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 thirteen week period ended April 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 April 3, 1999
-------------- --------------------
Common Stock $0.01 par value 4,415,764
THE GREAT TRAIN STORE COMPANY
QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL QUARTER ENDED
April 3, 1999
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Unaudited Consolidated Balance Sheet as of January 2, 1999 and 3
April 3, 1999
Unaudited Consolidated Statements of Operations for the thirteen 4
weeks ended April 4, 1998 and April 3, 1999
Unaudited Consolidated Statements of Cash Flows for the
thirteen 5 weeks ended April 4, 1998 and April 3, 1999
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis 7
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 11
ITEM 6. Exhibits and Reports on Form 8-K 12
SIGNATURE PAGE 13
EXHIBIT INDEX 13
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
January 2, 1999 April 3, 1999
--------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 402,136 $ 279,807
Merchandise inventories 10,362,635 9,781,761
Accounts receivable and other current assets 897,837 652,499
Income taxes receivable 390,000 390,000
----------- ------------
Total current assets 12,052,608 11,104,067
Store construction and leasehold improvements 6,256,902 6,275,912
Furniture, fixtures and equipment 3,631,539 3,653,963
----------- ------------
9,888,441 9,929,875
Less accumulated depreciation and amortization 2,850,751 3,164,351
----------- ------------
Property and equipment, net 7,037,690 6,765,524
Other assets, net 544,428 466,980
============ ============
Total assets $ 19,634,726 $ 18,336,571
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Merchandise payable $ 4,655,543 $ 2,558,668
Accounts payable and accrued liabilities 1,148,711 717,085
Sales taxes payable 667,199 179,006
Current portion of capital lease obligations 184,495 186,782
------------ ------------
Total current liabilities 6,655,948 3,641,541
Capital lease obligations, net of current portion 277,400 219,172
Line of credit payable 407,747 3,933,593
Deferred rent and other liabilities 1,134,785 1,199,579
Subordinated debentures 2,901,569 2,901,569
----------- -----------
Total liabilities 11,377,449 11,895,454
----------- -----------
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 76,006
Accumulated deficit (2,307,652) (4,123,812)
------------ -----------
Total stockholders' equity 8,257,277 6,441,117
------------ -----------
Total liabilities and stockholders'
equity $ 19,634,726 $ 18,336,571
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the First Quarter Ended
April 4, 1998 April 3, 1999
------------- -------------
NET SALES $ 5,366,886 $ 5,915,563
COST OF SALES 3,488,763 3,226,773
----------- -----------
Gross profit 1,878,123 2,688,790
----------- -----------
OPERATING EXPENSES:
Store opening expense 1,314,901 1,631,073
Occupancy expenses 1,151,834 1,532,979
Selling, general and administrative expenses 952,328 892,262
Depreciation and amortization expenses 235,745 320,144
---------- -----------
Total operating expenses 3,654,808 4,376,458
---------- -----------
OPERATING LOSS (1,776,685) (1,687,668)
---------- -----------
OTHER INCOME (EXPENSE):
Interest expense (135,582) (132,724)
Interest income 5,379 -
Other income 8,959 4,232
--------- -----------
Total other income (expense), net (121,244) (128,492)
--------- -----------
LOSS BEFORE INCOME TAX BENEFIT (1,897,929) (1,816,160)
PROVISION FOR INCOME TAX BENEFIT (702,233) -
============= =============
NET LOSS $ (1,195,696) $ (1,816,160)
============= =============
BASIC LOSS PER SHARE $ (0.27) $ (0.41)
============= =============
DILUTED LOSS PER SHARE $ (0.27) $ (0.41)
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the First Quarter Ended
April 4, 1998 April 3, 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,195,696) $ (1,816,160)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 235,745 320,144
Deferred income taxes (52,668) -
Changes in assets and liabilities:
Merchandise inventories 1,364,780 580,874
Accounts receivable and other current
assets 617,090 245,338
Other assets (734,686) 70,905
Merchandise payable (4,481,022) (2,096,875)
Accounts payable and accrued liabilities (559,684) (431,626)
Sales taxes payable (512,565) (488,193)
Income taxes payable (241,716) -
Other long term liabilities 46,174 68,564
----------- -----------
Net cash used in operating activities (5,514,248) (3,547,029)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (478,756) (41,435)
---------- ----------
Net cash used in investing activities (478,756) (41,435)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit 2,947,685 3,525,846
Repayment of notes payable and capital leases (25,194) (59,711)
---------- ----------
Net cash provided by financing activities 2,922,491 3,466,135
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,070,513) (122,329)
CASH AND CASH EQUIVALENTS, beginning of period 3,490,721 402,136
============= ===========
CASH AND CASH EQUIVALENTS, end of period $ 420,208 $ 279,807
=============== ===========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Interest paid $ 72,034 179,054
Income taxes paid $ 246,149 -
The accompanying notes are an integral part of these consolidated financial
statements.
