<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-23195
PROSPECTUS
2,727,272 SHARES
[LOGO TO COME]
COMMON STOCK
--------------
All of the shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of Track 'n Trail ("Track 'n Trail" or the "Company") offered hereby
are being sold by the Company. Prior to this offering (the "Offering"), there
has been no public market for the Common Stock. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price.
The Common Stock has been approved for quotation on The Nasdaq National
Market, subject to official notice of issuance, under the symbol "TKTL."
-------------------
THE OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 8 OF THIS PROSPECTUS.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................... $10.50 $0.735 $9.765
Total(3).................................... $28,636,356 $2,004,545 $26,631,811
</TABLE>
(1) The Company and certain stockholders (the "Selling Stockholders") have
agreed to indemnify the several Underwriters against certain liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering, payable by the Company, estimated
at $1.4 million.
(3) The Selling Stockholders have granted the Underwriters a 30-day option (the
"Over-allotment Option") to purchase up to 409,090 additional shares of
Common Stock on the same terms and conditions as set forth above solely to
cover over-allotments, if any. If the Over-allotment Option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Selling Stockholders will be $32,931,801, $2,305,226 and
$3,994,764, respectively. See "Principal and Selling Stockholders" and
"Underwriting."
-------------------
The shares of Common Stock offered by this Prospectus are offered by the
several Underwriters, subject to prior sale, when, as and if issued to and
accepted by them, and subject to approval of certain legal matters by counsel
for the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is anticipated that delivery of the shares of Common Stock subject
to the Offering will be made at the offices of BT Alex. Brown Incorporated,
Baltimore, Maryland, on or about October 16, 1997.
-------------------
BT ALEX. BROWN
A.G. EDWARDS & SONS, INC.
LADENBURG THALMANN & CO. INC.
<PAGE>
THE DATE OF THIS PROSPECTUS IS OCTOBER 10, 1997
<PAGE>
[INSIDE FRONT COVER OF PROSPECTUS]
[TRACK 'N TRAIL LOGO]
[PICTURE OF UNITED STATES MAP
INDICATING 100 TRACK 'N TRAIL LOCATIONS]
100 Locations Nationwide
Track 'n Trail-TM-, Overland Trading Company-TM-, Nordic Trail-TM-, Coloma
Trail-TM-, Forza-TM-, New Terrain-TM- and Mole-TM- are trademarks of the
Company. This Prospectus also includes trade names and trademarks of other
companies.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK, INCLUDING SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF A PENALTY
BID. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
[INSIDE FRONT COVER GATEFOLD OF PROSPECTUS]
[PHOTOGRAPH SHOWS INTERIOR WALL OF TRACK 'N TRAIL STORE]
Adventure
[PHOTOGRAPH SHOWS FRONT EXTERIOR OF TRACK 'N TRAIL STORE]
Every day a new adventure
[PHOTOGRAPH SHOWS INTERIOR WALL OF TRACK 'N TRAIL STORE WITH DISPLAY OF HIKING
BOOTS]
Hike
[PHOTOGRAPH SHOWS CLOSE-UP VIEW OF TREKKING BOOTS]
Trek
[PHOTOGRAPH SHOWS PANORAMIC VIEW OF LEGS AND FEET]
[PHOTOGRAPH SHOWS INTERIOR WALL OF TRACK 'N TRAIL STORE WITH DISPLAY OF WALKING
SHOES]
Walk
Trek
Skate
Walk
Hike
Work
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING
ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS SET FORTH IN THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO OR OTHERWISE AS SPECIFIED HEREIN, ALL INFORMATION
IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT
OPTION AND (II) REFLECTS THE CONSUMMATION IN OCTOBER 1997 OF THE TRANSACTION IN
WHICH TRACK 'N TRAIL, A CALIFORNIA CORPORATION ("TRACK 'N TRAIL-CALIFORNIA"),
AND OVERLAND MANAGEMENT CORPORATION ("OVERLAND") BECAME SUBSIDIARIES OF THE
COMPANY (THE "REORGANIZATION"). SEE "UNDERWRITING" AND NOTE 14 OF NOTES TO THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS. EFFECTIVE JUNE 28, 1992, THE
COMPANY CHANGED ITS FISCAL YEAR-END FROM THE LAST SATURDAY IN JUNE TO THE LAST
SATURDAY IN DECEMBER. AS USED IN THIS PROSPECTUS, "FISCAL 1992," "FISCAL 1993,"
"FISCAL 1994," "FISCAL 1995" AND "FISCAL 1996" REFER TO THE COMPANY'S FISCAL
YEARS ENDED JUNE 27, 1992, DECEMBER 25, 1993, DECEMBER 31, 1994, DECEMBER 30,
1995 AND DECEMBER 28, 1996, RESPECTIVELY, AND "FISCAL 1997" REFERS TO THE
COMPANY'S FISCAL YEAR ENDING DECEMBER 27, 1997. "STORE CONTRIBUTION" REFERS TO
GROSS PROFIT AFTER DEDUCTING SELLING AND MARKETING EXPENSES. EXCEPT AS OTHERWISE
SPECIFIED OR WHERE THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO THE "COMPANY"
OR "TRACK 'N TRAIL" INCLUDE THE RESULTS OF OVERLAND FROM AND AFTER THE
ACQUISITION OF OVERLAND.
THE COMPANY
Track 'n Trail ("Track 'n Trail" or 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. The Company has
increased its store base and net sales each year since inception. In addition,
the Company's net income has grown at a compound annual rate of 37.5% from $1.1
million in fiscal 1993 to $2.9 million in fiscal 1996, after giving effect to
assumed C corporation income taxes.
As of September 1, 1997, the Company operated 135 stores in 24 states under
the Track 'n Trail and Overland Trading names. Subsequently, the Company opened
its first Overland Trading store in California. All but three of the Company's
stores are located in regional or super-regional shopping malls, concentrated in
California, the Midwest and the Northeast. Each store offers a wide range of
rugged walking and fashion casual shoes, sandals and boots, featuring brands
such as Timberland, Dr. Martens, Birkenstock, Vans, Teva, Airwalk, Clarks, Ecco
and Rockport.
The Company targets middle to upper income consumers, with the Track 'n
Trail stores focusing on consumers in the 15- to 40-year-old age group and the
Overland Trading stores focusing on the 25- to 55-year-old age group. The
Company markets to these two different customer segments through distinct
merchandise assortments and store designs. The Track 'n Trail stores offer a
merchandise selection that emphasizes fashionable, performance-oriented footwear
and typically feature an all-glass front, often accented with rock fixtures, and
earth-tone interiors reminiscent of an outdoor setting. The Company's Overland
Trading stores are merchandised and designed to appeal to a slightly older and
more conservative consumer, with a focus on traditional and comfort-oriented
styles displayed in a contemporary, natural wood setting. The Company operates
these two distinct retail concepts to capitalize on the rapid population growth
in the 15- to 24-year old age group and the 40- to 55-year-old age group, which
the U.S. Bureau of the Census estimates will grow 19.4% and 21.7%, respectively,
from 1996 to 2010. Track 'n Trail stores average approximately 1,881 square feet
in size, while the Overland Trading stores average approximately 1,407 square
feet. As of September 27, 1997, the Company operated 100 Track 'n Trail stores
in 23 states, and 36 Overland Trading stores in eight states, including the
Overland Trading store opened in California in September 1997.
The Company obtained 33 Overland Trading stores by acquiring control of
Overland Management Corporation, a Massachusetts corporation ("Overland"), on
October 25, 1996. Overland generated net sales of approximately $23.8 million
and total store contribution of approximately $2.4 million for the 12 months
preceding the acquisition under prior management. In addition to obtaining a
distinct retail venue, by acquiring Overland the Company strengthened its
presence in the northeastern United States. The
3
<PAGE>
Company also believes that the acquisition increases its purchasing power and
negotiating position with suppliers and real estate developers, permits it to
realize operational economies of scale, and increases the potential number of
stores it can open in both existing and future markets.
OPERATING STRATEGIES
The Company's goal is to become the premier destination specialty retailer
of better casual, outdoor and adventure footwear. To accomplish its goal, the
Company is pursuing the following operational strategies:
- Focus on authentic, well-established brands.
- Emphasize customer service and convenience.
- Appeal to two rapidly growing demographic groups through two distinct
retail concepts.
- Implement its focused merchandising strategy on a store-by-store basis.
- Recognize and respond to changing lifestyle trends and their effect on
customer preferences.
- Establish complementary private label brands.
GROWTH STRATEGIES
The Company's senior management team intends to continue to invest in and
strengthen the infrastructure of the Company. These investments in
infrastructure are designed to enhance the Company's ability to continue to grow
through new store openings and acquisitions. Management has developed the
following strategies to accelerate the Company's growth and increase its future
profitability:
- Strengthen its position in certain of its current markets by selectively
opening new Track 'n Trail and Overland Trading stores where demographics
are attractive and where management believes opportunities exist to
achieve economies of scale in management and distribution. The Company
plans to open approximately 20 stores in fiscal 1997 and at least 30
stores in fiscal 1998.
- Increase comparable store net sales by gaining greater recognition through
increased market presence and by fully implementing the Track 'n Trail
operating strategies at the Overland Trading stores.
- Increase the store contribution of the Overland Trading stores as a
percentage of net sales to the level historically achieved by the Track 'n
Trail stores by improving gross profit margin and implementing the
Company's operating expense controls.
- Acquire, as appropriate, other regional specialty footwear retailers from
within the large and fragmented industry for high-quality casual, outdoor
and adventure footwear.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby....... 2,727,272 shares
Common Stock to be outstanding
after the Offering.............. 6,834,880 shares(1)
Use of proceeds................... To repay indebtedness and fund S corporation
distributions to stockholders, and for general corporate
purposes.
Nasdaq National Market symbol..... TKTL
</TABLE>
- ------------------------
(1) Excludes options to purchase 831,659 shares of Common Stock at a weighted
average exercise price of $2.32, and warrants to purchase 49,392 and 74,089
shares of Common Stock at exercise prices equal to the initial public
offering price and 120% of such price, respectively.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER SQUARE FOOT AMOUNTS)
<TABLE>
<CAPTION>
OFFERING,
REORGANIZATION
AND 26 WEEKS 26 WEEKS
FISCAL ACQUISITION ENDED ENDED
-------------------------------------------- PRO FORMA JUNE 29, JUNE 28,
1993 1994(1) 1995 1996 1996(2) 1996 1997
--------- ----------- --------- --------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $ 41,858 $ 48,165 $ 50,691 $ 66,233 $ 84,186 $ 23,286 $ 37,528
Gross profit........................ 19,955 23,085 24,499 32,171 39,726 11,266 18,115
Operating income (loss)............. 2,224 3,175 2,821 5,603 5,467 158 143
Income (loss) before income taxes
and minority interest.............. 1,838 2,814 2,427 4,957 5,401 (71) (608)
Net income (loss)(3)................ $ 1,783 $ 2,747 $ 2,386 $ 4,364 $ 4,375 $ (69) $ (236)(3)
PRO FORMA STATEMENT OF OPERATIONS
DATA(4):
Historical income (loss) before
income taxes and minority
interest........................... $ 1,838 $ 2,814 $ 2,427 $ 4,957 $ 5,401 $ (71) $ (608)
Pro forma income tax expense
(benefit).......................... 735 1,125 971 1,983 2,160 (28) (243)
Minority interest................... -- -- -- 105 -- -- --
--------- ----------- --------- --------- -------------- --------- ---------
Pro forma net income (loss)......... $ 1,103 $ 1,688 $ 1,456 $ 2,869 $ 3,241 $ (43) $ (365)
--------- ----------- --------- --------- -------------- --------- ---------
--------- ----------- --------- --------- -------------- --------- ---------
Pro forma net income (loss) per
share.............................. $ 0.51 $ 0.46 $ (0.07)
--------- -------------- ---------
--------- -------------- ---------
Common and common equivalent shares
used in computing per share
amounts(5)......................... 5,588,537 7,119,052 5,348,426
SELECTED STORE OPERATING DATA:
Store contribution(6)............... $ 6,880 $ 8,110 $ 7,647 $ 11,111 $ 12,450 $ 2,474 $ 3,587
Number of stores:
Opened or acquired during
period.......................... 9 9 12 51(7) 21 (7) 8 6
Closed during period.............. 2 4 4 5 5 5 --
Open at end of period............. 69 74 82 128 128 85 134
Total weighted average square
feet(8)............................ 114,813 130,542 144,612 168,966 205,265 151,775 228,656
Average square feet per store....... 1,851 1,894 1,873 1,744 1,744 1,861 1,758
Weighted average net sales per
square foot(9)..................... $ 365 $ 369 $ 351 $ 392 $ 410 $ 153 $ 164
Increase (decrease) in comparable
store net sales(10)................ 4.1% 0.6% (1.4)% 3.1% 3.1% 3.1% 2.5%
<CAPTION>
OFFERING AND
REORGANIZATION
PRO FORMA
26 WEEKS ENDED
JUNE 28,
1997(2)
--------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $ 37,528
Gross profit........................ 18,115
Operating income (loss)............. 224
Income (loss) before income taxes
and minority interest.............. 183
Net income (loss)(3)................ $ 1,325
PRO FORMA STATEMENT OF OPERATIONS
DATA(4):
Historical income (loss) before
income taxes and minority
interest........................... $ 183
Pro forma income tax expense
(benefit).......................... 73
Minority interest................... --
--------------
Pro forma net income (loss)......... $ 110
--------------
--------------
Pro forma net income (loss) per
share.............................. $ 0.02
--------------
--------------
Common and common equivalent shares
used in computing per share
amounts(5)......................... 6,970,141
SELECTED STORE OPERATING DATA:
Store contribution(6)............... $ 3,587
Number of stores:
Opened or acquired during
period.......................... 6
Closed during period.............. --
Open at end of period............. 134
Total weighted average square
feet(8)............................ 228,656
Average square feet per store....... 1,758
Weighted average net sales per
square foot(9)..................... $ 164
Increase (decrease) in comparable
store net sales(10)................ 2.5%
</TABLE>
<TABLE>
<CAPTION>
JUNE 28, 1997
------------------------------
REORGANIZATION
PRO FORMA
ACTUAL AS ADJUSTED(11)(12)
--------- -------------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital..................................................................... $ 5,870 $ 18,672
Total assets........................................................................ 38,303 39,038
Total debt.......................................................................... 18,993 329
Stockholders' equity................................................................ 8,214 27,957
</TABLE>
- ------------------------------
(1) Fiscal 1994 consisted of 53 weeks. All other fiscal years presented consist
of 52 weeks. During the 53rd week of fiscal 1994, the Company generated
$1.2 million in net sales. As a result, the Company's operating results in
fiscal 1994 are not comparable to its results in any other fiscal year
presented. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(2) Gives effect to (i) for fiscal 1996 only, the Company's acquisition of 100%
of Overland's common stock, (ii) the Reorganization and the resulting
conversion of Track 'n Trail-California from S corporation to C corporation
status, (iii) the sale by the Company, in addition to those shares
described in footnote 5 below, of only those shares of Common Stock
necessary to fund the repayment of indebtedness as described in "Use of
Proceeds" at the initial public offering price of $10.50 per share, net of
underwriting discounts and estimated Offering expenses, and the application
of such portion of the net proceeds as described in "Use of Proceeds," and
(iv) certain other events intended or mandated to occur in connection with
the Offering, as if all of the foregoing had occurred on the first day of
fiscal 1996 or the first day of the 26-week period ended June 28, 1997,
respectively. See "The Company" and "Pro Forma Condensed Consolidated
Financial Information."
5
<PAGE>
(3) The net loss for the 26 weeks ended June 28, 1997 has been computed based
upon a tax expense or benefit for Track 'n Trail-California as an S
corporation for federal tax and state tax purposes in certain states and as
a C corporation in certain other states, including California, the state in
which the Company has its headquarters and its highest concentration of
store locations. If California and certain other states adopt tax
legislation by the end of 1997 which retroactively conforms to federal law
regarding S corporation tax status, the Company will be taxed for all of
1997 as an S corporation in those states. The effect of such state tax
legislation would be to reduce the Company's tax benefit and increase its
net loss for the 26 weeks ended June 28, 1997 by approximately $111,000.
See Note 9 of Notes to Consolidated Financial Statements.
(4) Includes, for fiscal 1993, 1994, 1995 and 1996 and for the 26-week periods
ended June 29, 1996 and June 28, 1997, pro forma provision for income taxes
using an assumed combined federal and state tax rate of 40.0%, which the
Company believes approximates the statutory federal and state income tax
rates that would have been applied had Track 'n Trail-California been taxed
as a C corporation. Commencing June 28, 1992, Track 'n Trail-California has
operated as an S corporation and has not been subject to federal and
certain state income taxes. In connection with the Reorganization and the
Offering, the S corporation election of Track 'n Trail-California and the
Company, respectively, will be 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.
(5) Shares outstanding include 660,547 shares issuable upon exercise of stock
options outstanding at December 28, 1996 and June 28, 1997, after applying
the treasury stock method based on the initial public offering price of
$10.50 per share. The pro forma common and common equivalent shares also
give effect to the sale by the Company of only those shares of Common Stock
necessary to fund the payment of the excess of (i) the sum of stockholder
distributions during the previous 12-month period (during fiscal 1996 for
the determination of shares outstanding for fiscal 1996 and during the 12
months ended June 28, 1997 for the determination of shares outstanding for
the 26 weeks ended June 28, 1997) and distributions paid or declared
thereafter until the consummation of the Offering over (ii) the S
corporation earnings in the previous 12-month period, based on the initial
public offering price of $10.50 per share, net of underwriting discounts
and estimated Offering expenses. See "Capitalization" and "Pro Forma
Condensed Consolidated Financial Information."
(6) Store contribution refers to gross profit after deducting selling and
marketing expenses. Store contribution is presented to provide additional
information about the Company and is commonly used as a performance
measurement by retail companies. Store contribution should not be
considered in isolation or as a substitute for operating income, cash flow
from operating activities and other income or cash flow data prepared in
accordance with generally accepted accounting principles, or as a measure
of the Company's profitability or liquidity.
(7) On October 25, 1996, the Company acquired 33 Overland Trading stores. The
Company opened one additional Overland Trading store in November 1996
pursuant to a commitment previously entered into by Overland. Opened or
acquired stores in fiscal 1996, pro forma for the acquisition, the
Reorganization and the Offering, are shown as if the acquisition had
occurred prior to fiscal 1996.
(8) Weighted to reflect store openings and closings during each period,
assuming that all periods presented consist of 52 weeks (except for the
26-week periods ended June 29, 1996 and June 28, 1997).
(9) Weighted average net sales for fiscal 1994 have been adjusted as if such
year consisted of 52 weeks.
(10) Comparable store net sales include only those stores that were open both
for the full fiscal period and for the full prior fiscal period. The fiscal
1994 and 1995 increases have been calculated by comparing net sales in such
years to net sales for the prior 53 and 52 weeks, respectively. The
increases for fiscal 1996 and for the 26 weeks ended June 28, 1997 exclude
the Overland Trading stores acquired in October 1996. If such stores had
been included in the Company's comparable store net sales comparison since
the acquisition, the increases (decreases) in comparable store net sales
for fiscal 1996 and for the 26 weeks ended June 28, 1997 would have been
2.3% and (0.3%), respectively.
(11) Pro forma balance sheet data give effect to (i) the Reorganization, (ii)
$215,000 of S corporation distributions made in fiscal 1997 subsequent to
June 28, 1997 and (iii) the $6.4 million distribution of previously
undistributed accumulated S corporation earnings to the Existing
Stockholders, as if all of the foregoing had occurred on December 29, 1996,
the first day of fiscal 1997. See "Pro Forma Condensed Consolidated
Financial Information."
(12) Adjusted to reflect (i) the sale by the Company of 2,727,272 shares of
Common Stock offered hereby at the initial public offering price of $10.50
per share and the application of the estimated net proceeds therefrom and
(ii) certain other events intended or mandated to occur in connection with
the Offering. See "Use of Proceeds," "Capitalization" and "Pro Forma
Condensed Consolidated Financial Information."
6
<PAGE>
THE COMPANY
THE OVERLAND ACQUISITION
On October 25, 1996, the Company, together with its three stockholders (the
"Existing Stockholders"), obtained 33 Overland Trading stores by acquiring the
outstanding common stock of Overland in exchange for subordinated promissory
notes in the principal amount of approximately $3.2 million (the "Seller Notes")
and warrants to purchase one percent of the Company's Common Stock calculated on
a fully diluted basis immediately prior to an initial public offering. In
connection with the acquisition, Overland repurchased all of its outstanding
preferred stock in exchange for a $3.5 million subordinated promissory note (the
"Subordinated Note"), which the Company guaranteed. Due to the then-existing
prohibition against an S corporation owning 80.0% or more of a subsidiary's
stock, the Company initially purchased 79.0% of Overland's common stock, while
the Existing Stockholders personally acquired the remaining 21.0%. Following
legislative changes to the S corporation rules under federal and certain state
statutes, the Company acquired the remaining 21.0% effective January 1, 1997,
and assumed the Existing Stockholders' pro rata portion of the Seller Notes (the
"Minority Interest Acquisition"). Total payments in connection with the
acquisition were approximately $9.0 million, including the Seller Notes, the
Subordinated Note, the refinancing of approximately $2.1 million in indebtedness
under Overland's credit facility through borrowings under the Company's
revolving loan agreement with a commercial bank (the "Revolving Loan
Agreement"), and associated expenses of approximately $240,000. The Seller
Notes, the Subordinated Note and the Revolving Loan Agreement mature upon the
consummation of the Offering. Pursuant to consulting agreements entered into in
connection with the acquisition, the Company currently pays an aggregate of
approximately $23,400 per month plus related benefit expenses to certain former
Overland stockholders. The consulting agreements terminate upon the consummation
of the Offering.
THE REORGANIZATION
The Company was formed to own the businesses conducted by Track 'n
Trail-California and its subsidiary, Overland. In connection with its formation,
the Company issued an aggregate of 40,816 shares of Common Stock to the Existing
Stockholders and filed an S corporation election. In October 1997, the Company
effected a reorganization of Track 'n Trail-California (the "Reorganization") 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 as a dividend, resulting in the
predecessor businesses becoming wholly owned subsidiaries of the Company.
GENERAL
The Company was incorporated in Delaware in 1997, and Track 'n
Trail-California was incorporated in California in 1980. Except where the
context otherwise requires, all references to the "Company" in this Prospectus
are to Track 'n Trail, a Delaware corporation, and its consolidated
subsidiaries. The Company's executive offices are located at 4961-A Windplay
Drive, El Dorado Hills, CA 95762, and its telephone number is (916) 933-4525.
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING
RISK FACTORS IN ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS PROSPECTUS,
BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED
BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
RISKS ASSOCIATED WITH EXPANSION
The Company's continued growth will depend largely upon the Company's
ability to open or acquire new stores in a timely manner and to operate them
profitably. The Company opened 18 stores in fiscal 1996 and six stores in the
first six months of fiscal 1997, and presently anticipates opening a substantial
number of stores in fiscal 1997 and 1998. The success of the Company's planned
expansion will depend on many factors, including the Company's ability to secure
suitable store sites on satisfactory leasing terms and to complete any necessary
construction or refurbishment of these sites, the hiring, training and retention
of qualified managers and other personnel and the successful integration of new
stores into existing operations. No assurance can be given that the Company will
be able to expand as planned in fiscal 1997, fiscal 1998 or any future period,
that new stores will achieve results similar to those achieved at prior
locations, or that the Company will be able to manage any future growth
successfully. Because the Company's business is highly seasonal, any delays in
store openings past peak selling periods could significantly reduce the new
stores' near-term contribution to total net sales. See "Use of Proceeds,"
"Business--Growth Strategies," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Growth
Strategies."
DEPENDENCE ON MAJOR SUPPLIERS
The Company's business depends to a significant degree upon its ability to
obtain timely and plentiful shipments of brand name merchandise at competitive
prices. In fiscal 1995 and fiscal 1996, the Company's ten largest suppliers
(eight of which were the same in each period) accounted for approximately 66.8%
and 68.0% of its net sales, respectively. The extent to which the Company is
dependent upon any particular supplier varies from season to season. The Company
does not have any long-term supply agreements or other contractual assurances of
continued supply, pricing or access to new products. The deterioration of the
Company's relationship with any key vendor could result in delivery delays,
merchandise shortages or less favorable trade terms than the Company currently
enjoys. The Company has occasionally received allocations of merchandise from
vendors, particularly merchandise in high demand by many footwear retailers,
that are insufficient to meet the Company's desired levels of such merchandise.
There can be no assurance that the Company will receive its desired levels of
such merchandise in the future. The Company's business is also affected by its
suppliers' ability to manufacture and deliver merchandise in a timely and
cost-effective manner, which depends upon a number of factors beyond the
Company's control, including fluctuations in currency exchange rates, trade
barriers, and economic, labor and political conditions in the countries in which
the Company's vendors have manufacturing operations. In particular, a
significant deterioration in China's trade relationship with the United States
could adversely affect the supply and pricing of a substantial portion of the
Company's merchandise.
UNCERTAINTIES IN MERCHANDISE TRENDS
The Company's success depends in part on its ability to anticipate and
respond to changing merchandise trends and consumer demands in a timely manner.
Any failure by the Company to identify and respond to emerging trends could
adversely affect consumer acceptance of the merchandise in the Company's stores,
which in turn could adversely affect the Company's business, financial condition
and
8
<PAGE>
results of operations. Failure to anticipate and respond to changing consumer
preferences could lead to, among other things, shortages of styles in high
demand, lower net sales, additional markdowns and lower margins, which would
have a material adverse effect on the Company's results of operations and
financial condition.
DEPENDENCE ON MALL TRAFFIC
All but three of the Company's stores are located in regional or
super-regional shopping malls. The Company's net sales are derived, in large
part, from the volume of traffic in these malls, particularly because the
Company does little independent advertising to attract customers. The Company
therefore depends upon the ability of mall "anchor" tenants and other mall
attractions to generate consumer traffic in the vicinity of the Company's
stores, as well as the continuing popularity of malls as shopping destinations.
Mall traffic and the Company's net sales and profitability may be adversely
affected by regional economic downturns, competition from non-mall retailers and
other malls, the closing of "anchor" tenants or declines in the desirability of
the shopping environment in a particular mall. As with other specialty footwear
retailers, the Company's business is also subject to general economic
conditions, including the possibility of a nationwide recession, consumer
confidence and the level of consumer spending.
SEASONALITY
The Company's business is highly seasonal. The Company typically incurs
losses in the first six months and recorded a larger loss in the first six
months of fiscal 1997 than in the first six months of fiscal 1996, due to the
operating loss and interest expense associated with the Overland acquisition.
The Company derives a substantial percentage of its annual net sales and
operating profitability during the "back-to-school" and year-end holiday
periods. In anticipation of increased net sales activity during these periods,
the Company incurs significant additional expenses, including the hiring of a
substantial number of temporary employees. As a result of this seasonality, the
Company's working capital needs are greatest in October and early November, and
late in the first quarter of each fiscal year. The Company's net sales are
affected by weather patterns in California, the Northeast and the Midwest,
particularly during the Spring and Fall selling seasons. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
COMPETITION
The retail footwear business is intensely competitive. Most of the items
sold by the Company are sold by department stores, outdoor and sporting goods
stores, athletic footwear stores and traditional shoe stores. Some of these
stores are owned or franchised by the Company's footwear suppliers. Many of the
stores with which the Company competes are units of large national or regional
chains that have substantially greater financial and other resources than the
Company. In many cases, the Company's stores are located in shopping malls in
which one or more of its competitors also has a presence. To a lesser extent,
the Company also competes with mail order retailers. A significant change in
price, level of promotion or other strategies by the Company's competitors could
have a material adverse effect on the Company's results of operations. See
"Business--Competition."
UNCERTAINTIES ASSOCIATED WITH PRIVATE LABEL SOURCING
Private label products accounted for approximately 11.7% and 8.7% of net
sales in fiscal 1996 and the first six months of fiscal 1997, respectively. The
Company has no long-term contracts with its private label manufacturing sources
and competes with other companies for production facilities. In addition, the
Company's private label products may experience higher mark-downs than branded
products, because they require longer lead times and must be ordered in larger
volumes, and because the Company is typically unable to return private label
products to its manufacturers. There can be no assurance that the foregoing
9
<PAGE>
factors will not disrupt the Company's supply of private label goods or
otherwise adversely impact the Company's operations in the future. See
"Business--Purchasing and Sourcing."
INTERNATIONAL PURCHASING RISKS
Substantially all of the Company's private label manufacturers are located
outside of the United States. Accordingly, the Company is subject to the risks
typically associated with an import business, including unexpected changes in
foreign regulatory requirements, disruptions or delays in shipments and the
risks associated with United States import laws and regulations, including
quotas, duties, taxes, tariffs and other restrictions. The Company has not, to
date, been materially affected by any such risk, but there can be no assurance
that such risks will not adversely impact the Company's operations in the
future. See "Business--Purchasing and Sourcing."
POTENTIAL FOREIGN CURRENCY FLUCTUATIONS
Because a portion of the Company's purchases of private label goods are
denominated in foreign currencies, the Company's operating results are subject
to fluctuations in the exchange rates between such currencies and the U.S.
dollar. The Company has not typically engaged in hedging transactions designed
to manage currency fluctuation risks. Although the Company entered into three
forward contracts to purchase foreign currency in fiscal 1996, these contracts
were designed to hedge only a small portion of the Company's overall exchange
rate risk. There can be no assurance that exchange rate fluctuations will not
have a material adverse effect on the Company's future operating results or
financial condition. See "Business--Purchasing and Sourcing."
RISKS ASSOCIATED WITH ACQUISITIONS
The Company's business strategy includes expanding through acquisitions, as
well as through new store openings. See "Business--Growth Strategies." No
assurance can be given that any acquisition by the Company will occur, or that
any such acquisition will enhance the Company's results of operations. Any
acquisition will involve numerous risks, including difficulties in the
assimilation of the acquired company's operations, the diversion of management's
attention, uncertainties associated with operating stores in new markets and the
potential loss of the acquired company's key employees. Acquisitions may also
result in potentially dilutive issuances of equity securities, the incurrence of
debt and contingent liabilities, potential reductions in income due to losses
incurred by the acquired business and increased amortization expense related to
intangible assets acquired, any of which could materially adversely affect the
Company's financial condition and results of operations.
CONTROL BY EXISTING STOCKHOLDERS
David L. Suechting, Jr., the Company's Chairman of the Board, Barbara
Suechting, a director of the Company, and Deborah Suechting, the Existing
Stockholders, in the aggregate will own beneficially approximately 60.1% of the
Company's outstanding shares of Common Stock after the Offering (54.1%, if the
Underwriters' Over-allotment Option is exercised in full). As a result, the
Existing Stockholders, acting together, will be able to control all matters
requiring approval by the stockholders of the Company, including the election of
the Board of Directors. See "Principal and Selling Stockholders."
FUTURE CAPITAL NEEDS
The Company expects that the net proceeds of the Offering remaining after
the repayment of indebtedness and the payment of the stockholder distribution
described under "Use of Proceeds," together with anticipated cash flow from
operations and anticipated borrowings under a new credit facility for which the
Company has obtained a commitment from Union Bank of California, one of its
existing lenders, and which will become effective at the closing of the
Offering, will satisfy its cash requirements through fiscal
10
<PAGE>
1998. However, in connection with its growth strategy, the Company will incur
significant working capital requirements and capital expenditures. To the extent
that the foregoing cash resources are insufficient to fund the Company's
activities, including new store openings planned for fiscal 1997 and 1998,
additional funds will be required. There can be no assurance that additional
financing will be available on reasonable terms or at all. Failure to obtain
such financing could delay or prevent the Company's planned expansion, which
could adversely affect the Company's business, financial condition and operating
results. In addition, if additional capital is raised through the sale of
additional equity or convertible securities, dilution to the Company's
stockholders could occur. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on the efforts
and abilities of its executive officers. The loss of the services of certain of
these individuals could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
maintain any key man life insurance. The Company's recent growth, particularly
as a result of the acquisition of Overland, has resulted in an increase in
responsibilities for management personnel. The Company's ability to manage
growth effectively will require it to continue to train, motivate and manage its
employees, and to attract, motivate and retain additional skilled managerial and
merchandising personnel. Competition for such personnel is intense, and there
can be no assurance that the Company will be successful in attracting,
assimilating and retaining the personnel it requires to grow and operate
profitably.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders under Rule 144 and
Rule 701 of the Securities Act of 1933, as amended (the "Securities Act"),
through the exercise of outstanding registration rights or otherwise could have
an adverse effect on the price of the Company's Common Stock. The 2,727,272
shares offered hereby will be eligible for sale in the public market following
the Offering. The 4,107,608 shares of Common Stock outstanding prior to the
Offering and 831,659 shares of Common Stock issuable pursuant to the exercise of
options that become fully vested and immediately exercisable upon completion of
the Offering will be eligible for sale in the public market 180 days after the
date of this Prospectus upon expiration of lockup agreements with the
Underwriters, subject to Rule 144 or Rule 701 under the Securities Act.
Additionally, 49,392 and 74,089 shares of Common Stock issuable pursuant to
warrants that become exercisable upon completion of the Offering and one year
following completion of the Offering, respectively, will be available for sale
in the public market one year from the date of exercise of such warrants (or
earlier if certain cashless exercise provisions are utilized), subject to Rule
144 and the 180-day lockup restrictions described above. The Company intends to
register up to a total of 1,055,735 shares of Common Stock reserved for issuance
under the Stock Option Plan (including shares already subject to stock options)
and up to a total of 150,000 shares of Common Stock reserved for issuance under
the Company's Employee Stock Purchase Plan as soon as practicable following the
date of this Prospectus. Certain existing stockholders and warrant holders have
rights under certain circumstances to require the Company to register their
shares for future sale. See "Shares Eligible for Future Sale" and "Description
of Capital Stock--Registration Rights."
LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained. The initial offering price for the Common Stock sold by the Company
was determined by negotiations among the Company and the representatives of the
Underwriters and may bear no relationship to the price at which the Common Stock
will trade after completion of the Offering. See "Underwriting" for factors
considered in determining such offering price. The market price of the Common
Stock could be subject to significant fluctuations in
11
<PAGE>
response to quarter-to-quarter variations in operating results, announcements of
pricing or promotional changes by the Company or its suppliers or competitors,
changes in earnings estimates by securities analysts, disruptions in the supply
of merchandise and other events or factors. In addition, the stock market in
recent years has experienced extreme price and volume fluctuations that have
particularly affected the market prices of many retailers and that have often
been unrelated or disproportionate to the operating performance of such
companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the market price of the Common Stock. See
"Seasonality."
DILUTION AND BENEFITS TO EXISTING STOCKHOLDERS
Purchasers of shares of Common Stock in the Offering will incur immediate
and substantial dilution in net tangible book value per share. See "Dilution."
The consummation of the Offering will result in certain benefits to the
Company's stockholders other than the investors in the Offering, including the
Company's Chairman of the Board and one of its directors. The Company intends to
use a portion of the proceeds from the Offering to fund a $6.4 million
distribution by Track 'n Trail-California to the Existing Stockholders, which is
intended as a distribution of previously undistributed accumulated S corporation
retained earnings (the "Distribution"). See "S Corporation Distributions." A
portion of the net proceeds of the Offering will also be used to repay
indebtedness currently guaranteed by the Existing Stockholders.
INTELLECTUAL PROPERTY
Prior to being acquired by Track 'n Trail, Overland entered into an
agreement with a third party for the exclusive use of the Overland Trading
Company trademark in nine Midwestern states. The agreement prohibits the Company
from opening Overland Trading stores in those states until the agreement is
terminated. There can be no assurance that the activities of the third party
will not detract from the Company's efforts to maintain its Overland Trading
stores as a distinct retail concept, particularly in the Midwest, or from the
Company's reputation.
ANTITAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
Upon completion of the Offering, the Board of Directors will have the
authority to issue up to 2,000,000 shares of Preferred Stock, and to determine
the rights, preferences and restrictions of such shares, without further
stockholder approval. The rights of holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may have
the effect of delaying or preventing a change in control of the Company. In
addition, certain provisions of the Company's Certificate of Incorporation and
Bylaws and of Delaware law could discourage potential acquisition proposals and
could delay or prevent a change in control of the Company. Such provisions could
diminish the opportunities for a stockholder to participate in tender offers,
including tender offers at a price above the then-current market value of the
Common Stock. See "Description of Capital Stock."
12
<PAGE>
S CORPORATION DISTRIBUTIONS
From June 28, 1992 until the Reorganization, Track 'n Trail-California has
been and will be treated for federal and certain state income tax purposes as an
S corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended (the "Code"), and comparable tax laws in certain states. As a result,
the earnings of Track 'n Trail-California from June 28, 1992 through October 6,
1997, the date preceding the date of termination of Track 'n Trail-California's
S corporation status (the "Termination Date"), have been and will be taxed, with
certain exceptions, for federal and state income tax purposes directly to the
stockholders of Track 'n Trail-California rather than to Track 'n
Trail-California. Beginning on the Termination Date, Track 'n Trail-California
will be treated for federal and state income tax purposes as a corporation under
Subchapter C of the Code and, as a result, will become subject to state and
federal income taxes. See Note 14 of Notes to Consolidated Financial Statements.
STOCKHOLDER DISTRIBUTIONS
Track 'n Trail-California has historically paid distributions to its
stockholders to enable them to pay their income tax liabilities as a result of
Track 'n Trail-California's status as an S corporation and, from time to time,
to distribute previously undistributed accumulated S corporation earnings.
During fiscal 1994, fiscal 1995 and fiscal 1996, Track 'n Trail-California made
S corporation distributions to stockholders of $1.7 million, $376,000 and $3.1
million, respectively. In addition, through June 28, 1997 Track 'n Trail-
California had made distributions of $2.2 million to stockholders in fiscal
1997.
Prior to the Reorganization, Track 'n Trail-California, the Existing
Stockholders and a predecessor in interest thereto entered into an Agreement for
Distribution of Accumulated Adjustments Account and Tax Indemnification (the
"Distribution and Tax Agreement"). Pursuant to the Distribution and Tax
Agreement, Track 'n Trail-California declared to the Existing Stockholders, as
the sole stockholders of record on a date prior to the Termination Date, the
$6.4 million Distribution which is designed to constitute substantially all of
Track 'n Trail-California's remaining undistributed accumulated S corporation
earnings. The Distribution will be paid in cash and will be funded from a
portion of the net proceeds to the Company of the Offering. Purchasers of Common
Stock in the Offering will not receive any portion of the Distribution. Under
certain circumstances, the Company may make payments to the Existing
Stockholders or the predecessor in interest to satisfy certain tax liabilities
with respect to pre-Reorganization tax periods resulting from adjustments to the
Company's tax returns. In addition, under certain circumstances, the Existing
Stockholders or the predecessor in interest may make payments to the Company to
satisfy any tax liabilities (i) resulting from an unexpected pre-Reorganization
loss of S corporation status and/or (ii) with respect to post-Reorganization
taxable periods for which the Existing Stockholders or the predecessor in
interest receive a tax benefit, provided that the indemnity provided by the
Existing Stockholders will be limited to any federal and state refunds they
receive as a result of a loss of S corporation status or other tax adjustments
for such taxable periods. See "Use of Proceeds" and "Certain Transactions."
ACCOUNTING EFFECT
Upon the Termination Date, deferred income taxes representing the tax effect
of differences between the Company's financial statement and tax bases in
certain assets and liabilities will be recorded as an asset of the Company on
its consolidated balance sheet, with a corresponding non-recurring decrease in
the Company's tax expense in its consolidated statement of operations. The
amount of the non-recurring decrease in tax expense will depend on a number of
factors, including the timing and nature of transactions with differing
treatment for tax and financial statement purposes. If the Termination Date had
been June 28, 1997, the non-recurring decrease in tax expense would have been
approximately $1.1 million. Management expects the amount of the non-recurring
decrease in tax expense at the Termination Date to approximate this amount.
13
<PAGE>
Additionally, income or loss during the period preceding the Termination
Date will be taxed to the Existing Stockholders, which may affect the Company's
effective tax rate for fiscal 1997. Consequently, management anticipates that
the effective tax rate for fiscal 1997, before considering the non-recurring
reduction upon conversion from an S corporation to a C corporation, will be less
than the combined federal and state statutory tax rate.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,727,272 shares of
Common Stock being offered by the Company are estimated to be $25.2 million
based on the initial public offering price of $10.50 per share and after
deducting underwriting discounts and commissions and estimated Offering
expenses. The Company intends to use its net proceeds from the Offering (i) to
repay all outstanding indebtedness under its Revolving Loan Agreement, which
aggregated approximately $11.1 million as of June 28, 1997, all of which bore
interest at the prime rate (8.50% per annum, as of June 28, 1997) plus 0.5% per
annum, (ii) to repay indebtedness under a secured loan agreement (the "Merrill
Lynch Loan"), which aggregated $867,000 at June 28, 1997 and bore interest at
the 30-day commercial paper rate (5.55% per annum at June 28, 1997) plus 2.95%
per annum, (iii) to repay in full approximately $3.2 million in Seller Notes and
the $3.5 million Subordinated Note, all of which presently bear interest at
10.0% per annum, and (iv) to fund the payment of the $6.4 million Distribution
to the Existing Stockholders. See "S Corporation Distributions." Effective March
31, 1997, the interest rate on the term loan portion of the Revolving Loan
Agreement was amended to the London Inter-Bank Offered Rate (5.69% at June 28,
1997) plus 3.0% or the bank reference rate (8.50% per annum, as of June 28,
1997) plus 0.5% per annum, at the Company's option. The Company anticipates that
the outstanding balance under the Revolving Loan Agreement will be approximately
$10.7 million immediately prior to the closing of the Offering. The balance of
the net proceeds from the Offering will be used for general corporate purposes,
including new store expansion and possible acquisitions of businesses that
complement that of the Company. No such acquisitions are being negotiated as of
the date of this Prospectus. Pending such uses, the Company intends to invest
its net proceeds from the Offering in short-term, investment-grade,
interest-bearing instruments.
DIVIDEND POLICY
Following the Offering, the Company currently intends to retain its
earnings, if any, for the development of its business and therefore does not
anticipate paying any dividends in the foreseeable future. Historically, Track
'n Trail-California made certain distributions to its stockholders as a result
of its status as an S corporation. See "S Corporation Distributions" and Note 1
and Note 6 of Notes to Consolidated Financial Statements.
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<PAGE>
DILUTION
The actual net tangible book value of the Company as of June 28, 1997 was
$3.6 million, or $0.87 per share. Net tangible book value per share represents
the amount of total tangible assets less total liabilities, divided by the
number of shares of Common Stock outstanding. After giving effect to the
Distribution, the Reorganization and the vesting of certain stock options upon
the closing of the Offering (including the associated compensation expense and
tax effects), the pro forma net tangible book deficit of the Company at June 28,
1997 would have been $3.0 million or $0.74 per share. After giving effect to the
sale of the shares of Common Stock offered by the Company hereby at the initial
public offering price of $10.50 per share and after deduction of underwriting
discounts and commissions and estimated Offering expenses, the pro forma net
tangible book value of the Company at June 28, 1997 would have been $23.0
million, or $3.37 per share. This represents an immediate increase in such net
tangible book value of $4.11 per share to the Existing Stockholders and an
immediate dilution of $7.13 per share to new investors purchasing shares in the
Offering. Net tangible book value dilution per share represents the difference
between the amount per share paid by new investors purchasing shares of Common
Stock in the Offering and the pro forma net tangible book value per share of
Common Stock immediately after the completion of the Offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price................................................... $10.50
Actual net tangible book value before the Offering............................ $ 0.87
Pro forma adjustment.......................................................... (1.61)
------
Pro forma net tangible book value (deficit) before the Offering............... (0.74)
Increase attributable to new investors........................................ 4.11
------
Pro forma net tangible book value after the Offering............................ 3.37
------
Dilution to new investors....................................................... $ 7.13
------
------
</TABLE>
The following table summarizes, on a pro forma basis as of June 28, 1997,
the differences between the Existing Stockholders and new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company, and the average consideration paid per share,
based upon the initial public offering price of $10.50 per share, and before
deduction of underwriting discounts and commissions and estimated Offering
expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES
PURCHASED(1) TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders....................................... 4,107,608 60.1% $ 773,230(2) 2.63% $ 0.19
New investors............................................... 2,727,272 39.9% 28,636,356 97.37% 10.50
--------- ------- ----------- -------
Total................................................... 6,834,880 100% $29,409,586 100%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>
- ------------------------
(1) If the Underwriters' Over-allotment Option is exercised in full, the number
of shares held by new investors would increase to 3,136,362, or
approximately 45.9%, of the total number of shares of Common Stock
outstanding after the Offering.
(2) Excludes all undistributed accumulated S corporation earnings, substantially
all of which are assumed to be distributed prior to the closing of the
Offering.
The foregoing table assumes no exercise of any outstanding stock options. At
June 28, 1997, there were outstanding options to purchase an aggregate of
851,786 shares of Common Stock at a weighted average exercise price of $2.36 per
share. In August 1997, options to purchase 20,127 shares were terminated,
leaving options to purchase 831,659 shares of Common Stock currently outstanding
at a weighted average exercise price of $2.32 per share. All of these options
will become exercisable upon the consummation of the Offering. To the extent
these options are exercised, there will be further dilution to new investors.
See "Management--Stock Option Plan" and Note 5 of Notes to Consolidated
Financial Statements.
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<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company (i) as of June 28, 1997, (ii) on a pro forma basis after giving effect
to (a) a nonrecurring reduction in tax expense in connection with the
termination of Track 'n Trail-California's S corporation status, (b) $215,000 of
S corporation distributions made subsequent to June 28, 1997, and (c) the $6.4
million Distribution of previously undistributed accumulated S corporation
earnings to the Existing Stockholders, and (iii) pro forma as adjusted to give
effect to (a) the sale of the 2,727,272 shares of Common Stock being offered by
the Company at the initial public offering price of $10.50 per share and the
application of the estimated net proceeds therefrom as set forth under "Use of
Proceeds" and (b) the vesting of certain stock options upon the closing of the
Offering, including the associated compensation expense of $59,000 and related
tax effects.
<TABLE>
<CAPTION>
JUNE 28, 1997
----------------------------------------
REORGANIZATION
REORGANIZATION PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED(6)
------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revolving line of credit(1)(2).......................................................... $ 8,740 $ 8,955(4) $--
------- ------- -------
------- ------- -------
Long-term debt, current portion(1)...................................................... $ 2,742 $ 2,742 $ 142
------- ------- -------
------- ------- -------
Distributions payable................................................................... $ -- $ 6,400(4) $--
------- ------- -------
------- ------- -------
Subordinated Note....................................................................... $ 3,500 $ 3,500 $--
Seller Notes............................................................................ 3,157 3,157 --
Other long-term debt.................................................................... 855 855 188
------- ------- -------
Total long-term debt, net of current portion(2)......................................... 7,511 7,511 188
------- ------- -------
Stockholders' equity:
Preferred Stock, $.01 par value; 2,000,000 shares authorized; no shares issued and
outstanding......................................................................... -- -- --
Common Stock, $.01 par value; 20,000,000 shares authorized; 4,107,608 shares issued
and outstanding actual and pro forma; 6,834,880 shares issued and outstanding pro
forma as adjusted(3)................................................................ 41 41 68
Additional paid-in capital.............................................................. 732 732 25,996
Retained earnings....................................................................... 7,441 1,928(4)(5) 1,893
------- ------- -------
Total stockholders' equity.............................................................. 8,214 2,701 27,957
------- ------- -------
Total capitalization.................................................................... $15,725 $10,212 $28,145
------- ------- -------
------- ------- -------
</TABLE>
- ------------------------
(1) At June 28, 1997, the $11.1 million balance under the Revolving Loan
Agreement consisted of $8.7 million under the revolving line of credit and
$2.4 million under the term loan, which is included in the table under
long-term debt, current portion.
(2) See Note 4 of Notes to Consolidated Financial Statements for a description
of the Company's long-term debt and revolving line of credit.
(3) Shares issued and outstanding excludes 905,735 shares of Common Stock
reserved for issuance and available for grant or sale under the Company's
Stock Option Plan at June 28, 1997, under which there were options
outstanding to purchase an aggregate of 851,786 shares of Common Stock as of
June 28, 1997. Upon completion of the Offering, 1,055,735 shares of Common
Stock will be reserved for issuance under such plan. Also excludes 123,481
shares of Common Stock issuable pursuant to the exercise of warrants. See
"Management--Stock Option Plan," "Description of Capital Stock-- Warrants"
and Notes 5 and 13 of Notes to Consolidated Financial Statements.
16
<PAGE>
(4) Gives effect to $215,000 of S corporation distributions made subsequent to
June 28, 1997, all to the Existing Stockholders, assuming such distributions
were made from borrowings available under the Company's revolving line of
credit. Also gives effect to the $6.4 million Distribution to the Existing
Stockholders.
(5) Gives effect to $1.1 million of nonrecurring deferred tax assets to be
recorded in connection with the Reorganization.
(6) Reflects assumed net proceeds of approximately $25.2 million from the sale
by the Company of 2,727,272 shares of Common Stock in the Offering at the
initial public offering price of $10.50 per share, net of underwriting
discounts and estimated Offering expenses, and reflects the repayment of the
revolving line of credit assuming that approximately $215,000 in S
corporation distributions will be made subsequent to June 28, 1997 and the
payment of the Distribution to the Existing Stockholders of $6.4 million.
Also reflects a non-cash compensation charge of $59,000, subject to a tax
effect of $24,000, relating to options that will vest upon the Offering and
will be expensed at that time. This charge results in a net reduction in
retained earnings of $35,000, which is more than offset by a $59,000
increase in additional paid-in capital.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(dollars in thousands, except per share and per square foot amounts and store
operating data)
The selected consolidated financial information set forth below under the
captions "Statement of Operations Data" and "Balance Sheet Data" has been
derived from the Company's financial statements. The consolidated financial
statements as of December 30, 1995 and December 28, 1996, and for the fiscal
years then ended and the independent auditors' reports of Coopers & Lybrand
L.L.P. thereon, are included elsewhere in this Prospectus. The financial
statements for the fiscal year ended December 31, 1994 and the independent
auditors' report thereon of Deloitte & Touche LLP are included elsewhere in this
Prospectus. Unaudited consolidated financial statements as of June 28, 1997 and
for the 26-week periods ended June 29, 1996 and June 28, 1997 are included
elsewhere in this Prospectus. The selected consolidated financial data set forth
below under the caption "Statement of Operations Data" as of and for the fiscal
periods ended June 27, 1992, December 26, 1992, December 25, 1993 and under the
caption "Balance Sheet Data" as of December 31, 1994 are derived from audited
financial statements not included herein. In the opinion of management, the
unaudited consolidated financial information for the 26-week periods ended June
29, 1996 and June 28, 1997 has been prepared on the same basis as the audited
information and includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein. The
statement of operations data for the 26-week period ended June 28, 1997 are not
necessarily indicative of the results of operations that may be expected for the
full fiscal year. The information for all periods set forth below under the
captions "Pro Forma Statement of Operations Data" and "Selected Store Operating
Data" is derived from unaudited data. The data set forth below are qualified by,
and should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
26 WEEKS 26 WEEKS ENDED
ENDED FISCAL --------------------
FISCAL DECEMBER 26, ------------------------------------ JUNE 29, JUNE 28,
1992 1992(1) 1993 1994(2) 1995 1996 1996(1) 1997(1)
------- ------------ ------- ------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $38,181 $22,762 $41,858 $48,165 $50,691 $ 66,233 $23,286 $ 37,528
Cost of sales........................... 19,906 12,027 21,902 25,079 26,192 34,062 12,020 19,413
------- ------------ ------- ------- ------- --------- -------- ---------
Gross profit............................ 18,275 10,735 19,955 23,085 24,499 32,171 11,266 18,115
Selling and marketing expense........... 12,150 6,633 13,076 14,975 16,852 21,059 8,791 14,527
Administrative and distribution
expense............................... 3,637 2,104 4,656 4,935 4,826 5,508 2,316 3,444
------- ------------ ------- ------- ------- --------- -------- ---------
Operating income (loss)................. 2,488 1,998 2,224 3,175 2,821 5,603 158 143
Interest expense........................ 386 166 330 324 435 670 240 730
Other expense (income).................. 76 335 56 38 (40) (24) (11) 21
------- ------------ ------- ------- ------- --------- -------- ---------
Income (loss) before income taxes and
minority interest..................... 2,027 1,497 1,838 2,814 2,427 4,957 (71) (608)
Income tax expense (benefit)............ 825 45 55 67 41 488 (2) (373)(3)
Minority interest....................... -- -- -- -- -- 105 -- --
------- ------------ ------- ------- ------- --------- -------- ---------
Net income (loss)....................... $1,202 $ 1,452 $ 1,783 $2,747 $ 2,386 $ 4,364 $ (69) $ (236)
------- ------------ ------- ------- ------- --------- -------- ---------
------- ------------ ------- ------- ------- --------- -------- ---------
PRO FORMA STATEMENT OF OPERATIONS
DATA(4):
Historical income (loss) before income
taxes and minority interest........... $ 1,497 $ 1,838 $2,814 $ 2,427 $ 4,957 $ (71) $ (608)
Pro forma income tax expense
(benefit)............................. 599 735 1,125 971 1,983 (28) (243)
Minority interest....................... -- -- -- -- 105 -- --
------------ ------- ------- ------- --------- -------- ---------
Pro forma net income (loss)............. $ 898 $ 1,103 $1,688 $ 1,456 $ 2,869 $ (43) $ (365)
------------ ------- ------- ------- --------- -------- ---------
------------ ------- ------- ------- --------- -------- ---------
Pro forma net income (loss) per share... $ 0.51 $ (0.07)
--------- ---------
--------- ---------
Common and common equivalent shares used
in computing per share amounts(5)..... 5,588,537 5,348,426
SELECTED STORE OPERATING DATA:
Store contribution(6)................... $6,125 $ 4,102 $ 6,880 $8,110 $ 7,647 $ 11,111 $ 2,474 $ 3,587
Number of stores:
Opened or acquired during period...... 2 1 9 9 12 51(7) 8 6
Closed during period.................. -- -- 2 4 4 5 5 --
Open at end of period................. 61 62 69 74 82 128 85 134
Total weighted average square feet(8)... 110,147 110,732 114,813 130,542 144,612 168,966 151,775 228,656
Average square feet per store........... 1,792 1,792 1,851 1,894 1,873 1,744 1,861 1,758
Weighted average net sales per square
foot(9)............................... $ 347 $ 206 $ 365 $ 369 $ 351 $ 392 $ 153 $ 164
Increase (decrease) in comparable store
net sales(10)......................... 2.0 % 2.5% 4.1% 0.6 % (1.4)% 3.1% 3.1% 2.5%
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
AS OF
---------------------------------------------------------------------------------------------------
JUNE 27, DECEMBER 26, DECEMBER 25, DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 28,
1992 1992(1) 1993 1994 1995 1996(1) 1997(1)
----------- ------------- ------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 3,182 $ 3,527 $ 5,695 $ 5,742 $ 6,710 $ 9,430 $ 5,870
Total assets.................. 12,478 13,537 15,409 15,630 17,050 31,858 38,303
Total debt.................... 4,604 3,722 3,633 2,396 2,734 10,765 18,993
Stockholders' equity.......... 4,754 5,233 5,650 6,349 7,648 10,646 8,214
</TABLE>
- ------------------------------
(1) Effective June 28, 1992, the Company changed its fiscal year end from the
last Saturday in June to the last Saturday in December. Results for the
26-week period ended December 26, 1992 and for the 26-week periods ended
June 29, 1996 and June 28, 1997 are not indicative of full calendar year
results, as the second half of the year includes the Company's strongest
selling season.
(2) Fiscal 1994 consisted of 53 weeks. All other fiscal years presented
consisted of 52 weeks. During the 53rd week of fiscal 1994, the Company
generated $1.2 million in net sales. As a result, the Company's operating
results in fiscal 1994 are not comparable to its results in any other fiscal
year presented. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(3) The net loss for the 26 weeks ended June 28, 1997 has been computed based
upon a tax expense or benefit for Track 'n Trail-California as an S
corporation for federal tax and state tax purposes in certain states and as
a C corporation in certain other states, including California, the state in
which the Company has its headquarters and its highest concentration of
store locations. If California and certain other states adopt tax
legislation by the end of 1997 which retroactively conforms to federal law
regarding S corporation tax status, the Company will be taxed for all of
1997 as an S corporation in those states. The effect of such state tax
legislation would be to reduce the Company's tax benefit and increase its
net loss for the 26 weeks ended June 28, 1997 by approximately $111,000. See
Note 9 of Notes to Consolidated Financial Statements.
(4) Includes, for the 26 weeks ended December 26, 1992, for fiscal 1993, 1994,
1995 and 1996, and for the 26-week periods ended June 29, 1996 and June 28,
1997, pro forma provision for income taxes using an assumed combined federal
and state tax rate of 40.0%, which the Company believes approximates the
statutory federal and state income tax rates that would have been applied
had Track 'n Trail-California been taxed as a C corporation. Commencing June
28, 1992, Track 'n Trail-California has operated as an S corporation and has
not been subject to federal and certain state income taxes. The Company's
earnings during such periods have been taxed directly to the Company's
stockholders, rather than to the Company. In connection with the
Reorganization and the Offering, the S corporation election of Track 'n
Trail-California and the Company, respectively, will be 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.
(5) Shares outstanding include 660,547 shares issuable upon exercise of stock
options outstanding at December 28, 1996 and June 28, 1997, after applying
the treasury stock method based on the initial public offering price of
$10.50 per share. The pro forma common and common equivalent shares also
give effect to the sale by the Company of only those shares of Common Stock
necessary to fund the payment of the excess of (i) the sum of stockholder
distributions during the previous 12-month period (during fiscal 1996 for
the determination of shares outstanding for fiscal 1996, and during the 12
months ended June 28, 1997 for the determination of shares outstanding for
the 26 weeks ended June 28, 1997) and distributions paid or declared
thereafter until the consummation of the Offering over (ii) the S
corporation earnings in the previous 12-month period, based on the initial
public offering price of $10.50 per share, net of underwriting discounts and
estimated Offering expenses. See "Capitalization," "Management--Stock Option
Plan" and "Pro Forma Condensed Consolidated Financial Information."
(6) Store contribution refers to gross profit after deducting selling and
marketing expenses. Store contribution is presented to provide additional
information about the Company and is commonly used as a performance
measurement by retail companies. Store contribution should not be considered
in isolation or as a substitute for operating income, cash flow from
operating activities and other income or cash flow data prepared in
accordance with generally accepted accounting principles, or as a measure of
the Company's profitability or liquidity.
(7) On October 25, 1996, the Company acquired 33 Overland Trading stores. The
Company opened one additional Overland Trading store in November 1996
pursuant to a commitment previously entered into by Overland.
(8) Weighted to reflect store openings and closings during each period, assuming
that all periods presented consisted of 52 weeks (except for the 26-week
periods ended June 29, 1996 and June 28, 1997).
(9) Weighted average net sales for the 26 weeks ended December 26, 1992 reflect
only sales for that 26-week period. Weighted average net sales for fiscal
1994 have been adjusted as if such year consisted of 52 weeks.
(10) Comparable store net sales include only those stores that were open both
for the full fiscal period and for the full prior fiscal period. The fiscal
1994 and 1995 increases have been calculated by comparing net sales in such
years to net sales for the prior 53 and 52 weeks, respectively. The
increases for fiscal 1996 and for the 26 weeks ended June 28, 1997 exclude
the Overland Trading stores acquired in October 1996. If such stores had
been included in the Company's comparable store net sales comparison since
the acquisition, the change in comparable store net sales for fiscal 1996
and for the 26 weeks ended June 28, 1997 would have been 2.3% and (0.3%),
respectively.
19
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
The following Pro Forma Condensed Consolidated Financial Information should
be read in conjunction with the historical consolidated financial statements and
the notes thereto included elsewhere in this Prospectus. The Pro Forma Condensed
Consolidated Financial Information:
(i) Reflects the Reorganization and the Company's resulting conversion from
S corporation status to C corporation status; and
(ii) Is adjusted for the sale of the shares of Common Stock offered by the
Company hereby at the initial public offering price of $10.50 per share, the
application of the estimated net proceeds therefrom as described in "Use of
Proceeds" and certain events intended or mandated to occur in connection with
the Offering.
The Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 28, 1996 reflects financial information with respect to the
Company's acquisition in (a) October 1996 of 79.0% of Overland's common stock
and (b) January 1997 of the remaining Overland common stock (the "Minority
Interest") from certain of the Company's stockholders (the "Minority Interest
Acquisition" and, collectively with the Company's acquisition of 79.0% of
Overland, the "Acquisition"), which has been accounted for under the purchase
method of accounting. The Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 28, 1996 was prepared as if the
Acquisition, the Reorganization and the Offering occurred on December 31, 1995,
the first day of fiscal 1996. The Pro Forma Condensed Consolidated Statement of
Operations for the 26-week period ended June 28, 1997 was prepared as if the
Reorganization and the Offering occurred on December 29, 1996, the first day of
fiscal 1997. The Pro Forma Condensed Consolidated Balance Sheet was prepared as
if the Reorganization and the Offering occurred on June 28, 1997. As there were
no material differences, no pro forma adjustments to the Pro Forma Condensed
Consolidated Statement of Operations for the 26 weeks ended June 28, 1997 were
necessary to record the Minority Interest Acquisition, which occurred on January
1, 1997, as if it had occurred on December 29, 1996.
The Pro Forma Condensed Consolidated Statements of Operations for fiscal
1996 and for the 26-week period ended June 28, 1997 do not include any potential
operational cost savings other than the elimination of consulting agreements
with former Overland stockholders which will terminate by their contractual
terms upon the closing of the Offering. The Company believes that it may be able
to further reduce operational costs as it consolidates the Overland operations
into the Company. There can be no assurance that the Company will be successful
in effecting any such cost savings.
The Pro Forma Condensed Consolidated Financial Information is unaudited and
is not necessarily indicative of the consolidated financial position and results
which actually would have occurred if the Acquisition, the Reorganization and
the Offering had been consummated as of the dates presented, nor does it purport
to present the financial position or results of operations of the Company for
future periods.
20
<PAGE>
TRACK 'N TRAIL
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 28, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
REORGANIZATION REORGANIZATION
PRO FORMA REORGANIZATION OFFERING PRO FORMA AS
COMPANY HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS ADJUSTED
------------------ -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets.................................. $ 27,031 $ 662(1) $ 27,693 $ 456(4) $ 28,149
Noncurrent assets............................... 11,272 440(1) 11,712 24(5) 10,889
(847)(4)
------- ------- ------- ------------- -------
Total assets................................ $ 38,303 $ 1,102 $ 39,405 $ (367) $ 39,038
------- ------- ------- ------------- -------
------- ------- ------- ------------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities............................. $ 21,162 $ 215(2) $ 27,777 $ (18,300)(4) $ 9,477
6,400(3)
Noncurrent liabilities.......................... 8,927 8,927 (7,323)(4) 1,604
------- ------- ------- ------------- -------
Total liabilities........................... 30,089 6,615 36,704 (25,623) 11,081
------- ------- ------- ------------- -------
Stockholders' equity:
Common stock.................................. 41 41 27(4) 68
Paid-in capital............................... 732 732 25,205(4) 25,996
59(5)
Retained earnings............................. 7,441 1,102(1) 1,928 (35)(5) 1,893
(215)(2)
(6,400)(3)
------- ------- ------- ------------- -------
Total stockholders' equity.................. 8,214 (5,513) 2,701 25,256 27,957
------- ------- ------- ------------- -------
Total liabilities and stockholders' $ 1,102
equity.................................. $ 38,303 $ 39,405 $ (367) $ 39,038
------- ------- ------- ------------- -------
------- ------- ------- ------------- -------
</TABLE>
21
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 28, 1997
(UNAUDITED)
(1) To give effect to $1.1 million of deferred tax assets arising from the
conversion of the Company from an S corporation to a C corporation. Such
deferred tax assets relate to temporary differences in the basis of assets
and liabilities for tax and accounting purposes.
(2) To reflect $215,000 of S corporation distributions made subsequent to June
28, 1997 and before the Reorganization.
(3) To give effect to the declaration of the $6.4 million Distribution, which is
designed to constitute substantially all remaining undistributed accumulated
S corporation earnings of Track 'n Trail-California immediately prior to the
Reorganization.
(4) To reflect net proceeds from the sale by the Company of 2,727,272 shares of
Common Stock in the Offering at the initial public offering price of $10.50
per share, net of underwriting discounts and estimated Offering expenses of
approximately $3.4 million, and the payment of the Distribution and the
repayment of indebtedness as described under "Use of Proceeds."
(5) To give effect to changes in deferred taxes, retained earnings and
additional paid-in capital with respect to stock options that will vest upon
the Offering in accordance with the terms of the Stock Option Plan. The
total compensation in connection with the options at the time of grant was
$170,000, of which $103,000 and $8,000 were recorded as expense in fiscal
1996 and in the 26-week period ended June 28, 1997, respectively. The
remaining $59,000 relates to options that will vest upon the Offering and
will be expensed at that time. The non-cash compensation charge of $59,000,
subject to a tax effect of $24,000, results in a net reduction in retained
earnings of $35,000. This net reduction is more than offset by a $59,000
increase in additional paid-in capital. The tax effect of $24,000 is
recorded as a deferred tax asset.
22
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 28, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
OFFERING PRO OFFERING AND
COMPANY REORGANIZATION REORGANIZATION FORMA REORGANIZATION
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
---------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $ 37,528 $ $ 37,528 $ $ 37,528
Cost of sales.......................... 19,413 19,413 19,413
---------- ------- -------------- ----- --------------
Gross profit........................... 18,115 18,115 18,115
---------- ------- -------------- ----- --------------
Selling and marketing expenses......... 14,527 14,527 14,527
Administration and distribution
expenses.............................. 3,444 3,444 (140)(3) 3,363
59(4)
---------- ------- -------------- ----- --------------
Total operating expenses............... 17,972 17,972 (81) 17,891
---------- ------- -------------- ----- --------------
Operating income (loss)................ 143 143 81 224
Other (income) expense:
Interest expense..................... 730 730 (710)(5) 20
Other, net........................... 21 21 21
---------- ------- -------------- ----- --------------
Income (loss) before income taxes...... (608) (608) 791 183
Income tax provision (benefit)......... (373) (1,102)(1) (1,458) 316(6) (1,142)
17(2)
---------- ------- -------------- ----- --------------
Net income (loss)...................... $ (236) $ 1,085 $ 850 $ 475 $ 1,325
---------- ------- -------------- ----- --------------
---------- ------- -------------- ----- --------------
PRO FORMA STATEMENT OF OPERATIONS
DATA(7):
Historical income (loss) before income
taxes................................. $ (608) $ (608) $ 183
Pro forma income tax provision
(benefit)............................. (243) (243) 73
---------- -------------- --------------
Pro forma net income (loss)............ $ (365) $ (365) $ 110
---------- -------------- --------------
---------- -------------- --------------
Pro forma net income (loss) per
share(8).............................. $ (0.07) $ (0.07) $ 0.02
---------- -------------- --------------
---------- -------------- --------------
Pro forma weighted average number of
common and common equivalent
shares(9)............................. 5,348,426 5,348,426 6,970,141
</TABLE>
23
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE 26-WEEK PERIOD ENDED JUNE 28, 1997
(UNAUDITED)
(1) To give effect to a nonrecurring reduction in tax expense resulting from the
conversion of Track 'n Trail-California from an S corporation to a C
corporation upon the Reorganization which is associated with the recording
of deferred tax assets due to temporary differences in the basis of assets
and liabilities for tax and financial statement purposes. See Note 14 of
Notes to Consolidated Financial Statements.
