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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 1, 2000.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-22359
TRACK `N TRAIL
(Exact name of registrant as specified in its charter)
DELAWARE 91-1778085
(State or other jurisdiction of I.R.S. Employer Identification Number
incorporation or organization)
4961-A WINDPLAY DRIVE, EL DORADO HILLS, CALIFORNIA 95762
(Address of principal executive offices) (zip code)
(916) 933-4525
(Registrant's telephone number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The number of shares of Registrant's Common Stock, $0.01 par value, outstanding
as of August 8, 2000 was 7,167,866.
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TRACK 'N TRAIL
FORM 10-Q
QUARTER ENDED JULY 1, 2000
INDEX
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PAGE
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PART I: FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets as of July 1, 2000
and December 25, 1999..............................................................1
Consolidated Statements of Operations for the 13-Weeks and 27-Weeks ended
July 1, 2000 and the 13-Weeks and 26-Weeks ended June 26, 1999.....................2
Consolidated Statements of Cash Flows for the 27-Weeks
ended July 1, 2000 and the 26-Weeks ended June 26, 1999............................3
Notes to Consolidated Financial Statements........................................4-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................................6-10
PART II: OTHER INFORMATION
Item 4. Submissions of Matters to Vote of Security-Holders................................11
Item 6. Exhibits and Reports on Form 8-K..................................................11
SIGNATURES...................................................................................................12
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------
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<CAPTION>
JULY 1, DECEMBER 25,
2000 1999
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,147 $ 3,069
Accounts receivable 799 1,898
Income taxes receivable 129 1,710
Inventories 31,064 34,099
Prepaid expenses 241 662
Prepaid income taxes 417 -
Deferred income taxes 2,831 2,831
-------------- --------------
Total current assets 36,628 44,269
Fixed assets, net 9,005 9,513
Goodwill, net 2,675 2,757
Deferred income taxes 3,646 3,646
Other assets 296 -
-------------- --------------
Total assets $ 52,250 $ 60,185
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4 $ 15,534
Accounts payable 8,090 13,772
Reserve for store closings and restructuring costs 3,318 4,782
Accrued payroll 772 1,008
Sales tax payable 426 945
Accrued expenses and other liabilities 1,073 1,106
-------------- --------------
Total current liabilities 13,683 37,147
Deferred rent 1,559 1,483
Long-term debt, net of current portion 16,026 5
-------------- --------------
Total liabilities 31,268 38,635
-------------- --------------
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; 7,156,759 and 6,959,476 shares issued and
outstanding at July 1, 2000 and December 25, 1999, respectively 72 70
Additional paid-in capital 25,976 25,962
Retained deficit (5,066) (4,482)
-------------- --------------
Total stockholders' equity 20,982 21,550
-------------- --------------
Total liabilities and stockholders' equity $ 52,250 $ 60,185
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------
(UNAUDITED)
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<CAPTION>
PERIOD ENDED
--------------------------------------------------------------------------
JULY 1, JUNE 26, JULY 1, JUNE 26,
2000 1999 2000 1999
(13 WEEKS) (13 WEEKS) (27 WEEKS) (26 WEEKS)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 23,094 $ 28,272 $ 46,464 $ 51,596
Cost of sales 12,355 14,529 23,822 27,150
-------------- -------------- -------------- --------------
Gross profit 10,739 13,743 22,642 24,446
-------------- -------------- -------------- --------------
Operating expenses:
Selling and marketing 9,069 11,009 18,960 21,870
Administrative and distribution 1,916 2,299 4,247 4,704
Restructuring, impairment, and related costs (340) - (340) -
-------------- -------------- -------------- --------------
Total operating expenses 10,645 13,308 22,867 26,574
-------------- -------------- -------------- --------------
Operating income (loss) 94 435 (225) (2,128)
Other (income) expense:
Interest expense 413 310 756 558
Other, net (1) 47 (8) 51
-------------- -------------- -------------- --------------
Income (loss) before income taxes (318) 78 (973) (2,737)
