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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4961-A WINDPLAY DRIVE,
EL DORADO HILLS, CALIFORNIA 95762
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIPCODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 933-4525
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K [ ].
The aggregate market value of Common Stock held by non-affiliates of
the registrant on March 20, 2000 was $3.4 million.
On March 20, 2000 the registrant had 7,156,759 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive
Proxy Statement for the 2000 Annual Meeting of Stockholders, to be filed with
the Commission no later than 120 days after the end of the registrant's
fiscal year covered by this Form 10-K.
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PART I
ITEM 1. BUSINESS
Track 'n Trail, a Delaware corporation (together with its
subsidiaries, unless the context otherwise requires, the "Company"), is one
of the largest full-service specialty retailers in the United States focusing
on a broad range of high-quality branded casual, outdoor and adventure
footwear. The Company has increased its number of stores and net sales each
year since inception. Pursuant to the reorganization (the "Reorganization")
effected in October 1997, the Company acquired the businesses conducted by
its subsidiaries, Track 'n Trail, a California corporation ("Track 'n
Trail-California"), and Overland Management Corporation ("Overland"). The
Company obtained 33 Overland Trading stores by acquiring control of Overland
on October 25, 1996. On August 26, 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.
In December 1999, the Company adopted a plan to restructure
operations and divest itself of its Eagles Nest locations and also close 35
marginal or unprofitable Track 'n Trail and Overland stores. It is estimated
that the restructuring will be completed during the first 120 days of fiscal
2000.
As of December 25, 1999, the Company operated 199 stores in 35
states under the Track 'n Trail, Overland Trading and Eagles Nest names. All
but three of the Company's stores are located in regional or super-regional
shopping malls, located throughout the United States. Each Track 'n Trail and
Overland store offers a wide range of rugged walking and fashion casual
shoes, sandals and boots, featuring brands such as Timberland, Dr. Martens,
Birkenstock, Vans, Teva, Etnies, Clarks, Ecco and Rockport. In addition to
offering many of the same footwear brands as Track 'n Trail and Overland,
each Eagles Nest store specialized in sport and outdoor apparel lines.
The Company targets middle to upper income consumers, with the
Track 'n Trail stores focusing on consumers in the 15- to 40-year-old age
group and the Overland Trading stores focusing on the 25- to 55-year-old age
group. The Company markets to these two different customer segments through
distinct merchandise assortments and store designs. The Track 'n Trail stores
offer a merchandise selection that emphasizes fashionable,
performance-oriented footwear and typically feature an all-glass front, often
accented with rock fixtures, and earth-tone interiors reminiscent of an
outdoor setting. The Company's Overland Trading stores are merchandised and
designed to appeal to a slightly older and more conservative consumer, with a
focus on traditional and comfort-oriented styles displayed in a contemporary,
natural wood setting. Track 'n Trail stores average approximately 2,026
square feet in size, the Overland Trading stores average approximately 1,502
square feet and the Eagles Nest stores average approximately 5,480 square
feet in size. As of December 25, 1999, the Company operated 144 Track 'n
Trail stores in 34 states, 48 Overland Trading stores in 13 states and seven
Eagles Nest stores in four states.
OPERATING STRATEGIES
The Company's goal is to become the premier destination specialty
retailer of better casual, outdoor and adventure footwear. To accomplish its
goal, the Company is pursuing the following operational strategies:
BRAND NAME MERCHANDISE. Management believes that brand name identity
is of paramount importance to its target customer in making footwear
purchasing decisions. The Company focuses on carrying authentic,
well-established brand names for each product category. For example,
the Company offers the Timberland brand for quality hiking, work,
performance and casual boots and shoes. For younger buyers of
"alternative" footwear, the Company offers Dr. Martens, Vans, and
Etnies shoes. The Company features the Ecco and Rockport brands in the
walking shoe and rugged walking category and the Birkenstock brand in
walking sandals. In the category of performance, water and active
sandals, the Company offers the Teva brand. Management believes that
each of the foregoing brands is recognized as one of the originals in
the primary category it represents.
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CUSTOMER SERVICE AND CONVENIENCE. The Company is committed to
achieving customer satisfaction and to building a loyal customer
base by providing a high level of knowledgeable, attentive and
personalized customer service. The Company believes that educating
consumers about the features and benefits of its product offerings
is a critical component of its success, and management considers
its sales associates' knowledge of the Company's customers and
products to be essential to its marketing approach and customer
satisfaction. The Company's extensive employee training and
development programs are designed to provide its field personnel
with the knowledge and skills needed to understand and communicate
the performance characteristics of the Company's merchandise, and
to better serve its customers' needs.
CAPITALIZE ON TWO DISTINCT DEMOGRAPHIC GROUPS. Management believes
that the Company's distinct retail concepts enable it to serve two
diverse and rapidly growing demographic groups. Track 'n Trail stores
are designed and merchandised to target 15- to 40-year-olds, while
Overland Trading stores target 25- to 55-year-olds. The Track 'n Trail
strategy is to focus on products that reflect an active and
performance-oriented lifestyle, which the Company believes are
particularly popular with the fast-growing 15- to 24-year-old age
group. Overland Trading stores are designed to appeal more to the
large 25- to 55-year-old age group. Management plans to differentiate
the two footwear retail concepts to a greater degree in malls in which
the Company operates both a Track 'n Trail store and an Overland
Trading store.
FOCUSED MERCHANDISING STRATEGY. To tailor merchandise mix to
individual stores' customer profiles, increase inventory efficiency
and minimize lost sales due to out-of-stock occurrences, the Company
analyzes detailed sales and inventory data generated by the Company's
advanced information and distribution systems on a daily basis. The
Company's systems, which feature automatic replenishment,
point-of-sale ("POS") data collection and electronic data interchange
("EDI"), capture net sales and inventory data daily on a
store-by-store basis for each stock keeping unit ("SKU").
RECOGNIZE AND RESPOND TO CHANGING LIFESTYLE TRENDS. The Company
strives to recognize and quickly respond to lifestyle trends that
affect customer preferences. Most recently, prevailing lifestyle
trends that have affected retail footwear sales have included (i) the
growth in alternative sports such as skateboarding, snowsports,
in-line skating and mountain biking as well as the footwear trends
these sports have inspired, (ii) the movement to outdoor activities
and to nature as evidenced by the resurgence of walking, hiking,
biking, fly fishing and camping and (iii) the increased acceptance of
casual dress for both work and social settings. Management believes
that it has developed strong relationships with the primary suppliers
of the more than 100 brand names that the Company carries. These
relationships provide access to market information regarding emerging
merchandise trends. Management believes that the breadth and strength
of these relationships, together with the Company's focused
merchandising strategy, provide the Company with the flexibility
necessary to permit it to respond accurately and quickly to changing
customer preferences.
MERCHANDISING
The Company's footwear merchandising philosophy is to maintain a
core group of basic styles while identifying and stocking emerging brands and
styles. The Company avoids taking significant inventory risk on new items by
carefully testing and monitoring their sales. The Company generally tests and
monitors numerous new styles each year. After evaluation of market
performance and other criteria, a new style may be distributed to a broader
segment of stores or system-wide.
Merchandising decisions, including merchandise mix, pricing,
promotions and markdowns, are made at the Company's corporate offices. The
Company's product purchasing is coordinated through a centralized
merchandising department under the direction of its Executive Vice
President-Merchandising/Chief Operating Officer. The merchandising department
currently consists of approximately 21 persons, including two merchandising
managers, three buyers for the Track 'n Trail stores and two buyers for the
Overland Trading stores. The Company's Track 'n Trail and Overland Trading
buyers operate independently, allowing them to focus on their distinct
customers' merchandise preferences and lifestyles. These buyers are supported
by stock allocation analysts and assistants, who manage the
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Company's computerized merchandise planning system. Management also receives
input from the Company's 14 district managers and two regional managers
regarding local or regional factors relevant to merchandising decisions.
The principal categories of product offered by the Company's
concepts and selected vendors for each, are summarized below:
MEN'S AND WOMEN'S FUNCTIONAL AND SPORT SPECIFIC MERCHANDISE
Functional products are designed to perform under adverse
conditions or for a specific activity such as hiking and water sports, field
and duty, skateboarding, snowsports and inclement weather.
<TABLE>
<CAPTION>
SELECTED TRACK 'N TRAIL VENDORS SELECTED OVERLAND TRADING VENDORS SELECTED EAGLES NEST VENDORS*
<S> <C> <C>
Timberland Timberland The North Face
Solomon Teva Patagonia
Vasque Columbia Columbia
Caterpillar Ex Officio
Teva Royal Robbins
Vans
Etnies
Adidas
Columbia
</TABLE>
* In December 1999, the company adopted a restructuring plan which
includes liquidation of its Eagles Nest stores
MEN'S AND WOMEN'S CASUAL WEAR
Casual footwear and sportswear is designed primarily for everyday
wear such as walking shoes and casual tops and bottoms including shorts,
trousers, pants, T-shirts, knit and woven shirts, blouses, dresses and skirts.
<TABLE>
<CAPTION>
SELECTED TRACK 'N TRAIL VENDORS SELECTED OVERLAND TRADING VENDORS SELECTED EAGLES NEST VENDORS*
<S> <C> <C>
Birkenstock Timberland Tommy Bahama
Rockport Clarks Tsunami
Timberland Joseph Seibel Royal Robbins
Dr. Martens Rockport True Grit
Born Stegmann Woolrich
Simple Ecco Gramicci
Havana Joe Birkenstock
Dr. Martens
Havana Joe
Born
Sperry
</TABLE>
* In December 1999, the company adopted a restructuring plan which
includes liquidation of its Eagles Nest s ores
The following table sets forth the Company's merchandise assortment by
category as a percentage of net sales for the periods shown:
<TABLE>
<CAPTION>
FISCAL
------------------------------------------
1999 1998 1997
-------- --------- ---------
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<S> <C> <C> <C>
Men's and Women's Functional and Sport Specific Footwear......... 28 % 28 % 31 %
Men's and Women's Casual Footwear ............................... 58 60 60
Apparel ......................................................... 5 2 --
Men's, Women's and Children's Slippers........................... 1 1 1
Children's Footwear.............................................. 1 1 1
Shoe Care Products, Hosiery and Accessories...................... 7 8 7
--- --- --
100% 100% 100%
===== ===== ====
</TABLE>
ACCESSORIES
The Company also offers accessories, including socks, belts,
backpacks and shoe care products such as sprays and polishes. Some of these
accessories carry the same brand names as the ready-to-wear and footwear sold
by the Company, although most are supplied by different manufacturers.
Accessories accounted for approximately 7.2% of net sales at the Track 'n
Trail and Overland Trading stores in fiscal 1999.
PURCHASING AND SOURCING
The Company believes that its ability to buy in large quantities
directly from suppliers helps it to plan merchandise flow effectively and to
obtain competitive pricing and trade terms. Although the Company deals with
approximately 100 vendors, a substantial portion of the Company's merchandise
is provided by a limited number of brand name suppliers. The Company's ten
largest suppliers accounted for approximately 66.6% of the Company's net
sales in fiscal 1999. In fiscal 1999, Dr. Martens, Timberland and Birkenstock
accounted for 20.7%, 13.6% and 8.3% of the Company's total net sales,
respectively.
The Company strives to build and maintain strong and interactive
relationships with its major suppliers. Buyers meet regularly with major
vendors to stay abreast of new product lines, new features and changes in
styling direction. The Company frequently shares information with its vendors
about market research, merchandising trends and the Company's goals. In
addition, the Company has established EDI programs with most of its major
suppliers in order to improve its inventory efficiency. The Company develops
and transmits purchase orders through its EDI links, and receives information
about order status, delivery times and pricing from the suppliers. These
programs thus permit more rapid merchandise replenishment and faster
inventory turns. The Company believes that its relationships with major
suppliers improve its ability to obtain desired styles and give the Company
flexibility to adjust to shifting market demand for different vendors'
products from season to season. In an effort to secure appropriate quantities
of items that are in high demand, the Company advises its major vendors of
its forecasted needs approximately six to 12 months in advance. However, the
Company has no long-term purchase contracts or other contractual assurances
of continued supply or pricing with any of its suppliers. See "Risk Factors."
STORE OPERATIONS
The Company operated 199 stores as of December 25, 1999, all but
three of which were located in regional or super-regional shopping malls.
Although all stores are integrated into the Company's inventory control,
distribution and management information systems, Track 'n Trail, Overland
Trading and Eagles Nest stores differ in format, merchandise content and
decor because of their different targeted customer bases.
TRACK 'N TRAIL STORE FORMAT
The Track 'n Trail storefront design typically features an all
glass 20- to 30-foot front, enabling customers to view featured products on
display as well as the extensive product assortment available inside the
store. The edges of the storefront are often accented with rock fixtures that
are a signature element in the Track 'n Trail design theme. Product display
fixtures at several stores are designed to represent rock formations, which
may also be incorporated into customer seating fixtures and waterfall display
pieces. The store interiors feature natural-tone walls, accent trim,
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furniture and fixtures. Floor coverings are natural wood or soft earth-tone
carpeting, and often include colorful murals depicting outdoor scenes,
providing an environment that is both aesthetically pleasing and
complementary to the product displays. Each style of footwear is displayed by
category, such as hiking boots or sandals. Merchandise is typically featured
on rock displays or fixtures along the walls of the stores, with product
categories indicated by an overhead sign. The eight Track 'n Trail stores
located in the Mills malls feature a contemporary "industrial" decor, and
utilize industrial equipment throughout as props and fixtures. Track 'n Trail
stores average approximately 2,026 square feet in size, of which 40% to 60%
is devoted to the sales floor.
OVERLAND TRADING STORE FORMAT
Overland Trading stores generally feature interiors that are well
lighted, open and inviting. Most stores have two display windows in which a
representative collection of merchandise is presented. Store furnishings are
constructed of high-quality light woods that contrast against the rich,
emerald green floor coverings. Management believes that the Overland Trading
stores' more traditional environment conveys the high quality of merchandise
and service sought by the Overland Trading concept's more mature target
consumer. The Overland Trading merchandising approach focuses on the
high-quality brands carried. Each major brand is housed as a "collection" in
a distinct wall section, which is delineated by architectural elements and by
a distinctive, back-lit overhead sign carrying the vendor's logo. For
example, men's Timberland footwear is presented as a collection within a
defined wall section, with a back-lit Timberland sign overhead. Overland
Trading stores have sales floors similar in size to those at Track 'n Trail
stores, but the stores acquired by the Company in October 1996 have smaller
stockrooms. The Company has incorporated larger stockrooms in the Overland
Trading stores opened after the acquisition of Overland in order to minimize
missed sales opportunities due to shortages of high-demand products. Overland
Trading stores average approximately 1,502 square feet in size, of which 40%
to 60% is devoted to the sales floor.
EAGLES NEST STORE FORMAT
Eagles Nest stores are designed with expansive, all glass
storefronts framed in rich slate and warm natural wood design elements.
Windows feature mannequins showing the most current sportswear and active
wear collections and accessories. Store interiors feature a contemporary
outdoor environment created through wall elements that are used to create
mountain silhouettes depicting the heritage of the company's Rocky Mountain
roots. Vignettes featuring natural wood and slate elements emphasize
sportswear, travel and active wear collections throughout the store's
interior. Impact brand signing is used to call attention to the collections
of premium quality and unique brands carried in the Eagles Nest stores.
Eagles Nest stores average approximately 5,480 square feet in size, of which
75% to 85% is devoted to the sales floor. These stores will be closed in the
first 120 days of fiscal 2000 as part of a restructuring plan adopted in
December 1999.
STORE MANAGEMENT AND COMPENSATION
The Company's Vice President-Stores, two regional managers and 14
district managers visit each of the Company's stores on a regular basis to
review the implementation of Company policy, monitor operations and review
inventories and merchandise presentation. Each store has a store manager who
is responsible for supervision and overall operations, two to three assistant
managers and approximately four to eight sales associates, most of whom work
part-time.
The regional, district and store managers receive fixed salaries
and are eligible for incentive bonuses, primarily based on their achievement
of the goals stated in the Company's Management by Objective ("MBO") program.
The MBO program focuses on reviewing, managing and improving two key
objectives: net sales and inventory shrinkage. All field incentive
compensation programs are based upon goals within these two key objectives.
To support the MBO program, the Company has developed an appraisal system to
monitor each store's performance on a monthly and quarterly basis. Each
appraisal focuses on a store's performance in a key compliance area such as
customer service,
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visual presentation, store operations or loss prevention, to support
performance in the two key MBO objectives. The Company also monitors many
other store-level variables from its corporate offices, including payroll
costs, refund levels, register variances, telephone bills and similar items.
The Company intends for store employees to focus a substantial
portion of their efforts on customer service. As a consequence, the Company
has centralized as many administrative functions as possible, including
buying, development of in-store merchandising displays, inventory allocation,
human resources and accounting functions, at its El Dorado Hills, California
corporate offices.
CUSTOMER SERVICE
The Company is committed to achieving customer satisfaction and to
building a loyal customer base by providing a high level of knowledgeable,
attentive and personalized customer service. The Company believes that
educating consumers about the features and benefits of its product offerings
is a critical component of its success, and management considers its sales
associates' knowledge of the Company's customers and products to be essential
to its marketing approach and customer satisfaction.
