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 23, 2000
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, Suite 100
Golden Valley, MN 55422-4837
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code 763-520-8500
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, 5,386,433 shares outstanding as of October 31, 2000.
<PAGE>
GROW BIZ INTERNATIONAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets: 3
September 23, 2000 (Unaudited) and December 25, 1999
Condensed Statements of Operations: 4
Three Months Ended
September 23, 2000 and September 25, 1999 (Unaudited)
Nine Months Ended
September 23, 2000 and September 25, 1999 (Unaudited)
Condensed Statements of Cash Flows: 5
Nine Months Ended
September 23, 2000 and September 25, 1999 (Unaudited)
Notes to Condensed Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION PAGE
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Items 1 through 5 have been omitted since all items are
inapplicable or answers negative.
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GROW BIZ INTERNATIONAL, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------- -----------------------
(Unaudited)
September 23, 2000 December 25, 1999
---------------------- -----------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,706,900 $ -
Trade receivables, less allowance for doubtful accounts of
$2,126,600 and $1,044,000 6,602,900 11,164,600
Inventories 1,454,000 1,959,600
Prepaid expenses and other 419,800 6,773,800
Deferred income taxes 2,074,200 2,074,200
Total current assets 13,257,800 21,972,200
Notes receivable 359,000 1,156,300
Property and equipment, net 1,428,800 4,369,100
Other assets, net 760,700 2,144,200
$ 15,806,300 $ 29,641,800
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,020,300 $ 5,350,700
Accrued liabilities 2,944,400 3,707,000
Current maturities of long-term debt 953,800 9,287,600
Current deferred revenue 598,600 878,900
Total current liabilities 8,517,100 19,224,200
Long-Term Debt 4,825,800 7,528,500
Deferred Gain on Building Sale 502,200 -
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 542,100 1,575,600
Total shareholders' equity 1,961,200 2,889,100
$ 15,806,300 $ 29,641,800
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
GROW BIZ INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
--------------------------------------- ----------------------------------
Three Months Ended Nine Months Ended
September 23, September 25, September 23, September 25,
2000 1999 2000 1999
------------------- ------------------- -------------------- -------------
<S> <C> <C> <C> <C>
REVENUE:
Merchandise sales $ 6,777,200 $ 11,223,300 $ 22,912,200 $ 34,165,600
Royalties 4,169,000 4,755,700 12,581,800 14,391,100
Franchise fees 405,300 500,600 789,300 1,478,800
Advertising and other 190,000 194,000 349,300 438,200
Total revenue 11,541,500 16,673,600 36,632,600 50,473,700
COST OF MERCHANDISE SOLD 5,787,400 9,846,500 19,666,400 29,195,400
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 4,863,300 7,160,800 14,987,500 21,541,100
RESTRUCTURING CHARGE -- 11,575,300 -- 11,575,300
EARNINGS CHARGE -- -- 3,337,900 --
GAIN ON SALE OF COMPUTER RENAISSANCE 537,200 -- 537,200 --
Income (loss) from operations 1,428,000 (11,909,000) (822,000) (11,838,100)
INTEREST INCOME 12,000 61,800 84,500 284,000
INTEREST EXPENSE (224,500) (391,200) (962,500) (1,171,900)
Income (loss) before income taxes 1,215,500 (12,238,400) (1,700,000) (12,726,000)
(BENEFIT) PROVISION FOR INCOME TAXES 476,500 (4,797,500) (666,400) (4,988,600)
NET INCOME (LOSS) $ 739,000 $ (7,440,900) $ (1,033,600) $ (7,737,400)
NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED $ .14 $ (1.43) $ (.19) $ (1.50)
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 5,386,400 5,218,600 5,380,800 5,159,200
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
GROW BIZ INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------
Nine Months Ended
September 23, 2000 September 25, 1999
--------------------- ---------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,033,600) $ (7,737,400)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,992,200 1,551,600
Restructuring Charge - 11,575,300
Change in operating assets and liabilities:
Trade receivables 5,359,000 4,801,200
Inventories 505,600 711,300
Prepaid expenses and other 6,354,000 (4,566,900)
Accounts payable (1,330,400) (6,142,100)
Accrued liabilities (762,600) 1,633,800
