UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 26, 1998
Commission File Number 0-22012
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
Golden Valley, MN 55422-4837
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code 612-520-8500
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, and (2) has been subject to such filing requirements
for the past 90 days.
Yes: X No:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value, 5,073,492 shares outstanding as of October 31, 1998.
<PAGE>
GROW BIZ INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
- --------------------------------------------------------------------------------
Item 1. Financial Statements (Unaudited)
CONDENSED BALANCE SHEETS: 3
September 26, 1998 and December 27, 1997
CONDENSED STATEMENTS OF OPERATIONS: 4
Three Months Ended
September 26, 1998 and September 27, 1997
Nine Months Ended
September 26, 1998 and September 27, 1997
CONDENSED STATEMENTS OF CASH FLOWS: 5
Nine Months Ended
September 26, 1998 and September 27, 1998
NOTES TO CONDENSED FINANCIAL STATEMENTS 6 - 7
Item 2. Management's Discussion and Analysis of Financial 8 - 14
Condition and Results of Operations
PART II. OTHER INFORMATION PAGE
- --------------------------------------------------------------------------------
Items 1 through 5 have been omitted since all items are
inapplicable or answers negative.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibit
Number: Description:
------- ------------
27 Financial Data Schedule
99 Cautionary Statements
(b.) Reports on Form 8-K - none
2
<PAGE>
GROW BIZ INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
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September 26, 1998 December 27, 1997
--------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ -- $ 3,088,000
Trade receivables, less allowance for doubtful
accounts of $771,500 and $880,000 11,975,700 12,880,700
Inventories 7,256,600 5,728,600
Prepaid expenses and other 1,663,600 1,987,300
Deferred income taxes 1,491,600 1,491,600
------------ ------------
Total current assets 22,387,500 25,176,200
Notes receivable 173,800 184,000
Property and equipment, net 5,810,200 5,617,900
Other assets, net 5,482,100 6,776,500
------------ ------------
$ 33,853,600 $ 37,754,600
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable 8,401,400 $ 6,604,800
Accrued liabilities 4,359,700 3,781,500
Notes payable and current maturities of long-term debt 5,569,300 2,061,400
Deferred franchise fee revenue 2,332,300 3,588,000
------------ ------------
Total current liabilities 20,662,700 16,035,700
Long-Term Debt 4,020,800 4,268,200
Shareholders' Equity:
Common stock, no par, 10,000,000 shares authorized,
5,100,614 and 6,002,214 shares issued and outstanding -- 7,474,900
Retained earnings 9,170,100 9,975,800
------------ ------------
Total shareholders' equity 9,170,100 17,450,700
------------ ------------
$ 33,853,600 $ 37,754,600
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
GROW BIZ INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
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Three Months Ended Nine Months Ended
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
REVENUE:
Merchandise sales $ 16,638,500 $ 16,209,000 $ 54,037,000 $ 45,787,400
Royalties 4,688,700 4,553,500 14,574,700 12,809,900
Franchise fees 940,900 1,006,900 2,488,400 2,614,600
Advertising and other 215,900 309,100 505,000 655,000
------------- ------------- ------------- -------------
Total revenue 22,484,000 22,078,500 71,605,100 61,866,900
COST OF MERCHANDISE SOLD 13,451,700 13,705,900 44,210,500 39,770,400
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 6,541,600 6,316,200 22,082,000 17,624,000
GAIN ON SALE OF DISC GO ROUND -- -- 5,231,500 --
------------- ------------- ------------- -------------
Income from operations 2,490,700 2,056,400 10,544,100 4,472,500
INTEREST INCOME 125,100 126,500 345,100 253,800
INTEREST EXPENSE (143,500) (95,700) (351,400) (107,400)
------------- ------------- ------------- -------------
Income before income taxes 2,472,300 2,087,200 10,537,800 4,618,900
PROVISION FOR INCOME TAXES 969,200 818,200 4,130,900 1,810,600
------------- ------------- ------------- -------------
NET INCOME $ 1,503,100 $ 1,269,000 $ 6,406,900 $ 2,808,300
============= ============= ============= =============
NET INCOME PER COMMON SHARE - BASIC $ .27 $ .21 $ 1.09 $ .46
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 5,614,600 6,051,300 5,861,300 6,137,300
============= ============= ============= =============
NET INCOME PER COMMON SHARE - DILUTED $ .26 $ .20 $ 1.06 $ .45
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 5,846,800 6,277,300 6,054,700 6,276,100
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
GROW BIZ INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
---------------------------------
Nine Months Ended
September 26, September 27,
1998 1997
---------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,406,900 $ 2,808,300