To develop knowledgeable and responsive sales associates, the
Company has devoted significant resources to developing and implementing
employee development and incentive programs. All store employees receive
extensive training on merchandise features, benefits and technology, as well
as customer relations and selling skills. The training program focuses on
"six steps" to achieve sales and customer satisfaction: greeting the
customer; assessing his or her needs; exceeding customer expectations;
overcoming objections; suggestive selling; and closing the sale. In addition
to training from the store manager, each employee attends regional product
information seminars, receives in-store training through vendor presentations
and vendor-supplied videotapes, and is required to complete a formal, written
training program. Store managers are also required to complete a 12-week
training program, during which they are instructed in the technical aspects
of the merchandise, management skills and employee relations. To provide
managers with hands-on training, new store and district managers are
typically required to work alongside individuals in comparable positions for
two to three weeks before they are asked to perform their duties without
direct supervision. Managers also attend a minimum of three management
training meetings per year. Supplemental product information bulletins are
distributed frequently from the Company's corporate offices to educate store
managers and sales associates about new products as they are introduced. The
Company also employs an independent agency to send unidentified "mystery
shoppers" to Company stores, and to report on the service provided to these
shoppers by store personnel. The Company also monitors the level of customer
service on an ongoing basis through various initiatives, such as telephone
surveys.
STORE LOCATIONS
The Company considers its ability to obtain attractive,
high-traffic store locations to be a critical element of its business and a
key factor in the Company's future growth and profitability. In determining
new store locations, the Company considers regional and local economic
conditions and household income data, mall locations, site locations within
the mall, vacancy rates, sales per square foot, "anchor" tenant stores,
tenant mix, consumer traffic, competition and occupancy, construction and
other costs associated with opening a store. Site selection and lease
negotiation are supervised by the Company's Vice President-Real Estate and
senior management.
The Company operated 199 stores in 35 states as of December 25,
1999, as set forth in the following table:
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TRACK 'N TRAIL STORES
<TABLE>
<CAPTION>
CURRENT CURRENT
STATE STORES STATE STORES
- ----- ------ ----- ------
<S> <C> <S> <C>
Alabama..................... 1 Michigan.................... 10
Alaska ..................... 2 Minnesota .................. 4
Arkansas.................... 1 Missouri ................... 1
California.................. 25 North Carolina ............. 3
Colorado.................... 5 Nebraska ................... 1
Connecticut................. 4 Nevada...................... 1
Florida ................... 6 New Hampshire............... 3
Georgia .................... 5 New York.................... 8
Idaho....................... 1 Ohio........................ 4
Illinois.................... 9 Oregon...................... 4
Indiana..................... 5 Pennsylvania................ 3
Iowa ....................... 1 South Carolina ............. 2
Kentucky ................... 3 Tennessee................... 2
Louisiana .................. 1 Texas ...................... 7
Maine....................... 2 Virginia.................... 4
Maryland.................... 1 Washington.................. 7
Massachusetts............... 4 Wisconsin................... 4
OVERLAND TRADING STORES
<CAPTION>
CURRENT CURRENT
STATE STORES STATE STORES
- ----- ------ ----- ------
<S> <C> <S> <C>
California ................ 2 New Jersey.................. 4
Connecticut ................ 3 New York.................... 9
Florida .................... 3 Ohio........................ 5
Georgia .................... 2 Pennsylvania.............. 2
Kentucky ................... 1 Tennessee ................. 4
Massachusetts .............. 8 Virginia ................... 4
Michigan ................... 1
EAGLES NEST STORES
<CAPTION>
CURRENT CURRENT
STATE STORES STATE STORES
- ----- ------ ----- ------
<S> <C> <S> <C>
Colorado ................... 4 Nevada .................... 1
Michigan.................... 1 Virginia ................... 1
</TABLE>
In connection with the restructuring plan adopted in December 1999,
the Company expects to close approximately 42 stores in the first 120 days of
fiscal 2000. The Company leases all of its store space. Initial lease terms
of the Company's stores generally range from eight to ten years in duration
without renewal options, ten-year leases being the most common. The leases
generally provide for a fixed minimum rental plus a percentage of store sales
in excess of a specified amount.
MARKETING
The Company's policy is to price its merchandise competitively with
department stores and specialty retailers in the particular mall in which
each Company store is located. The Company is primarily a full-price
retailer, selling most merchandise at full retail prices. However, the
Company conducts promotions that generally revolve around themes such as
back-to-school, and holiday seasons. In addition, the Company promotes
individual items as needed to increase sales activity.
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The Company relies primarily on mall traffic and the visual appeal
of its stores to attract customers, and on the breadth of its product
offering and the quality of its customer service to retain them. In-store
promotions with point-of-purchase materials are also an important part of the
Company's marketing strategy. The Company also takes advantage of advertising
and promotional assistance from many of its suppliers, which takes the form
of cooperative advertising programs, point-of-purchase materials, product
training for employees and other programs. The Company spends very little on
advertising, primarily contributing to mall merchant association funds which
advertise both the mall and individual stores within the mall.
DISTRIBUTION
The Company believes that strong distribution support for its
stores is a critical element in its strategy to maintain a low cost operating
structure and to expand in the future. In order to support the needs of a
growing store base, the Company relocated its central distribution center in
fiscal 1998 to a larger facility located in West Sacramento, California,
approximately 30 miles from the previous location in El Dorado Hills,
California. The facility contains approximately 50,000 square feet of storage
space that the Company believes will provide distribution support for up to
500 stores.
The Company receives approximately 85% of its merchandise at its
central distribution center in West Sacramento, California. Other merchandise
is drop-shipped from vendors directly to individual stores. The Overland
Trading stores currently receive a higher proportion of drop-shipped
merchandise than the Track 'n Trail stores. Virtually all of the merchandise
for the Eagles Nest stores was drop-shipped.
The central distribution center is operated primarily as a
"cross-docking" facility rather than as a warehouse. The Company attempts to
retain minimal inventory at this facility, although it will occasionally
back-stock high-demand items that are expected to be in short supply and
inventory for peak seasonal needs. The central distribution center has
multi-access docks, enabling the Company to receive and ship simultaneously
and to pack separate trailers for shipments to different regions of the
country at the same time.
Upon receipt at the central distribution center, merchandise is
inspected, recorded in the Company's management information system, allocated
to stores by the system's automatic replenishment function, processed and
repackaged for distribution. Merchandise is typically shipped via common
carrier from the central distribution center to the various stores once a
week, or more often as needed during peak seasonal periods.
MANAGEMENT INFORMATION SYSTEMS
The Company has a computerized management information system that
includes a network of terminals at the corporate offices to support
management decision making, along with PC-based POS computers at the stores
that are connected via modem to the computers at the corporate offices. Each
store's POS system accumulates detailed sales transaction data that is polled
by the Company's main system nightly and reviewed by management each day. The
system's perpetual inventory feature enables the Company's buyers to review
and analyze daily the inventory levels at each individual store by
department, class and SKU in order to replenish fast-selling items on a
timely basis. The system also includes an automated replenishment system for
core products that orders replacement stock of such products based on factors
such as current sales trends or store inventory levels. The minimal inventory
that is maintained at the Company's central distribution center is also
managed through daily inventory management reports. In January 1999, the
Company upgraded the computer hardware at its corporate offices to
accommodate its current and presently anticipated growth.
COMPETITION
The business in which the Company is engaged is highly competitive.
Most of the items sold by the Company are sold by department stores, outdoor
and sporting goods stores, athletic footwear and apparel stores and
traditional shoe and apparel stores. Some of these stores are owned or
franchised by major suppliers of the Company. Many of the stores with which
the Company competes are units of large national and regional chains that
have substantially greater
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financial and other resources than the Company. To a lesser extent, the
Company competes with mail order and e-commerce retailers. In many cases, the
Company's stores are located in shopping malls in which one or more of its
competitors also has a store.
The Company believes that it has been able to compete favorably
with its competitors by operating attractive, well-stocked stores in high
retail traffic areas, offering competitive prices and providing knowledgeable
and courteous customer service. The Company seeks to provide competitive
pricing by effectively mixing high profile, brand name merchandise with
private label merchandise and opportunistic purchases of other brand name
merchandise, and by controlling both store and administrative expenses.
EMPLOYEES
As of December 25, 1999, the Company had approximately 1,100
full-time employees and 880 part-time employees, none of whom is represented
by a labor union. The number of part-time employees fluctuates depending on
seasonal needs. The Company considers its relationship with its employees to
be good and has not experienced any interruptions of operations due to labor
disagreements.
RISK FACTORS
THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS REPORT.
RISKS ASSOCIATED WITH EXPANSION
The Company's continued growth will depend largely upon the
Company's ability to open or acquire new stores in a timely manner and to
operate them profitably. The Company opened 18 stores in fiscal 1999 and 47
stores (including the five Eagles Nest stores acquired in August 1998) in
fiscal 1998. The Company plans on closing 42 marginal or unprofitable stores
and one store located in a temporary location in fiscal 2000 (including all
the Eagles Nest stores) and plans on scaling back store openings in 2000
until sustained comparable store gains are achieved. Thus, the Company
presently anticipates opening four stores in fiscal 2000. The success of the
Company's future expansion efforts will depend on many factors, including the
Company's ability to secure suitable store sites on satisfactory leasing
terms and to complete any necessary construction or refurbishment of these
sites, the hiring, training and retention of qualified managers and other
personnel and the successful integration of new stores into existing
operations. No assurance can be given that the Company will be able to expand
as planned, that new stores will provide a positive contribution to the
Company's operating results, or that the Company will be able to manage any
future growth successfully. Because the Company's business is highly
seasonal, any delays in store openings past peak selling periods could
significantly reduce the new stores' near-term contribution to total net
sales. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
RISKS ASSOCIATED WITH IMPLEMENTING RESTRUCTURING PLAN
During fiscal 1999, the Company adopted a restructuring plan to
close 42 marginal or unprofitable stores (including all seven Eagles Nest
stores) and a regional office facility. However, the Company's ability to
close stores as scheduled is subject to a number of factors, including its
ability to negotiate favorable lease termination provisions, dispose of
inventory, and handle employee matters on a timely basis. The Company's
inability to implement planned closures on schedule or at the expected costs
could have an adverse effect on its operating results. Additionally, the
closing of the 42 stores could have an adverse effect on the Company's
ability to obtain new store locations in the future. In addition, the Company
continually evaluates store profitability, and there can be no assurance that
the number of future store closings will not change.
NASDAQ STOCK MARKET LISTING
9
<PAGE>
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 March 20, 2000, the Company had nine registered
and active market-makers, and based on the closing bid price of the Company's
common stock of $1.125, the aggregate market value of the 3,024,282 shares
held by non-affiliates was approximately $3,402,317. In November 1999, the
Nasdaq Stock Market notified the Company that its common stock would be
delisted effective February 17, 2000, if the Company's common stock did not
achieve compliance with the maintenance criteria established for Nasdaq
National Market securities. The Company appealed the Nasdaq Stock Market's
determination and a hearing was held on March 9, 2000. The Company expects to
receive the results of the hearing on or about March 28, 2000, at which time
the Company's common stock could be delisted 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 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.
DEPENDENCE ON MAJOR SUPPLIERS
The Company's business depends to a significant degree upon its
ability to obtain timely and plentiful shipments of brand name merchandise at
competitive prices. In fiscal 1999, the Company's ten largest suppliers
accounted for approximately 66.6% of its net sales. The extent to which the
Company is dependent upon any particular supplier varies from season to
season. The Company does not have any long-term supply agreements or other
contractual assurances of continued supply, pricing or access to new
products. The deterioration of the Company's relationship with any key vendor
could result in delivery delays, merchandise shortages or less favorable
trade terms than the Company currently enjoys. The Company has occasionally
received allocations of merchandise from vendors, particularly merchandise in
high demand by many footwear retailers, that are insufficient to meet the
Company's desired inventory levels of such merchandise. There can be no
assurance that the Company will receive its desired levels of such
merchandise in the future. The Company's business is also affected by its
suppliers' ability to manufacture and deliver merchandise in a timely and
cost-effective manner, which depends upon a number of factors beyond the
Company's control, including fluctuations in currency exchange rates, trade
barriers, and economic, labor and political conditions in the countries in
which the Company's vendors have manufacturing operations.
UNCERTAINTIES IN MERCHANDISE TRENDS
The Company's success depends in part on its ability to anticipate
and respond to changing merchandise trends and consumer demands in a timely
manner. Any failure by the Company to identify and respond to emerging trends
could adversely affect consumer acceptance of the merchandise in the
Company's stores, which in turn could adversely affect the Company's
business, financial condition and results of operations. Failure to
anticipate and respond to changing consumer preferences could lead to, among
other things, shortages of styles in high demand, lower net sales, additional
markdowns and lower margins, which would have a material adverse effect on
the Company's results of operations and financial condition.
DEPENDENCE ON MALL TRAFFIC
All but two of the Company's stores are located in regional or
super-regional shopping malls. The Company's net sales are derived, in large
part, from the volume of traffic in these malls, particularly because the
Company does little independent advertising to attract customers. The Company
therefore depends upon the ability of mall "anchor" tenants and other mall
attractions to generate consumer traffic in the vicinity of the Company's
stores, as well as the continuing popularity of malls as shopping
destinations. Mall traffic and the Company's net sales and profitability may
be adversely affected by "anchor" tenants or declines in the desirability of
the shopping environment in a particular mall. As with
10
<PAGE>
other specialty footwear retailers, the Company's business is also subject to
general economic conditions, including the possibility of a nationwide
recession, consumer confidence and the level of consumer spending.
SEASONALITY; WEATHER
The Company's business is highly seasonal. The Company typically
incurs losses in the first three months of each fiscal year and recorded a
larger loss in the first quarter of fiscal 1999 than in the first quarter of
fiscal 1998, due to the fixed operating costs associated with a larger store
base during a period of historically low sales. The Company derives a
substantial percentage of its annual net sales and operating profitability
during the "back-to-school" and year-end holiday periods. In anticipation of
increased net sales activity during these periods, the Company incurs
significant additional expenses, including the hiring of a substantial number
of temporary employees. A slowdown in sales during these peak periods will
tend to have a particularly pronounced effect on the Company's results of
operations. In addition, as a result of this seasonality, the Company's
working capital needs are greatest in October and early November, and late in
the first quarter of each fiscal year. The Company's net sales are also
affected by weather patterns, particularly during the Spring and Fall selling
seasons. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
COMPETITION
The retail footwear business is intensely competitive. Most of the
items sold by the Company are sold by department stores, outdoor and sporting
goods stores, athletic footwear and apparel stores and traditional shoe and
apparel stores. Some of these stores are owned or franchised by the Company's
footwear suppliers. Many of the stores with which the Company competes are
units of large national or regional chains that have substantially greater
financial and other resources than the Company. In many cases, the Company's
stores are located in shopping malls in which one or more of its competitors
also has a presence. To a lesser extent, the Company also competes with mail
order and e-commerce retailers. A significant change in price, level of
promotion or other strategies by the Company's competitors could have a
material adverse effect on the Company's results of operations. See
"Business--Competition" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNCERTAINTIES ASSOCIATED WITH PRIVATE LABEL SOURCING
The Company has no long-term contracts with its private label
manufacturing sources and competes with other companies for production
facilities. In addition, the Company's private label products may experience
higher mark-downs than branded products, because they require longer lead
times and must be ordered in larger volumes, and because the Company is
typically unable to return private label product to its manufacturers. There
can be no assurance that the foregoing factors will not disrupt the Company's
supply of private label goods or otherwise adversely impact the Company's
operations in the future. See "Business--Purchasing and Sourcing."
INTERNATIONAL PURCHASING RISKS
Substantially all of the Company's private label manufacturers are
located outside of the United States. Accordingly, the Company is subject to
the risks typically associated with an import business, including unexpected
changes in foreign regulatory requirements, disruptions or delays in
shipments and the risks associated with United States import laws and
regulations, including quotas, duties, taxes, tariffs and other restrictions.
The Company has not, to date, been materially affected by any such risk, but
there can be no assurance that such risks will not adversely impact the
Company's operations in the future. See "Business--Purchasing and Sourcing."
POTENTIAL FOREIGN CURRENCY FLUCTUATIONS
Because a portion of the Company's purchases of private label goods
are denominated in foreign currencies, the Company's operating results are
subject to fluctuations in the exchange rates between such currencies and the
U.S. dollar. The Company has not typically engaged in hedging transactions
designed to manage currency fluctuation risks.
11
<PAGE>
There can be no assurance that exchange rate fluctuations will not have a
material adverse effect on the Company's future operating results or
financial condition. See "Business--Purchasing and Sourcing."
RISKS ASSOCIATED WITH YEAR 2000
The Company did not experience any significant operating problems
associated with the transition of its information systems to the Year 2000.
However, although it is past January 1, 2000, no assurance can be given that
the Company and its suppliers and customers have not been affected in a
manner that is not yet apparent. As a result, the Company expects to continue
to monitor its Year 2000 compliance and the compliance of its suppliers and
customers.
