Business Context and Reporting Period
Company: Grow Biz International, Inc. (Ticker: GBIZ)
Filing Type: Form 10-K Annual Report
Period Ended: December 26, 1998
Business Overview: The Company franchises seven retail concepts (Play It Again Sports, Once Upon A Child, Computer Renaissance, Music Go Round, It's About Games, ReTool, and Plato's Closet) that buy, sell, trade, and consign used and new merchandise. The Company also operates a centralized buying group for franchisees and maintains a portfolio of corporate-owned retail stores.
Key Financial Metrics
| Metric (in thousands) | Fiscal 1998 | Fiscal 1997 |
|---|---|---|
| Total Revenue | $96,351 | $88,835 |
| Net Income | $7,244 | $3,231 |
| Diluted EPS | $1.24 | $0.52 |
| Operating Cash Flow | $3,175 | $6,089 |
| Total Debt | $17,949 | $6,330 |
| Working Capital | $1,103 | $9,141 |
| Cash and Equivalents | $2,418 | $3,088 |
| Return on Average Equity | 52.5% | 18.4% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 8.5% to $96.4 million, driven by a 12.4% increase in royalties and a 9.6% increase in merchandise sales. Franchise fees declined 23.6% due to fewer new store openings compared to 1997.
- Profitability Surge: Net income more than doubled to $7.2 million (up 124.2%). This was significantly aided by a one-time $5.23 million gain from the sale of the Disc Go Round concept in June 1998.
- Debt Expansion: Total debt increased from $6.3 million to $17.9 million. The Company utilized a $10 million revolving credit line and term notes to fund the repurchase of 1.1 million shares of common stock and to finance a $2.0 million litigation settlement.
- Liquidity Pressure: Working capital decreased sharply from $9.1 million to $1.1 million, and the current ratio tightened to 1.04:1.0, reflecting increased current maturities of long-term debt.
- Store Count: Total system-wide stores decreased from 1,303 to 1,212, primarily due to the divestiture of 137 Disc Go Round stores, partially offset by 144 new openings across other concepts.
Guidance, Outlook, and Risks
- Strategic Outlook: Management anticipates continued growth in royalty revenue as new stores open. Buying group revenues are expected to decline as a percentage of total revenue, while retail sales from corporate-owned stores (specifically It's About Games) are expected to increase.
- Merger Proposal: In December 1998, the Company received a non-binding proposal from majority shareholders (Dahlberg and Olson) to exchange minority shares for $14 per share. A special committee is reviewing the proposal; consummation is not guaranteed.
- Legal Contingencies:
- Shareholder Class Action: A lawsuit alleges the proposed $14/share buyout undervalues the company and breaches fiduciary duties. The Company intends to defend vigorously.
- Litigation Settlement: The Company settled a dispute regarding Play It Again Sports development rights, agreeing to pay $2.0 million ($400k immediate, $1.6m over three years).
- Year 2000 Compliance: The Company is upgrading systems to be Y2K compliant. Estimated future costs are less than $435,300. Risks include potential vendor non-compliance affecting product supply.
- Market Risk: The Company has approximately $15.3 million in variable-rate debt. A 1% increase in interest rates would increase annual interest costs by $153,000.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial ratios required by the $10M revolving credit line and $8M term note, given the tight working capital position.
- Merger Status: Monitor the progress of the special committee's review of the $14/share buyout proposal and the outcome of the shareholder class action lawsuit.
- Recurring Earnings: Assess core profitability by excluding the $5.23 million one-time gain from the Disc Go Round sale to understand organic operational performance.
- Store Economics: Review comparable store sales trends for the remaining concepts (Play It Again Sports, Once Upon A Child, etc.) to ensure growth is sustainable without the Disc Go Round segment.
- Share Repurchases: Confirm the impact of the $16.5 million spent on share repurchases in 1998 on future liquidity and capital allocation strategy.