U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the thirteen week period ended April 4, 1998.
Commission file number 1-13158
The Great Train Store Company
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 75-2539189
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
14180 Dallas Parkway, Suite 618, Dallas, Texas 75240
(Address of Principal Executive Offices) (Zip Code)
(972) 392-1599
(Issuer's Telephone Number, Including Area Code)
Check whether the Issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date:
Number of Shares Outstanding
Title of Class as of April 4, 1998
-------------- --------------------
Common Stock $0.01 par value 4,415,764
<PAGE>
THE GREAT TRAIN STORE COMPANY
QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL QUARTER ENDED
April 4, 1998
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Unaudited Consolidated Balance Sheet as of April 4, 1998 3
Unaudited Consolidated Statements of Operations for the
thirteen weeks ended March 29, 1997 and April 4, 1998 4
Unaudited Consolidated Statements of Cash Flows for the
thirteen weeks ended March 29, 1997 and April 4, 1998 5
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 7
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 10
SIGNATURE PAGE 11
EXHIBIT INDEX 12
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
April 4, 1998
-----------------
CURRENT ASSETS:
Cash and cash equivalents $ 420,208
Merchandise inventories 7,614,009
Accounts receivable and
other current assets 865,156
------------
Total current assets 8,899,373
PROPERTY AND EQUIPMENT:
Store construction and leasehold
improvements 5,136,058
Furniture, fixtures and equipment 2,734,793
------------
7,870,851
Less accumulated depreciation and
amortization 2,057,862
------------
Property and equipment, net 5,812,989
DEFERRED TAXES 369,012
OTHER ASSETS, net 1,044,250
------------
Total assets $ 16,125,624
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,003,393
Sales taxes payable 147,982
Current portion of capital lease obligations 87,477
-----------
Total current liabilities 1,238,852
CAPITAL LEASE OBLIGATIONS, net of current portion 188,867
LINE OF CREDIT PAYABLE 2,947,685
DEFERRED RENT AND OTHER LIABILITIES 915,471
-----------
Total liabilities 5,290,875
-----------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock: $.01 par value; 2,000,000
Shares authorized; none issued -
Common stock: $.01 par value; 18,000,000
shares authorized; 4,415,764 shares issued
and outstanding 44,158
Additional paid-in capital 10,444,765
Retained earnings 345,826
-----------
Total stockholders' equity 10,834,749
-----------
Total liabilities and
stockholders' equity $16,125,624
===========
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Thirteen Weeks Ended
March 29, 1997 April 4, 1998
-------------- -------------
NET SALES $ 3,890,121 $ 5,366,886
COST OF SALES 2,063,709 3,488,763
-------------- ------------
Gross profit 1,826,412 1,878,123
-------------- ------------
OPERATING EXPENSES:
Store operating expenses 962,574 1,314,901
Occupancy expenses 799,144 1,151,834
Selling, general and
administrative expenses 715,928 952,328
Depreciation and amortization
expenses 163,735 235,745
------------- ------------
Total operating expenses 2,641,381 3,654,808
------------- ------------
OPERATING LOSS (814,969) (1,776,685)
------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (34,097) (135,582)
Interest income 32,424 5,379
Other income 3,908 8,959
-------------- ------------
Total other income
(expense), net 2,235 (121,244)
------------- ------------
LOSS BEFORE INCOME TAXES (812,734) (1,897,929)
INCOME TAX BENEFIT (300,712) (702,233)
-------------- ------------
NET LOSS $ (512,022) $(1,195,696)
============== ============
BASIC EARNINGS PER SHARE $ (0.12) $ (0.27)
============== ============
DILUTED EARNINGS PER SHARE $ (0.12) $ (0.27)
============== ============
WEIGHTED AVERAGE SHARES OUTSTANDING 4,387,148 4,415,764
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Thirteen Weeks Ended
March 29, 1997 April 4, 1998
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ (512,022) $ (1,195,696)
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization 163,735 235,745
Deferred income taxes (22,553) (52,668)
Amortization of unearned compensation -
restricted stock 516 -
Changes in assets and
liabilities:
Merchandise inventories (31,485) 1,364,780
Accounts receivable and other
current assets 401,855 617,090
Other assets (86,353) (734,686)
Accounts payable and accrued
liabilities (1,734,017) (5,040,706)
Sales taxes payable (302,225) (512,565)
Income taxes payable (261,280) (241,716)
Other long term
liabilities - 46,174
------------ ------------
Net cash used in
operating activities (2,383,829) (5,514,248)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (556,548) (478,756)
------------- ------------
Net cash used in investing
activities (556,548) (478,756)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock options
exercised 37,833 -
Proceeds from notes
payable - 2,947,685
Repayment of notes payable and
capital leases (23,564) (25,194)
------------- -----------
Net cash provided by financing
activities 14,269 2,922,491
------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,926,108) (3,070,513)
CASH AND CASH EQUIVALENTS, beginning of period 4,864,539 3,490,721
------------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,938,431 420,208
============= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 35,687 $ 72,034
Income taxes paid $ 261,280 246,149
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of The Great Train
Store Company and subsidiaries (the "Company") as of and for the thirteen week
periods ended April 4, 1998 and March 29, 1997 have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission ("SEC")
for interim reporting and therefore do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation of the results of the interim periods have been included. Operating
results for any interim period are not necessarily indicative of the results
that may be expected for the entire fiscal year. The Company's business is
heavily dependent on fourth quarter sales. Historically, the fourth quarter has
accounted for a significantly disproportionate share of the Company's sales and
earnings. These statements should be read in conjunction with the financial
statements and notes thereto for the year ended January 3, 1998 included in the
Company's 1997 Annual Report on Form 10-KSB as filed with the SEC.
