SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ X ] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 2, 1999
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ______ to __________
Commission file number 1-13158
THE GREAT TRAIN STORE COMPANY
(Name of Small Business Issuer in Its Charter)
Delaware 75-2539189
(State or Other Jurisdiction (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)
Securities registered under Section 12(g) of the Act: Common Stock $.01 par
value
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
At March 19, 1999, the aggregate market value of the voting stock held by
non-affiliates of The Great Train Store Company (the "Company") was
approximately $3,865,140, based on the average bid and asked prices of the
common stock reported by The Nasdaq National Market on March 19, 1999. At March
19, 1999, the Company had outstanding 4,415,764 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders (to be filed pursuant to Regulation 14A within 120 days of the end
of the registrant's most recently completed fiscal year) are incorporated by
reference to Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
Page
ITEM 1. Description of Business 3
ITEM 2. Description of Property 7
ITEM 3. Legal Proceedings 8
ITEM 4. Submission of Matters to a Vote of Security Holders 8
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters 8
ITEM 6. Selected Financial Data 9
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
ITEM 8. Financial Statements and Supplementary Data 15
ITEM 9. Changes In and Disagreements with Accountants on 15
Accounting and Financial Disclosures
PART III
ITEM 10. Directors and Executive Officers of the Registrant 16
ITEM 11. Executive Compensation 16
ITEM 12. Security Ownership of Certain Beneficial Owners 16
and Management
ITEM 13. Certain Relationships and Related Transactions 16
PART IV
ITEM 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 16
PART I
ITEM 1. Description of Business
Overview
The Great Train Store Company is a national chain of unique, upscale specialty
retail stores, which offer a broad selection of train-themed merchandise not
generally available from any other single retailer. Each of the fifty-six
currently operated The Great Train Stores typically offer approximately 4,200
stock keeping units ("SKUs"), except The Train Depot, which offers approximately
9,700, including: (i) mechanical and non-mechanical toy trains, games, plush
animals, and other toys, (ii) model trains, tracks, buildings, scenery, and
accessories, (iii) men's, women's, and children's apparel, jewelry, and
accessories, (iv) decorative items, novelties and souvenirs, and (v) books,
magazines, printed material and audiovisual products, all of which are related
to a common train and railroad theme. As an important element of its strategic
positioning, the Company strives to create an exciting and entertaining shopping
experience which appeals to all segments of the population, whether male or
female, child or adult, by featuring attractions such as moving model trains,
train whistles and sounds, and audiovisual presentations.
The Company's growth plans include capitalizing on what it believes to be (i)
its role as a leading retailer of train-themed merchandise, (ii) the significant
national nostalgia for railroads and (iii) the growth of themed entertainment
retailing. To accomplish its objective, the Company strives to emphasize (i) the
entertaining quality of The Great Train Store shopping experience, (ii) the
broad merchandise selection offered by each of The Great Train Stores, and (iii)
the knowledgeable and personalized customer service rendered by The Great Train
Store sales personnel.
The Great Train Store concept was developed in 1985 by James H. Levi to
contribute to the unique retail shopping environment then under development as
part of the adaptive reuse of the landmark St. Louis Union Station in St. Louis,
Missouri, for which Mr. Levi was principally responsible. The Great Train Store
retail concept was well received in the renovated St. Louis Union Station. As a
result, it was apparent to the Company that the train-themed merchandise and
atmosphere of The Great Train Store had a customer base and general level of
interest among retail consumers which was much broader than and extended well
beyond the St. Louis Union Station store. Beginning in 1987, the Company
expanded slowly at first but expansion has become much more rapid in the last
few years. As of the end of 1998, the Company operates 56 The Great Train
Stores. During 1996, the Company also acquired one additional store through the
purchase of The Train Depot in Winter Park, Florida. In 1997 and 1998, the
Company also tested one possible area for expansion, The Great Train Store
Express. The Great Train Store Express stores are temporary holiday stores that
allow the Company to sell more merchandise during the most active selling period
of the year and to test new sites without being committed to the location on a
long-term basis. In 1997, the Company tested the concept by opening five Express
stores and followed up by testing six additional locations in 1998.
The Great Train Store Concept
The Great Train Store Layout and Design. The Great Train Stores are as
distinctive in appearance as the shopping experience that they provide. As a key
element of its strategic positioning, the Company has designed The Great Train
Stores to encourage shoppers to enter and browse the Company's merchandise. The
Great Train Stores are typically located in highly visible locations within
regional shopping malls or festival marketplaces. The prototypical storefront of
approximately 30 feet has a high quality appearance and is constructed of wood
and glass with a design which integrates with the internal decor and color
palette and is intended to draw the customer into its ambiance of an early 20th
century train station. Each of The Great Train Stores features attractions, such
as moving electrical trains, whistles, railroad crossing signals, train sounds
and audiovisual presentations, to increase the visibility of the store and
enhance the quality of each customer's shopping experience.
The Great Train Stores range in size from 1,150 to 3,301 square feet of gross
rented space and 1,016 to 2,429 of selling square feet. The Train Depot has
approximately 6,867 square feet of gross rented space and 4,304 of selling
square feet. Merchandise is presented in a logical, accessible and
understandable manner to arouse interest and encourage customers, especially
children, to touch and experience the offered products. Large-scale moving
trains encircle the interior and, in most stores, the exterior of The Great
Train Store on a patented overhead trestle. Informational signage and displays
presented in close proximity to well-lighted shelving containing the featured
merchandise give prominence to selected products which the Company believes have
particular appeal to shoppers. Merchandise is regularly relocated and new
merchandise is added within the store to offer a fresh presentation to frequent
customers.
Merchandising and Pricing. A key element of the Company's business strategy is
to distinguish The Great Train Stores by carrying a broad selection of
train-themed merchandise. Management believes that offering an extensive
selection of high-quality train-themed merchandise significantly expands The
Great Train Stores' customer base and increases store traffic. The Company
closely monitors in-stock inventories through its information system and
regularly replenishes and adds to the merchandise carried in order to reinforce
the customers' awareness of the wide and varied selection of products offered by
the stores.
The Company's pricing strategy considers a variety of factors, including gross
profit contribution and potential mark-up over cost. Notwithstanding its focus
on gross profit contribution and sales margin, however, the Company intends to
be generally competitive with prices charged by other comparable retailers.
Accordingly, the Company customarily prices its products at the manufacturers
suggested retail price and monitors price levels at its competitors' outlets in
order to insure that its prices remain competitive.
Each of The Great Train Stores is specifically merchandised to be compatible
with local railroad history and market characteristics. The prototypical The
Great Train Store stocks approximately 4,200 of the SKUs currently offered by
the Company throughout its store network. Merchandise is currently offered in
the following principal product lines:
Toy Trains and Train-Themed Merchandise. In 1998, approximately 39% of
the Company's net revenues were derived from the sale of toys
(including, for example, Brio, Learning Curve Toys, Tomy, Ertl, and
Playmobil), games, puzzles, and plush animals.
Model Trains and Accessories. The Great Train Stores offer a broad
selection of model railroad cars, track, and accessories in each of the
five principal sizes, HO gauge, #1 gauge, 0/0-27 gauge, Z gauge and N
gauge, including merchandise from most of the best-known names in model
railroading, such as Lionel, Athearn, LGB, Bachmann, K-Line, Life-Like,
Model Power, Atlas, Kato, Rivarossi, Walthers, Woodland Scenics, and
Micro Trains. Net sales in 1998 from this product line accounted for
approximately 35% of the Company's annual net sales volume.
Printed and Recorded Materials. Each of The Great Train Stores carries
a wide selection of books, magazines, posters, calendars, videotapes,
and children's educational material, which accounted for approximately
9% of the Company's annual net sales volume in 1998.
Decorative Gifts, Novelties and Souvenirs. The Company offers its
customers a large selection of train-themed decorative items, novelties
and souvenirs, including clocks, music boxes, porcelain, glass, marble
and pewter wares, mugs, whistles, postcards, stickers, pins, magnets,
signs, plaques, pens and pencils. Net sales from such merchandise in
1998 accounted for approximately 11% of the Company's annual net sales
volume.