Income tax provision (benefit) (127) 33 (389) (1,191)
-------------- -------------- -------------- --------------
Net income (loss) $ (191) $ 45 $ (584) $ (1,546)
============== ============== ============== ==============
Earnings (loss) per share:
Basic $ (0.03) $ 0.01 $ (0.08) $ (0.23)
============== ============== ============== ==============
Diluted $ (0.03) $ 0.01 $ (0.08) $ (0.23)
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
-----------
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 1, JUNE 26,
2000 1999
(27 WEEKS) (26 WEEKS)
-------------- --------------
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Cash flows from operating activities:
Net loss $ (584) $ (1,546)
Adjustments to reconcile to cash used for operating activities:
Depreciation and amortization 1,055 1,325
Loss on disposal of fixed assets 1 56
Adjustments to reserve for store closings and restructuring costs (573) -
Cash provided by (used for) changes in operating assets and liabilities:
Accounts receivable 1,099 1,203
Income taxes receivable 1,581 130
Inventories 3,035 (568)
Prepaid expenses 421 132
Prepaid income taxes (417) (1,525)
Accounts payable and other accrued liabilities (6,471) (5,226)
Reserve for store closings and restructuring costs (891) -
Income taxes payable - (687)
Deferred rent 76 91
-------------- --------------
Cash used for operating activities (1,668) (6,615)
-------------- --------------
Cash flows from investing activities:
Purchases of fixed assets (466) (1,195)
Proceeds from sale of fixed assets - 22
-------------- --------------
Cash used for investing activities (466) (1,173)
-------------- --------------
Cash flows from financing activities:
Bank line of credit:
Borrowings 64,352 32,458
Repayments (63,829) (25,257)
Long-term debt:
Repayments (31) (35)
Payment of loan fees (296) -
Net proceeds from issuance of common stock 14 23
Proceeds from excercise of stock options 2 -
-------------- --------------
Cash provided by financing activities 212 7,189
-------------- --------------
Decrease in cash and cash equivalents (1,922) (599)
Cash and cash equivalents, beginning of period 3,069 1,808
-------------- --------------
Cash and cash equivalents, end of period $ 1,147 $ 1,209
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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TRACK 'N TRAIL AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
INTERIM RESULTS
The accompanying consolidated financial statements for the 13 weeks
and 27 weeks ended July 1, 2000 and 13 weeks and 26 weeks ended June 26,
1999, have been prepared in accordance with generally accepted accounting
principles ("GAAP"), and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. These financial statements have not been audited by
independent public accountants, but include all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial condition, results of
operations and cash flows for such periods. However, these results are not
necessarily indicative of results for any other interim period or for the
full fiscal year. The accompanying consolidated balance sheet as of December
25, 1999 has been derived from the audited financial statements, but does not
include all disclosures required by GAAP. Track 'n Trail, a Delaware
corporation (together with its subsidiaries, unless the context otherwise
requires, the "Company"), has historically experienced significant quarterly
fluctuations due to seasonality in operating results and it expects that
these fluctuations in sales, expenses, and net income or losses will continue.
The financial statements and related disclosures have been prepared
with the presumption that users of the interim financial information have
read or have access to the audited financial statements for the preceding
fiscal year. Accordingly, these financial statements should be read in
conjunction with the audited financial statements and the related notes
thereto incorporated by reference from the Company's Annual Report on Form
10-K for the fiscal year ended December 25, 1999.
2. REVENUE RECOGNITION
The Company records sales net of actual and estimated future returns.
Layaway sales are not significant.
3. EARNINGS PER SHARE
Earnings per share ("EPS") is calculated under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER
SHARE. SFAS No. 128 requires dual presentation of basic and diluted earnings
per share by entities with complex capital structures. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock, or resulted in the issuance of common stock, that then shared in
earnings of the entity.
