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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER 0-22359
TRACK 'n TRAIL
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 91-1778085
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4961-A WINDPLAY DRIVE,
EL DORADO HILLS, CALIFORNIA 95762
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 933-4525
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ( X ).
The aggregate market value of Common Stock held by non-affiliates of the
registrant on March 16, 1998 was $21.2 million.
On March 16, 1998 the registrant had 6,842,644 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive Proxy
Statement for the 1998 Annual Meeting of Stockholders, to be filed with the
Commission no later than 120 days after the end of the registrant's fiscal year
covered by this Form 10-K.
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PART I
ITEM 1. BUSINESS
Track 'n Trail, a Delaware corporation (together with its subsidiaries,
unless the context otherwise requires, the "Company"), is one of the largest
full-service specialty retailers in the United States focusing on a broad range
of high-quality branded casual, outdoor and adventure footwear. The Company has
increased its number of stores and net sales each year since inception. Pursuant
to the reorganization (the "Reorganization") effected in October 1997, the
Company acquired the businesses conducted by its subsidiaries, Track 'n Trail,
a California corporation ("Track 'n Trail-California"), and Overland Management
Corporation ("Overland"). The Company operates in a single business segment.
As of December 27, 1997, the Company operated 150 stores in 29 states under
the Track 'n Trail and Overland Trading names. 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. Track 'n Trail stores
average approximately 1,896 square feet in size, while the Overland Trading
stores currently average approximately 1,423 square feet. As of December 27,
1997, the Company operated 113 Track 'n Trail stores in 28 states, and 37
Overland Trading stores in nine states, including the first Overland Trading
store opened in California in September 1997.
The Company obtained 33 Overland Trading stores by acquiring control of
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.
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
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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. Overland Trading
stores are designed to appeal more to the large and growing 40- to
55-year-old age group. 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.
- - 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 10% of total net sales in
fiscal 1997, 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.
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
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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 20 district managers and three regional managers regarding local
or regional factors relevant to merchandising decisions.
The principal categories of footwear offered by Track 'n Trail and Overland
Trading stores, and selected vendors for each, are summarized below:
MEN'S AND WOMEN'S FUNCTIONAL AND SPORT SPECIFIC FOOTWEAR
Functional footwear designed to perform under adverse conditions or for a
specific activity; includes Hiking and Approach Shoes and Boots, White Water
Sandals, Field and Duty Footwear, Skate Boarding Shoes and Foul Weather Boots.
SELECTED TRACK'N TRAIL VENDORS SELECTED OVERLAND TRADING VENDORS
Timberland Rockport
Solomon Sperry
Vasque Sorel
Caterpillar Timberland
Teva
Etnies
Vans
Airwalk
Columbia
MEN'S AND WOMEN'S CASUAL FOOTWEAR
Casual footwear whose primary end use is as casual everyday footwear;
includes Walking Shoes, Casual and Walking Sandals, Lightweight Casuals, Dress
Casuals and Fashion Casuals.
SELECTED TRACK'N TRAIL VENDORS SELECTED OVERLAND TRADING VENDORS
Birkenstocks Timberland
Rockport Clarks
Timberland Joseph Seibel
Doc Marten H.H. Brown
Born Rockport
Simple Easentials
Stegmann Bostonian
The following table sets forth the Company's merchandise assortment by category
as a percentage of net sales for the periods shown:
<TABLE>
<CAPTION>
Fiscal
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Men's and Women's Functional and Sport Specific
Footwear....................................... 31% 32% 35%
Men's and Women's Casual Footwear................ 60 58 54
Men's, Women's and Children's Slippers........... 1 2 2
Children's Footwear.............................. 1 1 2
Shoe Care Products, Hosiery and Accessories...... 7 7 7
---- ---- ----
---- ---- ----
100% 100% 100%
---- ---- ----
---- ---- ----
</TABLE>
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Private label merchandise accounted for approximately 10% of the Company's
net sales in fiscal 1997. 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 7.2% of net sales at the Track 'n Trail
stores in fiscal 1997 and the Company has increased accessories sales to
approximately 5.5% of Overland's net sales in fiscal 1997 (from less than 2% for
the fiscal year ended August 3, 1996).
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 70.3% of the Company's net sales in
fiscal 1997. In fiscal 1997, Dr. Martens, Timberland and Birkenstock accounted
for 19.3%, 15.7% and 7.9% 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. See "Risk
Factors".
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 1997, the Company relied on approximately 50 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".
STORE OPERATIONS
The Company operated 150 stores as of December 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
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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 average
approximately 1,896 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 1,423 square
feet in size, of which 40% to 60% is devoted to the sales floor.
OUTLET STORES
The Company consolidates older or slow-moving merchandise to three
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 stores
currently feature a contemporary "industrial" decor, and utilize industrial
equipment throughout as props and fixtures. 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, three regional managers and 20
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.
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
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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 telephone
surveys.
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 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 150 stores in 29 states as of December 27, 1997, as
set forth in the following table:
TRACK 'N TRAIL STORES
<TABLE>
<CAPTION>
Current Current
State Stores State Stores
----- ------ ----- ------
<S> <C> <C> <C>
Alaska...................................... 2 Minnesota................................. 2
California.................................. 27 Missouri.................................. 1
Colorado.................................... 6 Nebraska.................................. 1
Connecticut................................. 3 Nevada.................................... 1
Georgia..................................... 1 New Hampshire............................. 2
Idaho....................................... 1 New York.................................. 7
Illinois.................................... 9 Ohio...................................... 5
Indiana..................................... 5 Oregon.................................... 3
Iowa........................................ 1 Pennsylvania.............................. 3
Kentucky.................................... 1 South Carolina............................ 1
Maine....................................... 1 Tennessee................................. 2
Maryland.................................... 1 Virginia.................................. 3
Massachusetts............................... 3 Washington................................ 7
Michigan.................................... 10 Wisconsin................................. 4
OVERLAND TRADING STORES
Current Current
State Stores State Stores
----- ------ ----- ------
California................................. 1 New York................................... 10
Connecticut................................ 2 Ohio....................................... 5
Kentucky................................... 1 Pennsylvania............................... 2
Massachusetts.............................. 9 Virginia................................... 3
New Jersey................................. 4
</TABLE>
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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 three 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.
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 receives approximately 85% of its
merchandise at its central distribution center in El Dorado Hills, California,
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.
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.
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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.
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 December 27, 1997, the Company had approximately 500 full-time
employees and 670 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.
RISK FACTORS
THIS REPORT 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 REPORT.
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 22 stores in fiscal 1997, and presently
anticipates opening a substantial number of stores in fiscal 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 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
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 1997, the Company's ten largest suppliers accounted for
approximately 70.3% of its net sales. 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 inventory 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
8
<PAGE>
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 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 "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 three months of each fiscal year and recorded a larger loss
in the first three months of fiscal 1997 than in the first three 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. A slowdown in sales
during these peak periods will tend to have a particularly pronounced effect on
the Company's results of operations. For example, the Company's fiscal 1997
results were negatively affected by slower than expected Christmas sales. In
addition, 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 also affected by weather patterns,
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."
9
<PAGE>
UNCERTAINTIES ASSOCIATED WITH PRIVATE LABEL SOURCING
Private label products accounted for approximately 10% of net sales in
fiscal 1997. 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 product to its manufacturers. There can be no
assurance that the foregoing 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. 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. 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 CERTAIN STOCKHOLDERS
David L. Suechting, Jr., the Company's Chairman of the Board, Barbara
Suechting, a director of the Company, and Deborah Suechting (the "Pre-Offering
Stockholders") in the aggregate own beneficially approximately 60% of the
Company's outstanding shares of Common Stock. As a result, the Pre-Offering
Stockholders, acting together, are able to control all matters requiring
approval by the stockholders of the Company, including the election of the Board
of Directors.
FUTURE CAPITAL NEEDS
The Company expects that anticipated cash flow from operations and
anticipated borrowings under a new credit facility will satisfy its cash
requirements through fiscal 1998. To the extent that the foregoing cash
resources are insufficient to fund the Company's activities, including new store
openings planned for 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
10
<PAGE>
securities, dilution to the Company's stockholders could occur. See
"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.
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
The Board of Directors 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.
ITEM 2. PROPERTIES
The Company leases a single 24,192 square foot distribution center in El
Dorado Hills, California, a 6,000 square foot staging facility in Rancho
Cordova, California, and a 14,000 square foot corporate office facility in El
Dorado Hills, California. 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 and distribution
facility's lease expires in 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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On October 6, 1997 the Company's stockholders approved, by unanimous
written consent, (i) the Company's Employee Stock Purchase Plan and the Track 'n
Trail 1996 Stock Option Plan, (ii) the amendment and restatement of the
Company's Certificate of Incorporation and (iii) the amended and restated bylaws
of the Company.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's initial public offering of its Common Stock (the "Offering")
occurred in October 1997. The Company's Common Stock is listed on the Nasdaq
National Market under the symbol "TKTL". For the period from commencement of
trading through December 27, 1997 the high and low sale prices reported by
Nasdaq were $11.88 and $8.50, respectively.
As of March 16, 1998, there were 59 holders of record of the Company's
Common Stock.
The Company has never paid or declared any cash dividends on its Common
Stock or other securities and does not anticipate paying cash dividends in the
foreseeable future. In addition, the Company's current line of credit prohibits
the payment of cash dividends on its capital stock.
In October 1997, the Company completed the Offering pursuant to a
Registration Statement on Form S-1 (File No. 333-23195) and issued 2,727,272
shares of its Common Stock to the public at a price of $10.50 per share. The
Company received approximately $25 million of cash from the Offering, net of
underwriting discounts, commissions, and other offering costs and expenses.
The Company has applied all of the proceeds of the Offering as follows:
approximately $17.7 million to repay indebtedness, $6.4 million to fund the
payment of a distribution to the Pre-Offering Stockholders, $443,000 for the
build-out of new stores and $485,000 for working capital.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The balance sheet and statement of operations data as of December 27, 1997
and December 28, 1996, and for each of the three fiscal years in the period
ended December 27, 1997, are derived from audited consolidated financial
statements of the Company included herein and should be read in conjunction with
such financial statements. The balance sheet and statement of operations data
as of December 30, 1995, December 31, 1994 and December 25, 1993, and for each
of the two fiscal years in the period ended December 31, 1994 are derived from
audited consolidated financial statements of the Company which are not included
herein. 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 report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------
1997 1996 1995 1994(1) 1993
---- ---- ---- ------- ----
STATEMENT OF OPERATIONS DATA: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE, PER SQUARE FOOT AND NUMBER OF STORES DATA)
<S> <C> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . . . . . . $ 91,834 $66,233 $50,691 $48,165 $41,858
Cost of sales . . . . . . . . . . . . . . . . . . . . 47,677 34,062 26,192 25,080 21,903
-------- ------- ------- ------- -------
Gross profit . . . . . . . . . . . . . . . . . . . . 44,157 32,171 24,499 23,085 19,955
Selling and marketing expense . . . . . . . . . . . . 30,780 21,060 16,852 14,975 13,076
Administrative and distribution . . . . . . . . . . . 6,840 5,508 4,826 4,935 4,655
-------- ------- ------- ------- -------
Operating income . . . . . . . . . . . . . . . . . . 6,537 5,603 2,821 3,175 2,224
Interest expense . . . . . . . . . . . . . . . . . . 1,260 670 435 324 330
Other expense (income) . . . . . . . . . . . . . . . (21) (24) (41) 37 56
-------- ------- ------- ------- -------
Income before income taxes and
minority interest . . . . . . . . . . . . . . . 5,298 4,957 2,427 2,814 1,838
Income tax expense . . . . . . . . . . . . . . . . . 118 488 41 67 55
Minority interest . . . . . . . . . . . . . . . . . -- 105 -- -- --
-------- ------- ------- ------- -------
Net income . . . . . . . . . . . . . . . . . . . . . $ 5,180 $ 4,364 $ 2,386 $ 2,747 $ 1,783
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Historical earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . $ 1.10 $ 1.06 $ 0.58 $ 0.67 $ 0.43
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Diluted . . . . . . . . . . . . . . . . . . . . . $ 1.03 $ 1.04 $ 0.58 $ 0.67 $ 0.43
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
PRO FORMA STATEMENT OF OPERATIONS DATA (2):
Historical income before income taxes
and minority interest . . . . . . . . . . . . . $ 5,298 $ 4,957 $ 2,427 $ 2,814 $ 1,838
Pro forma income tax expense (2) . . . . . . . . . . 2,119 1,983 971 1,126 735
Minority interest . . . . . . . . . . . . . . . . . . -- 105 -- -- --
-------- ------- ------- ------- -------
Pro forma net income . . . . . . . . . . . . . . . . $ 3,179 $ 2,869 $ 1,456 $ 1,688 $ 1,103
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Pro forma earnings per share (3):
Basic . . . . . . . . . . . . . . . . . . . . . . . $ 0.68 $ 0.70
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Diluted . . . . . . . . . . . . . . . . . . . . . . $ 0.58 $ 0.57
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
SELECTED STORE OPERATING DATA:
Store contribution(4) . . . . . . . . . . . . . . . . $ 13,377 $ 11,111 $ 7,647 $ 8,110 $ 6,880
Number of stores:
Opened or acquired during period . . . . . . . 22 51(5) 12 9 9
Closed during period . . . . . . . . . . . . . 0 5 4 4 2
Open at end of period . . . . . . . . . . . . . 150(6) 128 82 74 69
Total weighted average square feet(7) . . . . . . . 236,095 168,966 144,612 130,542 114,813
Weighted average net sales per square foot(8) . . . . $ 389 $ 392 $ 351 $ 369 $ 365
Average square feet per store . . . . . . . . . . . . 1,780 1,744 1,873 1,894 1,851
Increase(decrease) in comparable stores net sales(9) 0.6% 3.1% (1.4)% 0.6% 4.1%
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30, DECEMBER 31, DECEMBER 25,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital. . . . . . . . . . . . . . . . . . . $ 21,896 $ 9,430 $ 6,710 $ 5,742 $ 5,695
Total assets . . . . . . . . . . . . . . . . . . . . 44,133 31,858 17,050 15,630 15,409
Total debt . . . . . . . . . . . . . . . . . . . . . 236 10,765 2,734 2,396 3,633
Stockholders' equity . . . . . . . . . . . . . . . . 32,082 10,646 7,648 6,349 5,650
</TABLE>
- -------------------
(1) 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.
