UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 25, 1999 Commission File Number 0-22012 GROW BIZ INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter) Minnesota 41-1622691 --------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 4200 Dahlberg Drive Golden Valley, MN 55422-4837 ---------------------------- (Address of Principal Executive Offices, Zip Code) Registrant's Telephone Number, Including Area Code 612-520-8500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, no par value, 5,346,119 shares outstanding as of November 3, 1999. - --------------------------------------------------------------------------------
GROW BIZ INTERNATIONAL, INC. INDEX PART I. FINANCIAL INFORMATION PAGE - -------------------------------------------------------------------------------- Item 1. Financial Statements (Unaudited) CONDENSED BALANCE SHEETS: 3 September 25, 1999 and December 26, 1998 CONDENSED STATEMENTS OF OPERATIONS: 4 Three Months Ended September 25, 1999 and September 26, 1998 Nine Months Ended September 25, 1999 and September 26, 1998 CONDENSED STATEMENTS OF CASH FLOWS: 5 Nine Months Ended September 25, 1999 and September 26, 1998 NOTES TO CONDENSED FINANCIAL STATEMENTS 6 - 7 Item 2. Management's Discussion and Analysis of Financial 8 - 16 Condition and Results of Operations PART II. OTHER INFORMATION PAGE - -------------------------------------------------------------------------------- Items 1 and 3 through 5 have been omitted since all items are inapplicable or answers negative. Item 2. Changes in Securities and Use of Proceeds 16 Item 6. Exhibits and Reports on Form 8-K 16 - 17 2
GROW BIZ INTERNATIONAL, INC. CONDENSED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> ----------------------------------------- September 25, 1999 December 26, 1998 ----------------------------------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ -- $ 2,418,000 Trade receivables, less allowance for doubtful accounts of $989,000 and $1,053,000 8,671,600 13,893,700 Inventories 6,949,800 10,124,400 Prepaid expenses and other 6,919,300 2,459,300 Deferred income taxes 1,699,100 1,699,100 ------------- ------------- Total current assets 24,239,800 30,594,500 Notes receivable 1,505,300 1,208,600 Property and equipment, net 4,729,300 5,960,500 Restructuring asset held for sale (Note 3) 111,900 -- Other assets, net 1,929,100 5,377,300 ------------- ------------- $ 32,515,400 $ 43,140,900 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 5,164,400 $ 11,306,600 Accrued liabilities 1,131,000 1,818,700 Accrued restructuring liability (Note 3) 4,643,500 -- Current maturities of long-term debt 7,680,900 14,464,300 Deferred franchise fee revenue 1,280,300 1,901,800 ------------- ------------- Total current liabilities 19,900,100 29,491,400 Long-Term Debt 8,764,000 3,484,600 Shareholders' Equity: Common stock, no par, 10,000,000 shares authorized, 5,329,795 and 5,079,055 shares issued and outstanding -- -- Retained earnings 3,851,300 10,164,900 ------------- ------------- Total shareholders' equity 3,851,300 10,164,900 ------------- ------------- $ 32,515,400 $ 43,140,900 ============= ============= </TABLE> The accompanying notes are an integral part of these financial statements 3
GROW BIZ INTERNATIONAL, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> --------------------------------------------------------------------- Quarter Ended Nine Months Ended September 25, September 26, September 25, September 26, 1999 1998 1999 1998 --------------------------------------------------------------------- <S> <C> <C> <C> <C> REVENUE: Merchandise sales $ 11,223,300 $ 16,638,500 $ 34,165,600 $ 54,037,000 Royalties 4,755,700 4,688,700 14,391,100 14,574,700 Franchise fees 500,600 940,900 1,478,800 2,488,400 Advertising and other 194,000 215,900 438,200 505,000 ------------- ------------- ------------- ------------- Total revenue 16,673,600 22,484,000 50,473,700 71,605,100 COST OF MERCHANDISE SOLD 9,846,500 13,451,700 29,195,400 44,210,500 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,160,800 6,541,600 21,541,100 22,082,000 RESTRUCTURING CHARGE (NOTE 3) 11,575,300 -- 11,575,300 -- GAIN ON SALE OF DISC GO ROUND -- -- -- 5,231,500 ------------- ------------- ------------- ------------- Income from operations (11,909,000) 2,490,700 (11,838,100) 10,544,100 INTEREST INCOME 61,800 125,100 284,000 345,100 INTEREST EXPENSE (391,200) (143,500) (1,171,900) (351,400) ------------- ------------- ------------- ------------- Income before income taxes (12,238,400) 2,472,300 (12,726,000) 10,537,800 (BENEFIT) PROVISION FOR INCOME TAXES (4,797,500) 969,200 (4,988,600) 4,130,900 ------------- ------------- ------------- ------------- NET INCOME (LOSS) $ (7,440,900) $ 1,503,100 $ (7,737,400) $ 6,406,900 ============= ============= ============= ============= NET INCOME (LOSS) PER COMMON SHARE - BASIC $ (1.43) $ .27 $ (1.50) $ 1.09 ============= ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING - - BASIC 5,218,600 5,614,600 5,159,200 5,861,300 ============= ============= ============= ============= NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ (1.43) $ .26 $ (1.50) $ 1.06 ============= ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING - - DILUTED 5,218,600 5,846,800 5,159,200 6,054,700 ============= ============= ============= ============= </TABLE> The accompanying notes are an integral part of these financial statements 4
