UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 29, 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
Golden Valley, MN 55422-4837
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code 612/520-8500
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes: X No:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value, 6,141,915 shares outstanding as of April 30, 1997.
GROW BIZ INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
- --------------------------------------------------------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets:
March 29, 1997 and December 28, 1996 3
Condensed Statements of Operations:
Three month periods ended 4
March 29, 1997 and March 30, 1996
Condensed Statements of Cash Flows:
Three month periods ended 5
March 29, 1997 and March 30, 1996
Notes to Condensed Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 11
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
Items 1 through 5 have been omitted since all items
are inapplicable or answers negative.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibit
Number: Description:
------- ------------
11 Statement of Computation of Per Share Earnings
27 Financial Data Schedule
99 Cautionary Statements
(b.) Reports on Form 8-K -- None
<TABLE>
<CAPTION>
GROW BIZ INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
------------------------------
March 29, December 28,
1997 1996
------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,344,200 $ 1,388,800
Trade receivables, less allowance for doubtful
accounts of $793,000 and $930,000 13,687,300 13,171,400
Inventories 2,836,700 2,716,000
Prepaid expenses and other 876,300 862,900
Deferred income taxes 1,726,400 1,726,400
----------- -----------
Total current assets 22,470,900 19,865,500
Notes Receivable 329,800 339,800
Property and equipment, net 5,697,100 5,979,300
Other assets, net 2,845,600 2,991,900
----------- -----------
$31,343,400 $29,176,500
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,698,400 $ 5,670,300
Accrued liabilities 1,323,800 1,275,800
Current maturities of long-term debt 134,900 134,900
Deferred franchise fee revenue 4,391,500 4,269,000
----------- -----------
Total current liabilities 13,548,600 11,350,000
LONG-TERM DEBT 92,700 129,000
SHAREHOLDERS' EQUITY:
Common stock, no par, 10,000,000 shares authorized,
6,247,409 and 6,263,444 shares issued and outstanding 10,412,300 10,952,900
Retained earnings 7,289,800 6,744,600
----------- -----------
Total shareholders' equity 17,702,100 17,697,500
----------- -----------
$31,343,400 $29,176,500
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
GROW BIZ INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
----------------------------
Three Months Ended
March 29, March 30,
1997 1996
----------------------------
<S> <C> <C>
REVENUE:
Merchandise sales $14,379,100 $20,849,300
Royalties 3,925,800 3,232,900
Franchise fees 533,000 764,500
Advertising and other 271,500 279,700
----------- -----------
Total revenue 19,109,400 25,126,400
COST OF MERCHANDISE SOLD 12,660,000 18,797,800
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 5,623,100 5,844,200
----------- -----------
Income from operations 826,300 484,400
INTEREST INCOME, NET 70,500 58,600
----------- -----------
Income before income taxes 896,800 543,000
PROVISION FOR INCOME TAXES 351,600 212,800
----------- -----------
NET INCOME $ 545,200 $ 330,200
=========== ===========
NET INCOME PER COMMON SHARE $ .09 $ .05
=========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,360,500 6,889,300
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
GROW BIZ INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
-----------------------------
Three Months Ended
March 29, March 30,
1997 1996
-----------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 545,200 $ 330,200
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 468,900 455,300
Deferred income tax -- --
Change in operating assets and liabilities:
Trade receivables (505,900) (1,695,700)
Inventories (120,700) 104,300
Prepaid expenses and other (13,400) 35,500
Accounts payable 2,028,100 6,376,800
Accrued liabilities 48,000 (248,700)
Deferred franchise fee revenue 122,500 547,500
----------- -----------
Net cash provided by operating
activities 2,572,700 5,905,200
----------- -----------
INVESTING ACTIVITIES:
Purchase of short-term investments -- (1,100,000)
Increase in other assets -- 1,600
Purchases of property and equipment (40,400) (77,600)
----------- -----------
Net cash used for investing
activities
(40,400) (1,176,000)
----------- -----------
FINANCING ACTIVITIES:
Payments on long-term debt (36,300) (46,800)
Proceeds from stock option exercises 88,200 50,000
Repurchase of common stock (628,800) (2,766,800)
----------- -----------
Net cash used for financing
activities (576,900) (2,763,600)
----------- -----------
INCREASE IN CASH & CASH EQUIVALENTS 1,955,400 1,965,600
Cash and cash equivalents, beginning of period 1,388,800 101,500
----------- -----------
Cash and cash equivalents, end of period $ 3,344,200 $ 2,067,100
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
GROW BIZ INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. MANAGEMENT'S INTERIM FINANCIAL STATEMENT REPRESENTATION:
The accompanying condensed financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The information in the condensed financial statements
includes normal recurring adjustments and reflects all adjustments which are, in
the opinion of management, necessary for a fair presentation of such financial
statements. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
condensed financial statements be read in conjunction with the audited financial
statements and the notes thereto included in the Company's latest Annual Report
on Form 10-K.