RISKS ASSOCIATED WITH ACQUISITIONS
The Company's business strategy includes expanding when appropriate
through acquisitions, as well as through new store openings. No assurance can
be given that any acquisition by the Company will occur, or that any such
acquisition will enhance the Company's results of operations. Any acquisition
will involve numerous risks, including difficulties in the assimilation of
the acquired company's operations, the diversion of management's attention,
uncertainties associated with operating stores in new markets and the
potential loss of the acquired company's key employees. Acquisitions may also
result in potentially dilutive issuances of equity securities, the incurrence
of debt and contingent liabilities, potential reductions in income due to
losses incurred by the acquired business and increased amortization expense
related to intangible assets acquired, any of which could materially
adversely affect the Company's financial condition and results of operations.
CONTROL BY CERTAIN STOCKHOLDERS
David L. Suechting, Jr., the Company's Chairman of the Board,
President and Chief Executive Officer, Barbara Suechting, a director of the
Company, and Deborah Landgrebe (the "Pre-Offering Stockholders") in the
aggregate own beneficially approximately 57% of the Company's outstanding
shares of Common Stock. As a result, the Pre-Offering Stockholders, acting
together, are able to control all matters requiring approval by the
stockholders of the Company, including the election of the Board of Directors.
FUTURE CAPITAL NEEDS
The Company expects that anticipated cash flow from operations and
anticipated borrowings under its credit facility will satisfy its cash
requirements through fiscal 2000. To the extent that the foregoing cash
resources are insufficient to fund the Company's activities, including new
store openings planned for 2000, additional funds will be required. There can
be no assurance that additional financing will be available on reasonable
terms or at all. Failure to obtain such financing could delay or prevent the
Company's planned expansion, which could adversely affect the Company's
business, financial condition and operating results. In addition, if
additional capital is raised through the sale of additional equity or
convertible securities, dilution to the Company's stockholders could occur.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on the
efforts and abilities of its executive officers. The loss of the services of
certain of these individuals could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company does not maintain any key man life insurance. The Company's recent
growth has resulted in an increase in responsibilities for management
personnel. The Company's ability to manage growth effectively will require it
to continue to train, motivate and manage its employees, and to attract,
motivate and retain additional skilled managerial and merchandising
personnel. Competition for such personnel
12
<PAGE>
is intense, and there can be no assurance that the Company will be successful
in attracting, assimilating and retaining the personnel it requires to grow
and operate profitably.
INTELLECTUAL PROPERTY
Prior to being acquired by Track 'n Trail, Overland entered into an
agreement with a third party for the exclusive use of the Overland Trading
Company trademark in nine Midwestern states. The agreement prohibits the
Company from opening Overland Trading stores in those states until the
agreement is terminated. There can be no assurance that the activities of the
third party will not detract from the Company's efforts to maintain its
Overland Trading stores as a distinct retail concept, particularly in the
Midwest, or from the Company's reputation.
ITEM 2. PROPERTIES
The Company has a lease on a single 50,240 square foot distribution
center in West Sacramento, California expiring on October 31, 2008. The
Company believes that its central distribution facility will support as many
as 500 stores, which the Company believes is sufficient to continue to
service existing stores and to accommodate anticipated growth. In 1999, the
Company extended its current lease on its 16,000 square foot corporate office
facility located in El Dorado Hills, California for an additional 10 years.
This facility's lease expires on March 31, 2009. The Company also maintains a
5-year lease on a 2,681 square foot office facility in Littleton, Colorado to
support the sales operations and merchandising management team for the Eagles
Nest stores. This lease expires on October 31, 2001. As part of the
restructuring plan, the Company vacated this facility in January 2000 and is
currently negotiating lease exit terms with the landlord.
ITEM 3. LEGAL PROCEEDINGS
Although the Company is subject to various claims and legal actions
that arise in the ordinary course of its business, the Company is not
presently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's initial public offering of its common stock (the
"Offering") occurred in October 1997. The Company's common stock is listed on
the Nasdaq National Market under the symbol "TKTL". The following table sets
forth, for the quarterly periods indicated, the high and low prices per share
of common stock as reported by Nasdaq:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998
----------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter $ 3.25 $ 1.75 $9.00 $ 4.75
2nd Quarter 2.63 1.75 9.13 4.38
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
3rd Quarter 4.00 1.63 5.44 3.50
4th Quarter 2.00 0.94 3.63 1.88
</TABLE>
As of February 22, 2000 there were 72 holders of record of the
Company's common stock.
The Company has never paid or declared any cash dividends on its
common stock or other securities and does not anticipate paying cash dividends
in the foreseeable future. In addition, the Company's current line of credit
prohibits the payment of cash dividends on its capital stock without the
bank's consent.
ITEM 6. SELECTED FINANCIAL DATA
The balance sheet and statement of operations data as of December
25, 1999 and December 26, 1998, and for each of the three fiscal years in the
period ended December 25, 1999, are derived from audited consolidated
financial statements of the Company included herein and should be read in
conjunction with such financial statements. The balance sheet and statement of
operations data as of December 27, 1997, December 28, 1996 and December 30,
1995, and for each of the two fiscal years in the period ended December 28,
1996 are derived from audited consolidated financial statements of the Company
which are not included herein. The information for all periods set forth below
under the captions "Pro Forma Statement of Operations Data" and "Selected
Store Operating Data" is derived from unaudited data. The data set forth below
are qualified by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes included elsewhere in
this report.
<TABLE>
<CAPTION>
Fiscal Year Ended
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands, except per share, per square foot and number of stores data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales........................................... $ 114,758 $ 99,851 $ 91,834 $ 66,233 $ 50,691
Cost of sales....................................... 64,896 53,615 47,677 34,062 26,192
---------- --------- --------- --------- ---------
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Gross profit ....................................... 49,862 46,236 44,157 32,171 24,499
---------- --------- --------- --------- ---------
Selling and marketing expense....................... 46,034 37,186 30,780 21,060 16,852
Administrative and distribution..................... 9,741 7,741 6,840 5,508 4,826
Restructuring and impairment........................ 8,994 122 -- -- --
---------- --------- --------- --------- ---------
Operating income (loss)............................. (14,907) 1,187 6,537 5,603 2,821
Interest expense.................................... 1,226 369 1,260 670 435
Other expense (income).............................. 174 51 (21) (24) (41)
---------- --------- --------- --------- ---------
Income (loss) before income taxes and
minority interest............................... (16,307) 767 5,298 4,957 2,427
Income tax provision (benefit)...................... (5,187) 371 118 488 41
Minority interest .................................. -- -- -- 105 --
---------- --------- --------- --------- ---------
Net income (loss) .................................. $ (11,120) $ 396 $ 5,180 $ 4,364 $ 2,386
========== ========= ========= ========= =========
Historical earnings(loss) per share (1):
Basic............................................ $ (1.62) $ .06 $ 1.10 $ 1.06 $ 0.58
========== ========= ========= ========= =========
Diluted.......................................... $ (1.62) $ .06 $ 1.03 $ 1.04 $ 0.58
========== ========= ========= ========= =========
Weighted average shares outstanding:
Basic............................................ 6,881 6,847 4,700 4,108 4,108
=========== ========= ======== ========= =========
Diluted.......................................... 6,881 7,154 5,027 4,202 4,108
=========== ========= ======== ========= =========
PRO FORMA STATEMENT OF OPERATIONS DATA (2):
Historical income before income taxes
and minority interest.......................... $ 5,298 $ 4,957 $ 2,427
Pro forma income tax expense (2) ................... 2,119 1,983 971
Minority interest................................... -- 105 --
-------- --------- ---------
Pro forma net income................................ $ 3,179 $ 2,869 $ 1,456
======== ========= =========
Pro forma earnings per share (1):
Basic............................................. $ 0.68 $ 0.70
======== =========
Diluted........................................... $ 0.58 $ 0.57
======== =========
Weighted average shares outstanding:
Basic............................................ 4,700 4,108
======== =========
Diluted.......................................... 5,448 5,030
======== =========
SELECTED STORE OPERATING DATA:
Store contribution(3)............................... $ 3,828 $ 9,050 $ 13,377 $ 11,111 $ 7,647
Number of stores:
Opened or acquired during period .............. 18 47(4) 22 51(5) 12
Closed during period .......................... 11 5 0 5 4
Open at end of period.......................... 199(6) 192 150 128 82
Total weighted average square feet(7).............. 377,006 306,737 236,095 168,966 144,612
Weighted average net sales per square foot.......... $ 304 $ 326 $ 389 $ 392 $ 351
Average square feet per store....................... 2,021 1,937 1,780 1,744 1,873
Increase(decrease) in comparable stores net sales(8) 2.5% (9.1)% 0.6% 3.1% (1.4)%
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 25, DECEMBER 26, DECEMBER 27, DECEMBER 28, DECEMBER 30,
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $ 7,122 $ 25,116 $ 21,896 $ 9,430 $ 6,710
Total assets............................... 60,185 61,279 44,133 31,858 17,050
Total debt................................. 15,539 11,510 236 10,765 2,734
Stockholders' equity....................... 21,550 32,538 32,082 10,646 7,648
</TABLE>
(1) Shares outstanding include approximately 307,000, 327,000 and 94,000 shares
issuable upon exercise of stock options outstanding at December 26, 1998,
December 27, 1997 and December 28, 1996, respectively, after applying the
treasury stock method. In applying the treasury stock method for
determining the dilution applicable to stock options outstanding, the
15
<PAGE>
incremental shares assumed issued (excess of shares assumed issued over the
number of shares assumed purchased) was determined using the sum of
exercise proceeds, future compensation and the tax benefit to the Company
upon exercise of the options as the assumed proceeds that would have been
used to purchase shares at the average value during the period. Average
market value was based on estimated fair values for periods prior to the
Company's initial public offering in October 1997 (the "Offering") and
market prices thereafter. Distribution shares of approximately 421,000
included in pro forma diluted earnings per share for fiscal 1997 represents
the number of shares of Common Stock sold in the Offering, the proceeds of
which were necessary to pay the excess of S corporation distributions paid
or declared during the twelve month period preceding the Offering over
earnings during the twelve month period preceding the Offering.
Distribution shares of approximately 828,000 included in pro forma diluted
earnings per share for fiscal 1996 represent the number of shares of Common
Stock sold in the Offering, the proceeds of which were necessary to pay the
excess of S corporation distributions paid or declared during fiscal 1996
through the Offering over fiscal 1996 earnings. All warrants outstanding
and certain options with exercise prices in excess of market value were not
dilutive and, accordingly, were not included.
(2) Includes pro forma provision for income taxes using an assumed combined
federal and state tax rate of 40%, which the Company believes approximates
the statutory federal and state income tax rates that would have been
applied had Track 'n Trail-California been taxed as a C corporation.
Commencing June 28, 1992 and until the Reorganization, Track 'n
Trail-California operated as an S corporation and was not subject to
federal and certain state income taxes. The Company's earnings during such
periods have been taxed directly to the Company's stockholders, rather than
to the Company. In connection with the Reorganization on October 7, 1997,
the S corporation election of Track 'n Trail-California and the Company,
respectively, was terminated under circumstances under which income
reported by the Company and Track 'n Trail-California for their respective
terminated S corporation taxable years was determined utilizing a "closing
of the books" method.
(3) Store contribution refers to gross profit after deducting selling and
marketing expenses. Store contribution is presented to provide additional
information about the Company and is commonly used as a performance
measurement by retail companies. Store contribution should not be
considered in isolation or as a substitute for operating income, cash flow
from operating activities and other income or cash flow data prepared in
accordance with generally accepted accounting principles, or as a measure
of the Company's profitability or liquidity.
(4) On August 26, 1998, the Company acquired five Eagles Nest stores.
(5) On October 25, 1996, the Company acquired 33 Overland Trading stores.
(6) Stores open at the end of fiscal 1999 consist of 144 Track 'n Trail stores,
48 Overland Trading stores and seven Eagles Nest stores.
(7) Weighted to reflect store openings and closings during each period.
(8) Comparable store net sales include only those stores that were open both
for the full fiscal period and for the full prior fiscal period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. In
addition to historical information, this Management's Discussion and Analysis
includes certain forward-looking statements regarding events and financial
trends which may affect the Company's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause the Company's actual results and financial position to differ
materially. Factors that could cause or contribute to such differences include
those discussed below. These and other risks and uncertainties related to the
business are described in detail in this report. See "Business--Risk Factors."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. The following
discussion should be read in conjunction with the financial statements and
notes thereto of the Company included elsewhere in this report.
The Company is one of the largest full-service specialty retailers
in the United States focusing on a broad range of high-quality branded casual,
outdoor and adventure footwear. On August 26, 1998, the Company acquired the
16
<PAGE>
outstanding common stock of Nevin's Eagles Nest, Inc. ("Eagles Nest") for $1.5
million in cash. Eagles Nest is a mall-based retailer primarily of premium
branded outdoor apparel and operates seven stores in four states. As is common
in the apparel industry, Eagles Nest margins are lower than those that the
Company currently experiences in its footwear business.
During fiscal 1999, the Company adopted a formal restructuring plan
which includes provisions to close of all the Eagles Nest locations, 31 Track
'n Trail stores and four Overland Trading stores (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Restructuring
Expense/Asset Impairment Charge"). As of December 25, 1999, the Company
operated 144 Track 'n Trail stores, 48 Overland Trading stores and seven
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 increased 2.5% in fiscal
1999, excluding the acquired Eagles Nest stores. Had the Eagles Nest stores
acquired by the Company on August 26, 1998 been included in the Company's
comparable store net sales comparison since the acquisition, comparable store
net sales would have increased by 2.1% in fiscal 1999.
Track 'n Trail-California was treated as an S corporation for
federal and certain state income tax purposes from June 28, 1992, until its S
corporation status terminated and it became a wholly owned subsidiary of the
Company as a result of the Reorganization on October 7, 1997 (the "Termination
Date"). As a result, the earnings of Track 'n Trail-California during such
period were taxed, with certain exceptions, directly to the stockholders of
Track 'n Trail-California rather than to Track 'n Trail-California.
Thereafter, the Company has been subject to state and federal income taxes as
a C corporation, and all references to net income for periods prior to fiscal
1998 in this "Management's Discussion and Analysis of Financial Condition and
Results of Operations" are presented as if Track 'n Trail-California, prior to
the Reorganization, had been subject to income taxes at a combined state and
federal income tax rate of 40%.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of net sales for the periods indicated:
<TABLE>
<CAPTION>
Fiscal
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net sales ........................... 100.0% 100.0% 100.0%
Cost of sales........................ 56.6 53.7 51.9
-------- -------- -------
Gross profit......................... 43.4 46.3 48.1
Selling and marketing expenses....... 40.1 37.2 33.5
-------- -------- -------
Store contribution (1) .............. 3.3 9.1 14.6
Administrative and distribution
expenses ....................... 8.5 7.8 7.5
Restructuring and impairment......... 7.8 0.1 --
-------- -------- -------
Operating income(loss) ............. (13.0) 1.2 7.1
Interest expense..................... 1.1 0.4 1.4
Other (income) expense .............. 0.1 0.0 (0.1)
-------- -------- -------
Income (loss) before income taxes ... (14.2) 0.8 5.8
Income tax provision (benefit) (2) .. (4.5) 0.4 2.3
-------- -------- -------
Net income(loss) (2) ................ 0.4% 3.5%
======== ======== =======
</TABLE>
(1) Store contribution refers to gross profit after deducting selling and
marketing expenses. Store contribution is presented to provide additional
information about the Company and is commonly used as a performance
measurement by retail companies. Store contribution should not be
considered in isolation or as a substitute for operating income, cash flow
from operating activities and other income or cash flow data prepared in
accordance with generally accepted accounting principles, or as a measure
of the Company's profitability or liquidity.
(2) For 1997, reflects an assumed combined federal and state tax rate of 40%,
which the Company believes approximates the statutory federal and state
income tax rates that would have been applied had Track 'n Trail-California
been taxed as a C corporation. From June 28, 1992, through the Termination
Date, Track 'n Trail-California operated as an S corporation and was not
subject to federal and certain state income taxes.
RESTRUCTURING EXPENSE/ASSET IMPAIRMENT CHARGE
17
<PAGE>
During fiscal 1999, declining operating results of certain of the
Company's stores led to the adoption of a restructuring plan. Under the
restructuring plan, the Company intends to close stores during the first 120
days of fiscal 2000 consisting of 31 Track 'n Trail stores, four Overland
Trading stores and all seven Eagles Nest stores along with the regional office
in Colorado. The decision to close the stores and the regional office was
based on store performance combined with market economic factors and projected
future cash flows. During fiscal 1999, in connection with the restructuring
plan, the Company recorded charges to operations for restructuring costs,
asset impairments and inventory reserves of $12.8 million. The charge included
$9.0 million of restructuring costs and asset impairments, including (1) a
write-down of leasehold improvements of $2.7 million, (2) lease termination
and other related costs of $4.4 million, (3) impairment of goodwill of $1.8
million, representing the unamortized goodwill in connection with the
Company's acquisition of Eagles Nest and (4) accrual of employee severance
payments of $82,000 to 12 administrative employees. Approximately 291 store
employees were terminated without severance. Additionally, the Company
recorded charges of $3.8 million in cost of sales to reduce inventory to its
net realizable value in the 42 stores scheduled for closure. The net cash
impact of this plan in fiscal 2000 is expected to be minimal, as cash
restructuring costs will likely be offset by inventory reduction and operating
loss reduction associated with the store closings.
