U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the twenty-six week period ended July 3, 1999.
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)
Indicate by checkmark 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
--- ---
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 July 3, 1999
Common Stock $0.01 par value 4,417,193
<PAGE>
THE GREAT TRAIN STORE COMPANY
QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL QUARTER ENDED
July 3, 1999
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Consolidated Balance Sheet as of January 2, 1999 and 3
July 3, 1999 (Unaudited)
Unaudited Consolidated Statements of Operations for 4
the thirteen weeks ended April 4, 1998 and April 3,
1999 and the twenty-six weeks ended July 4, 1998 and
July 3, 1999
Unaudited Consolidated Statements of Cash Flows for 5
the twenty-six weeks ended July 4, 1998 and July 3, 1999
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 7
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 12
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURE PAGE 14
EXHIBIT INDEX 15
<PAGE>
<TABLE>
<CAPTION>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
January 2, 1999 July 3, 1999
--------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 402,136 $ 342,383
Merchandise inventories 10,362,635 9,028,213
Accounts receivable and other current assets 897,837 545,013
Income taxes receivable 390,000 -
---------- ---------
Total current assets 12,052,608 9,915,609
PROPERTY AND EQUIPMENT:
Store construction and leasehold improvements 6,256,902 6,550,218
Furniture, fixtures, and equipment 3,631,539 3,670,185
---------- ----------
9,888,441 10,220,403
Less accumulated depreciation and amortization 2,850,751 3,461,002
---------- ----------
Property and equipment, net 7,037,690 6,759,401
OTHER ASSETS, net 544,428 714,133
---------- ----------
Total assets $ 19,634,726 $ 17,389,143
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Merchandise payable $ 4,655,543 $ 1,966,472
Accounts payable and accrued liabilities 1,148,711 683,249
Sales taxes payable 667,199 183,957
Current portion of capital lease obligations 184,495 189,068
--------- ---------
Total current liabilities 6,655,948 3,022,746
CAPITAL LEASE OBLIGATIONS, net of current portion 277,400 180,579
LINE OF CREDIT PAYABLE 407,747 5,410,458
DEFERRED RENT AND OTHER LIABILITIES 1,134,785 1,272,178
SUBORDINATED DEBENTURES 2,901,569 2,912,551
---------- ----------
Total liabilities 11,377,449 12,798,512
---------- ----------
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; 4,417,193 shares
issued and outstanding 44,158 44,172
Additional paid-in capital 10,444,765 10,449,750
Warrants 76,006 94,119
Accumulated deficit (2,307,652) (5,997,410)
---------- ----------
Total stockholders' equity 8,257,277 4,590,631
---------- ----------
Total liabilities and stockholders' equity $ 19,634,726 $ 17,389,143
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Thirteen Weeks Ended For the Twenty-six Weeks Ended
July 4, 1998 July 3, 1999 July 4, 1998 July 3, 1999
---------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 5,132,035 $ 5,737,466 $ 10,498,921 $ 11,653,029
COST OF SALES 2,939,243 2,996,512 6,428,006 6,223,284
----------- ----------- ----------- -----------
Gross profit 2,192,792 2,740,954 4,070,915 5,429,745
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Store operating expenses 1,292,769 1,539,599 2,607,670 3,170,673
Occupancy expenses 1,208,699 1,528,287 2,360,532 3,061,266
Selling, general and administrative expenses 874,444 1,013,680 1,826,773 1,905,942
Depreciation and amortization expenses 258,926 304,030 494,671 624,174
----------- ----------- ----------- -----------
Total operating expenses 3,634,838 4,385,596 7,289,646 8,762,055
----------- ---------- ----------- -----------
OPERATING LOSS (1,442,046) (1,644,642) (3,218,731) (3,332,310)
----------- ---------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (126,194) (243,890) (261,776) (376,614)
Interest income 3,661 - 9,040 -
Other income (expense) (1,101) 14,934 7,858 19,166
----------- ---------- ----------- -----------
