SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997 COMMISSION FILE NUMBER: 0-22012
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GROW BIZ INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter.)
MINNESOTA 41-1622691
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4200 Dahlberg Drive, Minneapolis, MN 55422-4837
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 520-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Registrant's Common Stock
on January 31, 1998, as reported on the NASDAQ National Market System, was $27.8
million.
Shares of no par value Common Stock outstanding as of January 31, 1998:
5,951,134 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's Annual Meeting
of Shareholders to be held on May 6, 1998 have been incorporated by
reference into Part III of this report.
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
INDEX TO ANNUAL REPORT ON FORM 10-K
PART I PAGE
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Item 1. Business 4
General 4
Franchising Overview 6
Business Strategy 6
Franchise Operations 7
Franchise Marketing 8
Franchise Agreement 9
International Franchise Expansion 10
Competition 10
Government Regulations 10
Trademarks and Service Marks 11
Seasonality 11
Employees 11
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 4a. Executive Officers of the Registrant 12
PART II PAGE
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Item 5. Market for the Registrant's Common Equity and Related 14
Shareholder Matters
Item 6. Selected Consolidated Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition 21
and Results of Operations
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting 38
and Financial Disclosure
PART III PAGE
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Item 10. Directors and Executive Officers of the Registrants 38
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and 38
Management
Item 13. Certain Relationships and Related Transactions 38
PART IV PAGE
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Item 14. Exhibits and Reports on Form 8-K 39
SIGNATURES 41
Exhibit 10.6 It's About Games(TM) Franchise Agreement
Exhibit 10.16 Amendment No. 3 to the 1992 Stock Option Plan
Exhibit 11.1 Statement of Computation of Per Share Earnings
Exhibit 21.1 Subsidiaries
Exhibit 23.1 Consent of Independent Public Accountants
Exhibit 27.1 Financial Data Schedule
Exhibit 99.1 Cautionary Statements for Purposes of the "Safe Harbor"
Provision of the Private Securities Litigation Reform Act
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:
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STORES
TOTAL OPENED/ TOTAL AWARDED,
12/28/96 PURCHASED CLOSED CONVERTED 12/27/97 NOT OPEN TOTAL
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Play It Again Sports(R)
Franchised Stores - US and Canada 676 43 (63) (2) 654 62 716
Franchised Stores - Other International 8 0 (0) 0 8 0 8
Corporate - Owned 4 0 (1) 2 5 0 5
Other 22 0 (0) 0 22 0 22
Once Upon A Child(R)
Franchised Stores - US and Canada 182 26 (6) 2 204 39 243
Corporate - Owned 6 0 (0) (2) 4 0 4
Computer Renaissance(R)
Franchised Stores - US and Canada 108 76 (1) (3) 180 82 262
Corporate - Owned 4 0 (0) 3 7 0 7
Music Go Round(R)
Franchised Stores - US and Canada 20 18 (0) 0 38 14 52
Corporate - Owned 4 0 (0) 0 4 0 4
Disc Go Round(R)
Franchised Stores - US and Canada 114 31 (12) (1) 132 41 173
Corporate - Owned 2 0 (0) 1 3 0 3
It's About Games(TM)
Franchised Stores - US and Canada 0 0 (0) 0 0 2 2
Corporate - Owned 0 42 (0) 0 42 0 42
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Total 1,150 236 (83) 0 1,303 240 1,543
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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)
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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