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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 25, 1999 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 March 13, 2000, as reported on the NASDAQ SmallCap Market, was $7.0 million.
Shares of no par value Common Stock outstanding as of March 13, 2000: 5,381,119
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's Annual Meeting
of Shareholders to be held on May 3, 2000 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 7
Business Strategy 7
Franchise Agreement 9
Competition 10
Government Regulations 10
Trademarks and Service Marks 10
Seasonality 10
Employees 11
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II PAGE
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Item 5. Market for the Registrant's Common Equity and Related 11
Shareholder Matters
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting 33
and Financial Disclosure
PART III PAGE
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Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners and Management 35
Item 13. Certain Relationships and Related Transactions 35
PART IV PAGE
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Item 14. Exhibits and Reports on Form 8-K 35
Signatures 38
2
EXHIBITS
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Exhibit 10.6 Plato's Closet(R) Franchise Agreement
Exhibit 10.26 Consulting Agreement with Sheldon Fleck
Exhibit 10.27 Trademark Security Agreement
Exhibit 10.28 Amended and Restated Credit Agreement
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
3
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(R) 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 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 was a forty store retail operation with
stores in Ohio, Pennsylvania, Kentucky, Georgia and Maryland and became the
nucleus of the It's About Games(TM) store concept. The Company began
franchising this concept in 1997.
* In April 1998, the Company acquired certain assets and franchising rights
of Tool Traders, Inc. of Detroit, Michigan, which formed the basis for the
Company's ReTool(R) store concept. The Company paid $380,200 plus a
percentage of future royalties for a period of seven years. The Company
began franchising this concept in 1998.
4
* In June 1998, the Company completed the sale of the assets and franchising
rights of its Disc Go Round concept to CD Warehouse, Inc. (CD Warehouse)
for $7.0 million cash plus the assumption of $384,000 in deferred franchise
fees. At the time of the sale, there were 137 Disc Go Round stores in
operation, including 3 Company-owned stores, and an additional 37 franchise
agreements were awarded for stores that were not yet opened. The sale
resulted in a $5,231,500 operating gain in the second quarter ending June
27, 1998.
* In January 1999, the Company acquired certain assets and franchising rights
of Plato's Closet, Inc. of Columbus, Ohio for total consideration of
$400,000 plus a percentage of future royalties for a period of seven years.
The Company began franchising this concept in 1999.
* In December 1999, the Company completed the sale of the assets of the
Company's It's About Games(TM) concept. The Company undertook an orderly
liquidation of the inventory and other assets by conducting a liquidation
sale. Approximately 50% of the assets were disposed of in three main
transactions. The first sale, to an unrelated party, of substantially all
of the assets of fourteen stores in Kentucky, Maryland, Ohio and
Pennsylvania for $114,200 plus inventory valued at 40% of cost to be
received in cash and a promissory note. The second sale, to an unrelated
party, of substantially all of the assets of fourteen stores in Ohio for
$42,000 plus inventory at 40% of cost to be received in cash and a
promissory note. The third, a bulk inventory sale to an unrelated party for
$140,000 cash. The remaining assets of the It's About Games(TM)concept were
disposed of by abandonment or liquidation sale resulting in a total
restructuring charge of $11,345,500 for the year ended December 25, 1999.
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 continuing store concepts with their 1999 system-wide sales,
defined as revenues from all affiliated stores, are summarized as follows:
PLAY IT AGAIN SPORTS(R) - $270 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) - $82 MILLION
Once Upon A Child(R) stores sell and buy used and new children's clothing, toys,
furniture and accessories. This 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) - $145 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 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.
5
MUSIC GO ROUND(R) - $33 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, as well as
professional and amateur musicians.
RETOOL(R) - $2 MILLION
ReTool(R) stores sell and buy both used and new hand tools, power tools and
accessories. The stores also offer to customers the opportunity to try out
equipment prior to making a purchase.
PLATO'S CLOSET(R) - $3 MILLION
Plato's Closet(R) stores sell and buy used and new clothing and accessories
geared toward the teenage market. Customers also have the opportunity to sell
their used items to a Plato's Closet(R) store when outgrown and to purchase
quality used clothing and accessories at prices lower than new merchandise.
Following is a summary of the Company's franchising and corporate store activity
for the fiscal year ended December 25, 1999:
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TOTAL OPENED/ TOTAL
12/26/98 PURCHASED CLOSED/SOLD CONVERTED 12/25/99
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Play It Again Sports(R)
- --------------------
Franchised Stores - US and Canada 622 16 (59) 1 580
Franchised Stores - Other International 8 0 0 0 8
Corporate - Owned 4 0 0 (1) 3
Other 23 0 0 0 23
Once Upon A Child(R)
- -----------------
Franchised Stores - US and Canada 209 25 (16) 2 220
Corporate - Owned 4 0 (1) (2) 1
Computer Renaissance(R)
- --------------------
Franchised Stores - US and Canada 224 23 (37) (2) 208
Corporate - Owned 2 0 (1) 2 3
Music Go Round(R)
- --------------
Franchised Stores - US and Canada 54 19 (1) 0 72
Corporate - Owned 8 0 0 0 8
It's About Games(TM)
- ----------------
Franchised Stores - US and Canada 3 0 (3) 0 0
Corporate - Owned 46 15 (61) 0 0
ReTool(R)
- ------
Franchised Stores - US and Canada 2 9 0 0 11
Corporate - Owned 3 0 (2) 0 1
Plato's Closet(R)
- --------------
Franchised Stores - US and Canada 0 4 (0) 0 4
Corporate - Owned 0 1 (0) 0 1
-------------------------------------------------------------
Total 1,212 112 (181) 0 1,143
=============================================================
6
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.
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 (1)
offering value-oriented retail concepts to prospective entrepreneurs, (2)
attracting new, qualified franchisees and (3) supporting existing franchisees.
1. OFFERING VALUE-ORIENTED MERCHANDISE CONCEPT OPPORTUNITIES
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.
2. ATTRACTING FRANCHISEES
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. The Company seeks owners who intend to
be integrally involved with the management of the store. At December 25, 1999,
the Company had 88 franchise agreements for stores that were not yet opened.
Typically, the franchisee's initial store is open for business within 180 to 270
days from the date the franchise agreement is signed.
The Company began franchising internationally in 1991 and, as of December 25,
1999, had 95 franchised stores open in Canada and an aggregate of approximately
6 stores in Germany, Austria and Switzerland. The Canadian stores are operated
by franchisees under agreements substantially similar to those used in the
United States.
3. FRANCHISE SUPPORT:
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, lease evaluation, 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. The second training session is centered on store operations. It
covers, 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.
7
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
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), ReTool(R) and Plato's Closet(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
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 encourages 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 are required to spend the following minimum 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%,
ReTool(R) - 4% and Plato's Closet(R) - 4%. In addition, all franchisees, except
Computer Renaissance(R), are required to pay the Company an annual marketing fee
of $500. Beginning in 1998, Computer Renaissance(R) franchisees were required to
pay the Company 0.5% of their gross sales to an advertising fund in lieu of the
$500 annual marketing fee. Beginning in 1999, the Computer Renaissance(R)
franchisees were required to pay the Company 0.5% of their first $400,000 of
gross sales. In 2000, the Computer Renaissance(R) franchisees are required to
pay the Company 0.6% of their first $800,000 of gross sales. Franchisees are
required to participate in regional cooperative advertising groups as designated
by the Company.
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 both the
software and the hardware for the system.
