1998. There were 75,000 shares exercisable at December 27, 1997. 5. SHAREHOLDERS' EQUITY (CONTINUED): The Company accounts for the above plans under APB Opinion No. 25, and accordingly no compensation expense relating to the granting of options has been recognized in the Statement of Operations. Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123), the Company's proforma net income and net income per common share would have changed to the following proforma amounts:
1995 1996 1997 ---------------------------------------------- Net Income: As Reported $ 2,028,600 $ 2,585,500 $ 3,231,200 Pro Forma 1,889,900 2,293,000 2,964,300 Net Income Per Common Share (Diluted): As Reported $ .28 $ .40 $ .52 Pro Forma $ .26 $ .35 $ .47
The fair value of each option granted subsequent to January 1, 1995 in accordance with SFAS 123 was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk free interest rates of 6.07% to 7.90% in 1995, 6.01% to 6.81% in 1996 and 5.77% to 6.83% in 1997, expected life of five years for 1995, two to five years for 1996 and five years for 1997; expected volatility of 47.05% to 56.01% in 1995, 39.78% to 44.59% in 1996 and 20.11% to 36.85% in 1997. WARRANTS In connection with a 1992 private placement, options to purchase 37,500 shares of the Company's common stock were exercised in 1997 under the net issuance method resulting in 13,306 shares being issued. At December 27, 1997 there were outstanding warrants remaining to purchase 37,500 shares of the Company's common stock at $10.00 per share. The warrants expire in 1998. 6. LINE OF CREDIT: The Company has a $5.0 million committed revolving line of credit agreement which is due for renewal on July 31, 1998. Borrowings against the line are due on demand and carry an interest rate of prime which was 8.5% at December 27, 1997. At December 27, 1997, the Company had no borrowings against the line. 7. LONG-TERM DEBT: The Company's long-term debt consists of: December 28, 1996 December 27, 1997 ---------------------------------------- Bank Term Debt $ - $ 4,275,000 Note Payable - 1,666,700 Other 263,900 387,900 ----------- ------------ Total 263,900 6,329,600 Less: Current Portion (134,900) (2,061,400) ----------- ------------ $ 129,000 $ 4,268,200 =========== ============ 7. LONG-TERM DEBT (CONTINUED): Future maturities of long-term debt as of December 27, 1997 are as follows: 1998 $ 2,061,400 1999 1,700,600 2000 900,000 2001 1,022,100 2002 645,500 ----------- $ 6,329,600 =========== The bank term note bears interest at prime plus one-half of one percent. It is due in monthly principal and interest installments through September 2002. This note contains various restrictive covenants which, among other matters, require the Company to maintain certain financial ratios. The Company was in compliance with all these covenants as of December 27, 1997. The note payable bears interest at prime plus one-half of one percent. It is due in monthly principal and interest installments through September 1999. 8. INCOME TAXES: Components of the provision for income taxes are as follows:
December 30, 1995 December 28, 1996 December 27, 1997 --------------------------------------------------------------- Currently payable: Federal $ 1,511,100 $ 1,701,300 $ 1,423,400 State 175,000 240,600 425,000 ------------ ------------ ------------ Subtotal 1,686,100 1,941,900 1,848,400 Deferred income tax benefit (378,100) (274,900) 234,800 ------------ ------------ ------------ Total tax provision $ 1,308,000 $ 1,667,000 $ 2,083,200 ============ ============ ============
The effective tax rate differs from the federal statutory rate due primarily to the following:
December 30, 1995 December 28, 1996 December 27, 1997 --------------------------------------------------------------- Federal statutory rate 34.0% 34.0% 34.0% State income taxes, net of federal benefit 3.4 3.7 5.3 Nondeductible meals and entertainment 1.1 0.8 0.7 Tax exempt interest income (0.9) - - Other, net 1.6 0.7 (0.8) ---- ---- ---- 39.2% 39.2% 39.2% ==== ==== ====
Deferred income taxes are the result of provisions of the tax laws that either require or permit certain items of income or expense to be reported for tax purposes in different periods than they are reported for financial reporting. The components of the deferred tax asset are as follows: December 28, 1996 December 27, 1997 -------------------------------------- Deferred franchise fees $ 929,500 $ 614,600 Accounts receivable reserves 470,600 466,500 Other 326,300 410,500 ----------- ----------- Net deferred tax asset $ 1,726,400 $ 1,491,600 =========== =========== 9. COMMITMENTS AND CONTINGENCIES: EMPLOYEE BENEFIT PLAN The Company provides a 401(k) Savings Incentive Plan which covers substantially all employees. The plan provides for matching contributions and optional profit-sharing contributions at the discretion of the board of directors. Employee contributions are fully vested; matching and profit-sharing contributions are subject to a five-year service vesting schedule. Contributions to the plan for 1995, 1996 and 1997 were $205,100, $267,000 and $253,500, respectively. OPERATING LEASES The Company conducts all of its retail operations in leased facilities that expire over the next five years. A majority of these leases require the Company to pay maintenance, insurance, taxes and other expenses in addition to minimum annual rent. Total rent expense under these operating leases was $850,800 in 1995, $1,033,000 in 1996 and $1,468,100 in 1997. As of December 27, 1997, minimum rental commitments under noncancelable operating leases are: $1,701,900 in 1998, $696,900 in 1999, $379,700 in 2000, $258,800 in 2001 and $144,100 in 2002. The Company rents retail space from PIAS Holdings, a partnership of two of the Company's officers, through an agreement that expires September 2000. Payments under this agreement were approximately $59,000, $66,000 and $66,000 in 1995, 1996 and 1997, respectively. CONSULTING AGREEMENTS The Company has a consulting agreement with a former shareholder in which the Company is required to pay $35,000 per year through 1999. The Company has consulting agreements with the former owners of Computer Renaissance. The agreements require the Company to pay 1/2% of all receipts from franchising Computer Renaissance retail stores through May 31, 1998. 10. LITIGATION SETTLEMENT: In 1995, an early partner in the original Play It Again Sports store commenced an action against the Company relating to, among other things, the development of stores under a 1992 retail store agreement. In February 1998, the court ruled that an enforceable settlement agreement was reached between the parties. The terms of the settlement require the Company to pay $2.0 million to purchase certain development rights and settle all claims. The Company has recorded the $2.0 million non-operating expense in fiscal 1997. The likelihood of a favorable ruling on an appeal cannot be determined at this time. 11. QUARTERLY FINANCIAL DATA: The Company's unaudited quarterly results for the years ended December 27, 1997 and December 28, 1996 are as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------------------------------------- 1997 Total Revenue $ 19,109,400 $ 20,679,000 $ 22,078,500 $26,968,400 Income from Operations 826,300 1,589,700 2,056,400 2,739,300 Net Income 545,200 994,000 1,269,000 423,000 Net Income Per Common Share - Basic $ .09 $ .16 $ .21 $ .07 Net Income Per Common Share - Diluted $ .09 $ .16 $ .20 $ .07 1996 Total Revenue $ 25,126,400 $ 25,008,800 $ 21,573,900 $19,840,500 Income from Operations 543,000 725,300 1,385,000 1,404,500 Net Income 330,200 467,500 887,700 900,100 Net Income Per Common Share - Basic $ .05 $ .07 $ .14 $ .14 Net Income Per Common Share - Diluted $ .05 $ .07 $ .14 $ .14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Grow Biz International, Inc.: We have audited the accompanying consolidated balance sheets of Grow Biz International, Inc. and Subsidiary (Minnesota corporations) as of December 27, 1997 and December 28, 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 27, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Grow Biz International, Inc. and Subsidiary as of December 27, 1997 and December 28, 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, February 3, 1998 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The section entitled "Election of Directors" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be held on May 6, 1998, sets forth certain information with respect to the directors of the Registrant and the required information is incorporated herein by reference. Certain information with respect to persons who are or may be deemed to be executive officers of the Registrant is set forth under the caption "Executive Officers of the Registrant" in Part I of this report. ITEM 11: EXECUTIVE COMPENSATION. The section entitled "Executive Compensation" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be held on May 6, 1998, sets forth certain information with respect to the compensation of management of the Registrant and the required information is incorporated herein by reference. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The sections entitled "Security Ownership of Certain Beneficial Owners, Directors and Executive Officers" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be held on May 6, 1998, set forth certain information with respect to the ownership of the Registrant's Common Stock and the required information is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The section entitled "Certain Transactions" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be held on May 6, 1998, sets forth certain information with respect to certain business relationships and transactions between the Registrant and its directors and officers and the required information is incorporated herein by reference. PART IV ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K. (a.) The following documents are filed as a part of this Report: 1. FINANCIAL STATEMENTS. The financial statements filed as part of this report are listed on the Index to Financial Statements on page 24. 2. EXHIBITS. EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 3.1 Articles of Incorporation, as amended (Exhibit 3.1) (1) 3.2 By-laws, as amended and restated to date (Exhibit 3.2) (1) 4.1 Form of Stock Purchase Warrant to Hayne, Miller & Farni, Inc. (1992) (Exhibit 4.2) (1) 4.2 Revised form of Stock Purchase Warrant to Hayne, Miller & Farni, Inc. (1992) (Exhibit 4.3) (1) 10.1 Form of franchise agreement for Play It Again Sports(R) (Exhibit 10.1) (3) 10.2 Form of franchise agreement for Once Upon A Child(R)(Exhibit 10.2) (3) 10.3 Form of franchise agreement for Computer Renaissance(R) (Exhibit 10.3) (3) 10.4 Form of franchise agreement for Music Go Round(R) (Exhibit 10.4) (3) 10.5 Form of franchise agreement for Disc Go Round(R) (Exhibit 10.5) (3) 10.6 Form of franchise agreement for It's About Games(TM) (Exhibit 10.6) 10.7 Lease for 3505 Hennepin Avenue, Minneapolis Minnesota (Exhibit 10.4) (1) 10.8 Asset Purchase Agreement dated January 24, 1992 with Sports Traders, Inc. and James D. Van Buskirk ("Van Buskirk") concerning acquisition of wholesale business, including amendment dated March 11, 1992 (Exhibit 10.6 (a) ) (1) 10.9 Retail store agreement dated January 24, 1992 with Van Buskirk (Exhibit 10.6 (b) ) (1) 10.10 Noncompetition and Consulting agreement dated January 1, 1990, as amended January 24, 1992, with Martha Morris (Exhibit 10.7) (1) 10.11 Asset Purchase Agreement dated April 1, 1993 concerning purchase of assets of Computer Renaissance, Inc., including stock option agreement (Exhibit 10.12) (1) 10.12 Asset Purchase Agreement dated July 1, 1994 for purchase of assets of CDX Audio Development, Inc. (Exhibit 10.13) (3) 10.13 1992 Stock Option Plan, including forms of stock option agreement (Exhibit 10.12) (1) (3) 10.14 Amendment No. 1 to the 1992 Stock Option Plan (Exhibit 10.15) (2) 10.15 Amendment No. 2 to the 1992 Stock Option Plan (Exhibit 10.16) (2) 10.16 Amendment No. 3 to the 1992 Stock Option Plan 10.17 Nonemployee Director Stock Option Plan, as amended, including form of stock option agreement (Exhibit 10.16) (2) (3) 10.18 Employee Stock Purchase Plan of 1994 (Exhibit 10.17) (2) (3) 10.19 Real Estate Purchase Agreement for Purchase of the Company's headquarters (Exhibit 10.18) (2) EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 10.20 Consulting and Noncompetition Agreement dated November 6, 1992 with Lynn and Dennis Blum (Exhibit 10.19) (3) 10.21 Noncompetition Agreements dated April 1, 1993 with Charles G. Welle and Richard C. Frost related to the purchase of assets of Computer Renaissance (Exhibit 10.20) (3) 10.22 Asset Purchase Agreement between Grow Biz Games, Inc. and Video Game Exchange, Inc., dated August 15, 1997 (Exhibit 10.1) (5) 10.23 First Amendment to Credit Agreement and Revolving Note, dated August 8, 1997 (Exhibit 10.2) (5) 10.24 Term Note, TCF, dated August 8, 1997 (Exhibit 10.3) (5) 10.25 Non-Negotiable Promissory Note, Video Game Exchange, Inc., dated August 15, 1997 (Exhibit 10.4) (5) 11.1 Statement of Computation of Per Share Earnings 21.1 Subsidiaries 23.1 Consent of Arthur Andersen LLP Independent Public Accountants 27.1 Financial Data Schedule 99.1 Cautionary Statements (1) Incorporated by reference to the specified exhibit to the Registration Statement on Form S-1, effective August 24, 1993 (Reg. No. 33-65108). (2) Incorporated by reference to the specified exhibit to the Annual Report on Form 10-K for the fiscal year ended December 30, 1995. (3) Incorporated by reference to the specified exhibit to the Annual Report on Form 10-K for the fiscal year ended December 28, 1996. (4) Incorporated by reference to the specified exhibit to the Quarterly Report on Form 10-Q for the quarter ended September 28, 1996. (5) Incorporated by reference to the specified exhibit to the Current Report on Form 8-K, August 15, 1997. (6) Indicates management contracts, compensation plans or arrangements required to be filed as exhibits. (b.) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the fiscal quarter ended December 27, 1997. SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY By: /s/ RONALD G. OLSON Date: March 16, 1998 ------------------------------------- Ronald G. Olson President and Chief Executive Officer KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints K. Jeffrey Dahlberg, Ronald G. Olson and David J. Osdoba, Jr., and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof. In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ K. JEFFREY DAHLBERG Chairman of the Board of Directors March 17, 1998 - ------------------------------ K. Jeffrey Dahlberg President, Chief Executive Officer /s/ RONALD G. OLSON and Director March 16, 1998 - ------------------------------ (principal executive officer) Ronald G. Olson Vice President of Finance and Chief Financial /s/ DAVID J. OSDOBA, JR. Officer March 13, 1998 - ------------------------------ (principal financial and accounting officer) David J. Osdoba, Jr. /s/ GAYLEN L. KNACK Vice President and General Counsel March 16, 1998 - ------------------------------ Gaylen L. Knack /s/ RANDEL S. CARLOCK Director March 13, 1998 - ------------------------------ Randel S. Carlock /s/ DENNIS J. DOYLE Director March 13, 1998 - ------------------------------ Dennis J. Doyle /s/ ROBERT C. POHLAD Director March 16, 1998 - ------------------------------ Robert C. Pohlad /s/ BRUCE C. SANBORN Director March 13, 1998 - ------------------------------ Bruce C. Sanborn
