Business Context and Reporting Period
Company: Grow Biz International, Inc. (Note: Metadata listed "WINMARK CORP" but filing text confirms "Grow Biz International, Inc.")
Filing Type: Form 10-K
Period Ended: December 25, 1999
Business Overview: A franchisor of six retail concepts (Play It Again Sports, Once Upon A Child, Computer Renaissance, Music Go Round, ReTool, and Plato's Closet) that buy, sell, trade, and consign used and new merchandise. The company operates a centralized buying group for certain concepts and maintains a small number of corporate-owned stores.
Key Financial Metrics
| Metric | Fiscal 1999 | Fiscal 1998 |
|---|---|---|
| Total Revenue | $66.6 million | $96.4 million |
| Net Income (Loss) | $(8.6) million | $7.2 million |
| Operating Income (Loss) | $(12.5) million | $12.2 million |
| Restructuring Charges | $11.3 million | $0 |
| Cash Flow from Operations | $1.4 million | $3.2 million |
| Total Debt | $16.8 million | $17.9 million |
| Working Capital | $2.7 million | $1.1 million |
| Cash and Equivalents | $0 | $2.4 million |
| Current Ratio | 1.14 | 1.04 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 30.9% to $66.6 million, driven primarily by a 38.4% drop in merchandise sales due to the liquidation of the "It's About Games" concept and a strategic reduction in the centralized buying group's scope.
- Net Loss: The company reported a net loss of $8.6 million compared to a net income of $7.2 million in 1998. This reversal was primarily caused by a $11.3 million restructuring charge related to the disposal of the "It's About Games" concept.
- Store Count: Total system-wide stores decreased from 1,212 to 1,143. The company closed all 61 "It's About Games" corporate stores and sold the concept's assets in December 1999.
- Liquidity: Cash and cash equivalents dropped to zero by year-end, down from $2.4 million in 1998, though working capital improved to $2.7 million.
Guidance, Outlook, and Risks
- Strategic Shift: Management is pivoting away from corporate-owned retail operations to focus on franchising. The company expects franchise fee revenue to decline in 2000 due to a revised fee schedule that eliminates fees for additional stores opened by existing franchisees.
- Debt Covenants: As of December 25, 1999, the company was not in compliance with certain debt covenants but has received a waiver from its bank. The company amended its debt agreements to ensure compliance for the upcoming year.
- Key Risks:
- Ability to attract qualified franchisees and open new stores.
- Reliance on franchisees to acquire high-quality used merchandise.
- Interest rate risk on approximately $15.7 million of variable-rate debt.
- Renewal of the $7.5 million revolving line of credit due April 30, 2000.
- Year 2000 Compliance: The company incurred approximately $494,000 in compliance costs and reported no operational interruptions. Approximately 80 franchisees had not yet converted their point-of-sale systems to Year 2000 compliant versions.
Investor Verification Checklist
- Debt Renewal: Verify the status of the $7.5 million revolving line of credit renewal due April 30, 2000, given the company's zero cash balance.
- Covenant Compliance: Confirm the company remains in compliance with the amended debt covenants for the 2000 fiscal year.
- Franchisee Health: Assess the impact of the revised fee schedule (elimination of fees for additional stores) on future franchise fee revenue.
- Inventory Valuation: Review the remaining inventory levels and valuation methods following the liquidation of the "It's About Games" concept.
- Franchisee Compliance: Monitor the progress of the ~80 franchisees who had not yet upgraded to Year 2000 compliant systems.