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 thirty-nine week period ended October 3, 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 October 3, 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
October 3, 1998
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Unaudited Consolidated Balance Sheet as of
October 3, 1998 3
Unaudited Consolidated Statements of Operations
for the thirteen and thirty-nine weeks ended
September 27, 1997 and October 3, 1998 4
Unaudited Consolidated Statements of Cash Flows
for the thirty-nine weeks ended September 27, 1997
and October 3, 1998 5
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 8
PART II - OTHER INFORMATION
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURE PAGE 14
EXHIBIT INDEX 15
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
October 3, 1998
-----------------
CURRENT ASSETS:
Cash and cash equivalents $ 71,605
Merchandise inventories 10,046,166
Accounts receivable and other current assets 1,129,196
-----------------
Total current assets 11,246,967
PROPERTY AND EQUIPMENT:
Store construction and leasehold improvements 5,970,063
Furniture, fixtures, and equipment 3,228,457
-----------------
9,198,520
Less accumulated depreciation and amortization (2,577,277)
-----------------
Property and equipment, net 6,621,243
DEFERRED TAXES 2,065,690
OTHER ASSETS, net 727,824
-----------------
Total assets $ 20,661,724
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 3,521,502
Sales taxes payable 164,610
Current portion of capital lease obligations 177,426
-----------------
Total current liabilities 3,863,538
CAPITAL LEASE OBLIGATIONS, net of current portion 324,560
LINE OF CREDIT PAYABLE 3,411,219
DEFERRED RENT AND OTHER LIABILITIES 1,087,483
SUBORDINATED DEBENTURES 2,863,430
-----------------
Total liabilities 11,550,230
-----------------
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
Warrants 76,006
Accumulated deficit (1,453,435)
-----------------
Total stockholders' equity 9,111,494
-----------------
Total liabilities and stockholders' equity $ 20,661,724
=================
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Thirteen Weeks Ended For the Thirty-Nine Weeks Ended
September 27, 1997 October 3, 1998 September 27, 1997 October 3, 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 5,010,210 $ 6,010,250 $ 12,915,336 $ 16,509,171
COST OF SALES 2,622,657 3,305,524 6,793,173 9,733,530
------------------ -------------- ------------------ ---------------
Gross profit 2,387,553 2,704,726 6,122,163 6,775,641
------------------ -------------- ------------------ ---------------
OPERATING EXPENSES:
Store operating expenses 1,055,799 1,411,961 2,915,517 4,019,631
Occupancy expenses 902,857 1,317,099 2,532,378 3,677,630
Selling, general and
administrative expenses 843,135 765,102 2,470,455 2,591,874
Depreciation and amortization
expenses 179,330 272,219 540,806 766,890
------------------ -------------- ------------------ ---------------
Total operating expenses 2,981,121 3,766,381 8,459,156 11,056,025
------------------ -------------- ------------------ ---------------
OPERATING LOSS (593,568) (1,061,655) (2,336,993) (4,280,384)
------------------ -------------- ------------------ ---------------
OTHER INCOME (EXPENSE):
Interest expense (62,674) (230,236) (134,174) (492,012)
Interest income 8,569 3,348 52,915 12,388
Other income 252,168 13,529 258,572 21,387
------------------ -------------- ------------------ ---------------
Total other income (expense), net 198,063 (213,359) 177,313 (458,237)
------------------ -------------- ------------------ ---------------
LOSS BEFORE INCOME TAXES (395,505) (1,275,014) (2,159,680) (4,738,621)
INCOME TAX BENEFIT (146,336) (468,818) (799,081) (1,743,664)
------------------ -------------- ------------------ ---------------
NET LOSS $ (249,169) $ (806,196) $ (1,360,599) $ (2,994,957)
================== ============== ================== ===============
BASIC EARNINGS PER SHARE $ (0.06) $ (0.18) $ (0.31) $ (0.68)
================== ============== ================== ===============
DILUTED EARNINGS PER SHARE $ (0.06) $ (0.18) $ (0.31) $ (0.68)
================== ============== ================== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING 4,404,953 4,415,764 4,397,234 4,415,764
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Thirty-Nine Weeks Ended
September 27, 1997 October 3, 1998
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $ (1,360,599) $ (2,994,957)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 540,806 766,890
Deferred income taxes (799,081) (1,749,346)
Amortization of unearned compensation - restricted stock 4,125 -
Amortization of debt discount - 11,573
Changes in assets and liabilities:
Merchandise inventories (1,545,759) (1,067,377)
Accounts receivable and other current assets 750,749 353,050
Other assets (304,089) (187,038)
Accounts payable and accrued liabilities (505,546) (2,522,597)
Sales taxes payable (268,193) (495,937)
Income taxes payable (277,253) (241,716)
Other long term liabilities 201,430 149,946
------------------ ------------------
Net cash used in operating activities (3,563,410) (7,977,509)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,365,949) (1,506,425)
------------------ ------------------
Net cash used in investing activities (1,365,949) (1,506,425)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock options exercised 69,398 -
Net proceeds from line of credit 551,000 3,411,219
Net proceeds from subordinated debentures and warrants - 2,757,048
Repayment of notes payable and capital leases (99,637) (103,449)
------------------ ------------------
Net cash provided by financing activities 520,761 6,064,818
------------------ ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,408,598) (3,419,116)
CASH AND CASH EQUIVALENTS, beginning of period 4,864,539 3,490,721
------------------ ------------------
CASH AND CASH EQUIVALENTS, end of period $ 455,941 $ 71,605
================== ==================
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired through capital lease transactions $ - $ 300,000
Interest paid $ 69,299 $ 328,174
Income taxes paid $ - $ 241,716
</TABLE>
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
1. GENERAL
The accompanying unaudited consolidated financial statements of The Great Train
Store Company and subsidiaries (the "Company") as of October 3, 1998 and for the
thirteen and thirty-nine week periods ended September 27, 1997 and October 3,
1998 have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC") and 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.
Prior year balances include certain reclassifications to conform to the current
year presentation.
2. REVOLVING LINE OF CREDIT
In January 1998, the Company entered into a $15,000,000 revolving line of credit
with BankAmerica Business Credit, Inc. The availability of the line, which is
based on the Company's inventory, is calculated at varying advance rates
throughout the year. 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 0.25% 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 October 3, 1998 there
was approximately $3,411,000 outstanding on the revolving line of credit.
3. SUBORDINATED DEBENTURES
In June 1998, the Company sold $3,000,000 aggregate principal amount of 12%
subordinated debentures due 2003 and warrants to purchase 175,000 shares of the
Company's common stock at an exercise price of $3.75 per share to Tandem
Capital. The warrants were allocated a fair value of $76,006 on the date of
issuance, resulting in a discount in face amount of the subordinated debentures,
using the Black-Scholes Option pricing model with the following weighted average
assumptions: dividend yield of 0%; expected volatility of 40.0%; risk free
interest rate of 5.04%; an expected life of four years; and a block trading
discount. Net proceeds to the Company from the sale of these securities were
approximately $2,757,000 and are expected to be used to support new store
openings in 1998 and 1999 and for general working capital purposes. The
subordinated debentures are secured by certain assets, primarily fixtures and
equipment. Under the terms of purchase, and upon satisfaction of certain
conditions, including a requirement that the Company achieve operating income,
as defined, for the year 1998 of at least $1,500,000, the Company has the right
to require Tandem to purchase an additional $2,000,000 aggregate principal
amount of such debentures and warrants to purchase 116,667 shares of common
stock at an exercise price based on the fair market value of such shares on the
date of issuance. The Company has the right to repay the subordinated debentures
at any time without penalty. If not previously repaid, Tandem will receive
additional warrants at the end of each year, exercisable at a price based on the
fair market value of such shares on the date of issuance.
The warrants anticipated to be issued in the future periods are valued each
quarter and as of October 3, 1998 have been recorded at an aggregate fair value
of $72,137 using the Black-Scholes Option pricing model with the following
weighted average assumptions: dividend yield of 0%; expected volatility of
50.0%; risk free interest rate of 4.08%; an expected life of four years; and a
block trading discount. The aggregate fair value of these warrants is reflected
on the balance sheet in deferred financing charges, a component of other assets,
and deferred rent and other liabilities.
