<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 SEPTEMBER 26, 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 November 3,1998 was 6,851,961.
<PAGE>
TRACK 'N TRAIL
FORM 10-Q
QUARTER ENDED SEPTEMBER 26, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 26, 1998
and December 27, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the 39-Week and 13-Week
periods ended September 26, 1998 and September 27, 1997 . . . . . . . . . 2
Consolidated Statements of Cash Flows for the 39-Week period
ended September 26, 1998 and September 27, 1997. . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 4-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . 7-12
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
___________
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 27,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,398 $ 2,383
Accounts receivable 828 1,540
Inventories 38,129 27,852
Prepaid expenses 298 311
Prepaid income taxes 503 --
Deferred income taxes 376 317
------------ -----------
Total current assets 41,532 32,403
Fixed assets, net 9,860 7,284
Goodwill, net 4,918 3,084
Deferred income taxes 1,915 1,362
------------ -----------
Total Assets $ 58,225 $ 44,133
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ 9,100 $ --
Current maturities of long-term debt 70 116
Accounts payable 13,455 6,958
Accrued payroll and bonuses 849 668
Sales tax payable 506 874
Income taxes payable -- 1,089
Accrued expenses and other liabilities 988 802
------------ -----------
Total current liabilities 24,968 10,507
Deferred rent 1,541 1,424
Long-term debt, net of current maturities 58 120
------------ -----------
Total liabilities 26,567 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; 6,851,961 and 6,839,811 shares issued and
outstanding at September 26, 1998 and December 27, 1997, respectively 69 68
Additional paid-in capital 25,831 25,772
Retained earnings 5,758 6,242
------------ -----------
Total stockholders' equity 31,658 32,082
------------ -----------
Total liabilities and stockholders' equity $ 58,225 $ 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
----------------------------------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1998 1997
(13 WEEKS) (13 WEEKS) (39 Weeks) (39 Weeks)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 25,662 $ 24,761 $ 66,881 $ 62,289
Cost of sales 13,927 12,975 35,377 32,388
------------ ------------ ------------ ------------
Gross profit 11,735 11,786 31,504 29,901
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing 9,511 7,787 26,273 22,315
Administrative and distribution 1,945 1,777 5,860 5,221
------------ ------------ ------------ ------------
Total operating expenses 11,456 9,564 32,133 27,536
------------ ------------ ------------ ------------
Operating income (loss) 279 2,222 (629) 2,365
Other (income) expense:
Interest 89 440 140 1,171
Other, net 29 (26) 38 (5)
------------ ------------ ------------ ------------
Income (loss) before income taxes 161 1,808 (807) 1,199
Income tax provision (benefit) 64 125 (323) (249)
------------ ------------ ------------ ------------
Net income (loss) $ 97 $ 1,683 $ (484) $ 1,448
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Historical earnings (loss) per share:
Basic $ 0.01 $ 0.41 $ (0.07) $ 0.35
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted $ 0.01 $ 0.39 $ (0.07) $ 0.34
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Pro forma income data:
Historical income before income taxes $ 1,808 $ 1,199
Pro forma income tax provision(Note 1) 723 480
------------ ------------
Pro forma net income $ 1,085 $ 719
------------ ------------
------------ ------------
Pro forma earnings per share:
Basic $ 0.26 $ 0.18
------------ ------------
------------ ------------
Diluted $ 0.22 $ 0.15
------------ ------------
------------ ------------
</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>
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
(39 WEEKS) (39 WEEKS)
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (484) $ 1,448
Adjustments to reconcile to cash used for operating activities:
Depreciation and amortization 1,507 1,284
Loss (gain) on disposal of fixed assets 33 (13)
Compensation recorded in connection
with stock option plans -- 13
Deferred income taxes -- (132)
Cash provided by (used for) changes in operating assets
and liabilities, net of effects of business combination:
Accounts receivable 720 377
Inventories (9,077) (7,055)
Prepaid expenses 30 (58)
Prepaid income taxes (503) --
Accounts payable and other accrued liabilities 5,337 2,821
Income taxes payable (1,089) (756)
Deferred rent 66 25
------------ -----------
Cash used for operating activities (3,460) (2,046)
------------ -----------
Cash flows from investing activities:
Purchases of fixed assets (3,740) (1,137)
Cash paid for business combination (1,401) --
Proceeds from sale of fixed assets -- 28
------------ -----------
Cash used for investing activities (5,141) (1,109)
------------ -----------
Cash flows from financing activities:
Bank line of credit:
Borrowings 32,211 36,930
Repayments (23,711) (30,210)
Long-term debt:
Repayments (943) (718)
Payment of distributions to stockholders -- (2,420)
Offering expenses paid -- (689)
Proceeds from issuance of common stock 59 --
------------ -----------
Cash provided by financing activities 7,616 2,893
------------ -----------
Decrease in cash and cash equivalents (985) (262)
Cash and cash equivalents, beginning of period 2,383 977
------------ -----------
Cash and cash equivalents, end of period $ 1,398 $ 715
------------ -----------
------------ -----------
</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 39
weeks ended September 26, 1998 and September 27, 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>
Period ended
-----------------------------------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
(13 weeks) (13 weeks) (39 weeks) (39 weeks)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income available to common