Total other expense, net (123,634) (228,956) (244,878) (357,448)
----------- ---------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,565,680) (1,873,598) (3,463,609) (3,689,758)
INCOME TAX BENEFIT (572,612) - (1,274,846) -
----------- ---------- ----------- -----------
NET LOSS $ (993,068) $ (1,873,598) $ (2,188,763) $ (3,689,758)
=========== ========== =========== ===========
BASIC EARNINGS PER SHARE $ (0.22) $ (0.42) $ (0.50) $ (0.84)
=========== ========== =========== ===========
DILUTED EARNINGS PER SHARE $ (0.22) $ (0.42) $ (0.50) $ (0.84)
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,415,764 4,415,937 4,415,764 4,415,850
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Twenty-six Weeks Ended
July 4, 1998 July 3, 1999
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (2,188,763) (3,689,758)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 494,671 624,174
Deferred income taxes (1,274,846) -
Amortization of debt discount - 14,166
Non-cash compensation expense - 4,999
Changes in assets and liabilities:
Merchandise inventories 967,383 1,334,422
Income tax receivable - 390,000
Accounts receivable and other current assets 840,315 352,824
Other assets 106,528 (50,205)
Merchandise payable (3,862,345) (2,689,071)
Accounts payable and accrued liabilities (659,476) (465,462)
Sales taxes payable (515,988) (483,242)
Income taxes payable (241,716) -
Other long term liabilities 110,732 159,938
----------- -----------
Net cash used in operating activities (6,223,505) (4,497,215)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,114,773) (331,962)
----------- -----------
Net cash used in investing activities (1,114,773) (331,962)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit 1,272,049 5,002,711
Net proceeds from subordinated debentures and warrants 2,797,007 -
Proceeds from notes payable and capitalized leases 300,000 -
Repayment of notes payable and capital leases (59,462) (99,864)
Debt issuance costs (242,952) (133,423)
----------- -----------
Net cash provided by financing activities 4,066,642 4,769,424
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,271,636) (59,753)
CASH AND CASH EQUIVALENTS, beginning of period 3,490,721 402,136
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 219,085 342,383
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES AND CASH FLOW INFORMATION:
Assets acquired through capital lease transactions $ 300,000 $ -
Issuance of warrants $ 76,006 $ 18,113
Interest paid $ 171,989 $ 236,689
Income taxes paid (received) $ 241,716 $ (390,000)
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited consolidated financial statements of The
Great Train Store Company and subsidiaries (the "Company") as of July 3, 1999
and for the thirteen and twenty-six week periods ended July 4, 1998 and July 3,
1999 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 2, 1999 included in the
Company's 1998 Annual Report on Form 10-K as filed with the SEC.
Prior year balances include certain reclassifications to conform to the
current year presentation.
2. REVOLVING LINE OF CREDIT
In April 1999, the Company entered into a $10,000,000 revolving line of
credit agreement with Paragon Capital LLC ("Paragon") to replace its previously
existing line with BankAmerica Business Credit. Borrowings under the Paragon
line are based on an advance rate percentage of the Company's inventory, which
varies throughout the year. Borrowings under the line at July 3, 1999, were
$5,410,000, and unused capacity was $854,000. Interest is charged at an initial
rate of Norwest Bank of Minnesota's base lending rate plus 1.25% with a right to
reduce this rate by .5% if the Company meets certain operating targets. The
initial term of the facility is five years and borrowings are secured by certain
assets of the Company, primarily inventory.
3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income or loss 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 periods ended July 4, 1998 or July 3, 1999.
4. AUTHORITATIVE 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 adopted SOP 98-5 which had no
effect on the Company's consolidated financial statements.
