<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-22359
TRACK 'N TRAIL
(Exact name of registrant as specified in its charter)
DELAWARE 91-1778085
(State or other jurisdiction of I.R.S. Employer Identification Number
incorporation or organization)
4961-A WINDPLAY DRIVE, EL DORADO HILLS, CALIFORNIA 95762
(Address of principal executive offices) (zip code)
(916) 933-4525
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of the Registrant's Common Stock, $0.01 par value,
outstanding as of August 3, 1998 was 6,851,961.
<PAGE>
TRACK 'N TRAIL
FORM 10-Q
QUARTER ENDED JUNE 27, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I: FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 27, 1998
and December 27, 1997 . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the 26-Weeks
ended June 27, 1998 and June 28, 1997. . . . . . . . . . . . 2
Consolidated Statements of Cash Flows for the 26-Weeks
ended June 27, 1998 and June 28, 1997 . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements. . . . . . . . . 4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . 6-9
PART II: OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security-Holders . . . . . .10
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . .10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
----------
<TABLE>
<CAPTION>
JUNE 27, DECEMBER 27,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,097 $ 2,383
Accounts receivable 745 1,540
Inventories 29,640 27,852
Prepaid expenses 183 311
Prepaid income taxes 554 --
Deferred income taxes 317 317
---------- ----------
Total current assets 32,536 32,403
Fixed assets, net 8,675 7,284
Goodwill, net 3,002 3,084
Deferred income taxes 1,362 1,362
---------- ----------
Total Assets $ 45,575 $ 44,133
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 2,069 $ --
Current maturities of long-term debt 66 116
Accounts payable 8,618 6,958
Accrued payroll and bonuses 609 668
Sales tax payable 429 874
Income taxes payable -- 1,089
Accrued expenses and other liabilities 745 802
---------- ---------
Total current liabilities 12,536 10,507
Deferred rent 1,451 1,424
Long-term debt, net of current maturities 66 120
---------- ---------
Total liabilities 14,053 12,051
---------- ---------
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; 6,842,644 and 6,839,811 shares
issued and outstanding at June 27, 1998 and
December 27, 1997, respectively 68 68
Additional paid-in capital 25,793 25,772
Retained earnings 5,661 6,242
---------- ---------
Total stockholders' equity 31,522 32,082
---------- ---------
Total liabilities and stockholders' equity $ 45,575 $ 44,133
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
----------
<TABLE>
<CAPTION>
PERIOD ENDED
-----------------------------------------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1998 1997 1998 1997
(13 WEEKS) (13 WEEKS) (26 WEEKS) (26 WEEKS)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 22,311 $ 20,661 $ 41,219 $ 37,528
Cost of sales 11,385 10,556 21,450 19,413
---------- ---------- ---------- ----------
Gross profit 10,926 10,105 19,769 18,115
---------- ---------- ---------- ----------
Operating expenses:
Selling and marketing 8,523 7,334 16,762 14,528
Administrative and distribution 1,908 1,664 3,915 3,444
---------- ---------- ---------- ----------
Total operating expenses 10,431 8,998 20,677 17,972
---------- ---------- ---------- ----------
Operating income (loss) 495 1,107 (908) 143
Other (income) expense:
Interest 46 441 51 730
Other, net 4 31 9 21
---------- ---------- ---------- ----------
Income (loss) before income taxes 445 635 (968) (608)
Income tax provision (benefit) 178 44 (387) (372)
---------- ---------- ---------- ----------
Net income (loss) $ 267 $ 591 $ (581) $ (236)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Historical earnings (loss) per share:
Basic $ 0.04 $ 0.14 $ (0.08) $ (0.06)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted $ 0.04 $ 0.14 $ (0.08) $ (0.06)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma income data:
Historical income (loss) before income taxes $ 635 $ (608)