Revenues and operating results for the three months ended March 29, 1997 are not
necessarily indicative of the results to be expected for the full year.
2. ORGANIZATION AND BUSINESS:
Grow Biz International, Inc. (the `Company') offers licenses to operate retail
stores using the service marks `Play it Again Sports', `Once Upon A Child',
`Computer Renaissance', `Music Go Round' and `Disc Go Round'. In addition, the
Company sells inventory to the Play It Again Sports franchisees through its
buying group and operates retail stores. The Company has a 52/53 week year which
ends on the last Saturday in December.
3. SHAREHOLDERS' EQUITY:
Since 1995, the Company's Board of Directors has authorized the repurchase of up
to 1,500,000 shares of the Company's common stock on the open market. As of
April 30, 1997, the Company had repurchased 1,241,563 shares of its stock at an
average price of $8.94 per share including 60,160 shares repurchased at an
average price of $10.45 per share in the three months ended March 29, 1997.
4. LITIGATION:
In December 1995, an early partner in the original Play It Again Sports store
commenced an action against the Company relating to, among other things, the
development of stores under a 1992 retail store agreement. The suit alleges
breach of contract, fraud and misrepresentation, and violation of federal and
state anti-racketeering (RICO) statutes. The plaintiff seeks monetary damages in
excess of $50,000, treble damages under the RICO claim and, among other things,
injunctive and declaratory relief. The Company believes the suit is without
merit and intends to vigorously defend the action. When concluded, in the
opinion of management, based upon information it presently possesses, the
actions will not have a material adverse effect on the Company's financial
position.
5. EARNINGS PER SHARE:
Net income per share has been computed by dividing net income by the weighted
average number of common shares outstanding during each period. Common stock
equivalent shares, which relate to stock options and warrants, are included in
the weighted average when the effect is dilutive.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The Company
will be required to adopt SFAS No. 128 in 1997. The Company expects that the
ultimate adoption of SFAS No. 128 will not have a material impact on the
Company's computation or presentation of EPS, as the Company's common stock
equivalents have had no material effect on earnings per share amounts.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Following is a summary of the Company's franchising and corporate retail store
activity for the three months ended March 29, 1997:
<TABLE>
<CAPTION>
----------- ----------- ----------- ------------- -----------
TOTAL TOTAL
12/28/96 OPENED CLOSED CONVERTED 3/29/97
----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Play It Again Sports(R)
Franchised Stores - US and Canada 676 2 (9) 0 669
Franchised Stores - Other International 8 0 0 0 8
Corporate 4 0 0 0 4
Other 22 0 0 0 22
Once Upon A Child(R)
Franchised Stores - US and Canada 182 5 (2) 0 185
Corporate 6 0 0 0 6
Computer Renaissance(R)
Franchised Stores - US and Canada 108 11 0 0 119
Corporate 4 0 0 0 4
Music Go Round(R)
Franchised Stores - US and Canada 20 0 0 0 20
Corporate 4 0 0 0 4
Disc Go Round(R)
Franchised Stores - US and Canada 114 4 (3) 0 115
Corporate 2 0 0 0 2
----------- ----------- ------------ ------------- -----------
Total 1,150 22 (14) 0 1,158
=========== =========== ============ ============= ===========
</TABLE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements included in this Quarterly Report on Form 10-Q which are not
historical in nature are identified as "forward looking statements" for the
purposes of the safe harbor provided by Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The Company cautions readers that forward looking statements, including
without limitation, those relating to the Company's future business prospects,
revenues, working capital, liquidity, capital needs, interest costs, and income,
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those indicated in the forward looking statements. The
risks and uncertainties include, but are not limited to, the Company's ability
to: attract new franchisees, collect receivables, open stores, obtain used
merchandise, compete in our respective industries, control expenses, and other
risks indicated in Exhibit 99.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain income
statement items as a percentage of total revenue and the percentage change in
the dollar amounts from the prior period:
<TABLE>
<CAPTION>
------------------------------- ----------------
Three Months Ended First Quarter
March 29, March 30, 1997 over First
1997 1996 Quarter 1996
------------------------------- ----------------
<S> <C> <C> <C>
Revenue:
Merchandise sales 75.2% 83.0% (31.0)%
Royalties 20.5 12.9 21.4
Franchise fees 2.8 3.0 (30.3)
Advertising and other 1.5 1.1 (2.9)
------- ------- --------