EX-10.6 2 FRANCHISE AGREEMENT EXHIBIT 10.6 IT'S ABOUT GAMES(TM) FRANCHISE AGREEMENT BETWEEN GROW BIZ INTERNATIONAL, INC. 4200 Dahlberg Drive Minneapolis, Minnesota 55422-4837 (612) 520-8500 AND ------------------------------------------ ------------------------------------------ ------------------------------------------ Name(s) of Franchisee ------------------------------------------ Street ------------------------------------------ City State Zip Code (-----)------------------------------------ Area Code Telephone FRANCHISED LOCATION: ------------------------------------------ Street ------------------------------------------ City State Zip Code (-----)------------------------------------ Area Code Telephone IT'S ABOUT GAMES(TM) FRANCHISE AGREEMENT INDEX SECTION DESCRIPTION PAGE - ------- ----------- ---- 1. GRANT OF FRANCHISE; FRANCHISED LOCATION...........................1 2. TERM OF FRANCHISE; RENEWAL RIGHTS.................................2 3. OWNERSHIP AND USE OF MARKS........................................3 4. INITIAL FRANCHISE FEE.............................................4 5. CONTINUING FEE....................................................4 6. ADVERTISING AND PROMOTION.........................................4 7. FRANCHISOR'S OBLIGATIONS..........................................6 8. OPERATION OF THE FRANCHISEE'S BUSINESS............................7 9. CONFIDENTIAL INFORMATION.........................................10 10. INSURANCE; BONDING...............................................11 11. INDEPENDENT CONTRACTORS; INDEMNIFICATION.........................11 12. SALES REPORTS, FINANCIAL STATEMENTS AND AUDIT RIGHTS.............12 13. FRANCHISOR'S RIGHT OF FIRST REFUSAL TO PURCHASE..................12 14. ASSIGNMENT OF FRANCHISE AGREEMENT................................13 15. FRANCHISOR'S TERMINATION RIGHTS..................................14 16. FRANCHISEE'S TERMINATION RIGHTS; NOTICE REQUIRED.................15 17. FRANCHISEE'S OBLIGATIONS UPON TERMINATION........................15 18. FRANCHISEE'S COVENANTS NOT TO COMPETE............................16 19. ARBITRATION; ENFORCEMENT.........................................17 20. SEVERABILITY AND CONSTRUCTION....................................18 21. NOTICES..........................................................18 22. ACKNOWLEDGMENTS..................................................19 EXHIBITS A - FRANCHISEE'S DEVELOPMENT AREA AND EXCLUSIVE TERRITORY B - COMPUTER SOFTWARE LICENSE AGREEMENT C - PERSONAL GUARANTY 01 GK082597 02 GK030698 IT'S ABOUT GAMES(TM) FRANCHISE AGREEMENT THIS FRANCHISE AGREEMENT is made and entered into this _______ day of _______________, 19____, by and between GROW BIZ INTERNATIONAL, INC., a Minnesota corporation ("Franchisor"), and ____________________________________ ("Franchisee"). BACKGROUND: A. Franchisor franchises video and computer game resale stores known as "It's About Games" stores ("It's About Games(TM) Stores") which feature quality used and new video and computer games and related accessories. Franchisor uses and licenses certain trademarks, including "It's About Games," and may hereafter adopt, use and license additional or substitute trademarks, service marks, logos and commercial symbols in connection with the operation of It's About Games(TM) Stores (collectively, the "Marks"). It's About Games(TM) Stores use Franchisor's methods, procedures, standards, specifications and the Marks (all of which are collectively referred to as the "Business System"), which Franchisor may periodically improve, further develop or otherwise modify. B. Franchisee has had an adequate opportunity to be thoroughly advised of the provisions of this Agreement and Franchisor's Offering Circular and has had sufficient time and opportunity to evaluate and investigate the Business System and the procedures and financial requirements associated with the Business System as well as the competitive market in which it operates. C. Franchisee desires to operate an "It's About Games" Store which will conform to the uniform requirements and quality standards of the Business System. AGREEMENTS: The Franchisor and Franchisee agree as follows: 1. GRANT OF FRANCHISE; FRANCHISED LOCATION A. Grant of Franchise. Subject to the provisions stated below, Franchisor grants to Franchisee a personal license and franchise to operate an It's About Games(TM) Store (the "Store") in conformity with Franchisor's Business System at a location within the development area specified in Exhibit A attached hereto. The specified area identified in Exhibit A is referred to as the "Development Area." Franchisee will operate the Store under the Business System in strict compliance with the provisions of this Agreement and only at a location within the Development Area approved by Franchisor (the "Franchised Location"). B. Franchisee's Protected Area; Rights Reserved By Franchisor. During the term of this Agreement, Franchisor will not establish for its own account or franchise others to operate an It's About Games(TM) Store or any other business generally classified as a video and computer game retail business within the exclusive area specified in Exhibit A. The exclusive area identified in Exhibit A, which includes the Development Area, is referred to as the "Exclusive Territory." Franchisee understands, however, that Franchisor may sell any products or services under trademarks other than the Marks (subject to those restrictions described above). Franchisor also may sell products or services under the Marks through other channels of distribution, provided any such products or services Franchisor intends to sell directly within the Exclusive Territory will first be offered to Franchisee on the same terms and conditions as would otherwise be offered within the Exclusive Territory. The rights and privileges granted to Franchisee under this Agreement are personal in nature, and may not be used at any location other than the Franchised Location. Franchisee will not relocate the Store without Franchisor's prior written consent and will not open any other It's About Games(TM) Store in the Exclusive Territory. Franchisee will not have the right to subfranchise or sublicense any of its rights under this Agreement. Franchisee will not use the Franchised Location for any purposes other than the operation of an It's About Games(TM) Store. 2. TERM OF FRANCHISE; RENEWAL RIGHTS A. Term. The term of this Agreement will be for ten (10) years commencing on the date of this Agreement. B. Renewal. Franchisee will have the right to renew its It's About Games(TM) franchise for the Franchised Location for continuing ten (10) year terms, provided Franchisee meets the following conditions: 1. Franchisee has given Franchisor written notice at least one hundred eighty (180) days before the end of the term of this Agreement of its intention to renew; 2. Franchisee has complied with all of the material provisions of this Agreement, including the payment of all monetary obligations owed by Franchisee to Franchisor, and has complied with Franchisor's material operating and quality standards and procedures; 3. Franchisee has at its expense made such reasonable capital expenditures necessary to remodel, modernize and redecorate the Store premises and to replace and modernize the supplies, fixtures, and equipment used in Franchisee's business so that Franchisee's business reflects the then-current physical appearance of new It's About Games(TM) Stores; 4. Franchisee has paid a Renewal Fee of Five Thousand Dollars ($5,000) to Franchisor at least thirty (30) days before the expiration of the initial (and any renewal) term of this Agreement expires; 5. Franchisee executes the standard Franchise Agreement then being used by Franchisor; provided that Franchisee will be required to pay the Renewal Fee in lieu of the Initial Franchise Fee stated in the then-current Franchise Agreement; and 6. Franchisee is able to secure a renewal or extension of the lease for the Franchised Location or is able to secure a new location within the Development Area which has been accepted by Franchisor, such acceptance not to be unreasonably withheld. 3. OWNERSHIP AND USE OF MARKS A. Ownership. Franchisor is the owner of the Marks. Any and all improvements by Franchisee relating to the Marks and Business System will become the sole property of Franchisor who has the exclusive right to register and protect all such improvements in its name. B. Use. Franchisee's right to use and identify with the Marks and Business System applies only to the operation of the Store at the Franchised Location, and exists concurrently with the term of this Agreement and only so long as Franchisee is in complete compliance with Franchisor's quality standards. Franchisee will have the right to use the Marks and Business System only in the manner Franchisor directs and approves in writing. Franchisee will not have or acquire any rights in any of the Marks or Business System other than the right of use as governed by this Agreement. If, in the judgment of Franchisor, Franchisee's acts infringe upon or harm the goodwill, standards of uniformity or quality, or business standing associated with the Marks and Business System, Franchisee will immediately, upon written notice from Franchisor, modify its use of the Marks and Business System in the manner Franchisor directs in writing. Franchisee will not during or after the term of this Agreement do anything directly or indirectly which would infringe upon, harm, mislead or contest Franchisor's rights in the Marks or Business System. Franchisee cannot advertise any liquidation sale or similar type of activity. C. Promotion. Franchisee will operate the Store so that it is clearly identified and advertised as an It's About Games(TM) Store. The style, form and use of the words "It's About Games" in any advertising, written materials or supplies must, however, have Franchisor's prior written approval, which approval will not be unreasonably withheld. Franchisee will use the name "It's About Games" and the other Marks which now or hereafter may form a part of the Business System, on all paper supplies, business cards, letterhead, envelopes, uniforms, advertising materials, signs or other articles in the identical combination and manner as Franchisor may require in writing. Franchisee will comply with all trademark, trade name, service mark and copyright notice marking requirements. D. Identity. Franchisee will not use the words "It's About Games" in its corporate or partnership name. Franchisee will clearly indicate on its business checks, purchase orders, business cards, receipts, promotional materials and other written materials that Franchisee is the owner of the Store and that Franchisee is an It's About Games(TM) franchisee. Franchisee will display a sign which is clearly visible to the general public indicating that the Store is independently owned and operated. E. Substitutions. If any third party claims that its rights to use any of the Marks are superior and if Franchisor determines that such claim is legally meritorious, Franchisee will, upon receiving written notice from the Franchisor, immediately use such changes and amendments to the Marks as Franchisor may require. Franchisee will not make any changes or amendments in or to the use of the Marks and Business System unless directed by Franchisor in writing. F. Litigation. Franchisee will have no obligation to and will not, without Franchisor's prior written consent, defend or enforce any of the Marks in any court or other proceedings for or against imitation, infringement, any claim of prior use, or for any other allegation. Franchisee will, however, immediately notify Franchisor of any claims or complaints made against Franchisee respecting the Marks and will, at its expense, cooperate in all respects with Franchisor in any court or other proceedings involving the Marks. Franchisor will pay the cost and expense of all litigation Franchisor incurs, including attorneys' fees, specifically relating to the Marks. Franchisor and its legal counsel will have the right to control and conduct any litigation relating to the Marks. 4. INITIAL FRANCHISE FEE A. Initial Franchisee Fee. Franchisee will pay Franchisor a nonrefundable Initial Franchise Fee of _____________ Thousand Dollars ($______), which will be due and payable on the date of this Agreement. The Initial Fee payable by Franchisee is payment to Franchisor for the costs that it will incur to get Franchisee into business including costs Franchisor incurs for training, site evaluation, business overhead costs, travel costs, and for the other initial services Franchisor provides hereunder. B. Refund of Fee. If Franchisor subsequently determines that Franchisee is not qualified to properly operate the Store, Franchisor will refund to Franchisee the Initial Franchise Fee. Franchisor will notify Franchisee in writing within one hundred eighty (180) days of the date of this Agreement if this Agreement is subject to termination under this Section 4(B). 5. CONTINUING FEE A. Continuing Fee. Franchisee will, for the term of this Agreement, pay to Franchisor a Continuing Fee equal to four percent (4%) of Franchisee's Gross Sales (as defined below). Franchisee's obligation to pay Franchisor the Continuing Fee under the terms of this Agreement will remain in full force and effect until this Agreement has expired or is terminated under the provisions herein. B. Payment. At Franchisor's request, Franchisee will promptly execute and deliver to Franchisor appropriate pre-authorized check forms or such other instruments or drafts Franchisor's bank requires payable against Franchisee's bank account, so that Franchisor may electronically collect (draft on Franchisee's account by electronic withdrawal) the Continuing Fee due pursuant to Section 5(A) above. Franchisor will report to Franchisee on or before Wednesday of each week its Gross Sales for the previous week. If Franchisee fails to report its Gross Sales on a timely basis, Franchisor may estimate Franchisee's Gross Sales to prepare a provisional estimate for billing purposes for that week. On Thursday of each week, Franchisor will bill Franchisee for all amounts due for the previous week and deposit into its account Franchisee's pre-authorized check or other instrument for the amounts due either pursuant to Franchisee's report or Franchisor's estimate. Any unpaid Continuing Fee or other amounts past due and owing to Franchisor will bear interest at the rate of eighteen percent (18%) per annum or the maximum rate permitted by law, whichever is less. Franchisee will pay Franchisor for any and all costs Franchisor incurs in collecting any unpaid and past due Continuing Fees, including reasonable attorneys' fees. C. Gross Sales. The term "Gross Sales" means the total amount of all revenues Franchisee receives from the sale of goods and services, whether for cash or by check, credit card or trade, in connection with the Store, less customer refunds and returns. Gross Sales will include sales made through the Internet and wholesale transactions involving any party other than an It's About Games(TM) franchisee who is in good standing with Franchisor. Gross Sales will not include sales tax collected from customers and paid to appropriate tax authorities. 