Deferred franchise fees (463,500) (621,500)
Net cash provided by operating activities 10,620,700 1,205,300
INVESTING ACTIVITIES:
(Increase) Decrease in other assets 64,800 (839,000)
Purchase of property and equipment (445,500) (2,704,200)
Proceeds from sale of property and equipment 3,397,800 -
Net cash provided by (used for)
investing activities 3,017,100 (3,543,200)
FINANCING ACTIVITIES:
Proceeds from notes payable 5,000,000 4,664,500
Payments on long-term debt (16,036,500) (6,168,500)
Proceeds from stock option exercises 105,600 653,000
Issuance of common stock - 770,800
Net cash used for financing activities (10,930,900) (80,200)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,706,900 (2,418,000)
Cash and cash equivalents, beginning of period - 2,418,000
Cash and cash equivalents, end of period $ 2,706,900 $ -
</TABLE>
The accompanying notes are an integral part of these financial statements
<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 Grow Biz
International, Inc. (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 three month period and nine month period
ended September 23, 2000 are not necessarily indicative of the results to be
expected for the full year.
2. Organization and Business:
The Company offers licenses to operate retail stores using the service marks
"Play it Again Sports(R)", "Once Upon A Child(R)", "Music Go Round(R)",
"ReTool(R)" and "Plato's Closet(R)". In addition, the Company sells inventory to
its Play It Again Sports(R) franchisees through its buying group and operates 11
retail stores. The Company has a 52/53-week year that ends on the last Saturday
in December. Fiscal year 2000 is a 53-week fiscal year.
3. Sale of Computer Renaissance:
On August 30, 2000, the Company completed the disposition of substantially all
the assets related to the Computer Renaissance(R) franchising and retailing
operations for $3.0 million to Hollis Technologies, LLC. One million dollars of
the purchase price is being held in an escrow account for up to 18 months from
August 30, 2000. Assuming Hollis Technologies, LLC does not make any claim
against the escrow fund, the escrow agent will disperse $333,333 to the Company
on the six, twelve and eighteen month anniversary of August 30, 2000. Any
amounts received from the escrow will be recorded as additional income when
received. The sale resulted in a $537,200 operating gain, or $.06 per share
diluted, in the third quarter ended September 23, 2000. In addition, the Company
has entered into a five-year $2.0 million consulting agreement to provide
ongoing franchise and business consulting services to Hollis Technologies, LLC.
Pursuant to the Consulting Agreement, Hollis Technologies, LLC agreed to make 60
equal monthly payments of $33,333 to the Company over the term of the agreement.
4. Sale of Corporate Headquarters:
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 then existing bank debt. The Company entered into a four-year lease for
approximately 55% of the facility pursuant to which the Company will pay annual
base rent of $218,980. The sale resulted in a $731,000 gain to be recognized
over the 48-month lease term.
<PAGE>
5. Revolving Line of Credit and Long-Term Debt:
On July 31, 2000, the Company paid in full all amounts outstanding on the bank
revolving line of credit with TCF National Bank Minnesota ("TCF Line") and bank
term note with TCF National Bank Minnesota ("TCF Note") that carried interest
rates at the bank's base rate plus one percent. To replace the bank debt, the
Company entered into a credit agreement with Rush River Group, LLC, an affiliate
of the Company, to provide in one or more term loans up to $7.5 million of
subordinate secured debt at a fixed rate of 14% per year ("Rush River
Facility"). The initial amount borrowed was $5.0 million amortized over seven
years with an additional $2.5 million available under the Rush River Facility on
similar terms upon 10-days' notice. In connection with the credit agreement
governing the Rush River Facility, the Company has agreed to maintain
shareholders' equity of $1,100,000 plus an amount equal to any positive addition
to shareholders' equity by reason of the issuance of the warrant referenced
below. In addition, if there is a change in control, as defined in the credit
agreement, such change in control is considered an event of default and Rush
River Group, LLC may declare all loan(s) under the Rush River Facility
immediately due and payable.
