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 28, 1998
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, 5,981,853 shares outstanding as of April 30, 1998.
<PAGE>
GROW BIZ INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
- --------------------------------------------------------------------------------
Item 1. Financial Statements (Unaudited)
CONDENSED BALANCE SHEETS:
March 28, 1998 and December 27, 1997 3
CONDENSED STATEMENTS OF OPERATIONS:
Three Months Ended
March 28, 1998 and March 29, 1997 4
CONDENSED STATEMENTS OF CASH FLOWS:
Three Months Ended
March 28, 1998 and March 29, 1997 5
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 PAGE
- --------------------------------------------------------------------------------
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:
------- ------------
27 Financial Data Schedule
99 Cautionary Statements
(b.) Reports on Form 8-K -- None
<PAGE>
GROW BIZ INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------
March 28, 1998 December 27, 1997
----------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,020,500 $ 3,088,000
Trade receivables, less allowance for doubtful
accounts of $1,007,500 and $880,000 12,530,500 12,880,700
Inventories 5,414,800 5,728,600
Prepaid expenses and other 1,841,800 1,987,300
Deferred income taxes 1,491,600 1,491,600
----------- -----------
Total current assets 26,299,200 25,176,200
Notes receivable 206,700 184,000
Property and equipment, net 5,359,200 5,617,900
Other assets, net 6,641,400 6,776,500
----------- -----------
$38,506,500 $37,754,600
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable 7,677,400 6,604,800
Accrued liabilities 3,826,500 3,781,500
Current maturities of long-term debt 2,134,200 2,061,400
Deferred franchise fee revenue 3,584,300 3,588,000
----------- -----------
Total current liabilities 17,222,400 16,035,700
Long-Term Debt 3,483,300 4,268,200
Shareholders' Equity:
Common stock, no par, 10,000,000 shares authorized,
5,976,103 and 6,002,214 shares issued and outstanding 7,134,100 7,474,900
Retained earnings 10,666,700 9,975,800
----------- -----------
Total shareholders' equity 17,800,800 17,450,700
----------- -----------
$38,506,500 $37,754,600
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
GROW BIZ INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------------------
Three Months Ended
March 28, 1998 March 29, 1997
------------------------------------
<S> <C> <C>
REVENUE:
Merchandise sales $ 20,192,700 $ 14,379,100
Royalties 4,682,100 3,925,800
Franchise fees 515,300 533,000
Advertising and other 233,300 271,500
------------ ------------
Total revenue 25,623,400 19,109,400
COST OF MERCHANDISE SOLD 16,622,100 12,660,000
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 7,825,700 5,623,100
------------ ------------
Income from operations 1,175,600 826,300
INTEREST INCOME (EXPENSE) (39,200) 70,500
------------ ------------
Income before income taxes 1,136,400 896,800
PROVISION FOR INCOME TAXES 445,500 351,600
------------ ------------
NET INCOME $ 690,900 $ 545,200
============ ============
NET INCOME PER COMMON SHARE - BASIC $ .12 $ .09
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 5,977,400 6,360,500
============ ============
NET INCOME PER COMMON SHARE - DILUTED $ .11 $ .09
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 6,165,800 6,255,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
GROW BIZ INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------
Three Months Ended
March 28, 1998 March 29, 1997
--------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 690,900 $ 545,200
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 517,700 468,900
Change in operating assets and liabilities:
Trade receivables 327,400 (505,900)
Inventories 313,800 (120,700)
Prepaid expenses and other 145,400 (13,400)
Accounts payable 1,072,600 2,028,100
Accrued liabilities 45,100 48,000
Deferred franchise fee revenue (3,700) 122,500
----------- -----------
Net cash provided by operating activities 3,109,200 2,572,700
----------- -----------
INVESTING ACTIVITIES:
Increase in other assets (20,200) --
Purchases of property and equipment (103,700) (40,400)
----------- -----------
Net cash used for investing activities (123,900) (40,400)
----------- -----------
FINANCING ACTIVITIES:
Payments on long-term debt (712,100) (36,300)
Proceeds from stock option exercises 342,800 88,200
Repurchase of common stock (683,500) (628,800)
----------- -----------
Net cash used for financing activities (1,052,800) (576,900)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 1,932,500 1,955,400
Cash and cash equivalents, beginning of period 3,088,000 1,388,800
----------- -----------
Cash and cash equivalents, end of period $ 5,020,500 $ 3,344,200
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
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 28, 1998 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', `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 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 2,000,000 shares of the Company's common stock on the open market. As of
April 30, 1998, the Company had repurchased 1,523,856 shares of its stock at an
average price of $9.42 per share, including 56,373 shares repurchased at an
average price of $12.13 per share in the three months ended March 28, 1998.
