UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 29, 1997 Commission File Number 0-22012 GROW BIZ INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter) Minnesota 41-1622691 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 4200 Dahlberg Drive Golden Valley, MN 55422-4837 (Address of Principal Executive Offices, Zip Code) Registrant's Telephone Number, Including Area Code 612/520-8500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, no par value, 6,141,915 shares outstanding as of April 30, 1997. GROW BIZ INTERNATIONAL, INC. INDEX PART I. FINANCIAL INFORMATION PAGE - -------------------------------------------------------------------------------- Item 1. Financial Statements (Unaudited) Condensed Balance Sheets: March 29, 1997 and December 28, 1996 3 Condensed Statements of Operations: Three month periods ended 4 March 29, 1997 and March 30, 1996 Condensed Statements of Cash Flows: Three month periods ended 5 March 29, 1997 and March 30, 1996 Notes to Condensed Financial Statements 6 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 11 PART II. OTHER INFORMATION - -------------------------------------------------------------------------------- Items 1 through 5 have been omitted since all items are inapplicable or answers negative. Item 6. Exhibits and Reports on Form 8-K (a.) Exhibit Number: Description: ------- ------------ 11 Statement of Computation of Per Share Earnings 27 Financial Data Schedule 99 Cautionary Statements (b.) Reports on Form 8-K -- None <TABLE> <CAPTION> GROW BIZ INTERNATIONAL, INC. CONDENSED BALANCE SHEETS (UNAUDITED) ------------------------------ March 29, December 28, 1997 1996 ------------------------------ ASSETS <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents $ 3,344,200 $ 1,388,800 Trade receivables, less allowance for doubtful accounts of $793,000 and $930,000 13,687,300 13,171,400 Inventories 2,836,700 2,716,000 Prepaid expenses and other 876,300 862,900 Deferred income taxes 1,726,400 1,726,400 ----------- ----------- Total current assets 22,470,900 19,865,500 Notes Receivable 329,800 339,800 Property and equipment, net 5,697,100 5,979,300 Other assets, net 2,845,600 2,991,900 ----------- ----------- $31,343,400 $29,176,500 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 7,698,400 $ 5,670,300 Accrued liabilities 1,323,800 1,275,800 Current maturities of long-term debt 134,900 134,900 Deferred franchise fee revenue 4,391,500 4,269,000 ----------- ----------- Total current liabilities 13,548,600 11,350,000 LONG-TERM DEBT 92,700 129,000 SHAREHOLDERS' EQUITY: Common stock, no par, 10,000,000 shares authorized, 6,247,409 and 6,263,444 shares issued and outstanding 10,412,300 10,952,900 Retained earnings 7,289,800 6,744,600 ----------- ----------- Total shareholders' equity 17,702,100 17,697,500 ----------- ----------- $31,343,400 $29,176,500 =========== =========== The accompanying notes are an integral part of these financial statements. </TABLE> <TABLE> <CAPTION> GROW BIZ INTERNATIONAL, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) ---------------------------- Three Months Ended March 29, March 30, 1997 1996 ---------------------------- <S> <C> <C> REVENUE: Merchandise sales $14,379,100 $20,849,300 Royalties 3,925,800 3,232,900 Franchise fees 533,000 764,500 Advertising and other 271,500 279,700 ----------- ----------- Total revenue 19,109,400 25,126,400 COST OF MERCHANDISE SOLD 12,660,000 18,797,800 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,623,100 5,844,200 ----------- ----------- Income from operations 826,300 484,400 INTEREST INCOME, NET 70,500 58,600 ----------- ----------- Income before income taxes 896,800 543,000 PROVISION FOR INCOME TAXES 351,600 212,800 ----------- ----------- NET INCOME $ 545,200 $ 330,200 =========== =========== NET INCOME PER COMMON SHARE $ .09 $ .05 =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING 6,360,500 6,889,300 =========== =========== </TABLE> The accompanying notes are an integral part of these financial statements. <TABLE> <CAPTION> GROW BIZ INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) ----------------------------- Three Months Ended March 29, March 30, 1997 1996 ----------------------------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 545,200 $ 330,200 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 468,900 455,300 Deferred income tax -- -- Change in operating assets and liabilities: Trade receivables (505,900) (1,695,700) Inventories (120,700) 104,300 Prepaid expenses and other (13,400) 35,500 Accounts payable 2,028,100 6,376,800 Accrued liabilities 48,000 (248,700) Deferred franchise fee revenue 122,500 547,500 ----------- ----------- Net cash provided by operating activities 2,572,700 5,905,200 ----------- ----------- INVESTING ACTIVITIES: Purchase of short-term investments -- (1,100,000) Increase in other assets -- 1,600 Purchases of property and equipment (40,400) (77,600) ----------- ----------- Net cash used for investing activities (40,400) (1,176,000) ----------- ----------- FINANCING ACTIVITIES: Payments on long-term debt (36,300) (46,800) Proceeds from stock option exercises 88,200 50,000 Repurchase of common stock (628,800) (2,766,800) ----------- ----------- Net cash used for financing activities (576,900) (2,763,600) ----------- ----------- INCREASE IN CASH & CASH EQUIVALENTS 