In connection with the Rush River Facility, Rush River Group, LLC received a
warrant to purchase 200,000 shares of the Company's common stock at an exercise
price of $2.00 per share. The terms of the warrant allowed Rush River Group, LLC
to surrender the warrant in exchange for an increase in the annual interest rate
under the Rush River Facility from 14% to 18% if the Nasdaq Stock Market
required the shareholders of the Company to approve the warrant and such
approval was not received. On October 12, 2000, the Nasdaq Stock Market
confirmed that it did not require that the shareholders of the Company approve
the warrant. The warrant was not exercisable prior to such time. In management's
opinion, the Rush River Facility was negotiated at terms comparable to those
that could be arranged with unrelated parties.
6. Net Income Per Common Share:
The Company calculates net income per share in accordance with FASB Statement
No. 128 by dividing net income by the weighted average number of shares of
common stock outstanding to arrive at the Net Income Per Common Share Basic. The
Company calculates Net Income Per Share - Dilutive by 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.
There were no dilutive options outstanding during the periods presented.
7. 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 September 23, 2000, the Company is contingently liable on these
leases for up to an additional $829,000. These leases have various expiration
dates through 2008. The Company's exposure is reduced as leases are paid,
expire, or are renewed by the current operator of the location.
8. New Accounting Pronouncements:
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 137, "Deferral of the Effective Date of SFAS
No. 133," which establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. If certain conditions are met, a
derivative may qualify for hedge accounting. Based on current operations, the
Company anticipates that the adoption of SFAS No. 133 at the beginning of fiscal
2001 will not have a significant impact on its results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. On June 26, 2000, the SEC delayed the adoption date of SAB No. 101.
SAB No. 101 is effective for the Company no later than October 1, 2000. SAB No.
101 is not expected to have a material effect on the Company's financial
position or results of operations.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company franchises and operates retail concepts that buy, sell, trade and
consign merchandise. Each concept operates in a different industry and provides
the consumer with 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 23, 2000:
<TABLE>
<CAPTION>
------------ ------------- ----------- ------------- -----------
TOTAL OPENED/ CLOSED/SOLD TOTAL
6/24/00 PURCHASED CONVERTED 9/23/00
------------ ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Play It Again Sports(R)
Franchised Stores - US and Canada 548 3 (7) 0 544
Franchised Stores - Other International 8 0 0 0 8
Corporate 2 0 0 0 2
Other 23 0 0 0 23
Once Upon A Child(R)
Franchised Stores - US and Canada 226 10 (5) 0 231
Corporate 1 0 0 0 1
Computer Renaissance(R)
Franchised Stores - US and Canada 187 0 (187) 0 0
Corporate 3 0 (3) 0 0
Music Go Round(R)
Franchised Stores - US and Canada 71 1 (5) 0 67
Corporate 7 0 0 0 7
ReTool(R)
Franchised Stores - US and Canada 13 1 0 0 14
Corporate 1 0 0 0 1
Plato's Closet(R)
Franchised Stores - US and Canada 12 8 0 0 20
Corporate 1 0 0 0 1
------------ ------------- ----------- ------------- -----------
Total 1,103 23 (207) 0 919
============ ============= =========== ============= ===========
</TABLE>
<PAGE>
Following is a summary of the Company's franchising and corporate retail store
activity for the nine months ended September 23, 2000:
<TABLE>
<CAPTION>
------------ ------------- ----------- ------------- -----------
TOTAL OPENED/ CLOSED/SOLD TOTAL
12/25/99 PURCHASED CONVERTED 9/23/00
------------ ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Play It Again Sports(R)
Franchised Stores - US and Canada 580 10 (47) 1 544
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 22 (11) 0 231
Corporate 1 0 0 0 1
Computer Renaissance(R)
Franchised Stores - US and Canada 208 1 (209) 0 0
Corporate 3 0 (3) 0 0
Music Go Round(R)
Franchised Stores - US and Canada 72 4 (9) 0 67
Corporate 8 0 (1) 0 7
ReTool(R)
Franchised Stores - US and Canada 11 4 (1) 0 14
Corporate 1 0 0 0 1
Plato's Closet(R)
Franchised Stores - US and Canada 4 16 0 0 20
Corporate 1 0 0 0 1
------------ ------------- ----------- ------------- -----------
Total 1,143 57 (281) 0 919
============ ============= =========== ============= ===========
</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 stores profitably; (7) the
Company's ability to negotiate acceptable lease terminations in connection with
the It's About Games restructuring; and (8) the ability of the primary obligors
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.
