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 26, 1998 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, 5,073,492 shares outstanding as of October 31, 1998.
GROW BIZ INTERNATIONAL, INC. INDEX PART I. FINANCIAL INFORMATION PAGE - -------------------------------------------------------------------------------- Item 1. Financial Statements (Unaudited) CONDENSED BALANCE SHEETS: 3 September 26, 1998 and December 27, 1997 CONDENSED STATEMENTS OF OPERATIONS: 4 Three Months Ended September 26, 1998 and September 27, 1997 Nine Months Ended September 26, 1998 and September 27, 1997 CONDENSED STATEMENTS OF CASH FLOWS: 5 Nine Months Ended September 26, 1998 and September 27, 1998 NOTES TO CONDENSED FINANCIAL STATEMENTS 6 - 7 Item 2. Management's Discussion and Analysis of Financial 8 - 14 Condition and Results of Operations PART II. OTHER INFORMATION PAGE - -------------------------------------------------------------------------------- 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: ------- ------------ 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> -------------------------------------- September 26, 1998 December 27, 1997 -------------------------------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ -- $ 3,088,000 Trade receivables, less allowance for doubtful accounts of $771,500 and $880,000 11,975,700 12,880,700 Inventories 7,256,600 5,728,600 Prepaid expenses and other 1,663,600 1,987,300 Deferred income taxes 1,491,600 1,491,600 ------------ ------------ Total current assets 22,387,500 25,176,200 Notes receivable 173,800 184,000 Property and equipment, net 5,810,200 5,617,900 Other assets, net 5,482,100 6,776,500 ------------ ------------ $ 33,853,600 $ 37,754,600 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable 8,401,400 $ 6,604,800 Accrued liabilities 4,359,700 3,781,500 Notes payable and current maturities of long-term debt 5,569,300 2,061,400 Deferred franchise fee revenue 2,332,300 3,588,000 ------------ ------------ Total current liabilities 20,662,700 16,035,700 Long-Term Debt 4,020,800 4,268,200 Shareholders' Equity: Common stock, no par, 10,000,000 shares authorized, 5,100,614 and 6,002,214 shares issued and outstanding -- 7,474,900 Retained earnings 9,170,100 9,975,800 ------------ ------------ Total shareholders' equity 9,170,100 17,450,700 ------------ ------------ $ 33,853,600 $ 37,754,600 ============ ============ </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 Nine Months Ended September 26, September 27, September 26, September 27, 1998 1997 1998 1997 ------------------------------------------------------------------------- <S> <C> <C> <C> <C> REVENUE: Merchandise sales $ 16,638,500 $ 16,209,000 $ 54,037,000 $ 45,787,400 Royalties 4,688,700 4,553,500 14,574,700 12,809,900 Franchise fees 940,900 1,006,900 2,488,400 2,614,600 Advertising and other 215,900 309,100 505,000 655,000 ------------- ------------- ------------- ------------- Total revenue 22,484,000 22,078,500 71,605,100 61,866,900 COST OF MERCHANDISE SOLD 13,451,700 13,705,900 44,210,500 39,770,400 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,541,600 6,316,200 22,082,000 17,624,000 GAIN ON SALE OF DISC GO ROUND -- -- 5,231,500 -- ------------- ------------- ------------- ------------- Income from operations 2,490,700 2,056,400 10,544,100 4,472,500 INTEREST INCOME 125,100 126,500 345,100 253,800 INTEREST EXPENSE (143,500) (95,700) (351,400) (107,400) ------------- ------------- ------------- ------------- Income before income taxes 2,472,300 2,087,200 10,537,800 4,618,900 PROVISION FOR INCOME TAXES 969,200 818,200 4,130,900 1,810,600 ------------- ------------- ------------- ------------- NET INCOME $ 1,503,100 $ 1,269,000 $ 6,406,900 $ 2,808,300 ============= ============= ============= ============= NET INCOME PER COMMON SHARE - BASIC $ .27 $ .21 $ 1.09 $ .46 ============= ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 5,614,600 6,051,300 5,861,300 6,137,300 ============= ============= ============= ============= NET INCOME PER COMMON SHARE - DILUTED $ .26 $ .20 $ 1.06 $ .45 ============= ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED 5,846,800 6,277,300 6,054,700 6,276,100 ============= ============= ============= ============= </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 26, September 27, 1998 1997 --------------------------------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 6,406,900 $ 2,808,300 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,435,900 1,310,000 Change in operating assets and liabilities: Trade receivables 700,100 