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, 1996
----------------
( ) 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
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DART GROUP CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 53-0242973
- ------------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 75th Avenue, Landover, Maryland, 20785
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(Address of principal executive offices)
(Zip Code)
(301) 731-1200
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(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 13, 1996, the registrant had 1,760,063 shares outstanding of Class
A Common Stock, $1.00 par value per share, and 327,270 shares outstanding of
Class B Common Stock, $1.00 par value per share. The Class B Stock is the only
voting stock and is not publicly traded.
Page 1 of 24 pages
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Certain consolidated financial statements included herein have been
prepared by Dart Group Corporation ("Dart"), 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 Dart
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 Dart's annual report on Form 10-K for the fiscal year ended January
31, 1996.
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DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
(Unaudited)
Three Months Nine Months
Ended October 31, Ended October 31,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
Sales $157,945 $155,662 $478,271 $457,820
Real estate revenue - 3,409 - 13,155
Other interest and other income 918 2,413 3,659 7,828
-------- -------- -------- --------
158,863 161,484 481,930 478,803
-------- -------- -------- --------
Expenses:
Cost of sales, store occupancy
and warehousing 125,345 121,726 375,956 357,546
Selling and administrative 36,494 37,302 105,802 103,729
Depreciation and amortization 3,386 3,873 10,316 11,926
Interest 1,257 3,115 5,593 11,141
Write-down value of Cabot Morgan
real estate - 14,562 - 14,562
Closed store reversal (1,052) (3,326) (1,052) (6,435)
Restructuring reversal (3,865) (1,231) (3,865) (1,797)
-------- -------- -------- --------
161,565 176,021 492,750 490,672
-------- -------- -------- --------
Loss before income taxes, equity
in affiliate and minority
interests (2,702) (14,537) (10,820) (11,869)
Income taxes (benefit) 252 1,028 (965) 3,278
-------- -------- -------- --------
Loss before equity in
affiliate and minority
interests (2,954) (15,565) (9,855) (15,147)
Equity in affiliate 1,894 709 7,018 4,314
Minority interests in (income)
loss of consolidated
subsidiaries and partnerships (104) (472) 908 (2,089)
-------- -------- -------- --------
Net loss $ (1,164) $(15,328) $ (1,929) $(12,922)
======== ======== ======== ========
Loss per common share and
common share equivalents:
Net loss $ (.66) $ (8.16) $ (1.33) $ (7.11)
======== ======== ======== ========
Weighted average common share and
common share equivalents
outstanding 2,086 1,889 2,075 1,889
======== ======== ======== ========
Dividends per share of Class
A Common Stock $ .033 $ .033 $ .099 $ .099
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
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DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS (Unaudited)
October 31, January 31,
1996 1996
----------- ----------
Current Assets:
Cash $ 12,796 $ 13,967
Short-term instruments 19,219 50,817
Marketable debt securities 8,335 22,544
Accounts receivable 12,823 8,965
Income taxes refundable 8,250 -
Merchandise inventories 249,257 205,615
Deferred income tax benefit 7,754 13,915
Other current assets 6,679 2,199
---------- ----------
Total Current Assets 325,113 318,022
---------- ----------
Property and Equipment, at cost:
Furniture, fixtures and equipment 100,499 91,311
Buildings and leasehold improvements 30,652 28,105
Land 1,034 1,034
Property under capital leases 24,472 24,472
---------- ----------
156,657 144,922
Accumulated Depreciation and Amortization 78,161 68,559
---------- ----------
78,496 76,363
---------- ----------
Other Assets 4,202 3,145
---------- ----------
Note Receivable - Ronald S. Haft - 11,621
---------- ----------
Share of Equity in Shoppers Food
Warehouse Corp. 48,415 46,397
---------- ----------
Retained interest in Cabot-Morgan Real
Estate Joint Venture - 2,000
---------- ----------
Excess of Purchase Price Over Net Assets
Acquired net of accumulated
amortization of $325,000
and $127,000, respectively 1,947 1,735
---------- ----------
Deferred Income Tax Benefit 12,729 11,282
---------- ----------
Total Assets $ 470,902 $ 470,565
========== ==========
The accompanying notes are an integral part of these balance sheets.
