<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 25, 1999
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 Registrant's Common Stock, $0.01 par value, outstanding
as of October 25, 1999 was 6,891,476.
<PAGE>
TRACK 'N TRAIL
FORM 10-Q
QUARTER ENDED SEPTEMBER 25, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets as of September 25, 1999
and December 26, 1998.........................................................1
Consolidated Statements of Operations for the 39-Week and 13-Week
periods ended September 25, 1999 and September 26, 1998......................2
Consolidated Statements of Cash Flows for the 39-Week periods
ended September 25, 1999 and September 26, 1998...............................3
Notes to Consolidated Financial Statements...................................4-5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................5-10
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................11
SIGNATURES...........................................................................................12
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
----------
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 26,
1999 1998
-------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 978 $ 1,808
Accounts receivable 1,037 2,510
Income taxes receivable 0 130
Inventories 38,393 36,998
Prepaid expenses 367 432
Prepaid income taxes 1,458 0
Deferred income taxes 675 675
------- -------
Total current assets 42,908 42,553
Fixed assets, net 11,842 11,849
Goodwill, net 4,656 4,852
Deferred income taxes 2,025 2,025
------- -------
Total assets $61,431 $61,279
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $17,184 $ 1,574
Current portion of long-term debt 52 172
Accounts payable 9,560 12,481
Accrued payroll and bonuses 712 561
Sales tax payable 552 952
Income taxes payable 0 687
Accrued expenses and other liabilities 1,111 1,010
------- -------
Total current liabilities 29,171 17,437
Deferred rent 1,710 1,540
Long-term debt, net of current portion 6 9,764
------- -------
Total liabilities 30,887 28,741
------- -------
Stockholders' equity:
Preferred stock, $0.01 par value; 2,000,000 shares
authorized; no shares issued or outstanding 0 0
Common stock, $0.01 par value; 20,000,000 shares
authorized; 6,891,476 and 6,851,961 shares issued and
outstanding at September 25, 1999 and December 26, 1998, respectively 69 69
Additional paid-in capital 25,892 25,831
Retained earnings 4,583 6,638
------- -------
Total stockholders' equity 30,544 32,538
------- -------
Total liabilities and stockholders' equity $61,431 $61,279
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
----------
(unaudited)
<TABLE>
<CAPTION>
PERIOD ENDED
---------------------------------------------------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1999 1998 1999 1998
(13 WEEKS) (13 WEEKS) (39 WEEKS) (39 WEEKS)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 29,671 $ 25,662 $ 81,267 $ 66,881
Cost of sales 15,906 13,927 43,056 35,377
-------- -------- -------- --------
Gross profit 13,765 11,735 38,211 31,504
-------- -------- -------- --------
Operating expenses:
Selling and marketing 11,709 9,511 33,579 26,273
Administrative and distribution 2,090 1,945 6,794 5,860
-------- -------- -------- --------
Total operating expenses 13,799 11,456 40,373 32,133
-------- -------- -------- --------
Operating income (loss) (34) 279 (2,162) (629)
Other expense:
Interest expense 317 89 875 140
Other, net 66 29 117 38
-------- -------- -------- --------
Income (loss) before income taxes (417) 161 (3,154) (807)
Income tax provision (benefit) 92 64 (1,099) (323)
-------- -------- -------- --------
Net income (loss) $ (509) $ 97 $ (2,055) $ (484)
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per share:
Basic $ (0.07) $ 0.01 $ (0.30) $ (0.07)
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ (0.07) $ 0.01 $ (0.30) $ (0.07)
-------- -------- -------- --------
-------- -------- -------- --------
</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)
----------
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1999 1998
(39 WEEKS) (39 WEEKS)
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,055) $ (484)
Adjustments to reconcile to cash used for operating activities:
Depreciation and amortization 1,997 1,507
Loss on disposal of fixed assets 56 33
Cash provided by (used for) changes in operating assets and liabilities:
Accounts receivable 1,473 720
Income taxes receivable 130 0
Inventories (1,395) (9,077)
Prepaid expenses 65 30
Prepaid income taxes (1,458) (503)
Accounts payable and other accrued liabilities (3,071) 5,337
Income taxes payable (687) (1,089)
Deferred rent 171 66
-------- --------
Cash used for operating activities (4,774) (3,460)
-------- --------
Cash flows from investing activities:
Purchases of fixed assets (1,872) (3,740)
Proceeds from sale of fixed assets 22 0
Cash paid for business combination 0 (1,401)
-------- --------
Cash used for investing activities (1,850) (5,141)
-------- --------
Cash flows from financing activities:
Bank line of credit:
Borrowings 51,217 32,211
Repayments (45,332) (23,711)
Long-term debt:
Repayments (153) (943)
Net proceeds from issuance of common stock 62 59
-------- --------
Cash provided by financing activities 5,794 7,616
-------- --------
Decrease in cash and cash equivalents (830) (985)
Cash and cash equivalents, beginning of period 1,808 2,383
-------- --------
Cash and cash equivalents, end of period $ 978 $ 1,398
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
INTERIM RESULTS
The accompanying consolidated financial statements for the 13 weeks and
39 weeks ended September 25, 1999 and September 26, 1998 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 fiscal year. The accompanying consolidated balance sheet as of
December 26, 1998 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 26, 1998.