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3. EARNINGS PER SHARE (continued)
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations under SFAS No. 128 is as follows (in
thousands, except per share information):
<TABLE>
<CAPTION>
Period Ended
------------------------------------------------------------------
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
(13 weeks) (13 weeks) (27 weeks) (26 weeks)
------------- -------------- ------------- --------------
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Income (loss) available to common stockholders for
basic and diluted earnings (loss) per share......... $ (191) $ 45 $ (584) $ (1,546)
============= ============== ============= ==============
Weighted average shares for basic earnings (loss)
per share........................................... 7,157 6,866 7,117 6,865
Dilutive effect of stock options (treasury stock
method)............................................. 0 225 0 0
------------- -------------- ------------- --------------
Weighted average shares for diluted earnings (loss)
per share........................................... 7,157 7,091 7,117 6,865
============= ============== ============= ==============
Earnings (loss) per share:
Basic.......................................... $ (0.03) $ 0.01 $ (0.08) $ (0.23)
============= ============== ============= ==============
Diluted........................................ $ (0.03) $ 0.01 $ (0.08) $ (0.23)
============= ============== ============= ==============
</TABLE>
For the 13 weeks and 27 weeks ended July 1, 2000 and the 26 weeks
ended June 26, 1999, all warrants and options outstanding were not dilutive
and, accordingly, were not included in the weighted number of common and
common equivalent shares outstanding. For the 13 weeks ended June 26, 1999,
all warrants outstanding and certain options with exercise prices in excess
of market value were not dilutive and, accordingly, were not included in the
weighted average number of common and common equivalent shares outstanding.
4. RESTRUCTURING RESERVES
In fiscal 1999 the Company adopted a restructuring plan to close
42 stores during the first 120 days of fiscal 2000. A reserve was established
in fiscal 1999 for $4.8 million for lease termination and other related costs
and for severance payments for 12 administrative employees. During the first
quarter in fiscal 2000, the Company had completed the closure of all
42 stores and had paid $82,000 in employee severance for 12 administrative
employees. Additionally, 15 lease buyouts were negotiated in the second
quarter of fiscal 2000 for $809,000. An additional $112,000 was paid in the
second quarter of fiscal 2000 for legal and other related costs for the
15 completed lease buyouts. Based on current economic and competitive
factors, the Company has determined that it will reopen one of the 42 stores
closed as part of the 1999 restructuring plan during the third quarter of
fiscal 2000.
The Company reviewed the adequacy of its remaining reserves related to
the 1999 restructuring plan based on expected future payments. Based on this
review, the Company reduced its reserve for lease termination and related
costs by $573,000 including $54,000 for the one store planned to be reopened.
The $573,000 consists of $452,000 related to the better than expected results
for completed lease buyouts and $121,000 which was a reserve established
against a construction allowance for one of the closed stores. This $121,000
reserve was written off against the associated receivable resulting in no
effect on income. Remaining reserves under the restructuring plan relate to
the remaining lease obligations and related costs. The following table sets
forth the activity in the restructuring reserves (in thousands):
5
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<CAPTION>
Reserve at Reserve at
December 25, Reserve July 1,
1999 Payments Adjustments 2000
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Lease termination and other
related costs $ 4,700 $ (809) $ (573) $3,318
Employee severance 82 (82) 0 0
--------------- --------------- --------------- --------------
Total $ 4,782 $ (891) $ (573) $3,318
=============== =============== =============== ==============
</TABLE>
Additionally, in fiscal 1999, the Company recorded charges of
$3.8 million in cost of sales to reduce inventory to its net realizable value
in the stores scheduled for closure and $493,000 in severance and related
expenses in connection with management changes. Due to the successful
completion of the liquidation process, the Company reduced cost of sales by
$290,000 during the first quarter of fiscal 2000. In addition, during the
13 weeks ended July 1, 2000, the Company reduced administrative and
distribution expenses by $93,000 for a severance reserve established in
fiscal 1999 in connection with the management changes during the fourth
quarter of fiscal 1999.
5. LONG-TERM DEBT
In March 2000, the Company obtained a 60 month senior revolving credit
facility ("New Revolver") with borrowing availability up to $25.0 million
dollars. The New Revolver bears variable interest and is collateralized by
all of the Company's assets. Borrowings under the New Revolver are limited to
specified percentages of eligible inventory and accounts receivable. The New
Revolver prohibits the Company from paying dividends without the lender's
consent and limits the Company's capital expenditures. In addition, the New
Revolver requires the Company to meet certain financial covenants, including
minimum financial ratios and profitability ratios. As the New Revolver is not
scheduled to mature until March 2005, the outstanding balance at July 1, 2000
has been classified as noncurrent.