6. ADVERTISING AND PROMOTION A. Cooperative Advertising. Franchisee will participate in, support and contribute a proportionate share, but no more than an amount equal to four percent (4%) of the Gross Sales for the Store, of the cost of regional cooperative advertising programs either designated by Franchisor or approved by a regional advertising council established by Franchisor or other It's About Games(TM) franchisees in Franchisee's area. Franchisor reserves the right to designate regional advertising markets, to establish regional advertising councils and to establish the rules under which such councils will operate. B. Local Advertising Expenditures. To the extent Franchisee's annual contributions to cooperative advertising programs described in Section 6(A) above are less than four percent (4%) of the Gross Sales for the Store, or if the Franchisee cannot participate in any regional cooperative advertising program because such a program has not been established in Franchisee's geographic area, Franchisee will then be obligated to conduct advertising and promotional activities in Franchisee's local geographic area; provided that Franchisee's local advertising activities will not reduce, eliminate or otherwise impact Franchisee's obligations under Section 6(A) above. Franchisee's local advertising expenditures will include advertising, merchandising, sales promotion and other forms of advertising at the local level. Within thirty (30) days following the end of each calendar quarter, Franchisee will provide Franchisor with an accounting of the monies that it has spent for approved regional cooperative advertising and local advertising for the preceding calendar quarter. If Franchisee has failed to spend at least four percent (4%) of its Gross Sales for the calendar quarter for approved regional cooperative advertising or local advertising, Franchisee will deposit with Franchisor the difference between what it should have spent for advertising during the calendar quarter and what it actually spent for advertising during the calendar quarter. Franchisor will spend such amount for any type of advertising or promotion that Franchisor deems appropriate for Franchisee's business, although Franchisor will use reasonable efforts to spend such amounts in Franchisee's local geographic area. C. Marketing Fee. In addition to Franchisee's local advertising obligations described in Section 6(B) above, Franchisee will pay to Franchisor an annual Marketing Fee of Five Hundred Dollars ($500) which will be payable in two (2) installments of Two Hundred Fifty Dollars ($250) each on the first day of January and July of each year. Franchisor will use the Marketing Fee to develop marketing programs, produce advertising and/or promotional materials, conduct advertising research, and implement advertising and promotional campaigns. D. Yellow Page Advertising. Franchisee will, at its expense, obtain an annual yellow page listing in the primary yellow page directory serving the geographic area in which the Store is located. At a minimum, this listing will consist of a bold heading in such directory. Amounts spent for yellow page advertising will be credited towards Franchisee's local advertising obligations described in Section 6(B) above. E. Future Advertising Programs. Franchisee acknowledges and agrees that as the It's About Games(TM) franchise system continues to expand and mature, it will be necessary to revise Franchisee's advertising obligations. Franchisee therefore agrees that Franchisor may increase Franchisee's minimum advertising expenditures (as described in Section 6(B) above) up to a total of five percent (5%) of Franchisee's Gross Sales. Franchisee further agrees that of the five percent (5%), up to two percent (2%) of Franchisee's Gross Sales will be paid in the form of an "Advertising Fee" to Franchisor for deposit in an "Advertising Fund." In such event, Franchisee's advertising obligations under Section 6(A) (and, if appropriate, Section 6(B)) above will be reduced to three percent (3%) of the Gross Sales for the Store. Franchisor will provide Franchisee with at least sixty (60) days' written notice before the commencement of an Advertising Fee. All Advertising Fees will be placed in an Advertising Fund managed by Franchisor. Reasonable disbursements from the Advertising Fund will be made solely for the payment of expenses incurred in connection with the general promotion of the Marks and the Business System, including the cost of formulating, developing and implementing advertising and promotional campaigns; and the reasonable costs of administering the Advertising Fund, including accounting expenses and the actual costs of salaries and fringe benefits paid to Franchisor's employees engaged in administration of the Advertising Fund. Although Franchisor will strive to manage the Advertising Fund in such a manner that benefits franchisees uniformly, taking into account regional and/or local advertising costs and forms of media available, Franchisor cannot insure that any individual franchisee will benefit directly or on a pro rata basis from the future placement of any such advertising in its local market. The methods of advertising, media employed and contents, terms and conditions of advertising campaigns and promotional programs will be within Franchisor's sole discretion. Franchisor will provide Franchisee an annual unaudited statement of the receipts and disbursements of the Advertising Fund. F. Approved Advertising Materials. Franchisee will use only approved advertising and promotional materials. If Franchisee desires to use any unapproved advertising or promotional materials bearing the name "It's About Games" or other Marks, Franchisee must obtain written approval from Franchisor before using any such materials, which approval will not be unreasonably withheld. G. Promotion. Franchisee will use its best efforts to promote and advertise its It's About Games(TM) business and will participate in all advertising and promotional programs Franchisor establishes. Franchisee will have the right to advertise and sell its products at whatever prices Franchisee determines. 7. FRANCHISOR'S OBLIGATIONS A. Location. Franchisor will provide Franchisee with assistance respecting site location and evaluation for the Store. Franchisee acknowledges that Franchisor's assistance in site location and acceptance of the premises does not constitute a representation or guaranty by Franchisor that the location will be a successful location for Franchisee's It's About Games(TM) Store. B. Lay-Out and Design. Franchisor will designate the standard design, lay-out and motif for Franchisee's premises and will furnish prototype specifications for the premises. C. Equipment, Supplies and Inventory. Franchisor will designate the standard fixtures, equipment, supplies, signs and initial inventory for use in the Store. Franchisee will purchase only such types, models or brands of fixtures, furniture, equipment, signs and supplies that Franchisor approves for It's About Games(TM) Stores as meeting its specifications and standards, including specifications and standards for quality, design, warranties, appearance, function and performance. D. Training. Franchisor will, at its expense, provide a three-part training program in Minneapolis, Minnesota or other location Franchisor designates to educate, familiarize and acquaint Franchisee with the business of operating an It's About Games(TM) Store. The first session of the training program will include instruction on general business issues related to the ownership of a privately-owned retail business, including real estate matters, business plan development, inventory management and point-of-sales systems. The period of this session will be at Franchisor's discretion but generally will be for not less than two and one-half (2 1/2) days and will be scheduled by Franchisor at its discretion. The second session of the training program will address personnel issues, store buildout, used product purchasing, Franchisor's preferred vendor program and other topics Franchisor selects. The period of this session will be at Franchisor's discretion but generally will be for not less than two and one-half (2 1/2) days and will be scheduled by Franchisor in its sole discretion. The third session of the training program will include instruction on sales and marketing, inventory purchasing, computer operation, store management and other topics Franchisor selects. The period of this session will be at Franchisor's discretion but generally will be for not less than five (5) days and will be scheduled by Franchisor in its sole discretion. Franchisee must successfully complete all sessions of the training program. If Franchisee fails to successfully complete all sessions, he/she will not be permitted or authorized to manage Franchisee's business and Franchisor may terminate this Agreement pursuant to Section 15(A)(2) below. Franchisee will be responsible for travel costs, room and board, the salaries, fringe benefits and other expenses Franchisee and its employees incur in attending all sessions of the training program. E. Opening Assistance. Franchisor will assist in scheduling the opening of the Store. Franchisee will not open or commence business operations until Franchisor has approved the opening. Franchisor will, at no charge, provide at least one (1) person to assist Franchisee with the opening of the Store for at least two (2) days around the time of opening. If Franchisee is opening its second or subsequent Store, Franchisee will provide this assistance only at Franchisee's request. F. Operations Manual. Franchisor will loan Franchisee one copy of the Operations Manual wherein Franchisor will describe its operational policies, standards, requirements and practices. Franchisee will comply with all provisions of the Operations Manual. Franchisor reserves the right to revise the Operations Manual at any time. G. Additional Initial Assistance. Franchisor will assist Franchisee in the development of a business plan. Franchisor and Franchisee may also agree that Franchisor provide management assistance and other services, in addition to the usual initial assistance and supervision Franchisor provides to all franchisees, for additional agreed upon compensation. H. Ongoing Assistance. During the operation of Franchisee's business, Franchisor will: (1) inspect the Store as often as Franchisor deems necessary and provide written reports to Franchisee on operations; (2) provide, upon the written request of Franchisee, advisory services pertaining to operation of Franchisee's business; (3) periodically make available to Franchisee all changes, improvements and additions to the Business System to the same extent as made available to other franchisees; (4) provide Franchisee with all supplements and modifications to the Operations Manual; and (5) develop advertising and marketing materials. 8. OPERATION OF THE FRANCHISEE'S BUSINESS The Marks and Business System licensed to Franchisee represent valuable goodwill distinctive of Franchisor's business and reputation. Franchisor will periodically develop uniform standards of quality and service regarding the business operations of the Store so as to protect (for the benefit of all franchisees and Franchisor) the distinction, valuable goodwill and uniformity represented and symbolized by the Marks and Business System. To insure that all franchisees will maintain the uniform requirements and quality standards for goods and services associated with the It's About Games(TM) Stores and with the Marks and Business System, Franchisee will maintain the uniformity and quality standards Franchisor reasonably requires for all products and services and agrees to the following provisions: A. Managerial Responsibility. During the term of this Agreement, the parties who have signed this Agreement on behalf of Franchisee will personally manage and operate Franchisee's business and will not, without Franchisor's prior written consent, delegate its authority and responsibility with respect to management and operation. If Franchisee is a corporate entity or a partnership, one individual will retain at least fifty percent (50%) of the equity and voting interest in such corporation or partnership and will be obligated to personally manage and operate the Franchisee's business. B. Design and Appearance of Premises. The design and appearance of the exterior and interior of the Store, including signage, are part of the Business System. It is essential to the integrity of Franchisor's Business System that as great a degree of uniformity as possible be maintained among the various premises of It's About Games(TM) franchisees. Franchisee agrees that: (1) no material alteration or addition will be made to the premises without Franchisor's prior written consent; (2) the painting and decor will be maintained in such manner and form as Franchisor may reasonably require; (3) Franchisee will follow Franchisor's reasonable instructions with respect to layout and character of interior fixtures and furnishings; and (4) only such signs, emblems, logos, lettering, and artwork as Franchisor may reasonably require or periodically provide will be displayed on the Store premises. C. General Operation. Franchisee will use the Marks and Business System in strict compliance with the standards, operating procedures, specifications, requirements and instructions required of all It's About Games(TM) franchisees, which Franchisor may periodically amend and supplement. D. Products and Services. Franchisee will sell only those categories of products and services Franchisor approves in writing and will offer for sale all products and services required by Franchisor. Franchisee will conform to all quality and customer service standards Franchisor requires in writing. FRANCHISOR DISCLAIMS ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE IN CONNECTION WITH FRANCHISOR'S (AND/OR AN AFFILIATE'S) SALE OF ANY GOODS, EQUIPMENT, FURNITURE, SIGNS OR SUPPLIES TO FRANCHISEE. Franchisee agrees to execute any and all documents Franchisor reasonably requests, including letters of credit, security agreements, and financing statements, to provide collateral for amounts due to Franchisor for purchases of inventory and other items used in Franchisee's business. Franchisor's approval is not required with respect to new and used video and computer games and other accessories Franchisee purchases from its customers or places in the Store on a consignment basis, provided, however, that Franchisee may not sell or offer for sale any goods which would be determined unsafe upon reasonable inspection. E. Maintenance of Premises; Modernization. Franchisee will, at its expense, repair, paint and keep in an attractive, clean and sanitary condition the interior and exterior of the Store premises. Franchisee will insure that all equipment will be kept in good working order and will meet Franchisor's quality standards. Franchisee will periodically make reasonable capital expenditures to remodel, modernize and redecorate the Store and to replace and modernize the furniture, fixtures, signs, supplies and equipment used in the Store so that the Store will reflect the then-current physical appearance of new It's About Games(TM) Stores. All remodeling, modernization