Pro forma income tax provision (benefit)
(Note 1) 254 (243)
---------- ----------
Pro forma net income (loss) $ 381 $ (365)
---------- ----------
---------- ----------
Pro forma earnings (loss) per share:
Basic $ 0.09 $ (0.09)
---------- ----------
---------- ----------
Diluted $ 0.08 $ (0.08)
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
----------
<TABLE>
<CAPTION>
JUNE 27, JUNE 28,
1998 1997
(26 Weeks) (26 Weeks)
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (581) $ (236)
Adjustments to reconcile to cash used for operating activities:
Depreciation and amortization 972 843
Loss (gain) on disposal of fixed assets 8 (13)
Compensation recorded in connection
with stock option plans -- 8
Deferred income taxes -- (114)
Cash provided by (used for) changes in operating assets
and liabilities:
Accounts receivable 795 202
Inventories (1,788) (4,933)
Prepaid expenses 129 21
Prepaid income taxes (554) (391)
Accounts payable and other accrued liabilities 1,098 865
Income taxes payable (1,089) (476)
Deferred rent 27 22
----------- -------------
Cash used for operating activities (983) (4,202)
----------- -------------
Cash flows from investing activities:
Purchases of fixed assets (2,289) (910)
Proceeds from sale of fixed assets -- 27
----------- -------------
Cash used for investing activities (2,289) (883)
----------- -------------
Cash flows from financing activities:
Bank line of credit:
Borrowings 13,870 24,455
Repayments (11,801) (16,395)
Long-term debt:
Borrowings -- --
Repayments (104) (496)
Payment of distributions to stockholders -- (2,204)
Offering expenses paid -- (503)
Proceeds from issuance of Common Stock 21 --
----------- -------------
Cash provided by financing activities 1,986 4,857
----------- -------------
Decrease in cash and cash equivalents (1,286) (228)
Cash and cash equivalents, beginning of period 2,383 977
----------- -------------
Cash and cash equivalents, end of period $ 1,097 $ 749
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
INTERIM RESULTS
The accompanying consolidated financial statements for the 13 weeks and 26
weeks ended June 27, 1998 and June 28, 1997 have been prepared in accordance
with generally accepted accounting principles ("GAAP"), and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. These financial
statements have not been audited by independent public accountants, but include
all adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
condition, results of operations and cash flows for such periods. However,
these results are not necessarily indicative of results for any other interim
period or for the full year. The accompanying consolidated balance sheet as of
December 27, 1997 has been derived from the audited financial statements, but
does not include all disclosures required by GAAP. The Company has historically
experienced significant quarterly fluctuations due to seasonality in operating
results and it expects that these fluctuations in sales, expenses, and net
income or losses will continue.
The financial statements and related disclosures have been prepared with
the presumption that users of the interim financial information have read or
have access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto incorporated by
reference from the Company's Annual Report on Form 10-K for the fiscal year
ended December 27, 1997.
PRO FORMA INFORMATION
Pro forma net income has been computed for periods during which a portion
of the Company's income was subject to S corporation taxes to include a
provision for income taxes at an effective tax rate of 40% representing
management's estimate of the effective tax rate as if the Company had been a C
corporation for all such periods.
2. EARNINGS PER SHARE
Earnings per share ("EPS") is calculated under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. SFAS No.
128 requires dual presentation of basic and diluted earnings per share by
entities with complex capital structures. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock,
or resulted in the issuance of common stock, that then shared in earnings of the
entity.
