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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 26, 1998 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 January 31, 1999, as reported on the NASDAQ National Market System, was $21.6
million.
Shares of no par value Common Stock outstanding as of January 31, 1999:
5,093,355 shares.
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 11
Employees 11
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II PAGE
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Item 5. Market for the Registrant's Common Equity and 12
Related Shareholder Matters
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on 33
Accounting and Financial Disclosure
PART III PAGE
- --------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial 36
Owners and Management
Item 13. Certain Relationships and Related Transactions 37
PART IV PAGE
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Item 14. Exhibits and Reports on Form 8-K 38
SIGNATURES 40
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Exhibit 10.6 ReTool(TM) Franchise Agreement
Exhibit 10.26 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
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ITEM 1: BUSINESS
GENERAL
Grow Biz International, Inc., (the Company) is a franchise company that
franchises seven 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 store concept in 1988 and, through a series of acquisitions, has expanded
its operations.
o 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 reflectiv
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.
o 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.
o 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.
o 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.
o 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(R) 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.
o 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 is a forty store retail operation with
stores in Ohio, Pennsylvania, Kentucky, Georgia and Maryland and has
become the nucleus of the It's About Games(TM) concept. The Company
began franchising this concept in 1997.
o 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. The Company began franchising the ReTool(TM)
concept in 1998.
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o On June 26, 1998, the Company completed the sale of the assets and
franchising rights of its Disc Go Round(R) 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(R) 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.
o 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. The Company anticipates
franchising Plato's Closet(R) in 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 seven store concepts with their 1998 system-wide sales, defined as
revenues from all affiliated stores, are summarized as follows:
PLAY IT AGAIN SPORTS(R) - $286 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) - $75 million
Once Upon A Child(R) stores sell and buy used and new children's clothing, toys,
furniture and accessories. The Once Upon A Child(R) 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) - $155 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 of Computer Renaissance(R) 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.
MUSIC GO ROUND(R) - $25 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.
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IT'S ABOUT GAMES(TM) - $18 million
It's About Games(TM) stores sell and buy both used and new video games, comics,
trading cards and accessories. The stores also offer game rental programs to
customers as well as several interactive stations that allow customers to play
the games prior to making a purchase.
RETOOL(TM) - $1 million
ReTool(TM) 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) - $1 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 26, 1998:
----------- ------------- ---------- ------------- -----------
TOTAL OPENED/ CLOSED/ TOTAL
12/27/97 PURCHASED SOLD CONVERTED 12/26/98
----------- ------------- ---------- ------------- -----------
Play It Again Sports(R)
- -----------------------
Franchised Stores - US and Canada 654 33 (65) 0 622
Franchised Stores - Other International 8 0 (0) 0 8
Corporate - Owned 5 0 (1) 0 4
Other 22 1 (0) 0 23
Once Upon A Child(R)
- --------------------
Franchised Stores - US and Canada 204 14 (8) (1) 209
Corporate - Owned 4 0 (1) 1 4
Computer Renaissance(R)
- -----------------------
Franchised Stores - US and Canada 180 53 (14) 5 224
Corporate - Owned 7 0 (0) (5) 2
Music Go Round(R)
- --------------
Franchised Stores - US and Canada 38 14 (2) 4 54
Corporate - Owned 4 8 (0) (4) 8
Disc Go Round(R)
- ----------------
Franchised Stores - US and Canada 132 8 (140) 0 0
Corporate - Owned 3 0 (3) 0 0
It's About Games(TM)
- --------------------
Franchised Stores - US and Canada 0 3 (0) 0 3
Corporate - Owned 42 5 (1) 0 46
ReTool(TM)
- ----------
Franchised Stores - US and Canada 0 0 (0) 0 0
Corporate - Owned 0 3 (0) 0 3
Other 0 2 (0) 0 2
----------- ------------- ---------- ------------- -----------
Total 1,303 144 (235) 0 1,212
=========== ============= ========== ============= ===========
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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 26, 1998,
the Company had 147 franchise agreements for stores that were not yet opened.
Typically, the franchisee's initial store is open for business within 150 to 210
days from the date of the franchise agreement is signed.
The Company began franchising internationally in 1991 and as of December 26,
1998, had 99 franchised stores open in Canada and an aggregate of 8 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, 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. They cover, among other
things, point-of-sale computer training,
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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.
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
used 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), It's About Games(TM),
ReTool(TM) 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 then
invoiced by the vendor and, in turn, the Company invoices the franchisee adding
a 4% service fee. To provide the remaining six 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%, It's
About Games(TM) - 4%, ReTool(TM) - 4% and Plato's Closet - 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 1/2% of their gross sales to an
advertising fund in lieu of the $500 annual marketing fee. In 1999, the Computer
Renaissance franchisees are required to pay the Company 1/2% of their first
$400,000 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
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franchisees with an important management tool that reduces errors, increases
efficiencies and enhances inventory control. The Company provides the software,
while the hardware is provided by a third-party vendor located on the Company's
premises.
OTHER SUPPORT SERVICES
The Company assists each new franchisee in site location. A third party vendor
provides design layouts and opening materials including pricing materials,
stationery, 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 26, 1998, the franchise fee for Play It Again
Sports(R) and Computer Renaissance(R) was $25,000 for an initial store and
$20,000 for each subsequent store awarded to the same franchisee within the same
concept. At December 26, 1998, the franchise fee for Once Upon A Child(R), Music
Go Round(R), It's About Games(TM), ReTool(TM) and Plato's Closet(R) was $20,000
for an initial store and $15,000 for each subsequent store awarded to the same
franchisee within the same concept. Typically, the franchisee's initial store is
open for business within 150 to 210 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%, It's About Games(TM) - 4%, ReTool(TM) - 4% and Plato's Closet
- - 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 are required to pay the
Company 1/2% of their gross sales to fund an advertising fund in lieu of the
$500 annual fee. In 1999, the Computer Renaissance franchisees are required to
pay the Company 1/2% of their first $400,000 of gross sales. Each Play It Again
Sports(R) and Once Upon A Child(R) franchisee is required to spend 5%, each It's
About Games(TM) franchisee is required to spend 4% 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 1/2%, would be paid to the Company as an
advertising fee for deposit into an advertising fund.
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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.
COMPETITION
Retailing, including the sale of sporting goods, children's apparel, computer
equipment, musical instruments, video games, tools and adolescent 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, two franchisors of stores
which sell used and new children's clothing, toys and accessories and three
franchisors of stores which sell used and new video games.
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), VGE Video Game Exchange(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"). It's About
Games(TM) and ReTool(TM) are service marks for which the Company has filed
service mark applications with 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.
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SEASONALITY
The Company's Play It Again Sports(R), Once Upon A Child(R) and It's About
Games(TM) 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.
EMPLOYEES
As of December 26, 1998, the Company employed 238 full-time employees, of which
8 are franchise salespersons, 58 are franchise support personnel, 29 are
administrative and 143 are retail sales staff. The Company also employs 308
part-time employees at its retail stores.