4. LITIGATION:
In connection with an action filed by an early partner in the original Play It
Again Sports store, the Company received a court ruling in February 1998 on a
motion filed by the plaintiff stating that an enforceable settlement agreement
existed between the two parties. The Company has appealed the order which
requires the Company 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 recognized the entire $2.0
million as a non-operating expense in the year ended December 27, 1997.
<PAGE>
5. 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 diving 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.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 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.
Following is a summary of the Company's franchising and corporate retail store
activity for the six retail concepts for the three months ended March 28, 1998:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
TOTAL OPENED/ TOTAL
12/27/97 PURCHASED CLOSED CONVERTED 3/28/98
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Play It Again Sports(R)
Franchised Stores - US and Canada 654 5 (17) 0 642
Franchised Stores - Other International 8 0 0 0 8
Corporate 5 0 0 0 5
Other 22 0 0 0 22
Once Upon A Child(R)
Franchised Stores - US and Canada 204 2 (3) (1) 202
Corporate 4 0 0 1 5
Computer Renaissance(R)
Franchised Stores - US and Canada 180 10 0 0 190
Corporate 7 0 0 0 7
Music Go Round(R)
Franchised Stores - US and Canada 38 1 0 0 39
Corporate 4 0 0 0 4
Disc Go Round(R)
Franchised Stores - US and Canada 132 4 (1) 0 135
Corporate 3 0 0 0 3
It's About Games(TM)
Franchised Stores - US and Canada 0 1 0 0 1
Corporate 42 0 0 0 42
-------------------------------------------------------------------------------
Total 1,303 23 (21) 0 1,305
===============================================================================
</TABLE>
In April 1998, the Company announced the acquisition of certain assets and
franchising rights of Tool Traders, Inc. of Detroit, Michigan. The Company paid
$380,200 plus a percentage of future royalties for a period of seven years. Tool
Traders stores buy, sell and trade used and new tools. The Company anticipates
opening Company-owned stores in the Minneapolis/Saint Paul markets and will
begin franchising the concept under the name ReTool(TM) during the second half
of 1998. ReTool(TM) is the seventh franchise concept for Grow Biz International,
Inc.
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
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 28, March 29, 1998 over (under)
1998 1997 First Quarter 1997
--------------------------------------------------
<S> <C> <C> <C>
Revenue:
Merchandise sales 78.8% 75.2% 40.4%
Royalties 18.3 20.5 19.2
Franchise fees 2.0 2.8 (3.3)
Advertising and other 0.9 1.5 (14.1)
----- ----- -----
Total revenues 100.0% 100.0% 34.1%
Cost of merchandise sold 64.9 66.3 31.3
Selling, general and administrative expenses 30.5 29.4 39.2
----- ----- -----
Income from operations 4.6 4.3 42.3
Interest and other income (expense), net 0.2 0.4 (155.6)
----- ----- -----
Income before income taxes 4.4 4.7 26.7
Provision for income taxes 1.7 1.8 26.7
----- ----- -----
Net income 2.7% 2.9% 26.7%
===== ===== =====
</TABLE>
<PAGE>
COMPARISON OF THREE MONTHS ENDED MARCH 28, 1998 TO THREE MONTHS ENDED MARCH 29,
1997
REVENUES
Revenues for the quarter ended March 28, 1998 totaled $25.6 million compared to
$19.1 million for the comparable period in 1997. Merchandise sales increased to
$20.2 million for the three months ended March 28, 1998 from $14.4 million for
the same period in 1997. Merchandise sales consist of the sale of product to
franchisees through the buying group and retail sales at the Company-owned
stores. For the first quarter of 1998 and 1997 they were as follows:
1998 1997
----------- -----------
Buying Group $11,782,200 $11,206,300
Retail Sales 8,410,500 3,172,800
----------- -----------
Merchandise Sales $20,192,700 $14,379,100
=========== ===========
Buying group revenues increased 5.1% for the three months ended March 28, 1998
compared to the same period last year. It is anticipated that 1998 buying group
revenues will be consistent with the prior year. Retail store sales increased
$5.2 million, or 165.1%, in the first three months of 1998 compared to 1997 as a
result of acquiring forty Video Game Exchange, Inc. (VGE) stores in August 1997.
