UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 26, 1999 Commission File Number 0-22012 GROW BIZ INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter) Minnesota 41-1622691 --------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 4200 Dahlberg Drive Golden Valley, MN 55422-4837 ---------------------------- (Address of Principal Executive Offices, Zip Code) Registrant's Telephone Number, Including Area Code 612-520-8500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, no par value, 5,163,128 shares outstanding as of July 30, 1999. -----------------------------------------------------------------------------
GROW BIZ INTERNATIONAL, INC. INDEX PART I. FINANCIAL INFORMATION PAGE - -------------------------------------------------------------------------------- Item 1. Financial Statements (Unaudited) CONDENSED BALANCE SHEETS: 3 June 26, 1999 and December 26, 1998 CONDENSED STATEMENTS OF OPERATIONS: 4 Three Months Ended June 26, 1999 and June 27, 1998 Six Months Ended June 26, 1999 and June 27, 1998 CONDENSED STATEMENTS OF CASH FLOWS: 5 Six Months Ended June 26, 1999 and June 27, 1998 NOTES TO CONDENSED FINANCIAL STATEMENTS 6 - 7 Item 2. Management's Discussion and Analysis of Financial 8 - 15 Condition and Results of Operations PART II. OTHER INFORMATION PAGE - -------------------------------------------------------------------------------- Items 1 through 3 and 5 have been omitted since all items are inapplicable or answers negative. Item 4. Submission of Matters to a Vote of Security-holders 16 Item 6. Exhibits and Reports on Form 8-K (a.) Exhibit Number: Description: ------- ------------ 10.1 Letter of Agreement between the Company and Sheldon and Terry Fleck regarding approval to purchase stock 27 Financial Data Schedule 99 Cautionary Statements (b.) Reports on Form 8-K -- None 2
GROW BIZ INTERNATIONAL, INC. CONDENSED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> ------------------------------------ June 26, 1999 December 26, 1998 ------------------------------------ ASSETS <S> <C> <C> Current Assets: Cash and cash equivalents $ 31,200 $ 2,418,000 Receivables, less allowance for doubtful accounts of $941,000 and $1,053,000 8,341,600 13,893,700 Inventories 7,316,200 10,124,400 Prepaid expenses and other 2,227,100 2,459,300 Deferred income taxes 1,699,100 1,699,100 ------------ ------------ Total current assets 19,615,200 30,594,500 Long-term receivables 1,062,800 1,208,600 Property and equipment, net 7,407,200 5,960,500 Other assets, net 5,573,500 5,377,300 ------------ ------------ $ 33,658,700 $ 43,140,900 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable 2,785,500 11,306,600 Accrued liabilities 417,900 1,818,700 Current maturities of long-term debt 9,391,500 14,464,300 Deferred franchise fee revenue 1,431,000 1,901,800 ------------ ------------ Total current liabilities 14,025,900 29,491,400 Long-Term Debt 9,111,400 3,484,600 Shareholders' Equity: Common stock, no par, 10,000,000 shares authorized, 5,163,128 and 5,079,055 shares issued and outstanding -- -- Retained earnings 10,521,400 10,164,900 ------------ ------------ Total shareholders' equity 10,521,400 10,164,900 ------------ ------------ $ 33,658,700 $ 43,140,900 ============ ============ </TABLE> The accompanying notes are an integral part of these financial statements 3
GROW BIZ INTERNATIONAL, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) <TABLE> <CAPTION> ------------------------------------------------------------------ Three Months Ended Six Months Ended June 26, 1999 June 27, 1998 June 26, 1999 June 27, 1998 ------------------------------------------------------------------ <S> <C> <C> <C> <C> REVENUE: Merchandise sales $ 10,004,700 $ 17,205,700 $ 22,942,200 $ 37,398,500 Royalties 4,805,200 5,203,900 9,635,400 9,886,000 Franchise fees 422,500 1,032,300 978,300 1,547,500 Advertising and other 32,400 55,900 244,200 289,200 ------------ ------------ ------------ ------------ Total revenue 15,264,800 23,497,800 33,800,100 49,121,200 COST OF MERCHANDISE SOLD 8,238,500 14,136,800 19,348,900 30,758,900 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,938,100 7,714,600 14,380,300 15,540,300 GAIN ON SALE OF DISC GO ROUND -- 5,231,500 -- 5,231,500 ------------ ------------ ------------ ------------ Income from operations 88,200 6,877,900 70,900 8,053,500 INTEREST INCOME 122,200 125,300 222,200 220,000 INTEREST EXPENSE (409,900) (74,000) (780,700) (207,900) ------------ ------------ ------------ ------------ Income (loss) before income taxes (199,500) 6,929,200 (487,600) 8,065,600 BENEFIT (PROVISION) FOR INCOME TAXES 78,200 (2,716,200) 191,100 (3,161,700) ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ (121,300) $ 4,213,000 $ (296,500) $ 4,903,900 ============ ============ ============ ============ NET INCOME (LOSS) PER COMMON SHARE - - BASIC $ (.02) $ .70 $ (.06) $ .82 ============ ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING - - BASIC 5,159,800 5,994,100 5,129,200 5,985,600 ============ ============ ============ ============ NET INCOME (LOSS) PER COMMON SHARE - - DILUTED $ (.02) $ .68 $ (.06) $ .79 ============ ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING - - DILUTED 5,205,700 6,211,900 5,212,400 6,183,300 ============ ============ ============ ============ </TABLE> The accompanying notes are an integral part of these financial statements 4
GROW BIZ INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> ------------------------------------ Six Months Ended June 26, 1999 June 27, 1998 ------------------------------------ <S> <C> <C> OPERATING ACTIVITIES: Net income (loss) $ (296,500) $ 4,903,900 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,043,700 1,039,300 Change in operating assets and liabilities: Receivables 5,697,900 1,542,900 Inventories 2,808,200 (613,600) Prepaid expenses and other 232,200 27,400 Accounts payable (8,521,100) (1,358,400) Accrued liabilities (1,400,800) 2,082,200 Deferred franchise fee revenue (470,800) (338,100) ------------ ------------ Net cash provided by (used for) operating activities (907,200) 7,285,600 ------------ ------------ INVESTING ACTIVITIES: Increase in other assets (417,700) (400,200) Purchase of property and equipment (2,268,900) (679,900) Proceeds from sale of net assets of Disc Go Round -- 1,768,500 ------------ ------------ Net cash provided by (used for) investing activities (2,686,600) 688,400 ------------ ------------ FINANCING ACTIVITIES: Proceeds from long-term debt 4,364,500 130,200 Payments on long-term debt (3,810,500) (1,111,500) Proceeds from stock option exercises 653,000 623,800 Repurchase of common stock -- (1,195,500) ------------ ------------ Net cash provided by (used for) financing activities 1,207,000 (1,553,000) ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,386,800) 6,421,000 Cash and cash equivalents, beginning of period 2,418,000 3,088,000 ------------ ------------ Cash and cash equivalents, end of period $ 31,200 $ 9,509,000 ============ ============ </TABLE> The accompanying notes are an integral part of these financial statements 5
GROW BIZ INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. MANAGEMENT'S INTERIM FINANCIAL STATEMENT REPRESENTATION: The accompanying condensed financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The information in the condensed financial statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's latest Annual Report on Form 10-K. Revenues and operating results for the six months ended June 26, 1999 are not necessarily indicative of the results to be expected for the full year. 2. ORGANIZATION AND BUSINESS: Grow Biz International, Inc. (the 'Company') offers licenses to operate retail stores using the service marks 'Play it Again Sports', 'Once Upon A Child', 'Computer Renaissance', 'Music Go Round', 'It's About Games', 'ReTool' and 'Plato's Closet'. In addition, the Company sells inventory to its Play It Again Sports franchisees through its buying group and operates retail stores. The Company has a 52/53 week year which ends on the last Saturday in December. 3. LITIGATION: Harbor Finance Partners, a shareholder of Grow Biz, commenced a shareholder class action against Grow Biz and the members of its Board of Directors, arising out of the non-binding proposal by Jeff Dahlberg and Ron Olson, officers, directors and majority shareholders of Grow Biz, to exchange, through a newly formed entity, all of the shares of Grow Biz that they do not already own, for $14 per share in cash. The plaintiff alleges, among other things, that the proposed price for the shares was substantially below the fair value of those shares, that the defendants failed to maximize stockholder value through an adequate auction or market check process, and that the defendants have breached their fiduciary duties and otherwise unfairly dealt with the plaintiff and the other minority shareholders. The proposal by Messrs. Dahlberg and Olson was withdrawn May 4, 1999. On August 3, 1999, the parties to the litigation and the judge agreed that the case would be dismissed without prejudice. These dismissal documents are being prepared and are expected to be approved. 6
