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 thirty-nine week period ended October 2, 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 October 2, 1999
-------------- ----------------------------
Common Stock $0.01 par value 4,540,270
1
THE GREAT TRAIN STORE COMPANY
QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL QUARTER ENDED
October 2, 1999
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
----
Consolidated Balance Sheets as of January 2, 1999
and October 2, 1999 (Unaudited) 3
Unaudited Consolidated Statements of Operations
for the thirteen weeks ended October 3, 1998
and October 2, 1999 and the thirty-nine weeks
ended October 3, 1998 and October 2, 1999 4
Unaudited Consolidated Statements of Cash Flows
for the thirty-nine weeks ended October 3, 1998
and October 2, 1999 5
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURE PAGE 15
EXHIBIT INDEX 16
2
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
January 2, 1999 October 2, 1999
---------------- -----------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 402,136 $ 227,961
Merchandise inventories 10,362,635 9,491,234
Accounts receivable and
other current assets 897,837 464,983
Income taxes receivable 390,000 -
------------- --------------
Total current assets 12,052,608 10,184,178
PROPERTY AND EQUIPMENT:
Store construction and leasehold
improvements 6,256,902 6,629,563
Furniture, fixtures, and equipment 3,631,539 3,716,174
------------- -------------
9,888,441 10,345,737
Less accumulated depreciation and
amortization 2,850,751 3,765,702
------------- -------------
Property and equipment, net 7,037,690 6,580,035
OTHER ASSETS, net 544,428 764,843
------------- -------------
Total assets $ 19,634,726 $ 17,529,056
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Merchandise payable $ 4,655,543 $ 2,682,030
Accounts payable and accrued
liabilities 1,148,711 566,219
Sales taxes payable 667,199 209,858
Current portion of capital
lease obligations 184,495 191,355
-------------- --------------
Total current liabilities 6,655,948 3,649,462
CAPITAL LEASE OBLIGATIONS, net of
current portion 277,400 132,169
LINE OF CREDIT PAYABLE 407,747 6,049,753
DEFERRED RENT AND OTHER LIABILITIES 1,134,785 1,334,473
SUBORDINATED DEBENTURES 2,901,569 2,922,341
-------------- --------------
Total liabilities 11,377,449 14,088,198
-------------- --------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock; $.01 par value;
2,000,000 shares
authorized; none issued -- --
Common stock; $.01 par value;
18,000,000 shares authorized;
4,417,193 and 4,540,270 shares
issued and outstanding 44,158 45,403
Additional paid-in capital 10,444,765 10,548,520
Warrants 76,006 94,119
Accumulated deficit (2,307,652) (7,247,184)
------------- --------------
Total stockholders' equity 8,257,277 3,440,858
-------------- ---------------
Total liabilities and
stockholders' equity $ 19,634,726 $ 17,529,056
============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
3
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Thirteen Weeks Ended For the Thirty-nine Weeks Ended
October 3, 1998 October 2, 1999 October 3, 1998 October 2, 1999
--------------- --------------- --------------- ---------------
NET SALES $ 6,010,250 $ 7,396,987 $ 16,509,171 $ 19,050,016
COST OF SALES 3,305,524 3,999,184 9,733,530 10,222,468
--------------- --------------- --------------- ---------------
Gross profit 2,704,726 3,397,803 6,775,641 8,827,548
--------------- --------------- --------------- ---------------
OPERATING EXPENSES:
Store operating expenses 1,411,961 1,604,505 4,019,631 4,775,178
Occupancy expenses 1,317,099 1,533,656 3,677,630 4,594,922
Selling, general and administrative
expenses 765,102 895,878 2,591,874 2,803,737
Depreciation and amortization
expenses 272,219 311,619 766,890 935,793
--------------- --------------- --------------- ---------------
Total operating expenses 3,766,381 4,345,658 11,056,025 13,109,630
--------------- --------------- --------------- ---------------
OPERATING LOSS (1,061,655) (947,855) (4,280,384) (4,282,082)
--------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense (230,236) (304,099) (492,012) (680,713)
Interest income 3,348 (9,747) 12,388 9,419
Other income 13,529 13,844 21,387 13,844
--------------- --------------- --------------- ---------------
