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 25, 1999
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, 5,346,119 shares outstanding as of November 3, 1999.
- --------------------------------------------------------------------------------
<PAGE>
GROW BIZ INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
- --------------------------------------------------------------------------------
Item 1. Financial Statements (Unaudited)
CONDENSED BALANCE SHEETS: 3
September 25, 1999 and December 26, 1998
CONDENSED STATEMENTS OF OPERATIONS: 4
Three Months Ended
September 25, 1999 and September 26, 1998
Nine Months Ended
September 25, 1999 and September 26, 1998
CONDENSED STATEMENTS OF CASH FLOWS: 5
Nine Months Ended
September 25, 1999 and September 26, 1998
NOTES TO CONDENSED FINANCIAL STATEMENTS 6 - 7
Item 2. Management's Discussion and Analysis of Financial 8 - 16
Condition and Results of Operations
PART II. OTHER INFORMATION PAGE
- --------------------------------------------------------------------------------
Items 1 and 3 through 5 have been omitted since all items
are inapplicable or answers negative.
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16 - 17
2
<PAGE>
GROW BIZ INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
-----------------------------------------
September 25, 1999 December 26, 1998
-----------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ -- $ 2,418,000
Trade receivables, less allowance for doubtful accounts of
$989,000 and $1,053,000 8,671,600 13,893,700
Inventories 6,949,800 10,124,400
Prepaid expenses and other 6,919,300 2,459,300
Deferred income taxes 1,699,100 1,699,100
------------- -------------
Total current assets 24,239,800 30,594,500
Notes receivable 1,505,300 1,208,600
Property and equipment, net 4,729,300 5,960,500
Restructuring asset held for sale (Note 3) 111,900 --
Other assets, net 1,929,100 5,377,300
------------- -------------
$ 32,515,400 $ 43,140,900
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,164,400 $ 11,306,600
Accrued liabilities 1,131,000 1,818,700
Accrued restructuring liability (Note 3) 4,643,500 --
Current maturities of long-term debt 7,680,900 14,464,300
Deferred franchise fee revenue 1,280,300 1,901,800
------------- -------------
Total current liabilities 19,900,100 29,491,400
Long-Term Debt 8,764,000 3,484,600
Shareholders' Equity:
Common stock, no par, 10,000,000 shares authorized,
5,329,795 and 5,079,055 shares issued and outstanding -- --
Retained earnings 3,851,300 10,164,900
------------- -------------
Total shareholders' equity 3,851,300 10,164,900
------------- -------------
$ 32,515,400 $ 43,140,900
============= =============
</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>
---------------------------------------------------------------------
Quarter Ended Nine Months Ended
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Merchandise sales $ 11,223,300 $ 16,638,500 $ 34,165,600 $ 54,037,000
Royalties 4,755,700 4,688,700 14,391,100 14,574,700
Franchise fees 500,600 940,900 1,478,800 2,488,400
Advertising and other 194,000 215,900 438,200 505,000
------------- ------------- ------------- -------------
Total revenue 16,673,600 22,484,000 50,473,700 71,605,100
COST OF MERCHANDISE SOLD 9,846,500 13,451,700 29,195,400 44,210,500
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 7,160,800 6,541,600 21,541,100 22,082,000
RESTRUCTURING CHARGE (NOTE 3) 11,575,300 -- 11,575,300 --
GAIN ON SALE OF DISC GO ROUND -- -- -- 5,231,500
------------- ------------- ------------- -------------
Income from operations (11,909,000) 2,490,700 (11,838,100) 10,544,100
INTEREST INCOME 61,800 125,100 284,000 345,100
INTEREST EXPENSE (391,200) (143,500) (1,171,900) (351,400)
------------- ------------- ------------- -------------
Income before income taxes (12,238,400) 2,472,300 (12,726,000) 10,537,800
(BENEFIT) PROVISION FOR INCOME TAXES (4,797,500) 969,200 (4,988,600) 4,130,900
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (7,440,900) $ 1,503,100 $ (7,737,400) $ 6,406,900
============= ============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE -
BASIC $ (1.43) $ .27 $ (1.50) $ 1.09
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING
- - BASIC 5,218,600 5,614,600 5,159,200 5,861,300
============= ============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE -
DILUTED $ (1.43) $ .26 $ (1.50) $ 1.06
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING
- - DILUTED 5,218,600 5,846,800 5,159,200 6,054,700
============= ============= ============= =============
