1
UNITED STATES
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 October 31, 1994
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from____________ to
_____________
Commission file number 0-1946
------
DART GROUP CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 53-0242973
--------------------------------------------- ---------------
(State or other jurisdiction of incorporation (I.R.S.Employer
or organization) Identification No.)
3300 75th Avenue, Landover, Maryland, 20785
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(301) 731-1200
---------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
------ -------
At December 14, 1994, the registrant had 1,458,338 shares of Class A Common
Stock outstanding and 302,952 shares of Class B Common Stock outstanding. The
Class B Stock is the only voting stock and is not publicly traded.
This Quarterly Report on Form 10-Q contains one Exhibit. The exhibit index
begins on page 28.
Page 1 of 36
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The consolidated financial statements included herein have been prepared
by Dart Group Corporation (the "Corporation"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Corporation believes that the disclosures are adequate to make the information
presented not misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Corporation's report on Form 10-K for the fiscal year ended
January 31, 1994.
2
3
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
----------------------------------- -------------------------------
October 31, October 31, October 31, October 31,
1994 1993 1994 1993
------------ -------------- ----------- ------------
Sales $162,841,000 $323,355,000 $747,715,000 $962,080,000
Income from bankers'
acceptances - 710,000 429,000 2,034,000
Real estate revenue 5,050,000 4,628,000 14,536,000 13,523,000
Other interest and
other income 1,759,000 2,819,000 7,067,000 8,624,000
------------ ------------ ------------ ------------
169,650,000 331,512,000 769,747,000 986,261,000
------------ ------------ ------------ ------------
Expenses:
Cost of sales,
store occupancy
and warehousing 150,409,000 261,250,000 620,256,000 770,870,000
Selling and
administrative 106,792,000 57,040,000 207,294,000 169,455,000
Depreciation and
amortization 4,108,000 6,625,000 16,505,000 21,089,000
Interest 2,807,000 3,493,000 9,235,000 10,190,000
------------ ------------ ------------ ------------
264,116,000 328,408,000 853,290,000 971,604,000
------------ ------------ ------------ ------------
Income (loss) before
income taxes, equity
in affiliate and
minority interests (94,466,000) 3,104,000 (83,543,000) 14,657,000
Income taxes (benefit) (12,173,000) 2,096,000 (6,745,000) 7,812,000
------------ ------------ ------------ ------------
Income (loss) before
equity in affiliate
an minority
interests (82,293,000) 1,008,000 (76,798,000) 6,845,000
Equity in affiliate 2,327,000 - 4,499,000 -
Minority interests
in income of
consolidated
subsidiaries and
partnerships 11,369,000 (1,695,000) 7,662,000 (6,300,000)
------------ ------------ ------------ ------------
Net income (loss) $(68,597,000) $ (687,000) $(64,637,000) $ 545,000
============ ============ ============ ============
(continued on following page)
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4
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - (CONT'D)
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------- --------------------------
October 31, October 31, October 31, October 31,
1994 1993 1994 1993
----------- ----------- ----------- -----------
Earnings per common
share and common
share equivalents:
Net income (loss) $ (36.91) $ (.44) $ (34.98) $ .06
=========== =========== =========== ===========
Weighted average
common share and
common share
equivalents
outstanding 1,867,000 1,871,000 1,867,000 1,867,000
=========== =========== =========== ===========
Dividends per share
of Class A Common
Stock $ .033 $ .033 $ .099 $ .099
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
4
5
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
October 31, January 31,
------------ ------------
1994 1994
------------ ------------
Current Assets:
Cash $ 15,707,000 $ 17,955,000
Short-term instruments, including
$49,406,000 and $133,315,000 held
by majority-owned subsidiaries at
October 31, 1994 and January 31,
1994 53,049,000 138,278,000
Marketable debt securities 145,459,000 68,837,000
Bankers' acceptances - 62,307,000
Accounts receivable, trade 7,133,000 15,351,000
Accounts receivable, other 546,000 1,044,000
Merchandise inventories 228,437,000 203,036,000
Deferred income tax benefit 12,770,000 6,522,000
Other current assets 2,642,000 4,048,000
------------ ------------
Total Current Assets 465,743,000 517,378,000
------------ ------------
Property and Equipment, at cost:
Furniture, fixtures and equipment 74,102,000 128,982,000
Building and leasehold improvements 165,137,000 166,250,000
Land 33,252,000 33,396,000
Property under capital leases 27,129,000 35,792,000
------------ ------------
299,620,000 364,420,000
Accumulated Depreciation and
Amortization 74,292,000 104,137,000
------------ ------------
225,328,000 260,283,000
Share of Equity in Shoppers Food
Warehouse Corporation 44,643,000 -
------------ ------------
Other Assets 8,511,000 9,369,000
------------ ------------
Excess of Purchase Price Over Net
Assets Acquired net of accumulated
amortization of $6,074,000 - 3,659,000
------------ ------------
Deferred Income Tax Benefit 15,992,000 12,209,000
------------ ------------
Total Assets $760,217,000 $802,898,000
============ ============
The accompanying notes are an integral part of these balance sheets.
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DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
October 31, January 31,
------------ ------------
1994 1994
------------ ------------
Current Liabilities:
Current portion of mortgage payable $ 988,000 $ 988,000
Accounts payable, trade 147,436,000 154,926,000
Income taxes payable 2,518,000 4,968,000
Accrued salaries and employee benefits 48,871,000 22,791,000
Accrued taxes other than income taxes 8,688,000 11,831,000
Other accrued liabilities 65,252,000 40,287,000
Current portion of obligations under
capital leases 345,000 345,000
------------ ------------
Total Current Liabilities 274,098,000 236,136,000
------------ ------------
Mortgage Payable 80,881,000 80,709,000
------------ ------------
Obligations Under Capital Leases 29,751,000 39,295,000
------------ ------------
Reserve for Closed Facilities and
Restructuring 70,252,000 28,595,000
------------ ------------
Other Long-term Liabilities - 3,219,000
------------ ------------
Commitments and Contingencies
Minority Interests 96,463,000 140,637,000
------------ ------------
Stockholders' Equity:
Class A common stock, non-voting,
par value $1.00 per share; 3,000,000
shares authorized; 1,660,678 and
1,655,763 shares issued 1,661,000 1,656,000
Class B common stock, voting, par
value $1.00 per share; 500,000
shares authorized; 302,952 shares
issued and outstanding 303,000 303,000
Paid-in capital 65,295,000 65,323,000
Unrealized losses on short-term
instruments (730,000) -
Retained earnings 143,992,000 208,774,000
Treasury stock, 202,340 shares of
Class A common stock, at cost (1,749,000) (1,749,000)
------------ ------------
Total Stockholders' Equity 208,772,000 274,307,000
------------ ------------
Total Liabilities
and Stockholders' Equity $760,217,000 $802,898,000
============ ============
The accompanying notes are an integral part of these balance sheets.