Total other expense, net (213,359) (300,002) (458,237) (657,450)
--------------- --------------- --------------- ---------------
LOSS BEFORE INCOME TAXES (1,275,014) (1,247,857) (4,738,621) (4,939,532)
INCOME TAX BENEFIT (468,818) - (1,743,664) -
--------------- --------------- --------------- ---------------
NET LOSS $ (806,196) $ (1,247,857) $ (2,994,957) $ (4,939,532)
=============== =============== =============== ===============
BASIC LOSS PER SHARE $ (0.18) $ (0.28) $ (0.68) $ (1.11)
=============== =============== =============== ===============
DILUTED LOSS PER SHARE $ (0.18) $ (0.28) $ (0.68) $ (1.11)
=============== =============== =============== ===============
WEIGHTED AVERAGE SHARES OUTSTANDING 4,415,764 4,463,178 4,415,764 4,431,626
=============== =============== =============== ===============
The accompanying notes are an integral part of these consolidated
financial statements.
4
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Thirty-nine Weeks Ended
October 3, 1998 October 2, 1999
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss (2,994,957) $ (4,939,532)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and amortization 766,890 935,793
Deferred income taxes (1,749,346) --
Amortization of debt discount 11,573 14,166
Non-cash compensation expense -- 5,000
Changes in assets and liabilities:
Merchandise inventories (1,067,377) 871,401
Income tax receivable -- 390,000
Accounts receivable and other
current assets 353,050 432,854
Other assets (187,038) (107,834)
Merchandise payable (2,040,790) (1,973,513)
Accounts payable and accrued
liabilities (481,807) (575,494)
Sales taxes payable (495,937) (457,341)
Income taxes payable (241,716) (6,998)
Other long term liabilities 149,946 236,270
-------------- ---------------
Net cash used in operating
activities (7,977,509) (5,175,228)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,506,425) (457,296)
-------------- ---------------
Net cash used in investing
activities (1,506,425) (457,296)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock purchase -- 100,000
Net proceeds from line of credit 3,411,219 5,642,006
Proceeds from subordinated debentures
and warrants 3,000,000 --
Repayment of notes payable and capital
leases (103,449) (150,234)
Debt issuance costs (242,952) (133,423)
-------------- ---------------
Net cash provided by financing
activities 6,064,818 5,458,349
-------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,419,116) (174,175)
CASH AND CASH EQUIVALENTS, beginning
of period 3,490,721 402,136
-------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 71,605 $ 227,961
============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES AND CASH FLOW INFORMATION:
Assets acquired through capital lease
transactions $ 300,000 $ --
Issuance of warrants $ -- $ 18,113
Interest paid $ -- 264,036
Income taxes paid (received) $ 241,716 (383,002)
The accompanying notes are an integral part of these consolidated
financial statements.
5
THE GREAT TRAIN STORE COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited consolidated financial statements of The Great Train
Store Company and subsidiaries (the "Company") as of October 2, 1999 and for the
thirteen and thirty-nine week periods ended October 3, 1998 and October 2, 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. 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.
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.
Prior year balances include certain reclassifications to conform to the current
year presentation.
2. REVOLVING LINE OF CREDIT
In April 1999, the Company entered into a $10,000,000 revolving line of credit
agreement with Paragon Capital LLC ("Paragon") to replace its previously
existing line with BankAmerica Business Credit. Borrowings under the Paragon
line are based on an advance rate percentage of the Company's inventory, which
varies throughout the year. Borrowings under the line at October 2, 1999, were
$6,050,000, and unused capacity was approximately $671,000. Interest is charged
at an initial rate of Norwest Bank of Minnesota's base lending rate plus 1.25%
with a right to reduce this rate by .5% if the Company meets certain operating
targets. The initial term of the facility is five years and borrowings are
secured by certain assets of the Company, primarily merchandise inventories.
