ITEM 1: BUSINESS
GENERAL
Grow Biz International, Inc., (the Company) is a franchise company that franchises six retail concepts which buy, sell, trade and consign merchandise. Each concept operates in a different industry and provides the consumer with 'ultra-high value' retailing. The Company began franchising the Play It Again Sports store concept in 1988 and, through a series of acquisitions, has expanded its operations.
* In January 1992, the Company purchased certain assets and the operations of Sports Traders, Inc., a wholesaler to Play It Again Sports retail stores, for aggregate consideration of $1.9 million. Prior to this acquisition, Sports Traders, Inc. operated as an independent wholesaler and priced its merchandise at margins reflective of an independent wholesaler. Subsequent to this acquisition, the Company restructured the operations into a centralized buying group with the goal of creating a cost-effective inventory purchasing service to support the Company's franchise system. The buying group negotiates favorable discount terms with vendors and charges the franchisee a service fee, currently set at 4%. The service fee on merchandise purchased through the buying group is used to cover the cost of operating the buying group.
* In November 1992, the Company purchased from Once Upon A Child, Inc. its franchising and royalty rights for an aggregate purchase price of $325,000. There were 22 retail stores in operation at the time of purchase, 11 of which have been exempted from paying royalty fees as part of the purchase agreement. The Company began franchising this concept in 1993.
* In February 1993, the Company purchased certain assets of the retail operations of Hi Tech Consignments, which formed the basis of the Company's Music Go Round(R) store concept, for an aggregate purchase price of $500,000. The Company began franchising this concept in 1994.
* In April 1993, the Company purchased the retail and warehouse operations and the franchising and royalty rights of Computer Renaissance, Inc. for an aggregate purchase price of $672,000. The Company began franchising this concept in 1993.
* In July 1994, the Company acquired certain assets and the franchising and royalty rights of CDX Audio Development, Inc., which formed the basis for the Company's Disc Go Round(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.
* 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.
Each of the Company's retail store concepts emphasize consumer value by offering quality used merchandise at substantial savings from the price of new merchandise and by purchasing customers' used goods that have been outgrown or are no longer used. The stores also offer new merchandise to supplement their selection of used goods.
The Company's six store concepts with their 1997 system-wide sales, defined as revenues from all affiliated stores, are summarized as follows:
PLAY IT AGAIN SPORTS(R) - $284 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) - $61 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) - $115 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) - $16 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 and professional and amateur musicians.
DISC GO ROUND(R) - $27 million
Disc Go Round(R) stores sell and buy both used and new compact discs and related accessories. The concept primarily targets consumers who actively trade and collect compact discs. Most stores carry a variety of titles that appeal to all ages and musical tastes.
IT'S ABOUT GAMES(TM) - $8 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.
Following is a summary of the Company's franchising and corporate store activity for the fiscal year ended December 27, 1997:
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. Virtually all types of retail businesses are currently franchised, including clothing, computers and electronics, sporting goods and various specialty retail businesses.
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:
VALUE-ORIENTED MERCHANDISING
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.
FRANCHISE SUPPORT
The Company recognizes that its success depends on the economic success of its franchisees. Accordingly, the Company provides a comprehensive package of support services and assistance to franchisees, including advertising and marketing programs, point-of-sale computerized information systems, management training, store opening assistance and periodic field support visits. A central element of this support system is television advertising designed to build consumer awareness of the Company's used product concepts.
ACTIVE OWNER INVOLVEMENT
In the Company's experience, its retail concepts are most successful when the owner of the franchise is integrally involved in the management of a store. As a result, the Company generally grants franchises to someone who will directly operate their store.
FRANCHISE OPERATIONS
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. Subsequent training sessions are centered on store operations. They cover, among other things, point-of-sale computer training, inventory selection and acquisition, sales, marketing and other topics selected by the Company. The franchisee is provided with an operations manual that is updated periodically by the Company.
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) and Disc Go Round(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 five concept's franchisees a source of affordable new product, the Company has developed relationships with its core vendors and negotiated prices for our franchisees to take advantage of on a direct basis.
RETAIL ADVERTISING AND MARKETING
The Company requires 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 required to spend the following 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%, Disc Go Round(R) - 5% and It's About Games(TM) - 4%. In addition to these required advertising expenditures, all franchisees are required to pay the Company an annual advertising production fee of $500. Franchisees are required to participate in regional cooperative advertising groups as designated by the Company.