stockholders (net income (loss)) for
basic and diluted earnings per share . . . . . . . $97 $1,683 $(484) $1,448
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares for basic
earnings per share . . . . . . . . . . . . . . . . 6,851 4,108 6,845 4,108
Dilutive effect of stock options
(treasury stock method). . . . . . . . . . . . . . 219 222 0 203
---------- ---------- ---------- ----------
Weighted average shares for diluted
earnings per share . . . . . . . . . . . . . . . . 7,070 4,330 6,845 4,311
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Historical earnings (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . . $0.01 $0.41 $(0.07) $0.35
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted. . . . . . . . . . . . . . . . . . . . . $0.01 $0.39 $(0.07) $0.34
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
Period ended
------------------------------------
September 27, September 27,
1997 1997
(13 weeks) (39 weeks)
------------ -------------
<S> <C> <C>
Income available to common stockholders
(pro forma net income) for basic and diluted
earnings per share . . . . . . . . . . . . . . . . . . . . . $ 1,085 $ 719
----------- ----------
----------- ----------
Weighted average shares for basic earnings
per share . . . . . . . . . . . . . . . . . . . . . . . . . . 4,108 4,108
Dilutive effect of stock options (treasury stock method). . . 222 203
Distribution Shares . . . . . . . . . . . . . . . . . . . . . 550 550
----------- ----------
Weighted average shares for diluted earnings
per share . . . . . . . . . . . . . . . . . . . . . . . . . . 4,880 4,861
----------- ----------
----------- ----------
Pro forma earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.26 $ 0.18
----------- ----------
----------- ----------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.22 $ 0.15
----------- ----------
----------- ----------
</TABLE>
5
<PAGE>
For the 13 weeks ended September 26, 1998 and September 27, 1997 and for
the 39 weeks ended September 27, 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 39 weeks ended September 26,
1998, all warrants and options outstanding were not dilutive and, accordingly,
were not included in the weighted number of common and common equivalent shares
outstanding.
3. BUSINESS COMBINATION
On August 26, 1998, the Company acquired all the outstanding shares of
capital stock of Nevin's Eagles Nest, Inc., a Colorado corporation d/b/a Eagles
Nest ("Eagles Nest"). The purchase price of the shares was $1.5 million in
cash, $100,000 of which remained payable at September 26, 1998. Substantially
all of the cash was provided by the Company's credit facility.
The acquisition was accounted for using the purchase method of accounting.
The purchase price was allocated to the fair value of the assets and liabilities
acquired as follows: $1.3 million to current assets, $244,000 to property,
plant and equipment, $518,000 to other assets, $1.1 million to accounts payable
and other accrued liabilities and $1.4 million to debt and capital lease
obligations. This resulted in goodwill of $2.0 million. Upon closing of the
Eagles Nest acquisition, the Company extinguished $1.4 million of Eagles Nest
debt.
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Eagles Nest as if the acquisition had occurred
at the beginning of fiscal 1997 and fiscal 1998 after giving effect to certain
adjustments, including amortization of goodwill, revised depreciation based on
estimated fair market values, and revised interest expense based on the
additional borrowings and interest rate differentials on Eagles Nest debt
retired at acquisition. The pro forma summary does not necessarily reflect the
results of operations as they would have been if the Company and Eagles Nest had
constituted a single entity during such periods (in thousands, except per share
information):
<TABLE>
<CAPTION>
September 26, September 27,
1998 1997
(39 Weeks) (39 Weeks)
------------ -------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $ 70,590 $ 66,570
----------- ------------
----------- ------------
Net income (loss) before income taxes . . . $ (1,356) $ 576
Income tax (benefit). . . . . . . . . . . . (517) (468)
----------- ------------
Net income (loss) . . . . . . . . . . . . . $ (839) $ 1,044
----------- ------------
----------- ------------
Earnings (loss) per share:
Basic . . . . . . . . . . . . . . . . . $ (0.12) $ 0.25
----------- ------------
----------- ------------
Diluted . . . . . . . . . . . . . . . . $ (0.12) $ 0.24
----------- ------------
----------- ------------
Net income before income taxes . . . . . . $ 576
Pro forma income tax provision (Note 1) . . 230
------------
------------
Pro forma net income . . . . . . . . . . . $ 346
------------
------------
Pro forma earnings per share:
Basic . . . . . . . . . . . . . . . . . $ 0.08
------------
------------
Diluted . . . . . . . . . . . . . . . . $ 0.07
------------
------------
</TABLE>
6
<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. On August 26,
1998, the Company acquired the outstanding common stock of Nevin's Eagles Nest,
Inc. ("Eagles Nest") in a cash-for-stock transaction (see attached "Notes to
Consolidated Financial Statements"). Eagles Nest is a mall-based retailer
primarily of premium branded outdoor apparel and operates five stores, four in
Colorado and one in Nevada. The Eagles Nest acquisition represents the
Company's entrance into the apparel market, an expansion that also is expected
to provide new customer streams for the footwear lines. As is common in the
apparel industry, Eagles Nest margins are lower than those that the Company
currently experiences in its footwear business. Since Eagles Nest results are
included for only one month in each of the periods reported, the full effect of
this margin differential will not be evident until future quarters. As of
September 26, 1998, the Company operated 131 Track 'n Trail stores, 42 Overland
Trading stores and five Eagles Nest stores in 32 states.