Apparel. Each of The Great Train Stores is stocked with a variety of
men's, women's and children's apparel and accessories, including hats,
T-shirts, sweatshirts, ties, jewelry, watches and belt buckles, the net
sales of which represented approximately 6% of the Company's annual net
sales volume in 1998.
A substantial portion of the Company's annual net sales in the last five years
have been derived from the sale of merchandise based on the award-winning
children's series, Shining Time Station, and its star, Thomas the Tank Engine.
This merchandise includes toys, printed material, audio-visual products and
apparel and is obtained by the Company from more than 40 licensed vendors. The
Company believes it sells more Thomas the Tank Engine than any other company in
the world. Thomas the Tank Engine is the feature character in a very popular,
children's cartoon series that moved in the fall of 1998 from public television
to the new Fox Family Channel. The Company has been informed by the Britt
Allcroft Company that it has entered into an agreement to produce a full-length
movie featuring Thomas the Tank Engine which is expected to be released in early
2000.
The Company believes the high quality of its stores and of the products carried
by its stores is valued by customers. The Company further believes that the
quality of The Great Train Stores' products make them exceptionally well suited
for gift giving, especially for men and children. The Company's sales personnel
are taught the importance of educating the customer about the products offered
by the store and of assisting the customer in making suitable gift selections.
The Company constantly seeks to identify and introduce new products which meet
its quality and profitability standards. Its merchandise buyers attend trade
shows and meet with manufacturers throughout the year in search of new products
for The Great Train Stores. Products meeting the Company's initial merchandise
criteria are tested and reviewed by the Company's personnel. The Company's
information system is used to track the popularity of new products prior to
chain-wide introduction.
Customer Service. The Company is committed to achieving total customer
satisfaction and encouraging repeat business by providing a high level of
knowledgeable, attentive and personalized customer service. Many of the
Company's sales personnel are train enthusiasts and are well versed in the train
lore and history of their locality. The Company believes that educating its
broad range of consumers with respect to the suitability, benefits and
differences in all merchandise offered is an important component to its success.
In order to develop responsive and well-trained sales personnel, the Company has
devoted substantial resources to developing and implementing employee training
and incentive programs.
Personnel Training. An important aspect of the Company's customer service
strategy is "The Great Training Program" which has been developed to provide
each employee with education in product knowledge, salesmanship, and Company
policies and procedures. New store managers receive on-the-job training under
the supervision of an experienced store manager prior to assuming their
responsibilities. Each store manager participates in regular telephone
conferences with the field supervisors, who in turn participate in a weekly
conference call with the Company's Director of Stores, and receives regular
communications. The Company believes that this communication process both
enhances the training of its store managers and establishes a direct flow of
relevant Company information from the Company's central office to all of The
Great Train Stores.
Each store is staffed with a store manager, one or two assistant managers and
such additional sales associates and support staff as are required to meet the
specific needs of the store. The Company provides financial incentives to its
store managers through incentive compensation programs based upon the
performance of the individual store in which the employee performs services. The
Company believes that its incentive compensation programs increase the
motivation and overall performance of its personnel, and the Company's ability
to attract and retain qualified employees.
Expansion Strategy
Given the Company's recent past performance, management has determined that in
1999, the Company's expansion strategy will temporarily be curtailed. The
Company has committed to open one new store in Providence Place in Providence,
Rhode Island in mid-1999. The Company's primary focus for 1999 will be
satisfactorily resolving all significant store operational issues. Accordingly,
other than the opening of its new store in Providence Place, the Company does
not anticipate any additional openings in 1999. As of January 2, 1999, the
Company operated fifty-six stores primarily located in distinctive regional
shopping malls and festival marketplaces.
It is anticipated that the Company's expansion strategy will resume, possibly in
2000. The Company does not anticipate a significant variance in the new store
opening process that is detailed below. Because of the broad market appeal of
their merchandise mix, the Company seeks to locate The Great Train Stores in
high traffic shopping environments. Prior to entering a new market, the Company
reviews the market's demographic and competitive situation to evaluate the
suitability of and prospects for the market. Among other factors, each site is
evaluated on such information as local market demographics, traffic counts, the
retail mix of the center, the visibility of available locations within the
center, access to the center from major thoroughfares, presence or absence of
competition, overall retail activity of the area and proposed lease terms. The
time period required to open a store after signing a lease depends upon the
landlord's ability to deliver the premises to the Company. Upon acceptance of
the premises from the landlord, the Company generally can open a store within
sixty days.
The Company also believes that opportunities exist to achieve growth through the
identification and development of new and unique product lines and through the
development or acquisition of businesses complimentary to the Company's existing
business, including the possibility of Internet, mail order and catalog sales
operations. In 1996, the Company acquired an existing train hobby store in
Winter Park, Florida and may consider additional similar acquisitions.
Currently, the Company has no agreement, arrangement or understanding with
respect to any future acquisition.
Advertising and Promotion
The Company relies primarily on highly visible store locations and attractive
store design and visual presentation to attract the attention of prospective
consumers. Its marketing activities also include special event promotions and a
variety of public relations activities, such as promotion of local events
relating to railroading, "how to" instructional sessions, and book readings for
children. Moreover, the Company considers media relations to be an integral part
of its image-building program and strives to develop good working relationships
by inviting media members to store grand openings and maintaining access to the
appropriate Company personnel. The Company participates in cooperative
advertising programs with certain of its major vendors. The Company also
maintains direct mail contact with customers, highlighting sales promotions, as
an important aspect of its marketing strategy.
Suppliers
Most of the Company's products are purchased directly from manufacturers. The
Company presently purchases products from approximately 600 vendors. No single
vendor supplied products representing more than 10% of the Company's net sales
in 1998 other than Learning Curve (which represented approximately 18.9%) and
Lionel Trains, Inc. (which represented approximately 10.6%). The largest five
vendors represented approximately 45.1% of net sales for the year. Although the
Company's net sales are not dependent on any single vendor, the Company views
its relationships with certain key vendors, such as Bachmann Industries, United
Model Distributors, Brio Scanditoy, Walthers, Ertl, LGB, Learning Curve Toys,
and Lionel Trains, Inc., to be important factors in its success. The Company
deals with its vendors principally on an order-by-order basis and has no
long-term purchase contracts or other contractual assurance of continued supply
or pricing. The Company believes that, due to its relative size, its purchasing
activities, which account for an important portion of many of its suppliers'
sales, permit it to achieve a lower cost of goods sold which, together with its
broad selection of merchandise, good locations, and exciting store presentation,
permit it to be competitive against other forms of train-themed retailers. The
Company also intends to increase the number of unique items manufactured
specifically for it, such as its patented G scale railroad trestle system and
its The Great Train Store neckties and whistles.
Information Systems
During 1998, the Company made significant enhancements to its information
systems, including a major upgrade of the store point of sale and central office
systems. In addition to providing continuous knowledge of the Company's
inventories, these computerized systems enable the Company's central office to
re-price merchandise, replenish depleted store inventories, identify sales
trends and monitor merchandise mix at individual stores and throughout the
Company's store network. These systems will help the buying staff reduce average
store inventories and thus achieve higher inventory turnover and better in stock
availability. The systems also enable the Company to realize purchase discounts
and to produce the financial reports necessary for monitoring and developing
budgets for the Company's expanding business. The Company's point-of-sale system
keeps daily records of each SKU from receipt to sale.
The Company is presently engaged in various programs to enhance its information
systems in order to accommodate its growth and further improve the
sophistication, timeliness, and accuracy of the information obtained.