The Company commenced the restructure plan in late December 1999 and
anticipates to substantially complete the plan by the second quarter of fiscal
2000. Accruals for restructuring costs and asset impairments were made in
December 1999 when the restructuring plan was approved by the Company's Board
of Directors. See Note 4 of Notes to Consoldiated Financial Statements for
further information regarding the Company's restructuring and impairment
charge.
In addition to the restructure and asset impairment charges incurred
during fiscal 1999, the Company incurred $493,000 in severance and related
expenses in connection with management changes.
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES
Net sales increased to $114.8 million in fiscal 1999, an increase of
$14.9 million, or 14.9%, over fiscal 1998 net sales of $99.9 million. The 18
stores opened by the Company in fiscal 1999 generated $3.2 million in net
sales. The 37 Track 'n Trail and Overland Trading stores (net of closures)
opened in fiscal 1998 were responsible for $10.3 million more in net sales in
fiscal 1999 than in fiscal 1998 and the five Eagles Nest stores acquired in
fiscal 1998 contributed $3.2 million more in net sales in fiscal 1999 than in
fiscal 1998. In addition, comparable store net sales increased $2.0 million,
or 2.5% for fiscal 1999. These additions to net sales were partially offset by
approximately $3.3 million, relative to fiscal 1998, in net sales attributable
to the closing of 11 stores during fiscal 1999 and a $454,000 decrease,
relative to fiscal 1998, in net sales attributable to the remodeling of two
stores in fiscal 1999. 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 1998 as a result of competitor store closures.
GROSS PROFIT
Gross profit was $49.9 million for fiscal 1999, an increase of $3.6
million, or 7.8%, over the gross profit for fiscal 1998. The increase in gross
profit is due to a reduction in markdowns taken in 1999 from markdowns taken
in 1998 in response to competitor discounting. This increase was offset by a
$3.8 million decrease due to the writedown of the inventory in the 42 stores
scheduled for closure in fiscal 2000 under the restructuring plan to its net
realizable value. Gross profit as a percentage of net sales decreased to 43.4%
for fiscal 1999 from 46.3% in fiscal 1998. The decrease in gross profit as a
percentage of sales is primarily attributable to the Eagles Nest stores, which
generally carry lower margin merchandise, and the writedown of the inventory
in the 42 stores scheduled for closure to its net realizable value. Excluding
these two factors, gross profit as a percentage of sales would have been 47.6%
in fiscal 1999, an increase of 1.3% over the gross profit of fiscal 1999.
SELLING AND MARKETING EXPENSES
18
<PAGE>
Selling and marketing expenses were $46.0 million for fiscal 1999,
an increase of $8.8 million, or 23.8%, over the $37.2 million in selling and
marketing expenses for fiscal 1998. Approximately $2.6 million, or 29.6%, of
this increase is attributable to the Eagles Nest stores. The remaining
increase is primarily attributable to operating costs related to the 37 Track
'n Trail and Overland Trading Co. stores (net closures) opened in fiscal 1998
that were in operations for all of fiscal 1999 and the five additional Track
'n Trail and Overland Trading Co. stores (net closures) opened in fiscal 1999.
As a percentage of net sales, selling and marketing expenses increased to
40.1% in fiscal 1999 from 37.2% in fiscal 1998, 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 assimilation of
the Eagles Nest store operations.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $9.7 million for
fiscal 1999, an increase of $2.0 million, or 25.8%, over $7.7 million in
administrative and distribution expenses for fiscal 1998. Approximately
$480,000 of the increase in administrative and distribution expenses is
attributable to the Eagles Nest acquisition in August 1998, and $493,000 of
the increase is attributable to severance and related expenses associated with
changes in management. The remaining increase is primarily attributable to the
increases in personnel and related expenses associated with the Company's
expansion. As a percentage of net sales, administrative and distribution
expenses increased to 8.5% in fiscal 1999 from 7.8% in fiscal 1998, primarily
as a result of costs associated with changes in management.
INTEREST EXPENSE
Interest expense increased to $1.2 million, or 1.1% of net sales,
for fiscal 1999, from $369,000, or 0.4% of net sales in fiscal 1998. Interest
expense attributable to debt incurred in connection with the Eagles Nest
acquisition was $399,000, or 32.6% of total interest expense for fiscal 1999.
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.
INCOME TAX PROVISION (BENEFIT)
The Company's effective tax rate for fiscal 1999 and 1998 was 31.8%
and 48.4%, respectively. The variation in the effective rate for the tax
benefit in fiscal 1999 and the tax provision in fiscal 1998 is primarily
attributable to the effect of nondeductible goodwill and other permanent
differences and the recording of a valuation allowance of $500,000 against
state deferred tax assets in fiscal 1999.
NET LOSS
The Company incurred a net loss of $11.1 million in fiscal 1999
compared to recording a net income of $396,000 in fiscal 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES
Net sales increased to $99.9 million in fiscal 1998, an increase of
$8.0 million, or 8.7%, over fiscal 1997 net sales. The 42 stores opened by the
Company in fiscal 1998 generated $8.0 million in net sales. In addition, the
20 stores (net of closures) opened in fiscal 1997 were responsible for $5.9
million more in net sales in fiscal 1998 than in fiscal 1997 and, the five
Eagles Nest stores acquired in fiscal 1998 contributed $2.9 million in fiscal
1998. These additions to net sales were partially offset by a decrease in
comparable store net sales of $7.7 million, or 9.1%, for fiscal 1998, a
$378,000 decrease, relative to fiscal 1997, in net sales attributable to the
closing of five stores during fiscal 1998, and a $773,000 decrease, relative
to fiscal 1997, in net sales attributable to the relocation of three stores
and the remodeling of one store in fiscal 1998. The decrease in comparable
store sales is primarily due to the disruptions caused by unseasonable weather
conditions consisting of a wet and cold spring associated with El Nino and a
warm fall season. In addition, heavy discounting by competitors (related, in
part, to competitor store closures) put pressure on both the customer stream
and prices.
19
<PAGE>
GROSS PROFIT
Gross profit was $46.2 million for fiscal 1998, an increase of $2.1
million, or 4.7%, over the gross profit for fiscal 1997. Approximately $1.2
million of the increase in gross profit is attributable to the Eagles Nest
stores acquired in 1998. Gross profit as a percentage of net sales decreased
to 46.3% for fiscal 1998 from 48.1% in fiscal 1997. This decrease was
primarily the result of markdowns taken to liquidate winter goods in the first
quarter and in response to competitor discounting in the third and fourth
quarters.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $37.2 million for fiscal 1998,
an increase of $6.4 million, or 20.8%, over the $30.8 million in selling and
marketing expenses for fiscal 1997. Approximately $664,000, or 10.4%, of this
increase is attributable to the Eagles Nest stores acquired in 1998. The
remaining increase is primarily attributable to operating costs related to
operating 42 additional stores at December 26, 1998 versus December 27, 1997.
As a percentage of net sales, selling and marketing expenses increased to
37.2% in fiscal 1998 from 33.5% in fiscal 1997, primarily as a result of
operating a larger store base during a period in which the Company experienced
declining comparable store sales and opened new stores which have a lower
initial sales base.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $7.7 million for
fiscal 1998, an increase of $901,000, or 13.2%, over $6.8 million in
administrative and distribution expenses for fiscal 1997. This increase is
primarily attributable to the increases in personnel and related expenses
associated with the Company's expansion and becoming a public company.
Approximately $201,000 of the increase in administrative and distribution
expenses is attributable to the Eagles Nest acquisition in August 1998. As a
percentage of net sales, administrative and distribution expenses increased to
7.8% in fiscal 1998 from 7.5% in fiscal 1997, predominately as a result of the
decrease in comparable store sales.
INTEREST EXPENSE
Interest expense decreased to $369,000, or 0.4% of net sales, for
fiscal 1998, from $1.3 million, or 1.4% of net sales, in fiscal 1997. This
decrease is primarily attributable to repayment of debt incurred in connection
with the acquisition of Overland and reduction of the outstanding principal
balance of the Company's credit facility from the proceeds from the Offering.
Interest expense attributable to debt incurred in connection with the Eagles
Nest acquisition was $88,000, or 23.9% of total interest expense for fiscal
1998.
NET INCOME
The Company's net income for fiscal 1998 was $396,000, a decrease of
$2.8 million, or 87.5 %, from $3.2 million in fiscal 1997. Approximately
$107,000 of net income for fiscal 1998 is attributable to the Eagles Nest
acquisition in August 1998. The decrease in net income of $2.9 million
(excluding Eagles Nest) is primarily attributable to fixed operating costs
associated with a larger store base during a period in which the Company
experienced declining comparable store sales and the start up costs associated
with a larger base of new stores in fiscal 1998.
QUARTERLY RESULTS OF OPERATIONS
The Company typically incurs losses in the first quarter, and derives
a substantial percentage of its annual net sales and operating profitability
during the "back-to-school" and year-end holiday periods. The table below sets
forth quarterly operating data of the Company, including such data as a
percentage of net sales for fiscal 1999 and fiscal 1998. This quarterly
information is unaudited, but in management's opinion reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the periods presented when read in
conjunction with the audited consolidated financial statements of the Company
and notes thereto. The operating results for any quarter are not necessarily
indicative of results for any future period.
20
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
------------------------------------------- ------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- --------- --------- --------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................... $23,324 $ 28,272 $ 29,671 $ 33,491 $ 18,908 $ 22,311 $ 25,662 $ 32,970
Cost of sales........................ 12,621 14,529 15,906 21,840 10,065 11,385 13,927 18,238
-------- --------- --------- ---------- ---------- -------- --------- --------
Gross profit......................... 10,703 13,743 13,765 11,651 8,843 10,926 11,735 14,732
Selling and marketing expenses....... 10,861 11,009 11,709 12,455 8,239 8,523 9,511 10,913
-------- --------- --------- ---------- ---------- -------- --------- ---------
Store contribution(1)................ (158) 2,734 2,056 (804) 604 2,403 2,224 3,819
Administrative and distribution
expenses........................ 2,405 2,299 2,090 2,947 2,007 1,908 1,945 1,881
Restructuring and impairment......... - - - 8,994 - - - 122
--------- --------- --------- ---------- ---------- -------- --------- ---------
Operating income (loss).............. $ (2,563) $ 435 $ (34) $ (12,745) $ (1,403) $ 495 $ 279 $ 1,816
Interest expense..................... 248 310 317 351 5 46 89 229
Other expense (income)............... 4 47 66 57 5 4 29 13
--------- --------- --------- ---------- ---------- -------- --------- ---------
Income (loss) before income taxes ... $ (2,815) $ 78 $ (417) $ (13,153) $ (1,413) $ 445 $ 161 $ 1,574
Income tax provision (benefit)....... (1,224) 33 92 (4,088) (565) 178 64 694
--------- --------- --------- ---------- ---------- -------- --------- ---------
Net income (loss).................... (1,591) 45 (509) (9,065) (848) 267 97 880
========= ========= ========= ========== ========== ======== ========= =========
Earnings (loss) per share:
Basic........................... $ (0.23) $ 0.01 $ (0.07) $ (1.31) $ (0.12) $ 0.04 $ 0.01 $ 0.13
========= ========= ========= ========== ========== ======== ========= =========
Diluted......................... $ (0.23) $ 0.01 $ (0.07) $ (1.31) $ (0.12) $ 0.04 $ 0.01 $ 0.12
========= ========= ========= ========== ========== ======== ========= =========
Weighted average shares outstanding:
Basic........................... 6,864 6,866 6,889 6,903 6,842 6,843 6,851 6,852
========= ========= ========= ========== ========== ======== ========= =========
Diluted......................... 6,864 7,091 6,889 6,903 6,842 7,256 7,070 7,074
========= ========= ========= ========== ========== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
As a percentage of net sales
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 54.1 51.4 53.6 65.2 53.2 51.0 54.3 55.3
-------- -------- -------- -------- ---------- -------- -------- --------
Gross profit......................... 45.9 48.6 46.4 34.8 46.8 49.0 45.7 44.7
Selling and marketing expenses....... 46.6 39.0 39.5 37.2 43.6 38.2 37.0 33.1
-------- -------- -------- -------- ---------- -------- -------- --------
Store contribution(1)................ (0.7) 9.6 6.9 (2.4) 3.2 10.8 8.7 11.6
Administrative and distribution
expenses........................ 10.3 8.1 7.0 8.8 10.6 8.6 7.6 5.7
Restructuring and impairment......... 0.0 0.0 0.0 26.9 0.0 0.0 0.0 0.4
--------- -------- -------- -------- ---------- -------- -------- --------
Operating income (loss).............. (11.0) 1.5 (0.1) (38.1) (7.4) 2.2 1.1 5.5
Interest expense..................... 1.1 1.1 1.1 1.0 0.1 0.2 0.4 0.7
Other expense (income)............... 0.0 0.1 0.2 0.2 0.0 0.0 0.1 0.0
-------- -------- -------- -------- ---------- -------- -------- --------
Income (loss) before income taxes.... (12.1) 0.3 (1.4) (39.3) (7.5) 2.0 0.6 4.8
Income tax provision (benefit)....... (5.3) 0.1 0.3 (12.2) (3.0) 0.8 0.2 2.1
Net income (loss).................... (6.8)% 0.2% (1.7)% (27.1)% (4.5)% 1.2% 0.4% 2.7%
======== ======== ======== ======== ========== ======== ======== ========
</TABLE>
(1) Store contribution refers to gross profit after deducting selling and
marketing expenses. Store contribution is presented to provide additional
information about the Company and is commonly used as a performance
measurement by retail companies. Store contribution should not be
considered in isolation or as a substitute for operating income, cash flow
from operating activities and other income or cash flow data prepared in
accordance with generally accepted accounting principles, or as a measure
of the Company's profitability or liquidity.
The Company anticipates that operating results will fluctuate as a result
of a number of factors, including seasonality, weather, changes in pricing or
promotion policies by the Company, its competitors or its suppliers, the
availability and cost of merchandise, consumer acceptance of the products sold
by the Company, and the number and timing of store openings and closures. The
availability and cost of merchandise may, in turn, fluctuate due to a number
of factors including changes in the Company's relationships with major
suppliers, the Company's access to private label
21
<PAGE>
manufacturing capacity, foreign currency fluctuations and other risks
associated with importing private label products from foreign countries.
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, remodeling of existing
stores and the implementation of its restructuring plan. In fiscal 1998, the
Company also used funds for the acquisition of Eagles Nest and the relocation
of its distribution facility from El Dorado Hills, California to West
Sacramento, California. In connection with the acquisition of Eagles Nest,
the Company paid off the Eagles Nest line of credit and other debt of
approximately $1.4 million.
Net cash provided by operating activities for fiscal 1999 was
$645,000. Net cash used for operating activities for fiscal 1998 and 1997
was, $3.3 million, and $1.3 million , respectively. Net cash used
for/provided by operating activities has historically been driven by net
income (loss) levels combined with fluctuations in inventory and accounts
payable resulting from growth. Inventories at the end of fiscal 1999 were
$34.1 million compared to $37.0 million at the end of fiscal 1998, a decrease
of $2.9 million. The decrease in inventory is primarily due to the $3.8
million writedown of inventory in the 42 stores scheduled for closure, offset
by an increase in inventory related to the opening of seven stores (net of
closures) during fiscal 1999. 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 Company had $7.1 million in working capital at the end of
fiscal 1999 compared to $25.1 million at the end of fiscal 1998, a decrease
of $18.0 million. The decrease in working capital is primarily attributable
to the October 1999 amendment to the revolving line of credit agreement
whereby the Company forfeited its right to convert up to $10.0 million of the
line of credit to term debt amortizing over a five year period. The Company's
working capital needs are somewhat seasonal and typically peak in the second
and fourth quarters. The peak in the second quarter is due to the incurrence
of operating losses in the first quarter and increased inventory purchased
for the Spring selling season. Working capital needs peak in the fourth
quarter due to increases in inventory in advance of the holiday selling
season, and payments coming due for back-to-school merchandise. 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 excluding the cost of acquisitions were $2.8
million, $6.4 million and $2.3 million in fiscal 1999, 1998, and 1997,
respectively. Capital expenditures for fiscal 1999 were primarily for the
build-out of 18 new stores, the build-out of two stores opened in 1998, the
remodeling of two stores, software and hardware upgrades, and furniture and
fixtures for the Company's new distribution center.
During fiscal 2000, the Company plans to open approximately four
new stores and remodel eight existing stores. The Company estimates that
total capital expenditures in fiscal 2000 will be approximately $1.5 million.