4
<PAGE>
2. EARNINGS PER SHARE (continued)
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):
HISTORICAL EARNINGS PER SHARE
<TABLE>
<CAPTION>
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
(13 weeks) (13 weeks) (26weeks) (26weeks)
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Income available to common stockholders
(net income (loss)) for basic and diluted
earnings per share . . . . . . . . . . . . . . . . . . $ 267 $ 591 $ (581) $ (236)
------ ------ ------ ------
------ ------ ------ ------
Shares for basic earnings per share. . . . . . . . . . 6,843 4,108 6,842 4,108
Dilutive effect of stock options (treasury
stock method). . . . . . . . . . . . . . . . . . . . . 413 194 0 0
------ ------ ------ ------
Shares for diluted earnings per share. . . . . . . . . 7,256 4,302 6,842 4,108
------ ------ ------ ------
------ ------ ------ ------
Basic earnings (loss) per share. . . . . . . . . . . . $ 0.04 $ 0.14 $(0.08) $(0.06)
------ ------ ------ ------
------ ------ ------ ------
Diluted earnings (loss) per share. . . . . . . . . . . $ 0.04 $ 0.14 $(0.08) $(0.06)
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
June 28, June 28,
1997 1997
(13weeks) (26 weeks)
--------- ----------
<S> <C> <C>
Income available to common stockholders
(pro forma net income (loss)) for basic and
diluted earnings per share . . . . . . . . . . . . . . $381 $(365)
----- -----
----- -----
Shares for basic earnings per share. . . . . . . . . . 4,108 4,108
Dilutive effect of stock options (treasury
stock method). . . . . . . . . . . . . . . . . . . . . 194 0
Distribution Shares. . . . . . . . . . . . . . . . . . 586 586
----- -----
Shares for diluted earnings per share. . . . . . . . . 4,888 4,694
----- -----
----- -----
Basic earnings (loss) per share. . . . . . . . . . . . $0.09 $(0.09)
----- -----
----- -----
Diluted earnings (loss) per share. . . . . . . . . . . $0.08 $(0.08)
----- -----
----- -----
</TABLE>
For the 13 weeks ended June 27, 1998 and June 28, 1997 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. For the 26 weeks
ended June 27, 1998 and June 28, 1997, all warrants and options outstanding were
not dilutive and, accordingly, were not included in the weighted number of
common and common equivalent shares outstanding.
5
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. In
addition to historical information, this Management's Discussion and Analysis
includes certain forward-looking statements regarding events and financial
trends which may affect the Company's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause the Company's actual results and financial position to differ materially.
Factors that could cause or contribute to such differences include those
discussed below. These and other risks and uncertainties related to the
business are described in detail in the Company's Annual Report on Form 10-K
under the heading "Risk Factors". Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
Track 'n Trail, a Delaware corporation (together with its subsidiaries,
unless the context otherwise requires, the "Company"), is one of the largest
full-service specialty retailers in the United States focusing on a broad range
of high-quality branded casual, outdoor and adventure footwear. As of June 27,
1998, the Company operated 126 Track 'n Trail stores and 40 Overland Trading
stores in 30 states.
Pursuant to a reorganization (the "Reorganization"), effected shortly
prior to the consummation of the Company's initial public offering (the
"Offering") on October 16, 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
Reorganization was accounted for in a manner similar to a pooling of interests.
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 decreased 4.8% and 2.6% for the 13 weeks
and 26 weeks ended June 27, 1998, respectively.
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 fiscal
1997 net income in this Management's Discussion and Analysis are to pro forma
net income, which is 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 discussions compare the Company's results of operations for
the 13 weeks and 26 weeks ended June 27, 1998 with its results for the
comparable periods in the prior year. The results achieved in these periods are
not necessarily indicative of results to be achieved in future periods. The
following comparative information should be read in conjunction with the
Consolidated Financial Statements and accompanying notes for each period
discussed, as well as the information presented in all other sections of this
Management's Discussion and Analysis.
THIRTEEN WEEKS ENDED JUNE 27, 1998 COMPARED TO THIRTEEN WEEKS ENDED JUNE 28,
1997
NET SALES
Net sales were $22.3 million for the 13 weeks ended June 27, 1998, an
increase of $1.7 million, or 8.0%, over the net sales for the comparable period
in the prior year. Of this increase in net sales, $2.6 million is attributable
to 22 stores opened in fiscal 1997 and 18 stores opened in the first 26 weeks of
fiscal 1998, none of which were open for the full comparable period in the prior
year, partially offset by two store closures in the first 13 weeks of fiscal
1998. Of the 15 stores the Company opened during the second quarter, nine were
opened in June. As a result, the Company does not expect to see a material
contribution from these stores until the third quarter. Comparable store sales
decreased $943,000 or 4.8%
6
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for the 13 weeks ended June 27, 1998. The decrease in comparable store sales
is primarily due to the disruptions caused by the unseasonal weather
associated with El Nino. The Company's sales were also effected by the
penetration of the traditional "white" shoe retailer into the "brown" shoe
market and a shift in fashion trends within the "brown" shoe market,
especially by the female consumer. The Company expects to open approximately
17 additional stores (14 net of store closures) during the remainder of
fiscal 1998.