GROW BIZ INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> --------------------------------- Nine Months Ended September 25, September 26, 1999 1998 --------------------------------- <S> <C> <C> OPERATING ACTIVITIES: Net income (loss) $ (7,737,400) $ 6,406,900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,551,600 1,435,900 Restructuring Charge 11,575,300 -- Change in operating assets and liabilities: Trade receivables 4,801,200 700,100 Inventories 711,300 (1,805,900) Prepaid expenses and other (4,566,900) 319,700 Accounts payable (6,142,100) 1,796,600 Accrued liabilities 1,633,800 427,700 Deferred franchise fee revenue (621,500) (971,700) ------------- ------------- Net cash provided by operating activities 1,205,300 8,309,300 ------------- ------------- INVESTING ACTIVITIES: Increase in other assets (839,000) (400,200) Purchase of property and equipment (2,704,200) (1,338,500) Sale of net assets of Disc Go Round, net of gain -- 1,768,500 ------------- ------------- Net cash provided by (used for) investing activities (3,543,200) 29,800 ------------- ------------- FINANCING ACTIVITIES: Proceeds from notes payable 4,664,500 4,930,200 Payments on long-term debt (6,168,500) (1,669,800) Proceeds from stock option exercises 653,000 1,655,200 Repurchase of common stock -- (16,342,700) Issuance of common stock 770,800 -- ------------- ------------- Net cash used for financing activities (80,200) (11,427,100) ------------- ------------- DECREASE IN CASH AND CASH EQUIVALENTS (2,418,000) (3,088,000) Cash and cash equivalents, beginning of period 2,418,000 3,088,000 ------------- ------------- Cash and cash equivalents, end of period $ -- $ -- ============= ============= </TABLE> The accompanying notes are an integral part of these financial statements 5
GROW BIZ INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. MANAGEMENT'S INTERIM FINANCIAL STATEMENT REPRESENTATION: The accompanying condensed financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The information in the condensed financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. Revenues and operating results for the nine months ended September 25, 1999 are not necessarily indicative of the results to be expected for the full year. 2. ORGANIZATION AND BUSINESS: Grow Biz International, Inc. (the `Company') offers licenses to operate retail stores using the service marks `Play It Again Sports', `Once Upon A Child', `Computer Renaissance', `Music Go Round', `It's About Games', `ReTool' and `Plato's Closet'. In addition, the Company sells inventory to its Play It Again Sports franchisees through its buying group and operates retail stores. The Company has a 52/53 week year which ends on the last Saturday in December. 3. RESTRUCTURING CHARGE: The Company recorded a pre-tax restructuring charge of $11.6 million in the third quarter and expects to incur approximately $1.8 million in additional operating costs, severance and other restructuring costs in the fourth quarter. This charge primarily relates to discontinuing the operations of the sixty Company-owned It's About Games(TM) stores. The planned store closings are expected to be completed by year-end. The $11.6 million restructuring charge includes $6.8 million for anticipated non-cash writedowns, goodwill and other items. Inventory reserves have been increased $2.5 million based on the Company's estimate of net realizable value of the inventory. It also includes $2.3 million of anticipated cash expenditures primarily consisting of estimated payments to landlords for early termination of operating leases and estimated legal and consulting fees. 6
