<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 27, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-22359
TRACK 'N TRAIL
(Exact name of registrant as specified in its charter)
DELAWARE 91-1778085
(State or other jurisdiction of I.R.S. Employer Identification Number
incorporation or organization)
4961-A WINDPLAY DRIVE, EL DORADO HILLS, CALIFORNIA 95762
(Address of principal executive offices) (zip code)
(916) 933-4525
(Registrant's telephone number, including area code)
Indicate by a 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 (or for such shorter period that the
Registrant was required to file such reports) Yes X No ; and (2) has
been subject to such filing requirements for the past 90 days. Yes No X
The number of shares of the Registrant's Common Stock, $0.01 par value,
outstanding as of October 10, 1997, was 6,834,880.
<PAGE>
TRACK 'N TRAIL
FORM 10-Q
QUARTER ENDED SEPTEMBER 27, 1997
INDEX
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PAGE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 27,1997 (unaudited), Pro Forma
September 27, 1997 (unaudited) and
December 28, 1996 . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for
the 39-Weeks ended September 27, 1997
(unaudited) and September 28, 1996 (unaudited),
and for the 13-Weeks ended September 27,
1997 (unaudited) and September 28, 1996
(unaudited) . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows for
the 39-Weeks ended September 27, 1997 (unaudited),
and September 28, 1996 (unaudited). . . . . . . . . . . 3
Notes to Consolidated Financial Statements. . . . . . .4-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . .8-12
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds . . . . . . 13-14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . .15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
TRACK 'N TRAIL
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
__________
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 27, SEPTEMBER 27, DECEMBER 28,
1997 1997 1996
------------ -------------- ------------
ASSETS (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash $ 715 $ 3,097 $ 977
Accounts receivable 634 634 1,010
Inventories 26,923 26,923 19,868
Prepaid expenses 270 270 212
Prepaid income taxes 280 280 --
Deferred income taxes 103 831 49
--------- --------- ---------
Total current assets 28,925 32,035 22,116
Fixed assets, net 6,544 6,544 6,582
Goodwill, net 3,125 3,125 2,691
Deferred income taxes 547 1,056 469
Deferred offering costs 972 -- --
--------- --------- ---------
$ 40,113 $ 42,760 $ 31,858
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 7,400 $ -- $ 680
Current maturities of long-term debt 9,183 77 3,061
Accounts payable 9,430 9,146 5,835
Accrued payroll and bonuses 716 716 1,032
Sales tax payable 483 483 752
Income taxes payable -- -- 476
Accrued expenses and other liabilities 947 947 851
--------- --------- ---------
Total current liabilities 28,159 11,369 12,687
Deferred rent 1,420 1,420 1,395
Long-term debt, net of current maturities 847 214 7,025
--------- --------- ---------
Total liabilities 30,426 13,003 21,107
--------- --------- ---------
Minority interest in consolidated subsidiary -- -- 105
--------- --------- ---------
Stockholders' Equity:
Preferred stock, $0.01 par value; 2,000,000 shares
authorized; no shares issued or outstanding -- -- --
Common stock, $0.01 par value; 20,000,000 shares
authorized; 4,107,608 shares issued and outstanding
(pro forma, 6,834,880 shares issued and outstanding) 41 68 41
Additional paid-in capital 736 26,000 724
Retained earnings 8,910 3,689 9,881
--------- --------- ---------
Total stockholders' equity 9,687 29,757 10,646
--------- --------- ---------
$ 40,113 $ 42,760 $ 31,858
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE>
TRACK 'N TRAIL
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
__________
<TABLE>
<CAPTION>
PERIOD ENDED
----------------------------------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
(13 WEEKS) (13 WEEKS) (39 WEEKS) (39 WEEKS)
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 24,761 $ 16,581 $ 62,289 $ 39,866
Cost of sales 12,975 8,576 32,388 20,595
--------- --------- --------- ---------
Gross profit 11,786 8,005 29,901 19,271
--------- --------- --------- ---------
Operating expenses:
Selling and marketing 7,787 5,013 22,315 13,805
Administrative and distribution 1,777 1,151 5,221 3,466
--------- --------- --------- ---------
Total operating expenses 9,564 6,164 27,536 17,271
--------- --------- --------- ---------
Operating income 2,222 1,841 2,365 2,000
Other (income) expense:
Interest 440 146 1,171 386
Other, net (26) (3) (5) (13)
--------- --------- --------- ---------
Income before income taxes 1,808 1,698 1,199 1,627
Income tax provision (benefit) 125 51 (249) 49
--------- --------- --------- ---------
Net income $ 1,683 $ 1,647 $ 1,448 $ 1,578
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro Forma Income Data (unaudited):
Historical income before income taxes $ 1,808 $ 1,698 $ 1,199 $ 1,627
Pro forma income tax provision (Note 1) 723 679 480 651
--------- --------- --------- ---------
Pro forma net income $ 1,085 $ 1,019 $ 719 $ 976
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma net income per common and
common equivalent share $ 0.20 $ 0.14
--------- ---------
--------- ---------
Pro forma weighted average number
of shares of common stock and common
stock equivalents 5,305,742 5,310,671
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
