-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JXxwpN/8z5XwlVveXZ2AcwLRHQgJksuLJs2qX1OYhwEy7jt7NpYsqjNKFtJ/JIiH Cu6aUS1B8blvV/R3wgePug== 0001042645-00-000002.txt : 20000107 0001042645-00-000002.hdr.sgml : 20000107 ACCESSION NUMBER: 0001042645-00-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991127 FILED AS OF DATE: 20000106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TREND LINES INC CENTRAL INDEX KEY: 0000922978 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 042722797 STATE OF INCORPORATION: MA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24390 FILM NUMBER: 502357 BUSINESS ADDRESS: STREET 1: 135 AMERICAN LEGION HWY CITY: REVERE STATE: MA ZIP: 02151 BUSINESS PHONE: 7818930900 MAIL ADDRESS: STREET 1: 135 AMERICAN LEGION HWY CITY: REVERE STATE: MA ZIP: 02151 10-Q 1 TREND-LINES, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 27, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ---------------------------- TO ---------------------------------- Commission file . . . .0-24390. . . . TREND - LINES, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Exact name of registrant as specified in its charter) Massachusetts 04-2722797 ===================== ================== (State or other jurisdiction of (I.R.S. Employer incorporation Identification No.) or organization) 135 American Legion Highway, Revere, Massachusetts 02151 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Address of principal executive office) (Zip Code) (781) 853 - 0900 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Registrant's telephone number, including area code) Indicate by check mark 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...... Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS NUMBER OF SHARES OUTSTANDING JANUARY 5, 2000 - ----- --------------------------------------------- Class A Common Stock, $.01 par value 6,010,411 Class B Common Stock, $.01 par value 4,641,082 Trend-Lines, Inc. and Subsidiary INDEX PAGE PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets November 27, 1999 (Unaudited) and February 27, 1999 3 Condensed Consolidated Statements of Operations Nine Months Ended November 27, 1999 and November 28, 1998 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended November 27, 1999 and November 28, 1998 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements 6-8 ITEM 2. Management's Discussion and Analysis of Financial Condition And Results of Operations 9-14 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 15 ITEM 2. Changes in Securities 15 ITEM 3. Defaults Upon Senior Securities 15 ITEM 4. Submission of Matters to a Vote of Security Holders 15 ITEM 5. Other Information 15 ITEM 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 TREND-LINES, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS NOVEMBER 27, FEBRUARY 27, 1999 1999 (UNAUDITED) ------------ ----------- CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 560 $ 540 ACCOUNTS RECEIVABLE, NET 25,038 22,270 INVENTORIES 147,705 131,219 PREPAID EXPENSES AND OTHER CURRENT ASSETS 6,161 9,508 ------------ ----------- TOTAL CURRENT ASSETS 179,464 163,537 PROPERTY AND EQUIPMENT, NET 20,958 21,413 INTANGIBLE ASSETS, NET 6,358 6,621 OTHER ASSETS 1,174 1,367 ------------ ----------- $ 207,954 $ 192,938 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: BANK CREDIT FACILITY $ 94,984 $ 80,152 CURRENT PORTION OF CAPITAL OBLIGATIONS 681 1,028 ACCOUNTS PAYABLE 64,275 62,589 ACCRUED EXPENSES 6,499 8,056 ------------ ----------- TOTAL CURRENT LIABILITIES 166,439 151,825 ------------ ----------- CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 327 671 ------------ ----------- STOCKHOLDERS' EQUITY: COMMON STOCK, $.01 PAR VALUE - CLASS A -- AUTHORIZED-20,000,000 SHARES ISSUED-6,510,411 AND 6,469,553 SHARES AT NOVEMBER 27, 1999 AND FEBRUARY 27, 1999 65 64 CLASS B -- AUTHORIZED-5,000,000 SHARES ISSUED AND OUTSTANDING-4,641,082 AND 4,681,082 SHARES AT NOVEMBER 27, 1999 AND FEBRUARY 27, 1999 46 47 ADDITIONAL PAID IN CAPITAL 41,626 41,625 RETAINED EARNINGS 1,911 1,166 LESS: 500,000 CLASS A SHARES HELD IN TREASURY AT NOVEMBER 27, 1999 AND FEBRUARY 27, 1999, AT COST (2,460) (2,460) ------------ ----------- TOTAL STOCKHOLDERS' EQUITY 41,188 40,442 ------------ ------------ $ 207,954 $ 192,938 ============ =========== See notes to condensed consolidated financial statements
