<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,
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 November 14, 2000 was 7,167,866.
<PAGE>
TRACK 'N TRAIL
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I: FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000
and December 25, 1999..............................................................1
Consolidated Statements of Operations for the 13-Weeks and 40-Weeks ended
September 30, 2000 and the 13-Weeks and 39-Weeks ended September 25, 1999..........2
Consolidated Statements of Cash Flows for the 40-Weeks ended
September 30, 2000 and the 39-Weeks ended September 25, 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
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................10-11
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................12
SIGNATURES...................................................................................................13
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
----------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 25,
2000 1999
----------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 494 $ 3,069
Accounts receivable 917 1,898
Income taxes receivable 126 1,710
Inventories 29,804 34,099
Prepaid expenses 388 662
Prepaid income taxes 519 --
Deferred income taxes 2,831 2,831
-------------- --------------
Total current assets 35,079 44,269
Fixed assets, net 8,793 9,513
Goodwill, net 2,634 2,757
Deferred income taxes 3,646 3,646
Other assets 282 --
-------------- --------------
Total assets $ 50,434 $ 60,185
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 15,534
Accounts payable 7,481 13,772
Reserve for store closings and restructuring costs 2,403 4,782
Accrued payroll 523 1,008
Sales tax payable 430 945
Accrued expenses and other liabilities 947 1,106
-------------- --------------
Total current liabilities 11,784 37,147
Deferred rent 1,617 1,483
Long-term debt, net of current portion 16,197 5
-------------- --------------
Total liabilities 29,598 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; 7,167,866 and 6,959,476 shares issued and
outstanding at September 30, 2000 and December 25, 1999, respectively 72 70
Additional paid-in capital 25,984 25,962
Retained deficit (5,220) (4,482)
-------------- --------------
Total stockholders' equity 20,836 21,550
-------------- --------------
Total liabilities and stockholders' equity $ 50,434 $ 60,185
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
----------
(unaudited)
<TABLE>
<CAPTION>
PERIOD ENDED
----------------------------------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 25,
2000 1999 2000 1999
(13 WEEKS) (13 WEEKS) (40 WEEKS) (39 WEEKS)
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 25,329 $ 29,671 $ 71,793 $ 81,267
Cost of sales 14,096 15,906 37,918 43,056
-------------- ------------- -------------- --------------
Gross profit 11,233 13,765 33,875 38,211
-------------- ------------- -------------- --------------
Operating expenses:
Selling and marketing 9,531 11,709 28,491 33,579
Administrative and distribution 1,938 2,090 6,185 6,794
Restructuring and impairment costs
(reserve reduction) (384) -- (724) --
-------------- ------------- -------------- --------------
Total operating expenses 11,085 13,799 33,952 40,373
-------------- ------------- -------------- --------------
Operating income (loss) 148 (34) (77) (2,162)
Other expense:
Interest expense 393 317 1,149 875
Other, net 10 66 2 117
-------------- ------------- -------------- --------------
Loss before income taxes (255) (417) (1,228) (3,154)
Income tax provision (benefit) (102) 92 (491) (1,099)
-------------- ------------- -------------- --------------
Net loss $ (153) $ (509) $ (737) $ (2,055)
============== ============= ============== ==============
Loss per share:
Basic $ (0.02) $ (0.07) $ (0.10) $ (0.30)
============== ============= ============== ==============
Diluted $ (0.02) $ (0.07) $ (0.10) $ (0.30)
============== ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
TRACK 'N TRAIL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
----------
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 25,
2000 1999
(40 WEEKS) (39 WEEKS)
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (737) $ (2,055)
Adjustments to reconcile to cash used for operating activities:
Depreciation and amortization 1,586 1,997
Loss on disposal of fixed assets 30 56
Adjustments to reserve for store closings and restructuring costs (1,010) --
Cash provided by (used for) changes in operating assets and liabilities:
Accounts receivable 981 1,473
Income taxes receivable 1,584 130
Inventories 4,295 (1,395)
Prepaid expenses 274 65
Prepaid income taxes (519) (1,458)
Accounts payable and other accrued liabilities (7,450) (3,071)
Reserve for store closings and restructuring costs (1,369) --
Income taxes payable -- (687)
Deferred rent 134 171
------------- --------------
Cash used for operating activities (2,201) (4,774)
------------- --------------
Cash flows from investing activities:
Purchases of fixed assets (773) (1,872)
Proceeds from sale of fixed assets -- 22
------------- --------------
Cash used for investing activities (773) (1,850)
------------- --------------
Cash flows from financing activities:
Bank line of credit:
Borrowings 92,299 51,217
Repayments (91,602) (45,332)
Long-term debt:
Repayments (39) (153)
Payment of loan fees (282) --
Net proceeds from issuance of common stock 21 62
Proceeds from excercise of stock options 2 --
------------- --------------
Cash provided by financing activities 399 5,794
------------- --------------
Decrease in cash and cash equivalents (2,575) (830)
Cash and cash equivalents, beginning of period 3,069 1,808
------------- --------------
Cash and cash equivalents, end of period $ 494 $ 978
============= ===============
</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
40 weeks ended September 30, 2000 and 13 weeks and 39 weeks ended September 25,
1999, have been prepared in accordance with accounting principles generally
accepted in the United States of America, 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 accounting principles generally accepted in
the United States of America. 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.