TRACK 'N TRAIL
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
__________
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
(39 WEEKS) (39 WEEKS)
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,448 $ 1,578
Adjustments to reconcile to cash provided by operating activities:
Depreciation and amortization 1,284 753
Gain on disposal of fixed assets (13) --
Compensation recorded in connection
with stock option plans 13 --
Deferred income taxes (132) --
Cash provided by (used for) changes in operating assets
and liabilities
Accounts receivable 377 --
Inventories (7,055) (3,542)
Prepaid expenses (58) (107)
Accounts payable and other accrued liabilities 2,821 1,414
Income taxes payable (756) --
Stock appreciation rights -- 12
Deferred rent 25 12
---------- ----------
Cash provided by (used for) operating activities (2,046) 120
---------- ----------
Cash flows from investing activities:
Purchases of fixed assets (1,137) (1,440)
Proceeds from sale of fixed assets 28 --
---------- ----------
Cash used for investing activities (1,109) (1,440)
---------- ----------
Cash flows from financing activities:
Bank line of credit:
Borrowings 36,930 21,240
Repayments (30,210) (20,060)
Long-term debt:
Borrowings -- 2,313
Repayments (718) (566)
Advances to related parties under notes receivable -- (591)
Payment of distributions to stockholders (2,420) (1,071)
Offering expenses paid (689) --
---------- ----------
Cash provided by financing activities 2,893 1,265
---------- ----------
Decrease in cash (262) (55)
Cash, beginning of period 977 489
---------- ----------
Cash, end of period $ 715 $ 434
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
TRACK 'N TRAIL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES:
BACKGROUND
Track 'n Trail, a Delaware corporation (Company), is the successor to
businesses formerly conducted by Track 'n Trail, a California corporation (Track
'n Trail-California) and its subsidiary, Overland Management Corporation
(Overland). In connection with the formation of the Company, the Company issued
an aggregate of 40,816 shares of its common stock to existing stockholders of
Track 'n Trail-California. As described in Note 4, a reorganization of Track 'n
Trail-California (the Reorganization) was effected on October 7, 1997, in which
the Track 'n Trail-California stockholders exchanged 100% of their Track 'n
Trail-California common stock for 4,107,608 shares of the Company's common
stock, inclusive of the 40,816 shares of the Company's common stock issued upon
formation. The Reorganization, which will be accounted for in a manner similar
to a pooling-of-interests, was accomplished in an exchange of one share of Track
'n Trail-California common stock for approximately 100 shares of the Company's
common stock. In connection with the Reorganization, all of the common stock
of Overland was transferred to the Company in the form of a dividend resulting
in the predecessor businesses being wholly owned subsidiaries of the Company.
The accompanying financial statements reflect, for all periods presented, the
capital structure and number of shares outstanding as a result of the
Reorganization.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet as of September 27, 1997 and the statements
of operations and cash flows for the 39- and 13-week periods ended September 28,
1996 and September 27, 1997 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of only normal recurring
adjustments, necessary for the fair presentation of the results of the interim
periods. The data disclosed in these notes to the financial statements for
those interim periods are also unaudited. Because all of the disclosures
required by generally accepted accounting principles are not included, these
interim statements should be read in conjunction with the financial statements
and notes thereto contained in the Company's Registration Statement on Form S-1
(File No. 333-23195).
PRO FORMA INFORMATION (UNAUDITED)
The pro forma balance sheet reflects adjustments to give effect as of
September 27, 1997, to events occurring in October 1997, as described in Note 4,
including (i) recording deferred tax assets of approximately $1.2 million
arising from the conversion of Track 'n Trail-California from an S corporation
to a C corporation upon the Reorganization, (ii) declaration of a $6.4 million
distribution (the Distribution) which was designed to constitute substantially
all remaining undistributed S corporation earnings of Track 'n Trail-California
immediately prior to the Reorganization, (iii) receipt by the Company of net
proceeds of approximately $25.2 million from the initial public offering (the
Offering), net of underwriting discounts and Offering expenses, (iv) payment of
the Distribution from the proceeds of the Offering, (v) repayment of
indebtedness which had terms requiring repayment upon the Offering amounting to
$17.1 million at September 27, 1997 ($17.7 million at the Offering), and (vi)
compensation of $59,000, offset by a related deferred income tax asset of
$24,000, relating to stock options that vested upon the Offering in accordance
with the terms of the Stock Option Plan.
Pro forma net income has been computed to include a provision for income
taxes at an effective tax rate of 40.0% representing management's estimate of
the effective tax rate as if the Reorganization had been in effect and the
Company had been a C corporation for all periods presented.