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 year. The
Company's comparable store net sales decreased 13.7% and 6.9% for the 13 weeks
and 39 weeks ended September 26, 1998, respectively, excluding the acquired
Eagles Nest stores.
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.
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 39 weeks ended September 26, 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.
7
<PAGE>
THIRTEEN WEEKS ENDED SEPTEMBER 26, 1998 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 27, 1997
NET SALES
Net sales were $25.7 million for the 13 weeks ended September 26, 1998, an
increase of $901,000, or 3.6%, over the $24.8 million in net sales for the
comparable period in the prior year. The five Eagles Nest stores acquired
contributed $416,000, or 46.2%, of this increase in net sales. Of the
remaining $25.3 million in net sales for the quarter, $3.8 million is
attributable to the net sales of the 12 stores (net of subsequent closures)
opened in the fourth quarter of fiscal 1997 and the 28 stores opened in the
first 39 weeks of fiscal 1998. Of the 10 stores the Company opened during the
third quarter of fiscal 1998, seven were opened in September and as a result,
the Company does not expect to see a material contribution from these stores or
the Eagles Nest stores until the fourth quarter of fiscal 1998. Aggregate
incremental net sales of $135,000 also were contributed by the 8 stores opened
in the first 39 weeks of fiscal 1997. A comparable store sales decrease of
13.7% reduced net sales by $3.1 million for the 13 weeks ended September 26,
1998. In addition, net sales were affected by three store closures in the
third quarter of fiscal 1998. The decrease in comparable store sales is
primarily due to heavy discounting by competitors (in part because of competitor
store closures) which put pressure on both the customer stream and prices. The
Company's sales were also adversely affected by a lack of "freshness" in vendor
styling and unseasonably warm weather which impacted the traditional late third
quarter sales. The Company expects to open approximately seven new stores
during the remainder of fiscal 1998.
GROSS PROFIT
Gross profit was $11.7 million for the 13 weeks ended September 26, 1998, a
decrease of $52,000, or 0.4%, from the gross profit for the comparable period in
the prior year. Gross profit as a percentage of net sales decreased to 45.7%
for the 13 weeks ended September 26, 1998 from 47.6% in the comparable period in
the prior year. Eagles Nest accounted for 0.1% of the decrease in gross profit
as a percentage of net sales while the remaining decrease is primarily
attributable to markdowns taken in response to competitor discounting.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $9.5 million for the 13 weeks ended
September 26, 1998, an increase of $1.7 million, or 22.1%, over the selling
and marketing expenses in the comparable period in the prior year. Eagles Nest
accounted for $134,000 of the increase. The remaining $1.6 million increase is
primarily attributable to operating costs related to operating 37 additional
stores at September 26, 1998 versus September 27, 1997. As a percentage of net
sales, selling and marketing expenses increased to 37.1% in the 13 weeks ended
September 26, 1998 from 31.4% in the comparable period in the prior year,
primarily attributable to operating costs associated with a larger store base in
a period in which the Company experienced declining comparable store sales and
opened new stores which have a lower initial sales base.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $1.9 million for the 13 weeks
ended September 26, 1998, an increase of $168,000, or 9.5%, over the
administrative and distribution expenses for the comparable period in the
prior year. This increase is primarily attributable to increases in staffing
and associated expenses as a result of the Company's expansion and becoming a
public company. In addition, Eagles Nest accounted for $48,000 of the increase
in administrative and distribution expenses. As a percentage of net sales,
administrative and distribution expenses increased to 7.6% in the 13 weeks ended
September 26, 1998 from 7.2% in the comparable period in the prior year. The
increase as a percentage of net sales is primarily due to a decrease in
comparable store sales.
