UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 28, 1997 Commission File Number 0-22012 GROW BIZ INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter) Minnesota 41-1622691 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 4200 Dahlberg Drive Golden Valley, MN 55422-4837 (Address of Principal Executive Offices, Zip Code) Registrant's Telephone Number, Including Area Code 612-520-8500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes: __X__ No: ____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, no par value, 6,054,070 shares outstanding as of July 31, 1997.
GROW BIZ INTERNATIONAL, INC. INDEX PART I. FINANCIAL INFORMATION PAGE - ---------------- ------------------------------------------------------- ------- Item 1. Financial Statements (Unaudited) CONDENSED BALANCE SHEETS: 3 June 28, 1997 and December 28, 1996 CONDENSED STATEMENTS OF OPERATIONS: 4 Three Months Ended June 28, 1997 and June 29, 1996 Six Months Ended June 28, 1997 and June 29, 1996 CONDENSED STATEMENTS OF CASH FLOWS: 5 Six Months Ended June 28, 1997 and June 29, 1996 NOTES TO CONDENSED FINANCIAL STATEMENTS 6 - 7 Item 2. Management's Discussion and Analysis of Financia Condition and Results of Operations 8 - 12 PART II. OTHER INFORMATION PAGE - ---------------- ------------------------------------------------------- ------- Items 1 through 3 and 5 have been omitted since all items are inapplicable or answers negative. Item 4. Submission of Matters to a Vote of Security-holders 13 Item 6. Exhibits and Reports on Form 8-K (a.) Exhibit Number: Description: ------- ------------ 11 Statement of Computation of Per Share Earnings 27 Financial Data Schedule 99 Cautionary Statements (b.) Reports on Form 8-K -- None
GROW BIZ INTERNATIONAL, INC. CONDENSED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> June 28, 1997 December 28, 1996 ----------- ----------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 1,676,600 $ 1,388,800 Trade receivables, less allowance for doubtful accounts of $669,500 and $930,000 12,629,900 13,171,400 Inventories 2,704,800 2,716,000 Prepaid expenses and other 1,580,900 862,900 Deferred income taxes 1,726,400 1,726,400 ----------- ----------- Total current assets 20,318,600 19,865,500 Notes receivable 431,000 339,800 Property and equipment, net 5,166,300 5,979,300 Other assets, net 2,698,800 2,991,900 ----------- ----------- $28,614,700 $29,176,500 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable 5,663,700 5,670,300 Accrued liabilities 1,010,300 1,275,800 Current maturities of long-term debt 231,200 134,900 Deferred franchise fee revenue 4,685,500 4,269,000 ----------- ----------- Total current liabilities 11,590,700 11,350,000 Long-Term Debt 226,600 129,000 Shareholder's Equity: Common stock, no par, 10,000,000 shares authorized, 6,086,270 and 6,263,444 shares issued and outstanding 8,513,500 10,952,900 Retained earnings 8,283,900 6,744,600 ----------- ----------- Total shareholders' equity 16,797,400 17,697,500 ----------- ----------- $28,614,700 $29,176,500 =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements.
GROW BIZ INTERNATIONAL, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 28, 1997 June 29, 1996 June 28, 1997 June 29, 1996 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> REVENUE: Merchandise sales $15,199,200 $20,236,100 $29,578,400 $41,085,400 Royalties 4,330,700 3,744,600 8,256,400 6,977,500 Franchise fees 1,074,700 972,600 1,607,700 1,737,100 Advertising and other 74,400 55,500 345,900 335,200 ----------- ----------- ----------- ----------- Total revenue 20,679,000 25,008,800 39,788,400 50,135,200 COST OF MERCHANDISE SOLD 13,404,500 18,267,900 26,064,500 37,065,700 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,684,800 6,015,600 11,307,900 11,859,800 ----------- ----------- ----------- ----------- Income from operations 1,589,700 725,300 2,416,000 1,209,700 INTEREST INCOME, NET 45,200 43,600 115,700 102,300 ----------- ----------- ----------- ----------- Income before income taxes 1,634,900 768,900 2,531,700 1,312,000 PROVISION FOR INCOME TAXES 640,900 301,400 992,400 514,300 ----------- ----------- ----------- ----------- NET INCOME $ 994,000 $ 467,500 $ 1,539,300 $ 797,700 =========== =========== =========== =========== NET INCOME PER COMMON SHARE $ .16 $ .07 $ .25 $ .12 =========== =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING 6,223,500 6,507,400 6,281,300 6,704,300 =========== =========== =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements.