Competition
Competition is highly intense among specialty retailers, traditional toy and
hobby stores and mass merchant discounters in regional shopping malls and other
high-traffic retail locations and could increase in the future. To the Company's
knowledge, there are no other national chains of stores specializing in
train-related merchandise. Consumers of train-related merchandise are generally
served by toy and hobby stores, mail order merchandisers, and Internet
merchants. Competition is fragmented and varies substantially from one
geographic location to another. National toy store chains, mail order
merchandisers, discount stores and other mass merchandisers have a significant
market share and could increase competitive pressures on the Company in the
future. In addition, the mail order and Internet industries have become
increasingly competitive in recent years. Competition is generally focused on
product availability, customer service and price.
The Company believes that it differentiates itself from its competitors by
offering a broader selection of merchandise in a more exciting and entertaining
environment. The Company also believes that the train-related knowledge of its
sales personnel is a significant competitive advantage.
Trademarks
The name "The Great Train Store" and its related logo, the Company's slogan
"More trains than you ever imagined" and the name "Train Depot" are trademarks
and service marks registered in the United States and Canadian Patent and
Trademark offices. In addition, the name "The Great American Train Store" has
been registered in the Japanese and ECU Patent and Trademark offices and the
name "The Great Train Store" has been registered in Japan and is pending in the
ECU. Management believes that the name "The Great Train Store" is an important,
but not critical, element of the Company's marketing strategy. The Company
closely monitors the use of its intellectual property and intends to vigorously
defend its rights with respect thereto.
Employees
As of January 2, 1999, the Company employed a total of 704 persons, of whom 178
were salaried personnel and 526 were employed on an hourly wage basis.
Thirty-four of the Company's employees were assigned to central office
responsibilities and 670 were engaged in activities in stores. None of the
Company's employees are covered by a collective bargaining agreement and the
Company considers its employee relations to be good.
ITEM 2. Description of Properties
The Company leases all stores from developers or operators of the regional
shopping malls, festival marketplaces and other locations in which the stores
are located. Typically, the Company's leases provide for the payment of minimum
annual rent and additional rent calculated as a percentage of the stores' net
sales. Generally, the Company is also required to pay a portion of the
landlord's cost of insurance, taxes and other operating expenses. The leases
typically provide for an initial term of between five and twelve years and may
have various renewal terms. The following table summarizes the number of
expiration dates in each year for stores and the central office leases:
Number of
Year Leases Expiring
---- ---------------
1999 0
2000 3
2001 1
2002 0
2003 5
2004 and thereafter 48
The Company's central offices are presently located in approximately 8,245
square feet of leased space in Dallas, Texas under a lease that expires on March
14, 2000. The Company believes this space is adequate for its present needs.
ITEM 3. Legal Proceedings
The Company is not presently party to any material legal proceedings. The
Company does not believe that any claims and lawsuits to which it is a party
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, results of operations or liquidity.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of 1998 to a vote of security
holders.
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
The Great Train Store Company's common stock is traded on The Nasdaq National
Market under the symbol GTRN. At March 29, 1999 the number of common
stockholders of record was 139. Based on discussions with the Company's transfer
agent and investment banker, the Company believes that its common stock is
beneficially held by more than four hundred persons. The following table sets
forth, for the periods indicated, the range of high and low bid prices with
respect to the Company's Common Stock as reported by The Nasdaq National Market.
Common Stock
--------------------------------------
Period High Low
------ ---- ---
1997:
First Quarter (beginning 12/29/96) 9-3/8 8-1/4
Second Quarter 8-7/8 6-3/4
Third Quarter 9-3/8 7
Fourth Quarter 8-1/2 5-5/8
1998:
First Quarter 5-11/16 3-3/8
Second Quarter 4-1/4 2-1/2
Third Quarter 3-3/16 1-1/2
Fourth Quarter 1-3/4 3/4
The foregoing quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
On March 19, 1999, the last sale price for the Common Stock, as reported by The
Nasdaq National Market, was 1-1/4.
The Company has not declared or paid any cash dividends on its Common Stock
since its inception, and the Board of Directors presently intends to retain cash
flow for the development of the Company's business for the foreseeable future.
The declaration and payment of cash dividends in the future will be at the
discretion of the Company's Board of Directors and will depend upon a number of
factors, including, among others, future earnings, operations, capital
requirements, the general financial condition of the Company and such other
factors as the Board of Directors may deem relevant. The payment of dividends is
also limited by the Company's agreements with its senior lender and the holder
of its subordinated debentures.
ITEM 6. Selected Financial Data
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Results of Operations
Net Sales $8,992,686 $12,815,833 $18,998,461 $28,090,948 $33,932,790
Income (loss) before income tax (593,564) 386,550 1,051,529 641,940 (3,962,640)
Net income (loss) (593,564) 386,550 772,228 410,613 (3,849,174)
Basic income (loss) per share (.25) .12 .21 .09 (.87)
Diluted income (loss) per share (.25) .12 .20 .09 (.87)
Financial Position
Total Assets 6,985,422 8,049,918 16,060,678 19,795,559 19,634,726
Long Term Debt and other Liabilities 999,600 1,243,111 980,443 1,085,338 4,721,501
Working Capital 4,467,900 4,305,887 8,273,994 6,919,897 5,396,660
Stockholders' Equity 4,427,864 4,831,413 11,368,800 12,030,445 8,257,277
Retail Stores
Number of Stores at year-end 14 18 30 42 56
Total store sales growth 40.6% 42.5% 48.3% 47.9% 20.8%
Comparable store sales growth 3.5% 4.3% 2.3% 0.0% (7.3%)
Store selling area at year-end 23,689 32,326 50,465 69,220 90,738
(sq. ft.)
ITEM 7. Management's Discussion and Analysis
Results of Operations
The following table sets forth, for the periods indicated, selected statements
of operating data expressed as a percentage of net sales (prior year balances
include certain reclassifications to conform to the current year presentation).
The Company's fiscal year is based on a 52/53 week fiscal year ending on the
Saturday closest to December 31.
Fiscal 1996 Fiscal 1997 Fiscal 1998
----------- ----------- -----------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 51.8 53.7 58.9
------- ------- -------
Gross Profit 48.2 46.3 41.1
Store operating expenses 16.3 16.9 19.0
Occupancy expenses 11.7 13.2 15.5
Selling, general and 12.4 12.1 11.7
administrative expenses
Provision for store closing 0.0 0.0 0.7
Depreciation and amortization 2.1 2.7 3.1
------ ------ -------
Operating income (loss) 5.7 1.4 (8.9)
Interest expense (0.7) (0.7) (2.9)
Interest income 0.5 0.2 0.1
Other income 0.1 1.4 0.1
------ ------ ------
Income (loss) before income 5.6 2.3 (11.6)
taxes
Income (tax) benefit ( 1.5) (.8) 0.3
------ ------- ------
Net income (loss) 4.1% 1.5% (11.3)%
====== ======= =======
Comparison of Fiscal Year Ended January 3, 1998 to the Fiscal Year Ended January
2, 1999
Net sales increased approximately $5,842,000, or 20.8%, for the fiscal year
ended January 2, 1999 compared with the corresponding period last year due to
the opening of new stores. The increase was offset by a $1,604,000 or 7.3%
decrease in comparable store sales. Since the 1997 fiscal year contained 53
weeks, the comparable store calculation is based on the applicable 52 week
period. Comparable store sales are calculated based on the stores open in all
periods for both fiscal years. The Company attributes sales results primarily to
significant out-of-stock positions that developed during 1998 due to both
internal and external factors. Various other store operational issues also
contributed to the poor sales performance. These issues are currently being
addressed by a detailed action plan.
Gross profit increased approximately $934,000 or 7.2%, for the fiscal year ended
January 2, 1999, compared with the corresponding period last year. Gross profit
as a percentage of net sales decreased to 41.1% for the fiscal year ended
January 2, 1999, compared with 46.3% for the corresponding period last year.
Gross profit, as a percentage of sales, was impacted by several factors,
primarily significant shrink and reduced margins resulting from increased price
promotional programs which were developed in an effort to increase sales.
External shrink related contributors included ineffective product distribution
to new stores by an external central distribution facility which is believed to
have resulted in a significant volume of lost product. Internal factors were
primarily related to various store operational issues that are being addressed
by a new initiative of exception reporting.