-4-
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Pro forma net income per common and common equivalent share (unaudited) for
the 39- and 13-week periods ended September 27, 1997, have been computed by
dividing pro forma net income by the weighted average number of common and
common equivalent shares outstanding (using the treasury stock method and the
initial public offering price) after giving retroactive effect to (i) a change
in the number of outstanding shares effected by the Reorganization, (ii) common
stock options issued during the 12-month period preceding the Offering computed
under the treasury stock method and (iii) the number of shares of common stock
to be sold in the Offering, at the offering price, the proceeds of which would
be necessary to pay the excess of S corporation distributions during the period
from September 29, 1996 and thereafter until the consummation of the Offering
over earnings during the 12-month period ended September 27, 1997.
Historical net income per share information is not presented on the face of
the consolidated statement of operations as such information is not meaningful.
Historical primary and fully diluted net income per common and common equivalent
share were $0.33 and $0.30 for the 39-week periods ended September 28, 1996 and
September 27, 1997, respectively, and $0.35 for the 13-week periods ended
September 27, 1997 and September 28, 1996, respectively, with weighted average
shares outstanding of 4,768,155 and 4,765,690 for the 39-week periods ended
September 28, 1996 and September 27, 1997, respectively, and 4,768,155 for the
13-week periods ended September 28, 1996 and September 27, 1997, respectively.
2. INCOME TAXES:
For the 39- and 13-week periods ended September 28, 1996 and September 27,
1997, the provision for income taxes consists of the amounts computed at
management's estimate of the effective tax rate during the applicable portion of
the related fiscal years. For the 39-week period ended September 27, 1997, the
estimated effective rate takes into account the portion of the income (loss)
that will be taxed as S corporation income (Track 'n Trail-California's federal
and certain state income) and as C corporation income (Overland's federal and
state income and a portion of Track 'n Trail-California's state income), and is
adjusted by a nonrecurring deferred income tax benefit of $132,000 related to
recording deferred tax assets upon the change in tax status of Track 'n
Trail-California in certain states from that of an S corporation to a C
corporation.
3. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
----------------------------
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Noncash investing and financing transactions:
Acquisition of minority investor's interest in Overland:
Purchase price, including acquisition costs $ 557,724 $ --
Minority interest eliminated 105,151 --
Less debt issued in connection with the acquisition (662,875) --
---------- ----------
Cash paid for acquisition $ -- $ --
---------- ----------
---------- ----------
Distribution of notes receivable to stockholders $ -- $1,660,000
---------- ----------
---------- ----------
Cancellation of stock appreciation rights $ -- $ 596,424
---------- ----------
---------- ----------
</TABLE>
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<PAGE>
4. SUBSEQUENT EVENTS:
REORGANIZATION
The Company is the successor to businesses formerly conducted by Track 'n
Trail-California and its subsidiary, Overland. In October 1997, the
Reorganization of Track 'n Trail-California was consummated (Note 1,
Background). The Reorganization resulted in an increase of approximately 100 to
one in the shares of common stock outstanding immediately before the
Reorganization. Upon the effective date of the Reorganization, the Company had
4,107,608 shares of common stock outstanding. The Reorganization will be
accounted for in a manner similar to a pooling of interests. Accordingly, all
references to the number of common and common equivalent shares and to per share
information in the consolidated financial statements have been adjusted to
reflect the capital structure resulting from the Reorganization on a retroactive
basis for all periods presented.
Upon completion of the Reorganization, Track 'n Trail-California converted
from an S corporation to a C corporation under provisions of the Internal
Revenue Code and state statutes and, accordingly, became subject to federal and
state income tax on all of its income. Upon termination of the S corporation
election, deferred income taxes representing the net tax effect of differences
between the Company's financial statement and tax bases in certain assets and
liabilities as of the date of the conversion to a C corporation will become a
net asset of the Company and will be included in the consolidated balance sheet
with a corresponding non-recurring decrease in tax expense in the consolidated
statement of operations as of the date of the Reorganization. Upon conversion
from an S corporation to a C corporation, an increase in deferred tax assets,
net, of $1,214,000 and a corresponding reduction of income tax expense will be
recorded. Such deferred tax assets relate primarily to differences in the
financial statement and tax bases of fixed assets and inventory and the effect
of stock compensation plan deductions for accounting, but not tax, purposes.
INITIAL PUBLIC OFFERING
On October 16, 1997, the Company completed its initial public offering of
its common stock. In connection with the Offering, the Company issued 2,727,272
shares of common stock and received net proceeds of approximately $25.2 million,
net of underwriting discounts and offering expenses.
Upon closing of the Offering, the Company's nonqualified and incentive
stock options vested, resulting in a non-cash compensation charge reducing net
income by approximately $35,000, after netting the related income tax effect of
$24,000.
Certain notes payable, which had an aggregate balance of approximately
$17.1 million at September 27, 1997 ($17.7 million at the Offering), became due
and payable upon closing of the Offering. The Company used a portion of its
proceeds of the Offering to retire these obligations.
