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 24, 2000
Commission File Number 0-22012
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GROW BIZ INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Minnesota 41-1622691
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4200 Dahlberg Drive
Golden Valley, MN 55422-4837
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(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code 763-520-8500
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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, 5,386,433 shares outstanding as of July 31, 2000.
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GROW BIZ INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements (Unaudited)
CONDENSED BALANCE SHEETS: 3
June 24, 2000 and December 25, 1999
CONDENSED STATEMENTS OF OPERATIONS: 4
Three Months Ended
June 24, 2000 and June 26, 1999
Six Months Ended
June 24, 2000 and June 26, 1999
CONDENSED STATEMENTS OF CASH FLOWS: 5
Six Months Ended
June 24, 2000 and June 26, 1999
NOTES TO CONDENSED FINANCIAL STATEMENTS 6 - 8
Item 2. Management's Discussion and Analysis of Financial 8 - 15
Condition and Results of Operations
PART II. OTHER INFORMATION PAGE
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Items 1, 3 and 5 have been omitted since all items are
inapplicable or answers negative.
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security-holders 15
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibit
Number: Description:
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10.1 Credit Agreement with Rush River Group, LLC
10.2 Common Stock Warrant with Rush River Group, LLC
10.3 Real Estate Purchase Agreement with Stan Koch & Sons Trucking,
Inc.
10.4 Lease with Stan Koch & Sons Trucking, Inc. for Corporate
Headquarters
27 Financial Data Schedule
99 Cautionary Statements
(b.) On May 26, 2000, Grow Biz International, Inc. (the "Company") filed a
current report on form 8-K related to the $2.5 million charge to earnings
in the second quarter of 2000.
2
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GROW BIZ INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
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June 24, 2000 December 25, 1999
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 174,700 $ --
Receivables, less allowance for doubtful accounts of
$2,049,600 and $1,044,000 7,562,700 11,164,600
Inventories 1,654,500 1,959,600
Prepaid expenses and other 1,031,600 6,773,800
Deferred income taxes 2,074,200 2,074,200
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Total current assets 12,497,700 21,972,200
Notes receivables 388,300 1,156,300
Property and equipment, net 4,264,700 4,369,100
Other assets, net 873,800 2,144,200
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$ 18,024,500 $ 29,641,800
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,835,000 $ 5,350,700
Accrued liabilities 2,887,500 3,707,000
Current maturities of long-term debt 9,817,500 9,287,600
Deferred franchise fee revenue 865,800 878,900
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Total current liabilities 16,405,800 19,224,200
Long-Term Debt 396,600 7,528,500
Shareholders' Equity:
Common stock, no par, 10,000,000 shares authorized,
5,386,433 and 5,346,119 shares issued and outstanding 1,419,100 1,313,500
Retained earnings (197,000) 1,575,600
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Total shareholders' equity 1,222,100 2,889,100
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$ 18,024,500 $ 29,641,800
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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GROW BIZ INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
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Three Months Ended Six Months Ended
June 24, 2000 June 26, 1999 June 24, 2000 June 26, 1999
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<S> <C> <C> <C> <C>
REVENUE:
Merchandise sales $ 7,757,400 $ 10,004,700 $ 16,002,200 $ 22,942,200
Royalties 4,229,500 4,805,200 8,412,800 9,635,400
Franchise fees 232,800 422,500 384,000 978,300
Advertising and other 64,100 32,400 292,100 244,200
------------ ------------ ------------ ------------
Total revenue 12,283,800 15,264,800 25,091,100 33,800,100
COST OF MERCHANDISE SOLD 6,765,300 8,238,500 13,879,000 19,348,900
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 4,810,800 6,938,100 10,124,200 14,380,300
NONRECURRING CHARGE 3,337,900 -- 3,337,900 --
------------ ------------ ------------ ------------
Income (loss) from operations (2,630,200) 88,200 (2,250,000) 70,900
INTEREST INCOME 27,000 122,200 72,500 222,200
INTEREST EXPENSE (353,500) (409,900) (738,000) (780,700)
------------ ------------ ------------ ------------
Loss before income taxes (2,956,700) (199,500) (2,915,500) (487,600)
BENEFIT FOR INCOME TAXES 1,159,000 78,200 1,142,900 191,100
------------ ------------ ------------ ------------
NET LOSS $ (1,797,700) $ (121,300) $ (1,772,600) $ (296,500)
============ ============ ============ ============
NET LOSS PER COMMON SHARE - BASIC AND