GROW BIZ INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Six Months Ended June 28,1997 June 29,1996 ----------- ----------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 1,539,300 $ 797,700 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 888,900 863,400 Change in operating assets and liabilities: Trade receivables 450,300 602,100 Inventories 11,200 270,800 Prepaid expenses and other (718,000) (75,700) Accounts payable (6,600) 2,346,800 Accrued liabilities (265,500) (524,900) Deferred franchise fee revenue 416,500 609,000 ----------- ----------- Net cash provided by operating activities 2,316,100 4,889,200 ----------- ----------- INVESTING ACTIVITIES: Redemption of short-term investments - 220,000 Increase in other assets (69,500) (137,200) Decrease (Increase) in property and equipment 286,700 (200,900) ----------- ----------- Net cash provided by (used for) investing activities 217,200 (118,100) ----------- ----------- FINANCING ACTIVITIES: Increase in notes payable 267,000 1,200,000 Payments on long-term debt (73,100) (81,000) Proceeds from stock option exercises 182,400 106,700 Repurchase of common stock (2,621,800) (5,652,800) ----------- ----------- Net cash used for financing activities (2,245,500) (4,427,100) ----------- ----------- INCREASE IN CASH & CASH EQUIVALENTS 287,800 344,000 Cash and cash equivalents, beginning of period 1,388,800 101,500 ----------- ----------- Cash and cash equivalents, end of period $ 1,676,600 $ 445,500 =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements.
GROW BIZ INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. MANAGEMENT'S INTERIM FINANCIAL STATEMENT REPRESENTATION: The accompanying condensed financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The information in the condensed financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. Revenues and operating results for the six months ended June 28, 1997 are not necessarily indicative of the results to be expected for the full year. 2. ORGANIZATION AND BUSINESS: Grow Biz International, Inc. (the "Company") offers licenses to operate retail stores using the service marks "Play it Again Sports", "Once Upon A Child", "Computer Renaissance", "Music Go Round" and "Disc Go Round". In addition, the Company sells inventory to its franchisees through its buying group and operates retail stores. The Company has a 52/53 week year which ends on the last Saturday in December. 3. SHAREHOLDERS' EQUITY: Since 1995, the Company's Board of Directors has authorized the repurchase of up to 2,000,000 shares of the Company's common stock on the open market. As of July 31, 1997, the Company had repurchased 1,346,113 shares of its stock at an average price of $9.07 per share, including 188,159 shares repurchased at an average price of $10.59 per share in the three months ended June 28, 1997. 4. LITIGATION: In December 1995, an early partner in the original Play It Again Sports store commenced an action against the Company relating to, among other things, the development of stores under a 1992 retail store agreement. The suit alleges breach of contract, fraud and misrepresentation, and violation of federal and state anti-racketeering (RICO) statutes. The plaintiff seeks monetary damages in excess of $50,000, treble damages under the RICO claim and, among other things, injunctive and declaratory relief. The Company believes the suit is without merit and intends to vigorously defend the action. When concluded, in the opinion of management, based upon information it presently possesses, the actions will not have a material adverse effect on the Company's financial position. 5. EARNINGS PER SHARE: Net income per share has been computed by dividing net income by the weighted average number of common shares outstanding during each period. Common stock equivalent shares, which relate to stock options and warrants, are included in the weighted average when the effect is dilutive.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The Company will be required to adopt SFAS No. 128 in 1997. The Company expects that the ultimate adoption of SFAS No. 128 will not have a material impact on the Company's computation or presentation of EPS, as the Company's common stock equivalents have had no material effect on earnings per share amounts.