or redecoration of the Store must be done pursuant to Franchisor's then-current standards and specifications and only with Franchisor's prior written approval. Franchisee agrees to commence remodeling activities within ninety (90) days after written notice from Franchisor, although Franchisee will not be required to remodel, modernize and redecorate the Store more than once every five (5) years during the term of this Agreement. F. Compliance with Laws. Franchisee will, at its expense, comply with all applicable local, state, federal and municipal laws, ordinances, rules and regulations pertaining to the operation of the Store, including any and all licensing and bonding requirements. G. Payment of Liabilities. Franchisee will timely pay all of its obligations and liabilities due and payable to Franchisor, suppliers, lessors and creditors. H. Taxes. Franchisee will promptly pay all federal, state and local taxes arising out of the operation of Franchisee's business. Franchisor will not be liable for these or any other taxes and Franchisee will indemnify Franchisor for any such taxes that may be assessed or levied against Franchisor which arise or result from Franchisee's business. I. Standardization. Franchisee will require its employees to wear such uniforms as Franchisor may designate and will comply with such programs of standardization as Franchisor may periodically develop to promote the common business image and to protect the goodwill associated with the Marks and Business System. J. Personnel. Franchisee will, at all times when open for business, have a person designated as a management person on duty who will be responsible for the business operations of Franchisee's business. Franchisee will employ and maintain a sufficient number of adequately trained and competent employees to provide efficient service to Franchisee's customers. K. Hours of Operation. Franchisee's business will be open for business for such days and hours as Franchisor may reasonably designate. L. Additional Training Seminars. Franchisor may periodically conduct refresher courses, seminars and other programs for all It's About Games(TM) franchisees. Franchisee and/or its employees will be required to attend any such programs and will be responsible for any expenses incurred by them in attending such programs including the cost of transportation, lodging, meals and any wages. M. Photographs. Franchisor will have the right to photograph the Store premises and, with prior written consent, Store employees at all reasonable times. N. Operations Manual. To protect Franchisor's reputation and goodwill and to maintain uniform operating standards under the Marks and Business System, Franchisee will conduct its business in accordance with Franchisor's Operations Manual, one copy of which Franchisee will have on loan from Franchisor. Franchisee will treat the Operations Manual as confidential, and will use all reasonable efforts to maintain the Operations Manual as secret and confidential. The Operations Manual will remain Franchisor's sole property. Franchisor may periodically revise the contents of the Operations Manual. Franchisee agrees to comply with each new or changed standard. Franchisee will insure that its copy of the Operations Manual is kept current. In the event of any dispute as to the contents of the Operations Manual, the terms of the master copy of the Operations Manual maintained by Franchisor will be controlling. O. Lease. Franchisee's lease or sublease for the Store premises must be approved by Franchisor before its execution, but such approval will not be unreasonably withheld. Franchisee must provide Franchisor with an executed copy of any lease for the Store. Franchisor makes no guarantees concerning the success of the Store located on any site consented to by Franchisor. Franchisor recommends that Franchisee employ an independent real estate broker to assist Franchisee in locating a suitable site and negotiating a lease for such site. Franchisee's lease must contain provisions requiring that: (i) so long as this Agreement remains in effect, the premises will be used only for an It's About Games(TM) business; (ii) Franchisor will be granted the right (but not the duty) to take possession of the premises and assume the lease in the event of a termination of this Agreement or a threatened termination of the lease as a result of a breach by Franchisee; (iii) the landlord will provide Franchisor written notice of any Franchisee default and/or right to cure; and (iv) upon termination of this Agreement or the Lease, Franchisee must remove all signs and materials bearing the name "It's About Games" and other Marks. P. Point-of-Sale System. Franchisee will utilize in the Store the point-of-sale system (the "POS System") which Franchisor has developed and/or selected for the Business System, including all future updates, supplements and modifications. The computer software package developed for use in Franchisee's business will include a proprietary software program owned by Franchisor or developed for Franchisor by a third party (the "Third Party Developer"). Franchisee must lease the proprietary software from Franchisor or the Third Party Developer. Franchisee and Franchisor will enter into Franchisor's standard form of Computer Software License Agreement attached hereto as Exhibit B ("the Software License Agreement") in connection with Franchisee's use of such software. Franchisor reserves the right to assign its rights, title and interest in the Proprietary Software or the Software License Agreement to the Third Party Developer. In such event, Franchisee may be required to enter into a separate computer software license agreement specified by the Third Party Developer. Franchisor also reserves the right, upon prior written notice to Franchisee, to access information and data produced by Franchisee's POS System. The computer hardware component of the POS System must conform with specifications Franchisor or the Third Party Developer develops and must be configured as a package unit as Franchisor or the Third Party Developer designates. If Franchisor or a third party designee is requested to configure Franchisee's computer hardware component to conform with the designated computer software component of the POS System, Franchisor or the third party designee may provide such assistance for additional agreed upon compensation. Franchisee will be required to utilize and, at Franchisor's discretion, pay for all future updates, supplements and modifications to the POS System. Q. Participation in Internet Web Site. Franchisee acknowledges that the Internet is a powerful, expanding medium through which business is conducted. Franchisee must have an e-mail address. In addition, Franchisor may, upon ninety (90) days' prior written notice, require Franchisee, at Franchisee's expense, to participate in an It's About Games(TM) World Wide Web Site listed on the Internet. Franchisor will, at its discretion, determine the content and use of an It's About Games(TM) Web Site and will establish the rules under which franchisees may or will participate in such Web Site or separately use the Internet. Franchisor will retain all rights relating to the It's About Games(TM) Web Site and may alter or terminate the Web Site upon thirty (30) days' notice to Franchisee. Franchisee's general conduct on the Internet and specifically its use of the Marks on the Internet (including the domain name and any other Marks Franchisor may develop as a result of participation in the Internet) will be subject to the provisions of this Agreement. Franchisee acknowledges that certain information obtained through its participation in the It's About Games(TM) Web Site may be considered Confidential Information (as defined in Section 9 below), including access codes and identification codes. Franchisee's right to participate in the It's About Games(TM) Web Site or otherwise use the Marks or Business System on the Internet will terminate when this Agreement expires or terminates. 9. CONFIDENTIAL INFORMATION A. Non-Disclosure of Confidential Information. Franchisee and those individuals who have signed the Personal Guaranty attached hereto as Exhibit C will not, during or after the term of this Agreement, communicate, disclose or use for the benefit of any other person or entity any confidential information, knowledge or know-how concerning the Business System which may be communicated to Franchisee. Franchisee will disclose such confidential information only to such of its employees as must have access to it in order to operate Franchisee's business. Any and all information, knowledge and know-how, including the Operations Manual, any other manuals created for use in the operation of the Store, methods, supplier lists, procedures, specifications, techniques, computer programs and other data which Franchisor copyrights or designates as confidential will be deemed confidential for purposes of this Agreement. B. Confidentiality Agreements. All of Franchisee's employees who have managerial duties respecting the Store and who have access to confidential information of Franchisor, as well as all corporate officers, directors and shareholders if Franchisee is a corporation (all partners if Franchisee is a partnership), must sign agreements in a form satisfactory to Franchisor, agreeing to maintain the confidentiality, during the course of their agreement and thereafter, of all information Franchisor copyrights or designates as confidential and proprietary. Copies of the executed agreements will be provided to Franchisor upon request. 10. INSURANCE; BONDING A. Insurance. Franchisee will obtain and maintain in force (under policies of insurance issued by solvent and reputable carriers) and pay the premiums for public liability insurance with complete operations coverage with minimum limits of $1,000,000 per person and $1,000,000 per occurrence, bailee insurance protecting Franchisee's consignment goods and other insurance in such types and amounts as Franchisor may reasonably require. Such insurance policies will expressly protect both Franchisee and Franchisor and will require the insurer to defend both Franchisee and Franchisor in any action. Franchisee will furnish to Franchisor a certificate of insurance as stated above, naming Franchisor as an additional insured, and providing that such policy will not be canceled, amended or modified except upon thirty (30) days' prior written notice to Franchisor. Maintenance of the insurance requirement will not relieve Franchisee of the obligations of indemnification stated in Section 11 below. If Franchisee fails to obtain or maintain in force any insurance as required by this Section or to furnish any certificate of insurance required hereunder, Franchisor may, in addition to all other available remedies, obtain such insurance or certificates, and Franchisee will promptly reimburse Franchisor for all insurance premiums and other costs incurred in obtaining such insurance. B. Bonding. Franchisee will comply with any and all bonding requirements which may be applicable to its It's About Games(TM) business, including bonding requirements resulting from the consignment portion of Franchisee's business. 11. INDEPENDENT CONTRACTORS; INDEMNIFICATION A. Relationship. Franchisor and Franchisee are independent contractors. Neither Franchisor nor Franchisee will make any agreements, representations or warranties in the name of or for the other or that their relationship is other than franchisor and franchisee. Neither Franchisor nor Franchisee will be obligated by or have any liability under any agreements, representations or warranties made by the other. Franchisee alone will be responsible for all loss or damage arising out of or relating to the operation of Franchisee's business or arising out of the acts or omissions of Franchisee or any of its agents, employees or contractors in connection with the preparation and sale of products by Franchisee, and for all claims for damage to property or for injury or death of any persons directly or indirectly resulting therefrom. Franchisee will indemnify Franchisor against and will reimburse Franchisor for all obligations and damages arising out of the operation of Franchisee's business, including all costs Franchisor reasonably incurs in the defense of any such claim brought against it or in any action in which it is named as a party (including reasonable attorneys' fees). Franchisor will have the right to defend any such claim against it. Franchisor will indemnify Franchisee against and reimburse Franchisee for any obligations or liability for damages attributable to agreements, representations or warranties of Franchisor, or caused by Franchisor's negligence or willful action, and for costs Franchisee reasonably incurs in the defense of any such claim brought against it or in any action in which it is named as a party, provided that Franchisor will have the right to participate in and, to the extent Franchisor deems necessary, to control any litigation or proceeding which might result in liability of or expense to Franchisee subject to such indemnification. The indemnities and assumptions of liabilities and obligations stated in this Agreement will continue in full force and effect following the expiration or termination of this Agreement. B. Enforcement. The non-prevailing party will pay all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party in any action or proceeding brought to enforce any provision of this Agreement or to enjoin any violation of this Agreement. 12. SALES REPORTS, FINANCIAL STATEMENTS AND AUDIT RIGHTS A. Sales Reports. Franchisee will maintain an accurate written record of daily Gross Sales and will deliver to Franchisor a signed and verified statement of the weekly Gross Sales of Franchisee's business using such forms as Franchisor may require in writing. The weekly statement of Gross Sales must be provided to Franchisor on or before Wednesday of each week for the preceding week. Franchisor reserves the right to modify or substitute the required forms and impose additional recordkeeping procedures. B. Financial Statements. Franchisee will, at its expense, provide Franchisor with quarterly and annual financial statements and such other financial reports as Franchisor specifies using the forms and chart of accounts Franchisor requires. All financial information provided to Franchisor under this Section must be presented in the form Franchisor periodically requires in writing. Franchisee will deliver the quarterly financial information to Franchisor by the thirtieth (30th) day of the month following the end of the preceding quarter. The annual financial statement must be provided on or before March 1 of each year for the preceding calendar year. C. Audit Rights. Franchisee will make all of its financial books and records available to Franchisor or its designated representative at all reasonable times for review and audit by Franchisor or its designee. Franchisee's financial books and records for each fiscal and calendar year will be kept in a secure place and will be available for audit by Franchisor for at least five (5) years. If an audit conducted by Franchisor results in a determination that the Continuing Fees paid to Franchisor are deficient (underpaid) by more than two percent (2%), Franchisee will pay Franchisor for the reasonable costs and expenses that it has incurred as a result of the audit. If pursuant to audits, the Continuing Fees have been deficient by more than two percent (2%) twice or more within any five (5) year period, this will be considered a material breach of this Agreement. 