DILUTED $ (.33) $ (.02) $ (.33) $ (.06)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
- BASIC AND DILUTED 5,384,661 5,159,800 5,372,109 5,129,200
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
4
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GROW BIZ INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
---------------------------------
Six Months Ended
June 24, 2000 June 26, 1999
---------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,772,600) $ (296,500)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 1,750,100 1,043,700
Change in operating assets and liabilities:
Receivables 4,369,900 5,697,900
Inventories 305,100 2,808,200
Prepaid expenses and other 5,742,200 232,200
Accounts payable (2,515,700) (8,521,100)
Accrued liabilities (819,500) (1,400,800)
Deferred franchise fee revenue (13,100) (470,800)
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Net cash provided by (used for) operating
activities 7,046,400 (907,200)
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INVESTING ACTIVITIES:
Increase in other assets (600) (417,700)
Purchase of property and equipment (374,700) (2,268,900)
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Net cash used for investing activities (375,300) (2,686,600)
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FINANCING ACTIVITIES:
Proceeds from long-term debt -- 4,364,500
Payments on long-term debt (6,602,000) (3,810,500)
Proceeds from stock option exercises 105,600 653,000
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Net cash provided by (used for) financing
activities (6,496,400) 1,207,000
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INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 174,700 (2,386,800)
Cash and cash equivalents, beginning of period -- 2,418,000
------------ ------------
Cash and cash equivalents, end of period $ 174,700 $ 31,200
============ ============
</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 24, 2000 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', '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. NONRECURRING CHARGE:
The Company recorded a pre-tax, nonrecurring charge of $3.3 million in the
second quarter. This charge consists primarily of two components. First,
approximately $2.0 million relates to management's assessment of current
information relating to notes receivable and lease obligations booked in
connection with the 1998 sale of Company-owned stores. The other component
relates to re-evaluating its franchising concepts and Company-owned stores that
are not performing at expected levels. As a result of this re-evaluation,
certain intangible assets were written-down to reflect estimated realizability
of long-lived assets. The increase in the nonrecurring charge from the $2.5
million reported on the Form 8-K filed on May 26, 2000 relates to additional
charges in connection with Company-owned stores sold in 1998.
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.
6
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<TABLE>
<CAPTION>
--------------------------------
Three Months Ended
June 24, 2000 June 26, 1999
--------------------------------
<S> <C> <C>
Shares used in per common share computation:
Weighted average shares outstanding - Basic 5,384,661 5,159,800
Dilutive effect of stock options after application
of the treasury stock method -- --
------------ ------------
Weighted average shares outstanding - Diluted 5,384,661 5,159,800
============ ============
<CAPTION>
--------------------------------
Six Months Ended
June 24, 2000 June 26, 1999
--------------------------------
Shares used in per common share computation:
Weighted average shares outstanding - Basic 5,372,109 5,129,200
Dilutive effect of stock options after application
of the treasury stock method -- --
------------ ------------
Weighted average shares outstanding - Diluted 5,372,109 5,129,200
============ ============
</TABLE>
5. OTHER CONTINGENCIES:
In addition to the operating lease obligations disclosed in footnote 8 of the
Company's Form 10-K for the year ended December 25, 1999, the Company has
remained a guarantor on Company-owned retail stores that have been either sold
or closed. As of June 24, 2000, the Company is contingently liable on these
leases for up to an additional $1.6 million. These leases have various
expiration dates through 2008. The Company's exposure is reduced as leases
expire or are renewed by the current operator of the location.
6. SUBSEQUENT EVENTS:
On July 6, 2000, the Company signed a non-binding Letter of Intent to sell the
Computer Renaissance franchise concept for $3.0 million to Hollis Technologies,
LLC of Lakeland, Florida, operated by Jack Hollis, a franchisee that currently
operates five Computer Renaissance stores. In connection with this transaction,
the Company will enter into a five-year consulting agreement to provide ongoing
franchise and business consulting services.
On July 10, 2000, the Company sold its corporate headquarters facility to Koch
Trucking, Inc. for $3.5 million in cash. Net proceeds from the sale were used to
pay down bank debt. The Company will lease back approximately 55% of the
facility.