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DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended October 31,
-----------------------------
1994 1993
------------- -------------
Cash Flows from Operating Activities:
Net income (loss) $ (64,637,000) $ 545,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 13,201,000 21,089,000
Write-off deferred compensation 1,424,000 -
Equity in affiliate (5,549,000) -
Provision for closed facilities 46,413,000 (1,574,000)
Change in assets and liabilities:
Accounts receivable, trade 4,019,000 (1,950,000)
Accounts receivable, other 498,000 3,270,000
Merchandise inventories (52,361,000) (95,306,000)
Other current assets (18,000) (944,000)
Deferred tax benefits (13,350,000) (1,704,000)
Other assets 264,000 (1,157,000)
Accounts payable, trade 25,681,000 74,474,000
Income taxes payable (2,194,000) 364,000
Accrued salaries and employee benefits 29,751,000 4,999,000
Accrued taxes other than income taxes (1,188,000) 100,000
Other accrued liabilities 13,059,000 (2,410,000)
Deferred income - 50,000
Reserve for closed facilities (2,207,000) (1,519,000)
Minority interests (8,264,000) 9,222,000
------------- -------------
Net cash provided by (used in)
operating activities $ (15,458,000) $ 7,549,000
------------- -------------
Cash Flows from Securities and Capital
Investment Activities:
Capital expenditures $(10,247,000) $ (34,172,000)
Decrease in cash and cash equivalents
as a result of deconsolidation of
Shoppers Food Warehouse Corp. (61,014,000) -
Purchases of bankers' acceptances (28,198,000) (325,400,000)
Maturities of bankers' acceptances 90,505,000 346,038,000
Sales of United States Treasury Bills 34,823,000 230,888,000
Purchases of United States Treasury Bills (169,668,000) (270,213,000)
Maturities of United States Treasury Bills 87,866,000 30,917,000
Sales of marketable debt securities 176,765,000 66,714,000
Purchases of marketable debt securities (213,909,000) (120,049,000)
Maturities of marketable debt securities 6,771,000 6,250,000
Proceeds from reverse repurchase
agreements 18,019,000 -
------------- -------------
Net cash provided by (used in)
securities and capital
investment activities $ (68,287,000) $ (69,027,000)
------------- -------------
(continued on following page)
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DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Nine Months Ended October 31,
-----------------------------
1994 1993
------------- ------------
Cash Flows from Financing Activities:
Borrowings from real estate mortgages $ - $ 9,750,000
Cash dividends (145,000) (144,000)
Stock options exercised 368,000 624,000
Proceeds from (repayment of) the option
to acquire common stock (985,000) 985,000
Distribution paid to minority partners (1,776,000) -
Proceeds from redemption of note
receivable - 833,000
Principal payments under mortgage
obligations (934,000) (307,000)
Principal payments under capital
lease obligations (260,000) (316,000)
------------ ------------
Net cash provided by (used in)
financing activities $ (3,732,000) $ 11,425,000
------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents $(87,477,000) $(50,053,000)
Cash and Cash Equivalents at Beginning
of Year 156,233,000 170,361,000
------------ ------------
Cash and Cash Equivalents at End of Period $ 68,756,000 $120,308,000
============ ============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for:
Interest $ 9,235,000 $ 10,327,000
Income taxes 9,216,000 10,860,000
Reconciliation of Cash and Cash Equivalents
to Balance Sheet Captions:
Cash $ 15,707,000 $ 13,794,000
Overnight repurchase agreements - 1,600,000
Short-term investment of majority-owned
subsidiaries utilized in their
operating cash management 53,049,000 104,914,000
------------ ------------
$ 68,756,000 $120,308,000
============ ============
The accompanying notes are an integral part of these statements.
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9
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1994 and 1993
(Unaudited)
(1) General:
The accompanying consolidated financial statements reflect the accounts of
Dart Group Corporation (the "Corporation") and its direct and indirect
wholly-owned and majority-owned subsidiaries and majority-owned partnerships,
including Trak Auto Corporation ("Trak Auto"), Crown Books Corporation ("Crown
Books"), Shoppers Food Warehouse Corp. ("Shoppers Food"), Total Beverage
Corporation ("Total Beverage"), Cabot-Morgan Real Estate Company ("CMREC"), and
Dart Group Financial Corporation ("Dart Financial"). The accounts of Shoppers
Food are consolidated with the Corporation's through May 28, 1994, but not
thereafter, as a result of a reduction of the Corporations' ownership to 50%.
The Corporation's investment in Shoppers Food is reflected in the financial
statements using the equity method of accounting for periods subsequent to May
28, 1994 (see Note 7). The accounts of Total Beverage are included from the
date of its purchase on February 28, 1993. The Corporation, Trak Auto, Crown
Books, Shoppers Food (for periods through May 28, 1994), Total Beverage, CMREC
and Dart Financial and the Corporation's other direct and indirect wholly-owned
and majority-owned subsidiaries and majority-owned partnerships are referred to
collectively as the "Company". All significant intercompany accounts and
transactions have been eliminated. The unaudited statements as of October 31,
1994 and 1993 reflect, in the opinion of management, all adjustments (normal
and recurring in nature) necessary to present fairly the consolidated financial
position as of October 31, 1994 and 1993 and the results of operations and cash
flows for the periods indicated.
(2) Earnings Per Common Share and Common Share Equivalents:
Earnings per share is based on the weighted average number of the
Corporation's Class A and Class B common stock and common stock equivalents
(certain stock options) outstanding during the period. In reporting earnings
per share, the Corporation's interest in the earnings of its subsidiaries is
adjusted for the dilutive effect, if any, of these subsidiaries' outstanding
stock options. The difference between primary earnings per share and fully
diluted earnings per share is not significant for either period.
(3) Short-term Instruments and Marketable Debt Securities:
At October 31, 1994, the Company's short-term instruments included United
States Treasury Bills (held by subsidiaries) and marketable debt securities
included United States Treasury Bills (held by the Corporation), United States
Treasury Notes, corporate notes, municipal securities and United States agency
securities. Additionally, approximately $18,019,000 of United States treasury
obligations serve as security for reverse repurchase agreements, the liability
for which has been included in other accrued liabilities in the accompanying
balance sheets. The Company adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, effective February 1, 1994. In accordance with the standard, these
short-term instruments and marketable debt securities are considered available
for sale securities. Accordingly, they are recorded at fair market value and
unrealized losses are classified as a component of stockholders' equity. At
October 31, 1994, market value was $730,000 less than cost, net of minority
interest and income taxes.
9
10
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
October 31, 1994 and 1993
(Unaudited)
(4) Inventory:
Trak Auto and Shoppers Food inventories are priced at the lower of last-in,
first-out (LIFO) cost or market. Effective January 30, 1994, Trak Auto changed
its method for determining the index used to calculate the cost basis of the
LIFO inventory for financial and income tax reporting purposes. Under the new
method, Trak Auto uses an index published by United States Bureau of Labor
Statistics. Previously an index determined by Trak Auto, based upon inventory
cost changes between financial reporting periods, was utilized. This change
has been accounted for as a change in accounting method in the accompanying
financial statements. Due to limitations in the availability of historical
information, it is not possible to determine the effect, if any, of the
corresponding cumulative catch-up adjustment required under Accounting
Principle Bulletin 20. Accordingly, the change in principle is being
accounting for on a prospective basis from January 31, 1994. The change in
LIFO inventory as of October 31, 1994 under the new method was not material to
the financial statements when compared to the LIFO inventory under the old
method. Crown Books' and Total Beverage's inventories are priced at the lower
of FIFO cost or market.
Trak Auto, Crown Books and Total Beverage take a physical count of their
store and warehouse inventories semi-annually, except for one Trak Auto
warehouse for which the count is taken annually. Shoppers Food takes an annual
physical count of its store and warehouse inventories. Physical inventories
were not taken for the quarter ended October 31, 1994. The Company uses a
gross profit method combined with available perpetual inventory information to
determine Trak Auto's, Crown Books', Shoppers Food's and Total Beverage's
inventories for quarters when complete physical counts are not taken.