GROSS PROFIT
Gross profit was $10.9 million for the 13 weeks ended June 27, 1998, an
increase of $821,000, or 8.1%, over the $10.1 million in gross profit for the
comparable period in the prior year. Gross profit as a percentage of net sales
increased to 49.0% for the 13 weeks ended June 27, 1998 from 48.9% in the
comparable period in the prior year. This incease is primarily attributable to
improved initial margins on new merchandise purchases.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $8.5 million for the 13 weeks ended
June 27, 1998, an increase of $1.2 million, or 16.2%, over the $7.3 million
recorded in the comparable period in the prior year. The increase is
primarily attributable to 18 stores opened in fiscal 1997 and 16 stores (net
of closures) opened in the first 26 weeks of fiscal 1998, for a total of 34
stores (net of closures), none of which were open for the full comparable
period in the prior year. As a percentage of net sales, selling and
marketing expenses increased to 38.2% in the 13 weeks ended June 27, 1998
from 35.5% in the comparable period in the prior year, primarily attributable
to operating costs associated with new stores which historically have a
lower initial sales base.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $1.9 million for the 13 weeks
ended June 27, 1998, an increase of $244,000, or 14.7%, over the $1.7 million in
administrative and distribution expenses for the comparable period in the
prior year. As a percentage of net sales, administrative and distribution
expenses increased to 8.6% in the 13 weeks ended June 27, 1998 from 8.1% in the
comparable period in the prior year. Both the dollar increase and percentage of
net sales increase in administrative and distribution expenses are primarily
attributable to increases in staffing and associated expenses as a result of the
Company's expansion and becoming a public company.
INTEREST EXPENSE
Interest expense decreased to $46,000, or 0.2% of net sales, for the 13
weeks ended June 27, 1998, from $441,000, or 2.1% of net sales, in the
comparable period in 1997. The decrease was primarily attributable to
repayment of the debt incurred in connection with the acquisition of Overland
and reduction of the outstanding principal balance of the Company's credit
facility from the proceeds from the Offering.
NET INCOME
The Company's net income for the 13 weeks ended June 27, 1998 was $267,000,
a decrease of $114,000 from the net income of $381,000 in the comparable
period in 1997. The decrease in net income is primarily attributable to fixed
operating costs associated with a larger store base in a period in which the
Company experienced declining comparable stores sales and where the majority of
the stores opened during the quarter did not contribute materially due to the
timing of their openings.
TWENTY-SIX WEEKS ENDED JUNE 27, 1998 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 28,
1997
NET SALES
Net sales were $41.2 million for the 26 weeks ended June 27, 1998, an
increase of $3.7 million, or 9.8%, over the $37.5 million in net sales for the
comparable period in the prior year. Of this increase in net sales, $4.6
million is attributable to 22 stores opened in fiscal 1997 and 18 stores opened
in the first 26 weeks of fiscal 1998, none of which were open for the full
comparable period in the prior year, partially offset by two store closures in
the first 13 weeks of fiscal 1998. Of the 16 stores (net of closures) the
Company opened,nine were opened June. As a result, the Company does not expect
7
<PAGE>
to see a material contribution from these stores until the third quarter.
Comparable store sales decreased $922,000 or 2.6% for the 26 weeks ended June
27, 1998. The decrease in comparable store sales is primarily due to (a product
of) the disruptions caused by the unseasonal weather associated with El Nino,
the penetration of the traditional "white" shoe retailer into the "brown" shoe
market and a shift in fashion trends within the "brown" shoe market, especially
by the female consumer. The Company expects to open approximately 17 additional
stores (14 net of store closures) during the remainder of fiscal 1998.