ITEM 2: PROPERTIES
The Company owns its headquarters facility in Golden Valley, Minnesota and rents
a distribution warehouse in Cleveland, Ohio. The Company believes that its
facilities are sufficient to meet its current needs and for the near future.
The Company leases space for its 81 retail store locations, typically for a
fixed monthly rental and operating costs. Seventeen leases are due to expire in
1999, eight in 2000, three in 2001, seven in 2002, thirty-six in 2003 and ten
thereafter.
ITEM 3: LEGAL PROCEEDINGS
James D. Van Buskirk and Aravan, Inc. v. Grow Biz International, Inc. In January
1998, the Company was involved in discussions to purchase certain rights from an
original owner of Play It Again Sports and settle all claims related to a
lawsuit filed with the United States District Court, District of Minnesota,
commenced in December 1995. Grow Biz believes these discussions did not lead to
a final or complete agreement. However, the court ruling on a motion on February
26, 1998, entered an order finding that a settlement agreement had been reached
by the parties. Under the order, the Company is required to pay plaintiffs $2.0
million to purchase certain development rights. The order further directs that
all claims be dismissed. The Company filed an appeal and in November 1998
dropped the appeal upon reaching acceptable terms and entered into an agreement
to repurchase certain development rights held by the plaintiff. Among other
things, the Company agreed to pay $400,000 at the time the agreement was signed
and $1.6 million over a three year period.
Harbor Finance Partners, a shareholder of Grow Biz, commenced a shareholder
class action against Grow Biz and the members of its Board of Directors, arising
out of the non-binding proposal by Jeff Dahlberg and Ron Olson, officers,
directors and majority shareholders of Grow Biz, to exchange, through a newly
formed entity, all of the shares of Grow Biz that they do not already own, for
$14 per share in cash. The plaintiff alleges, among other things, that the
proposed price for the shares is substantially below the fair value of those
shares, that the defendants failed to maximize stockholder value through an
adequate auction or market check process, and that the defendants have breached
their fiduciary duties and otherwise unfairly dealt with the plaintiff and the
other minority shareholders. The plaintiff seeks, among other things: (1)
injunctive relief to enjoin any proposed transaction; (2) creation of a
committee of shareholders to help protect the interests of the minority
shareholders in any proposed transaction; and (3) damages in an unstated amount,
pre-judgment interest, and costs and attorneys' fees incurred in this action.
The action was filed in the Hennepin County, Minnesota District Court. Grow Biz
and the Board of Directors deny the plaintiff's allegations and intend to defend
the action vigorously.
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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 1998.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.
The stock is traded on the NASDAQ National Market System 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:
1998: First Second Third Fourth 1997: First Second Third Fourth
- ----- ------- ------- ------- ------- ------ -------- -------- -------- -------
HIGH 13 1/4 13 7/8 15 1/4 13 3/4 HIGH 12 3/4 11 1/8 17 1/4 16 1/4
LOW 12 13 13 9 1/2 LOW 8 3/4 10 1/2 10 7/16 11 7/8
At March 1, 1999, there were 5,098,355 shares of common stock outstanding held
by approximately 1,189 beneficial shareholders and 244 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. There were no
unregistered sales of the Company's common stock in fiscal year ended 1998.
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.
12
Fiscal Year Ended
---------- ---------- ---------- ---------- ----------
December December December December December
26, 1998 27, 1997 28, 1996 30, 1995 31, 1994
---------- ---------- ---------- ---------- ----------
REVENUE: (1) (2) (3)
Merchandise sales $ 73,306 $ 66,889 $ 71,737 $ 84,043 $ 71,425
Royalties 19,473 17,329 14,965 11,560 7,645
Franchise fees 2,986 3,907 4,162 3,889 3,963
Advertising and other 586 710 686 721 553
-------- -------- -------- -------- --------
Total revenue 96,351 88,835 91,550 100,213 83,586
Cost of merchandise sold 60,325 56,634 63,856 76,192 65,479
Selling, general and administrative expenses 29,105 24,990 23,636 20,980 15,889
Gain on sale of Disc Go Round 5,232 - - - -
-------- -------- -------- -------- --------
Income from operations 12,153 7,211 4,058 3,041 2,218
Litigation settlement - (2,000) - - -
Interest income (expense), net (239) 103 195 296 478
Equity in net loss of unconsolidated affiliates - - - - (416)
-------- -------- -------- -------- --------
Income before income taxes 11,914 5,314 4,253 3,337 2,280
Provision for income taxes 4,670 2,083 1,667 1,308 900
-------- -------- -------- -------- --------
Net income $ 7,244 $ 3,231 $ 2,586 $ 2,029 $ 1,380
======== ======== ======== ======== ========
Net income per common share - diluted $ 1.24 $ .52 $ .40 $ .28 $ .19
======== ======== ======== ======== ========
Weighted average shares outstanding 5,833 6,274 6,516 7,351 7,440
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital $ 1,103 $ 9,141 $ 8,516 $ 11,068 $ 12,441
Total assets 43,141 37,755 29,177 34,024 39,564
Total debt 17,949 6,330 264 415 615
Shareholders' equity 10,165 17,451 17,698 21,192 21,685
SELECTED FINANCIAL RATIOS
Return on average assets 17.9% 9.7% 8.2% 5.5% 3.9%
Return on average equity 52.5% 18.4% 13.3% 9.5% 6.6%
(1) In June 1998, the Company completed the sale of Disc Go Round.
(2) 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.
(3) In July 1994, the Company acquired certain assets and franchising
rights of CDX Audio Development, Inc.
13
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
In December 1998, the Company received from K. Jeffrey Dahlberg, the Chairman of
Grow Biz, and Ronald G. Olson, the President and Chief Executive Officer of Grow
Biz, a non-binding proposal to exchange all of the outstanding Grow Biz shares,
other than shares owned or controlled by Messrs. Dahlberg and Olson, for $14 per
share in cash. The proposal contemplates that a company to be formed by Messrs.
Dahlberg and Olson will be merged into Grow Biz. The proposal reserves the right
to adjust the $14 price per share at any time prior to the execution of a
definitive agreement. The Board of Directors have formed a special committee of
independent directors to review the proposal. The proposal is subject to, among
other things, completion of a definitive merger agreement, completion of
financing acceptable to Messrs. Dahlberg and Olson and approval by the special
committee, by the full Board of Directors and by the shareholders. Although
Messrs. Dahlberg and Olson currently own approximately 67% of the Company's
outstanding stock, there is no certainty that the transaction will be
consummated.