(2) Includes pro forma provision for income taxes using an assumed combined
federal and state tax rate of 40%, 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 and until the Reorganization, Track 'n
Trail-California operated as an S corporation and was not 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 on October 7, 1997,
the S corporation election of Track 'n Trail-California and the Company,
respectively, was terminated under circumstances under which income
reported by the Company and Track 'n Trail-California for their respective
terminated S corporation taxable years was determined utilizing a "closing
of the books" method.
(3) Shares outstanding include approximately 327,000 and 94,000 shares issuable
upon exercise of stock options outstanding at December 27, 1997 and
December 28, 1996, respectively, after applying the treasury stock method.
In applying the treasury stock method for determining the dilution
applicable to stock options outstanding, the incremental shares assumed
issued (excess of shares assumed issued over the number of shares assumed
purchased) was determined using the sum of exercise proceeds, future
compensation and the tax benefit to the Company upon exercise of the
options as the assumed proceeds that would have been used to purchase
shares at the average value during the period. Average market value was
based on estimated fair values for periods prior to the Offering and market
prices thereafter. Distribution shares of approximately 421,000 included in
pro forma diluted earnings per share for fiscal 1997 represents the number
of shares of Common Stock sold in the Offering, the proceeds of which were
necessary to pay the excess of S corporation distributions paid or declared
during the twelve month period preceding the Offering over earnings during
the twelve month period preceding the Offering. Distribution shares of
approximately 828,000 included in pro forma diluted earnings per share for
fiscal 1996 represent the number of shares of Common Stock sold in the
Offering, the proceeds of which were necessary to pay the excess of S
corporation distributions paid or declared during fiscal 1996 through the
Offering over fiscal 1996 earnings. All warrants outstanding and certain
options with exercise prices in excess of market value were not dilutive
and, accordingly, were not included.
(4) 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.
(5) 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.
(6) Stores open at end of fiscal 1997 consist of 113 Track 'n Trail stores and
37 Overland Trading stores.
(7) Weighted to reflect store openings and closings during each period,
assuming that all periods presented consisted of 52 weeks.
(8) Weighted average net sales for fiscal 1994 have been adjusted as if such
year consisted of 52 weeks.
(9) 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
1995 and 1994 increases have been calculated by comparing net sales in such
years to net sales for the prior 52 and 53 weeks, respectively. The
increases for fiscal 1997 and 1996 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 1997 and for fiscal 1996 would have
been (2%) and 2.3%, respectively.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. In
addition to historical information, this Management's Discussion and Analysis
includes certain forward-looking statements regarding events and financial
trends which may affect the Company's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause the Company's actual results and financial position to differ materially.
Factors that could cause or contribute to such differences include those
discussed below. These and other risks and uncertainties related to the business
are described in detail in this report. See "Business--Risk Factors." Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The Company is one of the largest full-service specialty retailers
in the United States focusing on a broad range of high-quality branded casual,
outdoor and adventure footwear. As of December 27, 1997, the Company operated
113 Track 'n Trail stores and 37 Overland Trading stores in 29 states. The
following discussion should be read in conjunction with the financial statements
and notes thereto of the Company included elsewhere in this report.
Comparable store sales are commonly used as a performance measurement
by retail companies. The Company defines comparable stores as those stores that
were open for the full fiscal period and for the full prior fiscal period. The
Company's comparable store net sales grew 0.6% in 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 decreased by 2% in fiscal 1997.
Track 'n Trail-California was treated as an S corporation for federal
and certain state income tax purposes from June 28, 1992, until its S
corporation status terminated as a result of the Reorganization on October 7,
1997 (the "Termination Date"). As a result, the earnings of Track 'n
Trail-California during such period were taxed, with certain exceptions,
directly to the stockholders of Track 'n Trail-California rather than to
Track 'n Trail-California. Thereafter, Track 'n Trail-California has been
subject to state and federal income taxes as a C corporation, and all
references to net income in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" are presented as if Track 'n
Trail-California had been subject to income taxes at a combined state and
federal income tax rate of 40%.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
Fiscal
-----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . 51.9 51.4 51.7
----- ----- -----
Gross profit . . . . . . . . . . . . . . 48.1 48.6 48.3
Selling and marketing expenses . . . . . 33.5 31.8 33.2
----- ----- -----
Store contribution (1) . . . . . . . . . 14.6 16.8 15.1
Administrative and distribution
expenses . . . . . . . . . . . . . 7.5 8.3 9.5
----- ----- -----
Operating income . . . . . . . . . . . 7.1 8.5 5.6
Interest expense . . . . . . . . . . . . 1.3 1.0 0.9
Other income . . . . . . . . . . . . . . (0.0) (0.0) (0.1)
----- ----- -----
Income before income taxes
and minority interest . . . . . . . 5.8 7.5 4.8
Pro forma income tax provision (2) . . . 2.3 3.0 1.9
Minority interest . . . . . . . . . - 0.2 -
----- ----- -----
Pro forma net income (2) . . . . . . . . 3.5% 4.3% 2.9%
----- ----- -----
----- ----- -----
</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.
(2) Reflects an assumed combined federal and state tax rate of 40%, 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.
15
<PAGE>
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES
Net sales for fiscal 1997 were $91.8 million, an increase of $25.6 million,
or 38.7%, over fiscal 1996 net sales of $66.2 million. The 37 Overland Stores
accounted for $17.9 million or 69.9% of the increase in net sales, while the 19
Track 'n Trail stores opened during the year accounted for an additional $3.2
million. A comparable store net sales increase of 0.6% for the Track 'n Trail
stores contributed $290,000 to the net sales gain. The remaining increase in net
sales of $4.2 million is primarily attributable to stores opened in fiscal 1996.
The modest comparable store net sales increase for the Track 'n Trail stores is
a result of lower than expected year-end holiday sales.
GROSS PROFIT
Gross profit was $44.2 million in fiscal 1997, an increase of $12
million, or 37.3%, over the $32.2 million gross profit in fiscal 1996. Gross
profit as a percentage of net sales decreased to 48.1% in fiscal 1997 from 48.6%
in fiscal 1996. Gross profit at the Track 'n Trail stores in fiscal 1997 was
48.8% of net sales, a 0.2% margin improvement over the 48.6% gross profit as a
percentage of net sales in fiscal 1996. This increase was primarily attributable
to enhanced cumulative markups and lower markdowns. Overland's gross profit in
fiscal 1997 was $11.3 million, or 46.2% of net sales, which had a negative
impact on the consolidated gross profit as a percentage of net sales. The level
of gross profit as a percentage of net sales realized at the Overland Trading
stores represented an improvement over the 43.2% gross profit margin recorded by
Overland under previous management in the comparable period in 1996. This
improvement was due, in part, to increased purchasing economies of scale after
the acquisition of Overland. Management also believes that liquidity problems at
Overland contributed to Overland's low gross profit margin in the comparable
period in 1996.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $30.8 million in fiscal 1997, an
increase of $9.7 million, or 46.2%, over fiscal 1996. Overland accounted for
$6.7 million of the increase. The remaining $3 million increase is primarily
attributable to the 17 Track 'n Trail stores opened in 1996 and the 19 Track 'n
Trail stores opened in 1997 which were not open for the full comparable period
in the prior year. As a percentage of net sales, selling and marketing expenses
increased to 33.5% in fiscal 1997 from 31.8% in fiscal 1996, primarily as a
result of higher operating expenses as a percentage of net sales at Overland,
which were 34.1% of Overland's net sales in fiscal 1997. As a percentage of net
sales, selling and marketing expenses at the Track 'n Trail stores increased
slightly to 33.3% in fiscal 1997 from 32.6% in the comparable period in 1996,
primarily due to the timing of new store openings.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $6.8 million in fiscal 1997,
an increase of $1.3 million, or 24.2%, over the $5.5 million recorded in fiscal
1996. Overland accounted for $1.2 million of the increase. The remaining
$123,000 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 7.5% in fiscal
1997 from 8.3% in fiscal 1996. In the absence of the Overland acquisition,
administrative and distribution expenses would have been 7.5% of Track 'n Trail
net sales, down from the 8.3% experienced in fiscal 1996, as a result of
spreading such expenses over a larger revenue base.
INTEREST EXPENSE
Interest expense increased to $1.3 million, or 1.4% of net sales in fiscal
1997, from $670,000, or 1% of net sales, in fiscal 1996. This $590,000 increase
was primarily attributable to $421,000 of interest on the debt incurred in
connection with the Overland acquisition (all of which was repaid in October
1997), and $157,000 of interest on Overland's borrowings under its line of
credit.
16
<PAGE>
NET INCOME
The Company's net income in fiscal 1997 was $3.2 million, an increase from
the $2.9 million net income in fiscal 1996. The increase in net income is
attributable to the increase in net sales and the effect of the other factors
discussed above.
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 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%, 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.
17
<PAGE>
INTEREST EXPENSE
Interest expense increased to $670,000, or 1% 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%
interest in Overland net income owned by the Company's Pre-Offering
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% increase over
the net income of $1.5 million in fiscal 1995.
18
<PAGE>
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 1997 and fiscal 1996. 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 consolidated 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 1997 FISCAL 1996
------------------------------------------ -----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------ ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Net sales . . . . . . . . . . . . . $16,867 $20,660 $24,761 $29,546 $10,249 $13,037 $16,581 $26,366
Cost of sales . . . . . . . . . . . . 8,857 10,556 12,975 15,289 5,430 6,590 8,576 13,466
------ ------- ------- ------- ------- ------- ------- -------
Gross profit . . . . . . . . . . . . 8,010 10,104 11,786 14,257 $ 4,819 $ 6,447 $ 8,005 $12,900
Selling and marketing expenses . . . 7,194 7,333 7,787 8,466 4,259 4,532 5,013 7,256
------ ------- ------- ------- ------- ------- ------- -------
Store contribution(1) . . . . . . . . 816 2,771 3,999 5,791 $560 $ 1,915 $ 2,992 $ 5,644
Administrative and distribution
expenses . . . . . . . . . . . . 1,780 1,664 1,777 1,619 1,180 1,137 1,151 2,040
------ ------- ------- ------- ------- ------- ------- -------
Operating income (loss) . . . . . . . $ (964) $ 1,107 $ 2,222 $ 4,172 $ (620) $ 778 $ 1,841 $ 3,604
Interest expense . . . . . . . . . . 289 442 440 89 91 149 146 284
Other expense (income) . . . . . . . (10) 30 (26) (15) (15) 4 (3) (10)
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes and minority interest . . $(1,243) $ 635 $ 1,808 $ 4,098 $ (696) $ 625 $ 1,698 $ 3,330
Income tax provision (benefit) . . . (416) 44 125 365 (19) 17 51 439
Minority interest . . . . . . . . . . -- -- -- -- -- -- -- 105
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss) . . . . . . . . . . (827) 591 1,683 3,733 (677) 608 1,647 2,786
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
Historical earnings per share:
Basic . . . . . . . . . . . . . $ (0.20) $ 0.14 $0.41 $0.58 $ (0.16) $ 0.15 $ 0.40 $0.68
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
Diluted . . . . . . . . . . . . $ (0.19) $ 0.14 $0.39 $0.54 $ (0.16) $ 0.15 $ 0.38 $0.65
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
Historical income (loss) before income
taxes and minority interest . . (1,243) 635 1,808 4,098 (696) 625 1,698 3,330
Pro forma income tax provision
(benefit) . . . . . . . . . . . (497) 254 723 1,639 (278) 250 679 1,332
Minority interest . . . . . . . . . . - - - - - - - 105
------ ------- ------- ------- ------- ------- ------- -------
Pro forma net income (loss) (2) . . . $ (746) $381 $ 1,085 $ 2,459 $ (418) $ 375 $ 1,019 $ 1,893
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
Pro forma earnings per share (3):
Basic . . . . . . . . . . . . . $ (0.18) $ 0.09 $ 0.26 $ 0.38 $ (0.10) $ 0.09 $ 0.25 $ 0.46
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
Diluted . . . . . . . . . . . . $ (0.15) $ 0.08 $ 0.22 $ 0.35 $ (0.08) $ 0.07 $ 0.20 $ 0.37
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
As a percentage of net sales
----------------------------------------------------------------------------------------
Net sales . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . 52.5 51.1 52.4 51.7 53.0 50.5 51.7 51.1
------ ------- ------- ------- ------- ------- ------- -------
Gross profit . . . . . . . . . . . . . 47.5 48.9 47.6 48.3 47.0 49.5 48.3 48.9
Selling and marketing expenses . . . . 42.7 35.5 31.5 28.7 41.5 34.8 30.3 27.5
------ ------- ------- ------- ------- ------- ------- -------
Store contribution(1) . . . . . . . . . 4.8 13.4 16.1 19.6 5.5 14.7 18.0 21.4
Administrative and distribution
expenses . . . . . . . . . . . . . 10.6 8.1 7.1 5.5 11.5 8.7 6.9 7.7
------ ------- ------- ------- ------- ------- ------- -------
Operating income (loss) . . . . . . . . (5.8) 5.3 9.0 14.1 (6.0) 6.0 11.1 13.7
Interest expense . . . . . . . . . . . 1.7 2.1 1.8 0.3 0.9 1.1 0.9 1.1
Other expense (income) . . . . . . . . (0.1) 0.1 (0.1) (0.1) (0.1) 0.1 (0.0) (0.0)
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes and minority interest . . . (7.4) 3.1 7.3 13.9 (6.8) 4.8 10.2 12.6
Income tax provision (benefit) . . . . (2.5) 0.2 0.5 1.2 (0.2) 0.1 0.3 1.7
Minority interest . . . . . . . . . . . -- -- -- -- -- -- -- 0.4
Net income (loss) . . . . . . . . . . . (4.9)% 2.9% 6.8% 12.7% (6.6)% 4.7% 9.9% 10.5%
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
Historical income (loss)
before income taxes and minority
interest . . . . . . . . . . . . . (7.4) 3.1 7.3 13.9 (6.8) 4.8 10.2 12.6
Pro forma income tax provision
(benefit) . . . . . . . . . . . . . . . (3.0) 1.3 2.9 5.6 (2.7) 1.9 4.1 5.1
Minority interest . . . . . . . . . . . -- -- -- -- -- -- -- 0.3
------ ------- ------- ------- ------- ------- ------- -------
Pro forma net income (loss)(2) . . . . . (4.4)% 1.8% 4.4% 8.3% (4.1%) 2.9% 6.1% 7.2%
------ ------- ------- ------- ------- ------- ------- -------
------ ------- ------- ------- ------- ------- ------- -------
</TABLE>
19
<PAGE>
(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.