Beginning in 1998, Computer Renaissance(R) franchisees are required to pay the Company 1/2% of their gross sales to fund a National Advertising Campaign in lieu of the $500 annual advertising production fee.
COMPUTERIZED POINT-OF-SALE SYSTEMS
The Company requires franchisees to use a retail information management computer system in each store. Stores which were opened prior to April 1992 were not required to install the system. This computerized point-of-sale system is designed specifically for use in the retail stores franchised by the Company. This system includes a cash register, bar code printer and scanner, together with software modules for inventory management, cash management and customer information management. The system is designed to accommodate buying and consigning of used merchandise. The Company believes that this system provides franchisees with an important management tool that reduces errors, increases efficiencies and enhances inventory control. The Company provides 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.
FRANCHISE MARKETING
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.
DEVELOPMENT / FUTURE EXPANSION
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. Deferred franchise fee revenue was $4,269,000 and $3,588,000 representing fees relating to 290 and 240 stores sold but not open at December 28, 1996 and December 27, 1997, respectively. The majority of this backlog represents stores to be opened in the future under multiple store development agreements.
THE FRANCHISE AGREEMENT
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 current agreement has been filed 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 27, 1997, 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 27, 1997, the franchise fee for Once Upon A Child(R), Music Go Round(R), Disc Go Round(R) and It's About Games(TM) 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. Multiple franchise holders are generally required to open only one store per year. 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 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%, Disc Go Round(R) - 5% and It's About Games(TM) - 4%. Play It Again Sports(R) franchise agreements signed prior to April 1, 1992 require payment of a 3% royalty.
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 a National Advertising Fund in lieu of the $500 annual marketing fee. Each Play It Again Sports(R) and Once Upon A Child(R) franchisee is required to spend 5%, each Disc Go Round(R) and It's About Games(R) 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.
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.
INTERNATIONAL FRANCHISE EXPANSION
The Company began franchising the Play It Again Sports(R) concept internationally in 1991 and as of December 27, 1997, had 97 franchised stores open in Canada, eight in Germany and one in Australia. The Canadian stores are operated by franchisees under agreements substantially similar to those used for franchisees in the United States.
During 1995, the Company also entered into a Master Franchise Agreement for development of the Play It Again Sports(R) concept in certain portions of Australia. Under this Master Franchise Agreement, the Company has granted to a master franchisee the right to subfranchise to others who will directly operate Play It Again Sports(R) stores.
COMPETITION
Retailing, including the sale of sporting goods, children's apparel, computer equipment, musical instruments, compact discs and video games, 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, one franchisor of stores which sell used and new children's clothing, toys and accessories, one franchisor of stores which sell used and new compact discs 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, and from 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
Fifteen 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 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), Disc Go Round(R), VGE Video Game Exchange(R) and It's About Games(TM), among others, have been registered as service marks by the Company with the United States Patent and Trademark Office (the "USPTO"). The Company believes these marks are of considerable value to its business and important to its marketing efforts. The Company intends to protect its service marks by appropriate legal action where and when necessary.
SEASONALITY
The Company's Play It Again Sports(R), 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 27, 1997, the Company employed 269 full-time employees, of which 14 are franchise salespersons, 68 are franchise support personnel, 38 are administrative and 149 are retail sales staff. The Company also employs 243 part-time employees at its retail stores.
ITEM 2:
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 65 retail stores, typically for a fixed monthly rental and operating costs. Thirty-two leases are due to expire in 1998, seventeen in 1999, five in 2000, three in 2001 and eight in 2002.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
James D. Van Buskirk and Aravan, Inc. v. Grow Biz International, Inc. (United States District Court, District of Minnesota, commenced December 21, 1995). The case primarily concerns the interpretation and application of a Retail Store Agreement entered into by the Company and the plaintiff, James D. Van Buskirk, in January 1992. By their Complaint, plaintiffs assert claims against the Company for beach of contract, fraud and misrepresentation, interference with relationships and violation of federal anti-racketeering statutes. Plaintiffs seek damages in an amount of approximately $5.7 million which the plaintiffs seek to be trebled and seek approximately $2.0 million on separate claims in addition to injunctive and declaratory relief. Grow Biz has denied each of plaintiffs' claims and has filed counterclaim for breach of contract and other claims resulting from plaintiffs' conduct under the 1992 Agreement. In January 1998, the Company was involved in discussions to purchase certain rights from plaintiffs and settle all claims. 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. Grow Biz plans to appeal certain of the district court's rulings.