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
December 26, December 27, December 28, Fiscal 1998 Fiscal 1997
1998 1997 1996 over 1997 over 1996
------------ ------------ ------------ ----------- -----------
Revenues
Merchandise sales 76.1% 75.3% 78.4% 9.6% (6.8%)
Royalties 20.2 19.5 16.3 12.4 15.8
Franchise fees 3.1 4.4 4.6 (23.6) (6.1)
Advertising and other 0.6 0.8 0.7 (17.6) 3.5
-------- ------ ------- --------- ------
Total revenues 100.0 100.0 100.0 8.5 (3.0)
Cost of merchandise sold 62.6 63.8 69.7 6.5 (11.3)
Selling, general and administrative
expenses 30.2 28.1 25.9 16.5 5.7
Gain on sale of Disc Go Round 5.4 - - - -
-------- ------ ------- --------- ------
Income from operations 12.6 8.1 4.4 68.5 77.8
Litigation settlement - (2.2) - - -
Interest and other income (expense), net (0.2) 0.1 0.2 (332.5) (47.3)
--------- ------ ------- -------- -------
Income before income taxes 12.4 6.0 4.6 124.2 25.0
Provision for income taxes 4.9 2.4 1.8 124.2 25.0
-------- ------ ------- ------- ------
Net income 7.5% 3.6% 2.8% 124.2% 25.0%
========= ======= ======== ======== =======
REVENUES
Merchandise sales include the sale of product to franchisees through the buying
group and retail sales at the Company-owned stores as follows:
1998 1997 1996
---- ---- ----
Buying Group $ 40,605,300 $ 45,717,100 $ 58,437,100
Retail Sales 32,700,700 21,172,000 13,299,700
------------ ------------ ------------
$ 73,306,000 $ 66,889,100 $ 71,736,800
14
The Play It Again Sports 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 and franchisees electing to purchase more
inventory on a direct basis. The increase in retail sales at Company-owned
stores is a result of the forty Video Game Exchange stores acquired in August
1997 and the addition of eight Company-owned Music Go Round(R) stores in 1998.
It is anticipated that buying group revenues will continue to decline as a
percent of total revenues in the upcoming year while retail sales are expected
to increase as the Company opens an additional fifteen It's About Games(TM)
stores early in 1999.
Revenues from franchising activity were as follows:
1998 1997 1996
---- ---- ----
Royalties $ 19,472,800 $ 17,328,500 $ 14,964,800
Franchise Fees 2,986,400 3,907,200 4,161,600
Royalties are a derivative of system-wide retail sales and have increased by
$2.1 million and $2.4 million in 1998 and 1997, respectively, as a result of
opening additional franchise stores and increases in comparable store sales. The
Company anticipates that royalty revenue will continue to grow as additional
stores are opened.
Key franchise store sales information is included in the table below. Comparable
store sales information compares 1998 sales to 1997 sales and 1997 sales to 1996
sales. It is calculated utilizing all stores that are open for the entire
twenty-four month comparable period. Average store sales is computed utilizing
all stores open for the entire twelve month period.
1998 Comparable 1997 Comparable
Store Sales Store Sales 1998 Average
Increase from 1997 Increase from 1996 Store Sales
------------------ ------------------ -------------
Play It Again Sports(R) 1.7% 1.1% $ 459,800
Once Upon A Child(R) 8.6% 13.4% 368,000
Computer Renaissance(R) 4.9% 4.4% 818,300
Music Go Round(R) 12.9% 11.6% 512,900
Franchise fees are recognized as revenue when substantially all initial
franchise services have been performed. Franchise fees declined $920,800, or
23.6%, from 1997 as a result of opening 125 franchised stores in 1998 compared
to 194 in 1997. The Company expects to recognize marginal increases in
franchising fees in upcoming years as the Company begins opening ReTool(TM) and
Plato's Closet(R) franchise stores.
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:
1998 1997 1996
---- ---- ----
Buying Group 94.5% 95.0% 95.2%
Retail Stores 65.6 62.4 61.7
The 3.2% increase in the 1998 retail store cost 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.
15
SELLING, GENERAL AND ADMINISTRATIVE
The increases in selling, general and administrative expenses over the past two
years have been a result of the costs associated with operating the
Company-owned retail stores. The $4.1 million increase in 1998 expenses includes
costs of operating the forty Video Game Exchange stores acquired in August 1997
for a full year in 1998. The increase also includes start-up costs for the
opening of sixteen Company-owned stores in 1998 as well as costs related to the
fifteen stores scheduled to open in the first quarter of 1999 compared to two
Company-owned store openings in 1997. The increase in the costs incurred in
operating the Company-owned retail stores was slightly offset by a $602,300
decrease in franchising expenses as a result of receiving increased vendor
support in the cost of producing franchise advertisements. 1999 franchising
expenses are expected to be consistent with the 1998 results. Costs incurred in
operating Company-owned retail stores in 1999 will reflect start up fees and
operational expenses for the fifteen additional It's About Games(TM) stores
opening offset by the reduction of nine Company-owned stores sold in December
1998.
SALE OF DISC GO ROUND
In June 1998, the Company completed the sale of the assets and franchising
rights of its Disc Go Round concept to CD Warehouse, Inc. 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 three
Company-owned stores, and an additional 37 franchise agreements 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.
LITIGATION
In connection with an action filed by an early partner in the original Play It
Again Sports store, the Company received a court ruling on a motion filed by the
plaintiff stating that an enforceable agreement existed between the two parties.
Under the order, the Company was required to pay $2.0 million to purchase
certain development rights held by the plaintiff from a 1992 agreement. The
order further directed that all claims between the parties be dismissed. The
Company filed an appeal and in November 1998 dropped the appeal upon reaching
acceptable terms and entered into an agreement to repurchase certain development
rights held by the plaintiff. Among other things, the Company agreed to pay
$400,000 at the time the agreement was signed and $1.6 million over a three year
period.
NET INTEREST
Net interest (expense)/income was ($238,800), $102,700 and $194,700 in 1998,
1997 and 1996, respectively. The increase in net interest expense in 1998 and
1997 was due to the Company having lower cash balances and drawing funds on
notes payable as a result of acquisitions 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 39.2% for
fiscal 1998, 1997 and 1996.
YEAR 2000
The Company has completed an assessment of its internal systems. Older personal
computers will be upgraded to new systems that are Year 2000 compliant by the
third quarter of 1999. Software updates to the Company's systems are in process
and expected to be completed by the second quarter of 1999. An upgraded version
of the Point of Sale system, provided to franchisees, has been completed and is
ready for implementation. The Company has completed an analysis of its vendor
relationships in which the risk of each vendor's non-compliance with Year 2000
was assessed. Letters were sent out in the fourth quarter of 1998 to ascertain
the
16
status of each vendor's Year 2000 compliance. Total costs associated with
the Year 2000 compliance project through December 26, 1998 have been $76,200 and
future costs are expected to be less than $435,300.
The Company does not provide services to it's franchisees in which critical
information is date sensitive, nor does it perform operations with equipment
that may contain embedded chips that are not Year 2000 compliant. The greatest
known risk to an internal system failure is that receivable records would not
age and calculate finance charges properly. Should this occur the Company would
be required to manage credit granted to franchisees and calculate the monthly
finance charge manually.
The Company does not have vendor or customer relationships in which critical
data is exchanged electronically. The Company would suffer if a service provider
such as a telecommunications or utility vendor was not Year 2000 compliant and
their respective service was interrupted or terminated. In such a case the
Company would be required to revert to its completed disaster recovery plan for
the specific issue. If a large number of vendors that provide product to our
franchisees were not compliant and unable to provide our franchisees with their
`new' product, it is likely that the Company would recognize a material
reduction of royalties from the franchisee's lost sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the year with $2.4 million cash and had a current ratio of
1.04 to 1.0.