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,435,900 1,310,000
Change in operating assets and liabilities:
Trade receivables 700,100 1,156,900
Inventories (1,805,900) (1,431,600)
Prepaid expenses and other 319,700 (615,900)
Accounts payable 1,796,600 1,313,300
Accrued liabilities 427,700 549,200
Deferred franchise fee revenue (971,700) (500)
------------- -------------
Net cash provided by operating activities 8,309,300 5,089,700
------------- -------------
INVESTING ACTIVITIES:
Increase in other assets (400,200) (4,354,200)
Purchase of property and equipment (1,338,500) (470,200)
Sale of net assets of Disc Go Round, net of gain 1,768,500 --
------------- -------------
Net cash provided by (used for) investing
activities 29,800 (4,824,400)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from notes payable 4,930,200 6,767,000
Payments on long-term debt (1,669,800) (277,600)
Proceeds from stock option exercises 1,655,200 451,900
Repurchase of common stock (16,342,700) (3,211,500)
------------- -------------
Net cash provided by (used for) financing
activities (11,427,100) 3,729,800
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,088,000) 3,995,100
Cash and cash equivalents, beginning of period 3,088,000 1,388,800
------------- -------------
Cash and cash equivalents, end of period $ 0 $ 5,383,900
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
GROW BIZ INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. MANAGEMENT'S INTERIM FINANCIAL STATEMENT REPRESENTATION:
The accompanying condensed financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. The information in the condensed financial statements
includes normal recurring adjustments and reflects all adjustments which are, in
the opinion of management, necessary for a fair presentation of such financial
statements. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
condensed financial statements be read in conjunction with the audited financial
statements and the notes thereto included in the Company's latest Annual Report
on Form 10-K.
Revenues and operating results for the nine months ended September 26, 1998 are
not necessarily indicative of the results to be expected for the full year.
2. 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' and 'ReTool'. In
addition, the Company sells inventory to its franchisees through its buying
group and operates retail stores. The Company has a 52/53 week year which ends
on the last Saturday in December.
3. SALE OF DISC GO ROUND
On June 26, 1998, Grow Biz International, Inc., (the Company) completed the sale
of the assets, primarily intangibles, and franchising rights of its Disc Go
Round 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 stores in operation, including 3 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, or $.51 per
share diluted, in the second quarter ending June 27, 1998.
4. SHAREHOLDERS' EQUITY:
Since 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
September 26, 1998, the Company had repurchased 2,547,513 shares of its stock at
an average price of $11.68 per share, including 1,003,227 shares repurchased at
an average price of $15.10 per share in the three months ended September 26,
1998.
6
<PAGE>
5. 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 in February 1998 on a
motion filed by the plaintiff stating that an enforceable settlement agreement
existed between the two parties. The Company has appealed the order which
requires the Company 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 recognized the entire $2.0
million as a non-operating expense in the year ended December 27, 1997.
6. 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 diving net income by
the weighted average number of shares of common stock outstanding plus the
dilutive effect of 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:
<TABLE>
<CAPTION>
------------------------------
Three Months Ended
September 26, September 27,
1998 1997
------------------------------
<S> <C> <C>
Shares used in per common share computation:
Weighted average shares outstanding - Basic 5,614,600 6,051,300
Dilutive effect of stock options after application
of the treasury stock method 232,200 226,000
------------ ------------
Weighted average shares outstanding - Diluted 5,846,800 6,277,300
============ ============
<CAPTION>
------------------------------
Nine Months Ended
September 26, September 27,
1998 1997
------------------------------
Shares used in per common share computation:
Weighted average shares outstanding - Basic 5,861,300 6,137,300
Dilutive effect of stock options after application
of the treasury stock method 193,400 138,800
------------ ------------
Weighted average shares outstanding - Diluted 6,054,700 6,276,100
============ ============
</TABLE>
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Grow Biz International, Inc., (the Company) is a franchise company that
franchises 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 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.
