UNITED STATESSECURITIES 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 30, 2001
Commission File Number 000-22012
Grow Biz International, Inc.(Exact Name of Registrant as Specified in Its Charter)
4200 Dahlberg Drive, Suite 100Golden Valley, MN 55422-4837(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code 763-520-8500
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes: X No:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common stock, no par value, 5,392,254 shares outstanding as of August 7, 2001.
GROW BIZ INTERNATIONAL, INC.INDEX
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PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
GROW BIZ INTERNATIONAL, INC.CONDENSED BALANCE SHEETS
The accompanying notes are an integral part of these financial statements
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GROW BIZ INTERNATIONAL, INC.CONDENSED STATEMENTS OF OPERATIONS(Unaudited)
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GROW BIZ INTERNATIONAL, INC.CONDENSED STATEMENTS OF CASH FLOWS(Unaudited)
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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 30, 2001 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®, Music Go Round®, ReTool®and Plato’s Closet®. In addition, the Company sells inventory to its 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. 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. The weighted average diluted outstanding shares is computed by adding the weighted average basic shares outstanding with the dilutive effect of 239,059 and 165,305 stock options and warrants for the three and six months ended June 30, 2001, respectively. The impact of stock options and warrants outstanding in 2000 were anti-dilutive and were therefore excluded from the earnings per share calculation.
4. New Accounting Pronouncements:
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133," which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. If certain conditions are met, a derivative may qualify for hedge accounting. The adoption of SFAS No. 133 did not have a material effect on the Company's financial position or results of operations as the Company currently has no derivative instruments and does not engage in other hedging activities.
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5. Other Contingencies:
In addition to the operating lease obligations disclosed in footnote 9 of the Company's Form 10-K for the year ended December 30, 2000, the Company has remained a guarantor on Company-owned retail stores that have been either sold or closed. As of June 30, 2001, the Company is contingently liable on these leases for up to an additional $329,600. These leases have various expiration dates through 2006. The Company’s exposure is reduced as leases are paid, expire, or are renewed by the current operator of the location.
6. Subsequent Events:
On August 1, 2001, the Company entered into a Settlement Agreement and Mutual Release with Hollis Technologies, LLC and CompRen, Inc. ("Hollis") to settle claims Hollis asserted against $1.0 million of escrowed funds. Hollis deposited the $1.0 million in an escrow account pursuant to the sale of the Company's Computer Renaissance®franchise and retail operations to Hollis on August 30, 2000. Pursuant to the Settlement Agreement and Mutual Release, the parties terminated the escrow agreement, released each other of certain claims, and Hollis and the Company received approximately $400,000 and $600,000 of the escrowed funds, respectively. In addition, all accrued interest on the escrowed funds was distributed to the Company. The Company dismissed its lawsuit against Hollis seeking the escrowed funds.
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
General
The Company is a franchise company that franchises retail brands that buy, sell, trade and consign merchandise. Each brand operates in a different industry and provides the consumer with high value retailing by offering high-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.
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Following is a summary of our franchising and corporate retail store activity for the retail brands for the three months ended June 30, 2001:
Following is a summary of our franchising and corporate retail store activity for the retail brands for the six months ended June 30, 2001:
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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:
Comparison of Three Months Ended June 30, 2001 to Three Months Ended June 24, 2000
Revenues
Revenues for the quarter ended June 30, 2001 totaled $8.5 million compared to $12.3 million for the comparable period in 2000. Revenues decreased primarily as a result of the sale of the Computer Renaissance®franchise system in the third quarter of 2000.
Merchandise sales consist of the sale of product to Play It Again Sports®franchisees through the buying group and retail sales at the Company-owned stores. For the second quarter of 2001 and 2000 merchandise sales were as follows:
The Play It Again Sports®buying group revenues decreased $2,900,700, or 50.7%, for the quarter ended June 30, 2001 compared to the second quarter last year. This is a result of management’s strategic decision to have more Play It Again Sports®franchisees purchase merchandise directly from vendors and having 46 fewer Play It Again Sports®stores open than one year ago. Retail store sales decreased $687,600, or 33.7%, for the quarter ended June 30, 2001 compared to the second quarter last year. The revenue decline was due to selling five
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Company-owned stores in 2000, partially offset by aggregate increased sales at the remaining Company-owned stores.
Royalties decreased to $3.9 million for the second quarter of 2001 from $4.2 million for the same period in 2000, an approximate 7.3% decrease. This decrease relates primarily to the sale of the Computer Renaissance®brand in the third quarter of 2000, partially offset by increased royalty income from the five remaining brands. If royalties generated by Computer Renaissance®were excluded from the 2000 royalty totals, royalties would have increased 4.3% from the second quarter 2000 to the second quarter 2001.