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 stores in the first quarter of 1999 and closed four additional stores
in the third quarter. The Company anticipates closing 43 stores in fiscal
2000, 42 stores as part of the restructuring plan and one store currently in
a temporary location.
Financing activities provided cash of $3.4 million, $10.5 million
and $5.0 million in fiscal 1999, 1998 and 1997, respectively. Net cash
provided by financing activities in fiscal 1999 was primarily attributable to
additional borrowings under the Company's revolving line of credit to fund
working capital requirements, costs associated with the restructure and the
severance and related costs associated with the changes in management. Net
cash provided in fiscal 1998 was primarily attributable to additional
borrowings under the Company's revolving line of credit to fund working
capital requirements and the acquisition of Eagles Nest. Cash was also used
from financing activities for the early retirement of long-term debt. In
fiscal 1997 the Company consummated its initial public offering which
generated $25 million in net proceeds. The proceeds were utilized to repay
all indebtedness then outstanding under the Company's
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<PAGE>
revolving credit facility ($10.2 million) and other debt totaling $7.5
million, and to make a $6.4 million distribution to the Pre-Offering
Stockholders.
In October 1999 the Company obtained an amendment ("Amendment") to
its revolving line of credit ("Revolving Line"). The Amendment increased the
Revolving Line to $25.0 million, including up to $1.5 million in letters of
credit and limited borrowings and letters of credit to a percentage of
eligible inventory. The amended Revolving Line is due October 2, 2000. The
terms of the Amendment terminated the Company's previous right to convert up
to $10.0 million of the Revolving Line to term debt amortizing over a five
year period.
The Company's Revolving Line bears interest at the option of the
Company at either the bank's reference rate or the London Inter-Bank Offered
Rate plus 2%, and is collateralized by all of the Company's assets. The
Revolving Line requires the Company to meet certain financial covenatnts
including minimum earnings before income taxes, depreciation and amortization
(EDITDA), and limits on dividends and acquistions of capital assets. Such
covenants were amended as part of the October 1999 Amendment. In January
2000, the Company obtained a waiver and amendment to the Revolving line to
bring the Company into compliance with such covenants. As of December 25,
1999, $15.5 million was outstanding under the Revloving Line.
In March 2000, the Company obtained a firm commitment letter for a
60 month senior revolving credit facility ("New Revolver") with borrowing
availability up to $25 million, which will replace its Revolving Line. Upon
closing, the New Revolver will bear variable interest and will be
collateralized by all of the Company's assets. Borrowings under the New
Revolver will be limited to specified percentages of eligible inventory and
accounts receivable. The New Revolver will prohibit the Company from paying
dividends without the bank's consent and will limit the Company's capital
expenditures. In addition, the New Revolver will require the Company to meet
certain financial covenants, including minimum financial ratios and
profitability ratios. The Company expects to close its New Revolver agreement
in April 2000 and plans to use the proceeds from the Revolver to repay all
indebtedness under the Company's Revolving Line and to fund the Company's
working capital needs.
Management believes that operating cash flow and borrowing under
its credit facility will be sufficient to complete the Company's fiscal 2000
planned store expansions and to satisfy the Company's other capital
requirements through fiscal 2000. The Company's capital requirements may vary
significantly from those anticipated depending upon such factors as operating
results, the number and timing of new store openings, and the number and size
of any future acquisitions.
As part of its growth strategy, the Company may, when appropriate,
pursue opportunities to acquire complementary businesses. To the extent that
the foregoing cash resources are insufficient to fund the purchase price of
future acquisitions, if any, or the operations of any acquired business,
additional external capital may be required. There can be no assurance that
additional financing will be available on reasonable terms or at all.
IMPACT OF INFLATION
Management does not believe that inflation has had a material
adverse effect on the Company's results of operations. However, the Company
cannot predict accurately the effect of inflation on future operating results.
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.
To address the Year 2000 issue, the Company 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 Company identified three
areas of focus for its Y2K Plan: corporate headquarters,
23
<PAGE>
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
were applied to these three areas.
All phases of the Y2K Plan were completed as scheduled. To date,
the Company has not experienced any Year 2000 problems with respect to its
corporate headquarters, store sites, or Third Parties. In addition, the
Company has not experienced any loss in revenues due to the Year 2000 problem.
As of December 25, 1999, the Company had spent a total of
approximately $60,000 in connection with addressing the Year 2000 problem and
does not anticipate any significant future costs. These costs were largely
due to repairing software problems and the replacement of problem systems and
equipment. 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 funded the foregoing from
operating cash flow.
Although unlikely, given that the Company has not experienced any
Year 2000 problems to date, there can be no certainty that any future
unforeseen Year 2000 problem will not adversely affect the Company's results
of operations, liquidity or financial position or adversely affect the
Company's relationships with customers, suppliers, vendors or others.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's market risk sensitivity
instruments is the potential loss arising from adverse changes in interest
rates and foreign currency exchange rates. All financial instruments held by
the Company and described below are held for purposes other than trading.
INTEREST RATE RISK
The Company's revolving line of credit exposes earnings to changes
in short-term interest rates since the interest rates on the revolving line
of credit are variable. If the variable rates on the Company's revolving line
of credit were to increase by 1% from the rate at December 25, 1999 and the
Company borrowed the maximum amount available under its revolving line of
credit ($25.0 million) for all of fiscal 2000, the Company's interest expense
would increase, soley as a result of the increase in interest rates,
resulting in a $150,000 decrease in net income. The marginal income tax rate
of 40.0% was used in this analysis. This analysis does not consider the
effects of the reduced level of overall economic activity that could exist in
such an environment. Further, in the event of a change of such magnitude,
management would likely take actions to further mitigate its exposure to the
change. The fair value of the Company's revolving line of credit is not
believed to be materially affected by changes in market interest rates.
FOREIGN EXCHANGE RISK
The Company typically does not hedge its foreign currency exposure.
Management does not believe its exposure to foreign currency rate
fluctuations to be material.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
<S> <C>
Report of independent accountants. 26
Consolidated balance sheets as of December 25, 1999 and December 26, 1998. 27
Consolidated statements of operations for each of the three fiscal years in the period ended
December 25, 1999. 28
Consolidated statements of changes in stockholders' equity for each of the three fiscal years
in the period ended December 25, 1999. 29
Consolidated statements of cash flows for each of the three fiscal years in the period ended
December 25, 1999. 30
Notes to financial statements. 31
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Track 'n Trail and Subsidiaries
El Dorado Hills, California
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Track
'n Trail and its subsidiaries at December 25, 1999 and December 26, 1998, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended December 25, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
Sacramento, California
February 11, 2000, except for the last paragraph of Note 5,
as to which the date is March 21, 2000
26
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,069 $ 1,808
Accounts receivable 1,898 2,510
Income taxes receivable 1,710 130
Inventories 34,099 36,998
Prepaid expenses 662 432
Deferred income taxes 2,831 675
-------------- ---------------
Total current assets 44,269 42,553
Fixed assets, net 9,513 11,849
Goodwill, net 2,757 4,852
Deferred income taxes 3,646 2,025
------------- --------------
Total assets $ 60,185 $ 61,279
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 15,534 $ 1,746
Accounts payable 13,772 12,481
Reserve for store closings and restructuring costs 4,782 -
Accrued payroll 1,008 561
Sales tax payable 945 952
Income taxes payable - 687
Accrued expenses and other liabilities 1,106 1,010
--------------- ----------------
Total current liabilities 37,147 17,437
Deferred rent 1,483 1,540
Long-term debt, net of current portion 5 9,764
-------------- ---------------
Total liabilities 38,635 28,741
-------------- ---------------
Commitments and contingencies (Notes 5, 7 and 13)
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; 6,959,476 and 6,851,961 shares issued
and outstanding at December 25, 1999 and
December 26, 1998, respectively 70 69
Additional paid-in capital 25,962 25,831
Retained earnings (deficit) (4,482) 6,638
--------------- ----------------
Total stockholders' equity 21,550 32,538
--------------- ----------------
Total liabilities and stockholders' equity $ 60,185 $ 61,279
=============== ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------
DECEMBER 25, DECEMBER 26, DECEMBER 27,
1999 1998 1997
<S> <C> <C> <C>
Net sales $ 114,758 $ 99,851 $ 91,834
Cost of sales 64,896 53,615 47,677
--------- --------- ---------
Gross profit 49,862 46,236 44,157
--------- --------- ---------
Operating expenses:
Selling and marketing 46,034 37,186 30,780
Administrative and distribution 9,741 7,741 6,840
Restructuring and impairment 8,994 122 -
--------- --------- ---------
Total operating expenses 64,769 45,049 37,620
--------- --------- ---------
Operating income (loss) (14,907) 1,187 6,537
Other (income) expenses:
Interest expense 1,226 369 1,260
Other, net 174 51 (21)
--------- --------- ---------
Income (loss) before income taxes (16,307) 767 5,298
Income tax provision (benefit) (5,187) 371 118
--------- --------- ---------
Net income (loss) $ (11,120) $ 396 $ 5,180
========= ========= =========
Historical earnings (loss) per share:
Basic $ (1.62) $ 0.06 $ 1.10
========= ========= =========
Diluted $ (1.62) $ 0.06 $ 1.03
========= ========= =========
Pro forma income data (unaudited):
Historical income before income
taxes $ 5,298
Pro forma income tax provision 2,119
---------
Pro forma net income $ 3,179
=========
Pro forma earnings per share:
Basic $ 0.68
=========
Diluted $ 0.58
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
28
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------- PAID-IN RETAINED
NUMBER AMOUNT CAPITAL EARNINGS (DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 28, 1996 4,107,608 $ 41 $ 724 $ 9,881 $ 10,646
Issuance of common stock upon
initial public offering, net of
offering costs of $3,649 2,727,272 27 24,961 - 24,988
Issuance of common stock upon
exercise of options 4,931 - 20 - 20
Distributions to stockholders - - - (8,819) (8,819)
Compensation recorded under stock
option plans - - 67 - 67
Net income - - - 5,180 5,180
------------- -------------- -------------- --------------------- --------------
BALANCE, DECEMBER 27, 1997 6,839,811 68 25,772 6,242 32,082
Issuance of common stock under the
employee stock purchase plan 12,150 1 59 - 60
Net income - - - 396 396
------------- -------------- -------------- --------------------- --------------
BALANCE, DECEMBER 26, 1998 6,851,961 69 25,831 6,638 32,538
Issuance of common stock under the
employee stock purchase plan 39,515 - 61 - 61
Issuace of common stock upon 68,000 1 70 - 71
exercise of options
Net loss - - - (11,120) (11,120)
------------- -------------- -------------- --------------------- --------------
BALANCE, DECEMBER 25, 1999 6,959,476 $ 70 $ 25,962 $ (4,482) $ 21,550
============= ============== ============== ===================== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
29
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (11,120) $ 396 $ 5,180
Adjustments to reconcile to cash provided by
(used for) operating activities:
Depreciation and amortization 2,683 2,119 1,743
Loss on disposal of fixed assets 61
Restructuring and impairment 8,994 122 -
Compensation recorded in connection
with stock option plans - - 67
Deferred income taxes (3,777) (408) (1,161)
Cash provided by (used for) changes in
operating assets and liabilities, net of
effects of business combinations:
Accounts receivable 611 (961) (530)
Income taxes receivable (1,579) (130) -
Inventories 2,899 (7,946) (7,984)
Prepaid expenses (230) (104) (99)
Accounts payable and accrued liabilities 2,552 3,916 831
Income taxes payable (687) (402) 613
Deferred rent 238 64 29
--------------- --------------- ----------------
Cash provided by (used for)
operating activities 645 (3,334) (1,311)
--------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets (2,842) (6,365) (2,306)
Proceeds from sale of fixed assets 22 - 27
Cash paid for business combinations - (1,401) -
--------------- --------------- ----------------
Cash used for investing activities (2,820) (7,766) (2,279)
--------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank line of credit:
Borrowings 64,019 48,431 44,819
Repayments (59,818) (37,732) (45,499)
Other long-term debt:
Repayments (171) (960) (10,513)
Change in book overdraft (726) 726 -
Net proceeds from issuance of common stock 61 60 24,988
Proceeds from exercise of stock options 71 - 20
Payment of distributions to stockholders - - (8,819)
--------------- --------------- ----------------
Cash provided by financing activities 3,436 10,525 4,996
--------------- --------------- ----------------
Increase (decrease) in cash and cash equivalents 1,261 (575) 1,406
Cash and cash equivalents, beginning of year 1,808 2,383 977
--------------- --------------- ----------------
Cash and cash equivalents, end of year $ 3,069 $ 1,808 $ 2,383
=============== =============== ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
30
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Track n' Trail, a Delaware corporation (Company), is a retailer of
footwear, apparel and related accessories. As of December 25, 1999 and
December 26, 1998, the Company operated 199 and 192 stores in 35 and 36
states, respectively, under the Track `n Trail, Overland Trading and Eagles
Nest names. Each Track `n Trail and Overland Trading store offers a wide
range of rugged walking and fashion casual shoes, sandals and boots. Each
Eagles Nest store offers premium outdoor apparel and footwear.
The Company ends its fiscal year on the last Saturday in December. All
fiscal years presented include fifty-two weeks.
The Company is the successor to businesses formerly conducted by Track 'n
Trail, a California corporation (Track 'n Trail-California), and its
subsidiary, Overland Management Corporation (Overland). In connection with
the formation of the Company, the Company issued an aggregate of 40,816
shares of its common stock to existing stockholders of Track 'n
Trail-California. A reorganization of Track 'n Trail-California (the
Reorganization) was effected on October 7, 1997, in which the Track 'n
Trail-California stockholders exchanged 100% of their Track 'n
Trail-California common stock for 4,107,608 shares of the Company's common
stock, inclusive of the 40,816 shares of the Company's common stock issued
upon formation. The Reorganization, which was accounted for in a manner
similar to a pooling-of-interests, was accomplished in an exchange of
approximately 100 shares of the Company's common stock for each share of
Track 'n Trail-California common stock. In connection with the
Reorganization, all of the common stock of Overland was transferred to the
Company in the form of a dividend resulting in the predecessor businesses
being wholly owned subsidiaries of the Company. The accompanying financial
statements reflect, for all periods presented prior to the Reorganization,
the capital structure and number of shares outstanding resulting from the
Reorganization. Accordingly, all references to the number of common and
common equivalent shares and to per share information in the consolidated
financial statements have been adjusted to reflect the capital structure
resulting from the Reorganization on a retroactive basis for all periods
presented.
The Company operates in a single business segment of retailing. The Company
acquires its merchandise from a number of manufacturers; however, during
the fiscal years ended December 25, 1999 and December 26, 1998, 42.6% and
44.8%, respectively, of the Company's net sales were related to merchandise
purchased from three manufacturers.
INITIAL PUBLIC OFFERING
On October 16, 1997, the Company completed its initial public offering
(Offering) of its common stock. In connection with the Offering, the
Company issued 2,727,272 shares of common stock and received net proceeds
of $24,988,000, net of underwriting discounts and offering expenses. Upon
closing of the Offering, the Company's nonqualified and incentive stock
options vested, resulting in a non-cash compensation charge reducing net
income by $33,000, after the related income tax effect of $22,000.
Certain notes payable, which had an aggregate balance of approximately
$17.7 million at the date of the Offering became due and payable upon
closing of the Offering. The Company used a portion of its proceeds of the
Offering to retire these obligations.
31
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
During 1997, Track 'n Trail-California declared distributions to its
stockholders of substantially all previously undistributed accumulated S
corporation earnings remaining at the date of the Reorganization. Of such
distributions, $6,400,000 were paid from a portion of the Company's
proceeds from the Offering.
PRINCIPLES OF CONSOLIDATION
The financial statements include the consolidated accounts of the Company
and its three subsidiaries, Track 'n Trail-California, Overland and Nevin's
Eagles Nest, Inc. (Eagles Nest). Overland became a 79.0% owned subsidiary
on October 25, 1996, and a wholly owned subsidiary effective January 1,
1997, and Eagles Nest became a wholly owned subsidiary on August 26, 1998.
All intercompany transactions and balances have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash balances and all highly liquid
investments with an original maturity of three months or less. Cash
deposits periodically exceed the Federal Deposit Insurance Corporation
insured limit of $100,000 for each account.
In the ordinary course of business the Company periodically has outstanding
checks in excess of its bank balance (book overdraft). The Company had a
book overdraft $726,000 at December 26, 1998, which was included in
accounts payable.
INVENTORIES
Inventories are stated at lower of cost (retail method) or market.
FIXED ASSETS
Fixed assets are stated at cost and depreciated on the straight-line method
over the assets' estimated useful lives ranging from three to ten years;
the cost of leasehold improvements are amortized over the shorter of the
lease term or useful life of the related assets. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
income for the period. The cost of maintenance and repairs is charged to
income as incurred; significant renewals and betterments are capitalized.
STORE PRE-OPENING COSTS
Costs of a noncapital nature incurred prior to store openings are expensed
as incurred.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets of acquired companies and is being amortized using the
straight-line method over 20 years. Accumulated amortization of goodwill at
December 25, 1999, amounted to $526,000.