Following is a summary of the Company's franchising and corporate retail store
activity for the retail concepts for the three months ended September 26, 1998:
<TABLE>
<CAPTION>
------------------------------------------------------------
TOTAL OPENED/ TOTAL
6/27/98 PURCHASED CLOSED CONVERTED 9/26/98
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Play It Again Sports(R)
Franchised Stores - US and Canada 633 13 (10) 0 636
Franchised Stores - Other International 8 0 (0) 0 8
Corporate 5 0 (1) 0 4
Other 22 1 (0) 0 23
Once Upon A Child(R)
Franchised Stores - US and Canada 204 8 (3) 0 209
Corporate 5 0 (0) 0 5
Computer Renaissance(R)
Franchised Stores - US and Canada 201 16 (3) 0 214
Corporate 7 0 (0) 0 7
Music Go Round(R)
Franchised Stores - US and Canada 46 5 (0) 0 51
Corporate 6 6 (0) 0 12
It's About Games(TM)
Franchised Stores - US and Canada 1 2 (0) 0 3
Corporate 44 0 (1) 0 43
ReTool(TM)
Franchised Stores - US and Canada 0 0 (0) 0 0
Corporate 0 1 (0) 0 1
Other 2 0 (0) 0 2
------------------------------------------------------------
Total 1,184 52 (18) 0 1,218
============================================================
</TABLE>
8
<PAGE>
Following is a summary of the Company's franchising and corporate retail store
activity for the nine months ended September 26, 1998:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
TOTAL OPENED/ TOTAL
12/27/97 PURCHASED CLOSED CONVERTED SALE OF BUSINESS 9/26/98
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Play It Again Sports(R)
Franchised Stores - US and Canada 654 28 (46) 0 (0) 636
Franchised Stores - Other International 8 0 (0) 0 (0) 8
Corporate 5 0 (1) 0 (0) 4
Other 22 1 (0) 0 (0) 23
Once Upon A Child(R)
Franchised Stores - US and Canada 204 13 (7) (1) (0) 209
Corporate 4 0 (0) 1 (0) 5
Computer Renaissance(R)
Franchised Stores - US and Canada 180 39 (5) 0 (0) 214
Corporate 7 0 (0) 0 (0) 7
Music Go Round(R)
Franchised Stores - US and Canada 38 13 (0) 0 (0) 51
Corporate 4 8 (0) 0 (0) 12
Disc Go Round(R)
Franchised Stores - US and Canada 132 8 (0) 0 (140) 0
Corporate 3 0 (0) 0 (3) 0
It's About Games(TM)
Franchised Stores - US and Canada 0 3 (0) 0 (0) 3
Corporate 42 2 (1) 0 (0) 43
ReTool(TM)
Franchised Stores - US and Canada 0 0 (0) 0 (0) 0
Corporate 0 1 (0) 0 (0) 1
Other 0 2 (0) 0 (0) 2
----------------------------------------------------------------------------
Total 1,303 118 (60) 0 (143) 1,218
============================================================================
</TABLE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
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 revenue and profitability of 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.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain income
statement items as a percentage of total revenue and the percentage change in
the dollar amounts from the prior period:
<TABLE>
<CAPTION>
------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Merchandise sales 74.0% 73.4% 70.3% 74.0%
Royalties 20.8 20.6 19.0 20.7
Franchise fees 4.2 4.6 3.2 4.2
Advertising and other 1.0 1.4 7.5 1.1
------- ------- ------- -------
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold 59.8 62.1 61.7 64.3
Selling, general and administrative expenses 29.1 28.6 30.8 28.5
Gain on the sale of Disc Go Round 0.0 0.0 7.3 0.0
------- ------- ------- -------
Income from operations 11.1 9.3 14.8 7.2
Interest and other income, net (0.1) 0.1 (0.1) 0.2
------- ------- ------- -------
Income before income taxes 11.0 9.4 14.7 7.4
Provision for income taxes 4.3 3.7 5.8 2.9
------- ------- ------- -------
Net income 6.7% 5.7% 8.9% 4.5%
======= ======= ======= =======
</TABLE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 26, 1998 TO THREE MONTHS ENDED
SEPTEMBER 27, 1997
REVENUES
Revenues for the quarter ended September 26, 1998 totaled $22.5 million compared
to $22.1 million for the comparable period in 1997. Merchandise sales increased
to $16.6 million for the three months ended September 26, 1998 from $16.2
million for the same period in 1997. Merchandise sales consist of the sale of
product to the Play It Again Sports franchisees through the buying group and
retail sales at Company-owned stores. For the third quarter of 1998 and 1997
they were as follows:
1998 1997
---- ----
Buying Group $ 9,333,300 $ 11,184,700
Retail Sales 7,305,200 5,024,300
------------- -------------
Merchandise Sales $ 16,638,500 $ 16,209,000
============= =============
10
<PAGE>
Buying group revenue decreased 16.6% for the three months ended September 26,
1998 compared to the same period last year as a result of more franchisees
purchasing merchandise directly from vendors. Retail store sales increased $2.3
million, or 45.4%, in the three months ended September 26, 1998 compared to the
same period in 1997 as a result of acquiring forty Video Game Exchange, Inc.