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.
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations under SFAS No. 128 is as follows (in
thousands, except per share information):
<TABLE>
<CAPTION>
Period Ended
------------------------------------------------------------------------
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
(13 weeks) (13 weeks) (39 weeks) (39 weeks)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income (loss) available to common
stockholders for basic and diluted
earnings per share $ (509) $ 97 $(2,055) $ (484)
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares for basic
earnings (loss) per share 6,889 6,851 6,873 6,845
Dilutive effect of stock options
(treasury stock method) 0 219 0 0
------- ------- ------- -------
Weighted average shares for diluted
earnings (loss) per share 6,889 7,070 6,873 6,845
------- ------- ------- -------
------- ------- ------- -------
Earnings (loss) per share:
Basic $ (0.07) $ 0.01 $ (0.30) $ (0.07)
------- ------- ------- -------
------- ------- ------- -------
Diluted $ (0.07) $ 0.01 $ (0.30) $ (0.07)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
4
<PAGE>
For the 13 weeks and 39 weeks ended September 25, 1999 and 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. For the 13 weeks ended September 26, 1998, 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.
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.
NASDAQ STOCK MARKET LISTING. The Company's common stock is currently
included in the Nasdaq Stock Market and designated as a Nasdaq National Market
security. In order for the common stock to continue to be designated as a Nasdaq
National Market security and included in the Nasdaq Stock Market, the Company
and its common stock must meet certain quantitative maintenance criteria which
include, among other things, requirements that (1) the Company maintain
$4,000,000 in total assets, (2) the bid price of the common stock be at least
$1.00, (3) at least 750,000 shares of the common stock be held by persons who
are not affiliates of the Company, and (4) the shares held by non-affiliates of
the Company have an aggregate market value of at least $5,000,000. In addition,
continued inclusion in the Nasdaq Stock Market requires two registered and
active market-makers. As of October 25, 1999, the Company only had one
registered and active market-maker, and based on the closing bid price of the
Company's common stock of $1.3125, the aggregate market value of the 2,764,121
shares held by non affiliates was approximately $3,627,909. The failure of the
Company's common stock to meet the maintenance criteria may result in delisting
of the Company's common stock from the Nasdaq Stock Market, and trading, if any,
in the Company's common stock would thereafter be conducted in the Nasdaq
SmallCap Market (if then eligible) or the non-Nasdaq over-the-counter market. As
a result of such delisting, an investor could find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of, the Company's
common stock.
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 and apparel.
Pursuant to the reorganization (the "Reorganization") effected in October 1997,
the Company acquired the businesses conducted by its subsidiaries, Track `n
Trail, a California corporation ("Track `n Trail - California"), and Overland
Management Corporation ("Overland"). The Reorganization was accounted for in a
manner similar to a pooling of interests. In August 1998 the Company acquired
Nevin's Eagles Nest, Inc. ("Eagles Nest"), a retailer of premium branded outdoor
apparel. The Company operates in a single business segment. As of September 25,
1999, the Company operated 138 Track `n Trail stores, 46 Overland Trading
stores, and six Eagles Nest stores in 35 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, exclusive of sales attributable to the
Eagles Nest stores acquired in 1998, increased 5.1% and 4.1% for the 13 weeks
and 39 weeks ended September 25, 1999, respectively.
RESULTS OF OPERATIONS
The following discussions compare the Company's results of operations
for the 13 weeks and 39 weeks ended September 25, 1999 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
5
<PAGE>
in conjunction with the Consolidated Financial Statements and accompanying notes
for each period discussed, as well as the information presented in all other
sections of this Management's Discussion and Analysis.