8
OTHER SUPPORT SERVICES
The Company assists each new franchisee with site location. A third party vendor
provides design layouts and opening materials including pricing materials,
stationary, 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.
THE FRANCHISE AGREEMENT
The Company enters into franchise agreements with franchisees. 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 agreement has been filed by incorporation 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 25, 1999, the franchise fee for all concepts
was $20,000 for an initial store. In May 1999, the Company eliminated franchise
fees for additional stores for Grow Biz franchise owners. Once a franchisee
opens their initial store, they can open additional stores, in any concept,
without paying any additional fees, provided there is territory availability and
they meet minimum financial standards. Typically, the franchisee's initial store
is open for business within 180 to 270 days from the date the franchise
agreement is signed. 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 continuing
fees (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%, ReTool(R) - 4% and Plato's Closet(R) - 4%. Play It Again
Sports(R) franchise agreements signed prior to April 1, 1992 require payment of
a 3% royalty. Upon completion of the initial 10-year term, Play It Again
Sports(R) royalties will change to 4%. Play It Again Sports(R) franchisees
opening their second or additional store will pay a 4% royalty for that store.
Each franchisee is required to pay the Company an annual marketing fee of $500.
Beginning in 1998, Computer Renaissance(R) franchisees were required to pay the
Company 0.5% of their gross sales to fund an advertising fund in lieu of the
$500 annual marketing fee. Beginning in 1999, the Computer Renaissance(R)
franchisees were required to pay the Company 0.5% of their first $400,000 of
gross sales. In 2000, the Computer Renaissance(R) franchisees are required to
pay the Company 0.6% of their first $800,000 of gross sales. Each Play It Again
Sports(R) and Once Upon A Child(R) franchisee is required to spend 5% 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 1.5%, 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.
9
COMPETITION
Retailing, including the sale of sporting goods, children's apparel, computer
equipment, musical instruments, tools and teenage apparel, 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 and two franchisors of stores which sell used
and new children's clothing, toys and accessories.
The Company and its franchisees may face additional competition as its franchise
systems expand. This could include 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
Fourteen 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 imminent
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), Retool(R) and Plato's Closet(R), 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) and Once Upon A Child(R) 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.
10
EMPLOYEES
As of December 25, 1999, the Company employed 179 full-time employees, of which
6 were franchise salespersons, 73 were franchise support personnel, 31 were
administrative and 69 were retail sales staff. The Company also employed 41
part-time employees at its retail stores as of fiscal year end 1999.
ITEM 2: PROPERTIES
The Company owns its headquarters facility in Golden Valley, Minnesota. The
Company believes that its facilities are sufficient to meet its current needs
and its needs for the near future.
The Company leases space for its 17 retail store locations, typically for a
fixed monthly rental and operating costs. Two leases are due to expire in 2000,
three in 2001, one in 2002, nine in 2003, two in 2004 and none thereafter.
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware of any
threatened litigation that would have a material adverse effect on its business.
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 1999.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The Company's common stock was traded on the NASDAQ National Market System
through February 6, 2000 and is now traded on the NASDAQ SmallCap Market 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:
1999: First Second Third Fourth 1998: First Second Third Fourth
- ------------------------------------------------- -------------------------------------------------
HIGH 13 10/32 12 5/16 8 1/2 5 1/8 HIGH 13 1/4 13 7/8 15 1/4 13 3/4
LOW 12 1/4 6 1/2 4 1/2 2 7/8 LOW 12 13 13 9 1/2
At March 13, 2000, there were 5,381,119 shares of common stock outstanding held
by approximately 954 beneficial shareholders and 252 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.
11
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
---------------------------------------------------------------------------
December 25, December 26, December 27, December 28, December 30,
1999 1998 1997 1996 1995
---------------------------------------------------------------------------
REVENUE: (1) (2) (3)
Merchandise sales $ 45,163 $ 73,306 $ 66,889 $ 71,737 $ 84,043
Royalties 19,085 19,473 17,329 14,965 11,560
Franchise fees 1,942 2,986 3,907 4,162 3,889
Advertising and other 368 586 710 686 721
------------ ------------ ------------ ------------ ------------
Total revenue 66,558 96,351 88,835 91,550 100,213
Cost of merchandise sold 39,387 60,325 56,634 63,856 76,192
Selling, general and administrative expenses 28,320 29,105 24,990 23,636 20,980
Restructuring and other 11,345 -- -- -- --
Gain on sale of Disc Go Round -- 5,232 -- -- --
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (12,494) 12,153 7,211 4,058 3,041
Litigation settlement -- -- (2,000) -- --
Interest income (expense), net (1,293) (239) 103 195 296
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (13,787) 11,914 5,314 4,253 3,337
(Benefit) Provision for income taxes (5,198) 4,670 2,083 1,667 1,308
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (8,589) $ 7,244 $ 3,231 $ 2,586 $ 2,029
============ ============ ============ ============ ============
Net income (loss) per common share - diluted $ (1.65) $ 1.24 $ .52 $ .40 $ .28
============ ============ ============ ============ ============
Weighted average shares outstanding 5,206 5,833 6,274 6,516 7,351
============ ============ ============ ============ ============
BALANCE SHEET DATA:
Working capital $ 2,748 $ 1,103 $ 9,141 $ 8,516 $ 11,068
Total assets 29,642 43,141 37,755 29,177 34,024
Total debt 16,816 17,949 6,330 264 415
Shareholders' equity 2,889 10,165 17,451 17,698 21,192
SELECTED FINANCIAL RATIOS:
Return on average assets (23.6)% 17.9% 9.7% 8.2% 5.5%
Return on average equity (131.6)% 52.5% 18.4% 13.3% 9.5%
(1) In November 1999, the Company completed the sale of the assets of the
It's About Games(TM) concept. Footnote 4 of the Consolidated Notes to
the Financial Statements.
(2) In June 1998, the Company completed the sale of Disc Go Round.
(3) In August 1997, the Company acquired certain assets and franchising
rights of Video Game Exchange, Inc. Footnote 4 of the Consolidated
Notes to the Financial Statements.
12
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
RESULTS OF OPERATIONS
The following table sets forth selected information from the Company's
Consolidated Statements of Operations expressed as a percentage of total revenue
and the percentage changes in the dollar amounts from the prior period:
----------------------------------------------------------------------------
Fiscal Year Ended
-------------------------------------------- Fiscal 1999 Fiscal 1998
December 25, December 26, December 27, over (under) over (under)
1999 1998 1997 1998 1997
----------------------------------------------------------------------------
Revenues
Merchandise sales 67.9% 76.1% 75.3% (38.4)% 9.6%
Royalties 28.7 20.2 19.5 (2.0) 12.4
Franchise fees 2.9 3.1 4.4 (35.0) (23.6)
Advertising and other 0.5 0.6 0.8 (37.2) (17.6)
---------- ---------- ---------- ---------- ----------
Total revenues 100.0 100.0 100.0 (30.9) 8.5
Cost of merchandise sold 59.2 62.6 63.8 (34.7) 6.5
Selling, general and administrative
expenses 42.6 30.2 28.1 (2.7) 16.5
Restructuring and other 17.0 -- -- -- --
Gain on sale of Disc Go Round -- 5.4 -- (100.0) --
---------- ---------- ---------- ---------- ----------
Income (loss) from operations (18.8) 12.6 8.1 (202.8) 68.5
Litigation settlement -- -- (2.2) -- --
Interest and other income (expense),
net (1.9) (0.2) 0.1 (441.0) (332.5)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes (20.7) 12.4 6.0 (215.7) 124.2
(Benefit) Provision for income taxes (7.8) 4.9 2.4 (211.3) 124.2
---------- ---------- ---------- ---------- ----------
Net income (loss) (12.9)% 7.5% 3.6% (218.6)% 124.2%
========== ========== ========== ========== ==========
REVENUES
Merchandise sales, which include the sale of product to franchisees through the
buying group and retail sales at the Company-owned stores, are as follows:
1999 1998 1997
---- ---- ----
Buying Group $ 24,554,500 $ 40,605,300 $ 45,717,100
Retail Sales 20,608,500 32,700,700 21,172,000
------------- ------------- -------------
$ 45,163,000 $ 73,306,000 $ 66,889,100
The Play It Again Sports(R) buying group revenue declined the past two years as
part of management's strategic decision to reduce the number of vendors which
are offered centralized billing through the buying group and encouraging
franchisees to purchase more inventory on a direct basis. The decrease in retail
sales at Company-owned stores is a result of selling and closing all sixty-one
It's About Games(TM) stores in the fourth quarter of 1999 and the sale of nine
Company-owned stores in December 1998. It is anticipated that buying group
revenues will increase slightly as a percent of total revenues in the upcoming
year.