INTEREST EXPENSE
Interest expense decreased to $89,000 for the 13 weeks ended September 26,
1998, a decrease of $351,000 or 79.8% from $440,000 in the comparable period in
the prior year. Eagles Nest accounted for $23,000, or 25.5%, of total interest
expense. As a percentage of net sales, interest expense decreased to 0.3% in
the 13 weeks ended September 26, 1998 from 1.8% in the comparable period in the
prior year. 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.
8
<PAGE>
NET INCOME
The Company's net income for the 13 weeks ended September 26, 1998 was
$97,000, a decrease of $987,000 from the net income of $1.1 million in the
comparable period in 1997. Eagles Nest accounted for $15,000 of the decrease in
net income. The remaining 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 both declining comparable store sales and the start up
costs associated with a larger base of new stores.
THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 1998 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 27, 1997
NET SALES
Net sales were $66.9 million for the 39 weeks ended September 26, 1998, an
increase of $4.6 million, or 7.4%, over the $62.3 million in net sales for the
comparable period in the prior year. The five Eagles Nest stores added
$416,000, or 9.1%, of the increase in net sales. Of the remaining $66.5 million
in net sales for the first thirty-nine weeks of fiscal 1998, $7.3 million is
attributable to the net sales of the 12 stores (net of subsequent closures)
opened in the fourth quarter of fiscal 1997 and the 28 stores opened in the
first 39 weeks of fiscal 1998. Of the 23 stores (net of closures) the Company
opened in fiscal 1998, seven were opened in September and as a result, the
Company does not expect to see a material contribution from these stores or the
five Eagles Nest stores until the fourth quarter of fiscal 1998. Aggregate
incremental net sales of $1.3 million also were contributed by the 8 stores
opened in the first 39 weeks of fiscal 1997. Comparable store sales decreased
$4.0 million, or 6.9%, for the 39 weeks ended September 26, 1998. In addition,
net sales were affected by three store closures in the third quarter of fiscal
1998. The decrease in comparable store sales is primarily due to the
disruptions caused by the unseasonably wet and cold spring weather associated
with El Nino and heavy discounting by competitors (in part because of competitor
store closures) which put pressure on both the customer stream and prices. The
Company's sales were also affected by a lack of "freshness" in vendor styling
and unseasonably warm weather which impacted the traditional late third quarter
sales. The Company expects to open approximately seven additional stores during
the remainder of fiscal 1998.
GROSS PROFIT
Gross profit was $31.5 million for the 39 weeks ended September 26, 1998,
an increase of $1.6 million, or 5.4%, over the $29.9 million in gross profit
for the comparable period in the prior year. Eagles Nest contributed $178,000,
or 11.1%, of the increase in gross profit. Gross profit as a percentage of net
sales decreased to 47.1% for the 39 weeks ended September 26, 1998 from 48.0% in
the comparable period in the prior year, primarily as a result of markdowns
taken to liquidate winter goods in the first quarter and in response to
competitor discounting in the third quarter.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $26.3 million for the 39 weeks ended
September 26, 1998, an increase of $4.0 million, or 17.7%, over the $22.3
million in selling and marketing expenses for the comparable period in the
prior year. Eagles Nest accounted for $134,000, or 3.4%, of this increase. The
remaining increase is primarily attributable to operating costs related to
operating 37 additional stores at September 26, 1998 versus September 27, 1997.
As a percentage of net sales, selling and marketing expenses increased to 39.3%
in the 39 weeks ended September 26, 1998 from 35.8% in the comparable period in
the prior year, primarily attributable to operating costs associated with a
larger store base in a period in which the Company experienced declining
comparable store sales and opened new stores which have a lower initial sales
base.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $5.9 million for the 39 weeks
ended September 26, 1998, an increase of $639,000, or 12.2%, over the
administrative and distribution expenses for the comparable period in the prior
year. This increase is primarily attributable to increases in staffing and
associated expenses as a result of the Company's expansion and becoming a public
company. In addition, Eagles Nest accounted for $48,000 of the increase in
administrative and distribution expenses. As a percentage of net sales,
administrative and distribution expenses increased to 8.8% in the 39 weeks
ended September 26, 1998 from 8.4% in the comparable period in the prior year.
Eagles Nest accounted for 0.1%
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of the increase of administrative and distribution expenses as a percentage
of net sales and the remaining percentage increase is primarily attributable
to a decrease in comparable store sales.
INTEREST EXPENSE
Interest expense decreased to $140,000, or 0.2% of net sales, for the 39
weeks ended September 26, 1998, from $1.2 million, or 1.9% of net sales, in the
comparable period in the prior year. This 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. Interest expense incurred
by Eagles Nest since its acquisition was $23,000, or 16.2% of total interest
expense.