2) Reflects an assumed combined federal and state tax rate of 40%, 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.
(3) Shares outstanding include approximately 327,000 and 94,000 shares issuable
upon exercise of stock options outstanding at December 27, 1997 and
December 28, 1996, respectively, after applying the treasury stock method.
In applying the treasury stock method for determining the dilution
applicable to stock options outstanding, the incremental shares assumed
issued (excess of shares assumed issued over the number of shares assumed
purchased) was determined using the sum of exercise proceeds, future
compensation and the tax benefit to the Company upon exercise of the
options as the assumed proceeds that would have been used to purchase
shares at the average value during the period. Average market value was
based on estimated fair values for periods prior to the Offering and market
prices thereafter. Distribution shares of approximately 421,000 included in
pro forma diluted earnings per share for fiscal 1997 represents the number
of shares of Common Stock sold in the Offering, the proceeds of which were
necessary to pay the excess of S corporation distributions paid or declared
during the twelve month period preceding the Offering over earnings during
the twelve month period preceding the Offering. Distribution shares of
approximately 828,000 included in pro forma diluted earnings per share for
fiscal 1996 represent the number of shares of Common Stock sold in the
Offering, the proceeds of which were necessary to pay the excess of S
corporation distributions paid or declared during fiscal 1996 through the
Offering over fiscal 1996 earnings. All warrants outstanding and certain
options with exercise prices in excess of market value were not dilutive
and, accordingly, were not included.
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 $21.9 million in working capital as of December 27, 1997,
compared to $9.4 million at the end of fiscal 1996. This increase is primarily
attributable to the reduction in debt and increase in cash due to the Offering
and the increase in inventories as a result of the 22 stores opened in 1997. 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. The Company has historically opened the highest percentage of stores in
its third quarter; however, in fiscal 1997, 14 of the 22 stores were opened in
the fourth quarter. 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 bank credit
facilities. Net cash used for operating activities for fiscal 1997 was $1.3
million. Net cash provided by operating activities was $5.1 million and $3.4
million for 1996 and 1995, respectively. Net cash provided by/used for 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.
20
<PAGE>
Inventories at the end of fiscal 1997 were $27.9 million compared to $19.9
million at the end of fiscal 1996, an increase of $8 million. The Company's
average store inventories vary throughout the year and increase in advance of
the peak selling periods of back-to-school and Christmas. The increase in
inventories at fiscal 1997 year end was primarily related to opening 22 new
stores, advantageous purchases from key vendors and early deliveries of
spring merchandise, as well as lower than expected Christmas sales.
Capital expenditures excluding the cost of acquisitions were $2.3 million,
$1.7 million and $1.6 million in fiscal 1997, 1996 and 1995, respectively.
Expenditures in fiscal 1997 were primarily for the build-out of 22 new stores
of which 6 are temporary locations to be completed in 1998, as well as the
completion of three stores opened in 1996. 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.
Financing activities provided cash of $5 million in fiscal 1997. The
Company used cash of $2.7 million and $1.7 million in financing activities in
fiscal 1996 and 1995, 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 then
existing revolving loan agreement (Revolving Loan Agreement). The Company has
historically paid distributions to its stockholders as a result of the Company's
status as an S corporation prior to the Reorganization. During fiscal 1997, 1996
and 1995, the Company made S corporation distributions to stockholders of $8.8
million (including the $6.4 million distribution to the Pre-Offering
Stockholders paid from a portion of the Company's proceeds from the Offering),
$3.1 million and $376,000, respectively. Under an agreement entered in
connection with the Offering, the Company may make payments to the Pre-Offering
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 Pre-Offering 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
Pre-Offering Stockholders receive a tax benefit, provided that the indemnity
provided by the Pre-Offering 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. On October 16, 1997 the Company
consummated its initial public offering which generated $25 million in net
proceeds. The proceeds were utilized to repay all outstanding indebtedness under
the Revolving Loan Agreement ($10.2 million) and other debt totaling $7.5
million and to make the $6.4 million distribution to the Pre-Offering
Stockholders.
In connection with the Offering, Track 'n Trail-California and Overland put
into place a new two-year, $10 million revolving line of credit with Union Bank
of California. This credit facility is guaranteed by the Company. The line of
credit bears interest at the option of the Company at either the bank's
reference rate or the London Inter-Bank Offered Rate plus 2%, and is
collateralized by all of the Company's assets. Of the $10 million available
under this facility, up to $1.5 million may be allocated to letters of credit
with durations of up to 180 days. Advances under the revolving line of credit
are limited to 50% of eligible inventory, subject to reduction by any amounts
outstanding under letters of credit. The new credit facility prohibits the
Company from paying dividends without the bank's consent and limits the
Company's capital expenditures to $5 million in 1997, $8 million in 1998 and $10
million in 1999. In addition, the new credit facility requires the Company to
meet certain financial covenants, including minimum financial ratios and
profitability tests. As of December 27, 1997, no amount was outstanding under
the credit facility.
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 filing. 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 operating cash flow and borrowings under its
credit facilities will be sufficient to complete the Company's fiscal 1998
store expansion program and to satisfy the Company's other capital requirements
through 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.
21
<PAGE>
YEAR 2000
The Company is aware of the issues that many computer systems will face as
the millennium (year 2000) approaches. The Company has identified its internal
software and hardware that is subject to year 2000 compliancy and has created a
plan to help ensure such software and hardware is compliant by the year 2000.
The Company estimates that the cost of pursuing this plan will total less than
$150,000 in fiscal 1998; however, there can be no assurance that actual costs of
implementing the plan will not exceed this amount. The Company believes that any
year 2000 problems encountered by third parties with whom the Company deals will
be resolved and are not likely to have a material adverse effect on the
Company's operations. The Company anticipates no other year 2000 problems which
are reasonably likely to have a material adverse effect on the Company's
operations or financial position. There can be no assurance, however, that such
problems will not arise.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, REPORTING COMPREHENSIVE INCOME, which establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This pronouncement is effective for fiscal 1998 and reclassification
of financial statements for earlier periods for comparative purposes is
required. Management is in the process of determining the impact of the new
pronouncement.
In June 1997, the FASB issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION, which requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate, and their major customers. This
statement is effective for fiscal 1998. Management is in the process of
determining the impact of the new pronouncement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
<S> <C>
Report of independent accountants. 23
Consolidated balance sheets as of December 27, 1997 and December 28, 1996. 24
Consolidated statements of operations for each of the three fiscal years in the
period ended December 27, 1997. 25
Consolidated statements of changes in stockholders' equity for each of the three
fiscal years in the period ended December 27, 1997. 26
Consolidated statements of cash flows for each of the three fiscal years in the
period ended December 27, 1997. 27
Notes to financial statements. 28
</TABLE>
-22-
<PAGE>
[LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders
Track 'n Trail and Subsidiaries
El Dorado Hills, California
We have audited the accompanying consolidated balance sheets of Track 'n Trail
and Subsidiaries as of December 27, 1997 and December 28, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the fiscal years ended December 27, 1997, December 28, 1996
and December 30, 1995. 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 27, 1997 and December 28, 1996, and the
consolidated results of their operations and their cash flows for each of the
fiscal years ended December 27, 1997, December 28, 1996 and December 30, 1995,
in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Sacramento, California
February 24, 1998
-23-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
------------
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,383 $ 977
Accounts receivable 1,540 1,010
Inventories 27,852 19,868
Prepaid expenses 311 212
Deferred income taxes 317 49
------- -------
Total current assets 32,403 22,116
Fixed assets, net 7,284 6,582
Goodwill, net 3,084 2,691
Deferred income taxes 1,362 469
------- -------
$44,133 $31,858
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ -- $ 680
Current maturities of long-term debt 116 3,060
Accounts payable 6,958 5,836
Accrued payroll and bonuses 668 1,032
Sales tax payable 874 752
Income taxes payable 1,089 476
Accrued expenses and other liabilities 802 851
------- -------
Total current liabilities 10,507 12,687
Deferred rent 1,424 1,395
Long-term debt, net of current maturities 120 7,025
------- -------
Total liabilities 12,051 21,107
------- -------
Minority interest in consolidated subsidiary -- 105
------- -------
Commitments and contingencies (Notes 8 and 14).
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; 6,839,811 and 4,107,608 shares issued
and outstanding at December 27, 1997 and
December 28, 1996, respectively 68 41
Additional paid-in capital 25,772 724
Retained earnings 6,242 9,881
------- -------
Total stockholders' equity 32,082 10,646
------- -------
$44,133 $31,858
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-24-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $91,834 $66,233 $50,691
Cost of sales 47,677 34,062 26,192
------- ------- -------
Gross profit 44,157 32,171 24,499
------- ------- -------
Operating expenses:
Selling and marketing 30,780 21,060 16,852
Administrative and distribution 6,840 5,508 4,826
------- ------- -------
Total operating expenses 37,620 26,568 21,678
------- ------- -------
Operating income 6,537 5,603 2,821
Other (income) expense:
Interest 1,260 670 435
Other, net (21) (24) (41)
------- ------- -------
Income before provision for income taxes
and minority interest 5,298 4,957 2,427
Provision for income taxes 118 488 41
------- ------- -------
Income before minority interest 5,180 4,469 2,386
Minority interest in net income of consolidated
subsidiaries -- 105 --
------- ------- -------
Net income $ 5,180 $ 4,364 $ 2,386
------- ------- -------
------- ------- -------
Historical earnings per share:
Basic $ 1.10 $ 1.06 $ 0.58
------- ------- -------
------- ------- -------
Diluted $ 1.03 $ 1.04 $ 0.58
------- ------- -------
------- ------- -------
Pro forma income data (unaudited):
Historical income before income
taxes and minority interest $ 5,298 $ 4,957 $ 2,427
Pro forma income tax provision 2,119 1,983 971
------- ------- -------
Pro forma income before minority interest 3,179 2,974 1,456
Minority Interest -- 105 --
------- ------- -------
Pro forma net income $ 3,179 $ 2,869 $ 1,456
------- ------- -------
------- ------- -------
Pro forma earnings per share:
Basic $ 0.68 $ 0.70
------- -------
------- -------
Diluted $ 0.58 $ 0.57
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-25-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
------------
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
COMMON STOCK ADDITIONAL FROM
-------------------- PAID-IN RELATED RETAINED
NUMBER AMOUNT CAPITAL PARTIES EARNINGS TOTAL
--------- ------ ------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 4,107,608 $41 $24 $ (358) $ 6,642 $ 6,349
Cash advances to stockholders and
related party -- -- -- (711) -- (711)
Distibutions to stockholders -- -- -- -- (376) (376)
Net income -- -- -- -- 2,386 2,386
--------- --- ------- ------ ------- -------
Balance, December 30, 1995 4,107,608 41 24 (1,069) 8,652 7,648
Cash advances to stockholders -- -- -- (591) -- (591)
Distribution of notes to stockholders -- -- -- 1,660 (1,660) --
Distributions to stockholders -- -- -- -- (1,475) (1,475)
Exchange of stock appreciation rights
for stock option grants -- -- 597 -- -- 597
Compensation recorded under stock
option plans -- -- 103 -- -- 103
Net income -- -- -- -- 4,364 4,364
--------- --- ------- ------ ------- -------
Balance, December 28, 1996 4,107,608 41 724 -- 9,881 10,646
Issuance of common stock upon
initial public offering, net of
offering costs of $3,649 2,727,272 27 24,961 -- -- 24,988
Issuance of common stock upon
excercise of options 4,931 -- 20 -- -- 20
Distributions to stockholders -- -- -- -- (8,819) (8,819)
Compensation recorded under stock
option plans -- -- 67 -- -- 67
Net income -- -- -- -- 5,180 5,180
--------- --- ------- ------ ------- -------
Balance, December 27, 1997 6,839,811 $68 $25,772 $ -- $ 6,242 $32,082
--------- --- ------- ------ ------- -------
--------- --- ------- ------ ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-26-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,180 $ 4,364 $ 2,386
Adjustments to reconcile to cash provided by
operating activities:
Depreciation and amortization 1,743 1,121 919
Minority interest -- 105 --
Compensation recorded under stock
option plans 67 103 --
Deferred income taxes (1,161) 81 22
Cash provided by (used for) changes in
operating assets and liabilities, net of
effects of business combination in 1996:
Accounts receivable (530) (375) (73)
Inventories (7,984) (1,008) (612)
Prepaid expenses (99) 88 (10)
Accounts payable and other accrued liabilities 831 281 453
Income taxes payable 613 291 --
Stock appreciation rights -- 12 196
Deferred rent 29 42 86
-------- -------- --------
Cash (used for) provided by operating activities (1,311) 5,105 3,367
-------- -------- --------
Cash flows from investing activities:
Purchases of fixed assets (2,306) (1,721) (1,604)
Proceeds from sale of fixed assets 27 -- --
Cash paid for business combination -- (240) --
-------- -------- --------
Cash used for investing activities (2,279) (1,961) (1,604)
-------- -------- --------
Cash flows from financing activities:
Bank line of credit:
Borrowings 44,819 31,154 20,906
Repayments (45,499) (33,484) (20,626)
Long-term debt:
Borrowings -- 2,487 767
Repayments (10,513) (748) (709)
Advances to related parties under notes
receivable -- (591) (711)
Net proceeds from issuance of common stock 24,988 -- --
Proceeds from exercise of stock options 20 -- --
Payment of distributions to stockholders (8,819) (1,474) (1,328)
-------- -------- --------
Cash provided by (used for) financing activities 4,996 (2,656) (1,701)
-------- -------- --------
Increase in cash 1,406 488 62
Cash, beginning of year 977 489 427
-------- -------- --------
Cash, end of year $ 2,383 $ 977 $ 489
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-27-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------
1. SIGNIFICANT ACCOUNTING POLICIES:
BACKGROUND
Track 'n Trail, a Delaware corporation (Company), is the successor to
businesses formerly conducted by Track 'n Trail, a California corporation
(Track 'n Trail-California), and its subsidiary, Overland Management
Corporation (Overland). In connection with the formation of the Company,
the Company issued an aggregate of 40,816 shares of its common stock to
existing stockholders of Track 'n Trail-California. A reorganization of
Track 'n Trail-California (the Reorganization) was effected on October 7,
1997, in which the Track 'n Trail-California stockholders exchanged 100% of
their Track 'n Trail-California common stock for 4,107,608 shares of the
Company's common stock, inclusive of the 40,816 shares of the Company's
common stock issued upon formation. The Reorganization, which was accounted
for in a manner similar to a pooling-of-interests, was accomplished in an
exchange of approximately 100 shares of the Company's common stock for each
share of Track 'n Trail-California 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.