The Company assesses goodwill for recoverability along with its assessment
of store assets for recoverability based on undiscounted cash flow and
operating income for each subsidiary having a material goodwill balance. In
the event that estimated future undiscounted cash flows of the stores in a
subsidiary acquired in a business combination that gave rise to goodwill is
less than the carrying amount of those stores and any related goodwill,
reductions are made of goodwill and then of the store assets such that the
carrying amount does not exceed the fair value of the stores.
32
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INCOME TAXES
The Company accounts for income taxes using the liability method. The
estimated future tax effect of differences between the basis in assets and
liabilities for tax and accounting purposes is accounted for as deferred
taxes. A valuation allowance is established to reduce deferred tax assets
when management estimates that it is more likely than not that all, or some
portion, of such deferred tax assets would not be realized.
Commencing June 28, 1992, and until the Reorganization on October 7, 1997,
Track 'n Trail-California had elected S corporation status for federal
income taxes and most state income taxes while Overland operated as a C
corporation for federal and state income tax purposes. Under S corporation
status, Track 'n Trail-California's income, other than that of Overland,
was taxable to its stockholders personally, with only minimal state income
taxes charged to Track 'n Trail-California.
Upon completion of the Reorganization in October 1997, Track 'n
Trail-California converted from an S corporation to a C corporation under
provisions of the Internal Revenue Code and state statutes and,
accordingly, became subject to federal and state income tax on all of its
income. Upon termination of the S corporation election, deferred income
taxes of $1,324,000, representing the net tax effect of differences between
Track 'n Trail-California's financial statement and tax bases in certain
assets and liabilities, became a net asset and was included in the
consolidated balance sheet with a corresponding non-recurring decrease in
tax expense in the consolidated statement of operations as of the date of
the Reorganization. Such deferred tax assets relate primarily to
differences in the financial statement and tax bases of fixed assets and
inventory and the effect of rent and stock compensation plan deductions for
accounting, but not tax, purposes.
Pro forma net income (unaudited) for 1997 has been computed to include a
provision for income taxes at an effective tax rate of 40.0% representing
management's estimate of the effective tax rate as if the Reorganization
had been in effect and Track 'n Trail-California had been a C corporation
for all periods presented.
STOCK OPTIONS
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to measure and record compensation costs relative to
employee stock option and purchase plans in accordance with the provisions
of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and make pro forma disclosure of net income and
earnings per share as if the fair value based method of valuing stock
options had been applied.
RENT EXPENSE
Rent expense is recognized on a straight-line basis over the respective
lease term. Rents accrued but not contractually due are reported as
deferred rent. Contingent rental expense, based on store sales, is
recognized when incurred.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
33
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RECLASSIFICATIONS
Certain reclassifications were made to 1998 year amounts to conform with
the 1999 presentation.
2. EARNINGS (LOSS) PER SHARE
A reconciliation of the numerators and denominators used in the computation
of basic and diluted earnings per share is as follows (in thousands, except
per share information):
<TABLE>
<CAPTION>
HISTORICAL EARNINGS PER SHARE
----------------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Income (loss) available to common
stockholders for basic and diluted
earnings (loss) per share $ (11,120) $ 396 $ 5,180
=============== ================ ================
Weighted average shares for basic
earnings (loss) per share 6,881 6,847 4,700
Dilutive effect of stock options
(treasury stock method) - 307 327
--------------- ---------------- ----------------
Weighted average shares for
diluted earnings (loss) per share 6,881 7,154 5,027
=============== ================ ================
Historical earnings (loss) per share:
Basic $ (1.62) $ 0.06 $ 1.10
=============== ================ ================
Diluted $ (1.62) $ 0.06 $ 1.03
=============== ================ ================
</TABLE>
34
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
EARNINGS
PER SHARE
(UNAUDITED)
1997
<S> <C>
Income available to common stockholders
(pro forma net income) for basic and
diluted earnings per share $ 3,179
===============
Weighted average shares for
basic earnings per share 4,700
Dilutive effect of stock options
(treasury stock method) 327
Distribution shares 421
---------------
Weighted average shares for diluted
earnings per share 5,448
===============
Pro forma earnings per share:
Basic $ 0.68
===============
Diluted $ 0.58
===============
</TABLE>
All warrants and options for fiscal 1999 and all warrants outstanding and
certain options with exercise prices in excess of market value for fiscal
1998 and 1997, were not dilutive and, accordingly, were not included in the
weighted average number of common and common equivalent shares outstanding.
In applying the treasury stock method for determining the dilution
applicable to stock options outstanding, the incremental shares assumed
issued (excess of shares assumed issued over the number of shares assumed
purchased) were determined using the sum of exercise proceeds, future
compensation and tax benefit to the Company upon exercise of the options as
the assumed proceeds that would have been used to purchase shares at the
average value during the period. Average market value was based on
estimated fair values for periods prior to the Offering and market prices
thereafter.
Distribution shares included in weighted average common shares outstanding
used to compute pro forma diluted earnings per share (unaudited) for fiscal
1997 represents the weighted number of shares of common stock sold in the
Offering, the net proceeds of which were necessary to pay the excess of S
corporation distributions paid or declared during the twelve month period
preceding the Offering over earnings during the twelve month period
preceding the Offering.
35
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. FIXED ASSETS
Fixed assets consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1999 1998
<S> <C> <C>
Leasehold improvements $ 10,241 $ 11,814
Furniture, fixtures and equipment 5,529 5,736
--------------- ---------------
15,770 17,550
Less accumulated depreciation (6,257) (5,701)
--------------- ---------------
Fixed assets, net $ 9,513 $ 11,849
=============== ===============
</TABLE>
Depreciation expense for fiscal years 1999, 1998 and 1997 was $2,421,000,
$1,922,000 and $1,579,000, respectively.
4. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
During fiscal 1999, declining operating results of certain of the Company's
stores led to the adoption of a restructuring plan. Under the restructuring
plan, the Company intends to close 42 stores during the first 120 days of
fiscal 2000 consisting of 31 Track `n Trail stores, four Overland Trading
stores and all seven Eagles Nest stores along with a regional office in
Colorado. The decision to close the stores and regional office was based on
store performance combined with market economic and projected future cash
flows. During fiscal 1999, in connection with the restructuring plan, the
Company recorded charges to operations for restructuring costs, asset
impairments and inventory reserves of $12,773,000. The charge included
$8,994,000 of restructuring costs and asset impairments, including:
<TABLE>
<S> <C>
Write-down of leasehold improvements in stores to be closed $2,674,000
Impairment of goodwill 1,833,000
Accrual of lease termination and other related costs 4,405,000
Employee severance 82,000
-----------
Total $8,994,000
===========
</TABLE>
A total of 12 administrative employees received severance payments.
Additionally, the Company recorded charges of $3,779,000 in cost of sales
to reduce inventory to its net realizable value in the stores scheduled for
closure.
The Company commenced the restructure in late December 1999 and expects to
substantially complete the plan in the second quarter of fiscal 2000. For
fiscal 1999, 1998 and 1997, the net sales
36
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
of the closing stores were $19,849,000, $13,409,000 and $8,438,000,
respectively. Store operating results (net sales less cost of sales and
store operating costs) for Track `n Trail and Overland Trading Company
closing stores, and pre-tax income (loss) for the Eagles Nest stores,
before restructuring and impairment and inventory writedowns, were
($3,589,000), ($475,000) and $451,000 for fiscal 1999, 1998 and 1997,
respectively. Accruals for restructuring costs and asset impairments
were made in December 1999 when the restructuring plan was approved by
the Company's Board of Directors.
A reconciliation of the restructuring reserve and asset impairment charges
follows (in thousands):
<TABLE>
<CAPTION>
LEASE
TERMINATION
AND OTHER LEASEHOLD EMPLOYEE
RELATED COSTS IMPROVEMENTS GOODWILL SEVERANCE TOTAL
<S> <C> <C> <C> <C> <C>
Charges in fiscal 1999 for
restructuring and impairments $ 4,405 $ 2,674 $ 1,833 $ 82 $ 8,994
Asset impairments recorded
in fiscal 1999 - (2,674) (1,833) - (4,507)
Reversal of accrual to recognize
rents on a straight-line basis 295 - - - 295
----------------- ---------------- ------------- ------------- -------------
Reserve balance,
December 25, 1999 $ 4,700 $ - $ - $ 82 $ 4,782
================= ================ ============= ============= =============
</TABLE>
In addition to the restructure and asset impairment charges, during fiscal
1999 the Company incurred $493,000 in severance and related expenses in
connection with management changes.
37
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. LONG-TERM DEBT
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1999 1998
<S> <C> <C>
Revolving line of credit, due 2000 $ 15,500 $ 11,299
Promissory note, interest at 9.36%, collateralized
by leasehold improvements, due 2000 30 99
Payable to sellers of Eagles
Nest, repaid in 1999 - 100
Capital lease, final payment due 2002 9 12
---------------- ---------------
Total 15,539 11,510
Less current portion (15,534) (1,746)
---------------- ---------------
Long-term portion $ 5 $ 9,764
================ ===============
</TABLE>
In October 1999, the Company obtained an amendment (Amendment) to its
revolving line of credit (Revolving Line). The Amendment increased the
Revolving Line to $25.0 million, including up to $1.5 million in letters of
credit (of which $189,000 were issued and outstanding at December 25,
1999), and limited borrowings and letters of credit to a percentage of
eligible inventory. The amended Revolving Line is due October 2, 2000. The
terms of the Amendment terminated the Company's previous right to convert
up to $10.0 million of the Revolving Line to term debt amortizing over a
five year period.
Available additional borrowings under the Revolving Line were approximately
$1.5 and $6.9 million at December 25, 1999 and December 26, 1998,
respectively. Borrowings under the Revolving Line are collateralized by
substantially all of the Company's assets.
The Revolving Line bears interest, at the option of the Company, at either
the bank's reference rate (8.50% at December 25, 1999) or LIBOR (6.49% at
December 25, 1999), plus 2.0%, payable monthly, plus an annual commitment
fee of $46,875. The weighted average interest rates for fiscal years 1999
and 1998, were 8.01% and 7.99%, respectively.
The Revolving Line requires the Company to meet certain financial covenants
including minimum earnings before income taxes, depreciation and
amortization (EBITDA), and limits on dividends and acquisitions of capital
assets. Such covenants were amended as part of the October 1999 Amendment.
At December 25, 1999, the Company was not in compliance with certain debt
covenants. In January 2000, the Company obtained a waiver and amendment to
the Revolving line to bring the Company into compliance with such
covenants.
38
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Scheduled maturities of long-term debt at December 25, 1999, are as follows
(in thousands):
<TABLE>
<S> <C>
2000 $ 15,534
2001 4
2002 1
----------------
Total $ 15,539
================
</TABLE>
In March 2000, the Company obtained a firm commitment letter for a 60 month
senior revolving credit facility ("New Revolver") with borrowing
availability up to $25 million. Upon closing, the New Revolver will bear
variable interest and will be collateralized by all of the Company's
assets. Borrowings under the New Revolver will be limited to specified
percentages of eligible inventory and accounts receivable. The New Revolver
will prohibit the Company from paying dividends without the bank's consent
and will limit the Company's capital expenditures. In addition, the New
Revolver will require the Company to meet certain financial covenants,
including minimum financial ratios and profitability ratios. The Company
expects to close its New Revolver agreement in April 2000 and plans to use
the proceeds to repay all indebtedness under the Company's Revolving Line
and to fund the Company's working capital needs.
6. STOCK OPTION AND PURCHASE PLANS
STOCK OPTION PLAN
In June 1996, Track 'n Trail-California stockholders approved the adoption
of the 1996 Stock Option Plan (Plan). Effective upon the Reorganization,
the Company assumed the Plan and, effective as of the date of the Offering,
amended and restated the Plan. Upon the Reorganization, options to purchase
shares of the Company's common stock were exchanged for all stock options
then outstanding pursuant to the Plan to purchase shares of the common
stock of Track 'n Trail-California. The terms and conditions of the options
exchanged were equivalent. A total of 1,055,735 shares of common stock are
reserved for issuance under the Plan.
The Plan provides for the granting of nonstatutory stock options (NSOs) to
employees, directors, consultants and advisors of the Company. The Plan
also provides for the granting of incentive stock options (ISOs) to
employees. The Plan provides for formula grants to non-employee directors
of the Company (Outside Directors). Each such Outside Director
automatically received NSOs to purchase 5,000 shares of common stock upon
their initial appointment as an Outside Director and, upon each annual
meeting of stockholders after their initial appointment, is entitled to
receive NSOs to purchase 1,250 shares (unless the Outside Director was
appointed prior to such a meeting, in which case the annual grant will
occur at the second annual meeting following the initial appointment). The
Plan provides that the option exercise price for ISOs and Outside Director
options must be at least equal to 100% of the fair market value of the
common stock on the date of grant. Options will have exercise and vesting
terms as determined at the date of the grant by a compensation committee of
the Company's board of directors; however, the options must have exercise
and vesting terms of no more than ten years from the date of grant.
39
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following is a summary of the activity in stock options granted during
the fiscal years ended December 25, 1999, December 26, 1998 and December
27, 1997:
<TABLE>
<CAPTION>
INCENTIVE STOCK NONQUALIFIED STOCK
OPTIONS OPTIONS
------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding as of December 28, 1996 501,168 $ 4.00 350,618 $ 0.01
Granted - - 10,000 9.75
Forfeited (20,127) 4.00 - -
Exercised (4,931) 4.00 - -
-------------- -------------- --------------- --------------
Outstanding as of December 27, 1997 476,110 4.00 360,618 0.28
Granted 40,000 9.75 - -
-------------- -------------- --------------- --------------
Outstanding as of December 26, 1998 516,110 4.45 360,618 0.28
Granted 20,000 5.00 2,500 5.00
Forfeited (60,000) 8.17 - -
Exercised - - (68,000) 0.01
-------------- -------------- --------------- --------------
Outstanding as of December 25, 1999 476,110 $ 4.00 295,118 $ 0.38
============== ============== =============== ==============
Options exercisable as of December 25, 1999 476,110 $ 4.00 287,618 $ 0.18
============== ============== =============== ==============
Options exercisable as of December 26, 1998 476,110 $ 4.00 353,118 $ 0.08
============== ============== =============== ==============
Options exercisable as of December 27, 1997 476,110 $ 4.00 350,618 $ 0.01
============== ============== =============== ==============
</TABLE>
The weighted average remaining contractual life of all options outstanding
at December 25, 1999, was:
<TABLE>
<CAPTION>
INCENTIVE STOCK NONQUALIFIED STOCK
OPTIONS OPTIONS
----------------------------------- ----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
REMAINING REMAINING
CONTRACTUAL CONTRACTUAL
EXERCISE LIFE EXERCISE LIFE
PRICE (IN YEARS) PRICE (IN YEARS)
<S> <C> <C> <C> <C>
$ 4.00 5.2 $ 0.01 2.5
$ 9.75 7.8
$ 5.00 9.4
</TABLE>
Compensation expense recognized for stock compensation awards, including
stock appreciation rights, amounted to $0, $0 and $67,000 during the 1999,
1998 and 1997 fiscal years, respectively.
40
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN
In April 1997, the Company adopted the Employee Stock Purchase Plan
(Purchase Plan) effective as of the closing of the Offering. The Purchase
Plan covers an aggregate of 150,000 shares of common stock and is intended
to qualify as an employee stock purchase plan within the meaning of Section
423 of the Internal Revenue Code. The plan administrator, appointed by the
Company's board of directors, may authorize participation by eligible
employees, including officers, in periodic Purchase Plan offerings. Under
its terms, the board of directors may amend, modify or terminate the
Purchase Plan at any time without notice.
Substantially all full-time (as defined) employees with at least one year
service prior to the commencement of the participation period are eligible
to participate in the Purchase Plan; however, any highly compensated
employee (as defined) who owns 3.0% or more of the outstanding stock in the
Company may not participate in the Purchase Plan. Employees who participate
in a Purchase Plan offering may have a percentage of their earnings (as
established by the plan administrator) withheld pursuant to the Purchase
Plan. The amount withheld will be used to purchase shares of common stock
on dates specified by the board at a price that will be equal to 85.0% of
the lesser of the fair market value of the common stock at the commencement
of each Purchase Plan offering period or at the relevant purchase date.
Employees may end their participation in a Purchase Plan offering at any
time during the Purchase Plan offering period except as provided under the
terms of the Purchase Plan offering. Participation ends automatically on
termination of employment with the Company.
The initial Purchase Plan offering commenced in October 1997 and terminated
on December 31, 1997. Four additional Purchase Plan offerings plans
commenced, on January 1, 1998, July 1, 1998, January 1, 1999 and July 1,
1999, and terminated on June 30, 1998, December 31, 1998, June 30, 1999 and
December 31, 1999, respectively. Another Purchase Plan offering commenced
January 1, 2000, and will terminate no later than December 31, 2001. As of
December 25, 1999, and December 26, 1998, 51,665 and 12,150 shares had been
issued under the Purchase Plan, respectively. In January 2000, 14,899
shares of common stock were issued pursuant to the Purchase Plan for
approximately $14,000.