(5) Minority Interests:
The $96,463,000 of minority interests reflected in the Consolidated Balance
Sheet as of October 31, 1994 represents the minority portion of real estate
partnership equity owned by Haft family partnerships (CMREC owns the majority
interest in these real estate partnerships) and the portion of Trak Auto
and Crown Books equity owned by the public shareholders of Trak Auto and Crown
Books. The minority interests reflected in the Consolidated Balance Sheets as
of January 31, 1994, also included the portion of Shoppers Food equity owned by
the shareholders of Shoppers Food (other than the Corporation). No such
minority interests for Shoppers Food are included as of October 31, 1994.
Income attributed to the minority shareholders of Trak Auto was $2,849,000 and
$239,000 for the nine months ended October 31, 1994 and 1993, respectively and
$768,000 and $92,000 for the three months ended October 31, 1994 and 1993,
respectively. Income (loss) attributed to the minority shareholders of Crown
Books was $(11,668,000) and $846,000 for the nine months ended October 31, 1994
and 1993, respectively and $(12,166,000) and $59,000 for the three months ended
October 31, 1994 and 1993, respectively. Income attributed to the minority
ownership of Shoppers Food was $1,050,000 and $4,946,000 for the nine months
ended October 31, 1994 and 1993, respectively; no income for Shoppers Food was
attributed to minority interest for periods after May 28, 1994. Income
attributed to the minority ownership of the real estate partnerships was
$107,000 and $227,000 for the nine months ended October 31, 1994 and 1993,
respectively and $29,000 and $61,000 for the three months ended October 31,
1994 and 1993, respectively.
10
11
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
October 31, 1994 and 1993
(Unaudited)
(6) Shoppers Food Warehouse:
In June 1994, one of the other shareholders of Shoppers Food exercised his
right to reacquire one share of Shoppers Food Class B common stock, thereby
reducing the Corporation's ownership to exactly 50%. As a result, the accounts
of Shoppers Food are consolidated with the Corporation's through May 28, 1994,
but not thereafter. The Corporation's investment in Shoppers Food is reflected
in the financial statements using the equity method of accounting for periods
subsequent to May 28, 1994. Under the equity method, the Company's investment
is shown in the balance sheet as a single line under Share of Equity in
Shoppers Food Warehouse. Accordingly, assets and liabilities of Shoppers Food
previously shown in the accounts of the Company have been aggregated and are
included in this item. The unamortized difference between the original
purchase price of Shoppers Food and the net assets acquired of $11,260,000 is
also included in this item and continues to be amortized over ten years from
the acquisition date. Similarly, the sales and expenses of Shoppers Food which
were previously included in the accounts of the Company have been aggregated,
subsequent to May 28, 1994 and reflected in the caption Equity in Affiliate on
the Consolidated Statements of Income.
For purposes of the statements of cash flows only, the accounts of
Shoppers Food have been deconsolidated at January 31, 1994. Accordingly, the
Company's consolidated cash position was decreased by $61,014,000 (representing
cash and cash equivalents held by Shoppers Food at January 31, 1994) and net
income excluded the Corporation's share of Shoppers Food net income for the
nine months ended October 31, 1994.
Summary Income Data for Deconsolidated Subsidiary:
The following information reflects the results of Shoppers Food from May
29, 1994 to October 31, 1994:
Revenue $335,779,000
Gross Profit 63,470,000
Net Income 8,999,000
The Corporation's interest in Shoppers Food is held through a wholly-owned
subsidiary Dart/SFW Corp. ("Dart/SFW"). The Corporation had previously
executed agreements which by their express terms provide for options to Herbert
H. Haft and Robert M. Haft to each acquire up to 10% of the stock of Dart/SFW
on a fully diluted basis. These agreements state that the options became
exercisable in August 1994 and expire in August 2004 and that the optionees
have the right to require the Corporation to repurchase the shares at their
then fair market value at any time within three years after receipt of the
shares. The Corporation accrues the estimated fair value of the stock over the
exercise price of the options provided for in these agreements ($7.0 million at
October 31, 1994).
11
12
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
October 31, 1994 and 1993
(Unaudited)
(7) Board of Directors:
The Board of Directors of the Corporation established an Executive
Committee of the Board of Directors (the "Executive Committee") on September 7,
1994. The Executive Committee has the authority to conduct the affairs of the
Corporation with respect to matters that are the subject of dispute between the
present Chairman of the Board, Mr. Herbert H. Haft, and the present President
of the Corporation, Mr. Ronald S. Haft. The Directors appointed to the
Executive Committee are Douglas M. Bregman, H. Ridgely Bullock, Larry G.
Schafran and Bonita Wilson, with Mr. Bullock serving as the Chairman of the
Executive Committee. Any and all actions of the Executive Committee are
required to be without a dissenting vote. On October 11, 1994, the Boards of
Directors of Trak Auto, Crown Books and Total Beverage each established an
Executive Committee of their respective Board of Directors with authority
parallel to that of the Corporation's Executive Committee.
Members of the Executive Committee are compensated at a salary rate of
$275 per hour plus reimbursement of expenses. Members of the Special
Litigation Committee of the Board of Directors, which was established in
January 1994, have been compensated at a salary rate of $250 per hour plus
reimbursement of expenses. Through October 31, 1994, the compensation paid by
the Corporation and its subsidiaries to members of the respective Executive
Committees for their services on those committees totalled $263,000, and the
compensation paid by the Corporation and its subsidiaries to members of the
Special Litigation Committee for their service on that committee totalled
$300,000, in each case exclusive of expense reimbursement.
(8) Control Procedure:
On August 4, 1994, the Corporation, on the instruction of Herbert H. Haft,
caused to be issued to Herbert H. Haft two bank cashiers checks totalling
$18,000,000 in exchange for a promissory note from Mr. Haft. On August 8, 1994
Mr. Haft returned to the Corporation the two checks, unnegotiated. Mr. Haft
subsequently paid the Corporation interest on the amount for the period it was
outstanding. The Executive Committee of the Corporation has conducted a review
of this transaction and as a result the Board of Directors has adopted a policy
that no funds of the Corporation will be advanced to any person who owns of
record or has power to vote 10% or more of the Corporation's Class B common
stock (except pursuant to contracts previously approved by the Board of
Directors) without prior approval of a majority of the disinterested Directors.
The Executive Committee, with the assistance of counsel, is continuing to
review the circumstances related to the loan as well as certain charges of
misconduct made by the Corporation's Chairman and Chief Executive Officer and
the Corporation's President and Chief Operating Officer against each other.
12
13
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
October 31, 1994 and 1993
(Unaudited)
(9) Pennsy Warehouse Leases:
The Pennsy Warehouse leases cover a 533,800 square foot facility
consisting of office space and three warehouses once occupied and used by the
Dart Drugstore chain, a predecessor of the Corporation. The warehouses and
office space are not required by the Corporation for its operations. These
warehouses are owned by partnerships in which members of the Haft family own
all of the general and limited partnership interests. The office space and
warehouses were built by Haft partnerships between 1965 and 1974: warehouse I
and the offices in 1965, warehouse II in 1971 and warehouse III in 1974. The
facility is located at 3301 Pennsy Drive, Landover, Maryland.
Trak Auto has an agreement with the Corporation to sublease 6,500 square
feet of the facility. The term of the sublease is one year (with nine one-year
option periods). The annual rental is $21,000 and will increase to $24,000 for
each of the last five option periods. The sublease requires Trak Auto to pay
approximately $6,000 annually for its share of common area maintenance, real
estate taxes and insurance premiums. In addition, Shoppers Food has an
agreement with the Corporation to rent (on a month to month basis) 6,000 square
feet of the above facility for approximately $2,000 a month.