1,156,900 Inventories (1,805,900) (1,431,600) Prepaid expenses and other 319,700 (615,900) Accounts payable 1,796,600 1,313,300 Accrued liabilities 427,700 549,200 Deferred franchise fee revenue (971,700) (500) ------------- ------------- Net cash provided by operating activities 8,309,300 5,089,700 ------------- ------------- INVESTING ACTIVITIES: Increase in other assets (400,200) (4,354,200) Purchase of property and equipment (1,338,500) (470,200) Sale of net assets of Disc Go Round, net of gain 1,768,500 -- ------------- ------------- Net cash provided by (used for) investing activities 29,800 (4,824,400) ------------- ------------- FINANCING ACTIVITIES: Proceeds from notes payable 4,930,200 6,767,000 Payments on long-term debt (1,669,800) (277,600) Proceeds from stock option exercises 1,655,200 451,900 Repurchase of common stock (16,342,700) (3,211,500) ------------- ------------- Net cash provided by (used for) financing activities (11,427,100) 3,729,800 ------------- ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,088,000) 3,995,100 Cash and cash equivalents, beginning of period 3,088,000 1,388,800 ------------- ------------- Cash and cash equivalents, end of period $ 0 $ 5,383,900 ============= ============= </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 26, 1998 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' and 'ReTool'. In addition, the Company sells inventory to its 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. SALE OF DISC GO ROUND On June 26, 1998, Grow Biz International, Inc., (the Company) completed the sale of the assets, primarily intangibles, and franchising rights of its Disc Go Round concept to CD Warehouse, Inc. (CD Warehouse) for $7.0 million cash plus the assumption of $384,000 in deferred franchise fees. At the time of the sale, there were 137 Disc Go Round stores in operation, including 3 Company-owned stores, and an additional 37 franchise agreements awarded for stores that were not yet opened. The sale resulted in a $5,231,500 operating gain, or $.51 per share diluted, in the second quarter ending June 27, 1998. 4. SHAREHOLDERS' EQUITY: Since 1995, the Company's Board of Directors has authorized the repurchase of up to 3,000,000 shares of the Company's common stock on the open market. As of September 26, 1998, the Company had repurchased 2,547,513 shares of its stock at an average price of $11.68 per share, including 1,003,227 shares repurchased at an average price of $15.10 per share in the three months ended September 26, 1998. 6
5. LITIGATION: In connection with an action filed by an early partner in the original Play It Again Sports store, the Company received a court ruling in February 1998 on a motion filed by the plaintiff stating that an enforceable settlement agreement existed between the two parties. The Company has appealed the order which requires the Company to pay $2.0 million to purchase certain development rights held by the plaintiff from a 1992 agreement. The order further directed that all claims between the parties be dismissed. The Company recognized the entire $2.0 million as a non-operating expense in the year ended December 27, 1997. 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 diving net income by the weighted average number of shares of common stock outstanding plus the dilutive effect of stock equivalents from the exercise of stock options and warrants using the treasury stock method. A reconciliation of basic weighted average number of shares outstanding to dilutive average number of shares outstanding is as follows: <TABLE> <CAPTION> ------------------------------ Three Months Ended September 26, September 27, 1998 1997 ------------------------------ <S> <C> <C> Shares used in per common share computation: Weighted average shares outstanding - Basic 5,614,600 6,051,300 Dilutive effect of stock options after application of the treasury stock method 232,200 226,000 ------------ ------------ Weighted average shares outstanding - Diluted 5,846,800 6,277,300 ============ ============ <CAPTION> ------------------------------ Nine Months Ended September 26, September 27, 1998 1997 ------------------------------ Shares used in per common share computation: Weighted average shares outstanding - Basic 5,861,300 6,137,300 Dilutive effect of stock options after application of the treasury stock method 193,400 138,800 ------------ ------------ Weighted average shares outstanding - Diluted 6,054,700 6,276,100 ============ ============ </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 September 26, 1998: <TABLE> <CAPTION> ------------------------------------------------------------ TOTAL OPENED/ TOTAL 6/27/98 PURCHASED CLOSED CONVERTED 9/26/98 ------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Play It Again Sports(R) Franchised Stores - US and Canada 633 13 (10) 0 636 Franchised Stores - Other International 8 0 (0) 0 8 Corporate 5 0 (1) 0 4 Other 22 1 (0) 0 23 Once Upon A Child(R) Franchised Stores - US and Canada 204 8 (3) 0 209 Corporate 5 0 (0) 0 5 Computer Renaissance(R) Franchised Stores - US and Canada 201 16 (3) 0 214 Corporate 7 0 (0) 0 7 Music Go Round(R) Franchised Stores - US and Canada 46 5 (0) 0 51 Corporate 6 6 (0) 0 12 It's About Games(TM) Franchised Stores - US and Canada 1 2 (0) 0 3 Corporate 44 0 (1) 0 43 ReTool(TM) Franchised Stores - US and Canada 0 0 (0) 0 0 Corporate 0 1 (0) 0 1 Other 2 0 (0) 0 2 ------------------------------------------------------------ Total 1,184 52 (18) 0 1,218 ============================================================ </TABLE> 8
Following is a summary of the Company's franchising and corporate retail store activity for the nine months ended September 26, 1998: <TABLE> <CAPTION> ---------------------------------------------------------------------------- TOTAL OPENED/ TOTAL 12/27/97 PURCHASED CLOSED CONVERTED SALE OF BUSINESS 9/26/98 ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Play It Again Sports(R) Franchised Stores - US and Canada 654 28 (46) 0 (0) 636 Franchised Stores - Other International 8 0 (0) 0 (0) 8 Corporate 5 0 (1) 0 (0) 4 Other 22 1 (0) 0 (0) 23 Once Upon A Child(R) Franchised Stores - US and Canada 204 13 (7) (1) (0) 209 Corporate 4 0 (0) 1 (0) 5 Computer Renaissance(R) Franchised Stores - US and Canada 180 39 (5) 0 (0) 214 Corporate 7 0 (0) 0 (0) 7 Music Go Round(R) Franchised Stores - US and Canada 38 13 (0) 0 (0) 51 Corporate 4 8 (0) 0 (0) 12 Disc Go Round(R) Franchised Stores - US and Canada 132 8 (0) 0 (140) 0 Corporate 3 0 (0) 0 (3) 0 It's About Games(TM) Franchised Stores - US and Canada 0 3 (0) 0 (0) 3 Corporate 42 2 (1) 0 (0) 43 ReTool(TM) Franchised Stores - US and Canada 0 0 (0) 0 (0) 0 Corporate 0 1 (0) 0 (0) 1 Other 0 2 (0) 0 (0) 2 ---------------------------------------------------------------------------- Total 1,303 118 (60) 0 (143) 1,218 ============================================================================ </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; and (6) the Company's ability to obtain competitive financing to fund its growth. The Company's strategy focuses on enhancing revenue and profitability of 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 26, September 27, September 26, September 27, 1998 1997 1998 1997 ------------------------------------------------------------------ <S> <C> <C> <C> <C> Revenue: Merchandise sales 74.0% 73.4% 70.3% 74.0% Royalties 20.8 20.6 19.0 20.7 Franchise fees 4.2 4.6 3.2 4.2 Advertising and other 1.0 1.4 7.5 1.1 ------- ------- ------- ------- Total revenues 100.0% 100.0% 100.0% 100.0% Cost of merchandise sold 59.8 62.1 61.7 64.3 Selling, general and administrative expenses 29.1 28.6 30.8 28.5 Gain on the sale of Disc Go Round 0.0 0.0 7.3 0.0 ------- ------- ------- ------- Income from operations 11.1 9.3 14.8 7.2 Interest and other income, net (0.1) 0.1 (0.1) 0.2 ------- ------- ------- ------- Income before income taxes 11.0 9.4 14.7 7.4 Provision for income taxes 4.3 3.7 5.8 2.9 ------- ------- ------- ------- Net income 6.7% 5.7% 8.9% 4.5% ======= ======= ======= ======= </TABLE> COMPARISON OF THREE MONTHS ENDED SEPTEMBER 26, 1998 TO THREE MONTHS ENDED SEPTEMBER 27, 1997 REVENUES Revenues for the quarter ended September 26, 1998 totaled $22.5 million compared to $22.1 million for the comparable period in 1997. Merchandise sales increased to $16.6 million for the three months ended September 26, 1998 from $16.2 million for the same period in 1997. Merchandise sales consist of the sale of product to the Play It Again Sports franchisees through the buying group and retail sales at Company-owned stores. For the third quarter of 1998 and 1997 they were as follows: 1998 1997 ---- ---- Buying Group $ 9,333,300 $ 11,184,700 Retail Sales 7,305,200 5,024,300 ------------- ------------- Merchandise Sales $ 16,638,500 $ 16,209,000 ============= ============= 10