PRO FORMA RESULTS OF OPERATIONS
The weighted-average, grant-date fair value, computed in accordance with
the measurement provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, of all options granted during fiscal 1999,1998 and 1997 was
$47,000, $95,000 and $61,000, respectively. The weighted average,
grant-date fair value was estimated in fiscal 1999, 1998, and 1997,
respectively, assuming risk-free interest rates of 5.96%, 5.22% and 5.97%,
an expected life of five years, expected volatility of 75.0% for 1999,
61.4% for 1998 and 55.0% for 1997.
41
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Results of operations, computed on a pro forma basis to assume that the
measurement provisions of SFAS No. 123 had been adopted, would have been as
follows for fiscal 1999, 1998 and 1997 (in thousands, except per share
information):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- -------------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (11,120) $ (11,146) $ 396 $ 377 $ 5,180 $ 5,173
------------ ------------ ----------- ------------ ----------- -----------
Pro forma net income,
as though a C corporation $ 3,179 $ 3,173
----------- -----------
Historical earnings per share:
Basic earnings (loss) per share $ (1.62) $ (1.62) $ 0.06 $ 0.06 $ 1.10 $ 1.10
------------ ------------ ----------- ------------ ----------- -----------
Diluted earnings (loss) per share $ (1.62) $ (1.62) $ 0.06 $ 0.05 $ 1.03 $ 1.03
------------ ------------ ----------- ------------ ----------- -----------
Pro forma earnings per share,
as though a C corporation
Basic earnings per share $ 0.68 $ 0.68
----------- -----------
Diluted earnings per share $ 0.58 $ 0.58
----------- -----------
</TABLE>
42
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. Lease Commitments
The Company operates its stores, main office and warehouse from facilities
under operating lease agreements which expire at various dates through
2010. The store leases require minimum annual rentals plus, in some cases,
periodic increases stipulated in the lease agreements (fixed amounts or
percentages, in some cases, and increases indexed to consumer price
increases, in other cases). Some leases also provide for contingent rentals
based on sales. The Company is generally responsible for maintenance,
insurance and property taxes. At December 25, 1999, future minimum lease
payments under all non-cancelable leases are as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 14,158
2001 13,927
2002 13,660
2003 13,039
2004 11,873
Thereafter 31,156
----------------
Total $ 97,813
================
</TABLE>
Rent expense was $14,039,000, $11,293,000 and $8,912,000 during fiscal
years 1999, 1998 and 1997, including contingent rentals of $49,000, $62,000
and $119,000, respectively.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit-sharing plan for the benefit of employees
who meet certain eligibility requirements. Participants may make tax
deferred contributions of up to 15% of earned income, limited to the
maximum allowed under the Internal Revenue Code. Employer contributions
match at least 50% of participant contributions to a maximum of 2% of
earned income. Employee contributions vest immediately. Employer
contributions vest based on years of employment with the Company, with full
vesting in five years. The profit-sharing expense was $61,000, $61,000 and
$81,000 in fiscal years 1999, 1998 and 1997, respectively.
43
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. Income Taxes
The provision (benefit) for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------------
DECEMBER 25, DECEMBER 26, DECEMBER 27,
1999 1998 1997
<S> <C> <C> <C>
Currently payable:
Federal $ (1,566) $ 525 $ 1,264
State 156 254 15
Deferred:
Federal (3,104) (351) (13)
State (673) (57) 176
Net deferred tax assets recorded
upon change in tax status from
S corporation to C corporation - - (1,324)
--------------- --------------- ----------------
$ (5,187) $ 371 $ 118
=============== =============== ================
</TABLE>
44
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The components of deferred income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1999 1998
<S> <C> <C>
Depreciation $ 2,350 $ 1,149
Inventory - Uniform capitalization 731 337
Inventory - method change 94 131
Stock compensation programs 199 240
Deferred rent and other accrued liabilities 481 484
Net operating loss carryforward 1,448 436
State income taxes (365) (105)
Restructuring charges 2,019 -
Other 20 28
--------------- ----------------
6,977 2,700
Valuation allowance (500) -
--------------- ----------------
Net deferred income taxes $ 6,477 $ 2,700
=============== ================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
taxes will not be realized. An allowance of $500,000 was recorded in 1999
against state deferred tax assets that may not be realized. Management
believes the balance of the deferred tax assets will be realized from
reversal of the existing net deductible temporary differences during
periods in which carrybacks are available and/or in which the Company will
generate net taxable income.
45
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Net operating loss carryforwards at December 25, 1999, available to reduce
future taxable income are approximately $2,753,000 and will expire as
follows:
<TABLE>
<S> <C>
2008 $ 114,000
2009 795,000
2010 40,000
2011 35,000
2012 97,000
Thereafter 1,672,000
----------------
$ 2,753,000
================
</TABLE>
Of the net operating losses, $1,081,000 represents losses acquired in a
business combination. Due to the change in ownership rules under Internal
Revenue Code Section 382, the use of the acquired net operating losses is
limited to approximately $75,000 annually.
46
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Differences between the Company's provision (benefit) for income taxes and
the federal statutory tax rate are:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
DECEMBER 25, DECEMBER 26, DECEMBER 27,
1999 1998 1997
<S> <C> <C> <C>
Federal statutory rate (34.0)% 34.0 % 34.0 %
Benefit due to Subchapter S
tax status - - (12.0)
State income taxes (2.6) 5.2 3.6
Nondeductable goodwill and
other permanent differences 4.8 9.2 1.4
Effect of change from S to C
corporation tax status - - (24.9)
Other - - 0.1
--------------- ---------------- ---------------
(31.8)% 48.4 % 2.2 %
=============== ================ ===============
</TABLE>
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating the fair value of its significant financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts reported in the
consolidated balance sheets approximate fair value because of the
immediate or short-term maturity of these financial instruments.
LONG-TERM DEBT: The carrying amounts, totaling $15,539,000 and
$11,510,000 at December 25, 1999 and December 26, 1998, respectively,
are believed to approximate fair value due to the floating interest
rate on the majority of these financial instruments.
47
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
LETTERS OF CREDIT: The Company had outstanding irrevocable letters of
credit in the amount of $189,000 and $550,000 at December 25, 1999 and
December 26, 1998, respectively. These letters of credit collateralize
certain of the Company's obligations to third parties for the purchase
of inventory. The fair value of these off - balance sheet letters of
credit approximates contract values based on the nature of the fee
arrangements with the issuing bank.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------
DECEMBER 25, DECEMBER 26, DECEMBER 27,
1999 1998 1997
<S> <C> <C> <C>
Interest paid $ 1,213 $ 294 $ 1,360
=============== ================ ===============
Income taxes paid $ 938 $ 1,312 $ 644
=============== ================ ===============
Noncash investing and financing transactions:
Acquisitions of businesses:
Purchase price, including
acquisition costs $ - $ 1,501 $ 558
Minority interest eliminated - - 105
Less debt issued in connection
with the acquisition - - (663)
Less retention - (100) -
--------------- ---------------- ---------------
Cash paid for acquisitions $ - $ 1,401 $ -
=============== ================ ===============
</TABLE>
12. BUSINESS COMBINATIONS
OVERLAND TRADING COMPANY
On October 25, 1996, Track 'n Trail-California, together with its
stockholders, obtained 33 Overland Trading stores by acquiring the
outstanding common stock of Overland. Track 'n Trail-California and its
stockholders purchased 79.0% and 21.0%, respectively, of the common stock
of Overland. As part of the purchase consideration, Track `n Trail
California issued warrants which give the sellers the right to purchase up
to 49,392 shares of the Company's common stock at $10.50 per share until
October 25, 2001. Additionally, Track 'n Trail-California issued warrants
to an investment bank in consideration of financial advisory services
rendered in connection with the acquisition of Overland. The warrants allow
the investment bank to purchase up to 74,089 shares of the Company's common
stock at $12.60 per share for four years commencing October 1998. The
warrants held by both the Overland sellers and the investment bank were
assigned only a nominal value because of the restrictive terms of the
warrants when issued. All such warrants remain outstanding at December 25,
1999.
48
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Effective on January 1, 1997, Track 'n Trail-California acquired from its
stockholders the remaining 21.0% interest in Overland at their purchase
price by assuming notes of $663,000 previously issued by Track 'n
Trail-California's stockholders as their purchase consideration for the
21.0% interest.
NEVIN'S EAGLES NEST
On August 26, 1998, the Company acquired all the outstanding shares of
capital stock of Eagles Nest. The purchase price of the shares was $1.5
million in cash, $100,000 of which was paid in fiscal 1999.
The acquisition was accounted for using the purchase method of accounting.
The purchase price was allocated to the fair value of the assets and
liabilities acquired as follows: $1.3 million to current assets, $244,000
to property, plant and equipment, $518,000 to other assets, $1.1 million to
accounts payable and other accrued liabilities and $1.4 million to debt and
capital lease obligations. This resulted in goodwill of $2.0 million.
Accumulated amortization at December 25, 1999 and December 26, 1998, on
goodwill recorded in connection with the Eagles Nest acquisition, was $0
and $33,000, respectively. The goodwill associated with the Eagles Nest
acquisition was written off in December 1999, in connection with the
restructuring described above.
49
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following unaudited pro forma summary combines the consolidated results
of operations of the Company and Eagles Nest as if the acquisition had
occurred at the beginning of fiscal 1997 and fiscal 1998 after giving
effect to certain adjustments, including amortization of goodwill, revised
depreciation based on estimated fair market values, and revised interest
expense based on the additional borrowings and interest rate differentials
on Eagles Nest debt retired at acquisition. The pro forma summary does not
necessarily reflect the results of operations as they would have been if
the Company and Eagles Nest had constituted a single entity during such
periods (in thousands, except per share information):
<TABLE>
<CAPTION>
PRO FORMA, ASSUMING
ACQUISITION OCCURRED AT
BEGINNING OF FISCAL
YEARS ENDED
(UNAUDITED)
------------------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
<S> <C> <C>
Net sales $ 103,224 $ 98,731
================ ================
Net income before income taxes $ 218 $ 5,077
Income tax 178 59
---------------- ----------------
Net income $ 40 $ 5,018
================ ================
Earnings per share:
Basic $ 0.01 $ 1.07
================ ================
Diluted $ 0.01 $ 1.00
================ ================
Net income before income taxes $ 5,077
Pro forma income tax provision 2,031
----------------
Pro forma net income $ 3,046
================
Pro forma earnings per share:
Basic $ 0.65
================
Diluted $ 0.56
================
</TABLE>
13. CONTINGENCIES
Beginning in October 1999, the Company is partially self insured for health
insurance, workers' compensation and property and liability insurance. The
Company's policy is to accrue undiscounted amounts which are estimated
based upon the Company's actual and industry experience. Changes in
assumptions for such matters as legal actions, medical costs and changes in
actual experience could cause these estimates to change.
The Company is involved in various claims arising out of the normal course
of the conduct of business. Management believes, after reviewing such
matters with legal counsel, that the outcome of pending claims will not
have a material adverse effect on the Company's consolidated results of
operations or consolidated financial position.
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to this item is incorporated by reference
from the registrant's definitive Proxy Statement to be filed with the
Commission not later than 120 days after the end of the registrant's fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item is incorporated by reference
from the registrant's definitive Proxy Statement to be filed with the
Commission not later than 120 days after the end of the registrant's fiscal
year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to this item is incorporated by reference
from the registrant's definitive Proxy Statement to be filed with the
Commission not later than 120 days after the end of the registrant's fiscal
year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item is incorporated by reference
from the registrant's definitive Proxy Statement to be filed with the
Commission not later than 120 days after the end of the registrant's fiscal
year.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements:
Reference is made to the Index to Consolidated Financial
Statements under Item 8 in Part II of this Form 10-K.
2. Financial Statement Schedules:
Financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
3. Exhibits:
The exhibits listed below are required by Item 601 of Regulation
S-K. Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K has been
identified.
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit
NUMBER NOTES DESCRIPTION OF DOCUMENT
------- ----- -----------------------
<S> <C> <C>
3.1 (1) Amended and Restated Certificate of Incorporation of the Registrant.
3.2 (1) Amended and Restated Bylaws of the Registrant.
4.1 (1) Form of Common Stock Certificate.
4.2 (1) Registration Rights Agreement among the Registrant and certain stockholders.
10.1 (1) Employment Agreement dated January 3, 1994 between Registrant and
Gregory M. Kilgore.
10.2 (1) Employment Agreement dated January 3, 1994 between Registrant and
John E. Wilkinson.
10.3 (1) Employment Agreement dated January 3, 1994 between Registrant and
Daniel J. Nahmens.
10.4 (1) Employment Agreement dated January 3, 1994 between Registrant and
David T. Morgan.
10.5 (1) Amended and Restated 1996 Stock Option Plan.
10.6 (1) Form of Incentive Stock Option and Stock Option Agreement, as amended.
10.7 (1) Form of Nonqualified Stock Option and Stock Option Agreement, as amended.
10.8 (1) Agreement for Distribution of Accumulated Adjustments Account and
Tax Indemnification.
10.9 (1) Form of Indemnification Agreement between the Company and directors and
certain officers.
10.10 (1) Stock Exchange Agreement between the Company, Track 'n Trail-California
and certain stockholders.
10.11 (1) Warrant to Purchase Common Stock issued to Ladenburg Thalmann & Co. Inc.
10.12 (1) Form of Warrant to Purchase Common Stock issued to stockholders of Overland
Management Corporation.
10.13 (2) Amended and Restated Loan Agreement dated as of October 4, 1999 between
Union Bank of California, N.A. and the subsidiaries of the Registrant.
10.14 (3) Continuing Guaranty dated as of September 25, 1997 between Union Bank of
California, N.A. and the Registrant.
10.15 (4) 1998 Bonus Plan for Officers of the Registrant.
10.16 (5) 1999 Bonus Plan for Officers of the Registrant.
10.17 (5) Lease Agreement dated as of September 18, 1998 between Spieker Properties,
L.P. and the Registrant.
10.18 2000 Bonus Plan for Officers of the Registrant
10.19 Agreement and Release of Claims dated October 25, 1999 between Gregory M.
Kilgore and the Registrant.
10.20 First Amendment dated January 26, 2000 to
the Loan Agreement dated October 4, 1999
between Union Bank of California, N.A. and
the Registrant.
10.21 Second Amendment dated January 26, 2000 to
the Loan Agreement dated October 4, 1999
between Union Bank of California, N.A. and
the Registrant.
21.1 (1) List of Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney (see page 55 of this Form 10-K).
27.1 Financial Data Schedule.
</TABLE>
53
<PAGE>
Notes
(1) Filed with Registrant's Registration Statement on Form S-1 (File No.
333-23195).
(2) Filed with Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 25, 1999.
(3) Filed with Registrant's Annual Report on Form 10-K for the year ended
December 27, 1997.
(4) Filed with Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 28, 1998.
(5) Filed with Registrant's Annual Report on Form 10-K for the year ended
December 26, 1998.
(b) Reports on Form 8-K.
A Form 8-K was filed on October 26, 1999 announcing the termination of the
Company's President Gregory M. Kilgore.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
March 21, 2000 on its behalf by the undersigned, thereunto duly authorized.
TRACK 'N TRAIL
By /s/ DAVID L. SUECHTING, JR
David L. Suechting, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David L. Suechting, Jr. and Daniel J.
Nahmens, and each of them, his or her true and lawful attorneys-in-fact, each
with full power of substitution, for him or her in any and all capacities, to
sign any amendments to this report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact or their substitute or substitutes may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ DAVID L. SUECHTING, JR President, Chief Executive Officer
and Chairman of the Board 3/21/00
/s/ DANIEL J. NAHMENS Executive Vice President - Finance, Chief Financial
Officer (Principal Financial and
Accounting Officer), Treasurer and Secretary 3/21/00
/s/ BARBARA J. SUECHTING Director 3/21/00
/s/ HELEN C. BULWIK Director 3/21/00
/s/ STEVEN D. TOUGH Director 3/21/00
</TABLE>
55
<PAGE>
2000 BONUS PLAN
APPROVED DATE
-------------- ---------
2000 CEO/PRESIDENT'S BONUS PROGRAM
WE ARE PLEASED TO ANNOUNCE THE 2000 BONUS PLAN FOR YOU, FOR THE PERIOD
ENDING DECEMBER 30, 2000. YOUR BONUS EARNINGS WILL BE BASED ENTIRELY ON
NET INCOME EARNINGS PER SHARE (EPS).
PROFITABILITY
-$75,000 FOR ATTAINING EPS OF $.05
-$5,500 FOR EACH $.01 OF EPS OVER $.05
THE BONUS PAYOUT FOR FISCAL 2000 WILL OCCUR ON OR BEFORE 3/15/01, FOR EACH
PARTICIPANT THAT WAS EMPLOYED AS OF 12/30/00.
THE COMPANY RESERVES THE RIGHT TO CHANGE THE BONUS PLAN FOR FUTURE
PERIODS.
SHOULD THE STOCK BE SPLIT IN ANY MANNER THROUGHOUT THE YEAR, THE EPS TARGETS
WILL SHIFT ACCORDINGLY TO MAINTAIN THE SAME RATIO.