Franchise fees decreased to $145,000 for the second quarter of 2001 compared to $232,800 for the second quarter of 2000. Nine franchised stores were opened in the second quarter of 2001 compared to seventeen franchised stores opened during the second quarter last year. The decrease in franchise fees is also in part a result of a change in the franchise fee structure made in July 1999. Under that policy, franchisees with existing franchises were not required to pay an initial franchise fee for an additional franchise. As of August 1, 2000, existing franchisees are required to pay an initial franchise fee of $15,000 for each additional franchise. Four stores were opened in the second quarter of 2001 that were not required to pay a franchise fee compared to eight stores in the second quarter of 2000.
Other revenue increased $176,600, or 275.5%, for the second quarter of 2001 compared to the second quarter of 2000. The increase is primarily due to approximately $100,000 in fees received pursuant to the consulting agreement with Hollis Technologies, LLC, the current franchisor of the Computer Renaissance®brand.
Cost of Merchandise Sold
Cost of merchandise sold includes the cost of merchandise sold through the Play It Again Sports®buying group and at Company-owned retail stores. Cost of merchandise sold as a percentage of the buying group revenue and Company-owned store retail revenue, respectively, for the second quarter of 2001 and 2000 were as follows:
Retail gross margin improved to 46.4% in the second quarter of 2001 from 37.3% in the second quarter of 2000. The improvement in retail gross margin is primarily the result of increased sales of used merchandise, which have a higher margin, and from closing under-performing Company-owned retail stores.
Selling, General and Administrative
The $982,000, or 20.4%, decrease in operating expenses in the quarter ended June 30, 2001 compared to the second quarter of 2000 is primarily due to selling the Computer Renaissance®brand in the third quarter of 2000 and elimination of related costs and lower Company salary expenses.
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During the quarter ended June 30, 2001, the Company had a net interest expense of $179,800 compared to $326,500 during the second quarter of 2000. This decrease is primarily the result of reduced outstanding debt in the second quarter of 2001 compared to the second quarter of last year.
The provision for income taxes was calculated at an effective rate of 39.2% for the second quarter of 2001 and 2000.
Comparison of Six Months Ended June 30, 2001 to Six Months Ended June 24, 2000
Revenues for the six months ended June 30, 2001 were $18.6 million compared to $25.1 million for the comparable period in 2000. Revenues declined primarily as a result of the sale of the Computer Renaissance®franchise system in the third quarter of 2000.
Merchandise sales consist of the sale of product to Play It Again Sports®franchisees through the Play It Again Sports®buying group and retail sales at the Company-owned stores. For the first six months of 2001 and 2000 merchandise sales were as follows:
The Play It Again Sports®buying group revenues decreased $4,604,100, or 39.6%, for the six months ended June 30, 2001 compared to the same period last year. This is a result of management’s strategic decision to have more Play It Again Sports®franchisees purchase merchandise directly from vendors and having 46 fewer stores open than one year ago. Retail store sales decreased $1,577,900, or 36.0%, for the six months ended June 30, 2001 compared to the same period last year. The revenue decline was due to selling five Company-owned stores in 2000, partially offset by aggregate increased sales at the remaining Company-owned stores.
Royalties decreased to $7.9 million for the first six months of 2001 from $8.4 million for the first six months of 2000, a 6.2% decrease. This decrease relates primarily to the sale of the Computer Renaissance brand in the third quarter of 2000 partially offset by increased royalty income from the five remaining brands. If royalties generated by Computer Renaissance®were excluded from the 2000 royalty totals, royalties would have increased 9.8% from the first six months of 2000 to the first six months of 2001.
Franchise fees decreased to $307,500 for the first six months of 2001 compared to $384,000 for the first six months of 2000. Eighteen franchised stores were opened in the first six months of 2001 compared to thirty-four franchised stores opened during the first six months of 2000. The decrease in franchise fees is also in part a result of a change in the franchise fee structure made in July 1999. Under such policy, franchisees with existing franchises were not required to pay an initial franchise fee for an additional franchise. As of August 1, 2000, existing franchisees are required to pay an initial franchise fee of $15,000 for each additional franchise. Seven stores were opened in the first six months of 2001 that were not required to pay a franchise fee compared to 19 stores in the first six months of 2000.
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Other revenue increased $312,800, or 107.1%, for the first six months of 2001 compared to the first six months of 2000. The increase is primarily due to approximately $200,000 in fees received on the consulting agreement with Hollis Technologies, LLC, the current franchisor of the Computer Renaissance®brand.
Cost of merchandise sold includes the cost of merchandise sold through the Play It Again Sports®buying group and at Company-owned retail stores. Cost of merchandise sold as a percentage of the buying group revenue and Company-owned retail store revenue for the first six months of 2001 and 2000 were as follows:
Retail gross margin improved to 45.2% in the first six months of 2001 from 37.1% in the first six months of 2000. The improvement in retail gross margin is primarily the result of increased sales of used merchandise, which have a higher margin, and from closing under-performing Company-owned retail stores.