GROSS PROFIT
Gross profit was $19.8 million for the 26 weeks ended June 27, 1998, an
increase of $1.7 million, or 9.1%, over the $18.1 million in gross profit for
the comparable period in the prior year. Gross profit as a percentage of net
sales decreased to 48.0% for the 26 weeks ended June 27, 1998 from 48.3% in the
comparable period in the prior year. Markdowns taken to liquidate winter goods
in the first quarter had a negative impact on gross profit as a percent of net
sales for the 26 weeks ended June 27, 1998, more than offsetting the improved
initial margins obtained in the second quarter.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $16.8 million for the 26 weeks ended
June 27, 1998, an increase of $2.2 million, or 15.4%, over the comparable period
in the prior year. The increase is primarily attributable to 22 stores opened
in fiscal 1997 and 16 stores (net of closures) opened in the first 26 weeks of
fiscal 1998, for a total of 38 stores (net of closures), none of which were open
for the full comparable period in the prior year. As a percentage of net sales,
selling and marketing expenses increased to 40.7% in the 26 weeks ended June 27,
1998 from 38.7% in the comparable period in the prior year, primarily
attributable to operating costs associated with new stores which historically
have a lower initial sales base.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $3.9 million for the 26 weeks
ended June 27, 1998, an increase of $471,000, or 13.7%, over the $3.4 million in
administrative and distribution expenses for the comparable period in the prior
year. As a percentage of net sales, administrative and distribution expenses
increased to 9.5% in the 26 weeks ended June 27, 1998 from 9.2% in the
comparable period in the prior year. Both the dollar increase and percentage of
net sales increase in administrative and distribution expenses are primarily
attributable to increases in staffing and associated expenses as a result of the
Company's expansion and becoming a public company.
INTEREST EXPENSE
Interest expense decreased to $51,000, or 0.1% of net sales, for the 26
weeks ended June 27, 1998, from $730,000, or 1.9% of net sales, in the
comparable period in 1997. This $679,000 decrease was primarily attributable to
repayment of the debt incurred in connection with the acquisition of Overland
and reduction of the outstanding principal balance of the Company's credit
facility from the proceeds from the Offering.
NET LOSS
The Company's net loss for the 26 weeks ended June 27, 1998 was
$581,000, an increase of $216,000 over the net loss of $365,000 in the
comparable period in 1997. The increase in net loss is primarily
attributable to fixed operating costs associated with a larger store base in
a period in which the Company experienced declining comparable stores sales
and where the majority of the stores opened during the period did not
contribute materially due to the timing of their openings.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from internally generated cash
flow, borrowings under its revolving line of credit, and equity financing. The
Company's capital requirements relate primarily to the build-out of new stores,
remodeling of existing stores and financing of inventories.
The Company had $20.0 million in working capital as of June 27, 1998
compared to $21.9 million at the end of
8
<PAGE>
fiscal 1997, a decrease of $1.9 million. The Company's working capital needs
historically have been 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 and
payments coming due for back-to-school merchandise. In addition, the Company
requires incremental working capital to stock each new store upon opening.
Capital expenditures were $2.3 million for the 26 weeks ended June 27,
1998. Capital expenditures in the first 26 weeks of 1998 were primarily for the
build-out of 18 new stores, the completion of four of the stores opened in 1997,
and the remodeling of one store. The Company estimates capital expenditures for
the remainder of the year to be $1.6 million for the build-out of approximately
17 new stores, $500,000 for remodels and $400,000 for software and hardware
upgrades.
The Company reviews the operating performance of its stores on an ongoing
basis to determine which stores, if any, to close. The Company closed two
stores in the first quarter of 1998 and anticipates closing three additional
stores in 1998.