stores in August 1997, the opening of an additional eight Company-owned Music Go
Round stores and an increase in comparable store sales.
Royalties increased 3% to $4.7 million for the third quarter of 1998 from $4.6
million for the same period in 1997. The decrease in the third quarter 1998
growth rate compared to the year to date growth rate in royalties is primarily
due to the sale of the Disc Go Round stores at the end of the second quarter of
1998. The royalty growth rate is expected to maintain the year to date rate due
to continued expansion of franchise stores offsetting the loss of royalties from
Disc Go Round stores. Franchise fee income, which is recognized when the store
is open, is down slightly from the prior year.
COST OF MERCHANDISE SOLD
Cost of merchandise sold includes the cost of merchandise sold through the
buying group and at Company-owned retail stores. As shown in the following
table, for the three months ended September 26, 1998, the cost of merchandise
sold as a percentage of the related buying group revenue was consistent with the
previous year and increased 3.9% for the retail stores. The corresponding
decline in gross profit percentage for retail stores was primarily due to the
declining retail prices in the computer industry impacting our Company-owned
Computer Renaissance.
1998 1997
---- ----
Buying Group 94.4% 95.8%
Retail Stores 63.4 59.5
SELLING, GENERAL AND ADMINISTRATIVE
For the three months ended September 26, 1998 the operating expenses were
consistent with the prior year. Operating expenses are expected to continue to
increase proportionately with the opening of the additional Company-owned retail
stores.
NET INCOME
Net income for the third quarter of 1998 was $1.5 million, or $.26 per share
diluted, compared to $1.3 million, or $.20 per share diluted, in the same period
of 1997.
11
<PAGE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 26, 1998 TO NINE MONTHS ENDED
SEPTEMBER 27, 1997
SALE OF DISC GO ROUND
On June 26, 1998, Grow Biz International, Inc., (the Company) completed the sale
of the assets, primarily intangibles, and franchising rights of its Disc Go
Round concept to CD Warehouse, Inc. (CD Warehouse). At the time of the sale,
there were 137 Disc Go Round stores in operation, including 3 Company-owned
stores, and an additional 37 franchise agreements awarded for stores that were
not yet opened.
REVENUES
Revenues for the nine months ended September 26, 1998 were $71.6 million
compared to $61.2 million for the comparable period in 1997. Merchandise sales
consist of the sale of product to the Play It Again Sports franchisees through
the buying group and retail sales at the Company-owned stores. For the first
nine months of 1998 and 1997 merchandise sales were as follows:
1998 1997
---- ----
Buying Group $ 31,530,500 $ 34,377,400
Retail Sales 22,506,500 11,410,000
------------- -------------
Merchandise Sales $ 54,037,000 $ 45,787,400
============= =============
The 8.3% decrease in buying group sales for the nine months ended September 26,
1998 compared to the same period last year was a result of more franchisees
purchasing merchandise directly from vendors during the period. It is
anticipated that buying group revenues will continue their current trend for the
remainder of 1998 and 1999. Retail store sales increased $11.1 million, or
97.3%, in the first nine months of 1998 compared to 1997 as a result of
acquiring forty Video Game Exchange, Inc. stores in August 1997. Retail sales
are expected to continue to increase as the Company opens an additional fifteen
Company-owned stores in 1998.