ITEM 4:
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 1997.
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company, who are elected by and serve at the discretion of the Company's Board of Directors, are as follows:
NAME AGE POSITION - ---- --- --------
K. Jeffrey Dahlberg 44 Chairman of the Board Ronald G. Olson 57 President, Chief Executive Officer and Director Ted R. Manley 48 Executive Vice President of Operations David J. Osdoba, Jr. 42 Vice President of Finance and Chief Financial Officer Gaylen L. Knack 38 Vice President and General Counsel Charles V. Kanan 46 President / Play It Again Sports(R) Michael E. Flynn 49 President / Computer Renaissance(R) William L. Shell II 41 President / Music Go Round(R) Brad D. Tait 48 President / Disc Go Round(R)and President / It's About Games(TM)
---------------
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) since December 1996 and General Manager since July 1994. 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.
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.
WILLIAM L. SHELL II has served as President of Music Go Round(R) since December 1996 and General Manager since March 1996. From February 1993 to March 1996, Mr. Shell served as a member of the Company's management team focused on the development of the Computer Renaissance(R) and Music Go Round(R) concepts as well as Corporate-owned retail stores. Mr. Shell was the company founder of Hi-Tech Consignments, the predecessor of Music Go Round(R) and served as its President from November 1986 until February 1993.
BRADLEY D. TAIT has served as President of It's About Games(TM) since August 1997 while also serving as the President of Disc Go Round(R). He has served as President of Disc Go Round(R) since December 1996 and General Manager since March 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.
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.
PART II
ITEM 5:
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:
At March 9, 1998, there were 5,945,841 shares of common stock outstanding held by 1,719 beneficial shareholders and 264 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 1997.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA (continued):
(1) The Company's fiscal year ends on the last Saturday in December, which results in a 52 or 53-week year. Fiscal 1994 was 53 weeks. Fiscal 1995 and 1996 were 52 weeks.
(2) The Company acquired certain assets of CDX Audio Development, Inc. (CDX) on July 1, 1994. The pro forma information is presented as if the acquisitions occurred on December 26, 1993.
(3) The Company acquired certain assets of Video Game Exchange, Inc. (VGE ) on August 15, 1997. The pro forma information is presented as if the acquisition occurred on December 31, 1994.
(4) See Note 2 of Notes to the Company's Financial Statements for an explanation of the determination of weighted average shares outstanding.
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Unaudited Pro Forma Condensed Statement of Operations (in thousands, except per share amounts)
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Unaudited Pro Forma Condensed Statement of Operations (in thousands, except per share amounts)
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Unaudited Pro Forma Condensed Statement of Operations (in thousands, except per share amounts)
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Unaudited Pro Forma Condensed Statement of Operations (in thousands, except per share amounts)
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Notes to Unaudited Pro Forma Condensed Statement of Operations
For the Fiscal Years Ended December 31, 1994, December 30, 1995, December 28, 1996 and December 27, 1997
(a) Operations are for the period January 1, 1994 through the acquisition date (June 30, 1994).
(b) The pro forma condensed statement of operations gives effect to the following pro forma CDX acquisition adjustments:
(1) Represents amortization charges related to the intangible assets acquired as a part of the purchase.
(2) Represents interest costs associated with the acquisition debt incurred.
(3) Represents adjustments to reflect the necessary estimated net tax effects of the transactions and pro forma adjustments described herein using current tax rates.
(c) The pro forma condensed statement of operations give effect to the following pro forma VGE acquisition adjustments:
(1) Represents amortization of the $4.3 million of goodwill over twenty-five years and amortization of covenants not to compete over five years arising from the acquisition of VGE.
(2) Represents the net change in depreciation expense associated with the write-up to fair market value of certain assets acquired.
(3) Represents the elimination of certain VGE salary costs which will not recur.
(4) Represents the elimination of VGE interest expense and other income derived from certain assets or liabilities which were not acquired or assumed by the Company.
(5) Represents interest expense related to the acquisition debt.