In 1998, the Company's operating activities provided $3.2 million of cash. Net
income before depreciation and change in deferred income tax provided $9.1
million, offset by the following: (1) $2.1 million reduction in accrued
liabilities resulting from the 1997 accrued litigation charge of $2.0 million
being financed with a long-term note payable when the Repurchase of Certain
Rights Agreement was signed in November 1998, (2) $1.4 million decrease in the
deferred franchise fees resulting from the reduction of the number of stores
awarded but not opened from 240 at December 27, 1997 to 147 at December 26, 1998
and (3) the $1.6 million net increase of inventory over the related accounts
payable.
Investing activities used $934,600 of cash in 1998 resulting from property
additions of $2.0 million related to the expansion of the Company-owned stores
and the $400,200 of goodwill recorded primarily related to the acquisition of
ReTool(TM) offset by the sale of the net assets related to Disc Go Round in June
1998.
Financing activities used $2.9 million of cash in 1998. The Company received
proceeds from notes payable of $13.7 million including $7.8 million and $4.2
million drawn on the revolving line of credit and committed term loan,
respectively, to fund the repurchase of 1,111,915 shares of the Company's common
stock at an average price of $14.86 per share. The Company also financed $1.6
million of the $2.0 million litigation settlement. The $2.2 million payments on
long-term debt related to the installment payments on the notes payable entered
with the purchase of Video Game Exchange, Inc. The Company received $2.0 million
in cash from the options exercised and shares purchased through the Employee
Stock Purchase Plan in 1998.
The Company has $10.0 million committed revolving line of credit which is due
for renewal on July 31, 1999. Borrowings against the line carry an interest rate
of the bank's base rate which was 7.75% at December 26, 1998. The Company also
has a $8.0 million committed term note. Borrowings against the note carry an
interest rate of the bank's base rate plus one-half of one percent which was
8.25% at December 26, 1998. Borrowings can be made in installments up through
March 31, 1999 at which date the total amount outstanding shall be paid off in
monthly installments beginning May 1, 1999 through March 4, 2004.
17
The Company believes that its current cash position, cash generated from future
operations, availability of line of credit borrowings and additional capacity
for debt will be adequate to meet the Company's current obligations and
operating needs.
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; and (6) 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 assumption 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 equal 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 26, 1998, the
Company had borrowed approximately $15.3 million subject to interest rate risk.
On this amount, a 1% increase in the interest rate would cost the Company
$153,000 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 19
Consolidated Statements of Operations Page 20
Consolidated Statements of Shareholders' Equity Page 21
Consolidated Statements of Cash Flows Page 22
Consolidated Notes to Financial Statement Page 23
Report of Independent Public Accountants Page 32
18
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
--------------------------------------
December 26, 1998 December 27, 1997
--------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,418,000 $ 3,088,000
Receivables, less allowance for doubtful accounts of $1,053,000
and $1,190,000 (Note 3) 13,893,700 12,880,700
Inventories 10,124,400 5,728,600
Prepaid expenses and other 2,459,300 1,987,300
Deferred income taxes (Note 7) 1,699,100 1,491,600
------------ ------------
Total current assets 30,594,500 25,176,200
LONG-TERM RECEIVABLES (Note 3) 1,208,600 184,000
PROPERTY AND EQUIPMENT:
Furniture and equipment 7,131,000 6,339,200
Building and building improvements 3,765,300 3,375,100
Less - accumulated depreciation and amortization (4,935,800) (4,096,400)
------------ ------------
Property and equipment, net 5,960,500 5,617,900
OTHER ASSETS:
Noncompete agreements and other, net of accumulated
amortization of $2,388,800 and $3,258,300 554,500 1,507,000
Goodwill, net of accumulated amortization of $339,600 and
$230,200 4,822,800 5,269,500
------------ ------------
Total other assets 5,377,300 6,776,500
------------ ------------
$ 43,140,900 $ 37,754,600
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 11,306,600 6,604,800
Accrued liabilities 1,818,700 3,781,500
Current maturities of long-term debt (Note 6) 14,464,300 2,061,400
Deferred franchise fee revenue 1,901,800 3,588,000
------------ ------------
Total current liabilities 29,491,400 16,035,700
COMMITMENTS AND CONTINGENCIES (Note 8) -- --
LONG-TERM DEBT (Note 6) 3,484,600 4,268,200
SHAREHOLDER'S EQUITY (Note 5):
Common stock, no par, 10,000,000 shares authorized,
5,079,055 and 6,002,214 shares issued and outstanding -- 7,474,900
Retained earnings 10,164,900 9,975,800
------------ ------------
Total shareholders' equity 10,164,900 17,450,700
------------ ------------
$ 43,140,900 $ 37,754,600
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
19
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
----------------------------------------------------
Fiscal Year Ended
-----------------
December 26, December 27, December 28,
1998 1997 1996
----------------------------------------------------
REVENUE
Merchandise sales $ 73,306,000 $ 66,889,100 $ 71,736,800
Royalties 19,472,800 17,328,500 14,964,800
Franchise fees 2,986,400 3,907,200 4,161,600
Advertising and other 585,700 710,500 686,400
------------ ------------ ------------
Total revenue 96,350,900 88,835,300 91,549,600
COST OF MERCHANDISE SOLD 60,324,600 56,633,700 63,855,600
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 29,105,000 24,989,900 23,636,200
GAIN ON SALE OF DISC GO ROUND 5,231,500 -- --
------------ ------------ ------------
Income from operations 12,152,800 7,211,700 4,057,800
LITIGATION SETTLEMENT (Note 6) -- (2,000,000) --
INTEREST EXPENSE (710,500) (256,700) (56,900)
INTEREST INCOME 471,700 359,400 251,600
------------ ------------ ------------
Income before income taxes 11,914,000 5,314,400 4,252,500
PROVISION FOR INCOME TAXES (Note 7) 4,670,200 2,083,200 1,667,000
------------ ------------ ------------
NET INCOME $ 7,243,800 $ 3,231,200 $ 2,585,500
============ ============ ============
BASIC EARNINGS PER SHARE $ 1.28 $ .53 $ .40
============ ============ ============
BASIC WEIGHTED AVERAGE SHARES
OUTSTANDING 5,664,000 6,116,200 6,428,500
============ ============ ============
DILUTED EARNINGS PER SHARE $ 1.24 $ .52 $ .40
============ ============ ============
DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING 5,832,700 6,273,500 6,516,000
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
20
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Fiscal years ended December 26, 1998, December 27, 1997 and December 28, 1996
------------------------------------------------------------------------
Common Stock
------------ Retained
Shares Amount Earnings Total
------------------------------------------------------------------------
BALANCE, December 30, 1995 6,958,468 $ 17,033,000 $ 4,159,100 $ 21,192,100
Repurchase of common stock (Note 5) (740,194) (6,266,100) -- (6,266,100)
Stock options exercised and related tax benefits 45,170 186,000 -- 186,000
Net income -- -- 2,585,500 2,585,500
------------ ------------ ------------ ------------
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
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
21
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
------------------------------------------------
Fiscal Year Ended
-----------------
December 26, December 27, December 28,