4. NET INCOME PER COMMON SHARE: The Company calculates net income per share in accordance with FASB Statement No. 128 by dividing net income by the weighted average number of shares of common stock outstanding to arrive at the Net Income Per Common Share - Basic. The Company calculates Net Income Per Share - Dilutive by dividing net income by the weighted average number of shares of common stock and dilutive stock equivalents from the exercise of stock options and warrants using the treasury stock method. ------------------------------ Three Months Ended September 25, September 26, 1999 1998 ------------------------------ Shares used in per common share computation: Weighted average shares outstanding - Basic 5,218,600 5,614,600 Dilutive effect of stock options after application of the treasury stock method 0 232,200 --------- --------- Weighted average shares outstanding - Diluted 5,218,600 5,846,800 ========= ========= ------------------------------ Nine Months Ended September 25, September 26, 1999 1998 ------------------------------ Shares used in per common share computation: Weighted average shares outstanding - Basic 5,159,200 5,861,300 Dilutive effect of stock options after application of the treasury stock method 0 193,400 --------- --------- Weighted average shares outstanding - Diluted 5,159,200 6,054,700 ========= ========= 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Grow Biz International, Inc., (the Company) is a franchise company that franchises retail concepts which buy, sell, trade and consign merchandise. Each concept operates in a different industry and provides the consumer with `ultra-high value' retailing by offering quality used merchandise at substantial savings from the price of new merchandise and by purchasing customers' used goods that have been outgrown or are no longer used. The stores also offer new merchandise to supplement their selection of used goods. Following is a summary of the Company's franchising and corporate retail store activity for the retail concepts for the three months ended September 25, 1999: <TABLE> <CAPTION> --------------------------------------------------------- TOTAL OPENED/ CLOSED/ TOTAL 6/26/99 PURCHASED SOLD CONVERTED 9/25/99 --------------------------------------------------------- <S> <C> <C> <C> <C> <C> Play It Again Sports(R) - ----------------------- Franchised Stores - US and Canada 599 4 (14) 1 590 Franchised Stores - Other International 8 0 0 0 8 Corporate 4 0 0 (1) 3 Other 23 0 0 0 23 Once Upon A Child(R) - -------------------- Franchised Stores - US and Canada 218 5 (2) 1 222 Corporate 4 0 0 (1) 3 Computer Renaissance(R) - ----------------------- Franchised Stores - US and Canada 227 2 (12) (1) 216 Corporate 1 0 0 1 2 Music Go Round(R) - ----------------- Franchised Stores - US and Canada 59 5 0 0 64 Corporate 8 0 0 0 8 It's About Games(TM) - -------------------- Franchised Stores - US and Canada 3 0 0 0 3 Corporate 60 1 0 0 61 ReTool(R) - --------- Franchised Stores - US and Canada 5 0 0 0 5 Corporate 3 0 0 0 3 Plato's Closet(R) - ----------------- Franchised Stores - US and Canada 4 0 0 0 4 Corporate 0 1 0 0 1 --------------------------------------------------------- Total 1,226 18 (28) 0 1,216 ========================================================= </TABLE> 8
Following is a summary of the Company's franchising and corporate retail store activity for the nine months ended September 25, 1999: <TABLE> <CAPTION> --------------------------------------------------------- TOTAL OPENED/ CLOSED/ TOTAL 12/27/98 PURCHASED SOLD CONVERTED 9/25/99 --------------------------------------------------------- <S> <C> <C> <C> <C> <C> Play It Again Sports(R) - ----------------------- Franchised Stores - US and Canada 622 10 (43) 1 590 Franchised Stores - Other International 8 0 0 0 8 Corporate 4 0 0 (1) 3 Other 23 0 0 0 23 Once Upon A Child(R) - -------------------- Franchised Stores - US and Canada 209 22 (10) 1 222 Corporate 4 0 0 (1) 3 Computer Renaissance(R) - ----------------------- Franchised Stores - US and Canada 224 17 (24) (1) 216 Corporate 2 0 (1) 1 2 Music Go Round(R) - ----------------- Franchised Stores - US and Canada 54 11 (1) 0 64 Corporate 8 0 0 0 8 It's About Games(TM) - -------------------- Franchised Stores - US and Canada 3 0 0 0 3 Corporate 46 15 0 0 61 ReTool(R) - --------- Franchised Stores - US and Canada 2 3 0 0 5 Corporate 3 0 0 0 3 Plato's Closet(R) - ----------------- Franchised Stores - US and Canada 0 4 0 0 4 Corporate 0 1 0 0 1 --------------------------------------------------------- Total 1,212 83 (79) 0 1,216 ========================================================= </TABLE> FACTORS THAT MAY AFFECT FUTURE RESULTS The statements made in this report that are not historical facts are forward looking statements. Such statements are based on current expectations but involve risks, uncertainties and other factors which may cause actual results to differ materially from those contemplated by such forward looking statements. Important factors which may result in variations from results contemplated by such forward looking statements include, but are not limited to: (1) the Company's ability to attract qualified franchisees; (2) the Company's ability to collect its receivables; (3) the Company's ability to open stores; (4) each store's ability to acquire high-quality, used merchandise; (5) the Company's ability to control selling, general and administrative expenses; (6) the Company's ability to operate the Company-owned retail stores profitably; (7) the Company's ability to negotiate acceptable lease terminations in connection with the It's About Games(TM) restructuring; and (8) the Company's ability to obtain competitive financing to fund its growth. The Company's strategy focuses on enhancing revenues and profits at all store locations and the opening of additional stores. The Company's growth strategy is premised on a number of assumptions concerning trends in each of the retail industries as well as trends in franchising and the economy. To the extent that the Company's assumptions with respect to any of these matters are inaccurate, its results of operations and financial condition could be adversely affected. 9