TREND-LINES, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED NOVEMBER 27, NOVEMBER 28, NOVEMBER 27, NOVEMBER 28, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ NET SALES $ 57,616 $ 60,102 $ 196,962 $ 184,638 COST OF SALES 38,620 41,735 134,957 128,683 ------------ ------------ ------------ ------------ GROSS PROFIT 18,996 18,367 62,005 55,955 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 17,019 16,730 55,593 63,388 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS 1,977 1,637 6,412 (7,433) INTEREST EXPENSE, NET 1,831 1,578 5,189 3,999 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE PROVISION (BENEFIT) BEFORE INCOME TAXES 146 59 1,223 (11,432) PROVISION (BENEFIT) FOR INCOME TAXES 57 - 477 (3,230) ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 89 $ 59 $ 746 (8,202) ============ ============ ============ ============ BASIC NET INCOME (LOSS) PER SHARE $ 0.01 $ 0.01 $ 0.07 (0.77) ============ ============ ============ ============ DILUTED NET INCOME (LOSS) PER SHARE $ 0.01 $ 0.01 $ 0.07 (0.77) ============ ============ ============ ============ BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 2) 10,651,493 10,650,635 10,643,555 10,647,610 ============ ============ ============ ============ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 2) 10,651,493 10,723,142 10,691,560 10,647,610 ============ ============ ============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. TREND-LINES, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED NOVEMBER 27, NOVEMBER 28, 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) $ 746 $ (8,202) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES-- DEPRECIATION AND AMORTIZATION 4,156 3,503 CHANGES IN CURRENT ASSETS AND LIABILITIES ACCOUNTS RECEIVABLE (2,768) (4,132) INVENTORIES (16,486) (24,793) PREPAID EXPENSES AND OTHER CURRENT ASSETS 3,347 (282) ACCOUNTS PAYABLE 1,686 9,512 ACCRUED EXPENSES (1,560) (3,647) ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (10,879) (28,041) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: PURCHASES OF PROPERTY AND EQUIPMENT (3,183) (5,658) INCREASE (DECREASE) IN OTHER ASSETS (60) 40 ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (3,243) (5,618) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: NET BORROWINGS UNDER BANK CREDIT FACILITIES 14,832 34,503 NET PAYMENTS ON CAPITAL LEASE OBLIGATIONS (690) (576) PROCEEDS FROM EXERCISE OF STOCK OPTIONS - 101 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 14,142 34,028 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 20 369 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 540 669 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 560 $ 1,038 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID (REFUNDED) FOR: INTEREST $ 4,792 $ 3,599 ============ ============ INCOME TAXES $ (3,228) $ 339 ============ ============ See notes to condensed consolidated financial statements TREND-LINES, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The information set forth in these financial statements is unaudited and may be subject to normal year end adjustments. In the opinion of management, the information reflects all adjustments, which consist of normal recurring accruals, that are considered necessary to present a fair statement of the results of operations of Trend-Lines, Inc. (the "Company") for the interim periods presented. The operating results for the nine months ended November 27, 1999 are not necessarily indicative of the results to be expected for the fiscal year ending February 26, 2000. The financial statements presented herein should be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the fiscal year February 27, 1999. Certain information in footnote disclosures normally included in financial statements has been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. 2. Earnings Per Share Data In fiscal 1997, the Company adopted SFAS No. 128 Earnings Per Share, which changed the method of calculating earnings per share. SFAS 128 requires the presentation of "basic" earnings per share and "diluted" earnings per share. Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average number of shares of common stock outstanding. For the purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of common stock outstanding and the dilutive effect of common stock equivalents such as stock options and warrants. Potentially dilutive securities include outstanding options under the Company's stock option plan. Below is a summary of the shares used in calculating basic and diluted earnings per share: Three Months Ended Nine Months Ended November 27, November 28, November 27, November 28, 1999 1998 1999 1998 ---- ---- ---- ---- Weighted average number of shares of common stock outstanding 10,651,493 10,650,635 10,643,555 10,647,610 Dilutive stock options 0 72,507 48,005 0 ---------- ---------- ---------- ---------- Shares used in calculating diluted earnings per share 10,651,493 10,723,142 10,691,560 10,647,610 ========== ========== ========== ==========