3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income or loss by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing net income by the weighted average number of common
shares plus the number of additional shares that would have resulted from
potentially dilutive securities. There were no potentially dilutive securities
for the periods ended October 3, 1998 or October 2, 1999.
4. INCOME TAXES
The Company reported losses in the thirteen and thirty-nine week periods ended
October 2, 1999, and has recorded a valuation allowance to reduce the deferred
tax benefit for such periods to zero. The Company's decision to record the
additional valuation allowance was based on evaluation of all available
evidence, both positive and negative. At the present time, earnings in the
fourth quarter are indeterminate. Accordingly, the Company is unable to conclude
that it is more likely than not that the deferred tax asset will be realized.
5. AUTHORITATIVE PRONOUNCEMENTS
The AICPA has issued Statement of Position 98-5 "Reporting on the Costs of
Start-up Activities" ("SOP 98-5") which is effective for fiscal years beginning
after December 15, 1998. The Company adopted SOP 98-5, effective January 3, 1999
and the effect of adoption was not material to the Company's consolidated
financial statements.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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, statements of operations
data expressed as a percentage of net sales:
For the Thirteen Weeks Ended For the Thirty-nine Weeks Ended
October 3, October 2, October 3, October 2,
1998 1999 1998 1999
--------- ---------- --------- ----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 55.0 54.1 59.0 53.7
-------- ---------- ----------- ---------
Gross profit 45.0 45.9 41.0 46.3
Store operating expenses 23.5 21.7 24.4 25.1
Occupancy expenses 21.9 20.7 22.3 24.1
Selling, general and
administrative expenses 12.8 12.1 15.7 14.7
Depreciation and amortization 4.5 4.2 4.6 4.9
-------- ---------- ------------ ---------
Operating loss (17.7) (12.8) (26.0) (22.5)
Interest expense (3.8) (4.1) (2.9) (3.6)
Interest income 0.1 - 0.1 -
Other income 0.2 - 0.1 0.1
-------- ---------- ------------ ---------
Loss before income taxes (21.2) (16.9) (28.7) (26.0)
Income tax benefit 7.8 - 10.6 -
-------- ---------- ----------- ---------
Net loss (13.4)% (16.9)% (18.1)% (26.0)%
-------- --------- ------- --------
Comparison of the Thirteen Weeks Ended October 3, 1998 to the Thirteen Weeks
Ended October 2, 1999
Net sales increased approximately $1,387,000 or 23.1%, for the thirteen weeks
ended October 2, 1999, compared with the corresponding period last year. On a
comparable store basis, sales increased by $286,000 or 5.7% in the third
quarter. Comparable store sales are calculated based on the stores open in all
periods for both fiscal years. The Company has been working diligently to remedy
issues which it believes have had a significant negative impact on the Company's
sales performance. The two major areas of focus have been the various issues in
the merchandising area relating to out-of-stock situations and delays in getting
new product to the stores on a timely basis, and in the store operations area
relating to inadequate supervision in the field prior to the management
realignment during the first quarter of 1999. The Company continues to implement
changes in its merchandise programs and believes it is making progress in
ensuring more timely replenishment, obtaining new and exciting product (much of
it exclusive to The Great Train Stores) and developing important new
relationships with many of its vendors. In addition, the Company has continued
to improve its store operations and has been pleased with its new supervisory
alignment and added controls. Sales in the thirteen week period were favorably
impacted by a strong promotion the Company ran in the latter part of the quarter
which was not run in the comparable period of the prior year. Comparable store
sales showed continuous improvement throughout the third quarter of 1999.