(2) To reflect an effective tax rate of 40.0%, representing management's
estimate of the effective tax rate had Track 'n Trail-California been a C
corporation for the period presented. Overland was a C corporation for the
entire period presented.
(3) To eliminate payments under consulting agreements with certain former owners
of Overland common stock that, by the terms of the agreements, terminate
upon the closing of the Offering, as if the Offering had occurred on
December 29, 1996, the first day of fiscal 1997.
(4) To record a non-cash compensation expense resulting from the vesting of
stock options as a result of the Offering in accordance with the terms of
the Stock Option Plan. The total compensation expense in connection with the
options at the date of grant was $170,000, less the portion that was
recorded as expense through June 28, 1997 of $111,000. See Note 14 of Notes
to Consolidated Financial Statements.
(5) To eliminate interest expense of $158,000, $175,000 and $377,000 associated
with the Seller Notes, the Subordinated Note and other indebtedness,
respectively, all of which will be repaid from the net proceeds of the
Offering as described under "Use of Proceeds."
(6) To record income taxes on pro forma adjustments to administrative and
distribution expense due to the elimination of payments under consulting
agreements, the vesting of stock options and the elimination of certain
interest expense, as described in footnotes 3, 4 and 5 above. Income taxes
on such pro forma adjustments were computed at 40.0%, representing
management's estimate of the effective rate had Track 'n Trail-California
been a C corporation for the 26 weeks ended June 28, 1997.
(7) Reflects an effective tax rate of 40.0%, representing management's estimate
of the effective tax rate had Track 'n Trail-California been a C corporation
for the period presented. Overland was a C corporation for the entire period
presented. The pro forma income tax provision reflects the tax provisions
that would have been recorded if Track 'n Trail-California had been a C
corporation throughout the 26-week period ended June 28, 1997 and,
accordingly, eliminates the $1.1 million nonrecurring reduction in income
tax expense resulting from the conversion of Track 'n Trail-California from
an S corporation to a C corporation. See Note 14 of Notes to Consolidated
Financial Statements.
(8) Pro forma net income (loss) per share has been computed by dividing pro
forma net income (loss) by the weighted average number of common and common
equivalent shares outstanding using the treasury stock method and the
initial public offering price of $10.50 per share, net of underwriting
discounts and estimated Offering expenses, after giving retroactive effect
to (i) a change in the number of outstanding shares effected by the
Reorganization, (ii) the 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 being sold in the Offering, at
the initial public offering price, the proceeds of which would be necessary
to pay the excess of S corporation distributions paid or declared during the
12-month period ended June 28, 1997 and thereafter until the consummation of
the Offering over S corporation earnings during the 12-month period ended
June 28, 1997.
(9) The pro forma common and common equivalent shares give effect to the sale by
the Company, in addition to those shares described in footnote 8 above, of
only that number of offered shares of Common Stock, the proceeds (net of
underwriting discounts and estimated Offering expenses) of which would be
necessary to fund the repayment of indebtedness as described in "Use of
Proceeds." The amount of indebtedness assumed to be outstanding for the
purpose of calculating the pro forma number of common and common equivalent
shares outstanding is equal to the weighted average indebtedness assumed to
have been outstanding had the Reorganization occurred on December 29, 1996,
the first day of the 1997 fiscal year.
24
<PAGE>
TRACK 'N TRAIL
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 28, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
OVERLAND
TEN MONTHS REORGANIZATION
ENDED ACQUISITION ACQUISITION AND
TRACK 'N OCTOBER 25, PRO FORMA PRO FORMA REORGANIZATION ACQUISITION
TRAIL 1996 ADJUSTMENTS COMBINED ADJUSTMENTS PRO FORMA
--------- ----------- -------------- ----------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $ 66,233 $ 17,953 $ $ 84,186 $ $ 84,186
Cost of sales................... 34,062 10,398 44,460 44,460
--------- ----------- ----- ----------- ------- --------------
Gross profit.................... 32,171 7,555 39,726 39,726
--------- ----------- ----- ----------- ------- --------------
Selling and marketing
expenses....................... 21,060 6,216 27,276 27,276
Administrative and distribution 143(1)
expenses....................... 5,508 1,655 (32)(2) 7,274 7,274
--------- ----------- ----- ----------- ------- --------------
Total operating expenses........ 26,568 7,871 111 34,550 34,550
--------- ----------- ----- ----------- ------- --------------
Operating income (loss)......... 5,603 (316) (111) 5,176 5,176
Other (income) expense:
Interest expense.............. 670 232 552(3) 1,425 1,425
(29)(4)
Other, net.................... (24) 32 8 8
--------- ----------- ----- ----------- ------- --------------
Income (loss) before income
taxes and minority interest.... 4,957 (580) (634) 3,743 3,743
Income tax provision (1,134)(7)
(benefit)...................... 488 (232) (89)(5) 167 1,330(8) 363
--------- ----------- ----- ----------- ------- --------------
Income before minority
interest....................... 4,469 (348) (545) 3,576 (196) 3,380
Minority interest............... 105 (105)(6) 0
--------- ----------- ----- ----------- ------- --------------
Net income (loss)............... $ 4,364 $ (348) $ (440) $ 3,576 $ (196) $ 3,380
--------- ----------- ----- ----------- ------- --------------
--------- ----------- ----- ----------- ------- --------------
PRO FORMA STATEMENT OF
OPERATIONS DATA(13):
Historical income before income
taxes and minority interest.... $ 4,957 $ 3,743 $ 3,743
Pro forma income tax
provision...................... 1,983 1,497 1,497
--------- ----------- --------------
Pro forma income before minority
interest....................... 2,974 2,246 2,246
Minority interest............... 105
--------- ----------- --------------
Pro forma net income............ $ 2,869 $ 2,246 $ 2,246
--------- ----------- --------------
--------- ----------- --------------
Pro forma net income per
share(14)...................... $ 0.51 $ 0.40 $ 0.40
--------- ----------- --------------
--------- ----------- --------------
Pro forma weighted average
number of common and common
equivalent shares(15).......... 5,588,537 5,588,537 5,588,537
<CAPTION>
OFFERING,
REORGANIZATION
OFFERING PRO AND
FORMA ACQUISITION
ADJUSTMENTS PRO FORMA
-------------- --------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $ $ 84,186
Cost of sales................... 44,460
------- --------------
Gross profit.................... 39,726
------- --------------
Selling and marketing
expenses....................... 27,276
Administrative and distribution (358) (9)
expenses....................... 67 (10 6,983
------- --------------
Total operating expenses........ (291) 34,259
------- --------------
Operating income (loss)......... 291 5,467
Other (income) expense:
Interest expense.............. (1,367)(11) 58
Other, net.................... 8
------- --------------
Income (loss) before income
taxes and minority interest.... 1,658 5,401
Income tax provision
(benefit)...................... 663 (12 1,026
------- --------------
Income before minority
interest....................... 995 4,375
Minority interest...............
------- --------------
Net income (loss)............... $ 995 $ 4,375
------- --------------
------- --------------
PRO FORMA STATEMENT OF
OPERATIONS DATA(13):
Historical income before income
taxes and minority interest.... $ 5,401
Pro forma income tax
provision...................... 2,160
--------------
Pro forma income before minority
interest....................... 3,241
Minority interest...............
--------------
Pro forma net income............ $ 3,241
--------------
--------------
Pro forma net income per
share(14)...................... $ 0.46
--------------
--------------
Pro forma weighted average
number of common and common
equivalent shares(15).......... 7,119,052
</TABLE>
25
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 28, 1996
(UNAUDITED)
(1) To reflect the amortization over a 20-year period of goodwill of
$3,295,000 in connection with the Acquisition as if it had occurred in its
entirety on December 31, 1995, the first day of fiscal 1996. The
adjustment represents amortization for the period from December 31, 1995
through October 25, 1996 of goodwill associated with acquisition of 79.0%
of Overland and for all of fiscal 1996, goodwill associated with
acquisition of the remaining 21.0%. See Note 13 of Notes to Consolidated
Financial Statements for additional information.
(2) To adjust depreciation expense to reflect (i) adjustments to reduce the
carrying value of fixed assets acquired by $189,000 to the fair value at
acquisition and (ii) adjustments to convert the depreciation method
previously used by Overland to the straight line method employed by the
Company and (iii) adjustments to convert the assets' useful lives from
lives previously used by Overland to the three to ten year lives used by
the Company for similar assets.
(3) To give effect to the interest expense associated with the Seller Notes
and the Subordinated Note, including the Seller Notes assumed in
connection with the Minority Interest Acquisition, as if such indebtedness
had been outstanding since December 31, 1995, the first day of fiscal
1996. Interest was calculated based on Seller Notes of $3,157,000 at 10%
per annum, and the Subordinated Note of $3,500,000 at 10% per annum, as
though such notes were outstanding from December 31, 1995 through October
25, 1996, the date of the Acquisition.
(4) To reflect the difference in interest expense in connection with the
mandatory refinancing of Overland's previous bank line of credit and Small
Business Administration term loan with the Company's Revolving Loan
Agreement, resulting from the associated difference in interest rates, as
if such refinancing had occurred on December 31, 1995, the first day of
fiscal 1996. The interest adjustment was computed as the excess of (i) the
weighted average interest rates on Overland's previous line of credit and
Small Business Administration term loans over (ii) the weighted average
interest rate on the Company's Revolving Line of Credit, such excess then
being applied to the weighted average balances outstanding for the period
from December 31, 1995, the beginning of fiscal 1996, to October 25, 1996.
(5) To record income taxes on pro forma adjustments to depreciation expense as
described in footnote 2 above, and interest expense as described in
footnotes 3 and 4 above, with respect to Overland (a C corporation) at
40.0% estimated effective rate applicable to Overland, and state income
taxes at reduced S corporation rates on adjustments resulting from the
Minority Interest Acquisition, as described in footnote 6 below, for Track
'n Trail-California, which is treated as an S corporation for the period
presented prior to adjustments for the Reorganization.
(6) To reverse the elimination of the minority interest in Overland's net
income, as if the Minority Interest Acquisition had occurred on December
31, 1995.
(7) To give effect to a nonrecurring reduction in tax expense resulting from
the conversion of Track 'n Trail-California from an S corporation to a C
corporation upon the Reorganization, which is associated with the
recording of deferred tax assets due to temporary differences in the basis
of assets and liabilities for tax and financial statement purposes. See
Note 14 of Notes to Consolidated Financial Statements.
(8) To reflect an effective tax rate of 40.0%, representing management's
estimate of the effective tax rate had Track 'n Trail-California been a C
corporation for the period presented. Overland was a C corporation for the
entire period presented.
(9) To eliminate payments under consulting agreements with certain former
owners of Overland common stock that by the terms of the agreements
terminate upon the closing of the Offering, as if the Offering had
occurred on December 31, 1995.
26
<PAGE>
(10) To record a non-cash compensation expense resulting from the vesting of
stock options as a result of the Offering, in accordance with the terms of
the Stock Option Plan. The total compensation expense in connection with
the options at the date of grant was $170,000, less the portion that was
recorded as expense during the 1996 fiscal year of $103,000. The remaining
$67,000 relates to options that will vest upon the Offering. See Note 14
of Notes to Consolidated Financial Statements.
(11) To eliminate interest expense of $316,000, $350,000 and $701,000
associated with the Seller Notes, the Subordinated Note and other
indebtedness, respectively, inclusive of the effects of adjustments to
interest described in footnote 3 above, as such debts will be repaid from
the net proceeds of the Offering as described under "Use of Proceeds."
(12) To record income taxes on pro forma adjustments to administrative and
distribution expense due to the elimination of payments under consulting
agreements, the vesting of stock options and the elimination of certain
interest expense, as described in footnotes 9, 10 and 11 above. Income
taxes on such pro forma adjustments were computed at 40.0%, representing
management's estimate of the effective rate had Track 'n Trail-California
been a C corporation for all of fiscal 1996.
(13) Reflects an effective tax rate of 40.0%, representing management's
estimate of the effective tax rate had Track 'n Trail-California been a C
corporation for the period presented. Overland was a C corporation for the
entire period presented. The pro forma income tax provision is accounted
for as if Track 'n Trail-California had been a C corporation throughout
the year and, accordingly, eliminates the $1.1 million nonrecurring
reduction in income tax expense resulting from the conversion of Track 'n
Trail-California from an S corporation to a C corporation. See Note 14 of
Notes to Consolidated Financial Statements.
(14) Pro forma net income per share has 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 of $10.50 per share, net of underwriting discounts and
estimated Offering expenses, after giving retroactive effect to (i) a
change in the number of outstanding shares effected by the Reorganization,
(ii) those 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 being sold in the Offering, the
proceeds of which would be necessary to pay the excess of S corporation
distributions paid or declared during fiscal 1996 and thereafter until the
consummation of the Offering over S corporation earnings during fiscal
1996.
(15) The pro forma common and common equivalent shares give effect to the sale
by the Company, in addition to those shares described in footnote 14
above, of only that number of offered shares of Common Stock, the proceeds
(net of underwriting discounts and estimated Offering expenses) of which
would be necessary to fund the repayment of indebtedness as described in
"Use of Proceeds." The amount of indebtedness assumed to be outstanding
for the purpose of calculating the pro forma number of common and common
equivalent shares outstanding is equal to the weighted average
indebtedness assumed to have been outstanding had the Acquisition and the
Reorganization occurred on December 31, 1995, the first day of fiscal
1996.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS PROSPECTUS.
INTRODUCTION
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 1, 1997, the Company operated 100 Track 'n
Trail stores and 35 Overland Trading stores in 24 states, concentrated in
California, the Midwest and the Northeast. Subsequently, the Company opened its
first Overland Trading store in California. All but three of the Company's
stores are located in regional or super-regional shopping malls. Track 'n Trail
stores average approximately 1,881 square feet in size, while Overland Trading
stores average approximately 1,407 square feet.
On October 25, 1996, the Company, together with the Existing Stockholders,
obtained control of 33 Overland Trading stores by acquiring the outstanding
common stock of Overland in exchange for the $3.2 million of Seller Notes and
warrants to purchase one percent of the Company's Common Stock calculated on a
fully diluted basis immediately prior to an initial public offering. In
connection with the acquisition, Overland repurchased all of its outstanding
preferred stock in exchange for the $3.5 million Subordinated Note, which the
Company guaranteed. Due to the then-existing prohibition against an S
corporation owning 80.0% or more of a subsidiary's stock, the Company initially
purchased 79.0% of Overland's common stock, while the Existing Stockholders
personally acquired the remaining 21.0%. Following legislative changes to the S
corporation rules, the Company acquired the remaining 21.0% effective at the
beginning of fiscal 1997, and assumed the Existing Stockholders' pro rata
portion of the Seller Notes. Total payments in connection with the acquisition
were approximately $9.0 million, including the Seller Notes, the Subordinated
Note, the refinancing of approximately $2.1 million in indebtedness under
Overland's credit facility through borrowings under the Revolving Loan
Agreement, and associated expenses of approximately $240,000. In connection with
the acquisition, which was accounted for under the purchase method of
accounting, $3.3 million was allocated to goodwill. The Seller Notes, the
Subordinated Note and the Revolving Loan Agreement mature upon the consummation
of the Offering. Pursuant to consulting agreements entered into in connection
with the acquisition, the Company currently pays an aggregate of approximately
$23,400 per month plus related benefit expenses to certain former Overland
stockholders. The consulting agreements terminate upon the consummation of the
Offering.
Since the acquisition of Overland, the Company has reduced overhead by
closing Overland's corporate office and distribution facility, centralizing
these functions within the Company's corporate office. Additionally, the Company
converted Overland's MIS systems to the Company's MIS systems. As a result,
management is able to analyze sales and inventory by SKU on a daily basis in
order to implement its focused merchandising strategy. The Company's employee
development, incentive compensation, customer service, marketing and loss
prevention programs have also been implemented in the Overland Trading stores.
The Company's net sales have grown at a compound annual rate of 16.5% from
$41.9 million in fiscal 1993 to $66.2 million in fiscal 1996 as a result of the
Company's store expansion program, increased sales from existing stores and the
acquisition of Overland in October 1996. During that three-year period, the
number of stores increased from 69 to 128. In addition, the Company's net income
has grown at a compound annual rate of 37.5% from $1.1 million in fiscal 1993 to
$2.9 million in fiscal 1996, after giving effect to assumed C corporation income
taxes.
28
<PAGE>
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 4.1% and 0.6% in fiscal 1993 and 1994,
respectively, declined by 1.4% in fiscal 1995, and grew by 3.1% in fiscal 1996
and 2.5% in the first six months 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
2.3% in fiscal 1996 and declined by 0.3% in the first six months of 1997.
Track 'n Trail-California has been treated as an S corporation for federal
and certain state income tax purposes since June 28, 1992. As a result, the
earnings of Track 'n Trail-California from June 28, 1992 through the date
preceding the Termination Date have been taxed, with certain exceptions,
directly to the stockholders of Track 'n Trail-California rather than to Track
'n Trail-California. Track 'n Trail-California's S corporation status terminated
as a result of the Reorganization on the Termination Date. Thereafter, Track 'n
Trail-California will be 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%.
In connection with Track 'n Trail-California's conversion to C corporation
status, the Company will record a nonrecurring tax benefit, which would have
been $1.1 million had the conversion occurred at June 28, 1997.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of net
sales for the periods indicated:
<TABLE>
<CAPTION>
26 WEEKS
ENDED
FISCAL --------------------
------------------------------- JUNE 29, JUNE 28,
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 52.1 51.7 51.4 51.6 51.7
--------- --------- --------- --------- ---------
Gross profit............................ 47.9 48.3 48.6 48.4 48.3
Selling and marketing expenses.......... 31.1 33.2 31.8 37.8 38.7
--------- --------- --------- --------- ---------
Store contribution(1)................... 16.8 15.1 16.8 10.6 9.6
Administrative and distribution
expenses............................... 10.2 9.5 8.3 9.9 9.2
--------- --------- --------- --------- ---------
Operating income (loss)................. 6.6 5.6 8.5 0.7 0.4
Interest expense........................ 0.7 0.9 1.0 1.0 1.9
Other expense (income).................. 0.1 (0.1) (0.0) 0.0 0.1
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
minority interest...................... 5.8 4.8 7.5 (0.3) (1.6)
Pro forma income tax provision
(benefit)(2)........................... 2.3 1.9 3.0 (0.1) (0.6)
Minority interest....................... -- -- 0.2 -- --
--------- --------- --------- --------- ---------
Pro forma net income (loss)(2).......... 3.5% 2.9% 4.3% (0.2)% (1.0)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Store contribution refers to gross profit after deducting selling and
marketing expenses. Store contribution is presented to provide additional
information about the Company and is commonly used as a performance
measurement by retail companies. Store contribution should not be considered
in
29
<PAGE>
isolation or as a substitute for operating income, cash flow from operating
activities and other income or cash flow data prepared in accordance with
generally accepted accounting principles, or as a measure of the Company's
profitability or liquidity.
(2) Reflects an assumed combined federal and state tax rate of 40.0%, which the
Company believes approximates the statutory federal and state income tax
rates that would have been applied had Track 'n Trail-California been taxed
as a C corporation. From June 28, 1992 through the Termination Date, Track
'n Trail-California operated as an S corporation and was not subject to
federal and certain state income taxes.
RECENT RESULTS
Net sales were $24.8 million for the 13-week period ended September 27,
1997, an increase of $8.2 million, or 49.3%, over the $16.6 million in net sales
during the comparable period in the prior year. The Company's comparable store
net sales grew by 1.2% in the 13-week period ended September 27, 1997. Had the
Overland Trading stores acquired by the Company on October 25, 1996 been
included in the Company's store base for all of fiscal 1996, the growth in
comparable store net sales would have remained 1.2% for the 13-week period ended
September 27, 1997.
TWENTY-SIX WEEKS ENDED JUNE 28, 1997 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 29,
1996
NET SALES
Net sales were $37.5 million for the 26 weeks ended June 28, 1997, an
increase of $14.2 million, or 61.2%, over the $23.3 million in net sales for the
comparable period in the prior year. The 34 Overland Trading stores accounted
for $10.0 million or 70.8% of the increase in net sales. A comparable store net
sales increase of 2.5% for the Track 'n Trail stores contributed $546,000 to the
net sales gain, while the six Track 'n Trail stores opened in the first six
months of 1997 contributed $516,000 in net sales. The remaining increase in net
sales of $3.1 million is primarily attributable to stores opened in fiscal 1996.
GROSS PROFIT
Gross profit was $18.1 million for the 26 weeks ended June 28, 1997, an
increase of $6.8 million, or 60.8%, over the $11.3 million gross profit for the
comparable period in the prior year. Gross profit as a percentage of net sales
decreased to 48.3% for the 26 weeks ended June 28, 1997 from 48.4% in the
comparable period in the prior year. Gross profit at the Track 'n Trail stores
for the 26 weeks ended June 28, 1997 was 49.0% of net sales, a 0.6% margin
improvement over the 48.4% gross profit as a percentage of net sales in the 26
weeks ended June 29, 1996. This increase was primarily attributable to enhanced
cumulative markups and lower markdowns. Overland's gross profit for the 26 weeks
ended June 28, 1997 was $4.7 million, or 46.4% of net sales, which had a
negative impact on the consolidated gross profit as a percentage of net sales
for the 26 weeks ended June 28, 1997. The level of gross profit as a percentage
of net sales realized at the Overland Trading stores represented an improvement
over the 39.4% 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 low gross profit margin in the comparable period in 1996.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $14.5 million for the 26 weeks ended
June 28, 1997, an increase of $5.7 million, or 65.2%, over the comparable period
in the prior year. Overland accounted for $4.0 million of the increase. The
remaining $1.7 million increase is primarily attributable to the 17 stores
opened in 1996 and the six 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 38.7% in the 26
30
<PAGE>
weeks ended June 28, 1997 from 37.8% in the comparable period in 1996, primarily
as a result of higher operating expenses as a percentage of net sales at
Overland, which were 39.9% 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 38.3% in the 26 weeks ended June 28, 1997 from
37.8% in the comparable period in 1996, primarily due to new store openings.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $3.4 million for the 26 weeks
ended June 28, 1997, an increase of $1.1 million, or 48.7%, over the $2.3
million recorded in the comparable period in 1996. Overland accounted for
$958,000 of the increase. The remaining $171,000 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 decreased to 9.2% from 9.9% in the comparable period in
1996. In the absence of the Overland acquisition, administrative and
distribution expenses would have been 9.1% of Track 'n Trail net sales, down
from the 9.9% 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 $730,000, or 1.9% of net sales, for the 26
weeks ended June 28, 1997, from $240,000, or 1.0% of net sales, in the
comparable period in 1996. The $490,000 increase was primarily attributable to
$333,000 of interest on the Seller Notes and Subordinated Note incurred in
connection with the Overland acquisition, and $83,000 of interest on Overland's
borrowings under its line of credit.
NET LOSS
The net loss for the 26 weeks ended June 28, 1997 was $365,000, an increase
of $323,000 over the net loss of $43,000 incurred in the comparable period in
1996. The increase was more than accounted for by the net loss of $445,000
attributable to Overland. Excluding such loss, the Company would have realized
net income of $80,000 for the 26 weeks ended June 28, 1997, which would have
represented a $123,000 improvement over the comparable period in 1996. The
$445,000 net loss attributable to Overland in the 26 weeks ended June 28, 1997
compares to a net loss of $471,000 for the comparable period in 1996 under
previous management. This decrease in Overland's net losses was attributable to
an improved gross margin and lower operating costs, partially offset by interest
costs of $333,000 incurred as a result of the Overland acquisition.
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES
Net sales for fiscal 1996 were $66.2 million, an increase of $15.5 million,
or 30.7%, over fiscal 1995 net sales of $50.7 million. The 34 Overland Trading
stores accounted for $6.6 million of the increase in net sales since the
acquisition in October 1996, while the 17 Track 'n Trail stores opened during
the year accounted for an additional $6.2 million. These increases were
partially offset by a reduction in net sales of $1.8 million due to the closure
of five stores in 1996. These stores had net sales of only $117,000 in fiscal
1996 due to their closure, compared to net sales of $1.9 million in 1995. The
remaining increase in net sales of $4.4 million is primarily attributable to the
3.1% growth in comparable store net sales at Track 'n Trail stores and the
full-year benefit in fiscal 1996 of the stores opened during fiscal 1995.
GROSS PROFIT
Gross profit was $32.2 million in fiscal 1996, an increase of $7.7 million,
or 31.3%, over the $24.5 million gross profit in fiscal 1995. Gross profit as a
percentage of net sales increased to 48.6% in fiscal 1996 from 48.3% in fiscal
1995. The increase as a percentage of net sales was primarily related to a
reduction in
31
<PAGE>
freight costs in fiscal 1996 due to shipping efficiencies. Gross profit at
Overland for the two months since the acquisition was $3.2 million, or 48.3% of
net sales, which had a slightly negative impact on the consolidated gross profit
as a percentage of net sales in fiscal 1996. Nevertheless, Overland generated a
higher gross profit as a percentage of net sales for that two-month period,
which was during the Company's peak selling season, than it is expected to
produce for a full fiscal year.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $21.1 million in fiscal 1996, an
increase of $4.2 million, or 25.0%, over fiscal 1995. Overland accounted for
$1.6 million of the increase, and $2.6 million of the remaining increase is
primarily attributable to the net increase of 12 Track 'n Trail stores during
the year. As a percentage of net sales, selling and marketing expenses decreased
to 31.8% from 33.2% in fiscal 1995. In the absence of the Overland acquisition,
selling and marketing expenses would have been $19.4 million, or 32.5% of net
sales, in fiscal 1996. This decrease in selling and marketing expense as a
percentage of net sales was primarily attributable to the higher net sales at
the Track 'n Trail stores. For the two months since the acquisition, Overland
recorded selling and marketing expenses of $1.6 million, or 24.8% of net sales.
This level of selling and marketing expenses as a percentage of net sales is not
indicative of Overland's anticipated performance for a full fiscal year because
the acquisition occurred immediately prior to the Company's peak selling season.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $5.5 million in fiscal 1996,
an increase of $682,000, or 14.1%, over fiscal 1995. Such expenses decreased as
a percentage of net sales to 8.3% in fiscal 1996 from 9.5% in fiscal 1995. The
increase in administrative and distribution expenses from fiscal 1995 to 1996
was primarily attributable to increases in the Company's corporate staff as a
result of the Company's expansion. The reduction in administrative and
distribution expenses as a percentage of net sales was the result of spreading
such expenses over a larger revenue base. In the absence of the Overland
acquisition, administrative and distribution expenses would have been $4.9
million, or 8.3% of Track 'n Trail's net sales, in fiscal 1996. The Company
incurred $653,000 in legal and accounting expenses in fiscal 1995, primarily in
defending itself and certain of its directors and executive officers in lawsuits
filed by the Company's former Chairman of the Board. These lawsuits were
subsequently resolved favorably.
INTEREST EXPENSE
Interest expense increased to $670,000, or 1.0% of net sales, in fiscal
1996, from $435,000, or 0.9% of net sales, in fiscal 1995. The increase is
attributable to additional borrowings for store expansion as well as two months
of interest on the Seller Notes and the Subordinated Note incurred in connection
with the Overland acquisition.
MINORITY INTEREST
The minority interest elimination of $105,000 represents the 21.0% interest
in Overland net income owned by the Company's Existing Stockholders in fiscal
1996. No minority interest existed in fiscal 1995.
NET INCOME
The Company's consolidated net income in fiscal 1996 would have been $2.5
million excluding the operations of Overland. This amount would have represented
a 71.5% increase over fiscal 1995. Fiscal 1996 net income also reflects $477,000
in net income attributable to Overland from the acquisition of Overland in
October 1996 through the end of fiscal 1996, partially offset by the $105,000
minority interest. On a consolidated basis, the Company's net income was $2.9
million in fiscal 1996, which represents a 97.0% increase over the net income of
$1.5 million in fiscal 1995.
32
<PAGE>
FISCAL 1995 COMPARED TO FISCAL 1994
NET SALES
Net sales in fiscal 1995 were $50.7 million, an increase of $2.5 million, or
5.2%, over fiscal 1994 net sales of $48.2 million. Fiscal 1995 had 52 weeks of
net sales, whereas fiscal 1994 had 53 weeks of net sales. The additional week in
fiscal 1994 generated $1.2 million in net sales. On a comparable 52-week basis,
fiscal 1995 net sales increased $3.7 million, which was primarily attributable
to the 12 stores opened in fiscal 1995, which generated $3.3 million in net
sales, and a $2.7 million net sales increase due to a full year of sales in
fiscal 1995 by stores opened in fiscal 1994. These increases were partially
offset by the closure of four stores that had accounted for net sales of $1.8
million in fiscal 1994, and a decrease in comparable store net sales of 1.4%
which resulted in a reduction of net sales of $583,000.
GROSS PROFIT
Gross profit was $24.5 million in fiscal 1995, an increase of $1.4 million,
or 6.1%, from $23.1 million in fiscal 1994. Gross profit as a percentage of net
sales increased to 48.3% in fiscal 1995 from 47.9% in fiscal 1994. The increase
was primarily attributable to increased sales of higher-margin private label
products as a percentage of total net sales.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $16.9 million in fiscal 1995, an
increase of $1.9 million, or 12.5%, from $15.0 million in fiscal 1994. Such
expenses represented 33.2% of net sales in fiscal 1995, compared to 31.1% in
fiscal 1994. The increase in selling and marketing expenses as a percentage of
net sales was primarily attributable to the operating expenses of the 12 new
stores opened, the four stores remodeled during the year and the impact of a
52-week year in fiscal 1995 compared to a 53-week year in fiscal 1994. In fiscal
1994, the 53rd week accounted for an additional $1.2 million in net sales, which
leveraged the Company's fixed costs over a larger sales base in comparison to
the 52 weeks in fiscal 1995. Excluding these additional net sales, selling and
marketing expenses would have been 31.9% of net sales in fiscal 1994 compared to
33.2% in fiscal 1995.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $4.8 million in fiscal 1995, a
decrease of $108,000, or 2.2%, from fiscal 1994. Administrative and distribution
expenses were 9.5% of net sales in fiscal 1995, compared to 10.2% in fiscal
1994. Performance-based bonuses in fiscal 1995 were lower by $195,000 and the
Company achieved approximately $47,000 in cost savings at its central
distribution facility through operational efficiencies. The reduction in
administrative and distribution expenses as a percentage of net sales is
attributable to the spreading of the Company's relatively fixed costs over a
larger sales base. The reduction in administrative and distribution expenses was
partially offset by an increase in legal expenses from $514,000 in fiscal 1994
to $653,000 in fiscal 1995 primarily due to increased activity in the litigation
previously described.
INTEREST EXPENSE
Interest expense increased to $435,000 in fiscal 1995, an increase of
$110,000, or 34.1%, from fiscal 1994. Interest expense increased to 0.9% of net
sales in fiscal 1995 from 0.7% of net sales in fiscal 1994. The change was
attributable to additional borrowings for store expansion.
NET INCOME
Net income in fiscal 1995 was $1.5 million, a decrease of $232,000, or
13.7%, from $1.7 million in fiscal 1994. The decrease was primarily attributable
to the additional week of net sales in fiscal 1994, which was a
33
<PAGE>
53-week fiscal period. The additional week in fiscal 1994 accounted for
approximately $1.2 million in net sales, without a corresponding increase in
certain fixed expenses under the categories of selling and marketing expenses,
administrative and distribution expenses and interest expense.
QUARTERLY RESULTS OF OPERATIONS
The Company typically incurs losses in the first quarter, and derives a
substantial percentage of its annual net sales and operating profitability
during the "back-to-school" and year-end holiday periods. The table below sets
forth quarterly operating data of the Company, including such data as a
percentage of net sales, for fiscal 1995, fiscal 1996 and the first and second
quarters of fiscal 1997. This quarterly information is unaudited, but in
management's opinion reflects all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods presented when read in conjunction with the audited financial
statements of the Company and notes thereto. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
FISCAL
FISCAL 1995 FISCAL 1996 1997
---------------------------------------- ----------------------------------------- --------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ $9,326 $10,757 $13,963 $16,645 $10,249 $13,037 $16,580 $26,367 $16,867
Cost of sales............ 4,876 5,494 7,454 8,368 5,430 6,590 8,575 13,467 8,857
------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit............. 4,450 5,263 6,509 8,277 4,819 6,447 8,005 12,900 8,010
Selling and marketing
expenses................ 3,791 3,923 4,411 4,727 4,259 4,532 5,013 7,255 7,194
------- -------- -------- -------- -------- -------- -------- -------- --------
Store contribution(1).... 659 1,340 2,098 3,550 560 1,915 2,992 5,645 816
Administrative and
distribution expenses... 1,162 1,185 1,239 1,240 1,180 1,137 1,151 2,041 1,780
------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss).. $ (503) $ 155 $ 859 $ 2,310 $ (620) $ 778 $ 1,841 $ 3,604 $ (965)
------- -------- -------- -------- -------- -------- -------- -------- --------
------- -------- -------- -------- -------- -------- -------- -------- --------
<CAPTION>
SECOND
QUARTER
--------
<S> <C>
Net sales................ $20,660
Cost of sales............ 10,556
--------
Gross profit............. 10,105
Selling and marketing
expenses................ 7,333
--------
Store contribution(1).... 2,772
Administrative and
distribution expenses... 1,664
--------
Operating income (loss).. $ 1,108
--------
--------
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....... 52.3 51.1 53.4 50.3 53.0 50.5 51.7 51.1 52.5 51.1
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit........ 47.7 48.9 46.6 49.7 47.0 49.5 48.3 48.9 47.5 48.9
Selling and
marketing
expenses........... 40.6 36.5 31.6 28.4 41.6 34.8 30.2 27.5 42.7 35.5
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Store
contribution(1).... 7.1 12.5 15.0 21.3 5.5 14.7 18.0 21.4 4.8 13.4
Administrative and
distribution
expenses........... 12.5 11.0 8.9 7.4 11.5 8.7 6.9 7.7 10.6 8.1
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)............. (5.4)% 1.4% 6.2% 13.9% (6.0)% 6.0% 11.1% 13.7% (5.7)% 5.4%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
- ------------------------
(1) Store contribution refers to gross profit after deducting selling and
marketing expenses. Store contribution is presented to provide additional
information about the Company and is commonly used as a performance
measurement by retail companies. Store contribution should not be considered
in isolation or as a substitute for operating income, cash flow from
operating activities and other income or cash flow data prepared in
accordance with generally accepted accounting principles, or as a measure of
the Company's profitability or liquidity.