3. Bank Credit Facility During fiscal 1996, the Company entered into a secured line-of-credit agreement with a bank (the "credit facility") that, as amended during fiscal 1998, expires on December 31, 2001. The credit facility bears interest at the bank's reference rate plus .50% (9.00% at November 27, 1999) or LIBOR plus 2.00% (7.4% at November 27, 1999). If for any 12 month rolling period, the fixed charges ratio exceeds certain limits, as defined, the bank's interest rate on the credit facility is decreased by .25% for the period immediately following such rolling period, which is reflected above. A commitment fee of .375% per year of the average unused commitment amount, as defined, is payable monthly. The credit facility allows for borrowing up to $100 million based on a percentage of inventory (the "advance rate"). Borrowings include 50% of the amounts reserved for outstanding letters of credit. At November 27, 1999, the Company had approximately $95.0 million of borrowings outstanding and approximately $0.5 million of letters of credit outstanding. The Company had approximately $1.5 million in available borrowings under this facility at November 27, 1999. The bank has a security interest in substantially all assets of the Company. The bank credit facility agreement contains certain financial covenants, including, but not limited to, maintaining minimum levels of tangible net worth, and interest coverage ratios and limitations on capital expenditures. At November 27, 1999, the Company was in compliance with all financial covenants. The borrowing base of the credit facility is to a maximum amount of $100 million. The advance rate is 65% through the last day of May, 1999, 70% from the first day of June, 1999 through the last day of October, 1999, and 65% thereafter. The Company is required to maintain an interest coverage ratio of 2.00:1.00, on a rolling 12 month basis for each quarter. The adjusted tangible net worth as of the last day of the third fiscal quarter of 1999 is required to be $41.0 million, and for the fourth fiscal quarter 1999 and each fiscal quarter thereafter, adjusted tangible net worth is required to be $42.0 million. Capital expenditures may not exceed $6.0 million for any fiscal year. 4. Selected Information By Business Segment Information as to the operations of the different business segments with respect to sales and operating income is set forth below for quarter ended and nine months ended November 27, 1999 and November 28, 1998 (in thousands): Three Months Ended Nine Months Ended November 27, November 28, November 27, November 28, 1999 1998 1999 1998 ---- ---- ---- ---- Net Sales Retail Tools $ 36,299 $ 37,873 $ 109,063 $ 100,059 Golf 13,743 12,490 61,804 52,106 Catalog Tools 4,713 6,325 14,846 19,546 Golf 2,861 3,414 11,249 12,927 ------------ ------------ ------------ --------- $ 57,616 $ 60,102 $ 196,962 $ 184,638 ------------ ------------ ------------ --------- Income (Loss) From Operations Retail Tools $ 3,515 $ 2,625 $ 8,875 $ 1,489 Golf 26 (401) 2,618 560 Catalog Tools 1,097 1,164 3,397 884 Golf 484 653 997 279 General Corporate Expense (5,033) (3,982) (15,141) (11,415) ------------ ------------ ------------ ---------- $ 89 $ 59 $ 746 $ (8,203) ------------ ------------ ------------ ---------- The Company sells its products through its Woodworkers Warehouse, Post Tool and Golf Day retail stores and its Trend-Lines and Golf Day catalogs. These businesses have been aggregated into their respective reportable segments based on the management reporting structure. The Company operates from a single distribution center in Revere, Massachusetts, for its Woodworkers Warehouse and Golf Day operations and utilizes common labor pools, common management at the corporate level and a single telemarketing sales force. Post Tool, Inc. has a distribution center facility in Hayward, California. As a result, many of the expenses of the Company are allocated between the business segments. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net sales for the third quarter of fiscal 1999 decreased by $2.5 million, or 4.2%, from $60.1 million for the third quarter of fiscal 1998 to $57.6 million. Net retail sales for the third quarter of fiscal 1999 decreased $0.3 million or 0.6% from $50.3 million for the third quarter of fiscal 1998 to $50.0 million. Catalog sales for the third quarter of fiscal 1999 decreased $2.2 million, or 21.6%, from $9.7 million for the third quarter of fiscal 1998 to $7.5 million. The catalog sales were impacted by the Company's practice, which the Company plans to continue, of not mailing catalogs to areas where it operates retail stores. The revenue decrease of retail stores is primarily attributable to flat comparable store sales growth and a decrease in net new store openings and closed stores. Comparable store sales for Woodworkers Warehouse, Post Tool, and Golf Day stores for the third quarter of fiscal 1999 increased by 1% as compared to the third quarter of fiscal 1998. The store base decreased 1% from 230 locations at the end of the third quarter of fiscal 1998 to 228 locations at the end of the third quarter of fiscal 1999. Net sales for the first nine months ended of fiscal 1999 increased by $12.4 million, or 6.7%, from $184.6 million for the first nine months ended of fiscal 1998 to $197.0 million. Net retail sales for the first nine months of fiscal 1999 increased $18.7 million or 12.3% from $152.2 million for the first nine months of fiscal 1998 to $170.9 million. Comparable store sales for Woodworkers Warehouse, Post Tool, and Golf Day stores for the nine months ended of fiscal 1999 increased by 9.1% as compared to the nine months ended of fiscal 1998. Catalog sales for the first nine months of fiscal 1999 decreased $6.4 million, or 19.7%, from $32.5 million for the first nine months of fiscal 1998 to $26.1 million. This is partially due to the Company's practice, which the Company plans to continue, of not mailing catalogs to areas where it operates retail stores. The revenue growth of retail stores is primarily attributable to increased store sales at existing retail locations. The following table presents net sales and gross margin data of the Company for the periods indicated: THREE MONTHS ENDED NINE MONTHS ENDED NOVEMBER 27, NOVEMBER 28, NOVEMBER 27, NOVEMBER 28, 1999 1998 1999 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA) NET SALES: RETAIL TOOLS $ 36,299 $ 37,873 $ 109,063 $ 100,059 GOLF 13,743 12,490 61,804 52,106 CATALOG TOOLS 4,713 6,325 14,846 19,546 GOLF 2,861 3,414 11,249 12,927 ------------ ------------ ------------ ----------- TOTAL $ 57,616 $ 60,102 $ 196,962 $ 184,638 ============ ============ ============ =========== GROSS MARGIN RETAIL TOOLS 30.6% 26.6% 28.9% 25.6% GOLF 30.8% 30.3% 29.5% 31.3% CATALOG TOOLS 44.9% 45.0% 45.7% 41.0% GOLF 53.5% 48.0% 48.6% 47.0% ------------ ------------ ------------ ----------- 33.0% 30.6% 31.5% 30.3% ============ ============ ============ =========== Following is a summary of retail store growth: THREE MONTHS ENDED NOVEMBER 27, NOVEMBER 28, 1999 1998 ---- ---- STORES OPERATED AT THE BEGINNING OF THE QUARTER TOOLS 148 141 GOLF 78 76 --- --- TOTAL 226 217 STORES OPENED TOOLS 1 9 GOLF 2 8 --- --- TOTAL 3 17 STORES CLOSED TOOLS 1 2 GOLF 0 2 --- --- TOTAL 1 4 STORES OPERATED AT THE END OF THE THIRD QUARTER TOOLS 148 148 GOLF 80 82 --- --- TOTAL 228 230 ==== === Gross profit for the third quarter of fiscal 1999 increased $0.6 million, or 3.4%, from $18.4 million for the third quarter of fiscal 1998 to $19.0 million. As a percentage of net sales, gross profit increased 2.4% from 30.6% of net sales for the third quarter of fiscal 1998 to 33.0% of net sales in the third quarter of fiscal 1999. Planned price increases in retail stores accounted for the increase in gross margin. This increase took place in spite of decreased catalog sales which have a higher gross margin. Gross profit for the first nine months of fiscal 1999 increased $6.0 million, or 10.8%, from $56.0 million for the first nine months of fiscal 1998 to $62.0 million for the first nine months of fiscal 1999. As a percentage of net sales, gross profit increased 1.2% from 30.3% of net sales for the first nine months of fiscal 1998 to 31.5% of net sales in the first nine months of fiscal 1999. Gross margin for the first nine months of fiscal 1999 was consistent with historical performance parameters given the different levels of gross margin that are inherent between the retail and catalog businesses and the planned price increases in retail stores. Selling, general and administrative expenses for the third quarter of fiscal 1999 increased $0.3 million, or 1.7%, from 27.8% for the third quarter of fiscal 1998 to 29.5% for the third quarter of fiscal 1999. The increase in selling, general and administrative as a percentage of net sales is primarily attributable to higher net retail advertising expenses in the third quarter of fiscal 1999 compared to the third quarter of fiscal 1998. Selling, general and administrative