4. NET INCOME PER COMMON SHARE: The Company calculates net income per share in accordance with FASB Statement No. 128 by dividing net income by the weighted average number of shares of common stock outstanding to arrive at the Net Income Per Common Share - Basic. The Company calculates Net Income Per Share - Dilutive by dividing net income by the weighted average number of shares of common stock and dilutive stock equivalents from the exercise of stock options and warrants using the treasury stock method. <TABLE> <CAPTION> -------------------------------- Three Months Ended June 26, 1999 June 27, 1998 -------------------------------- <S> <C> <C> Shares used in per common share computation: Weighted average shares outstanding - Basic 5,159,800 5,994,100 Dilutive effect of stock options after application of the treasury stock method 45,900 217,800 ----------- ----------- Weighted average shares outstanding - Diluted 5,205,700 6,211,900 =========== =========== <CAPTION> -------------------------------- Six Months Ended June 26, 1999 June 27, 1998 -------------------------------- Shares used in per common share computation: Weighted average shares outstanding - Basic 5,129,200 5,985,600 Dilutive effect of stock options after application of the treasury stock method 83,200 197,700 ----------- ----------- Weighted average shares outstanding - Diluted 5,212,400 6,183,300 =========== =========== </TABLE> 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Grow Biz International, Inc., (the Company) is a franchise company that franchises retail concepts which buy, sell, trade and consign merchandise. Each concept operates in a different industry and provides the consumer with 'ultra-high value' retailing by offering quality used merchandise at substantial savings from the price of new merchandise and by purchasing customers' used goods that have been outgrown or are no longer used. The stores also offer new merchandise to supplement their selection of used goods. Following is a summary of the Company's franchising and corporate retail store activity for the retail concepts for the three months ended June 26, 1999: <TABLE> <CAPTION> --------------------------------------------------- TOTAL OPENED/ CLOSED/ TOTAL 3/27/99 PURCHASED SOLD CONVERTED 6/26/99 --------------------------------------------------- <S> <C> <C> <C> <C> <C> Play It Again Sports(R) Franchised Stores - US and Canada 609 3 (13) 0 599 Franchised Stores - Other International 8 0 (0) 0 8 Corporate 4 0 (0) 0 4 Other 23 0 (0) 0 23 Once Upon A Child(R) Franchised Stores - US and Canada 220 5 (7) 0 218 Corporate 4 0 (0) 0 4 Computer Renaissance(R) Franchised Stores - US and Canada 227 6 (6) 0 227 Corporate 1 0 (0) 0 1 Music Go Round(R) Franchised Stores - US and Canada 57 2 (0) 0 59 Corporate 8 0 (0) 0 8 It's About Games(TM) Franchised Stores - US and Canada 3 0 (0) 0 3 Corporate 57 3 (0) 0 60 ReTool(TM) Franchised Stores - US and Canada 3 2 (0) 0 5 Corporate 3 0 (0) 0 3 Plato's Closet(R) Franchised Stores - US and Canada 4 0 (0) 0 4 Corporate 0 0 (0) 0 0 ---------------------------------------------------- Total 1,231 21 (26) 0 1,226 ==================================================== </TABLE> 8