In January 1998, the Company entered into a $15,000,000 revolving line of credit
with BankAmerica Business Credit, Inc. The initial term of the facility is three
years and is secured by certain assets of the Company, primarily inventory.
Outstanding borrowings bear interest at BankAmerica Business Credit, Inc's base
lending rate plus .25% and a commitment fee of 0.375% is charged on the unused
portion. The revolving credit facility provides a source of additional liquidity
to manage cash flow and provide capital for expansion. As of April 4, 1998,
there was approximately $2,948,000 outstanding on the revolving line of credit.
As of the date of this report, the Company has opened new stores in Palisades
Center in West Nyack, New York and in Hamilton Place, Chattanooga, Tennessee. In
addition, the Company has signed leases for additional new stores to open in
1998 in Woodland Hills Mall, Tulsa, Oklahoma; Scottsdale Fashion Square,
Scottsdale, Arizona and Lynnhaven Mall in Virginia Beach, Virginia. The Company
has also signed a lease for a The Great Train Store Express temporary store
which will be open during the summer at Faneuil Hall Marketplace in Boston,
Massachusetts.
The AICPA has issued Statement of Position 98-5 "Reporting on the Costs of
Start-up Activities" ("SOP 98-5") which is required for fiscal years beginning
after December 15, 1998. The Company has considered the impact of SOP 98-5 and
does not anticipate the adoption of this statement will have any effect on the
Company's financial statements.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") which became effective on a retroactive basis
with the issuance of the Company's consolidated financial statements for fiscal
1997. Accordingly, the Company has restated its prior year earnings per share
data to conform with SFAS 128.
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share is
computed by dividing net income by the weighted average number of common shares
plus the number of additional shares that would have resulted from potentially
dilutive securities. There were no potentially dilutive securities for the
quarters ended March 29, 1997 or April 4, 1998.
<PAGE>
ITEM 2. Management's Discussion and Analysis
Actual results may differ materially from any "forward-looking" statements due
to a number of important factors. Those factors include possible difficulties in
opening new stores when expected or at all, successfully operating such stores
in accordance with the Company's new operating initiatives and in general,
controlling the Company's central overhead and producing overall profitability
as well as satisfying the various requirements of the Company's financial
arrangements. These risk factors and others, are more fully discussed in Exhibit
99.1 attached to the Company's Form 10-QSB for the third quarter of 1997, a copy
of which is available without charge from the Company.