<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 Twenty-six Weeks Ended
July 4, 1998 July 3, 1999 July 4, 1998 July 3, 1999
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 57.3 52.2 61.2 53.4
Gross profit 42.7 47.8 38.8 46.6
Store operating expenses 25.2 26.8 24.8 27.2
Occupancy expenses 23.6 26.6 22.5 26.3
Selling, general and administrative expenses 17.0 17.7 17.4 16.3
Depreciation and amortization 5.0 5.3 4.7 5.4
Operating loss (28.1) (28.6) (30.6) (28.6)
Interest expense (2.5) (4.3) (2.5) (3.2)
Interest income 0.1 - 0.1 -
Other income - 0.3 0.1 0.2
Loss before income taxes (30.5) (32.6) (32.9) (31.6)
Income tax benefit 11.2 - 12.1 -
Net loss (19.3)% (32.6)% (20.8)% (31.6)%
</TABLE>
Comparison of the Thirteen Weeks Ended July 4, 1998 to the Thirteen
Weeks Ended July 3, 1999
Net sales increased approximately $605,000 or 11.8%, for the thirteen
weeks ended July 3, 1999, compared with the corresponding period last year. On a
comparable store basis, sales decreased by $451,000 or 9.5% in the second
quarter. Comparable store sales are calculated based on the stores open in all
periods for both fiscal years. The Company has been working diligently to remedy
issues which it believes have significantly impacted the Company's sales
performance. The two major areas of focus have been the various issues in the
merchandising area relating to out-of-stock situations and delays in getting new
product to the stores on a timely basis, and in the store operations area
relating to inadequate supervision in the field prior to the management
realignment during the first quarter of 1999. The Company continues to implement
changes in its merchandise programs and believes it is making progress in
ensuring more timely replenishment, regionally realigning the merchandise
carried in its various stores, obtaining new and exciting product (much of it
exclusive to The Great Train Stores) and developing important new relationships
with many of its vendors. In addition, the Company has continued to improve its
store operations and has been pleased with its new supervisory alignment and
added controls. The relationship of comparable store sales throughout the
quarter has shown continuous improvement throughout the quarter.
Gross profit increased approximately $548,000 or 25.0%, for the
thirteen weeks ended July 3, 1999, compared with the corresponding period last
year. As a percentage of net sales, gross profit increased to 47.8% for the
thirteen weeks ended July 3, 1999 compared with 42.7% for the corresponding
period last year. The increase in gross profit, as a percentage of sales, was
due to various factors including: improved terms with vendors, improved product
mix, and significant improvements to the Company's shrink results for mid-year
counts completed during the second quarter of 1999. During the second quarter of
1999 the Company sold product for which markdown reserves of approximately
$52,000 were recorded at January 2, 1999; accordingly, the related markdown
reserve was reversed to cost of sales. No additional increases to the reserve
were necessary.
Store operating expenses increased approximately $247,000 or 19.1%, for
the thirteen weeks ended July 3, 1999, compared with the corresponding period
last year. The increase was due to approximately $257,000 of store operating
expense for stores that were not open for the same period last year. This
increase was partially offset by a decrease of approximately $10,000 in
comparable stores. As a percentage of net sales, store operating expenses
increased to 26.8% for the thirteen weeks ended July 3, 1999, compared with
25.2% 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 $320,000, or 26.4%, for the
thirteen weeks ended July 3, 1999, compared with the corresponding period last
year. The increase was due to approximately $347,000 of occupancy expenses
attributable to the stores that were not open for the same period of last year.
This increase was partially offset by a decrease of approximately $10,000 in
comparable stores. As a percentage of net sales, overall occupancy expenses
increased to 26.6% for the thirteen weeks ended July 3, 1999, compared with
23.6% 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
$139,000, or 15.9%, for the thirteen weeks ended July 3, 1999, compared with the
corresponding period last year. A significant portion of such increase related
to the Company's realignment of the supervisory structure in the field during
the first quarter which provided that all stores have the direct review and
supervision of a regional manager. The Company believes this structure will more
effectively facilitate the resolution of issues and encourage and promote
selling opportunities in the stores. This structure will also allow all stores
to have the full concentration of a store manager who is no longer also
responsible for operational issues in other stores, as was the case with the
Company's previous operational structure. As a percentage of net sales, selling,
general and administrative expenses increased to 17.7% for the thirteen weeks
ended July 3, 1999, compared with 17.0% for the corresponding period in 1998.
The increase as a percentage of sales was primarily due to lower than
anticipated sales.
Depreciation and amortization expense increased approximately $45,000,
or 17.4%, for the thirteen weeks ended July 3, 1999, compared with the
corresponding period last year. The increase was due to $69,000 of depreciation
and amortization for stores that were not open for the same period last year.
This increase was partially offset by a decrease of approximately $24,000 in
comparable stores. As a percentage of net sales, depreciation and amortization
expense increased slightly to 5.3% for the thirteen weeks ended July 3, 1999,
from 5.0% for the corresponding period in 1998.