RESULTS OF OPERATIONS The following table sets forth for the periods indicated, certain income statement items as a percentage of total revenue and the percentage change in the dollar amounts from the prior period: <TABLE> <CAPTION> -------------------------------------------------------------- Three Months Ended Nine Months Ended September 25, September 26, September 25, September 26, 1999 1998 1999 1998 -------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue: Merchandise sales 67.3% 74.0% 67.7% 70.3% Royalties 28.5 20.8 28.5 19.0 Franchise fees 3.0 4.2 2.9 3.2 Advertising and other 1.2 1.0 0.9 7.5 ------ ------ ------ ------ Total revenues 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold 59.1 59.8 57.8 61.7 Selling, general and administrative expenses 42.9 29.1 42.7 30.8 Restructuring charge 69.4 0.0 22.9 0.0 Gain on the sale of Disc Go Round 0.0 0.0 0.0 7.3 ------ ------ ------ ------ Income (loss) from operations (71.4) 11.1 (23.4) 14.8 Interest and other income, net (2.0) (0.1) (1.8) (0.1) ------ ------ ------ ------ Income before income taxes (73.4) 11.0 (25.2) 14.7 (Benefit) Provision for income taxes (28.8) 4.3 (9.9) 5.8 ------ ------ ------ ------ Net income (loss) (44.6)% 6.7% (15.3)% 8.9% ====== ====== ====== ====== </TABLE> COMPARISON OF THREE MONTHS ENDED SEPTEMBER 25, 1999 TO THREE MONTHS ENDED SEPTEMBER 26, 1998 REVENUES Revenues for the quarter ended September 25, 1999 totaled $16.7 million compared to $22.5 million for the comparable period in 1998. Merchandise sales consist of the sale of product to franchisees through the buying group and retail sales at the Company-owned stores. For the third quarter of 1999 and 1998 they were as follows: <TABLE> <CAPTION> 1999 1998 ---- ---- <S> <C> <C> Buying Group $ 5,562,600 $ 9,333,300 Retail Sales 5,660,700 7,305,200 ------------ ------------ Merchandise Sales $ 11,223,300 $ 16,638,500 ============ ============ </TABLE> 10
Buying group revenue decreased 40% for the three months ended September 25, 1999 compared to the same period last year as a result of more franchisees purchasing merchandise directly from vendors. In addition, shipments were delayed by a major hockey supplier, which had an impact on 1999 third quarter revenue and may also impact 1999 fourth quarter. It is anticipated that the buying group sales trends will continue for the remainder of 1999. Retail store sales decreased $1.6 million, or 23%, for the three months ended September 25, 1999 compared to the same period last year despite having an average number of Company-owned stores of 81 in the third quarter of 1999 compared to 70 in the same period of 1998. The revenue decline was due primarily to a comparable store sales decrease of 22% in the It's About Games(TM) stores. The Company is in the process of closing or selling all It's About Games(TM) stores during the fourth quarter of 1999. This will result in a significant decrease in retail store sales for the fourth quarter of 1999. Royalties increased to $4.8 million for the third quarter of 1999 from $4.7 million for the same period in 1998, a 1.4% increase. Franchise fees declined to $500,600 for the third quarter of 1999 compared to $940,900 for the third quarter of 1998. This decrease can be attributed to 16 franchises opened during the quarter ended September 25, 1999 compared to 44 opened during the same period of 1998. In addition, $200,000 of the 1999 third quarter franchise fees related to a master franchise agreement signed with Duskin Company, Ltd., a Japanese company. COST OF MERCHANDISE SOLD Cost of merchandise sold includes the cost of merchandise sold through the buying group and at Company-owned retail stores. Cost of merchandise sold as a percentage of the related revenue for the third quarter of 1999 and 1998 were as follows: 1999 1998 ---- ---- Buying Group 95.8% 94.4% Retail Stores 79.8 63.4 Retail gross margins deteriorated from 36.6% in the third quarter of 1998 to 20.2% in the third quarter of 1999 primarily because of a shift in the mix of video game sales from used to new merchandise which carries a lower gross margin per item. Markdowns required to reduce an overstock position of video game inventory also contributed to the decrease in retail gross margin. SELLING, GENERAL AND ADMINISTRATIVE The $619,200, or 9.5%, increase in operating expenses in the third quarter of 1999 compared to the same period in 1998 is due to the additional costs relating to operating 61 It's About Games(TM) stores during the third quarter of 1999 compared to 43 It's About Games(TM) stores during the same period in 1998 and costs incurred to begin franchising the Plato's Closet(R) concept. 11