1,955,400 1,965,600 Cash and cash equivalents, beginning of period 1,388,800 101,500 ----------- ----------- Cash and cash equivalents, end of period $ 3,344,200 $ 2,067,100 =========== =========== The accompanying notes are an integral part of these financial statements. </TABLE> GROW BIZ INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. MANAGEMENT'S INTERIM FINANCIAL STATEMENT REPRESENTATION: The accompanying condensed financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The information in the condensed financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. Revenues and operating results for the three months ended March 29, 1997 are not necessarily indicative of the results to be expected for the full year. 2. ORGANIZATION AND BUSINESS: Grow Biz International, Inc. (the `Company') offers licenses to operate retail stores using the service marks `Play it Again Sports', `Once Upon A Child', `Computer Renaissance', `Music Go Round' and `Disc Go Round'. In addition, the Company sells inventory to the Play It Again Sports franchisees through its buying group and operates retail stores. The Company has a 52/53 week year which ends on the last Saturday in December. 3. SHAREHOLDERS' EQUITY: Since 1995, the Company's Board of Directors has authorized the repurchase of up to 1,500,000 shares of the Company's common stock on the open market. As of April 30, 1997, the Company had repurchased 1,241,563 shares of its stock at an average price of $8.94 per share including 60,160 shares repurchased at an average price of $10.45 per share in the three months ended March 29, 1997. 4. LITIGATION: In December 1995, an early partner in the original Play It Again Sports store commenced an action against the Company relating to, among other things, the development of stores under a 1992 retail store agreement. The suit alleges breach of contract, fraud and misrepresentation, and violation of federal and state anti-racketeering (RICO) statutes. The plaintiff seeks monetary damages in excess of $50,000, treble damages under the RICO claim and, among other things, injunctive and declaratory relief. The Company believes the suit is without merit and intends to vigorously defend the action. When concluded, in the opinion of management, based upon information it presently possesses, the actions will not have a material adverse effect on the Company's financial position. 5. EARNINGS PER SHARE: Net income per share has been computed by dividing net income by the weighted average number of common shares outstanding during each period. Common stock equivalent shares, which relate to stock options and warrants, are included in the weighted average when the effect is dilutive. 6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The Company will be required to adopt SFAS No. 128 in 1997. The Company expects that the ultimate adoption of SFAS No. 128 will not have a material impact on the Company's computation or presentation of EPS, as the Company's common stock equivalents have had no material effect on earnings per share amounts. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Following is a summary of the Company's franchising and corporate retail store activity for the three months ended March 29, 1997: <TABLE> <CAPTION> ----------- ----------- ----------- ------------- ----------- TOTAL TOTAL 12/28/96 OPENED CLOSED CONVERTED 3/29/97 ----------- ----------- ----------- ------------- ----------- <S> <C> <C> <C> <C> <C> Play It Again Sports(R) Franchised Stores - US and Canada 676 2 (9) 0 669 Franchised Stores - Other International 8 0 0 0 8 Corporate 4 0 0 0 4 Other 22 0 0 0 22 Once Upon A Child(R) Franchised Stores - US and Canada 182 5 (2) 0 185 Corporate 6 0 0 0 6 Computer Renaissance(R) Franchised Stores - US and Canada 108 11 0 0 119 Corporate 4 0 0 0 4 Music Go Round(R) Franchised Stores - US and Canada 20 0 0 0 20 Corporate 4 0 0 0 4 Disc Go Round(R) Franchised Stores - US and Canada 114 4 (3) 0 115 Corporate 2 0 0 0 2 ----------- ----------- ------------ ------------- ----------- Total 1,150 22 (14) 0 1,158 =========== =========== ============ ============= =========== </TABLE> FACTORS THAT MAY AFFECT FUTURE RESULTS Statements included in this Quarterly Report on Form 10-Q which are not historical in nature are identified as "forward looking statements" for the purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company cautions readers that forward looking statements, including without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements. The risks and uncertainties include, but are not limited to, the Company's ability to: attract new franchisees, collect receivables, open stores, obtain used merchandise, compete in our respective industries, control expenses, and other risks indicated in Exhibit 99.
