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 March 25, 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 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, 5,386,433 shares outstanding as of April 28, 2000.
GROW BIZ INTERNATIONAL, INC. INDEX PART I. FINANCIAL INFORMATION PAGE - -------------------------------------------------------------------------------- Item 1. Financial Statements (Unaudited) CONDENSED BALANCE SHEETS: 3 March 25, 2000 and December 25, 1999 CONDENSED STATEMENTS OF OPERATIONS: 4 Three Months Ended March 25, 2000 and March 27, 1999 CONDENSED STATEMENTS OF CASH FLOWS: 5 Three Months Ended March 25, 2000 and March 27, 1999 NOTES TO CONDENSED FINANCIAL STATEMENTS 6 Item 2. Management's Discussion and Analysis of Financial 7 - 11 Condition and Results of Operations PART II. OTHER INFORMATION - -------------------------------------------------------------------------------- Items 1 through 5 have been omitted since all items are inapplicable or answers negative. Item 6. Exhibits and Reports on Form 8-K (a.) Exhibit Number: Description: ------- ------------ 10.1 Employment Agreement with John Morgan, dated March 22, 2000 10.2 Non-qualified Stock Option Agreement with John Morgan, dated March 22, 2000 10.3 Common Stock Warrant with Sheldon Fleck, dated March 22, 2000 10.4 Fourth Amendment to Amended and Restated Credit Agreement, dated April 28, 2000 27 Financial Data Schedule 99 Cautionary Statements (b.) On March 29, 2000, the Company filed an 8-K related to the resignation of K. Jeffrey Dahlberg and the appointment of John L. Morgan as Chairman and Chief Executive Officer. 2
GROW BIZ INTERNATIONAL, INC. CONDENSED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> ----------------------------------- March 25, 2000 December 25, 1999 ----------------------------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ -- $ -- Receivables, less allowance for doubtful accounts of $1,113,000 and $1,044,000 9,745,700 11,164,600 Inventories 1,830,800 1,959,600 Prepaid expenses and other 5,753,700 6,773,800 Deferred income taxes 2,074,200 2,074,200 -------------- -------------- Total current assets 19,404,400 21,972,200 Notes receivable 1,136,600 1,156,300 Property and equipment, net 4,315,900 4,369,100 Other assets, net 2,079,000 2,144,200 -------------- -------------- $ 26,935,900 $ 29,641,800 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 5,046,100 $ 5,350,700 Accrued liabilities 3,314,800 3,707,000 Current maturities of long-term debt 7,883,700 9,287,600 Deferred franchise fee revenue 940,700 878,900 -------------- -------------- Total current liabilities 17,185,300 19,224,200 Long-Term Debt 6,766,400 7,528,500 Shareholders' Equity: Common stock, no par, 10,000,000 shares authorized, 5,381,119 and 5,346,119 shares issued and outstanding 1,383,500 1,313,500 Retained earnings 1,600,700 1,575,600 -------------- -------------- Total shareholders' equity 2,984,200 2,889,100 -------------- -------------- $ 26,935,900 $ 29,641,800 ============== ============== </TABLE> The accompanying notes are an integral part of these financial statements 3
GROW BIZ INTERNATIONAL, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> ----------------------------------- Three Months Ended March 25, 2000 March 27, 1999 ----------------------------------- <S> <C> <C> REVENUE: Merchandise sales $ 8,268,400 $ 12,937,500 Royalties 4,183,300 4,830,200 Franchise fees 151,200 555,800 Advertising and other 204,400 211,900 -------------- -------------- Total revenue 12,807,300 18,535,400 COST OF MERCHANDISE SOLD 7,113,700 11,110,400 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,313,400 7,442,300 -------------- -------------- Income (loss) from operations 380,200 (17,300) INTEREST INCOME 45,500 100,100 INTEREST EXPENSE (384,500) (370,900) -------------- -------------- Income (loss) before income taxes 41,200 (288,100) BENEFIT (PROVISION) FOR INCOME TAXES (16,100) 112,900 -------------- -------------- NET INCOME (LOSS) $ 25,100 $ (175,200) ============== ============== NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED $ .00 $ (.03) ============== ============== WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 5,357,774 5,103,300 ============== ============== </TABLE> The accompanying notes are an integral part of these financial statements 4
GROW BIZ INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> ----------------------------------- Three Months Ended March 25, 2000 March 27, 1999 ----------------------------------- <S> <C> <C> OPERATING ACTIVITIES: Net income (loss) $ 25,100 $ (175,200) Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 339,200 521,300 Change in operating assets and liabilities: Receivables 1,438,600 2,308,400 Inventories 128,800 2,362,500 Prepaid expenses and other 1,020,100 100,200 Accounts payable (304,600) (5,397,200) Accrued liabilities (392,200) (1,337,000) Deferred franchise fee revenue 61,800 (176,300) -------------- -------------- Net cash provided by (used for) operating activities 2,316,800 (1,793,300) -------------- -------------- INVESTING ACTIVITIES: Increase in other assets (600) (299,100) Purchases