Accordingly, all references to the number of common and common equivalent
shares and to per share information in the consolidated financial statements
have been adjusted to reflect the capital structure resulting from the
Reorganization on a retroactive basis for all periods presented.
The Company is a retailer of footwear and related accessories. As of
December 27, 1997 and December 28, 1996, the Company operated 150 and 128
stores in 29 and 23 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 years ended December 27, 1997 and
December 28, 1996, 42.9% and 39.7%, respectively, of the Company's net sales
was of products purchased from three manufacturers.
INITIAL PUBLIC OFFERING
On October 16, 1997, the Company completed its initial public offering
(Offering) of its common stock. In connection with the Offering, the
Company issued 2,727,272 shares of common stock and received net proceeds of
$24,988,000, net of underwriting discounts and offering expenses.
-28-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
1. SIGNIFICANT ACCOUNTING POLICIES, continued:
Upon closing of the Offering, the Company's nonqualified and incentive
stock options vested, resulting in a non-cash compensation charge reducing
net income by $33,000, after netting the related income tax effect of
$22,000.
Certain notes payable, which had an aggregate balance of approximately
$17.7 million at the Offering became due and payable upon closing of the
Offering. The Company used a portion of its proceeds of the Offering to
retire these obligations.
During 1997, Track 'n Trail-California declared distributions to its
stockholders of substantially all previously undistributed accumulated S
corporation earnings remaining at the date of the Reorganization. Of such
distributions, $6,400,000 were paid from a portion of the Company's
proceeds from the Offering.
PRINCIPLES OF CONSOLIDATION
The financial statements include the consolidated accounts of the Company
and its two subsidiaries, Track 'n Trail-California and Overland.
Overland became a 79.0% owned subsidiary on October 25, 1996, and a wholly
owned subsidiary effective January 1, 1997 (Note 13). All intercompany
transactions and balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include demand deposits, money market accounts
and all highly liquid investments with an original maturity of three
months or less.
INVENTORIES
Inventories are stated at lower of cost, retail method, or market.
FIXED ASSETS
Fixed assets are stated at cost and depreciated on the straight-line
method over the assets' 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.
-29-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
1. SIGNIFICANT ACCOUNTING POLICIES, continued:
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, Track 'n Trail-California owned 79.0% of the common
stock of Overland and Track 'n Trail-California's stockholders owned the
21.0% minority interest. Effective January 1, 1997, Track 'n
Trail-California acquired the remaining 21.0% interest in Overland (Note
13).
INCOME TAXES
Commencing June 28, 1992, and until the Reorganization, Track 'n
Trail-California had elected S corporation status for federal income taxes
and most state income taxes. Overland is a C corporation for federal and
state income tax purposes. Under S corporation status, Track 'n
Trail-California's income, other than that of Overland, was taxable to its
stockholders personally, with only minimal state income taxes charged to
Track 'n Trail-California.
Upon completion of the Reorganization in October 1997, Track 'n
Trail-California converted from an S corporation to a C corporation under
provisions of the Internal Revenue Code and state statutes and,
accordingly, became subject to federal and state income tax on all of its
income. Upon termination of the S corporation election, deferred income
taxes of $1,324,000, representing the net tax effect of differences
between Track 'n Trail-California's financial statement and tax bases in
certain assets and liabilities, became a net asset and was 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. Such deferred tax assets relate primarily to
differences in the financial statement and tax bases of fixed assets and
inventory and the effect of rent and stock compensation plan deductions
for accounting, but not tax, purposes.
-30-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
1. SIGNIFICANT ACCOUNTING POLICIES, continued:
Pro forma net income (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 Track 'n Trail-California had been a C corporation
for all periods presented.
The Company accounts for income taxes 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 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 were more likely than not
that all, or some portion, of such deferred tax assets would not be
realized. No allowance against deferred tax assets was provided as of
December 27, 1997 or December 28, 1996.
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 and purchase 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
earnings per share as if the fair value based method of valuing stock
options had been applied.
RENT EXPENSE
Rent expense is recognized on a 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.
-31-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
2. EARNINGS PER SHARE:
Effective December 27, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER
SHARE, which was effective for accounting periods ending after December
15, 1997. SFAS No. 128 and related recently released positions of the
staff of the Securities and Exchange Commission changed the method of
calculating earnings per share and require a dual presentation of basic
and diluted earnings per share. In accordance with the provisions of SFAS
No. 128, historical and pro forma earnings per share information for all
periods presented have been restated to the methodology and disclosures
specified in SFAS No. 128.
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations under SFAS No. 128 is as follows
(in thousands, except per share information):
<TABLE>
<CAPTION>
HISTORICAL EARNINGS PER SHARE
----------------------------------
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Income available to common stockholders (net income)
for basic and diluted earnings per share $5,180 $4,364 $2,386
------ ------ ------
------ ------ ------
Shares for basic earnings per share 4,700 4,108 4,108
Dilutive effect of stock options (treasury stock method) 327 94 --
------ ------ ------
Shares for diluted earnings per share 5,027 4,202 4,108
------ ------ ------
------ ------ ------
Basic earnings per share $ 1.10 $ 1.06 $ 0.58
------ ------ ------
------ ------ ------
Diluted earnings per share $ 1.03 $ 1.04 $ 0.58
------ ------ ------
------ ------ ------
<CAPTION>
PRO FORMA EARNINGS
PER SHARE (UNAUDITED)
----------------------
1997 1996
--------- ----------
<S> <C> <C>
Income available to common stockholders (pro forma net
income) basic and diluted earnings per share $3,179 $2,869
------ ------
------ ------
Shares for basic earnings per share 4,700 4,108
Dilutive effect of stock options (treasury stock method) 327 94
Distribution shares 421 828
------ ------
Shares for diluted earnings per share 5,448 5,030
------ ------
------ ------
Basic earnings per share $ 0.68 $ 0.70
------ ------
------ ------
Diluted earnings per share $ 0.58 $ 0.57
------ ------
------ ------
</TABLE>
-32-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
2. EARNINGS PER SHARE, continued:
All warrants outstanding and certain options with exercise prices in
excess of market value were not dilutive and, accordingly, were not
included in the weighted average number of common and common equivalent
shares outstanding.
In applying the treasury stock method for determining the dilution
applicable to stock options outstanding, the incremental shares assumed
issued (excess of shares assumed issued over the number of shares assumed
purchased) was determined using the sum of exercise proceeds, future
compensation and tax benefit to the Company upon exercise of the options
as the assumed proceeds that would have been used to purchase shares at
the average value during the period. Average market value was based on
estimated fair values for periods prior to the Offering and market prices
thereafter.
Distribution shares included in weighted average common shares outstanding
used to compute pro forma diluted earnings per share (unaudited) for
fiscal 1997 represents the weighted number of shares of common stock sold
in the Offering, the net proceeds of which were necessary to pay the
excess of S corporation distributions paid or declared during the twelve
month period preceding the Offering over earnings during the twelve month
period preceding the Offering. Distribution shares included in the
computation of pro forma diluted earnings per share (unaudited) for the
fiscal 1996 represents the number of shares of common stock 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 earnings during
fiscal 1996.
3. CONCENTRATION OF CREDIT RISK:
Cash and cash equivalents include cash balances and all highly liquid
investments with an original maturity of three months or less at the date
of purchase. Cash deposits periodically exceed the Federal Deposit
Insurance Corporation insured limit of $100,000 for each account.
-33-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
4. FIXED ASSETS:
Fixed assets consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
Leasehold improvements $ 8,645 $ 7,237
Furniture, fixtures and equipment 4,493 3,671
Vehicles -- 16
------- -------
13,138 10,924
Less accumulated depreciation (5,854) (4,342)
------- -------
Fixed assets, net $ 7,284 $ 6,582
------- -------
------- -------
</TABLE>
Depreciation expense for fiscal years 1997, 1996 and 1995, was $1,579,000,
$1,098,000 and $916,000, respectively.
5. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT:
In 1997 and 1996, the Company had a revolving loan agreement (Revolving
Loan Agreement) which was paid in full from a portion of the proceeds of
the Offering.
Upon the consummation of the Offering, the Company obtained a $10.0
million revolving line of credit (Revolving Line) from a bank, which is
due October 1999. Of the total amount available under the line, up to
$1.5 million may be allocated to letters of credit. Advances under the
Revolving Line, including outstanding letters of credit (of which $857,000
were issued at December 27, 1997), are limited to a percentage of eligible
inventory. Available additional borrowings under the Revolving Line were
approximately $9.1 million at December 27, 1997. Borrowings under the
Revolving Line are collateralized by substantially all of the Company's
assets.
The Revolving Line bears interest, at the option of the Company, at either
the bank's reference rate (8.50% at December 27, 1997) or LIBOR (5.91% at
December 27, 1997), plus 2.0%, payable monthly. The weighted average
interest rates for fiscal years 1997, 1996 and 1995, were 8.94%, 8.77% and
9.40%, respectively.
-34-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
5. REVOLVING LINE OF CREDIT AND LONG-TERM DEBT, continued:
The Revolving Line requires the Company to meet certain financial
covenants including minimum financial ratios, limits on dividends and
acquisitions of capital assets.
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
Bank term loan under Revolving Loan
Agreement, repaid in 1997 $ -- $ 2,700
Subordinated promissory note, repaid in 1997 -- 3,500
Subordinated promissory notes, repaid in 1997 -- 2,494
Term note, repaid in 1997 -- 967
Auto loans, repaid in 1997 -- 20
Construction notes to store lessors, interest
ranging from 9% to 12%, without collateral,
due at various dates through 2000 74 185
Promissory note, interest at 9.36%, collateralized
by leasehold improvements, due 2000 162 219
----- -------
Total 236 10,085
Less current portion (116) (3,060)
----- -------
Long-term portion $ 120 $ 7,025
----- -------
----- -------
</TABLE>
Scheduled maturities of long-term debt at December 27, 1997, are as
follows (in thousands):
1998 $116
1999 84
2000 36
----
Total $236
----
----
-35-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
6. STOCK OPTION AND PURCHASE 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. 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, Track 'n Trail-California stockholders approved the adoption
of the 1996 Stock Option Plan (Plan). Effective upon the Reorganization,
the Company assumed the Plan and, effective as of the date of the
Offering, amended and restated the Plan. Upon the Reorganization, options
to purchase shares of the Company's common stock were exchanged for all
stock options then outstanding pursuant to the Plan to purchase shares of
the common stock of Track 'n Trail-California. The terms and conditions
of the options exchanged were equivalent. A total of 1,055,735 shares of
common stock are reserved for issuance under the Plan.
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). Each such Outside Director
automatically received 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 exercise and vesting terms as determined
at the date of the grant by a compensation committee of the Company's
board of directors; however, the options must have exercise and vesting
terms of no more than ten years from the date of grant.
-36-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
6. STOCK OPTION AND PURCHASE PLANS, continued:
The following is a summary of the activity in stock options granted during
the fiscal years ended December 27, 1997 and 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>
Outstanding as of December 31, 1995 -- $ -- -- $ --
Granted 501,168 4 350,618 0.01
------- -------
Outstanding as of December 28, 1996 501,168 4 350,618 0.01
Granted -- -- 10,000 9.75
Canceled (20,127) 4 -- --
Exercised (4,931) 4 -- --
------- -------
Outstanding as of December 27, 1997 476,110 $ 4 360,618 $0.28
------- ---- ------- ----
------- ---- ------- ----
Options exercisable as of
December 27, 1997 476,110 $ 4 350,618 $0.01
------- ---- ------- ----
------- ---- ------- ----
Options exercisable as of
December 28, 1996 100,228 $ 4 212,383 $0.01
------- ---- ------- ----
------- ---- ------- ----
</TABLE>
The weighted average remaining contractual life at December 27, 1997, of
all outstanding options, all outstanding NSOs with an exercise price of
$0.01 and all outstanding ISOs was 8.5 years, and for all outstanding NSOs
with an exercise price of $9.75 was 9.8 years.
All outstanding ISOs vested upon the Offering. No compensation resulted
from the grant of ISOs in fiscal 1996.
NSOs for 177,825 shares vested upon grant, 34,558 shares vested on
December 15, 1996, and an additional 138,235 shares vested upon the
Offering. The remaining NSOs for 10,000 shares (granted to the Outside
Directors upon appointment) vest prorata on October 16 of each of four
years commencing on October 16, 1998.
The excess of the fair value of common stock at the date of the grant over
the exercise price of the NSOs represents the per share compensation of
the NSOs that is recorded as compensation and as an increase in additional
paid-in capital when the stock options vest. A one-time increase in
additional paid-in capital of $597,000 was recorded in 1996 for the
liability that was eliminated upon exchange of the stock appreciation
rights for NSOs.
-37-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
6. STOCK OPTION AND PURCHASE PLANS, continued:
Compensation expense recognized for stock compensation awards, including
stock appreciation rights, amounted to $67,000, $116,000 and $196,000
during the 1997, 1996 and 1995 fiscal years, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In April 1997, the Company adopted the Employee Stock Purchase Plan
(Purchase Plan) effective as of the closing of the Offering. The Purchase
Plan covers an aggregate of 150,000 shares of common stock and is intended
to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code. The plan administrator,
appointed by the Company's board of directors, may authorize participation
by eligible employees, including officers, in periodic Purchase Plan
offerings. Under its terms, the board of directors may amend, modify or
terminate the Purchase Plan at any time without notice.
Substantially all full-time (as defined) employees with at least one year
service prior to the commencement of the participation period are 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 a Purchase Plan 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 Purchase Plan offering period or at the relevant
purchase date. Employees may end their participation in a Purchase Plan
offering at any time during the Purchase Plan offering period except as
provided under the terms of the Purchase Plan offering. Participation ends
automatically on termination of employment with the Company.
The initial Purchase Plan offering commenced in October 1997 and
terminated on December 31, 1997. A second Purchase Plan offering
commenced January 1, 1998, and will terminate no later than December 31,
1999. As of December 27, 1997, no shares had been issued under the
Purchase Plan. In January 1998, 2,833 shares of common stock were issued
pursuant to the Purchase Plan for $21,000.