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited consolidated financial statements of The Great Train
Store Company and subsidiaries (the "Company") as of April 3, 1999 and for the
thirteen week periods ended April 4, 1998 and April 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 January 1998, the Company entered into a revolving line of credit with
BankAmerica Business Credit, Inc. ("BankAmerica"). The availability of the line,
which was based on the Company's inventory, was calculated at varying advance
rates throughout the year. As of January 2, 1999, the maximum loan was reduced
to $8,000,000 and the advance ratios were reduced. Under the amended agreement,
borrowings bore interest at BankAmerica's base lending rate plus 1.75% and a
commitment fee of 0.375% was charged on the unused portion. As of April 3, 1999,
there was approximately $3,934,000 outstanding on the 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 the BankAmerica credit
line. 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 May 1, 1999, were $4,850,000, and unused capacity was $1,782,000.
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 is 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 quarters ended April 4, 1998 or April 3, 1999.
4. AUTHORATATIVE 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 financial statements.
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:
For the Thirteen Weeks Ended
April 4, 1998 April 3, 1999
------------- -------------
Net sales 100.0% 100.0%
Cost of sales 65.0 54.5
---- ----
Gross profit 35.0 45.5
Store operating expenses 24.5 27.6
Occupancy expenses 21.5 25.9
Selling, general and administrative
expenses 17.7 15.1
Depreciation and amortization 4.4 5.4
----- -----
Operating loss (33.1) (28.5)
Interest expense (2.6) (2.2)
Interest income .1 -
Other income .2 -
---- -----
Loss before income taxes (35.4) (30.7)
Income tax benefit 13.1 -
------ ----
Net loss (22.3)% (30.7)%
------- -------
Comparison of Thirteen Week Period Ended April 4, 1998 to the Thirteen Week
Period Ended April 3, 1999
Net sales increased approximately $549,000 or 10.2%, for the thirteen weeks
ended April 3, 1999 compared with the corresponding period last year. On a
comparable store basis, sales decreased by 15.4% in the first quarter.
Comparable store sales are calculated based on the stores open the entire period
for both fiscal years. At the beginning of the current year, the Company was
significantly cash-constrained due to the previously disclosed reductions in its
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 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.
Gross profit increased approximately $811,000 or 43.2%, for the thirteen weeks
ended April 3, 1999 compared with the corresponding period last year. As a
percentage of net sales, gross profit increased to 45.5% for the thirteen weeks
ended April 3, 1999 compared with 35.0% 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 a
reserve of $383,000 recorded in the first quarter of 1998 for inventory
markdowns, which significantly reduced the 1998 first quarter margin. During the
first quarter of 1999, the Company reversed approximately $51,000 of the reserve
recorded at January 2, 1999, related to markdowns taken on sales of product in
the first quarter. No additional increases to the reserve were necessary.
Store operating expenses increased approximately $316,000 or 24.0%, for the
thirteen weeks ended April 3, 1999, compared with the corresponding period last
year. An approximate $338,000 increase resulted from the operation of the stores
which were not open in the comparable period in 1998. This increase was
partially offset by a decrease in comparable store expense of approximately
$22,000. As a percentage of net sales, store operating expenses increased to
27.6% for the thirteen weeks ended April 3, 1999 compared with 24.5% 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 $381,000, or 33.1%, for the thirteen
weeks ended April 3, 1999, compared with the corresponding period last year.