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Following is a summary of the Company's franchising and corporate retail store activity for the three months ended June 28, 1997: <TABLE> <CAPTION> ----------- ------------ ----------- ------------- ----------- TOTAL TOTAL 3/29/97 OPENED CLOSED CONVERTED 6/28/97 ----------- ------------ ----------- ------------- ----------- <S> <C> <C> <C> <C> <C> Play It Again Sports(R) Franchised Stores - US and Canada 669 9 (14) (1) 663 Franchised Stores - Other International 8 0 0 0 8 Corporate 4 0 0 1 5 Other 22 0 0 0 22 Once Upon A Child(R) Franchised Stores - US and Canada 185 3 (3) 2 187 Corporate 6 0 0 (2) 4 Computer Renaissance(R) Franchised Stores - US and Canada 119 18 (1) 0 136 Corporate 4 0 0 0 4 Music Go Round(R) Franchised Stores - US and Canada 20 8 0 0 28 Corporate 4 0 0 0 4 Disc Go Round(R) Franchised Stores - US and Canada 115 8 (3) 0 120 Corporate 2 0 0 0 2 ----------- ------------ ----------- ------------- ----------- Total 1,158 46 (21) 0 1,183 =========== ============ =========== ============= =========== Following is a summary of the Company's franchising and corporate retail store activity for the six months ended June 28, 1997: ----------- ------------ ----------- ------------- ----------- TOTAL TOTAL 12/28/96 OPENED CLOSED CONVERTED 6/28/97 ----------- ------------ ----------- ------------- ----------- Play It Again Sports(R) Franchised Stores - US and Canada 676 11 (23) (1) 663 Franchised Stores - Other International 8 0 0 0 8 Corporate 4 0 0 1 5 Other 22 0 0 0 22 Once Upon A Child(R) Franchised Stores - US and Canada 182 8 (5) 2 187 Corporate 6 0 0 (2) 4 Computer Renaissance(R) Franchised Stores - US and Canada 108 29 (1) 0 136 Corporate 4 0 0 0 4 Music Go Round(R) Franchised Stores - US and Canada 20 8 0 0 28 Corporate 4 0 0 0 4 Disc Go Round(R) Franchised Stores - US and Canada 114 12 (6) 0 120 Corporate 2 0 0 0 2 ----------- ------------ ----------- ------------- ----------- Total 1,150 68 (35) 0 1,183 =========== ============ =========== ============= =========== </TABLE>
RESULTS OF OPERATIONS The following table sets forth for the periods indicated, certain income statement items as a percentage of total revenue: <TABLE> <CAPTION> ------------------------------------ ------------------------------------ Three Months Ended Six Months Ended June 28, 1997 June 29, 1996 June 28, 1997 June 29, 1996 ------------------ ----------------- ------------------ ----------------- <S> <C> <C> <C> <C> Revenue: Merchandise sales 73.5% 80.9% 74.3% 81.9% Royalties 20.9 15.0 20.8 13.9 Franchise fees 5.2 3.9 4.0 3.5 Advertising and other 0.4 0.2 0.9 0.7 ------- ------- ------- ------- Total revenues 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold 64.8 73.0 65.5 73.9 Selling, general and administrative expenses 27.5 24.1 28.4 23.7 ------ ------ ------ ------ Income from operations 7.7 2.9 6.1 2.4 Interest and other income, net 0.2 0.2 0.3 0.2 ------- ------- ------- ------- Income before income taxes 7.9 3.1 6.4 2.6 Provision for income taxes 3.1 1.2 2.5 1.0 ------- ------- ------- ------- Net income 4.8% 1.9% 3.9% 1.6% ======== ======== ======== ======== </TABLE> Comparison of Three Months Ended June 28, 1997 to Three Months Ended June 29, 1996 Revenues for the quarter ended June 28, 1997 totaled $20.7 million compared to $25.0 million for the comparable period in 1996. Merchandise sales consist of the sale of product to franchisees through the buying group and retail sales at the corporate-owned stores. For the second quarter of 1997 and 1996 merchandise sales were as follows: 1997 1996 ---- ---- Buying Group Sales $ 11,986,300 $ 16,941,200 Retail Sales 3,212,900 3,294,900 -------------- -------------- Merchandise Sales $ 15,199,200 $ 20,236,100 ============== ============== The 29.2% decrease in buying group sales for the three months ended June 28, 1997 compared to the same period last year was anticipated and, as discussed previously, is the result of management's strategic plan to reduce the number of Play It Again Sports(R) vendors being offered centralized billing and the elimination of central billing for the other concepts. It is anticipated that buying group sales as a percent of total revenues will continue to decline in future periods. Retail sales were relatively flat despite having an average of two fewer corporate-owned stores in the three months ended June 28, 1997 compared to the same period in 1996.