-38-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
6. STOCK OPTION AND PURCHASE PLANS, continued:
PRO FORMA RESULTS OF OPERATIONS
The weighted-average, grant-date fair value, computed in accordance with
the measurement provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, of all options granted during fiscal 1997 and 1996, net of
the liability recorded in 1996 in connection with stock appreciation
rights canceled in exchange for the NSOs, was $61,000 and $170,000,
respectively. The weighed-average, grant-date fair value was estimated in
fiscal 1997 and 1996, respectively, assuming risk-free interest rates of
5.97% and 6.49%, an expected life of five years, expected volatility of
55.0% for 1997, no expected volatility for l996 as the Company had no
trading record and no expected dividends.
Results of operations, computed on a pro forma basis to assume that the
measurement provisions of SFAS No. 123 had been adopted, would have been
the same as the results of operations, as reported, for fiscal year 1996
and as follows for fiscal 1997 (in thousands, except per share
information):
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net income $5,180 $5,173
------ ------
------ ------
Pro forma net income, as though a
C corporation $3,179 $3,173
------ ------
------ ------
Historical earnings per share:
Basic earnings per share $ 1.10 $ 1.10
------ ------
------ ------
Diluted earnings per share $ 1.03 $ 1.03
------ ------
------ ------
Pro forma earnings per share, as
though a C corporation:
Basic earnings per share $ 0.68 $ 0.68
------ ------
------ ------
Diluted earnings per share $ 0.58 $ 0.58
------ ------
------ ------
</TABLE>
7. NOTES RECEIVABLE FROM RELATED PARTIES:
Notes receivable from related parties at December 30, 1995, consisted of
$1,036,000 in stockholder demand notes and $33,000 in related party demand
notes. The balance was distributed to the stockholders in 1996 along with
additional notes of $591,000 related to advances made to such parties in
1996.
-39-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
8. LEASE COMMITMENTS:
The Company operates its stores, main office and warehouse from facilities
under operating lease agreements which expire at various dates through
2009. 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 27, 1997, future
minimum lease payments under all noncancelable leases are as follows (in
thousands):
<TABLE>
<S> <C>
1998 $ 9,417
1999 8,172
2000 7,279
2001 6,940
2002 6,620
Thereafter 18,909
-------
Total $57,337
-------
-------
</TABLE>
Rent expense was $8,912,000, $6,160,000 and $4,964,000 during fiscal years
1997, 1996 and 1995, including contingent rentals of $119,000, $123,000
and $130,000, respectively.
9. 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 the
maximum allowed under the Internal Revenue Code. 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 $81,000,
$50,000 and $58,000 in fiscal years 1997, 1996 and 1995, respectively.
-40-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
10. INCOME TAXES:
The provision for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes:
Current $ 1,279 $ 407 $ 19
Deferred 163 81 22
Net deferred tax assets
recorded upon change
in tax status from
S corporation to
C corporation (1,324) -- --
--------- --------- ---------
$ 118 $ 488 $ 41
--------- --------- ---------
--------- --------- ---------
</TABLE>
The components of deferred income taxes are (in thousands):
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 28,
1997 1996
------------ ------------
<S> <C> <C>
Depreciation $ 860 $ 269
Inventory - Uniform Capitalization 253 116
Stock compensation programs 248 --
Deferred rent 305 200
Accrued liabilities 57 34
Federal effect of deferred state taxes 50 (43)
Other (94) (58)
------------ ------------
$ 1,679 $ 518
------------ ------------
------------ ------------
</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 period 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.
-41-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
10. 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 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
Benefit due to Subchapter S
tax status (12.0) (28.3) (34.0)
State income taxes 3.6 3.9 1.7
Permanent differences 1.4 0.2 --
Effect of change from S to C
Corporation tax status (24.9) -- --
Other 0.1 -- --
------- ------- ------
2.2% 9.8% 1.7%
------- ------- ------
------- ------- ------
</TABLE>
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 AND CASH EQUIVALENTS: The carrying amounts reported in the consolidated
balance sheets approximate fair value because of the immediate or short-term
maturity of these financial instruments.
BANK LINE OF CREDIT: The carrying amounts approximate fair value due to the
floating interest rate and short maturity nature of these financial
instruments.
LONG-TERM DEBT: The carrying amounts, totaling $236,000 at December 27,
1997, are not believed to differ materially from fair value. The carrying
amounts at December 28, 1996, approximate fair value due to floating rates on
the recent issuance of the fixed rate notes.
-42-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
12. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental cash flow information is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest paid $ 1,360 $ 615 $ 401
------------ ------------ ------------
------------ ------------ ------------
Income taxes paid $ 644 $ 73 $ 78
------------ ------------ ------------
------------ ------------ ------------
Noncash investing and financing
transactions:
Acquisition of Overland:
Purchase price, including
acquisition costs $ 558 $ 2,733 $ --
Minority interest eliminated 105 -- --
Less debt issued in connection
with the acquisition (663) (2,493) --
------------ ------------ ------------
Cash paid for acquisition $ -- $ 240 $ --
------------ ------------ ------------
------------ ------------ ------------
Distribution of notes receivable to
stockholders $ -- $ 1,660 $ --
------------ ------------ ------------
------------ ------------ ------------
Cancellation of stock appreciation
rights $ -- $ 596 $ --
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
13. BUSINESS COMBINATION:
On October 25, 1996, Track 'n Trail-California, together with its stockholders,
obtained 33 Overland Trading stores by acquiring the outstanding common stock
of Overland (Note 1, PRINCIPLES OF CONSOLIDATION; MINORITY INTEREST). Track 'n
Trail-California purchased the 79.0% interest for approximately $2,733,000
consisting of promissory notes to the sellers of approximately $2,493,000 and
warrants issued to the sellers valued at nominal amounts, plus acquisition
costs of $240,000. The warrants give the sellers the right to purchase up to
49,392 shares of the Company's common stock at $10.50 per share until October
25, 2001.
-43-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
13. BUSINESS COMBINATION, continued:
Effective on January 1, 1997, Track 'n Trail-California acquired from its
stockholders the remaining 21.0% interest in Overland at their purchase
price by assuming the $663,000 Seller Notes previously issued by Track 'n
Trail-California's stockholders.
Total promissory notes issued by Track 'n Trail-California and its
stockholders in exchange for the common stock of Overland was $3,157,000
(the Seller Notes). The Seller Notes were repaid with a portion of the
proceeds of the Offering in October 1997.
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 Track 'n Trail-California, 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. Track 'n Trail-California guaranteed the Subordinated
Note. The Subordinated Note was repaid with a portion of the proceeds of
the Offering in October 1997.
Additionally, Track 'n Trail-California 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 74,089 shares of the Company's common
stock at $12.60 per share for four years commencing October 1998. Under
their terms, the warrants may be exercised prior to October 1998 upon a
change in control 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 when issued.
-44-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
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 (in thousands):
<TABLE>
<CAPTION>
79.0% 21.0%
INTEREST INTEREST
-------- --------
<S> <C> <C>
Inventory $ 6,911 $ --
Store fixtures, leasehold improvements
and office equipment 1,908 --
Accounts receivable and prepaid expenses 406 --
Deferred income taxes 555 --
Accounts payable and accrued liabilities (3,040) --
Line of credit and long-term debt (6,124) --
Other liabilities (608) --
Minority interest (21.0%) in net assets -- 105
Goodwill 2,725 558
-------- --------
Purchase price $ 2,733 $ 663
-------- --------
-------- --------
</TABLE>
Goodwill recorded in connection with the acquisition is being amortized
using the straight line method over a 20-year period. Accumulated
amortization at December 27, 1997 and December 28, 1996, was $199,000 and
$34,000, respectively.
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 Track 'n Trail-California's
stockholders shown as minority interest in 1996.
-45-
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
-----------
13. BUSINESS COMBINATION, continued:
If the Company had purchased 100% of Overland's common stock as of the
beginning of fiscal year 1995, pro forma condensed consolidated results of
operations (unaudited) would have been (in thousands):
<TABLE>
<CAPTION>
PRO FORMA, ASSUMING
ACQUISITION OCCURRED AT
BEGINNING OF FISCAL 1995
(UNAUDITED)
-------------------------
FISCAL FISCAL
1996 1995
--------- --------
<S> <C> <C>
Net sales $ 84,186 $ 70,660
Gross profit $ 39,726 $ 33,275
Operating income $ 5,176 $ 2,763
Net income $ 3,576 $ 1,467
Pro forma net income, as though a C
corporation $ 2,246 $ 728
Historical earnings per share:
Basic earnings per share $ 0.87 $ 0.36
Diluted earnings per share $ 0.85 $ 0.36
Pro forma earnings per share,
as though a C corporation:
Basic earnings per share $ 0.55
Diluted earnings per share $ 0.45
</TABLE>
Pro forma net income (unaudited) in the above table is computed after
deducting a pro forma provision for income taxes at the effective rate of
40% representing management's estimate of the effective rate that would
have been in effect had Track 'n Trail-California been a C corporation.
14. 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 consolidated results
of operations or consolidated financial position.
-46-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements:
Reference is made to the Index to Consolidated Financial
Statements under Item 8 in Part II of this Form 10-K.
2. Financial Statement Schedules:
Financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
-47-
<PAGE>
3. Exhibits:
The exhibits listed below are required by Item 601 of Regulation
S-K. Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K has been
identified.
<TABLE>
<CAPTION>
Exhibit
Number Notes Description of Document
-------- ----- -----------------------
<S> <C> <C>
3.1 (1) Amended and Restated Certificate of Incorporation of
the Registrant.
3.2 (1) Amended and Restated Bylaws of the Registrant.
4.1 (1) Form of Common Stock Certificate.
4.2 (1) Registration Rights Agreement among the Registrant
and certain stockholders.
10.1 (1) Employment Agreement dated January 3, 1994 between
Registrant and Gregory M. Kilgore.
10.2 (1) Employment Agreement dated January 3, 1994 between
Registrant and John E. Wilkinson
10.3 (1) Employment Agreement dated January 3, 1994 between
Registrant and Daniel J. Nahmens.
10.4 (1) Employment Agreement dated January 3, 1994 between
Registrant and David T. Morgan.
10.5 (1) Amended and Restated 1996 Stock Option Plan.
10.6 (1) Form of Incentive Stock Option and Stock Option
Agreement, as amended.
10.7 (1) Form of Nonqualified Stock Option and Stock Option
Agreement, as amended.
10.8 (1) Agreement for Distribution of Accumulated
Adjustments Account and Tax Indemnification.
10.9 (1) Form of Indemnification Agreement between the
Company and directors and certain officers.
10.10 (1) Stock Exchange Agreement between the Company, Track
'n Trail-California and certain stockholders.
10.11 (1) Warrant to Purchase Common Stock issued to Ladenburg
Thalmann & Co. Inc.
10.12 (1) Form of Warrant to Purchase Common Stock issued to
stockholders of Overland Management Corporation.
10.13 Loan Agreement dated as of October 16, 1997 between
Union Bank and the subsidiaries of the Registrant.
10.14 Continuing Guaranty dated as of September 25, 1997
between Union Bank and the Registrant.
16.1 Letter regarding change in certifying accountant.
21.1 (1) List of Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney (see page 49 of this Form 10-K).
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule (Form 10-Q for the
quarter ended September 27, 1997).
27.3 Restated Financial Data Schedule (Form S-1--File
No. 333-23195).
</TABLE>
Notes
-------
(1) Filed with Registrant's Registration Statement on Form S-1 (File
No. 333-23195).
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the last quarter of the
fiscal year covered by this report.
-48-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on March 19, 1998 on its behalf by the undersigned, thereunto duly
authorized.
TRACK 'N TRAIL
By /s/ GREGORY M. KILGORE
-------------------------------------
Gregory M. Kilgore
President and Chief Operating Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Gregory M. Kilgore and Daniel J. Nahmens,
and each of them, his or her true and lawful attorneys-in-fact, each with full
power of substitution, for him or her in any and all capacities, to sign any
amendments to this report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or their substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ------- ------
<S> <C> <C>
/s/ GREGORY M. KILGORE President, Chief Operating Officer 3/19/98
- --------------------------- (Principal Executive Officer), and
Director
/s/ DANIEL J. NAHMENS Vice President - Finance, Chief Financial 3/19/98
- --------------------------- Officer (Principal Financial and
Accounting Officer), Treasurer and Secretary
/s/ DAVID L. SUECHTING, JR. Chairman of the Board 3/19/98
- ---------------------------
/s/ BARBARA J. SUECHTING Director 3/19/98
- ---------------------------
/s/ HELEN C. BULWIK Director 3/19/98
- ---------------------------
</TABLE>
-49-
<PAGE>
LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT ("Agreement") is made and entered
into as of October 16, 1997, by and between TRACK 'N TRAIL, a California
corporation, and OVERLAND MANAGEMENT CORPORATION, a Massachusetts corporation
(each of the foregoing, in their respective joint and several capacities
hereunder, hereafter referred to individually as "Borrower" and collectively
as "Borrowers") and UNION BANK OF CALIFORNIA, N.A. ("Bank"). This Agreement
amends and restates in its entirety that certain loan agreement dated October
22, 1996, between Bank and Track 'N Trail ("Prior Agreement").
SECTION 1. THE LOAN
1.1.1 THE REVOLVING LOAN. Bank will loan to Borrowers an amount not
to exceed Ten Million Dollars ($10,000,000) outstanding in the aggregate at
any one time (the "Revolving Loan"). Borrowers may borrow, repay and reborrow
all or part of the Revolving Loan in accordance with the terms of the
Revolving Note. All borrowings of the Revolving Loan must be made before
October 9, 1999, at which time all unpaid principal and interest of the
Revolving Loan shall be due and payable. The Revolving Loan shall be
evidenced by a promissory note (the "Revolving Note") on the standard form
used by Bank for commercial loans. Bank shall enter each amount borrowed and
repaid in Bank's records and such entries, where noted shall be deemed to
reflect the amount of the Revolving Loan outstanding. Omission of Bank to
make any such entries shall not discharge Borrowers of their obligation to
repay in full with interest all amounts borrowed. Any outstanding advances
under the revolving loan extended pursuant to the Prior Agreement shall
constitute the initial borrowings under the Revolving Loan. Borrowers
acknowledge that the opportunity of each Borrower to seek and obtain
borrowings in the full amount of the Revolving Loan constitutes consideration
for each Borrower's obligation to Bank to the full extent of the Revolving
Loan outstanding from time to time. Borrowers further acknowledge that the
extension of the Revolving Loan shall lessen or eliminate any need on the
part of either Borrower to provide the other Borrower with supplemental
working capital that otherwise might be required from time to time.