Store operating expenses increased approximately $1,691,000 or 35.6%, for the
fiscal year ended January 2, 1999, compared with the corresponding period last
year. Approximately $1,660,000 of the increase resulted from the operation of
the new stores and the remaining approximate increase of $31,000 was
attributable to an increase in comparable store operating expenses. As a
percentage of net sales, store operating expenses increased to 19.0% for the
fiscal year ended January 2, 1999, compared with 16.9% for the corresponding
period last year. This increase was primarily due to lower than anticipated
sales.
Occupancy expenses increased approximately $1,545,000, or 41.6%, for the fiscal
year ended January 2, 1999, compared with the corresponding period last year.
Approximately $1,440,000 of the increase related to the new stores and
comparable store occupancy expenses increased approximately $105,000, mostly
from increases in shared expenses charged by certain of the malls in which the
Company has stores. The Company believes the current central office space is
adequate for the foreseeable future. As a percentage of net sales, overall
occupancy expenses increased to 15.5% for the fiscal year January 2, 1999, from
13.2% for the corresponding period last year.
Selling, general and administrative expenses increased approximately $605,000 or
17.8%, for the fiscal year ended January 2, 1999, compared with the
corresponding period last year. The increase was primarily related to increased
overhead directly related to the operation and supervision of more stores in
1998 than were open in 1997. As a percentage of net sales, selling, general and
administrative expenses decreased to 11.7% for the fiscal year ended January 2,
1999, from 12.1% for the corresponding period last year.
Depreciation and amortization expense increased approximately $288,000, or
38.0%, for the fiscal year ended January 2, 1999, compared with the
corresponding period last year. Such increases were primarily the result of an
increase in the asset base related to new stores. As a percentage of net sales,
depreciation and amortization expense increased to 3.1% for the fiscal year
ended January 2, 1999, from 2.7% for the corresponding period last year. The
increase as a percentage of net sales was primarily related to the reduced sales
performance.
A provision for store closing of approximately $241,000 during 1998 resulted
from the non-recurring charge related to the expected closing of two store
locations which are expected to occur during 1999. Store closing expense for
1998 was 0.7% of sales.
Other income decreased approximately $342,000 for the fiscal year ended January
2, 1999 compared with the corresponding period last year. This decrease was
primarily due to a $350,000 settlement the Company received in 1997 from the
City of Indianapolis in connection with the closing of Union Station requiring
the Company to close its store during the term of the lease.
Pretax income decreased to a loss of approximately $3,963,000 for the fiscal
year ended January 2, 1999. The Company recorded a tax benefit of approximately
$113,000 related to the 1998 results.
As a result of the foregoing, the Company recorded a net loss of approximately
$3,849,000 for the fiscal year ended January 2, 1999, compared with net income
of approximately $411,000 for the corresponding period last year. As a
percentage of net sales, net loss was 11.3% for fiscal 1998, compared to net
income of 1.5% for fiscal 1997.
Comparison of Fiscal Year Ended December 26, 1996 to the Fiscal Year Ended
January 3, 1998
Net sales increased approximately $9,092,000, or 47.9%, for the fiscal year
ended January 3, 1998 compared with the corresponding 1996 period. Substantially
all of this increase (approximately $9,091,000) was attributable to net sales
generated by new stores not included in the comparable store calculation.
Approximately $1,000 of the increase was attributable to a slight increase in
comparable store sales. The calculation of comparable store sales includes sales
for stores open in all periods for both fiscal years. The sales performance of
comparable store sales was primarily related to a combination of several
factors. Most notably, the Company's buying staff did not cope as ably as they
might have with the rapid growth of the Company and, on many occasions, ordered
product later than they should have, creating periods in which key product was
out of stock. In addition, there were external factors, such as certain
manufacturers not meeting promised quantity or delivery dates and the
well-publicized UPS strike. Another contributing factor during 1997 related to
poor traffic in certain of the malls where the Company's stores are located. In
several instances, the Company believes the disappointing traffic was related to
certain events including major store closings, a mall which closed, bad weather,
and a ship having hit a riverfront center where a store was located. While these
issues adversely impacted the overall results, many stores performed
significantly above the 1996 level and all stores continued to have a positive
store level contribution. As the Company's base of stores continues to grow, the
performance of any individual store is expected to have a less material effect
on the Company.
Gross profit increased approximately $3,867,000 or 42.3%, for the fiscal year
ended January 3, 1998, compared with the corresponding 1996 period, due
primarily to an increase in sales volume. Gross profit as a percentage of net
sales decreased to 46.3% for the fiscal year ended January 3, 1998, compared
with 48.2% for the corresponding 1996 period. The decrease in gross profit as a
percentage of sales resulted from several factors. One of the principle focus
areas of the new buying staff was to reallocate certain portions of the
Company's inventory among its stores which resulted in significant freight
charges related to the transfer of product. Gross profit was also adversely
impacted by a charge of approximately $188,000 related to the management of the
Company's inventory. This charge was discovered in reconciling the computer
generated accounts payable and detailed vendor statements. In addition, due to
disappointing sales results, the Company made efforts to counteract this by
reducing certain selling prices which, in turn, adversely impacted gross profit.
In the past, the Company has not found it necessary to significantly promote its
product through price promotions. As part of the improved vendor arrangements,
the Company has been able to negotiate significant improvements to the prices
and terms on which it is buying merchandise and will continue to review its
pricing strategy going forward. The gross profit was also impacted by out of
stock issues in high margin departments and certain reduced cash discounts.
Store operating expenses increased approximately $1,655,000 or 53.5%, for the
fiscal year ended January 3, 1998, compared with the corresponding 1996 period.
Approximately $1,674,000 of the increase resulted from the operation of the new
stores. This increase was partially offset by an approximate $19,000 decrease in
comparable store operating expenses. As a percentage of net sales, store
operating expenses increased to 16.9% for the fiscal year ended January 3, 1998,
compared with 16.3% for the corresponding period last year. This increase was
primarily due to lower than anticipated sales, pre-opening expenses incurred in
connection with more new stores and the opening of The Great Train Store Express
temporary holiday stores, and an increase in store personnel compensation which
included changes in the federal minimum wage standards.
Occupancy expenses increased approximately $1,489,000, or 67.0%, for the fiscal
year ended January 3, 1998, compared with the corresponding 1996 period.
Approximately $1,364,000 of the increase related to the new stores and
comparable store occupancy expenses increased approximately $40,000, mostly from
increases in shared expenses charged by certain of the malls in which the
Company has stores. In addition, approximately $85,000 of the increase was
related to the Company leasing additional central office space in order to
support future growth and leasing additional space adjacent to an existing store
for the purpose of redistributing a small portion of the Company's merchandise
which could not economically or otherwise be shipped directly to the stores. As
a percentage of net sales, overall occupancy expenses increased to 13.2% for the
fiscal year January 3, 1998, from 11.7% for the corresponding 1996 period,
primarily due to lower than planned sales.
Selling, general and administrative expenses increased approximately $1,035,000
or 43.9%, for the fiscal year ended January 3, 1998, compared with the
corresponding 1996 period. The increase in selling, general and administrative
expenses was primarily due to approximately $474,000 of additional expenses
related to salaries and related expenses for additional central office personnel
to support the continuing growth of the Company. A significant portion of such
increase is related to the Company's promotion of certain of its Store Managers
to Regional Sales Managers. These positions, which did not exist in the prior
year, are a new level of management created to supervise the operation of the
Company's rapidly growing number of existing stores and assist in the opening of
new stores as part of the Company's increasing expansion program. In addition,
the Company expended more significant funds than in prior years in aggressive
marketing programs in several locations in an effort to enhance sales. A
considerable portion of this included the existing train hobby store location
that the Company acquired in November 1996. As a percentage of net sales,
selling, general and administrative expenses decreased to 12.1% for the fiscal
year ended January 3, 1998, from 12.4% for the corresponding 1996 period.