34
<PAGE>
The Company anticipates that 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $5.8 million in working capital as of June 28, 1997,
compared to $9.4 million at the end of fiscal 1996. The Company's capital
requirements relate primarily to working capital and the build-out of new
stores. The Company's working capital needs are somewhat seasonal and typically
peak in the second and fourth quarters. The peak in the second quarter is due to
the incurrence of operating losses in the first quarter and increased inventory
purchased for the Spring selling season. Working capital needs peak in the
fourth quarter 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. Although the
Company has historically opened the highest percentage of stores in its third
quarter, this pattern may change in the future. 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.
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 26 weeks ended June 29, 1996 and June
28, 1997 was $1.7 million and $4.2 million, respectively. Net cash provided by
operating activities was $3.7 million, $3.4 million and $5.1 million for fiscal
1994, 1995 and 1996, respectively. Net cash provided by operating activities has
historically been driven by net income levels combined with fluctuations in
inventory and accounts payable. Inventory levels have increased throughout these
periods due to an increase in the number of stores.
Capital expenditures were $958,000 and $910,000 for the 26 weeks ended June
29, 1996 and June 28, 1997, respectively. Capital expenditures excluding the
cost of acquisitions were $1.3 million, $1.6 million and $1.7 million in fiscal
1994, 1995 and 1996, respectively. Expenditures in the first 26 weeks of fiscal
1997 were primarily for the build-out of six new stores as well as the
completion of three stores opened in 1996. Expenditures in the first 26 weeks of
1996 were primarily for the build-out of eight new stores as well as the
remodeling of two stores. Expenditures in fiscal 1996 were primarily for the
build-out of 14 of the 17 Track 'n Trail stores that were opened in fiscal 1996,
plus the remodeling of two existing stores. The full build-outs of the other
three Track 'n Trail stores opened in fiscal 1996 were delayed until fiscal
1997. These build-outs were completed in the first quarter of fiscal 1997.
Expenditures in fiscal 1995 were primarily for the build-out of 12 of the new
stores opened, plus the remodeling of four existing stores. The Company
estimates that capital expenditures in fiscal 1997, excluding the cost of any
acquisitions, will total approximately $2.5 million, primarily for the
construction of approximately 20 new stores and the completion of three stores
opened in late 1996.
Financing activities provided cash of $2.6 million and $4.9 million for the
26 weeks ended June 29, 1996 and June 28, 1997, respectively. The increase
primarily reflects additional borrowings under the Revolving Loan Agreement to
fund increased working capital requirements as a result of the larger store
base. This increase was partially offset by increased stockholder distributions.
The Company used cash of $2.9 million, $1.7 million and $2.7 million in
financing activities in fiscal 1994, 1995 and 1996, respectively. Cash was used
in financing activities primarily for advances and distributions to stockholders
and repayment of long-term debt, primarily financed by borrowings under the
Company's Revolving Loan Agreement. The Company has historically paid
distributions to its stockholders as a result of the
35
<PAGE>
Company's status as an S corporation. During fiscal 1994, 1995 and 1996 and the
first six months of fiscal 1997, the Company made S corporation distributions to
stockholders of $1.7 million, $376,000, $3.1 million and $2.2 million,
respectively. Subsequent to June 28, 1997, the Company made an additional
$215,000 in distributions to the Existing Stockholders. Prior to the Termination
Date, Track 'n Trail-California declared the $6.4 million Distribution to the
Existing Stockholders, which will be paid from a portion of the Company's
proceeds from the Offering. Under certain circumstances, the Company may make
payments to the Existing Stockholders to satisfy certain tax liabilities with
respect to pre-Reorganization tax periods resulting from adjustments to the
Company's tax returns. In addition, under certain circumstances, the Existing
Stockholders may make payments to the Company to satisfy any tax liabilities (i)
resulting from an unexpected pre-Reorganization loss of S corporation status
and/or (ii) with respect to post-Reorganization taxable periods for which the
Existing Stockholders receive a tax benefit, provided that the indemnity
provided by the Existing Stockholders will be limited to any federal and state
refunds they receive as a result of a loss of S corporation status or other tax
adjustments for such taxable periods. See "S Corporation Distributions."
The Company's Revolving Loan Agreement includes a revolving line of credit,
a term loan and a letter of credit facility. As of June 28, 1997, the Company
had approximately $360,000 in available borrowing capacity under the revolving
line of credit, as well as $134,000 available in the form of additional letters
of credit. Borrowings under the Revolving Loan Agreement aggregated
approximately $11.1 million as of June 28, 1997 ($2.4 million of which was in
the form of a term loan), are collateralized by substantially all of the
Company's assets and are guaranteed by the Existing Stockholders. The term loan
bears interest at the Company's option at (i) the prime rate (8.5% per annum, at
June 28, 1997) plus 0.5% per annum or (ii) the London Inter-Bank Offered Rate
(5.69% at June 28, 1997) plus 3%. Borrowings under the line of credit bear
interest at the prime rate (8.50% per annum, at June 28, 1997) plus 0.5% per
annum. On July 3, 1997, the Revolving Loan Agreement was amended to allow for an
additional $1.0 million to be borrowed against the revolving line of credit
until September 30, 1997. There were no outstanding borrowings against the
additional $1.0 million of available borrowings as of September 30, 1997. The
Revolving Loan Agreement requires the Company to meet certain financial
covenants, including minimum financial ratios, and contains limitations on loans
and dividends to stockholders and on expenditures to acquire fixed or capital
assets. The Company intends to use a portion of the net proceeds of the Offering
to repay all outstanding indebtedness under the Revolving Loan Agreement.
The Company also intends to use a portion of the net proceeds of the
Offering to repay all outstanding indebtedness under its secured Merrill Lynch
Loan, which aggregated $867,000 at June 28, 1997 and bore interest at the 30-day
commercial paper rate (5.55% per annum, at June 28, 1997) plus 2.95% per annum.
The Company has outstanding indebtedness incurred in connection with the
Acquisition. In October 1996, the Company and the Existing Stockholders together
issued approximately $3.2 million in subordinated Seller Notes to the former
common stockholders of Overland in connection with the Acquisition. Also in
connection with the Acquisition, Overland repurchased all of its outstanding
preferred stock in exchange for the $3.5 million Subordinated Note, which the
Company guaranteed. The Company subsequently assumed the Existing Stockholders'
pro rata portion of the Seller Notes in exchange for the remaining 21.0% of
Overland's common stock. The Company intends to use a portion of the net
proceeds of the Offering to repay the Seller Notes and the Subordinated Note.
After the foregoing reductions in indebtedness and payment of the $6.4
million Distribution, the Company plans to use the remaining net proceeds of the
Offering for general corporate purposes, including new store expansion. See "Use
of Proceeds."
The Company has obtained a commitment letter from Union Bank of California,
Track 'n Trail-California's current lender under the Revolving Loan Agreement,
to provide Track 'n Trail-California and Overland with a two-year, $10.0 million
revolving line of credit, effective upon the consummation of the Offering. This
credit facility will replace the Revolving Loan Agreement and will be guaranteed
by the
36
<PAGE>
Company. The bank's commitment is conditioned upon the consummation of the
Offering by December 31, 1997 and the associated repayment of certain other
indebtedness. The commitment letter provides that the line of credit will bear
interest at the option of the Company at either the bank's reference rate (which
was 8.50% at June 28, 1997), or the London Inter-Bank Offered Rate (which was
5.69% at June 28, 1997) plus 2.0%, and will be 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 will be limited to 50.0% of eligible
inventory, subject to reduction by any amounts outstanding under letters of
credit. As stated in the commitment letter, the new credit facility will require
the Company to meet certain financial covenants, including minimum financial
ratios and profitability tests. The new credit facility will also prohibit the
Company from paying dividends without the bank's consent and will limit the
Company's capital expenditures to $5.0 million in 1997, $8.0 million in 1998 and
$10.0 million in 1999.
As part of its growth strategy, the Company plans to pursue opportunities to
acquire complementary businesses, although no such transactions are being
negotiated as of the date of this Prospectus. Accordingly, a portion of any
remaining proceeds of the Offering may be used to fund one or more potential
acquisitions that complement the business of the Company. To the extent that the
foregoing cash resources are insufficient to fund the purchase price of future
acquisitions, if any, or the operations of any acquired business, additional
external capital may be required. There can be no assurance that additional
financing will be available on reasonable terms or at all.
Management believes that the net proceeds of the Offering, together with
operating cash flow and borrowings under its credit facilities, 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.
IMPACT OF INFLATION
Management does not believe that inflation has had a material adverse effect
on the Company's results of operations. However, the Company cannot predict
accurately the effect of inflation on future operating results.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
During fiscal year 1996, the Company implemented Statement of Financial
Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION. In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, EARNINGS PER SHARE.
SFAS No. 121 requires the recognition of an impairment loss when the
carrying amount of a long-lived asset may not be recoverable. Implementation of
this accounting standard had no effect on the Company's financial position or
results of operations.
SFAS No. 123 establishes an alternative method (the "fair value" method) of
accounting for compensation in connection with stock issued to employees and
permits companies to elect to continue measuring and recording compensation
costs relative to stock option plans in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and make pro forma disclosure of net income and net income per share
as if the fair value method of valuing stock options had been applied. As
described in Note 5 to the Consolidated Financial Statements, the Company
elected to continue measuring and recording compensation costs relative to stock
option plans in accordance with the provisions of APB No. 25. Pro forma net
income and net income per share calculations indicated that net income would
have been unchanged if the fair value method had been used.
37
<PAGE>
SFAS No. 128 changes the method of calculating earnings per share and is
effective for interim and annual periods ending after December 15, 1997. It
requires a dual presentation of basic and diluted earnings per share. Basic
earnings per share will be computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share will reflect the potential dilution if
securities or other contracts to issue common stock were exercised or converted
into Common Stock. Early application is not permitted, and all periods presented
must be restated when SFAS No. 128 is implemented. Management is in the process
of determining the effects of implementing SFAS No. 128.
38
<PAGE>
BUSINESS
THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED UNDER
"RISK FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS."
Track 'n Trail 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. The Company has increased its store base and net sales each
year since inception. In addition, the Company's net income has grown at a
compound annual rate of 37.5% from $1.1 million in fiscal 1993 to $2.9 million
in fiscal 1996, after giving effect to assumed C corporation income taxes.
As of September 1, 1997, the Company operated 135 stores in 24 states under
the Track 'n Trail and Overland Trading names. Subsequently, the Company opened
its first Overland Trading store in California. All but three of the Company's
stores are located in regional or super-regional shopping malls, concentrated in
California, the Midwest and the Northeast. Each store offers a wide range of
rugged walking and fashion casual shoes, sandals and boots, featuring brands
such as Timberland, Dr. Martens, Birkenstock, Vans, Teva, Airwalk, Clarks, Ecco
and Rockport.
The Company targets middle to upper income consumers, with the Track 'n
Trail stores focusing on consumers in the 15- to 40-year-old age group and the
Overland Trading stores focusing on the 25- to 55-year-old age group. The
Company markets to these two different customer segments through distinct
merchandise assortments and store designs. The Track 'n Trail stores offer a
merchandise selection that emphasizes fashionable, performance-oriented footwear
and typically feature an all-glass front, often accented with rock fixtures, and
earth-tone interiors reminiscent of an outdoor setting. The Company's Overland
Trading stores are merchandised and designed to appeal to a slightly older and
more conservative consumer, with a focus on traditional and comfort-oriented
styles displayed in a contemporary, natural wood setting. The Company operates
these two distinct retail concepts to capitalize on the rapid population growth
in the 15- to 24-year old age group and the 40- to 55-year-old age group, which
the U.S. Bureau of the Census estimates will grow 19.4% and 21.7%, respectively,
from 1996 to 2010. Track 'n Trail stores average approximately 1,881 square feet
in size, while the Overland Trading stores currently average approximately 1,407
square feet. As of September 27, 1997, the Company operated 100 Track 'n Trail
stores in 23 states, and 36 Overland Trading stores in eight states, including
the Overland Trading store opened in California in September 1997.
The Company obtained 33 Overland Trading stores by acquiring control of
Overland Management Corporation ("Overland") on October 25, 1996. Overland
generated net sales of approximately $23.8 million and total store contribution
of approximately $2.4 million for the 12 months preceding the acquisition, under
prior management. In addition to obtaining a distinct retail venue, by acquiring
Overland the Company strengthened its presence in the northeastern United
States. The Company also believes that the acquisition increases its purchasing
power and negotiating position with suppliers and real estate developers,
permits it to realize operational economies of scale, and increases the
potential number of stores it can open in both existing and future markets.
INDUSTRY BACKGROUND
According to published industry sources, total retail footwear sales in the
United States during 1996 were approximately $36.8 billion, representing a 3.4%
increase over 1995 retail footwear sales. Of that total, approximately $19.7
billion, or 53.5%, was derived from casual and rugged shoes, boots and sandals,
including hiking, work, winter weather and casual western boots. Casual footwear
expenditures, which accounted for $17.7 billion in retail sales in 1996, grew
6.6% from 1995 levels of $16.6 billion, or at almost twice the rate of the total
footwear market. Rugged footwear increased 17.6% to $2.0 billion in 1996 from
$1.7 billion in 1995 and has grown at a compound annual rate of 30.0% since
1992. These two categories are projected by published industry sources to
continue to outpace the overall footwear market, growing
39
<PAGE>
6.2% and 13.7% per year, respectively, over the next five years compared to
projected overall annual industry growth of 4.0%. By comparison, athletic
footwear has grown only 3.1% annually since 1992 and grew only 2.6% to $12.1
billion in 1996 from $11.8 billion. The growth of the athletic shoe segment of
the industry is expected to continue to slow and underperform the overall
footwear market, growing only 2.4% per year for the next five years.
The footwear industry historically has been served by a variety of retail
distribution channels, including department stores, mall-based specialty
footwear retailers, traditional shoe stores, outdoor specialty retailers,
sporting goods stores and other retailers. Family shoe stores and specialty shoe
stores are expected to account for approximately 20.8% of all footwear sold at
retail in 1997. Management believes that few of the retailers providing footwear
in these formats are focused exclusively on casual, outdoor and adventure
footwear and, of those that are, even fewer carry the depth and breadth of
merchandise carried by the Company. Management believes that this segment of the
industry is very fragmented and that the Company is one of the largest retailers
dedicated to this niche.
OPERATING STRATEGIES
The Company's goal is to become the premier destination specialty retailer
of better casual, outdoor and adventure footwear. To accomplish its goal, the
Company is pursuing the following operational strategies:
- BRAND NAME MERCHANDISE. Management believes that brand name identity is of
paramount importance to its target customer in making footwear purchasing
decisions. The Company focuses on carrying authentic, well-established
brand names for each product category. For example, the Company offers the
Timberland brand for quality hiking, work, performance and casual boots
and shoes. For younger buyers of "alternative" footwear, the Company
offers Dr. Martens, Vans, Simple and Airwalk shoes. The Company features
the Ecco and Rockport brands in the walking shoe and rugged walking
category and the Birkenstock brand in walking sandals. In the category of
performance, water and active sandals, the Company offers the Teva brand.
Management believes that each of the foregoing brands is recognized as one
of the originals in the primary category of footwear it represents.
- CUSTOMER SERVICE AND CONVENIENCE. The Company is committed to achieving
customer satisfaction and to building a loyal customer base by providing a
high level of knowledgeable, attentive and personalized customer service.
The Company believes that educating consumers about the features and
benefits of its product offerings is a critical component of its success,
and management considers its sales associates' knowledge of the Company's
customers and products to be essential to its marketing approach and
customer satisfaction. The Company's extensive employee training and
development programs are designed to provide its field personnel with the
knowledge and skills needed to understand and communicate the performance
characteristics of the Company's merchandise, and to better serve its
customers' needs.
- CAPITALIZE ON TWO DISTINCT DEMOGRAPHIC GROUPS. Management believes that
the Company's distinct Track 'n Trail and Overland Trading retail concepts
enable it to serve two diverse and rapidly growing demographic groups.
Track 'n Trail stores are designed and merchandised to target 15- to
40-year-olds, while Overland Trading stores target 25- to 55-year-olds.
Although the customer base of the two concepts overlaps to some extent,
the Track 'n Trail concept is intended to focus more on active and
performance-oriented lifestyles, which it believes are particularly
popular with the fast-growing 15- to 24-year-old age group. The United
States Bureau of the Census estimates that the 15- to 24-year-old age
group included 35.9 million people in 1996 and will expand 19.4% to 42.9
million people by 2010. Overland Trading stores are designed to appeal
more to the large and growing 40- to 55-year-old age group, which the U.S.
Bureau of the Census estimates will grow 21.7% from 55.5 million people in
1996 to 67.6 million people in 2010. Management plans to differentiate the
two retail concepts to a greater degree in malls in which the Company
operates both concepts, and slightly less so in malls in which the Company
operates only one store.
40
<PAGE>
- FOCUSED MERCHANDISING STRATEGY. To tailor merchandise mix to individual
stores' customer profiles, increase inventory efficiency and minimize lost
sales due to out-of-stock occurrences, the Company analyzes detailed sales
and inventory data generated by the Company's advanced information and
distribution systems on a daily basis. The Company's systems, which
feature automatic replenishment, point-of-sale ("POS") data collection and
electronic data interchange ("EDI"), capture net sales and inventory data
daily on a store-by-store basis for each stock keeping unit ("SKU").
- RECOGNIZE AND RESPOND TO CHANGING LIFESTYLE TRENDS. The Company strives to
recognize and quickly respond to lifestyle trends that affect footwear
customer preferences. Most recently, prevailing lifestyle trends that have
affected footwear sales have included (i) the growth in alternative sports
such as skate, wake and snow boarding, in-line skating and mountain biking
as well as the footwear trends these sports have inspired, (ii) the
movement to outdoor activities and to nature as evidenced by the
resurgence of walking, hiking, biking, fly fishing and camping and (iii)
the increased acceptance of casual dress for both work and social
settings.
Management believes that it has developed strong relationships with the
primary suppliers of the more than 100 brand names that the Company
carries. These relationships provide access to market information
regarding emerging merchandise trends. Management believes that the
breadth and strength of these relationships, together with the Company's
focused merchandising strategy, provide the Company with the flexibility
necessary to permit it to respond accurately and quickly to changing
customer preferences.
- ESTABLISH COMPLEMENTARY PRIVATE LABEL BRANDS. The Company's brand strategy
is complemented by its private label merchandise, which is marketed in
several product categories under brand names including Forza-TM-,
Mole-TM-, New Terrain-TM-, Nordic Trail-TM- and Coloma Trail-TM-. Private
label merchandise, which represented approximately 11.7% and 8.7% of total
net sales in fiscal 1996 and the first six months of fiscal 1997,
respectively, has provided the Company with higher maintained gross
margins than branded products. The Company's private label strategy is to
offer merchandise with quality and features equal or superior to branded
products at lower prices.
GROWTH STRATEGIES
The Company's senior management team has successfully increased the store
base and net sales level each year since joining the Company, and intends to
continue to build and strengthen the Company's infrastructure. To enhance the
Company's ability to continue to grow through new store openings and
acquisitions, the Company currently plans to lease a new corporate headquarters
and distribution facility in 1999, which will be sufficient to supply at least
500 stores when expanded to its full anticipated capacity. The Company has also
made and will continue to make investments in management information systems.
Management has developed the following strategies to accelerate the Company's
growth and increase its future profitability:
- NEW STORE OPENINGS. The Company plans to strengthen its position in its
current markets by selectively opening new Track 'n Trail and Overland
Trading stores in markets with attractive demographics and in which
management believes the Company can gain economies of scale in management
and distribution. In determining new store locations, the Company
considers regional and local economic conditions, mall locations, site
locations within the mall, vacancy rates, sales per square foot, "anchor"
tenant stores, tenant mix, consumer traffic, competition and occupancy,
construction and other costs associated with opening a store. By
solidifying the Company's position in certain markets, management believes
that the Company can establish a higher degree of name recognition through
increased market representation and a correspondingly stronger market
presence. In addition, management believes that new store openings will
permit the Company to realize greater distribution efficiencies. The
Company plans to open approximately 20 stores in fiscal 1997 and at least
30 stores in fiscal 1998.
- COMPARABLE STORE NET SALES GROWTH. Management plans to leverage the
increased market presence and recognition gained by opening new stores to
drive comparable store net sales increases in
41
<PAGE>
existing markets. Management also believes that the Company can achieve
comparable store net sales growth in its recently acquired Overland
Trading stores by (i) implementing the store-by-store sales analysis and
focused merchandising strategies employed in the Track 'n Trail stores,
(ii) supplementing existing assortments with style additions and private
label merchandise, (iii) improving inventory management to reduce lost
sales due to out-of-stock occurrences and (iv) emphasizing accessories
sales through the sales associate training programs currently employed at
the Track 'n Trail stores.
- GROSS MARGIN IMPROVEMENT AND OPERATING EXPENSE CONTROLS. The Track 'n
Trail store contribution for fiscal 1995 and fiscal 1996 as a percentage
of net sales was approximately six percentage points higher than that of
the recently acquired Overland Trading stores for the fiscal year prior to
the Overland acquisition. The superior performance of Track 'n Trail
stores reflects a higher maintained gross margin and better management of
store-level operating expenses. Management intends to improve the
maintained gross profit levels of the Overland Trading stores, with the
goal of achieving results similar to those of the Track 'n Trail stores,
by (i) implementing the Company's MIS systems and focused merchandising
strategies, (ii) taking advantage of increased purchasing economies of
scale, (iii) selectively eliminating less profitable styles, (iv)
increasing sales associates' emphasis on accessories sales at Overland
Trading stores and (v) broadening these stores' offering of private label
footwear, which carries higher maintained gross margins than branded
products. The Company also intends to improve management controls and
accountability at the Overland Trading stores, leveraging the systems
already in place at Track 'n Trail stores, in an effort to reduce Overland
Trading store-level expenses as a percentage of net sales.
- ADDITIONAL ACQUISITIONS. Management believes that the market for
high-quality outdoor, casual and adventure footwear is large and
fragmented. Accordingly, management intends to identify opportunities to
acquire one or more regional specialty footwear retailers in this market.
Management plans to pursue such opportunities where, as in the case of the
Overland acquisition, it believes that (i) the target company's stores are
strategically well-located within their local market and regionally
well-located within the United States, (ii) the Company can bring
merchandising and operational efficiencies and improvements to the target
company's operations, (iii) the retail concept of the target company fits
or can be easily adapted to Track 'n Trail's strategic objectives and (iv)
the acquisition can be accomplished on terms advantageous to the Company.
MERCHANDISING
The Company's merchandising philosophy is to maintain a core group of basic
styles while identifying and stocking emerging brands and styles. The Company
avoids taking significant inventory risk on new items by carefully testing and
monitoring their sales. The Company generally tests and monitors numerous new
styles each year. Typically, a new style is tested initially in approximately
ten stores. Successful new styles are then tested in 20 to 30 additional stores.
After further evaluation, a new style may be rolled out to a broader segment of
stores or system-wide. New styles are rolled out selectively, with attention to
test results in particular regions or in stores known to serve a higher
percentage of a certain demographic group. Each store typically carries 250 to
300 styles.
Merchandising decisions, including merchandise mix, pricing, promotions and
markdowns, are made at the Company's corporate offices. The Company's product
purchasing is coordinated through a centralized merchandising department under
the direction of its Executive Vice President--Merchandising. The merchandising
department currently consists of 20 persons, including two merchandising
managers, five buyers for the Track 'n Trail stores and two buyers for the
Overland Trading stores. The Company's Track 'n Trail and Overland Trading
buyers operate independently, allowing them to focus on their distinct
customers' merchandise preferences and lifestyles. These buyers are supported by
three stock analysts and six assistants, who manage the Company's computerized
merchandise planning system and other systems personnel. Management also
receives input from the Company's 17 district managers regarding local or
regional factors relevant to merchandising decisions.
42
<PAGE>
FOOTWEAR
The principal categories of footwear offered by Track 'n Trail and Overland
Trading stores, and selected vendors for each, are summarized below:
<TABLE>
<CAPTION>
SELECTED TRACK SELECTED
'N TRAIL OVERLAND TRADING
CATEGORY DESCRIPTION VENDORS VENDORS
<S> <C> <C> <C>
Rugged Casual Rugged footwear with technical features Ecco Clarks
designed to perform on adverse terrain, Merrill Ecco
including internal support systems, Rockport H.H. Brown
waterproof leathers or membranes, comfort Timberland Rockport
technology built into the midsole and Timberland
insole, and technical outsoles.
Walking/Comfort Traditional walking shoes incorporating Clarks Clarks
comfort technology in design and Ecco Ecco
construction. Rockport Rockport
Joseph Seibel
Hikers Functional backpacking, lightweight hiking Rockport Rockport
and approach boots and shoes. These Solomon Timberland
products contain the technical features and Timberland
benefits necessary to support activities Vasque
ranging from heavy backpacking to
recreational day hiking and trail running.
Work/Fashion Functional (work, field and duty) and Caterpillar Dr. Martens
fashion boots and shoes, including steel Dr. Martens H.H. Brown
toe, insulated, waterproof and ANSI Timberland Timberland
approved footwear.
Sandals Comfort footbed, sports specific, casual Birkenstock Birkenstock
and fashion sandals, as well as clogs. Born Born
Clarks Clarks
Dr. Martens Dr. Martens
Simple Rockport
Stegmann Joseph Seibel
Teva Stegmann
Teva
Sportleisure Youth-oriented and alternative products Airwalk --
designed for skateboarding, BMX biking and Etnies
other "extreme" sports activities. Duffs
Simple
Vans
Lightweight Casual Lightweight footwear, including boat shoes Born Born
and opened-up casuals. Sperry Clarks
Timberland Rockport
Joseph Seibel
Sperry
Timberland
Cold Weather Seasonal products designed for foul Columbia Canada North
weather. Most products are waterproof and Sorel Columbia
temperature rated. Ugg Sorel
Ugg
</TABLE>
43
<PAGE>
Private label merchandise accounted for approximately 11.7% of the Company's
net sales in fiscal 1996. The Company sells its private label merchandise under
names such as Forza-TM-, New Terrain-TM-, Mole-TM-, Nordic Trail-TM- and Coloma
Trail-TM-. The Company introduced private label merchandise at Overland Trading
stores in fiscal 1997.
ACCESSORIES
The Company also offers accessories, including socks and shoe care products
such as sprays and polishes. Some of these accessories carry the same brand
names as the shoes, boots and sandals sold by the Company, although most are
supplied by different manufacturers than the Company's footwear suppliers.
Accessories accounted for approximately 6.7% of net sales at Track 'n Trail
stores in fiscal 1996, and accounted for less than 2.0% of net sales at Overland
Trading stores for Overland's fiscal year ended August 3, 1996. The Company has
increased accessories sales to 3.7% of Overland's net sales in the 26 weeks
ended June 28, 1997, and intends to continue to increase accessories sales at
Overland Trading stores in fiscal 1997.
PURCHASING AND SOURCING
The Company believes that its ability to buy in large quantities directly
from suppliers helps it to plan merchandise flow effectively and to obtain
competitive pricing and trade terms. Although the Company deals with
approximately 100 vendors, a substantial portion of the Company's merchandise is
provided by a limited number of brand name suppliers. The Company's ten largest
suppliers accounted for approximately 66.8% and 68.0% of the Company's net sales
in fiscal 1995 and fiscal 1996, respectively, of which eight were the same in
each period. In fiscal 1996, Dr. Martens, Timberland and Birkenstock accounted
for 18.3%, 12.8% and 8.7% of the Company's total net sales, respectively.
The Company strives to build and maintain strong and interactive
relationships with its major suppliers. Buyers meet regularly with major vendors
to stay abreast of new product lines, new features and changes in styling
direction. The Company frequently shares information with its vendors about
market research, merchandising trends and the Company's goals. In addition, the
Company has established EDI programs with most of its major suppliers in order
to improve its inventory efficiency. The Company develops and transmits purchase
orders through its EDI links, and receives information about order status,
delivery times and pricing. These programs thus permit more rapid merchandise
replenishment and faster inventory turns. The Company believes that its
relationships with major suppliers improve its ability to obtain desired styles
and give the Company flexibility to adjust to shifting market demand for
different vendors' products from season to season. In an effort to secure
appropriate quantities of items in high demand, the Company advises its major
vendors of its forecasted needs approximately six to 12 months in advance.
However, the Company has no long-term purchase contracts or other contractual
assurances of continued supply or pricing with any of its suppliers.
Most private label products are sourced from the Far East (primarily China,
Taiwan and South Korea) and Europe (primarily Spain, Italy and Portugal). The
Company's Product Development Manager is responsible for identifying developing
styles for private label manufacture, arranging for product design and locating
manufacturers with the assistance of local agents. The Company actively seeks
advantageous sourcing opportunities and works with a variety of manufacturers.
During fiscal 1996, the Company relied on approximately 25 private label
manufacturers. Generally, private label products are delivered to the Company
approximately four to six months after initial order placement, with longer lead
times for products manufactured in the Far East. Upon order, the Company
typically posts an irrevocable letter of credit in the amount of the purchase
price. The Company has no long-term contracts with its manufacturing sources and
competes with other companies for production facilities. See "Risk
Factors--Dependence on Major Suppliers," "Risk Factors--Uncertainties Associated
with Private Label Sourcing," "Risk Factors--International Purchasing Risks" and
"Risk Factors--Potential Foreign Currency Fluctuations."
44
<PAGE>
STORE OPERATIONS
The Company operated 136 stores as of September 27, 1997, all but three of
which were located in regional or super-regional shopping malls. Each store
typically carries 250 to 300 styles of footwear. Although all stores are
integrated into the Company's inventory control, distribution and management
information systems, Track 'n Trail and Overland Trading stores differ in format
and decor because of their different targeted customer bases.
TRACK 'N TRAIL STORE FORMAT
The Track 'n Trail storefront design typically features an all glass 20- to
30-foot front, enabling customers to view featured products on display as well
as the extensive product assortment available inside the store. The edges of the
storefront are often accented with rock fixtures that are a signature element in
the Track 'n Trail design theme. Product display fixtures at several stores are
designed to represent rock formations, which may also be incorporated into
customer seating fixtures and waterfall display pieces. The store interiors
feature natural-tone walls, accent trim, furniture and fixtures. Floor coverings
are natural wood or soft earth-tone carpeting, and often include colorful murals
depicting outdoor scenes, providing an environment that is both aesthetically
pleasing and complementary to the product displays. Each style of footwear is
displayed by category, such as hiking boots or sandals. Merchandise is typically
featured on rock displays or fixtures along the walls of the stores, with
product categories indicated by an overhead sign. Track 'n Trail stores range in
size from 931 to 2,650 square feet and average approximately 1,881 square feet
in size, of which 40% to 60% is devoted to the sales floor.
OVERLAND TRADING STORE FORMAT
Overland Trading stores generally feature interiors that are well lighted,
open and inviting. Most stores have two display windows in which a
representative collection of merchandise is presented. Store furnishings are
constructed of high-quality light woods that contrast against the rich, emerald
green floor coverings. Management believes that the Overland Trading stores'
more traditional environment conveys the high quality of merchandise and service
sought by the Overland Trading concept's more mature target consumer. The
Overland Trading merchandising approach focuses on the high-quality brands
carried. Each major brand is housed as a "collection" in a distinct wall
section, which is delineated by architectural elements and by a distinctive,
back-lit overhead sign carrying the vendor's logo. For example, men's Timberland
footwear is presented as a collection within a defined wall section, with a
back-lit Timberland sign overhead. Overland Trading stores have sales floors
similar in size to those at Track 'n Trail stores, but have smaller stockrooms.
The Company plans to incorporate larger stockrooms in future Overland Trading
stores in order to minimize missed sales opportunities due to shortages of
high-demand products. Overland Trading stores average approximately 1,407 square
feet in size.
OUTLET STORES
The Company consolidates older or slow-moving merchandise to two outlet
stores for additional or final markdown. Inventory transfers are initiated by
the merchandising department and are effected directly between the retail store
and the outlet store. The Company's Track 'n Trail outlet store, opened in
August 1996, currently features a contemporary "industrial" decor, with a moving
conveyor belt carrying merchandise along the storefront's perimeter. The Company
also operates an Overland Trading outlet store. The Company is currently
evaluating the merchandising, format and interiors of its outlet stores.
STORE MANAGEMENT AND COMPENSATION
The Company's Vice President-Stores, two regional managers and 17 district
managers visit each of the Company's stores on a regular basis to review the
implementation of Company policy, monitor operations and review inventories and
the merchandise presentation. Each store has a store manager who is responsible
for supervision and overall operations, two to three assistant managers and
approximately four to eight sales associates, most of whom work part-time.
45
<PAGE>
The regional, district and store managers receive fixed salaries and are
eligible for incentive bonuses, primarily based on their achievement of the
goals stated in the Company's Management by Objective ("MBO") program. The MBO
program focuses on reviewing, managing and improving three key objectives: net
sales, selling cost and inventory shrinkage. All field incentive compensation
programs are based upon goals within these three key objectives. To support the
MBO program, the Company has developed an appraisal system to monitor each
store's performance on a monthly and quarterly basis. Each appraisal focuses on
a store's performance in a key compliance area such as customer service, visual
presentation, store operations or loss prevention, to support performance in the
three key MBO objectives. The Company also monitors many other store-level
variables from its corporate offices, including refund levels, register
variances, telephone bills and similar items.