of property and equipment (220,200) (1,104,500) -------------- -------------- Net cash used for investing activities (220,800) (1,403,600) -------------- -------------- FINANCING ACTIVITIES: Proceeds from long-term debt -- 1,776,000 Payments on long-term debt (2,166,000) (683,700) Proceeds from stock option exercises 70,000 287,900 -------------- -------------- Net cash provided by (used for) financing activities (2,096,000) 1,380,200 -------------- -------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (1,816,700) Cash and cash equivalents, beginning of period -- 2,418,000 -------------- -------------- Cash and cash equivalents, end of period -- $ 601,300 ============== ============== </TABLE> The accompanying notes are an integral part of these financial statements 5
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 three months ended March 25, 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. NET INCOME PER COMMON SHARE: The Company calculates net income per share in accordance with FASB Statement No. 128 by dividing net income by the weighted average number of shares of common stock outstanding to arrive at the Net Income Per Common Share - Basic. The Company calculates Net Income Per Share - Dilutive by diving net income by the weighted average number of shares of common stock and dilutive stock equivalents from the exercise of stock options and warrants using the treasury stock method. <TABLE> <CAPTION> --------------------------------- Three Months Ended March 25, 2000 March 27, 1999 --------------------------------- <S> <C> <C> Shares used in per common share computation: Weighted average shares outstanding - Basic 5,357,774 5,103,300 Dilutive effect of stock options after application of the treasury stock method - - ------------ ------------ Weighted average shares outstanding - Diluted 5,357,774 5,103,300 ============ ============ </TABLE> 6
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 March 25, 2000: <TABLE> <CAPTION> ------------------------------------------------------------ TOTAL OPENED/ TOTAL 12/25/99 PURCHASED CLOSED CONVERTED 3/25/00 ------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Play It Again Sports(R) - -------------------- Franchised Stores - US and Canada 580 3 (21) 0 562 Franchised Stores - Other International 8 0 0 0 8 Corporate 3 0 0 0 3 Other 23 0 0 0 23 Once Upon A Child(R) - ----------------- Franchised Stores - US and Canada 220 6 (3) 0 223 Corporate 1 0 0 0 1 Computer Renaissance(R) - -------------------- Franchised Stores - US and Canada 208 1 (3) 0 206 Corporate 3 0 0 0 3 Music Go Round(R) - -------------- Franchised Stores - US and Canada 72 2 (2) 0 72 Corporate 8 0 0 0 8 ReTool(TM) - ------ Franchised Stores - US and Canada 11 1 0 0 12 Corporate 1 0 0 0 1 Plato's Closet(R) - -------------- Franchised Stores - US and Canada 4 4 0 0 8 Corporate 1 0 0 0 1 ------------------------------------------------------------ Total 1,143 17 (29) 0 1,131 ============================================================ </TABLE> 7
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 refinance its existing credit facilities; (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 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. 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 First Quarter March 25, March 27, 2000 over (under) 2000 1999 First Quarter 1999 ------------------------------------------------- <S> <C> <C> <C> Revenue: Merchandise sales 64.5% 69.8% (36.1)% Royalties 32.7 26.1 (13.4) Franchise fees 1.2 3.0 (72.8) Advertising and other 1.6 1.1 (3.5) ------- ------- ------- Total revenues 100.0% 100.0% (30.9)% Cost of merchandise sold 55.5 59.9 (36.0) Selling, general and administrative expenses 41.5 40.2 (28.6) ------- ------- ------- Income (loss) from operations 3.0 (0.1) 2,297.7 Interest income (expense), net (2.7) (1.5) (3.7) ------- ------- ------- Income (loss) before income taxes 0.3 (1.6) 114.3 Benefit (provision) for income taxes (0.1) 0.6 114.3 ------- ------- ------- Net income (loss) 0.2% (1.0)% 114.3% ======= ======= ======= </TABLE> 8
COMPARISON OF THREE MONTHS ENDED MARCH 2000 TO THREE MONTHS ENDED MARCH 1999 REVENUES Revenues for the quarter ended March 25, 2000 totaled $12.8 million compared to $18.5 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 first quarter of 2000 and 1999 they were as follows: 2000 1999 ---- ---- Buying Group $ 5,922,600 $ 6,787,600 Retail 2,345,800 6,149,900 ------------ ------------ Merchandise Sales $ 8,268,400 $ 12,937,500 ============ ============ Buying group revenues decreased $865,000, or 12.7%, for the three months ended March 25, 2000 compared to the same period last year. This is a result of management's strategic decision to have more franchisees purchase merchandise directly from vendors and having forty fewer stores open. It is anticipated that buying group sales will trend at the first quarter level for the remainder of 2000. Retail store sales decreased $3.8 million, or 61.9%, for the three months ended March 25, 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 $4.2 million for the first quarter of 2000 from $4.8 million for the same period in 1999, a 13.4% decrease. This decrease relates primarily to the Computer Renaissance concept. Management is addressing this by focusing on store-level profitability and positioning of the concept in a changing environment. Franchise fees decreased $404,600 in the first quarter of 2000 compared to the first quarter of 1999. This decrease is due to opening 17 stores in the first quarter of 2000 compared to 44 stores opened during the same period last year and the change in the franchise fee structure made in July 1999. 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 first quarter of 2000 and 1999 were as follows: 2000 1999 ---- ---- Buying Group 95.1% 95.8% Retail 63.1 75.0 9