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DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
October 31, January 31,
1996 1996
------------ ------------
Current Liabilities:
Current portion of mortgages payable $ 1,083 $ 1,028
Accounts payable, trade 125,898 89,095
Income taxes payable 3,008 967
Accrued salaries and employee benefits 19,921 18,456
Accrued taxes other than income taxes 8,337 7,669
Accrued judgement in favor of
Robert M. Haft - 34,579
Current portion of reserve for closed
facilities and restructuring 5,462 6,970
Crown Books' credit facility 9,368 -
Other accrued liabilities 37,981 40,056
Current portion of obligations under
capital leases 101 101
------------ ------------
Total Current Liabilities 211,159 198,921
------------ ------------
Mortgages Payable 435 660
------------ ------------
Obligations Under Capital Leases 30,421 30,165
------------ ------------
Reserve for Closed Facilities and
Restructuring 28,710 36,816
------------ ------------
Minority Interests 66,913 69,427
------------ ------------
Stockholders' Equity
Class A common stock, non-voting,
par value $1.00 per share; 3,000,000
shares authorized; 1,962,303 and
1,949,223 shares issued, respectively 1,962 1,949
Class B common stock, voting par value
$1.00 per share; 500,000 shares
authorized and issued 500 500
Paid-in capital 78,833 77,879
Notes receivable-shareholder (65,130) (65,130)
Unrealized gains on short-term investments 71 246
Retained earnings 119,065 121,169
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DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
(Continued) October 31, January 31,
1996 1996
----------- ------------
Treasury Stock, 202,340 shares of Class
A common stock, at cost (1,749) (1,749)
Treasury Stock, 172,730 shares of Class
B common stock, at cost (288) (288)
----------- -------------
Total Stockholders' Equity 133,264 134,576
----------- -------------
Total Liabilities and Stockholders' Equity $ 470,902 $ 470,565
=========== =============
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
(dollars in thousands)
(Unaudited)
Nine Months
Ended October 31,
--------------------
1996 1995
--------- ---------
Cash Flows from Operating Activities:
Net loss $ (1,929) $ (12,922)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,316 8,814
Equity in affiliate (7,018) (4,271)
Provision (reversal) of closed stores and
restructuring charges (3,946) (6,852)
Write-down of Cabot Morgan real estate
joint ventures - 14,562
Change in assets and liabilities:
Accounts receivable (3,510) 2,869
Merchandise inventories (43,642) (31,568)
Income tax refundable (8,250) -
Other current assets (4,480) (2,298)
Deferred tax benefits 4,614 3,773
Other assets (958) 47
Accounts payable, trade 36,803 25,252
Income taxes payable 2,041 (5,540)
Accrued salaries and employee benefits 2,612 (1,047)
Accrued taxes other than income taxes 668 610
Payment to Robert M. Haft (35,726) -
Other accrued liabilities (1,689) (4,365)
Reserve for closed facilities (5,356) (6,517)
Minority interests (2,865) 3,652
--------- ---------
Net cash used for
operating activities $ (62,315) $ (15,801)
--------- ---------
Cash Flows from Securities and Capital
Investment Activities:
Capital expenditures $ (12,710) $ (12,013)
Proceeds from Shoppers Food dividends 5,000 5,000
Proceeds from sale of Cabot-Morgan
Real Estate joint ventures 2,000 -
Distributions from Cabot-Morgan Real
Estate joint ventures - 4,888
Decrease in cash and equivalents as a result
of deconsolidation of Cabot-Morgan Real
Estate joint ventures - (5,713)
Acquisition of treasury shares by subsidiary - (6,904)
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DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
(Unaudited)
Nine Months
Ended October 31,
--------------------
1996 1995
--------- ---------
Cash Flows from Securities and Capital
Investment Activities (continued):
Purchases of United States Treasury Bills (40,152) (27,819)
Sales of United States Treasury Bills 16,734 12,328
Maturities of United States Treasury Bills 27,098 22,810
Purchases of marketable debt securities - (3,199)
Sales of marketable debt securities 3,612 35,974
Maturities of marketable debt securities 6,494 5,850
--------- ---------
Net cash provided by
securities and capital
investment activities $ 8,076 $ 31,202
--------- ---------
Cash Flows from Financing Activities:
Cash dividends paid $ (175) $ (146)
Proceeds from Note Receivable - Ronald S. Haft 11,621 -
Net borrowing under credit facility 9,368 -
Proceeds from stock options exercised 956 197
Proceeds from option to acquire common stock - 985
Distributions to Ronald S. Haft - (49,547)
Principal payments under mortgage
obligations (225) (75)
Principal payments under capital
lease obligations (75) (345)
-------- ---------
Net cash provided by (used in)
financing activities $ 21,470 $(48,931)
-------- --------
Net Increase (Decrease) in Cash and Equivalents $(32,769) $(33,530)
Cash and Equivalents at Beginning of Year 64,784 102,374
-------- --------
Cash and Equivalents at End of Period $ 32,015 $ 68,844
======== ========
Supplemental Disclosures of Cash Flow on:
Cash paid during the period for:
Interest $ 3,282 $ 8,324
Income taxes 673 5,095
Reconciliation of Cash and Equivalents
to Balance Sheet Captions:
Cash $ 12,796 $ 14,268
Short-term investments 19,219 54,576
-------- --------
$ 32,015 $ 68,844
======== ========
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DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(1) General:
The accompanying consolidated financial statements reflect the
accounts of Dart Group Corporation ("Dart") 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"), Total Beverage Corporation ("Total Beverage") and Cabot-Morgan Real
Estate Company ("CMREC"). Dart's investment in Shoppers Food Warehouse Corp.