The Company intends for store employees to focus a substantial portion of
their efforts on customer service. As a consequence, the Company has centralized
as many administrative functions as possible, including buying, development of
in-store merchandising displays, inventory allocation, human resources and
accounting functions, at its El Dorado Hills, California corporate offices.
CUSTOMER SERVICE
The Company is committed to achieving customer satisfaction and to building
a loyal customer base by providing a high level of knowledgeable, attentive and
personalized customer service. The Company believes that educating consumers
about the features and benefits of its product offerings is a critical component
of its success, and management considers its sales associates' knowledge of the
Company's customers and products to be essential to its marketing approach and
customer satisfaction.
To develop knowledgeable, responsive sales associates, the Company has
devoted significant resources to developing and implementing employee
development and incentive programs. All store employees receive extensive
training on merchandise features, benefits and technology, as well as customer
relations and selling skills. The training program focuses on "six steps" to
achieve sales and customer satisfaction: greeting the customer; assessing his or
her needs; exceeding customer expectations; overcoming objections; suggestive
selling; and closing the sale. In addition to training from the store manager,
each employee attends regional product information seminars, receives in-store
training through vendor presentations and vendor-supplied videotapes, and is
required to complete a formal, written training program. Store managers are also
required to complete a 12-week training program, during which they are
instructed in the technical aspects of footwear, management skills and employee
relations. To provide managers with hands-on training, new store and district
managers are typically required to work alongside individuals in comparable
positions for two to three weeks before they are asked to perform their duties
without direct supervision. Managers also attend a minimum of three management
training meetings per year. Supplemental product information bulletins are
distributed frequently from the Company's corporate offices to educate store
managers and sales associates about new products as they are introduced. The
Company also employs an independent agency to send unidentified "mystery
shoppers" to Company stores, and to report on the service provided to these
shoppers by store personnel. The Company also monitors the level of customer
service on an ongoing basis through various initiatives, such as customer
comment forms and telephone surveys. The Company is implementing the foregoing
employee development and incentive programs and customer service initiatives at
its Overland Trading stores, and has undertaken a review of all of the policies
and procedures for Overland Trading store operations.
STORE LOCATIONS
The Company considers its ability to obtain attractive, high-traffic store
locations to be a critical element of its business and a key factor in the
Company's future growth and profitability. In determining new store locations,
the Company considers regional and local economic conditions and household
income data, mall locations, site locations within the mall, vacancy rates,
sales per square foot, "anchor" tenant stores, tenant mix, consumer traffic,
competition and occupancy, construction and other costs associated
46
<PAGE>
with opening a store. Site selection and lease negotiation are supervised by the
Company's Vice President-Real Estate and senior management.
The Company operated 136 stores in 24 states as of September 27, 1997, as
set forth in the following table, and has signed leases for an additional six
stores which have not commenced commercial operations.
TRACK 'N TRAIL STORES
<TABLE>
<CAPTION>
CURRENT
STATE STORES
- --------------------------------------------- -------------
<S> <C>
Alaska....................................... 2
California................................... 26
Colorado..................................... 6
Connecticut.................................. 1
Idaho........................................ 1
Illinois..................................... 8
Indiana...................................... 5
Maine........................................ 1
Maryland..................................... 1
Massachusetts................................ 3
Michigan..................................... 10
Minnesota.................................... 2
<CAPTION>
CURRENT
STATE STORES
- --------------------------------------------- -------------
<S> <C>
Missouri..................................... 1
Nevada....................................... 1
New Hampshire................................ 2
New York..................................... 7
Ohio......................................... 5
Oregon....................................... 3
Pennsylvania................................. 3
Tennessee.................................... 1
Virginia..................................... 1
Washington................................... 7
Wisconsin.................................... 3
</TABLE>
OVERLAND TRADING STORES
<TABLE>
<CAPTION>
CURRENT
STATE STORES
- --------------------------------------------- -------------
<S> <C>
California................................... 1
Connecticut.................................. 2
Massachusetts................................ 9
New Jersey................................... 4
<CAPTION>
CURRENT
STATE STORES
- --------------------------------------------- -------------
<S> <C>
New York..................................... 10
Ohio......................................... 5
Pennsylvania................................. 2
Virginia..................................... 3
</TABLE>
The Company leases all of its stores. Initial lease terms of the Company's
stores generally range from eight to ten years in duration without renewal
options, ten-year leases being the most common. The leases generally provide for
a fixed minimum rental plus a percentage of store sales in excess of a specified
amount.
MARKETING
The Company's policy is to price its merchandise competitively with
department stores and specialty footwear retailers in the particular mall in
which each Company store is located. The Company is primarily a full-price
retailer, selling most merchandise at full retail prices. However, the Company
conducts promotions that generally revolve around themes such as back-to-school,
and holiday seasons. In addition, the Company promotes individual items as
needed and consolidates seasonal and slow-moving merchandise into selected
mall-based stores prior to consolidation into its two outlet format stores for
liquidation.
The Company relies primarily on mall traffic and the visual appeal of its
stores to attract customers, and on the breadth of its product offering and the
quality of its customer service to retain them. In-store promotions with
point-of-purchase materials are also an important part of the Company's
marketing strategy. The Company also takes advantage of advertising and
promotional assistance from many of its suppliers, which takes the form of
cooperative advertising programs, point-of-purchase materials, product training
for employees and other programs. The Company spends very little on advertising,
primarily contributing to mall merchant association funds which will advertise
both the mall and individual stores within the mall.
47
<PAGE>
DISTRIBUTION
The Company believes that strong distribution support for its stores is a
critical element in its strategy to maintain a low cost operating structure and
to expand in the future. The Company leases a single 24,192 square foot
distribution center in El Dorado Hills, California and manages the distribution
process centrally from its corporate offices located at the same site. The
Company also leases a 6,000 square foot staging facility in Rancho Cordova,
California. The Company receives approximately 85.0% of its merchandise at its
central distribution center, of which approximately two-thirds is distributed to
Track 'n Trail stores and one-third is distributed to the Overland Trading
stores. Other merchandise is drop-shipped from vendors directly to individual
stores. The Overland Trading stores currently receive a higher proportion of
drop-shipped merchandise than the Track 'n Trail stores. The Company intends to
process an increasing percentage of Overland Trading merchandise through its
central distribution center, as it expands the stockroom capacity of future
Overland Trading stores.
The central distribution center is operated primarily as a "cross-docking"
facility rather than as a warehouse. The Company attempts to retain minimal
inventory at this facility, although it will occasionally back-stock high-demand
items that are expected to be in short supply and inventory for peak seasonal
needs. The central distribution center has multi-access docks, enabling the
Company to receive and ship simultaneously and to pack separate trailers for
shipments to different regions of the country at the same time.
Upon receipt at the central distribution center, merchandise is inspected,
recorded in the Company's MIS system, allocated to stores by the system's
automatic replenishment function, price tagged and repackaged for distribution
(to the extent it was not prepared and pre-ticketed by the vendor according to
individual store). Merchandise is typically shipped via common carrier from the
central distribution center to the various stores once a week, or as needed
during peak seasonal periods.
The Company believes that its current central distribution facility will
support as many as 200 stores, which the Company believes is sufficient to
continue to service existing stores and to accommodate anticipated growth
through mid-1999. The current corporate facility's lease expires in March 1998;
however, the Company intends to exercise an option to extend the lease to March
1999. The Company presently anticipates moving its distribution facility and
corporate offices to a larger, leased "build-to-suit" facility in 1999, which is
expected to have 45,000 square feet of distribution facility space initially,
and could accommodate at least 500 stores if expanded to its anticipated full
capacity of 80,000 square feet.
MANAGEMENT INFORMATION SYSTEMS
The Company has a computerized management information system that includes a
network of terminals at the corporate offices to support management decision
making, along with PC-based POS computers at the stores that are connected via
modem to the computers at the corporate offices. Each store's POS system
accumulates detailed sales transaction data that is polled by the Company's main
system nightly and reviewed by management each day. The system's perpetual
inventory feature enables the Company's buyers to review and analyze daily the
inventory levels at each individual store by department, class and SKU in order
to replenish fast-selling items on a timely basis. The system also includes an
automated replenishment system for core products that orders replacement stock
of such products based on factors such as current sales trends or store
inventory levels. The minimal inventory that is maintained at the Company's
central distribution center is also managed through daily inventory management
reports. During fiscal 1996, the Company upgraded the computer hardware at its
corporate offices to accommodate its presently anticipated growth. The Company
completed the integration of the Overland Trading stores into its management
information system in January 1997.
COMPETITION
The business in which the Company is engaged is highly competitive. Most of
the items sold by the Company are sold by department stores, outdoor and
sporting goods stores, athletic footwear stores and traditional shoe stores.
Some of these stores are owned or franchised by major suppliers of the Company.
48
<PAGE>
Many of the stores with which the Company competes are units of large national
and regional chains that have substantially greater financial and other
resources than the Company. To a lesser extent, the Company competes with mail
order retailers. In many cases, the Company's stores are located in shopping
malls in which one or more of its competitors also has a store.
The Company believes that it has been able to compete favorably with its
competitors by operating attractive, well-stocked stores in high retail traffic
areas, offering competitive prices and providing knowledgeable and courteous
customer service. The Company seeks to provide competitive pricing by
effectively mixing high profile, brand name merchandise with private label
merchandise and opportunistic purchases of other brand name merchandise, and by
controlling both store and administrative expenses.
EMPLOYEES
As of September 27, 1997, the Company had approximately 510 full-time
employees and 425 part-time employees, none of whom is represented by a labor
union. The number of part-time employees fluctuates depending on seasonal needs.
The Company considers its relationship with its employees to be good and has not
experienced any interruptions of operations due to labor disagreements.
LEGAL PROCEEDINGS
Although the Company is subject to various claims and legal actions that
arise in the ordinary course of its business, the Company is not presently a
party to any material legal proceedings.
49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
David L. Suechting, Jr.......................... 38 Chairman of the Board
Gregory M. Kilgore.............................. 48 President, Chief Operating Officer and Director
John E. Wilkinson............................... 48 Executive Vice President-Marketing
Daniel J. Nahmens............................... 39 Vice President-Finance, Chief Financial Officer,
Treasurer and Secretary
David T. Morgan................................. 54 Vice President-Real Estate
William Forsberg................................ 52 Vice President-Stores
Barbara J. Suechting............................ 56 Director
Helen C. Bulwik................................. 48 Prospective Director
Steven D. Tough................................. 46 Prospective Director
</TABLE>
DAVID L. SUECHTING, JR. has served as Chairman of the Board since the
Company's organization in March 1997. Mr. Suechting co-founded Track 'n
Trail-California and has served as Chairman of the Board since January 1993.
From January 1993 to April 1996, Mr. Suechting served as President of Track 'n
Trail-California. Prior to that time, he served Track 'n Trail-California in
various capacities, including Vice President-Stores from July 1991 to April
1996, Vice President-Operations from October 1989 to July 1991, Vice
President-Merchandise from February 1982 to October 1989 and as Store
Manager/District Manager from 1980 to February 1982.
GREGORY M. KILGORE has served as President and Chief Operating Officer of
the Company since its organization in March 1997. Mr. Kilgore has also served as
President and Chief Operating Officer of Track 'n Trail-California since April
1996. Prior to being appointed President, Mr. Kilgore served as Executive Vice
President and Chief Operating Officer from September 1991 to April 1996. From
May 1987 to September 1991, Mr. Kilgore functioned as interim President and
Chief Operating Officer of several turnaround and emerging retail operations.
From 1981 to 1987, Mr. Kilgore was Vice President-- Operations of Berman's
Leather Experts. Mr. Kilgore has served as a director of the Company since March
1997, and as a director of Track 'n Trail-California since July 1996.
JOHN E. WILKINSON has served as Executive Vice President-Marketing of the
Company since its organization in March 1997. Mr. Wilkinson has also served as
Executive Vice President-Marketing of Track 'n Trail-California since June 1996.
From September 1991 to May 1996, he held the position of Vice
President-Marketing. From 1982 to September 1991, Mr. Wilkinson was associated
with Weinstock's Department Store, a division of Carter Hawley Hale, where he
held the positions of Senior Vice President and General Merchandise Manager from
1989 to 1991, Vice President and General Merchandise Manager from 1987 to 1989
and Divisional Vice President from 1982 to 1987.
DANIEL J. NAHMENS has served as Chief Financial Officer and Vice
President-Finance of the Company since its organization in March 1997, and as
Secretary since October 1997. Mr. Nahmens has also served as Chief Financial
Officer and Vice President-Finance of Track 'n Trail-California since November
1993, and as Treasurer since June 1996. From August 1988 to November 1993, Mr.
Nahmens served as Controller of Track 'n Trail-California. From February 1988 to
June 1988, he held the position of Chief Financial Officer of Greenwood
Development Co., a local chain of fast-food stores. From October 1981 to
February 1988, Mr. Nahmens was associated with Cal Gas Corporation, a nationwide
liquid gas retailer, where he last held the position of Financial Accounting
Manager. From 1980 to 1981, Mr. Nahmens was employed by Peat Marwick, Mitchell &
Co. (presently known as KPMG Peat Marwick LLP) as a Certified Public Accountant.
50
<PAGE>
DAVID T. MORGAN has served as Vice President-Real Estate of the Company
since its organization in March 1997. Mr. Morgan has also served as Vice
President-Real Estate of Track 'n Trail-California since June 1996, and from
August 1992 to June 1996, he served as Director of Real Estate and Development.
From May 1990 to August 1992, Mr. Morgan was a Real Estate Representative of
Payless Shoe Source, a national retail shoe store chain, and from April 1986 to
May 1990, he was Vice President-Real Estate of Round Table Franchise
Corporation.
WILLIAM FORSBERG has served as Vice President-Stores of the Company since
its organization in March 1997, and as Vice President-Stores of Track 'n
Trail-California since June 1996. Prior to joining Track 'n Trail-California,
Mr. Forsberg was President and Chief Operating Officer of New Century Co. Inc.,
an owner and operator of a chain of video stores and a chain of tailoring and
alteration stores, from April 1994 to June 1996. From October 1983 to April
1994, Mr. Forsberg was employed by Wilsons Suede & Leather, where he last held
the position of Director of In Store Operations. From 1974 to 1983, he was
Regional Manager of Fanny Farmer Candy Shops.
BARBARA J. SUECHTING has served as a director of the Company since its
organization in March 1997. Ms. Suechting co-founded Track 'n Trail-California
and served as Secretary and a director from 1980 to October 1997.
HELEN C. BULWIK is expected to become a director of the Company immediately
following the consummation of the Offering. Ms. Bulwik has been President of
Seagate International, Inc., a management services and financial advisory
services firm based in Oakland, California, since 1988. She was Executive Vice
President of Palo Alto Consulting Center, a division of the Tom Peters Group (a
consulting firm), from 1987 to 1988. From 1982 to 1987, Ms. Bulwik was co-owner
and founder of Sanca International, Inc., a private label apparel manufacturer.
She served as General Manager of Bullock's Northern California from 1978 to 1982
and as Store Merchandiser and Buyer for Macy's California from 1972 to 1978.
STEVEN D. TOUGH is expected to become a director of the Company immediately
following the consummation of the Offering. Mr. Tough has served as Senior Vice
President of Operations of Foundation Health Corporation, a provider of managed
health care services based in Sacramento, California, since 1993. Mr. Tough has
also been President and Chief Operating Officer of Foundation Health Federal
Services, a subsidiary of Foundation Health Corporation, since 1990. He also
served as President and Chief Operating Officer of Foundation Health (a
California Health Plan) from 1988 to 1992.
The Company currently has authorized three directors. The Company intends to
expand the size of the Board to five directors, two of whom will be non-employee
directors, prior to the closing of the Offering. The size of the Board is
presently fixed at three, but upon expansion will be fixed at not less than
three nor more than nine members, to be divided into three approximately equal
classes serving staggered three-year terms or until their successors are duly
elected and qualified. As a result, approximately one-third of the total number
of directors will be elected each year.
The Board of Directors will also establish an Audit Committee and a
Compensation Committee prior to the closing of the Offering. The functions of
the Audit Committee will include recommending to the Board of Directors the
retention of independent auditors, reviewing the scope of the annual audit
undertaken by the Company's independent auditors and the progress and results of
their work, and reviewing the Company's financial statements, internal
accounting and auditing procedures and corporate program to ensure compliance
with applicable laws. The functions of the Compensation Committee will include
reviewing and approving executive compensation policies and practices, reviewing
salaries and bonuses for certain officers of the Company, administering the
Company's Stock Option Plan and other benefit plans, and considering such other
matters as may from time to time be referred to the committee by the Board of
Directors.
51
<PAGE>
Directors of the Company who are not also employees of the Company or one of
its subsidiaries will receive $1,000 for each Board meeting attended and $750
for each committee meeting attended. No other director will receive cash
compensation for services as a director. All directors will, however, be
reimbursed for their expenses incurred in attending meetings. In addition,
directors who are not common law employees or officers of the Company will
receive options to purchase 5,000 shares of the Company's Common Stock upon
their initial appointment as a director of the Company, and will receive options
to purchase 1,250 shares of Common Stock upon each annual stockholders' meetings
following the meeting at which such director was initially appointed (unless any
director was appointed prior to such a meeting, in which case such director's
annual grant will occur at the second annual meeting following the initial
appointment). Certain of the Company's directors have received distributions and
loans from the Company in their capacity as stockholders. See "Certain
Transactions."
Officers are elected at the first board of directors meeting following the
stockholders' meeting at which directors are elected and serve at the discretion
of the Board of Directors. There are no family relationships among any of the
directors or executive officers of the Company, except that David L. Suechting,
Jr., the Chairman of the Board, is the son of Barbara Suechting, who is a
director.
EXECUTIVE COMPENSATION
The following table summarizes all compensation earned by or paid to the
Company's Chairman of the Board and to each of the Company's four most highly
compensated executive officers other than the Chairman of the Board whose total
annual salary and bonus exceeded $100,000, for services rendered in all
capacities to the Company during the fiscal year ended December 28, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION(1)
- --------------------------------------------------------------- ---------- ---------- ------------- -----------------
<S> <C> <C> <C> <C>
David L. Suechting, Jr. ....................................... $ 36,750 $ 0 0 $ 3,137
Chairman of the Board
Gregory M. Kilgore ............................................ 153,951 158,000 350,618 5,977
President and Chief Operating Officer
John E. Wilkinson ............................................. 117,869 102,000 200,468 5,340
Executive Vice President-Marketing
Daniel J. Nahmens ............................................. 92,350 131,000 100,234 4,947
Vice President-Finance and Chief Financial Officer
David T. Morgan ............................................... 70,066 54,000 50,117 4,161
Vice President-Real Estate
</TABLE>
- ------------------------
(1) Represents Company-paid health and life insurance premiums and Company
contributions to the Company's 401(k) plan, as follows: Mr. Suechting,
$3,137 and $0; Mr. Kilgore, $2,638 and $3,339; Mr. Wilkinson, $2,638 and
$2,702; Mr. Nahmens, $2,638 and $2,309; and Mr. Morgan, $2,638 and $1,523.
The following tables set forth certain information as of December 28, 1996
and for the fiscal year then ended with respect to stock options granted to and
exercised by the individuals named in the Summary Compensation Table above.
52
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------ POTENTIAL REALIZED VALUE
NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------------
NAME GRANTED(#)(1)(2) FISCAL YEAR ($/SH) DATE(3) 5%($) 10%($)
- -------------------------- ----------------- --------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
David L. Suechting, Jr.... 0 0 $ -- -- $ -- $ --
Gregory M. Kilgore........ 100,234 11.8 4.00 7/1/06 252,590 638,491
250,384 29.4 0.01 7/1/06 1,630,000 2,593,978
John E. Wilkinson......... 100,234 11.8 4.00 7/1/06 252,590 638,491
100,234 11.8 0.01 7/1/06 652,523 1,038,424
Daniel J. Nahmens......... 100,234 11.8 4.00 7/1/06 252,590 638,491
David T. Morgan........... 50,117 5.9 4.00 7/1/06 126,295 319,245
</TABLE>
- ------------------------
(1) The options listed in the table were originally granted under the 1996 Stock
Option Plan of Track 'n Trail-California, and will, upon adoption by the
Company of such stock option plan, be substituted with options to purchase
Common Stock of the Company.
(2) The options listed in the table vest ratably on an annual basis over a
five-year period, on December 15 of each year, except that 148,238 and
29,587 options granted to Mr. Kilgore and Mr. Wilkinson, respectively,
vested immediately upon grant. Upon the closing of the Offering, all
outstanding options will vest in full. See "--Stock Option Plan."
(3) The options will expire earlier than the stated expiration date upon a sale
of the Company.
(4) The 5% and 10% assumed rates of appreciation are mandated by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price. There can be no
assurance that any of the values reflected in the table will be achieved.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT FISCAL YEAR-
FISCAL YEAR-END(#) END($)(2)
---------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE(3) EXERCISABLE UNEXERCISABLE(3)
- ---------------------------------------------------- ----------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
David L. Suechting, Jr.............................. 0 0 $ -- $ --
Gregory M. Kilgore.................................. 188,713 161,905 1,993,972 1,459,385
John E. Wilkinson................................... 63,762 136,706 620,761 1,182,449
Daniel J. Nahmens................................... 20,046 80,188 140,322 561,316
David T. Morgan..................................... 10,023 40,094 70,161 280,658
</TABLE>
- ------------------------
(1) No stock options were exercised in fiscal 1996.
(2) Based on an assumed initial public offering price of $11.00 per share of
Common Stock (the midpoint of the Offering range) minus the exercise price,
multiplied by the number of shares underlying the options.
(3) All stock options will vest in full upon the closing of the Offering.
STOCK OPTION PLAN
In April 1997, the Company approved the assumption of the 1996 Stock Option
Plan of Track 'n Trail-California (the "Stock Option Plan" or the "Plan")
effective upon the Reorganization, and amended and restated the Plan, effective
as of the date of the Offering. Upon the Reorganization, options to purchase
53
<PAGE>
shares of the Company's Common Stock were exchanged for all options to purchase
shares of the Common Stock of Track 'n Trail-California then outstanding under
the Plan.
The Stock Option Plan provides for awards in the form of options, including
incentive stock options ("ISOs") and nonstatutory stock options ("NSOs").
Employees, directors, consultants and advisors of the Company will be eligible
for the grant of NSOs, while only employees will be eligible for the grant of
ISOs. The Plan also provides for formula grants for non-employee directors of
the Company ("Outside Directors"). Each Outside Director will automatically
receive NSOs to purchase 5,000 shares of Common Stock upon initial appointment
as an Outside Director and, upon each annual stockholders' meeting following the
meeting at which such director was initially appointed, will receive NSOs to
purchase 1,250 shares of Common Stock (unless the Outside Director was appointed
prior to such a meeting, in which case the annual grant will occur at the second
annual meeting following the initial appointment). Outside Director options will
have a term of ten years and will vest at a rate of 25% on each anniversary of
the date of grant. Such options will become 100% vested upon a change of control
of the Company (defined as the acquisition without prior Board approval by a
person of 25% or more of the combined voting power of the Company's outstanding
voting securities). The number of shares available for issuance pursuant to
formula grants to Outside Directors will equal the number of shares with respect
to which NSOs are granted pursuant to the formula. In addition, Outside
Directors may, to the extent permitted by the Board of Directors, elect to
receive any director fees in NSOs.
Effective as of the Offering, a total of 1,055,735 shares of Common Stock
will be reserved for issuance pursuant to the exercise of stock options granted
under the Stock Option Plan.
The Stock Option Plan will be administered by the Compensation Committee,
which will consist of at least two directors who are "nonemployee directors," as
defined in Rule 16b-3 under the Securities Exchange Act of 1934. The Board of
Directors may amend the Stock Option Plan as desired without further action by
the Company's stockholders except as required by applicable law. The Plan will
continue in effect until terminated by the Board or, with respect to ISOs, for a
term of ten years from its original adoption date, whichever is earlier.
The consideration for each award under the Stock Option Plan will be
established by the Compensation Committee, but in no event will the option
exercise price for ISOs and Outside Director options be less than 100% of the
fair market value of the Common Stock on the date of grant. Awards for key
employees will have such terms and be exercisable in such manner and at such
time as the Compensation Committee may determine, and the Committee may permit
the deferred payment of awards. However, each ISO must expire no later than ten
years from the date of grant.
The Stock Option Plan provides that, in the event of a merger or
reorganization of the Company, outstanding options shall be subject to the
agreement of merger or reorganization.
As of June 28, 1997, the Company had outstanding options to purchase an
aggregate of 851,786 shares of Common Stock at a weighted average per share
exercise price of $2.36. Upon the closing of the Offering, a total of 224,076
shares of Common Stock will be available for future issuance under the Plan.
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan (the "Purchase Plan") of the Company was
adopted by the Board of Directors in April 1997, to become effective as of the
closing of the Offering. The Purchase Plan will cover 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 Code. The Purchase Plan will be
administered by a plan administrator appointed by the Board. Under the Purchase
Plan, the plan administrator may authorize participation by eligible employees,
including officers, in periodic offerings following the commencement of the
Purchase Plan. The initial offering under the Purchase Plan will commence on the
effective date of the Purchase Plan and terminate no more than 27 months after
the commencement of the Offering.
54
<PAGE>
Employees will be eligible to participate in the Purchase Plan if they have
been employed by the Company or a participating subsidiary for at least one year
prior to the commencement of a participation period. However, any highly
compensated employee (as defined in Section 414 of the Code) who owns 3% or more
of the outstanding stock in the Company may not participate in the Purchase
Plan. Employees who participate in an offering may have a percentage of their
earnings (as established by the plan administrator) withheld pursuant to the
Purchase Plan. The amount withheld will then be used to purchase shares of
Common Stock on specified dates determined by the Board. The price of Common
Stock purchased under the Purchase Plan will be equal to 85% of the lesser of
the fair market value of the Common Stock at the commencement date of each
offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period except as
provided by the plan administrator under the terms of the offering, and
participation will end automatically on termination of employment with the
Company.
In the event of a merger, reorganization, consolidation or liquidation
involving the Company, unless otherwise provided, the Purchase Plan will
terminate and all participants' accumulated payroll deductions will be refunded
without interest. The Board will have the authority to amend or terminate the
Purchase Plan, provided, however, that no such action may adversely affect any
outstanding rights to purchase Common Stock.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (collectively, the
"Employment Agreements") with Gregory Kilgore, President and Chief Operating
Officer; John Wilkinson, Executive Vice President-Marketing; Daniel Nahmens,
Vice President-Finance and Chief Financial Officer; and David Morgan, Vice
President-Real Estate. Each of the Employment Agreements provides for an initial
two-year term expiring on January 3, 1996, with automatic one-year renewals upon
the expiration of the initial term and on each anniversary thereafter. Each of
the Employment Agreements may be terminated by the Company or the employee
without cause (as defined in the Employment Agreements) upon 30 days' notice, or
for cause without any notice. Under the Employment Agreements, Messrs. Kilgore,
Wilkinson, Nahmens and Morgan are entitled to minimum compensation of $130,000,
$105,000, $75,000 and $60,000, respectively. Each of the Employment Agreements
provides that if the Company breaches any portion of such Employment Agreement
or terminates it without cause, the Company must pay to the employee an amount
equal to one year of his salary, calculated at the highest salary rate paid to
such employee by the Company in the two-year period prior to the termination.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Certificate of Incorporation that
limit the liability of its directors for monetary damages for breach of their
fiduciary duty as directors, except for liability that cannot be eliminated
under the Delaware General Corporation Law ("Delaware Law"). The Delaware Law
provides that directors of a company will not be personally liable for monetary
damages for breach of their fiduciary duty as directors, except for liability
(i) for any breach of their duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payment of dividend
or unlawful stock repurchase or redemption, as provided in Section 174 of the
Delaware Law, or (iv) for any transaction from which the director derived an
improper personal benefit. Any amendment or repeal of these provisions requires
the approval of the holders of shares representing at least 66 2/3% of the
shares of the Company entitled to vote in the election of directors, voting as
one class.
The Company's By-Laws also provide that the Company shall indemnify its
directors and officers to the fullest extent permitted by the Delaware Law. The
Company intends to enter into separate indemnification agreements with its
directors and certain of its officers that could require the Company, among
other things, to indemnify them against certain liabilities that may arise by
reason of their status or service
55
<PAGE>
as directors or officers and to advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified. The Company
believes that the limitation of liability provision in its Certificate of
Incorporation and the indemnification agreements will facilitate the Company's
ability to continue to attract and retain qualified individuals to serve as
directors and officers of the Company.
The Employment Agreements with each of Gregory Kilgore, John Wilkinson,
Daniel Nahmens and David Morgan also provide that the Company will indemnify
such individuals for any losses, costs, damages or expenses incurred as a direct
consequence of the discharge of their duties or by reason of their status as
agents of the Company.
Pursuant to a registration rights agreement with the Existing Stockholders,
the Company has agreed to indemnify the Existing Stockholders against losses,
liabilities and expenses arising out of certain misstatements or omissions
herein or in any subsequent registration effected pursuant to such agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors will consist of two
directors, neither of whom will be an officer or employee of the Company. All
matters concerning executive compensation in fiscal 1996 were addressed by the
full Board of Directors of Track 'n Trail-California, including Messrs.
Suechting and Kilgore, who were executive officers in fiscal 1996.
56
<PAGE>
CERTAIN TRANSACTIONS
As a result of Track 'n Trail-California's status as an S corporation, Track
'n Trail-California has historically paid distributions to its stockholders to
enable them to pay their income tax liabilities and, from time to time, to
distribute previously undistributed S corporation earnings. During fiscal 1994,
fiscal 1995 and fiscal 1996, Track 'n Trail-California made S corporation
distributions to the Existing Stockholders of $1.7 million, $376,000 and $3.1
million, respectively. In addition, through June 28, 1997 the Company had made
distributions of $2.2 million to stockholders in fiscal 1997, and made
additional distributions of approximately $215,000 between June 28, 1997 and the
Reorganization. Prior to the Reorganization, Track 'n Trail-California declared
the $6.4 million Distribution to the Existing Stockholders, which is designed to
constitute substantially all of the accumulated undistributed S corporation
earnings through the Termination Date, pursuant to the Distribution and Tax
Agreement. The Distribution will be paid out of a portion of the Company's
proceeds of the Offering. See "S Corporation Distributions."
The Company has from time to time extended loans to its stockholders and
their family members. See Note 6 of Notes to Consolidated Financial Statements.
All of the foregoing loans were repaid in March 1996, through a distribution to
the obligors of the remaining $1.7 million in notes.
In fiscal 1994 and 1995, the Company paid $514,000 and $653,000,
respectively, in legal expenses in defending lawsuits filed by the Company's
former Chairman of the Board against the Company and certain executive officers
and directors, pursuant to an indemnification arrangement with such officers and
directors.
In July 1996, the Company granted options to purchase an aggregate of
350,618 shares of Common Stock to two of its executive officers, in
consideration, in part, of such officers' cancellation of stock appreciation
rights granted in 1994. See "Management--Executive Compensation."
In October 1996, the Existing Stockholders acquired 21.0% of the outstanding
common stock of Overland in return for $663,000 of Seller Notes, which the
Company guaranteed. Effective January 1, 1997, the Existing Stockholders
assigned their Overland stock to the Company, in consideration of the Company's
assumption of their Seller Notes exclusive of accrued interest.
The Existing Stockholders have also guaranteed the Company's obligations
under the Revolving Loan Agreement and approximately $1.1 million in other
secured debt as of June 28, 1997, substantially all of which will be repaid from
the proceeds of the Offering, and several equipment leases currently providing
for aggregate annual rental payments of $141,000, which will remain outstanding
after the Offering.
In connection with the formation of the Company, the Company issued an
aggregate of 40,816 shares of its Common Stock to the Existing Stockholders. In
connection with the Reorganization, Track 'n Trail-California stockholders
entered into a Stock Exchange Agreement to exchange 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 Company Common Stock issued upon
formation. The exchange of Track 'n Trail-California stock for Company Common
Stock was accomplished in October 1997, in an exchange of one share of Track 'n
Trail-California common stock for approximately 100 shares of the Company's
Common Stock.
The Company believes that the foregoing transactions were in its best
interests.
For information concerning indemnification of directors and officers, see
"Management--Limitation of Liability and Indemnification Matters."
57
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 27, 1997, and as
adjusted to reflect the sale by the Company of the shares offered hereby
(assuming no exercise of the Underwriters' over-allotment option), by: (i) each
person who is known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each of the Company's directors and prospective
directors, (iii) each of the Company's officers named under "Management--Summary
Compensation Table," and (iv) all directors, prospective directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(2) OFFERING(2)(3)
--------------------- ---------------------
NAME AND ADDRESS(1) NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Barbara Suechting.................................................... 1,811,470 44.1% 1,811,470 26.5%
David L. Suechting, Jr.(4)........................................... 1,390,403 33.8 1,390,403 20.3
Deborah Suechting.................................................... 905,735 22.1 905,735 13.3
Gregory M. Kilgore(5)................................................ 350,618 7.9 350,618 4.9
John E. Wilkinson(5)................................................. 200,468 4.7 200,468 2.9
Daniel J. Nahmens(5)................................................. 100,234 2.4 100,234 1.4
David T. Morgan(5)................................................... 50,117 1.2 50,117 *
Helen C. Bulwik...................................................... 0 -- 0 --
Steven D. Tough...................................................... 0 -- 0 --
All directors, prospective directors and executive officers as a
group (9 persons)(6)............................................... 3,953,427 81.4% 3,953,427 52.1%
</TABLE>
- ------------------------
* Less than 1%.
(1) The address for each listed stockholder is c/o Track 'n Trail, 4961-A
Windplay Drive, El Dorado Hills, CA 95672. To the Company's knowledge, the
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and the information
contained in the footnotes to this table.