</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 25, September 26,
1999 1998
---------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (7,737,400) $ 6,406,900
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,551,600 1,435,900
Restructuring Charge 11,575,300 --
Change in operating assets and liabilities:
Trade receivables 4,801,200 700,100
Inventories 711,300 (1,805,900)
Prepaid expenses and other (4,566,900) 319,700
Accounts payable (6,142,100) 1,796,600
Accrued liabilities 1,633,800 427,700
Deferred franchise fee revenue (621,500) (971,700)
------------- -------------
Net cash provided by operating activities 1,205,300 8,309,300
------------- -------------
INVESTING ACTIVITIES:
Increase in other assets (839,000) (400,200)
Purchase of property and equipment (2,704,200) (1,338,500)
Sale of net assets of Disc Go Round, net of gain -- 1,768,500
------------- -------------
Net cash provided by (used for) investing
activities (3,543,200) 29,800
------------- -------------
FINANCING ACTIVITIES:
Proceeds from notes payable 4,664,500 4,930,200
Payments on long-term debt (6,168,500) (1,669,800)
Proceeds from stock option exercises 653,000 1,655,200
Repurchase of common stock -- (16,342,700)
Issuance of common stock 770,800 --
------------- -------------
Net cash used for financing activities (80,200) (11,427,100)
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS (2,418,000) (3,088,000)
Cash and cash equivalents, beginning of period 2,418,000 3,088,000
------------- -------------
Cash and cash equivalents, end of period $ -- $ --
============= =============
</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 25, 1999 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', `ReTool' and
`Plato's Closet'. In addition, the Company sells inventory to its Play It Again
Sports 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. RESTRUCTURING CHARGE:
The Company recorded a pre-tax restructuring charge of $11.6 million in the
third quarter and expects to incur approximately $1.8 million in additional
operating costs, severance and other restructuring costs in the fourth quarter.
This charge primarily relates to discontinuing the operations of the sixty
Company-owned It's About Games(TM) stores. The planned store closings are
expected to be completed by year-end. The $11.6 million restructuring charge
includes $6.8 million for anticipated non-cash writedowns, goodwill and other
items. Inventory reserves have been increased $2.5 million based on the
Company's estimate of net realizable value of the inventory. It also includes
$2.3 million of anticipated cash expenditures primarily consisting of estimated
payments to landlords for early termination of operating leases and estimated
legal and consulting fees.
6
<PAGE>
4. 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.
------------------------------
Three Months Ended
September 25, September 26,
1999 1998
------------------------------
Shares used in per common share computation:
Weighted average shares outstanding - Basic 5,218,600 5,614,600
Dilutive effect of stock options after
application of the treasury stock method 0 232,200
--------- ---------
Weighted average shares outstanding - Diluted 5,218,600 5,846,800
========= =========
------------------------------
Nine Months Ended
September 25, September 26,
1999 1998
------------------------------
Shares used in per common share computation:
Weighted average shares outstanding - Basic 5,159,200 5,861,300
Dilutive effect of stock options after
application of the treasury stock method 0 193,400
--------- ---------
Weighted average shares outstanding - Diluted 5,159,200 6,054,700
========= =========
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 25, 1999:
<TABLE>
<CAPTION>
---------------------------------------------------------
TOTAL OPENED/ CLOSED/ TOTAL
6/26/99 PURCHASED SOLD CONVERTED 9/25/99
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Play It Again Sports(R)
- -----------------------
Franchised Stores - US and Canada 599 4 (14) 1 590
Franchised Stores - Other International 8 0 0 0 8
Corporate 4 0 0 (1) 3
Other 23 0 0 0 23
Once Upon A Child(R)
- --------------------
Franchised Stores - US and Canada 218 5 (2) 1 222
Corporate 4 0 0 (1) 3
Computer Renaissance(R)
- -----------------------
Franchised Stores - US and Canada 227 2 (12) (1) 216
Corporate 1 0 0 1 2
Music Go Round(R)
- -----------------
Franchised Stores - US and Canada 59 5 0 0 64
Corporate 8 0 0 0 8
It's About Games(TM)
- --------------------
Franchised Stores - US and Canada 3 0 0 0 3
Corporate 60 1 0 0 61
ReTool(R)
- ---------
Franchised Stores - US and Canada 5 0 0 0 5