Retail sales are expected to continue to increase as the Company opens an
additional twenty-five Company-owned stores in 1998. It is anticipated the total
number of Company-owned stores will be over eighty-five by the end of 1998.
Royalties increased to $4.7 million for the first quarter of 1998 from $3.9
million for the same period in 1997, primarily due to the expanding base of
franchise stores and increases in comparable store sales. Franchise fees
recognized for store openings were consistent with the prior year. Store
openings for the twelve months ended December 26, 1998 are anticipated to be
consistent with the same period in 1997.
COST OF MERCHANDISE SOLD
Cost of merchandise sold includes the cost of merchandise sold through the
buying group and at Company-owned retail stores. Cost of merchandise sold as a
percentage of the related revenue was consistent with the previous year as shown
in the following table:
1998 1997
---- ----
Buying Group 96.1% 95.0%
Retail Stores 63.1 63.5
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
The $2.2 million, or 39.2%, increase in operating expenses in the first three
months of 1998 compared to the same period in 1997 is primarily due to the costs
related to operating the Video Game Exchange, Inc. stores acquired in August
1997. Selling, general and administrative expenses as a percent of revenues
increased slightly.
During the first quarter of 1998, the Company had a net interest expense of
$39,200 compared to net interest income of $70,500 in the first quarter of 1997.
This decrease is primarily the result of the interest expense incurred on the
notes payable related to the Video Game Exchange, Inc. acquisition.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $5.0 million in cash and had a current ratio
of 1.5 to 1.0.
During the three months ended March 28, 1998, the Company's operating activities
provided $3.1 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 $1.1 million increase in payables, a
$327,400 decrease in receivables and a $313,800 decrease in inventory.
The Company's $1.1 million use of cash for financing activities in the first
three months of 1998 was due to note payable payments and the repurchase of
56,373 shares of the Company's common stock offset by cash received from the
exercise of options and warrants to purchase 48,312 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, 1998. Borrowings against the line carry an
interest rate of prime which was 8.5% at March 28, 1998. The available line is
reduced by a $2.0 million letter of credit issued by the Company in March 1998
in connection with its appeal of a court ruling on a motion in the Van Buskirk
litigation matter.
The Company believes that its current cash position, cash generated from future
operations, availability of line of credit borrowings and additional capacity
for debt will be adequate to meet the Company's current obligations and
operating needs.
<PAGE>
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.
By: /s/ Ronald G. Olson
----------------------
Ronald G. Olson
Date: May 11, 1998 President and Chief Executive Officer
By: /s/ David J. Osdoba, Jr.
------------------------
David J. Osdoba, Jr.
Date: May 11, 1998 Vice President of Finance and Chief Financial
Officer
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.
<PAGE>
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-26-1998
<PERIOD-END> MAR-28-1998
<CASH> 5,021
<SECURITIES> 0
<RECEIVABLES> 13,745
<ALLOWANCES> (1,008)
<INVENTORY> 5,415
<CURRENT-ASSETS> 26,299
<PP&E> 9,818
<DEPRECIATION> (4,459)
<TOTAL-ASSETS> 38,507
<CURRENT-LIABILITIES> 17,222
<BONDS> 0
7,134
0
<COMMON> 0
<OTHER-SE> 10,667
<TOTAL-LIABILITY-AND-EQUITY> 38,507
<SALES> 20,193
<TOTAL-REVENUES> 25,623
<CGS> 16,222
<TOTAL-COSTS> 24,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 196
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> 1,136
<INCOME-TAX> 446
<INCOME-CONTINUING> 691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 691
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
</TABLE>