1998 1997 1996
------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 7,243,800 $ 3,231,200 $ 2,585,500
Adjustments to reconcile net income to net cash provided by operating
activities -
Depreciation and amortization 2,074,500 1,878,100 1,785,000
Gain on sale of retail stores (39,800) -- --
Deferred income tax (207,500) 234,800 (274,900)
Change in operating assets and liabilities:
Receivables (278,100) 446,500 2,861,000
Inventories (6,298,300) (1,461,900) 1,576,000
Prepaid expenses and other (476,000) (998,500) 122,800
Accounts payable 4,701,800 934,500 (1,408,200)
Accrued liabilities (2,143,300) 2,505,700 80,200
Deferred franchise fee revenue (1,402,200) (681,000) 126,000
------------ ------------ ------------
Net cash provided by operating activities 3,174,900 6,089,400 7,453,400
------------ ------------ ------------
INVESTING ACTIVITIES:
Redemption of short-term investments -- -- 420,000
Purchases of property and equipment, net (2,302,900) (366,900) (297,000)
Increase in other assets (400,200) (31,300) (57,700)
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 (934,600) (6,977,900) 65,300
------------ ------------ ------------
FINANCING ACTIVITIES:
Notes payable 13,772,100 6,767,000 --
Payments on long-term debt, net (2,152,900) (701,200) (151,300)
Repurchase of common stock (Note 5) (16,528,000) (4,217,300) (6,266,100)
Proceeds from stock option and warrants exercises 1,998,500 739,200 186,000
------------ ------------ ------------
Net cash provided by (used for) financing activities (2,910,300) 2,587,700 (6,231,400)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH (670,000) 1,699,200 1,287,300
CASH AND CASH EQUIVALENTS, beginning of period 3,088,000 1,388,800 101,500
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,418,000 $ 3,088,000 $ 1,388,800
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 682,200 $ 196,600 $ 50,200
============ ============ ============
Cash paid for income taxes $ 4,746,400 $ 2,744,300 $ 1,831,500
============ ============ ============
NON CASH ACTIVITIES:
Note receivable received in exchange for sale of inventory and
property and equipment $ 1,974,500 $ -- $ --
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
22
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Notes to the Financial Statements
December 26, 1998 and December 27, 1997
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", "It's About Games", "ReTool" and
"Plato's Closet". 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 1998 revenue by retail
store concept were as follows:
Play It Again Sports(R) $54,347,400
Once Upon A Child(R) 5,305,700
Computer Renaissance(R) 12,279,700
Music Go Round(R) 5,503,400
Disc Go Round(R) 1,426,700
It's About Games(TM) 17,376,700
ReTool(TM) 111,300
Plato's Closet(R)
---------------------
$96,350,900
=====================
The Company has all significant assets located within the United States and
generates all revenues from United States operations other than 1998 franchising
revenues from Canadian operations of $1.5 million. The Company had no major
customers in 1998.
23
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 1998 and 1997. 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.
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.
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
$1,901,800 and $3,588,000 at December 26, 1998 and December 27, 1997,
respectively.
24
NET INCOME PER COMMON SHARE
The Company calculates net income per share in accordance with FASB Statement
No. 128 by dividing net income by the weighted average number of shares of
common stock outstanding to arrive at the Net Income Per Common Share Basic. The
Company calculates Net Income Per Share - Dilutive by dividing net income by the
weighted average number of shares of common stock and dilutive stock equivalents
from the exercise of stock options and warrants using the treasury stock method.
A reconciliation of basic weighted average number of shares outstanding to
dilutive average number of shares outstanding is as follows:
December 26, 1998 December 27, 1997 December 28, 1996
----------------- ----------------- -----------------
Weighted average shares outstanding - Basic 5,664,000 6,116,200 6,428,500
Dilutive effect of stock options after application of
the treasury stock method 168,700 157,300 87,500
---------- --------- ---------
Weighted average shares outstanding - Dilutive 5,832,700 6,273,500 6,516,000
========= ========= =========
3. RECEIVABLES:
The Company's current receivables consisted of the following:
December 26, 1998 December 27, 1997
----------------- -----------------
Trade (Net) $ 10,620,900 $ 11,065,200
Royalty 2,041,300 1,718,500
Other 2,440,100 281,000
--------- ----------
15,102,300 13,064,700
Less: Long-term Notes (1,208,600) (184,000)
----------- ------------
Current Receivables $ 13,893,700 $ 12,880,700
============ ============
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.
4. ACQUISITIONS:
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
and will be amortized over a twenty-five year period.
The following are the unaudited pro forma results of operations for 1997 and
1996, as if the above acquisition had occurred on December 30, 1995:
December 27, 1997 December 28, 1996
----------------- -----------------
Revenue $ 97,230,400 $ 105,756,600
Net income 3,498,000 2,962,500
Net income per common share (basic) $ .57 $ .46
Net income per common share (diluted) $ .56 $ .45
25
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.
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 26, 1998, the Company had repurchased 2,560,828 shares of
its stock at an average price of $11.70 per share including 1,111,915 shares
repurchased at an average price of $14.86 per share in the year ended December
26, 1998.
STOCK OPTION PLAN
The Company has authorized up to 1,100,000 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 26, 1998 are
as follows:
Weighted Average
Number of Shares Exercise Price
---------------- --------------
Outstanding at December 30, 1995 588,575 $ 8.35
Granted 357,000 7.95
Exercised (38,750) 2.75
Forfeited (190,700) 9.86
--------- ---------
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
======= ========
26
Options available for future years as of December 26, 1998 are exercisable as
follows:
Options Outstanding Options Exercisable
-------------------------------------------------------------- -----------------------------------------
Weighted Average
Remaining Weighted Average
Range of Contractual Life Weighted Average Exercisable
Exercise Price Number Outstanding (Years) Exercise Price Number Exercisable Price
----------------- ------------------- ---------------- ----------------- ------------------- ----------------
$ 2.00 - $2.00 35,000 1.08 $ 2.00 28,000 $ 2.00
7.25 - 8.07 141,437 1.46 7.68 99,312 7.54
10.00 - 12.25 353,500 2.72 10.75 129,316 10.39
14.50 - 14.50 20,000 .17 14.50 20,000 14.50
------- -------
549,937 276,628
======= =======
A majority shareholder has exercisable options to purchase 15,000 shares of the
Company's common stock with an exercise price of 110% of the fair market value
on the date of the grant. All remaining unexercised options at December 26, 1998
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 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. During 1998, the Company issued 8,631
shares under the plan at a price of $8.93. As of December 26, 1998,
contributions have been received for the issuance of 7,024 shares under phase
five.
NONPLAN OPTIONS
The Company sponsors a Stock Option Plan for Nonemployee Directors (the
"Nonemployee Directors Plan") and reserved a total of 100,000 common 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 options to purchase the Company's common stock at $10.00 per
share to four non-employee directors. There were 95,000 shares outstanding and
exercisable at December 26, 1998.