Depreciation and amortization expense increased approximately $362,000, or
91.5%, for the fiscal year ended January 3, 1998, compared with the
corresponding 1996 period. Such increases were primarily the result of an
increase in the asset base related to new stores, the external development of a
SQL server to facilitate enhanced operational reporting in the central office
and additions to fixed assets related to the central office expansion discussed
above. As a percentage of net sales, depreciation and amortization expense
increased to 2.7% for the fiscal year ended January 3, 1998, from 2.1% for the
corresponding 1996 period. This increase as a percentage of net sales was
primarily related to the central office developments discussed above.
Other income increased approximately $351,000 for the fiscal year ended January
3, 1998 compared with the corresponding 1996 period. This increase was primarily
due to a $350,000 settlement the Company received from the City of Indianapolis
in connection with the closing of Union Station requiring the Company to close
its store during the term of the lease.
Pretax income decreased 39.0% to approximately $642,000 for the fiscal year
ended January 3, 1998. In fiscal 1997, the effective income tax rate was higher
than in fiscal 1996, primarily due to the elimination of the remaining valuation
allowance for deferred tax assets in 1996. As anticipated, the Company's
effective income tax rate in 1997 approximated statutory income tax rates.
As a result of the foregoing, the Company recorded net income of approximately
$411,000 for the fiscal year ended January 3, 1998, compared with net income of
approximately $772,000 for the corresponding 1996 period. As a percentage of net
sales, net income decreased to 1.5% for fiscal 1997.
Liquidity and Capital Resources
The Company's primary historical uses of cash have been for the purchase of
merchandise inventories, the financing of new store openings and capital
expenditures.
For the fiscal year ended January 2, 1999, net cash used in operating activities
was approximately $3,684,000 compared with net cash provided by operating
activities of approximately $1,175,000 for the corresponding period last year.
Net cash used in operating activities primarily results from the funding of the
Company's operating losses in 1998 and an increase in cash used for the purchase
of merchandise inventories for new stores opened in the period.
As of January 2, 1999, the Company had approximately $462,000 payable under
capital lease obligations related to the management information systems,
fixtures and equipment. Of such debt obligations, approximately $184,000 under
the fixtures and equipment financing arrangements are payable during 1999.
In January 1998, the Company entered into a 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 Company had approximately $4,252,000 of borrowing capacity under
the line at January 2, 1999. The initial term of the facility is three years and
is secured by certain assets of the Company, primarily inventory. As of year-end
1998, the maximum loan was reduced to $8,000,000 and advance ratios were
reduced. Under the amended agreement, outstanding borrowings bear interest at
BankAmerica Business Credit, Inc.'s base lending rate plus 1.75% 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. As of
January 2, 1999, there was approximately $408,000 outstanding on the revolving
line of credit.
The Company has received a commitment from Paragon Capital LLC to make available
to the Company a $10,000,000 revolving credit facility in replacement of the
BankAmerica credit line. As proposed, borrowings under the Paragon line will be
based on an advance rate percentage of the Company's inventory, which varies
throughout the year. The proposed initial term of the facility is five years and
is secured by certain assets of the Company, primarily inventory. The Company
has accepted Paragon's proposal and is currently engaged in negotiation of the
definitive credit agreements. The Company expects to complete this transaction
before the end of April 1999.
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 in 1998 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 at the end of each year,
exercisable at a price based on the fair market value of such shares on the date
of issuance.
As of January 2, 1999, the Company operated fifty-six stores primarily located
in distinctive regional shopping malls and festival marketplaces. During fiscal
1998, the Company opened fourteen new stores. The Company also operated six The
Great Train Store Express, temporary stores in 1998. A 1999 store opening has
been announced for Providence, Rhode Island.
The Company intends to finance anticipated capital expenditures, working capital
needs and debt obligations for the foreseeable future from net proceeds from the
Company's operating activities, landlord allowances, the line of credit,
possible fixtures and equipment or inventory financing, trade credit and / or
the public or private sale of debt or equity securities.
Year 2000
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," may 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 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 also actively monitored 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 may 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.
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.
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 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 Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which will become effective for the Company on January 2, 2000. The Company does
not anticipate the adoption of this statement will have any effect on the
Company's financial statements.
ITEM 8. Financial Statements
The Company's Consolidated Balance Sheets as of January 3, 1998 and January 2,
1999 and the Consolidated Statements of Operations, Stockholders' Equity and
Cash Flows for the years ended December 28, 1996, January 3, 1998, and January
2, 1999 together with the notes thereto and the report of the Company's
independent auditors thereon are included as a separate section of this report
which begins on page F-2.
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures
None
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding Directors, Executive Officers, Promoters and Control
Persons is incorporated by reference to the material contained in the Company's
1999 Proxy Statement.
ITEM 11. Executive Compensation
Information regarding Executive Compensation is incorporated by reference to the
material contained in the Company's 1999 Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding Security Ownership of Certain Beneficial Owners and
Management is incorporated by reference to the material contained in the
Company's 1999 Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
None
ITEM 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) Exhibits.
See Exhibit Index beginning on page F-14 of this Report.
(b) Financial Statements Schedule
See index to Consolidated Financial Statements on page F-1.
(c) Reports on Form 8-K.
None
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of January 3, 1998
and January 2, 1999 F-3
Consolidated Statements of Operations for the years ended
December 28, 1996, January 3, 1998 and January 2, 1999 F-4
Consolidated Statements of Stockholders' Equity for the years F-5
ended December 28, 1996, January 3, 1998 and January 2, 1999
Consolidated Statements of Cash Flows for the years ended
December 28, 1996, January 3, 1998 and January 2, 1999 F-6
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts for the years
ended December 28, 1996, January 3, 1998 and January 2, 1999 S-1
Independent Auditors' Report
The Board of Directors and Stockholders
The Great Train Store Company:
We have audited the consolidated financial statements of The Great Train Store
Company and subsidiaries as listed in the accompanying index. In connection with
our audits, we also have audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Great Train
Store Company and subsidiaries as of January 3,1998 and January 2, 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended January 2, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Dallas, Texas
February 19, 1999
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
January 3, 1998 January 2, 1999
--------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,490,721 $ 402,136
Merchandise inventories 8,978,789 10,362,635
Accounts receivable and other current assets 1,130,163 897,837
Income taxes receivable - 390,000
--------------- --------------
Total current assets 13,599,673 12,052,608
PROPERTY AND EQUIPMENT:
Store construction and leasehold improvements 4,741,495 6,256,902
Furniture, fixtures and equipment 2,650,600 3,631,539
--------------- --------------
7,392,095 9,888,441
Less accumulated depreciation and amortization 1,827,691 2,850,751
--------------- --------------
Property and equipment, net 5,564,404 7,037,690
DEFERRED TAXES 316,344 -
OTHER ASSETS, net 315,138 544,428
--------------- --------------
Total assets $ 19,795,559 $ 19,634,726
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Merchandise payable $ 4,580,080 $ 4,655,543
Accounts payable and accrued liabilities 1,111,936 1,148,711
Sales taxes payable 660,547 667,199
Income taxes payable 241,716 -
Current portion of capital lease obligations 85,497 184,495
--------------- --------------
Total current liabilities 6,679,776 6,655,948
CAPITAL LEASE OBLIGATIONS, net of current portion 212,221 277,400
LINE OF CREDIT PAYABLE - 407,747
DEFERRED RENT AND OTHER LIABILITIES 873,117 1,134,785
SUBORDINATED DEBENTURES - 2,901,569
--------------- --------------
Total liabilities 7,765,114 11,377,449
--------------- --------------
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 44,158
Additional paid-in capital 10,444,765 10,444,765
Warrants - 76,006
Retained earnings (accumulated deficit) 1,541,522 (2,307,652)
--------------- --------------
Total stockholders' equity 12,030,445 8,257,277
--------------- --------------
Total liabilities and stockholders' equity $ 19,795,559 $ 19,634,726
=============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Fiscal Year Ended
December 28, 1996 January 3, 1998 January 2, 1999
-------------------- ----------------- --------------------
NET SALES $ 18,998,461 $ 28,090,948 $ 33,932,790
COST OF SALES 9,847,463 15,072,692 19,980,206
-------------------- ----------------- --------------------
Gross profit 9,150,998 13,018,256 13,952,584
-------------------- ----------------- --------------------
OPERATING EXPENSES:
Store operating expenses 3,095,361 4,750,266 6,441,594
Occupancy expenses 2,223,853 3,713,162 5,258,037
Selling, general and administrative expenses 2,354,880 3,389,652 3,994,398
Depreciation and amortization expenses 396,136 758,562 1,046,830
Provision for store closing - - 241,417
-------------------- ----------------- --------------------
Total operating expenses 8,070,230 12,611,642 16,982,276
-------------------- ----------------- -------------------
OPERATING INCOME (LOSS) 1,080,768 406,614 (3,029,692)
-------------------- ----------------- --------------------
OTHER INCOME (EXPENSE):
Interest expense (129,500) (188,128) (978,712)
Interest income 84,960 56,664 20,750
Other income 15,301 366,790 25,013
-------------------- ----------------- --------------------
Total other income (expense), net (29,239) 235,326 (932,949)
-------------------- ----------------- --------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 1,051,529 641,940 (3,962,641)
PROVISION FOR INCOME TAXES (BENEFIT) 279,301 231,327 (113,467)
-------------------- ----------------- --------------------
NET INCOME (LOSS) $ 772,228 $ 410,613 $ (3,849,174)
==================== ================= ====================
BASIC EARNINGS (LOSS) PER SHARE $ 0.21 $ 0.09 $ (0.87)
==================== ================= ====================
DILUTED EARNINGS (LOSS) PER SHARE $ 0.20 $ 0.09 $ (0.87)
==================== ================= ====================
The accompanying notes are an integral part of these consolidated financial statements.