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT. In
addition to historical information, this Management's Discussion and Analysis
includes certain forward-looking statements regarding events and financial
trends which may affect the Company's future operating results and financial
position. Such statements are subject to risks and uncertainties that could
cause the Company's actual results and financial position to differ
materially. Factors that could cause or contribute to such differences
include those discussed below. These and other risks and uncertainties
related to the business are described in detail in the Company's Annual
Report on Form 10-K under the heading "Risk Factors". Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
OVERVIEW
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. Pursuant to the reorganization (the
"Reorganization") effected in October 1997, the Company acquired the
businesses conducted by its subsidiaries, Track `n Trail, a California
corporation ("Track `n Trail - California"), and Overland Management
Corporation ("Overland"). The Reorganization was accounted for in a manner
similar to a pooling of interests. In August 1998 the Company acquired
Nevin's Eagles Nest, Inc. ("Eagles Nest"), a retailer of premium branded
outdoor apparel. 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 Trading stores. The
Company operates in a single business segment. As of July 1, 2000, the
Company operated 112 Track `n Trail stores and 44 Overland Trading stores in
33 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
6
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Company's comparable store net sales decreased 4.5% for the 13 weeks ended
July 1, 2000 and decreased 1.3% for the 27 weeks ended July 1, 2000 versus
the comparable 27 week period in 1999.
RESULTS OF OPERATIONS
The following discussions compare the Company's results of
operations for the 13 weeks ended July 1, 2000 with its results for the 13
weeks ended June 26, 1999, and the Company's results of operations for the 27
weeks ended July 1, 2000 with its results for the 26 weeks ended June 26,
1999. The results achieved in these periods are not necessarily indicative of
results to be achieved in future periods. The following comparative
information should be read in conjunction with the Consolidated Financial
Statements and accompanying notes for each period discussed, as well as the
information presented in all other sections of this Management's Discussion
and Analysis.
THIRTEEN WEEKS ENDED JULY 1, 2000 COMPARED TO THIRTEEN WEEKS ENDED
JUNE 26, 1999
NET SALES
Net sales were $23.1 million for the 13 weeks ended July 1, 2000,
representing a decrease of $5.2 million, or 18.3%, over net sales for the
13 weeks ended June 26, 1999. Net sales for the 36 stores closed (net of
openings) subsequent to fiscal 1998 accounted for $4.0 million of the
decrease in net sales. Comparable store net sales for the 13 weeks ended
July 1, 2000 decreased $994,000, or 4.5%. The decrease in comparable store
net sales is primarily due to soft sandal sales resulting from an over-supply
of sandals in the market. The Company expects to open two additional stores
during the remainder of fiscal 2000.
GROSS PROFIT
Gross profit was $10.7 million for the 13 weeks ended July 1, 2000,
representing a decrease of $3.0 million, or 21.9%, over gross profit for the
13 weeks ended June 26, 1999. Gross profit as a percentage of net sales
decreased to 46.5% for the 13 weeks ended July 1, 2000 from 48.6% for the
13 weeks ended June 26, 1999. The decrease in gross profit as a percentage of
net sales is primarily due to additional markdowns taken in response to
increased competition in the sandal market than experienced in the 13 weeks
ended June 26, 1999.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $9.1 million for the 13 weeks
ended July 1, 2000, representing a decrease of $1.9 million, or 17.6%, from
selling and marketing expenses for the 13 weeks ended June 26, 1999.
