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 June 26, 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, 5,163,128 shares outstanding as of July 30, 1999.
-----------------------------------------------------------------------------
<PAGE>
GROW BIZ INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
- --------------------------------------------------------------------------------
Item 1. Financial Statements (Unaudited)
CONDENSED BALANCE SHEETS: 3
June 26, 1999 and December 26, 1998
CONDENSED STATEMENTS OF OPERATIONS: 4
Three Months Ended
June 26, 1999 and June 27, 1998
Six Months Ended
June 26, 1999 and June 27, 1998
CONDENSED STATEMENTS OF CASH FLOWS: 5
Six Months Ended
June 26, 1999 and June 27, 1998
NOTES TO CONDENSED FINANCIAL STATEMENTS 6 - 7
Item 2. Management's Discussion and Analysis of Financial 8 - 15
Condition and Results of Operations
PART II. OTHER INFORMATION PAGE
- --------------------------------------------------------------------------------
Items 1 through 3 and 5 have been omitted since all
items are inapplicable or answers negative.
Item 4. Submission of Matters to a Vote of Security-holders 16
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibit
Number: Description:
------- ------------
10.1 Letter of Agreement between the Company and Sheldon
and Terry Fleck regarding approval to purchase stock
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>
------------------------------------
June 26, 1999 December 26, 1998
------------------------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 31,200 $ 2,418,000
Receivables, less allowance for doubtful accounts of
$941,000 and $1,053,000 8,341,600 13,893,700
Inventories 7,316,200 10,124,400
Prepaid expenses and other 2,227,100 2,459,300
Deferred income taxes 1,699,100 1,699,100
------------ ------------
Total current assets 19,615,200 30,594,500
Long-term receivables 1,062,800 1,208,600
Property and equipment, net 7,407,200 5,960,500
Other assets, net 5,573,500 5,377,300
------------ ------------
$ 33,658,700 $ 43,140,900
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable 2,785,500 11,306,600
Accrued liabilities 417,900 1,818,700
Current maturities of long-term debt 9,391,500 14,464,300
Deferred franchise fee revenue 1,431,000 1,901,800
------------ ------------
Total current liabilities 14,025,900 29,491,400
Long-Term Debt 9,111,400 3,484,600
Shareholders' Equity:
Common stock, no par, 10,000,000 shares authorized,
5,163,128 and 5,079,055 shares issued and outstanding -- --
Retained earnings 10,521,400 10,164,900
------------ ------------
Total shareholders' equity 10,521,400 10,164,900
------------ ------------
$ 33,658,700 $ 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>
------------------------------------------------------------------
Three Months Ended Six Months Ended
June 26, 1999 June 27, 1998 June 26, 1999 June 27, 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Merchandise sales $ 10,004,700 $ 17,205,700 $ 22,942,200 $ 37,398,500
Royalties 4,805,200 5,203,900 9,635,400 9,886,000
Franchise fees 422,500 1,032,300 978,300 1,547,500
Advertising and other 32,400 55,900 244,200 289,200
------------ ------------ ------------ ------------
Total revenue 15,264,800 23,497,800 33,800,100 49,121,200
COST OF MERCHANDISE SOLD 8,238,500 14,136,800 19,348,900 30,758,900
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 6,938,100 7,714,600 14,380,300 15,540,300
GAIN ON SALE OF DISC GO ROUND -- 5,231,500 -- 5,231,500
------------ ------------ ------------ ------------
Income from operations 88,200 6,877,900 70,900 8,053,500
INTEREST INCOME 122,200 125,300 222,200 220,000
INTEREST EXPENSE (409,900) (74,000) (780,700) (207,900)
------------ ------------ ------------ ------------
Income (loss) before income taxes (199,500) 6,929,200 (487,600) 8,065,600
BENEFIT (PROVISION) FOR INCOME TAXES 78,200 (2,716,200) 191,100 (3,161,700)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (121,300) $ 4,213,000 $ (296,500) $ 4,903,900
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
- - BASIC $ (.02) $ .70 $ (.06) $ .82
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
- - BASIC 5,159,800 5,994,100 5,129,200 5,985,600
