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 September 27, 1997 Commission File Number 0-22012 GROW BIZ INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter) Minnesota 41-1622691 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 4200 Dahlberg Drive 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, 6,076,114 shares outstanding as of November 6, 1997.
GROW BIZ INTERNATIONAL, INC. INDEX PART I. FINANCIAL INFORMATION PAGE - -------------------------------------------------------------------------------- Item 1. Financial Statements (Unaudited) CONDENSED BALANCE SHEETS: 4 September 27, 1997 and December 28, 1996 CONDENSED STATEMENTS OF OPERATIONS: 5 Three Months Ended September 27, 1997 and September 28, 1996 Nine Months Ended September 27, 1997 and September 28, 1996 CONDENSED STATEMENTS OF CASH FLOWS: 6 Nine Months Ended September 27, 1997 and September 28, 1996 NOTES TO CONDENSED FINANCIAL STATEMENTS 7-8 Item 2. Management's Discussion and Analysis of Financial 9-14 Condition and Results of Operations PART II. OTHER INFORMATION PAGE - -------------------------------------------------------------------------------- Items 1 through 5 have been omitted since all items are inapplicable or answers negative. Item 6. Exhibits and Reports on Form 8-K (a.) Exhibit Number: Description: ------- ------------ 11 Statement of Computation of Per Share Earnings 27 Financial Data Schedule 99 Cautionary Statements (b.) Reports on Form 8-K On August 28, 1997, the Company filed an 8-K related to the purchase of Video Game Exchange, Inc. On October 15, 1997, the Company filed an amended 8-K related to the Video Game Exchange, Inc. acquisition that included the following financial statements:
(a) Financial statements of business acquired Independent Auditor's Report Audited Balance Sheet, December 31, 1996 Audited Statement of Income and Retained Earnings, December 31, 1996 Audited Statement of Cash Flows, December 31, 1996 Audited Notes to Financial Statements, December 31, 1996 Unaudited Balance Sheet, June 30, 1997 Unaudited Statement of Income and Retained Earnings, June 30, 1997 and June 30, 1996 Unaudited Statements of Cash Flows, June 30, 1997 and June 30, 1996 (b) Pro forma financial information Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 28, 1996 Unaudited Pro Forma Condensed Consolidated Statements of Operations for the Six Months Ended June 28, 1997 Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 28, 1997
GROW BIZ INTERNATIONAL, INC. CONDENSED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> --------------------------- September 27, December 28, 1997 1996 --------------------------- ASSETS <S> <C> <C> Current Assets: Cash and cash equivalents $ 5,383,900 $ 1,388,800 Trade receivables, less allowance for doubtful accounts of $750,300 and $930,000 11,928,600 13,171,400 Inventories 4,148,600 2,716,000 Prepaid expenses and other 1,477,800 862,900 Deferred income taxes 1,726,400 1,726,400 ----------- ----------- Total current assets 24,665,300 19,865,500 Notes receivable 425,700 339,800 Property and equipment, net 5,569,700 5,979,300 Other assets, net 6,915,900 2,991,900 ----------- ----------- $37,576,600 $29,176,500 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable 6,983,600 5,670,300 Accrued liabilities 1,825,000 1,275,800 Current maturities of long-term debt 2,093,400 134,900 Deferred franchise fee revenue 4,268,500 4,269,000 ----------- ----------- Total current liabilities 15,170,500 11,350,000 Long-Term Debt 4,659,900 129,000 Shareholder's Equity: Common stock, no par, 10,000,000 shares authorized, 6,062,058 and 6,263,444 shares issued and outstanding 8,193,300 10,952,900 Retained earnings 9,552,900 6,744,600 ----------- ----------- Total shareholders' equity 17,746,200 17,697,500 ----------- ----------- $37,576,600 $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 Nine Months Ended September 27, September 28, September 27, September 28, 1997 1996 1997 1996 ----------------------------------------------------------- <S> <C> <C> <C> <C> REVENUE: Merchandise sales $16,209,000 $15,980,000 $45,787,400 $57,065,400 Royalties 4,553,500 3,875,700 12,809,900 10,853,200 Franchise fees 1,006,900 1,453,000 2,614,600 3,190,100 Advertising and other 309,100 263,000 655,000 598,200 ----------- ----------- ----------- ----------- Total revenue 22,078,500 21,571,700 61,866,900 71,706,900 COST OF MERCHANDISE SOLD 13,705,900 14,206,700 39,770,400 51,272,400 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,316,200 5,921,300 17,624,000 17,781,200 ----------- ----------- ----------- ----------- Income from operations 2,056,400 1,443,700 4,472,500 2,653,300 INTEREST INCOME, NET 30,800 16,500 146,400 118,700 ----------- ----------- ----------- ----------- Income before income taxes 2,087,200 1,460,200 4,618,900 2,772,000 PROVISION FOR INCOME TAXES 818,200 572,400 1,810,600 1,086,600 ----------- ----------- ----------- ----------- NET INCOME $ 1,269,000 $ 887,800 $ 2,808,300 $ 1,685,400 =========== =========== =========== =========== NET INCOME PER COMMON SHARE $ .20 $ .14 $ .45 $ .26 =========== =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING 6,277,300 6,327,200 6,276,100 6,574,700 =========== =========== =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements
GROW BIZ INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> ---------------------------- Nine Months Ended September 27, September 28, 1997 1996 ---------------------------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 2,808,300 $ 1,685,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,310,000 1,215,000 Deferred income tax -- 247,800 Change in operating assets and liabilities: Trade receivables 1,156,900 2,044,900 Inventories (1,431,600) 1,014,700 Prepaid expenses and other (615,900) 138,300 Accounts payable 1,313,300 1,954,600 Accrued liabilities 549,200 (324,100) Deferred franchise fee revenue (500) 154,000 ----------- ----------- Net cash provided by operating activities 5,089,700 8,130,600 ----------- ----------- INVESTING ACTIVITIES: Purchase of short-term investments -- (1,166,000) Increase in other assets (4,354,200) (34,300) Purchases of property and equipment (470,200) (120,500) ----------- ----------- Net cash used for investing activities (4,824,400) (1,320,800) ----------- ----------- FINANCING ACTIVITIES: Proceeds from notes payable 6,767,000 -- Payments on long-term debt (277,600) (113,400) Proceeds from stock option exercises 451,900 125,500 Repurchase of common stock (3,211,500) (6,266,100) ----------- ----------- Net cash provided by (used for) financing activities 3,729,800 (6,254,000) ----------- ----------- INCREASE IN CASH & CASH EQUIVALENTS 3,995,100 555,800 Cash and cash equivalents, beginning of period 1,388,800 101,500 ----------- ----------- Cash and cash equivalents, end of period $ 5,383,900 $ 657,300 =========== =========== </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 nine months ended September 27, 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', `Disc Go Round' and `It's About Games'. In addition, the Company sells inventory to its Play It Again Sports(R) 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 October 31, 1997, the Company had repurchased 1,365,913 shares of its stock at an average price of $9.09 per share, including 55,500 shares repurchased at an average price of $10.63 per share in the three months ended September 27, 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 intends to vigorously defend the action. 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. On August 15, 1997, Grow Biz Games, Inc. a wholly-owned subsidiary of Grow Biz International, Inc. ("Registrant") acquired certain assets and franchising rights of Video Game Exchange, Inc. ("VGE") of Cleveland, Ohio for total consideration of $6,579,700. VGE operates 40 retail stores in Ohio, Pennsylvania, Kentucky, Georgia and Maryland. These stores buy, sell and trade used and new video games and equipment and will become the nucleus of the sixth business concept under the title It's About Games(TM). The Registrant intends to market and franchise the concept throughout the United States and Canada. GENERAL Following is a summary of the Company's franchising and corporate retail store activity for the three months ended September 27, 1997: <TABLE> <CAPTION> ----------------------------------------------------------------- TOTAL OPENED/ TOTAL 6/28/97 PURCHASED CLOSED CONVERTED 9/27/97 ----------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Play It Again Sports(R) - ------------------------ Franchised Stores - US and Canada 663 11 (18) 0 656 Franchised Stores - Other International 8 0 0 0 8 Corporate 5 0 0 0 5 Other 22 0 0 0 22 Once Upon A Child(R) - ------------------------ Franchised Stores - US and Canada 187 9 (1) 0 195 Corporate 4 0 0 0 4 Computer Renaissance(R) - ------------------------ Franchised Stores - US and Canada 136 18 0 0 154 Corporate 4 0 0 0 4 Music Go Round(R) - ------------------------ Franchised Stores - US and Canada 28 6 0 0 34 Corporate 4 0 0 0 4 Disc Go Round(R) - ------------------------ Franchised Stores - US and Canada 120 4 (5) (1) 118 Corporate 2 0 0 1 3 Video Game Exchange(TM) - ------------------------ Franchised Stores - US and Canada 0 0 0 0 0 Corporate 0 40 0 0 40 It's About Games(TM) - ------------------------ Franchised Stores - US and Canada 0 0 0 0 0 Corporate 0 1 0 0 1 ------------------------------------------------------------------ Total 1,183 89 (24) 0 1,248 ================================================================== </TABLE>