("Shoppers Food") is reflected in the financial statements using the equity
method of accounting. The accounts of CMREC's real estate joint ventures were
consolidated with Dart's financial statements through October 5, 1995, but not
thereafter, as a result of a settlement of certain litigation between Dart and
Ronald S. Haft (the "RSH Settlement"). Dart, Trak Auto, Crown Books, Total
Beverage and CMREC and Dart'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,
1996 and 1995 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, 1996 and 1995 and the results of operations and cash
flows for the periods indicated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Accordingly, actual results could differ
from those estimates.
The results of operations for the three months ended October 31, 1996
are not necessarily indicative of the results to be achieved for the full
fiscal year.
(2) Earnings Per Common Share and Common Share Equivalents:
Earnings per share is based on the weighted average number of Dart's
Class A and Class B common stock and common stock equivalents (certain stock
options) outstanding during the period. In reporting earnings per share,
Dart's interest in the earnings of its majority-owned subsidiaries is adjusted
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DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
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, 1996, the Company's short-term instruments included
money market funds and United States Treasury Bills held by Crown Books and
Trak Auto. The Company considers short-term instruments, consisting of United
States Treasury Bills, purchased with a maturity of less than one year to be
cash equivalents. The Company's United States Treasury Bills primarily consist
of instruments with a maturity of less than four months. Marketable debt
securities include United States Treasury Notes, corporate notes, municipal
securities, United States Agency Securities Acceptances and United States
Treasury Bills held by Dart.
Management determines the appropriate classification of its
investments in debt securities at the time of purchase and reevaluates such
determination at each balance sheet date. Debt securities for which the
Company does not have the intent or ability to hold to maturity are classified
as available for sale. Securities available for sale are carried at fair
value, with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. At October 31, 1996, market value of
short-term instruments and marketable debt securities was $71,000 greater than
cost (adjusted for income taxes). At October 31, 1996, the Company had no
investments that qualified as trading or held to maturity.
The amortized cost of debt securities classified as available for sale
is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization and interest are included in interest income.
Realized gains and losses are included in other income or expense. The cost of
securities sold is based on the specific identification method.
Included in short-term instruments and marketable debt securities were
$12,853,000 and $46,091,000 held by majority-owned subsidiaries at October 31,
1996 and January 31, 1996, respectively.
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DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
4) Interim Inventory Estimates:
Trak Auto inventories are priced at the lower of last-in, first-out
("LIFO") cost or market. At October 31, 1996 and January 31, 1996, Trak Auto
inventories determined on a lower of first-in, first-out ("FIFO") cost or
market basis would have been greater by $6,657,000 and $6,579,000,
respectively. Crown Books' and Total Beverage's inventories are priced at the
lower of FIFO cost or market.
Trak Auto and Total Beverage take a physical count of their store and
warehouse inventories semi-annually. Crown Books takes a physical count of its
inventories annually. Physical inventories were not taken for the quarter
ended October 31, 1995. The Company uses a gross profit method combined with
available perpetual inventory information to determine Trak Auto's, Crown
Books', and Total Beverage's inventories for quarters when complete physical
counts are not taken.
(5) Credit Agreements:
On December 11, 1996, Trak Auto's Board of Directors approved a
resolution authorizing Trak Auto to enter into revolving credit facility under
which Trak Auto could borrow up to $25.0 million.