Total revenues 100.0% 100.0% (23.9)%
Cost of merchandise sold 66.3 74.8 (32.7)
Selling, general and administrative expenses 29.4 23.3 (3.8)
------- ------- --------
Income from operations 4.3 1.9 70.6
Interest and other income, net 0.4 0.2 20.3
------- ------- --------
Income before income taxes 4.7 2.1 65.1
Provision for income taxes 1.8 .8 65.2
------- ------- --------
Net income 2.9% 1.3% 65.1%
======== ======== ========
</TABLE>
Comparison of Three Months Ended March 29, 1997 to Three Months Ended
March 30, 1996
Revenues for the quarter ended March 29, 1997 totaled $19.1 million compared to
$25.1 million for the comparable period in 1996. Merchandise sales decreased to
$14.4 million for the three months ended March 29, 1997 from $20.8 million for
the same period in 1996. Merchandise sales consist of the sale of product to
franchisees through the buying group and retail sales at the corporate-owned
stores. For the first quarter of 1997 and 1996 they were as follows:
1997 1996
---- ----
Buying Group $ 11,206,400 $ 17,659,000
Retail Sales 3,172,800 3,190,300
-------------- --------------
Merchandise Sales $ 14,379,100 $ 20,849,300
============== ==============
The 36.5% decrease in buying group sales for the three months ended March 29,
1997 compared to the same period last year was anticipated and, as discussed
previously, is the direct result of a reduced number of Play It Again Sports(R)
vendors being offered centralized billing and the elimination of central billing
for the other concepts. It is anticipated that buying group as a percent of
total revenues will continue to decline in future periods. Retail sales were
consistent with the comparable period in 1996.
Royalties increased to $3.9 million for the first quarter of 1997 from $3.2
million for the same period in 1996, primarily due to the expanding base of
franchise stores and increases in comparable store sales. Franchise fees were
$533,000 in the first quarter of 1997 compared to $764,500 in the first quarter
of 1996. This decrease reflects 12 fewer franchise fees recognized during the
quarter compared to the same quarter of 1996. Store openings for the nine months
ended December 27, 1997 are likely to be consistent with the same period in
1996.
Cost of merchandise sold was $12.7 million for the first quarter of 1997
compared to $18.8 million for the same period last year. Gross margin on
merchandise sales improved to 12.0% from 9.8% due to an increase in the mix of
merchandise sales at the corporate-owned retail stores, on which gross margin
contributions are significantly higher. Selling, general and administrative
expenses were $5.6 million or 29.4% of revenues in the first quarter of 1997
compared to $5.8 million or 23.3% of revenues for the same period in 1996. The
$221,100 decrease in selling, general and administrative expenses is primarily
due to the Company exiting the warehouse operations and a reduction of
non-operational staff needed to support the franchise system. The increase in
selling, general and administrative expenses as a percent of revenue is due to
the decline in the low margin buying group sales. It is anticipated that future
increases in revenues from franchising activities, royalties and franchise fees,
will surpass future increases in selling, general and administrative expenses.
During the first quarter of 1997, the Company had net interest income of $70,500
compared to net interest income of $58,600 in the first quarter of 1996. This
increase is primarily the result of a higher average balance of funds invested
in short-term, high-grade investments.
Net income for the first quarter of 1997 was $545,200 or $.09 per share compared
to $330,200 or $.05 per share for the comparable period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $3.3 million in total cash and short-term,
high-grade investments.
During the three months ended March 29, 1997, the Company's operating activities
provided $2.6 million of cash. This increase in cash available from operations,
other than net income and depreciation, is primarily due to working capital
management activities that include a $2.0 million increase in payables offset by
a $505,900 increase in receivables.
The Company's use of $576,900 from financing activities in the first three
months of 1997 was primarily from the repurchase of 60,160 shares of the
Company's common stock.
The Company has a $5.0 million committed revolving line of credit agreement
which is due for renewal on July 31, 1997. Borrowings against the line are due
on demand and carry an interest rate of prime which was 8.50% at March 29, 1997.
At March 29, 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.
2. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GROW BIZ INTERNATIONAL, INC.
Date: May 7, 1997 By: /s/ Ronald G. Olson
---------------------
Ronald G. Olson
President and Chief Executive Officer
Date: May 7, 1997 By: /s/ David J. Osdoba, Jr.
--------------------------
David J. Osdoba, Jr.