Buying group revenue decreased 16.6% for the three months ended September 26, 1998 compared to the same period last year as a result of more franchisees purchasing merchandise directly from vendors. Retail store sales increased $2.3 million, or 45.4%, in the three months ended September 26, 1998 compared to the same period in 1997 as a result of acquiring forty Video Game Exchange, Inc. stores in August 1997, the opening of an additional eight Company-owned Music Go Round stores and an increase in comparable store sales. Royalties increased 3% to $4.7 million for the third quarter of 1998 from $4.6 million for the same period in 1997. The decrease in the third quarter 1998 growth rate compared to the year to date growth rate in royalties is primarily due to the sale of the Disc Go Round stores at the end of the second quarter of 1998. The royalty growth rate is expected to maintain the year to date rate due to continued expansion of franchise stores offsetting the loss of royalties from Disc Go Round stores. Franchise fee income, which is recognized when the store is open, is down slightly from the prior year. COST OF MERCHANDISE SOLD Cost of merchandise sold includes the cost of merchandise sold through the buying group and at Company-owned retail stores. As shown in the following table, for the three months ended September 26, 1998, the cost of merchandise sold as a percentage of the related buying group revenue was consistent with the previous year and increased 3.9% for the retail stores. The corresponding decline in gross profit percentage for retail stores was primarily due to the declining retail prices in the computer industry impacting our Company-owned Computer Renaissance. 1998 1997 ---- ---- Buying Group 94.4% 95.8% Retail Stores 63.4 59.5 SELLING, GENERAL AND ADMINISTRATIVE For the three months ended September 26, 1998 the operating expenses were consistent with the prior year. Operating expenses are expected to continue to increase proportionately with the opening of the additional Company-owned retail stores. NET INCOME Net income for the third quarter of 1998 was $1.5 million, or $.26 per share diluted, compared to $1.3 million, or $.20 per share diluted, in the same period of 1997. 11
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 26, 1998 TO NINE MONTHS ENDED SEPTEMBER 27, 1997 SALE OF DISC GO ROUND On June 26, 1998, Grow Biz International, Inc., (the Company) completed the sale of the assets, primarily intangibles, and franchising rights of its Disc Go Round concept to CD Warehouse, Inc. (CD Warehouse). At the time of the sale, there were 137 Disc Go Round stores in operation, including 3 Company-owned stores, and an additional 37 franchise agreements awarded for stores that were not yet opened. REVENUES Revenues for the nine months ended September 26, 1998 were $71.6 million compared to $61.2 million for the comparable period in 1997. Merchandise sales consist of the sale of product to the Play It Again Sports franchisees through the buying group and retail sales at the Company-owned stores. For the first nine months of 1998 and 1997 merchandise sales were as follows: 1998 1997 ---- ---- Buying Group $ 31,530,500 $ 34,377,400 Retail Sales 22,506,500 11,410,000 ------------- ------------- Merchandise Sales $ 54,037,000 $ 45,787,400 ============= ============= The 8.3% decrease in buying group sales for the nine months ended September 26, 1998 compared to the same period last year was a result of more franchisees purchasing merchandise directly from vendors during the period. It is anticipated that buying group revenues will continue their current trend for the remainder of 1998 and 1999. Retail store sales increased $11.1 million, or 97.3%, in the first nine months of 1998 compared to 1997 as a result of acquiring forty Video Game Exchange, Inc. stores in August 1997. Retail sales are expected to continue to increase as the Company opens an additional fifteen Company-owned stores in 1998. Royalties increased 13.8% to $14.6 million for the first nine months of 1998 from $12.8 million for the same period in 1997, primarily due to the expanded base of franchise stores and an increase in comparable store sales. Franchise fee income declined slightly compared to the prior period as a result of opening twelve fewer stores in the first nine months of 1998 compared to the same period in 1997. We anticipate store openings for the twelve months ended December 26, 1998 to be consistent with the same period in 1997, and that the impact of the sale of Disc Go Round will be offset by the opening of ReTool franchise stores. COST OF MERCHANDISE SOLD Cost of merchandise sold includes both the cost of merchandise sold through the buying group and at Company-owned retail stores. For the nine months ended September 26, 1998 the cost of merchandise sold as a percentage of the related revenue was consistent with the previous year as shown in the following table: 12