Royalties increased to $4.3 million for the second quarter of 1997 from $3.7 million for the same period in 1996, primarily due to the expanding base of franchise stores. Franchise fees were $1,074,700 in the second quarter of 1997 compared to $972,600 in the second quarter of 1996. This increase is due to higher average franchise fees and an increased number of fees from resale transactions. Store openings for the quarter were consistent with the prior period. Store openings for the remainder of 1997 are likely to be consistent with the same period in 1996. Cost of merchandise sold was $13.4 million for the second quarter of 1997 compared to $18.3 million for the same period last year. Gross margin on merchandise sales improved to 11.8% from 9.8% due to an increase in the mix of merchandise sales from the corporate-owned retail stores, on which gross margin contributions are significantly higher. Selling, general and administrative expenses were $5.7 million or 27.5% of revenues in the second quarter of 1997 compared to $6.0 million or 24.1% of revenues for the same period in 1996. The $330,800 decrease in selling, general and administrative expenses is primarily due to the Company exiting the warehouse operations and a reduction of non-operational staff needed to support the franchise system. The increase in selling, general and administrative expenses as a percent of revenue is due to the decline in the low margin buying group sales. It is anticipated that future increases in revenues from franchising activities, royalties and franchise fees, will surpass future increases in selling, general and administrative expenses. Net income for the second quarter of 1997 was $994,000 or $.16 per share compared to $467,500 or $.07 per share for the comparable period in 1996. Comparison of Six Months Ended June 28, 1997 to Six Months Ended June 29, 1996 Revenues for the six months ended June 28, 1997 were $39.8 million compared to $50.1 million for the comparable period in 1996. Merchandise sales consist of the sale of product to franchisees through the buying group and retail sales at the corporate-owned stores. For the first six months of 1997 and 1996 merchandise sales were as follows: 1997 1996 ---- ---- Buying Group Sales $ 23,192,700 $ 34,600,200 Retail Sales 6,385,700 6,485,200 -------------- -------------- Merchandise Sales $ 29,578,400 $ 41,085,400 ============== ============== The 33.0% decrease in buying group sales for the six months ended June 28, 1997 compared to the same period last year was anticipated and, as discussed previously, is the result of management's strategic plan to reduce the number of Play It Again Sports(R) vendors being offered centralized billing and the elimination of central billing for the other concepts. It is anticipated that buying group sales as a percent of total revenues will continue to decline in future periods. Retail sales were relatively flat despite having an average of two fewer corporate-owned stores in the six months ended June 28, 1997 compared to the same period in 1996. Royalties increased to $8.3 million for the first six months of 1997 from $7.0 million for the same period in 1996, primarily due to the expanding base of franchise stores. Franchise fees decreased $129,400 in the first six months of 1997 compared to the first six months of 1996 as a result of opening fewer stores in the first quarter of 1997 compared to the first quarter of 1996.