expenses for the first nine months of fiscal 1999 decreased $7.8 million, or 12.3%, from $63.4 million for the first nine months of fiscal 1998 to $55.6 million for the first nine months of fiscal 1999. The decrease in selling, general and administrative expenses is primarily related to the elimination of the non-recurring expenses incurred last year as a result of the problems encountered in the implementation of the then new warehouse management system. Interest expense for the third quarter of fiscal 1999, net of interest income, increased by $0.3 million from $1.6 million in the third quarter of fiscal 1998 to $1.9 million in the third quarter of fiscal 1999. The increase in interest expense is attributable to the increase in the amount outstanding under the Company's existing bank credit facility. Interest expense for the first nine months of fiscal 1999, net of interest income, increased by $1.2 million from $4.0 million in the first nine months of fiscal 1998 to $5.2 million in the first nine months of fiscal 1999. The increase in interest expense is attributable to the increase in the amount outstanding under the Company's existing bank credit facility. For the foregoing reasons, net income for the third quarter of fiscal 1999 was approximately $89,000, or $0.01 per share, compared to net income of approximately $59,000, or $0.01 per share, in the comparable quarter ended November 28, 1998. For the same reasons, net income for the nine months ended November 27, 1999 was approximately $746,000, or $0.07 per share, compared with a net after-tax loss of approximately $8.2 million, or ($0.77) per share, for the nine months ended November 28, 1998. Liquidity and Capital Resources The Company believes that projected cash flows from operations in combination with current available resources are sufficient to meet working capital needs, such as store openings and debt payments. Achievement of projected cash flows from operations, however, will be dependent upon the Company's attainment of sales, gross profit, expense and trade support levels that are consistent with its financial plans. Such operating performance will be subject to financial, economic and other factors affecting the industry and operations of the Company, including factors beyond its control, and there can be no assurance that the Company's plans will be achieved. If projected cash flows from operations are not realized, then the Company may have to explore various available alternatives, including obtaining further modification to its existing lending arrangements or attempting to locate additional sources of financing. The Company's working capital increased by $1.3 million, from $11.7 million as of February 27, 1999 to $13.0 million as of November 27, 1999. The increase resulted primarily from an increase in inventory of $16.5 million and accounts receivable of $2.8 million which was offset by an increase in the net borrowings under the Company's bank credit facility of $14.8 million and a decrease in prepaid expenses and other current assets of $3.3 million. During the first nine months of fiscal 1999, the cash used in operating activities was $11.0 million. The primary uses of the cash were an increase in inventories for $16.5 million and accounts receivable for $2.8 million and a decrease in accrued expenses of $1.6 million, which was offset by an increase in accounts payable of $1.7 million, a decrease in prepaid expenses and other current assets of $3.3 million and a decrease in accrued expenses for $1.6 million and depreciation and amortization of $4.2 million. The net cash used in investing activities was approximately $3.2 million. The main use of the cash was for the purchase of property and equipment. The net cash provided by financing activities was approximately $14.1 million and was primarily attributable to the increase in borrowings on the Company's bank credit facility of $14.8 million. During fiscal 1996, the Company entered into a secured line-of-credit agreement with a bank (the "credit facility") that, as amended during fiscal 1998, expires on December 31, 2001. The credit facility bears interest at the bank's reference rate plus .50% (9.00% at November 27, 1999) or LIBOR plus 2.00% (7.4% at November 27, 1999). If for any 12 month rolling period, the fixed charges ratio exceeds certain limits, as defined, the bank's interest rate on the credit facility is decreased by .25% for the period immediately following such rolling period, which is reflected above A commitment fee of .375% per year of the average unused commitment amount, as