THIRTEEN WEEKS ENDED SEPTEMBER 25, 1999 COMPARED TO THIRTEEN WEEKS
ENDED SEPTEMBER 26, 1998
NET SALES
Net sales were $29.7 million for the 13 weeks ended September 25,
1999, representing an increase of $4.0 million, or 15.6%, over net sales of
$25.7 million for the comparable period in the prior year. Net sales for the
35 stores (net of closures) opened subsequent to fiscal 1997 accounted for
$2.1 million of the increase in net sales, and the Company's five Eagles Nest
stores acquired in August 1998 accounted for $854,000 of the increase in net
sales for the third quarter of fiscal 1999. Comparable store net sales for
the 13 weeks ended September 25, 1999 increased $1.0 million, or 5.1%. The
increase in comparable store net sales is due in part to a successful summer
sandal season as well as to a less competitive market than experienced during
the 13 weeks ended September 26, 1998 as a result of competitor store
closures. The Company expects to open approximately nine additional stores
during the remainder of fiscal 1999.
GROSS PROFIT
Gross profit was $13.8 million for the 13 weeks ended September 25,
1999, representing an increase of $2.0 million, or 17.3%, over gross profit for
the comparable period in the prior year. Gross profit as a percentage of net
sales increased to 46.4% for the 13 weeks ended September 25, 1999 from 45.7%
for the comparable period in the prior year. The increase in gross profit as a
percentage of net sales is primarily due to the decrease in markdowns taken in
the third quarter of 1999 compared to the markdowns taken in the third quarter
of 1998 in response to competitor discounting, which increase was partially
offset by sales attributable to the Eagles Nest stores on which margins are
generally lower than the margins on sales attributable to the Track `n Trail and
Overland Trading stores. Excluding the Eagles Nest stores, gross profit would
have increased to 47.3% for the 13 weeks ended September 25, 1999.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $11.7 million for the 13 weeks
ended September 25, 1999, representing an increase of $2.2 million, or 23.1%,
over selling and marketing expenses for the comparable period in the prior year.
Approximately $671,000, or 30.5%, of this increase is attributable to the Eagles
Nest stores. The remaining increase is primarily attributable to operating costs
related to operating 11 additional Track `n Trail and Overland Trading stores at
September 25, 1999 versus September 26, 1998. As a percentage of net sales,
selling and marketing expenses increased to 39.5% for the 13 weeks ended
September 25, 1999 from 37.1% for the comparable period of the prior year,
primarily as a result of fixed operating costs attributable to a larger base of
new stores and the increased selling and marketing expenses required in
connection with the continuing assimilation of the Eagles Nest store operations.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $2.1 million for the 13
weeks ended September 25, 1999, representing an increase of $145,000 over
administrative and distribution expenses for the comparable period in the prior
year. The addition of the Eagles Nest stores accounted for $98,000 of the
increase in administrative and distribution expenses. As a percentage of net
sales, administrative and distribution expenses decreased to 7.0% for the 13
weeks ended September 25, 1999 from 7.6% for the comparable period in the prior
year. The decrease as a percentage of net sales is primarily due to an increase
in comparable store net sales and the dilutive effect on fixed operating costs
resulting from the increased revenue attributable to a larger store base.
INTEREST EXPENSE
Interest expense was $317,000 for the 13 weeks ended September 25,
1999, representing an increase of $228,000 from interest expense of $89,000 for
the comparable period in the prior year. Debt incurred in connection with the
Eagles Nest acquisition accounted for $86,000, or 37.7% of this increase. The
remainder is attributable to an increase of the outstanding principal balance of
the Company's credit facility due to the expansion of the Company's store base.
6
<PAGE>
NET INCOME / LOSS
The Company had a net loss for the 13 weeks ended September 25,
1999, of $509,000, representing a decrease of $606,000 from net income of
$97,000 for the comparable period in 1998. Eagles Nest accounted for $506,000
of the decrease in net income. The net loss for the 13 weeks ended September
25, 1999 was also attributable in part to the cumulative effect of adjusting
the estimated tax rate downward from 43.50% to 34.85% in response to the
losses experienced during the 39 weeks ended September 25, 1999.
THIRTY-NINE WEEKS ENDED SEPTEMBER 25, 1999 COMPARED TO THIRTY-NINE
WEEKS ENDED SEPTEMBER 26, 1998
NET SALES
Net sales were $81.3 million for the 39 weeks ended September 25,
1999, representing an increase of $14.4 million, or 21.5%, over net sales of
$66.9 million for the comparable period in the prior year. Net sales for the
35 stores (net of closures) opened subsequent to fiscal 1997 accounted for
$8.5 million of the increase in net sales, and the Company's five Eagles Nest
stores acquired in August 1998 accounted for $3.5 million of the increase in
net sales for the 39 weeks ended September 25, 1999. The increase in net
sales was partially offset by two stores temporarily closed for remodeling.