4
<PAGE>
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
-------------------------------------------------------------------------------
September 30, September 25, September 30, September 25,
2000 1999 2000 1999
(13 weeks) (13 weeks) (40 weeks) (39 weeks)
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Loss available to common
stockholders for basic and diluted
loss per share............................ $ (153) $ (509) $ (737) $ (2,055)
================ ================= ================= =================
Weighted average shares for basic and
diluted loss per share.................... 7,167 6,889 7,134 6,873
================ ================= ================= =================
Loss per share:
Basic................................ $ (0.02) $ (0.07) $ (0.10) $ (0.30)
================ ================= ================= =================
Diluted.............................. $ (0.02) $ (0.07) $ (0.10) $ (0.30)
================ ================= ================= =================
</TABLE>
For the 13 weeks and 40 weeks ended September 30, 2000 and the 13 weeks
and 39 weeks ended September 25, 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.
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
of 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, 29 lease buyouts were negotiated during the second and third
quarters of fiscal 2000 for $1.3 million. An additional $164,000 was paid during
the second and third quarters of fiscal 2000 for legal and other related costs
for the 29 completed lease buyouts. Based on current economic and competitive
factors, the Company reopened 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 $1.0 million including $46,000 for the one reopened store. The $1.0 million
consists of $888,000 related to better than expected results for completed lease
buyouts and $122,000 which was a reserve established against a construction
allowance for one of the closed stores. This $122,000 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):
<TABLE>
<CAPTION>
Reserve at Reserve at
December 25, Reserve September 30,
1999 Payments Adjustments 2000
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Lease termination and other
related costs $ 4,700 $ (1,287) $ (1,010) $2,403
Employee severance 82 (82) 0 0
---------------- ----------------- ----------------- -----------------
Total $ 4,782 $ (1,369) $ (1,010) $2,403
================ ================= ================= =================
</TABLE>
5
<PAGE>
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 second quarter of fiscal
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 September 30,
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
September 30, 2000, the Company operated 113 Track `n Trail stores and 45
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
Company's comparable store net sales increased 0.4% for the 13 weeks ended
September 30, 2000 and decreased 0.7% for the 40 weeks ended September 30, 2000
versus the comparable 40 week period in 1999.
RESULTS OF OPERATIONS
The following discussions compare the Company's results of operations
for the 13 weeks ended September 30, 2000 with its results for the 13 weeks
ended September 25, 1999, and the Company's results of operations for the 40
weeks ended September 30, 2000 with its results for the 39 weeks ended September
25, 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.
6
<PAGE>
THIRTEEN WEEKS ENDED SEPTEMBER 30, 2000 COMPARED TO THIRTEEN WEEKS
ENDED SEPTEMBER 25, 1999
NET SALES
Net sales were $25.3 million for the 13 weeks ended September 30, 2000,
representing a decrease of $4.3 million, or 14.6%, over net sales for the 13
weeks ended September 25, 1999. Net sales for the 34 stores closed (net of
openings) subsequent to fiscal 1998 accounted for $3.9 million of the decrease
in net sales. Additionally, a change in the measurement period used for
period-to-period comparisons due to a one week shift in the fiscal calendar
accounted for approximately a $505,000 decrease in net sales. These decreases
were offset by comparable store net sales increase of $95,000, or 0.4%, for the
13 weeks ended September 30, 2000. The Company does not expect to open any
additional stores during the remainder of fiscal 2000.