Following is a summary of the Company's franchising and corporate retail store activity for the six months ended June 26, 1999: <TABLE> <CAPTION> --------------------------------------------------- TOTAL OPENED/ CLOSED/ TOTAL 12/26/98 PURCHASED SOLD CONVERTED 6/26/99 --------------------------------------------------- <S> <C> <C> <C> <C> <C> Play It Again Sports(R) Franchised Stores - US and Canada 622 6 (29) 0 599 Franchised Stores - Other International 8 0 (0) 0 8 Corporate 4 0 (0) 0 4 Other 23 0 (0) 0 23 Once Upon A Child(R) Franchised Stores - US and Canada 209 17 (8) 0 218 Corporate 4 0 (0) 0 4 Computer Renaissance(R) Franchised Stores - US and Canada 224 15 (12) 0 227 Corporate 2 0 (1) 0 1 Music Go Round(R) Franchised Stores - US and Canada 54 6 (1) 0 59 Corporate 8 0 (0) 0 8 It's About Games(TM) Franchised Stores - US and Canada 3 0 (0) 0 3 Corporate 46 14 (0) 0 60 ReTool(TM) Franchised Stores - US and Canada 2 3 (0) 0 5 Corporate 3 0 (0) 0 3 Plato's Closet(R) Franchised Stores - US and Canada 0 4 (0) 0 4 Corporate 0 0 (0) 0 0 ---------------------------------------------------- Total 1,212 65 (51) 0 1,226 ==================================================== </TABLE> FACTORS THAT MAY AFFECT FUTURE RESULTS The statements made in this report that are not historical facts are forward looking statements. Such statements are based on current expectations but involve risks, uncertainties and other factors which may cause actual results to differ materially from those contemplated by such forward looking statements. Important factors which may result in variations from results contemplated by such forward looking statements include, but are not limited to: (1) the Company's ability to attract qualified franchisees; (2) the Company's ability to collect its receivables; (3) the Company's ability to open stores; (4) each store's ability to acquire high-quality, used merchandise; (5) the Company's ability to control selling, general and administrative expenses; (6) the Company's ability to operate the Company-owned retail stores profitably; and (7) the Company's ability to obtain competitive financing to fund its growth. The Company's strategy focuses on enhancing revenues and profits at all store locations and the opening of additional stores. The Company's growth strategy is premised on a number of assumptions concerning trends in each of the retail industries as well as trends in franchising and the economy. To the extent that the Company's assumptions with respect to any of these matters are inaccurate, its results of operations and financial condition could be adversely affected. 9
RESULTS OF OPERATIONS The following table sets forth for the periods indicated, certain income statement items as a percentage of total revenue and the percentage change in the dollar amounts from the prior period: <TABLE> <CAPTION> ----------------------------------------------------------------- Three Months Ended Six Months Ended June 26, 1999 June 27, 1998 June 26, 1999 June 27, 1998 ----------------------------------------------------------------- <S> <C> <C> <C> <C> Revenue: Merchandise sales 65.5% 73.2% 67.9% 76.1% Royalties 31.5 22.1 28.5 20.1 Franchise fees 2.8 4.4 2.9 3.2 Advertising and other 0.2 0.3 0.7 0.6 ----- ----- ----- ----- Total revenues 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold (54.0) (60.2) (57.3) (62.6) Selling, general and administrative expenses (45.5) (32.8) (42.6) (31.7) Gain on the sale of Disc Go Round 0.0 22.3 0.0 10.7 ----- ----- ----- ----- Income from operations 0.6 29.3 0.2 16.4 Interest and other income, net (1.9) 0.2 (1.7) 0.0 ----- ----- ----- ----- Income (loss) before income taxes (1.3) 29.5 (1.4) 16.4 Benefit (provision) for income taxes 0.5 (11.6) 0.6 (6.4) ----- ----- ----- ----- Net income (loss) (0.8)% 17.9% (0.9)% 10.0% ====== ====== ====== ====== </TABLE> COMPARISON OF THREE MONTHS ENDED JUNE 26, 1999 TO THREE MONTHS ENDED JUNE 27, 1998 REVENUES Revenues for the quarter ended June 26, 1999 totaled $15.3 million compared to $23.5 million for the comparable period in 1998. Merchandise sales consist of the sale of product to franchisees through the buying group and retail sales at the Company-owned stores. For the second quarter of 1999 and 1998 they were as follows: <TABLE> <CAPTION> 1999 1998 ---- ---- <S> <C> <C> Buying Group $ 5,316,700 $ 10,414,900 Retail Sales 4,688,000 6,790,800 ------------ ------------ Merchandise Sales $ 10,004,700 $ 17,205,700 ============ ============ </TABLE> Buying group revenue decreased 49% for the three months ended June 26, 1999 compared to the same period last year as a result of more franchisees purchasing merchandise directly from vendors and a reduction in the number of golf close-outs made available through the buying group compared to the previous year. It is anticipated that the buying group sales trends will 10