On July 31, 2000, the Company secured a financing commitment with Rush River
Group, LLC, an affiliate of the Company, to provide $5.0 million of subordinate
debt at a fixed rate of 14% amortized over seven years with an additional $2.5
million available on similar terms upon 10-days' notice. In connection with the
credit agreement, the Company has agreed to maintain Shareholders' Equity of
$1,100,000. In addition, if there is a change in control, as defined in the
credit agreement, with respect to the Company, such change of control is
considered an event of default and Rush River Group may declare all loan(s)
under the credit agreement immediately due and payable. In connection with the
financing commitment, a warrant to purchase 200,000
7
<PAGE>
shares of the Company's common stock was granted to Rush River Group, LLC at an
exercise price of $2.00 per share. The warrant cannot be exercised unless the
Company obtains shareholder approval pursuant to the Nasdaq Stock Market rules
or a waiver of such requirement. In management's opinion, this agreement was
negotiated at terms comparable to those that could be arranged with unrelated
parties.
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 24, 2000:
<TABLE>
<CAPTION>
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TOTAL OPENED/ CLOSED/ TOTAL
3/25/00 PURCHASED SOLD CONVERTED 6/24/00
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Play It Again Sports(R)
--------------------
Franchised Stores - US and Canada 562 4 (19) 1 548
Franchised Stores - Other International 8 0 (0) 0 8
Corporate 3 0 (0) (1) 2
Other 23 0 (0) 0 23
Once Upon A Child(R)
-----------------
Franchised Stores - US and Canada 223 6 (3) 0 226
Corporate 1 0 (0) 0 1
Computer Renaissance(R)
--------------------
Franchised Stores - US and Canada 206 0 (19) 0 187
Corporate 3 0 (0) 0 3
Music Go Round(R)
--------------
Franchised Stores - US and Canada 72 1 (2) 0 71
Corporate 8 0 (1) 0 7
ReTool(R)
------
Franchised Stores - US and Canada 12 2 (1) 0 13
Corporate 1 0 (0) 0 1
Plato's Closet(R)
--------------
Franchised Stores - US and Canada 8 4 (0) 0 12
Corporate 1 0 (0) 0 1
---------------------------------------------------------------
Total 1,131 17 (45) 0 1,103
===============================================================
</TABLE>
8
<PAGE>
Following is a summary of the Company's franchising and corporate retail store
activity for the six months ended June 24, 2000:
<TABLE>
<CAPTION>
---------------------------------------------------------------
TOTAL OPENED/ CLOSED/ TOTAL
12/25/99 PURCHASED SOLD CONVERTED 6/24/00
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Play It Again Sports(R)
--------------------
Franchised Stores - US and Canada 580 7 (40) 1 548
Franchised Stores - Other International 8 0 (0) 0 8
Corporate 3 0 (0) (1) 2
Other 23 0 (0) 0 23
Once Upon A Child(R)
-----------------
Franchised Stores - US and Canada 220 12 (6) 0 226
Corporate 1 0 (0) 0 1
Computer Renaissance(R)
--------------------
Franchised Stores - US and Canada 208 1 (22) 0 187
Corporate 3 0 (0) 0 3
Music Go Round(R)
--------------
Franchised Stores - US and Canada 72 3 (4) 0 71
Corporate 8 0 (1) 0 7
ReTool(R)
------
Franchised Stores - US and Canada 11 3 (1) 0 13
Corporate 1 0 (0) 0 1
Plato's Closet(R)
--------------
Franchised Stores - US and Canada 4 8 (0) 0 12
Corporate 1 0 (0) 0 1
---------------------------------------------------------------
Total 1,143 34 (74) 0 1,103
===============================================================
</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 continue to obtain competitive financing to further its
growth; (2) the Company's ability to attract qualified franchisees; (3) the
Company's ability to collect its receivables; (4) the Company's ability to open
stores; (5) each store's ability to acquire high-quality, used merchandise; (6)
the Company's ability to control selling, general and administrative expenses;
(7) the Company's ability to operate the Company-owned stores profitably; (8)
the Company's ability to negotiate acceptable lease terminations in connection
with the It's About Games restructuring; and (9) the ability of the purchasers
of Company-owned stores to meet their commitments on leases that the Company is
a guarantor.