RESTRUCTURING CHARGE The Company recorded a pre-tax restructuring charge of $11.6 million in the third quarter and expects to incur approximately $1.8 million in additional operating costs, severance and other restructuring costs in the fourth quarter. This charge primarily relates to discontinuing operations of the sixty Company-owned It's About Games(TM) stores. The concept has posted year-to-date operating losses in excess of $3.4 million and has had a significant impact on the overall financial performance of the Company. The $11.6 million restructuring charge includes $6.8 million for anticipated non-cash writedowns, goodwill and other items. Inventory reserves have been increased $2.5 million based on the Company's estimate of net realizable value of the inventory. It also includes $2.3 million of anticipated cash expenditures primarily consisting of estimated payments to landlords for early termination of operating leases and estimated legal and consulting fees. Further investment in this business is not consistent with the Company's current strategy of reducing the number of Company-owned stores and focusing on franchised store development. The objective is to close or sell all the stores in the It's About Games(TM) chain by year-end. INTEREST EXPENSE During the third quarter of 1999, the Company had interest expense of $391,200 compared to $143,500 in the third quarter of 1998. This increase is primarily the result of the utilization of credit facilities subsequent to June 27, 1998 in connection with the stock repurchase plan. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 25, 1999 TO NINE MONTHS ENDED SEPTEMBER 26, 1998 REVENUES Revenues for the nine months ended September 25, 1999 were $50.5 million compared to $71.6 million for the comparable period in 1998. Merchandise sales consist of the sale of product to franchisees through the buying group and retail sales at the Company-owned stores. For the nine months ended September 25, 1999 and September 26, 1998 they were as follows: 1999 1998 ---- ---- Buying Group $ 17,667,000 $ 31,530,500 Retail Sales 16,498,600 22,506,500 ------------ ------------ Merchandise Sales $ 34,165,600 $ 54,037,000 ============ ============ Buying group revenue decreased 44% for the nine months ended September 25, 1999 compared to the same period last year as a result of more franchisees purchasing merchandise directly from vendors. It is anticipated that the buying group sales trend will continue for the remainder of 12
1999. Retail store sales decreased $6.0 million, or 26.7%, for the nine months ended September 25, 1999 compared to the same period last year despite having an average of 74 Company-owned stores for the nine months ended September 25, 1999 compared to 69 in the same period of 1998. The revenue decline was due to a comparable store sales decrease of 21% for the It's About Games(TM) stores. The Company is in the process of closing or selling all It's About Games(TM) stores during the fourth quarter of 1999. This will result in a significant decrease in retail store sales for the fourth quarter of 1999. Royalties decreased to $14.4 million for the nine months ended September 25, 1999 from $14.6 million for the same period in 1998, a 1.3% decrease. If you exclude the $719,000 in royalties for the nine months ended September 26, 1998 relating to the 137 Disc Go Round stores that were sold in June 1998, royalties increased 3.9% in the third quarter of 1999 compared to the same period in 1998. This increase, excluding Disc Go Round, is due to stronger average franchise store sales within each concept offset slightly by a decrease in the number of franchise stores open. Franchise fees declined to $1.5 million for the nine months ended September 25, 1999 compared to $2.5 million for the same period of 1998. This decrease can be attributed to 67 franchises opened during the nine months ended September 25, 1999 compared to 104 opened during the same period of 1998. COST OF MERCHANDISE SOLD Cost of merchandise sold includes the cost of merchandise sold through the buying group and at Company-owned retail stores. Cost of merchandise sold as a percentage of the related revenue for the nine months ended September 25, 1999 and September 26, 1998 were as follows: 1999 1998 ---- ---- Buying Group 95.2% 95.4% Retail Stores 75.0 62.8 Retail gross margins deteriorated from 37.2% in the first nine months of 1998 to 25.0% in the first nine months of 1999 primarily because of a shift in the mix of video game sales from used to new merchandise which carries a lower gross margin per item. Markdowns required to reduce an overstock position of video game inventory also contributed to the decrease in retail gross margin. SELLING, GENERAL AND ADMINISTRATIVE The $540,900, or 2.4%, decrease in operating expenses in the first nine months of 1999 compared to the same period in 1998 is primarily due to the elimination of Disc Go Round related costs. 13