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
- - DILUTED $ (.02) $ .68 $ (.06) $ .79
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
- - DILUTED 5,205,700 6,211,900 5,212,400 6,183,300
============ ============ ============ ============
</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>
------------------------------------
Six Months Ended
June 26, 1999 June 27, 1998
------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (296,500) $ 4,903,900
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,043,700 1,039,300
Change in operating assets and liabilities:
Receivables 5,697,900 1,542,900
Inventories 2,808,200 (613,600)
Prepaid expenses and other 232,200 27,400
Accounts payable (8,521,100) (1,358,400)
Accrued liabilities (1,400,800) 2,082,200
Deferred franchise fee revenue (470,800) (338,100)
------------ ------------
Net cash provided by (used for) operating
activities (907,200) 7,285,600
------------ ------------
INVESTING ACTIVITIES:
Increase in other assets (417,700) (400,200)
Purchase of property and equipment (2,268,900) (679,900)
Proceeds from sale of net assets of Disc Go Round -- 1,768,500
------------ ------------
Net cash provided by (used for) investing
activities (2,686,600) 688,400
------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 4,364,500 130,200
Payments on long-term debt (3,810,500) (1,111,500)
Proceeds from stock option exercises 653,000 623,800
Repurchase of common stock -- (1,195,500)
------------ ------------
Net cash provided by (used for) financing
activities 1,207,000 (1,553,000)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,386,800) 6,421,000
Cash and cash equivalents, beginning of period 2,418,000 3,088,000
------------ ------------
Cash and cash equivalents, end of period $ 31,200 $ 9,509,000
============ ============
</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 six months ended June 26, 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. LITIGATION:
Harbor Finance Partners, a shareholder of Grow Biz, commenced a shareholder
class action against Grow Biz and the members of its Board of Directors, arising
out of the non-binding proposal by Jeff Dahlberg and Ron Olson, officers,
directors and majority shareholders of Grow Biz, to exchange, through a newly
formed entity, all of the shares of Grow Biz that they do not already own, for
$14 per share in cash. The plaintiff alleges, among other things, that the
proposed price for the shares was substantially below the fair value of those
shares, that the defendants failed to maximize stockholder value through an
adequate auction or market check process, and that the defendants have breached
their fiduciary duties and otherwise unfairly dealt with the plaintiff and the
other minority shareholders. The proposal by Messrs. Dahlberg and Olson was
withdrawn May 4, 1999. On August 3, 1999, the parties to the litigation and the
judge agreed that the case would be dismissed without prejudice. These dismissal
documents are being prepared and are expected to be approved.
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.
<TABLE>
<CAPTION>
--------------------------------
Three Months Ended
June 26, 1999 June 27, 1998
--------------------------------
<S> <C> <C>
Shares used in per common share computation:
Weighted average shares outstanding - Basic 5,159,800 5,994,100
Dilutive effect of stock options after application
of the treasury stock method 45,900 217,800
----------- -----------
Weighted average shares outstanding - Diluted 5,205,700 6,211,900
=========== ===========
<CAPTION>
--------------------------------
Six Months Ended
June 26, 1999 June 27, 1998
--------------------------------
Shares used in per common share computation:
Weighted average shares outstanding - Basic 5,129,200 5,985,600
Dilutive effect of stock options after application
of the treasury stock method 83,200 197,700
----------- -----------
Weighted average shares outstanding - Diluted 5,212,400 6,183,300
=========== ===========
</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 June 26, 1999:
<TABLE>
<CAPTION>
---------------------------------------------------
TOTAL OPENED/ CLOSED/ TOTAL
3/27/99 PURCHASED SOLD CONVERTED 6/26/99
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Play It Again Sports(R)