Royalties increased 13.8% to $14.6 million for the first nine months of 1998
from $12.8 million for the same period in 1997, primarily due to the expanded
base of franchise stores and an increase in comparable store sales. Franchise
fee income declined slightly compared to the prior period as a result of opening
twelve fewer stores in the first nine months of 1998 compared to the same period
in 1997. We anticipate store openings for the twelve months ended December 26,
1998 to be consistent with the same period in 1997, and that the impact of the
sale of Disc Go Round will be offset by the opening of ReTool franchise stores.
COST OF MERCHANDISE SOLD
Cost of merchandise sold includes both the cost of merchandise sold through the
buying group and at Company-owned retail stores. For the nine months ended
September 26, 1998 the cost of merchandise sold as a percentage of the related
revenue was consistent with the previous year as shown in the following table:
12
<PAGE>
1998 1997
---- ----
Buying Group 95.4% 95.3%
Retail Stores 62.8 61.4
SELLING, GENERAL AND ADMINISTRATIVE
The $4.5 million, or 25.3%, increase in operating expense for the nine months
ended September 26, 1998 compared to the same period in 1997 is primarily due to
the costs related to operating the Video Game Exchange, Inc. stores acquired in
August 1997, along with the costs incurred to begin franchising the It's About
Games and ReTool concepts. Operating expenses are expected to continue to
increase proportionately with the opening of the additional Company-owned retail
stores.
NET INCOME
Net income for the first nine months of 1998 was $6.4 million, or $1.06 per
share diluted, compared to $2.8 million, or $.45 per share diluted, in the same
period of 1997. The first nine months of 1998 earnings include the $5.2 million
gain on the sale of Disc Go Round. This gain, net of taxes, represents $3.2
million, or $.51 per share diluted.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 26, 1998, the Company's operating
activities provided $8.3 million of cash. The increase in cash available from
operations is due primarily to the net income before depreciation and
amortization. The increase in inventory and related accounts payable is related
to expansion of Company-owned stores in 1998.
The Company disposed of $1.7 million of certain net assets of Disc Go Round and
purchased $1.7 million of property and equipment and other assets related to
Company-owned store expansion and system upgrades.
The Company's $11.4 million use of cash for financing activities in the first
nine months of 1998 was due to debt service payments and the repurchase of
1,098,600 shares of the Company's common stock at an average price of $14.88 per
share, offset by cash received from the exercise of options and warrants to
purchase 183,193 shares of the Company's common stock.
On October 13, 1998, the Company signed an amended and restated credit agreement
in which the Company's line of credit was increased from $5.0 million to $10.0
million and will be due for renewal on July 31, 1999. Borrowings against the
line carry an interest rate of prime which was 8.25% at September 26, 1998. The
available line is reduced by a $2.2 million letter of credit issued in March
1998 in connection with the Company's appeal of a court ruling on a motion in
the Van Buskirk litigation matter.
13
<PAGE>
In addition to the line of credit, the Company received a $8.0 million committed
term note. Borrowings against the note carry an interest rate of prime plus .5%
which was 8.75% at September 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 principal installments beginning May 1, 1999 through March 4, 2004.
Concurrent with the signing of the new agreement, all lending facilities with
the bank, including the August 8, 1997 note having a principal balance of $3.6
million at September 26, 1998, became secured by a security interest in all
tangible and intangible assets of the Company.
At September 26, 1998, the Company had $2.8 million outstanding on its previous
line of credit agreement as well as a $2.0 million bridge loan. Upon signing the
amended and restated credit agreement, the bridge loan was paid in full by
proceeds from the $10.0 million line of credit.
The Company believes that cash generated from future operations and availability
on the credit facility will be adequate to meet the Company's current
obligations and operating needs.
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 are expected to be sent out in the fourth quarter of 1998
to ascertain the status of each vendor's Year 2000 compliance. Total costs
associated with the Year 2000 compliance project through September 26, 1998 have
been $76,200 and future costs are expected to be less than $250,000.
