<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 26, 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 July 20, 1999 was 6,891,476.
<PAGE>
TRACK 'n TRAIL
FORM 10-Q
QUARTER ENDED JUNE 26, 1999
INDEX
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Page
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 26, 1999
and December 26, 1998..............................................................1
Consolidated Statements of Operations for the 26-Week and 13-Week
periods ended June 26, 1999 and June 27, 1998.....................................2
Consolidated Statements of Cash Flows for the 26-Week periods
ended June 26, 1999 and June 27, 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 4. Submission of Matters to Vote of Security-Holders ................................11
Item 6. Exhibits and Reports on Form 8-K..................................................11
SIGNATURES...................................................................................................12
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRACK 'n TRAIL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
----------
<TABLE>
<CAPTION>
JUNE 26, DECEMBER 26,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,209 $ 1,808
Accounts receivable 1,307 2,510
Income taxes receivable -- 130
Inventories 37,566 36,998
Prepaid expenses 300 432
Prepaid income taxes 1,525 --
Deferred income taxes 675 675
--------- ---------
Total current assets 42,582 42,553
Fixed assets, net 11,771 11,849
Goodwill, net 4,721 4,852
Deferred income taxes 2,025 2,025
--------- ---------
Total Assets $ 61,099 $ 61,279
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,796 $ 1,746
Accounts payable 7,562 12,481
Accrued payroll and bonuses 674 561
Sales tax payable 586 952
Income taxes payable -- 687
Accrued expenses and other liabilities 955 1,010
--------- ---------
Total current liabilities 19,573 17,437
Deferred rent 1,631 1,540
Long-term debt, net of current portion 8,880 9,764
--------- ---------
Total liabilities 30,084 28,741
--------- ---------
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; 6,865,899 and 6,851,961 shares issued and
outstanding at June 26, 1999 and December 26, 1998, respectively 69 69
Additional paid-in capital 25,854 25,831
Retained earnings 5,092 6,638
--------- ---------
Total stockholders' equity 31,015 32,538
--------- ---------
Total liabilities and stockholders' equity $ 61,099 $ 61,279
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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TRACK 'n TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
----------
(unaudited)
<TABLE>
<CAPTION>
PERIOD ENDED
--------------------------------------------------------------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1999 1998 1999 1998
(13 WEEKS) (13 WEEKS) (26 WEEKS) (26 WEEKS)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 28,272 $ 22,311 $ 51,596 $ 41,219
Cost of sales 14,529 11,385 27,150 21,450
-------- -------- -------- --------
Gross profit 13,743 10,926 24,446 19,769
-------- -------- -------- --------
Operating expenses:
Selling and marketing 11,009 8,523 21,870 16,762
Administrative and distribution 2,299 1,908 4,704 3,915
-------- -------- -------- --------
Total operating expenses 13,308 10,431 26,574 20,677
-------- -------- -------- --------
Operating income (loss) 435 495 (2,128) (908)
Other expense:
Interest expense 310 46 558 51
Other, net 47 4 51 9
-------- -------- -------- --------
Income (loss) before income taxes 78 445 (2,737) (968)
Income tax provision (benefit) 33 178 (1,191) (387)
-------- -------- -------- --------
Net income (loss) $ 45 $ 267 $ (1,546) $ (581)
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per share:
Basic $ 0.01 $ 0.04 $ (0.23) $ (0.08)
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ 0.01 $ 0.04 $ (0.23) $ (0.08)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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TRACK 'n TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
----------
(unaudited)
<TABLE>
<CAPTION>
JUNE 26, JUNE 27,
1999 1998
(26 WEEKS) (26 WEEKS)
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,546) $ (581)
Adjustments to reconcile to cash used for operating activities:
Depreciation and amortization 1,325 972
Loss on disposal of fixed assets 56 8
Cash provided by (used for) changes in operating assets and liabilities:
Accounts receivable 1,203 795
Income taxes receivable 130 --
Inventories (568) (1,788)
Prepaid expenses 132 129
Prepaid income taxes (1,525) (554)
Accounts payable and other accrued liabilities (5,226) 1,098
Income taxes payable (687) (1,089)
Deferred rent 91 27
--------- ---------
Cash used for operating activities (6,615) (983)
--------- ---------
Cash flows from investing activities:
Purchases of fixed assets (1,195) (2,289)
Proceeds from sale of fixed assets 22 --
--------- ---------
Cash used for investing activities (1,173) (2,289)
--------- ---------
Cash flows from financing activities:
Long-term debt:
Borrowings 32,458 13,870
Repayments (25,292) (11,905)
Net proceeds from issuance of common stock 23 21
--------- ---------
Cash provided by financing activities 7,189 1,986
--------- ---------
Decrease in cash and cash equivalents (599) (1,286)
Cash and cash equivalents, beginning of period 1,808 2,383
--------- ---------
Cash and cash equivalents, end of period $ 1,209 $ 1,097
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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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
26 weeks ended June 26, 1999 and June 27, 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
------------------------------------------------------------------
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Income (loss) available to common stockholders for
basic and diluted earnings per share................ $ 45 $ 267 $ (1,546) $ (581)
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Weighted average shares for basic earnings (loss)
per share........................................... 6,866 6,843 6,865 6,842
Dilutive effect of stock options (treasury stock
method)............................................. 225 413 0 0
------------- -------------- ------------- --------------
Weighted average shares for diluted earnings (loss)
per share........................................... 7,091 7,256 6,865 6,842
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Earnings (loss) per share:
Basic.......................................... $ 0.01 $ 0.04 $ (0.23) $ (0.08)
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Diluted........................................ $ 0.01 $ 0.04 $ (0.23) $ (0.08)
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
</TABLE>
4
<PAGE>
For the 13 weeks ended June 26, 1999 and June 27, 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. For the 26 weeks
ended June 26, 1999 and June 27, 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.