Franchised Stores - US and Canada 609 3 (13) 0 599
Franchised Stores - Other International 8 0 (0) 0 8
Corporate 4 0 (0) 0 4
Other 23 0 (0) 0 23
Once Upon A Child(R)
Franchised Stores - US and Canada 220 5 (7) 0 218
Corporate 4 0 (0) 0 4
Computer Renaissance(R)
Franchised Stores - US and Canada 227 6 (6) 0 227
Corporate 1 0 (0) 0 1
Music Go Round(R)
Franchised Stores - US and Canada 57 2 (0) 0 59
Corporate 8 0 (0) 0 8
It's About Games(TM)
Franchised Stores - US and Canada 3 0 (0) 0 3
Corporate 57 3 (0) 0 60
ReTool(TM)
Franchised Stores - US and Canada 3 2 (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 0 (0) 0 0
----------------------------------------------------
Total 1,231 21 (26) 0 1,226
====================================================
</TABLE>
8
<PAGE>
Following is a summary of the Company's franchising and corporate retail store
activity for the six months ended June 26, 1999:
<TABLE>
<CAPTION>
---------------------------------------------------
TOTAL OPENED/ CLOSED/ TOTAL
12/26/98 PURCHASED SOLD CONVERTED 6/26/99
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Play It Again Sports(R)
Franchised Stores - US and Canada 622 6 (29) 0 599
Franchised Stores - Other International 8 0 (0) 0 8
Corporate 4 0 (0) 0 4
Other 23 0 (0) 0 23
Once Upon A Child(R)
Franchised Stores - US and Canada 209 17 (8) 0 218
Corporate 4 0 (0) 0 4
Computer Renaissance(R)
Franchised Stores - US and Canada 224 15 (12) 0 227
Corporate 2 0 (1) 0 1
Music Go Round(R)
Franchised Stores - US and Canada 54 6 (1) 0 59
Corporate 8 0 (0) 0 8
It's About Games(TM)
Franchised Stores - US and Canada 3 0 (0) 0 3
Corporate 46 14 (0) 0 60
ReTool(TM)
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 0 (0) 0 0
----------------------------------------------------
Total 1,212 65 (51) 0 1,226
====================================================
</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; and (7)
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 Six Months Ended
June 26, 1999 June 27, 1998 June 26, 1999 June 27, 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Merchandise sales 65.5% 73.2% 67.9% 76.1%
Royalties 31.5 22.1 28.5 20.1
Franchise fees 2.8 4.4 2.9 3.2
Advertising and other 0.2 0.3 0.7 0.6
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold (54.0) (60.2) (57.3) (62.6)
Selling, general and administrative expenses (45.5) (32.8) (42.6) (31.7)
Gain on the sale of Disc Go Round 0.0 22.3 0.0 10.7
----- ----- ----- -----
Income from operations 0.6 29.3 0.2 16.4
Interest and other income, net (1.9) 0.2 (1.7) 0.0
----- ----- ----- -----
Income (loss) before income taxes (1.3) 29.5 (1.4) 16.4
Benefit (provision) for income taxes 0.5 (11.6) 0.6 (6.4)
----- ----- ----- -----
Net income (loss) (0.8)% 17.9% (0.9)% 10.0%
====== ====== ====== ======
</TABLE>
COMPARISON OF THREE MONTHS ENDED JUNE 26, 1999 TO THREE MONTHS ENDED JUNE 27,
1998
REVENUES
Revenues for the quarter ended June 26, 1999 totaled $15.3 million compared to
$23.5 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 second
quarter of 1999 and 1998 they were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Buying Group $ 5,316,700 $ 10,414,900
Retail Sales 4,688,000 6,790,800
------------ ------------
Merchandise Sales $ 10,004,700 $ 17,205,700
============ ============
</TABLE>
Buying group revenue decreased 49% for the three months ended June 26, 1999
compared to the same period last year as a result of more franchisees purchasing
merchandise directly from vendors and a reduction in the number of golf
close-outs made available through the buying group compared to the previous
year. It is anticipated that the buying group sales trends will
10
<PAGE>
continue for the remainder of 1999. Retail store sales decreased $2.1 million,
or 31%, for the three months ended June 26, 1999 compared to the same period
last year despite having an average number of Company-owned stores of 79 in the
second quarter of 1999 compared to 67 in the same period of 1998. The revenue
decline was due to a comparable store sales decrease of 27% in the It's About
Games stores. Comparable stores sales are expected to continue to show a
decrease through the fourth quarter of 1999.