13
Revenues from franchising activity were as follows:
1999 1998 1997
---- ---- ----
Royalties $ 19,085,100 $ 19,472,800 $ 17,328,500
Franchise Fees 1,942,200 2,986,400 3,907,200
Royalties are derived from retail sales at the franchise level and are 3% to 5%
of net sales. In 1999, royalties decreased $387,700 compared to 1998. This
decrease is due to the sale of Disc Go Round in June 1998. If the royalties
relating to Disc Go Round are excluded, 1999 royalties would have increased
$331,300 compared to 1998. This increase is due to an increase in retail sales
at the franchise level offset, in part, by a decrease in the total number of
franchise stores open.
Key franchise store sales information is included in the table below. Comparable
store sales information compares 1999 sales to 1998 sales and 1998 sales to 1997
sales. It is calculated utilizing all stores that were open for the entire
twenty-four month comparable period. Average store sales are computed utilizing
all stores open for the entire twelve-month period.
Comparable Store Sales
-------------------------------------------------------------
1999 Increase 1998 1999
(Decrease) from 1998 Increase from 1997 Average Store Sales
-------------------- ------------------ -------------------
Play It Again Sports(R) 1.0% 1.7% 485,400
Once Upon A Child(R) 4.7% 8.6% 394,700
Computer Renaissance(R) (7.2%) 4.9% 741,500
Music Go Round(R) 6.8% 12.9% 517,000
Franchise fee revenue is recognized when substantially all initial franchise
services have been performed by the Company. During 1999, the Company revised
its fee schedule by eliminating franchise fees for all stores other than the
first store opened by a franchisee. Franchise fees declined $1.1 million to $1.9
million in 1999 compared to $3.0 million in 1998. This decrease is a result of
opening fewer stores overall; 96 in 1999 compared to 125 in 1998; and the
elimination of franchise fees on all stores other than the first store opened by
a franchisee. By restructuring the fee schedule, we expect to encourage growth
of multi-store ownership. The reduction in franchise fees was offset, in part,
by the $200,000 master franchise fee paid by Duskin Company Ltd., a Japanese
company, in the third quarter of 1999. Franchise fees in 1998 declined $920,800,
or 23.6%, from 1997 as a result of opening 125 franchise stores in 1998 compared
to 194 in 1997. The Company expects franchise fee revenue to decline in 2000 as
a result of the change in the fee schedule.
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:
1999 1998 1997
---- ---- ----
Buying Group 95.1% 94.5% 95.0%
Retail Stores 77.8 65.6 62.4
The 12.2% increase in the 1999 retail store cost of goods sold is primarily the
result of the liquidation of It's About Games(TM) inventory sold at
significantly reduced prices. It also reflects a shift in the mix of sales from
used product to new product in the It's About Games(TM) concept which carry
lower gross margins. The 3.2% increase in the 1998 retail stores costs of goods
sold is a result of a shift in the mix of sales from used product to new product
which carry lower gross margins. It is anticipated that in the future, retail
store costs of goods sold will decrease
14
as a result of closing the It's About Games(TM) stores and a renewed emphasis on
used product in the other concepts Company-owned retail stores.
SELLING, GENERAL AND ADMINISTRATIVE
The $784,800 decrease in 1999 selling, general and administrative expenses was
due to lower direct retail selling expenses for the Company-owned stores. This
is a result of selling nine Company-owned stores in December 1998, closing and
selling additional Company-owned stores during the fourth quarter of 1999 offset
by additional direct selling expenses of It's About Games(TM) and the new
concepts of Retool(R) and Plato's Closet(R). Franchising expenses in 1999 were
consistent with 1998.
RESTRUCTURING AND OTHER
In the third quarter of 1999, the Company made the decision to dispose of the
It's About Games(TM) concept. Accordingly, a restructuring charge and charge for
asset impairment was taken. Further investment in the business was not
consistent with the Company's strategy of reducing the number of Company-owned
stores and focusing on franchised store development. In December 1999, the
Company completed the sale of the assets of the It's About Games(TM) concept.
The Company undertook an orderly liquidation of the inventory and store assets
by conducting a liquidation sale resulting in a total restructuring charge and
charge for asset impairment of $11,345,500 for the year ended December 25, 1999.
NET INTEREST
Net interest (expense)/income was $(1,292,900), $(238,800) and $102,700 in 1999,
1998 and 1997, respectively. The increase in net interest expense in 1999 and
1998 was due to the Company having lower cash balances and drawing funds on
notes payable as a result of acquisitions, operations of It's About Games(TM)
and the repurchase of shares of the Company's common stock.
PROVISION FOR INCOME TAXES
The provision for income taxes was calculated at an effective rate of 37.7% for
fiscal 1999 and 39.2% for fiscal 1998 and 1997.
YEAR 2000
In preparation for the Year 2000, older personal computers were upgraded to new
systems that were Year 2000 compliant. Software updates were made to the
Company's systems and a complete analysis of its vendor relationships in which
the risk of each vendor's non-compliance with Year 2000 was assessed. Total
costs associated with the Year 2000 compliance project through December 25, 1999
were approximately $494,000. The Company did not experience any interruption or
failure as a result of the Year 2000 changeover.
Approximately 80 franchisees have not converted their point-of-sale hardware and
software to be Year 2000 compliant. A Year 2000 compliant version of the
point-of-sale software was completed in December 1998 and has been available and
ready for implementation.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the year with no cash balance and had a current ratio of 1.14
to 1.0.
During the year ended December 25, 1999 the Company's operating activities
provided $1.4 million of cash. The net loss before depreciation and the change
in deferred taxes utilized $6.7 million of cash. This was offset by the
liquidation of the It's About Games(TM) concept and activities relating to
ongoing operations.
15
The restructuring charge relating to the liquidation of It's About Games(TM)
provided $9.2 million. In addition, $4.2 million cash was provided by the
reduction of inventory, $600,000 by the reduction in prepaids and $1.8 million
of cash was utilized reducing accounts payable relating to eliminating the It's
About Games(TM) concept.
Ongoing operating activities provided cash of $2.9 million relating to the
reduction of accounts receivable offset in part by a reduction in accounts
payable, as a result of reduced sales of new product through the Play It Again
Sports(R) buying group. In addition to the reduction in inventory relating to
the It's About Games(TM) liquidation, operating cash was provided by a reduction
of $1.5 million in inventory relating to the sale of Company-owned stores and
the reduction in overall inventory levels in the remaining Company-owned stores.