Results of Operations
Operating results for any interim period are not necessarily indicative of the
results that may be expected for the entire fiscal year. The Company's business
is heavily dependent on fourth quarter sales which historically have accounted
for a significantly disproportionate share of the Company's annual sales and
earnings. The results of operations in any particular quarter also may be
significantly impacted by the opening of new stores. Prior year balances include
certain reclassifications to conform to the current year presentation. The
following table sets forth, for the periods indicated, selected statements of
operations data expressed as a percentage of net sales:
For the Thirteen Weeks Ended
March 29, 1997 April 4, 1998
-------------- -------------
Net Sales 100.0% 100.0%
Cost of Sales 53.0 65.0
--------- -------
Gross Profit 47.0 35.0
Store operating expenses 24.7 24.5
Occupancy expenses 20.5 21.5
Selling, general & administrative
expenses 18.5 17.7
Depreciation and amortization 4.2 4.4
--------- -------
Operating loss (20.9) (33.1)
Interest expense (.9) (2.6)
Interest income .8 .1
Other income .1 .2
---------- ---------
Loss before income taxes (20.9) (35.4)
Income taxes 7.7 13.1
--------- -------
Net loss (13.2)% (22.3)%
Comparison of the Thirteen Week Period Ended March 29, 1997 to the Thirteen Week
Period Ended April 4, 1998
Net sales increased approximately $1,477,000 or 38.0%, for the thirteen weeks
ended April 4, 1998, compared with the corresponding period last year. Of this
increase, approximately $1,517,000 was attributable to net sales generated by
new stores not included in the comparable store calculation. This increase was
partially offset by a decrease in comparable store sales of approximately
$40,000 or 1.1%. The calculation of comparable store sales includes sales for
stores open in all periods for both fiscal years. The Company notes two factors
related to the retail calendar which significantly impacted the first quarter
sales comparison. The week after Christmas, which is typically a significant
sales week, was excluded from the first quarter of 1998 due to the 53-week year
<PAGE>
in 1997. When the Company compares the more comparable weeks, on a calendar
basis, comparable store sales increased by 1.0%. In addition, comparable store
sales were significantly impacted by the Easter shopping season falling in the
second quarter for the retail calendar in 1998. Prior to the last 12 days of the
quarter, which were the 12 days before Easter Sunday during 1997, the Company's
comparable stores were performing at 1.3% ahead of last year.
Gross profit increased approximately $52,000 or 2.8%, for the thirteen weeks
ended April 4, 1998, compared with the corresponding period last year. As a
percentage of net sales, gross profit decreased to 35.0% for the thirteen weeks
ended April 4, 1998, compared with 47.0% in the corresponding period last year.
The decrease in gross margin was primarily related to significant markdowns of
certain product lines and the cost of a regional realignment of the Company's
inventory. In an effort to improve the Company's inventory turn and increase
sales by improving the in-stock position in key product for all stores, the
Company significantly refined its product selection during the first quarter of
1998. The Company initiated a comprehensive program to reallocate the existing
inventory, primarily rail line specific merchandise such as, train hobby
merchandise, books, videos and apparel, to the appropriate region of the country
where the respective rail line is indigenous. Such program involved transfer
cost among stores and certain markdowns where deemed necessary. This process
already has successfully resulted in a 5.8% decrease in average store inventory
as of April 4, 1998 when compared to the inventory level at March 29, 1997.
Store operating expenses increased approximately $352,000 or 36.6%, for the
thirteen weeks ended April 4, 1998, compared with the corresponding period last
year. Approximately $369,000 resulted from the operation of the stores which
were not open in the comparable period in 1997. This increase was partially
offset by a decrease in comparable store expenses of approximately $17,000. As a
percentage of net sales, store operating expenses decreased to 24.5% for the
thirteen weeks ended April 4, 1998, compared with 24.7% for the corresponding
period last year.
Occupancy expenses increased approximately $353,000, or 44.1%, for the thirteen
weeks ended April 4, 1998, compared with the corresponding period last year.
Occupancy expenses increased approximately $360,000 due to the stores which were
not open in the comparable period in 1997. This increase was partially offset by
a decrease in comparable store expenses of approximately $7,000. As a percentage
of net sales, overall occupancy expenses increased to 21.5% for the thirteen
weeks ended April 4, 1998, compared with 20.5% for the corresponding period last
year. This percentage change resulted from the Company opening new stores at an
increasing rate which may not yet have developed to their full sales potential,
therefore, causing occupancy expenses to result in a higher percentage of sales
for the first quarter following the opening holiday season.
Selling, general and administrative expenses increased approximately $236,000,
or 33.0%, for the thirteen weeks ended April 4, 1998, compared with the
corresponding period last year. The increase is due to the overall growth of the
Company and is primarily due to supervision and administrative expenses related
to the increased number of stores. The Company anticipates that selling, general
and administrative expenses will increase further as a result of increased
staffing and other costs in anticipation of opening additional stores pursuant
to the Company's expansion strategy. As a percentage of net sales, selling,
general and administrative expenses decreased to 17.7% for the first quarter of
1998, from 18.5% for the same period in 1997. This percentage change resulted
from the relatively fixed nature of selling, general and administrative expenses
and the increase in net sales experienced by the Company in the period. The
Company anticipates that, as additional stores are opened, selling, general and
administrative expenses will continue to increase at a slower rate than the rate
<PAGE>
of sales growth. Depreciation and amortization expense increased approximately
$72,000, or 44.0%, for the thirteen weeks ended April 4, 1998, compared with the
corresponding period last year. Approximately $69,000 of this increase was the
result of depreciation of assets in new stores opened subsequent to the first
fiscal quarter of 1996. As a percentage of net sales, depreciation and
amortization increased as a percentage of net sales to 4.4% for the thirteen
weeks ended April 4, 1998 from 4.2% for the same period in 1997.