Royalties decreased to $4.8 million for the second quarter of 1999 from $5.2
million for the same period in 1998, a 7.7% decrease. Excluding the $409,000 in
royalties generated in the second quarter of 1998 by the 137 Disc Go Round
stores, that were sold in June 1998, the royalties were consistent with the
prior year.
Franchise fees declined to $422,500 for the second quarter of 1999 compared to
$1.0 million for the second quarter of 1998. This decrease can be attributed to
18 franchises opened during the quarter ended June 26, 1999 compared to 39
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 second quarter of 1999 and 1998 were
as follows:
1999 1998
---- ----
Buying Group 94.0% 95.5%
Retail Stores 69.2 61.7
Retail gross margins deteriorated from 38.3% in the second quarter of 1998 to
30.8% in the second 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. The Company
intends to shift the product mix towards a larger percentage of used video
games, which carry a higher gross margin, and rely less on new product in the
future.
SELLING, GENERAL AND ADMINISTRATIVE
The $776,500, or 10.1%, decrease in operating expenses in the second quarter of
1999 compared to the same period in 1998 is primarily due to the elimination of
Disc Go Round related costs and a reduction in advertising expenditures.
INTEREST EXPENSE
During the second quarter of 1999, the Company had interest expense of $409,900
compared to $74,000 in the second quarter of 1998. This increase is primarily
the result of the interest expense incurred on the lines of credit drawn
subsequent to June 27, 1998 in connection with the stock repurchase plan.
11
<PAGE>
COMPARISON OF SIX MONTHS ENDED JUNE 26, 1999 TO SIX MONTHS ENDED JUNE 27, 1998
REVENUES
Revenues for the six months ended June 26, 1999 were $33.8 million compared to
$49.1 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 six months
ended June 26, 1999 and June 27, 1998 they were as follows:
1999 1998
---- ----
Buying Group $ 12,104,200 $ 22,197,100
Retail Sales 10,838,000 15,201,400
------------ ------------
Merchandise Sales $ 22,942,200 $ 37,398,500
============ ============
Buying group revenue decreased 45.5% for the six months ended June 26, 1999
compared to the same period last year as a result of more franchisees purchasing
merchandise directly from vendors and a reduction in the number of golf
close-outs made available through the buying group compared to the previous
year. It is anticipated that the buying group sales trend will continue for the
remainder of 1999. Retail store sales decreased $4.4 million, or 28.7%, for the
six months ended June 26, 1999 compared to the same period last year despite
having an average number of Company-owned stores of 74 for the six months ended
June 26, 1999 compared to 66 in the same period of 1998. The revenue decline was
due to a comparable store sales decrease of 22% for the It's About Games stores.
Comparable store sales are expected to continue to show a decrease through the
fourth quarter of 1999.
Royalties decreased to $9.6 million for the six months ended June 26, 1999 from
$9.9 million for the same period in 1998, a 2.5% decrease. Excluding the
$719,000 in royalties generated in the six months ended June 27, 1998 by the 137
Disc Go Round stores, that were sold in June 1998, the comparable increase in
royalties is 5.1%. This increase is due to the expanding base of franchise
stores in the remaining concepts and stronger average franchise store sales
within each concept.
Franchise fees declined to $978,300 for the six months ended June 26, 1999
compared to $1.5 million for the same period of 1998. This decrease can be
attributed to 51 franchises opened during the six months ended June 26, 1999
compared to 62 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 six months ended June 26, 1999 and
June 27, 1998 were as follows:
12
<PAGE>
1999 1998
---- ----
Buying Group 95.0% 95.8%
Retail Stores 72.5 62.4
Retail gross margins deteriorated from 37.6% in the first six months of 1998 to
27.5% in the first six 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. The Company
intends to shift the product mix towards a larger percentage of used video
games, which carry a higher gross margin, and rely less on new product in the
future.
SELLING, GENERAL AND ADMINISTRATIVE
The $1.2 million, or 7.5%, decrease in operating expenses in the first six
months of 1999 compared to the same period in 1998 is primarily due to the
elimination of Disc Go Round related costs and to efficiencies achieved in
operating the franchise system.