GROSS PROFIT
Gross profit was $11.2 million for the 13 weeks ended September 30,
2000, representing a decrease of $2.5 million, or 18.4%, over gross profit for
the 13 weeks ended September 25, 1999. Gross profit as a percentage of net sales
decreased to 44.3% for the 13 weeks ended September 30, 2000 from 46.4% for the
13 weeks ended September 25, 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 September 25, 1999 and the markdowns taken to liquidate product identified
during the quarter which is being discontinued by the Company. Decisions were
made in the quarter to reduce the number of SKUs offered, and to reduce
inventory levels in an effort to increase inventory turnover and improve cash
flow over the next 15 months.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $9.5 million for the 13 weeks ended
September 30, 2000, representing a decrease of $2.2 million, or 18.6%, from
selling and marketing expenses for the 13 weeks ended September 25, 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 26
fewer Track `n Trail and Overland Trading stores at September 30, 2000 versus
September 25, 1999. As a percentage of net sales, selling and marketing expenses
decreased to 37.6% for the 13 weeks ended September 30, 2000 from 39.5% for the
13 weeks ended September 25, 1999, primarily due to the liquidation of the 42
stores closed as part of the restructuring plan in 1999 which in the aggregate,
had higher selling and marketing expenses as a percentage of net sales than the
remaining stores.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $1.9 million for the 13
weeks ended September 30, 2000, representing a decrease of $152,000, or 7.3%,
from administrative and distribution expenses for the 13 weeks ended September
25, 1999. As a percentage of net sales, administrative and distribution expenses
increased to 7.7% for the 13 weeks ended September 30, 2000 from 7.0% for the 13
weeks ended September 25, 1999. The decrease in dollars is primarily due to 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 net sales during the 13 weeks ended
September 30, 2000.
RESTRUCTURING AND IMPAIRMENT COSTS (RESERVE REDUCTION)
Restructuring and impairment costs were ($384,000), or (1.5%), of net
sales for the 13 weeks ended September 30, 2000. The benefit was a result of a
$437,000 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 $53,000 paid in the third quarter of
fiscal 2000 for legal and other related costs for 14 lease buyouts completed
during the third quarter of fiscal 2000. No restructuring and impairment costs
were recorded during the 13 weeks ended September 25, 1999.
7
<PAGE>
INTEREST EXPENSE
Interest expense was $393,000, or 1.6% of net sales, for the 13 weeks
ended September 30, 2000, representing an increase of $76,000 from interest
expense of $317,000, or 1.1% of net sales, for the 13 weeks ended September 25,
1999. The increase is primarily attributable to higher lending rates which have
increased approximately 1.25% during the past 12 months and an increase of the
average outstanding principal balance of the Company's credit facility in the
third quarter of fiscal 2000 over that of the third quarter of fiscal 1999.
NET LOSS
The Company's net loss for the 13 weeks ended September 30, 2000 was
$153,000, representing a decrease of $356,000 from a net loss of $509,000 for
the 13 weeks ended September 25, 1999.
FORTY WEEKS ENDED SEPTEMBER 30, 2000 COMPARED TO THIRTY-NINE WEEKS
ENDED SEPTEMBER 25, 1999
NET SALES
Net sales were $71.8 million for the 40 weeks ended September 30, 2000,
representing a decrease of $9.5 million, or 11.7%, over net sales for the 39
weeks ended September 25, 1999. Net sales for the 34 stores closed (net of
openings) subsequent to fiscal 1998 accounted for $10.7 million of the decrease
in net sales. Comparable store net sales for the first 39 weeks in the period
ended September 23, 2000 decreased $696,000, or 1.1%. The decrease in comparable
store net sales is primarily due to soft sandal sales resulting from an
over-supply of sandals in the market. These decreases were offset by a $1.9
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 (forty week period for the first three quarters of fiscal 2000 and
thirty-nine week period for the first three quarters of fiscal 1999). The
Company does not expect to open any additional stores during the remainder of
fiscal 2000.
GROSS PROFIT
Gross profit was $33.9 million for the 40 weeks ended September 30,
2000, representing a decrease of $4.3 million, or 11.3%, over gross profit for
the 39 weeks ended September 25, 1999. Gross profit as a percentage of net sales
increased to 47.2% for the 40 weeks ended September 30, 2000 from 47.0% for the
39 weeks ended September 25, 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. These increases are partially offset
by additional markdowns taken in response to increased competition in the sandal
market than experienced during the 39 weeks ended September 25, 1999 and the
markdowns taken to liquidate redundant merchandise which is being phased out.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses were $28.5 million for the 40 weeks
ended September 30, 2000, representing a decrease of $5.1 million, or 15.2%,
from selling and marketing expenses for the 39 weeks ended September 25, 1999.