<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 23, September 25, September 23, September 25,
2000 1999 2000 1999
------------------ ------------------ --- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenue:
Merchandise sales 58.7% 67.3% 62.5% 67.7%
Royalties 36.1 28.5 34.3 28.5
Franchise fees 3.5 3.0 2.2 2.9
Advertising and other 1.7 1.2 1.0 0.9
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold 50.1 59.1 53.7 57.8
Selling, general and administrative expenses 42.1 42.9 40.9 42.7
Restructuring charge 0.0 69.4 0.0 22.9
Earnings charge 0.0 0.0 9.1 0.0
Gain on sale of Computer Renaissance(R) 4.6 0.0 1.5 0.0
Income (loss) from operations 12.4 (71.4) (2.2) (23.4)
Interest and other income, net (1.9) (2.0) (2.4) (1.8)
Income (loss) before income
taxes 10.5 (73.4) (4.6) (25.2)
(Benefit) Provision for income taxes 4.1 (28.8) (1.8) (9.9)
Net income (loss) 6.4% (44.6)% (2.8)% (15.3)%
</TABLE>
Comparison of Three Months Ended September 23, 2000 to
Three Months Ended September 25, 1999
Revenues
Revenues for the quarter ended September 23, 2000 totaled $11.5 million compared
to $16.7 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 third quarter
of 2000 and 1999 they were as follows:
2000 1999
Buying Group $ 4,872,000 $ 5,562,600
Retail Sales 1,905,200 5,660,700
Merchandise Sales $ 6,777,200 $ 11,223,300
<PAGE>
Buying group revenue decreased 12.4% for the three months ended September 23,
2000 compared to the same period last year. This is a result of having
approximately 47 fewer Play It Again Sports(R) stores open. Retail store sales
decreased $3.8 million, or 66.3%, for the three months ended September 23, 2000
compared to the same period last year. The 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 third quarter of 2000 from $4.8
million for the same period in 1999, a 12.3% decrease. This decrease relates
primarily to (i) the decline in retail sales in the Computer Renaissance concept
and (ii) 228 fewer franchised stores open at the end of the third quarter of
2000 compared to the same period last year, including approximately 182
franchised Computer Renaissance stores removed from the system as part of the
August 30, 2000 sale to Hollis Technologies, LLC.
Franchise fees declined to $405,300 for the third quarter of 2000 compared to
$500,600 for the third quarter of 1999. Although 23 franchised stores were
opened in the third quarter of 2000 compared to 16 stores opened during the same
period last year, the decrease in franchise fees is in part a result of a 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. As of August 1, 2000, existing franchisees are required
to pay an initial franchise fee of $15,000 for each additional franchise. Seven
stores were opened in the third quarter of 2000 that were not required to pay a
franchise fee. 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 2000 and 1999 were as
follows:
2000 1999
Buying Group 95.2% 95.8%
Retail Stores 60.3 79.8
Retail gross margin improvement from 20.2% in the third quarter of 1999 to 39.7%
in the third quarter of 2000, 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 $2.3 million, or 32.1%, decrease in operating expenses in the third 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.
<PAGE>
During the third quarter of 2000, the Company had a net interest expense of
$212,500 compared to $329,400 in the third quarter of 1999. This decrease is
primarily the result of lower debt balances in the third quarter of 2000
compared to the same period last year.