RESTRUCTURING CHARGE The Company recorded a pre-tax restructuring charge of $11.6 million in the third quarter and expects to incur approximately $1.8 million in additional operating costs, severance and other restructuring costs in the fourth quarter. This charge primarily relates to discontinuing operations of the sixty Company-owned It's About Games(TM) stores. The concept has posted year-to-date operating losses in excess of $3.4 million and has had a significant impact on the overall financial performance of the Company. The $11.6 million restructuring charge includes $6.8 million for anticipated non-cash writedowns, goodwill and other items. Inventory reserves have been increased $2.5 million based on the Company's estimate of net realizable value of the inventory. It also includes $2.3 million of anticipated cash expenditures primarily consisting of estimated payments to landlords for early termination of operating leases and estimated legal and consulting fees. Further investment in this business is not consistent with the Company's current strategy of reducing the number of Company-owned stores and focusing on franchised store development. The objective is to close or sell all the stores in the It's About Games(TM) chain by year-end. INTEREST EXPENSE During the third quarter of 1999, the Company had interest expense of $391,200 compared to $143,500 in the third quarter of 1998. This increase is primarily the result of the utilization of credit facilities subsequent to June 27, 1998 in connection with the stock repurchase plan. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with a current ratio of 1.2 to 1.0. During the nine months ended September 25, 1999, the Company's operating activities provided $1.2 million of cash. The net operating loss of $7.7 million was offset by $11.6 million relating to the restructuring charge, $1.6 million in depreciation and amortization and an increase of $4.6 million in prepaids primarily relating to the tax benefit of the restructuring charge. In addition, working capital management activities provided net cash primarily as a result of a $4.8 million decrease in trade receivables and a $1.6 million increase in accrued liabilities, offset by a $6.1 million decrease in accounts payable. The Company's investing activities used $3.5 million of cash primarily resulting from a $2.7 million increase in property and equipment. During the nine months ended September 25, 1999, the Company's financing activities used $80,200 of cash. The Company drew $4.7 million on its revolving credit and received $653,000 from options exercised to purchase 84,000 shares of the Company's stock. In addition, the Company issued 167,000 shares of stock at $4.63 per share. The proceeds were offset by payments made on the installment notes payable of $6.2 million. 14
On August 31, 1999, the Company renewed and amended its revolving credit facility through April 30, 2000. Maximum borrowings in the facility are $8.5 million through December 31, 1999 and $7.5 million from December 31, 1999 through April 30, 2000. Maximum borrowings are limited by a Borrowing Base that is established at the end of each fiscal month. At September 25, 1999 borrowings were limited to $7.9 million. Borrowings against the line carry an interest rate of the bank's base rate plus one-half of one percent, which was 8.75% at September 25, 1999. As of September 25, 1999, borrowing on the revolving line of credit totaled $5.3 million. The Company also has a $8.0 million term note with an outstanding balance of $7.4 million. In connection with the amendment to the revolving credit facility, the interest rate on the term loan was amended from the bank base plus one-half of one percent to the bank base plus one percent, which was 9.25% at September 25, 1999. As of September 25, 1999, the Company was in compliance or had received waivers of all covenants relating to these facilities. As a result of the restructuring change, the Company has fallen below the NASDAQ national market requirements. Depending on fourth quarter results, the Company may not meet NASDAQ small cap requirements at year-end. The Company believes that its current cash position, cash generated from future operations and the availability