1.1.2 THE COMMERCIAL LETTER OF CREDIT SUBLIMIT. As a sublimit to
the Revolving LOAN, Bank shall issue, for the account of Borrowers, jointly
or severally, one or more irrevocable commercial letters of credit
(individually, an "L/C" and collectively, the "L/Cs") with transport
documents presented in a full set to Bank (and, in case of airway bills,
consigned to Bank) and/or at Bank's option, with transport documents
presented in less than a full set to Bank and/or consigned to Borrower or to
any party other than Bank and calling for drafts at sight up to 180 days
covering the importation or purchase of shoes or related products. The
aggregate amount available to be drawn under all outstanding L/Cs and the
aggregate amount of unpaid reimbursement obligations under drawn L/Cs shall
not exceed One Million Five Hundred Thousand Dollars ($1,500,000) and shall
reduce, dollar for dollar, the maximum amount available under the Revolving
Loan. All such commercial L/Cs shall be drawn on such terms and conditions as
are acceptable to Bank and shall be governed by the terms of (and Borrower
agrees to execute) Bank's standard form for commercial L/C applications and
reimbursement agreement and shall not have an expiration date more than 180
days from its date of issuance. The amount available under this Commercial
Letter of Credit Sublimit shall be reduced by the amount of any documentary
letter of credit issued for Borrower's account, but such amount or portion
thereof shall again become available under the Commercial Letter of Credit
Sublimit (i) when such documentary letter of credit is deemed by Bank to have
expired undrawn, or (ii) when such documentary letter of credit is drawn upon
and Borrower reimburses Bank as provided in the standard of documentary
letter of credit documentation. No L/C shall expire more than ninety (90)
days after October 9, 1999. Any L/C's issued pursuant to the Prior Agreement
shall be deemed to be L/C's issued under and subject to this Commercial
Letter of Credit Sublimit and the face amount(s) thereof shall reduce the
amount available under this sublimit.
1.2 TERMINOLOGY. As used herein, the following word or words or
phrases have the following meanings:
"Loan" shall mean, collectively, all the credit facilities
described above.
"Note" shall mean, collectively, all the promissory notes
described above.
1
<PAGE>
"Loan Documents" shall mean all documents executed in
connection with this Agreement.
1.3 BORROWING BASE. Notwithstanding any other provision of this
Agreement, Bank shall not be obligated to advance funds under the Revolving Loan
or issue irrevocable documentary letters of credit under the Commercial Letter
of Credit Sublimit, if at any time the aggregate of Borrowers' obligations to
Bank under such facilities shall exceed the sum of fifty percent (50%) of
Borrowers' Eligible Inventory plus fifty percent (50%) of issued L/C's calling
for drafts at sight. If at any time Borrower's obligations to Bank under the
above facilities exceed the sum so permitted, Borrower shall immediately repay
to Bank such excess.
1.3.1 ELIGIBLE INVENTORY. The term "Eligible Inventory" means that
portion of Borrowers' inventory of finished goods consisting of Borrowers' main
line(s) of business products, which is (a) owned by a Borrower, free and clear
of all liens or encumbrances except those in favor of Bank, (b) held for sale or
lease by a Borrower and normally and currently salable in the ordinary course of
such Borrower's business, (c) of good and merchantable quality, free from
defects, (d) located only at locations of which Bank is notified in writing, and
(e) as to which Bank has been able to perfect and maintain perfected a first
priority security interest. Eligible Inventory does not include any of the
following: work in process, spare parts, returned items not for resale, damaged,
defective or recalled items, items unfit for further processing, obsolete or
unmerchantable items, items used as salesperson's samples or demonstrators, or
inventory which Bank otherwise deems not be Eligible Inventory.
1.4 PURPOSE OF LOAN. The proceeds of the Revolving Loan shall be
used for general corporate purposes.
1.5 INTEREST. The unpaid principal balance of the Revolving Loan
shall bear interest at the rate or rates provided in the Revolving Note and
selected by the Borrower. The Revolving Loan may be prepaid in full or in part
only in accordance with the terms of the Revolving Note and any such prepayment
shall be subject to the prepayment fee provided for therein.
1.6 LETTER OF CREDIT ISSUANCE AND NEGOTIATION FEES AND OTHER FEES.
(a) Documentary L/C's issued under the Commercial Letter of
Credit Sublimit shall be subject to the Bank's standard issuance and payment
fees.
(b) All other fees shall be in accordance with Bank's
existing schedule of fees as amended from time to time.
1.7 LOAN COMMITMENT FEE. Beginning October 9, 1998, and each year
thereafter, Borrower shall pay an annual, non-refundable commitment fee of
Thirty Seven Thousand Five Hundred Dollars ($37,500).
1.8 BALANCES. Borrower shall maintain its major depository accounts
with Bank until the Note and all sums payable pursuant to this Agreement have
been paid in full.
1.9 DISBURSEMENT. Upon execution hereof, Bank shall disburse
proceeds of the Loan as provided in Bank's standard form Authorization executed
by Borrower.
1.10 SECURITY. Prior to any disbursement of the Loan, Borrowers
shall have executed a security agreement, on Bank's standard form, and a
financing statement, suitable for filing in the office of the Secretary of State
of the State of California and any other state designated by Bank, granting to
Bank a first priority security interest in such of Borrowers' property as is
described in said security agreement. Exceptions to Bank's first priority, if
any, are permitted only as otherwise provided in this Agreement. At Bank's
request, Borrowers will use commercially reasonable efforts to obtain executed
landlord's and mortgagee's waivers on Bank's form covering all of Borrowers'
property located on LEASED or encumbered real property.
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1.11 CONTROLLING DOCUMENT. In the event of any inconsistency between
the terms of this Agreement and any Note or any of the other Loan Documents, the
terms of such Note or other Loan Documents will prevail over the terms of this
Agreement.
SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the proceeds
of the Loan unless at or prior to the time for the making of such disbursement,
the following conditions have been fulfilled to Bank's satisfaction.
2.1 COMPLIANCE. Borrowers shall have performed and complied with
all terms and conditions required by this Agreement to be performed or complied
with by it prior to or at the date of the making of such disbursement and shall
have executed and delivered to Bank the Note and other documents deemed
necessary by Bank.
2.2 GUARANTIES. Track 'n Trail, Inc., a Delaware Corporation
(hereafter called "Holding Company" or "Guarantor") shall have executed and
delivered to Bank a continuing guaranty in form and amount satisfactory to
Bank.
2.3 BORROWING RESOLUTION. Borrowers shall have provided Bank with
certified copies of resolutions duly adopted by the Board of Directors of
Borrower, authorizing this Agreement and the Loan Documents. Such resolutions
shall also designate the persons who are authorized to act on Borrower's behalf
in connection with this Agreement and to do the things required of Borrower
pursuant to this Agreement.
2.4 TERMINATION STATEMENTS. Borrowers shall have provided Bank
with UCC-2 termination statements executed by such secured creditors as May be
required by Bank and suitable for filing with the Secretary of State in each
state designated by Bank.
2.5 CONTINUING COMPLIANCE. At the time any disbursement is to be
made, there shall not exist any event, condition or act which constitutes an
Event of Default under Section 6 hereof or any event, condition or act which
with notice, lapse of time or both would constitute such Event of Default; nor
shall there be any such event, condition, or act immediately after the
disbursement were it to be made.
2.6 INITIAL PUBLIC OFFERING. Holding Company will raise a minimum
of Twenty Two Million Dollar ($22,000,000) from the proceeds of its Initial
Public Offering ("IPO"), net of customary expenses and underwriting costs.
2.7 TERM DEBT. Borrowers will repay in full a) to Bank that certain
term loan having a maturity date of March 31, 1998 and a principal balance
outstanding as of the date of this Agreement of Two Million Two Hundred Fifty
Thousand Dollars ($2,250,000); b) to Seacoast the subordinated notes totaling
Three Million Five Hundred Thousand Dollars ($3,500,000); maturing June 30,
1998; c) to various sellers the subordinated notes totaling Three Million One
Hundred Fifty Six Thousand Five Hundred and Forty Eight Dollars ($3,156,548),
maturing on June 30, 1998; and d) to Merrill Lynch all term notes outstanding.
2.8 FEES. Borrower will pay to Bank non-refundable loan fees in the
amount of Sixteen Thousand Five Hundred Dollars ($16,500).
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrowers represent and warrant that
3.1 BUSINESS ACTIVITY. The principal business of both Borrowers is
shoe/boot retailing.
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3.2 AFFILIATES AND SUBSIDIARIES. Borrowers' affiliates and
subsidiaries (those entities in which either Borrower has either a controlling
interest or at least a 25% ownership interest) and their addresses, and the
names of each Borrower's principal shareholders, are as provided on a schedule
delivered to Bank on or before the date of this Agreement.
3.3 AUTHORITY TO BORROW. The execution, delivery and performance of
this Agreement, the Note and all other agreements and instruments required by
Bank in connection with the Loan are not in contravention of any of the terms of
any indenture, agreement or undertaking to which either Borrower is a party of
by which IT or any of its property is bound or affected.
3.4 FINANCIAL STATEMENTS. The financial statements of Borrower,
including both a balance sheet at December 28, 1996, together with supporting
schedules, and an income statement for the twelve (12) months ended December 28,
1996, have heretofore been furnished to Bank, and are true and complete and
fairly represent the financial condition of Borrower during the period covered
thereby. Since December 28, 1996, there has been no material adverse change in
the financial condition or operations of Borrower.
3.5 TITLE. Except for assets which May have been disposed of in the
ordinary course of business, Borrowers have good and marketable title to all of
the property reflected in their financial statements delivered to Bank and to
all property as to which title was acquired by Borrowers since the date of said
financial statements, free and clear of all liens from time to time existing
(except for purchase money security interest from time to time existing on
personal property,) encumbrances, security interests and adverse claims except
those specifically referred to in said financial statements.
3.6 LITIGATION. There is no litigation or proceeding pending or
threatened against Borrowers or any of their property which is reasonably likely
to affect the financial condition, property or business of Borrowers in a
materially adverse manner or result in liability in excess of Borrowers'
insurance coverage.
3.7 DEFAULT. Borrowers are not now in default in the payment of
any of its material obligations, and there exists no event, condition or act
which constitutes an event of default under Section 6 hereof and no condition,
event or act which with notice or lapse of time, or both, would constitute an
event of default.
3.8 ORGANIZATION. Each Borrower is duly organized and existing
under the laws of the state of its organization, and has the power and authority
to carry on the business in which it is engaged and/or proposes to engage.
3.9 POWER. Each Borrower has the power and authority to enter into
this Agreement and to execute and deliver the Note and all of the other Loan
Documents.
3.10 AUTHORIZATION. This Agreement and all things required by this
Agreement have been duly authorized by all requisite action of Borrowers.
3.11 QUALIFICATION. Each Borrower is duly qualified and in good
standing in any jurisdiction where such qualification is required.
3.12 COMPLIANCE WITH LAWS. Neither Borrower is in violation with
respect to any applicable laws, rules, ordinances or regulations which
materially affect the operations or financial condition of such Borrower .
3.13 ERISA. Any defined benefit pension plans as defined in the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), of
Borrowers meet, as of the date hereof, the minimum funding standards of Section
302 of ERISA, and no Reportable Event or Prohibited Transaction as defined in
ERISA has occurred with respect to any such plan.
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3.14 REGULATION U. No action has been taken or is currently planned
by either Borrower, or any agent acting on its behalf, which would cause this
Agreement or the Note to violate Regulation U or any other regulation of the
Board of Governors of the Federal Reserve System or to violate the Securities
and Exchange Act of 1934, in each case as in effect now or as the same May
hereafter be in effect. Neither Borrower is engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock as one of its
important activities and none of the proceeds of the Loan will be used directly
or indirectly for such purpose.
3.15 CONTINUING REPRESENTATIONS. These representations shall be
considered to have been made again at and as of the date of each disbursement of
the Loan and shall be true and correct as of such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or any other
of the Loan Documents have been paid in full, unless Bank waives compliance in
writing, Borrowers agree that:
4.1 USE OF PROCEEDS. Borrowers will use the proceeds of the Loan
only as provided in subsection 1.4 above.
4.2 PAYMENT OF OBLIGATIONS. Borrowers will pay and discharge
promptly all taxes, assessments and other governmental charges and claims levied
or imposed upon it or its property, or any part thereof, provided, however, that
Borrowers shall have the right in good faith to obtain extensions on and to
contest any such taxes, assessments, charges or claims and, pending the outcome
of such contest, to delay or refuse payment thereof provided that adequately
funded reserves are established by it to pay and discharge any such taxes,
assessments, charges and claims.
4.3 MAINTENANCE OF EXISTENCE. Each Borrower will maintain and
preserve its existence and assets and all rights, franchises, licenses and other
authority necessary for the conduct of its business and will maintain and
preserve its property, equipment and facilities in good order, condition and
repair. Bank May, at reasonable times, visit and inspect any of the properties
of Borrowers.
4.4 RECORDS. Each Borrower will keep and maintain full and accurate
accounts and records of its operations according to generally accepted
accounting principles and will permit Bank to have access thereto, to make
examination and photocopies thereof, and to make audits during regular business
hours. Costs for all such audits shall be paid by Borrowers.
4.5 INFORMATION FURNISHED. Borrowers will furnish to Bank all of
the following, to be prepared and presented on a consolidating basis:
(a) within forty-five (45) days after the close of each fiscal
quarter, including the final quarter of each fiscal year, their unaudited
consolidating and consolidated balance sheet as of the close of such fiscal
quarter, their unaudited consolidating and consolidated income and expense
statement with supportive schedules and statement of retained earnings for that
fiscal quarter, prepared in accordance with generally accepted accounting
principles;
(b) Within ninety (90) days after the close of each fiscal
year, a copy of their statement of financial condition including at least their
consolidated balance sheet as of the close of such fiscal year, their
consolidated income and expense statement and retained earnings statement for
such fiscal year, examined and prepared on an audited basis by independent
certified public accountants selected by Borrowers and reasonably satisfactory
to Bank, in accordance with generally accepted accounting principles applied on
a basis consistent with that of the previous year;
(c) By December 15 of each fiscal year, annual monthly
projections on a consolidating basis for the following fiscal year;
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(d) Such other financial statements and information as Bank May
reasonably request from time to time;
(e) In connection with each financial statement provided
hereunder, a statement executed by the chief financial officer of each Borrower,
certifying that no default has occurred and no event exists which with notice or
the laps of time, or both, would result in a default hereunder.