The $2.3 million, or 22.6%, decrease in operating expenses in the first six months ended June 30, 2001 compared to the first six months of 2000 is primarily due to selling the Computer Renaissance®brand in the third quarter of 2000 and elimination of related costs and lower Company salary expenses.
During the first six months of 2001, the Company had a net interest expense of $304,800 compared to $665,500 during the first six months of 2000. This decrease is primarily the result of reduced outstanding debt in the first six months of 2001 compared to the same period last year.
The provision for income taxes was calculated at an effective rate of 39.2% for the first six months of 2001 and 2000.
Nonrecurring Charge
The Company recorded a pre-tax, nonrecurring charge of $3.3 million in the second quarter of 2000. Approximately $2.0 million related to reserves recorded on notes receivable and lease obligations booked in connection with Company-owned stores sold in 1998. The remaining $1.3 million primarily related to the write-down of certain intangibles of franchise concepts and Company-owned stores that were not performing at expected levels to reflect estimated realizability of long-lived assets.
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Liquidity and Capital Resources
The Company's primary sources of liquidity have historically been cash flow from operations and bank borrowings. The Company ended the second quarter of 2001 with $4.4 million in cash and a current ratio of 2.18 to 1.0 compared to $174,700 in cash and a current ratio of .76 to 1.0 at the end of the second quarter of 2000.
Ongoing operating activities provided cash of $3.4 million for the first six months of 2001 compared to $7.0 million for the same period last year. Components of the cash provided for the first six months of 2001 include a $2.7 million reduction in accounts receivable as a result of improved collection performance and reduction of certain revenue generating activities and buying group receivables. Inventory provided cash of $216,700 due to selling or closing Company-owned stores that were not meeting expectations. Accrued liabilities provided $114,000 of cash due primarily to the accrual of estimated bonuses. The components of cash utilized by the decrease in accounts payable of $1.4 million is primarily the result of reduced buying group liabilities.
Investing activities used $26,200 of cash during the first six months of 2001 related to the purchase of property and equipment.
Financing activities used $1.0 million of cash during the first six months of 2001 principally for payment on long-term debt. The payments on long-term debt include $740,600 on the Rush River Group, LLC credit facility described below and $307,700 on other notes.
On July 31, 2000, the Company entered into a credit agreement with Rush River Group, LLC, an affiliate of the Company, to provide a credit facility of up to $7.5 million dollars ("Rush River Facility"). The credit agreement allows such amount to be drawn upon by the Company in one or more term loans. The initial term loan was $5.0 million dollars to be repaid by the Company over a seven-year period. Each term loan will accrue or is accruing interest at 14% per year. Once repaid, amounts may not be reborrowed. As of June 30, 2001, the net outstanding balance of the initial term loan was $3,447,700. On July 10, 2001, the Company made an additional $500,000 principal payment on the Rush River Facility. The Rush River Facility is secured by a lien against substantially all of the Company’s assets. Rush River Group, LLC has agreed to subordinate its lien to any lien of a financial institution relating to financing not to exceed $2.5 million dollars.
Among other requirements, the Rush River Facility currently requires that the Company maintain shareholder equity of at least $1,922,000. In addition, if there is a change of control as defined in the credit agreement governing the Rush River Facility, such change of control is an event of default, and Rush River Group, LLC may declare all amounts outstanding under such term notes immediately due and payable. The Rush River Facility also contains an agreement allowing the Company to prepay any and all amounts outstanding under the Rush River Facility without premium or penalty. In connection with the Rush River Facility, the Company has issued to Rush River Group, LLC a warrant to purchase 200,000 shares of the Company's common stock at an exercise price of $2.00 per share. The warrant is currently exercisable and expires on July 31, 2010. The Company believes that the Rush River Facility, along with cash generated from future operations, will be adequate to meet the Company's current obligations and operating needs.
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Subsequent Events
Factors That May Affect Future Results
The statements contained in this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are not strictly historical fact, including without limitation, our statement that we will have adequate capital reserves to meet our current and contingent obligations and operating needs are forward looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act. Such statements are based on management's current expectations as of the date of this Report, but involve risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by such forward looking statements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company incurs financial markets risk in the form of interest rate risk. Management deals with such risk by negotiating fixed rate loan agreements. Accordingly, the Company is not exposed to cash flow risks related to interest rate changes. A one percent change in interest rates would not have a significant impact on the Company's fixed rate debt.
PART II. OTHER INFORMATION
Items 1 – 3:
Not applicable.
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Item 4: Submission of Matters to a Vote of Security-holders
At the Annual Shareholders meeting held on May 2, 2001, the Company submitted to a vote of security-holders the following matters which received the indicated votes:
Item 5:
Item 6: Exhibits and Reports on Form 8-K
(a.) Exhibits
None.
(b.) Reports on Form 8-K
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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.
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