(2) The percentage of beneficial ownership is calculated assuming 4,107,608
shares of Common Stock were outstanding on September 27, 1997 and 6,834,880
shares outstanding immediately following the completion of the Offering.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares subject to options
presently exercisable or exercisable within 60 days of September 27, 1997
are deemed to be beneficially owned by the holder but are not treated as
outstanding for the purpose of computing the beneficial ownership of any
other person.
(3) If the Underwriters exercise their Over-allotment Option in full, the
Selling Stockholders will sell the following shares of Common Stock and will
beneficially own the following percentages of the Common Stock after the
Offering: Barbara J. Suechting will sell 180,410 shares and will
beneficially own 23.9%; David L. Suechting, Jr. will sell 138,475 shares and
will beneficially own 18.3%; and Deborah Suechting, who is not a director or
executive officer, will sell 90,205 shares and will beneficially own 11.9%.
In such event, all directors and executive officers as a group will sell
318,885 shares of Common Stock and will beneficially own 47.9% of the Common
Stock after the Offering.
(4) Represents 1,390,403 shares held by the Suechting Family Trust for which Mr.
Suechting and his wife, Jackie Suechting, serve as co-trustees and hold
joint voting and investment power.
(5) Represents shares subject to stock options exercisable on September 27, 1997
or within 60 days thereafter.
(6) Includes 751,554 shares subject to stock options exercisable on September
27, 1997 or within 60 days thereafter.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $.01 par value, and 2,000,000 shares of Preferred Stock, $.01 par
value.
COMMON STOCK
As of September 27, 1997, there were 4,107,608 shares of Common Stock
outstanding held by three stockholders of record.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, including the
election of directors, and do not have cumulative voting rights. Accordingly,
the holders of a majority of the shares of Common Stock entitled to vote in any
election of directors can elect all of the directors standing for election, if
they so choose. Subject to preferences that may be applicable to any then
outstanding Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor. See "Dividend Policy." Upon a liquidation,
dissolution or winding up of the Company, the holders of Common Stock will be
entitled to share ratably in the net assets legally available for distribution
to stockholders after the payment of all debts and other liabilities of the
Company, subject to the prior rights of any Preferred Stock then outstanding.
Holders of Common Stock have no preemptive or conversion rights or other
subscription rights and there are no redemption or sinking funds provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
the Common Stock to be outstanding upon completion of the Offering will be,
fully paid and nonassessable.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 2,000,000 shares of
undesignated Preferred Stock, none of which is currently outstanding. The Board
of Directors has the authority, without further action by the stockholders, to
issue from time to time the Preferred Stock in one or more series and to fix the
number of shares, designations, preferences, powers, and relative,
participating, optional or other special rights and the qualifications or
restrictions thereof. The preferences, powers, rights and restrictions of
different series of Preferred Stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions and other matters. The issuance of Preferred
Stock could reduce the amount of earnings and assets available for distribution
to holders of Common Stock or affect adversely the rights and powers, including
voting rights, of the holders of Common Stock, and may have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue any shares of Preferred Stock.
WARRANTS
The former stockholders of Overland currently hold warrants to purchase an
aggregate of 49,392 shares of Common Stock at an exercise price equal to the
initial public offering price. These warrants expire on October 25, 2001.
In consideration for financial advisory services provided to the Company in
the Overland acquisition, Ladenburg Thalmann & Co. Inc., a representative of the
Underwriters, received a warrant to purchase 74,089 shares of Common Stock at an
exercise price equal to 120% of the initial public offering price, subject to
customary antidilution adjustments. This warrant will become exercisable one
year after the closing of the Offering and expires on the fifth anniversary of
the closing of the Offering.
REGISTRATION RIGHTS
After the Offering, the holders of warrants to purchase 123,481 shares of
Common Stock, or their permitted transferees, are, upon exercise of such
warrants, entitled to certain rights with respect to the
59
<PAGE>
registration of such shares under the Securities Act. If the Company proposes to
register any of its securities under the Securities Act either for its own
account or the account of any holders of securities exercising registration
rights, holders of shares registrable pursuant to registration rights are
entitled to notice of such registration and are entitled to include such
registrable shares therein, provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of shares
included in such registration. However, such registration rights are not
triggered by a registration relating solely to an employee benefit plan or a
transaction pursuant to Rule 145 under the Securities Act, or a registration on
any registration form that does not permit secondary sales.
The Company and the Existing Stockholders have entered into a Registration
Rights Agreement (the "Registration Rights Agreement"). Pursuant to the
Registration Rights Agreement, the Existing Stockholders will have the right to
require the Company to use its best efforts to register under the Securities Act
all or a portion of the issued and outstanding Common Stock owned by the
Existing Stockholders. Such demand rights would be subject to the condition that
the Company would not be required to effect more than three demand
registrations. The Existing Stockholders will also have the right to participate
in equity offerings initiated by the Company, subject to a reduction in the size
of the offering on the advice of the managing underwriter. The Company will pay
all expenses relating to the performance of, or compliance with, demand or
"piggy-back" registrations under the Registration Rights Agreement. In either
case, however, the Existing Stockholders will be responsible for underwriters'
discounts and selling commissions with respect to the shares being sold pursuant
to the agreement, and the fees and expenses of their counsel in connection with
such registration. The Existing Stockholders' rights under the Registration
Rights Agreement will be assignable to certain transferees of shares of Common
Stock who agree to be bound by the Registration Rights Agreement.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
After the consummation of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, this statute prohibits a publicly held Delaware
corporation from engaging in a business combination with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes a merger, asset sale or other transaction resulting in financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's voting stock.
After the consummation of the Offering, the Company's Certificate of
Incorporation will require that all stockholder action be taken at a
stockholders' meeting, and will permit special stockholders' meetings to be
called only by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors. The Bylaws also provide
that directors may only be removed for cause, and require advance notification
to the Company in order for a stockholder to nominate a director for election or
to propose other business at a stockholders' meeting. In addition, the foregoing
provisions of the Certificate of Incorporation may only be amended or repealed
by the holders of at least two-thirds of the voting power of the
then-outstanding shares of stock entitled to vote generally for the election of
directors voting together as a single class, and the foregoing Bylaw provisions
may only be repealed or amended by a two-thirds vote of the Board of Directors
or an 80% stockholder vote. The provisions described above, together with the
ability of the Board of Directors to issue Preferred Stock as described under
"--Preferred Stock," may have the effect of deterring a hostile takeover or
delaying a change in control or management of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Securities
Transfer & Trust, Inc.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock
of the Company, and no predictions can be made regarding the effect, if any,
that market sales of shares or the availability of shares for sale will have on
the market price prevailing from time to time. As described below, only a
limited number of shares will be available for sale shortly after the Offering
due to certain contractual and legal restrictions on resale. Nevertheless, sales
of substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price.
Upon completion of the Offering, the Company will have outstanding 6,834,880
shares of Common Stock. The 2,727,272 shares of Common Stock being sold hereby
will be freely tradable (other than by an "affiliate" of the Company as such
term is defined in the Securities Act) without restriction or registration under
the Securities Act. All remaining shares were issued and sold by the Company in
private transactions ("Restricted Shares") and are eligible for public sale if
registered under the Securities Act or sold in accordance with Rule 144 or Rule
701 thereunder (as described below).
The Existing Stockholders, who collectively hold an aggregate of 4,107,608
shares of Common Stock, have agreed pursuant to certain agreements that they
will not sell any Common Stock owned by them without the prior written consent
of the Representatives of the Underwriters (the "Representatives") for a period
of 180 days from the date of this Prospectus (the "Lockup Period"). Following
the expiration of the Lockup Period, all such shares will be available for
resale, subject to compliance with Rule 144. Certain of the Company's executive
officers and other employees, who hold stock options to purchase 831,659 shares
of Common Stock, have agreed that, should they exercise such options, they will
not sell any Common Stock owned by them during the Lockup Period without the
prior written consent of the Representatives. Following the expiration of the
Lockup Period, such 831,659 shares of Common Stock issuable upon the exercise of
options will be available for sale in the public market subject to compliance
with Rule 144 and Rule 701. See "Underwriting." In addition, 49,392 shares of
Common Stock issuable upon the exercise of warrants, and 74,089 shares of Common
Stock issuable pursuant to warrants that become exercisable one year after the
closing of the Offering, will be available for sale in the public market one
year from the date of exercise of such warrants (or earlier if certain cashless
exercise provisions are utilized), subject to Rule 144 and the 180-day lockup
restrictions described above.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an affiliate of the Company, or a holder of
Restricted Shares who owns beneficially shares that were not acquired from the
Company or an affiliate of the Company within the previous two years, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 68,348 shares immediately after the Offering) or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission (the "Commission"). Sales under Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. However, a person (or persons
whose shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
owns beneficially Restricted Shares is entitled to sell such shares under Rule
144(k) without regard to the limitations described above; provided that at least
two years have elapsed since the later of the date the shares were acquired from
the Company or from an affiliate of the Company. The foregoing is a summary of
Rule 144 and is not intended to be a complete description of it.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers prior to the closing of the
Offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Commission has
indicated that Rule 701 will apply to stock options granted by the
61
<PAGE>
Company before the Offering, along with the shares acquired upon exercise of
such options. Securities issued in reliance on Rule 701 are deemed to be
Restricted Shares and, beginning 90 days after the date of this Prospectus
(unless subject to the contractual restrictions described above), may be sold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144 and by affiliates under Rule 144 without compliance with its minimum
holding period requirements.
The Company intends to file one or more registration statements under the
Securities Act to register up to 1,055,735 shares of Common Stock that will be
reserved for issuance pursuant to the Stock Option Plan and 150,000 shares of
Common Stock reserved for issuance pursuant to the Purchase Plan. Each such
registration statement will become effective immediately upon filing.
Accordingly, the resale in the public market of such registered shares by
non-affiliates will be permitted without restriction under the Securities Act,
unless such shares are subject to vesting restrictions imposed by the Company or
the contractual restrictions described above.
In addition, after the Offering, the holders of warrants to purchase
approximately 123,481 shares of Common Stock will be entitled to certain rights
with respect to the registration of such shares under the Securities Act.
Registration of such shares under the Securities Act would result in such shares
becoming freely tradable without restriction under the Securities Act (except
for shares purchased by affiliates of the Company) immediately upon the
effectiveness of such registration. Pursuant to an agreement with the Company,
the Existing Stockholders will also be entitled to certain rights with respect
to the registration of shares under the Securities Act. Upon registration under
the Securities Act, such shares would become available for resale, subject to
compliance with Rule 144. See "Description of Capital Stock--Registration
Rights."
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom BT Alex. Brown Incorporated, A.G. Edwards & Sons, Inc. and Ladenburg
Thalmann & Co. Inc. are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company, the aggregate number of shares of
Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
BT Alex. Brown Incorporated.......................................................................... 669,092
A.G. Edwards & Sons, Inc............................................................................. 669,090
Ladenburg Thalmann & Co. Inc......................................................................... 669,090
NationsBanc Montgomery Securities, Inc............................................................... 60,000
Morgan Stanley & Co. Incorporated.................................................................... 60,000
PaineWebber Incorporated............................................................................. 60,000
BancAmerica Robertson Stephens....................................................................... 60,000
SBC Warburg Dillon Read Inc.......................................................................... 60,000
Smith Barney Inc..................................................................................... 60,000
J.C. Bradford & Co................................................................................... 40,000
Equitable Securities Corporation..................................................................... 40,000
Everen Securities, Inc............................................................................... 40,000
Genesis Merchant Group Securities.................................................................... 40,000
Gerard Klauer Mattison & Co., Inc.................................................................... 40,000
Rodman & Renshaw, Inc................................................................................ 40,000
Tucker Anthony Incorporated.......................................................................... 40,000
Van Kasper & Company................................................................................. 40,000
Wedbush Morgan Securities Inc........................................................................ 40,000
----------
Total.............................................................................................. 2,727,272
----------
----------
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the shares of Common
Stock offered by this Prospectus (other than those subject to the Over-allotment
Option described below) if any such shares are purchased. In the event of a
default by the Underwriters, the Underwriting Agreement provides that, in
certain circumstances, the purchase commitments of non-defaulting Underwriters
may be increased or the Underwriting Agreement may be terminated.
The Selling Stockholders have granted to the Underwriters an option,
exercisable by the Representatives during the 30-day period after the date of
this Prospectus, to purchase up to an aggregate of 409,090 shares of Common
Stock at the same price per share as the initial shares of Common Stock to be
purchased by the Underwriters. The Representatives may exercise such option only
to cover over-allotments in the sale of shares of Common Stock. To the extent
that the Representatives exercise such option, the Underwriters will have a firm
commitment, subject to certain conditions, to purchase the same proportion of
such additional shares of Common Stock as the number of shares of Common Stock
to be purchased and offered by such Underwriters in the above table bears to the
total number of shares in the above table.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the shares of Common Stock to the public at the
offering price set forth on the cover page of this Prospectus, and through the
Representatives to certain dealers at such price less a concession not in excess
of $0.42 per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess
63
<PAGE>
of $0.10 per share to certain other dealers. After the Offering, the public
offering price and other selling terms may be changed.
The Company and its officers, directors and present stockholders and
optionholders have agreed that they will not offer, sell, contract to sell, or
otherwise dispose of, directly or indirectly, any shares of Common Stock, or any
interests therein, or any securities convertible into, or exchangeable for,
shares of Common Stock, or rights to acquire the same, for a period of 180 days
from the date of this Prospectus without the prior written consent of the
Representatives, except pursuant to the Underwriting Agreement. Such consent may
be given without any public notice.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price of the Common Stock was
determined after negotiation among the Company, the Selling Stockholders and the
Representatives. Among the factors considered in such negotiations were
prevailing market conditions, the results of operations of the Company in recent
periods, the market capitalization and stages of development of other companies
which the Company and the Representatives believed to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant.
In connection with the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the Common Stock. Specifically, the Representatives may bid for and
purchase Common Stock in the open market to stabilize the price of the Common
Stock. The Underwriters may also over-allot the Offering, creating a syndicate
short position, and may bid for and purchase Common Stock in the open market to
cover the syndicate short position. The Representatives may also impose a
penalty bid pursuant to which the Representatives may reclaim from any
Underwriter or dealer participating in the Offering the selling concession on
shares sold by them and purchased by the Representatives in stabilizing or short
covering transactions. In addition, the Underwriters may bid for and purchase
the Common Stock in market making transactions. These activities may stabilize
or maintain the market price of the Common Stock above market levels that may
otherwise prevail. The Underwriters are not required to engage in these
activities, and may end these activities at any time.
The Underwriters have reserved for sale, at the initial public offering
price, up to 5% of the Common Stock offered hereby for employees and directors
of the Company and certain other individuals who have expressed an interest in
purchasing such shares of Common Stock in the Offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the Underwriters to the general public on the same basis as other
shares offered hereby.
The Company has issued to Ladenburg Thalmann & Co. Inc. warrants (the
"Warrants") to purchase 74,089 shares of Common Stock. The Warrants were issued
in consideration for financial advisory services provided to the Company in
connection with the Overland acquisition. The Warrants are exercisable for a
period of four years commencing one year after the closing of the Offering, at a
price equal to 120% of the initial public offering price, subject to customary
antidilution adjustments. The Warrants contain certain registration rights
relating to the shares issuable thereunder. For the life of the Warrants,
Ladenburg Thalmann & Co. Inc. will have the opportunity to profit from a rise in
the market price for the Common Stock. See "Description of Capital
Stock--Warrants."
The Underwriters have informed the Company that they do not intend to
confirm sales of Common Stock offered hereby for accounts over which they
exercise discretionary authority.
64
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Pillsbury Madison & Sutro
LLP, San Francisco, California, and for the Underwriters by Fulbright & Jaworski
L.L.P., New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 30, 1995
and December 28, 1996 and for the years then ended included in this Prospectus
have been audited by Coopers & Lybrand L.L.P., independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report of Coopers & Lybrand L.L.P. given upon the authority
of that firm as experts in accounting and auditing. The financial statements of
the Company for the year ended December 31, 1994 included in this Prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as set forth
in their report thereon appearing elsewhere herein, and are included in reliance
upon such report of Deloitte & Touche LLP given upon the authority of that firm
as experts in accounting and auditing.
The financial statements of Overland Management Corporation as of August 3,
1996 and for the year then ended included in this Prospectus have been audited
by KPMG Peat Marwick LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report of KPMG Peat Marwick LLP given upon the authority of that firm as experts
in accounting and auditing. The financial statements of Overland Management
Corporation as of July 29, 1995 and for each of the years in the two-year period
then ended included in this Prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of Deloitte & Touche LLP given upon the
authority of that firm as experts in accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective January 15, 1996, Coopers & Lybrand L.L.P. was engaged as the
Company's principal independent auditors, replacing Deloitte & Touche LLP
("Deloitte"). The decision to change independent accountants was approved by the
Company's Board of Directors. In the period from December 26, 1993 through
January 15, 1996, Deloitte issued no audit report which was qualified or
modified as to uncertainty, audit scope or accounting principles, or which
contained adverse opinions or disclaimers of opinion on any of the Company's
financial statements, and there were no disagreements with Deloitte on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures. Prior to January 15, 1996, the Company had not
consulted with Coopers & Lybrand L.L.P. on items which involved the Company's
accounting principles, the application of accounting principles to a specified
transaction, or the form of audit opinion to be rendered on the Company's
financial statements.
65
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is hereby made to such Registration
Statement, exhibits and schedules. Statements contained in this Prospectus
regarding the contents of any contract or other document are not necessarily
complete; with respect to each such contract or document filed as an exhibit to
the Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. A copy of the Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of such material may be obtained from
such office upon payment of the fees prescribed by the Commission. Such
documents may also be accessed electronically at the Commission's home page on
the Internet at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent certified public
accountants and quarterly reports containing unaudited financial information for
the first three quarters of each fiscal year.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TRACK 'N TRAIL
Reports of Independent Auditors............................................................................ F-2
Consolidated Balance Sheets as of December 30, 1995, December 28, 1996, June 28, 1997 (unaudited) and Pro
Forma June 28, 1997 (unaudited).......................................................................... F-4
Consolidated Statements of Operations for the fiscal years ended December 31, 1994, December 30, 1995,
December 28, 1996 and for the 26 weeks ended June 29, 1996 and June 28, 1997 (unaudited)................. F-5
Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended December 31, 1994,
December 30, 1995 and December 28, 1996 and for the 26 weeks ended June 28, 1997 (unaudited)............. F-6
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 1994, December 30, 1995,
December 28, 1996 and for the 26 weeks ended June 29, 1996 and June 28, 1997 (unaudited)................. F-7
Notes to Consolidated Financial Statements................................................................. F-8
OVERLAND MANAGEMENT CORPORATION
Reports of Independent Auditors............................................................................ F-27
Balance Sheets as of July 29, 1995, August 3, 1996 and October 25, 1996 (unaudited)........................ F-29
Statements of Operations for the fiscal years ended July 30, 1994, July 29, 1995 and August 3, 1996 and for
the 12 week periods ended October 21, 1995 and October 25, 1996 (unaudited).............................. F-30
Statements of Changes in Stockholders' Equity for the fiscal years ended July 30, 1994, July 29, 1995 and
August 3, 1996 and for the 12 week periods ended October 21, 1995 and October 25, 1996 (unaudited)....... F-31
Statements of Cash Flows for the fiscal years ended July 30, 1994, July 29, 1995 and August 3, 1996 and for
the 12 week periods ended October 21, 1995 and October 25, 1996 (unaudited).............................. F-32
Notes to Financial Statements.............................................................................. F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Track 'n Trail
El Dorado Hills, California
We have audited the accompanying consolidated balance sheets of Track 'n
Trail and subsidiaries as of December 30, 1995 and December 28, 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the fifty-two week periods then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Track 'n Trail
and subsidiaries as of December 30, 1995 and December 28, 1996, and the
consolidated results of their operations and their cash flows for each of the
fifty-two week periods then ended in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Sacramento, California
March 12, 1997 except for Note 1 and Note 14,
as to which the date is October 9, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Track 'n Trail
El Dorado Hills, California
We have audited the accompanying statements of operations, changes in
stockholders' equity, and cash flows of Track 'n Trail ("the Company") for the
fifty-three week period ended December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1994 financial statements present fairly, in all material
respects, the results of Track 'n Trail's operations and its cash flows for the
fifty-three week period ended December 31, 1994 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Sacramento, California
March 13, 1995
F-3
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 30, DECEMBER 28, JUNE 28, JUNE 28,
1995 1996 1997 1997
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................................... $ 489,458 $ 976,571 $ 749,053 $ 749,053
Accounts receivable..................................................... 401,960 1,010,151 808,207 808,207
Inventories............................................................. 11,949,237 19,867,764 24,801,065 24,801,065
Prepaid expenses........................................................ 126,347 212,461 190,811 190,811
Prepaid income taxes.................................................... -- -- 390,957 390,957
Deferred income taxes................................................... 44,000 49,225 91,177 91,177
------------ ------------ ----------- -----------
Total current assets................................................ 13,011,002 22,116,172 27,031,270 27,031,270
Fixed assets, net......................................................... 4,039,491 6,582,102 6,717,501 6,717,501
Goodwill, net............................................................. -- 2,690,832 3,166,239 3,166,239
Deferred income taxes..................................................... -- 468,890 540,771 540,771
Deferred offering costs................................................... -- -- 847,431 847,431
------------ ------------ ----------- -----------
$ 17,050,493 $ 31,857,996 $38,303,212 $38,303,212
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit................................................ $ 450,000 $ 680,000 $ 8,740,000 $ 8,955,000
Current maturities of long-term debt.................................... 701,251 3,060,480 2,741,888 2,741,888
Accounts payable........................................................ 3,730,391 5,835,186 8,024,543 8,024,543
Accrued payroll and bonuses............................................. 377,056 1,032,221 541,561 541,561
Sales tax payable....................................................... 540,296 751,788 408,499 408,499
Income taxes payable.................................................... -- 476,115 -- --
Accrued expenses and other liabilities.................................. 501,866 850,753 705,027 705,027
Distributions payable................................................... -- -- -- 6,400,000
------------ ------------ ----------- -----------
Total current liabilities........................................... 6,300,860 12,686,543 21,161,518 27,776,518
Deferred rent............................................................. 934,564 1,395,046 1,416,652 1,416,652
Stock appreciation rights................................................. 584,263 -- -- --
Long-term debt, net of current maturities................................. 1,582,799 7,025,017 7,510,658 7,510,658
------------ ------------ ----------- -----------
Total liabilities................................................... 9,402,486 21,106,606 30,088,828 36,703,828
------------ ------------ ----------- -----------
Minority interest in consolidated subsidiary.............................. -- 105,151 -- --
------------ ------------ ----------- -----------
Commitments and contingencies (Notes 5, 7, 8 and 15).
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......................................... 41,076 41,076 41,076 41,076
Additional paid-in capital.............................................. 23,924 723,738 732,154 732,154
Retained earnings....................................................... 8,651,792 9,881,425 7,441,154 826,154
Less notes receivable from related parties.............................. (1,068,785) -- -- --
------------ ------------ ----------- -----------
Total stockholders' equity.......................................... 7,648,007 10,646,239 8,214,384 1,599,384
------------ ------------ ----------- -----------
$ 17,050,493 $ 31,857,996 $38,303,212 $38,303,212
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FOR THE PERIOD ENDED
------------------------------------------ ------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 29, JUNE 28,
1994 1995 1996 1996 1997
(53 WEEKS) (52 WEEKS) (52 WEEKS) (26 WEEKS) (26 WEEKS)
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................................................. $ 48,164,675 $ 50,691,164 $ 66,232,884 $23,285,590 $37,527,863
Cost of sales.............................................. 25,079,211 26,191,741 34,062,252 12,020,022 19,413,199
------------ ------------ ------------ ----------- -----------
Gross profit......................................... 23,085,464 24,499,423 32,170,632 11,265,568 18,114,664
------------ ------------ ------------ ----------- -----------
Operating expenses:
Selling and marketing.................................... 14,975,365 16,852,124 21,059,485 8,791,499 14,527,464
Administrative and distribution.......................... 4,934,682 4,826,290 5,508,333 2,315,673 3,444,313
------------ ------------ ------------ ----------- -----------
Total operating expenses............................. 19,910,047 21,678,414 26,567,818 11,107,172 17,971,777
------------ ------------ ------------ ----------- -----------
Operating income (loss).............................. 3,175,417 2,821,009 5,602,814 158,396 142,887
Other (income) expense:
Interest................................................. 324,067 434,530 670,118 239,941 730,438
Other, net............................................... 37,633 (40,428) (24,467) (10,661) 20,848
------------ ------------ ------------ ----------- -----------
Income (loss) before income taxes and minority
interest........................................... 2,813,717 2,426,907 4,957,163 (70,884) (608,399)
Income tax provision (benefit)............................. 67,000 40,838 487,990 (1,772) (372,503)
------------ ------------ ------------ ----------- -----------
Income (loss) before minority interests.............. 2,746,717 2,386,069 4,469,173 (69,112) (235,896)
Minority interest in net income of consolidated
subsidiaries............................................. -- -- 105,151 -- --
------------ ------------ ------------ ----------- -----------
Net income (loss).................................... $ 2,746,717 $ 2,386,069 $ 4,364,022 $ (69,112) $ (235,896)
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Pro Forma Income Data (unaudited):
Historical income (loss) before income taxes and minority
interest............................................... $ 2,813,717 $ 2,426,907 $ 4,957,163 $ (70,884) $ (608,399)
Pro forma income tax provision (benefit) (Note 9)........ 1,125,487 970,763 1,982,865 (28,354) (243,360)
------------ ------------ ------------ ----------- -----------
Pro forma income (loss) before minority interest......... 1,688,230 1,456,144 2,974,298 (42,530) (365,039)
Minority interest........................................ -- -- 105,151 -- --
------------ ------------ ------------ ----------- -----------
Pro forma net income (loss).............................. $ 1,688,230 $ 1,456,144 $ 2,869,147 $ (42,530) $ (365,039)
------------ ------------ ------------ ----------- -----------
------------ ------------ ------------ ----------- -----------
Pro forma net income (loss) per common and common
equivalent share....................................... $ 0.51 $ (0.07)
------------ -----------
------------ -----------
Pro forma weighted average number of shares of common
stock and common stock equivalents..................... 5,588,537 5,348,426
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- PAID-IN FROM RELATED RETAINED
NUMBER AMOUNT CAPITAL PARTIES EARNINGS TOTAL
---------- --------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 26, 1993.................... 4,107,608 $ 41,076 $ 23,924 $ (29,437) $ 5,585,259 $ 5,620,822
Cash advances to stockholders and related
party..................................... -- -- -- (328,749) -- (328,749)
Distributions to stockholders............... -- -- -- -- (1,689,854) (1,689,854)
Net income.................................. -- -- -- -- 2,746,717 2,746,717
---------- --------- ----------- ------------ ------------ ------------
Balance, December 31, 1994.................... 4,107,608 41,076 23,924 (358,186) 6,642,122 6,348,936
Cash advances to stockholders and related
party..................................... -- -- -- (710,599) -- (710,599)
Distributions to stockholders............... -- -- -- -- (376,399) (376,399)
Net income.................................. -- -- -- -- 2,386,069 2,386,069
---------- --------- ----------- ------------ ------------ ------------
Balance, December 30, 1995.................... 4,107,608 41,076 23,924 (1,068,785) 8,651,792 7,648,007
Cash advances to stockholders............... -- -- -- (591,215) -- (591,215)
Distribution of notes to stockholders....... -- -- -- 1,660,000 (1,660,000) --
Distributions to stockholders............... -- -- -- -- (1,474,389) (1,474,389)
Exchange of stock appreciation rights for
stock option grants....................... -- -- 596,424 -- -- 596,424
Compensation recorded under stock option
plans..................................... -- -- 103,390 -- -- 103,390
Net income.................................. -- -- -- -- 4,364,022 4,364,022
---------- --------- ----------- ------------ ------------ ------------
Balance, December 28, 1996.................... 4,107,608 41,076 723,738 -- 9,881,425 10,646,239
Distributions to stockholders (unaudited)... -- -- -- -- (2,204,375) (2,204,375)
Compensation recorded under stock option
plans (unaudited)......................... -- -- 8,416 -- -- 8,416
Net loss (unaudited)........................ -- -- -- (235,896) (235,896)
---------- --------- ----------- ------------ ------------ ------------
Balance, June 28, 1997 (unaudited) 4,107,608 $ 41,076 $ 732,154 $ -- $ 7,441,154 $ 8,214,384
---------- --------- ----------- ------------ ------------ ------------
---------- --------- ----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FOR THE PERIOD ENDED
---------------------------------------- --------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, JUNE 29, JUNE 28,
1994 1995 1996 1996 1997
(53 WEEKS) (52 WEEKS) (52 WEEKS) (26 WEEKS) (26 WEEKS)
------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 2,746,717 $ 2,386,069 $ 4,364,022 $ (69,112) $ (235,896)
Adjustments to reconcile to cash provided by operating
activities:
Depreciation and amortization........................... 763,398 915,956 1,120,867 494,387 842,779
Minority interest....................................... -- -- 105,151 -- --
Loss (gain) on disposal of fixed assets................. 24,744 3,490 -- -- (13,200)
Compensation recorded in connection with stock options
plans................................................. -- -- 103,390 -- 8,416
Deferred income taxes................................... (33,000) 22,000 81,454 -- (113,833)
Cash provided by (used for) changes in operating assets
and liabilities, net of effects of business
combination:
Accounts receivable................................... 269,623 (72,762) (375,313) 15,962 201,944
Inventories........................................... (495,621) (612,478) (1,007,933) (2,692,644) (4,933,301)
Prepaid expenses...................................... (30,938) (10,304) 87,480 17,859 21,650
Other assets.......................................... 87,212 -- -- -- --
Accounts payable and other accrued liabilities........ (73,509) 452,784 280,868 422,332 865,003
Income taxes payable.................................. -- -- 290,964 56,072 (867,072)
Stock appreciation rights............................. 307,908 195,797 12,161 12,161 --
Deferred rent......................................... 128,973 86,448 41,761 7,659 21,606
------------ ------------ ------------ ------------ ------------
Cash provided by (used for) operating activities...... 3,695,507 3,367,000 5,104,872 (1,735,324) (4,201,904)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of fixed assets................................. (1,320,114) (1,604,299) (1,721,599) (957,970) (910,234)
Proceeds from sale of fixed assets........................ -- -- -- -- 27,573
Cash paid for business combination........................ -- -- (239,599) -- --
------------ ------------ ------------ ------------ ------------
Cash used for investing activities.................... (1,320,114) (1,604,299) (1,961,198) (957,970) (882,661)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Bank line of credit:
Borrowings.............................................. 15,035,000 20,906,000 31,154,000 13,125,000 24,455,000
Repayments.............................................. (15,465,000) (20,626,000) (33,483,961) (10,300,000) (16,395,000)
Long-term debt:
Borrowings.............................................. 16,000 766,674 2,486,605 1,483,333 --
Repayments.............................................. (823,281) (708,569) (747,601) (378,468) (495,826)
Advances to related parties under notes receivable........ (328,749) (710,599) (591,215) (591,215) --
Payment of distributions to stockholders.................. (1,293,354) (1,328,399) (1,474,389) (728,210) (2,204,375)
Offering expenses paid.................................... -- -- -- -- (502,752)
------------ ------------ ------------ ------------ ------------
Cash provided by (used for) financing activities...... (2,859,384) (1,700,893) (2,656,561) 2,610,440 4,857,047
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash........................... (483,991) 61,808 487,113 (82,854) (227,518)
Cash, beginning of period................................... 911,641 427,650 489,458 489,458 976,571
------------ ------------ ------------ ------------ ------------
Cash, end of period......................................... $ 427,650 $ 489,458 $ 976,571 $ 406,604 $ 749,053
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
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 (Old
Track 'n Trail), 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 Old Track 'n
Trail. As described in Note 14, a reorganization of Old Track 'n Trail (the
Reorganization) was effected on October 7, 1997, in which the Old Track 'n Trail
stockholders exchanged 100% of their Old Track 'n Trail 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 Old Track 'n Trail 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
that are outstanding as a result of the Reorganization.
The Company is a retailer of footwear and related accessories. As of
December 28, 1996 and June 28, 1997, the Company operated 128 and 134 stores in
23 and 24 states, respectively, under the Track 'n Trail and Overland Trading
names concentrated in California, the Midwest and the Northeast. Each store
offers a wide range of rugged walking and fashion casual shoes, sandals and
boots. The Company ends its fiscal year on the last Saturday in December.
The Company operates in a single business segment of retailing footwear and
related accessories. The Company acquires its shoes from a number of
manufacturers; however, during the fiscal year ended December 28, 1996, 39.7% of
the Company's net sales was of products purchased from three manufacturers.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet as of June 28, 1997 and the statements of
operations, changes in stockholders' equity and cash flows for the 26-week
periods ended June 29, 1996 and June 28, 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.
PRINCIPLES OF CONSOLIDATION
The financial statements include the consolidated accounts of the Company
and its two subsidiaries, Old Track 'n Trail and Overland, which became a 79.0%
owned subsidiary on October 25, 1996. Effective January 1, 1997, the Company
acquired the remaining 21.0% interest in Overland (Note 13). All intercompany
transactions and balances have been eliminated in consolidation.
INVENTORIES
Inventories are stated at lower of average cost or market using the retail
inventory method.
F-8
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FIXED ASSETS
Fixed assets are stated at cost and depreciated on the straight-line basis
over estimated useful lives ranging from three to ten years; the cost of
leasehold improvements are amortized over the shorter of the lease term or
useful life of the related assets. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in income for the period. The cost
of maintenance and repairs is charged to income as incurred; significant
renewals and betterments are capitalized.
STORE PRE-OPENING COSTS
Costs of a noncapital nature incurred prior to store openings are expensed
as incurred.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets of acquired companies and is being amortized using the
straight-line method over 20 years.