Comparable store net sales for the 39 weeks ended September 25, 1999
increased $2.3 million, or 4.1%. The increase in comparable store net sales
is primarily due to a successful summer sandal season as well as to a less
competitive market than experienced during the third fiscal quarter of 1998
as a result of competitor store closures. The Company expects to open
approximately nine additional stores during the remainder of fiscal 1999.
GROSS PROFIT
Gross profit was $38.2 million for the 39 weeks ended September 25,
1999, representing an increase of $6.7 million, or 21.3%, over gross profit of
$31.5 million for the comparable period in the prior year. The increase in gross
profit is primarily the result of a reduction in markdowns taken in the 39 weeks
ended September 25, 1999, from markdowns taken in the comparable period in 1998
in response to competitor discounting. Gross profit as a percentage of net sales
decreased to 47.0% for the 39 weeks ended September 25, 1999 from 47.1% for the
comparable period in the prior year. The decrease in gross profit as a
percentage of sales is primarily attributable to the Eagles Nest stores, which
generally carry lower margin merchandise. Excluding the Eagles Nest stores,
gross margin would have increased to 47.8% for the 39 weeks ended September 25,
1999.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $33.6 million for the 39 weeks
ended September 25, 1999, representing an increase of $7.3 million, or 27.8%,
over selling and marketing expenses of $26.3 million for the comparable period
in the prior year. Approximately $2.1 million, or 29.0%, of the increase is
attributable to the Eagles Nest stores. The remaining increase is primarily
attributable to operating costs related to operating 11 additional Track `n
Trail and Overland Trading stores at September 25, 1999 versus September 26,
1998. As a percentage of net sales, selling and marketing expenses increased to
41.3% for the 39 weeks ended September 25, 1999 from 39.3% for the comparable
period in the prior year, primarily as a result of fixed operating costs
attributable to a larger base of new stores and increased selling and marketing
expenses required in connection with the continuing assimilation of the Eagles
Nest store operations.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $6.8 million for the 39
weeks ended September 25, 1999, representing an increase of $934,000 over
administrative and distribution expenses of $5.9 million for the comparable
period in the prior year. The increase is primarily attributable to increases in
staffing and associated expenses as a result of the Company's continued internal
expansion. The Eagles Nest stores accounted for approximately $390,000 of the
increase in administrative and distribution expenses. As a percentage of net
sales, administrative and distribution expenses decreased to 8.4% for the 39
weeks ended September 25, 1999 from 8.8% for the comparable period in the prior
year. The decrease as a percentage of net sales is primarily due to an increase
in comparable store net sales and the dilutive effect on fixed operating costs
resulting from the increased revenue attributable to a larger store base.
7
<PAGE>
INTEREST EXPENSE
Interest expense increased to $875,000, or 1.1% of net sales, for the
39 weeks ended September 25, 1999, from $140,000, or 0.2% of net sales, for the
comparable period in 1998. Debt incurred as a result of the Eagles Nest
acquisition accounted for approximately $255,000, or 34.6%, of this increase.
The remaining increase in interest expense is attributable to an increase of the
outstanding principal balance of the Company's credit facility due to the
expansion of the Company's store base.
NET LOSS
The Company had a net loss for the 39 weeks ended September 25, 1999
of $2.1 million, representing an increase of $1.6 million over a net loss of
$484,000 for the comparable period in 1998. Eagles Nest accounted for
approximately $1.1 million of the increase in net loss. The remaining
increase in net loss is primarily attributable to incremental fixed store
operating costs associated with a larger base of new stores. The net loss for
the 39 weeks ended September 25, 1999 was also attributable in part to an
adjustment of the estimated tax rate downward from 43.50% to 34.85% in
response to the losses experienced during the 39 weeks ended September 25,
1999.
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.
Net cash used for operating activities for the 39 weeks ended September
25, 1999 was $4.8 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 September 25, 1999 were $38.4
million compared to $37.0 million at December 26, 1998. 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 26, 1998 and September 25, 1999 relates primarily to seasonal
differences.