INTEREST EXPENSE
During the first six months of 1999, the Company had interest expense of
$780,700 compared to $207,900 for the same period of 1998. This increase is
primarily the result of the interest expense incurred on the lines of credit
drawn 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 1.4 to 1.0.
During the six months ended June 26, 1999, the Company's operating activities
used $907,200 of cash. This decrease in cash available from operations is
primarily due to working capital management activities that included a $8.5
million decrease in accounts payable and a $1.4 million decrease in accrued
liabilities, offset partially by a $5.7 million decrease in receivables and a
$2.8 million decrease in inventory from year-end.
The change in these components is the result of a number of interrelated
factors. Typically, the Company is required to pay for winter goods purchased by
Play It Again Sports franchisees through the buying group in the first quarter.
It also collects a portion of the corresponding receivable from the franchisees
during this same period with the remaining amount collected later. This
contributed to the reduction in accounts payable and receivable in the first
quarter of 1999 and in 1998. Another factor that contributed to the reduction is
accounts payable related to the video game inventory. Video game inventory was
$4.8 million higher at the end of 1998 compared to 1997. Payment for this
inventory was made during the first quarter of 1999. The majority of the video
game inventory on hand at the end of 1997 had been paid and therefore there was
no corresponding accounts payable balance.
13
<PAGE>
The Company's investing activities used $2.7 million primarily resulting from a
$2.3 million increase in property and equipment.
During the six months ended June 26, 1999, the Company's financing activities
provided $1.2 million of cash. The Company drew $4.4 million on its revolving
credit and received $653,000 from options exercised to purchase 84,000 shares of
the Company's stock. The proceeds were offset by payments made on the
installment notes payable of $3.8 million.
The Company had a $10.0 million committed revolving line of credit which was due
to expire on July 31, 1999. Historically, this facility has been renewed on an
annual basis. The maturity date of this facility has been extended through
August 31, 1999 and the maximum borrowings reduced to $7.5 million. As of June
26, 1999, borrowings against the line were $6.5 million and carry an interest
rate of the bank's base rate, which was 8.0% at June 26, 1999. The Company
anticipates completing the renewal of the line of credit during August 1999.
The Company believes that its current cash position, cash generated from future
operations, availability of line of credit borrowings and additional capacity
for debt 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 are in process and expected to be
completed by the third quarter of 1999. 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 June 26, 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 third 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.
14
<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.
15
<PAGE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At the Annual Shareholders meeting held on May 26, 1999, the Company submitted
to a vote of security-holders the following matters which received the indicated
votes:
1. Approving setting the number of members of the Board of Directors at six (6):
Broker
For: 4,657,103 Against: 12,630 Abstain: 940 Non-Vote: 0
2. Election of Directors:
For: Withheld:
K. Jeffrey Dahlberg 4,662,607 8,066
Ronald G. Olson 4,662,707 7,966
Randel S. Carlock 4,664,707 5,966
Dennis J. Doyle 4,664,607 6,066
Robert C. Pohlad 4,662,507 8,166
Bruce C. Sanborn 4,664,607 6,066
3. Ratifying the appointment of Arthur Andersen LLP as independent auditors
for the current fiscal year:
Broker
For: 4,666,383 Against: 3,760 Abstain: 530 Non-Vote: 0
16
<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: August 5, 1999 By: /s/ K. Jeffrey Dahlberg
----------------------------------------
K. Jeffrey Dahlberg
Chairman and Chief Executive Officer
Date: August 5, 1999 By: /s/ David J. Osdoba, Jr.
----------------------------------------
David J. Osdoba, Jr.
Vice President of Finance and Chief
Financial Officer
17
Exhibit 10.1
GROW BIZ INTERNATIONAL, INC.