Interest expense increased approximately $118,000, for the thirteen
weeks ended July 3, 1999, compared with the corresponding period last year. The
increase primarily resulted from increased borrowings on the line of credit due
to seasonal net losses for additional open stores in 1999 compared to the same
period in 1998 and the higher interest rate under the Company's revolver
compared to the prior year.
The Company's pretax loss as a percentage of net sales, with fourteen
additional stores open compared to the prior year, increased to 32.6% for the
thirteen weeks ended July 3, 1999 from 30.5% for the corresponding period last
year. As the Company's stores typically lose money in the first part of the year
due to the seasonal nature of the Company's business, such losses typically
increase as more stores are opened during the period. The Company did not record
an expected income tax benefit for the quarter ended July 3, 1999 as it had in
the comparable period for 1998.
As a result of the foregoing, the Company recorded a net loss of
approximately $1,874,000 for the thirteen weeks ended July 3, 1999, compared
with a net loss of approximately $993,000 for the corresponding period last
year. The Company anticipates that it will continue to incur seasonal net losses
during the third quarter of the year. As a percentage of net sales, net loss
increased to 32.6% from 19.3% for the corresponding period last year.
Comparison of Twenty-six Weeks Ended July 4, 1998 to the Twenty-six
Weeks Ended July 3, 1999
Net sales increased approximately $1,154,000 or 11.0%, for the
twenty-six weeks ended July 3, 1999 compared with the corresponding period last
year. On a comparable store basis sales decreased by 12.6% from the prior year
for the twenty-six week period. Comparable store sales are calculated based on
the stores open in all periods for both fiscal years. The Company has been
working diligently to remedy issues which it believes have significantly
impacted the Company's sales performance. The two major areas of focus have been
the various issues in the merchandising area relating to out-of-stock situations
and delays in getting new product to the stores on a timely basis, and
management in the store operations area relating to inadequate supervision in
the field prior to the management realignment during the first quarter of 1999.
The Company continues to implement changes in its merchandise programs and
believes it is making progress in ensuring more timely replenishment, regionally
realigning the merchandise carried in its various stores, obtaining new and
exciting product (much of it exclusive to The Great Train Stores) and developing
important new relationships with many of its vendors. In addition, the Company
has continued to improve its store operations and has been pleased with its new
supervisory alignment and added controls. The twenty-six week period performance
was also impacted by cash constraint issues which occurred during the first
quarter of 1999. These issues existed at the beginning of the current year due
to the reductions in the Company's borrowing capacity resulting from changes in
terms imposed by its prior principal lender. As a result, the Company suffered
significant stock-outs in the earlier part of the first quarter and, in turn,
very poor comparable sales results. As was previously announced, the Company
recently was successful in replacing its revolving line of credit with a new
lender with considerably more advantageous arrangements. The Company is now able
to more appropriately replenish its merchandise. The relationship of comparable
store sales performance has shown continuous improvement throughout the
twenty-six week period.
Gross profit increased approximately $1,359,000 or 33.4%, for the
twenty-six weeks ended July 3, 1999 compared with the corresponding period last
year. As a percentage of net sales, gross profit increased to 46.6% for the
twenty-six weeks ended July 3, 1999 compared with 38.8% for the corresponding
period last year. The increase in gross profit, as a percentage of sales, was
due to various factors including: improved terms with vendors, improved product
mix, significant improvements to the Company's shrink results for mid-year
counts completed during the second quarter of 1999 and a prior year reserve of
$325,000 recorded in the first quarter of 1998 for inventory markdowns, which
significantly reduced the 1998 margin for the first twenty-six weeks. During the
twenty-six weeks ended July 3, 1999, the Company sold product for which markdown
reserves of approximately $103,000 were recorded at January 2, 1999;
accordingly, the related markdown reserve was reversed to cost of sales. No
additional increases to the reserve were necessary.