Cost of merchandise sold was $26.1 million for the first six months of 1997 compared to $37.1 million for the same period last year. Gross margin on merchandise sales improved to 11.9% from 9.8% due to an increase in the mix of merchandise sales at the corporate-owned retail stores, on which gross margin contributions are significantly higher. Selling, general and administrative expenses were $11.3 million or 28.4% of revenues for the first six quarter of 1997 compared to $11.9 million or 23.7% of revenues for the same period in 1996. The $551,900 decrease in selling, general and administrative expenses is primarily due to the Company exiting the warehouse operations and a reduction of non-operational staff needed to support the franchise system. The increase in selling, general and administrative expenses as a percent of revenue is due to the decline in the low margin buying group sales. It is anticipated that future increases in revenues from franchising activities, royalties and franchise fees, will surpass future increases in selling, general and administrative expenses. Net income for the first half of 1997 was $1,539,300 or $.25 per share compared to $797,700 or $.12 per share for the comparable period in 1996. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with $1.7 million in total cash and short-term, high-grade investments. Operating activities provided $2.3 million of cash during the six months ended June 28, 1997. This consists primarily of net income of $1.5 million along with changes in operating assets and liabilities. The Company used $2.6 million during the first six months of 1997 to repurchase 248,319 shares of the Company's common stock. In July 1997, the Company extended the buy back to include an additional 500,000 shares bringing the total shares the Company is authorized to buy back to 2,000,000. As of July 31, 1997, the Company had purchased 1,346,113 shares, at an average price of $9.07 per share. In June 1997, the Company renegotiated the terms of its purchase of the point-of-sale software license utilized by its franchisees. In January 1995, the Company acquired the point-of-sale software license for $260,000 in cash. In addition, the Company was required to pay a fee for each system installed through December 31, 1999. This fee carried a minimum liability of $1,150,000 for the term of the agreement. A total of $483,250 in fees had been paid through June 28, 1997. The new agreement requires that the Company pay a total of $400,000 in three equal installments in June 1997, January 1998 and January 1999. The Company will amortize the $400,000 and the unamortized portion of the initial purchase as additional licenses are sold. In July 1997, the Company signed a letter of intent to purchase certain assets and franchising rights from Video Game Exchange, based in Cleveland, Ohio. The letter of intent is subject to the parties' negotiation of a definitive purchase agreement. Video Game Exchange operates 40 retail stores in Ohio, Pennsylvania, Kentucky, Georgia and Maryland that buy, sell and trade used video games and equipment. These stores will become the nucleus of the Company's sixth concept, renamed It's About Games. The Company anticipates that the acquisition will occur in August 1997 and will begin advertising for potential franchisees in the Fall of 1997. The Company has a commitment to lend
from a bank for a substantial portion of the purchase price. The balance will be financed by Video Game Exchange. The Company has a $5.0 million committed revolving line of credit agreement which is due for renewal on July 31, 1998. Borrowings carry an interest rate of prime which was 8.50% at June 28, 1997. At June 28, 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.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS At the Annual Shareholders meeting held on April 30, 1997, the Company submitted to a vote of security-holders the following matters which received the indicated votes: 1. Approving setting the number of members of the Board of Directors at six: Broker For: 6,009,467 Against: 11,763 Abstain: 2,052 Non-Vote: 0 2. Election of Directors: For: Withheld: K. Jeffrey Dahlberg 6,014,822 8,460 Ronald G. Olson 6,014,822 8,460 Randel S. Carlock 6,014,722 8,560 Dennis J. Doyle 6,014,872 8,410 Robert C. Pohlad 6,013,595 9,687 Bruce C. Sanborn 6,014,922 8,360 3. Ratifying the appointment of Arthur Andersen LLP as independent auditors for the current fiscal year: Broker For: 6,014,153 Against: 4,560 Abstain: 4,569 Non-Vote: 0
2. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GROW BIZ INTERNATIONAL, INC. Date: August 11, 1997 By: /s/ Ronald G. Olson ---------------------- Ronald G. Olson President and Chief Executive Officer Date: August 11, 1997 By: /s/ David J. Osdoba, Jr. -------------------------- David J. Osdoba, Jr. Vice President of Finance and Chief Financial Officer