Corporate 3 0 0 0 3
Plato's Closet(R)
- -----------------
Franchised Stores - US and Canada 4 0 0 0 4
Corporate 0 1 0 0 1
---------------------------------------------------------
Total 1,226 18 (28) 0 1,216
=========================================================
</TABLE>
8
<PAGE>
Following is a summary of the Company's franchising and corporate retail store
activity for the nine months ended September 25, 1999:
<TABLE>
<CAPTION>
---------------------------------------------------------
TOTAL OPENED/ CLOSED/ TOTAL
12/27/98 PURCHASED SOLD CONVERTED 9/25/99
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Play It Again Sports(R)
- -----------------------
Franchised Stores - US and Canada 622 10 (43) 1 590
Franchised Stores - Other International 8 0 0 0 8
Corporate 4 0 0 (1) 3
Other 23 0 0 0 23
Once Upon A Child(R)
- --------------------
Franchised Stores - US and Canada 209 22 (10) 1 222
Corporate 4 0 0 (1) 3
Computer Renaissance(R)
- -----------------------
Franchised Stores - US and Canada 224 17 (24) (1) 216
Corporate 2 0 (1) 1 2
Music Go Round(R)
- -----------------
Franchised Stores - US and Canada 54 11 (1) 0 64
Corporate 8 0 0 0 8
It's About Games(TM)
- --------------------
Franchised Stores - US and Canada 3 0 0 0 3
Corporate 46 15 0 0 61
ReTool(R)
- ---------
Franchised Stores - US and Canada 2 3 0 0 5
Corporate 3 0 0 0 3
Plato's Closet(R)
- -----------------
Franchised Stores - US and Canada 0 4 0 0 4
Corporate 0 1 0 0 1
---------------------------------------------------------
Total 1,212 83 (79) 0 1,216
=========================================================
</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; (6) the
Company's ability to operate the Company-owned retail stores profitably; (7) the
Company's ability to negotiate acceptable lease terminations in connection with
the It's About Games(TM) restructuring; and (8) 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.
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 25, September 26, September 25, September 26,
1999 1998 1999 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Merchandise sales 67.3% 74.0% 67.7% 70.3%
Royalties 28.5 20.8 28.5 19.0
Franchise fees 3.0 4.2 2.9 3.2
Advertising and other 1.2 1.0 0.9 7.5
------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold 59.1 59.8 57.8 61.7
Selling, general and administrative
expenses 42.9 29.1 42.7 30.8
Restructuring charge 69.4 0.0 22.9 0.0
Gain on the sale of Disc Go Round 0.0 0.0 0.0 7.3
------ ------ ------ ------
Income (loss) from operations (71.4) 11.1 (23.4) 14.8
Interest and other income, net (2.0) (0.1) (1.8) (0.1)
------ ------ ------ ------
Income before income taxes (73.4) 11.0 (25.2) 14.7
(Benefit) Provision for income taxes (28.8) 4.3 (9.9) 5.8
------ ------ ------ ------
Net income (loss) (44.6)% 6.7% (15.3)% 8.9%
====== ====== ====== ======
</TABLE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 25, 1999 TO THREE MONTHS ENDED
SEPTEMBER 26, 1998
REVENUES
Revenues for the quarter ended September 25, 1999 totaled $16.7 million compared
to $22.5 million for the comparable period in 1998.
Merchandise sales consist of the sale of product to franchisees through the
buying group and retail sales at the Company-owned stores. For the third quarter
of 1999 and 1998 they were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Buying Group $ 5,562,600 $ 9,333,300
Retail Sales 5,660,700 7,305,200
------------ ------------
Merchandise Sales $ 11,223,300 $ 16,638,500
============ ============
</TABLE>
10
<PAGE>
Buying group revenue decreased 40% for the three months ended September 25, 1999
compared to the same period last year as a result of more franchisees purchasing
merchandise directly from vendors. In addition, shipments were delayed by a
major hockey supplier, which had an impact on 1999 third quarter revenue and may
also impact 1999 fourth quarter. It is anticipated that the buying group sales
trends will continue for the remainder of 1999. Retail store sales decreased
$1.6 million, or 23%, for the three months ended September 25, 1999 compared to
the same period last year despite having an average number of Company-owned
stores of 81 in the third quarter of 1999 compared to 70 in the same period of
1998. The revenue decline was due primarily to a comparable store sales decrease
of 22% in the It's About Games(TM) stores. The Company is in the process of
closing or selling all It's About Games(TM) stores during the fourth quarter of
1999. This will result in a significant decrease in retail store sales for the
fourth quarter of 1999.