NET INCOME/LOSS
The Company's net loss for the 39 weeks ended September 26, 1998 was
$484,000, a decrease of $1.2 million from the net income of $719,000 in the
comparable period in 1997. Eagles Nest accounted for $15,000, or 1.3%, of the
decrease in net income. The remaining 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 both declining comparable store sales
and the start up costs associated with a larger base of new stores.
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 liquidity requirements relate primarily to the financing of
inventories, build-out of new stores and remodeling of existing stores. During
the third quarter of 1998, the Company also used funds for the acquisition of
Eagles Nest.
Net cash used for operating activities for the 39 weeks ended September 26,
1998 was $3.5 million. Net cash used for operating activities has historically
been driven by net income levels combined with fluctuations in inventory and
accounts payable. Inventories at September 26, 1998 were $38.1 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 five Eagles Nest stores acquired accounted
for $1.8 million of the increase. The remaining increase in inventory between
December 27, 1997 and September 26, 1998 relates primarily to the opening of 23
new stores (net of closures), increased inventory levels in five larger format
stores and inventory purchased in advance for the stores to be opened in
October.
The Company had $16.6 million in working capital as of September 26, 1998
compared to $21.9 million at the end of fiscal 1997, a decrease of $5.3 million.
The decrease in working capital is primarily due to an increase in capital
expenditures for the construction of new stores and the acquisition of Eagles
Nest. The Company's working capital needs increase significantly 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. Seasonally strong holiday
sales at the end of the fourth quarter, and relatively low first quarter
inventory levels, typically reduce working capital needs in the first quarter.
Capital expenditures were $3.7 million, excluding acquisitions, for the 39
weeks ended September 26, 1998. Capital expenditures in the first 39 weeks of
1998 were primarily for the build-out of 28 new stores, the completion of four
stores opened in 1997, and the remodeling of three stores. An additional $1.4
million of cash was used for investing activities for the acquisition of Eagles
Nest. The Company estimates capital expenditures for the remainder of the year
to be $700,000 for the build-out of approximately seven additional stores,
$320,000 for the final build-out of stores opened earlier in the fiscal year,
$700,000 for remodels and $350,000 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 closed three additional stores in the
third quarter.
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Financing activities provided cash of $7.6 million for the 39 weeks ended
September 26, 1998, attributable to additional borrowings under the Company's
revolving line of credit to fund working capital requirements as well as to
fund the acquisition of Eagles Nest. Cash was also used from financing
activities for the early retirement of long-term debt.
In October management amended their existing loan agreement with Union Bank
of California to increase the revolving line of credit to $20.0 million.
Management believes that the Company's operating cash flow and borrowings under
its new credit facility will be sufficient to complete the Company's fiscal 1998
and fiscal 1999 planned store expansion and to satisfy the Company's other
capital requirements through such periods. 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.
YEAR 2000
The Year 2000 problem concerns the inability of some computer programs to
recognize a year that begins with "20" instead of the familiar "19". For
computer programs that were written using two digits instead of four to define
the applicable year, they may recognize a date using "00" as the year 1900
instead of the year 2000. Computer programs which are not Year 2000 compliant
may fail or create erroneous results after December 31, 1999 (and in some cases
before), causing disruptions of operations, including, among other things, a
temporary inability to process transactions or send and receive electronic data
to or from third parties or engage in similar normal business activities.
STATE OF READINESS
The Company has developed The Year 2000 Plan ("Y2K Plan") with the
objective of having all information technology ("IT") systems and non-IT systems
functioning properly with respect to the Year 2000 by December 31, 1999. The
Y2K Plan consists of the following phases: 1) assess the Year 2000 compliance
of IT and non-IT systems; 2) assign priorities to identified Year 2000 problems;
3) remediation; 4) test IT and non-IT systems; and 5) develop contingency
plans, including the possibility of securing alternate sources of supplies and
services, increasing inventory and supply levels, and adjusting store and office
staffing levels. The Company defines IT systems as all applications, operating
systems and hardware on mainframe, PC or LAN platforms. Non-IT systems refer to
those with embedded software or hardware that may have a time element. The
Company has identified its Year 2000 exposure as falling into three categories:
corporate headquarters; store sites; and "key" third parties (Third Parties).
Third Parties include suppliers, vendors, and service providers that are deemed
to be critical to business operations. All phases of the Y2K Plan are being
applied to these three categories.