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 and net income per common share would have changed to the following
proforma amounts:
1998 1997 1996
---- ---- ----
Net Income: As Reported $7,243,800 $3,231,200 $2,585,500
Pro Forma 6,988,400 2,985,400 2,297,500
Net Income Per Common
Share (Diluted): As Reported $ 1.24 $ .52 $ .40
Pro Forma $ 1.20 $ .48 $ .35
27
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 5.549% in 1998, 5.77% to 6.83% in 1997
and 6.01% to 6.81% in 1996, expected life of five years for 1998, five years for
1997 and two to five years for 1996; expected volatility of 30.69% in 1998,
20.11% to 36.85% in 1997 and 39.78% to 44.59% in 1996.
6. REVOLVING CREDIT AND LONG-TERM DEBT:
The Company's revolving credit and long-term debt consists of the following:
December 26, 1998 December 27, 1997
----------------- -----------------
Revolving Credit $ 11,955,900 $ -
Bank Term Debt 3,375,000 4,275,000
Notes Payable 2,353,800 1,666,700
Other 264,200 387,900
----------- -----------
Total 17,948,900 6,329,600
Less: Current Portion (14,464,300) (2,061,400)
------------ -----------
$ 3,484,600 $ 4,268,200
============ ============
The Company has a $10.0 million committed revolving line of credit which is due
for renewal on July 31, 1999. Borrowings against the line carry an interest rate
of the bank's base rate which was 7.75% at December 26, 1998. At December 26,
1998 the Company had borrowings of $7.8 million against the line. In addition to
the line of credit, the Company has a $8.0 million committed term note.
Borrowings against the note carry an interest rate of the bank's base rate plus
one-half of one percent which was 8.25% at December 26, 1998. Borrowings can be
made and repaid through March 31, 1999 on a revolving basis at which date the
total amount outstanding shall be converted to term debt and paid off in monthly
installments beginning May 1, 1999 through March 4, 2004. At December 26, 1998,
the Company had borrowings of $4.2 million against the note. Concurrent with the
signing of an amended credit agreement, all lending facilities with the bank
became secured by a security interest in all tangible and intangible assets of
the Company.
The bank term note bears interest at the bank's base rate plus one-half of one
percent which was 8.25% at December 26, 1998. It is due in monthly principal and
interest installments through September 2002. The note contains various
restrictive convenants which, among other matters, require the Company to
maintain certain financial ratios. The Company was in compliance with all these
covenants as of December 26, 1998.
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% on the remaining $1.6 million plus accrued interest of
$87,100.
The Company has a note with a principal balance outstanding at December 26, 1998
of $666,700 in connection with the 1997 acquisition of Video Game Exchange, Inc.
Monthly principal and interest installments are due at prime plus one-half of
one percent, which was 8.25% at December 26, 1998, through September 1999.
28
Future maturities of long-term debt as of December 26, 1998 are as follows:
1999 $ 14,464,300
2000 1,345,000
2001 1,381,800
2002 693,400
2003 19,800
Thereafter 44,600
------------
$ 17,948,900
============
7. INCOME TAXES:
Components of the provision for income taxes are as follows:
December 26, 1998 December 27, 1997 December 28, 1996
----------------- ----------------- -----------------
Currently payable:
Federal $ 4,052,700 $ 1,423,400 $ 1,701,300
State 825,000 425,000 240,600
----------- ----------- -----------
Subtotal 4,877,700 1,848,400 1,941,900
Deferred income tax
(benefit)/expense (207,500) 234,800 (274,900)
------------ ----------- -----------
Total tax provision $ 4,670,200 $ 2,083,200 $ 1,667,000
=========== =========== ===========
The effective tax rate differs from the federal statutory rate due primarily to
the following:
December 26, 1998 December 27, 1997 December 28, 1996
----------------- ----------------- -----------------
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 4.6 5.3 3.7
Nondeductible meals and entertainment 0.3 0.7 0.8
Tax exempt interest income - - -
Other, net 0.3 (0.8) 0.7
-------- -------- --------
39.2% 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 are as follows:
December 26, 1998 December 27, 1997
----------------- -----------------
Deferred settlement expense $ 627,200 $ -
Deferred franchise fees 431,400 614,600
Accounts receivable reserves 412,800 466,500
Other 227,700 410,500
----------- -----------
Net deferred tax asset $ 1,699,100 $ 1,491,600
=========== ===========
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
29
five-year service vesting schedule. Company contributions to the plan for 1998,
1997 and 1996 were $279,500, $253,500 and $267,000, 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 $2,531,600 in
1998, $1,468,100 in 1997 and $1,033,000 in 1996. As of December 26, 1998,
minimum rental commitments under noncancelable operating leases are: $2,034,700
in 1999, $1,735,800 in 2000, $1,566,600 in 2001, $1,472,500 in 2002 and
$1,110,500 in 2003 and $855,800 thereafter.
The Company rents 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 1998, 1997 and 1996.
LITIGATION
In 1998, a shareholder of Grow Biz, commenced a shareholder class action against
Grow Biz and the members of its Board of Directors, arising out of the
non-binding proposal by Jeff Dahlberg and Ron Olson, officers, directors and
majority shareholders of Grow Biz, to exchange, through a newly formed entity,
all of the shares of Grow Biz that they do not already own, for $14 per share in
cash. The plaintiff alleges, among other things, that the proposed price for the
shares is substantially below the fair value of those shares, that the
defendants failed to maximize stockholder value through an adequate auction or
market check process, and that the defendants have breached their fiduciary
duties and otherwise unfairly dealt with the plaintiff and the other minority
shareholders. The plaintiff seeks, among other things: (1) injunctive relief to
enjoin any proposed transaction; (2) creation of a committee of shareholders to
help protect the interests of the minority shareholders in any proposed
transaction; and (3) damages in an unstated amount, pre-judgment interest, and
costs and attorneys' fees incurred in this action. Grow Biz and the Board of
Directors deny the plaintiff's allegations and intend to defend the action
vigorously.
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 owner of Tool Traders, Inc. The
agreement requires the Company to pay the following percentages of receipts from
franchising ReTool 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%.
9. RELATED PARTY TRANSACTION:
In December 1998, the Company sold certain assets of nine Company-owned retail
stores to the former President of Music Go Round, for $2.0 million. In
connection with the sale, the Company received a short-term note of $700,000,
paid in January 1999, and 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 a $274,500 note payable in eighteen equal
monthly principal installments beginning February 15, 1999. Franchise agreements
were signed for each of the stores in which the buyer will be required to pay
royalties and advertising expenses consistent with other franchisees.