Store operating expenses increased approximately $563,000 or 21.6%, for
the twenty-six weeks ended July 3, 1999, compared with the corresponding period
last year. This increase was due to approximately $640,000 of store operating
expenses for stores that were not open in the comparable period in 1998. This
increase was partially offset by a decrease of approximately $77,000 in
comparable stores. As a percentage of net sales, store operating expenses
increased to 27.2% for the twenty-six weeks ended July 3, 1999 compared with
24.8% 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 $701,000, or 29.7%, for the
twenty-six weeks ended July 3, 1999, compared with the corresponding period last
year. The increase was due to occupancy expenses for stores not open in the
comparable period last year, partially offset by a slight decrease in comparable
store expense. As a percentage of net sales, overall occupancy expenses
increased to 26.3% for the twenty-six weeks ended July 3, 1999, compared with
22.5% 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 increased approximately
$79,000, or 4.3%, for the twenty-six weeks ended July 3, 1999, compared with the
corresponding period last year. The increase was primarily related to the
Company's realignment of the supervisory structure in the field during the first
quarter which provided that all stores have the direct review and supervision of
a regional manager. The Company believes this structure will more effectively
facilitate the resolution of issues and encourage and promote selling
opportunities in the stores. This structure will also allow all stores to have
the full concentration of a store manager who is no longer also responsible for
operational issues in other stores, as was the case with our previous
operational structure. As a percentage of net sales, selling, general and
administrative expenses decreased to 16.3% for the twenty-six weeks ended July
3, 1999, compared with 17.4% for the corresponding period in 1998. The decrease,
as a percent of sales, in selling, general and administrative expense was
primarily due to the Company's ability to automate processes and streamline
functions.
Depreciation and amortization expense increased approximately $130,000,
or 26.2%, for the twenty-six weeks ended July 3, 1999, compared with the
corresponding period last year. This increase was due to approximately $151,000
of depreciation and amortization for stores not open in the comparable period
last year. This increase was partially offset by a decrease of $21,000 in
comparable store expense. As a percentage of net sales, depreciation and
amortization expense increased to 5.4% for the twenty-six weeks ended July 3,
1999, from 4.7% for the corresponding period in 1998. The increase was primarily
due to lower than anticipated sales for the period.
Interest expense increased approximately $115,000, for the twenty-six
weeks ended July 3, 1999, compared with the corresponding period last year. The
increase primarily resulted from increased borrowings on the line of credit due
to seasonal net losses for additional open stores in 1999 compared to the same
period in 1998 and the increase in the interest rate under the Company's
revolver compared to the prior year.
The Company's pretax loss as a percentage of net sales, with fourteen
additional stores open compared to the prior year, decreased to 31.6% of sales
for the twenty-six weeks ended July 4, 1998 from 32.9% of sales for the
corresponding period last year. The Company did not record an expected income
tax benefit for the twenty-six weeks ended July 3, 1999 as it did in the
comparable period of 1998.
As a result of the foregoing, the Company recorded a net loss of
approximately $3,690,000 for the twenty-six weeks ended July 3, 1999, compared
with a net loss of approximately $2,189,000 for the corresponding period last
year. As a percentage of net sales, net loss increased to 31.6% from 20.8% of
sales for the corresponding period last year.
Liquidity and Capital Resources
For the twenty-six weeks ended July 3, 1999, net cash used in operating
activities was approximately $4,497,000 compared to approximately $6,224,000 for
the corresponding period last year. The Company's primary uses of cash during
the first twenty-six weeks of 1999 have been for funding anticipated seasonal
operating losses and payment of merchandise vendors.
In April 1999, the Company entered into a $10,000,000 revolving line of
credit agreement with Paragon Capital LLC ("Paragon") to replace its previously
existing line with BankAmerica Business Credit. Borrowings under the Paragon
line are based on an advance rate percentage of the Company's inventory, which
varies throughout the year. Borrowings under the line at July 3, 1999, were
$5,410,000, and unused capacity was $854,000. Interest is charged at an initial
rate of Norwest Bank of Minnesota's base lending rate plus 1.25% with a right to
reduce this rate by .5% if the Company meets certain operating targets. The
initial term of the facility is five years and borrowings are secured by certain
assets of the Company, primarily inventory.
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 were used to support new store openings and for
general working capital purposes. The subordinated debentures are secured by
certain assets, primarily fixtures and equipment.
The Company has the right to repay the subordinated debentures at any
time without penalty. If not previously repaid, Tandem will receive additional
warrants each year on the anniversary date of the loan, exercisable at a price
based on the fair market value of the Company's common stock on the date of
issuance. The Company issued 175,000 warrants in June 1998 and 90,000 warrants
in June 1999 pursuant to the terms of the agreement.
Management believes that cash flow from operations with the
availability under the line, will be adequate to meet cash needs for the
remainder of 1999.