(6) Represents pro forma provision for income taxes as if VGE was taxed as a C Corporation as of the beginning of the period.
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
Grow Biz International, Inc. (the Company) is a franchise company that franchises six retail concepts. In addition, the Company operates Company-owned stores in selected markets.
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. VGE is a forty store retail operation with stores in Ohio, Pennsylvania, Kentucky, Georgia and Maryland. These stores buy, sell and trade used and new video games and equipment.
RESULTS OF OPERATIONS
The following table sets forth selected information from the Company's Consolidated Statements of Operation expressed as a percentage of total revenue and the percentage changes in the dollar amounts from the prior period:
REVENUES
Merchandise sales include the sale of product to franchisees through the buying group and retail sales at the Company-owned stores as follows:
1995 1996 1997 ----------------------------------------------- Buying Group $ 72,971,600 $ 58,437,100 $ 45,717,100 Retail Sales 11,071,500 13,299,700 21,172,000 ------------ ------------ ------------ $ 84,043,100 $ 71,736,800 $ 66,889,100
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 offered centralized billing and franchisees purchase more inventory on a direct basis. Retail sales at Company-owned stores increased 59.2% in 1997 over 1996 primarily as a result of the forty Company-owned Video Game Exchange stores acquired on August 15, 1997 as well as a net increase of other Company-owned stores in 1997. It is anticipated that buying group revenues will continue to decline as a percent of total revenues in the upcoming year while retail sales are expected to increase as the revenues from these Video Game Exchange stores are included for the entire year and through other Company-owned store expansion.
REVENUES (CONTINUED)
Revenue from franchising activity was as follows:
1995 1996 1997 ---------------------------------------------- Royalties $11,565,500 $14,964,800 $17,328,500 Franchise Fees 3,888,500 4,161,600 3,907,200
Royalties are a derivative of system-wide retail sales and have increased by $3.4 million and $2.4 million in 1996 and 1997, respectively, as a result of opening additional franchise stores and increases in comparable store sales.
Comparable store sales increases and average store sales for stores open at least one year at December 27, 1997 for the five franchised concepts are shown in the following table:
Comparable Store Sales Increase from 1996 Average Store Sales ------------------ ------------------- Play It Again Sports(R) 1.1% $ 441,000 Once Upon A Child(R) 13.4% 341,000 Computer Renaissance(R) 4.4% 837,000 Music Go Round(R) 11.6% 495,000 Disc Go Round(R) 2.4% 238,000
Franchise fees are recognized as revenue essentially when the related franchise store opens. Store openings and related franchise fees have not changed materially over the last three years. The Company anticipates that royalty revenue will continue to grow as additional stores are opened and that franchise fees will continue at the same level as the past three years.
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:
1995 1996 1997 ---------------------------------------- Buying Group 95.1% 95.2% 95.0% Retail Stores 61.4 61.7 62.4
SELLING, GENERAL AND ADMINISTRATIVE
The increase of $1.4 million, or 6%, in operating expenses from 1996 to 1997 is primarily the additional costs related to operating the Company-owned retail stores acquired during the year. From 1995 to 1996, operating expenses increased $2.7 million, or 12.7%, due to an increased number of support personnel relating to our franchise system. It is anticipated that future operating expenses as a percent of revenue will be consistent with the 1997 results.
LITIGATION SETTLEMENT
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 is 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 intends to appeal the court order.
NET INTEREST
Net interest income was $295,500, $194,700 and $102,700 in 1995, 1996 and 1997, respectively. Interest income was earned on investments in short-term, high-grade investments and interest charges on accounts receivable balances. The decrease in interest income in 1996 and 1997 was due to the Company having lower cash balances as a result of the repurchase of shares of the Company's common stock and the interest expense incurred on the notes payable related to the Video Game Exchange, Inc. acquisition on August 15, 1997.
PROVISION FOR INCOME TAXES
The provision for income taxes was calculated at an effective rate of 39.2% for fiscal 1995, 1996 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the year with $3.1 million cash and had a current ratio of 1.6 to 1.0.