4200 DAHLBERG DRIVE
MINNEAPOLIS, MN 55422-4837
(612) 520-8500
July 3, 1999
Mr. Sheldon T. Fleck
Ms. Terry K. Fleck
5720 Smetana Drive, Suite 330
Minnetonka, MN 55343
Dear Mr. and Ms. Fleck:
By letter dated June 3, 1999, you indicated to the Board of Directors of
Grow Biz International, Inc. (the "Company") that you intend to acquire,
directly or through your Affiliates or Associates, Beneficial Ownership of
additional shares of the Company's stock. You requested, pursuant to Section
302A.673 of the Minnesota Business Corporation Act, that a committee of
disinterested members of the Board of Directors approve your acquisition of
Beneficial Ownership of additional shares of the Company's stock as your
Beneficial Ownership of shares of the Company reaches or exceeds ten percent of
the Company's outstanding shares. All capitalized terms contained in this letter
agreement shall have the definitions set forth in the Minnesota Business
Corporation Act.
In response to your letter, and in compliance with the provisions of
Section 302A.673, the Company's Board of Directors established a committee
comprised of Disinterested Directors. The committee of Disinterested Directors
has reviewed your request and has approved any acquisitions by you, directly or
through your Affiliates or Associates, of Beneficial Ownership of additional
shares of the Company's stock from time to time which may result in your
Beneficial Ownership reaching or exceeding ten percent of the Company's
outstanding shares.
In consideration for such approval, you have agreed to the following:
1. Neither you nor your Affiliates or Associates will acquire any
shares of the Company's stock that would result in your
Beneficial Ownership reaching or exceeding fifteen percent of the
Company's outstanding shares; and
2. While your Beneficial Ownership equals or exceeds ten percent of
the Company's outstanding shares, neither you nor any of your
Associates or Affiliates will effect any Business Combination
without the prior approval of a majority of a committee of the
Board of Directors consisting of all of the Disinterested
Directors.
For purposes of calculating the fifteen and ten percent thresholds in each of
the immediately preceding paragraphs numbered 1 and 2, Beneficial Ownership
shall include only shares directly owned by you or your Affiliates or
Associates, but does not include any additional shares, other than shares
directly owned by you or your Affiliates or Associates, which may be deemed
beneficially owned pursuant to the concepts and provisions described in
Subdivision 41(c) of Section 302A.011.
18
<PAGE>
This letter also will confirm that the prior approval for you to pass the
ten percent ownership threshold, which was granted by a special committee of the
Board of Directors on February 6, 1997, is superseded by this current approval.
In addition, because the Company may suffer irreparable harm as a result of
a breach of this letter agreement by you, the Company shall be entitled to
obtain remedies in equity, including without limitation specific performance, to
prevent any actual or threatened breach by you of any provision of this letter
without the necessity of proving damages.
If the terms outlined in this letter are acceptable to you and you are
willing to comply with the restrictions set forth above, please sign in the
space provided below and return an original to me. The second copy is for your
records.
This letter agreement may be executed in one or more counterparts, any one
of which need not contain the signatures of more than one party, but all such
counterparts taken together will constitute one and the same instrument.
Very truly yours,
By /s/ David J. Osdoba
---------------------------------
David J. Osdoba
Vice President of Finance and
Chief Financial Officer
Agreed to and acknowledged
this 3rd day of July, 1999.
/s/ Sheldon T. Fleck
- --------------------------------
Sheldon T. Fleck
/s/ Terry K. Fleck
- --------------------------------
Terry K. Fleck
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
"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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> JUN-26-1999
<CASH> 31
<SECURITIES> 0
<RECEIVABLES> 10,345
<ALLOWANCES> 941
<INVENTORY> 7,316
<CURRENT-ASSETS> 19,615
<PP&E> 13,134
<DEPRECIATION> 5,727
<TOTAL-ASSETS> 33,659
<CURRENT-LIABILITIES> 14,026
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 10,521
<TOTAL-LIABILITY-AND-EQUITY> 33,659
<SALES> 22,942
<TOTAL-REVENUES> 33,800
<CGS> 19,349
<TOTAL-COSTS> 33,729
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 142
<INTEREST-EXPENSE> (781)
<INCOME-PRETAX> (488)
<INCOME-TAX> 191
<INCOME-CONTINUING> (297)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (297)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