MINORITY INTEREST
Minority interest represents the minority stockholders' proportionate share
of the equity of Overland, including their share of Overland's net income during
the period from October 25, 1996 to December 28, 1996. At December 28, 1996, the
Company owned 79.0% of the common stock of Overland and the Company's
stockholders owned the 21.0% minority interest. Effective January 1, 1997, the
Company acquired the remaining 21.0% interest in Overland (Note 13).
INCOME TAXES
Commencing June 28, 1992 and until the Reorganization, Old Track 'n Trail
had elected S corporation status for federal income taxes and most state income
taxes. Its subsidiary, Overland, is a C corporation for federal and state income
tax purposes. Under S corporation status, Old Track 'n Trail's income, other
than that of Overland, was taxable to the stockholders personally, with only
minimal state income taxes charged to Old Track 'n Trail (Note 9).
The Company accounts for the federal and state income taxes of Overland and
the state income taxes of the Company, under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES,
using the liability method. The estimated future tax effect of differences
between the Company's basis in assets and liabilities for tax and accounting
purposes is accounted for as deferred taxes. In accordance with the provisions
of SFAS No. 109, a valuation allowance would be established to reduce deferred
tax assets if it is more likely than not that all, or some portion, of such
deferred tax assets will not be realized. No allowance against deferred tax
assets was provided by the Company as of December 28, 1996 or June 28, 1997.
STOCKHOLDER DISTRIBUTIONS
Old Track 'n Trail has historically provided distributions of a portion of
its earnings to the stockholders, as necessary, to satisfy their income tax
requirements as well as for other purposes.
F-9
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
STOCK OPTIONS
As permitted by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company has elected to measure and record compensation costs relative to stock
option plans in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and make pro
forma disclosure of net income and net income per common and common equivalent
share as if the fair value based method of valuing stock options had been
applied.
RENT EXPENSE
Rent expense is generally recognized on the straight-line basis over the
respective lease term. Rents accrued but not contractually due are reported as
deferred rent. Contingent rental expense, based on store sales, is recognized
when incurred.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates
RECLASSIFICATIONS
Certain reclassifications were made to the 1994 and 1995 financial
statements to conform to the 1996 presentation.
PRO FORMA INFORMATION (UNAUDITED)
The pro forma balance sheet reflects, as of June 28, 1997, adjustments for
distributions to stockholders that management expects will be paid or declared
between June 28, 1997 and the date of the Company's initial public offering (the
Offering) in October 1997 assuming that $215,000 of such distributions were made
from borrowings available under the Company's revolving line of credit and
assuming that an additional distribution of $6.4 million had been declared and
will be paid from proceeds of the Offering (Note 14).
Pro forma net income (loss) (unaudited) 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.
Pro forma net income (loss) per common and common equivalent share
(unaudited) for fiscal 1996 has 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 (Note 14), (ii) those common
stock options issued during the twelve 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, the proceeds of which would be
necessary to pay the excess of
F-10
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
S corporation distributions paid or declared during fiscal 1996 and thereafter
until the consummation of the Offering over earnings during fiscal 1996.
Warrants, which were issued during fiscal 1996, were not dilutive.
Pro forma net loss per common and common equivalent share (unaudited) for
the 26 weeks ended June 28, 1997 has been computed using the same methodology as
for fiscal 1996 except that the number of shares included in the computation
relative to item (iii) in the above paragraph is 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 June 30, 1996 and thereafter until the consummation of the Offering
over earnings during the 12-month period ended June 28, 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 $0.58, $0.50 and $0.92 for the 1994, 1995 and 1996 fiscal years,
respectively, with 4,768,155 as the weighted average common and common
equivalent shares outstanding for each period. Historical net loss per share,
both primary and fully diluted, for the 26-week period ended June 28, 1997 was
$(0.05), with 4,768,155 as the weighted average common and common equivalent
shares outstanding.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. SFAS No.
128 changes the method of calculating earnings per share and is effective for
interim and annual periods ending after December 15, 1997. Early application is
not permitted, and all periods presented must be restated when SFAS No. 128 is
implemented. Management is in the process of determining the effects of
implementing SFAS No. 128.
2. CONCENTRATION OF CREDIT RISK:
The Company deposits its excess cash with major financial institutions. As
of December 28, 1996, the Company had $2,614,000 on deposit (inclusive of
outstanding checks) in excess of the federally insured level.
F-11
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
3. FIXED ASSETS:
Fixed assets consist of:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------- ------------- JUNE 28, 1997
-------------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements..................................... $ 4,952,835 $ 7,236,478 $ 7,860,161
Furniture, fixtures and equipment.......................... 2,805,688 3,671,082 3,957,634
Vehicles................................................... 8,055 16,000 --
------------- ------------- -------------
7,766,578 10,923,560 11,817,795
Less accumulated depreciation.............................. (3,727,087) (4,341,458) (5,100,294)
------------- ------------- -------------
Fixed assets, net.......................................... $ 4,039,491 $ 6,582,102 $ 6,717,501
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Depreciation expense for fiscal years 1994, 1995 and 1996 was $763,000,
$916,000 and $1,098,000, respectively. Depreciation expense for the 26 week
periods ended June 29, 1996 and June 28, 1997 was $494,000 and $760,000,
respectively.
4. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT:
The Company has a revolving loan agreement (Revolving Loan Agreement) with a
bank which includes a $7,100,000 revolving line of credit, a term loan of which
$2,700,000 is outstanding at December 28, 1996, and a letter of credit facility
for up to an additional $800,000. Maximum aggregate borrowings under the
Revolving Loan Agreement, including outstanding letters of credit (of which
$389,000 were issued at December 28, 1996) and the term loan are limited to a
percentage of eligible inventory held by the Company. Available additional
borrowings under the Revolving Loan Agreement amounted to approximately
$6,319,000 at December 28, 1996. Borrowings under the Revolving Loan Agreement
are collateralized by substantially all the Company's assets and are guaranteed
by the Company's stockholders.
Interest accrues on the revolving line of credit at the bank's prime rate
(8.25% at December 28, 1996) plus 0.5%. Interest is payable monthly, and the
outstanding principal is due on the earlier of June 30, 1997, or the closing of
the Offering. The weighted average interest rates for fiscal years 1994, 1995
and 1996 were 8.05%, 9.40% and 8.77%, respectively.
The Revolving Loan Agreement requires the Company to meet certain financial
covenants including minimum financial ratios and limits on loans to stockholders
and expenditures to acquire fixed or capital assets. At December 28, 1996 and
June 28, 1997, the Company had complied with such covenants.
Interest accrues on the revolving line of credit at the bank's reference
rate (8.5% at June 28, 1997) plus 0.5%. The weighted average interest rate for
the 26 week periods ended June 29, 1996 and June 28, 1997, was 8.79% and 8.88%,
respectively.
Effective March 31, 1997, the Company received an amendment to the Revolving
Loan Agreement which increased the revolving line of credit to $9,100,000,
extended the expiration date on both the revolving line of credit and term loan
(of which $2,400,000 was outstanding at June 28, 1997) to the earlier of March
31, 1998 or the consummation of an initial public offering, and changed the
interest rate on the term loan to the Company's option of either the bank's
reference rate (8.5% at June 28, 1997) plus 0.5% or the LIBOR (5.69% at June 28,
1997) plus 3.0%.
F-12
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
4. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT: (CONTINUED)
Available additional borrowings under the Revolving Loan Agreement amounted
to approximately $360,000 at June 28, 1997. Letters of credit outstanding under
the agreement were $666,000 as of June 28, 1997.
On July 3, 1997, the Company received a second amendment to the Revolving
Loan Agreement which provided an addition to the line of credit of $1,000,000
until September 30, 1997. As of September 30, 1997, there were no outstanding
borrowings against the additional $1,000,000 in available borrowings under the
line of credit.
F-13
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
4. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT: (CONTINUED)
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28, JUNE 28,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Bank term loan under Revolving Loan Agreement, interest at 8.75% at December 28, 1996
(amended on March 31, 1997 to Company's option of the bank's reference rate (8.50% at
June 28, 1997) plus 0.5% or LIBOR (5.69% at June 28, 1997) plus 3.0%, due in monthly
installments of $50,000 plus interest, balance due the earlier of March 1998 or an
initial public offering.............................................................. $1,933,333 $2,700,000 $ 2,400,000
Subordinated promissory note, interest at 10% until October 25, 1997 and 12%
thereafter, without collateral due the earlier of June 30, 1998 or an initial public
offering............................................................................. -- 3,500,000 3,500,000
Subordinated promissory notes, interest at 10% until October 25, 1997, 12% on October
25, 1997 and thereafter, without collateral, due the earlier of June 30, 1998 or an
initial public offering.............................................................. -- 2,493,673 3,156,548
Term note, interest at 30 day commercial paper rate (5.55% at December 28, 1996 and
June 28, 1997) plus 2.95% collateralized by leasehold improvements, due the earlier
of 2001 or acceleration of any other indebtedness.................................... -- 966,667 866,685
Auto loan, interest at 12.36%, collateralized by a vehicle, repaid in 1997............. -- 9,719 --
Auto loan, interest at 10.5%, collateralized by a vehicle, repaid in 1997.............. -- 10,578 --
Construction notes to store lessors, interest at 12%, without collateral, maturing at
various dates throughout 1998........................................................ -- 33,027 21,589
Bank notes, interest at 10.59%, collateralized by leasehold improvements, repaid in
1996................................................................................. 16,281 -- --
Construction notes to store lessors, interest ranging from 10% to 12%, without
collateral, maturing at various dates through 2000................................... 262,050 111,174 85,605
Construction note to store lessor, federal funds rate plus 3.30% (not to be less than
6%), collateralized by leasehold improvements, due 1998.............................. 50,511 27,198 15,542
Promissory note, interest at 9.36%, collateralized by leasehold improvements, due
2000................................................................................. -- 219,086 195,952
Construction note to store lessor, prime plus 1% (not to exceed 11%), collateralized by
leasehold improvements, due 1998..................................................... 21,875 14,375 10,625
------------ ------------ -----------
Total.............................................................................. 2,284,050 10,085,497 10,252,546
Less current portion............................................................... (701,251) (3,060,480) (2,741,888)
------------ ------------ -----------
Long-term portion.................................................................. $1,582,799 $7,025,017 $ 7,510,658
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
F-14
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
4. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT: (CONTINUED)
Scheduled maturities of long-term debt at December 28, 1996, without giving
effect to acceleration upon the Offering, are as follows:
<TABLE>
<S> <C>
1997........................................................... $3,060,480
1998........................................................... 6,327,618
1999........................................................... 290,124
2000........................................................... 238,958
2001........................................................... 168,317
----------
Total...................................................... $10,085,497
----------
----------
</TABLE>
5. STOCK INCENTIVE PLANS:
STOCK APPRECIATION RIGHTS
Until canceled on July 1, 1996, the Company had granted stock appreciation
rights to certain key employees, which were measured and were vesting over the
period from 1992 to 1997. Under the agreements, the employees were to receive
certain percentages of appreciation of the Company's capital stock during the
measurement period based on agreed-upon appreciation measurement methodologies.
Payment was to be made in five equal annual installments following the earlier
of June 1, 2007, sale of 50% or more of the Company's outstanding stock or the
employees' death, retirement, disability or termination of employment with the
Company. Compensation expense was accrued over the term of the agreements for
the cost of the stock appreciation rights.
The stock appreciation rights were canceled on July 1, 1996, in exchange for
grants of nonqualified options under the Company's 1996 Stock Option Plan, as
described below. The accrued liability at the date of cancellation in connection
with compensation previously recognized under the stock appreciation rights was
offset against total compensation inherent in the nonqualified stock options
granted.
STOCK OPTION PLAN
In June 1996, the Company's stockholders approved the adoption of the 1996
Stock Option Plan (Plan) which provides for the granting of up to 905,735
options to purchase common shares to employees. Options granted under the Plan
may be incentive stock options or nonqualified stock options. The exercise price
and vesting term of the options is to be determined by a committee of the Board
of Directors at the time of grant. The vesting term for incentive and
nonqualified options cannot exceed ten years (five years for options granted to
stockholders who own 10% or more of the total voting power of all classes of the
Company's common stock at the date of the grant). The exercise price of
incentive stock options cannot be less than fair market value of a share of
common stock (110% of fair market value for options granted to stockholders who
own 10% or more of the total voting power of all classes of the Company's common
stock at the date of the grant).
F-15
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
5. STOCK INCENTIVE PLANS: (CONTINUED)
The following is a summary of the activity in stock options granted during
the fiscal year ended December 28, 1996:
<TABLE>
<CAPTION>
INCENTIVE STOCK NONQUALIFIED STOCK
OPTIONS OPTIONS
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Balance as of December 31, 1995................... -- $ -- -- $ --
Granted........................................... 501,168 4.00 350,618 0.01
--------- ----- --------- -----
Balance as of December 28, 1996................... 501,168 4.00 350,618 $ 0.01
--------- ----- --------- -----
--------- ----- --------- -----
Options exercisable as of December 28, 1996....... 100,228 $ 4.00 212,383 $ 0.01
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
There was no change in the number of options granted or exercisable during
the 26-week period ended June 28, 1997. In July 1997, 20,127 incentive stock
options were terminated, resulting in a reduced balance of 481,041 incentive
stock options outstanding, all of which are or will be exercisable at $4.00 per
share.
The incentive stock options vest pro rata on December 15 of each of five
years commencing December 15, 1996, and have an exercise term of ten years after
the date of grant. In the event of a public offering or sale of the Company, the
incentive stock options fully vest and are exercisable. No compensation resulted
from the grant of incentive stock options in fiscal 1996.
The nonqualified stock options partially vested upon grant (177,825 shares)
and the balance vest pro rata on each December 15 for the five years commencing
December 15, 1996, and have an exercise term of ten years after the date of
grant. In the event of a public offering or sale of the Company, the
nonqualified stock options vest and become exercisable in full. The excess of
the fair value of common stock at the date of the grant (determined by
appraisal) over the exercise price of the nonqualified stock options, net of the
liability recorded in connection with stock appreciation rights canceled in
exchange for the nonqualified stock options (an aggregate net amount of
$170,000), represents the per share compensation of the nonqualified stock
options that is being recorded as compensation and as an increase in additional
paid-in capital when the stock options vest. An increase in additional paid-in
capital at the date of grant was recorded for the liability under the stock
appreciation rights that were eliminated upon exchange for the nonqualified
stock options.
Compensation expense recognized for stock compensation awards, including
stock appreciation rights, amounted to $308,000, $196,000 and $116,000 during
the 1994, 1995 and 1996 fiscal years, respectively. Compensation expense
recognized for stock compensation awards, including stock appreciation rights,
amounted to $12,000 and $8,000 for the 26-week periods ended June 29, 1996 and
June 28, 1997, respectively.
The weighted-average, grant-date fair value, computed in accordance with
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, of all options granted
during 1996, net of the liability recorded in connection with stock appreciation
rights canceled in exchange for the nonqualified stock options, was
F-16
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
5. STOCK INCENTIVE PLANS: (CONTINUED)
$170,000. The weighted-average, grant-date fair value was estimated assuming a
risk-free interest rate of 6.49%, an expected life of five years, no expected
volatility as the Company has no trading record and no expected dividends in
excess of those necessary to provide Old Track 'n Trail's stockholders funds
with which to pay their income taxes on S corporation income of the Company.
Pro forma results of operations, computed to assume the provisions of SFAS
No. 123 had been adopted, for fiscal year 1996 would have been the same as the
historical results of operations, as presented.
6. NOTES RECEIVABLE FROM RELATED PARTIES:
Notes receivable from related parties at December 30, 1995, consisted of:
<TABLE>
<S> <C>
Stockholder notes, interest at prime (8.5% at December 30,
1995) plus 1.75%, principal and interest due on demand..... $1,036,322
Related party note, interest at prime (8.5% at December 30,
1995) plus 1.25%, principal and interest due on demand..... 32,463
----------
$1,068,785
----------
----------
</TABLE>
The balance outstanding at December 30, 1995, of both the stockholder notes
and the note from a related party (who became a stockholder in October 1995)
were distributed to the stockholders in 1996 along with additional notes of
$591,215 related to advances made to such parties in 1996.
7. LEASE COMMITMENTS:
The Company operates its stores, main office and warehouse from facilities
under operating lease agreements which expire at various dates through 2007. The
store leases require minimum annual rentals plus, in some cases, periodic
increases stipulated in the lease agreements (fixed amounts or percentages, in
some cases, and increases indexed to consumer price increases, in other cases).
Some leases also provide for contingent rentals based on sales. The Company is
generally responsible for maintenance, insurance and property taxes. At December
28, 1996, minimum lease payments under all noncancelable leases are as follows:
<TABLE>
<S> <C>
1997........................................................... $8,613,000
1998........................................................... 7,697,000
1999........................................................... 6,493,000
2000........................................................... 5,751,000
2001........................................................... 5,545,000
Thereafter..................................................... 17,587,000
----------
Total...................................................... $51,686,000
----------
----------
</TABLE>
F-17
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
7. LEASE COMMITMENTS: (CONTINUED)
Rent expense was $4,351,000, $4,964,000 and $6,160,000 during fiscal years
1994, 1995 and 1996, including contingent rentals of $141,000, $130,000 and
$123,000, respectively. Rent expense was approximately $2,679,000 and $4,342,000
including contingent rentals of $16,000 and $18,000 for the 26-week periods
ended June 29, 1996 and June 28, 1997, respectively.
8. EMPLOYEE BENEFIT PLAN:
The Company has a 401(k) profit-sharing plan for the benefit of employees
who meet certain eligibility requirements. Participants may make tax deferred
contributions of up to 15% of earned income, limited to $9,240 annually in
fiscal year 1996. Employer contributions match at least 50% of participant
contributions to a maximum of 4% of earned income. Employee contributions vest
immediately. Employer contributions vest based on years of employment with the
Company, with full vesting in five years. The employer contribution was $53,000,
$58,000 and $50,000 in fiscal years 1994, 1995 and 1996, respectively. Employer
contributions were $27,000 and $49,000 for the 26-week periods ended June 29,
1996 and June 28, 1997, repectively.
9. INCOME TAXES:
The provision for income taxes consists of:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes:
Current......................................... $ 100,000 $ 18,838 $ 406,536
Deferred........................................ (33,000) 22,000 81,454
------------ ------------ ------------
$ 67,000 $ 40,838 $ 487,990
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
For the 26-week periods ended June 29, 1996 and June 28, 1997, the provision
for income taxes consists of the amounts computed at management's estimate of
the effective tax rate during the related fiscal years. For the 26-week period
ended June 28, 1997, the estimated effective rate takes into account the portion
of the income (loss) that will be taxed as S corporation income (Old Track 'n
Trail's federal and most state income) and as C corporation income (Overland's
federal and state loss and a portion of Old Track 'n Trail's state income), and
is adjusted by a nonrecurring deferred income tax benefit related to the change
in tax status of Old Track 'n Trail in certain states from that of an S
corporation to a C corporation, as described in the following paragraph.
Old Track 'n Trail converted from an S corporation to a C corporation for
state income tax purposes in certain states on January 1, 1997, as the result of
acquiring 100% ownership of Overland (Note 13). Certain states in which Old
Track 'n Trail did business have not conformed their state statutes to revised
Internal Revenue Code provisions that, effective beginning January 1, 1997,
permit S corporations to own 100% of subsidiaries. Accordingly, the provision
for income taxes for the 26-week period ended June 28, 1997 includes (i) C
corporation state taxes on the 1997 income of Old Track 'n Trail related to
income in states that have not conformed their S corporation regulations to the
Internal Revenue Code and (ii) a
F-18
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
9. INCOME TAXES: (CONTINUED)
reduction of $114,000 in the provision for income taxes related to recording
deferred tax assets representing the net tax effect (computed using the
applicable state income tax rates) of temporary differences between Old Track 'n
Trail's financial statement and tax bases in certain assets and liabilities as
of the date of converting to a C corporation status in certain states.
Management believes it is likely that some or all of the states in which it does
business that currently do not allow S corporations to own 100% of subsidiaries
will revise their regulations to conform to those of the Internal Revenue Code
(Conforming Regulations) and that such revisions will be retroactive to January
1, 1997. If such Conforming Regulations are made and are retroactive to January
1, 1997, the difference between the income tax provision for the 26-week period
ended June 28, 1997 computed as a C corporation in certain states will be
adjusted through adjustments to the income tax provision of future quarters to
reverse the tax effects of the conversion to C corporation status in states
adopting retroactive Conforming Regulations. The effect of future Conforming
Regulations, if they occur, will be an increase in the provision for income
taxes in the quarter that the Conforming Regulations occur by up to $111,000,
depending on which states, if any, adopt Conforming Regulations. California
adopted Conforming Regulations in October 1997, retroactive to January 1, 1997.
The components of deferred tax assets are:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
<S> <C> <C>
Depreciation..................................................... $ 16,930 $ 269,009
Inventory--Uniform Capitalization................................ 10,620 116,095
Stock compensation programs...................................... 10,520 --
Deferred rent.................................................... 3,200 199,881
Accrued liabilities.............................................. 2,070 34,049
Other............................................................ 660 --
Basis differences of assets acquired in business combination..... -- (58,319)
Federal effect of deferred state taxes........................... -- (42,600)
------------ ------------
$ 44,000 $ 518,115
------------ ------------
------------ ------------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
taxes will not be realized. Based upon the availability of management's
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes the existing net deductible temporary
differences will reverse during periods in which carrybacks are available and/or
in which the Company generates net taxable income.
F-19
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
9. INCOME TAXES: (CONTINUED)
Differences between the Company's provision for income taxes and the federal
statutory tax rate are:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Federal statutory rate............................ 34.0% 34.0% 34.0%
Benefit due to Subchapter S status................ (34.0) (34.0) (28.3)
State income taxes................................ 2.4 1.7 3.9
Permanent differences............................. -- -- 0.2
------ ------ ------
2.4% 1.7% 9.8%
------ ------ ------
------ ------ ------
</TABLE>
10. FORWARD FOREIGN CURRENCY CONTRACTS:
The Company occasionally enters into forward foreign contracts with the
objective of minimizing the short-term impact of foreign currency fluctuations
on commitments to purchase products from foreign manufacturers in foreign
currencies. A forward foreign currency contract, which is individually
negotiated and privately traded by currency traders, is a commitment to purchase
or sell a specific currency for an agreed-upon price at a future date. As of
December 28, 1996, all contracts were held for hedging purposes. The gain or
loss on these contracts is reported in the financial statements based upon the
fair value of the contracts obtained from published market prices and quotations
from major investment firms and offsets the corresponding gain or loss
recognized on the commitments to purchase products in foreign currencies. The
Company could be exposed to risk if the counterparties to the contracts are
unable to meet the terms of their contracts. The Company seeks to minimize risk
from counterparties by establishing minimum credit quality standards and maximum
credit limits.
The contracts outstanding as of December 28, 1996, consisted of the
following:
<TABLE>
<CAPTION>
CONTRACT TO BUY
ITALIAN LIRA IN EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- --------------- --------------- --------------- -----------
<S> <C> <C> <C>
54,329,640 U.S. $36,107 1/31/97 $ (185)
139,327,820 U.S. $92,480 2/28/97 (591)
76,882,761 U.S. $50,979 3/31/97 (378)
-----------
$ (1,154)
-----------
-----------
</TABLE>
During the 26-week period ended June 28, 1997, the contracts outstanding at
December 28, 1996 settled without material gain or loss, and no new contracts
were entered into.
F-20
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used by the Company in estimating
the fair value of its significant financial instruments:
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, ACCRUED PAYROLL AND BONUSES
PAYABLE AND ACCRUED EXPENSES AND OTHER LIABILITIES: The carrying amount
reported in the consolidated balance sheet approximates its fair value
because of the immediate or short-term maturity of those financial
instruments.
BANK LINE OF CREDIT: The carrying amount approximates fair value due to
the floating interest rate and short maturity nature of this financial
instrument.
LONG-TERM DEBT: The carrying amount approximates fair value due to
floating rates or recent issuance of the fixed rate notes.
NOTES RECEIVABLE FROM RELATED PARTIES: The fair value cannot be
determined.
12. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
------------- ------------- ------------ TWENTY-SIX WEEKS ENDED
------------------------
JUNE 29, JUNE 28,
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest paid.............................. $ 342,013 $ 401,433 $ 615,412 $ 230,766 $ 739,448
------------- ------------- ------------ ----------- -----------
------------- ------------- ------------ ----------- -----------
Income taxes paid.......................... $ 65,045 $ 77,540 $ 72,706 $ 54,300 $ 608,401
------------- ------------- ------------ ----------- -----------
------------- ------------- ------------ ----------- -----------
Noncash investing and financing
transactions:
Acquisition of Overland:
Purchase price, including acquisition
costs................................ $ -- $ -- $2,733,272 $ -- $ 557,724
Minority interest eliminated........... $ -- $ -- $ -- $ -- $ 105,151
Less debt issued in connection with the
acquisition.......................... -- -- (2,493,673) -- (662,875)
------------- ------------- ------------ ----------- -----------
Cash paid for acquisition............ $ -- $ -- $ 239,599 $ -- $ --
------------- ------------- ------------ ----------- -----------
------------- ------------- ------------ ----------- -----------
Increase in liability for distributions
payable to stockholders................ $ 396,500 $ -- $ -- $ -- $ --
------------- ------------- ------------ ----------- -----------
------------- ------------- ------------ ----------- -----------
Distribution of notes receivable to
stockholders........................... $ -- $ -- $1,660,000 $1,660,000 $ --
------------- ------------- ------------ ----------- -----------
------------- ------------- ------------ ----------- -----------
Cancellation of stock appreciation
rights................................. $ -- $ -- $ 596,424 $ 596,424 $ --
------------- ------------- ------------ ----------- -----------
------------- ------------- ------------ ----------- -----------
</TABLE>
13. BUSINESS COMBINATION:
On October 25, 1996, Old Track 'n Trail, together with its stockholders,
obtained 33 Overland Trading stores by acquiring the outstanding common stock of
Overland (Note 1, Principles of Consolidation; Minority Interest). Old Track 'n
Trail purchased the 79.0% interest for approximately $2,733,000 consisting
F-21
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
13. BUSINESS COMBINATION: (CONTINUED)
of promissory notes to the sellers of $2,493,673 and warrants issued to the
sellers valued at nominal amounts, plus acquisition costs of $239,599. In the
event of an initial public offering of the Company's common stock, the warrants
give the sellers the right to purchase up to 1.0% of the shares of the Company's
stock, on a fully diluted basis, outstanding immediately prior to an initial
public offering, at the initial public offering price until October 25, 2001. In
the absence of such initial public offering, the warrants require that the
Company purchase the warrants from the sellers for cash on October 25, 2001, in
an amount equal to one percent of the then fair value of the Company.
The remaining 21.0% interest in Overland was purchased by Old Track 'n
Trail's stockholders for $662,875 of promissory notes which the Company had
guaranteed.
Total promissory notes issued by Old Track 'n Trail and its stockholders in
exchange for the common stock of Overland was $3,156,548 (the Seller Notes). The
Seller Notes are not collateralized and bear interest at 10.0% per year through
October 25, 1997, and 12.0% thereafter. The Seller Notes are due on June 30,
1998, or earlier upon a firm underwritten initial public offering of the
Company's common stock. Interest payments are due quarterly through October
1997, and monthly thereafter.
Also, in connection with the acquisition, Overland repurchased all of its
outstanding preferred stock in exchange for a $3,500,000 subordinated promissory
note (the Subordinated Note) and borrowed $2,559,000 under a line of credit
arranged by Old Track 'n Trail, which was used to repay Overland's outstanding
line of credit, retire a note payable, pay accumulated dividends to its
preferred stockholders and provide additional working capital, all of which were
recorded by Overland in connection with the acquisition. Old Track 'n Trail
guaranteed the Subordinated Note.
Additionally, the Company issued warrants to an investment bank in
consideration of financial advisory services rendered in connection with the
acquisition of Overland. The warrants allow the investment bank to purchase up
to 1.5% of the shares of the Company's common stock, on a fully diluted basis,
outstanding immediately prior to an initial public offering, at a price equal to
120% of the initial public offering price for four years commencing upon the
first anniversary of the initial public offering. In the absence of such initial
public offering, the warrants require that the Company pay cash to the
investment bank on October 25, 2001, in an amount equal to 1.5% of the then fair
value of the Company. The warrants held by both the Overland sellers and the
investment bank were assigned only a nominal value because of the restrictive
terms of the warrants.
Effective on January 1, 1997, Old Track 'n Trail acquired the 21.0% interest
in Overland from its stockholders at their purchase price by assuming the
$662,875 Seller Notes previously issued by Old Track 'n Trail's stockholders.
F-22
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
13. BUSINESS COMBINATION: (CONTINUED)
The assets and liabilities of Overland were recorded at the fair value at
the time of the acquisition, based on management's estimates of value, and the
excess of the purchase price over amounts allocated to identifiable net assets
was recorded as goodwill, as follows:
<TABLE>
<CAPTION>
21.0%
79.0% INTEREST INTEREST
-------------- -------------
<S> <C> <C>
Inventory..................................................... $ 6,911,000
Store fixtures, leasehold improvements and office equipment... 1,908,000
Accounts receivable and prepaid expenses...................... 406,000
Deferred income taxes......................................... 555,000
Accounts payable and accrued liabilities...................... (3,040,000)
Line of credit and long-term debt............................. (6,124,000)
Other liabilities............................................. (608,000)
Minority interest (21%) in net assets......................... $ 105,000
-------------- -------------
Net identifiable assets..................................... 8,000 105,000
Goodwill...................................................... 2,725,000 558,000
-------------- -------------
Purchase price.............................................. $ 2,733,000 $ 663,000
-------------- -------------
-------------- -------------
</TABLE>
Except for inventories and fixed assets, which were reduced to their
respective fair values by adjustments of $220,000 and $189,000, respectively,
offset by related deferred taxes on the fair value adjustments amounting to
$164,000, management determined that the fair value of assets and liabilities
acquired was equal to the book value recorded by Overland and that there were no
identifiable intangible assets other than goodwill. Goodwill recorded in
connection with the acquisition is being amortized using the straight line
method over a 20-year period.
Results of operations of Overland are included in the consolidated financial
statements from October 25, 1996 with the portion attributable to the 21.0%
minority interest held by Old Track 'n Trail's stockholders shown as minority
interest in 1996. Acquisition of the minority interest effective January 1,
1997, eliminated the minority interest from the balance sheet as of that date.
If the Company had purchased 100% of Overland's common stock as of the
beginning of fiscal year 1995, condensed consolidated results of operations
would have been (unaudited):
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Net sales...................................................... $ 70,660,000 $ 84,186,000
Gross profit................................................... 33,275,000 39,726,000
Operating income............................................... 2,763,195 5,176,000
Net income..................................................... $ 1,467,000 $ 3,576,000
Pro forma net income (unaudited)............................... $ 728,000 $ 2,246,000
Pro forma net income per share (unaudited)..................... $ 0.40
</TABLE>
F-23
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
13. BUSINESS COMBINATION: (CONTINUED)
Pro forma net income (unaudited) in the above table is computed after
deducting a pro forma provision for income taxes at the effective rate estimated
to have been in effect had Old Track 'n Trail been a C corporation. Pro forma
net income per share (unaudited) has 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 (Note 14), (ii) those common
stock options issued during the twelve 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 initial public offering price,
the proceeds of which would be necessary to pay the excess of S corporation
distributions during fiscal 1996 and thereafter until the Reorganization over
earnings during fiscal 1996.
14. SUBSEQUENT EVENTS:
REORGANIZATION
The Company is the successor to businesses formerly conducted by Old Track
'n Trail and its subsidiary, Overland. In October 1997, the Reorganization of
Old Track 'n Trail was consummated (Note 1, Background). In connection with the
Reorganization, the Old Track 'n Trail stockholders exchanged 100% of their
common stock of Old Track 'n Trail for 4,107,608 shares of the common stock of
the Company, a newly formed holding company incorporated in Delaware, inclusive
of 40,816 shares issued upon the Company's formation. Also, all of the common
stock of Overland was transferred to the Company in the form of a dividend. As a
result of the Reorganization, the Old Track 'n Trail stockholders own 100% of
the Common Stock of the Company and the predecessor businesses became wholly
owned subsidiaries of the Company. 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 to all periods presented.
Upon completion of the Reorganization, Old Track 'n Trail converted from an
S corporation to a C corporation under provisions of the Internal Revenue Code
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 became 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. Had Old Track 'n Trail converted from an S
corporation to a C corporation at June 28, 1997, an increase in deferred tax
assets, net, of $1,102,000 and a corresponding reduction of income tax expense
would have been 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. In 1997, income or loss during the period preceding the
Reorganization while still an
F-24
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
14. SUBSEQUENT EVENTS: (CONTINUED)
S corporation will continue to be taxed to Old Track 'n Trail's stockholders
which will affect the Company's effective tax rate for that year.
INITIAL PUBLIC OFFERING
Upon closing of the Offering, the Company's nonqualified and incentive stock
options will vest resulting in a non-cash compensation charge reducing net
income by approximately $35,000, after netting the related income tax effect of
$24,000.
Upon closing of the Offering, certain notes payable, which had an aggregate
balance of $18,663,000 at June 28, 1997, will become due and payable. Management
intends to use a portion of the proceeds to the Company of the Offering to
retire these obligations. The weighted average interest rate on the balance of
such notes outstanding at June 28, 1997, was 9.24%.
Between June 28, 1997 and the closing of the Offering, Old Track 'n Trail
intends to pay or declare distributions aggregating $6,615,000, representing
management's estimate of substantially all of previously undistributed
accumulated S corporation earnings remaining at the date of the Reorganization.
Management expects to pay $6,400,000 of such distributions from a portion of the
Company's proceeds of the Offering. The balance will have been paid prior to the
Offering.
In connection with the Reorganization and the Offering, the S corporation
election of Old Track 'n Trail and the Company, respectively, will be terminated
under circumstances under which income to be reported by the Company and Old
Track 'n Trail for their respective terminated S corporation taxable years will
be determined utilizing a "closing of the books" method.