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unearned Retained
Compensation Earnings
Common Stock Paid-In - Restricted (Accumulated
Shares Amount Capital Stock Warrants Deficit) Total
----------- ----------- ----------- -------------- -------------- ------------- ------------
BALANCE, December 30, 1995 3,145,000 $ 31,450 $ 4,446,947 $ (5,665) $ - $ 358,681 $ 4,831,413
Net income - - - - - 772,228 772,228
Net proceeds from warrant 1,226,169 12,262 5,567,725 - - - 5,579,987
exercise
Exercise of stock options and
related tax benefits 11,950 119 59,111 - - - 59,230
Adjustments associated with
unearned compensation -
restricted stock 1,000 10 124,392 1,540 - - 125,942
----------- ----------- ----------- ------------ ----------- ----------- -----------
BALANCE, December 28, 1996 4,384,119 $ 43,841 $ 10,198,175 $ (4,125) $ - $ 1,130,909 $ 11,368,800
Net income - - - - - 410,613 410,613
Exercise of stock options and
related tax benefits 31,645 317 169,176 - - - 169,493
Adjustments associated with
unearned compensation -
restricted stock - - 77,414 4,125 - - 81,539
----------- ----------- ----------- -------------- ----------- ------------- ------------
BALANCE, January 3, 1998 4,415,764 $ 44,158 $ 10,444,765 $ - $ - $ 1,541,522 $ 12,030,445
Net loss - - - - - (3,849,174) (3,849,174)
Issuance of stock warrants - - - - 76,006 - 76,006
----------- ----------- ----------- -------------- ----------- ------------ ------------
BALANCE, January 3, 1999 4,415,764 $ 44,158 $ 10,444,765 $ - $ 76,006 $ (2,307,652) $ 8,257,277
=========== =========== ============ ============== ============== ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Year Ended
December 28, 1996 January 3, 1998 January 2, 1999
----------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 772,228 $ 410,613 $ (3,849,174)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 396,136 758,562 1,046,830
Deferred income taxes (150,193) (121,617) 316,344
Loss on retirement of assets - 14,728 -
Amortization of unearned compensation -
restricted stock 7,040 4,125 -
Amortization of debt discount - - 20,616
Provision for store closing - - 241,417
Changes in assets and liabilities:
Merchandise inventories (3,240,392) (2,855,437) (1,383,846)
Income tax receivable - - (390,000)
Accounts receivable and other current assets (836,914) (132,626) 232,327
Other assets (122,491) (122,585) (10,109)
Merchandise payable 1,039,634 2,931,992 75,462
Accounts payable and accrued liabilities 1,105,235 (117,608) 36,775
Sales taxes payable 167,841 255,913 6,652
Income taxes payable 257,067 (59,885) (241,716)
Other long term liabilities (340,884) 208,944 214,882
----------------- --------------- --------------
Net cash provided by (used in)
operating activities (945,693) 1,175,119 (3,683,540)
----------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,275,065) (2,649,724) (2,437,763)
----------------- --------------- --------------
Net cash used in investing activities (2,275,065) (2,649,724) (2,437,763)
--------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock options exercised 36,352 116,291 -
Tax benefit of stock option exercises 141,780 130,616 -
Net proceeds from line of credit - - 407,747
Net proceeds from warrant exercise 5,579,987 - -
Proceeds from subordinated debentures and warrants - - 3,000,000
Debt issuance costs - - (242,952)
Proceeds from notes payable 144,269 - -
Repayment of notes payable and capital leases (1,054,789) (146,120) (132,077)
----------------- --------------- --------------
Net cash provided by financing activities 4,847,599 100,787 3,032,718
----------------- --------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,626,841 (1,373,818) (3,088,585)
CASH AND CASH EQUIVALENTS, beginning of year 3,237,698 4,864,539 3,490,721
----------------- --------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 4,864,539 $ 3,490,721 $ 402,136
================= =============== ==============
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets financed through capital lease obligations $ 155,000 $ - $ 300,000
Interest paid $ 187,444 $ 146,289 $ 551,693
Income taxes paid $ 41,644 $ 282,213 $ 194,255
The accompanying notes are an integral part of these consolidated financial statements.
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The Great Train Store Company (the "Company") operates a chain of specialty
retail stores known as The Great Train Stores, which sell train-themed
merchandise including model trains, toys, books, videotapes, apparel, and
related merchandise. As of January 2, 1999, the Company operated fifty-six
stores in twenty-six states and the District of Columbia.
The Company's fiscal year is based on a 52/53 week retail calendar ending on the
Saturday closest to December 31. Fiscal years 1996 and 1998 consisted of 52 week
periods ended December 28, 1996 and January 2, 1999 as compared to fiscal 1997
which consisted of a 53 week period ended January 3, 1998. The consolidated
financial statements present the results of the Company and all of its
subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all short-term investments with original maturities of
less than 90 days cash equivalents. Substantially all of the Company's cash at
January 3, 1998 and January 2, 1999 was invested in money market funds.
Merchandise Inventories
Merchandise inventories are stated at the lower of average cost or market. At
January 2, 1999 the Company has recorded a reserve for inventory markdowns of
$383,000.
Property and Equipment
Property and equipment are stated at cost. The costs of additions and
improvements which substantially extend the useful life of an asset are
capitalized. Repair and maintenance costs are charged to expense when incurred.
When assets are sold or otherwise disposed of, the estimated costs and related
accumulated depreciation or amortization is removed from the accounts, and any
resulting gain or loss is included in income or expense. The Company reviews all
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount exceeds the fair value of
the assets.
Depreciation of property and equipment, including assets held under capital
leases, is provided using the straight-line method based on the estimated useful
lives of the assets that generally range from three to five years. Leasehold
improvements and fixtures are amortized over the shorter of the estimated useful
life of the asset or the remaining lease term.