Between September 27, 1997 and the closing of the Offering, Track 'n
Trail-California declared distributions aggregating $6,400,000, representing
management's estimate of substantially all previously undistributed accumulated
S corporation earnings remaining at the date of the Reorganization. Such
distributions were paid from a portion of the Company's proceeds from the
Offering.
In connection with the Reorganization and the Offering, the S corporation
elections of Track 'n Trail-California and the Company, respectively, were
terminated under circumstances under which income to be reported by the Company
and Track 'n Trail-California for their respective terminated S corporation
taxable years will be determined utilizing a "closing of the books" method.
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<PAGE>
4. SUBSEQUENT EVENTS: (CONTINUED)
STOCK OPTION AND PURCHASE PLANS
STOCK OPTION PLAN. Effective upon the Reorganization, the Company assumed
the 1996 Stock Option Plan of Track 'n Trail-California (the Plan) and amended
and restated the Plan, effective as of the date of the Offering. Upon the
Reorganization, options to purchase shares of the Company's common stock were
exchanged for all stock options then outstanding pursuant to the Plan to
purchase shares of the common stock of Track 'n Trail-California. The terms and
conditions of the options exchanged were equivalent. A total of 1,055,735
shares of common stock are reserved for issuance under the Plan.
EMPLOYEE STOCK PURCHASE PLAN. The Company adopted the Employee Stock
Purchase Plan (the Purchase Plan) effective as of the closing of the Offering.
The Purchase Plan covers an aggregate of 150,000 shares of common stock and is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code.
COMMITTED REVOLVING LINE OF CREDIT
Effective upon the consummation of the Offering, the Company obtained a
two-year, $10.0 million revolving line of credit from a bank. The line of
credit bears interest, at the option of the Company, at either the bank's
reference rate (8.5% at September 27, 1997) or LIBOR (5.66% at September 27,
1997) plus 2.0%, and is collateralized by all of the assets of the Company. Of
the total amount available under the line, up to $1.5 million may be allocated
to letters of credit. Under the terms of the related agreement, advances under
the line are limited to a percentage of eligible inventory, and the Company is
required to meet certain financial covenants.
-7-
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. In
addition to historical information, this Management's Discussion and Analysis
includes certain forward-looking statements regarding events and financial
trends which may affect the Company's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause the Company's actual results and financial position to differ materially.
Factors that could cause or contribute to such differences include those
discussed below. These and other risks and uncertainties related to the
business are described in detail in the Company's Registration Statement on Form
S-1 (File No. 333-23195) under the heading "Risk Factors". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
OVERVIEW
Track 'n Trail, a Delaware corporation (together with its subsidiaries,
unless the context otherwise requires, the Company), is one of the largest
full-service specialty retailers in the United States focusing on a broad range
of high-quality casual, outdoor and adventure footwear. As of September 27,
1997, the Company operated 100 Track 'n Trail stores and 36 Overland Trading
stores in 24 states.
In October 1996, the Company obtained 33 Overland Trading stores by
acquiring control of Overland Management Corporation (Overland). Due to the
then-existing prohibition against an S corporation owning 80% or more of a
subsidiary's stock, the Company initially purchased 79% of Overland's common
stock, while the Company's then-existing stockholders personally acquired the
remaining 21%. Following legislative changes to the S corporation rules, the
Company acquired the remaining 21% effective at the beginning of fiscal 1997,
and assumed such stockholders' pro rata portion of the notes issued to the prior
owners of Overland. In connection with the acquisition, which was accounted for
under the purchase method of accounting, $3.3 million was allocated to goodwill.
Since the Overland acquisition, the Company has opened an additional three
Overland Trading stores. The indebtedness that the Company issued or guaranteed
in connection with the acquisition was repaid in full from a portion of the net
proceeds of the Company's initial public offering (the Offering), which was
consummated in October 1997.
Pursuant to a reorganization effected in October 1997, the Company acquired
the businesses conducted by its subsidiaries, Track 'n Trail, a California
corporation (Track 'n Trail-California), and Overland. See notes 1 and 4 of
Notes to Consolidated Financial Statements.
Comparable store sales are commonly used as a performance measurement by
retail companies. The Company defines comparable stores as those stores that
were open for the full fiscal period and for the full prior fiscal period. The
Company's comparable store net sales grew 2.0% in the first 39 weeks of fiscal
1997, excluding the acquired Overland Trading stores. Had the Overland Trading
stores acquired by the Company on October 25, 1996 been included in the
Company's comparable store net sales comparison since the acquisition,
comparable store net sales would have grown by 0.3% in the first 39 weeks of
1997.