:
APPROVED DATE
-------------- ---------
2000 CHIEF FINANCIAL OFFICER'S BONUS PROGRAM
WE ARE PLEASED TO ANNOUNCE THE 2000 BONUS PLAN FOR YOU, FOR THE PERIOD ENDING
DECEMBER 30, 2000. YOUR BONUS EARNINGS WILL BE BASED ENTIRELY ON EPS.
PROFITABILITY
-$40,000 FOR ATTAINING EPS OF $.05
-$3,500 FOR EACH $.01 OF EPS OVER $.05
THE BONUS PAYOUT FOR FISCAL 2000 WILL OCCUR ON OR BEFORE 3/15/01, FOR EACH
PARTICIPANT THAT WAS EMPLOYED AS OF 12/30/00.
THE COMPANY RESERVES THE RIGHT TO CHANGE THE BONUS PLAN FOR FUTURE
PERIODS.
SHOULD THE STOCK BE SPLIT IN ANY MANNER THROUGHOUT THE YEAR, THE EPS TARGETS
WILL SHIFT ACCORDINGLY TO MAINTAIN THE SAME RATIO.
:
APPROVED DATE
-------------- ---------
2000 CHIEF OPERATING OFFICER'S BONUS PROGRAM
WE ARE PLEASED TO ANNOUNCE THE 2000 BONUS PLAN FOR YOU, FOR THE PERIOD ENDING
DECEMBER 30, 2000. YOUR BONUS EARNINGS WILL BE BASED ENTIRELY ON EPS.
PROFITABILITY
-$40,000 FOR ATTAINING EPS OF $.05
-$3,500 FOR EACH $.01 OF EPS OVER $.05
THE BONUS PAYOUT FOR FISCAL 2000 WILL OCCUR ON OR BEFORE 3/15/01, FOR EACH
PARTICIPANT THAT WAS EMPLOYED AS OF 12/30/00.
THE COMPANY RESERVES THE RIGHT TO CHANGE THE BONUS PLAN FOR FUTURE
PERIODS.
SHOULD THE STOCK BE SPLIT IN ANY MANNER THROUGHOUT THE YEAR, THE EPS TARGETS
WILL SHIFT ACCORDINGLY TO MAINTAIN THE SAME RATIO.
:
APPROVED DATE
-------------- ---------
2000 VICE-PRESIDENT REAL ESTATE BONUS PROGRAM
WE ARE PLEASED TO ANNOUNCE THE 2000 BONUS PLAN FOR YOU, FOR THE PERIOD ENDING
DECEMBER 30, 2000. YOUR BONUS EARNINGS WILL BE BASED ENTIRELY ON EPS.
PROFITABILITY
-$30,000 FOR ATTAINING EPS OF $.05
-$2,500 FOR EACH $.01 OF EPS OVER $.05
THE BONUS PAYOUT FOR FISCAL 2000 WILL OCCUR ON OR BEFORE 3/15/01, FOR EACH
PARTICIPANT THAT WAS EMPLOYED AS OF 12/30/00.
THE COMPANY RESERVES THE RIGHT TO CHANGE THE BONUS PLAN FOR FUTURE
PERIODS.
SHOULD THE STOCK BE SPLIT IN ANY MANNER THROUGHOUT THE YEAR, THE EPS TARGETS
WILL SHIFT ACCORDINGLY TO MAINTAIN THE SAME RATIO.
:
APPROVED DATE
-------------- ---------
2000 VICE-PRESIDENT SALES BONUS PROGRAM
WE ARE PLEASED TO ANNOUNCE THE 2000 BONUS PLAN FOR YOU, FOR THE PERIOD ENDING
DECEMBER 30, 2000. YOUR BONUS EARNINGS WILL BE BASED ENTIRELY ON EPS.
PROFITABILITY
-$30,000 FOR ATTAINING EPS OF $.05
-$2,500 FOR EACH $.01 OF EPS OVER $.05
THE BONUS PAYOUT FOR FISCAL 2000 WILL OCCUR ON OR BEFORE 3/15/01, FOR EACH
PARTICIPANT THAT WAS EMPLOYED AS OF 12/30/00.
THE COMPANY RESERVES THE RIGHT TO CHANGE THE BONUS PLAN FOR FUTURE
PERIODS.
SHOULD THE STOCK BE SPLIT IN ANY MANNER THROUGHOUT THE YEAR, THE EPS TARGETS
WILL SHIFT ACCORDINGLY TO MAINTAIN THE SAME RATIO.
<PAGE>
AGREEMENT AND RELEASE OF CLAIMS
WHEREAS, GREGORY M. KILGORE ("Executive") and TRACK `N TRAIL ("Company")
(collectively the "Parties") entered into an employment agreement ("Employment
Agreement"); and
WHEREAS, the Parties, by mutual consent, wish to terminate the Employment
Agreement as of October 25, 1999.
NOW THEREFORE, in recognition of the Parties' mutual termination of the
Employment Agreement and in full satisfaction of the Company's obligations to
the Executive for good and valuable consideration, receipt and sufficiency of
which is hereby acknowledged, intending to be legally bound, the Parties agree
as follows:
1. Executive shall terminate his employment with Company effective upon
the date of this Agreement.
2. Executive shall resign his seat on the Board of Directors of Track
`n Trail (a Delaware Corporation), Track `n Trail (a California Corporation),
Overland Management Corporation (a Massachusetts Corporation) , and Nevin's
Eagles Nest, Inc. (a Colorado Corporation) effective upon the date of this
Agreement.
3. The Company has previously paid to Executive his regular pay through
October 25, 1999 and accrued vacation through such date. Upon execution of this
agreement, Company shall pay to Executive a lump sum amount of one hundred
eighty thousand nine hundred thirteen dollars and twenty cents ($180,913.20) on
January 3, 2000, as a severance payment as set forth in the Employment Agreement
reduced by applicable withholding and FICA. Commencing November 25, 2000 and
continuing through April 25, 2001, the Company shall make six monthly payments
in the amount of fifteen thousand seventy-six dollars and ten cents (15,076.10)
each, provided such payments will not be made if Executive has entered into any
other employment prior to October 25, 2000 or if he enters into employment after
October 25, 2000 but before April 25, 2001 payments shall cease upon such
employment. Employment shall include any executive capacity employment or
contractor relationship and shall include any executive level agreement for
compensation, whether cash, liquid equity compensation, deferred compensation or
other.
4. Both the Company and Executive expressly waive any requirements
express or implied in the Employment Agreement regarding timing and form of
Executive's termination or notice of termination. Executive acknowledges receipt
of check #3445 dated November 1, 1999 in the amount of fourteen thousand eight
hundred sixty-nine dollars and fifty cents ($14,869.50) as a payment of 30 day's
salary and the parties agree that such payment is made and accepted in lieu of
notice under the Employment Agreement.
5. Company agrees to pay directly to Company's health insurance carrier
premiums on behalf of Executive to pay for his family's actual health coverage
under Internal Revenue Code Section 4980B ("COBRA") for the coverage period
through October 25, 2000. Thereafter, any
<PAGE>
such coverage shall be paid by Executive.
6. Company will make a good faith effort to identify a buyer for all
the stock exercised or exercisable under the Company's stock options granted to
Executive. This provision does not in any fashion amend the Company's stock
options plan or stock option agreements with Executive.
7. Contingent upon payment of the amount set forth in Section 2 above,
the parties expressly waive any and all rights and claims they have under the
Employment Agreement and the Employment Agreement shall be terminated upon
payment of the settlement.
8. Executive acknowledges that this Agreement shall not be construed as
an admission by the Company of a violation of its employment policies or
procedures or any other improper, unlawful or wrongful conduct by the Company on
its own part or on the part of any of its officers, directors, employees of
agents.
9. Executive agrees that the consideration set forth in this Agreement
is in full satisfaction of, and Executive hereby releases the Company, its
officers, directors, employees or agents from, any claims, liabilities, demands
or causes of action that Executive may have against the Company or any or the
directors, officers, employees, or agents of the Company (excepting claims for
vested benefits under Company employee benefit plans, based on Executive's
employment) (x) under the Employment Agreement, (y) in connection with
Executive's employment relationship with the Company or any affiliate of the
Company on or prior to the date of this Agreement, and (z) any rights or claims
for workers' compensation insurance benefits and any rights which may arise
after the date of this Agreement. The claims released include, but are not
limited to, claims for discrimination including claims under the Fair Employment
and Housing Act, Title VII of the Civil Rights Act of 1964 or the Federal Age
Discrimination in Employment Act of 1967, as amended, breach of contract, or any
other claims. Executive agrees and promises that he will not file any lawsuit
asserting any such connection with the pursuits of any claim that could not be
brought by the Executive hereunder.
10. Executive understands that various federal, state and local laws
prohibit age, sex, national origin, race and other forms of employment
discrimination, and that these laws are enforced through the U.S. Equal
Employment Opportunity Commission, and similar state and local agencies. If
Executive believed that his treatment by the Company had violated any these
anti-discrimination laws, he understands he could have in lieu of this Agreement
consulted with these agencies and filed a charge with them. Instead, Executive
has voluntarily decided to enter into this Agreement and to waive and release
the claims, if any, he may have under such laws.
11. Executive hereby expressly waives the provisions of California
Civil Code section 1542, which provides as follows:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have
materially affected his settlement with the debtor."
<PAGE>
12. The Company expressly waives any claim or action against Executive
of which it has knowledge as of the date of this Agreement.
IN WITNESS WHEREOF, the parties enter into this Agreement as of October 25,
1999.
TRACK 'N TRAIL
by: /S/ DANIEL J. NAHMENS
------------------------------
Title: Chief Financial Officer
/S/ GREGORY M. KILGORE
--------------------------------
GREGORY M. KILGORE
<PAGE>
[LOGO]
January 26, 2000
Track 'N Trail
Daniel J. Nahmens
4961-a Windplay Drive
El Dorado Hills CA 95762
"RE First Amendment ("Amendment") to the Loan Agreement dated
October 4, 1999 (all prior Amendments, this Amendment, and the
Loan Agreement together called the "Agreement").
Dear Daniel J. Nahmens:
In reference to the Agreement defined above between Union Bank of California,
N.A. ("Bank") and Track 'N Trail ("Borrower"), the Bank and Borrower desire to
amend the Agreement. Capitalized terms used herein which are not otherwise
defined shall have the meaning given them in the Agreement.
AMENDMENT TO AGREEMENT
(a) SECTION 4.6 CURRENT RATIO, of the Agreement is hereby amended by
substituting the ration "1.0 to 1.0" for the ratio "1.25 to 1.0"
(b) SECTION 4.7 CASH FLOW, of the Agreement is hereby deleted in its entirety
and replaced to read as follows: "Borrower will maintain a cumulative cash flow
of greater than or equal to a negative One Million Three Hundred Thousand
Dollars (-$1,300,000.00) for the first quarter ending March 31, 2000 based on
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITA).
Borrower will maintain a cumulative cash flow greater than or equal to Forty
Thousand Dollars ($40,000.00) for the second quarter ending June 30, 2000 based
on Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITA).
Borrower will maintain a cumulative cash flow greater than or equal to One
Million Three Hundred Thousand Dollars ($1,300,000.00) for the third quarter
ending September 30, 2000 and thereafter based on Earnings Before Interest,
Taxes, Depreciation, and Amortization (EBITA).
(c) SECTION 4.8 TANGIBLE NET WORTH, of the Agreement is hereby amended by
substituting the amount "Fifteen Million Five Hundred Thousand Dollars
($15,5000.00)" for the amount "Twenty Two Million Dollars" ($22,000,000.00).
<PAGE>
[LOGO]
Page 2
Track 'N Trail
First Amendment
WAIVER
(a) Bank hereby waives Borrower's Breach of SECTION 4.6 CURRENT RATION of the
Agreement occurring prior to December 31, 1999. Any further breach of the
Section in not waived.
(b) Bank hereby waives Borrower's Breach of SECTION 4.8 TANGIBLE NET WORTH, of
the Agreement occurring prior to December 31, 1999.
(c) Bank hereby waives Borrower's Breach of SECTION 4.7 CASH FLOW, of the
Agreement occurring prior to December 31, 1999.
Except as specifically amended hereby, the Agreement shall remain in full force
and effect and is hereby ratified and confirmed. This amendment shall not be a
waiver of any existing or future default or breach of condition to covenant
unless specified herein.
This Waiver and Amendment shall become effective January 1, 2000 and when the
Bank shall have received the acknowledgement copy of the Amendment executed by
the Borrower.
Very truly yours,
/s/ Randy Lambert
Union Bank of California, N.A.
Randy Lambert
Vice President
Agreed to and Accepted
Track 'N Trail
By: /s/ David L. Suechting By: /s/ Daniel J. Nahmens
--------------------------- ----------------------------
David L. Suechting, Jr. COB Daniel J. Nahmens, CFO
Overland Management Corporation
By: /s/ David L. Suechting By: /s/ Daniel J. Nahmens
--------------------------- ----------------------------
David L. Suechting, Jr. COB Daniel J. Nahmens, CFO
Nevin's Eagles Nest, Inc.
By: /s/ David L. Suechting By: /s/ Daniel J. Nahmens
--------------------------- ----------------------------
David L. Suechting, Jr. COB Daniel J. Nahmens, CFO
<PAGE>
[LOGO]
January 26, 2000
Track 'N Trail
Daniel J. Nahmens
4961-a Windplay Drive
El Dorado Hills CA 95762
"RE Second Amendment ("Amendment") to the Loan Agreement dated
October 4, 1999 ( all prior Amendments, this Amendment, and
the Loan Agreement together called the "Agreement").
Dear Daniel J. Nahmens:
In reference to the Agreement defined above between Union Bank of California,
N.A. ("Bank") and Track 'N Trail ("Borrower"), the Bank and Borrower desire to
amended the Agreement. Capitalized terms used herein which are not otherwise
defined shall have the meaning given them in the Agreement.
AMENDMENT TO AGREEMENT
(a) Section 1.1.1 The Revolving Line, of the Agreement is hereby amended by
substituting the amount "Twenty Million Dollars" ($20,000,000.00)"
for the amount "Twenty Five Million Dollars" ($25,000,000.00)."
Except as specifically amended hereby, the Agreement shall remain in full force
and effect and is hereby ratified and confirmed. This Amendment shall not be a
waiver of any existing or future default or breach of a condition to covenant
unless specified herein.
This Amendment shall become effective when the Bank shall have received the
acknowledgement copy of the Amendment executed by the Borrower.
Very truly yours,
/s/ Randy Lambert
Union Bank of California, N.A.
Randy Lambert
Vice President
<PAGE>
[LOGO]
Page 2
Track 'N Trail
Second Amendment
Agreed to and Accepted
Track 'N Trail
By: /s/ David L. Suechting, Jr. By: /s/ Daniel J. Nahmens
--------------------------- ----------------------------
David L. Suechting, Jr. COB Daniel J. Nahmens, CFO
Overland Management Corporation
By: /s/ David L. Suechting, Jr. By: /s/ Daniel J. Nahmens
--------------------------- ----------------------------
David L. Suechting, Jr. COB Daniel J. Nahmens, CFO
Nevin's Eagles Nest, Inc.
By: /s/ David L. Suechting, Jr. By: /s/ Daniel J. Nahmens
--------------------------- ----------------------------
David L. Suechting, Jr. COB Daniel J. Nahmens, CFO
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Registration Statements No.
333-39833 and 333-39835 of Track `n Trail on Form S-8 of our report dated
February 11, 2000 (except for the last paragraph of Note 5 for which the date is
March 21, 2000), appearing in the Annual Report on Form 10-K of Track `n Trail
for the year ended December 25, 1999.
/s/PricewaterhouseCoopers LLP
Sacramento, California
March 21, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-25-1999 DEC-25-1999
<PERIOD-START> SEP-26-1999 DEC-27-1998
<PERIOD-END> DEC-25-1999 DEC-25-1999
<CASH> 3,069 3,069
<SECURITIES> 0 0
<RECEIVABLES> 1,898 1,898
<ALLOWANCES> 0 0
<INVENTORY> 34,099 34,099
<CURRENT-ASSETS> 44,269 44,269
<PP&E> 15,770 15,770
<DEPRECIATION> 6,257 6,257
<TOTAL-ASSETS> 60,185 60,185
<CURRENT-LIABILITIES> 37,147 37,147
<BONDS> 0 0
0 0
0 0
<COMMON> 70 70
<OTHER-SE> 21,480 21,480
<TOTAL-LIABILITY-AND-EQUITY> 60,185 60,185
<SALES> 33,491 114,758
<TOTAL-REVENUES> 33,491 114,758
<CGS> 21,840 64,896
<TOTAL-COSTS> 12,455 46,034
<OTHER-EXPENSES> 11,998 18,909
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 351 1,226
<INCOME-PRETAX> (13,153) (16,307)
<INCOME-TAX> (4,088) (5,187)
<INCOME-CONTINUING> (9,065) (11,120)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,065) (11,120)
<EPS-BASIC> (1.31) (1.62)
<EPS-DILUTED> (1.31) (1.62)
</TABLE>