Approximately $364,000 was attributable to stores which were not open for both
periods and approximately $17,000 of the increase in occupancy expenses was
attributable to comparable stores. As a percentage of net sales, overall
occupancy expenses increased to 25.9% for the thirteen weeks ended April 3,
1999, compared with 21.5% 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 decreased approximately $60,000, or
6.3%, for the thirteen weeks ended April 3, 1999, compared with the
corresponding period last year. The decrease in selling, general and
administrative expense was primarily due to the Company's ability to automate
processes and streamline functions. As a percentage of net sales, selling,
general and administrative expenses decreased to 15.1% for the first quarter of
1999, from 17.7% for the same period in 1998.
Depreciation and amortization expense increased approximately $84,000, or 35.8%,
for the thirteen weeks ended April 3, 1999, compared with the corresponding
period last year. Approximately $81,000 of this increase was the result of
depreciation of assets in new stores not open for both periods. As a percentage
of net sales, depreciation and amortization expense increased to 5.4% for the
thirteen weeks ended April 3, 1999, from 4.4% for the corresponding period in
1998. The increase was primarily due to depreciation of a greater number of
stores than in this same period the year before and the lower than anticipated
sales for the period.
Interest expense decreased approximately $3,000, for the thirteen weeks ended
April 3, 1999, compared with the corresponding period last year. This decrease
results from the elimination of the amortization of debt issuance costs related
to the revolver, as the Company wrote-off all remaining debt issuance costs
related to BankAmerica at year-end 1998, partially offset by increased interest
expense due to increased borrowings on the available line of credit and the
increased interest rate.
The Company's pretax loss, with fourteen additional stores open than in the
prior year, decreased approximately $82,000 to 30.7% of sales for the thirteen
weeks ended April 3, 1998 from 35.4% of sales for the corresponding period last
year. The Company did not record an expected income tax benefit for the quarter
ended April 3, 1999.
As a result of the foregoing, the Company recorded a net loss of approximately
$1,816,000 for the thirteen weeks ended April 3, 1999, compared with a net loss
of approximately $1,196,000 for the corresponding period last year. As a
percentage of net sales, net loss increased to 30.7% from 22.3% of sales for the
corresponding period last year.
Liquidity and Capital Resources
For the thirteen weeks ended April 3, 1999, net cash used in operating
activities was approximately $3,547,000 compared to approximately $5,514,000 for
the corresponding period last year. The Company's primary uses of cash during
the first quarter of 1999 have been for funding anticipated seasonal operating
losses and payment of merchandise vendors.
In January 1998, the Company entered into a revolving line of credit with
BankAmerica. The availability of the line, which was based on the Company's
inventory, was calculated at varying advance rates throughout the year. As of
year-end 1998, the maximum loan was reduced to $8,000,000 and the advance ratios
were reduced. Under the amended agreement, borrowings bore interest at
BankAmerica's base lending rate plus 1.75% and a commitment fee of 0.375% was
charged on the unused portion. As of April 3, 1999, there was approximately
$3,934,000 outstanding on the 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 the BankAmerica credit
line. 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 May 1, 1999, were $4,850,000, and unused capacity was $1,782,000.
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 is 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 at the end of each year, exercisable at a price based on the fair
market value of such shares on the date of issuance.
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
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 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 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 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.
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.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(A) See Exhibit Index.
(B) The Company filed a report on Form 8-K on January 13,
1999 which included a letter to stockholders of the
Company and a press release each discussing the
Company's 1998 Financial performance.
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
May 18, 1999 By: /s/ Cheryl A. Taylor
- ------------------ ----------------------------------------
Date Cheryl A. Taylor
Vice President - Finance and Administration,
Principal Financial Officer
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
10.21 Loan and Security Agreement with Paragon Capital LLC
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