of line of credit borrowings will be adequate to meet the Company's current obligations and operating needs. YEAR 2000 The Company has completed an assessment of its internal systems. Older personal computers have been upgraded to new systems that are Year 2000 compliant. Software updates to the Company's systems have been completed. The Company has completed an analysis of its vendor relationships in which the risk of each vendor's non-compliance with Year 2000 was assessed. Letters were sent out in the fourth quarter of 1998 to ascertain the status of each vendor's Year 2000 compliance. Total costs associated with the Year 2000 compliance project through September 25, 1999 have been $494,000. The Company does not anticipate any additional material expenditures associated with completion of the Year 2000 compliance project. A number of franchisees have not converted their point-of-sale hardware and software to be Year 2000 compliant. A Year 2000 compliant version of the point-of-sale software was completed in December 1998 and has been available and ready for implementation. We are currently working with those franchisees that have not converted and expect to be completed by the fourth quarter of 1999. The Company does not provide services to its franchisees in which critical information is date sensitive, nor does it perform operations with equipment that may contain embedded chips that are not Year 2000 compliant. The greatest known risk to an internal system failure is that receivable records would not age and calculate finance charges properly. Should this occur the Company would be required to manage credit granted to franchisees and calculate the monthly finance charge manually. 15
The Company does not have vendor or customer relationships in which critical data is exchanged electronically. The Company would suffer if a service provider such as a telecommunications or utility vendor was not Year 2000 compliant and their respective service was interrupted or terminated. In such a case the Company would be required to revert to its completed disaster recovery plan for the specific issue. If a large number of vendors that provide product to our franchisees were not compliant and unable to provide our franchisees with their `new' product, it is likely that the Company would recognize a material reduction of royalties from the franchisee's lost sales. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c). On September 22, 1999, the Company issued 166,667 shares of its Common Stock, no par value, in connection with its acquisition of all the outstanding common stock of Syzygy Corporation from the five shareholders of Syzygy. The shares were issued pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933, as amended. In issuing the shares pursuant to the exemption, the Company relied on the limited number of offerees, the fact that the offering was made directly to each offeree, the absence of any general solicitation to the public, the sophistication of the offerees, the restriction on the resale of the shares, and the disclosure of information about the issuer similar to a registration statement. On October 1, 1999, the Company issued 16,324 shares of its Common Stock, no par value, in connection with its purchase of the assets of Lundeen Computers, Inc. from the one shareholder of Lundeen. The shares were issued pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933, as amended. In issuing the shares pursuant to the exemption, the Company relied on the limited number of offerees, the fact that the offering was made directly to each offeree, the absence of any general solicitation to the public, the sophistication of the offerees, the restriction on the resale of the shares, and the disclosure of information about the issuer similar to a registration statement. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a). Exhibits Certain of the following exhibits are incorporated by reference from prior filings. The form with which each exhibit was filed and the date of filing are indicated on the following pages. Exhibit Form Date Filed Description ------- ---- ---------- ----------- 27 Financial Data Schedule 99 8-K October 26, 1999 Cautionary Statements 16
(b). Reports on Form 8-K During the quarter ended December 25, 1999, the Company filed a report on Form 8-K dated October 26, 1999, reporting under Item 5, a press release dated October 14, 1999 related to the disposition of It's About Games(TM). 17
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GROW BIZ INTERNATIONAL, INC. Date: November 8, 1999 By: /s/ K. Jeffrey Dahlberg ------------------------ K. Jeffrey Dahlberg Chairman and Chief Executive Officer Date: November 8, 1999 By: /s/ David J. Osdoba, Jr. ------------------------- David J. Osdoba, Jr. Vice President of Finance and Chief Financial Officer 18