Prepaid expenses and other increased $4.4 million, therefore utilizing cash,
primarily because of the $5.5 million tax benefit recorded as a result of the
net operating loss. In addition to the $600,000 reduction in prepaids relating
to It's About Games(TM), the remaining change is a result of normal ongoing
operating activity.
The components of cash utilized by the reduction in accounts payable of $6.4
million consists primarily of three items: (1) $2.1 million relating to reduced
buying group activity, (2) $1.8 million relating to the liquidation of It's
About Games(TM) and (3) $2.5 million relating to ongoing operations.
Deferred franchise fee revenue utilized cash as a result of a reduction in the
number of stores awarded but not open from 147 at December 26, 1998 to 88 at
December 25, 1999. This decrease was primarily the result of a change in the fee
structure for additional stores. This change resulted in the refund of $746,761
in fees previously paid for additional stores by existing franchisees.
Investing activities used $3.2 million of cash in 1999 resulting from property
additions of $1.8 million related to the addition of fifteen It's About
Games(TM) Company-owned stores, $1.0 million for computer hardware and software
upgrades and $400,000 of goodwill recorded on the acquisition of Plato's
Closet(R).
Financing activities used $640,100 of cash in 1999. The Company received
proceeds from notes payable of $3.0 million drawn on the committed term loan.
The $4.2 million payments on long-term debt include $1.6 million related to the
installment payments on the notes payable entered with the purchase of Video
Game Exchange, Inc., $1.6 million payments on the line of credit, $858,000
payments on the settlement agreement and $149,000 on other debt. The Company
received $492,700 in cash from the options exercised and shares purchased
through the Employee Stock Purchase Plan in 1999.
As of December 25, 1999, the Company had a $7.5 million committed revolving line
of credit which is due for renewal on April 30, 2000. Borrowings against the
line carry an interest rate of the bank's base rate plus one-half of one
percent, which was 9.0% at December 25, 1999. At December 25, 1999, the Company
had borrowings of $6.2 million against the line. The Company expects to renew
this line of credit.
In addition to the line of credit, the Company had a $8.0 million converted bank
term note. Borrowings against the converted note carry an interest rate of the
bank's base rate plus one percent, which was 9.5% at December 25, 1999.
Borrowings could be made and repaid through March 31, 1999 on a revolving basis
at which date the total amount outstanding was converted to term debt, which
will be paid off in monthly installments that began May 1, 1999 and end March 4,
2004. At December 25, 1999, the Company had borrowings of $7.1 million against
the note.
A second bank term note bears interest at the bank's base rate plus one percent
which was 9.5% at December 25, 1999. It is due in monthly principal and interest
installments through September 2002. At December 25, 1999 the Company had
borrowings of $2.5 million against the note.
16
The Company believes that its current cash position, cash generated from future
operations, availability of line of credit borrowings, assuming renewal, and tax
refunds available as a result of the net operating loss carryback will be
adequate to meet the Company's current obligations and operating needs.
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; (6) the
Company's ability to operate the Company-owned stores profitably; (7) the
Company's ability to negotiate acceptable lease terminations in connection with
the It's About Games(TM) restructuring; and (8) 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 matter are inaccurate,
its results of operations and financial condition could be adversely affected.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's Credit Agreements described in Footnote 6 to the financial
statements as well as in the Management's Discussion and Analysis carries
interest rate risk. Amounts borrowed under this Agreement are subject to
interest charges at a rate tied to the lender's base rate. This is generally the
prime rate. Should the lenders base rate change, the Company's interest expense
will increase or decrease accordingly. As of December 25, 1999, the Company had
borrowed approximately $15.7 million subject to interest rate risk. On this
amount, a 1% increase in the interest rate would cost the Company $157,000 in
additional gross interest cost on an annual basis.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Grow Biz International, Inc. and Subsidiary
Index to Financial Statements
Consolidated Balance Sheets Page 18
Consolidated Statements of Operations Page 19
Consolidated Statements of Shareholders' Equity Page 20
Consolidated Statements of Cash Flows Page 21
Consolidated Notes to Financial Statements Page 22
Report of Independent Public Accountants Page 32
17
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
---------------------------------------
December 25, 1999 December 26, 1998
---------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 2,418,000
Receivables, less allowance for doubtful accounts of $1,044,000
and $1,053,000 (Note 3) 11,164,600 13,893,700
Inventories 1,959,600 10,124,400
Prepaid expenses and other 6,773,800 2,459,300
Deferred income taxes (Note 7) 2,074,200 1,699,100
------------ ------------
Total current assets 21,972,200 30,594,500
LONG-TERM RECEIVABLES (Note 3) 1,156,300 1,208,600
PROPERTY AND EQUIPMENT:
Furniture and equipment 6,280,800 7,131,000
Building and building improvements 3,681,800 3,765,300
Less - accumulated depreciation and amortization (5,593,500) (4,935,800)
------------ ------------
Property and equipment, net 4,369,100 5,960,500
OTHER ASSETS:
Noncompete agreements and other, net of accumulated
amortization of $2,531,600 and $2,388,800 329,800 554,500
Goodwill, net of accumulated amortization of $148,100 and
$339,600 1,814,400 4,822,800
------------ ------------
Total other assets 2,144,200 5,377,300
------------ ------------
$ 29,641,800 $ 43,140,900
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,350,700 $ 11,306,600
Accrued liabilities 3,707,000 1,818,700
Current maturities of long-term debt (Note 6) 9,287,600 14,464,300
Deferred franchise fee revenue 878,900 1,901,800
------------ ------------
Total current liabilities 19,224,200 29,491,400
COMMITMENTS AND CONTINGENCIES (Note 8)
LONG-TERM DEBT (Note 6) 7,528,500 3,484,600
SHAREHOLDERS' EQUITY (Note 5):
Common stock, no par, 10,000,000 shares authorized,
5,346,119 and 5,079,055 shares issued and outstanding 1,313,500 --
Retained earnings 1,575,600 10,164,900
------------ ------------
Total shareholders' equity 2,889,100 10,164,900
------------ ------------
$ 29,641,800 $ 43,140,900
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
18
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
------------------------------------------------------------
Fiscal Year Ended
-----------------
December 25, 1999 December 26, 1998 December 27, 1997
------------------------------------------------------------
REVENUE
Merchandise sales $ 45,163,000 $ 73,306,000 $ 66,889,100
Royalties 19,085,100 19,472,800 17,328,500
Franchise fees 1,942,200 2,986,400 3,907,200
Advertising and other 368,100 585,700 710,500
------------ ------------ ------------
Total revenue 66,558,400 96,350,900 88,835,300
COST OF MERCHANDISE SOLD 39,386,800 60,324,600 56,633,700
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 28,320,200 29,105,000 24,989,900
RESTRUCTURING AND OTHER (Note 4) 11,345,500 -- --
GAIN ON SALE OF DISC GO ROUND -- 5,231,500 --
------------ ------------ ------------
Income (loss) from operations (12,494,100) 12,152,800 7,211,700
LITIGATION SETTLEMENT (Note 6) -- -- (2,000,000)
INTEREST EXPENSE (1,545,700) (710,500) (256,700)
INTEREST INCOME 252,800 471,700 359,400
------------ ------------ ------------
Income (loss) before income taxes (13,787,000) 11,914,000 5,314,400
(BENEFIT) PROVISION FOR INCOME TAXES (Note 7) (5,197,700) 4,670,200 2,083,200
------------ ------------ ------------
NET INCOME (LOSS) $ (8,589,300) $ 7,243,800 $ 3,231,200
============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE $ (1.65) $ 1.28 $ .53