In 1984, the Corporation sold the Dart Drugstore chain to a new company
owned by its management, Dart Drug Stores, Inc. ("DDSI"). At that time, the
subject leases were assigned to a subsidiary (Dart Drug Corporation, Maryland)
whose stock was transferred to DDSI, and the leases were extended to 2016 and
modified. The leases were then assigned again to DDSI itself. Ownership of
DDSI was subsequently transferred and it commenced operation under the name of
Fantles in 1988. DDSI, dba Fantles, occupied the properties up to and through
DDSI's bankruptcy in December of 1990.
DDSI (Fantles) having rejected the leases in its bankruptcy, the
Corporation in February 1991 resumed paying rent to the landlords, Haft family
interest, on the theory that the Corporation's obligations to the landlords
survived the 1984 transactions.
The leases expire September 30, 2016 and provide for increasing rental
payments based on the Consumer Price Index. The leases are "triple net"
leases, in that in addition to rental payments the Corporation is responsible
for all expenses, including but not limited to real estate taxes, all
utilities, insurance and maintenance. The following table shows projected
future expenditures (assuming a 4% inflation rate) for the remaining term of
the leases.
13
14
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
October 31, 1994 and 1993
(Unaudited)
(9) Pennsy Warehouse Leases (continued):
Lease Table
Rental Payments
Fiscal ---------------------------------------
Year Whse I Whse II Whse III Maintenance Total
- ------ ----------- ----------- ----------- ----------- -----------
1996 $ 325,000 $ 305,000 $ 226,000 $ 500,000 $ 1,356,000
1997 325,000 597,000 398,000 510,000 1,830,000
1998 325,000 1,181,000 729,000 521,000 2,756,000
1999 325,000 1,198,000 729,000 532,000 2,784,000
2000 325,000 1,287,000 729,000 544,000 2,885,000
2001-2016 17,235,000 26,286,000 15,659,000 11,299,000 70,479,000
---------- ----------- ----------- ----------- -----------
$18,860,000 $30,854,000 $18,470,000 $13,906,000 $82,090,000
=========== =========== =========== =========== ===========
Since DDSI assumed control of the warehouses in 1984, the buildings have
fallen into disrepair. Deferred maintenance is estimated at between $2 million
and $3 million dollars (not included in the table above). On November 21,
1994, the Corporation's Executive Committee, which is comprised of the
Corporation's four outside directors, received a report indicating the presence
of friable asbestos in warehouses I and II as well as the existence of asbestos
located in certain intact floor tiles in warehouse III. Some
asbestos-containing material has fallen on particular store fixtures and
material stored in warehouse number I. However, tests demonstrated that the
level of airborne asbestos did not exceed the legal limits.
To remove certain fixtures and material unaffected by the asbestos, the
Corporation is allowing limited access to warehouse number I on a temporary
basis, by specially instructed employees with safety garb. The Corporation
will not permit the use of warehouses number I or II, nor will it place
personnel in those warehouses in their present condition except as described
above. The Corporation has taken steps to secure warehouses number I and II to
prevent unauthorized entry. With respect to warehouse number III, the
Corporation is in the process of ascertaining whether the presence of
asbestos-containing materials in the floor tiles renders warehouse number III
unsafe. Preliminary reports indicate that the materials are intact and the
asbestos is non-friable. The report noted no friable asbestos in the portion
of warehouse III sublet to Trak Auto and Shoppers Food.
It is estimated that, notwithstanding the asbestos problem and the special
handling it might require, the buildings could be demolished and rebuilt as
modern, efficient warehouses for approximately $13.0 million. Nevertheless, as
the table above shows, if these leases remain enforceable, the Corporation will
pay in excess of $68.2 million in rent to the Haft interests, plus an
additional $13.9 million in "triple net" expenses. The net present value of
future payments discounted at a risk free rate of 6%, and eliminating the
effect of estimated future inflation included in the table above is
approximately $32,300,000 and at the end of the lease term the Corporation
retains no residual value in either the land or buildings.
14
15
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
October 31, 1994 and 1993
(Unaudited)
(9) Pennsy Warehouse Leases (continued):
These estimated outflows will substantially impair the future cash flows
of the Corporation for the foreseeable future. The Corporation's Executive
Committee has undertaken a comprehensive legal review of the subject leases
from their inception.
Since 1991, the Corporation has received inquiries from unrelated third
parties interested in subletting various portions of the warehouse properties.
The Corporation is reviewing two proposals at this time. Such subleases would
serve to mitigate the net effect of these leases on the Corporation. However,
given the poor state of repair and the recently uncovered asbestos problem in
warehouses number I and number II, there can be no assurance that such
subleases can be satisfactorily and timely negotiated and consummated.
Accordingly, the Corporation revised its expectations of future sublease income
and increased the reserve for the obligations represented by these leases to
$32.3 million from $9.6 million, an increase of $22.7 million during the
quarter ended October 31, 1994.
(10) Stock Options:
On September 6, 1994, Ronald S. Haft tendered the Corporation a letter
requesting:
(1) to exercise, effective immediately, options (the "Options") to
purchase, at an exercise price of $89.65 per share, 197,048 shares
(the "Option Shares") of the Corporation's Class B Common Stock
pursuant to Article 4(a) of the Employment Agreement (the "Employment
Agreement") dated August 1, 1993 between Ronald S. Haft and the
Corporation; and
(2) to exercise his right under the Employment Agreement, effective
immediately, to obtain a loan from the Corporation in the amount of
$17,665,353.20, for part of the exercise price of the Options.
Together with that letter, Ronald S. Haft tendered to the Corporation
a check payable to the Corporation in the amount of $197,048 as payment of the
par value of the Option Shares; and an executed unsecured promissory note of
Ronald S. Haft payable to the order of the Corporation in the amount of
$17,665,353.20, the balance of the exercise price for the Option Shares under
the Options.
The Corporation has rejected the validity of Ronald S. Haft's
purported exercise of the Options and the promissory note tendered in
connection therewith. Issuance of the Option Shares has not been recorded in
the stock records of the Corporation, the Corporation has returned his $197,048
check, and the Corporation has not issued any stock certificate to Ronald S.
Haft for the Option Shares. The Corporation delivered to Ronald S. Haft a
check in the amount of the $985,000 price (plus interest) previously paid by
him for the Options, but he returned the check to the Corporation. These funds
are now in an interest bearing escrow account.
Ronald S. Haft has filed an action to compel the Corporation to issue the
Option Shares and grant him the related loan. See Note 12 to the Consolidated
Financial Statements.
15
16
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
October 31, 1994 and 1993
(Unaudited)
(11) Store Closing Reserves:
Trak Auto
Restructuring Charges
During the year ended January 30, 1993, Trak Auto recorded a restructuring
charge of $7,400,000, before income taxes. The restructuring charge was
divided into two categories consisting of the estimated cost of relocating or
expanding and remodeling an estimated 126 existing Classic Trak stores and
discontinuing the operations of an estimated 38 stores. The restructuring
charge for the two components consisted of unrecoverable lease obligations
(rent, real estate taxes, and common area charges) after the projected closing
date of the store or upon remodel or expansion, the write-off of leasehold
improvements and net book values of fixed assets, and costs associated with
inventory conversion. During the year ended January 29, 1994, Trak Auto
charged approximately $600,000 against the restructure reserve.
Store Closing Costs
Trak Auto has historically recorded charges when the decision is made
to close a store due to poor operating performance. Such costs consist
primarily of future lease obligations after the closing date, net of estimated
sublease income. Trak Auto's closed store reserve was approximately $997,000
as of January 29, 1994.