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 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 June 26, 1999,
the Company operated 139 Track `n Trail stores, 46 Overland Trading stores, and
six Eagles Nest stores in 36 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 3.5% for the 13 weeks
and 26 weeks ended June 26, 1999, respectively.
RESULTS OF OPERATIONS
The following discussions compare the Company's results of operations
for the 13 weeks and 26 weeks ended June 26, 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 in conjunction with the
Consolidated Financial Statements and accompanying notes for each period
discussed, as well as the information presented in all other sections of this
Management's Discussion and Analysis.
THIRTEEN WEEKS ENDED JUNE 26, 1999 COMPARED TO THIRTEEN WEEKS ENDED
JUNE 27, 1998
NET SALES
Net sales were $28.3 million for the 13 weeks ended June 26, 1999,
representing an increase of $6.0 million, or 26.7%, over net sales of $22.3
million for the comparable period in the prior year. Net sales for the 36 stores
(net of closures) opened subsequent to fiscal 1997 accounted for $3.5 million of
the increase in net sales, and the Company's five Eagles Nest stores acquired in
August 1998 accounted for $1.4 million of the increase in net sales for the
second quarter of fiscal 1999. Comparable store net sales for the 13 weeks ended
June 26, 1999 increased $995,000, or 5.1%. The increase in comparable store net
sales is primarily due to increased sales as a result of favorable weather
conditions in the second quarter of fiscal 1999 compared to the unseasonal
weather which occurred during the comparable period of fiscal 1998.
5
<PAGE>
The Company's sales were also positively affected by management's decision to
deliver spring related product earlier in the season than typically done in
prior years. The Company expects to open approximately six additional stores and
close three existing stores during the remainder of fiscal 1999.
GROSS PROFIT
Gross profit was $13.7 million for the 13 weeks ended June 26, 1999,
representing an increase of $2.8 million, or 25.8%, over gross profit of $10.9
million for the comparable period in the prior year. Gross profit as a
percentage of net sales decreased to 48.6% for the 13 weeks ended June 26, 1999
from 49.0% for the comparable period in the prior year. The decrease in gross
profit is the result of 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 remained at 49.0% for the 13 weeks ended June 26, 1999.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $11.0 million for the 13 weeks
ended June 26, 1999, representing an increase of $2.5 million, or 29.2%, over
selling and marketing expenses of $8.5 million for the comparable period in the
prior year. Approximately $794,000, or 31.9%, of this increase is attributable
to the Eagles Nest stores. The remaining increase is primarily attributable to
operating costs related to operating 19 additional Track `n Trail and Overland
Trading stores at June 26, 1999 versus June 27, 1998. As a percentage of net
sales, selling and marketing expenses increased to 38.9% for the 13 weeks ended
June 26, 1999 from 38.2% for the comparable period of the prior year, primarily
as a result of the increased selling and marketing expenses required to
assimilate the Eagles Nest store operations.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $2.3 million for the 13
weeks ended June 26, 1999, representing an increase of $391,000, or 20.5%, over
administrative and distribution expenses of $1.9 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 addition of the Eagles Nest stores accounted for $114,000 of the
increase in administrative and distribution expenses. As a percentage of net
sales, administrative and distribution expenses decreased to 8.1% for the 13
weeks ended June 26, 1999 from 8.6% 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 $310,000 for the 13 weeks ended June 26, 1999,
representing an increase of $264,000 from interest expense of $46,000 for the
comparable period in the prior year. Debt incurred in connection with the Eagles
Nest acquisition accounted for $93,000, or 29.9%, of total interest expense. 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.