Gross profit increased approximately $693,000 or 25.6%, for the thirteen weeks
ended October 2, 1999, compared with the corresponding period last year. As a
percentage of net sales, gross profit increased to 45.9% for the thirteen weeks
ended October 2, 1999 compared with 45.0% for the corresponding period last
year. The increase in gross profit, as a percentage of sales, was primarily due
to improved terms with vendors and improved product mix. The increase reported
was achieved notwithstanding the margin impact of the Company's promotion
discussed above. During the third quarter of 1999 the Company sold product for
which markdown reserves of approximately $84,000 were recorded at January 2,
1999; accordingly, the related markdown reserve was reversed to cost of sales.
No additional increases to the reserve were necessary.
Store operating expenses increased approximately $193,000 or 13.6%, for the
thirteen weeks ended October 2, 1999, compared with the corresponding period
last year. The increase was primarily due to approximately $194,000 of store
operating expense for stores that were not open for the same period last year.
Comparable store operating expense decreased $1,000 compared to the same period
last year. As a percentage of net sales, store operating expenses decreased to
21.7% for the thirteen weeks ended October 2, 1999, compared with 23.5% for the
corresponding period last year.
Occupancy expenses increased approximately $217,000, or 16.4%, for the thirteen
weeks ended October 2, 1999, compared with the corresponding period last year.
The increase was due to approximately $242,000 of occupancy expenses
attributable to the stores that were not open for the same period of last year.
This increase was partially offset by a decrease in occupancy expenses of
approximately $25,000 in comparable stores. As a percentage of net sales,
overall occupancy expenses decreased to 20.7% for the thirteen weeks ended
October 2, 1999, compared with 21.9% for the corresponding period last year.
Selling, general and administrative expenses increased approximately $131,000,
or 17.1%, for the thirteen weeks ended October 2, 1999, compared with the
corresponding period last year. A significant portion of such increase related
to the Company's realignment of the supervisory structure in the field during
the first quarter which provided that all stores have the direct review and
supervision of a regional manager. The Company believes this structure will more
effectively facilitate the resolution of issues and encourage and promote
selling opportunities in the stores. This structure will also allow all stores
to have the full concentration of a store manager who is no longer also
responsible for operational issues in other stores, as was the case with the
Company's previous operational structure. As a percentage of net sales, selling,
general and administrative expenses decreased to 12.1% for the thirteen weeks
ended October 2, 1999, compared with 12.8% for the corresponding period in 1998.
Depreciation and amortization expense increased approximately $39,000, or 14.5%,
for the thirteen weeks ended October 2, 1999, compared with the corresponding
period last year. The increase was due to approximately $47,000 of depreciation
and amortization for stores that were not open for the same period last year.
This increase was partially offset by a decrease in depreciation and
amortization expense of approximately $8,000 in comparable stores. As a
percentage of net sales, depreciation and amortization expense decreased to 4.2%
for the thirteen weeks ended October 2, 1999, from 4.5% for the corresponding
period in 1998.
Interest expense increased approximately $74,000, for the thirteen weeks ended
October 2, 1999, compared with the corresponding period last year. The increase
primarily resulted from increased borrowings on the line of credit due to
seasonal net losses for nine additional open stores in 1999 compared to the same
period in 1998 and the higher interest rate under the Company's new revolver
compared to the prior year.
The Company's pretax loss as a percentage of net sales, with nine additional
stores open compared to the prior year, decreased to 16.9% for the thirteen
weeks ended October 2, 1999 from a loss of 21.2% for the corresponding period
last year. As the Company's stores typically lose money in the first part of the
year due to the seasonal nature of the Company's business, such losses typically
increase as more stores are opened during the period. However, the Company's
pretax loss per store for the thirteen weeks ended October 2, 1999 decreased to
approximately $22,000 per open store from approximately $27,000 per open store
in the comparable period of 1998. The Company did not record a tax benefit for
the quarter ended October 2, 1999 as it had in the comparable period for 1998.