4. STORE OPENINGS
During 1998, the Company has opened nine new stores, the most recent of which
opened on November 11 in Barton Creek Square in Austin, Texas. The eight
additional stores were opened at Palisades Center in West Nyack, New York;
Hamilton Place in Chattanooga, Tennessee; Woodland Hills Mall in Tulsa,
Oklahoma; Lynnhaven Mall in Virginia Beach, Virginia; Scottsdale Fashion Square
in Scottsdale, Arizona; Newport Fashion Island in Newport Beach, California; The
Mall at Fairfield Commons in Beavercreek (near Dayton), Ohio, and Smith Haven
Mall in Lake Grove, New York. The Company also has opened five The Great Train
Store Express temporary stores which typically operate from November through
December. In addition, the Company has signed leases for additional new stores
to open in 1998 at Willow Grove Park near Philadelphia, Pennsylvania; The
Westchester, White Plains, New York; Glendale Galleria, Glendale, California;
Haywood Mall in Greenville, South Carolina; and Walden Galleria in Buffalo, New
York. The Company has also signed a lease for a store to open in 1999 in
Providence Place, Providence, Rhode Island. Additional leases for stores to open
in 1999 are expected to be signed.
5. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
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.
The Financial Accounting Standards Board has issued Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") which becomes effective for all fiscal quarters and
fiscal years beginning after June 15, 1998. The Company does not anticipate the
adoption of this statement will have any effect on the Company's financial
statements.
6. 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 September 27, 1997 or October 3, 1998.
<PAGE>
ITEM 2. Management's Discussion and Analysis
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:
<TABLE>
<CAPTION>
For the Thirteen For the Thirty-nine
Weeks Ended Weeks Ended
Sept. 27, 1997 Oct. 3, 1998 Sept. 27, 1997 Oct. 3, 1998
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 52.3 55.0 52.6 59.0
------ ------ ------ ------
Gross profit 47.7 45.0 47.4 41.0
Store operating expenses 21.1 23.5 22.6 24.4
Occupancy expenses 18.0 21.9 19.6 22.3
Selling, general and administrative expenses 16.8 12.8 19.1 15.7
Depreciation and amortization 3.6 4.5 4.2 4.6
------ ------ ------ -------
Operating loss (11.8) (17.7) (18.1) (26.0)
Interest expense (1.3) (3.8) (1.0) (2.9)
Interest income .2 .1 .4 .1
Other income 5.0 .2 2.0 .1
------ ------- ------ -------
Loss before income taxes (7.9) (21.2) (16.7) (28.7)
Income tax benefit 2.9 7.8 6.2 10.6
------- ------- ------ -------
Net loss (5.0)% (13.4)% (10.5)% (18.1)%
------- ------- ------- -------
</TABLE>
Comparison of Thirteen Week Period Ended September 27, 1997 to the Thirteen Week
Period Ended October 3, 1998
Net sales increased approximately $1,000,000 or 20.0%, for the thirteen weeks
ended October 3, 1998, compared with the corresponding period last year. Of this
increase, approximately $1,544,000 was attributable to net sales generated by
stores which were not open for both periods compared. This increase was
partially offset by a decrease in comparable store sales of approximately
$544,000 or 12.2%. Comparable store sales are calculated based on the stores
open in all periods for both fiscal years. The comparable store decrease is
discussed in the thirty-nine week analysis.
Gross profit increased approximately $317,000 or 13.3%, for the thirteen weeks
ended October 3, 1998, compared with the corresponding period last year. As a
percentage of net sales, gross profit decreased to 45.0% for the thirteen weeks
ended October 3, 1998 compared with 47.7% for the corresponding period last
year. The gross profit decrease as a percentage of net sales is discussed in the
thirty-nine week analysis.
Store operating expenses increased approximately $356,000 or 33.7%, for the
thirteen weeks ended October 3, 1998, compared with the corresponding period
last year. The increase was due to store operating expense for the stores which
were not open in both periods, partially offset by a slight decrease in
comparable store expenses. As a percentage of net sales, store operating
expenses increased to 23.5% for the thirteen weeks ended October 3, 1998
compared with 21.1% for the corresponding period last year. The increase as a
percentage of sales was primarily due to lower than anticipated sales.
Occupancy expenses increased approximately $414,000, or 45.9%, for the thirteen
weeks ended October 3, 1998, compared with the corresponding period last year.
Approximately $423,000 of the increase in occupancy expenses was attributable to
the stores which were not open for both periods compared which was partially
offset by a $9,000 decrease in comparable stores. As a percentage of net sales,
overall occupancy expenses increased to 21.9% for the thirteen weeks ended
October 3, 1998, compared with 18.0% for the corresponding period last year.
This increase as a percentage of sales was primarily due to lower than
anticipated sales.