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 24, 2000 June 26, 1999 June 24, 2000 June 26, 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Merchandise sales 63.5% 65.5% 64.0% 67.9%
Royalties 34.4 31.5 33.6 28.5
Franchise fees 1.9 2.8 1.5 2.9
Advertising and other 0.2 0.2 0.9 0.7
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold (55.1) (54.0) (55.3) (57.3)
Selling, general and administrative expenses (39.1) (45.5) (40.4) (42.6)
Nonrecurring charge (27.2) 0.0 (13.3) 0.0
----- ----- ----- -----
Income (loss) from operations (21.4) 0.6 (9.0) 0.2
Interest and other income, net (2.7) (1.9) (2.6) (1.7)
----- ----- ----- -----
Loss before income taxes (24.1) (1.3) (11.6) (1.4)
Benefit for income taxes 9.5 0.5 4.5 0.6
----- ----- ----- -----
Net loss (14.6)% (0.8)% (7.1)% (0.9)%
===== ===== ===== =====
</TABLE>
COMPARISON OF THREE MONTHS ENDED JUNE 24, 2000 TO THREE MONTHS ENDED JUNE 26,
1999
REVENUES
Revenues for the quarter ended June 24, 2000 totaled $12.3 million compared to
$15.3 million for the comparable period in 1999.
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 2000 and 1999 they were as follows:
2000 1999
---- ----
Buying Group $ 5,719,500 $ 5,316,700
Retail Sales 2,037,900 4,688,000
------------- -------------
Merchandise Sales $ 7,757,400 $ 10,004,700
============= =============
Buying group revenue increased 7.6% for the three months ended June 24, 2000
compared to the same period last year. This is a result of increased emphasis on
closeout merchandise and increased franchise retail sales in 2000 over 1999. It
is anticipated that buying group sales will be near the 1999 level for the
remainder of 2000. Retail store sales decreased $2.6 million, or 56.5%, for the
three months ended June 24, 2000 compared to the same period last year. The
10
<PAGE>
revenue decline was primarily due to closing all of the Company-owned It's About
Games stores in the fourth quarter of 1999.
Royalties decreased to $4.2 million for the second quarter of 2000 from $4.8
million for the same period in 1999, a 12.0% decrease. This decrease relates
primarily to the decline in retail sales in the Computer Renaissance concept and
58 fewer franchised stores open at the end of the second quarter of 2000
compared to the same period last year.
Franchise fees declined to $232,800 for the second quarter of 2000 compared to
$422,500 for the second quarter of 1999. This decrease is due to opening 17
stores in the second quarter of 2000 compared to 18 stores opened during the
same period last year and the change in the franchise fee structure made in July
1999. Under such policy, franchisees with existing franchises were not required
to pay an initial franchise fee for an additional franchise. Eight stores were
opened in the second quarter of 2000 that were not required to pay a franchise
fee. As of August 1, 2000, existing franchisees will be required to pay an
initial franchise fee of $15,000 for each additional franchise.
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 2000 and 1999 were
as follows:
2000 1999
---- ----
Buying Group 95.9% 94.0%
Retail Stores 62.7 69.2
Retail gross margin improvement from 30.8% in the second quarter of 1999 to
37.3% in the second quarter of 2000 is primarily the result of closing the It's
About Games retail stores. A large percentage of the video game sales were new
merchandise which carried a lower gross margin per item and, as a result,
reduced the Company's overall gross margins in the Company-owned retail stores.
Margins have returned to a level consistent with margins achieved prior to
acquiring the It's About Games concept and are anticipated to remain at this
level.
SELLING, GENERAL AND ADMINISTRATIVE
The $2.1 million, or 30.7%, decrease in operating expenses in the second quarter
of 2000 compared to the same period in 1999 is primarily due to closing all of
the It's About Games stores in the fourth quarter of 1999 and elimination of
related costs.
During the second quarter of 2000, the Company had a net interest expense of
$326,500 compared to $287,700 in the second quarter of 1999. This increase is
primarily the result of reduced interest income.
11
<PAGE>
NONRECURRING CHARGE
The Company recorded a pre-tax, nonrecurring charge of $3.3 million in the
second quarter. Approximately $2.0 million relates to reserves recorded on notes
receivable and lease obligations booked in connection with Company-owned stores
sold in 1998. The remaining $1.3 million primarily relates to the write-down of
certain intangibles of franchise concepts and Company-owned stores that are not
performing at expected levels to reflect estimated realizability of long-lived
assets.
COMPARISON OF SIX MONTHS ENDED JUNE 24, 2000 TO SIX MONTHS ENDED JUNE 26, 1999
REVENUES
Revenues for the six months ended June 24, 2000 were $25.1 million compared to
$33.8 million for the comparable period in 1999.