Approximately $800,000 of this decrease is attributable to the closure of the
Eagles Nest stores in the first quarter of 2000. The remaining decrease is
primarily attributable to decreased operating costs related to operating
29 fewer Track `n Trail and Overland Trading stores at July 1, 2000 versus
June 26, 1999. As a percentage of net sales, selling and marketing expenses
increased to 39.3% for the 13 weeks ended July 1, 2000 from 38.9% for the
13 weeks ended June 26, 1999, primarily due to the decrease in comparable
store net sales during the 13 weeks ended July 1, 2000.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $1.9 million for the
13 weeks ended July 1, 2000, representing a decrease of $383,000, or 16.7%,
from administrative and distribution expenses for the 13 weeks ended June 26,
1999. As a percentage of net sales, administrative and distribution expenses
increased to 8.3% for the 13 weeks ended July 1, 2000 from 8.1% for the
13 weeks ended June 26, 1999. The decrease in dollars is primarily due to a
benefit derived from reversing a severance reserve of $93,000 in connection
with management changes that occurred during the fourth quarter of fiscal
1999 and the closure of the Eagles Nest regional office in the first quarter
of 2000. The increase in administration and distribution expenses as a
percentage of net sales is primarily due to the decrease in comparable store
net sales during the 13 weeks ended July 1, 2000.
RESTRUCTURING, IMPAIRMENT, AND RELATED COSTS
Restructuring, impairment, and related costs were ($340,000), or
(1.5%), of net sales for the 13 weeks ended July 1, 2000. The benefit was a
result of a $452,000 adjustment to the reserves related to the 1999
restructuring plan based on future payments (See Note 4 of the "Notes To
Consolidated Financial Statements"). The benefit was offset by $112,000
7
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paid in the second quarter of fiscal 2000 for legal and other related costs
for 15 completed lease buyouts. No restructuring, impairment, and related
costs were recorded during the 13 weeks ended June 26, 1999.
INTEREST EXPENSE
Interest expense was $413,000, or 1.8% of net sales, for the 13
weeks ended July 1, 2000, representing an increase of $103,000 from interest
expense of $310,000, or 1.1% of net sales, for the 13 weeks ended June 26,
1999. The increase is primarily attributable to increased prime lending rates
during the past 12 months and an increase of the average outstanding
principal balance of the Company's credit facility in the second quarter of
fiscal 2000 over that of the second quarter of fiscal 1999.
NET LOSS
The Company's net loss for the 13 weeks ended July 1, 2000 was
$191,000, representing a decrease of $236,000 from a net income of $45,000
for the 13 weeks ended June 26, 1999.
TWENTY-SEVEN WEEKS ENDED JULY 1, 2000 COMPARED TO TWENTY-SIX WEEKS
ENDED JUNE 26, 1999
NET SALES
Net sales were $46.5 million for the 27 weeks ended July 1, 2000,
representing a decrease of $5.1 million, or 9.9%, over net sales of $51.6
million for the 26 weeks ended June 26, 1999. Net sales for the 36 stores
closed (net of openings) subsequent to fiscal 1998 accounted for $6.5 million
of the decrease in net sales. Comparable store net sales for the first 26
weeks in the period ended June 24, 2000 decreased $315,000, or 0.8%. These
decreases were offset by a $1.8 million increase in net sales due to a one
week shift in the fiscal calendar, which was caused by a change in the
measurement period used for period-to-period comparisons (twenty-seven week
period for the first half of fiscal 2000 and twenty-six week period for the
first half of fiscal 1999). The Company expects to open two additional stores
during the remainder of fiscal 2000.
GROSS PROFIT
Gross profit was $22.6 million for the 27 weeks ended July 1, 2000,
representing a decrease of $1.8 million, or 7.4%, over gross profit for the
26 weeks ended June 26, 1999. Gross profit as a percentage of net sales
increased to 48.7% for the 27 weeks ended July 1, 2000 from 47.4% for the 26
weeks ended June 26, 1999. The increase in gross profit as a percentage of
net sales is primarily due to two factors: 1) the $290,000 benefit derived
from a better than expected liquidation of the 42 stores closed as part of
the restructuring plan, and 2) the January 2000 closure of the Eagles Nest
stores on which margins were generally lower than the margins on sales
attributable to the Track `n Trail and Overland Trading stores.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $19.0 million for the 27 weeks
ended July 1, 2000, representing a decrease of $2.9 million, or 13.3%, from
selling and marketing expenses for the 26 weeks ended June 26, 1999.