Selling, general and administrative expenses decreased approximately $78,000, or
9.3%, for the thirteen weeks ended October 3, 1998, compared with the
corresponding period last year. The decrease in selling, general and
administrative expenses was primarily due to the Company's efforts to automate
processes and make certain functions more efficient. As a percentage of net
sales, selling, general and administrative expenses decreased to 12.8% for the
third quarter of 1998, from 16.8% for the same period in 1997. The Company
anticipates that, as additional stores are opened, selling, general and
administrative expenses will continue to increase, but at a slower rate than the
rate of sales growth, resulting in a continuing decline in selling, general and
administration expenses as a percentage of sales.
Depreciation and amortization expense increased approximately $93,000, or 51.8%,
for the thirteen weeks ended October 3, 1998, compared with the corresponding
period last year. The increase was primarily due to $83,000 of depreciation and
amortization for the stores not open for both periods compared and an increase
of $10,000 of depreciation for comparable stores. As a percentage of net sales,
depreciation and amortization expense increased to 4.5% for the thirteen weeks
ended October 3, 1998, from 3.6% for the corresponding period in 1997. The
increase was primarily due to depreciation of capitalized costs related to a
system upgrade which was completed in August 1998 and the lower than anticipated
sales for the period.
Interest expense increased approximately $168,000, for the thirteen weeks ended
October 3, 1998, compared with the corresponding period last year. The increase
primarily resulted from interest expense on the subordinated debentures and
increased borrowings on the line of credit due to seasonal net losses for
additional open stores in 1998 compared to the same period in 1997. In addition,
interest expense increased in 1998 due to the amortization of closing costs for
the BankAmerica Business Credit, Inc. line of credit and the Tandem Capital
Subordinated Debentures.
The Company's pretax loss increased to 21.2% of sales for the thirteen weeks
ended October 3, 1998 from 7.9% of sales for the corresponding period last year.
The Company recorded an income tax benefit of approximately $469,000 based on
the Company's effective tax rate of 37%.
As a result of the foregoing, the Company recorded a net loss of approximately
$806,000 for the thirteen weeks ended October 3, 1998, compared with a net loss
of approximately $249,000 for the corresponding period last year. As a
percentage of net sales, net loss increased to 13.4% from 5.0% of sales for the
corresponding period last year.
Comparison of Thirty-Nine Week Period Ended September 27, 1997 to the
Thirty-Nine Week Period Ended October 3, 1998
Net sales increased approximately $3,594,000 or 27.8%, for the thirty-nine weeks
ended October 3, 1998 compared with the corresponding period last year. Of this
increase, approximately $4,404,000 was attributable to net sales generated by
stores which were not open for both periods compared. This increase was
partially offset by a decrease of approximately $810,000 or 6.8% in comparable
store sales. Comparable store sales are calculated based on the stores opened
during both of the entire years being compared. The Company experienced a
significant problem which began in 1997 and continued into 1998 related to stock
outages of some of the Company's best and fastest selling merchandise. The
Company continues to implement significant changes in its merchandise programs
and believes it has made much progress in ensuring more timely replenishment,
obtaining new product (much of it exclusive to The Great Train Stores) and
developing more effective relationships with many key vendors.
Gross profit increased approximately $653,000, or 10.7%, for the thirty-nine
weeks ended October 3, 1998, compared with the corresponding period last year.
As a percentage of net sales, gross profit decreased to 41.0% for the
thirty-nine weeks ended October 3, 1998 compared to 47.4% of sales in the
corresponding period last year. The decrease in gross margin was primarily
related to significant markdowns of certain product lines and the costs
associated with a realignment of the Company's inventory. In an effort to
improve the Company's inventory turn and to increase sales by improving the
in-stock position in key product for all stores, the Company has been
significantly refining product selection during 1998, improving the balance of
its overall inventories among the stores and significantly reducing slower
moving items.
Store operating expenses increased approximately $1,104,000, or 37.9%, for the
thirty-nine weeks ended October 3, 1998, compared with the corresponding period
last year. Approximately $1,093,000 of the increase resulted from the operation
of the stores which were not open for both periods compared and an increase in
comparable store operating expenses of approximately $11,000. As a percentage of
net sales, store operating expenses increased to 24.4% for the thirty-nine weeks
ended October 3, 1998, compared with 22.6% for the corresponding period last
year. The increase as a percentage of sales was primarily due to lower than
anticipated sales.