13. FRANCHISOR'S RIGHT OF FIRST REFUSAL TO PURCHASE A. Restrictions. Franchisee will not sell, assign, trade, transfer, lease, sublease, or otherwise dispose of: (1) any interest in or any part of the Franchised Location or this Agreement, or (2) any controlling interest (whether through one or more related transactions) in Franchisee's business or the assets of Franchisee's business to any third party, without first offering the same to Franchisor in writing, at the same price and on the same terms as stated in the proposed third-party offer. Franchisee's written offer to Franchisor must contain all material provisions of the proposed sale or transfer. Upon Franchisor's receipt of written notice specifying the proposed price and terms of a proposed sale or transfer of Franchisee's business or interest therein, Franchisor will give Franchisee written notice within ten (10) business days thereafter if Franchisor has an interest in negotiating to purchase the business or interest being offered according to the proposed terms. If Franchisor commences negotiations to purchase Franchisee's business or interest therein as described herein, Franchisee may not sell the business or interest being offered to a third party for at least thirty (30) days or until Franchisor and Franchisee agree in writing that the negotiations have terminated, whichever comes first. If Franchisor waives its right to purchase, Franchisee may complete the sale or transfer of the business or interest therein according to the terms described in the written notice to Franchisor but not upon more favorable terms. Any such sale, transfer or assignment to a third party is subject to the provisions stated in Section 14 of this Agreement. Franchisor's nonacceptance of Franchisee's written offer will not affect or change Franchisee's obligations under this Agreement. B. Corporate Franchisee. If Franchisee is a corporation, the shareholders cannot sell, assign, pledge or otherwise dispose of a controlling interest in the capital stock of Franchisee ("Capital Stock") (except to immediate family members of the controlling shareholder(s) or to a trust established for their benefit) until the Capital Stock has been first offered to Franchisor in writing under the same terms and conditions offered to any third party. A shareholder of Franchisee may, however, bequeath, sell, assign, trade or transfer his/her Capital Stock to the other shareholders of Franchisee corporation because of death or permanent disability without first offering it to Franchisor, provided Franchisee provides Franchisor with written notice of all such transactions. All shares of Capital Stock issued by Franchisee's corporation to its shareholders must bear the following legend on the reverse side of each issued and outstanding stock certificate: The shares of capital stock represented by this certificate are subject to a written Franchise Agreement which grants Grow Biz International, Inc. a right of first refusal to purchase these shares of capital stock from the shareholder. Nothing in this Section will be construed as prohibiting the shares of Capital Stock of a corporate Franchisee from being pledged as security to an institutional lender who has provided financing to or for the Store; provided the institutional lender accepts such security interest subject to Franchisor's reasonable conditions. 14. ASSIGNMENT OF FRANCHISE AGREEMENT A. By Franchisor. This Agreement may be assigned and transferred by Franchisor and will benefit Franchisor's successors and assigns. Any such assignment or transfer will require the assignee to fulfill Franchisor's obligations under this Agreement. B. Corporate Franchisee. This Agreement may be transferred or assigned by Franchisee to a corporation which is owned or controlled by Franchisee, provided: (i) Franchisee and all other shareholders of the assignee corporation owning at least ten percent (10%) of the Capital Stock thereof sign the Personal Guaranty attached hereto as Exhibit C and agree to be bound by the provisions of this Agreement; and (ii) Franchisee furnishes prior written proof to Franchisor substantiating that the corporation will be financially able to perform all of the provisions of this Agreement. Franchisee will give Franchisor fifteen (15) days written notice before the proposed date of assignment or transfer of this Agreement to a corporation owned or controlled by Franchisee; however, the transfer or assignment of this Agreement will not be valid or effective until Franchisor has received the legal documents which its legal counsel deems necessary to properly document such transfer or assignment. C. Conditions to Other Transfer or Assignment. Franchisee (and its partners and shareholders, if any) will not transfer (whether voluntary or involuntary), assign or otherwise dispose of, in one or more transactions, Franchisee's business, the Franchised Location, substantially all or all of the assets of Franchisee's business, this Agreement or any controlling interest in Franchisee (a "controlling" interest will include a proposed transfer of fifty percent (50%) or more of the Capital Stock of a corporate Franchisee) without Franchisor's prior written consent, except to trusts established for Franchisee's benefit. Franchisor will not unreasonably withhold its consent to a transfer, subject to any or all of the following conditions described below which Franchisor may, in its sole discretion, deem necessary: 1. All of Franchisee's accrued monetary obligations to Franchisor will have been satisfied, and Franchisee is not in default under this Agreement; 2. Franchisee executes a written agreement in a form satisfactory to Franchisor, in which Franchisee covenants to observe all applicable post-term obligations and covenants contained in this Agreement; 3. The transferee-franchisee enters into a written agreement in a form satisfactory to Franchisor assuming and agreeing to discharge all of Franchisee's obligations and covenants under this Agreement for the remainder of its term or, at Franchisor's option, execute Franchisor's then-current standard form of franchise agreement (which may provide for different royalties, advertising contributions, duration, and other rights and obligations from those provided in this Agreement); 4. The transferee-franchisee is approved by Franchisor and demonstrates to Franchisor's satisfaction that he/she meets Franchisor's managerial, financial, and business standards for new franchisees, possesses a good business reputation and credit rating, and has the aptitude and ability to conduct the franchised business. Franchisee understands that Franchisor may communicate directly with the transferee-franchisee during the transfer process to respond to inquiries, as well as to ensure that the transferee-franchisee meets Franchisor's qualifications; and 5. The transferee-franchisee successfully completes Franchisor's training program. D. Transfer Fee. If this Agreement is assigned or transferred pursuant to Section 14(C) above, Franchisee will pay Franchisor a transfer fee of Five Thousand Dollars ($5,000) for the costs Franchisor incurs, including the costs of any required training. There will be no transfer fee payable with respect to transfers to immediate family members. 15. FRANCHISOR'S TERMINATION RIGHTS A. Grounds. Franchisee will be in default, and Franchisor may, at its option, terminate this Agreement, as provided herein, if: (1) Franchisee fails to open and commence operations of the Store at such time as the premises are ready for occupancy or within nine (9) months of the execution of this Agreement, whichever occurs first; (2) Franchisee violates any material provision or obligation of this Agreement; (3) Franchisee or any of its managers, directors, officers or majority shareholders are convicted of, or plead guilty to or no contest to (a) a charge of violating any law which adversely impacts upon the reputation of the franchised business or (b) any felony; (4) Franchisee fails to conform to the material requirements of the Business System or the material standards of uniformity and quality for the products and services Franchisor has established in connection with the Business System; (5) Franchisee fails to timely pay Continuing Fees, Marketing or Advertising Fees, buying group (inventory) obligations or any other obligations or liabilities due and owing to Franchisor or fails to timely pay any advertising cooperative obligations; (6) Franchisee is insolvent within the meaning of any applicable state or federal law; (7) Franchisee makes an assignment for the benefit of creditors or enters into any similar arrangement for the disposition of its assets for the benefit of creditors; (8) Franchisee voluntarily or otherwise "abandons" (as defined below) the franchised business; (9) Franchisee is involved in any act or conduct which materially impairs the goodwill associated with the name "It's About Games" or any of the Marks or the Business System; or (10) Franchisee's lease for the Store premises expires or is terminated for any reason (unless, through no fault of Franchisee, the lessor of the premises in which the Store is located refuses to renew Franchisee's lease and Franchisee relocates within the Development Area to a site approved by Franchisor within sixty (60) days thereafter). The term "abandon" means Franchisee's failure to operate the Store during regular business hours for a period of ten (10) consecutive days without Franchisor's prior written consent unless such failure is due to an act of God, war, strikes or riots. B. Procedure. Except as described below, Franchisee will have thirty (30) days, or such longer period as applicable law may require, after its receipt from Franchisor of a written Notice of Termination within which to remedy any default hereunder, and to provide evidence thereof to Franchisor. If Franchisee fails to correct the alleged default within that time (or such longer period of time as applicable law may require), this Agreement will terminate without further notice to Franchisee effective immediately when the thirty (30) day period (or such longer period as applicable law may require) expires. Franchisor may terminate this Agreement immediately upon delivery of written notice to Franchisee, with no opportunity to cure, if the termination results from any of the following: (1) Franchisee repeatedly fails to comply with one or more material requirements of this Agreement; (2) the nature of Franchisee's breach makes it not curable; (3) Franchisee willfully and repeatedly deceives customers relative to the source, nature or quality of goods sold; (4) any default under items (3), (6), (8) or (9) in Section 15(A) above; or (5) Franchisee willfully and materially falsifies any report, statement, or other written data furnished to Franchisor either during the franchise application process or after Franchisee is awarded a franchise. Any report submitted pursuant to Section 12 will be conclusively deemed to be materially false if it understates Gross Sales by more than four percent (4%). C. Applicable Law. If the provisions of this Section 15 are inconsistent with applicable law, the applicable law will apply. Franchisor's ability to terminate or fail to renew a Wisconsin franchise will be governed by the Wisconsin Fair Dealership Law, Chap. 135, Wisc. Stats. Minnesota law provides franchisees with certain termination and non-renewal rights. As of the date of this Agreement, Minn. Stat. Section 80C.14, Subd. 3, 4 and 5 require that, except in certain specified cases, a franchisee be given 90 days notice of termination (with 60 days to cure) and 180 days notice for non-renewal of the Agreement. 16. FRANCHISEE'S TERMINATION RIGHTS; NOTICE REQUIRED A. Termination. Franchisee may terminate this Agreement if Franchisor violates any material obligation of Franchisor to Franchisee and fails to cure such violation within thirty (30) days after Franchisor's receipt of written notice from Franchisee; provided, however, that Franchisee is in substantial compliance with the Agreement at the time of giving such notice of termination. Franchisee's written notice will identify the violation and demand that it be cured. B. Required Notice. A party must give the other party written notice of an alleged default under or violation of this Agreement after it has knowledge of, determines, or is of the opinion that there has been an alleged default under or violation of this Agreement. If there is failure to give written notice of an alleged default under this Agreement within one (1) year from the date that the nonbreaching party has knowledge of, determines or is of the opinion that there has been an alleged default, the alleged default will be deemed to be approved and waived, and the alleged default or violation will not be deemed to be a default under or violation of this Agreement. 17. FRANCHISEE'S OBLIGATIONS UPON TERMINATION A. Post-Term Duties. If this Agreement is terminated for any reason other than a termination as a result of a breach by Franchisor, Franchisee will: (1) within five (5) days after termination, pay all amounts due and owing to Franchisor under this Agreement; (2) return to Franchisor by first class prepaid United States mail the Operations Manual and any other manuals, advertising materials, and all other printed materials relating to the operation of the franchised business; (3) assign to Franchisor the telephone number for the Store; and (4) remove all signs and other materials bearing the name "Its About Games" and other Marks; (5) comply with all post-termination obligations under the Software License Agreement, including the return of all copies of Franchisor's proprietary software; and (6) comply with all other applicable provisions of this Agreement, including the non-compete provisions. Upon termination of this Franchise Agreement for any reason, Franchisee's right to use the name "It's About Games" and the other Marks and the Business System will immediately terminate. If Franchisee fails to remove all signs and other materials bearing the Marks, Franchisor may do so at Franchisee's expense. B. Redecoration. If this Agreement is terminated for any reason, and Franchisor permits Franchisee to remain in possession of the Franchised Location, Franchisee will, at its expense modify, both the exterior and interior appearance of the business premises so that they will be easily distinguished from the standard appearance of It's About Games(TM) Stores. At a minimum, such changes and modifications to the premises will include: (1) repainting the premises with totally different colors; (2) removing all signs and other materials bearing the name "It's About Games" and other Marks; (3) removing from the premises all fixtures which are indicative of It's About Games(TM) Stores; (4) discontinuing use of the approved employee uniforms and refraining from using any uniforms which are confusingly similar; and (5) discontinuing use of all packaging and confidential information regarding the operation of the Store. 