Restructuring and Store Closing Costs - Current Period Activity
During the nine months ended October 29, 1994, Trak Auto charged
approximately $2,225,000 against the restructuring and closed store reserves,
primarily for the charge-off of unrecoverable lease obligations and the net
book value of fixed asset and leasehold improvements in stores that were
converted to Super Trak stores.
As of the end of the nine months ended October 29, 1994, Trak Auto
re-evaluated its needs for reserves for restructuring and closing stores. The
essence of the restructuring of Trak Auto has been accomplished, with a reduced
need for the reserve in the future. Trak Auto continues to review store
operations and reserve for projected costs to be incurred beyond the
estimated closing dates. It is Trak Auto's current estimate that approximately
sixteen additional stores will be closed in conjunction with Trak Auto's
restructuring efforts with an estimated future lease obligation beyond the
closing dates of approximately $1,360,000. Additionally, Trak Auto continues
to make payments on stores already closed, and has future lease obligations on
those stores of approximately $1,190,000. Finally, Trak Auto estimates that it
will close 38 stores that are not currently providing satisfactory performance.
The future lease obligations beyond the estimated closing dates for these
stores are approximately $5,100,000.
16
17
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
October 31, 1994 and 1993
(Unaudited)
(11) Store Closing Reserves (continued):
A charge of $2,080,000 for additional store closings net of the reduction
in the restructuring reserve is included in cost of sales, store occupancy and
warehousing expenses in the accompanying financial statements for the period
ending October 29, 1994. Trak Auto continues to review store operations and
may close additional stores in the future.
Crown Books
During the three months ended October 29, 1994, the new operating
management of Crown Books concluded that due to lower than anticipated
operating performance as many as 100 of its stores would not generate
sufficient return on investment to justify their continued operation and
therefore should be closed.
These stores are in addition to the stores previously scheduled for
closing under Crown Books' restructuring and closed store reserves and
accordingly, Crown Books has recorded charges of approximately $18,963,000
during the three months ended October 29, 1994. The charge is comprised of the
following components:
Future lease obligations $16,555,000
Leasehold improvements and fixtures 2,408,000
-----------
$18,963,000
===========
To estimate the future lease obligations, the Crown Books' charge considers
lease costs after the planned closing date. The charge is included in cost of
goods sold, store occupancy and warehousing in the accompanying statement of
income. Crown Books continues to review store operations and may close
additional stores in the future.
In addition to the charge recorded during the period ending October 29,
1994, Crown Books has remaining closed store reserves from charges recorded in
prior years of approximately $920,000. The following table indicates the
fiscal years in which the total closed store reserves are expected to be
utilized:
Fiscal Year Amount
----------- -----------
1996 $ 8,673,000
1997 4,181,000
1998 2,893,000
1999 1,690,000
2000 835,000
2001-2005 1,611,000
-----------
$19,883,000
===========
17
18
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
October 31, 1994 and 1993
(Unaudited)
(11) Store Closing Reserves (continued):
Total Beverage
During the three months ended October 31, 1994 the Corporation's
management concluded that one of the Total Beverage stores would never generate
a sufficient return on investment to justify its continued operation. The
store is located in a center owned by CMREC. Accordingly, the Corporation
decided to reserve approximately $2,800,000 for the future lease obligations
and a portion of the fixtures net of recoveries expected through CMREC.
(12) Litigation:
Robert M. Haft Employment
On September 20, 1994, a federal district court jury in the employment
litigation brought by Robert M. Haft, the former president of the Corporation
(Robert M. Haft v. Dart Group Corporation, et al. (D. Del. Civ. Action No.
93-384-SLR)), found that the Corporation had breached its employment contract
with him and awarded him damages against the Corporation (equivalent to the
compensation projected to be due under the remaining term of the employment
contract) in the amount of $18,856,964. The jury also found that Crown Books
had breached an employment agreement with Robert M. Haft and awarded him
damages (equivalent to the compensation projected to be due under that
employment contract) against Crown Books in the amount of $12,800,910. The
jury also found that Robert M. Haft did not voluntarily terminate his
employment within the meaning of his Incentive Stock Agreement with Crown
Books, and therefore Crown Books does not have the right to repurchase 100,000
shares of incentive stock at their original issue price.
Robert M. Haft has asked the judge presiding over the case to award him
additional damages in the amount of approximately $2.4 million based on the
failure of Crown Books to deliver the 100,000 shares of Crown Books incentive
stock to him when he demanded them in August of 1993. Robert M. Haft has also
requested a declaratory judgment on his claims against the Corporation, Crown
Books and Trak Auto arising from stock options granted to him by those
corporations and his claim that he has a purchase option for an interest in
Total Beverage. The defendants have opposed these requests. The court has not
ruled on the requests and has not entered a judgment in the case. The
defendants intend to move for a new trial after judgment is entered.
The Corporation and Crown Books have reserved $31,658,000 for the jury
verdict and Crown Books has charged-off the remaining unamortized deferred
compensation totalling $1,424,000 (before income taxes) associated with the
incentive stock.
18
19
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
October 31, 1994 and 1993
(Unaudited)
(12) Litigation (continued):
Derivative Litigation
In September 1994, Jolien Lou, who alleges to be a shareholder of Crown
Books, filed a lawsuit in the Delaware Court of Chancery for New Castle County
naming as defendants Herbert H. Haft, Glenn E. Hemmerle, Ronald S. Haft,
Douglas M. Bregman, H. Ridgely Bullock, Larry G. Schafran and Bonita A.
Wilson. The suit is brought derivatively and names Crown Books as nominal
defendant. The complaint alleges waste and breach of fiduciary duty in
connection with the termination of Robert M. Haft from his position at Crown
Books in 1993. Plaintiff seeks an accounting of unspecified damages incurred
by Crown Books, and costs and attorneys' fees. Crown Books has been informed
that Ronald S. Haft has been dismissed without prejudice from this lawsuit.
In September 1994, the Special Litigation Committee appointed by the Board
of Directors of the Corporation, Trak Auto, and Crown Books to assess two
previously reported lawsuits filed derivatively in the Delaware Court of
Chancery for New Castle County, one filed by Alan R. Kahn and The Tudor Trust
in September 1993 and the other filed by Robert M. Haft in November 1993, moved
for dismissal of certain claims in those derivative lawsuits and for
realignment of the parties to permit the Company to prosecute other claims in
those derivative lawsuits.
Given that these derivative lawsuits are brought in the name of the
Corporation and its subsidiaries, recovery in them would inure to the benefit
of the Corporation and its subsidiaries if the claims in them are successfully
litigated or settled. It is therefore the opinion of management that the
resolution of these actions will not have a material adverse effect on the
consolidated financial condition or annual results of operations of the
Company.
Ronald S. Haft Stock Options
Ronald S. Haft has filed a lawsuit against the Corporation (Ronald S. Haft
v. Dart Group Corporation, Del. Ch. 13736 (filed September 12, 1994)) seeking a
court order that the Corporation issue the Option Shares to him and grant him a
loan of $17,665,353.20 to be used as part of the payment for the Option Shares.
The Corporation has denied the validity of the Options and is contesting the
lawsuit. On September 14, 1994, a Standstill Agreement agreed to on behalf of
the Corporation and Ronald S. Haft was ordered by the Delaware Court of
Chancery in this matter. This Standstill Agreement restricts certain actions
by the Corporation and its stockholders until further order of the Court.