Approximately $1.3 million of this decrease is attributable to the closure of
the Eagles Nest stores in the first quarter of 2000. The remaining decrease
is primarily attributable to decreased operating costs related to operating
29 fewer Track `n Trail and Overland Trading stores at July 1, 2000 versus
June 26, 1999. As a percentage of net sales, selling and marketing expenses
decreased to 40.8% for the 27 weeks ended July 1, 2000 from 42.4% for the 26
weeks ended July 26, 1999, primarily as a result of the spreading of monthly
lease payments over an additional week of net sales.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $4.2 million for the
27 weeks ended July 1, 2000, representing a decrease of $457,000, or 9.7%
from administrative and distribution expenses for the 26 weeks ended June 26,
1999. As a percentage of net sales, administrative and distribution expenses
were 9.1% for the 27 weeks ended July 1, 2000 and 9.1% for the 26 weeks ended
June 26, 1999. The decrease in dollars is primarily due to the management
changes that occurred during the fourth quarter of 1999 and the closure of
the Eagles Nest regional office in the first quarter of 2000.
8
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RESTRUCTURING, IMPAIRMENT AND RELATED COSTS
Restructuring, impairment, and related costs were ($340,000), or
(0.7%), of net sales for the 27 weeks ended July 1, 2000. The benefit was a
result of a $452,000 adjustment to the reserves related to the 1999
restructuring plan based on future payments (See Note 4 of the "Notes To
Consolidated Financial Statements"). The benefit was offset by $112,000 paid
in the second quarter of fiscal 2000 for legal and other related costs for 15
completed lease buyouts. No restructuring, impairment, and related costs were
recorded during the 26 weeks ended June 26, 1999.
INTEREST EXPENSE
Interest expense was $756,000, or 1.6% of net sales, for the 27
weeks ended July 1, 2000, representing an increase of $198,000 from interest
expense of $558,000, or 1.1% of net sales, for the 26 weeks ended June 26,
1999. The increase is primarily attributable to increased prime lending rates
during the past 12 months and an increase of the average outstanding
principal balance of the Company's credit facility in the first half of
fiscal 2000 over that of the first half of fiscal 1999.
NET LOSS
The Company's net loss for the 27 weeks ended July 1, 2000 was
$584,000, representing an improvement of $962,000 from a net loss of
$1.5 million for the 26 weeks ended June 26, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from internally generated
cash flow, borrowings under its revolving line of credit, and equity
financing. The Company's liquidity requirements relate primarily to the
financing of inventories, build-out of new stores, remodeling of existing
stores and the implementation of the restructuring plan.
In March, management repaid the existing line of credit with Union
Bank of California with a 60 month senior revolving credit facility ("New
Revolver") with borrowing availability up to $25.0 million. The New Revolver
bears variable interest and is collateralized by all of the Company's assets.
Borrowings under the New Revolver are limited to specific percentages of
eligible inventory and accounts receivable. The New Revolver prohibits the
Company from paying dividends without the bank's consent and limits the
Company's capital expenditures. In addition, the New Revolver requires the
Company to meet certain financial covenants, including minimum financial
ratios and profitability ratios.
Net cash used for operating activities for the 27 weeks ended July
1, 2000 was $1.7 million. Net cash used for or provided by operating
activities has historically been driven by net income (loss) levels combined
with fluctuations in inventory and accounts payable. Inventories at July 1,
2000 were $31.1 million compared to $34.1 million at December 25, 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
decrease in inventory between December 25, 1999 and July 1, 2000 relates
primarily to the closure of 43 stores (net of openings) during the 27 weeks
ended July 1, 2000. This decrease is lessened by the fact that the inventory
in the stores scheduled to be closed had been written down to its net
realizable value at December 25, 1999 and by seasonal differences.
The Company had $22.9 million in working capital as of July 1, 2000
compared to $7.1 million at the end of fiscal 1999, representing an increase
of $15.8 million. The increase in working capital is primarily the result of
reclassifying $16.0 million to long term debt as a result of the New
Revolver. The Company's working capital needs historically have been seasonal
and typically peak in the second and fourth quarters. The peak in the second
quarter is due to the incurrence of operating losses in the first quarter and
increased inventory purchased for the spring selling season. Working capital
needs peak in the fourth quarter due to increases in inventory in advance of
the holiday selling season and payments coming due for back-to-school
merchandise. In addition, the Company requires incremental working capital to
stock each new store upon opening.