Occupancy expenses increased approximately $1,145,000, or 45.2%, for the
thirty-nine weeks ended October 3, 1998, compared with the corresponding period
last year. Approximately $1,119,000 of the increase in occupancy expenses was
attributable to the stores which were not open for both periods compared, and
approximately $26,000 related to comparable stores. As a percentage of net
sales, overall occupancy expenses increased to 22.3% for the thirty-nine weeks
ended October 3, 1998, from 19.6% for the corresponding period last year. The
increase as a percentage of sales was primarily due to lower than anticipated
sales.
Selling, general and administrative expenses increased approximately $121,000 or
4.9%, for the thirty-nine weeks ended October 3, 1998, compared with the
corresponding period last year. As a percentage of net sales, selling, general
and administrative expenses decreased to 15.7% for the thirty-nine weeks ended
October 3, 1998, from 19.1% for the corresponding period last year. The decrease
in selling, general and administrative expenses was primarily due to the
Company's efforts to automate processes and make certain functions more
efficient. The Company anticipates that as additional stores are opened,
selling, general and administrative expenses will continue to increase, but at a
slower rate than the rate of sales growth, resulting in a continuing decrease in
selling, general and administrative expenses as a percentage of net sales.
Depreciation and amortization expense increased approximately $226,000, or
41.8%, for the thirty-nine weeks ended October 3, 1998, compared with the
corresponding period last year. The increase was primarily due to approximately
$225,000 for the stores which were not open in both periods and an increase of
$1,000 in comparable stores. As a percentage of net sales, depreciation and
amortization expense increased to 4.6% for the thirty-nine weeks ended October
3, 1998, from 4.2% for the corresponding period last year. The increase was
primarily due to depreciation of capitalized costs related to a system upgrade,
which occurred in August 1998, and the lower than anticipated sales for the
period.
Interest expense increased approximately $358,000, for the thirty-nine weeks
ended October 3, 1998, compared with the corresponding period last year. The
increase primarily resulted from interest expense on the subordinated debentures
and increased borrowings on the line of credit due to seasonal net losses for
additional open stores in 1998 compared to the same period in 1997. In addition,
interest expense increased in 1998 due to the amortization of closing costs for
the BankAmerica Business Credit, Inc. line of credit and the Tandem Capital
Subordinated Debentures.
The Company's pretax loss increased to 28.7% of sales for the thirty-nine weeks
ended October 3, 1998 from 16.7% of sales for the corresponding period last
year. The Company recorded an income tax benefit of approximately $1,744,000
based on the Company's effective tax rate of 37%.
As a result of the foregoing, the Company recorded a net loss of approximately
$2,995,000 for the thirty-nine weeks ended October 3, 1998, compared with a net
loss of approximately $1,361,000 for the corresponding period last year. As a
percentage of net sales, net loss increased to 18.1% for the thirty-nine weeks
ended October 3, 1998, from 10.5% from the same period last year.
Liquidity and Capital Resources
The Company's primary uses of cash have been for new store openings, capital
expenditures and funding anticipated seasonal operating losses.
For the thirty-nine weeks ended October 3, 1998, net cash used in operating
activities was approximately $7,978,000 compared to approximately $3,563,000 for
the corresponding period last year. The increase in net cash used in operating
activities primarily resulted from the timing of payments and the increased
activity due to the larger number of stores, a payment of approximately $242,000
in income taxes, 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 availability of the line, which is
based on the Company's inventory is calculated at varying advance rates
throughout the year. 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 0.25% 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 October 3, 1998 there
was approximately $3,411,000 outstanding on the revolving line of credit.
In June 1998, the Company sold $3,000,000 aggregate principal amount of 12%
subordinated debentures due 2003 and warrants to purchase 175,000 shares of the
Company's common stock at an exercise price of $3.75 per share to Tandem
Capital. Net proceeds to the Company from the sale of these securities were
approximately $2,757,000 and are expected to be used to support new store
openings in 1998 and 1999 and for general working capital purposes. The
subordinated debentures are secured by certain assets, primarily fixtures and
equipment. Under the terms of purchase, and upon satisfaction of certain
conditions, including a requirement that the Company achieve operating income,
as defined, for the year 1998 of at least $1,500,000, the Company has the right
to require Tandem to purchase an additional $2,000,000 aggregate principal
amount of such debentures and warrants to purchase 116,667 shares of common
stock at an exercise price based on the fair market value of such shares on the
date of issuance. The Company has the right to repay the subordinated debentures
at any time without penalty. If not previously repaid, Tandem will receive
additional warrants at the end of each year, exercisable at a price based on the
fair market value of such shares on the date of issuance.