Year 2000 Readiness Disclosure
General
The advent of the year 2000 poses certain technological challenges
resulting from a reliance in computer technologies on two digits rather than
four digits to represent the calendar year (e.g., "98" for "1998"). Computer
technologies programmed in this manner, if not corrected, could produce
inaccurate or unpredictable results or system failures in connection with the
transition from 1999 to 2000, when dates will begin to have a lower two-digit
number than dates in the prior century. This problem, the so-called "Year 2000
Problem" or "Y2K Problem," could have a material adverse effect on the Company's
financial condition, results of operations, business or business prospects
because the Company relies extensively on computer technology to manage its
financial information and serve its customers.
The Company's State of Readiness
The Company has developed a Year 2000 Action Plan (the "Plan"),
specifying a range of tasks and goals to be achieved at various dates before the
year 2000. To date, the Plan is on target and major deadlines have been met.
Senior management and the Board of Directors of the Company are regularly
apprised of the Company's progress, and both provide input and guidance on a
regular basis.
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, so that the system should be capable of accurately processing
date related data through and after the transition from 1999 to 2000. The
Company has identified other systems that are in need of renovation or
modification to minimize disruptions or failures related to the Year 2000
Problem. Such systems have either already been modified or replaced, or such
upgrades or replacements are scheduled to be completed by the third quarter of
1999.
Pursuant to the Plan, the Company has been attempting to actively
monitor the Y2K preparedness of its third party providers and servicers,
utilizing various methods for testing and verification. Due to the relatively
limited number of key suppliers, the Company could experience product delivery
delays if these vendors are not adequately prepared for the Year 2000 Problem.
The Company is discussing Year 2000 preparedness with these principal providers
and servicers.
The Costs to Address the Company's Year 2000 Issues
The Company has projected remaining Y2K expenditures to be immaterial.
The Company does not anticipate that the Company's Year 2000 Action Plan will
have any material effect on its financial statements or results of operations.
The projection of the Company's Y2K costs does not include internal personnel
costs, which are not expected to be significantly greater as a result of the
Year 2000 Problem, or external consulting or advisory fees, which have been and
are expected to be minimal. The Company's budget for Y2K expenditures consists
predominantly of expenditures for the upgrading or replacement of hardware and
software systems, divided approximately 50% for hardware and 50% for software.
The Company has funded, and plans to fund, its Year 2000 related expenditures
out of general operating cash flows and/or the Company's line of credit or
possible additional equipment financing.
Year 2000 Risks Facing the Company and the Company's Contingency Plans
The failure of the Company to substantially complete its Plan could
result in an interruption in or failure of certain normal business activities or
operations. Such failures could materially adversely affect the Company's
results of operations, liquidity and financial condition. Currently, the Plan is
on schedule and management believes that successful completion of the Plan
should significantly reduce the risks faced by the Company with respect to the
Year 2000 Problem.
The Company believes that its most reasonably likely worst-case
scenario with respect to the Year 2000 Problem involves the potential failure of
one or more of its third party vendors to continue to provide uninterrupted
service through the changeover to the year 2000. The Company relies on a
relatively small number of critical providers; thus if any such provider fails
adequately to prepare for the changeover between 1999 and 2000, the Company
could face product delivery delays. While an evaluation of the Year 2000
preparedness of its third party vendors has been part of the Company's Plan, the
Company's ability to evaluate is limited by the willingness of vendors to supply
information and the ability of vendors to verify the Y2K preparedness of their
own systems or their sub-providers. However, the Company does not currently
anticipate that any of its significant third party vendors will fail to provide
continuing service due to the Year 2000 Problem.
In order to reduce the risks enumerated above, the Company has begun to
develop contingency plans. In particular, if the Company receives information
that any of its critical suppliers will not be adequately prepared to meet the
transition from 1999 to 2000, the Company plans to take action to preserve the
Company's core business functions, such as purchasing merchandise earlier than
it might otherwise have done.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Borrowings under the Company's revolving line of credit are based on a
variable rate resulting in possible exposure to market risk. The Company's
subordinated debentures do not expose the Company to market risk as the related
interest accrues at a fixed rate. The Company does not use derivative financial
instruments to manage overall borrowing costs or reduce exposure to adverse
fluctuations in interest rates. The impact on the Company's results of
operations of a one point interest rate change on the outstanding balance of the
variable rate borrowings under the Company's revolving line of credit as of July
3, 1999 would be immaterial.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on June 15, 1999. At the
meeting, the stockholders voted for the election of both persons nominated by
management to be Class II Directors. The votes for these nominated Directors
were as follows:
Name Votes For Votes Withheld
Joel S. Pollack 3,796,157 224,109
John J. Schultz 3,796,157 224,109
Item 6. Exhibits and Reports on Form 8-K
(A) See Exhibit Index.