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 24, 2000 and June 26, 1999 they were as follows:
2000 1999
---- ----
Buying Group $ 11,618,600 $ 12,104,200
Retail Sales 4,383,600 10,838,000
------------- -------------
Merchandise Sales $ 16,002,200 $ 22,942,200
============= =============
Buying group revenue decreased 4.0% for the six months ended June 24, 2000
compared to the same period last year. This is a result of having 51 fewer
stores open. It is anticipated that buying group sales will be near the 1999
level for the remainder of 2000. Retail store sales decreased $6.5 million, or
59.6%, for the six months ended June 24, 2000 compared to the same period last
year. The revenue decline was due to closing all of the Company-owned It's About
Games stores in the fourth quarter of 1999.
Royalties decreased to $8.4 million for the six months ended June 24, 2000 from
$9.6 million for the same period in 1999, a 12.7% decrease. This decrease
relates primarily to the decline in retail sales in the Computer Renaissance
concept and 58 fewer franchised stores open at the end of the second quarter of
2000 compared to the same period last year.
Franchise fees declined to $384,000 for the six months ended June 24, 2000
compared to $978,300 for the same period of 1999. This decrease can be
attributed to 34 franchises opened during the six months ended June 24, 2000
compared to 51 opened during the same period of 1999 and the change in the
franchise fee structure made in July 1999. Nineteen stores were opened in the
six months ended June 24, 2000 that were not required to pay a franchise fee.
12
<PAGE>
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 24, 2000 and
June 26, 1999 were as follows:
2000 1999
---- ----
Buying Group 95.7% 95.0%
Retail Stores 62.9 72.5
Retail gross margins improved from 27.5% in the first six months of 1999 to
37.1% in the first six months of 2000 is primarily as a result of closing the
It's About Games retail stores. A large percentage of the video game sales were
new merchandise which carried a lower gross margin per item and, as a result,
reduced the Company's overall gross margin in the Company-owned retail stores.
Margins have returned to a level consistent with margins achieved prior to
acquiring the It's About Games concept and are anticipated to remain at this
level.
SELLING, GENERAL AND ADMINISTRATIVE
The $5.5 million, or 28.3%, decrease in operating expenses in the first six
months of 2000 compared to the same period in 1999 is primarily due to closing
all of the It's About Games stores in the fourth quarter of 1999 and elimination
of related costs.
During the first six months of 2000, the Company had a net interest expense of
$665,500 compared to $558,500 in the first six months of 1999. This increase is
primarily the result of reduced interest income.
NONRECURRING CHARGE
The Company recorded a pre-tax, nonrecurring charge of $3.3 million in the
second quarter. Approximately $2.0 million relates to reserves recorded on notes
receivable and lease obligations booked in connection with Company-owned stores
sold in 1998. The remaining $1.3 million primarily relates to the write-down of
certain intangibles of franchise concepts and Company-owned stores that are not
performing at expected levels to reflect estimated realizability of long-lived
assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the second quarter with $174,700 in cash and had a current
ratio of .76 to 1.0.
Ongoing operating activities provided cash of $7.0 million relating to a $4.4
million reduction in accounts receivable as a result of reduced royalty
accruals, note receivables and buying group receivables. Prepaid expenses and
other provided cash of $5.7 million, primarily due to income tax refunds
received and cash surrender value proceeds from life insurance policies on
officers that were canceled. The components of cash utilized by the reduction in
accounts payable of $2.5 million is primarily the result of reduced buying group
activity. The $819,500 reduction in
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<PAGE>
accrued liabilities consists primarily of payments on lease settlements on
closed It's About Games store locations accrued at year-end.
Investing activities used $375,300 of cash during the first six months of 2000
and primarily relates to ongoing development of software utilized by our
franchisees.
Financing activities used $6.5 million of cash during the second quarter of
2000. The $6.6 million payments on long-term debt includes $1.1 million payments
on the line of credit, $2.8 million on the bank term note, $2.5 million to pay
off the note relating to the purchase of Video Game Exchange, Inc. and $175,800
payments on other notes. The Company received $105,600 in cash from options
exercised to purchase stock.
As of June 24, 2000, the Company had a $7.5 million committed revolving line of
credit, which expired on July 31, 2000. Borrowings against the line carried an
interest rate of the bank's base rate plus one percent, which was 10.5% at June
24, 2000. At June 24, 2000, the Company had borrowings of $5.1 million against
the line.