============ ============ ============
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING 5,205,900 5,664,000 6,116,200
============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE $ (1.65) $ 1.24 $ .52
============ ============ ============
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 5,205,900 5,832,700 6,273,500
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
19
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Fiscal years ended December 25, 1999 December 26, 1998 and December 27, 1997
------------------------------------------------------------
Common Stock
------------ Retained
Shares Amount Earnings Total
------------------------------------------------------------
BALANCE, December 28, 1996 6,263,444 $ 10,952,900 $ 6,744,600 $ 17,697,500
Repurchase of common stock (Note 5) (386,819) (4,217,300) -- (4,217,300)
Stock options exercised and related tax benefits 125,589 739,300 -- 739,300
Net income -- -- 3,231,200 3,231,200
------------ ------------ ------------ ------------
BALANCE, December 27, 1997 6,002,214 $ 7,474,900 $ 9,975,800 $ 17,450,700
Repurchase of common stock (Note 5) (1,111,915) (9,473,300) (7,054,700) (16,528,000)
Stock options exercised and related tax benefits 188,756 1,998,400 -- 1,998,400
Net income -- -- 7,243,800 7,243,800
------------ ------------ ------------ ------------
BALANCE, December 26, 1998 5,079,055 $ -- $ 10,164,900 $ 10,164,900
Issuance of common stock 182,991 820,800 -- 820,800
Stock options exercised and related tax benefits 84,073 492,700 -- 492,700
Net loss -- -- (8,589,300) (8,589,300)
------------ ------------ ------------ ------------
BALANCE, December 25, 1999 5,346,119 $ 1,313,500 $ 1,575,600 $ 2,889,100
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
20
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
-------------------------------------------------
Fiscal Year Ended
-----------------
December 25, December 26, December 27,
1999 1998 1997
-------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ (8,589,300) $ 7,243,800 $ 3,231,200
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 2,312,900 2,074,500 1,878,100
Restructuring and other 9,198,500 -- --
Loss on sale of retail stores -- (39,800) --
Deferred income tax (375,100) (207,500) 234,800
Change in operating assets and liabilities:
Receivables 2,878,300 (278,100) 446,500
Inventories 5,972,600 (6,298,300) (1,461,900)
Prepaid expenses and other (4,419,300) (476,000) (998,500)
Accounts payable (6,465,900) 4,701,800 934,500
Accrued liabilities 1,888,500 (2,143,300) 2,505,700
Deferred franchise fee revenue (1,022,900) (1,402,200) (681,000)
------------ ------------ ------------
Net cash provided by operating activities 1,378,300 3,174,900 6,089,400
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,805,700) (2,302,900) (366,900)
Increase in other assets (350,500) (400,200) (31,300)
Proceeds from sale of net assets of Disc Go Round -- 1,768,500 --
Acquisition of Video Game Exchange, Inc. (Note 4) -- -- (6,579,700)
------------ ------------ ------------
Net cash provided by (used for) investing activities (3,156,200) (934,600) (6,977,900)
------------ ------------ ------------
FINANCING ACTIVITIES:
Notes payable 3,044,000 13,772,100 6,767,000
Payments on long-term debt, net (4,176,800) (2,152,900) (701,200)
Repurchase of common stock (Note 5) -- (16,528,000) (4,217,300)
Proceeds from stock option and warrants exercises 492,700 1,998,500 739,200
------------ ------------ ------------
Net cash provided by (used for) financing activities (640,100) (2,910,300) 2,587,700
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (2,418,000) (670,000) 1,699,200
CASH AND CASH EQUIVALENTS, beginning of period 2,418,000 3,088,000 1,388,800
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ -- $ 2,418,000 $ 3,088,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 1,506,700 $ 682,200 $ 196,600
============ ============ ============
Cash paid for income taxes $ 350,400 $ 4,746,400 $ 2,744,300
============ ============ ============
NON CASH INVESTING AND FINANCING ACTIVITIES:
Note received in exchange for sale of inventory and property and
equipment $ 927,700 $ 1,974,500 $ --
============ ============ ============
Assets acquired through the issuance of stock $ 820,800 $ -- $ --
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
21
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Notes to the Financial Statements
December 25, 1999 and December 26, 1998
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",
"Computer Renaissance", "Music Go Round", "ReTool" and "Plato's Closet". The
initial franchise fee is $20,000 for all concepts. 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 in connection with the acquisition of Video Game Exchange, Inc.
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
Tool Traders, Inc. (ReTool) 1998
Plato's Closet 1999
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. The Company's revenue by retail store
concept was as follows:
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
Play It Again Sports(R) $ 36,864,100 $ 54,347,400 $ 58,520,000
Once Upon A Child(R) 5,372,300 5,305,700 5,005,400
Computer Renaissance(R) 6,569,500 12,279,700 10,566,500
Music Go Round(R) 4,015,000 5,503,400 4,598,200
Disc Go Round(R) -- 1,426,700 2,532,000
It's About Games(TM) 12,856,900 17,376,700 7,613,200
ReTool(R) 655,400 111,300 --
Plato's Closet(R) 225,200 -- --
------------ ------------ ------------
$ 66,558,400 $ 96,350,900 $ 88,835,300
============ ============ ============
The Company's significant assets are located within the United States and it
generates all revenues from United States operations other than 1999 franchising
revenues from Canadian operations of $1.6 million.
22
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments approximates
their carrying values as of December 1999 and 1998. The carrying amounts for
cash and trade receivables approximate fair value due to the maturity of the
instruments. The fair values of borrowings and notes receivable are estimated by
discounting future cash flow payment streams using rates that approximate those
of comparable borrowings and notes receivable.
INVENTORIES
The Company values its inventories at the lower of cost, as determined by the
average weighted cost method, or market.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has a policy of periodically reviewing for potential impairment of
long-lived assets. During 1999, the Company recognized a pre-tax impairment loss
of $275,500 related to the fixed assets of Music Go Round(R). The impairment was
identified through the exploration of sale opportunities and resulted in an
increase in selling, general and administrative expenses.
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.
STORE OPENING COSTS
All start-up costs associated with the opening of new stores are expensed as
incurred.
23
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 $878,900
and $1,901,800 at December 25, 1999 and December 26, 1998, respectively.
NET INCOME (LOSS) PER COMMON SHARE
The Company calculates net income (loss) 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 (Loss) Per Common
Share - Basic. The Company calculates Net Income (Loss) 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 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
Weighted average shares outstanding - Basic 5,205,900 5,664,000 6,116,200
Dilutive effect of stock options after application
of the treasury stock method -- 168,700 157,300
--------- --------- ---------
Weighted average shares outstanding - Dilutive 5,205,900 5,832,700 6,273,500
========= ========= =========
3. RECEIVABLES:
The Company's current receivables consisted of the following:
December 25, 1999 December 26, 1998
----------------- -----------------
Trade (Net) $ 7,068,800 $ 10,620,900
Royalty 3,188,500 2,041,300
Notes Receivable 2,013,500 2,258,300
Other 50,100 181,800
------------ ------------
12,320,900 15,102,300
Less: Long-term Notes (1,156,300) (1,208,600)
------------ ------------
Current Receivables $ 11,164,600 $ 13,893,700
============ ============
As part of its normal operating procedures, the Company requires Standby Letters
of Credit as collateral for a portion of its trade receivables from its
first-year and second-year stores.