Interest expense increased approximately $101,000 or 297.6% for the thirteen
weeks ended April 4, 1998, compared with the corresponding period last year.
This increase resulted from increased borrowings on the line of credit due to
anticipated seasonal net losses for additional open stores in 1998 compared to
the same period in 1997, as well as, a fee related to the termination of the
Company's previous line of credit which was replaced during the first quarter of
1998.
The Company's pretax loss increased from 20.9% of sales in the first fiscal
quarter of 1997 to 35.4% for the first fiscal quarter of 1998. The Company
recorded an income tax benefit of approximately $702,000 based on the Company's
effective tax rate of 37%.
As a result of the foregoing, the Company recorded a net loss of approximately
$1,196,000 for the thirteen weeks ended April 4, 1998, compared with a net loss
of approximately $512,000 for the corresponding period last year. As a
percentage of net sales, net loss increased to 22.3% for the first quarter of
1998, from 13.2% for the first quarter of 1997.
Liquidity and Capital Resources
For the thirteen weeks ended April 4, 1998, net cash used in operating
activities was approximately $5,514,000 compared with approximately $2,384,000
for the corresponding period last year. The increase in net cash used in
operating activities results from the timing of payments and the increased
activity due to the larger number of stores and seasonal net losses as adjusted
for non-cash items.
In January 1998, the Company entered into a $15,000,000 revolving line of credit
with BankAmerica Business Credit, Inc. The initial term of the facility is three
years and it is secured by certain assets of the Company, primarily inventory.
The line of credit will be used to provide a source of additional liquidity to
manage cash flow and provide capital for expansion. As of April 4, 1998, there
was approximately $2,948,000 outstanding on the revolving line of credit.
As of the date of this report, the Company has opened new stores in Palisades
Center in West Nyack, New York and in Hamilton Place, Chattanooga, Tennessee. In
addition, the Company has signed leases for additional new stores to open in
1998 in Woodland Hills Mall, Tulsa, Oklahoma; Scottsdale Fashion Square,
Scottsdale, Arizona and Lynnhaven Mall in Virginia Beach, Virginia. The Company
has also signed a lease for a The Great Train Store Express temporary Store
which will be open during the summer at Faneuil Hall Marketplace, Boston,
Massachusetts.
The Company is actively engaged in a program to ensure its computer systems will
be Year 2000 compliant. Such plans provide for the conversion efforts to be
completed by the end of 1999. The "Year 2000 problem" is the result of computer
programs being written using two digits rather than four to define the
applicable year. The cost of such project is expected to not be significant and
to be funded through operating cash flows and/or the Company's line of credit or
possibly through additional equipment financing.
<PAGE>
The Company intends to finance anticipated capital expenditures, working capital
needs and debt obligations for the foreseeable future from cash from the
Company's operating activities, landlord allowances, the available increased
line of credit, possible fixtures and equipment or inventory financing, trade
credit and/or the public or private sale of debt or equity securities.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) See Exhibit Index.
(B) No current reports on Form 8-K have been filed during
the thirteen week period ended April 4, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GREAT TRAIN STORE COMPANY
/s/ Cheryl A. Taylor
Date: May 15, 1998 Cheryl A. Taylor
Vice President - Finance and Administration,
Principal Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
27.1 Financial Disclosure Schedule .
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> APR-04-1998
<CASH> 420,208
<SECURITIES> 0
<RECEIVABLES> 856,156
<ALLOWANCES> 0
<INVENTORY> 7,614,009
<CURRENT-ASSETS> 8,899,373
<PP&E> 7,870,851
<DEPRECIATION> 2,057,862
<TOTAL-ASSETS> 16,125,624
<CURRENT-LIABILITIES> 1,238,852
<BONDS> 0
0
0
<COMMON> 44,158
<OTHER-SE> 10,790,591
<TOTAL-LIABILITY-AND-EQUITY> 16,125,624
<SALES> 5,366,886
<TOTAL-REVENUES> 5,366,886
<CGS> 3,488,763
<TOTAL-COSTS> 3,654,808
<OTHER-EXPENSES> (14,388)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135,582
<INCOME-PRETAX> (1,897,929)
<INCOME-TAX> (702,233)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,195,696)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
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