The Company had $13.7 million in working capital as of September 25,
1999 compared to $25.1 million at the end of fiscal 1998, representing a
decrease of $11.4 million. The decrease in working capital is primarily the
result of reclassifying $9.7 million in long term debt as a result of an
amendment to the Company's existing loan agreement with Union Bank of
California. 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 $1.9 million for the 39 weeks ended September
25, 1999. Capital expenditures in the first 39 weeks of 1999 were primarily for
the build-out of nine stores opened in this period, the build-out of two stores
opened in 1998, the remodel of two stores, software and hardware upgrades, and
furniture and fixtures for the Company's new distribution center. The Company
estimates capital expenditures for the remainder of the year to be approximately
$800,000 for the build-out of approximately nine additional stores,
approximately $50,000 for the remodel of one store and approximately $60,000 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
seven underperforming stores in the first quarter of 1999, and closed an
additional four stores in the third quarter of 1999.
Financing activities provided cash of $5.8 million for the 39 weeks
ended September 25, 1999, and consisted of additional borrowings under the
Company's revolving line of credit to fund working capital requirements.
In October 1999, the Company's loan agreement with Union Bank of
California was amended to increase the revolving line of credit to $25.0
million. Management believes that the Company's operating cash flow and
borrowings under its
8
<PAGE>
increased credit facility will be sufficient to complete the Company's fiscal
1999 and fiscal 2000 store expansion program 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 a Year 2000 plan ("Y2K Plan") with the
objective of having all of its 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 and identify potential problems; (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
three areas of focus for its Y2K Plan: corporate headquarters, store sites and
"key" third parties (the "Third Parties"). Third Parties include suppliers,
vendors and service providers that are deemed to be critical to the Company's
business operations. All phases of the Y2K Plan are being applied to these three
areas.
An outside vendor provides the mainframe system software used at the
Company's corporate office. The software contains an operating system and seven
modules. The outside vendor has tested the operating system, merchandise,
accounts payable, sales audit, fixed assets, report writing, electronic data
exchange and general ledger modules and has verified to the Company that such
software is Year 2000 compliant. The manufacturer of the mainframe hardware has
tested the hardware and advised the Company that it is Year 2000 compliant.
As of September 25, 1999, the Company has assessed all of the personal
computers and non-IT systems at the corporate headquarters and has retrofitted
and/or replaced all but five of the non-compliant systems. The remaining five
systems are scheduled to be replaced in the fourth quarter of 1999. The Local
Area Network (LAN) software and hardware manufacturers have advised the Company
that the LAN software and hardware used by the Company is Year 2000 compliant.
The Company utilizes software produced by an outside vendor for its
human resource and payroll functions. In the third quarter of 1998, the outside
vendor upgraded and tested both systems and verified to the Company that they
are Year 2000 compliant.
Contingency planning for the corporate headquarters category began in
third quarter 1998 and was completed in second quarter 1999.
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 was converted to the same POS system in the
first quarter of 1999. In the first quarter of 1999, the Company completed the
Year 2000 compliant hardware upgrade for all of its stores. Additionally, the
Company purchased a Year 2000 compliant software upgrade for its POS systems and
completed retrofitting all of its stores with the upgraded software version in
the second quarter of 1999. POS systems for any new stores will be installed
with the upgraded version of the software. Contingency planning for the store
site category began in the first quarter of 1999 and was completed in the second
quarter of 1999.
The Company 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. As of September 25, 1999, the
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Company had received assurances from all Third Parties contacted regarding their
remediation efforts. Additionally, the Company completed contingency plans
pertaining to Third Parties in second quarter 1999.
COSTS
The Company expects its costs associated with becoming Year 2000
compliant to be approximately $58,000, exclusive of system additions, upgrades
or replacements incurred in the normal course of business and assuming that
implementation of contingency plans will not be necessary. The Company estimates
$21,000 of this amount will have been incurred repairing software problems and
$37,000 will have been incurred in connection with replacement of problem
systems and equipment. Costs incurred through September 25, 1999 have been
approximately $45,000. The remaining costs are expected to be incurred by the
end of fourth quarter 1999. The Company does not separately track the internal
costs incurred for the Y2K Plan. Such costs are principally related to the
payroll of the Company's Management Information Systems department. 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. Because of the range
of possible issues and large number of variables involved, it is impossible to
quantify the total potential cost of Year 2000 problems or to determine the
Company's worst-case scenario in the event the Company's Year 2000 remediation
efforts or the efforts of those with whom it does business are not successful.