Approximately $2.2 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 26
fewer Track `n Trail and Overland Trading stores at September 30, 2000 versus
September 25, 1999. As a percentage of net sales, selling and marketing expenses
decreased to 39.7% for the 40 weeks ended September 30, 2000 from 41.3% for the
39 weeks ended September 25, 1999, primarily as a result of the spreading of
monthly lease payments over an additional week of net sales. The remaining
decrease is due to the liquidation of the 42 stores closed as part of the
restructuring plan in 1999 which in the aggregate, had higher selling and
marketing expenses as a percentage of net sales than the remaining stores.
ADMINISTRATIVE AND DISTRIBUTION EXPENSES
Administrative and distribution expenses were $6.2 million for the 40
weeks ended September 30, 2000, representing a decrease of $609,000, or 9.0%
from administrative and distribution expenses for the 39 weeks ended September
25, 1999. As a percentage of net sales, administrative and distribution expenses
were 8.6% for the 40 weeks
8
<PAGE>
ended September 30, 2000 and 8.4% for the 39 weeks ended September 25,
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. The increase in administration and
distribution expenses as a percentage of net sales is primarily due to the
decrease in net sales during the 40 weeks ended September 30, 2000.
RESTRUCTURING AND IMPAIRMENT COSTS (RESERVE REDUCTION)
Restructuring and impairment costs were ($724,000), or (1.0%), of net
sales for the 40 weeks ended September 30, 2000. The benefit was a result of a
$888,000 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 $164,000 paid in the second and third
quarters of fiscal 2000 for legal and other related costs for 29 completed lease
buyouts. No restructuring and impairment costs were recorded during the 39 weeks
ended September 25, 1999.
INTEREST EXPENSE
Interest expense was $1.1 million, or 1.6% of net sales, for the 40
weeks ended September 30, 2000, representing an increase of $274,000 from
interest expense of $875,000, or 1.1% of net sales, for the 39 weeks ended
September 25, 1999. The increase is primarily attributable to higher lending
rates which have increased approximately 1.25% during the past 12 months and an
increase of the average outstanding principal balance of the Company's credit
facility in the first three quarters of fiscal 2000 over that of the first three
quarters of fiscal 1999.
NET LOSS
The Company's net loss for the 40 weeks ended September 30, 2000 was
$737,000, representing an improvement of $1.3 million from a net loss of $2.1
million for the 39 weeks ended September 25, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from internally generated cash
flow and borrowings under its revolving line of credit. 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 40 weeks ended September
30, 2000 was $2.2 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 September 30,
2000 were $29.8 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 September 30, 2000 relates
primarily to the closure of 41 stores (net of openings) during the 40 weeks
ended September 30, 2000. Additionally, decisions were made in the quarter to
reduce the number of SKUs offered, and to reduce inventory levels in an effort
to increase inventory turnover and improve cash flow over the next 15 months.
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 $23.3 million in working capital as of September 30,
2000 compared to $7.1 million at the end of fiscal 1999, representing an
increase of $16.2 million. The increase in working capital is primarily the
result of reclassifying $16.2 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.
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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.
Capital expenditures were $773,000 for the 40 weeks ended September 30,
2000. Capital expenditures in the first 40 weeks of 2000 were primarily for the
build-out of three stores opened in this period, the build-out of one store
opened in 1999, the relocation of an existing store, and an upgrade to the
corporate phone system. The Company estimates capital expenditures for the
remainder of the year to be approximately $300,000 for the remodeling of one
store and routine 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. Based on current
economic and competitive factors, the Company reopened one of the 42 stores
closed as part of the 1999 restructuring plan during the third quarter of fiscal
2000. As of September 30, 2000, a reserve of $2.4 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 the first quarter of fiscal 2001 by cash generated
from operations and additional borrowings on the New Revolver.
Net cash provided by financing activities for the 40 weeks ended
September 30, 2000 was $399,000, 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.
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.
ITEM 3. 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 New Revolver exposes earnings to changes in short-term
interest rates since the interest rates on the New Revolver are variable. If the
variable rates on the Company's New Revolver were to increase by 1% from the
rate at September 30, 2000 and the Company borrowed the maximum amount available
($25.0 million) for all of fiscal 2001, the Company's interest expense would
increase, solely 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
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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 New Revolver 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.
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PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
(a) Exhibit
Number Description of Document
-------------------- -------------------------------------------------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
A Form 8-K was filed on September 1, 2000 announcing the resignation of
the Company's Chief Operating Officer.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
TRACK `N TRAIL
Date: November 14, 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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