defined, is payable monthly. The credit facility allows for borrowing up to $100 million based on a percentage of inventory (the "advance rate"). Borrowings include 50% of the amounts reserved for outstanding letters of credit. At November 27, 1999, the Company had approximately $95.0 million of borrowings outstanding and approximately $0.5 million of letters of credit outstanding. The Company had approximately $1.5 million in available borrowings under this facility at November 27, 1999. The bank has a security interest in substantially all assets of the Company. The bank credit facility agreement contains certain financial covenants, including, but not limited to, maintaining minimum levels of tangible net worth, and interest coverage ratios and limitations on capital expenditures. At November 27, 1999, the Company was in compliance with all financial covenants. The borrowing base of the credit facility is to a maximum amount of $100 million. The advance rate is 65% through the last day of May, 1999, 70% from the first day of June, 1999 through the last day of October, 1999, and 65% thereafter. The Company is required to maintain an interest coverage ratio of 2.00:1.00, on a rolling 12 month basis for each quarter. The adjusted tangible net worth as of the last day of the third fiscal quarter of 1999 is required to be $41.0 million, and for the fourth fiscal quarter 1999 and each fiscal quarter thereafter, adjusted tangible net worth is required to be $42.0 million. Capital expenditures may not exceed $6.0 million for any fiscal year. The Company anticipates that it will operate approximately 230 stores by the end of fiscal 1999. To the extent necessary, the Company will continue to invest in leasehold improvements and equipment to support its retail store expansion plans. In addition, the Company's limited expansion plans will require the use of cash to fund increased inventories associated with the operation of additional retail stores. The Company estimates that the cost of opening a new store (exclusive of distribution center inventory) averages approximately $350,000, of which $290,000 consists of inventory, in the case of a tool store, and approximately $425,000, of which $300,000 consists of inventory, in the case of a golf store. In each case, a portion of the inventory investment is financed with trade credit. The Company opened one new tool store and two new golf stores and closed one tool stores in the third quarter of fiscal 1999. For the first nine months of fiscal 1999, the Company opened two new tool store and four new golf store and closed three tool stores and six golf stores. YEAR 2000 Like many other companies, the Year 2000 computer issue created risk for the Company. If, when the date changed from December 31, 1999 to January 1, 2000, either information technology systems or imbedded technology did not correctly recognize date information, it could have had an adverse impact on the Company's operations. Prior to January 1, 2000, the Company updated its software to accommodate programming logic that properly interprets dates in the year 2000 and beyond. All software is under maintenance agreements by software companies that have provided updated software that properly recognizes the post January 1, 2000 dates. A review of embedded technology used in equipment provided by outside vendors with the manufacturers of such equipment, was completed by November, 1999. Upon the advent of January 1, 2000, the Company did not register any malfunctions related to its own technology, distribution systems or other operations and does not foresee any issues related to embedded technology in the equipment provided by other manufacturers. The Company also inquired of important third party vendors regarding their Year 2000 readiness and all such third party vendors appear to be continuing operations without any interruption or visible adverse effect. Based on the Company's work to date and its continuing uninterrupted operation on and after January 1, 2000, the Company believes that it was successful in ensuring the Year 2000 compliance of all systems and that future costs relating to the Year 2000 issue will not have a material impact on the Company's consolidated financial position, results of operations or cash flows. Since the Company relies on third-party suppliers for many systems, products and services including merchandise, telecommunications and call center support, the Company could have been adversely affected if these suppliers had not made all necessary changes to their own systems and products successfully and in