(B) None
<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
August 17, 1999 By: /s/ Cheryl A. Taylor
- -------------------------- --------------------------------------------
Date Cheryl A. Taylor
Vice President - Finance and Administration,
Principal Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule
99.1 Cautionary Statement Identifying Important Factors that Could
Cause the Company's Actual Results to Differ from those Projected
in Forward Looking Statements
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> APR-04-1999
<PERIOD-END> JUL-04-1999
<CASH> 342,383
<SECURITIES> 0
<RECEIVABLES> 545,013
<ALLOWANCES> 0
<INVENTORY> 9,028,213
<CURRENT-ASSETS> 9,915,609
<PP&E> 10,220,403
<DEPRECIATION> (3,461,002)
<TOTAL-ASSETS> 17,389,143
<CURRENT-LIABILITIES> 3,022,746
<BONDS> 9,775,766
0
0
<COMMON> 44,172
<OTHER-SE> 4,546,459
<TOTAL-LIABILITY-AND-EQUITY> 17,389,143
<SALES> 5,737,466
<TOTAL-REVENUES> 0
<CGS> 2,996,512
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,370,662
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (243,890)
<INCOME-PRETAX> (1,873,598)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,873,598)
<EPS-BASIC> (0.42)
<EPS-DILUTED> 0
</TABLE>
Exhibit 99.1
Cautionary Statement Identifying Important Factors that Could Cause the
Company's Actual Results to Differ from those Projected in Forward Looking
Statements
The following factors could affect The Great Train Store Company's
actual future results, including its merchandise sales, expenses, cash flow and
net income, and could cause them to differ from any forward-looking statements
made by or on behalf of the Company:
Due to the importance of the Christmas selling season to many
retailers, including the Company, and the Company's efforts to open new stores
late in the year to capitalize on increased net sales during the Christmas
season, net sales in the fourth quarter of each year constitute a highly
disproportionate amount of net sales for the entire year and, historically, has
represented all of the Company's income from operations. As a result, the
Company's annual earnings have been and will continue to be heavily dependent on
the results of operations in the fourth quarter of each year. Changes in
consumer tastes, spending habits, national, regional or local economic
conditions, population and traffic patterns, all of which could adversely affect
Company sales, expenses and profitability. In particular, the Company could be
affected by an adverse change in the popularity of trains in general or in the
Shining Time Station television series. Products related to the Shining Time
Station television series have represented a significant portion of the
Company's annual net sales in the past few years. There can be no assurance that
the Company will be able to successfully anticipate and respond to changing
conditions affecting consumer acceptance of its merchandise. The results
achieved to date by The Great Train Stores may not be indicative of future
operating results. Moreover, because of the relatively small number of stores,
poor operating results at any one store or any unsuccessful new store opening
could negatively impact the Company's results from operations to a greater
extent than would be the case in a larger chain. The Company's continued success
and expansion depends, in large part, on the continued availability of its
existing locations and on the Company's ability to identify and secure suitable
additional locations on acceptable terms in which to construct new stores. The
rate of new store openings is subject to various contingencies, many of which
are beyond the Company's control. These contingencies include, among others, the
availability of new retail space in locations and on terms considered acceptable
by the Company and the progress of construction of the Company's new stores and
of the shopping centers in which they are to be located and the ability to find,
successfully acquire, and effectively operate existing stores. Moreover, store
construction and opening costs could be higher than expected, and the Company
may reduce the rate at which it opens new stores. While some of the Company's
leases contain provisions for renewal terms, there can be no assurance that such
space will continue to be available to the Company after the expiration of the
renewal terms or, if available, that such space could be obtained on terms
considered acceptable by the Company. Further, certain of the renewal terms
provide for substantial increases in occupancy costs. In addition, deterioration
of shopping centers in which The Great Train Stores are located or increased
competition from newly constructed centers could necessitate renovation of The
Great Train Store or of the center in which it is located or otherwise adversely
impact the Company's sales and/or expenses. The need for such renovations could
involve unanticipated capital expenditures or result in a decrease in customer
traffic, either of which could adversely affect the Company's operating results.