In order to deal with the uncertainty associated with the Year 2000 problem, the
Company has developed contingency plans to address the possibility that efforts
to mitigate the Year 2000 risk are not successful either in whole or part. These
plans include manual processing of information for critical information
technology systems, increasing store staffing levels and inventory levels,
identifying alternative suppliers and increasing cash on hand. The contingency
plans were completed in the second quarter of fiscal 1999, and the appropriate
implementation training is scheduled to take place throughout the remainder of
the year. 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 will not suffer material interruptions of normal operations, or that
such interruptions, even after the implementation of any contingency plans, will
not have a material adverse effect on the Company's results of operations,
liquidity and financial condition.
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 4, 1999 between Union Bank of California,
N.A. and the subsidiaries of the Registrant
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter ended
September 25, 1999.
11
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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: October 27, 1999 By: /s/ Daniel J. Nahmens
------------------------------------
Daniel J. Nahmens
Executive 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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[LOGO]
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement") is made and entered into as of October
4, 1999 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 9, 1998, 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 Five Million Dollars ($25,000,000.00) 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 2, 2000 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 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
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letter of credit documentation. No letter of credit shall expire more than
(90) days after October 1, 2000. 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.
(a) Documentary L/C's issued under the Commercial Letter
of Credit Sublimit shall be subject to the Bank's standard
issuance and payment fees.
(b) All other fees shall be in accordance with the
Bank's existing schedule of fees as amended from time to
time.
1.7 LOAN COMMITMENT FEE. Borrower's shall pay a non-refundable
fee of Forty Six Thousand Eight Hundred Seventy Five Dollars ($46,875.00).
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 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.
2.3 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.
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2.4 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.
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 26, 1998, together with
supporting schedules, and an income statement for the twelve (12) months ended
December 26, 1998 have heretofore been furnished to Bank as well as the balance
sheet and income statement for the six (6) months ended June 26, 1999, and are
true and complete and fairly represent the financial condition of Borrowers
during the period covered thereby. Since June 26, 1999, there has been no
material adverse change in the financial condition or operations of Borrowers.
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 from time to time existing (except for
purchase money security interest from time to time existing on personal
property), encumbrances, security interests and adverse claims except those
specifically referred to in said financial statements.
3.6 LITIGATION. There is no litigation or proceeding pending
or threatened against 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.
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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.
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
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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;
(g) Within thirty (30) 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.
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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 One Million Five Hundred Thousand
Dollars ($1,500,000.00) from September 25, 1999 and thereafter based on Earnings
Before Interest, Taxes, Depreciation and Amortization (EBITDA).
4.8 TANGIBLE NET WORTH. Borrower will at all times maintain
Tangible Net Worth of not less than Twenty Two Million Dollars ($22,000,000.00).
"Tangible Net Worth" shall mean net worth increased by indebtedness of Borrower
subordinated to Bank and decreased by patents, licenses, trademarks, trade
names, goodwill and other similar intangible assets, organizational expenses,
security deposits, prepaid costs and expenses and monies due from affiliates
(including officers, shareholders, and directors).
4.9 COVENANTS ON CONSOLIDATED BASIS. All financial covenants
set forth in sections 4.6 through 4.8 above shall be calculated on a
consolidated basis.
4.10 INSURANCE. Each Borrower will keep all of its insurable
property, real, personal or mixed, insured by companies and in amounts approved
by Bank 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.
4.11 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.
4.12 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.
4.13 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.
4.14 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.
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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 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 Six Million Five Hundred Thousand Dollars
($6,500,000) during its fiscal year ending December 30, 2000 and only make such
expenditures as are necessary for Borrowers in the conduct of their ordinary
course of business.
-8-
<PAGE>
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.
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.
-9-
<PAGE>
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.
UNION BANK OF CALIFORNIA, N.A. TRACK 'N TRAIL
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: Address:
Union Bank of California, N. A. Track 'N Trail
770 "L" Street #1400 4961 A Windplay
Sacramento, California 95814 EL Dorado Hills, Ca. 95762
Attention: Randy Lambert, Attention: Daniel J. Nahmens
Fax: (916) 321-6713 Fax: (916) 933-4521
Telephone: (916) 321-6770 Telephone: (916) 933-4525
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
-11-
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<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-25-1999 DEC-25-1999
<PERIOD-START> JUN-27-1999 DEC-27-1998
<PERIOD-END> SEP-25-1999 SEP-25-1999
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<INTEREST-EXPENSE> 317 875
<INCOME-PRETAX> (417) (3,154)
<INCOME-TAX> 92 (1,099)
<INCOME-CONTINUING> (509) (2,055)
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<EXTRAORDINARY> 0 0
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<NET-INCOME> (509) (2,055)
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