Financial Instruments
The Company's financial instruments at January 3, 1998 and January 2, 1999,
consist of cash equivalents, accounts and income taxes receivable, accounts
payable, accrued liabilities, and long-term debt. The fair value of these
financial instruments approximates the carrying amounts reported in the
consolidated balance sheets. The following methods were used in estimating the
fair value of each class of financial instrument: cash equivalents, accounts and
income taxes receivable, merchandise and accounts payable and accrued
liabilities approximate their carrying amounts due to the short duration of
those items and long-term debt is based on current market rates.
Pre-Opening Costs
Store pre-opening costs are charged to expense in the period incurred.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense, net of vendor
reimbursements, was approximately $50,000, $139,000, and $138,000 respectively
during fiscal 1996, fiscal 1997, and fiscal 1998.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Earnings Per Share
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 the issuance
of potentially dilutive securities.
1996 1997 1998
---- ---- ----
Weighted average common shares
outstanding 3,663,780 4,401,225 4,415,764
Dilutive common stock equivalents 193,300 196,737 -
----------- --------- ---------
Weighted average common shares
outstanding and dilutive common
stock equivalents 3,857,080 4,597,962 4,415,764
========== ========== ==========
For the year ended January 2, 1999, there are 554,600 options and 482,500
warrants to purchase common stock that were not included in the computation of
diluted earnings per share because to do so would have been antidilutive for
that fiscal year. For the years ended December 28, 1996 and January 3, 1998,
there are 15,600 and 75,000 options, respectively and 240,000 and 120,000
warrants, respectively, to purchase common stock that were not included in the
computation of earnings per share because their inclusion would have been
antidilutive.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations. Compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeds the exercise price. Since the Company grants stock options with an
exercise price equal to the current market price of the stock on the grant date,
no compensation expense is recorded. Under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company may elect to recognize expense for stock-based compensation based on the
fair value of the awards, or continue to account for stock-based compensation
under APB 25 and disclose in the financial statements the pro forma effects of
SFAS 123 as if the recognition provisions were adopted. The Company has elected
not to adopt the recognition provisions of SFAS 123.
Segment Information
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" in the fiscal year ended January 2, 1999. The Company operates in
one business segment, the retail sale of train-themed merchandise. All of the
Company's sales consist of similar products and occur in the United States.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Prior Year Reclassifications
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 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 borrowings are
secured by certain assets of the Company, primarily inventory. As of year-end
1998, the maximum loan was reduced to $8,000,000 and advance ratios were
reduced. Under the amended agreement, borrowings bear interest at BankAmerica
Business Credit, Inc.'s base lending rate plus 1.75% (8.5% at January 2, 1999)
and a commitment fee of 0.375% is charged on the unused portion. As of January
2, 1999, there was approximately $408,000 outstanding on the revolving line of
credit, with approximately $4,252,000 remaining capacity under the line.
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, which expire June 2003, were allocated a fair value of
$76,006 on the date of issuance, resulting in a debt discount of a like amount
on the subordinated debentures. The fair value of the warrants was determined
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. 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 January 2, 1999 have been recorded at an aggregate fair value
of $43,041 using the Black-Scholes Option pricing model with the following
weighted average assumptions: dividend yield of 0%; expected volatility of
55.0%; risk free interest rate of 4.56%; 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. The components of subordinated
debentures as of January 2, 1999 are as follows:
Principal balance $ 3,000,000
Unamortized debt discount (98,431)
----------------
$ 2,901,569
4. INCOME TAXES
Income tax expense (benefit) for the years ended December 28, 1996, January 3,
1998 and January 2, 1999 consisted of the following:
Current: 1996 1997 1998
---- ---- ----
Federal income taxes $ 389,494 $ 341,332 $ (440,041)
State income taxes 40,000 11,612 10,230
Deferred (150,193) (121,617) 316,344
--------- --------- -------
$ 279,301 $ 231,327 $ (113,467)
========== ========== ===========
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% to pretax income (loss) for the years ended
December 28, 1996, January 3, 1998 and January 2, 1999, respectively, as a
result of the following:
1996 1997 1998
---- ---- ----
Computed "expected" tax expense (benefit) 357,520 $ 218,260 $ (1,347,298)
State income tax, net of federal tax benefit 26,400 7,664 6,752
Change in the balance of the valuation allowance
for deferred tax assets allocated to income
tax expense (107,507) - 1,262,407
Other 2,888 5,403 (35,328)
---------- ---------- -----------
$ 279,301 $ 231,327 $(113,467)
========= =========== =========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at January 3, 1998 and January 2,
1999 are:
Deferred tax assets: January 3, 1998 January 2, 1999
--------------- ---------------
NOL Carryforward $ - $ 810,144
Deferred rent 267,240 340,429
Other 73,016 234,262
---------------- ------------
Total deferred tax assets 340,256 1,384,655
Valuation Allowance - (1,262,407)
-------------- -----------
Net Deferred Tax Asset 340,256 122,248
Deferred tax liabilities
- property and equipment (23,912) (122,248)
--------------- -----------
Net deferred tax assets $ 316,344 $ -
=============== ==========
In assessing the realizability of deferred tax assets, management considers the
carry back potential, the scheduled reversal of deferred tax assets and
liabilities, future taxable income and tax planning strategies. The Company
recorded a valuation allowance for deferred tax assets of $0 and $1,262,407 at
January 3, 1998 and January 2, 1999, respectively.
The Company had Federal tax net operating loss carryforwards of approximately
$2,104,000 as of January 2, 1999, which will expire in 2018.
5. COMMITMENTS
Leases
The Company conducts its retail operations from leased locations with initial
lease terms ranging from five to twelve years. Certain store leases provide for
contingent rentals based on sales levels and require payment for all or part of
the applicable real estate taxes, common area maintenance, and certain other
allowable expenses. In addition, certain store lease obligations are secured by
fixtures and equipment of the Company. The Company also leases its central
offices under a five-year operating lease.
The Company records base rental expense using the straight-line method over the
life of the lease and, accordingly, has recorded a deferred liability of
approximately $786,000 at January 3, 1998 and $1,001,000 at January 2, 1999,
representing the cumulative excess of straight-line rental expense over amounts
paid.
Total rental expense under all noncancelable operating leases totaled
approximately $1,448,000, $2,388,000, and $3,281,000 for the years ended
December 28, 1996, January 3, 1998 and January 2, 1999 respectively. Included in
these amounts is contingent rent of approximately $224,000, $281,000, and
$220,000, respectively. The Company has capital leases payable to a finance
company which are secured by certain property and equipment. These leases are
payable in monthly installments (together with interest) at rates ranging from
12.1% to 16.8%.
Scheduled future minimum lease payments under all lease commitments with initial
or noncancelable terms in excess of one year are as follows:
Operating Capital
--------- -------
1999............... $3,891,070 $ 243,309
2000............... 3,787,559 221,096
2001............... 3,774,028 85,966
2002............... 3,765,006 -
2003............... 3,698,848 -
Thereafter......... 13,677,865 -
---------- ------------
Total minimum payments $ 32,594,376 $ 550,371
============
Less portion representing interest 88,476
------
Capital lease obligations 461,895
Less current portion 184,495
-------
Capital lease obligations, less current $ 277,400
portion ============
6. STOCKHOLDERS' EQUITY
The Company's authorized capital consists of 18,000,000 shares of common stock,
$.01 par value, and 2,000,000 shares of preferred stock, $.01 par value. The
Company's Board of Directors may establish one or more series of preferred stock
with terms, rights and preferences (including voting, dividend, liquidation,
conversion, and other rights) as it so determines.
No preferred stock has been issued.
As of January 2, 1999, the underwriter in the Company's initial public offering
has outstanding an option to purchase up to 120,000 shares of the Company's
common stock at $7.25 per share. The underwriter's option expires on August 4,
1999. Also, as of January 2, 1999 Tandem Capital holds warrants to purchase up
to 175,000 shares of the Company's common stock at an exercise price of $3.75
per share. The warrants expire June 2003.
In May 1994, the Company completed a private placement consisting of promissory
notes and warrants (which expire in May 1999) to purchase up to 187,500 shares
of common stock at $4.50 per share. The promissory notes were repaid with net
proceeds from the Company's initial public offering.