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.
14
<PAGE>
2. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GROW BIZ INTERNATIONAL, INC.
By: /s/ Ronald G. Olson
-------------------
Ronald G. Olson
Date: November 5, 1998 President and Chief Executive Officer
By: /s/ David J. Osdoba, Jr.
------------------------
David J. Osdoba, Jr.
Date: November 5, 1998 Vice President of Finance and Chief
Financial Officer
15
Exhibit 99
GROW BIZ INTERNATIONAL, INC.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
Grow Biz International, Inc. (the "Company") desires to take advantage of the
new "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and is filing this Exhibit to its Quarterly Report on Form 10-Q in order to
do so. When used in this Quarterly Report on Form 10-Q and in future filings by
the Company with the Securities and Exchange Commission in the Company's annual
report, quarterly reports, press releases and in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "look for", "may result", "will continue", "is anticipated", "expect",
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. The Company cautions readers that the
following important factors, among others, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any forward-looking statements made by, or on behalf of,
the Company:
DEPENDENCE ON NEW FRANCHISEES
The Company's ability to generate increased revenue and achieve higher levels of
profitability depends on increasing the number of franchised stores open. While
management believes that a number of major metropolitan markets have reached or
are nearing the saturation point for certain concepts, management also believes
that many larger and smaller markets will continue to provide significant
opportunities for sales of franchises and that the Company can sustain
approximately its current annual level of store openings. However, there can be
no assurance that the Company will sustain this level of store openings.
INABILITY TO COLLECT ACCOUNTS RECEIVABLE
In the event that the Company's ability to collect accounts receivable
significantly declines from current rates, additional charges that affect
earnings may be incurred.
UNOPENED STORES
The Company believes that a substantial majority of stores sold but not opened
will open within the time period permitted by the applicable franchise agreement
or the Company will be able to resell the territories for most of the terminated
or expired franchises. However, there can be no assurance that substantially all
of the currently sold but unopened franchises will open and commence paying
royalties to the Company. To the extent the Company is required to refund any
franchise fees for stores that do not open, the Company believes that it will be
able to repay these fees out of available cash.
<PAGE>
DEPENDENCE ON SUPPLY OF USED MERCHANDISE
The Company's store concepts are based on offering customers a mix of used and
new merchandise. As a result, obtaining continuing supplies of high quality used
merchandise is essential to the success of the Company's store concepts. To
date, supplies of used merchandise have been adequate and the Company's training
programs emphasize methods for locating and purchasing used goods. There can be
no assurance, however, that supply problems will not be encountered in the
future.
COMPETITION
Retailing, including the sale of sporting goods, children's apparel, computer
equipment, compact disks and musical instruments, is highly competitive. Many
retailers have significantly greater financial and other resources than the
Company and its franchisees. Individual franchisees face competition in their
markets from retailers of new merchandise and, in certain instances, resale,
thrift and other stores that sell used merchandise. To date, the Company's
franchisees and its Company-owned stores have not faced a high degree of
competition in the sale of used merchandise. However, the Company may face
additional competition as its franchise systems expand and additional
competitors may enter the used merchandise market.
S, G & A EXPENSE
The Company's ability to control the amount, and rate of growth in, selling,
general and administrative expenses; and the impact of unusual items resulting
from the Company's ongoing evaluation of its business strategies, asset
valuations and organizational structures.
FINANCING
The Company's ability to obtain competitive financing to fund its growth.
QUARTERLY FLUCTUATIONS
The Company's quarterly results of operations have fluctuated as a result of the
timing of recognition of franchise fees, receipt of royalty payments, timing of
merchandise shipments, timing of expenditures and other factors. There can be no
assurance that results in future periods will not fluctuate on a quarterly
basis.
GOVERNMENT REGULATION
As a franchisor, the Company is subject to various federal and state franchise
laws and regulations. Although the Company believes it is currently in material
compliance with existing federal and state laws, there is a trend toward
increasing government regulation of franchising. The promulgation of new
franchising laws and regulations could adversely affect the Company.
The Company does not undertake and specifically declines any obligations to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-END> SEP-26-1998
<CASH> 0
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<RECEIVABLES> 12,747
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0
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