18. FRANCHISEE'S COVENANTS NOT TO COMPETE A. During Term. Franchisee (and the Personal Guarantors) will not, during the term of this Agreement, on their own account or as an employee, agent, consultant, partner, officer, director, or shareholder of any other person, firm, entity, partnership or corporation, own, operate, lease, franchise, conduct, engage in, be connected with, have any interest in, or assist any person or entity engaged in any business involving the selling, leasing, renting or exchanging of new or used video or computer games or related accessories, or any other related business that is competitive with or similar to an It's About Games(TM) Store, except with Franchisor's prior written consent. Separately, Franchisee cannot offer or sell new or used musical instruments, amplifiers, audio compact discs, or music-related equipment or electronics (other than equipment or electronics used in connection with video games) in the Store or elsewhere. B. After Termination. Franchisee (and the Personal Guarantors) will not, for a period of one (1) year after this Agreement expires or is terminated (except for a termination as a result of a Franchisor's breach), on their own account or as an employee, agent, consultant, partner, officer, director, or shareholder of any other person, firm, entity, partnership or corporation, own, operate, lease, franchise, conduct, engage in, be connected with, have any interest in or assist any person or entity engaged in any business involving the selling, leasing, renting or exchanging of new or used video or computer games or related accessories, or any other related business that is competitive with or similar to an It's About Games(TM) Store which is located at the Franchised Location or within a six (6) mile radius of the Franchised Location or any It's About Games(TM) Store. Franchisee expressly agrees that the one (1) year period and the six (6) mile radius are the reasonable and necessary time and distance needed to protect Franchisor if this Agreement expires or is terminated for any reason. C. Injunctive Relief. Franchisee agrees that damages alone cannot adequately compensate Franchisor if there is a violation of these noncompetitive covenants and that injunctive relief is essential for the protection of Franchisor. Franchisee therefore agrees that in case of any alleged breach or violation of this Section by it, Franchisor may seek injunctive relief without posting any bond or security, in addition to all other remedies that may be available to Franchisor at equity or law. 19. ARBITRATION; ENFORCEMENT A. Arbitration Process. Except to the extent Franchisor elects to enforce the provisions of this Agreement by judicial process and injunction as provided herein, all disputes, claims and controversies between the parties arising under or in connection with this Agreement or the making, performance or interpretation thereof (including claims of fraud in the inducement and other claims of fraud and the arbitrability of any matter) will be settled by arbitration under the authority of the Federal Arbitration Act in Minneapolis, Minnesota. The arbitrator will have the right to award specific performance of this Agreement. The proceedings will be conducted under the commercial arbitration rules of the American Arbitration Association, to the extent such Rules are not inconsistent with the provisions of this arbitration provision. The decision of the arbitrator will be final and binding on all parties. This Section will survive termination or non-renewal of this Agreement under any circumstances. Judgment upon the award of the arbitrator may be entered in any court having jurisdiction thereof. During the pendency of any arbitration proceeding, Franchisee and Franchisor will fully perform their respective obligations under this Agreement. B. Additional Proceedings. If, after Franchisor or Franchisee institutes an arbitration proceeding, one or the other asserts a claim, counterclaim or defense, the subject matter of which, under statute or current judicial decision is nonarbitrable for public policy reasons, the party against whom the claim, counterclaim or defense is asserted may elect to proceed with the arbitration of all arbitrable claims, counterclaims or defenses or to proceed to litigate all claims, counterclaims or defenses in a court having competent jurisdiction. C. Punitive Damages. Franchisor and Franchisee acknowledge that judgment upon an arbitration award may be entered in any court of competent jurisdiction and will be binding, final and nonappealable. Franchisor and Franchisee (and their respective owners and guarantors, if applicable) agree to waive, to the fullest extent permitted by law, the right to or claim for any punitive or exemplary damages against the other and agree that in the event of a dispute between them, each will be limited to the recovery of actual damages sustained by it. D. Enforcement of Franchise Agreement. Notwithstanding the other provisions of this Section 19, Franchisee recognizes that the failure of a single franchisee to comply with the terms of its It's About Games(TM) franchise agreement could cause irreparable damage to Franchisor or to some or all other It's About Games(TM) franchisees. Franchisor and Franchisee, therefore agree that, in the event of a breach or threatened breach of Sections 3, 8, 9, 12, 13, 14, 17 and/or 18 of this Agreement by Franchisee or in the event of any conduct by Franchisee which is illegal or is dishonest or misleading to Franchisee's customers or prospective customers or may impair the goodwill associated with the Marks, Franchisor may seek an injunction restraining such breach or obtain a decree of specific performance, without showing or proving any actual damage, until such time as a final and binding determination is made by the arbitrator. The foregoing equitable remedy will be in addition to, and not in lieu of, all other remedies or rights which Franchisor might otherwise have by virtue of any breach of this Agreement by Franchisee. 20. SEVERABILITY AND CONSTRUCTION A. Severability. All provisions of this Agreement are severable and this Agreement will be interpreted and enforced as if all completely invalid or unenforceable provisions were not contained herein and partially valid and enforceable provisions will be enforced to the extent valid and enforceable. If any applicable law or rule of any jurisdiction requires a greater prior notice period than is required hereunder, or if under any applicable law or rule of any jurisdiction, any provision of this Agreement is invalid or unenforceable, the prior notice required by such law or rule will be substituted for the notice requirements hereof, or such invalid or unenforceable provision will be modified to the extent required to be valid and enforceable. Such modifications to this Agreement will be effective only in such jurisdiction and will be enforced as originally made and entered into in all other jurisdictions. B. Waiver. Franchisor and Franchisee may by written instrument unilaterally waive any obligation of or restriction upon the other under this Agreement. No acceptance by Franchisor of any payment by Franchisee and no failure, refusal or neglect of Franchisor or Franchisee to exercise any right under this Agreement or to insist upon full compliance by the other with its obligations hereunder, including any mandatory specification, standard or operating procedure, will constitute a waiver of any provision of this Agreement. C. Cumulative Rights. The rights of Franchisor and Franchisee hereunder are cumulative and no exercise or enforcement by Franchisor or Franchisee of any right or remedy hereunder will preclude the exercise or enforcement by Franchisor or Franchisee of any other right or remedy hereunder or which Franchisor or Franchisee is entitled by law to enforce. D. Governing Law. Except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. Section 1051 et seq.), this Agreement and the franchise relationship will be governed by the laws of the state in which the Franchised Location is located. E. Binding Effect. This Agreement is binding upon the parties hereto and their respective executors, administrators, heirs, assigns and successors in interest. F. Consents. Whenever a party's consent or approval is required under this Agreement, such consent or approval will not be unreasonably withheld or delayed. G. Entire Agreement. The "Background" section is a part of this Agreement which, together with exhibits, represents the entire agreement of the parties. This Agreement supersedes and terminates any prior oral or written understandings or agreements between Franchisor and Franchisee relating to the subject matter of this Agreement. No modification of this Agreement will be effective unless it is in writing and signed by Franchisor and Franchisee. The term "Franchisee" as used herein is applicable (where relevant) to one or more persons, a corporation or a partnership. References to "Franchisee," "assignees" and "transferees" which are applicable to an individual or individuals mean the principal owner or owners of the equity or operating control of Franchisee or any such assignee or transferee if Franchisee or such assignee or transferee is a corporation or partnership. If Franchisee consists of more than one individual, all individuals will be bound jointly and severally by the provisions of this Agreement. 21. NOTICES All notices to Franchisor will be in writing and will be made by personal service or sent by prepaid first class United States mail addressed to Franchisor at its principal place of business, or at such other address as Franchisor may designate in writing. All notices to Franchisee will be made by prepaid first class United States mail addressed to Franchisee at the Franchised Location, or such other address as Franchisee may designate in writing. Any notice under this Agreement may also be made by a recognized delivery service that requires a written receipt. 22. ACKNOWLEDGMENTS A. Independent Investigation. Franchisee acknowledges that it has conducted an independent investigation of the business franchised hereunder, and recognizes that the business venture contemplated by this Agreement involves business risks and that its success will largely depend on Franchisee's ability as an independent business person. Franchisor expressly disclaims the making of, and Franchisee acknowledges that it has not received, any warranty or guarantee, express or implied, as to the potential volume, profits or success of the business venture contemplated by this Agreement. B. Franchise Agreement. Franchisee acknowledges that it has received, read, and understood this Agreement and that Franchisor has fully and adequately explained the provisions of it to Franchisee's satisfaction and that Franchisee has had sufficient time and opportunity to consult with advisors of its own choosing about the potential benefits and risks of entering into this Agreement. C. Other Franchises. Franchisee acknowledges that other franchisees of Franchisor have or will be granted franchises at different times and in different situations, and further acknowledges that the provisions of such franchises may vary substantially from those contained in this Agreement. D. Receipt of Documents. Franchisee acknowledges that it received a copy of this Agreement at least five (5) business days before the date on which this Agreement was executed. Franchisee further acknowledges that he/she has received a Franchise Offering Circular at least ten (10) business days before the date on which this Agreement was executed. IN WITNESS WHEREOF, Franchisor and Franchisee have signed this Agreement as of the day and year first above written. FRANCHISOR DISCLAIMS ANY WARRANTY OR REPRESENTATION AS TO THE POTENTIAL SUCCESS OF FRANCHISEE'S BUSINESS OPERATIONS UNDER THIS AGREEMENT. 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 ---------------------------------------- EXHIBIT A TO FRANCHISE AGREEMENT FRANCHISEE'S DEVELOPMENT AREA AND EXCLUSIVE TERRITORY 1. Description of Development Area: 2. Description of Exclusive Territory: ----------------------------- -------------------------------- Franchisor Franchisee EXHIBIT B TO FRANCHISE AGREEMENT IT'S ABOUT GAMES(TM) COMPUTER SOFTWARE LICENSE AGREEMENT This AGREEMENT is made and entered into as of the _____ day of _______________, 199__, by and between GROW BIZ INTERNATIONAL, INC. ("Grow Biz"), and ____________________________ ("Licensee"). BACKGROUND: Grow Biz owns certain software and related documentation. Licensee is an It's About Games(TM) franchisee pursuant to a franchise agreement Licensee entered into with Grow Biz (the "Franchise Agreement"). Licensee wishes to use certain software in its franchised business under the provisions stated below. AGREEMENTS: 1. SOFTWARE LICENSE. A. Grant of License. Grow Biz grants Licensee a nonexclusive license to use the software identified on Schedule A attached to this Agreement. Collectively, all software licensed under this Agreement, and all modifications, updates and other works derivative of or to such software, and any related documentation or materials provided, is referred to as the "Software." B. Initial Software License Fee. Licensee will pay Grow Biz an Initial Software License Fee of Three Thousand Dollars ($3,000). This fee must be paid before Grow Biz delivers the Software to Licensee. Licensee will be solely responsible for all taxes relating to the Initial Software License Fee, excluding taxes measured by Grow Biz' net income. C. Scope of License. Licensee may use the Software only on a single computer or on a network of computers at the franchised business site or sites identified on Schedule A attached hereto or in Grow Biz' acceptance of Licensee's order. Unless Grow Biz otherwise agrees in writing, a single license fee entitles Licensee to use the Software on a network at one site with no more than five users. Licensee will be charged an additional license fee for use of the Software on a network at one site with more than five users or for use at more than one site. D. Licensee's Agreements. Licensee agrees: 1. Not to disassemble, decompile or otherwise reverse engineer the Software, nor to create, access or generate the source code of the Software. 2. Not to modify the Software, nor to develop or create, or assist any other party in developing or creating, any computer programs which are derived from, based upon, or contain features or functions similar to, the Software. 3. To use the Software only in Licensee's internal operation of the franchise business under the terms of the Franchise Agreement and not for the business needs of any third parties. 4. Not to disclose to any other party any part of or any information relating to the Software, nor to permit access to the Software except by Licensee's employees in the operation of the franchised business. 5. Not to assign, sublicense, loan or otherwise provide to any third party the Software, whether or not merged into other programs or materials. 