NET INCOME
The Company's net income for the 13 weeks ended June 26, 1999 was
$45,000, representing a decrease of $222,000 from net income of $267,000 for the
comparable period in 1998. Eagles Nest accounted for $192,000 of the decrease in
net income. The remaining decrease in net income is primarily attributable to
incremental fixed store operating costs associated with a larger store base in a
period in which the Company historically experiences low sales.
TWENTY-SIX WEEKS ENDED JUNE 26, 1999 COMPARED TO TWENTY-SIX WEEKS
ENDED JUNE 27, 1998
NET SALES
Net sales were $51.6 million for the 26 weeks ended June 26, 1999,
representing an increase of $10.4 million, or 25.2%, over net sales of $41.2
million for the comparable period in the prior year. Net sales for the 36 stores
(net of closures) opened subsequent to fiscal 1997 accounted for $6.8 million of
the increase in net sales, and the Company's five Eagles Nest stores acquired in
August 1998 accounted for $2.6 million of the increase in net sales for the 26
weeks ended
6
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June 26, 1999. The increase in net sales was partially offset by two stores
temporarily closed for remodeling. Comparable store net sales for the 26 weeks
ended June 26, 1999 increased $1.3 million, or 3.5%. The increase in comparable
store sales is primarily due to increased sales as a result of favorable weather
conditions in the second fiscal quarter of 1999 compared to the unseasonal
weather which occurred during the comparable period of 1998. The Company's sales
were also positively affected by management's decision to deliver spring related
product earlier in the season than typically done in prior years. The Company
expects to open approximately six additional stores and close three existing
stores during the remainder of fiscal 1999.
GROSS PROFIT
Gross profit was $24.4 million for the 26 weeks ended June 26, 1999,
representing an increase of $4.7 million, or 23.7%, over gross profit for the
comparable period in the prior year. Gross profit as a percentage of net sales
decreased to 47.4% for the 26 weeks ended June 26, 1999 from 48.0% for the
comparable period in the prior year. The decrease in gross profit is the result
of 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 margin would have
remained at 48.0% for the 26 weeks ended June 26, 1999.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $21.9 million for the 26 weeks
ended June 26, 1999, representing an increase of $5.1 million, or 30.5%, over
selling and marketing expenses of $16.8 million for the comparable period in the
prior year. Approximately $1.4 million, or 28.4%, of the increase is
attributable to the Eagles Nest stores. The remaining increase is primarily
attributable to operating costs related to operating 19 additional Track `n
Trail and Overland Trading stores at June 26, 1999 versus June 27, 1998. As a
percentage of net sales, selling and marketing expenses increased to 42.4% for
the 26 weeks ended June 26, 1999 from 40.7% for the comparable period in the
prior year, primarily as a result of increased selling and marketing expenses
required to assimilate Eagles Nest store operations and incremental fixed
operating costs attributable to a larger store base in a period in which the
Company historically experiences low sales.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $4.7 million for the 26
weeks ended June 26, 1999, representing an increase of $789,000, or 20.2%, over
administrative and distribution expenses of $3.9 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 addition of the Eagles Nest stores in August 1998 accounted for
approximately $292,000 of the increase in administrative and distribution
expenses. As a percentage of net sales, administrative and distribution expenses
decreased to 9.1% for the 26 weeks ended June 26, 1999 from 9.5% 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 increased to $558,000, or 1.1% of net sales, for the
26 weeks ended June 26, 1999, from $51,000, or 0.1% of net sales, for the
comparable period in 1998. Debt incurred as a result of the Eagles Nest
acquisition accounted for approximately $169,000, or 33.3%, 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's net loss for the 26 weeks ended June 26, 1999 was $1.5
million, representing an increase of $965,000 over a net loss of $581,000 for
the comparable period in 1998. Eagles Nest accounted for approximately $520,000
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
store base in a period in which the Company historically experiences low sales.
7
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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 26 weeks ended June 26,
1999 was $6.6 million. Net cash used for or provided by operating activities has
historically been driven by net income levels combined with fluctuations in
inventory and accounts payable. Inventories at June 26, 1999 were $37.6 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 June 26, 1999 relates primarily to seasonal differences.
The Company had $23.0 million in working capital as of June 26, 1999
compared to $25.1 million at the end of fiscal 1998, representing a decrease of
$2.1 million. The Company's working capital needs historically have been
seasonal and typically peak in the second and fourth quarters. The peak in the
second quarter is due to the incurrence of operating losses in the first quarter
and increased inventory purchased for the spring selling season. Working capital
needs peak in the fourth quarter due to increases in inventory in advance of the
holiday selling season and payments coming due for back-to-school merchandise.