RESULTS OF OPERATIONS The following table sets forth for the periods indicated, certain income statement items as a percentage of total revenue and the percentage change in the dollar amounts from the prior period: <TABLE> <CAPTION> ------------------------------- ---------------- Three Months Ended First Quarter March 29, March 30, 1997 over First 1997 1996 Quarter 1996 ------------------------------- ---------------- <S> <C> <C> <C> Revenue: Merchandise sales 75.2% 83.0% (31.0)% Royalties 20.5 12.9 21.4 Franchise fees 2.8 3.0 (30.3) Advertising and other 1.5 1.1 (2.9) ------- ------- -------- Total revenues 100.0% 100.0% (23.9)% Cost of merchandise sold 66.3 74.8 (32.7) Selling, general and administrative expenses 29.4 23.3 (3.8) ------- ------- -------- Income from operations 4.3 1.9 70.6 Interest and other income, net 0.4 0.2 20.3 ------- ------- -------- Income before income taxes 4.7 2.1 65.1 Provision for income taxes 1.8 .8 65.2 ------- ------- -------- Net income 2.9% 1.3% 65.1% ======== ======== ======== </TABLE> Comparison of Three Months Ended March 29, 1997 to Three Months Ended March 30, 1996 Revenues for the quarter ended March 29, 1997 totaled $19.1 million compared to $25.1 million for the comparable period in 1996. Merchandise sales decreased to $14.4 million for the three months ended March 29, 1997 from $20.8 million for the same period in 1996. Merchandise sales consist of the sale of product to franchisees through the buying group and retail sales at the corporate-owned stores. For the first quarter of 1997 and 1996 they were as follows: 1997 1996 ---- ---- Buying Group $ 11,206,400 $ 17,659,000 Retail Sales 3,172,800 3,190,300 -------------- -------------- Merchandise Sales $ 14,379,100 $ 20,849,300 ============== ============== The 36.5% decrease in buying group sales for the three months ended March 29, 1997 compared to the same period last year was anticipated and, as discussed previously, is the direct result of a reduced number of Play It Again Sports(R) vendors being offered centralized billing and the elimination of central billing for the other concepts. It is anticipated that buying group as a percent of total revenues will continue to decline in future periods. Retail sales were consistent with the comparable period in 1996. Royalties increased to $3.9 million for the first quarter of 1997 from $3.2 million for the same period in 1996, primarily due to the expanding base of franchise stores and increases in comparable store sales. Franchise fees were $533,000 in the first quarter of 1997 compared to $764,500 in the first quarter of 1996. This decrease reflects 12 fewer franchise fees recognized during the quarter compared to the same quarter of 1996. Store openings for the nine months ended December 27, 1997 are likely to be consistent with the same period in 1996. Cost of merchandise sold was $12.7 million for the first quarter of 1997 compared to $18.8 million for the same period last year. Gross margin on merchandise sales improved to 12.0% from 9.8% due to an increase in the mix of merchandise sales at the corporate-owned retail stores, on which gross margin contributions are significantly higher. Selling, general and administrative expenses were $5.6 million or 29.4% of revenues in the first quarter of 1997 compared to $5.8 million or 23.3% of revenues for the same period in 1996. The $221,100 decrease in selling, general and administrative expenses is primarily due to the Company exiting the warehouse operations and a reduction of non-operational staff needed to support the franchise system. The increase in selling, general and administrative expenses as a percent of revenue is due to the decline in the low margin buying group sales. It is anticipated that future increases in revenues from franchising activities, royalties and franchise fees, will surpass future increases in selling, general and administrative expenses. During the first quarter of 1997, the Company had net interest income of $70,500 compared to net interest income of $58,600 in the first quarter of 1996. This increase is primarily the result of a higher average balance of funds invested in short-term, high-grade investments. Net income for the first quarter of 1997 was $545,200 or $.09 per share compared to $330,200 or $.05 per share for the comparable period in 1996. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with $3.3 million in total cash and short-term, high-grade investments. During the three months ended March 29, 1997, the Company's operating activities provided $2.6 million of cash. This increase in cash available from operations, other than net income and depreciation, is primarily due to working capital management activities that include a $2.0 million increase in payables offset by a $505,900 increase in receivables. The Company's use of $576,900 from financing activities in the first three months of 1997 was primarily from the repurchase of 60,160 shares of the Company's common stock. The Company has a $5.0 million committed revolving line of credit agreement which is due for renewal on July 31, 1997. Borrowings against the line are due on demand and carry an interest rate of prime which was 8.50% at March 29, 1997. At March 29, 1997, the Company had no borrowings against the line. The Company believes that its current cash position, cash generated from future operations, availability of line of credit borrowings and additional capacity for debt will be adequate to meet the Company's current obligations and operating needs. 2. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GROW BIZ INTERNATIONAL, INC. Date: May 7, 1997 By: /s/ Ronald G. Olson --------------------- Ronald G. Olson President and Chief Executive Officer Date: May 7, 1997 By: /s/ David J. Osdoba, Jr. -------------------------- David J. Osdoba, Jr. Vice President of Finance and Chief Financial Officer