1998 1997 ---- ---- Buying Group 95.4% 95.3% Retail Stores 62.8 61.4 SELLING, GENERAL AND ADMINISTRATIVE The $4.5 million, or 25.3%, increase in operating expense for the nine months ended September 26, 1998 compared to the same period in 1997 is primarily due to the costs related to operating the Video Game Exchange, Inc. stores acquired in August 1997, along with the costs incurred to begin franchising the It's About Games and ReTool concepts. Operating expenses are expected to continue to increase proportionately with the opening of the additional Company-owned retail stores. NET INCOME Net income for the first nine months of 1998 was $6.4 million, or $1.06 per share diluted, compared to $2.8 million, or $.45 per share diluted, in the same period of 1997. The first nine months of 1998 earnings include the $5.2 million gain on the sale of Disc Go Round. This gain, net of taxes, represents $3.2 million, or $.51 per share diluted. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 26, 1998, the Company's operating activities provided $8.3 million of cash. The increase in cash available from operations is due primarily to the net income before depreciation and amortization. The increase in inventory and related accounts payable is related to expansion of Company-owned stores in 1998. The Company disposed of $1.7 million of certain net assets of Disc Go Round and purchased $1.7 million of property and equipment and other assets related to Company-owned store expansion and system upgrades. The Company's $11.4 million use of cash for financing activities in the first nine months of 1998 was due to debt service payments and the repurchase of 1,098,600 shares of the Company's common stock at an average price of $14.88 per share, offset by cash received from the exercise of options and warrants to purchase 183,193 shares of the Company's common stock. On October 13, 1998, the Company signed an amended and restated credit agreement in which the Company's line of credit was increased from $5.0 million to $10.0 million and will be due for renewal on July 31, 1999. Borrowings against the line carry an interest rate of prime which was 8.25% at September 26, 1998. The available line is reduced by a $2.2 million letter of credit issued in March 1998 in connection with the Company's appeal of a court ruling on a motion in the Van Buskirk litigation matter. 13
In addition to the line of credit, the Company received a $8.0 million committed term note. Borrowings against the note carry an interest rate of prime plus .5% which was 8.75% at September 26, 1998. Borrowings can be made in installments up through March 31, 1999 at which date the total amount outstanding shall be paid off in principal installments beginning May 1, 1999 through March 4, 2004. Concurrent with the signing of the new agreement, all lending facilities with the bank, including the August 8, 1997 note having a principal balance of $3.6 million at September 26, 1998, became secured by a security interest in all tangible and intangible assets of the Company. At September 26, 1998, the Company had $2.8 million outstanding on its previous line of credit agreement as well as a $2.0 million bridge loan. Upon signing the amended and restated credit agreement, the bridge loan was paid in full by proceeds from the $10.0 million line of credit. The Company believes that cash generated from future operations and availability on the credit facility 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 will be upgraded to new systems that are Year 2000 compliant by the third quarter of 1999. Software updates to the Company's systems are in process and expected to be completed by the second quarter of 1999. An upgraded version of the Point of Sale system, provided to franchisees, has been completed and is ready for implementation. 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 are expected to be 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 26, 1998 have been $76,200 and future costs are expected to be less than $250,000. The Company does not provide services to it's 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. 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. 14
2. 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. By: /s/ Ronald G. Olson ------------------- Ronald G. Olson Date: November 5, 1998 President and Chief Executive Officer By: /s/ David J. Osdoba, Jr. ------------------------ David J. Osdoba, Jr. Date: November 5, 1998 Vice President of Finance and Chief Financial Officer 15