As a result of the foregoing, the Company recorded a net loss of approximately
$1,248,000 for the thirteen weeks ended October 2, 1999, compared with a net
loss of approximately $806,000 for the corresponding period last year. As a
percentage of net sales, net loss increased to 16.9% from 13.4% for the
corresponding period last year. The increase, as a percentage of sales, was a
result of the Company not recording a tax benefit during 1999.
Comparison of Thirty-nine Weeks Ended October 3, 1998 to the Thirty-nine Weeks
Ended October 2, 1999
Net sales increased approximately $2,541,000 or 15.4%, for the thirty-nine weeks
ended October 2, 1999 compared with the corresponding period last year. On a
comparable store basis sales decreased by 6.5% from the prior year for the
thirty-nine week period. Comparable store sales are calculated based on the
stores open in all periods for both fiscal years. The Company has been working
diligently to remedy issues it believes have had a significant negative impact
on the Company's sales performance. The two major areas of focus have been the
various issues in the merchandising area relating to out-of-stock situations and
delays in getting new product to the stores on a timely basis, and management in
the store operations area relating to inadequate supervision in the field prior
to the management realignment during the first quarter of 1999. The Company
continues to implement changes in its merchandise programs and believes it is
making progress in ensuring more timely replenishment, regionally realigning the
merchandise carried in its various stores, obtaining new and exciting product
(much of it exclusive to The Great Train Stores) and developing important new
relationships with many of its vendors. In addition, the Company has continued
to improve its store operations and has been pleased with its new supervisory
alignment and added controls. The thirty-nine week period performance was
negatively impacted by cash constraint issues, particularly during the first
part of 1999. These issues existed at the beginning of the current year due to
the reductions in the Company's borrowing capacity resulting from changes in
terms imposed by its prior principal lender. As a result, the Company suffered
significant stock-outs in the first part of the year and, in turn, very poor
comparable sales results. As was previously announced, the Company replaced its
revolving line of credit facility with a new lender which has provided more
advantageous arrangements with the result that the Company is now able to more
appropriately replenish its merchandise. Comparable store sales performance has
shown continuous improvement throughout the thirty-nine week period.
Gross profit increased approximately $2,052,000 or 30.3%, for the thirty-nine
weeks ended October 2, 1999 compared with the corresponding period last year. As
a percentage of net sales, gross profit increased to 46.3% for the thirty-nine
weeks ended October 2, 1999 compared with 41.0% 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,
significant improvements to the Company's shrink results for mid-year counts
completed during the second quarter of 1999 and a prior year reserve of $325,000
recorded in the first quarter of 1998 for inventory markdowns, which
significantly reduced the 1998 margin for the first thirty-nine weeks. During
the thirty-nine weeks ended October 2, 1999, the Company sold product for which
markdown reserves of approximately $187,000 were recorded at January 2, 1999;
accordingly, the related markdown reserve was reversed to cost of sales. No
additional increases to the reserve were necessary.
Store operating expenses increased approximately $756,000 or 18.8%, for the
thirty-nine weeks ended October 2, 1999, compared with the corresponding period
last year. This increase was due to approximately $856,000 of store operating
expenses for stores that were not open in the comparable period in 1998. This
increase was partially offset by a decrease in store operating expenses of
approximately $100,000 in comparable stores. As a percentage of net sales, store
operating expenses increased to 25.1% for the thirty-nine weeks ended October 2,
1999 compared with 24.4% for the corresponding period last year. The increase,
as a percentage of sales, was primarily due to lower than anticipated sales in
the first two quarters of 1999.
Occupancy expenses increased approximately $917,000, or 24.9%, for the
thirty-nine weeks ended October 2, 1999, compared with the corresponding period
last year. The increase was due to due approximately $982,000 of occupancy
expenses attributable to the stores not open for the same period last year. The
increase was partially offset by a decrease in occupancy expenses of
approximately $65,000 in comparable stores. As a percentage of net sales,
overall occupancy expenses increased to 24.1% for the thirty-nine weeks ended
October 2, 1999, compared with 22.3% for the corresponding period last year.