In addition, the Company requires incremental working capital to stock each new
store upon opening.
Capital expenditures were $1.2 million for the 26 weeks ended June 26,
1999. Capital expenditures in the first 26 weeks of 1999 were primarily for the
build-out of six stores opened in this period, the build-out of one store opened
in 1998, the remodel of one store, 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 $700,000
for the build-out of approximately six additional stores, approximately $100,000
for the completion of one store opened in fiscal 1998, approximately $200,000
for remodels of existing stores, and approximately $100,000 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, which coincided with
the end of the lease terms for such stores, and anticipates closing three
additional stores in 1999.
Financing activities provided cash of $7.2 million for the 26 weeks
ended June 26, 1999, and consisted of additional borrowings under the Company's
revolving line of credit to fund working capital requirements.
Management believes that the Company's operating cash flow and
borrowings under its credit facility will be sufficient to complete the
Company's fiscal 1999 store expansion program and to satisfy the Company's other
capital requirements through fiscal 1999. 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
8
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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 and general ledger
modules and has 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 module, and expects installation and testing to be
complete in the third quarter 1999. The manufacturer of the mainframe hardware
has tested the hardware and advised the Company that it is Year 2000 compliant.
As of June 26, 1999, the Company had assessed all of the personal
computers and non-IT systems at the corporate headquarters and determined
approximately 30% were non-Year 2000 compliant. Retrofitting and/or replacement
and subsequent testing of non-compliant systems is scheduled for the third
quarter 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 June 26, 1999, the 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 $53,000, 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
$32,000 will have been incurred in connection with replacement of problem
systems and equipment. Costs incurred through June 26, 1999 have been
approximately $20,000. The remaining costs are expected to be incurred by the
end of third 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,
9
<PAGE>
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.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standard (SFAS) No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which requires that all
derivative instruments be recorded on the balance sheet at fair value, and that
changes in the fair value of the derivative instruments be recorded in net
earnings or comprehensive earnings. SFAS 133 must be adopted for all fiscal
years and quarters beginning after June 15, 2000, with earlier adoption
permitted. Management has determined that adoption of SFAS 133 will not have a
material impact on the Company's consolidated financial statements.
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.
10
<PAGE>
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS
At the Company's Annual Meeting of Stockholders held on May 27, 1999,
the following individuals were elected to the Board of Directors:
<TABLE>
<CAPTION>
Votes For Votes Withheld
------------- ------------------
<S> <C> <C>
Helen C. Bulwik 6,670,844 5,410
Steven D. Tough 6,670,844 5,410
</TABLE>
As Class I directors, Helen C. Bulwik and Steven D. Tough will serve until the
Annual Meeting of Stockholders in 2002; or, in each case, such time as
successors are elected and qualified.
In addition, the proposal to appoint the firm of PricewaterhouseCoopers LLP as
the independent public accountants of the Company was approved at the Company's
Annual Meeting of Stockholders by the following vote:
<TABLE>
<CAPTION>
For Against Abstain
--------------------- ----------------- -----------------
<S> <C> <C>
6,674,067 800 1,387
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
---------- -------------------------------------------------------------
<S> <C>
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
June 26, 1999.
11
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
TRACK `N TRAIL
Date: July 28, 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)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-25-1999 DEC-25-1999
<PERIOD-START> MAR-28-1999 DEC-27-1998
<PERIOD-END> JUN-26-1999 JUN-26-1999
<CASH> 1,209 1,209
<SECURITIES> 0 0
<RECEIVABLES> 1,307 1,307
<ALLOWANCES> 0 0
<INVENTORY> 37,566 37,566
<CURRENT-ASSETS> 42,582 42,582
<PP&E> 18,564 18,564
<DEPRECIATION> 6,793 6,793
<TOTAL-ASSETS> 61,099 61,099
<CURRENT-LIABILITIES> 19,573 19,573
<BONDS> 0 0
0 0
0 0
<COMMON> 69 69
<OTHER-SE> 30,946 30,946
<TOTAL-LIABILITY-AND-EQUITY> 61,099 61,099
<SALES> 28,272 51,596
<TOTAL-REVENUES> 28,272 51,596
<CGS> 14,529 27,150
<TOTAL-COSTS> 11,009 21,870
<OTHER-EXPENSES> 2,346 4,755
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 310 558
<INCOME-PRETAX> 78 (2,737)
<INCOME-TAX> 33 (1,191)
<INCOME-CONTINUING> 45 (1,546)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 45 (1,546)
<EPS-BASIC> 0.01 (0.23)
<EPS-DILUTED> 0.01 (0.23)
</TABLE>