STOCK OPTION AND PURCHASE PLANS
STOCK OPTION PLAN. In April 1997, the Company approved the assumption of
the 1996 Stock Option Plan of Old Track 'n Trail (the Plan), effective upon the
Reorganization, 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 Old Track 'n
Trail. A total of 1,055,735 shares of common stock will be reserved for issuance
under the Plan.
As amended and restated, the Plan provides for the granting of nonstatutory
stock options (NSOs) to employees, directors, consultants and advisors of the
Company. The Plan also provides for the granting of incentive stock options
(ISOs) to employees. The plan provides for formula grants to non-employee
directors of the Company (Outside Directors). Such Outside Directors will
automatically receive NSOs to purchase 5,000 shares of common stock upon their
initial appointment as an Outside Director and, upon each annual meeting of
stockholders after their initial appointment, will receive NSOs to purchase
1,250 shares (unless the Outside Director was appointed prior to such a meeting,
in which case the annual grant will occur at the second annual meeting following
the initial appointment). The Plan provides that the option exercise price for
ISOs and Outside Director options must be at least equal to 100% of the fair
market value of the common stock on the date of grant. Options will have an
exercise term as determined
F-25
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWENTY-SIX WEEKS
ENDED JUNE 29, 1996 AND JUNE 28, 1997)
14. SUBSEQUENT EVENTS: (CONTINUED)
by a compensation committee of the Company's board of directors at the date of
the grant; however, ISOs must have an exercise term of no more than ten years
from the date of grant.
EMPLOYEE STOCK PURCHASE PLAN. In April 1997, the Company adopted the
Employee Stock Purchase Plan (the Purchase Plan) to become effective as of the
closing of the Offering. The Purchase Plan will cover 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. The plan
administrator, appointed by the Company's board of directors, may authorize
participation by eligible employees, including officers, in periodic offerings
following commencement of the Purchase Plan.
Substantially all full-time (as defined) employees with at least one year
service prior to the commencement of the participation period will be eligible
to participate in the Purchase Plan; however, any highly compensated employee
(as defined) who owns 3.0% or more of the outstanding stock in the Company may
not participate in the Purchase Plan. Employees who participate in an offering
may have a percentage of their earnings (as established by the plan
administrator) withheld pursuant to the Purchase Plan. The amount withheld will
be used to purchase shares of common stock on dates specified by the Board at a
price that will be equal to 85.0% of the lesser of the fair market value of the
common stock at the commencement of each offering period or at the relevant
purchase date. Employees may end their participation in an offering at any time
during the offering period except as provided under the terms of the offering.
Participation ends automatically on termination of employment with the Company.
COMMITTED REVOLVING LINE OF CREDIT
In August 1997, the Company obtained a commitment letter from a bank to
provide a two-year, $10.0 million revolving line of credit, effective upon the
consummation of the Offering and conditioned on the Offering being completed by
December 31, 1997 and the repayment of certain indebtedness from the proceeds of
the Offering. The line of credit will bear interest, at the option of the
Company, at either the bank's reference rate (8.5% at June 28, 1997) or LIBOR
(5.69% at June 28, 1997) plus 2.0%, and will be 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. Advances under the line are
limited to a percentage of eligible inventory, and the Company will be required
to meet certain financial covenants.
15. CONTINGENCIES:
The Company is also involved in various claims arising out of the normal
course of the conduct of business. Management believes, after reviewing such
matters with legal counsel, that the outcome of pending claims will not have a
material adverse effect on the Company's results of operations or financial
position.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Overland Management Corporation:
We have audited the accompanying balance sheet of Overland Management
Corporation as of August 3, 1996, and the related statements of operations,
changes in stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the financial position of Overland Management
Corporation as of August 3, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
September 27, 1996
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Overland Management Corporation:
We have audited the accompanying balance sheet of Overland Management
Corporation at July 29, 1995, and the related statements of operations, changes
in stockholders' equity, and cash flows for the years ended July 30, 1994 and
July 29, 1995. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Overland Management Corporation at July 29,
1995 and the results of its operations and its cash flows for the years ended
July 30, 1994 and July 29, 1995, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 25, 1995
F-28
<PAGE>
OVERLAND MANAGEMENT CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 29, AUGUST 3, OCTOBER 25,
1995 1996 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 40,072 $ 285,377 $ --
Inventory................................................................. 5,367,121 6,389,101 7,130,968
Prepaid expenses and other assets......................................... 232,001 292,515 147,031
Other receivables......................................................... 29,260 298,751 232,878
Refundable income taxes................................................... 12,537 56,349 --
Deferred income tax asset................................................. -- 10,592 93,128
---------- ---------- -----------
Total current assets.................................................... 5,680,991 7,332,685 7,604,005
---------- ---------- -----------
Property and equipment:
Leasehold improvements.................................................... 1,539,422 1,889,366 1,935,474
Motor vehicles............................................................ 107,083 124,096 124,087
Machinery and equipment................................................... 845,564 1,086,803 1,117,184
Furniture and fixtures.................................................... 14,417 14,417 14,417
---------- ---------- -----------
Total property and equipment............................................ 2,506,486 3,114,682 3,191,162
Less accumulated depreciation............................................. (543,656) (979,213) (1,094,497)
---------- ---------- -----------
Net property and equipment............................................ 1,962,830 2,135,469 2,096,665
---------- ---------- -----------
Other assets:
Deferred income tax asset................................................. 313,500 269,837 298,814
Prepaid expenses and other assets......................................... 30,037 23,622 23,622
---------- ---------- -----------
Total other assets.................................................... 343,537 293,459 322,436
---------- ---------- -----------
$7,987,358 $9,761,613 $10,023,106
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................................ $ -- $ -- $ 355,449
Note payable--line of credit.............................................. 3,700,000 1,900,000 1,600,000
Current portion of long-term debt......................................... 129,840 134,354 135,172
Accounts payable and accrued expenses..................................... 946,949 2,838,331 2,882,765
Income taxes payable...................................................... -- -- 149,743
Deferred income tax liability............................................. 97,300 -- --
---------- ---------- -----------
Total current liabilities............................................. 4,874,089 4,872,685 5,123,129
Long-term debt, less current portion........................................ 523,693 400,647 375,452
Deferred rent............................................................... 364,747 411,247 423,247
---------- ---------- -----------
Total liabilities..................................................... 5,762,529 5,684,579 5,921,828
---------- ---------- -----------
Commitments (Note 6).
Redeemable preferred stock:
Redeemable Series A preferred stock, $.01 par value; 368,850 shares
authorized, issued and outstanding; $4.07 per share liquidation
preference.............................................................. 1,498,953 1,675,524 1,720,812
Redeemable Series B preferred stock, $.01 par value; 2,000,000 shares
authorized, issued and outstanding; $1.00 per share liquidation
preference.............................................................. -- 2,000,000 2,000,000
---------- ---------- -----------
Total redeemable preferred stock...................................... 1,498,953 3,675,524 3,720,812
---------- ---------- -----------
Stockholders' equity:
Common stock, $.01 par value, 3,000,000 voting shares authorized;
1,500,000 shares issued and outstanding................................. 15,000 15,000 15,000
Additional paid-in-capital................................................ 35,000 35,000 35,000
Retained earnings......................................................... 675,876 351,510 330,466
---------- ---------- -----------
Total stockholders' equity............................................ 725,876 401,510 380,466
---------- ---------- -----------
$7,987,358 $9,761,613 $10,023,106
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
OVERLAND MANAGEMENT CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
FOR THE YEAR ENDED ----------------------
------------------------------------- OCTOBER OCTOBER
JULY 30, JULY 29, AUGUST 3, 21, 25,
1994 1995 1996 1995 1996
(52 WEEKS) (52 WEEKS) (53 WEEKS) (12 WEEKS) (12 WEEKS)
----------- ----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.......................................................... $13,898,519 $18,041,403 $22,659,979 $4,691,001 $5,865,505
Cost of sales...................................................... 7,622,825 9,846,341 12,953,906 2,608,576 3,399,568
----------- ----------- ----------- ---------- ----------
Gross profit................................................... 6,275,694 8,195,062 9,706,073 2,082,425 2,465,937
----------- ----------- ----------- ---------- ----------
Operating expenses:
Selling and marketing............................................ 3,815,710 6,022,821 7,347,075 1,573,461 1,874,924
Administrative and distribution.................................. 1,784,175 1,948,253 2,012,404 449,179 419,801
----------- ----------- ----------- ---------- ----------
Total operating expenses....................................... 5,599,885 7,971,074 9,359,479 2,022,640 2,294,725
----------- ----------- ----------- ---------- ----------
Operating income............................................... 675,809 223,988 346,594 59,785 171,212
Other (income) expense:
Interest......................................................... 105,899 211,571 357,852 102,954 54,543
Other, net....................................................... 526 4,419 114,833 36,810 15,154
----------- ----------- ----------- ---------- ----------
Income (loss) before provision for income taxes................ 569,384 7,998 (126,091) (79,979) 101,515
Income tax expense (benefit)....................................... 239,362 3,200 (53,500) (31,992) 40,605
----------- ----------- ----------- ---------- ----------
Net income (loss).............................................. $ 330,022 $ 4,798 $ (72,591) $ (47,987) $ 60,910
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
OVERLAND MANAGEMENT CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
--------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Balance, August 1, 1993....................................... $ 150 $ 49,850 $ 521,700 $ 571,700
One hundred for one stock split (1,500,000 shares)............ 14,850 (14,850) -- --
Accretion of preferred stock to stock redemption value........ (18,814) (18,814)
Net income.................................................... -- -- 330,022 330,022
--------- ------------ ---------- ------------
Balance, July 30, 1994........................................ 15,000 35,000 832,908 882,908
Accretion of preferred stock to stock redemption value........ (161,830) (161,830)
Net income.................................................... -- -- 4,798 4,798
--------- ------------ ---------- ------------
Balance, July 29, 1995........................................ 15,000 35,000 675,876 725,876
Accretion of preferred stock to stock redemption value........ (176,571) (176,571)
Net loss...................................................... -- -- (72,591) (72,591)
Issuance of redeemable preferred stock........................
Issuance of 656,592 warrants to purchase common stock at $0.25
per share................................................... -- -- -- --
Dividends paid................................................ -- -- (75,204) (75,204)
--------- ------------ ---------- ------------
Balance, August 3, 1996....................................... 15,000 35,000 351,510 401,510
Accretion of preferred stock to stock redemption value........ (45,288) (45,288)
Net income (unaudited)........................................ -- -- 60,910 60,910
Dividends paid (unaudited).................................... -- -- (36,666) (36,666)
--------- ------------ ---------- ------------
Balance, October 25, 1996 (unaudited)......................... $ 15,000 $ 35,000 $ 330,466 $ 380,466
--------- ------------ ---------- ------------
--------- ------------ ---------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
OVERLAND MANAGEMENT CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED FOR THE PERIOD ENDED
------------------------------------- ------------------------
JULY 30, JULY 29, AUGUST 3, OCTOBER 21, OCTOBER 25,
1994 1995 1996 1995 1996
(52 WEEKS) (52 WEEKS) (53 WEEKS) (12 WEEKS) (12 WEEKS)
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................. $ 330,022 $ 4,798 $ (72,591) $ (47,987 ) $ 60,910
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization............................... 144,986 266,435 435,557 110,565 115,284
Loss on disposal of property and equipment.................. -- 4,380 2,620 -- --
Effect of changes in:
Employee receivables........................................ 4,054 -- -- -- --
Inventory................................................... (914,805) (1,755,501) (1,021,980) (1,307,186 ) (741,867)
Prepaid expenses and other assets........................... (30,973) (103,384) (54,099) (24,529 ) 145,484
Other receivables........................................... -- (29,260) (269,491) (293,097 ) 65,873
Refundable income taxes..................................... -- (12,537) (43,812) -- 56,349
Deferred income tax asset................................... (38,000) (236,500) 33,071 -- (111,513)
Other assets................................................ (24,311) -- -- -- --
Accounts payable and accrued expenses....................... 122,054 (422,894) 1,891,382 2,012,882 44,434
Deferred rent............................................... 82,010 195,027 46,500 -- 12,000
Income taxes payable........................................ 26,590 (182,540) -- -- 149,743
Deferred income tax liability............................... -- 97,300 (97,300) -- --
----------- ----------- ----------- ----------- -----------
Cash provided by operating activities..................... (298,373) (2,174,676) 849,857 450,648 (203,303)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment........................... (458,089) (1,428,423) (612,816) (244,878 ) (76,480)
Proceeds from sale of property and equipment.................. -- 7,000 2,000 -- --
----------- ----------- ----------- ----------- -----------
Cash used for investing activities........................ (458,089) (1,421,423) (610,816) (244,878 ) (76,480)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock..................... 1,318,309 -- 2,000,000 -- --
Borrowings from line of credit................................ 1,150,000 4,500,000 2,000,000 -- 355,449
Principal payments on line of credit.......................... (2,420,000) (800,000) (3,800,000) (200,000 ) (300,000)
Dividends paid................................................ -- -- (75,204) -- (36,666)
Proceeds from long-term debt.................................. 750,000 -- -- -- --
Payments on long-term debt.................................... (89,036) (135,966) (118,532) (28,201 ) (24,377)
----------- ----------- ----------- ----------- -----------
Cash provided by financing activities..................... 709,273 3,564,034 6,264 (228,201 ) (5,594)
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents.......... (47,189) (32,065) 245,305 (22,431 ) (285,377)
Cash, beginning of period....................................... 119,326 72,137 40,072 40,072 285,377
----------- ----------- ----------- ----------- -----------
Cash, end of period............................................. $ 72,137 $ 40,072 $ 285,377 $ 17,641 $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental cash flow information:
Interest paid................................................. $ 128,655 $ 211,571 $ 353,121 $ 101,506 $ 65,974
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income taxes paid............................................. $ 212,772 $ 337,170 $ 54,541 $ 6,970 $ 2,475
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
OVERLAND MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE TWELVE WEEKS ENDED
OCTOBER 21, 1995 AND OCTOBER 25, 1996)
1. BUSINESS OF CORPORATION:
As of August 3, 1996, Overland Management Corporation (the Corporation)
operated 32 retail shoe stores under the name of Overland Trading Company. One
additional store was opened in August 1996.
The Corporation operates in a single segment of retailing footwear and
related accessories. The Corporation acquires shoes from a number of
manufacturers; however, during the fiscal year ended August 3, 1996, 47.0% of
the Corporation's net sales was of products purchased from three manufacturers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR
The Corporation's fiscal year ends on the Saturday closest to July 31 in
each year.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet as of October 25, 1996 and the statements of
operations, changes in stockholders' equity and cash flows for the 12-week
periods ended October 21, 1995 and October 25, 1996 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 only of
normal recurring adjustments, necessary for a fair presentation of the results
of the interim periods. The data disclosed in the notes to the financial
statements for those interim periods are also unaudited.
CASH AND CASH EQUIVALENTS
The Corporation considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORY
Inventory, which consists mainly of goods for resale, is stated at the lower
of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures for maintenance
and repairs are charged to income as incurred. Depreciation is provided on the
double-declining balance basis over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Motor vehicles......................................................................... 5
Machinery and equipment................................................................ 7
Furniture and fixtures................................................................. 7
Leasehold improvements................................................................. 2-15
</TABLE>
Leasehold improvements are depreciated over the terms of the lease or the
useful lives of the improvement, whichever is shorter.
F-33
<PAGE>
OVERLAND MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWELVE WEEKS ENDED
OCTOBER 21, 1995 AND OCTOBER 25, 1996)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
STORE PRE-OPENING COSTS
Costs of a noncapital nature incurred prior to store openings are expensed
as incurred.
INCOME TAXES
The Corporation accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rate is recognized in income in the
period that includes the enactment date.
DEFERRED RENT AND RENTAL EXPENSE
The Corporation accounts for rental expense on stores, including leases with
scheduled base rent escalations, on a straight-line basis over the noncancelable
lease term.
RECLASSIFICATION
Certain amounts in 1995 have been reclassified to conform with the 1996
presentation.
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During 1995, additional long-term debt of $29,024 was recognized as a result
of the acquisition of certain fixed assets.
USE OF ESTIMATES
Management of the Corporation has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, other receivables, accounts
payable and accrued expenses and short and long term debt is a reasonable
estimate of its fair value based on instruments with similar terms and
maturities.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. SFAS No. 123 establishes fair value-based accounting and reporting
standards for stock-based employee compensation plans. The statement defines a
fair value based method of accounting for an employee stock option or similar
equity instrument
F-34
<PAGE>
OVERLAND MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWELVE WEEKS ENDED
OCTOBER 21, 1995 AND OCTOBER 25, 1996)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
and allows parties to elect to continue to measure compensation costs using the
intrinsic value method of accounting prescribed in Accounting Principles Board
(APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. SFAS No. 123
requires, for those electing to remain with the APB Opinion No. 25 accounting,
pro forma disclosure of net income as if the fair value-based method had been
applied.
3. STOCK TRANSACTIONS:
On June 13, 1994, the Corporation amended the Articles of Organization in
order to provide for one class of Common Stock, par value $.01 per share,
increase the number of authorized shares of Common Stock to 3,000,000 and
establish a class of Convertible Preferred Stock consisting of 368,850 shares,
par value $.01 per share. In addition, each share of Class A and B Common Stock
issued and outstanding as of June 13, 1994, was reclassified and exchanged into
100 shares of Common Stock, $.01 par value, of the Corporation.
On June 15, 1994, the Corporation issued and sold 368,850 shares of
Convertible Preferred Stock, $.01 par value, at $4.0667 per share. Each share of
Preferred Stock is convertible into approximately one share of the Corporation's
Common Stock for approximately $4.07 per share, and is entitled upon liquidation
to receive approximately $4.07 per share, plus any unpaid dividends. Holders of
Preferred Stock share ratably with holders of Common Stock in all common stock
dividends payable in cash (not in dividends payable in any Capital Stock or in
any other property) declared by the Board of Directors of the Corporation
computed as if the Preferred Stock had been converted into Common Stock at the
Conversion Ratio in effect at the date of declaration of the cash dividend.
Dividends on each share of Preferred Stock accumulate at an annual rate of 9% on
the liquidation value of each such share of Preferred Stock. Certain events,
including the sale of the Corporation, would cause the accumulated dividends to
become declared and payable immediately. At August 3, 1996 and October 25, 1996,
there were approximately $285,000 and $350,000, respectively, of accumulated but
undeclared Preferred Stock dividends.
On September 6, 1994, the stockholders approved a nonqualified stock option
plan with a maximum aggregate of 93,400 shares reserved for grant to key
personnel. Also, on that date, employees of the Corporation were granted fully
vested options to buy 32,888 Common Stock shares, $.01 par value, at an exercise
price of $3.50 per share with an expiration date of September 6, 2004. During
fiscal year 1996, 2,010 options were terminated. As of July 29, 1995, August 3,
1996 and October 25, 1996, 32,888, 30,878 and 30,878 options remained
outstanding. None of the options granted under the stock option plan have been
exercised.
On March 28, 1996, the Corporation amended the Articles of Organization in
order to convert the 368,850 authorized shares of Preferred Stock, $.01 par
value, into 368,850 authorized shares of Series A Preferred Stock, and to
authorize 2,000,000 shares of Series B Preferred Stock, $.01 par value. Any of
the Preferred Stock may be redeemed by the Corporation at any time. Series A
Preferred Stock is scheduled to be redeemed on June 23, 2000 and Series B is
scheduled to be redeemed on June 23, 2001.
On March 29, 1996, the Corporation issued and sold 2,000,000 shares of
Series B Preferred Stock, $.01 par value, at $1.00 per share. On the last day of
each calendar month, holders of Series B Preferred Stock are entitled to receive
any funds legally available for Series B preferred stock cumulative cash
dividends which have been declared by the Board of Directors.
F-35
<PAGE>
OVERLAND MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWELVE WEEKS ENDED
OCTOBER 21, 1995 AND OCTOBER 25, 1996)
3. STOCK TRANSACTIONS: (CONTINUED)
Dividends on each share of Series B Preferred Stock shall accumulate and
accrue from day to day at the annual rate of eleven percent (11%) on the
liquidation value of each share of Series B Preferred Stock. Provisions in the
Preferred Stock Agreement call for the Series B Preferred shareholders to
receive additional amounts in the event the dividends accumulate. There are no
accumulated dividends on the Series B Preferred Stock at August 3, 1996 and
October 25, 1996. In the event of liquidation of the Corporation, the holders of
outstanding Series B Preferred Stock shall be entitled to receive $1.00 per
share plus all accumulated and unpaid dividends.
4. STOCK WARRANTS:
As of July 29, 1995, the Corporation was in default of several covenants on
its loan agreements with Fleet Bank (formerly Shawmut Bank, N.A.). The balance
outstanding as of this date was $571,400. The debt covenants for these loans
were amended on August 25, 1995, which enabled the Corporation to be in
compliance with all covenants. On August 25, 1995, the Corporation entered into
a guarantee agreement with a stockholder (the Guarantor) to guarantee a portion
of the Corporation's loan agreement with the bank. As consideration for this
agreement, the Guarantor paid to the Corporation the amount of $2.00, and the
Corporation issued the Guarantor two series of warrants to purchase certain
shares of Common stock of the Corporation. The first warrant entitled the holder
to purchase 30,000 shares of the Corporation's Common Stock at a purchase price
of $0.25 per share. The second warrants entitled the holder to purchase 200,000
shares of the Corporation's Common Stock at a purchase price of $0.25 per share.
Both warrants were canceled under the terms of the Securities Purchase Agreement
(Agreement) dated March 29, 1996.
On March 29, 1996, the Corporation entered into an Agreement with a
stockholder to sell three series of warrants, at a price of $1.00 each, to
purchase certain shares of Common Stock of the Corporation. The first warrant
(Warrant 1996-1), entitles the holder to purchase nineteen percent (19%) of the
"Fully Diluted Shares of Common Stock of the Corporation" (as such term is
defined in the Agreement) at a purchase price of $0.25 per share. Warrant 1996-1
will expire on the earlier of the sixth anniversary of the redemption of the
Series B Preferred Stock or March 28, 2006. The second warrant (Warrant 1996-2)
entitles the holder to purchase nine percent (9%) of the "Fully Diluted Shares
of Common Stock of the Corporation" (as such term is defined in the Agreement)
at a purchase price of $0.25 per share. The third warrant (Warrant 1996-3) is
not exercisable until the earlier of June 24, 2000 or in the event of a default
to the stockholder (as defined in the Agreement). Warrant 1996-3 entitles the
holder to purchase two percent (2%) of the "Fully Diluted Shares of Common Stock
of the Corporation" (as such term is defined in the Agreement) at a purchase
price of $0.25 per share. Warrants 1996-2 and 1996-3 will expire on the earlier
of the sixth anniversary of the redemption of the Series A Preferred Stock or
June 23, 2004. As of August 3, 1996, the Corporation has reserved 656,592 shares
of the Common Stock for issuance upon exercise of Warrant 1996-1, Warrant 1996-2
and Warrant 1996-3.
F-36
<PAGE>
OVERLAND MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWELVE WEEKS ENDED
OCTOBER 21, 1995 AND OCTOBER 25, 1996)
5. DEBT:
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER
JULY 29, AUGUST 3, 25,
1995 1996 1996
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to Fleet Bank, 11.99%, payable
in monthly installments of principal and
interest of $317 from February 16, 1995
through January 16, 2000.................. $ 13,081 $ 10,768 $ 10,146
Note payable to Fleet Bank, 7.90%, payable
in monthly installments of principal and
interest of $364 from August 29, 1994
through July 29, 1998..................... 11,595 8,038 7,103
Note payable to IRA Olds/Toyota Corp.,
payable in monthly installments of
principal and interest of $244 from August
29, 1996 through July 29, 2001............ -- 11,308 10,874
Promissory note to PCM Development
Corporation for Middletown store leasehold
improvements, 12%, payable in monthly
installments of principal and interest of
$883 from April 1, 1992 through February
1, 1998................................... 23,390 15,156 12,939
Promissory note to Pyramid Company of
Buffalo for Buffalo store leasehold
improvements, 12%, payable in monthly
installments of principal and interest of
$1,017 from January 1, 1992 through
December 1, 1998.......................... 34,067 25,490 23,182
Notes payable to Fleet Bank, 80%, guaranteed
by the Small Business Administration,
10.75%, payable in monthly installments of
principal and interest of $8,930 from
December 6, 1993 through October 25,
2000...................................... 571,400 464,241 446,380
--------- --------- ---------
Total................................... 653,533 535,001 510,624
Less current portion........................ (129,840) (134,354) (135,172)
--------- --------- ---------
$ 523,693 $ 400,647 $ 375,452
--------- --------- ---------
--------- --------- ---------
</TABLE>
On December 6, 1993, the Corporation entered into a Term Loan Agreement (the
Agreement) guaranteed by the Small Business Administration. Under the terms of
the Agreement and the line-of-
F-37
<PAGE>
OVERLAND MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWELVE WEEKS ENDED
OCTOBER 21, 1995 AND OCTOBER 25, 1996)
5. DEBT: (CONTINUED)
credit agreement, substantially all of the assets of the Corporation were
pledged as collateral. The Agreement places limitations on the payment of
dividends and the incurrence of additional debt and also contains certain other
financial and operational covenants. The Corporation was in default of certain
covenants as of July 29, 1995. The debt covenants for these loans were amended
on August 25, 1995, which enabled the Corporation to be in compliance with all
covenants (see Note 4). The interest rate of the loan is based on the bank's
Corporate Base Rate plus 2% (10.25%, 10.75% and 10.25% at July 29, 1995, August
3, 1996 and October 25, 1996, respectively).
REVOLVING LINE OF CREDIT
The Corporation has a line-of-credit agreement with Fleet Bank (the Bank)
for $4,000,000. Interest is payable monthly at the Bank's prime rate plus 1.0%
(9.25% as of August 3, 1996). The line of credit is collateralized by inventory,
furniture, fixtures and the personal guarantees of the stockholders. There was
$1,900,000 outstanding at August 3, 1996. The weighted average interest rate for
the fiscal years ended July 29, 1995 and August 3, 1996, were 9.43% and 10.55%,
respectively. The weighted average interest rate for the periods ended October
21, 1995 and October 25, 1996, were 10.51% and 9.25%, respectively. The
Corporation has been notified by the Bank that the line of credit will not be
renewed upon its termination on December 31, 1996.
6. COMMITMENTS:
As of August 3, 1996, the Corporation leased its principal office and 32
retail shoe stores under noncancelable operating leases expiring on various
dates through January 2009. The Corporation opened an additional store in August
1996. The leases provide for base rental and, in some instances, for the payment
of percentage rents based on sales volume, real estate taxes and common area
maintenance charges. At August 3, 1996, future minimum lease payments under
these noncancelable leases were approximately as follows:
<TABLE>
<S> <C>
1997........................................................ $ 2,050,000
1998........................................................ 2,053,000
1999........................................................ 1,839,000
2000........................................................ 1,529,000
2001........................................................ 1,318,000
Thereafter.................................................. 5,391,000
-----------
$14,180,000
-----------
-----------
</TABLE>
Rent expense was approximately $1,063,000, $1,756,000 and $1,992,000 for the
years ended July 31, 1994, July 29, 1995 and August 3, 1996, respectively. Rent
expense was approximately $486,000 and $551,000 for the twelve week periods
ended October 21, 1995 and October 25, 1996, respectively.
F-38
<PAGE>
OVERLAND MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWELVE WEEKS ENDED
OCTOBER 21, 1995 AND OCTOBER 25, 1996)
7. INCOME TAXES:
The components of income tax expense (benefit) are approximately as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------
JULY 30, JULY 29, AUGUST 31,
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal................................................ $ 249,362 $ 121,000 $ 8,200
State.................................................. 28,000 21,400 13,500
Deferred:
Federal................................................ (34,000) (118,400) (62,400)
State.................................................. (4,000) (20,800) (12,800)
---------- ----------- -----------
Total................................................ $ 239,362 $ 3,200 $ (53,500)
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The deferred income tax balance at July 29, 1995, August 3, 1996 and October
25, 1996, represents income taxes at enacted statutory rates on temporary
differences. There is no valuation allowance with respect to the deferred income
tax asset as of July 29, 1995, August 3, 1996 and October 25, 1996. The
effective rate varied from the statutory rate of 34.0% primarily as a result of
state income taxes.
Components of the deferred income tax balance are as follows:
<TABLE>
<CAPTION>
JULY 29, AUGUST 3,
1995 1996
---------- -----------
<S> <C> <C>
Deferred tax assets:
Inventory--Uniform Capitalization.................................. $ 62,000 $ 88,601
Compensated absences............................................... 0 11,054
Depreciation....................................................... 97,600 289,553
Deferred rent...................................................... 145,600 0
Other.............................................................. 8,300 0
---------- -----------
Total gross deferred tax assets.................................. $ 313,500 $ 389,208
Deferred tax liabilities:
Prepaid expenses................................................... (86,400) 0
Prepaid rent....................................................... 0 (108,779)
Other.............................................................. (10,900) 0
---------- -----------
Total gross deferred tax liability............................... (97,300) (108,779)
---------- -----------
Net deferred tax asset......................................... $ 216,200 $ 280,429
---------- -----------
---------- -----------
</TABLE>
8. LICENSE AGREEMENT:
The Corporation has acquired the rights to use the trademarks "Overland" and
"Overland Trading Co." under a license agreement. The terms of the agreement
commenced on January 28, 1989 and continued through January 27, 1996, at which
time the licensor transferred and assigned to the Corporation its entire right,
title, and interest in the trademarks for no additional consideration. During
the term of
F-39
<PAGE>
OVERLAND MANAGEMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE TWELVE WEEKS ENDED
OCTOBER 21, 1995 AND OCTOBER 25, 1996)
8. LICENSE AGREEMENT: (CONTINUED)
the agreement, the Corporation paid to the licensor a royalty equal to 3.0% of
the gross sales of all products for six stores with royalties payable every six
months in February and August. At July 29, 1995, accrued royalties amounted to
$68,915 and were included in accounts payable and accrued expenses. All
obligations under the license agreement have been fulfilled as of August 3,
1996.
9. SALE OF THE COMPANY:
On October 25, 1996, Track 'n Trail and its stockholders purchased 79.0% and
21.0%, respectively, of the outstanding common stock of the Corporation for an
aggregate price of $3,156,548, paid with promissory notes plus warrants. The
notes issued by the Track 'n Trail stockholders have been guaranteed by Track 'n
Trail. In the event of an initial public offering of Track 'n Trail's common
stock, the warrants give the previous stockholders of the Corporation the right
to purchase up to 1.0% of the outstanding shares of Track 'n Trail's stock, on a
fully diluted basis, outstanding immediately prior to an initial public
offering, at the initial public offering price. In the absence of such an
initial public offering, the warrants require that Track 'n Trail purchase the
warrants from the Corporation's stockholders for cash on October 25, 2001, in an
amount equal to one percent of the then fair value of Track 'n Trail.
In connection with this acquisition, the Corporation redeemed all of the
outstanding shares of Series A Preferred Stock and Series B Preferred Stock in
exchange for a subordinated promissory note without collateral in the principal
amount of $3,500,000 due on June 30, 1998, or immediately upon a firm
underwritten initial public offering of Track 'n Trail. The note is guaranteed
by Track 'n Trail and bears interest at a rate of 10.0% through October 25,
1997, and 12.0% thereafter, with payments of interest due quarterly through
October 25, 1997, and monthly thereafter.
Under a line of credit arranged by Track 'n Trail, the Corporation borrowed
$2,559,000 and (i) repaid the outstanding line of credit of $1,600,000, (ii)
retired a note payable for $446,380, (iii) paid accumulated dividends to its
preferred stockholders of $350,000 and (iv) paid certain fees and expenses
associated with the acquisition. Additionally, the warrants (discussed in Note
4) were exercised for 597,288 shares of common stock, for total consideration of
$149,322 in connection with the acquisition.
F-40
<PAGE>
[INSIDE BACK COVER OF PROSPECTUS]
[OVERLAND TRADING COMPANY LOGO]
[PICTURE OF UNITED STATES MAP INDICATING OVERLAND TRADING COMPANY STORE
LOCATIONS]
35 Eastern Locations
<PAGE>
[INSIDE BACK COVER GATEFOLD OF PROSPECTUS]
[PHOTOGRAPH SHOWS INTERIOR PANEL WALL OF OVERLAND TRADING COMPANY STORE WITH
DISPLAY OF WOMEN'S SHOES]
Ecco
Clarks
Rockport
Timberland
Selbel
Birkenstock
HH Brown
Vasque
Sorel
[PHOTOGRAPH SHOWS EXTERIOR OF OVERLAND TRADING COMPANY STORE]
Quality, Comfort and Tradition Always in Style
[PHOTOGRAPH SHOWS PANORAMIC VIEW OF LEGS AND FEET]
[PHOTOGRAPH SHOWS INTERIOR PANEL WALL OF OVERLAND TRADING COMPANY STORE WITH
DISPLAY OF MEN'S SHOES]
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY
OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
The Company.................................... 7
Risk Factors................................... 8
S Corporation Distributions.................... 13
Use of Proceeds................................ 14
Dividend Policy................................ 14
Dilution....................................... 15
Capitalization................................. 16
Selected Consolidated Financial Information.... 18
Pro Forma Condensed Consolidated Financial
Information.................................. 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 28
Business....................................... 39
Management..................................... 50
Certain Transactions........................... 57
Principal and Selling Stockholders............. 58
Description of Capital Stock................... 59
Shares Eligible for Future Sale................ 61
Underwriting................................... 63
Legal Matters.................................. 65
Experts........................................ 65
Change in Independent Accountants.............. 65
Additional Information......................... 66
Financial Statements........................... F-1
</TABLE>
---------------------
UNTIL NOVEMBER 4, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,727,272 SHARES
[LOGO TO COME]
COMMON STOCK
--------------
PROSPECTUS
--------------
BT ALEX. BROWN
A.G. EDWARDS & SONS, INC.
LADENBURG THALMANN & CO. INC.
OCTOBER 10, 1997
- ------------------------------------------------
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- ------------------------------------------------
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