Sale of Computer Renaissance
On August 30, 2000, the Company completed the disposition of substantially all
the assets related to the Computer Renaissance franchising and retailing
operations to Hollis Technologies, LLC. At the time of the disposition, there
were approximately 185 Computer Renaissance(R) stores in operation, including
three Company-owned stores. The sale resulted in a $537,200 operating gain, or
$.06 per share diluted, in the third quarter ended September 23, 2000.
Sale of Corporate Headquarters
On July 10, 2000, the Company sold its corporate headquarters facility to Koch
Trucking, Inc. for approximately $3.5 million in cash. Net proceeds from the
sale were used to pay down then existing bank debt. The Company agreed to lease
back approximately 55% of the facility pursuant to which the Company will pay
annual base rent of $218,980. The sale resulted in a $731,000 gain to be
recognized over the 48-month lease term.
Comparison of Nine Months Ended September 23, 2000 to
Nine Months Ended September 25, 1999
Revenues
Revenues for the nine months ended September 23, 2000 were $36.6 million
compared to $50.5 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 nine months
ended September 23, 2000 and September 25, 1999 they were as follows:
2000 1999
Buying Group $ 16,623,400 $ 17,667,000
Retail Sales 6,288,800 16,498,600
Merchandise Sales $ 22,912,200 $ 34,165,600
Buying group revenue decreased 5.9% for the nine months ended September 23, 2000
compared to the same period last year. This is a result of having approximately
47 fewer Play It Again Sports(R) stores open. Retail store sales decreased $10.2
million, or 61.9%, for the nine months ended September 23, 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 $12.6 million for the nine months ended September 23,
2000 from $14.4 million for the same period in 1999, a 12.6% decrease. This
decrease relates primarily to the decline in retail sales in the Computer
Renaissance concept and 228 fewer franchised stores open at the end of the
second quarter of 2000 compared to the same period last year, including the
approximately 182 franchised Computer Renaissance stores removed as part of the
August 30, 2000 sale to Hollis Technologies, LLC.
<PAGE>
Franchise fees declined to $789,300 for the nine months ended September 23, 2000
compared to $1.5 million for the same period of 1999. This decrease can be
attributed to 57 franchises opened during the nine months ended September 23,
2000 compared to 67 opened during the same period of 1999 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. As of August 1, 2000, existing franchisees are required to
pay an initial franchise fee of $15,000 for each additional franchise.
Twenty-six stores were opened in the nine months ended September 23, 2000 that
were not required to pay a franchise fee.
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 23, 2000
and September 25, 1999 were as follows:
2000 1999
Buying Group 94.8% 95.2%
Retail Stores 62.1 75.0
Retail gross margins improved from 25.0% in the first nine months of 1999 to
37.9% in the first nine 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 $6.6 million, or 30.4%, decrease in operating expenses in the first nine
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 nine months of 2000, the Company had a net interest expense of
$878,000 compared to $887,900 in the first nine months of 1999.
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.
<PAGE>
Sale of Computer Renaissance
On August 30, 2000, the Company completed the disposition of substantially all
the assets related to the Computer Renaissance franchising and retailing
operations to Hollis Technologies, LLC. At the time of the disposition, there
were approximately 185 Computer Renaissance stores in operation, including three
Company-owned stores. The sale resulted in a $537,200 operating gain, or $.06
per share diluted, in the third quarter ended September 23, 2000.
Sale of Corporate Headquarters
On July 10, 2000, the Company sold its corporate headquarters facility to Koch
Trucking, Inc. for approximately $3.5 million in cash. Net proceeds from the
sale were used to pay down then existing bank debt. The Company agreed to lease
back approximately 55% of the facility pursuant to which the Company will pay
annual base rent of $218,980. The sale resulted in a $731,000 gain to be
recognized over the 48-month lease term.
Liquidity and Capital Resources
The Company's primary sources of liquidity have historically been cash flow from
operations and bank borrowings. The Company ended the third quarter of 2000 with
$2.7 million in cash and a current ratio of 1.56 to 1.0 compared to no cash and
a current ratio of 1.22 to 1.0 at the end of the third quarter of 1999.
Ongoing operating activities provided cash of $10.6 million for the first nine
months of 2000 compared to $1.2 million for the same period last year.