The Company faces substantial competition for consumer dollars,
suitable retail locations, management personnel and products from specialty
retailers and mass merchandisers, including toy stores and merchandisers of
gifts alternative to those offered by the Company. The Company also experiences
significant competition for customers from companies which market products
primarily or exclusively by mail order. Competition from such sources could
increase in the future. Certain of the Company's competitors have substantially
greater financial, marketing and other resources than the Company, and there can
be no assurance that the Company will be able to compete successfully with them
in the future. The Company's business is dependent, in part, upon its ability to
purchase and take timely delivery of merchandise. Numerous factors, many of
which are outside the Company's control, could impair the Company's ability to
purchase merchandise or delay the delivery of merchandise to the Company's
stores. Significant deviations in the amount of merchandise delivered or in the
delivery schedule could result in lost sales due to inadequate inventory,
especially during the Christmas selling season, and have a material adverse
effect on the Company's operating results. In order to successfully continue and
manage its expansion strategy, the Company will be dependent on its ability to
retain existing personnel and to hire, train and supervise additional personnel
for the new stores to be opened while maintaining satisfactory levels of
customer service at existing stores. The Company's quarterly operating results
can be expected to fluctuate as a result of seasonal fluctuations in consumer
demand for the Company's products, which is highest during the fourth quarter. A
significant portion of the Company's operating expenses are relatively fixed and
there can be no assurance that the Company will report income from operations in
any particular quarter. Accordingly, the market price of the common stock could
be subject to wide fluctuations in price and volume in response to actual or
anticipated variations in quarterly operating results and a variety of other
factors. To date, the Company has met its liquidity requirements through cash
flows from operating activities, the public sale of its equity securities and
borrowings under existing credit facilities. 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. In April 1999, the Company replaced its
previous revolving line of credit with Bank America Business Credit, with a $10
million credit facility with Paragon Capital, LLC. The trading of the Company's
common stock on the Nasdaq Small Cap Market is conditioned upon the Company
meeting certain asset, capital and surplus, earnings and stock price tests. If
the Company fails to satisfy any of these tests, the common stock may be
delisted from trading on Nasdaq Small Cap Market. The effects of delisting
include more limited news coverage of the Company. Delisting may restrict
investors interest in the Common Stock and materially adversely affect the
trading market and prices for the common stock and the Company's ability to
issue additional securities or to secure additional financing. Because Internet
retailing is still in a relatively early stage of development, there is no
guarantee the use of the Internet for retail purposes will become widespread.
Consumer concerns about privacy and security may hinder the growth of Internet
retailing. Technology in the online commerce industry changes rapidly. These
changes and the emergence of new industry standards and practices could render
our existing Website and technology obsolete. The Company has a limited amount
of experience marketing products electronically. The Company may be unable to
develop the methods and means necessary to produce sufficient consumer interest
in the Company's Website, thus hindering its ability to increase revenues via
Internet sales. In addition, the Company may not be able to establish links with
other web sites as planned which could adversely impact the success of the site.
The Company must also be able to effectively and efficiently fulfill customer
orders which is subject to various internal and external factors. The Company's
success and ability to facilitate product sales over the Internet depends on the
efficient and uninterrupted operation of its computer and communications
hardware systems. In the case of frequent or persistent system failures the
Company's reputation and name brand could be materially adversely affected. The
Company's internet systems and operations are vulnerable to damage or
interruption from earthquakes, floods, fires, power loss, telecommunications
failures, break-ins, sabotage, intentional acts of vandalism, and similar acts.
In addition, the Company's servers are vulnerable to computer viruses, physical
or electronic break-ins, and similar disruptions which could lead to
interruptions, delays, loss of data or the inability to complete customer
transactions. The Company does not presently have fully redundant systems, a
formal disaster recovery plan or alternative service providers and may not carry
sufficient business interruption insurance to compensate the Company for losses
that could occur.