Retail gross margin improvement from 25.0% in the first quarter of 1999 to 36.9% in the first quarter of 2000 is primarily the result of eliminating video game sales of new merchandise which carried a lower gross margin per item. 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 28.6%, decrease in operating expenses in the first three 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 quarter of 2000, the Company had a net interest expense of $339,000 compared to $270,800 in the first quarter of 1999. This increase is primarily the result of reduced interest income. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with no cash balance and had a current ratio of 1.1 to 1.0. Ongoing operating activities provided cash of $2.3 million relating to a $1.4 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 $1.0 million, primarily due to income tax refunds received and cash surrender value of life insurance proceeds. The components of cash utilized by the reduction in accounts payable of $304,600 consist primarily of reduced buying group activity. Deferred franchise fee revenue provided cash of $61,800. As a result of the change in the franchise fee structure for additional stores, the number of stores awarded but not opened remained at 88 while the number of stores requiring a franchise fee increased by three. Investing activities used $220,800 of cash during the first quarter of 2000 related to the purchase of office equipment and software development. Financing activities used $2.1 million of cash during the first quarter of 2000. The $2.17 million payments on long-term debt include $225,000 of installment payments on a note relating to the purchase of Video Game Exchange, Inc., $1.38 million payments on the line of credit, $450,000 on the bank term note and $104,800 payments on the settlement agreement note. The Company received $70,000 in cash from options exercised to purchase stock. As of March 25, 2000, the Company had a $7.5 million committed revolving line of credit which was due for renewal on April 30, 2000. This has been renewed through July 31, 2000, at which time the Company will be looking for a different financial institution to provide this financing. Borrowings against the line carry an interest rate of the bank's base rate plus one percent, which was 10.0% at April 28, 2000. At April 28, 2000, the Company had borrowings of $5.0 million against the line. 10
In addition to the line of credit, the Company had an $8.0 million converted bank term note. At March 25, 2000, the Company had borrowings of $6.7 million against the note. Borrowings against the converted note carry an interest rate of the bank's base rate plus one percent, which was 10.0% at March 25, 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. This note is due July 31, 2000. A second bank term note bears interest at the bank's base rate plus one percent which was 10.0% at March 25, 2000. It was being paid in monthly principal and interest installments that began September 1997. At March 25, 2000, the Company had borrowings of $2.3 million against the note. This note is due July 31, 2000. The Company is currently working with several financial institutions to secure a replacement to its existing credit facilities. It is possible that in order to secure the financing required, additional equity, subordinated debt or personal guarantees of the chief executive officer will be required. As of April 30, 2000, the total outstanding debt with its current financial institution was $13.7 million. In March 2000, the Company filed for tax refunds totaling $5.0 million as a result of net operating loss carrybacks. It is anticipated that these refunds will be received prior to July 31, 2000 and will be used to reduce bank debt. The Company believes that a facility with a new financial institution can be arranged prior to the expiration of the Company's current facilities and that this new facility, along with cash generated from future operations, will be adequate to meet the Company's current obligations and operating needs. 11
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: May 8, 2000 By: /s/ John L. Morgan ------------------ John L. Morgan Chairman of the Board, President and Chief Executive Officer Date: May 8, 2000 By: /s/ David J. Osdoba, Jr. ------------------------ David J. Osdoba, Jr. Senior Vice President of Finance and Chief Financial Officer 12