Net cash used for operating activities for the 26 weeks ended June 27, 1998
was $1.0 million. Net cash used for or provided by operating activities has
historically been driven by net income levels combined with fluctuations in
inventory and accounts payable. Inventories at June 27, 1998 were $29.6 million
compared to $27.9 million at December 27, 1997. 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 inventory between
December 27, 1997 and June 27, 1998 relates to the opening of 18 new stores,
offset by a higher than normal year end inventory level. The higher than normal
year end inventory level was primarily due to advantageous purchases from key
vendors and early deliveries of spring merchandise received prior to December
27, 1997.
Financing activities provided cash of $2.0 million for the 26 weeks ended
June 27, 1998, attributable to additional borrowings under the Company's
revolving line of credit to fund working capital requirements. Cash was also
used from financing activities for the early retirement of long-term debt.
Management believes that the Company's operating cash flow and borrowings
under its credit facility 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 potential future acquisitions.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company anticipates that its operating results will fluctuate as a
result of a number of factors, including the number and timing of store
openings and closures, seasonality, changes in pricing or promotion policies
by the Company, its competitors or its suppliers, the availability and cost
of merchandise and consumer acceptance of the products sold by the Company.
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.
9
<PAGE>
PART II: OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security-Holders
At the Company's Annual Meeting of Stockholders held on May 28, 1998, the
following individuals were elected to the Board of Directors:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
David L. Suechting, Jr. 6,004,387 4,408
Barbara J. Suechting 6,004,387 4,408
Gregory M. Kilgore 6,004,387 4,408
Helen C. Bulwik 6,004,387 4,408
Steven D. Tough 6,004,387 4,408
</TABLE>
As a Class III director, David L. Suechting, Jr. will serve until the Annual
Meeting of Stockholders in 2001; as Class II directors, Barbara J. Suechting and
Gregory M. Kilgore will serve until the Annual Meeting of Stockholders in 2000;
and as Class I directors, Helen C. Bulwik and Steven D. Tough will serve until
the Annual Meeting of Stockholders in 1999; or, in each case, such time as
successors are elected and qualified.
In addition, the proposal to appoint the firm of Coopers & Lybrand L.L.P. as the
independent public accountants of the Company was approved at the Company's
Annual Meeting of Stockholders by the following vote:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
5,097,869 909,176 1,750
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description of Document
------- -----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter ended June 27,
1998.
10
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
TRACK 'N TRAIL
Date: August 3, 1998 By: /s/Daniel J. Nahmens
--------------------------------
Daniel J. Nahmens
Vice President-Finance and
Chief Financial Officer and
Treasurer (on behalf of the
Registrant and as the Registrant's
Principal Financial and
Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-26-1998 DEC-26-1998
<PERIOD-START> MAR-29-1998 DEC-28-1997
<PERIOD-END> JUN-27-1998 JUN-27-1998
<CASH> 1,097 1,097
<SECURITIES> 0 0
<RECEIVABLES> 745 745
<ALLOWANCES> 0 0
<INVENTORY> 29,640 29,640
<CURRENT-ASSETS> 32,461 32,461
<PP&E> 14,947 14,947
<DEPRECIATION> 6,272 6,272
<TOTAL-ASSETS> 45,575 45,575
<CURRENT-LIABILITIES> 12,536 12,536
<BONDS> 0 0
0 0
0 0
<COMMON> 68 68
<OTHER-SE> 31,454 31,454
<TOTAL-LIABILITY-AND-EQUITY> 45,575 45,575
<SALES> 22,311 41,219
<TOTAL-REVENUES> 22,311 41,219
<CGS> 11,385 21,450
<TOTAL-COSTS> 8,523 16,762
<OTHER-EXPENSES> 1,912 3,924
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 46 51
<INCOME-PRETAX> 445 (968)
<INCOME-TAX> 178 (387)
<INCOME-CONTINUING> 267 (581)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 267 (581)
<EPS-PRIMARY> 0.04 (0.08)
<EPS-DILUTED> 0.04 (0.08)
</TABLE>