Track 'n Trail-California was treated as an S corporation for federal and
certain state income tax purposes from June 28, 1992, until its S corporation
status terminated as a result of the Reorganization on October 7, 1997 (the
Termination Date). As a result, the earnings of Track 'n Trail-California
during such period were taxed, with certain exceptions, directly to the
stockholders of Track 'n Trail-California rather than to Track 'n
Trail-California. Thereafter, Track 'n Trail-California has been subject to
state and federal income taxes as a C corporation, and all references to net
income in this "Management's Discussion and Analysis of Financial Condition and
Results of Operations" are presented as if Track 'n Trail-California had been
subject to income taxes at a combined state and federal income tax rate of
40.0%.
-8-
<PAGE>
RESULTS OF OPERATIONS
The following discussions compare the Company's results of operations for
the 13 weeks and 39 weeks ended September 27, 1997, with its results for the
comparable periods in the prior year. The results achieved in these periods are
not necessarily indicative of results to be achieved in future periods. The
following comparative information should be read in conjunction with the
Consolidated Financial Statements and accompanying notes for each period
discussed, as well as the information presented in all other sections of this
Management's Discussion and Analysis.
THIRTEEN WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 28, 1996
NET SALES
Net sales were $24.8 million for the 13 weeks ended September 27, 1997, an
increase of $8.2 million, or 49.3%, over the $16.6 million in net sales for the
comparable period in the prior year. The 36 Overland Trading stores accounted
for $6.3 million or 76.9% of the increase in net sales. A comparable store net
sales increase of 1.2% for the Track 'n Trail stores contributed $179,000 to the
net sales gain, while the six Track 'n Trail stores opened in the first 39 weeks
of 1997 contributed $709,000 in net sales. The remaining increase in net sales
of $1.0 million is primarily attributable to stores opened in fiscal 1996.
GROSS PROFIT
Gross profit was $11.8 million for the 13 weeks ended September 27, 1997,
an increase of $3.8 million, or 47.2%, over the $8.0 million gross profit for
the comparable period in the prior year. Gross profit as a percentage of net
sales decreased to 47.6% for the 13 weeks ended September 27, 1997 from 48.3% in
the comparable period in the prior year. Gross profit at the Track 'n Trail
stores for the 13 weeks ended September 27, 1997 was 48.2% of net sales.
Overland's gross profit for the 13 weeks ended September 27, 1997 was $2.9
million, or 45.9% of net sales, which had a negative impact on the consolidated
gross profit as a percentage of net sales for the 13 weeks ended September 27,
1997. Overland's gross profit percentage decreased from 47.5% in the comparable
period in the prior year due primarily to audit adjustments being recorded by
Overland's prior management in conjunction with their annual audit at August 3,
1996.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $7.8 million for the 13 weeks ended
September 27, 1997, an increase of $2.8 million, or 55.3%, over the comparable
period in the prior year. Overland accounted for $2.1 million of the increase.
The remaining $707,000 of the increase is primarily attributable to the 17 Track
'n Trail stores opened in 1996 and the six Track 'n Trail stores opened in 1997
which were not open for the full comparable period in the prior year. As a
percentage of net sales, selling and marketing expenses increased to 31.5% in
the 13 weeks ended September 27, 1997 from 30.2% in the comparable period in
1996, primarily as a result of higher operating expenses as a percentage of net
sales at Overland, which were 32.9% of Overland's net sales in the 1997 period.
As a percentage of net sales, selling and marketing expenses at the Track 'n
Trail stores increased slightly to 31.0% in the 13 weeks ended September 27,
1997 from 30.2% in the comparable period in 1996, primarily due to the timing of
new store openings.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $1.8 million for the 13 weeks
ended September 27, 1997, an increase of $626,000, or 54.4%, over the $1.2
million recorded in the comparable period in 1996. Overland accounted for
$435,000 of the increase. The remaining $191,000 of the increase is
attributable to increases in the Track 'n Trail staff and associated expenses as
a result of the Company's expansion. As a percentage of net sales,
administrative and distribution expenses increased to 7.2% from 6.9% in the
comparable period of 1996.
-9-
<PAGE>
INTEREST EXPENSE
Interest expense increased to $440,000, or 1.8% of net sales, for the 13
weeks ended September 27, 1997, from $146,000, or 0.9% of net sales, in the
comparable period in 1996. This $294,000 increase was primarily attributable to
$168,000 of interest on the debt incurred in connection with the Overland
acquisition, and $87,000 of interest on Overland's borrowings under its line of
credit.
NET INCOME
The Company's net income for the 13 weeks ended September 27, 1997 was $1.1
million, an increase of $66,000 over the net income of $1.0 million in the
comparable period in 1996.
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 28, 1996
NET SALES
Net sales were $62.3 million for the 39 weeks ended September 27, 1997, an
increase of $22.4 million, or 56.2%, over the $39.9 million in net sales for the
comparable period in the prior year. The 36 Overland Trading stores accounted
for $16.4 million or 73.0% of the increase in net sales. A comparable store net
sales increase of 2.0% for the Track 'n Trail stores contributed $725,000 to the
net sales gain, while the six Track 'n Trail stores opened in the first 39 weeks
of 1997 contributed $1.2 million in net sales. The remaining increase in net
sales of $4.1 million is primarily attributable to stores opened in fiscal 1996.