CORPORATE HEADQUARTERS. An outside vendor provides the mainframe system
software used at the corporate office. The software contains an operating
system and seven modules. The outside vendor has tested the operating system,
merchandise, accounts payable, sales audit and general ledger modules and
verified to the Company that such software is Year 2000 compliant. The Company
has received Year 2000 compliant upgrade software for the electronic data
exchange and report writing modules, and expects installation and testing to be
complete in fourth quarter 1998. The outside vendor has developed a Year 2000
upgrade for the fixed assets module and expects testing and delivery to be
complete in fourth quarter 1998. The manufacturer of the mainframe hardware
which runs the software has tested the hardware and verified to the Company that
it is Year 2000 compliant.
As of September 26, 1998, the Company had assessed approximately 75% of the
personal computers at the corporate headquarters, of which approximately 50%
were found to be non-Year 2000 compliant. The Company expects the remaining
personal computers and non-IT systems will be assessed by the end of fiscal
1998. Retrofitting and/or replacement and subsequent testing of non-compliant
systems is scheduled for first quarter 1999. The Local Area Network (LAN)
software and hardware has been verified by the respective manufacturers to be
Year 2000 compliant.
The Company utilizes software produced by an outside vendor for its human
resource and payroll functions. In September 1998, the outside vendor upgraded
and tested both systems and verified to the Company they are Year 2000
compliant.
The Company has identified the systems most critical to ongoing operations
within the corporate headquarters category. Contingency planning for this
category began in third quarter 1998 and is scheduled for completion in second
quarter 1999.
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STORE SITES. The Company uses Point of Sale (POS) hardware and software
provided by an outside vendor at each of its Track 'n Trail and Overland stores
to record sales transactions. Eagles Nest will be converted to the same POS
system in the first quarter of 1999. As of the end of third quarter 1998, the
Company had retrofitted and tested POS systems with the Year 2000 compliant
upgrade in 15 of its 178 stores, and expects to upgrade and test the remaining
units by the end of first quarter 1999. POS systems for new stores, if any,
will be installed with the upgraded version of the software. Contingency
planning for this category is scheduled to begin first quarter 1999 and is
expected to be completed by second quarter 1999.
THIRD PARTIES. The Company has initiated formal communications with all Third
Parties to determine the extent to which the Company is vulnerable to a Third
Party's failure to remediate its own Year 2000 issues. To the extent that the
Company does not receive adequate assurances, it will develop contingency plans,
with completion of these plans scheduled no later than the end of second quarter
1999.
COSTS
The total costs associated with becoming Year 2000 compliant is not expected to
be material to the Company's financial position. The Company expects such costs
in the aggregate to be approximately $53,000, exclusive of system additions,
upgrades or replacements incurred in the normal course of business and assuming
no implementation of contingency plans will be necessary. The Company
estimates $21,000 of this ultimate amount will have been incurred repairing
software problems and $32,000 will have been incurred in connection with
replacement of problem systems and equipment. Costs through September 26, 1998
have been approximately $12,000. The remaining costs are expected to be
incurred within the next 12 months. The Company's policy is to expense
maintenance and modification costs and capitalize hardware and software
purchases and upgrades. The Company intends to fund the foregoing from
operating cash flow.
RISKS
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. Due to
the general uncertainty inherent in the Year 2000 problem, particularly the
uncertainty of the Year 2000 readiness of Third Parties, the Company is
unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on the Company's results of operations,
liquidity or financial condition. As the Y2K Plan continues to be implemented
the Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its Third Parties
should be significantly reduced. The Company believes that, upon completion
of the Y2K Plan as scheduled, the possibility of material interruptions of
normal operations also should be substantially lowered. No assurances can be
given, however, that the Company may not suffer material interruptions of
normal operations.
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.
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PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- --------- -----------------------------------------------------------------
<S> <C>
10.13 Amended and restated Loan Agreement dated as of October 9, 1998
between Union Bank of California, N.A. and the subsidiaries of
the Registrant.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
</TABLE>
There were no reports filed on Form 8-K during the quarter ended
September 26, 1998.
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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: November 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
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Exhibit 10.13
[Logo]
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement") is made and entered into as of October
9, 1998 by and between Track 'N Trail, a California Corporation and Overland
Management Corporation, A Massachusetts corporation and Nevin's Eagles Nest,
Inc. a Colorado corporation (each of the foregoing, in their respective joint
and several capacities hereunder, hereafter referred to individually and
collectively as "Borrower" or "Borrowers") and UNION BANK OF CALIFORNIA,
N.A. ("Bank"). This Agreement amends and restates in its entirety that
certain loan agreement dated October 16, 1997, 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 Twenty Million Dollars ($20,000,000) 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 11, 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 shall be deemed to be the amount of the
Revolving Loan outstanding. Omission of Bank to make any such entries shall not
discharge Borrower of its 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 any Borrower to provide another 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
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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 documentary letter of credit documentation. No
letter of credit shall expire more than (90) days after October 11, 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) there of 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:
As used herein the word "Loan" shall mean, collectively, all the
credit facilities described above.