During the year ended December 27, 1997, the Company's operating activities provided $6.1 million of cash. Net income before depreciation and change in deferred income tax provided $5.3 million, offset by changes in the operating assets and liabilities. Prepaid assets increased by $1.0 million as a result of income tax deposits made during the year and the renegotiated point-of-sale software license agreement renegotiated in 1997. Inventory increased by $1.5 million as a result of the net addition of five Company-owned stores in 1997. Accrued liabilities increased by $2.5 million primarily as a result of recording the litigation settlement. The Company intends to appeal the court decision and does not anticipate paying for the settlement until all post litigation motions are concluded.
In August 1997, the Company purchased certain assets of Video Game Exchange, Inc. (VGE) for total consideration of $6.6 million. Of this amount, $4.5 million was financed through a five-year term loan, with a bank, payable in sixty equal installments beginning in October 1997 plus accrued interest at prime plus one-half of one percent. The former owners of VGE financed $2.0 million through a two-year note payable in twenty-four equal installments beginning in September 1997 plus accrued interest at prime plus one-half of one percent.
In 1997, the Company renegotiated the terms of its point-of-sale software license utilized by its franchisees from a per unit fee with a remaining minimum liability of $666,800 to a set fee of $400,000. The Company paid $133,000 upon signing the agreement and recorded the $267,000 note payable that is payable in equal installments in January 1998 and January 1999.
Financing activities provided cash of $2.6 million in 1997 compared to utilizing cash of $2.9 million and $6.2 million in 1995 and 1996, respectively. 1997 activity consisted primarily of the VGE notes offset by the repurchase of 386,819 shares of the Company's common stock. In July 1997, the buy back was extended to include an additional 500,000 shares bringing the total shares the Company is authorized to buy back to 2,000,000. As of March 9, 1998, 1,505,286 shares, at an average price of $9.37 per share had been purchased.
The Company has a $5.0 million committed revolving line of credit agreement which is due for renewal on July 31, 1998. Borrowings against the line are due on demand and carry an interest rate of prime which was 8.5% at December 27, 1997. At December 27, 1997, the Company had no borrowings against the line.
The Company believes that its current cash position, cash generated from future operations, availability of line of credit borrowings and additional capacity for debt will be adequate to meet the Company's current obligations and operating needs.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement No. 128, "Accounting for Earnings Per Share". The Company has adopted Statement No. 128 and has disclosed the impact of Statement No. 128 in the Statements of Operations and in the footnotes to the financial statements.
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 assumptions concerning trends in each of the retail industries as well as trends in franchising and the economy. To the extent that the Company's assumptions with respect to any of these matters are inaccurate, its results of operations and financial condition could be adversely affected.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Grow Biz International, Inc. and Subsidiary
Consolidated Balance Sheets Page 25 Consolidated Statements of Operations Page 26 Consolidated Statements of Changes in Shareholders' Equity Page 27 Consolidated Statements of Cash Flows Page 28 Consolidated Notes to Financial Statements Page 29 Report of Independent Public Accountants Page 37
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
The accompanying notes are an integral part of these financial statements.
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
The accompanying notes are an integral part of these financial statements.
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity Fiscal years ended December 30, 1995, December 28, 1996 and December 27, 1997
The accompanying notes are an integral part of these financial statements.
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these financial statements.
GROW BIZ INTERNATIONAL, INC. AND SUBSIDIARY Consolidated Notes to the Financial Statements December 28, 1996 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", "Music Go Round", "Computer Renaissance", "Disc Go Round" and "It's About Games". 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. 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
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.
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.
INVENTORIES
The Company values its inventories at the lower of cost or market, as determined by the average weighted cost method.
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.
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
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 $4,269,000 and $3,588,000 at December 28, 1996 and December 27, 1997, respectively.
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:
RECLASSIFICATION
Certain 1995 and 1996 amounts in the financial statements have been reclassified to conform with the 1997 financial statement presentation. These reclassifications have no effect on net income or shareholders' equity as previously reported.
3. RECEIVABLES:
The Company's current receivables consisted of the following:
December 28, 1996 December 27, 1997 ------------------------------------------- Trade (Net) $ 11,591,500 $ 11,065,200 Royalty 1,709,000 1,718,500 Other 210,700 281,000 ------------ ------------ 13,511,200 13,064,700 Less: Long-term Notes (339,800) (184,000) ------------ ------------ Current Receivables $ 13,171,400 $ 12,880,700 ============ ============
As part of its normal course of business, the Company requires Standby Letters of Credit as collateral for a portion of its trade receivables from it 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 has been 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 prime plus one-half of one percent. The former owners 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 1996 and 1997, as if the above acquisition had occurred on December 30, 1995.