GROSS PROFIT
Gross profit was $29.9 million for the 39 weeks ended September 27, 1997,
an increase of $10.6 million, or 55.2%, over the $19.3 million gross profit for
the comparable period in the prior year. Gross profit as a percentage of net
sales decreased to 48.0% for the 39 weeks ended September 27, 1997 from 48.3% in
the comparable period in the prior year. Gross profit at the Track 'n Trail
stores for the 39 weeks ended September 27, 1997 was 48.6% of net sales, a 0.3%
margin improvement over the 48.3% gross profit, as a percentage of net sales in
the 39 weeks ended September 28, 1996. This increase was primarily attributable
to enhanced cumulative markups and lower markdowns. Overland's gross profit for
the 39 weeks ended September 27, 1997 was $7.6 million, or 46.2% of net sales,
which had a negative impact on the consolidated gross profit as a percentage of
net sales for the 39 weeks ended September 27, 1997. The level of gross profit
as a percentage of net sales realized at the Overland Trading stores represented
an improvement over the 42.2% gross profit margin recorded by Overland under
previous management in the comparable period in 1996. This improvement was due,
in part, to increased purchasing economies of scale after the acquisition of
Overland. Management also believes that liquidity problems at Overland
contributed to Overland's lower gross profit margin in the comparable period in
1996.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $22.3 million for the 39 weeks ended
September 27, 1997, an increase of $8.5 million, or 61.6%, over the comparable
period in the prior year. Overland accounted for $6.1 million of the increase.
The remaining $2.4 million of the increase is primarily attributable to the 17
Track 'n Trail stores opened in 1996 and the six Track 'n Trail stores opened in
1997 which were not open for the full comparable period in the prior year. As a
percentage of net sales, selling and marketing expenses increased to 35.8% in
the 39 weeks ended September 27, 1997 from 34.6% in the comparable period in
1996, primarily as a result of higher operating expenses as a percentage of net
sales at Overland, which were 37.2% of Overland's net sales in the 1997 period.
As a percentage of net sales, selling and marketing expenses at Track 'n Trail
stores increased slightly to 35.3% in the 39 weeks ended September 27, 1997 from
34.6% in the comparable period in 1996, primarily due to the timing of new store
openings.
-10-
<PAGE>
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $5.2 million for the 39 weeks
ended September 27, 1997, an increase of $1.8 million, or 50.6%, over the $3.5
million recorded in the comparable period in 1996. Overland accounted for $1.4
million of the increase. The remaining $362,000 increase is attributable to
increases in the Track 'n Trail-California staff and associated expenses as a
result of the Company's expansion. As a percentage of net sales, administrative
and distribution expenses decreased to 8.4% from 8.7% in the comparable period
of 1996. In the absence of the Overland acquisition, administrative and
distribution expenses would have been 8.3% of Track 'n Trail's net sales, down
from the 8.7% experienced in the comparable period in 1996, as a result of
spreading such expenses over a larger revenue base.
INTEREST EXPENSE
Interest expense increased to $1.2 million, or 1.9% of net sales, for the
39 weeks ended September 27, 1997, from $386,000, or 1.0% of net sales, in the
comparable period in 1996. This $784,000 increase was primarily attributable to
$501,000 of interest on the debt incurred in connection with the Overland
acquisition (all of which was repaid in October 1997), and $170,000 of interest
on Overland's borrowings under its line of credit.
NET INCOME
The Company's net income for the 39 weeks ended September 27, 1997 was
$719,000, a decrease of $257,000 from the net income of $976,000 in the
comparable period in 1996. The decrease was more than accounted for by the net
loss of $363,000 attributable to Overland. Excluding such loss, the Company
would have realized net income of $1.1 million for the 39 weeks ended September
27, 1997, which would have represented a $106,000 improvement over the
comparable period in 1996. The $363,000 net loss attributable to Overland in
the 39 weeks ended September 27, 1997 compares to a net loss of $334,000 for the
comparable period in 1996 under previous management. This increase in
Overland's net loss is explained by interest costs of $501,000 incurred during
1997 as a result of the Overland acquisition net of the effect of an improved
gross margin and lower operating costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $766,000 in working capital as of September 27, 1997,
compared to $9.4 million at the end of fiscal 1996. This decrease of $8.7
million in working capital resulted from the reclassification to current
maturities of the Union Bank note and the debt incurred in conjunction with the
Overland acquisition, which have since been paid from a portion of the proceeds
of the Offering. Had these amounts not become current, working capital would
have increased by $218,000. The Company's capital requirements relate primarily
to working capital and the build-out of new stores. The Company's working
capital needs should increase significantly in the fourth quarter of 1997 due to
increases in inventory in advance of the holiday selling season, payments coming
due for back-to-school merchandise and construction payments on third-quarter
store build-outs. In addition, the Company requires incremental working capital
to stock each new store upon opening. The Company expects to open approximately
12 new stores in the fourth quarter, a significant increase over the eight
stores opened during the first 39 weeks of 1997. Seasonally strong holiday
sales at the end of the fourth quarter, and relatively low first-quarter
inventory levels, typically reduce working capital needs in the first quarter.