Royalties increased to $4.8 million for the third quarter of 1999 from $4.7
million for the same period in 1998, a 1.4% increase.
Franchise fees declined to $500,600 for the third quarter of 1999 compared to
$940,900 for the third quarter of 1998. This decrease can be attributed to 16
franchises opened during the quarter ended September 25, 1999 compared to 44
opened during the same period of 1998. In addition, $200,000 of the 1999 third
quarter franchise fees related to a master franchise agreement signed with
Duskin Company, Ltd., a Japanese company.
COST OF MERCHANDISE SOLD
Cost of merchandise sold includes the cost of merchandise sold through the
buying group and at Company-owned retail stores. Cost of merchandise sold as a
percentage of the related revenue for the third quarter of 1999 and 1998 were as
follows:
1999 1998
---- ----
Buying Group 95.8% 94.4%
Retail Stores 79.8 63.4
Retail gross margins deteriorated from 36.6% in the third quarter of 1998 to
20.2% in the third quarter of 1999 primarily because of a shift in the mix of
video game sales from used to new merchandise which carries a lower gross margin
per item. Markdowns required to reduce an overstock position of video game
inventory also contributed to the decrease in retail gross margin.
SELLING, GENERAL AND ADMINISTRATIVE
The $619,200, or 9.5%, increase in operating expenses in the third quarter of
1999 compared to the same period in 1998 is due to the additional costs relating
to operating 61 It's About Games(TM) stores during the third quarter of 1999
compared to 43 It's About Games(TM) stores during the same period in 1998 and
costs incurred to begin franchising the Plato's Closet(R) concept.
11
<PAGE>
RESTRUCTURING CHARGE
The Company recorded a pre-tax restructuring charge of $11.6 million in the
third quarter and expects to incur approximately $1.8 million in additional
operating costs, severance and other restructuring costs in the fourth quarter.
This charge primarily relates to discontinuing operations of the sixty
Company-owned It's About Games(TM) stores. The concept has posted year-to-date
operating losses in excess of $3.4 million and has had a significant impact on
the overall financial performance of the Company.
The $11.6 million restructuring charge includes $6.8 million for anticipated
non-cash writedowns, goodwill and other items. Inventory reserves have been
increased $2.5 million based on the Company's estimate of net realizable value
of the inventory. It also includes $2.3 million of anticipated cash expenditures
primarily consisting of estimated payments to landlords for early termination of
operating leases and estimated legal and consulting fees.
Further investment in this business is not consistent with the Company's current
strategy of reducing the number of Company-owned stores and focusing on
franchised store development. The objective is to close or sell all the stores
in the It's About Games(TM) chain by year-end.
INTEREST EXPENSE
During the third quarter of 1999, the Company had interest expense of $391,200
compared to $143,500 in the third quarter of 1998. This increase is primarily
the result of the utilization of credit facilities subsequent to June 27, 1998
in connection with the stock repurchase plan.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 25, 1999 TO NINE MONTHS ENDED
SEPTEMBER 26, 1998
REVENUES
Revenues for the nine months ended September 25, 1999 were $50.5 million
compared to $71.6 million for the comparable period in 1998.
Merchandise sales consist of the sale of product to franchisees through the
buying group and retail sales at the Company-owned stores. For the nine months
ended September 25, 1999 and September 26, 1998 they were as follows:
1999 1998
---- ----
Buying Group $ 17,667,000 $ 31,530,500
Retail Sales 16,498,600 22,506,500
------------ ------------
Merchandise Sales $ 34,165,600 $ 54,037,000
============ ============
Buying group revenue decreased 44% for the nine months ended September 25, 1999
compared to the same period last year as a result of more franchisees purchasing
merchandise directly from vendors. It is anticipated that the buying group sales
trend will continue for the remainder of
12
<PAGE>
1999. Retail store sales decreased $6.0 million, or 26.7%, for the nine months
ended September 25, 1999 compared to the same period last year despite having an
average of 74 Company-owned stores for the nine months ended September 25, 1999
compared to 69 in the same period of 1998. The revenue decline was due to a
comparable store sales decrease of 21% for the It's About Games(TM) stores. The
Company is in the process of closing or selling all It's About Games(TM) stores
during the fourth quarter of 1999. This will result in a significant decrease in
retail store sales for the fourth quarter of 1999.