On November 14, 1994, the Court of Chancery of the State of Delaware
entered a Memorandum Opinion denying plaintiff Ronald S. Haft's motion for
summary judgement. Separately, the Court scheduled a trial of this case in
March 1995. The Court has indicated that it will permit the plaintiffs in the
derivative lawsuit filed September 1993 (Alan R. Kahn and the Tudor Trust) to
intervene in this case for the purpose of challenging the validity of the
Options.
19
20
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, (Continued)
October 31, 1994 and 1993
(Unaudited)
(12) Litigation (continued):
Legal Costs
During the three months ended October 31, 1994, the Corporation and its
subsidiaries recorded an accrual of approximately $10.8 million for estimated
future legal costs considered necessary for the litigation discussed above.
(13) Credit Agreement:
The Corporation is party to a revolving credit agreement, together with
Trak Auto and Crown Books, for a $6,000,000 revolving line of credit. The
$6,000,000 is an aggregate amount and not specifically allocated to any of the
parties. The line is intended to be used for the issuance of standby and trade
letters of credit. At October 31, 1994, there had been no borrowings under the
credit agreement. This line of credit expires May 1, 1995.
(14) Income Taxes:
Trak Auto, Crown Books and Shoppers Food file separate income tax returns.
CMREC, Total Beverage and Dart Financial are consolidated in the Corporation's
income tax returns.
The following summarizes the Company's deferred tax asset position as of
October 31, 1994:
Gross Deferred Tax Asset $ 58,641,000
Valuation Allowance (29,879,000)
------------
Net Deferred Tax Asset $ 28,762,000
============
During the three months ended October 31, 1994 the Company's deferred tax
assets increased by $31,864,000. The valuation allowance increased by
$21,958,000 and is included in Income Taxes in the accompanying Consolidated
Statements of Income. The increase in the deferred tax asset is primarily
attributable to significant events that occurred during the third quarter that
have resulted in additional temporary differences. In management's opinion, a
valuation allowance of $29,879,000 is necessary for tax net operating loss
carrybacks, alternative minimum tax credit carryforwards and certain temporary
differences that the Company believes are not realizable under the "more likely
than not" criteria of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. The Company will evaluate the continuing need for
its valuation reserves on a periodic basis.
20
21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
Cash, including short-term instruments, and U.S. government and other
marketable debt securities are the Company's primary source of liquidity.
Cash, including short-term instruments, U.S. government and other marketable
debt securities and bankers' acceptances, decreased by $73,162,000 to
$214,215,000 at October 31, 1994 from $287,377,000 at January 31, 1994. This
decrease was primarily due to the accounts of Shoppers Food no longer
consolidated with the Company. Cash decreases for Crown Books' purchases of
merchandise inventory, Crown Books' payment of January 31, 1994 accounts
payable, payments for the Company's legal expenses, and purchases of United
States Treasury Notes were partially offset by Trak Auto's increased cash from
current period operating results.
For the nine months ended October 31, 1994, the Company realized a pre-tax
yield of approximately 3.3% on the bankers' acceptances, approximately 3.9% on
United States Treasury Bills and approximately 5.8% on the marketable debt
securities. All of the Corporation's bankers' acceptances have matured in the
normal course.
Operating activities (not including Shoppers Food) used $15,458,000 of the
Company's funds for the nine months ended October 31, 1994 compared to
providing $7,549,000 of the Company's funds (including Shoppers Food) for the
same period one year ago. The primary use of cash for the nine months ended
October 31, 1994 was for Crown Books payments on January 29, 1994 accounts
payable balances, Crown Books current inventory purchases and payments for the
Company's legal expenses. The decrease was partially offset by cash provided
by Trak Auto's current operating results.
Investing activities used $68,287,000 of the Company's funds for the nine
months ended October 31, 1994, compared to $69,027,000 for the same period last
year. The primary use of cash during the nine months ended October 31, 1994
was due to the deconsolidation of Shoppers Food (see Note 6 to the Consolidated
Financial Statements). During the nine months ended October 31, 1994, the
Company's net purchase/disposition of marketable debt securities was lower than
the same period last year, which was the Company's initial purchase of such
securities. The Corporation's bankers acceptances all matured and were
reinvested in United States Treasury Bills. Capital expenditures decreased
$23,925,000 to $10,247,000 compared to last year, primarily due to fewer Super
Crown Books and Super Trak stores opening this year.
The Company used $3,732,000 for net financing activities for the nine
months ended October 31, 1994 compared to providing $11,425,000 for the nine
months ended October 31, 1993. The change was primarily due to CMREC's Bull
Run Plaza obtaining a $9,750,000 mortgage last year.
The Corporation, together with Crown Books and Trak Auto, has a $6,000,000
revolving credit facility agreement. As of October 31, 1994 there has been no
borrowing under this credit agreement (see Note 13 to the Consolidated
Financial Statements).
At October 31, 1994, Crown Books had five signed leases for Super Crown
stores and three signed agreements for additional space in existing stores,
Trak Auto had nine signed leases for new stores and four signed agreements for
additional space in existing stores for Super Trak stores and CMREC's Bull Run
Plaza had completed renovation and expansion.
21
22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources (continued)
The Company anticipates that funds necessary to fund these capital
expenditures, as well as purchase inventory for new stores, meet the Company's
long-term lease obligations, and pay current liabilities (including any
judgment in the Robert M. Haft employment litigation) will come from
operations, existing current assets and, if necessary, the aforementioned
credit agreement.
The Company believes that Shoppers Food's cash and short-term investments,
plus cash generated from operations, will be adequate to fund Shoppers Food's
capital expenditures, purchase inventory for new stores, and to meet its
current liabilities and long-term lease obligations.
The liquid assets maintained by the Company are intended to fund the
expansion of the Company's retail business through the opening of stores in new
markets, converting selected existing stores to superstores, opening additional
stores in existing markets and other corporate purposes.
Results of Operations
Trak Auto
Sales of $266,415,000 for the thirty-nine weeks ended October 29, 1994
increased by $17,826,000 or 7.2% compared to the thirty-nine weeks ended
October 30, 1993 and sales of $88,848,000 for the thirteen weeks ended October
29, 1994 increased by $2,496,000 or 2.9% compared to the thirteen weeks ended
October 30, 1993. The increases were primarily attributable to increased sales
for Super Trak stores converted from classic Trak stores as well as a 4.3% and
2.0% increase in sales for all stores open more than one year for the
thirty-nine weeks and thirteen weeks ended October 29, 1994, respectively.
Sales for comparable Super Trak stores open more than one year increased 3.7%
and 3.0%, respectively, for the thirty-nine and thirteen weeks ended October
29, 1994. Sales for comparable classic Trak stores open more than one year
increased 4.6% and 1.5%, respectively, for the thirty-nine and thirteen weeks
ended October 29, 1994. Sales for Super Trak and Super Trak Warehouse stores
represented 40.7% and 45.2% of total sales during the thirty-nine and thirteen
weeks ended October 29, 1994 compared to 32.9% and 35.3% for the thirty-nine
and thirteen weeks ended October 30, 1993.
During the thirty-nine weeks ended October 29, 1994, Trak Auto opened or
converted 32 new Super Trak and Super Trak Warehouse stores, and closed or
converted 55 classic Trak stores. At October 29, 1994, Trak Auto had 292
stores, including 101 Super Trak stores and four Super Trak Warehouse stores.
Interest and other income increased by $14,000 and $118,000 for the
thirty-nine weeks and thirteen weeks ended October 29, 1994 when compared to
the same periods last year. The increases were primarily due to rental income
resulting from a temporary sublease for a portion of the Ontario, California
distribution center. In addition, interest income increased during the
thirteen weeks ended October 29, 1994 compared to the same period last year as
a result of increased funds available for short-term investment, while interest
income for the thirty-nine weeks ended October 29, 1994 remains less than last
year.