Vice President of Finance and Chief
Financial Officer
Exhibit 11
<TABLE>
<CAPTION>
GROW BIZ INTERNATIONAL, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
--------------------------
Three Months Ended
March 29, March 30,
1997 1996
--------------------------
<S> <C> <C>
Net income $ 545,200 $ 330,200
========== ==========
Shares used in per common share computation:
Weighted average common shares outstanding 6,255,000 6,786,900
Dilutive effect of stock options after application
of the treasury stock method 105,500 102,400
---------- ----------
6,360,500 6,889,300
========== ==========
Net income per common share $ .09 $ .05
========== ==========
</TABLE>
Exhibit 99
GROW BIZ INTERNATIONAL, INC.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
Grow Biz International, Inc. (the "Company") desires to take advantage of the
new "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and is filing this Exhibit to its Quarterly Report on Form 10-Q in order to
do so. When used in this Quarterly Report on Form 10-Q and in future filings by
the Company with the Securities and Exchange Commission in the Company's annual
report, quarterly reports, press releases and in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "look for", "may result", "will continue", "is anticipated", "expect",
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. The Company cautions readers that the
following important factors, among others, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any forward-looking statements made by, or on behalf of,
the Company:
DEPENDENCE ON NEW FRANCHISEES
The Company's ability to generate increased revenue and achieve higher levels of
profitability depends on increasing the number of franchised stores open. While
management believes that a number of major metropolitan markets have reached or
are nearing the saturation point for certain concepts, management also believes
that many larger and smaller markets will continue to provide significant
opportunities for sales of franchises and that the Company can sustain
approximately its current annual level of store openings. However, there can be
no assurance that the Company will sustain this level of store openings.
INABILITY TO COLLECT ACCOUNTS RECEIVABLE
In the event that the Company's ability to collect accounts receivable
significantly declines from current rates, additional charges that affect
earnings may be incurred.
UNOPENED STORES
The Company believes that a substantial majority of stores sold but not opened
will open within the time period permitted by the applicable franchise agreement
or the Company will be able to resell the territories for most of the terminated
or expired franchises. However, there can be no assurance that substantially all
of the currently sold but unopened franchises will open and commence paying
royalties to the Company. To the extent the Company is required to refund any
franchise fees for stores that do not open, the Company believes that it will be
able to repay these fees out of available cash.
DEPENDENCE ON SUPPLY OF USED MERCHANDISE
The Company's store concepts are based on offering customers a mix of used and
new merchandise. As a result, obtaining continuing supplies of high quality used
merchandise is essential to the success of the Company's store concepts. To
date, supplies of used merchandise have been adequate and the Company's training
programs emphasize methods for locating and purchasing used goods. There can be
no assurance, however, that supply problems will not be encountered in the
future.
COMPETITION
Retailing, including the sale of sporting goods, children's apparel, computer
equipment, compact disks and musical instruments, is highly competitive. Many
retailers have significantly greater financial and other resources than the
Company and its franchisees. Individual franchisees face competition in their
markets from retailers of new merchandise and, in certain instances, resale,
thrift and other stores that sell used merchandise. To date, the Company's
franchisees and its Company-owned stores have not faced a high degree of
competition in the sale of used merchandise. However, the Company may face
additional competition as its franchise systems expand and additional
competitors may enter the used merchandise market.
S, G & A EXPENSE
The Company's ability to control the amount, and rate of growth in, selling,
general and administrative expenses; and the impact of unusual items resulting
from the Company's ongoing evaluation of its business strategies, asset
valuations and organizational structures.
FINANCING
The Company's ability to obtain competitive financing to fund its growth.
QUARTERLY FLUCTUATIONS
The Company's quarterly results of operations have fluctuated as a result of the
timing of recognition of franchise fees, receipt of royalty payments, timing of
merchandise shipments, timing of expenditures and other factors. There can be no
assurance that results in future periods will not fluctuate on a quarterly
basis.
GOVERNMENT REGULATION
As a franchisor, the Company is subject to various federal and state franchise
laws and regulations. Although the Company believes it is currently in material
compliance with existing federal and state laws, there is a trend toward
increasing government regulation of franchising. The promulgation of new
franchising laws and regulations could adversely affect the Company.
The Company does not undertake and specifically declines any obligations to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> MAR-29-1997
<CASH> 3,344
<SECURITIES> 0
<RECEIVABLES> 14,810
<ALLOWANCES> (793)
<INVENTORY> 2,837
<CURRENT-ASSETS> 22,471
<PP&E> 8,899
<DEPRECIATION> (3,202)
<TOTAL-ASSETS> 31,343
<CURRENT-LIABILITIES> 13,549
<BONDS> 0
0
0
<COMMON> 10,412
<OTHER-SE> 7,290
<TOTAL-LIABILITY-AND-EQUITY> 31,343
<SALES> 14,379
<TOTAL-REVENUES> 19,109
<CGS> 12,660
<TOTAL-COSTS> 18,283
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 115
<INTEREST-EXPENSE> (71)
<INCOME-PRETAX> 897
<INCOME-TAX> 352
<INCOME-CONTINUING> 545
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 545
<EPS-PRIMARY> .09
<EPS-DILUTED> 0
</TABLE>