6. Not to copy the Software, although Licensee may make one copy of the Software for backup purposes if Licensee reproduces all copyright and other proprietary notices in such copy. E. Repairs; Updates; Etc. 1. For so long as Grow Biz owns and requires Licensee to use the Software, Grow Biz will provide ongoing maintenance and repair services for the Software owned by Grow Biz so that the Software will perform substantially as described in documentation Grow Biz has provided. Such maintenance and repair services include Licensee's right to receive any fixes and minor enhancements to the Grow Biz Software which Grow Biz may periodically develop, as well as any other maintenance or repair services Grow Biz offers in its discretion. Grow Biz does not warrant that the operation of the Grow Biz Software will be uninterrupted or error free, that all defects will be corrected or that the Software will meet Licensee's requirements. 2. Grow Biz may, in its sole discretion, periodically release updates, modifications and enhancements respecting the Software. Licensee will install any fixes, updates, modifications or enhancements which Grow Biz designates as mandatory. 3. Grow Biz is not obligated to provide Licensee with other services, including installation, support, training or other services relating to the Software. Further, Grow Biz is not obligated to provide maintenance or repair services for Software distributed, but not owned, by Grow Biz. 4. Grow Biz may charge a reasonable fee for its services, including its maintenance and repair services, as well as for any updates, modifications and enhancements to the Software which it elects to release. 2. PROPRIETARY RIGHTS. A. Confidentiality. The Software is the confidential and proprietary property of Grow Biz or its vendors. Licensee will hold the Software in confidence and safeguard it from disclosure to third parties and will use the Software only as intended by this Agreement. Licensee will notify Grow Biz promptly of any unauthorized access, copying or use of the Software and will reasonably assist Grow Biz in prosecuting any resulting claims or proceedings. B. Ownership. Grow Biz or its vendors retain all title and rights, including all copyright rights, to the Software, including all modifications, updates and other works derivative of or to the Software, all of which will be subject to the provisions of this Agreement. 3. TERM AND TERMINATION. A. Term and Termination. This Agreement will continue until terminated. Grow Biz may terminate this Agreement upon written notice to Licensee if Licensee breaches any term of this Agreement, the Franchise Agreement or any other agreement with Grow Biz, or if Licensee becomes insolvent. This Agreement will automatically terminate, without any further action of the parties, upon termination of the Franchise Agreement for any reason. Finally, this Agreement will automatically terminate if and when Grow Biz assigns all of its rights, title and interest in the Software or this Agreement to a third-party assignee. If such an assignment occurs, Licensee acknowledges and agrees that, to continue to use the Software, the third-party assignee may require Licensee to enter into a separate computer software license agreement. If Grow Biz assigns its interest in the Software or this Agreement to a third-party assignee, and the third-party assignee replaces the Software, Licensee may incur additional costs related to the conversion of such replacement software. B. Consequences of Termination. Upon termination of this Agreement, all licenses and rights Grow Biz has granted under this Agreement will terminate and Licensee will have no rights to use, sell or transfer its interest in, the Software. Licensee agrees to immediately return to Grow Biz all copies of the Software, or to destroy all Software. 4. LIMITED WARRANTY; DISCLAIMERS. Grow Biz warrants to Licensee that magnetic diskette or other media on which the Software is recorded will be free from material defects in materials or workmanship under normal use for a period of ninety (90) days after delivery of the media. If during such period the media should be defective, Licensee may return the media for replacement without charge. Licensee's sole remedy in the event of a defect is expressly limited to replacement of the media. ALL SOFTWARE, INCLUDING ALL GROW BIZ SOFTWARE, IS PROVIDED ON AN "AS IS" BASIS. However, Grow Biz acknowledges its Software maintenance and repair obligations stated in Section 1 (E). THESE WARRANTIES ARE IN LIEU OF, AND GROW BIZ EXPRESSLY DISCLAIMS, ALL OTHER WARRANTIES RELATING TO THIS AGREEMENT OR THE SOFTWARE, WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF TITLE, NONINFRINGEMENT, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 5. LIMITATION OF LIABILITY. GROW BIZ' LIABILITY FOR ANY CLAIM RELATED TO ANY SOFTWARE OR SERVICE PROVIDED WILL BE LIMITED TO THE LESSOR OF LICENSEE'S ACTUAL DAMAGE OR LOSS OR THE INITIAL FEE PAID FOR THE SOFTWARE. GROW BIZ WILL NOT BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, INCLUDING LOST PROFITS OR LOSS OF OR DAMAGE TO DATA. 6. INFRINGEMENT. A. Infringement Claims. Grow Biz does not have actual knowledge of any claim that the Grow Biz Software infringes upon a third party's patent, copyright or other proprietary right. If a third party asserts such an infringement claim against Licensee, Licensee will immediately notify Grow Biz in writing. Grow Biz will have the right (but not the obligation) to defend any such claim, at Grow Biz' expense, and Licensee will cooperate with Grow Biz with respect to such defense. In the event of any such claim, Licensee will, at Grow Biz' direction, immediately discontinue using the Software. Grow Biz will either modify the Software so as to render it non-infringing or replace the Software with such other non-infringing Software as Grow Biz may furnish to Licensee. In either case, Grow Biz will do so only if the modified or replacement Software performs substantially the same functions as the infringing Software. So long as Licensee complies with the terms hereof, Grow Biz will indemnify Licensee for any loss, damage, cost or expense related to such claim. B. Limitations. Grow Biz will not be liable to Licensee if an infringement claim is based on use of the Software in combination with any product, software or system not delivered by Grow Biz, or Licensee's unauthorized use or modification of the Software. Grow Biz will not have any obligations regarding any infringement of any non-Grow Biz Software. 7. GENERAL. A. Governing Law. This Agreement will be governed by Minnesota law. Any action related to this Agreement may be brought in any court located in Minneapolis, Minnesota, and the parties consent and submit to the personal jurisdiction and venue of any such court. Grow Biz will be entitled to temporary and permanent injunctive relief, without posting a bond or other security, to restrain any actual or threatened violation of the provisions of this Agreement, in addition to any other remedies Grow Biz may have. Grow Biz may recover its costs and expenses (including reasonable attorneys' fees) incurred in enforcing its rights under this Agreement. B. Scope of Agreement; Conflicting Terms. This Agreement will govern all orders for Software, and all Software Grow Biz provides. No purchase order, invoice or other similar form may vary the terms of this Agreement. Any term thereof that is inconsistent with or additional to the terms of this Agreement will not be binding on Grow Biz. C. Binding Effect. This Agreement will be binding upon and will benefit the parties hereto and their respective successors and assigns, subject to the limitations provided herein. Licensee may not assign or transfer this Agreement without Grow Biz' prior written consent. D. Waivers. The failure of either party to enforce or exercise any term of or any right under this Agreement does not represent a waiver of such term or right and will not affect that party's right later to enforce or exercise it. No modification or waiver of any of the provisions of this Agreement will be binding upon Grow Biz or Licensee unless it is in writing and is executed by the party against whom such modification or waiver is sought to be enforced. E. Severability. If any provision contained in this Agreement is held invalid, such provision will not affect any other provision and the remainder of this Agreement will continue in full force and effect. F. Entire Agreement. This Agreement is the complete and exclusive statement of the agreement of the parties regarding the subject matter hereof, and supersedes all prior or contemporaneous agreements, oral or written, and all other communications between the parties relating to the subject matter hereof. G. Survival. The provisions of this Agreement which by their nature extend beyond the termination hereof will survive and remain in effect until all obligations are satisfied. "GROW BIZ" "LICENSEE" GROW BIZ INTERNATIONAL, INC. If "Licensee" is a corporation, (Print Corporate Name) By By ------------------------------- ---------------------------------------- Its Its ------------------------- ---------------------------------- If "Licensee" is one or more individuals, ------------------------------------------- (Print Individual Name) By ---------------------------------------- ------------------------------------------- (Print Individual Name) By ---------------------------------------- ------------------------------------------- (Print Individual Name) By ---------------------------------------- Schedule A Software Software Site - ------------------------------------------- --------------------------------- Data Recycling System (DRS) point-of-sale Store #: ________________________ and inventory management software (the Proprietary Software) - Grow Biz' Address: proprietary software which is specifically _________________________________ designed to track various aspects of your _________________________________ store, including inventory, customer _________________________________ tracking, vendor purchase orders and daily _________________________________ sales reports. - ---------------------------------------------- For Office Use Only Grow Biz International, Inc. By ----------------------------------- Its ----------------------------- - ---------------------------------------------- Licensee: - -------------------------------------- (Name of Individual or Corporation) By ----------------------------------- (Signature) Its ----------------------------- (Title, if applicable) 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. 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 1 GK 082597 2 GK 030698 IT'S ABOUT GAMES(TM) MULTIPLE STORE DEVELOPMENT AGREEMENT THIS AGREEMENT made and entered into as of the ______ day of _____________________, 19_____, by and between GROW BIZ INTERNATIONAL, INC., a Minnesota corporation ("Franchisor") and ("Franchisee"). BACKGROUND: Franchisor and Franchisee are, on this day, entering into an It's About Games(TM) Franchise Agreement (the "Initial Franchise Agreement"), whereby Franchisee will be granted the right to operate an It's About Games(TM) Store in the area described in Section 1 of the Initial Franchise Agreement. Franchisee desires to obtain the right to develop more than one It's About Games(TM) retail store pursuant to Franchisor's standard Franchise Agreement within one or more specified territories. Franchisor is willing to grant such rights pursuant to the provisions stated below. AGREEMENTS: The Franchisor and Franchisee agree as follows: 1. Development Rights. Subject to the provisions stated below, Franchisor grants to Franchisee the right to establish and operate for its own account, but not to subfranchise, sublicense or resell, It's About Games(TM) retail stores (the "Stores") pursuant to an individual It's About Games(TM) Franchise Agreement ("Franchise Agreement") in the form then-currently used by Franchisor at the time of issuance, as amended by Section 2 of this Agreement. Franchisee's rights to establish and operate Stores under this Agreement will be limited to the area or areas described on Exhibit A attached hereto (the "Exclusive Development Territory"). So long as Franchisee is in compliance with the terms of this Agreement, and in compliance with the terms of the individual Franchise Agreement for each Store developed hereunder, Franchisor will not, for the term of this Agreement, establish for its own account or franchise others to operate an It's About Games(TM) Store within the Exclusive Development Territory other than to Franchisee pursuant to this Agreement. 2. Fees. A. Initial Fees. For the rights described in Section 1 above, Franchisee will pay Franchisor an Initial Fee of _____________________ Thousand Dollars ($_______) for each Store (in addition to the Store being developed pursuant to the Initial Franchise Agreement) to be developed pursuant to this Agreement. All Initial Fees will be payable when Franchisee executes this Agreement. B. Continuing Fees; Advertising Fees. For each Franchise Agreement to be executed hereunder, Franchisee will be obligated to pay Franchisor Continuing Fees and Advertising Fees at the same percentage rate as provided in the Initial Franchise Agreement. 3. Conditions to Development of Additional Stores. Franchisor will be obligated to enter into a Franchise Agreement for the development of a Store under this Agreement only if, at the time Franchisee intends to enter into a Franchise Agreement for such Store: (1) Franchisee meets the minimum financial standards stated in Exhibit B attached hereto; (2) All amounts owed by Franchisee to Franchisor or its affiliates under or relating to the Initial Franchise Agreement or any Store Franchise Agreement are paid in full and Franchisee otherwise is in good standing under such Agreements; and (3) Franchisee is not in default for any reason stated in Section 7 below for which Franchisee has received written notice. Should Franchisee fail to meet the minimum development schedule stated in Section 5 below for any Store because it failed to satisfy the conditions stated in provisions (1) or (2) above, Franchisor will refund to Franchisee one-half (1/2) of the Initial Franchise Fee paid to Franchisor for such Store. 4. Development Procedure. Each It's About Games(TM) Store to be developed pursuant to this Agreement will be governed by the terms of the Franchise Agreement executed or to be executed by Franchisor and Franchisee for such Store. Franchisee will not develop any It's About Games(TM) Store at any site which Franchisor has not evaluated in writing or for which there is no Franchise Agreement between the parties. Subject only to Franchisor's evaluation of a proposed site (which evaluation is not a guaranty that the proposed site will be successful), Franchisee is solely responsible for locating and securing acceptable sites. If Franchisee fails to provide Franchisor with an executed Franchise Agreement before Franchisee commences construction or leasehold improvements on the premises for a Store, Franchisee will be in default under this Agreement and Franchisor may terminate this Agreement under Section 7 below. 