(f) In connection with each fiscal year-end statement required
hereunder, any management letter of Borrowers' certified public accountants;
(g) within forty five (45) days after each fiscal quarter end,
a certification of compliance with the Borrowing Base described above, executed
by each Borrower's chief financial officer or other duly authorized officer of
such Borrower, in form acceptable to Bank, which certificate shall accurately
report Borrowers' Eligible Inventory and the sum of documentary letters of
credit calling for drafts at sight. Borrower will permit to Bank to audit, at
Borrower's expense, Bank's collateral upon reasonable notice and during regular
business hours.
(h) Within forty five (45) days after each fiscal quarter, a
certification of compliance with all covenants under this Agreement, executed by
each Borrower's chief financial officer or other duly authorized officer of such
Borrower, in form acceptable to Bank;
(I) Prompt written notice to Bank of all events of default
under any of the terms or provisions of this Agreement or of any other
agreement, contract, document or instrument entered, or to be entered into with
Bank; and of any litigation which, if decided adversely to either Borrower,
would have a material adverse effect on such Borrower's financial condition; and
of any other matter which has resulted in, or is likely to result in, a material
adverse change in its financial condition or operations; and
(j) Prior written notice to Bank of any changes in: either
Borrower's officers and other senior management (or immediate written notice
upon the unexpected departure of any officer or other person in senior
management); either Borrower's name; and the location of either Borrower's
assets, principal place of business or chief executive office.
4.6 CURRENT RATIO. Borrowers will at all times maintain a
ratio of current assets to current liabilities of at least 1.25:1.0, as such
terms are defined by generally accepted accounting principles.
4.7 TANGIBLE NET WORTH. Borrowers will maintain at all times
Tangible Net Worth of not less than Twenty Two Million Dollars ($22,000,000).
"Tangible Net Worth" shall mean net worth increased by Borrowers indebtedness
subordinated to Bank in form and substance satisfatory to Bank, and decreased by
patents, licenses, trademarks, trade names, goodwill and other similar
intangible assets, organizational expenses, and monies due from affiliates
(including officers, shareholders and directors).
4.8 DEBT TO TANGIBLE NET WORTH. Borrowers will at all times
maintain a ratio of total liabilities to Tangible Net Worth of not greater than
2.0: 1.0.
4.9 PROFITABILITY. Borrowers will maintain a net profit,
after provision for income taxes, of any positive amount for any consecutive
twelve month period, as reported at the end of each fiscal quarter and each
fiscal year end.
4.10 COVENANTS ON CONSOLIDATED BASIS. All financial covenants
set forth in Sections 4.6 through 4.9 above shall be calculated on a
consolidated basis.
4.11 INSURANCE. Each Borrower will keep all of its insurable
property, real, personal or mixed, insured by good and responsible companies
against fire and such other risks as are customarily insured
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against by companies conducting similar business with respect to like
properties. Each Borrower will maintain adequate worker's compensation
insurance and adequate insurance against liability for damages to persons and
property.
4.12 ADDITIONAL REQUIREMENTS. Each Borrower will promptly,
upon demand by Bank, take such further action and execute all such additional
documents and instruments in connection with this Agreement as Bank in its
reasonable discretion deems necessary, and promptly supply Bank with such
other information concerning its affairs as Bank May reasonably request from
time to time.
4.13 LITIGATION AND ATTORNEYS' FEES. Each Borrower will
pay promptly to Bank upon demand, reasonable attorneys' fees (including but
not limited to the reasonable estimate of the allocated costs and expenses of
in-house legal counsel and legal staff) and all costs and other expenses paid
or incurred by Bank in collecting, modifying or compromising the Loan or in
enforcing or exercising its rights or remedies created by, connected with or
provided for in this Agreement or any of the Loan Documents, whether or not
an arbitration, judicial action or other proceeding is commenced. If such
proceeding is commenced, only the prevailing party shall be entitled to
attorneys' fees and court costs.
4.14 BANK EXPENSES. Each Borrower will pay or reimburse Bank
for all reasonable costs, expenses and fees incurred by Bank in preparing and
documenting this Agreement and the Loan, and all amendments and modifications
thereof, including but not limited to all filing and recording fees, costs of
appraisals, insurance and attorneys' fees, including the reasonable estimate of
the allocated costs and expenses of in-house legal counsel and legal staff.
4.15 REPORTS UNDER PENSION PLANS. Each Borrower will furnish
to Bank, as soon as possible and in any event within 15 days after such Borrower
knows or has reason to know that any event or condition with respect to any
defined benefit pension plans of such Borrower described in Section 3.13 above
has occurred, a statement of an authorized officer of such Borrower describing
such event or condition and the action, if any, which such Borrower proposes to
take with respect thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this Agreement or any
other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrowers agree that:
5.1 ENCUMBRANCES AND LIENS. Neither Borrower will create,
assume or suffer to exist any mortgage, pledge, security interest, encumbrance,
or lien (other than for taxes not delinquent and for taxes and other items
being contested in good faith) on property of any kind, whether real, personal
or mixed, now owned or hereafter acquired, or upon the income or profits
thereof, except to Bank and except for minor encumbrances and easements on real
property which do not affect its market value, and except for existing liens on
such Borrower's personal property and future purchase money security interests
encumbering only the personal property purchased. All such permitted personal
property liens shall not exceed, in the aggregate, One Million Dollars
($1,000,000.00) at any time.
5.2 BORROWINGS. Other than as maybe allowed under Section
5.1 above, neither Borrower will sell, discount or otherwise transfer any
account receivable or any note, draft or other evidence of indebtedness, except
to Bank or except to a financial institution at face value for deposit or
collection purposes only and without any fee other than fees normally charged by
the financial institution for deposit or collection services. Neither Borrower
will borrow any money, become contingently liable to borrow money, or enter any
agreement to directly or indirectly obtain borrowed money.
5.3 SALE OF ASSETS, LIQUIDATION OR MERGER. If any any event
of default shall exist, neither Borrower will liquidate or dissolve or enter
into any consolidation, merger, partnership or other
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combination, or convey, or sell, or lease all or the greater part of its
assets or business, or purchase or lease all or the greater part of the
assets or business of another.
5.4 LOANS, ADVANCES AND GUARANTIES. Neither Borrower will,
except in the ordinary course of business as currently conducted, make any loans
or advances, become a guarantor or surety, pledge its credit or properties in
any manner or extend credit.
5.5 INVESTMENTS. Neither Borrower will purchase the debt or
equity of another person or entity except for savings accounts and certificates
of deposit, direct U.S. Government obligations and commercial paper issued by
corporations with the top ratings of Moody's or Standard & Poor's, provided all
such permitted investments shall mature within two years of purchase.
5.6 PAYMENT OF DIVIDENDS. Borrowers and guarantors will not
declare or pay any dividends, other than a dividend payable in its own common
stock, or authorize or make any other distribution with respect to any of its
stock now or hereafter outstanding.
5.7 RETIREMENT OF STOCK. Neither Borrower will acquire or
retire any share of its capital stock for value.
5.8 PARENT AND SUBSIDIARY PROPERTY. Neither Borrower will
transfer any property to its parent or any affiliate of its parent, except for
value received in the normal course of business as business would be conducted
with an unrelated or unaffiliated entity. In no event shall management fees or
fees for services be paid by any Borrower to any such direct or indirect
affiliate, except for commercially reasonable fees paid for accounting services
and related management, without Bank's prior written approval.
5.10 CAPITAL EXPENDITURES. Borrower will not in the
aggregate make capital expenditures in excess of Five Million Dollars
($5,000,000) during its fiscal year ending December 27, 1997; Borrower will not
in the aggregate make capital expenditures in excess of Eight Million Dollars
($8,000,000) during the fiscal year ending December 26, 1998; Borrower will not
in the aggregate make capital expenditures in excess of Ten Million Dollars
($10,000,000) during the fiscal year ending December 25, 1999; provided that all
such expenditures shall only by permitted if necessary for a Borrower in the
conduct of its ordinary course of business.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default") shall
terminate any obligation on the part of Bank to make or continue the Loan and
automatically, unless otherwise provided under the Note, shall make all sums of
interest and principal and any other amounts owing under the Loan immediately
due and payable, without notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor, or any other notices or demands:
6.1 Either Borrower shall default in the due and punctual
payment of the principal of or the interest on the Note or any of the other Loan
Documents; or
6.2 Any default shall occur under the Note; or
6.3 Either Borrower shall default in the due performance or
observance of any covenant or condition of the Loan Documents; or
6.4 Any guaranty or Subordination Agreement required hereunder
is breached or becomes ineffective, or any Guarantor or subordinating creditor
dies, disavows or attempts to revoke or terminate such guaranty or subordination
agreement; or
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6.5 There is a change in ownership or control of ten percent
(10%) or more of the issued and outstanding stock of either Borrower, except for
changes in ownership or control which have been approved by Bank; or
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 ADDITIONAL REMEDIES. The rights, powers and remedies
given to Bank hereunder shall be cumulative and not alternative and shall be in
addition to all rights, powers and remedies given to Bank by law against
Borrower or any other person, including but not limited to Bank's rights of set
off or banker's lien.
7.2 NONWAIVER. Any forbearance or failure or delay by Bank
in exercising any right, power or remedy hereunder shall not be deemed a waiver
thereof and any single or partial exercise of any right, power or remedy shall
not preclude the further exercise thereof. No waiver shall be effective unless
it is in writing and signed by an officer of Bank.
7.3 INUREMENT. The benefits of this Agreement shall inure to
the successors and assigns of Bank and the permitted successors and assignees of
Borrower, and any assignment of Borrower without Bank's consent shall be null
and void.
7.4 APPLICABLE LAW. This Agreement and all other agreements
and instruments required by Bank in connection therewith shall be governed by
and construed according to the laws of the State of California.
7.5 SEVERABILITY. Should any one or more provisions of this
Agreement be determined to be illegal or unenforceable, all other provisions
nevertheless shall be effective.
7.6 INTEGRATION CLAUSE. Except for documents and instruments
specifically referenced herein, this Agreement constitutes the entire agreement
between Bank and Borrower regarding the Loan and all prior communications verbal
or written between Borrower and Bank shall be of no further effect or
evidentiary value.
7.7 CONSTRUCTION. The section and subsection headings herein
are for convenience of reference only and shall not limit or otherwise affect
the meaning hereof.
7.8 AMENDMENTS. This Agreement May be amended only in
writing signed by all parties hereto.
7.9 COUNTERPARTS. Borrower and Bank May execute one or more
counterparts to this Agreement, each of which shall be deemed an original.
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for or
allowed hereunder shall be effective only when given by one of the following
methods and addressed to the respective part at its address given with the
signatures at the end of this Agreement and shall be considered to have been
validly given: (a) upon delivery, if delivered personally; (b) upon receipt,if
mailed, first class postage prepaid, with the United States Postal Service; (c)
on the next business day, if sent by overnight courier service of recognized
standing; and (d) upon telephoned confirmation of receipt, if telecopied.
8.2 The addresses to which notices or demands are to be
given May be changed from time to time by notice delivered as provided above.
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THIS AGREEMENT is executed on behalf of the parties by duly authorized
officers as of the date first above written.
UNION BANK OF CALIFORNIA, N.A. Address:
Union Bank of California, N.A.
P.O. Box 7230
By: /s/ PATRICIA LEE San Francisco, CA 94120-7230
--------------------------- Attention Patricia Lee
Patricia Lee Telecopier: (415) 705-7111
Vice President Telephone: (415) 705-7385
TRACK 'N TRAIL Address:
Track 'N Trail
Overland Management Corporation
By: /s/ DAVID L. SUECHTING, JR. 4961A Windplay
---------------------------- El Dorado Hills, CA 95762
David L. Suechting, Jr. Attention: Daniel J. Nahmens
Chairman of the Board Telecopier: (916) 933-4521
Telephone: (916) 933-4525
By: /s/ DANIEL J. NAHMENS
---------------------------
Daniel J. Nahmens
Chief Financial Officer
OVERLAND MANAGEMENT CORPORATION
By: /s/ DAVID L. SUECHTING, JR.
---------------------------
David L. Suechting, Jr.
Chairman of the Board
By: /s/ DANIEL J. NAHMENS
---------------------------
Daniel J. Nahmens
Chief Financial Officer
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CONTINUING GUARANTY
1. OBLIGATIONS GUARANTIED. For consideration, the adequacy and sufficiency of
which is acknowledged, the undersigned ("Guarantor") unconditionally guaranties
and promises (a) to pay to UNION BANK OF CALIFORNIA, N.A. ("Bank") on demand, in
lawful United States money, all Obligations to Bank of TRACK 'N TRAIL jt/w
OVERLAND MANAGEMENT CORPORATION ("Borrower") and (b) to perform all undertakings
of Borrower in connection with the Obligations. "Obligations" is used in its
most comprehensive sense and includes any and all debts, liabilities, rental
obligations, and other obligations and liabilities of every kind of Borrower to
Bank, whether made, incurred or created previously, concurrently or in the
future, whether voluntary or involuntary and however arising, whether incurred
directly or acquired by Bank by assignment or succession, whether due or not
due, absolute or contingent, liquidated or unliquidated, legal or equitable,
whether Borrower is liable individually or jointly or with others, whether
incurred before, during or after any bankruptcy, reorganization, insolvency,
receivership or similar proceeding ("Insolvency Proceeding"), and whether
recovery thereof is or becomes barred by a statute of limitations or is or
becomes otherwise unenforceable, together with all expenses of, for and
incidental to collection, including reasonable attorneys' fees.
2. LIMITATION OF GUARANTOR'S LIABILITY. Although this Guaranty covers all
Obligations, Guarantor's liability under this Guaranty for Borrower's
Obligations shall not exceed at any one time the sum of the following (the
"Guarantied Liability Amount"): (a) TEN MILLION AND NO/100 Dollars
($10,000,000.00) for Obligations representing principal and/or rent ("Principal
Amount"), (b) all interest, fees and like charges owing and allocable to the
Principal Amount as determined by Bank, and (c) without allocation in respect of
the Principal Amount, all costs, attorneys' fees, and expenses of Bank relating
to or arising out of the enforcement of the Obligations and all indemnity
liabilities of Guarantor under this Guaranty. The foregoing limitation applies
only to Guarantor's liability under this particular Guaranty. Unless Bank
otherwise agrees in writing, every other guaranty of any Obligations previously,
concurrently, or hereafter given to Bank by Guarantor is independent of this
Guaranty and of every other such guaranty. Without notice to Guarantor, Bank may
permit the Obligations to exceed the Principal Amount and may apply or reapply
any amounts received in respect of the Obligations from any source other than
from Guarantor to that portion of the Obligations not included within the
Guarantied Liability Amount.