On September 12, 1996, Crown Books entered into a $50 million
revolving credit facility with a finance company. Crown Books intends to use
proceeds from draw-downs under the credit facility for working capital and
other corporate purposes. Loans under the credit facility bear interest at a
rate equal to the prime rate (as defined in the agreement) or, at the option of
Crown Books, at LIBOR plus 2.25% (the effective interest rate was 8.25%
at November 2, 1996). Borrowings under the credit facility are secured by
inventory, accounts receivable and proceeds from the sale of such assets of
Crown Books. The credit facility contains certain restrictive covenants,
including a limitation on incurrence of additional indebtedness. There are
additional covenants related to tangible net worth if the Company's borrowing
exceeds $25 million under the facility. In addition, loans under the credit
facility are subject to limitations based upon inventory levels, as
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DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
defined in the agreement. Crown Books may terminate the credit facility upon
60-days prior written notice to the lender and the lender may terminate it as
of September 12, 1999 or any time thereafter upon 60-days prior written notice
to Crown Books. During the quarter ended November 2, 1996, Crown Books started
borrowing under the credit facility. The maximum borrowing outstanding at any
one time during the thirteen weeks ended November 2, 1996 was $9,368,000 and
the balance outstanding at November 2, 1996 was $9,368,000.
(6) Minority Interests:
The $66,913,000 of minority interests reflected in the Consolidated
Balance Sheet as of October 31, 1996 represents the minority portion of Trak
Auto and Crown Books equity owned by the public shareholders of Trak Auto and
Crown Books. The minority interest reflected in the Consolidated Balance Sheet
as of October 31, 1995, also included the portion of real estate joint ventures
equity owned by Haft family partnerships (CMREC owned the majority interest in
these partnerships). No such minority interest for CMREC are included as of
January 31, 1996 or October 31, 1996. The accounts of CMREC's real estate
joint ventures were consolidated with Dart's financial statements through
October 5, 1995, but not thereafter, as a result of the RSH Settlement. Income
attributed to the minority shareholders of Trak Auto was $658,000 and
$1,986,000 for the nine months ended October 31, 1996 and 1995, respectively,
and $51,000 and $696,000 for the three months ended October 31, 1996 and 1995,
respectively. Income (loss) attributed to the minority shareholders of Crown
Books was $(1,566,000) and $(391,000) for the nine months ended October 31,
1996 and 1995, respectively and $53,000 and $(326,000) for the three months
ended October 31, 1996 and 1995, respectively. Income attributed to the
minority ownership of the real estate partnerships was $494,000 and $102,000
for the nine months and three months ended October 31, 1995, respectively.
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DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(7) Shoppers Food Warehouse Corp.:
The following information reflects the results of Shoppers Food for
the nine months and three months ended October 31, 1996 and 1995.
Three months ended Nine months ended
October 31, 1996 October 31, 1996
--------------------- -------------------
Revenue $208,285,000 $633,920,000
Gross Profit 35,803,000 115,160,000
Net Income 4,352,000 15,726,000
October 31, 1995 October 31, 1995
---------------------- --------------------
Revenue $206,257,000 $608,235,000
Gross Profit 33,170,000 101,737,000
Net Income 1,626,000 9,953,000
(8) Sale of CMREC Joint Ventures:
During the three months ended July 31, 1996, five properties owned by
the CMREC real estate joint ventures were sold pursuant to the terms of the RSH
Settlement. As a result of the sale and pursuant to the terms of the RSH
Settlement, Dart received $2.0 million of the proceeds for its retained
interest in the joint ventures and Ronald S. Haft repaid a $11.6 million note
to Dart plus accrued interest. In addition, approximately $32.6 million of
CMREC's share of the net proceeds from the sale of the properties are held in
escrow and will be payable to Ronald S. Haft if certain transactions
contemplated by the RSH Settlement are effected.
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DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1996 AND 1995
(9) Payment to Robert M. Haft:
On August 21, 1996, Dart and Crown Books paid approximately
$20,977,000 and $16,895,000 (including interest of approximately $3,290,000),
respectively, to Robert M. Haft for satisfaction of a judgment awarded to him
in March 1995 (the "RMH Judgment"). The Company accrued approximately
$32,199,000 of the RMH Judgment in fiscal 1995 and accrued interest monthly at
rates set forth in the RMH Judgment. Pursuant to the RMH Judgment, Crown Books
paid $2,146,000 to Robert M. Haft for 100,000 shares of Crown Books common
stock. Crown Books recorded these shares as treasury shares.
(10) Closed Store and Restructuring Reserves:
During the thirteen weeks ended November 2, 1996, Crown Books reversed
approximately $3,865,000 of its restructuring reserve and approximately
$1,052,000 of its closed store reserve. The reversals resulted from (i)
stores that were closed under negotiated lease settlements that were more
favorable than expected and (ii) the postponement of certain store closing
dates. The remaining closed store and restructuring reserve relates to 93
stores with lease obligations primarily through the next three fiscal years.