During 1998, the Company has opened nine new stores, the most recent of which
opened on November 11 in Barton Creek Square in Austin, Texas. The eight
additional stores were opened at Palisades Center in West Nyack, New York;
Hamilton Place in Chattanooga, Tennessee; Woodland Hills Mall in Tulsa,
Oklahoma; Lynnhaven Mall in Virginia Beach, Virginia; Scottsdale Fashion Square
in Scottsdale, Arizona; Newport Fashion Island in Newport Beach, California; The
Mall at Fairfield Commons in Beavercreek (near Dayton), Ohio, and Smith Haven
Mall in Lake Grove, New York. The Company also has opened five The Great Train
Store Express temporary stores which typically operate from November through
December. In addition, the Company has signed leases for additional new stores
to open in 1998 at Willow Grove Park near Philadelphia, Pennsylvania; The
Westchester, White Plains, New York; Glendale Galleria, Glendale, California;
Haywood Mall in Greenville, South Carolina; and Walden Galleria in Buffalo, New
York. The Company has also signed a lease for a store to open in 1999 in
Providence Place, Providence, Rhode Island. Additional leases for stores to open
in 1999 are expected to be signed.
Year 2000
The Company is continuing to actively evaluate and deal with the "Year 2000
problem", ensuring that its computer systems will be Year 2000 compliant. The
computer systems presently in use at The Great Train Stores are made up entirely
of PC-compatible microcomputers and do not include any mini or mainframe
computers. On August 2, 1998, the Company upgraded its point of sale software,
which is the core software system in use at the central office and all store
locations, and it is now Year 2000 compliant. In addition, the Company has
verified that a substantial portion of its other hardware and software is ready
for the Year 2000 and the Company is scheduled to have the remaining conversion
efforts completed by the middle of 1999. The Company does not anticipate that
these efforts will have a material effect on the financial statements. All costs
are expected to be funded through operating cash flows and/or the Company's line
of credit or possible additional equipment financing. The Company is also
engaging in discussions with its principal vendors to try to ensure that the
vendors will have resolved the Year 2000 issues for any system which
interoperates with that of The Great Train Stores. Due to the relatively limited
number of key suppliers, the Company may experience product delivery delays if
these vendors are not Year 2000 compliant. However, this risk is minimized by
the seasonal nature of the Company's business and the expected timing of any
Year 2000 impact. To the extent the Company believes that any of its vendors may
have significant Year 2000 problems, it will take actions it deems appropriate,
such as purchasing merchandise earlier than it might otherwise have done. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year.
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
Unless otherwise required by law, under applicable regulations of the Securities
and Exchange Commission, proxies solicited by the Company in connection with its
1999 annual meeting of shareholders shall confer upon the individuals named
therein discretionary voting authority to vote on matters the Company did not
receive notice of by February 3, 1999.
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 thirty-nine week period ended October 3, 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
By: /s/ Cheryl A. Taylor
--------------------------------------------
Date: November 16, 1998 Cheryl A. Taylor
Vice President - Finance and Administration,
Principal Financial Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JUL-05-1998
<PERIOD-END> OCT-03-1998
<CASH> 71,605
<SECURITIES> 0
<RECEIVABLES> 1,129,196
<ALLOWANCES> 0
<INVENTORY> 10,046,166
<CURRENT-ASSETS> 11,246,967
<PP&E> 9,198,520
<DEPRECIATION> (2,577,277)
<TOTAL-ASSETS> 20,661,724
<CURRENT-LIABILITIES> 3,863,538
<BONDS> 7,686,692
0
0
<COMMON> 44,158
<OTHER-SE> 9,067,336
<TOTAL-LIABILITY-AND-EQUITY> 20,661,724
<SALES> 16,509,171
<TOTAL-REVENUES> 0
<CGS> 9,733,530
<TOTAL-COSTS> 6,775,641
<OTHER-EXPENSES> 11,022,250
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 492,012
<INCOME-PRETAX> (4,738,621)
<INCOME-TAX> 1,743,664
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,994,957)
<EPS-PRIMARY> (.68)
<EPS-DILUTED> (.68)
</TABLE>