3. CONTINUING NATURE/REVOCATION/REINSTATEMENT. This Guaranty is in addition to
any other guaranties of the Obligations, is continuing and covers all
Obligations, including those arising under successive transactions which
continue or increase the Obligations from time to time, renew all or part of the
Obligations after they have been satisfied, or create new Obligations.
Revocation by one or more signers of this Guaranty or any other guarantors of
the Obligations shall not (a) affect the obligations under this Guaranty of a
non-revoking Guarantor, (b) apply to Obligations outstanding when Bank receives
written notice of revocation, or to any extensions, renewals, readvances,
modifications, amendments or replacements of such Obligations, or (c ) apply to
Obligations, arising after bank receives such notice of revocation, which are
created pursuant to a commitment existing at the time of the revocation, whether
or not there exists an unsatisfied condition to such commitment or Bank has
another defense to its performance. All of Bank's rights pursuant to this
Guaranty continue with respect to amounts previously paid to Bank on account of
any Obligations which are thereafter restored or returned by Bank, whether in an
Insolvency Proceeding of Borrower or for any other reason, all as though such
amounts had not been paid to Bank; and Guarantor's liability under this Guaranty
(and all its terms and provisions) shall be reinstated and revived,
notwithstanding any surrender or cancellation of this Guaranty. Bank, at its
sole discretion, may determine whether any amount paid to it must be restored or
returned; provided, however, that if Bank elects to contest any claim for return
or restoration, Guarantor agrees to indemnify and hold Bank harmless from and
against all costs and expenses, including reasonable attorneys' fees, expended
or incurred by Bank in connection with such contest. No payment by Guarantor
shall reduce the Guarantied Liability Amount hereunder unless, at or prior to
the time of such payment, Bank receives Guarantor's written notice to that
effect. If any Insolvency Proceeding is
1
<PAGE>
commenced by or against Borrower or Guarantor, at Bank's election,
Guarantor's obligations under this Guaranty shall immediately and without
notice or demand become due and payable,whether or not then otherwise due and
payable.
4. AUTHORIZATION. Guarantor authorizes Bank, without notice and without
affecting Guarantor's liability under this Guaranty, from time to time, whether
before or after any revocation of this Guaranty, to (a) renew, compromise,
extend, accelerate, release, subordinate, waive, amend and restate, or otherwise
amend or change, the interest rate, time or place for payment or any other terms
of all or any part of the Obligations; (b) accept delinquent or partial payments
on the Obligations; (c ) take or not take security or other credit support for
this Guaranty or for all or any part of the Obligations, and exchange, enforce,
waive, release, subordinate, fail to enforce or perfect, sell, or otherwise
dispose of any such security or credit support; (d) apply proceeds of any such
security or credit support and direct the order or manner of its sale or
enforcement as Bank, at its sole discretion, may determine; and (e) release or
substitute Borrower or any guarantor or other person or entity liable on the
Obligations.
5. WAIVERS. To the maximum extent permitted by law, Guarantor waives (a) all
rights to require Bank to proceed against Borrower, or any other guarantor, or
proceed against, enforce or exhaust any security for the Obligations or to
marshall assets or to pursue any other remedy in Bank's power whatsoever; (b)
all defenses arising by reason of any disability or other defense of Borrower,
the cessation for any reason of the liability of Borrower, any defense that any
other indemnity, guaranty or security was to be obtained, any claim that Bank
has made Guarantor's obligations more burdensome or more burdensome than
Borrower's obligations, and the use of any proceeds of the Obligations other
than as intended or understood by Bank or Guarantor; (c) all presentments,
demands for performace, notices of nonperformance, protests, notices of protest,
notices of dishonor, notices of acceptance of this Guaranty and of the existence
or creation of new or additional Obligations, and all other notices or demands
to which Guarantor might otherwise be entitled; (d) all conditions precedent to
the effectiveness of this Guaranty; (e) all rights to file a claim in connection
with the Obligations in an Insolvency Proceeding filed by or against Borrower;
(f) all rights to require Bank to enforce any of its remedies; and (g) until the
Obligations are satisfied or fully paid with such payment not subject to return:
(i) all rights of subrogation, contribution, indemnification or reimbursement,
(ii) all rights of recourse to any assets or property of Borrower, or to any
collateral or credit support for the Obligations, (iii) all rights to
participate in or benefit from any security or credit support Bank may have or
acquire and (iv) all rights, remedies and defenses Guarantor may have or acquire
against Borrower. Guarantor understands that if Bank forecloses by trustee's
sale on a deed of trust securing any of the Obligations, Guarantor would then
have a defense preventing Bank from thereafter enforcing Guarantor's liability
for the unpaid balance of the secured Obligations. This defense arises because
the trustee's sale would eliminate Guarantor's right of subrogation, and
therefore Guarantor would be unable to obtain reimbursement from Borrower.
Guarantor specifically waives this defense and all rights and defenses that
Guarantor may have because the Obligations are secured by real property. This
means, among other things: (1) Bank may collect from Guarantor without first
foreclosing on any real or personal property collateral pledged by Borrower, and
(2) if Bank forecloses on any real property collateral pledged by Borrower: (a)
the amount of the Obligations may be reduced only by the price for which the
collateral is sold at the foreclosure sale, even if the collateral is worth more
than the sale price; and (B) Bank may collect from Guarantor even if Bank, by
foreclosing on the real property collateral, has destroyed any right Guarantor
may have to collect from Borrower. This is an unconditional and irrevocable
waiver of any rights and defenses Guarantor may have because the Obligations are
secured by real property. These rights and defenses include, but are not limited
to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the
California Code of Civil Procedures or similar laws in other states.
6. GUARANTOR TO KEEP INFORMED. Guarantor warrants having established with
Borrower adequate means of obtaining, on an ongoing basis, such information as
Guarantor may require concerning all matters bearing on the risk of nonpayment
or nonperformance of the Obligations. Guarantor assumes sole, continuing
responsibility for obtaining such information from sources other than from Bank.
Bank has no
2
<PAGE>
duty to provide any information to Guarantor until Bank receives Guarantor's
written request for specific information in Bank's possession and Borrower
has authorized Bank to disclose such information to Guarantor.
7. SUBORDINATION. All obligations of Borrower to Guarantor which presently or
in the future may exist ("Guarantor's Claims") are hereby subordinated to the
Obligations. At Bank's request, Guarantor's Claims will be enforced and
performance thereon received by Guarantor only as a trustee for Bank, and
Guarantor will promptly pay over to Bank all proceeds recovered for application
to the Obligations without reducing or affecting Guarantor's liability under
other provisions of this Guaranty.
8. SECURITY. To secure Guarantor's obligations under this Guaranty, other than
for payment of Obligations which are subject to the disclosure requirements of
the United States Truth in Lending Act, Guarantor grants Bank a security
interest in all moneys, general and special deposits, instruments and other
property of Guarantor at any time maintained with or held by Bank, and all
proceeds of the foregoing.
9. AUTHORIZATION. Where Borrower is a corporation, partnership or other
entity, Bank need not inquire into or verify the powers of Borrower or authority
of those acting or purporting to act on behalf of Borrower, and this Guaranty
shall be enforceable with respect to any Obligations Bank grants or creates in
reliance on the purported exercise of such powers or authority.
10. ASSIGNMENTS. Without notice to Guarantor, Bank may assign the Obligations
and this Guaranty, in whole or in part, and may disclose to any prospective or
actual purchaser of all or part of the Obligations any and all information Bank
has or acquires concerning Guarantor, this Guaranty and any security for this
Guaranty.
11. COUNSEL FEES AND COSTS. The prevailing party shall be entitled to
attorneys' fees (including a reasonable allocation for Bank's internal counsel)
and all other costs and expenses which it may incur in connection with the
enforcement or preservation of its rights under, or defense of, this Guaranty or
in connection with any other dispute or proceeding relating to this Guaranty,
whether or not incurred in any Insolvency Proceeding, arbitration, litigation or
other proceeding.
12. MARRIED GUARANTORS. By executing this Guaranty, a Guarantor who is married
agress that recourse may be had against his or her separate and community
property for all his or her obligations under this Guaranty.
13. MULTIPLE GUARANTORS/BORROWERS. When there is more than one Borrower
named herein or when this Guaranty is executed by more than one Guarantor,
then the words "Borrower" and "Guarantor", respectively, shall mean all and
any one or more of them, and their respective successors and assigns,
including debtors-in-possession and bankruptcy trustees; words used herein in
the singular shall be considered to have been used in the plural where the
context and construction so requires in order to refer to more than one
Borrower or Guarantor, as the case may be.
14. INTEGRATION/SEVERABILITY/AMENDMENTS. This Guaranty is intended by
Guarantor and Bank as the complete, final expression of their agreement
concerning its subject matter. It supersedes all prior understandings or
agreements with respect thereto and may be changed only by a writing signed
by Guarantor and Bank. No course of dealing, or parole or extrinsic evidence
shall be used to modify or supplement the express terms of this Guaranty. If
any provision of this Guaranty is found to be illegal, invalid or
unenforceable, such provision shall be enforced to the maximum extent
permitted, but if fully unenforceable, such provision shall be severable, and
this Guaranty shall be construed as if such provision had never been a part
of this Guaranty, and the remaining provisions shall continue in full force
and effect.
3
<PAGE>
15. JOIN AND SEVERAL. If more than one Guarantor signs this Guaranty, the
obligations of each under this Guaranty are joint and several, and
independent of the Obligations and of the obligations of any other person or
entity. A separate action or actions may be brought and prosecuted against
any one or more guarantors, whether action is brought against Borrower or
other guarantors of the Obligations, and whether borrower or others are
joined in any such action.
16. NOTICE. Any notice, including notice of revocation, given by any party
under this Guaranty shall be effective only upon its receipt by the other party
and only if (a) given in writing and (b) personally delivered or sent by United
States mail, postage prepaid, and addressed to Bank or Guarantor at their
respective addresses for notices indicated below. Guarantor and Bank may change
the place to which notices, requests, and other communications are to be sent to
them by giving written notice of such change to the other.
17. GOVERNING LAW. This Guaranty shall be governed by and construed according
to the laws of California, and, except as provided in any alternative dispute
resolution agreement executed between Guarantor and Bank, Guarantor submits to
the non-exclusive jurisdiction of the state or federal courts in said state.
18. DISPUTE RESOLUTION. This Guaranty hereby incorporates any alternative
dispute resolution agreement previously, concurrently or hereafter executed
between Guarantor and Bank.
Executed as of SEPTEMBER 25, 1997. Guarantor acknowledges having received a
copy of this Guaranty and having made each waiver contained in this Guaranty
with full knowledge of its consequences.
TRACK 'N TRAIL, INC., A DELAWARE
CORPORATION
BY: /s/ DANIEL J. NAHMENS
---------------------------------
BY: /s/ DAVID L. SUECHTING, JR.
---------------------------------
UNION BANK OF CALIFORNIA, N.A.
BY: /s/ PATRICIA LEE
---------------------------------
PATRICIA LEE
TITLE: Vice President
-------------------------------
4
<PAGE>
[LETTERHEAD]
March 20, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Track 'n Trail - Form 10-K for the fiscal year ended December 27, 1997
Ladies and Gentlemen:
With respect to the above-referenced Form 10K filed by Track 'n Trail on or
about March 20, 1998 under the Securities Act of 1934, we have read and agree
with the comments regarding Deloitte & Touche LLP set forth under the caption
"Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure" in such Form 10-K.
Very truly yours,
/s/ Deloitte & Touche LLP
<PAGE>
EXHIBIT 23.1
[LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Registration Statements No.
333-39833 and 333-39835 of Track 'n Trail on Form S-8 of our report dated
February 24, 1998, appearing in the Annual Report on Form 10-K of Track 'n
Trail for the year ended December 27, 1997.
/s/ COOPERS & LYBRAND L.L.P.
Sacramento, California
March 19, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> DEC-27-1997
<CASH> 2,383
<SECURITIES> 0
<RECEIVABLES> 1,540
<ALLOWANCES> 0
<INVENTORY> 27,852
<CURRENT-ASSETS> 32,403
<PP&E> 13,138
<DEPRECIATION> 5,854
<TOTAL-ASSETS> 44,133
<CURRENT-LIABILITIES> 10,507
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 32,014
<TOTAL-LIABILITY-AND-EQUITY> 44,133
<SALES> 91,834
<TOTAL-REVENUES> 91,834
<CGS> 47,677
<TOTAL-COSTS> 30,780
<OTHER-EXPENSES> 6,819
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,260
<INCOME-PRETAX> 5,298
<INCOME-TAX> 118
<INCOME-CONTINUING> 5,180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,180
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.58
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FILED AS PART OF
THE COMPANY'S 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> SEP-27-1997
<CASH> 715
<SECURITIES> 0
<RECEIVABLES> 634
<ALLOWANCES> 0
<INVENTORY> 26,923
<CURRENT-ASSETS> 28,925
<PP&E> 12,044
<DEPRECIATION> 5,500
<TOTAL-ASSETS> 40,113
<CURRENT-LIABILITIES> 28,159
<BONDS> 847
0
0
<COMMON> 41
<OTHER-SE> 9,646
<TOTAL-LIABILITY-AND-EQUITY> 40,113
<SALES> 62,289
<TOTAL-REVENUES> 62,289
<CGS> 32,388
<TOTAL-COSTS> 27,536
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,171
<INCOME-PRETAX> 1,199
<INCOME-TAX> (249)
<INCOME-CONTINUING> 1,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,448
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.15
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FILED AS PART OF
THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
<CASH> 976,571
<SECURITIES> 0
<RECEIVABLES> 1,010,151
<ALLOWANCES> 0
<INVENTORY> 19,867,764
<CURRENT-ASSETS> 22,116,172
<PP&E> 10,923,560
<DEPRECIATION> 4,341,458
<TOTAL-ASSETS> 31,857,996
<CURRENT-LIABILITIES> 12,686,543
<BONDS> 7,025,017
0
0
<COMMON> 41,076
<OTHER-SE> 10,605,163
<TOTAL-LIABILITY-AND-EQUITY> 31,857,996
<SALES> 66,232,884
<TOTAL-REVENUES> 66,232,884
<CGS> 34,062,252
<TOTAL-COSTS> 26,567,818
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 670,118
<INCOME-PRETAX> 4,957,163
<INCOME-TAX> 487,990
<INCOME-CONTINUING> 4,469,173
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,364,022
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.57
</TABLE>