Since the recorded closed store reserve represents an estimate based
upon anticipated store closing dates and the book value of the leasehold
improvements at the time a store is closed, the actual amount of costs
associated with store closing is subject to change in the future and may be
different from the reserve. The Company will continue to evaluate the
performance and future viability of its remaining stores and may close
additional stores in the future.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Outlook
Except for historical information, statements in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking. Actual results may differ materially due to a variety of
factors, including the results of ongoing litigation affecting the Company, the
Company's ability to open new stores and close other stores, the effect of
national and regional economic conditions, and the availability of capital to
fund operations. The Company undertakes no obligation and does not intend to
update, revise or otherwise publicly release the result of any revisions to
these forward-looking statements that may be made to reflect future events or
circumstances.
The litigation involving the Haft family members could pose a threat
to Dart's liquidity. See "Liquidity and Capital Resources" below.
On December 16, 1996, Dart submitted offers, pursuant to the
Stockholders' Agreement governing Dart's investment in Shoppers Food, to either
(i) sell all of Dart's equity interest in Shoppers Food or (ii) buy the other
50% equity interest in Shoppers Food, in either case for a cash price of $210
million. There can be no assurance as to which of these offers will be
accepted. Furthermore, if Dart sells its 50% equity interest, any use of the
proceeds from such sale may require further order of the Delaware Court of
Chancery under a Standstill Order and may be opposed by parties to the
litigation pending before the court. If Dart purchases the other 50% equity
interest in Shoppers Food, Dart expects to raise necesssary financing and,
subject to any court limitations, may thereafter sell all or part of the
interst in Shoppers Food but there can be no assurance as to whether or not, or
at what price, any such sale would occur.
Trak Auto and Crown Books believe that their superstore concepts
present significant growth opportunities and intend to open new superstores in
existing and possibly new markets. In the past, superstores have generated
higher sales at converted locations as well as higher gross margins as a result
of a change in product mix. In addition, Trak Auto may from time to time
expand its retail operations through acquisitions of existing stores from third
parties in existing or new markets.
Trak Auto, Crown Books and Total Beverage intend to continue their
practice of reviewing the profitability trends and prospects of existing
stores. These companies may from time to time close, relocate or sell stores
(or groups of stores) that are not satisfying certain performance objectives.
Crown Books closed 22 Classic Crown Books stores and one Super Crown Books
store during the nine months ended October 31, 1996 and currently anticipates
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
closing approximately 13 additional Classic Crown Books stores and one Super
Crown Books store during the remainder of fiscal 1997.
Liquidity and Capital Resources
Cash, including short-term instruments and U.S. government and other
securities, is the Company's primary source of liquidity. Cash, including
short-term instruments and U.S. government and other marketable debt securities
decreased by $46,978,000 to $40,350,000 at October 31, 1996 from $87,328,000 at
January 31, 1996. This decrease was primarily due to the payment of the RMH
Judgment, funding loss operations at Dart and Crown Books and to capital
expenditures for Trak Auto and Crown Books. The decrease was partially offset
by funds received from Ronald S. Haft as a result of the sale of CMREC joint
ventures.
For the quarter ended October 31, 1996, the Company realized a pre-tax
yield of approximately 5.2% on United States Treasury Bills and approximately
6.3% on the marketable debt securities.
Operating activities used $62,315,000 of the Company's funds for the
nine months ended October 31, 1996 compared to $15,801,000 for the same period
one year ago. The primary use of cash for the nine months ended October 31,
1996 was for payment of the RMH Judgment, Crown Books merchandise inventory
purchases and for funding loss operations at Dart and Crown Books.
Investing activities provided $8,076,000 to the Company for the nine
months ended October 31, 1996, compared to providing $31,202,000 to the Company
for the same period last year. The net disposition of United States Treasury
Bills and disposition of marketable debt securities provided cash in the
current year and was partially offset by capital expenditures
Financing activities provided $21,470,000 to the Company during the nine
months ended October 31, 1996 primarily as a result of the repayment of the
Ronald S. Haft note receivable and Crown Books' borrowing under its credit
agreement. Financing activities used $48,931,000 of the Company's funds during
the nine months ended October 31, 1995 primarily due to distributions to Ronald
S. Haft.
Historically, Dart and each of its subsidiaries generally funded their
respective requirements for working capital and capital expenditures with net
cash generated from operations and existing cash resources. However, the
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (Continued)
Company's cash, including marketable debt securities, decreased by
approximately $47.0 million in the first nine months of fiscal 1997 and $104.4
million in fiscal 1996.