Royalties decreased to $14.4 million for the nine months ended September 25,
1999 from $14.6 million for the same period in 1998, a 1.3% decrease. If you
exclude the $719,000 in royalties for the nine months ended September 26, 1998
relating to the 137 Disc Go Round stores that were sold in June 1998, royalties
increased 3.9% in the third quarter of 1999 compared to the same period in 1998.
This increase, excluding Disc Go Round, is due to stronger average franchise
store sales within each concept offset slightly by a decrease in the number of
franchise stores open.
Franchise fees declined to $1.5 million for the nine months ended September 25,
1999 compared to $2.5 million for the same period of 1998. This decrease can be
attributed to 67 franchises opened during the nine months ended September 25,
1999 compared to 104 opened during the same period of 1998.
COST OF MERCHANDISE SOLD
Cost of merchandise sold includes the cost of merchandise sold through the
buying group and at Company-owned retail stores. Cost of merchandise sold as a
percentage of the related revenue for the nine months ended September 25, 1999
and September 26, 1998 were as follows:
1999 1998
---- ----
Buying Group 95.2% 95.4%
Retail Stores 75.0 62.8
Retail gross margins deteriorated from 37.2% in the first nine months of 1998 to
25.0% in the first nine months of 1999 primarily because of a shift in the mix
of video game sales from used to new merchandise which carries a lower gross
margin per item. Markdowns required to reduce an overstock position of video
game inventory also contributed to the decrease in retail gross margin.
SELLING, GENERAL AND ADMINISTRATIVE
The $540,900, or 2.4%, decrease in operating expenses in the first nine months
of 1999 compared to the same period in 1998 is primarily due to the elimination
of Disc Go Round related costs.
13
<PAGE>
RESTRUCTURING CHARGE
The Company recorded a pre-tax restructuring charge of $11.6 million in the
third quarter and expects to incur approximately $1.8 million in additional
operating costs, severance and other restructuring costs in the fourth quarter.
This charge primarily relates to discontinuing operations of the sixty
Company-owned It's About Games(TM) stores. The concept has posted year-to-date
operating losses in excess of $3.4 million and has had a significant impact on
the overall financial performance of the Company.
The $11.6 million restructuring charge includes $6.8 million for anticipated
non-cash writedowns, goodwill and other items. Inventory reserves have been
increased $2.5 million based on the Company's estimate of net realizable value
of the inventory. It also includes $2.3 million of anticipated cash expenditures
primarily consisting of estimated payments to landlords for early termination of
operating leases and estimated legal and consulting fees.
Further investment in this business is not consistent with the Company's current
strategy of reducing the number of Company-owned stores and focusing on
franchised store development. The objective is to close or sell all the stores
in the It's About Games(TM) chain by year-end.
INTEREST EXPENSE
During the third quarter of 1999, the Company had interest expense of $391,200
compared to $143,500 in the third quarter of 1998. This increase is primarily
the result of the utilization of credit facilities subsequent to June 27, 1998
in connection with the stock repurchase plan.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with a current ratio of 1.2 to 1.0.
During the nine months ended September 25, 1999, the Company's operating
activities provided $1.2 million of cash. The net operating loss of $7.7 million
was offset by $11.6 million relating to the restructuring charge, $1.6 million
in depreciation and amortization and an increase of $4.6 million in prepaids
primarily relating to the tax benefit of the restructuring charge. In addition,
working capital management activities provided net cash primarily as a result of
a $4.8 million decrease in trade receivables and a $1.6 million increase in
accrued liabilities, offset by a $6.1 million decrease in accounts payable.
The Company's investing activities used $3.5 million of cash primarily resulting
from a $2.7 million increase in property and equipment.
During the nine months ended September 25, 1999, the Company's financing
activities used $80,200 of cash. The Company drew $4.7 million on its revolving
credit and received $653,000 from options exercised to purchase 84,000 shares of
the Company's stock. In addition, the Company issued 167,000 shares of stock at
$4.63 per share. The proceeds were offset by payments made on the installment
notes payable of $6.2 million.