Included in accounts receivable above are notes receivable consisting of the
following:
In December 1998, the Company sold certain assets of nine Company-owned retail
stores to the former president of Music Go Round(R) for $2.0 million. In
connection with the sale, the Company received (1) a short-term note of
$700,000, collected in January 1999, (2) a $1.0 million note secured by certain
assets of the stores bearing interest of 8% and payable in monthly principal and
interest installments until January 2006 and (3) a $274,500 note payable in
eighteen equal monthly principal installments beginning February 15, 1999.
The remaining notes receivable resulted from the sale of Company-owned retail
stores bearing interest ranging from 8% to 9.75%, payable in monthly principal
and interest installments and maturing at various dates from 2000 to 2006.
24
4. ACQUISITIONS AND DISPOSITIONS:
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 was 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 the bank's base rate plus one-half of one percent. The former owner
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.
The following are the unaudited pro forma results of operations for 1997, as if
the above acquisition had occurred on December 28, 1996:
December 27, 1997
-----------------
Revenue $ 97,230,400
Net income 3,498,000
Net income per common share (basic) $ .57
Net income per common share (diluted) $ .56
DISPOSITION OF IT'S ABOUT GAMES(TM)
In the third quarter of 1999, the Company made the decision to dispose of the
It's About Games(TM) concept. Accordingly, a restructuring charge and charge for
asset impairment was taken. In December 1999, the Company completed the sale of
the assets of the Company's It's About Games(TM) concept. The Company undertook
an orderly liquidation of the inventory and other assets by conducting a
liquidation sale. Approximately 50% of the assets were disposed of in three main
transactions.
The first sale, of substantially all of the assets of fourteen stores in
Kentucky, Maryland, Ohio and Pennsylvania, was for $114,200 plus inventory
valued at 40% of cost, to be received in cash and a promissory note. The second
sale, of substantially all of the assets of fourteen stores in Ohio, was for
$42,000 plus inventory at 40% of cost, to be received in cash and a promissory
note. The third sale, was a bulk inventory sale for $140,000 cash. The remaining
assets of the It's About Games(TM) concept were disposed of by abandonment or
liquidation sale resulting in a total restructuring charge of $11,345,500 for
the year ended December 25, 1999.
Restructuring Reserve:
Facility Costs Employee Costs Other Costs Total
-------------- -------------- ----------- -----------
Balance at September 25, 1999 $ 2,247,000 $ -- $ 75,000 $ 2,322,000
Additional Provisions -- 175,000 -- 175,000
Amounts Paid (30,500) (149,800) (155,300) (335,600)
Amounts Reclassed (80,300) -- 80,300 --
Amounts Reversed (350,000) -- -- (350,000)
----------- ----------- ----------- -----------
Balance at December 25, 1999 $ 1,786,200 $ 25,200 $ -- $ 1,811,400
=========== =========== =========== ===========
PURCHASE OF TOOL TRADERS, INC.
In April 1998, the Company announced the acquisition of certain assets and
franchising rights of Tool Traders, Inc. of Detroit, Michigan. The Company paid
$380,200 plus a percentage of future royalties for a period of seven years.
25
PURCHASE OF PLATO'S CLOSET, INC.
In January 1999, the Company announced the acquisition of certain assets and
franchising rights of Plato's Closet, Inc. of Columbus, Ohio for total
consideration of $400,000 plus a percentage of future royalties for a period of
seven years.
5. SHAREHOLDERS' EQUITY:
REPURCHASE OF COMMON STOCK
Since November 1995, the Company's Board of Directors has authorized the
repurchase of up to 3,000,000 shares of the Company's common stock on the open
market. As of December 25, 1999, the Company had repurchased 2,560,828 shares of
its stock at an average price of $11.70 per share. No shares were repurchased in
the year ended December 25, 1999.
STOCK OPTION PLAN
The Company has authorized up to 1,400,000 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 25, 1999 were
as follows:
Weighted Average
Number of Shares Exercise Price
---------------- --------------
Outstanding at December 28, 1996 716,125 $ 8.68
Granted 145,750 11.31
Exercised (101,968) 4.79
Forfeited (61,045) 9.82
---------- --------
Outstanding at December 27, 1997 698,862 9.88
Granted 87,750 12.42
Exercised (170,051) 9.52
Forfeited (66,624) 11.35
---------- --------
Outstanding at December 26, 1998 549,937 $ 9.54
Granted 150,000 4.25
Exercised (76,500) 7.58
Forfeited (192,061) 10.92
---------- --------
Outstanding at December 25, 1999 431,376 $ 7.43
========== ========
26
Options outstanding as of December 25, 1999 are exercisable as follows:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------
Weighted
Average Weighted
Remaining Weighted Average
Range of Number Contractual Life Average Number Exercisable
Exercise Price Outstanding (Years) Exercise Price Exercisable Price
-------------- ----------- ------- -------------- ----------- -----
$2.00 - $2.00 35,000 .08 $ 2.00 35,000 $ 2.00
4.25 - 4.25 150,000 4.92 4.25 -- 4.25
7.75 - 8.065 60,813 1.05 7.92 44,252 7.92
9.00 - 10.625 109,375 .79 9.95 65,750 10.06
11.875 - 12.25 76,188 .88 12.20 23,002 12.17
--------- ---------
431,376 168,004
========= =========
All unexercised options at December 25, 1999 have an exercise price equal to the
fair market value on the date of the initial grant.
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 purchase 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. In April 1999, the Company
issued 7,573 shares under the plan at a price of $9.67. As of December 25, 1999,
contributions had been received for the issuance of 5,012 shares to be issued in
April 2000.
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 (loss) and net income (loss) per common share
would have changed to the following proforma amounts:
1999 1998 1997
---- ---- ----
Net Income (Loss): As Reported $ (8,589,300) $ 7,243,800 $ 3,231,200
Pro Forma (8,786,600) 7,066,300 3,080,000
Net Income (Loss) Per Common Share
(Diluted): As Reported $ (1.65) $ 1.24 $ .52
Pro Forma $ (1.69) $ 1.21 $ .49
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 5.98% in 1999, 5.549% in 1998 and 5.77%
to 6.83% in 1997, expected life of five years for 1999, 1998 and 1997, expected
volatility of 64.13% in 1999, 30.69% in 1998 and 20.11% to 36.85% in 1997.
27
NONPLAN OPTIONS
The Company sponsors a Stock Option Plan for Nonemployee Directors (the
"Nonemployee Directors Plan") and reserved a total of 100,000 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 granted 50,000 options in 1993 and 50,000 options in 1995 to
purchase the Company's common stock at $10.00 per share to four non-employee
directors. All options granted to non-employee directors expired in 1999. There
were no shares outstanding and exercisable at December 25, 1999.
The Company accounts for nonplan options in accordance with SFAS 123 estimated
on the date of grant using the Black-Scholes option pricing model.
6. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT:
The Company's revolving credit and long-term debt consisted of the following:
December 25, 1999 December 26, 1998
----------------- -----------------
Revolving Line of Credit $ 6,165,900 $ 11,955,900
Bank Term Debt 9,575,000 3,375,000
Note Payable 859,600 2,353,800
Other 215,600 264,200
------------ ------------
Total 16,816,100 17,948,900
Less: Current Portion (9,287,600) (14,464,300)
------------ ------------
$ 7,528,500 $ 3,484,600
============ ============
The Company has a $8.5 million committed revolving line of credit which is due
for renewal on April 30, 2000. Borrowings against the line carry an interest
rate of the bank's base rate plus one-half of one percent which was 9.0% at
December 25, 1999. At December 25, 1999 the Company had borrowings of $6.2
million against the line.