30
10. QUARTERLY FINANCIAL DATA:
The Company's unaudited quarterly results for the years ended December 26, 1998
and December 27, 1997 are as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
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
1997
Total Revenue $ 19,109,400 $ 20,679,000 $ 22,078,500 $ 26,968,400
Income from Operations 826,300 1,589,700 2,056,400 2,739,300
Net Income 545,200 994,000 1,269,000 423,000
Net Income Per Common Share - Basic $ .09 $ .16 $ .21 $ .07
Net Income Per Common Share - Diluted $ .09 $ .16 $ .20 $ .07
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 26,
1998 and December 27, 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 26, 1998. 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 generally accepted auditing
standards. 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 26, 1998 and December 27,
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 26, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 1, 1999
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 45 Chairman of the Board
Ronald G. Olson 58 President, Chief Executive Officer and Director
Ted R. Manley 49 Executive Vice President of Operations
David J. Osdoba, Jr. 43 Vice President of Finance and Chief
Financial Officer
Gaylen L. Knack 39 Vice President and General Counsel
Charles V. Kanan 47 President / Play It Again Sports(R)
Michael E. Flynn 50 President / Computer Renaissance(R)
Bradley D. Tait 49 President / It's About Games(TM)
Randel S. Carlock 50 Director
Dennis J. Doyle 46 Director
Bruce C. Sanborn 46 Director
Robert C. Pohlad 44 Director
-------------------------------------------------------
K. JEFFREY DAHLBERG has served as Chairman of the Board of Directors of the
Company 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 President, Chief Executive Officer and a Director
of the Company since January 1990. Mr. Olson has been President and Chief
Executive Officer of Franchise Business Systems, Inc. since July 1988.
TED R. MANLEY has served as Executive Vice President of Operations since
September 1997. He served as President of Once Upon A Child(R) from December
1996 and General Manager from July 1994 to May 1998. 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 1987 to December 1990.
33
GAYLEN L. KNACK has served as Vice President and General Counsel of the Company
since August 1996. From April 1991 through July 1996, Mr. Knack was a Principal
in the Minneapolis law firm of Gray, Plant, Mooty, Mooty and Bennett, P.A.
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.
MICHAEL E. FLYNN has served as President of Computer Renaissance(R) since
December 1996 and General Manager since March 1995. Mr. Flynn was a divisional
merchandise manager of electronics and luggage for the department store division
of Dayton Hudson Corporation from August 1986 to March 1995.
BRADLEY D. TAIT has served as President of It's About Games(TM) since August
1997. He also served as President of Disc Go Round(R) since December 1996 and
General Manager since March 1996 until the sale of Disc Go Round in June 1996.
From February 1995 through February 1996, Mr. Tait was divisional Vice President
of Merchandising for the mall store division of the Musicland Stores Corporation
and Vice President of stores operations from January 1993 through January 1995.
RANDEL S. CARLOCK has served as a Director of the Company since September 1993.
He currently serves as a 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, 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. Since
1990 he has served as Chairman of the Board for the North Central Life Insurance
Company and Financial Life Companies, Inc.
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 26, 1998, all
34
Form 3, Form 4 and Form 5 filing requirements were met, except a Form 4 was
filed late for K. Jeffrey Dahlberg for the month of January 1998.
ITEM 11: EXECUTIVE COMPENSATION.
The following table sets forth certain information regarding compensation earned
or awarded during each of the last three fiscal years to the Company's Chief
Executive Officer and the other four most highly compensated executive officers
serving as executive officers at the end of fiscal 1998 (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ($)
--------------------------------------------------
LONG-TERM
COMPENSATION
FISCAL OTHER ANNUAL OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS (#) COMPENSATION
--------------------------- ---- ------ ----- ------------ ---------- ------------
K. Jeffrey Dahlberg 1998 200,000 - - - 43,044(1)
Chairman of the Board 1997 240,000 - - - 46,283
1996 220,000 - - - 44,392
Ronald G. Olson 1998 300,000 - - - 42,333(1)
Chief Executive Officer and 1997 260,000 - - - 45,181
President 1996 220,000 - - - 43,505
Ted R. Manley 1998 147,000 - - - 6,993(2)
Executive Vice President of 1997 126,000 90,750 - 10,000 5,610
Operations 1996 115,000 - - 20,000 4,509
Charles V. Kanan 1998 137,500 43,313 - - 7,234(2)
President Play It Again Sports 1997 137,500 - - 5,000 6,239
Division 1996 129,000 - - 20,000 4,904
Brad D. Tait 1998 122,000 10,065 - - 6,151(2)
President It's About Games 1997 116,000 87,000 - 10,000 3,391
Division 1996 80,000 - - 30,000 -
- ----------------------------
(1) Includes premiums paid in 1998 by the Company for term life insurance
coverage and the present value of the benefit to the executive of the
remainder of the premiums for split dollar life insurance coverage paid by
the Company on behalf of the named executive as follows: Mr. Dahlberg -
$33,702 and Mr. Olson - $32,594. Also includes 401(k) Company matching
contributions and profit sharing as follows: Mr. Dahlberg - $9,342 and Mr.
Olson - $9,739.
(2) Consists of 401(k) Company matching contributions and profit sharing.
OPTIONS GRANTED DURING FISCAL 1998
No options were granted to the Company's executive officers in 1998.
AGGREGATED OPTION EXERCISES DURING FISCAL 1998 AND FISCAL YEAR-END OPTION VALUES
The following table provides information relating to options exercised by the
Named Executive Officers during fiscal 1998 and the number and value of options
held at fiscal year-end. The Company does not have any outstanding stock
appreciation rights.
35
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE REALIZED YEAR-END (#) FISCAL YEAR-END ($)(1)
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------ --- ------------------------- -------------------------
K. Jeffrey Dahlberg 0 0 0 / 0 0 / 0
Ronald G. Olson 50,000 206,250 15,000 / 0 29,250 / 0
Ted R. Manley 0 0 37,500 / 22,500 124,375 / 80,625
Charles V. Kanan 7,500 33,750 33,750 / 18,750 57,031 / 71,094
Brad D. Tait 0 0 5,000 / 35,000 27,175 / 139,025
- ----------------------------
(1) Options are "in-the-money" if the fair market value of the underlying
shares at fiscal year end is greater than the exercise price. The amounts
set forth represent the difference between the fair market value of the
common shares on December 26, 1998 and the option exercise price multiplied
by the number of shares subject to the option.
DIRECTOR COMPENSATION
Each nonemployee director of the Company receives $500 for each board and
committee meeting attended. Effective August 23, 1993, Dennis J. Doyle and Bruce
C. Sanborn, the only nonemployee directors at the time, were each granted an
option to purchase 25,000 common shares at an exercise price of $10.00 per
share. Effective September 24, 1993, the Board of Directors adopted the Stock
Option Plan for Nonemployee Directors ("Directors Plan") which provides for an
automatic grant of an option to purchase 25,000 common shares upon the initial
election as a director. Pursuant to this Plan, Randel S. Carlock and Robert C.
Pohlad were each granted an option to purchase 25,000 common shares at an
exercise price of $15.00 per share. Effective November 21, 1995, the options
granted to Messrs. Carlock and Pohlad were canceled and replacement options to
purchase 25,000 common shares each at $10.00 per share, which was above the
market price on the effective date, were granted separate from the Directors
Plan. All options granted to nonemployee directors become exercisable in
increments through 1998, provided that the nonemployee director is still serving
as a director, and expire in 1999.