continue for the remainder of 1999. Retail store sales decreased $2.1 million, or 31%, for the three months ended June 26, 1999 compared to the same period last year despite having an average number of Company-owned stores of 79 in the second quarter of 1999 compared to 67 in the same period of 1998. The revenue decline was due to a comparable store sales decrease of 27% in the It's About Games stores. Comparable stores sales are expected to continue to show a decrease through the fourth quarter of 1999. Royalties decreased to $4.8 million for the second quarter of 1999 from $5.2 million for the same period in 1998, a 7.7% decrease. Excluding the $409,000 in royalties generated in the second quarter of 1998 by the 137 Disc Go Round stores, that were sold in June 1998, the royalties were consistent with the prior year. Franchise fees declined to $422,500 for the second quarter of 1999 compared to $1.0 million for the second quarter of 1998. This decrease can be attributed to 18 franchises opened during the quarter ended June 26, 1999 compared to 39 opened during the same period of 1998. COST OF MERCHANDISE SOLD Cost of merchandise sold includes the cost of merchandise sold through the buying group and at Company-owned retail stores. Cost of merchandise sold as a percentage of the related revenue for the second quarter of 1999 and 1998 were as follows: 1999 1998 ---- ---- Buying Group 94.0% 95.5% Retail Stores 69.2 61.7 Retail gross margins deteriorated from 38.3% in the second quarter of 1998 to 30.8% in the second quarter of 1999 primarily because of a shift in the mix of video game sales from used to new merchandise which carries a lower gross margin per item. Markdowns required to reduce an overstock position of video game inventory also contributed to the decrease in retail gross margin. The Company intends to shift the product mix towards a larger percentage of used video games, which carry a higher gross margin, and rely less on new product in the future. SELLING, GENERAL AND ADMINISTRATIVE The $776,500, or 10.1%, decrease in operating expenses in the second quarter of 1999 compared to the same period in 1998 is primarily due to the elimination of Disc Go Round related costs and a reduction in advertising expenditures. INTEREST EXPENSE During the second quarter of 1999, the Company had interest expense of $409,900 compared to $74,000 in the second quarter of 1998. This increase is primarily the result of the interest expense incurred on the lines of credit drawn subsequent to June 27, 1998 in connection with the stock repurchase plan. 11
COMPARISON OF SIX MONTHS ENDED JUNE 26, 1999 TO SIX MONTHS ENDED JUNE 27, 1998 REVENUES Revenues for the six months ended June 26, 1999 were $33.8 million compared to $49.1 million for the comparable period in 1998. Merchandise sales consist of the sale of product to franchisees through the buying group and retail sales at the Company-owned stores. For the six months ended June 26, 1999 and June 27, 1998 they were as follows: 1999 1998 ---- ---- Buying Group $ 12,104,200 $ 22,197,100 Retail Sales 10,838,000 15,201,400 ------------ ------------ Merchandise Sales $ 22,942,200 $ 37,398,500 ============ ============ Buying group revenue decreased 45.5% for the six months ended June 26, 1999 compared to the same period last year as a result of more franchisees purchasing merchandise directly from vendors and a reduction in the number of golf close-outs made available through the buying group compared to the previous year. It is anticipated that the buying group sales trend will continue for the remainder of 1999. Retail store sales decreased $4.4 million, or 28.7%, for the six months ended June 26, 1999 compared to the same period last year despite having an average number of Company-owned stores of 74 for the six months ended June 26, 1999 compared to 66 in the same period of 1998. The revenue decline was due to a comparable store sales decrease of 22% for the It's About Games stores. Comparable store sales are expected to continue to show a decrease through