December 28, 1996 December 27, 1997 --------------------------------------- Revenue $105,756,600 $ 97,230,400 Net income 2,962,500 3,498,000 Net income per common share (Basic) $ .46 $ .57 Net income per common share (Diluted) $ .45 $ .56
5. SHAREHOLDERS' EQUITY:
REPURCHASE OF COMMON STOCK
Since November 1995, the Company's Board of Directors has authorized the repurchase of up to 2,000,000 shares of the Company's common stock on the open market. As of December 27, 1997, the Company had repurchased 1,448,913 shares of its stock at an average price of $9.26 per share including 386,819 shares repurchased at an average price of $10.90 per share in the year ended December 27, 1997.
5. SHAREHOLDERS' EQUITY (CONTINUED):
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 27, 1997 are as follows:
The stock options outstanding at December 27, 1997 have a weighted average contractual life of 1.9 years.
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 1997, the Company issued 10,315 shares under the plan at a price of $6.85. As of December 27, 1997, contributions have been received for the issuance of 6,697 shares under phase four.
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 has granted options to purchase the Company's common stock at $10.00 per share to four non-employee directors. Each option granted vests and becomes exercisable in increments through 1998. There were 75,000 shares exercisable at December 27, 1997.
5. SHAREHOLDERS' EQUITY (CONTINUED):
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:
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 6.07% to 7.90% in 1995, 6.01% to 6.81% in 1996 and 5.77% to 6.83% in 1997, expected life of five years for 1995, two to five years for 1996 and five years for 1997; expected volatility of 47.05% to 56.01% in 1995, 39.78% to 44.59% in 1996 and 20.11% to 36.85% in 1997.
WARRANTS
In connection with a 1992 private placement, options to purchase 37,500 shares of the Company's common stock were exercised in 1997 under the net issuance method resulting in 13,306 shares being issued. At December 27, 1997 there were outstanding warrants remaining to purchase 37,500 shares of the Company's common stock at $10.00 per share. The warrants expire in 1998.
6. LINE OF CREDIT:
The Company has a $5.0 million committed revolving line of credit agreement which is due for renewal on July 31, 1998. Borrowings against the line are due on demand and carry an interest rate of prime which was 8.5% at December 27, 1997. At December 27, 1997, the Company had no borrowings against the line.
7. LONG-TERM DEBT:
The Company's long-term debt consists of:
December 28, 1996 December 27, 1997 ---------------------------------------- Bank Term Debt $ - $ 4,275,000 Note Payable - 1,666,700 Other 263,900 387,900 ----------- ------------ Total 263,900 6,329,600 Less: Current Portion (134,900) (2,061,400) ----------- ------------ $ 129,000 $ 4,268,200 =========== ============
7. LONG-TERM DEBT (CONTINUED):
Future maturities of long-term debt as of December 27, 1997 are as follows:
1998 $ 2,061,400 1999 1,700,600 2000 900,000 2001 1,022,100 2002 645,500 ----------- $ 6,329,600 ===========
The bank term note bears interest at prime plus one-half of one percent. It is due in monthly principal and interest installments through September 2002. This note contains various restrictive covenants which, among other matters, require the Company to maintain certain financial ratios. The Company was in compliance with all these covenants as of December 27, 1997.
The note payable bears interest at prime plus one-half of one percent. It is due in monthly principal and interest installments through September 1999.
8. INCOME TAXES:
Components of the provision for income taxes are as follows:
The effective tax rate differs from the federal statutory rate due primarily to the following:
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 28, 1996 December 27, 1997 -------------------------------------- Deferred franchise fees $ 929,500 $ 614,600 Accounts receivable reserves 470,600 466,500 Other 326,300 410,500 ----------- ----------- Net deferred tax asset $ 1,726,400 $ 1,491,600 =========== ===========
9. COMMITMENTS AND CONTINGENCIES:
EMPLOYEE BENEFIT PLAN
The Company provides a 401(k) Savings Incentive Plan which covers substantially all employees. The plan provides for matching contributions and optional profit-sharing contributions at the discretion of the board of directors. Employee contributions are fully vested; matching and profit-sharing contributions are subject to a five-year service vesting schedule. Contributions to the plan for 1995, 1996 and 1997 were $205,100, $267,000 and $253,500, respectively.