On August 4, 1996, 1,226,169 of the Company's 1,245,000 outstanding warrants to
purchase the Company's common stock at $5.00 per share were exercised. Net
proceeds to the Company were approximately $5,580,000.
The Company's 1994 Incentive Compensation Plan provides for the granting of
restricted stock awards and incentive and nonqualified stock options. Options
are granted at the current market price on the date of grant and typically
terminate ten years from the date of grant. A portion of these options first
become exercisable on the second anniversary of the date of grant and vest
ratably over a period of five years. Additionally, pursuant to the Company's
1994 Director Stock Option Plan, nonqualified stock options may be issued to
non-employee directors. Director's options become exercisable on the first
anniversary of the date of grant. The following summary sets forth the activity
under the plans:
6. STOCKHOLDERS' EQUITY (continued)
Incentive Compensation Plan Director Stock Option Plan
--------------------------- --------------------------
Weighted Average Weighted Average
Options Exercise Price Options Exercise Price
------- ---------------- ------- ----------------
Outstanding at December 30, 1995 154,700 $3.87 30,000 $4.25
Granted 216,600 $5.84 10,000 $5.63
Exercised (6,950) $3.07 (5,000) $3.00
Forfeited (16,300) $5.16 - -
--------- --------
Outstanding at December 28, 1996 348,050 $5.05 35,000 $4.82
Granted 228,150 $7.96 20,000 $7.88
Exercised (22,650) $3.19 (10,000) $4.41
Forfeited (89,950) $5.91 - -
--------- --------
Outstanding at January 3, 1998 463,600 $6.40 45,000 $6.27
========= ========
Granted 133,050 $3.10 20,000 $3.13
Canceled (325,050) $6.79 (35,000) $7.00
Reissued 325,050 $3.50 35,000 $3.50
Forfeited (107,050) $6.11 - -
--------- --------
Outstanding at January 2, 1999 489,600 $2.23 65,000 $3.17
========= ========
Exercisable at January 2, 1999 41,275 $3.00 5,000 $3.00
========= ========
Reserved and available for grant
at January 2, 1999 140,800 20,000
======== ========
At January 2, 1999, the range of exercise prices and weighted-average remaining
contractual life of outstanding options was $1.69 - $3.50 and 7.9 years for the
Incentive Compensation Plan and $3.00 - $3.50 and 6.1 years for the Director
Stock Option Plan, respectively.
The per share, weighted-average fair value of stock options granted during
fiscal 1996, fiscal 1997 and fiscal 1998 was $3.57, $4.83 and $2.15,
respectively for the Incentive Compensation Plan and $2.59, $3.67 and $1.67 for
the Director Stock Option Plan, respectively, on the date of grant using the
Black-Scholes option pricing model. The following assumptions were used in the
calculation:
Incentive Compensation Plan Director Stock Option Plan
1996 1997 1998 1996 1997 1998
---- ---- ---- ---- ---- ----
Expected dividend yield - - - - - -
Risk-free interest rate 6.4% 6.4% 5.6% 6.9% 6.6% 5.6%
Expected life in years 10 10 10 5 10 10
Expected volatility 40% 59% 55% 40% 59% 55%
The Company applies APB 25 in accounting for its Plan and, accordingly, no
compensation cost has been recognized for its stock options in the financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS 123, the Company's net income
(loss) would have been the pro forma amounts indicated below:
1996 1997 1998
---- ---- ----
Net Income (Loss): As reported $ 772,228 $ 410,613 ($ 3,849,174)
Pro forma $ 687,928 $ 191,165 ($ 4,073,515)
Diluted Earnings Per Share: As reported $ 0.20 $ 0.09 ($ 0.87)
Pro forma $ 0.18 $ 0.04 ($ 0.92)
Pro forma net income (loss) reflects compensation expense only for options
granted in fiscal 1995 and later. Therefore, the full impact of calculating
compensation cost for stock options under SFAS 123 is not reflected in the pro
forma net income (loss) amounts presented above. Compensation cost is reflected
over the options' vesting period of five years for the Incentive Compensation
Plan and one year for the Director's Stock Option Plan.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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
April 2, 1999 /s/ Cheryl A. Taylor
- - ------------------------------- --------------------------------------------
Date Cheryl A. Taylor
Vice President - Finance and Administration
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
April 2, 1999 /s/ James H. Levi
- - ------------------------------ --------------------------------------------
Date James H. Levi
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
April 2, 1999 /s/ Cheryl A. Taylor
- - ------------------------------- --------------------------------------------
Date Cheryl A. Taylor
Vice President - Finance and Administration,
(Principal Financial and Accounting Officer)
April 2, 1999 /s/ Joel S. Pollack
- - ------------------------------- --------------------------------------------
Date Joel S. Pollack
Director
April 2, 1999 /s/ John J. Schultz
- - ------------------------------- --------------------------------------------
Date John J. Schultz
Director
April 2, 1999 /s/ Charles M. Tureen
- - ------------------------------- --------------------------------------------
Date Charles M. Tureen
Director
April 2, 1999 /s/ Robert M. Warner
- - ------------------------------- -------------------------------------------
Date Robert M. Warner
Director
EXHIBIT INDEX
Exhibit
Number Description Page
- - ------- ----------- ----
3.1 * Certificate of Incorporation of the Registrant................
3.2 * Bylaws of the Registrant......................................
4.1 * Form of Stock Certificate.....................................
4.3 * Form of Bridge Warrants.......................................
4.4 * Form of Underwriter's Option..................................
10.1 *** The Great Train Store Company Amended and Restated
1994 Incentive Compensation Plan............................
10.2 * The Great Train Store Company 1994 Director Stock
Option Plan.................................................
10.4 * Form of Employment Agreement with James H. Levi..............
10.6 * The Great Train Store Partners, L. P. Agreement of
Limited Partnership dated as of
September 1, 1990, as amended...............................
10.9 ** First Amendment to The Great Train Store Company
1994 Director Stock Option Plan.............................
10.13 *** Second Amendment to The Great Train
Store Company 1994 Director Stock Option Plan...............
10.14 Amended and Restated Loan and Security
Agreement dated as of January 27, 1998 with
BankAmerica Business Credit, Inc............................
10.16 Consent and Amendment No. 1 to Loan and Security Agreement....
10.17 Amendment No. 2 to Loan and Security Agreement................
10.18 Amendment No. 3 to Loan and Security Agreement................
10.19 Amendment No. 4 to Loan and Security Agreement................
10.20 Amendment No. 5 to Loan and Security Agreement................
21.1 Subsidiaries of the Registrant................................
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule (filed only in EDGAR format)..........
99.1 **** Cautionary Statements Identifying Important Factors
that Could Cause the Company's Actual Results to Differ
from those Projected in Forward Looking Statements..........
* Incorporated by reference to the Registrant's Registration Statement
on Form SB-2 (Commission file no.33-79554) first filed on June 1, 1994
** Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 30, 1995.
*** Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Commission file no. 333-37705) filed on October 10, 1997.
**** Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the period ended October 2, 1998.
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
Schedule II - Valuation and Qualifying
Accounts For the fiscal years ended December 28, 1996,
January 3, 1998 and January 2, 1999
- - --------------------------------------------- ------------------ --------------------- ----------------- ----------------
Balance at Charged to costs Deductions, net Balance at end
Beginning of and expenses of recoveries of period
Period
- - --------------------------------------------- ------------------ --------------------- ----------------- ----------------
Reserve for Inventory Markdowns:
- - --------------------------------------------- ------------------ --------------------- ----------------- ----------------
December 28, 1996 - - - -
- - --------------------------------------------- ------------------ --------------------- ----------------- ----------------
January 3, 1998 - - - -
- - --------------------------------------------- ------------------ --------------------- ----------------- ----------------
January 2, 1999 - 383,000 - 383,000
- - --------------------------------------------- ------------------ --------------------- ----------------- ----------------