In addition to the line of credit, the Company had an $8.0 million converted
bank term note. At June 24, 2000, the Company had borrowings of $4.2 million
against the note. Borrowings against the converted note carried an interest rate
of the bank's base rate plus one percent, which was 10.5% at June 24, 2000.
Borrowings could be made and repaid through March 31, 1999 on a revolving basis
at which date the total amount outstanding was converted to term debt which was
being paid off in monthly installments that began May 1, 1999.
A second bank term note bearing interest at the bank's base rate plus one
percent was paid in full during the second quarter of 2000.
Subsequent to the end of the second quarter, the Company reduced debt by $4.6
million with proceeds from the sale of its corporate headquarters, tax refunds
and operating cash flows.
On July 31, 2000, the Company entered into a credit agreement with Rush River
Group, LLC, an affiliate of the Company, to provide a credit facility of up to
$7.5 million. The initial term loan was $5.0 million and will be repaid by the
Company over a seven-year period with a fixed rate of 14% interest. Proceeds
were utilized to repay the bank line of credit and term loan that expired July
31, 2000 and for working capital. Additional funding of $2.5 million is
available to the Company through July 31, 2007 in minimum increments of $250,000
with 10-days notice. Each additional funding will be a separate term loan under
the credit agreement. Additional funding will carry a fixed rate of 14% and will
be amortized from the date of the loan through July 31, 2007. In connection with
the credit agreement, the Company has agreed to maintain Shareholders' Equity of
$1,100,000. In addition, if there is a change in control, as defined in the
credit agreement, with respect to the Company, such change of control is
considered an event of default and Rush River Group may declare all loan(s)
under the credit agreement immediately due and payable.
Rush River Group has agreed to subordinate up to $2.5 million of the financing
to a bank. In addition, the agreement contains a prepayment provision that would
allow the Company to repay the debt at any time without premium or penalty. In
connection with the credit agreement, the Company has issued to Rush River Group
a warrant to purchase 200,000 shares of the Company's common stock at an
exercise price of $2.00 per share. The warrant can only be exercised if (i) the
shareholders of the Company approve the warrant or (ii) the Company obtains a
waiver of the shareholder approval requirement contained in the rules of The
Nasdaq Stock
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Market. The warrant expires July 31, 2010. If the Company is unable to obtain
shareholder approval or waiver as discussed above, then the interest rate of
each note issued under the credit facility will increase from 14% to 18%
retroactive to July 31, 2000. In addition, in such case, Rush River Group will
have the option to demand full payment of all such notes upon 60 days' notice.
The Company believes that this new facility, along with cash generated from
future operations, will be adequate to meet the Company's current obligations
and operating needs.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 31, 2000, the Company issued a warrant to Rush River Group, LLC, an
affiliate of the Company, allowing Rush River Group to purchase 200,000 shares
of the Company's common stock at an exercise price of $2 per share. The warrant
was issued in connection with the establishment of a credit facility allowing
the Company to borrow up to $7.5 million from Rush River Group. Other than the
establishment of the credit facility, no consideration was paid for the issuance
of the warrant. The Company issued the warrant pursuant to Section 4(2) the
Securities Act of 1933 (an exemption from the registration requirements of such
Act). The warrant can only be exercised if (i) the shareholders of the Company
approve the warrant or (ii) the Company obtains a waiver of the shareholder
approval requirement contained in the rules of The Nasdaq Stock Market. The
warrant expires July 31, 2010. In management's opinion, the credit agreement was
negotiated at terms comparable to those that could be arranged with unrelated
parties.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At the Annual Shareholders meeting held on May 3, 2000, 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
five (5):
Broker
For: 4,961,776 Against: 1,225 Abstain: 1,226 Non-Vote: 0
2. Election of Directors:
Grant: Withhold:
John L. Morgan 4,960,649 3,578
William D. Dunlap, Jr. 4,960,649 3,578
Kirk A. MacKenzie 4,960,649 3,578
Paul C. Reyelts 4,960,649 3,578
Mark L. Wilson 4,960,649 3,578
3. Ratifying the appointment of Arthur Andersen LLP as independent auditors
for the current fiscal year:
Broker
For: 4,962,388 Against: 660 Abstain: 1,179 Non-Vote: 0
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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 7, 2000 By: /s/ John L. Morgan
-------------------
John L. Morgan
Chairman and Chief Executive Officer
Date: August 7, 2000 By: /s/ Gary Stofferahn
-------------------
Gary Stofferahn
Controller
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