OPERATING LEASES
The Company conducts all of its retail operations in leased facilities that expire over the next five years. A majority of these leases require the Company to pay maintenance, insurance, taxes and other expenses in addition to minimum annual rent. Total rent expense under these operating leases was $850,800 in 1995, $1,033,000 in 1996 and $1,468,100 in 1997. As of December 27, 1997, minimum rental commitments under noncancelable operating leases are: $1,701,900 in 1998, $696,900 in 1999, $379,700 in 2000, $258,800 in 2001 and $144,100 in 2002.
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 $59,000, $66,000 and $66,000 in 1995, 1996 and 1997, respectively.
CONSULTING AGREEMENTS
The Company has a consulting agreement with a former shareholder in which the Company is required to pay $35,000 per year through 1999.
The Company has consulting agreements with the former owners of Computer Renaissance. The agreements require the Company to pay 1/2% of all receipts from franchising Computer Renaissance retail stores through May 31, 1998.
10. LITIGATION SETTLEMENT:
In 1995, an early partner in the original Play It Again Sports store commenced an action against the Company relating to, among other things, the development of stores under a 1992 retail store agreement. In February 1998, the court ruled that an enforceable settlement agreement was reached between the parties. The terms of the settlement require the Company to pay $2.0 million to purchase certain development rights and settle all claims. The Company has recorded the $2.0 million non-operating expense in fiscal 1997. The likelihood of a favorable ruling on an appeal cannot be determined at this time.
11. QUARTERLY FINANCIAL DATA:
The Company's unaudited quarterly results for the years ended December 27, 1997 and December 28, 1996 are as follows:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Grow Biz International, Inc.:
We have audited the accompanying consolidated balance sheets of Grow Biz International, Inc. and Subsidiary (Minnesota corporations) as of December 27, 1997 and December 28, 1996, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 27, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 27, 1997 and December 28, 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 27, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota, February 3, 1998
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10:
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The section entitled "Election of Directors" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be held on May 6, 1998, sets forth certain information with respect to the directors of the Registrant and the required information is incorporated herein by reference. Certain information with respect to persons who are or may be deemed to be executive officers of the Registrant is set forth under the caption "Executive Officers of the Registrant" in Part I of this report.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION.
The section entitled "Executive Compensation" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be held on May 6, 1998, sets forth certain information with respect to the compensation of management of the Registrant and the required information is incorporated herein by reference.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The sections entitled "Security Ownership of Certain Beneficial Owners, Directors and Executive Officers" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be held on May 6, 1998, set forth certain information with respect to the ownership of the Registrant's Common Stock and the required information is incorporated herein by reference.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section entitled "Certain Transactions" appearing in the Registrant's proxy statement for the annual meeting of stockholders to be held on May 6, 1998, sets forth certain information with respect to certain business relationships and transactions between the Registrant and its directors and officers and the required information is incorporated herein by reference.
PART IV
ITEM 14:
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 24.
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 Disc Go Round(R) (Exhibit 10.5) (3) 10.6 Form of franchise agreement for It's About Games(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) 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) 10.16 Amendment No. 3 to the 1992 Stock Option Plan 10.17 Nonemployee Director Stock Option Plan, as amended, including form of stock option agreement (Exhibit 10.16) (2) (3) 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)
EXHIBIT NUMBER DESCRIPTION - -------------- -----------
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) (5) 10.23 First Amendment to Credit Agreement and Revolving Note, dated August 8, 1997 (Exhibit 10.2) (5) 10.24 Term Note, TCF, dated August 8, 1997 (Exhibit 10.3) (5) 10.25 Non-Negotiable Promissory Note, Video Game Exchange, Inc., dated August 15, 1997 (Exhibit 10.4) (5) 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 Quarterly Report on Form 10-Q for the quarter ended September 28, 1996.
(5) Incorporated by reference to the specified exhibit to the Current Report on Form 8-K, August 15, 1997.
(6) Indicates management contracts, compensation plans or arrangements required to be filed as exhibits.
(b.) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the fiscal quarter ended December 27, 1997.
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 16, 1998 ------------------------------------- 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.