a timely manner. Prior to the new year, the Company made inquiries with major third party suppliers regarding their Year 2000 compliance and although there can be no assurance that such third parties have provided complete or accurate Year 2000 readiness disclosures or that such third parties will continue their uninterrupted operation, it appears that no major or critical systems operated by third parties failed as a result of the date change. Management of the Company believes it has an effective program in place to resolve any remaining Year 2000 issues in a timely manner. Nevertheless, since it is not possible to anticipate all possible future outcomes, especially when third parties are involved, there could be circumstances in which the Company could be adversely affected. For example, the Company could encounter future problems in taking customer orders, shipping products, invoicing customers or collecting payments. The amount of potential lost revenue or related consequences as a result of these unlikely contingencies has not been estimated. In addressing contingency issues, the Company plans to allocate internal resources and may retain dedicated consultants and vendor representatives to be available to take corrective action, if necessary. However, the Company will adjust and adopt additional plans if situations arise requiring modifications to existing contingency plans or new contingency plans, as required. Impact of Inflation The Company does not believe that inflation has had a material impact on its net sales or results of operations. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 Statements included in this report that do not relate to present or historical conditions are "forward-looking statements" within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Additional oral or written forward-looking statements may be made by the Company from time to time, and such statements may be included in documents other than this report that are filed with the Securities and Exchange Commission. Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in such forward-looking statements. Forward-looking statements in this report and elsewhere may include without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "forecasts," "intends," "possible," "expects," "estimates," "anticipates," or "plans" and similar expressions are intended to identify forward-looking statements. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) increased competition, a change in the retail business in the tool and/or golf sectors or a change in the Company's merchandise mix; (iii) a change in the Company's advertising, pricing policies or its net product costs after all discounts and incentives; (iv) the Company's plans and results of operations will be affected by the Company's ability to manage its growth and inventory as well as year end inventory and adjustments; (v) the Company's ability to achieve its plans and strategies of growth will be dependent on maintaining adequate bank and other financing: (vi) the timing and effectiveness of programs dealing with the Year 2000 issue; and (vii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. TREND-LINES, INC. AND SUBSIDIARY PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable Item 2. Changes in Securities Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number 27 Financial Data Schedule (furnished to the Securities and Exchange Commission for Electronic Data Gathering, Analysis and Retrieval [Edgar] purposes only) (b) Reports on Form 8-K - not applicable 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. TREND-LINES, INC. Registrant Date: January 6, 2000 /s/ Stanley D. Black Stanley D. Black (Chief Executive Officer) /s/ Ronald L. Franklin Ronald L. Franklin (Vice President Finance and Treasurer) EX-27 2 ART. 5 FDS 3 RD QUARTER 10-Q
5 ARTICLE 5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF FINANCIAL CONDITION AT NOVEMBER 27, 1999 (UNAUDITED) AND THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED NOVEMBER 27, 1999 (UNAUDITED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS YEAR FEB-26-2000 FEB-27-1999 FEB-28-1999 FEB-28-1998 NOV-27-1999 FEB-27-1999 560 540 0 0 25,239 22,483 (201) (213) 147,705 131,219 179,464 163,537 37,384 34,201 (16,426) (12,788) 207,954 192,938 166,439 151,825 0 0 0 0 0 0 111 111 41,077 40,331 207,954 192,938 196,962 262,550 196,962 262,550 134,957 181,577 134,957 181,577 55,593 86,393 0 0 5,189 5,580 1,223 (11,000) 477 (3,590) 746 (7,410) 0 0 0 0 0 0 746 (7,410) 0.07 (0.70) 0.07 (0.70)
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