5. Minimum Development Schedule. A. Franchisee's rights under this Agreement are conditioned upon its active development of the Exclusive Development Territory. Franchisee agrees to open for business and thereafter maintain in operation within the Exclusive Development Territory not less than the following number of It's About Games(TM) Stores within the time frame stated below: ____ Store opened and operating within ____ months from the date of this Agreement. ____ Stores opened and operating within ____ months from the date of this Agreement. ____ Stores opened and operating within ____ months from the date of this Agreement. B. The minimum development schedule described above will be satisfied only if the required number of Stores are open for business by the last day before the respective anniversary date of this Agreement. C. Franchisee may develop additional Stores within the Exclusive Development Territory only if: (1) Franchisee is in good standing under this Agreement, the Initial Franchise Agreement and each Store Franchise Agreement; (2) the Exclusive Development Territory described in Section 1(A) of Exhibit A is a general territory within which all Stores are to be located; and (3) Franchisee and Franchisor execute Franchisor's then-current form of standard Franchise Agreement for each additional Store. 6. Term. Subject to Section 7 below, the term of this Agreement will be for a ____________ (____) years commencing on the date of this Agreement. 7. Default and Termination. A. Franchisee may terminate this Agreement at any time with or without cause by delivering written notice thereof to Franchisor. Franchisee will be in default, and Franchisor may at its option, terminate this Agreement, as provided herein, if: (1) Franchisee fails to meet the minimum development schedule stated herein, (2) Franchisee violates any other material provision of this Agreement, (3) Franchisee violates any material provision of the Initial Franchise Agreement or any Store Franchise Agreement issued hereunder, (4) Franchisee is declared bankrupt or becomes insolvent, (5) Franchisee is convicted of violating any law, ordinance or regulation relating to Franchisee's operation of any Store referenced herein or developed hereunder, or (6) Franchisee attempts to subfranchise in any manner all or part of its rights under this Agreement. B. Except as described below, Franchisee will have thirty (30) days, or such longer period as applicable law may require, after its receipt from Franchisor of a written Notice of Termination within which to remedy any default hereunder, and to provide evidence thereof to Franchisor. If Franchisee fails to correct the alleged default within that time (or such longer period of time as applicable law may require), this Agreement will terminate without further notice to Franchisee effective immediately upon the expiration of the thirty (30) day period (or such longer period as applicable law may require). Franchisor may terminate this Agreement immediately upon delivery of written notice to Franchisee, with no opportunity to cure, if the termination results from any of the following: (1) Franchisee repeatedly fails to comply with one or more material requirements of this Agreement; (2) the nature of Franchisee's breach makes it not curable; or (3) any default under items (4), (5) or (6) in Section 7(A) above. C. During the period from the date Franchisor sends a notice of default until all violations and defaults specified therein are cured by Franchisee or this Agreement is terminated, Franchisor will not be obligated to enter into any Store Franchise Agreement with Franchisee or otherwise perform pursuant to this Agreement. Upon termination or expiration of this Agreement, all rights licensed herein will automatically revert to Franchisor and Franchisee's exclusive right to develop It's About Games(TM) Stores within the Exclusive Development Territory will cease. Termination or expiration of this Agreement will not affect Franchisee's rights under any individual Store Franchise Agreements in effect at that time. 8. Transfers. Store Franchise Agreements may be transferred only pursuant to their respective terms. Franchisee represents and warrants to Franchisor that it intends to develop, manage, and operate all of the Stores to be developed hereunder for its own benefit and not for the purpose of or with a view towards resale or redistribution of the franchises to be issued hereunder. This Agreement cannot be pledged, transferred or sold in whole or in part by Franchisee without Franchisor's prior written consent. Franchisor may impose conditions to any proposed transfer or assignment including the following: A. Franchisee is in complete compliance with the terms of this Agreement and all other agreements between the parties; B. The proposed transferee has been approved by Franchisor as meeting Franchisor's then-current standards for multiple store franchisees (if applicable); C. The proposed transferee has completed Franchisor's training program; D. Franchisee assigns to the proposed transferee its interest in the individual franchise agreements for all Stores located in the Territory; and E. Franchisee pays a transfer fee of Five Thousand Dollars ($5,000). This Agreement may be assigned and transferred by Franchisor and will benefit Franchisor's successors and assigns. Any such assignment or transfer will require the assignee to fulfill Franchisor's obligations under this Agreement. 9. Enforcement. This Agreement, and any dispute arising hereunder, will be governed by those provisions found in the Initial Franchise Agreement respecting arbitration, governing law and injunctive relief. 10. Miscellaneous. This Agreement represents the entire Agreement of the parties relative to its subject and cannot be waived, altered or rescinded in whole or in part except by an express writing by the parties. The provisions of this Agreement are severable and the invalidity or unenforceability of any of them will not affect the remainder of this Agreement. IN WITNESS WHEREOF, Franchisor and Franchisee have executed this Agreement as of the date first written above. "FRANCHISOR" "FRANCHISEE" GROW BIZ INTERNATIONAL, INC. If "Franchisee" is a corporation, (Print Corporate Name) By By ------------------------------- ---------------------------------------- Its Its ------------------------- ---------------------------------- If "Franchisee" is one or more individuals, ------------------------------------------- (Print Individual Name) By ---------------------------------------- ----------------------------------------- (Print Individual Name) By ---------------------------------------- ----------------------------------------- (Print Individual Name) By ---------------------------------------- EXHIBIT A TO DEVELOPMENT AGREEMENT FRANCHISEE'S DEVELOPMENT AREA AND EXCLUSIVE TERRITORY 1. Description of Development Area (Select A or B): _________ A. General Development Area within which all Stores will be developed: OR _________ B. Development Area for each Store to be developed: Store 1: Store 2 (if applicable): Store 3 (if applicable): 2. Description of Exclusive Territory (for each Store to be developed) Store 1: Store 2 (if applicable): Store 3 (if applicable): By: By: ------------------------------- ------------------------------ Franchisor Franchisee EXHIBIT B TO DEVELOPMENT AGREEMENT MINIMUM FINANCIAL STANDARDS FOR MULTIPLE STORE DEVELOPMENT To develop a store under the Multiple Store Development Agreement, Franchisee will need to satisfy the following requirements at the time Franchisee desires to proceed with development of that store: AVERAGE INVESTMENT: $160,000 MINIMUM FOR ONE STORE; CASH (1/3 of Investment) $ 53,000 FINANCING (Secured through Bank or other means) $107,000 Franchisee agrees to provide all appropriate financial documentation Franchisor requests to insure that Franchisee satisfies these requirements. By: By: ----------------------------------- --------------------------------- Franchisor's Initials Franchisee's Initials EX-10.16 3 AMENDMENT NO. 3 TO THE 1992 STOCK OPTION PLAN EXHIBIT 10.16 AMENDMENT NO. 3 TO THE GROW BIZ INTERNATIONAL, INC. 1992 STOCK OPTION PLAN The following resolution was adopted by the Board of Directors of Grow Biz International, Inc. effective February 18, 1998. Increase in Number of Shares Reserved Under 1992 Stock Option Plan RESOLVED, that the number of shares reserved for issuance under the 1992 Stock Option Plan ("1992 Plan") shall be increased from 1,100,000 to 1,400,000 shares of the Corporation's Common Stock, such increase in the number of shares reserved for issuance shall be submitted for approval by the shareholders at the next meeting of the shareholders of the Corporation. RESOLVED FURTHER, that the officers of the Corporation be, and they each hereby are, authorized and directed to take or cause the Corporation's transfer agent to take such action as they may deem necessary or advisable to accomplish the foregoing, and, subject to the approval of the shareholders, all such actions as heretofore may have been taken by the officers and directors for such purposes are hereby ratified and confirmed. EX-11.1 4 STATEMENT OF COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11.1 GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY Statement of Computation of Per Share Earnings
FISCAL YEAR ENDED ----------------------------------------------------------------- DECEMBER 30, 1995 DECEMBER 28, 1996 DECEMBER 27, 1997 --------------------- --------------------- --------------------- Net Income $ 2,028,600 $ 2,585,500 $ 3,231,200 ============ ============ ============ Weighted average shares outstanding - Basic 7,212,600 6,428,500 6,116,200 Dilutive effect of stock options after application of the treasury stock method 138,400 87,500 157,300 ------------ ------------ ------------ Weighted average shares outstanding - Dilutive 7,351,000 6,516,000 6,273,500 ============ ============ ============ Net income per common share - Basic $ .28 $ .40 $ .53 ============ ============ ============ Net income per common share - Dilutive $ .28 $ .40 $ .52 ============ ============ ============
EX-21.1 5 SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES GROW BIZ GAMES, INC. EX-23.1 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File Numbers 33-85972, 33-85960, 33-85956, 33-79176, 33-71772, 333-3236, 333-3068 and 333-3066. ARTHUR ANDERSEN LLP Minneapolis, Minnesota March 16, 1998 EX-99.1 7 CAUTIONARY STATEMENTS EXHIBIT 99.1 GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT Grow Biz International, Inc. (the "Company") desires to take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is filing this Exhibit to its Annual Report on Form 10-K in order to do so. When used in this Annual Report on Form 10-K and in future filings by the Company with the Securities and Exchange Commission in the Company's annual report, quarterly reports, press releases and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "look for", "may result", "will continue", "is anticipated", "expect", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company cautions readers that the following important factors, among others, could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any forward-looking statements made by, or on behalf of, the Company: DEPENDENCE ON NEW FRANCHISEES The Company's ability to generate increased revenue and achieve higher levels of profitability depends on increasing the number of franchised stores open. While management believes that a number of major metropolitan markets have reached or are nearing the saturation point for certain concepts, management also believes that many larger and smaller markets will continue to provide significant opportunities for sales of franchises and that the Company can sustain approximately its current annual level of store openings. However, there can be no assurance that the Company will sustain this level of store openings. INABILITY TO COLLECT ACCOUNTS RECEIVABLE In the event that the Company's ability to collect accounts receivable significantly declines from current rates, additional charges that affect earnings may be incurred. UNOPENED STORES The Company believes that a substantial majority of stores sold but not opened will open within the time period permitted by the applicable franchise agreement or the Company will be able to resell the territories for most of the terminated or expired franchises. However, there can be no assurance that substantially all of the currently sold but unopened franchises will open and commence paying royalties to the Company. To the extent the Company is required to refund any franchise fees for stores that do not open, the Company believes that it will be able to repay these fees out of available cash. DEPENDENCE ON SUPPLY OF USED MERCHANDISE The Company's store concepts are based on offering customers a mix of used and new merchandise. As a result, obtaining continuing supplies of high quality used merchandise is essential to the success of the Company's store concepts. To date, supplies of used merchandise have been adequate and the Company's training programs emphasize methods for locating and purchasing used goods. There can be no assurance, however, that supply problems will not be encountered in the future. COMPETITION Retailing, including the sale of sporting goods, children's apparel, computer equipment, compact disks and musical instruments, is highly competitive. Many retailers have significantly greater financial and other resources than the Company and its franchisees. Individual franchisees face competition in their markets from retailers of new merchandise and, in certain instances, resale, thrift and other stores that sell used merchandise. To date, the Company's franchisees and its Company-owned stores have not faced a high degree of competition in the sale of used merchandise. However, the Company may face additional competition as its franchise systems expand and additional competitors may enter the used merchandise market. S, G & A EXPENSE The Company's ability to control the amount, and rate of growth in, selling, general and administrative expenses; and the impact of unusual items resulting from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures. FINANCING The Company's ability to obtain competitive financing to fund its growth. QUARTERLY FLUCTUATIONS The Company's quarterly results of operations have fluctuated as a result of the timing of recognition of franchise fees, receipt of royalty payments, timing of merchandise shipments, timing of expenditures and other factors. There can be no assurance that results in future periods will not fluctuate on a quarterly basis. INSURANCE The Company maintains liability insurance in amounts it believes to be adequate based on the nature of its business. While the Company believes that Grow Biz operates its business safely and prudently, there can be no assurance that liabilities incurred with respect to a particular claim will be covered by insurance or, if covered that the dollar amount of such liabilities will not exceed coverage limits. GOVERNMENT REGULATION As a franchisor, the Company is subject to various federal and state franchise laws and regulations. Although the Company believes it is currently in material compliance with existing federal and state laws, there is a trend toward increasing government regulation of franchising. The promulgation of new franchising laws and regulations could adversely affect the Company. The Company does not undertake and specifically declines any obligations to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. EX-27.1 8 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-27-1997 DEC-27-1997 3,089 0 13,945 880 5,729 25,176 9,714 4,096 37,755 16,036 0 7,475 0 0 11,009 37,755 66,889 88,835 56,634 83,624 0 0 257 5,314 2,083 3,231 0 0 0 3,231 .53 .52
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