This increase as a percentage of sales was primarily due to lower than
anticipated sales in the first two quarters of 1999.
Selling, general and administrative expenses increased approximately $212,000,
or 8.2%, for the thirty-nine weeks ended October 2, 1999, compared with the
corresponding period last year. The increase was primarily related to the
Company's realignment of the supervisory structure in the field during the first
quarter which provided that all stores have the direct review and supervision of
a regional manager. The Company believes this structure will more effectively
facilitate the resolution of issues and encourage and promote selling
opportunities in the stores. This structure will also allow all stores to have
the full concentration of a store manager who is no longer also responsible for
operational issues in other stores, as was the case with our previous
operational structure. As a percentage of net sales, selling, general and
administrative expenses decreased to 14.7% for the thirty-nine weeks ended
October 2, 1999, compared with 15.7% for the corresponding period in 1998. The
decrease, as a percent of sales, in selling, general and administrative expense
was primarily due to the Company's ability to automate processes and streamline
functions.
Depreciation and amortization expense increased approximately $169,000, or
22.0%, for the thirty-nine weeks ended October 2, 1999, compared with the
corresponding period last year. This increase was due to approximately $184,000
of depreciation and amortization for stores not open in the comparable period
last year. This increase was partially offset by a decrease in depreciation and
amortization expense of $15,000 in comparable stores. As a percentage of net
sales, depreciation and amortization expense increased to 4.9% for the
thirty-nine weeks ended October 2, 1999, from 4.6% for the corresponding period
in 1998. The increase was primarily due to lower than anticipated sales for the
first two quarters of 1999.
Interest expense increased approximately $189,000, for the thirty-nine weeks
ended October 2, 1999, compared with the corresponding period last year. The
increase primarily resulted from increased borrowings on the line of credit due
to seasonal net losses for nine additional open stores in 1999 compared to the
same period in 1998 and the increase in the interest rate under the Company's
new revolver compared to the prior year.
The Company's pretax loss as a percentage of net sales, with nine additional
stores open compared to the prior year, decreased to 26.0% of sales for the
thirty-nine weeks ended October 2, 1999 from 28.7% of sales for the
corresponding period last year. However, the Company's pretax loss per store for
the thirty-nine weeks ended October 2, 1999 decreased to approximately $88,000
per open store from approximately $101,000 per open store in the comparable
period of 1998. The Company did not record a tax benefit for the thirty-nine
weeks ended October 2, 1999 as it did in the comparable period of 1998.
As a result of the foregoing, the Company recorded a net loss of approximately
$4,940,000 for the thirty-nine weeks ended October 2, 1999, compared with a net
loss of approximately $2,995,000 for the corresponding period last year. As a
percentage of net sales, net loss increased to 26.0% from 18.1% of sales for the
corresponding period last year. The increase, as a percentage of sales, was
primarily the result of the Company not recording a tax benefit during 1999.
Liquidity and Capital Resources
For the thirty-nine weeks ended October 2, 1999, net cash used in operating
activities was approximately $5,175,000 compared to approximately $7,978,000 for
the corresponding period last year. The Company's primary uses of cash during
the first thirty-nine weeks of 1999 have been for funding anticipated seasonal
operating losses and payment of merchandise vendors.
In April 1999, the Company entered into a $10,000,000 revolving line of credit
agreement with Paragon Capital LLC ("Paragon") to replace its previously
existing line with BankAmerica Business Credit. Borrowings under the Paragon
line are based on an advance rate percentage of the Company's inventory, which
varies throughout the year. Borrowings under the line at October 2, 1999, were
$6,050,000, and unused capacity was approximately $671,000. 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
results. The initial term of the facility is five years and borrowings are
secured by certain assets of the Company, primarily merchandise inventories.