In May 1996, the five properties owned by the CMREC real estate joint
ventures were sold pursuant to the terms of the RSH Settlement. Accordingly,
Dart received $2.0 million for its remaining interest in the joint ventures and
$11.6 million for repayment of Ronald S. Haft's loan from Dart. During the
three months ended October 31, 1996, Dart received a $5.0 million dividend from
Shoppers Food. These funds and existing cash resources will be sufficient to
fund Dart's remaining working capital needs in fiscal 1997.
If Dart does not obtain other sources of funds, then it may need
additional cash in fiscal 1998 to fund its working capital needs, which
primarily consist of funding any operating losses of Total Beverage, payroll
and legal fees. While Dart has considered various potential transactions to
generate additional funds, including the liquidation of its interest in
Shoppers Food, Dart presently has no definitive financing plans and there can
be no assurance that Dart will obtain sufficient working capital for fiscal
1998. Any financing transaction or other extraordinary transaction that would
generate cash may require further order of the Delaware Court of Chancery under
the Standstill Order and may be opposed by Herbert H. Haft or certain other
parties to the litigation pending before the court.
The primary capital requirements of Crown Books relate to new store
openings and investments in management information systems. Crown Books
believes that the costs incurred in opening a new store generally approximate
$1.1 million, including purchases of inventory and the costs of store fixtures
and leasehold improvements. During fiscal 1997, Crown Books expects to open
approximately 29 Super Crown Books stores and that capital expenditures would
approximate $8.5 million. As of December 7, 1996, Crown Books had opened 29
Super Crown Books stores including two expansions. In addition, Crown Books
had entered into lease agreements to open seven new Super Crown Books stores,
primarily in fiscal 1998. In fiscal 1997, Crown Books expects to make cash
expenditures of approximately $3.2 million related to actual and planned store
closings. Crown Books expects to meet its working capital and capital
expenditures with cash provided by operations and borrowing under its credit
agreement.
Trak Auto funds its requirements for working capital and capital
expenditures with net cash generated from operations and existing cash
resources. Trak Auto's primary capital requirements relate to remodelings, new
store openings (including purchases of inventory and the costs of store
17
18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (Continued)
fixtures and leasehold improvements), and acquisitions. As of November 2,
1996, Trak Auto had entered into lease agreements to open 13 new stores.
Total Beverage is considering locations for new stores and, to the
extent sufficient capital becomes available, may open one or more new stores in
fiscal 1997.
Results of Operations
Trak Auto
During the thirty-nine weeks ended November 2, 1996, Trak Auto opened 11
new Super Trak or Super Trak Warehouse stores and closed or converted four
Super Trak stores and eight classic Trak stores. At November 2, 1996, Trak
Auto had 275 stores, including 116 Super Trak stores and 34 Super Trak
Warehouse stores.
Sales of $265,397,000 during the thirty-nine weeks ended November 2,
1996 increased by $11,153,000 or 4.4% over the thirty-nine weeks ended October
28, 1995. Sales of $87,953,000 during the thirteen weeks ended November 2, 1996
decreased $273,000 or 0.3% compared to the same period one year ago. The sales
increase for the thirty-nine week period was primarily due to Trak Auto's
continuing conversion to Super Trak and Super Trak Warehouse stores and to the
entry into the Pittsburgh market in January 1996. The decrease for the
thirteen weeks was primarily due to increased competition, particularly in the
Los Angeles market. Comparable sales (stores open more than one year) remained
unchanged for the thirty-nine weeks and decreased 5.1% for the thirteen weeks
ended November 2, 1996, respectively. Sales for comparable Super Trak and Super
Trak Warehouse stores increased 1.0% for the thirty-nine weeks ended November
2, 1996 and decreased 4.3% during the thirteen weeks ended November 2, 1996.
Sales for comparable classic Trak stores decreased .4% and 6.2% for the
thirty-nine and thirteen weeks ended November 2, 1996, respectively. Sales for
Super Trak and Super Trak Warehouse stores represented 58.3% and 60.0% of total
sales during the thirty-nine and thirteen weeks ended November 2, 1996 compared
to 55.3% and 57.5% for the thirty-nine and thirteen weeks ended October 28,
1995, respectively.
Interest and other income decreased by $421,000 and $30,000 for the
thirty-nine and thirteen weeks ended November 2, 1996, respectively, when
compared to the prior year, largely due to reduced interest income as a result
of a decrease in funds available for short-term investment.