Components of the cash provided in the first nine months of 2000 include a $5.4
million reduction in accounts receivable as a result of reduced royalty
accruals, note receivables and buying group receivables. Prepaid expenses and
other current assets provided cash of $6.4 million, primarily due to income tax
refunds received and cash surrender value proceeds from officers' life insurance
policies that were canceled. The components of cash utilized by the reduction in
accounts payable of $1.3 million is primarily the result of reduced buying group
activity. The $762,600 reduction in accrued liabilities consists primarily of
payments on lease settlements on closed It's About Games store locations accrued
at year-end.
Investing activities provided $3.0 million of cash during the first nine months
of 2000 and primarily relates to the sale of the Company's corporate
headquarters facility. Investing activities for the first nine months of 1999
used $3.5 million.
Financing activities used $10.9 million of cash during the first nine months of
2000 compared to $80,200 for the same period last year. The $16.0 million
payments on long-term debt includes $6.2 million payments on the TCF Line, $7.1
million on the TCF Note, $2.5 million to pay off the note relating to the
purchase of Video Game Exchange, Inc. and $326,800 payments on other notes. The
Company received $105,600 in cash from options exercised to purchase stock. The
$5.0 million of proceeds from note payable is the amount borrowed on the new
credit facility with Rush River Group, LLC.
<PAGE>
At the beginning of the third quarter, the Company had in place the TCF Line and
TCF Note. The TCF Line and TCF Note had interest rates equal to the base rate of
TCF National Bank Minnesota plus one percent (10.5% for the portion of the third
quarter during which they were outstanding). On July 31, 2000, the Company
repaid the TCF Line and TCF Note in full.
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 dollars ("Rush River Facility"). The credit agreement allows such
amount to be drawn upon by the Company in one or more term loans. The initial
term loan was $5.0 million dollars and will be repaid by the Company over a
seven-year period. Each term loan is or will accrue interest at 14% per year.
The purposes of establishing the Rush River Facility were to repay the TCF Note
and TCF Line and for general corporate purposes. The Rush River Facility is
secured by a lien against substantially all of the Company's assets. Rush River
Group, LLC has agreed to subordinate its lien to any lien of a financial
institution relating to financing not to exceed $2.5 million dollars.
Among other requirements, the Rush River Facility currently requires that the
Company maintain shareholder equity of at least $1,100,000 plus an amount equal
to any positive addition to shareholders' equity by reason of the issuance of
the warrant referenced below. In addition, if there is a change of control as
defined in the credit agreement governing the Rush River Facility, such change
is an event of default, and Rush River Group, LLC may declare all amounts
outstanding under such term notes immediately due and payable. The Rush River
Facility also contains an agreement allowing the Company to prepay any and all
amounts outstanding under the Rush River Facility without premium or penalty.
In connection with the Rush River Facility, the Company has issued to Rush River
Group, LLC a warrant to purchase 200,000 shares of the Company's common stock at
an exercise price of $2.00 per share. The Warrant became exercisable upon the
removal of certain contingencies and expires on July 31, 2010. See Note 5 to the
Financial Statements, "Revolving Line of Credit and Long Term Debt." 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 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable
<PAGE>
PART II. OTHER INFORMATION
Item 5. Items 1-5.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b.) Reports on Form 8-K
The Company filed a report on Form 8-K on September 1, 2000 related to the sale
of its Computer Renaissance franchising and retail operations.
The Company filed a report on Form 8-K/A on September 14, 2000 related to the
sale of its Computer Renaissance franchising and retail operations.
The Company filed a report on Form 8-K/A on October 24, 2000 related to the sale
of its Computer Renaissance franchising and retail operations.
<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 6, 2000 By: /s/ John L. Morgan
John L. Morgan
Chairman and Chief Executive Officer
Date: November 6, 2000 By: /s/ Gary Stofferahn
Gary Stofferahn
Controller
<PAGE>
Exhibit Index
Grow Biz International, Inc.
Form 10-Q for the Quarter Ended September 23, 2000
Exhibit Description
27 Financial Data Schedule