In addition to the line of credit, the Company has a $8.0 million converted bank
term note. Borrowings against the converted note carry an interest rate of the
bank's base rate plus one percent, which was 9.5% at December 25, 1999.
Borrowings could be made and repaid through March 31, 1999 on a revolving basis
at which date the total amount outstanding was converted to term debt, which
will be paid off in monthly installments that began May 1, 1999 and end March 4,
2004. At December 25, 1999, the Company had borrowings of $7.1 million against
the note.
A second bank term note bears interest at the bank's base rate plus one percent
which was 9.5% at December 25, 1999. It is due in monthly principal and interest
installments through September 2002. At December 25, 1999 the Company had
borrowings of $2.5 million against the note.
The debt facilities listed above are secured by all tangible and intangible
assets of the Company. The notes contain various restrictive covenants which,
among other matters, require the Company to maintain a minimum capital base,
liabilities to capital base ratio and debt service coverage ratio. As of
December 25, 1999, the Company was not in compliance with all of the covenants,
but has received a waiver from the bank. The Company amended the existing debt
agreements effective December 25, 1999 and intends to be in full compliance of
the new covenants for the forth-coming year.
28
In November 1998, the Company entered into a Repurchase of Rights and Settlement
Agreement and dropped its appeal of a February 1998 court ruling requiring the
Company to pay $2.0 million to an early partner in the original Play It Again
Sports store. Under the agreement, the Company paid $400,000 and signed a
three-year note in which the Company is required to pay monthly principal and
interest payments at 8%. At December 25, 1999 the balance, including accrued
interest of $87,100, was $859,600.
Future maturities of long-term debt as of December 25, 1999 are as follows:
2000 $ 9,287,600
2001 3,194,000
2002 2,506,400
2003 1,734,000
2004 36,700
Thereafter 57,400
------------
$ 16,816,100
============
7. INCOME TAXES:
Components of the provision for income taxes were as follows:
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
Currently payable:
Federal $ (4,217,600) $ 4,052,700 $ 1,423,400
State (605,000) 825,000 425,000
------------ ------------ ------------
Subtotal (4,822,600) 4,877,700 1,848,400
Deferred income tax (benefit)/expense (375,100) (207,500) 234,800
------------ ------------ ------------
Total tax provision $ (5,197,700) $ 4,670,200 $ 2,083,200
============ ============ ============
The effective tax rate differs from the federal statutory rate due primarily to
the following:
December 25, 1999 December 26, 1998 December 27, 1997
----------------- ----------------- -----------------
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 2.9 4.6 5.3
Nondeductible meals and entertainment (0.2) 0.3 0.7
Other, net 1.0 0.3 (0.8)
------- ------- --------
37.7% 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 were as follows:
December 25, 1999 December 26, 1998
----------------- -----------------
Deferred settlement expense $ 336,900 $ 627,200
Deferred franchise fees 101,900 431,400
Accounts receivable reserves 409,200 412,800
Accrued restructuring charge 710,000 --
Other 516,200 227,700
------------ ------------
Net deferred tax asset $ 2,074,200 $ 1,699,100
============ ============
29
8. 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. Company
contributions to the plan for 1999, 1998 and 1997 were $332,300, $279,500 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 $2,834,200 in
1999, $2,531,600 in 1998 and $1,468,100 in 1997. As of December 25, 1999,
minimum rental commitments under noncancelable operating leases are: $701,000 in
2000, $563,800 in 2001, $467,000 in 2002, $453,700 in 2003, $83,000 in 2004 and
none thereafter.
The Company rents a 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 $66,000 in 1999, 1998 and 1997.
LITIGATION
The Company is exposed to a number of asserted and unasserted legal claims
encountered in the normal course of business. Management believes that the
ultimate resolution of these matters will not have a material adverse effect on
the financial position or results of operations of the Company.
CONSULTING AGREEMENTS
The Company has a consulting agreement with the former owner of Tool Traders,
Inc. The agreement requires the Company to pay the following percentages of
receipts from franchising ReTool(R) stores during the following periods:
September 14, 1999 through September 13, 2001 - 5%; September 14, 2001 through
September 13, 2003 - 4%; September 14, 2003 through September 13, 2004 - 3%;
September 14, 2004 through September 13, 2005 - 2% and September 14, 2005
through September 13, 2006 - 1%.
The Company has a consulting agreement with the former owner of Plato's Closet,
Inc. The agreement requires the Company to pay the following percentages of
receipts from franchising Plato's Closet(R) stores during the following periods:
January 1, 1999 through December 31, 2000 - 5%; January 1, 2001 through December
31, 2002 - 4%; January 1, 2003 through December 31, 2003 - 3%; January 1, 2004
through December 31, 2004 - 2% and January 1, 2005 through December 31, 2005 -
1%.
9. RELATED PARTY TRANSACTION:
In November 1999, the Company engaged a shareholder of the Company to act as a
non-exclusive financial advisor to the Company. Under the engagement agreement,
the shareholder provided services to the Company in the areas of strategic
planning and business development through February 29, 2000. In the event that a
significant strategic transaction occurs that was initiated by the shareholder,
and subject to a number of other conditions, the Company will issue to the
shareholder a warrant to purchase up to 200,000 shares of the Company's common
stock, exercisable over eight years at an exercise price of $6.00 per share. The
shareholder owns approximately 8.9% of the outstanding shares of the Company's
common stock as of March 13, 2000.
30
10. QUARTERLY FINANCIAL DATA:
The Company's unaudited quarterly results for the years ended December 25, 1999
and December 26, 1998 were as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
1999
Total Revenue $ 18,535,400 $ 15,264,800 $ 16,673,600 $ 16,084,600
Income (loss) from Operations (17,300) 88,200 (11,909,000) (656,000)
Net Income (loss) (175,200) (121,300) (7,440,900) (851,900)
Net Income (Loss) Per Common Share - Basic $ (.03) $ (.02) $ (1.43) $ (.16)
Net Income (Loss) Per Common Share - Diluted $ (.03) $ (.02) $ (1.43) $ (.16)
1998
Total Revenue $ 25,623,400 $ 23,497,800 $ 22,484,000 $ 24,745,800
Income from Operations 1,175,600 6,877,900 2,490,700 1,608,800
Net Income 690,900 4,213,000 1,503,100 836,800
Net Income Per Common Share - Basic $ .12 $ .70 $ .27 $ .17
Net Income Per Common Share - Diluted $ .11 $ .68 $ .26 $ .16
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Grow Biz International, Inc.:
We have audited the accompanying consolidated balance sheets of Grow Biz
International, Inc. and Subsidiary (Minnesota corporations) as of December 25,
1999 and December 26, 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 25, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 25, 1999 and December 26,
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 25, 1999, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 28, 2000
32
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 directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
K. Jeffrey Dahlberg 46 Chairman of the Board and Chief Executive
Officer
Ronald G. Olson 59 Vice Chairman
Ted R. Manley 50 President and Chief Operating Officer
David J. Osdoba, Jr. 44 Vice President of Finance and Chief Financial
Officer
Charles V. Kanan 48 President / Play It Again Sports(R)
Taylor Bond 38 President / Computer Renaissance(R)
Randel S. Carlock 51 Director
Dennis J. Doyle 47 Director
Bruce C. Sanborn 47 Director
Robert C. Pohlad 45 Director
----------------------------
K. JEFFREY DAHLBERG has served as Chief Executive Officer of the Company since
May 1999 and Chairman of the Board of Directors 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 Vice Chairman of the Company since May 1999. He
served as President and Chief Executive Officer of the Company from January 1990
until May 1999. Mr. Olson has been President and Chief Executive Officer of
Franchise Business Systems, Inc., a franchise consulting firm, since July 1988.