Cost of sales, store occupancy and warehousing expenses (excluding the
$2,080,000 closed store reserve, see Note 11 to the Consolidated Financial
Statements) as a percentage of sales were 72.6% and 73.0% for the thirty-nine
22
23
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (Continued)
weeks and thirteen weeks ended October 29, 1994, respectively, compared to
76.1% and 77.4% for the thirty-nine weeks and thirteen weeks ended October 30,
1993, respectively. The decreases were primarily due to increased store
margins as a result of higher merchandise margins and a favorable change in
sales mix (increased hard parts and decreased motor oils).
Selling and administrative expenses as a percentage of sales were 19.8% and
20.0% for the thirty-nine weeks and thirteen weeks ended October 29, 1994
compared to 20.8% and 19.6% for the thirty-nine and thirteen weeks ended
October 30, 1993. During the thirty-nine and thirteen weeks such expenses,
excluding a $500,000 legal accrual (see Note 12 to the Consolidated Financial
Statements) decreased to 19.6% and 19.5%, respectively, primarily due to lower
payroll costs as a result of Trak Auto's efforts to control store hours and
administrative overhead and to Super Trak store maturity.
Depreciation and amortization expenses decreased $303,000 and $342,000 for
the thirty-nine weeks and thirteen weeks ended October 29, 1994 when compared
to the same periods last year. The decreases were primarily the result of store
closings and to the point-of-sale registers system being fully depreciated.
The effective income tax rate was 30.7% for the thirty-nine weeks ended
October 29, 1994 compared to 32.8% for the thirty-nine weeks ended October 30,
1993. The decrease was primarily due to the reversal of the $728,000 deferred
tax valuation allowance. Management has concluded that based on the weight of
currently available evidence, it is more likely than not, that the entire
deferred tax asset is realizable. Management will continue to evaluate the
need for a valuation allowance.
Crown Books
New operating management has concluded that many of Crown Books'
stores are not generating, and are not expected to generate, a return on
investment sufficient to justify their continued operation. These stores are
mostly older, smaller, classic Crown Books stores (averaging 3,000 square feet)
and certain other stores whose operating results have been disappointing.
Accordingly, Crown Books expects to close as many as 100 of these
underperforming stores and has recorded a closed store reserve of $18.9 million
for the costs to be incurred in these closings over the next 18-36 months. See
Note 7 to the Consolidated Financial Statements. Management anticipates
opening 28 Super Crown Books stores varying in size from 12,000 to 18,000
square feet over the next twelve months. These stores represent opening
approximately 420,000 square feet of new space in the next twelve months. The
store identified for closing represent approximately 300,000 square feet to be
closed over the next 18-36 months.
Sales of $206,195,000 for the thirty-nine weeks ended October 29, 1994
increased by $30,553,000 or 17.4% over the same period one year ago while sales
of $68,374,000 for the thirteen weeks ended October 29, 1994 increased by
$7,402,000 or 12.1% over the same period one year ago. Comparable sales (sales
for stores open for fifteen months) increased 1.0% for the thirty-nine weeks
ended October 29, 1994 and decreased 2.1% for the thirteen weeks ended October
29, 1994. Sales for Super Crown Book stores represented 53.6% and 55.3% of
total sales for the thirty- nine weeks and thirteen weeks ended October 29,
1994 compared to 35.1% and 40.5% of total sales for the thirty-nine weeks and
thirteen weeks ended October 30, 1993. Super Crown sales of $110,605,000 and
$37,824,000 for the thirty-nine weeks and thirteen weeks ended October 29, 1994
increased 55.7% and 65.2% respectively, over the prior
23
24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (Continued)
year sales and sales for comparable Super Crown Books stores increased 4.8% and
1.1%, respectively. Sales for comparable classic Crown Books stores decreased
0.8% and 3.9% during the thirty nine and thirteen weeks ended October 29, 1994.
During the thirty-nine weeks ended October 29, 1994, Crown Books opened ten
Super Crown Books stores while closing 18 classic Crown Books stores and one
Super Crown Books store. This Super Crown Books store was closed as a result
of opening a larger superstore in the same area. At October 29, 1994, Crown
Books had 231 stores including 66 Super Crown Books stores.
Interest and other income decreased by $555,000 and $194,000 during the
thirty-nine weeks and thirteen weeks ended October 29, 1994, respectively, when
compared to the same periods one year ago. The decreases were due to decreased
funds available for short-term investment, resulting primarily from payments on
January 29, 1994 accounts payable balances and to current inventory purchases.
Cost of sales, store occupancy and warehousing (excluding the closed store
reserve) as a percentage of sales were 82.8% and 83.4% for the thirty-nine
weeks and thirteen weeks ended October 29, 1994, respectively, compared to
80.2% and 81.2% for the same periods last year. The increases were primarily
due to a decrease in store margins as a result of a less favorable sales mix
and to increased store occupancy costs for Super Crown stores. During the
thirteen weeks ended October 29, 1994, Crown Books recorded a closed store
reserve of $18,963,000 for underperforming stores while last year the Company's
cost of sales, store occupancy and warehousing expenses were reduced by a
$631,000 reduction in the closed store reserve as a result of the termination
of three leases.
Selling and administrative expenses as a percentage of sales were 24.0%
and 42.1% for the thirty-nine weeks and thirteen weeks ended October 29, 1994,
respectively, compared to 17.7% and 17.7% for the same periods last year. The
increases were primarily due to the accruals of Robert M. Haft's jury award and
legal costs (see Note 9 to the Consolidated Financial Statements). Excluding
these accruals, selling and administrative expenses as a percentage of sales
decreased to 15.5% and 16.4% for the thirty-nine and thirteen weeks ended
October 29, 1994, respectively, as a result of reduced payroll costs.
Depreciation expense increased $805,000 for the thirty-nine weeks ended
October 29, 1994 compared to the same period one year ago. The increase was
primarily due to the increase in fixed assets as a result of the expansion of
Super Crown Books stores.
Interest expense decreased by $14,000 due to the reduction of amounts owed
under capital lease obligations.
Crown Books has recorded a tax benefit of $14,234,000 for the thirty-nine
weeks ended October 29, 1994 net of a deferred tax valuation allowance of
$2,500,000 as compared to tax expense of $1,027,000 for the same period one
year ago. The tax benefit was the result of taxable temporary differences
included in the $35,718,000 financial reporting net operating loss. In
management's opinion, a valuation allowance of $2,500,000 was necessary for the
uncertainty related to the timing of the reversal of certain taxable temporary
differences during periods when Crown Books has taxable income.
24
25
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (Continued)
Shoppers Food
See Notes 1 and 6 to the Consolidated Financial Statements for a
description of a change in accounting presentation for the Corporation's
ownership for periods subsequent to May 28, 1994.
Shoppers Food sales for the four months and one month ended May 28, 1994,
were $258,476,000 and $63,218,000, respectively. Cost of sales, store
occupancy and warehousing, as a percentage of sales, were 84.3% and 84.5%,
respectively, during those periods. Selling and administrative expenses, as a
percentage of sales, were 13.7% and 14.3%, respectively during those periods.
Because Shoppers Food's accounts are not consolidated with the Company's
subsequent to May 28, 1994, comparisons with results of operations included in
the Company's consolidated financial statements for the periods ended October
31, 1993, would not be meaningful.