Capital expenditures were $466,000 for the 27 weeks ended July 1,
2000. Capital expenditures in the first 27 weeks of 2000 were primarily for
the build-out of two stores opened in this period, the build-out of one store
opened in 1999 and an upgrade to the corporate phone system. The Company
estimates capital expenditures for the remainder of the
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year to be approximately $150,000 for the build-out of approximately two
additional stores, approximately $450,000 for the remodeling of three stores
and approximately $50,000 for software and hardware upgrades.
The Company reviews the operating performance of its stores on an
ongoing basis to determine which stores, if any, to close. The Company closed
42 stores as part of the restructuring plan adopted in fiscal 1999 and three
other underperforming stores in the first half of fiscal 2000. As of July 1,
2000, a reserve of $3.3 million remains for the remaining lease obligations
and related costs associated with the 1999 restructuring plan. The Company
anticipates that the remaining lease obligations will be paid by the end of
fiscal 2000 by cash generated from operations and additional borrowings on
the New Revolver.
Net cash provided by financing activities for the 27 weeks ended
July 1, 2000 was $212,000, and consisted of borrowings under the Company's
revolving line of credit to fund working capital requirements offset by loan
fees associated with obtaining the New Revolver.
Management believes that the Company's operating cash flow and
borrowings under its New Revolver will be sufficient to complete the
Company's fiscal 2000 and fiscal 2001 store expansion program and to satisfy
the Company's other capital requirements through such periods. The Company's
capital requirements may vary significantly from those anticipated depending
upon such factors as operating results, the number and timing of new store
openings, and the number and size of any potential future acquisitions.
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.
YEAR 2000
All phases of the Company's 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.
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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company anticipates that its operating results will fluctuate as a result
of a number of factors, including the number and timing of store openings and
closures, seasonality, changes in pricing or promotion policies by the
Company, its competitors or its suppliers, the availability and cost of
merchandise, the ability of the Company to adjust to changing fashion trends
and consumer acceptance of the products sold by the Company. The availability
and cost of merchandise may, in turn, fluctuate due to a number of factors
including changes in the Company's relationships with major suppliers, the
Company's access to private label manufacturing capacity, foreign currency
fluctuations and other risks associated with importing private label products
from foreign countries.
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<PAGE>
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS
At the Company's Annual Meeting of Stockholders held on April 27, 2000,
the following individual was elected to the Board of Directors:
<TABLE>
<S> <C> <C>
Votes For Votes Withheld
------------------------ ------------------------
Barbara J. Suechting 6,345,635 14,960
</TABLE>
As Class II director, Barbara J. Suechting will serve until the Annual
Meeting of Stockholders in 2003; or such time as a successor is elected and
qualified.
The resolution for the amendment of the Company's certificate of
incorporation to effect a one-for-two reverse stock split of the Company's
outstanding common stock was not approved at the Company's Annual Meeting of
Stockholders by the following vote:
<TABLE>
<S> <C> <C>
For Against Abstain
------------------------------ ----------------------------- -----------------------------
2,180,473 4,179,888 234
</TABLE>
In addition, the proposal to appoint the firm of PricewaterhouseCoopers LLP
as the independent public accountants of the Company was approved at the
Company's Annual Meeting of Stockholders by the following vote:
<TABLE>
<S> <C> <C>
For Against Abstain
------------------------------ ----------------------------- -----------------------------
6,349,835 10,560 200
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description of Document
-------------------- --------------------------------------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
A Form 8-K was filed on April 13, 2000 announcing that the Company
will trade on the NASDAQ The SmallCap Market.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
TRACK `N TRAIL
Date: August 8, 2000 By: /s/ Daniel J. Nahmens
---------------------------------------
Daniel J. Nahmens
Executive Vice President - Finance and
Chief Financial Officer and Treasurer
(on behalf of the Registrant and as the
Registrant's Principal Financial and
Accounting Officer)
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