TED R. MANLEY has served as President and Chief Operating Office of the Company
since July 1999. From September 1997 until July 1999 he served as Executive Vice
President of Operations. He served as President of Once Upon A Child(R) from
January 1997 until January 1999 and General Manager from July 1994 to January
1997. 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 1984 to December 1990.
33
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.
TAYLOR BOND has served as President of Computer Renaissance(R) since July 1999.
He was President and a director of Syzygy Corporation, an Ann Arbor,
Michigan-based company that owned and operated a Computer Renaissance(R)
franchise from October 1993 to September 1999. From February 1987 through May
1994 Mr. Bond worked for Dominos Pizza, Inc., most recently as National Director
of Market Research.
RANDEL S. CARLOCK has served as a Director of the Company since September 1993.
He currently serves as an OPUS Professor of Family Enterprise at the University
of St. Thomas Graduate School of Business, a position held since 1990. He also
served as Chairman of the Board of Audio King, Inc., a Minneapolis consumer
electronics company, from March 1990 to June 1997.
DENNIS J. DOYLE has served as a Director of the Company since June 1993. Since
1978, he has served as President and Chief Executive Officer of Welsh Companies,
Inc., a real estate development and management firm, and Chairman of the Board
of Welsh Construction Corp. Mr. Doyle also serves as a director of the Rottlund
Company.
BRUCE C. SANBORN has served as a Director of the Company since June 1993. From
1990 until 1999 he served as Chairman of the Board for the North Central Life
Insurance Company and Financial Life Companies, Inc. He is currently working as
an independent investor and business advisor.
ROBERT C. POHLAD has served as a Director of the Company since September 1993.
Since 1987, he has served as President and Director of Pohlad Companies, a
Minneapolis based holding company active in investments and soft drink
manufacturing and distribution. Mr. Pohlad also currently serves as a Director
of Mesaba Holdings, Inc., Delta Beverage Group, Inc. and Pepsi-Cola Puerto Rico
Bottling Company.
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.
COMPLIANCE WITH SECTION 16(a)
Section 16(a) of the 1934 Act requires the Company's directors, executive
officers and persons who own more than ten percent of the Common Stock of the
Company to file with the Securities and Exchange Commission ("Commission")
initial reports of beneficial ownership and reports of changes in beneficial
ownership of common shares of the Company. Directors, officers and greater than
ten percent shareholders are required by the regulations of the Commission to
furnish the Company with copies of all Section 16(a) reports they file. The
Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, during the fiscal year ended December 25, 1999, all Form 3, Form 4 and
Form 5 filing requirements were met, except Form 4s were filed late for K.
Jeffrey Dahlberg for the months of February 1999 and May 1999 and a Form 4 was
filed late for Taylor Bond for the month of September 1999.
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 3,
2000, sets forth certain information with respect to the compensation of
management of the Registrant and the required information is incorporated herein
by reference.
34
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section 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 3, 2000, sets 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 Relationships and Related Transactions" appearing
in the Registrant's proxy statement for the annual meeting of stockholders to be
held on May 3, 2000, 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 17.
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)
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 ReTool(R)(Exhibit 10.6) (8)
10.6 Form of franchise agreement for Plato's Closet(R)(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 1992 Stock Option Plan, including forms of stock option
agreement (Exhibit 10.12) (1) (3) (7)
35
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.13 Amendment No. 1 to the 1992 Stock Option Plan (Exhibit 10.15)
(2)
10.14 Amendment No. 2 to the 1992 Stock Option Plan (Exhibit 10.16)
(2)
10.15 Amendment No. 3 to the 1992 Stock Option Plan (Exhibit 10.16)
(6)
10.16 Nonemployee Director Stock Option Plan, as amended, including
form of stock option agreement (Exhibit 10.16) (2) (7)
10.17 Employee Stock Purchase Plan of 1994 (Exhibit 10.17) (2) (3)
10.18 Real Estate Purchase Agreement for Purchase of the Company's
headquarters (Exhibit 10.18) (2)
10.19 Consulting and Noncompetition Agreement dated November 6,
1992 with Lynn and Dennis Blum (Exhibit 10.19) (3)
10.20 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)
10.21 Asset Purchase Agreement between Grow Biz Games, Inc. and
Video Game Exchange, Inc., dated August 15, 1997 (Exhibit
10.1) (4)
10.22 Term Note, TCF, dated August 8, 1997 (Exhibit 10.3) (4)
10.23 Non-Negotiable Promissory Note, Video Game Exchange, Inc.,
dated August 15, 1997 (Exhibit 10.4) (4)
10.24 Asset Purchase Agreement related to the disposition of Disc
Go Round to CD Warehouse, Inc., dated June 16, 1998 (Exhibit
10.1) (5)
10.25 Letter of Agreement between the Company and Sheldon & Terry
Fleck related to the purchase of stock, dated July 3, 1999
(Exhibit 10.1) (9)
10.26 Consulting Agreement with Sheldon Fleck, dated November 17,
1999
10.27 Trademark Security Agreement, dated November 24, 1999
10.28 Amended and Restated Credit Agreement, dated December 25,
1999
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 Current
Report on Form 8-K, August 15, 1997.
(5) Incorporated by reference to the specified exhibit to the Current
Report on Form 8-K, June 16, 1998.
(6) Incorporated by reference to the specified exhibit to the Annual Report
on Form 10-K for the fiscal year ended December 27, 1997.
(7) Indicates management contracts, compensation plans or arrangements
required to be filed as exhibits.
(8) Incorporated by reference to the specified exhibit to the Annual Report
on Form 10-K for the fiscal year ended December 26, 1998.
(9) Incorporated by reference to the specified exhibit to the Quarterly
Report on Form 10-Q for the quarter ended June 26, 1999.
36
(b.) Reports on Form 8-K: On October 14, 1999, the Company filed an 8-K related
to the restructuring charge related to the discontinuing of operations of the
It's About Games(TM) concept.
On December 10, 1999, the Company filed an 8-K related to disposition of
assets of the It's About Games(TM) concept.
37
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/ K. JEFFREY DAHLBERG Date: March 22, 2000
------------------------------------------
K. Jeffrey Dahlberg
Chairman 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 and March 22, 2000
- ------------------------------ Chief Executive Officer
K. Jeffrey Dahlberg (principal executive officer)
/s/ RONALD G. OLSON Vice Chairman March 22, 2000
- ------------------------------
Ronald G. Olson
/s/ TED R. MANLEY President and Chief Operating March 22, 2000
- ------------------------------ Officer
Ted R. Manley
/s/ DAVID J. OSDOBA, JR. Vice President of Finance and March 22, 2000
- ------------------------------ Chief Financial Officer
David J. Osdoba, Jr. (principal financial and
accounting officer)
/s/ RANDEL S. CARLOCK Director March 13, 2000
- ------------------------------
Randel S. Carlock
/s/ DENNIS J. DOYLE Director March 9, 2000
- ------------------------------
Dennis J. Doyle
/s/ ROBERT C. POHLAD Director March 10, 2000
- ------------------------------
Robert C. Pohlad
/s/ BRUCE C. SANBORN Director March 14, 2000
- ------------------------------
Bruce C. Sanborn
38