Cost of sales, store occupancy and warehousing expenses as a percentage
18
19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (Continued)
of sales were 75.7% and 76.5% for the thirty-nine and thirteen weeks ended
November 2, 1996, respectively, compared to 74.1% and 74.2% for the same
periods in the prior year. The increases were primarily due to increased store
occupancy costs and to a decrease in store margins largely as a result of grand
openings in the Pittsburgh market.
Selling and administrative expenses were 20.7% and 21.0% as a percentage
of sales for the thirty-nine and thirteen weeks ended November 2, 1996,
respectively, compared to 20.1% and 19.8% for the thirty-nine and thirteen
weeks ended October 28, 1995. The increases were due primarily to increased
payroll costs.
Depreciation and amortization expenses increased $1,382,000 and $262,000
for the thirty-nine and thirteen weeks ended November 2, 1996, respectively,
compared to the same periods one year ago. The increases were due to increases
in store fixed assets as a result of conversion to the Super Trak and Super
Trak Warehouse stores and the opening of new stores in Pennsylvania.
The effective income tax rate was 31.3% for the thirty-nine weeks ended
November 2, 1996 compared to 37.1% for the thirty-nine weeks ended October 28,
1995. The decrease in the effective rate was primarily due to reduced taxable
income as a result of certain permanent book/tax differences relating to the
net operating loss at a former subsidiary.
Crown Books
During the thirty-nine weeks ended November 2, 1996, Crown Books opened
15 Super Crown Books stores and closed 22 classic Crown Books stores and one
Super Crown Books store. At November 2, 1996, Crown Books had 164 stores,
including 98 Super Crown Books stores. Subsequent to November 2, 1996, Crown
Books opened an additional 14 Super Crown Books stores including two expansions.
Sales of $192,306,000 for the thirty-nine weeks ended November 2, 1996
increased by $7,145,000 or 3.9% compared to the thirty-nine weeks ended October
28, 1995 while sales of $63,281,000 for the thirteen weeks ended November 2,
1996 increased by $3,031,000 or 5.0% compared to the thirteen weeks ended
October 28, 1995. Comparable sales (sales for stores open more than thirteen
months) decreased 1.8% during the thirteen weeks ended November 2, 1996 and
remained unchanged during the thirty-nine weeks ended November 2, 1996.
Comparable Super Crown Books stores decreased 1.6% for the thirteen weeks ended
November 2, 1996 and remained constant for the thirty-nine week period ended
November 2, 1996 compared to the same period in the prior year. Comparable
sales for the new superstore prototype increased 12.0% and 7.0% for the
thirty-nine and thirteen weeks ended November 2, 1996. Crown Books'
superstores consist of the original superstores of 6,000 to 10,000 square feet
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20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (Continued)
and the new superstore prototype targeted to occupy 15,000 square feet.
Interest and other income decreased by $1,277,000 and $695,000 during
the thirty-nine and thirteen weeks ended November 2, 1996 when compared to the
same periods one year ago. The decreases were due to reduced interest income
as a result of decreased funds available for short-term investment.
Cost of sales, store occupancy and warehousing as a percentage of sales
were 82.4% and 83.1% for the thirty-nine and thirteen weeks ended November 2,
1996, respectively, compared to 83.3% and 83.7% for the same periods one year
ago. The decreases were due to increased store margins as a result of
improvements in shrink control and merchandising and was partially offset by an
increase in store occupancy costs.
Selling and administrative expenses as a percentage of sales were 20.6%
and 21.5% for the thirty-nine and thirteen weeks ended November 2, 1996
compared to 19.0% and 20.1% for the same periods one year ago. The increases
were due primarily to increased store and administrative payroll costs and were
partially offset by decreased advertising costs.
Depreciation and amortization expense increased $184,000 for the
thirty-nine weeks ended November 2, 1996 compared to the same period one year
ago primarily due to an increase in store fixed assets as a result of new Super
Crown openings.
Interest expense was $892,000 during the thirty-nine weeks ended November
2, 1996 primarily due to interest for the RMH Judgment and, to a lesser degree,
due to interest on borrowings under Crown Books' credit facility.
During the thirteen weeks ended November 2, 1996, Crown Books reversed
approximately $3,865,000 of its restructuring reserve and approximately
$1,052,000 of its closed store reserve. The reversals resulted from (i) stores
that were closed under negotiated lease settlements that were more favorable
than expected and (ii) the postponement of certain store closing dates. The
remaining closed store and restructuring reserve relates to 93 stores with
lease obligations primarily through the next three fiscal years.