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 90,000 additional
warrants each year for the next four years on the anniversary date of the loan,
exercisable at a price based on the average market price of the Company's common
stock for the twenty-day period prior to issuance. The Company issued 175,000
warrants in June 1998 and 90,000 warrants in June 1999 pursuant to the terms of
the agreement.
The Company intends to finance necessary working capital needs, capital
expenditures, and debt obligations during 2000 from cash from the Company's
operating activities, landlord allowances, availability on the Company's
revolving line of credit, possible fixtures and equipment or inventory
financing, trade credit and/or the public or private sale of debt or equity
securities. The Company is presently evaluating its alternatives for additional
financing sources and has retained the firm of Houlihan, Lokey, Howard & Zukin
to help evaluate these alternatives.
Year 2000 Readiness Disclosure
General
The advent of the year 2000 poses certain technological challenges resulting
from a reliance in computer technologies on two digits rather than four digits
to represent the calendar year (e.g., "98" for "1998"). Computer technologies
programmed in this manner, if not corrected, could produce inaccurate or
unpredictable results or system failures in connection with the transition from
1999 to 2000, when dates will begin to have a lower two-digit number than dates
in the prior century. Without being addressed by the Company, 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. As described
further below, the Company has completed its Year 2000 Action Plan, which in the
opinion of management, appropriately addresses the potential significant adverse
effects of the Y2K Problem.
The Company's State of Readiness
The Company 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. All
components of the Plan requiring action on the part of the Company were
completed in mid-1999.
The computer systems presently in use at The Great Train Stores are made up
entirely of PC-compatible microcomputers and do not include any mini or
mainframe computers. On August 2, 1998, the Company upgraded its point of sale
software, which is the core software system in use at the central office and all
store locations, so that the system should be capable of accurately processing
date related data through and after the transition from 1999 to 2000. At
present, all other systems for which the Company had previously identified a
need for renovation or modification to minimize disruptions or failures related
to the Year 2000 Problem have also been updated.
Pursuant to the Plan, the Company continues to attempt to actively monitor the
Y2K preparedness of its third party providers and servicers, utilizing various
methods for testing and verification. Due to the relatively limited number of
key suppliers, the Company could experience product delivery delays if these
vendors are not adequately prepared for the Year 2000 Problem. At this time, the
Company has no indication that such delays from its key suppliers are likely.
The Costs to Address the Company's Year 2000 Issues
Throughout 1999, Y2K-related expenditures were minimal and have had no material
effect on the Company's financial statements or results of operations. These
expenditures were funded out of general operating cash flows and the Company's
line of credit for financing of certain additional equipment required for
replacement.
Year 2000 Risks Facing the Company and the Company's Contingency Plans
The Company believes that its most 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 developed
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.
While the Company believes its Plan is comprehensive, the possibility exists
that an unforeseen Y2K-related problem which was not addressed by the Plan could
manifest itself during the year 2000. These unforeseen problems could include,
but are not limited to, the lack of readiness of electrical and other utilities,
financial institutions, and other providers of general infrastucture. If these
problems arise, they could pose significant impediments to the Company's ability
to carry on normal operations. In the event the Company is unable to implement
adequate contingency plans to overcome such problems, there could be a material
adverse effect on the Company's business, results of operations or financial
condition.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Borrowings under the Company's revolving line of credit are based on a variable
rate resulting in possible exposure to market risk. The Company's subordinated
debentures do not expose the Company to market risk as the related interest
accrues at a fixed rate. The Company does not use derivative financial
instruments to manage overall borrowing costs or reduce exposure to adverse
fluctuations in interest rates. The impact on the Company's results of
operations of a one percent interest rate change, assuming the outstanding
balance of the variable rate borrowings under the Company's revolving line of
credit remain at the October 2, 1999 balance of $6,050,000, would be
approximately $60,000.