Following is a summary of the Company's franchising and corporate retail store activity for the nine months ended September 27, 1997: <TABLE> <CAPTION> ------------------------------------------------------------------ TOTAL OPENED/ TOTAL 12/28/96 PURCHASED CLOSED CONVERTED 9/27/97 ------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Play It Again Sports(R) - ------------------------ Franchised Stores - US and Canada 676 22 (40) (2) 656 Franchised Stores - Other International 8 0 0 0 8 Corporate 4 0 (1) 2 5 Other 22 0 0 0 22 Once Upon A Child(R) - ------------------------ Franchised Stores - US and Canada 182 17 (6) 2 195 Corporate 6 0 0 (2) 4 Computer Renaissance(R) - ------------------------ Franchised Stores - US and Canada 108 47 (1) 0 154 Corporate 4 0 0 0 4 Music Go Round(R) - ------------------------ Franchised Stores - US and Canada 20 14 0 0 34 Corporate 4 0 0 0 4 Disc Go Round(R) - ------------------------ Franchised Stores - US and Canada 114 16 (11) (1) 118 Corporate 2 0 0 1 3 Video Game Exchange(TM) - ------------------------ Franchised Stores - US and Canada 0 0 0 0 0 Corporate 0 40 0 0 40 It's About Games(TM) - ------------------------ Franchised Stores - US and Canada 0 0 0 0 0 Corporate 0 1 0 0 1 ------------------------------------------------------------------ Total 1,150 157 (59) 0 1,248 ================================================================== </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 Nine Months Ended September 27, September 28, September 27, September 28, 1997 1996 1997 1996 -------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue: Merchandise sales 73.4% 74.1% 74.0% 79.6% Royalties 20.6 18.0 20.7 15.1 Franchise fees 4.6 6.7 4.2 4.5 Advertising and other 1.4 1.2 1.1 0.8 ------- ------- ------- ------- Total revenues 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold 62.1 65.9 64.3 71.5 Selling, general and administrative expenses 28.6 27.4 28.5 24.8 ------ ------ ------ ------ Income from operations 9.3 6.7 7.2 3.7 Interest and other income, net 0.1 0.1 0.2 0.2 ------- ------- ------- ------- Income before income taxes 9.4 6.8 7.4 3.9 Provision for income taxes 3.7 2.7 2.9 1.5 ------- ------- ------- ------- Net income 5.7% 4.1% 4.5% 2.4% ======== ======== ======== ======== </TABLE> Comparison of Three Months Ended September 27, 1997 to Three Months Ended September 28, 1996 Revenues for the quarter ended September 27, 1997 totaled $22.1 million compared to $21.6 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 Company-owned stores. For the third quarter of 1997 and 1996 merchandise sales were as follows: 1997 1996 ---- ---- Buying Group $ 11,184,700 $ 12,601,000 Retail Sales 5,024,300 3,379,000 -------------- -------------- Merchandise Sales $ 16,209,000 $ 15,980,000 ============== ============== Merchandise revenue increased $229,000 during the third quarter of 1997 compared to 1996. Play It Again Sports(R) buying group revenue has continued its planned decline as a result of management's strategic decision to reduce the number of vendors offered centralized billing. This decline has been more than offset by the retail sales of the 40 Company-owned Video Game Exchange(TM) stores acquired August 15, 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 from the Company-owned stores will increase due to the additional stores. Royalties increased to $4.6 million for the third quarter of 1997 from $3.9 million for the same period in 1996, due primarily to the growth in the number of franchise
stores to 1,157 open at September 27, 1997 compared to 1,037 stores at September 28, 1996. Franchise fees decreased to $1.0 million in the third quarter of 1997 from $1.5 million in the third quarter of 1996, as a result of opening 16 less franchise stores in the third quarter of 1997 as compared to the third quarter of 1996. The current trend of royalty increases from the prior year and as a percent of total revenue is expected to continue as the number of franchise stores continues to grow. Franchise fees are expected to remain consistent with prior periods as the overall annual rate of store openings appears stable, with any decline in mature concepts being offset by the anticipated franchise fees from It's About Games(TM). Cost of merchandise sold decreased in the third quarter of 1997 to $13.7 million from $14.2 million for the same period last year despite the increase in merchandise sales for the period. This was due to the shift in the mix of merchandise sales from the Company-owned retail store sales on which gross margin contributions are significantly higher than the buying group merchandise sales. Selling, general and administrative expenses were $6.3 million or 28.6% of revenues in the third quarter of 1997 compared to $5.9 million or 27.4% of revenues for the same period in 1996. This $394,900 increase is primarily the result of operating costs of the new 40 Company-owned Video Game Exchange(TM) stores as well as costs related to franchising the new It's About Games(TM) concept. It is anticipated that future increases in revenues from franchising activities, royalties and franchise fees, will surpass future increases in selling, general and administrative expenses. During the third quarter of 1997, the Company had net interest income of $30,800 as compared to net interest income of $16,500 in the third quarter of 1996. This increase is primarily the result of a higher average balance of funds invested in