Business Context and Reporting Period
Company: Grow Biz International, Inc. (Note: Metadata referenced "Winmark Corp," but the filing text identifies the registrant as Grow Biz International, Inc.)
Reporting Period: Quarterly period ended September 27, 1997 (Nine months ended September 27, 1997).
Business Model: The Company franchises retail store concepts including "Play It Again Sports," "Once Upon A Child," "Computer Renaissance," "Music Go Round," "Disc Go Round," and "It's About Games." It also operates corporate retail stores and sells inventory to franchisees via a buying group.
Key Financial Metrics
| Metric | Three Months Ended 9/27/97 | Nine Months Ended 9/27/97 |
|---|---|---|
| Total Revenue | $22,078,500 | $61,866,900 |
| Net Income | $1,269,000 | $2,808,300 |
| Net Income Per Share | $0.20 | $0.45 |
| Operating Cash Flow | N/A | $5,089,700 |
| Cash and Equivalents (End of Period) | $5,383,900 | $5,383,900 |
| Total Debt (Current + Long-Term) | $6,753,300 | $6,753,300 |
| Current Ratio | 1.63x | 1.63x |
Note: Debt figures derived from Balance Sheet (Current maturities of long-term debt $2,093,400 + Long-Term Debt $4,659,900).
Material Changes vs. Prior Period
- Revenue Mix Shift: Total revenue for the nine months decreased 13.7% to $61.9 million from $71.7 million in 1996. This was driven by a 27.2% decline in "Buying Group" sales (strategic reduction of centralized billing vendors), partially offset by a 15.7% increase in corporate retail sales.
- Profitability Improvement: Despite lower total revenue, Net Income increased 66.6% to $2.8 million for the nine months. Operating margins improved from 3.7% to 7.2% due to a higher mix of high-margin corporate retail sales versus lower-margin buying group sales.
- Acquisition Impact: On August 15, 1997, the Company acquired Video Game Exchange, Inc. (40 stores) for $6.58 million. This acquisition significantly boosted retail sales and inventory levels but added $6.77 million in new debt.
- Store Count: Total franchise and corporate stores increased from 1,150 to 1,248 over the nine-month period.
Guidance, Outlook, and Risks
- Outlook: Management anticipates buying group revenues will continue to decline as a percentage of total revenue, while retail sales from corporate stores will increase. Royalty income is expected to grow as the franchise store count expands.
- Interest Expense: Net interest income is expected to decline in future periods due to interest payments on the new debt incurred for the Video Game Exchange acquisition.
- Liquidity: The Company maintains a $5.0 million revolving line of credit (unutilized as of Sept 27, 1997) and believes current cash and operating cash flow are adequate for obligations.
- Risks/Contingencies:
- Litigation: An ongoing lawsuit from a 1995 partner alleges breach of contract, fraud, and RICO violations, seeking damages in excess of $50,000 plus treble damages.
- Debt Servicing: The acquisition was financed with a $4.5 million bank term loan and a $2.0 million note to former shareholders, increasing fixed interest obligations.
Investor Verification Checklist
- Acquisition Integration: Verify the performance of the 40 newly acquired Video Game Exchange stores against pro forma projections.
- Debt Covenants: Review the terms of the new $6.58 million debt facility to ensure compliance with covenants given the shift in revenue mix.
- Buying Group Decline: Monitor the rate of decline in buying group sales to ensure it does not outpace the growth in corporate retail sales.
- Share Repurchases: Confirm the remaining capacity under the $2.0 million share repurchase authorization (1,365,913 shares repurchased to date).
- Litigation Status: Track developments in the RICO/breach of contract lawsuit filed in December 1995.