PART II - OTHER INFORMATION
Item 2. Changes in Securities
During the second quarter of 1998, the Company granted 1,429 shares of
restricted common stock at the then current fair market value to James
L. Llewellyn, the Company's former Vice President - Sales, in lieu of a
salary increase. After all requirements of the stock grant had been
met, the restriction was lifted and the shares were granted, effective
June 24, 1999 and the Company recorded $5,000 of compensation expense.
The shares were issued under the exemption from registration in Section
4 (2) of the Securities Act of 1933, as amended.
On August 30, 1999, the Company issued 123,077 shares of common stock
for a purchase price of $100,000, to the then newly appointed
President, George I. Schwartz. The shares were issued under the
exemption from registration in Section 4 (2) of the Securities Act of
1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
A.) Appointment of President
On August 31, 1999, the Company announced the appointment of George I.
Schwartz as President and Chief Operating Officer. He assumed that
responsibility from James H. Levi, the founder of the Company, who will
continue as Chief Executive Officer and Chairman of the Board. Mr.
Schwartz began his career in New York City at Bloomingdale's, a
division of Federated Department Stores. After seven years at
Bloomingdale's where he became the Floor Coverings Buyer, he
transferred to Burdines in Miami as Merchandise Manager for Home
Furnishings. He then spent twelve years at Hahne's Department Stores, a
New Jersey-based division of The May Company, where he was Executive
Vice President - Merchandising. In 1991, Mr. Schwartz joined Pergament
Home Centers, a 38-store New York chain, as Vice President of
Merchandising. At Pergament, he was in charge of the company's
merchandising and marketing. With his significant merchandising and
marketing experience, subsequent to his appointment, Mr. Schwartz
assumed direct responsibility for managing the Company's merchandising
and marketing functions which previously reported to a Vice President.
As part of Mr. Schwartz's compensation package, he received an option
to purchase 230,000 shares of the Company's common stock at an
exercise price of $3.75 per share which option was granted under the
exemption from registration in Section 4(2) of the Securities Act of
1933, as amended.
B.) Lease Renewal Dispute
The Company's store lease at the Ramada Express Hotel in Laughlin,
Nevada ends in March 2000 and the Company is seeking to renew the lease
pursuant to certain rights contained in the lease. The landlord is
contesting that right and, in conjunction therewith, has filed a
lawsuit requesting the Court to interpret such rights. The Company
intends to pursue its efforts to renew such lease. However, if
unsuccessful, the Company would close such store.
C.) Nasdaq Listing
The trading of the Company's common stock on the Nasdaq Small Cap
Market is conditioned upon the Company meeting certain asset, capital
and surplus, earnings and stock price tests, including a requirement
that it maintain a minimum bid price greater than or equal to $1.00. If
the Company fails to satisfy any of these tests, the common stock may
be delisted from trading on Nasdaq Small Cap Market. On September 20,
1999, the Company received notification from Nasdaq that it had failed
to meet the minimum bid price requirement over the last thirty
consecutive trading days as required. The Company has been granted
ninety calendar days, or until December 20,1999, to regain compliance
with this rule for a minimum of ten consecutive trading days. To date
the Company has been unable to meet the requirement. In the event the
Company is unable to regain compliance, the Company will have the
option to appeal the staff's determination through either an oral or
written hearing. The request for a hearing will stay the Company's
delisting pending the panel's decision. In the event the appeal results
in a negative determination or the Company chooses not to appeal, the
shares will be delisted.
Item 6. Exhibits and Reports on Form 8-K
(A) See Exhibit Index.
(B) None
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
November 16, 1999 By: /s/ Cheryl A. Taylor
- --------------------------- -----------------------------------------
Date Cheryl A. Taylor
Vice President - Finance and Administration,
Principal Financial Officer
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
99.1 Cautionary Statement Identifying Important Factors
that Could Cause the Company's Actual Results to
Differ from those Projected in Forward Looking
Statements