the fourth quarter of 1999. Royalties decreased to $9.6 million for the six months ended June 26, 1999 from $9.9 million for the same period in 1998, a 2.5% decrease. Excluding the $719,000 in royalties generated in the six months ended June 27, 1998 by the 137 Disc Go Round stores, that were sold in June 1998, the comparable increase in royalties is 5.1%. This increase is due to the expanding base of franchise stores in the remaining concepts and stronger average franchise store sales within each concept. Franchise fees declined to $978,300 for the six months ended June 26, 1999 compared to $1.5 million for the same period of 1998. This decrease can be attributed to 51 franchises opened during the six months ended June 26, 1999 compared to 62 opened during the same period of 1998. COST OF MERCHANDISE SOLD Cost of merchandise sold includes the cost of merchandise sold through the buying group and at Company-owned retail stores. Cost of merchandise sold as a percentage of the related revenue for the six months ended June 26, 1999 and June 27, 1998 were as follows: 12
1999 1998 ---- ---- Buying Group 95.0% 95.8% Retail Stores 72.5 62.4 Retail gross margins deteriorated from 37.6% in the first six months of 1998 to 27.5% in the first six months of 1999 primarily because of a shift in the mix of video game sales from used to new merchandise which carries a lower gross margin per item. Markdowns required to reduce an overstock position of video game inventory also contributed to the decrease in retail gross margin. The Company intends to shift the product mix towards a larger percentage of used video games, which carry a higher gross margin, and rely less on new product in the future. SELLING, GENERAL AND ADMINISTRATIVE The $1.2 million, or 7.5%, decrease in operating expenses in the first six months of 1999 compared to the same period in 1998 is primarily due to the elimination of Disc Go Round related costs and to efficiencies achieved in operating the franchise system. INTEREST EXPENSE During the first six months of 1999, the Company had interest expense of $780,700 compared to $207,900 for the same period of 1998. This increase is primarily the result of the interest expense incurred on the lines of credit drawn subsequent to June 27, 1998 in connection with the stock repurchase plan. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with a current ratio of 1.4 to 1.0. During the six months ended June 26, 1999, the Company's operating activities used $907,200 of cash. This decrease in cash available from operations is primarily due to working capital management activities that included a $8.5 million decrease in accounts payable and a $1.4 million decrease in accrued liabilities, offset partially by a $5.7 million decrease in receivables and a $2.8 million decrease in inventory from year-end. The change in these components is the result of a number of interrelated factors. Typically, the Company is required to pay for winter goods purchased by Play It Again Sports franchisees through the buying group in the first quarter. It also collects a portion of the corresponding receivable from the franchisees during this same period with the remaining amount collected later. This contributed to the reduction in accounts payable and receivable in the first quarter of 1999 and in 1998. Another factor that contributed to the reduction is accounts payable related to the video game inventory. Video game inventory was $4.8 million higher at the end of 1998 compared to 1997. Payment for this inventory was made during the first quarter of 1999. The majority of the video game inventory on hand at the end of 1997 had been paid and therefore there was no corresponding accounts payable balance. 13