Capital expenditures were $1.1 million for the 39 weeks ended September 27,
1997. Expenditures in the first 39 weeks of fiscal 1997 were primarily for the
build-out of eight new stores as well as the completion of three stores opened
in 1996. The Company estimates capital expenditures for the remainder of the
year to be $1.4 million for the construction of approximately 12 new stores.
Historically, the Company has funded its cash requirements primarily
through cash flow from operations and borrowings under its Revolving Loan
Agreement. Net cash used by operating activities for the 39 weeks ended
September 27, 1997 was $2.0 million. Net cash used or provided by operating
activities has historically been driven by net income levels combined with
fluctuations in inventory and accounts payable.
-11-
<PAGE>
Financing activities provided cash of $2.9 million for the 39 weeks ended
September 27, 1997, attributable to additional borrowings under the Revolving
Loan Agreement to fund increased working capital requirements as a result of
the larger store base. Cash was used in financing activities primarily for
distributions to stockholders and repayment of long-term debt, primarily
financed by borrowings under the Company's Revolving Loan Agreement. The
Company historically paid distributions to its stockholders as a result of the
Company's prior status as an S corporation. During the first 39 weeks of fiscal
1997, the Company made S corporation distributions to its stockholders of $2.4
million. Prior to the Termination Date, Track 'n Trail-California declared the
$6.4 million Distribution to its then-existing stockholders (the Existing
Stockholders), which was paid from a portion of the Company's proceeds from the
Offering. On October 16, 1997 Track 'n Trail consummated its initial public
offering which generated $25.2 million in net proceeds. The proceeds were
utilized to repay all outstanding indebtedness under the Revolving Loan
Agreement ($10.2 million), other debt totaling $7.5 million and the $6.4 million
Distribution to the Existing Stockholders.
In connection with the Offering, Track 'n Trail-California and Overland put
into place a new two-year, $10.0 million revolving line of credit with Union
Bank of California. This credit facility is guaranteed by the Company. The
line of credit bears interest at the option of the Company at either the bank's
reference rate or the London Inter-Bank Offered Rate plus 2.0%, and is
collateralized by all of the Company's assets. Of the $10.0 million available
under this facility, up to $1.5 million may be allocated to letters of credit
with durations of up to 180 days. Advances under the revolving line of credit
are limited to 50.0% of eligible inventory, subject to reduction by any amounts
outstanding under letters of credit. The new credit facility prohibits the
Company from paying dividends without the bank's consent and limits the
Company's capital expenditures to $5.0 million in 1997, $8.0 million in 1998 and
$10.0 million in 1999.
Management believes that the net proceeds of the Offering, together with
operating cash flow and borrowings under its credit facility, will be sufficient
to complete the Company's fiscal 1997 and fiscal 1998 store expansion program
and to satisfy the Company's other capital requirements through fiscal 1997 and
fiscal 1998. The Company's capital requirements may vary significantly from
those anticipated depending upon such factors as operating results, the number
and timing of new store openings, and the number and size of any future
acquisitions.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company anticipates that its operating results will fluctuate as a
result of a number of factors, including seasonality, changes in pricing or
promotion policies by the Company, its competitors or its suppliers, the
availability and cost of merchandise, consumer acceptance of the products sold
by the Company, and the number and timing of store openings and closures. The
availability and cost of merchandise may, in turn, fluctuate due to a number of
factors including changes in the Company's relationships with major suppliers,
the Company's access to private label manufacturing capacity, foreign currency
fluctuations and other risks associated with importing private label products
from foreign countries.
-12-
<PAGE>
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds Information:
Subsequent to the period covered by this report, the Company effected an
initial public offering (the "Offering") of its Common Stock, par value $.01 per
share, pursuant to a Registration Statement on Form S-1 (File No. 333-23195)
that was declared effective by the Securities and Exchange Commission on October
9, 1997. The Offering commenced on October 10, 1997. The closing of the
Offering occurred on October 16, 1997 with respect to 2,727,272 shares of Common
Stock offered by the Company. The managing underwriters of the Offering are BT
Alex. Brown Incorporated, A.G. Edwards & Sons, Inc. and Ladenburg Thalmann & Co.
Inc.