As used herein the word "Note" shall mean, collectively, all the
promissory notes described above.
As used herein, the words "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 Borrower's
obligations to Bank thereunder shall exceed the sum of fifty percent (50%) of
Borrower's 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 Borrower's inventory of finished goods consisting of
Borrower's main line(s) of business products, which is (a) owned by Borrower,
free and clear of all liens or encumbrances except those in favor of Bank, (b)
held for sale or lease by Borrower and normally and currently saleable in the
ordinary course of 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 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 repayment shall
be subject to the prepayment fee provided for therein.
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1.6 LETTER OF CREDIT ISSUANCE AND NEGOTIATION FEES AND OTHER FEES.
Documentary L/C's issued under the Commercial Letter of Credit
Sublimit shall be subject to the Bank's standard issuance and payment
fees.
All other fees shall be in accordance with the Bank's existing
schedule of fees as amended from time to time.
1.7 LOAN COMMITMENT FEE. On October 9, 1998, Borrower's shall pay an
annual, non-refundable fee of Seventy Five Thousand Dollars ($75,000) of which
Thirty Seven Thousand, Five Hundred ($37,500) was paid on September 29, 1998.
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 the
proceeds of the Loan as provided in Bank's standard form Authorization executed
by Borrowers.
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 Borrower's 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.
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
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.
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<PAGE>
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 TERM DEBT. In the event that Borrowers have not successfully
completed a secondary Public Offering to repay Ten Million Dollars ($10,000,000)
of the Revolving Line of Credit by October 11, 1999, Bank has committed to term
out a maximum of Ten Million Dollars ($10,000,000) of the Revolving Line of
Credit to be repaid over a five year fully amortized term with last payment to
be made on October 30, 2004.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 BUSINESS ACTIVITY. The principal business of Borrower is
shoe/boot retailing.
3.2 AFFILIATES AND SUBSIDIARIES. Borrower's affiliates and
subsidiaries (those entities in which Borrower has either a controlling interest
or at least a 25% ownership interest) and their addresses, and the names of
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 Borrower is a party or by which
it or any of its property is bound or affected.
3.4 FINANCIAL STATEMENTS. The financial statements of Borrowers,
including both a balance sheet at December 27, 1997, together with supporting
schedules, and an income statement for the twelve (12) months ended December 27,
1997 have heretofore been furnished to Bank as well as the balance sheet and
income statement for the six (6) months ended June 27, 1998, and are true and
complete and fairly represent the financial condition of Borrowers during the
period covered thereby. Since June 27, 1998, there has been no material adverse
change in the financial condition or operations of Borrowers.
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<PAGE>
3.5 TITLE. Except for assets which may have been disposed of in the
ordinary course of business, Borrower has good and marketable title to all of
the property reflected in their financial statements delivered to Bank and to
all property acquired by Borrowers since the date of said financial statements,
free and clear of all liens (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 Borrower or any of its property which is reasonably likely to
affect the financial condition, property or business of Borrower in a materially
adverse manner or result in liability in excess of Borrower's 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. No Borrower is in violation with respect
to any applicable laws, rules, ordinances or regulations which materially affect
the operations or financial condition of Borrowers.
3.13 ERISA. Any defined benefit pension plans as defined in the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), of
Borrower 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.
3.14 REGULATION U. No action has been taken or is currently planned
by Borrowers, 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. Borrowers are not 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.
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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
Borrower shall have the right in good faith 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 Borrower.
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 such audits shall be paid by Borrowers.
4.5 INFORMATION FURNISHED. Borrowers will furnish to Bank:
(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 its
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 Borrower 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;
(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 lapse 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 Borrower's certified public accountants;
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<PAGE>
(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
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 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 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 Borrower's
officers and other senior management (or immediate written notice upon the
unexpected departure of any officer or other person in senior management);
Borrower's name; and location of Borrower's assets, principal place of business
or chief executive office.
4.6 CURRENT RATIO. Borrower 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 CASH FLOW. Borrower will at all times maintain cash flow equal
to a four quarter moving average of Four Million Five Hundred Dollars
($4,500,000) based on Earnings Before Interest, Taxes, Depreciaton and
Amortization (EBITDA).
4.8 COVENANTS ON CONSOLIDATED BASIS. All financial covenants set
forth in sections 4.6 and 4.7 above shall be calculated on a consolidated basis.
4.9 INSURANCE. Each Borrower will keep all of its insurable
property, real, personal or mixed, insured by companies against fire and such
other risks, and in such amounts, as is customarily obtained by companies
conducting similar business with respect to like properties. Each Borrower will
maintain adequate insurance against liability for damages to persons and
property.
4.10 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 request from time to time.<PAGE>
-7-
<PAGE>
4.11 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.
4.12 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.