The Company's investing activities used $2.7 million primarily resulting from a $2.3 million increase in property and equipment. During the six months ended June 26, 1999, the Company's financing activities provided $1.2 million of cash. The Company drew $4.4 million on its revolving credit and received $653,000 from options exercised to purchase 84,000 shares of the Company's stock. The proceeds were offset by payments made on the installment notes payable of $3.8 million. The Company had a $10.0 million committed revolving line of credit which was due to expire on July 31, 1999. Historically, this facility has been renewed on an annual basis. The maturity date of this facility has been extended through August 31, 1999 and the maximum borrowings reduced to $7.5 million. As of June 26, 1999, borrowings against the line were $6.5 million and carry an interest rate of the bank's base rate, which was 8.0% at June 26, 1999. The Company anticipates completing the renewal of the line of credit during August 1999. The Company believes that its current cash position, cash generated from future operations, availability of line of credit borrowings and additional capacity for debt will be adequate to meet the Company's current obligations and operating needs. YEAR 2000 The Company has completed an assessment of its internal systems. Older personal computers have been upgraded to new systems that are Year 2000 compliant. Software updates to the Company's systems are in process and expected to be completed by the third quarter of 1999. The Company has completed an analysis of its vendor relationships in which the risk of each vendor's non-compliance with Year 2000 was assessed. Letters were sent out in the fourth quarter of 1998 to ascertain the status of each vendor's Year 2000 compliance. Total costs associated with the Year 2000 compliance project through June 26, 1999 have been $494,000. The Company does not anticipate any additional material expenditures associated with completion of the Year 2000 compliance project. A number of franchisees have not converted their point-of-sale hardware and software to be Year 2000 compliant. A Year 2000 compliant version of the point-of-sale software was completed in December 1998 and has been available and ready for implementation. We are currently working with those franchisees that have not converted and expect to be completed by the third quarter of 1999. The Company does not provide services to its franchisees in which critical information is date sensitive, nor does it perform operations with equipment that may contain embedded chips that are not Year 2000 compliant. The greatest known risk to an internal system failure is that receivable records would not age and calculate finance charges properly. Should this occur the Company would be required to manage credit granted to franchisees and calculate the monthly finance charge manually. 14
The Company does not have vendor or customer relationships in which critical data is exchanged electronically. The Company would suffer if a service provider such as a telecommunications or utility vendor was not Year 2000 compliant and their respective service was interrupted or terminated. In such a case the Company would be required to revert to its completed disaster recovery plan for the specific issue. If a large number of vendors that provide product to our franchisees were not compliant and unable to provide our franchisees with their 'new' product, it is likely that the Company would recognize a material reduction of royalties from the franchisee's lost sales. 15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS At the Annual Shareholders meeting held on May 26, 1999, the Company submitted to a vote of security-holders the following matters which received the indicated votes: 1. Approving setting the number of members of the Board of Directors at six (6): Broker For: 4,657,103 Against: 12,630 Abstain: 940 Non-Vote: 0 2. Election of Directors: For: Withheld: K. Jeffrey Dahlberg 4,662,607 8,066 Ronald G. Olson 4,662,707 7,966 Randel S. Carlock 4,664,707 5,966 Dennis J. Doyle 4,664,607 6,066 Robert C. Pohlad 4,662,507 8,166 Bruce C. Sanborn 4,664,607 6,066 3. Ratifying the appointment of Arthur Andersen LLP as independent auditors for the current fiscal year: Broker For: 4,666,383 Against: 3,760 Abstain: 530 Non-Vote: 0 16
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GROW BIZ INTERNATIONAL, INC. Date: August 5, 1999 By: /s/ K. Jeffrey Dahlberg ---------------------------------------- K. Jeffrey Dahlberg Chairman and Chief Executive Officer Date: August 5, 1999 By: /s/ David J. Osdoba, Jr. ---------------------------------------- David J. Osdoba, Jr. Vice President of Finance and Chief Financial Officer 17