Shoppers Food's reported net income for the five months and three months
ended October 31, 1994 was $8,999,000 and $4,655,000, respectively, 50 percent
of which was included in the net income (loss) of the Company for the nine
months and three months ended October 31, 1994, pursuant to the equity method
of accounting.
Total Beverage
Total Beverage purchased the assets of a discount beverage superstore in
February 1993 and opened two additional stores in October 1993.
Total Beverage sales of $16,629,000 during the nine months ended October
31, 1994 increased $8,914,000 over the same period one year ago as a result of
the opening of the two new stores. Sales for the three months ended October
31, 1994 were $5,620,000 compared to $3,052,000 one year ago. Store margins
have increased approximately 2.0% compared to the prior year as a result of
improved control over inventory and pricing. Total Beverage recorded a net
operating loss of $8,173,000 during the nine months and three months ended
October 31, 1994 primarily the result of recording a closed store reserve of
approximately $5.6 million (before recoveries expected by CMREC) for one store
that management concluded will never generate returns to justify keeping it
open. Management believes that the Total Beverage concept is viable and that
with more stores to absorb overhead costs, principally advertising, the stores
will generate a reasonable return on investment. Accordingly, the Company
anticipates opening three additional stores next year.
Cabot-Morgan Real Estate
Revenues from real estate properties increased by $1,013,000 to
$14,536,000 and $422,000 to $5,050,000 during the nine months and three months
ended October 31, 1994, respectively when compared to the same periods one year
ago. The increases were primarily the result of higher occupancy rates at Bull
Run Plaza.
Administrative expenses for CMREC partnerships increased $414,000 and
$271,000 during the nine months and three months ended October 31, 1994
compared to the same periods one year ago primarily due to increased
maintenance charges and management fees.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (Continued)
Depreciation expense increased $333,000 and $98,000 during the nine months
and three months ended October 31, 1994 when compared to the same periods one
year ago. The increases were due to the increased basis of the building and
improvements at Bull Run Plaza as a result of the completed renovation of the
center.
Interest expense increased $527,000 and $72,000 during the nine months and
three months ended October 31, 1994 primarily due to the mortgage obtained by
Bull Run Plaza in 1993.
Dart Financial and Other Corporate
Income from bankers' acceptances decreased $1,605,000 during the nine
months ended October 31, 1994 when compared to the same period in the prior
year. The decrease is the result of the Corporation's decision to no longer
invest in bankers' acceptances. As bankers' acceptances matured during this
year they were reinvested in United States Treasury Bills. Dart Financial
currently has no assets.
Interest and other income increased $1,808,000 and $735,000 during the nine
months and three months ended October 31, 1994 when compared to the same period
in the prior year. The increase was primarily due to the Corporation investing
in United States Treasury Bills instead of bankers' acceptances.
During the three months ended October 31, 1994, the Corporation recorded
reserves totaling in excess of $54.0 million in administrative expenses. These
reserves are discussed in the footnotes to the accompanying financial
statements. The principal components of the reserves include:
Warehouse Lease Reserves $23,000,000
Robert M. Haft Employment Litigation 19,000,000
Legal and Other 12,000,000
-----------
$54,000,000
===========
Trak Auto and Crown Books file separate income tax returns. CMREC,
Total Beverage and Dart Financial are included in the Corporation's income tax
returns. The Corporation's current net operating loss was not tax benefitted.
As a result of the Corporation's operating loss for the nine months
ended October 31, 1994, a tax net operating loss carryforward of $15,939,000
was created. The Corporation's cumulative total tax net operating loss
carryforward is $23,250,000. All net operating loss carryforwards will expire
by fiscal 2010. In addition, the Corporation has an Alternative Minimum Tax
credit carryforward of approximately $1,010,000. The Corporation has recorded
a $27,379,000 valuation allowance at October 31, 1994. Management believes
that it is unlikely that these tax benefits can be utilized. Management will
continue to evaluate the need for the valuation allowance.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (Continued)
Effect of New Financial Accounting Standards
The Company does not offer any of the benefits covered under Statement of
Financial Accounting Standards No. 106, Employers' Accounting of Postretirement
Benefits Other Than Pensions, and as such the standard has had no impact on the
Company.
The Company has adopted Statement of Financial Accounting Standards No.
112, Employer's Accounting for Postemployment Benefits. Implementation of the
standard has not had a significant impact on the financial statements.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See the Corporation's Annual Report on Form 10-K for the fiscal year ended
January 31, 1994, at pages 50-51 and the Corporation's Quarterly Report on Form
10-Q for the quarter ended April 30, 1994, at page 16 for a description of
certain litigation.
See Note 12 to the Consolidated Financial Statements for a description of
current matters under litigation.
Item 4. Submission of Matter to a Vote of Security Holders
On October 22, 1994, Herbert H. Haft, who by proxy votes 172,713 (or 57%)
of the issued and outstanding shares of Class B Common Stock of the
Corporation, executed a written Consent of Majority Stockholder in lieu of a
special meeting of the holders of Class B Common Stock, adopting a resolution
to the effect that each member of the Executive Committee shall be entitled to
receive compensation from the Corporation at a rate of $275 per hour for his or
her time spent in connection with any and all activities of the Executive
Committee, plus disbursements including out-of-pocket costs incurred. The
consent of other holders of Class B Common Stock of the Corporation was not
solicited.
Item 5. Other Information
Shoppers Food Warehouse Corp.:
See Notes 1 and 6 to the Consolidated Financial Statements for a
description of events resulting in the Corporation's ownership of Shoppers Food
being reduced to 50% and the resulting change in the method of accounting for
the Corporation's ownership of Shoppers Food.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10(mmmmm) Consulting Agreement dated October 1, 1994 Pages 31-36
between RPF Inc. and Dart Group Corporation
relating to the appointment of Robert A. Marmon,
as Treasurer and Chief Financial Officer of Dart
Group and its subsidiaries (excluding Shoppers
Food Warehouse Corporation), Chief Financial
Officer of Crown Books Corporation and its
subsidiary corporations and Principal Financial
Officer of Trak Auto Corporation.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Corporation filed a Current Report on Form 8-K
on September 8, 1994 reporting the resignation of
Ron Marshall, the Corporation's Chief Financial Officer
and the establishment of the Executive Committee of
the Board of Directors of the Corporation.
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Item 6. Exhibits and Reports on Form 8-K (continued)
The Corporation filed a Current Report on Form 8-K on September
16, 1994 reporting Ronald S. Haft's request to exercise his
options to purchase Class B common Stock (the "Options"), his
subsequent lawsuit against the Corporation and a court ordered
Standstill Agreement.
The Corporation filed a Current Report on Form 8-K on September
26, 1994 reporting the federal district court jury verdict in
the Robert M. Haft employment litigation.
The Corporation filed a Current Report on Form 8-K on October
12, 1994 reporting the appointment of Robert A. Marmon as Chief
Financial Officer, the Executive Committee's filing an answer in
the lawsuit by Ronald S. Haft to enforce exercise of the
Options, the establishment of an Executive Committee for Crown
Books, Trak Auto and Total Beverage and the Executive
Committee's review of Herbert H. Haft's $18,000,000 advance from
the Corporation.
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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.
DART GROUP CORPORATION
Date December 15, 1994 By Herbert H. Haft
------------------------ ----------------------------------
HERBERT H. HAFT
Chairman of the Board
Date December 15, 1994 Robert A. Marmon
------------------------ ---------------------------------
ROBERT A. MARMON
Chief Financial Officer
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Exhibit Index
Exhibit No. Description
- ----------- -----------
EX-10(mmmmm) Consulting Agreement
EX-27 Financial Data Schedule