The following table summarizes the number of shares of Common Stock and
aggregate offering price of the shares registered for the account of the Company
and the amount and aggregate offering price sold through the date of this
report:
<TABLE>
<CAPTION>
For the account of the Company
- ----------------------------------------------------------------------------------------------------
Aggregate offering price Aggregate offering price
Amount registered of amount registered Amount sold of amount sold
- --------------------- ------------------------- -------------------- ------------------------
<S> <C> <C> <C>
2,727,272 $28,636,356 2,727,272 $28,636,356
</TABLE>
The following table summarizes the gross proceeds to the Company, the
expenses incurred for the Company's account, and the net proceeds to the Company
in connection with the issuance and distribution of Common Stock by the Company
in the Offering:
Gross proceeds: $ 28,636,356
-------------
Underwriting discounts and commissions: 2,004,545
Finders' fees: 0
Expenses paid to or for underwriters: 0
Other expenses: 1,400,000(E)
-------------
Total expenses: 3,404,545(E)
-------------
Net proceeds: $ 25,231,811(E)
-------------
-------------
_________________
(E) Estimated.
-13-
<PAGE>
The following table summarizes the amounts of net Offering proceeds to the
Company used for the purposes listed, through the date of this report:
Use of Proceeds Amount
- --------------- ------
Funding S corporation distribution by subsidiary(1): $ 6,400,000
Construction of plant, building and facilities: 0
Purchase and installation of machinery and equipment: 0
Purchases of real estate: 0
Acquisition of other businesses: 0
Repayment of indebtedness: $ 17,660,293
Working capital: $ 485,645
Temporary investments(2): $ 685,873
_________________
(1) Represents a payment to persons owning 10% or more of the Company's Common
Stock. All other payments listed are to persons other than directors, officers,
their associates, persons owning 10% or more of any class of the Company's
equity securities, and affiliates of the Company.
(2) Money market funds.
-14-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description of Document Page
- ------ ----------------------- ------------
3.1* Amended and Restated Certificate of Incorporation.. . . . .
3.2* Amended and Restated Bylaws.. . . . . . . . . . . . . . . .
4.1* Form of Common Stock Certificate. . . . . . . . . . . . . .
11.1 Statement of Computation of Earnings Per Share. . . . . . 17
27.1 Financial Data Schedule.. . . . . . . . . . . . . . . . . 18
_________________
* Incorporated herein by reference to the correspondingly numbered exhibit to
the Registrant's Registration Statement on Form S-1 (File No. 333-23195).
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter ended September
27, 1997.
-15-
<PAGE>
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.
TRACK 'N TRAIL
Date: November 6, 1997 By: /s/ Daniel J. Nahmens
-----------------------------------
Daniel J. Nahmens
Vice President-Finance and
Chief Financial Officer and
Treasurer (on behalf of the
Registrant and as the Registrant's
Principal Financial and
Accounting Officer)
-16-
<PAGE>
EXHIBIT 11.1
TRACK 'N TRAIL
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
September 27, September 27,
1997 1997
(13 Weeks) (39 Weeks)
---------- ----------
<S> <C> <C>
HISTORICAL EARNINGS PER SHARE
Weighted average common shares outstanding 4,107,608 4,107,608
Shares, warrants and options treated as common share
equivalents pursuant to SEC Staff Accounting Bulletin
Topic 4d. 653,153 658,082
---------- ----------
Total common and common equivalent share 4,760,761 4,765,690
---------- ----------
---------- ----------
Net income $1,683,434 $1,447,536
---------- ----------
---------- ----------
Earnings per common and common equivalent share $ .35 $ .30
---------- ----------
---------- ----------
PRO FORMA EARNINGS PER SHARE
Weighted average common shares outstanding 4,107,608 4,107,608
Shares, warrants and options treated as common share
equivalents pursuant to SEC Staff Accounting Bulletin
Topic 4d. 653,153 658,082
Shares, warrants and options treated as common share
equivalents pursuant to SEC Accounting Bulletin
Topic 1b3. 544,981 544,981
---------- ----------
Pro forma weighted average number of shares of common stock
and common stock equivalents 5,305,742 5,310,671
---------- ----------
---------- ----------
Pro forma net income $1,084,513 $ 719,473
---------- ----------
---------- ----------
Pro forma earnings per common and common equivalent share $ .20 $ .14
---------- ----------
---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FILED AS PART OF
THE COMPANY'S 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> SEP-27-1997
<CASH> 715
<SECURITIES> 0
<RECEIVABLES> 634
<ALLOWANCES> 0
<INVENTORY> 26,923
<CURRENT-ASSETS> 28,925
<PP&E> 12,044
<DEPRECIATION> 5500
<TOTAL-ASSETS> 40113
<CURRENT-LIABILITIES> 28159
<BONDS> 847
0
0
<COMMON> 41
<OTHER-SE> 9646
<TOTAL-LIABILITY-AND-EQUITY> 40113
<SALES> 62289
<TOTAL-REVENUES> 62289
<CGS> 32388
<TOTAL-COSTS> 27536
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1171
<INCOME-PRETAX> 1199
<INCOME-TAX> (249)
<INCOME-CONTINUING> 1448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1448
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
