WINA

Business Context and Reporting Period

Company: Grow Biz International, Inc. (Note: Input metadata referenced "Winmark Corp," but the filing text identifies the registrant as Grow Biz International, Inc.)
Reporting Period: Quarterly period ended September 25, 1999 (10-Q Filing).
Business Overview: The Company franchises retail concepts (e.g., Play It Again Sports, Once Upon A Child) that buy, sell, and trade used merchandise. It also operates corporate-owned stores and sells inventory to franchisees via a buying group.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 26% in Q3 and 29% for the nine months ended Sept 25, 1999, compared to 1998.
  • Merchandise Sales: Dropped 33% in Q3 and 37% for the nine months. Buying group revenue fell 40% (Q3) and 44% (9M) as franchisees purchased directly from vendors. Retail sales declined due to a 22% comparable store sales drop in the "It's About Games" concept.
  • Franchise Fees: Decreased 47% in Q3 due to fewer new franchise openings (16 in 1999 vs. 44 in 1998).
• Restructuring Charge: A significant pre-tax charge of $11.6 million was recorded in Q3 1999. This relates to the discontinuation of 60 corporate-owned "It's About Games" stores. The charge includes $6.8M in non-cash writedowns, $2.5M in inventory reserves, and $2.3M in anticipated cash expenditures (lease terminations, legal fees).
• Profitability: The Company swung from a net profit of $1.5M in Q3 1998 to a net loss of $7.4M in Q3 1999, primarily driven by the restructuring charge and revenue declines.
• Liquidity: Cash and cash equivalents were depleted to $0 by the end of the period, down from $2.4M at the start of the year. Operating cash flow turned positive ($1.2M for 9M) largely due to the non-cash restructuring charge and working capital management, despite the net loss.

Guidance, Outlook, and Risks

• Restructuring Outlook: Management expects to incur an additional $1.8 million in operating costs, severance, and restructuring costs in the fourth quarter. The objective is to close or sell all "It's About Games" stores by year-end.
• Revenue Outlook: Buying group sales trends are expected to continue declining for the remainder of 1999. Retail sales are expected to decrease significantly in Q4 due to the closure of "It's About Games" stores.
• Liquidity & Debt:
  • The Company has a revolving credit facility with a maximum borrowing limit of $8.5M (through Dec 31, 1999) and $7.5M thereafter. As of Sept 25, 1999, borrowings were limited to $7.9M, with $5.3M outstanding.
  • The Company holds an $8.0M term note with $7.4M outstanding.
  • Management believes current cash, future operations, and credit availability are adequate to meet obligations.
• Market Listing Risk: Due to the restructuring charge, the Company has fallen below NASDAQ National Market requirements and may not meet NASDAQ Small Cap requirements at year-end depending on Q4 results.
• Year 2000 Compliance: The Company has completed internal system assessments and software updates ($494k spent). Risks remain regarding franchisee compliance and potential service interruptions from third-party vendors.

Investor Verification Checklist

• Cash Position: Verify the current cash balance and immediate liquidity status given the $0 cash balance reported at period end.
• Restructuring Execution: Confirm the timeline and actual costs associated with closing the 60 "It's About Games" stores versus the projected $1.8M Q4 expense.
• Debt Covenants: Review the specific financial covenants of the revolving credit facility and term note to ensure compliance given the recent losses.
• NASDAQ Status: Monitor the Company's status regarding NASDAQ listing requirements and any potential delisting notices.
• Franchisee Trends: Assess the long-term impact of franchisees bypassing the buying group to purchase directly from vendors.