COMPENSATION COMMITTEE INTERLOCKS
The Compensation Committee of the Board of Directors consists of two nonemployee
directors, Dennis J. Doyle and Bruce C. Sanborn. Mr. Sanborn is the Chief
Executive Officer of North Central Life Insurance Company and
K. Jeffrey Dahlberg, the Company's Chairman, serves on the Board of North
Central Life Insurance Company.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number of shares of Common Stock beneficially
owned by (i) each person known by the Company to own 5% or more of the
outstanding shares of Common Stock, (ii) each Named Executive Officer, (iii)
each director of the Company and (iv) all directors and executive officers as a
group. All persons named in the table have sole voting and investment power with
respect to all shares of Common Stock owned, unless otherwise noted. The number
of shares listed is as of January 31, 1999 unless otherwise noted.
36
NUMBER OF SHARES PERCENT OF
BENEFICIALLY OWNED OUTSTANDING SHARES
------------------ -------------------
K. Jeffrey Dahlberg 2,079,225(1) 40.8%
4200 Dahlberg Drive
Golden Valley, MN 55422
Ronald G. Olson 1,362,068(2) 26.7%
4200 Dahlberg Drive
Golden Valley, MN 55422
Sheldon T. Fleck 288,500 5.7%
1400 International Centre
900 Second Avenue South
Minneapolis, MN 55402
Ted R. Manley 43,317(3) 0.8%
Charles V. Kanan 40,737(3) 0.8%
Brad D. Tait 22,500(3) 0.4%
Dennis J. Doyle 40,000(3) 0.8%
Bruce C. Sanborn 35,100(3)(4) 0.7%
Randel S. Carlock 25,000(3) 0.5%
Robert C. Pohlad 25,000(3) 0.5%
All directors and executive
officer as a group (12 persons) 3,745,913(3) 69.7%
- ---------------------------
(1) Includes 279,250 shares held in trust for minor children.
(2) Includes 17,900 shares held by Mr. Olson's adult children and 111,600
shares held in trust for these children and 1,500 shares held by Mr.
Olson's wife. Mr. Olson disclaims beneficial ownership of these shares.
(3) Includes the following shares which may be acquired within 60 days through
the exercise of stock options: Mr. Manley - 42,500; Mr. Kanan - 38,750; Mr.
Tait - 22,500; Mr. Doyle - 25,000; Mr. Sanborn - 20,000; Mr. Carlock -
25,000; Mr. Pohlad - 25,000 and all directors an executive officers as a
group - 283,500.
(4) Includes 100 shares held by Mr. Sanborn's son. Mr. Sanborn disclaims
beneficial ownership of these shares.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1998, two Play It Again Sports franchises, a Once Upon A Child franchise
and a Computer Renaissance franchise, owned by relatives of K. Jeffrey Dahlberg,
paid $65,932 in royalties to the Company and purchased $197,914 of merchandise
through the Company's buying group.
In December 1998, the Company sold certain assets of nine Company-owned retail
stores to the former President of Music Go Round, for $2.0 million. In
connection with the sale, the Company received a short-term note of $700,000
paid in January 1999, 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 a $274,500 note payable in eighteen equal
monthly principal installments beginning February 15, 1999. Franchise agreements
were signed for each of the stores in which the buyer will be required to pay
royalties and advertising expenses consistent with other franchisees.
37
The Company leases from PIAS Holdings, a general partnership owned by K. Jeffrey
Dahlberg and Ronald G. Olson, certain real property which houses a Company-owned
retail store located at 3505 Hennepin Avenue, Minneapolis, Minnesota. Pursuant
to this lease, the Company is obligated to make lease payments of $5,500 per
month through September 2000. During fiscal 1998, the Company made payments of
$66,000 under this lease.
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 18.
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)
4.1 Form of Stock Purchase Warrant to Hayne, Miller & Farni, Inc.(1992)
(Exhibit 4.2) (1)
4.2 Revised form of Stock Purchase Warrant to Hayne, Miller & Farni,
Inc. (1992) (Exhibit 4.3) (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 It's About Games(TM)
(Exhibit 10.6) (6)
10.6 Form of franchise agreement for ReTool(TM)(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 Asset Purchase Agreement dated July 1, 1994 for purchase of assets
of CDX Audio Development, Inc. (Exhibit 10.13) (3)
10.13 1992 Stock Option Plan, including forms of stock option agreement
(Exhibit 10.12) (1) (3) (7)
10.14 Amendment No. 1 to the 1992 Stock Option Plan (Exhibit 10.15) (2)
10.15 Amendment No. 2 to the 1992 Stock Option Plan (Exhibit 10.16) (2)
38
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.16 Amendment No. 3 to the 1992 Stock Option Plan (Exhibit 10.16) (6)
10.17 Nonemployee Director Stock Option Plan, as amended, including
form of stock option agreement (Exhibit 10.16) (2) (7)
10.18 Employee Stock Purchase Plan of 1994 (Exhibit 10.17) (2) (3)
10.19 Real Estate Purchase Agreement for Purchase of the Company's
headquarters (Exhibit 10.18) (2)
10.20 Consulting and Noncompetition Agreement dated November 6, 1992
with Lynn and Dennis Blum (Exhibit 10.19) (3)
10.21 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)
10.22 Asset Purchase Agreement between Grow Biz Games, Inc. and Video
Game Exchange, Inc., dated August 15, 1997 (Exhibit 10.1) (4)
10.23 Term Note, TCF, dated August 8, 1997 (Exhibit 10.3) (4)
10.24 Non-Negotiable Promissory Note, Video Game Exchange, Inc.,
dated August 15, 1997 (Exhibit 10.4) (4)
10.25 Asset Purchase Agreement related to the disposition of Disc Go
Round to CD Warehouse, Inc., dated June 16, 1998(Exhibit 10.1) (5)
10.26 Amended and Restated Credit Agreement, dated October 14, 1998.
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.
(b.) Reports on Form 8-K: On December 14, 1998, the Company filed an 8-K related
to the proposed merger and share exchange and related class action.
39
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/ RONALD G. OLSON Date: March 12, 1999
-------------------
Ronald G. Olson
President 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 of Directors March 12, 1999
- --------------------------
K. Jeffrey Dahlberg
/s/ RONALD G. OLSON President, Chief Executive March 12, 1999
- -------------------------- Officer and Director
Ronald G. Olson (principal executive officer)
/s/ DAVID J. OSDOBA, JR. Vice President of Finance and March 12, 1999
- -------------------------- Chief Financial Officer
David J. Osdoba, Jr. (principal financial and accounting officer)
/s/ GAYLEN L. KNACK Vice President and General Counsel March 12, 1999
- --------------------------
Gaylen L. Knack
/s/ RANDEL S. CARLOCK Director March 12, 1999
- --------------------------
Randel S. Carlock
/s/ DENNIS J. DOYLE Director March 12, 1999
- --------------------------
Dennis J. Doyle
/s/ ROBERT C. POHLAD Director March 12, 1999
- --------------------------
Robert C. Pohlad
/s/ BRUCE C. SANBORN Director March 12, 1999
- --------------------------
Bruce C. Sanborn
40