4.13 REPORTS UNDER PENSION PLANS. Each Borrower will furnish to Bank,
as soon as possible and in any event within 15 days after Borrower knows or has
reason to know that any event or condition with respect to any defined benefit
pension plans of Borrower described in Section 3 above has occurred, a statement
of an authorized officer of Borrower describing such event or condition and the
action, if any, which 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. Borrowers will not 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
Borrower's personal property and future purchase money security interests
encumbering only the personal property purchased. All of such permitted
personal property liens shall not exceed, in the aggregate, One Million Dollars
($1,000,000) at any time.
5.2 BORROWINGS. Other than as may be allowed under Section 5.1
above, Borrowers will not 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. Borrowers will not
borrow any money, become contingently liable to borrow money, nor enter any
agreement to directly or indirectly obtain borrowed money, except pursuant to
agreements made with Bank.
5.3 SALE OF ASSETS, LIQUIDATION OR MERGER. If any event of default
shall exist, Borrowers will not liquidate nor dissolve nor enter into any
consolidation, merger, partnership or other combination, nor convey, nor sell,
nor lease all or the greater part of its assets or business, nor purchase or
lease all or the greater part of the assets or business of another.
5.4 LOANS, ADVANCES AND GUARANTIES. Borrowers will not, 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. Borrowers will not purchase the debt or equity of
another person or entity except for savings accounts and certificates of deposit
of Bank, direct U.S. Government obligations and
-8-
<PAGE>
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 year 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. Borrowers will not acquire or retire any
share of its capital stock for value.
5.8 PARENT AND SUBSIDIARY PROPERTY. Borrowers will not 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.
5.9 CAPITAL EXPENDITURES. Borrowers will not in the aggregate make
capital expenditures in excess of Seven Million Dollars ($7,000,000) during its
fiscal year ending December 27, 1999 and only make such expenditures as are
necessary for Borrowers in the conduct of their 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 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 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
6.5 There is a change in ownership or control of ten percent
(10%) or more of the issued and outstanding stock of any Borrower, except for
changes in ownership or control which have been approved by Bank.
-9-
<PAGE>
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 setoff 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 by 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. Borrowers 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 party 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.
-10-
<PAGE>
THIS AGREEMENT is executed on behalf of the parties by duly authorized
officers as of the date first above written.
<TABLE>
<CAPTION>
UNION BANK OF CALIFORNIA, N.A. TRACK 'N TRAIL
<S> <C>
By: /s/ Randy Lambert By: /s/ David L. Suechting, Jr
----------------------------- -------------------------------------------
Randy Lambert , Vice President David L. Suechting, Jr. Chairman of the Board
By: /s/ Daniel J. Nahmens
-------------------------------------------
Daniel J. Nahmens, Chief Financial Officer
Address: 4961 A Windplay
--------------------------------------
Address: Union Bank of California, N. A. El Dorado Hills, Ca. 95762
----------------------------------- -----------------------------------
770 "L" Street #1400
- --------------------------------------
Sacramento, California 95814
- --------------------------------------
Attention: Daniel J. Nahmens
-------------------------
Attention: Randy Lambert, Telecopier: (916) 933-4521
---------------------------- ------------------
Telecopier: (916) 321-6713 Telephone: (916) 933-4525
--------------------- -------------------
Telephone: (916) 321-6770
----------------------
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
NEVIN'S EAGLES NEST, INC.
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
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-26-1998 DEC-26-1998
<PERIOD-START> JUN-28-1998 DEC-28-1997
<PERIOD-END> SEP-26-1998 SEP-26-1998
<CASH> 1,398 1,398
<SECURITIES> 0 0
<RECEIVABLES> 828 828
<ALLOWANCES> 0 0
<INVENTORY> 38,129 38,129
<CURRENT-ASSETS> 41,532 41,532
<PP&E> 16,301 16,301
<DEPRECIATION> 6,441 6,441
<TOTAL-ASSETS> 58,225 58,225
<CURRENT-LIABILITIES> 24,968 24,968
<BONDS> 0 0
0 0
0 0
<COMMON> 69 69
<OTHER-SE> 31,589 31,589
<TOTAL-LIABILITY-AND-EQUITY> 58,225 58,225
<SALES> 25,662 66,881
<TOTAL-REVENUES> 25,662 66,881
<CGS> 13,927 35,377
<TOTAL-COSTS> 9,511 26,273
<OTHER-EXPENSES> 1,974 5,898
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 89 140
<INCOME-PRETAX> 161 (807)
<INCOME-TAX> 64 (323)
<INCOME-CONTINUING> 97 (484)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 97 (484)
<EPS-PRIMARY> 0.01 (0.07)
<EPS-DILUTED> 0.01 (0.07)
</TABLE>