14
<PAGE>
On August 31, 1999, the Company renewed and amended its revolving credit
facility through April 30, 2000. Maximum borrowings in the facility are $8.5
million through December 31, 1999 and $7.5 million from December 31, 1999
through April 30, 2000. Maximum borrowings are limited by a Borrowing Base that
is established at the end of each fiscal month. At September 25, 1999 borrowings
were limited to $7.9 million. Borrowings against the line carry an interest rate
of the bank's base rate plus one-half of one percent, which was 8.75% at
September 25, 1999. As of September 25, 1999, borrowing on the revolving line of
credit totaled $5.3 million. The Company also has a $8.0 million term note with
an outstanding balance of $7.4 million. In connection with the amendment to the
revolving credit facility, the interest rate on the term loan was amended from
the bank base plus one-half of one percent to the bank base plus one percent,
which was 9.25% at September 25, 1999. As of September 25, 1999, the Company was
in compliance or had received waivers of all covenants relating to these
facilities.
As a result of the restructuring change, the Company has fallen below the NASDAQ
national market requirements. Depending on fourth quarter results, the Company
may not meet NASDAQ small cap requirements at year-end.
The Company believes that its current cash position, cash generated from future
operations and the availability of line of credit borrowings 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 have been upgraded to new systems that are Year 2000 compliant.
Software updates to the Company's systems have been completed. 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 were 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 25, 1999 have been $494,000. The Company does not anticipate any
additional material expenditures associated with completion of the Year 2000
compliance project.
A number of franchisees have not converted their point-of-sale hardware and
software to be Year 2000 compliant. A Year 2000 compliant version of the
point-of-sale software was completed in December 1998 and has been available and
ready for implementation. We are currently working with those franchisees that
have not converted and expect to be completed by the fourth quarter of 1999.
The Company does not provide services to its 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.
15
<PAGE>
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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c).
On September 22, 1999, the Company issued 166,667 shares of its Common Stock, no
par value, in connection with its acquisition of all the outstanding common
stock of Syzygy Corporation from the five shareholders of Syzygy. The shares
were issued pursuant to the exemption provided by Section 4(2) of the Securities
Act of 1933, as amended. In issuing the shares pursuant to the exemption, the
Company relied on the limited number of offerees, the fact that the offering was
made directly to each offeree, the absence of any general solicitation to the
public, the sophistication of the offerees, the restriction on the resale of the
shares, and the disclosure of information about the issuer similar to a
registration statement.
On October 1, 1999, the Company issued 16,324 shares of its Common Stock, no par
value, in connection with its purchase of the assets of Lundeen Computers, Inc.
from the one shareholder of Lundeen. The shares were issued pursuant to the
exemption provided by Section 4(2) of the Securities Act of 1933, as amended. In
issuing the shares pursuant to the exemption, the Company relied on the limited
number of offerees, the fact that the offering was made directly to each
offeree, the absence of any general solicitation to the public, the
sophistication of the offerees, the restriction on the resale of the shares, and
the disclosure of information about the issuer similar to a registration
statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
Certain of the following exhibits are incorporated by reference from prior
filings. The form with which each exhibit was filed and the date of filing are
indicated on the following pages.
Exhibit Form Date Filed Description
------- ---- ---------- -----------
27 Financial Data Schedule
99 8-K October 26, 1999 Cautionary Statements
16
<PAGE>
(b). Reports on Form 8-K
During the quarter ended December 25, 1999, the Company filed a report on Form
8-K dated October 26, 1999, reporting under Item 5, a press release dated
October 14, 1999 related to the disposition of It's About Games(TM).
17
<PAGE>
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.
Date: November 8, 1999 By: /s/ K. Jeffrey Dahlberg
------------------------
K. Jeffrey Dahlberg
Chairman and Chief Executive Officer
Date: November 8, 1999 By: /s/ David J. Osdoba, Jr.
-------------------------
David J. Osdoba, Jr.
Vice President of Finance and Chief
Financial Officer
18
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 and teenage apparel,
computer equipment, video games, tools 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 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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<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> SEP-25-1999
<CASH> 0
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<RECEIVABLES> 11,166
<ALLOWANCES> 959
<INVENTORY> 6,950
<CURRENT-ASSETS> 24,240
<PP&E> 10,124
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<TOTAL-LIABILITY-AND-EQUITY> 32,515
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<INTEREST-EXPENSE> (1,172)
<INCOME-PRETAX> (12,726)
<INCOME-TAX> 4,989
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