short-term, high-grade investments. A decline in net interest income is anticipated in future periods as the Company incurs interest expense on the notes payable related to the Video Game Exchange, Inc. acquisition. Comparison of Nine Months Ended September 27, 1997 to Nine Months Ended September 28, 1996 Revenues for the nine months ended September 27, 1997 were $61.9 million compared to $71.7 million for the comparable period in 1996. For the first nine months of 1997 and 1996 merchandise sales were as follows: 1997 1996 ---- ---- Buying Group $ 34,377,400 $ 47,201,200 Retail Sales 11,410,000 9,864,200 -------------- -------------- Merchandise Sales $ 45,787,400 $ 57,065,400 ============== ============== The 27.2% decrease in buying group sales for the nine months ended September 27, 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. The decrease in buying group sales was partially offset by a $1.6 million increase in retail sales at the Company-owned retail stores, primarily due to retail sales of the 40 Company-owned Video Game Exchange(TM) stores acquired August 15, 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 from the
Company-owned stores will increase due to the additional stores. Royalty income increased to $12.8 million for the first nine months of 1997 from $10.9 million for the same period last year as a result of the growth in the number of franchise stores to 1,157 open at September 27, 1997 compared to 1,037 stores open at September 28, 1996. The $575,000 decrease in franchise fees in the first nine months of 1997 compared to 1996 was due to the Company opening up 28 less stores than it opened in the comparable period in 1996. The current trend of royalty increases from the prior year and as a percent of total revenue is expected to continue as the number of franchise stores continues to grow. Franchise fees are expected to remain consistant with prior periods as the overall annual rate of store openings appears stable, with any decline in mature concepts being offset by the anticipated franchise fees from It's About Games(TM). Cost of merchandise sold decreased during the first nine months of 1997 to $39.8 million from $51.3 million for the same period last year as a result of decreased merchandise sales. Gross profits on merchandise sales improved to 13.1% from 10.2% for the comparable period. This increase is the result of an increase in the mix of merchandise sales at the Company-owned retail stores, on which gross margin contributions are significantly higher. Selling, general and administrative expenses remained constant for the first nine months of the year compared to the same period in 1996. Net interest income was $146,400 for the nine month period ending September 27, 1997, as compared to net interest income of $118,700 for the comparable period last year. This increase is primarily the result of a higher average balance of funds invested in short-term, high-grade investments. A decline in net interest income is anticipated in future periods as the Company incurs interest expense on the notes payable related to the Video Game Exchange, Inc. acquisition. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with $5.4 million in total cash and investments. During the nine months ended September 27, 1997, the Company's operating activities provided $5.1 million of cash. This increase in cash available from operations, other than net income and depreciation, is primarily due to a $1.2 million reduction in receivables as franchisees source more product on a direct basis. The $1.3 million increase in accounts payable was offset by the $1.4 million increase in inventory resulting from the Video Game Exchange, Inc. acquisition. Of the entire $6,579,700 purchase consideration for Video Game Exchange, Inc., $4.5 million was financed through a five year bank term loan payable in sixty equal monthly principal payments beginning October 10, 1997 plus accrued interest at prime plus one half of one percent. The remaining $2.0 million was financed through a two year note payable to the former shareholders of Video Game Exchange, Inc. payable in twenty-four equal monthly installments beginning September 1, 1997, bearing interest at the prime rate 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 25 year period. The Company used $3.2 million during the first nine months of 1997 to repurchase 303,819 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 October 31, 1997, the Company had purchased 1,365,913 shares, at an average price of $9.09 per share.
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 September 27, 1997. At September 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.
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: November 10, 1997 By: /s/ Ronald G. Olson -------------------- Ronald G. Olson President and Chief Executive Officer Date: November 10, 1997 By: /s/ David J. Osdoba, Jr. ------------------------- David J. Osdoba, Jr. Vice President of Finance and Chief Financial Officer