Since the recorded closed store reserve represents an estimate based
upon anticipated store closing dates and the book value of the leasehold
improvements at the time a store is closed, the actual amount of costs
associated to store closing is subject to change in the future and may be
different from the reserve. The Company will continue to evaluate the
20
21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (Continued)
performance and future viability of its remaining stores and may close
additional stores in the future.
Crown Books recorded a tax benefit on its net operating loss for the
thirty-nine weeks ended November 2, 1996 of $1,880,000. Crown Books has
incurred a $24,611,000 tax net operating loss for the thirty-nine weeks ended
November 2, 1996. Approximately $14,750,000 of the net operating loss can be
carried back to prior years when Crown Books paid income taxes. As a result,
Crown Books reclassified approximately $5.0 million of deferred income taxes to
current tax receivable. The remaining portion of the net operating loss will
be carried forward to offset future taxable earnings. The net operating loss
carryforward will expire in fiscal 2012. In addition, Crown Books has an
alternative minimum tax credit carryforward of approximately $500,000.
Total Beverage
During the nine months ended October 31, 1996, Total Beverage closed one
store due to disappointing sales volume. At November 2, 1996, Total Beverage
had three stores.
Total Beverage sales were $20,568,000 and $6,711,000 during the
thirty-nine and thirteen weeks ended November 2, 1996 compared to $18,415,000
and $7,186,000 for the thirty-nine and thirteen weeks ended October 28, 1995.
Sales for comparable stores decreased 5.6% and 1.8% during the thirty-nine and
thirteen week periods, respectively.
Cost of sales and store occupancy as a percentage of sales was 81.6%
during both the thirty-nine and thirteen weeks ended November 2, 1996,
respectively, compared to 81.3% and 81.2% for the same periods one year ago.
Selling and administrative expenses as a percentage of sales were 23.0%
and 21.8% during the thirty-nine and thirteen weeks ended November 2, 1996,
respectively, compared to 23.7% and 23.8% for the thirty-nine and thirteen
weeks ended October 18, 1995.
Total Beverage recorded operating losses of $1,154,000 and $283,000
during the thirty-nine and thirteen weeks ended November 2, 1996, respectively,
compared to operating losses of $1,110,000 and $428,000 during the thirty-nine
and thirteen weeks ended October 28, 1995. The net operating loss for the
thirty-nine weeks and thirteen weeks ended November 2, 1996, respectively,
included approximately $632,000 and $20,000 paid to outside consultants who
have been retained to assist in the development and implementation of a
strategic business plan.
21
22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, (Continued)
Dart Group and Other Corporate
Interest and other income decreased $2,836,000 during the nine months
ended October 31, 1996 when compared to the same period in the prior year. The
decrease was primarily due to reduced funds available for short-term investment
as a result of funds disbursed pursuant to the RSH Settlement.
Administrative expenses decreased $2,990,000 during the quarter ended
October 31, 1996, primarily due to expenses associated with the RSH Settlement
last year.
Interest expense was $892,000 during the quarter ended October 31, 1996
primarily due to interest on the RMH Judgment.
Trak Auto, Crown Books and Shoppers Food file separate income tax
returns. CMREC and Total Beverage are included in Dart's income tax returns.
Dart's current net operating loss was not tax benefitted as a result of the
complete utilization of all available carrybacks.
As a result of Dart's operating loss for the nine months ended October
31, 1996, a net tax operating loss carryforward of $29,621,000 was created.
Dart's cumulative total net tax operating loss carryforward is $74,096,000.
All net operating loss carryforwards will expire by fiscal 2012. In addition,
Dart has an Alternative Minimum Tax credit carryforward of approximately
$1,010,000. Dart has a deferred tax valuation allowance of $32,099,000 as of
October 31, 1996. Management continues to evaluate the adequacy of this
valuation allowance.
Effect of New Financial Accounting Standard
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, Accounting for Long Lived Assets and Long-Lived Assets to be Disposed
of. Adoption of the standard has not had a material impact on the Company's
consolidated financial statements.
The Company adopted SFAS No. 123, Accounting for Stock Based
Compensation. The Company expects to disclose the fair value of options
granted in a footnote to its annual consolidated statements.
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23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Material legal proceedings pending against Dart or its subsidiaries are
described in Dart's Annual Report on Form 10-K for the year ended January 31,
1996 (the "Annual Report"). Except as disclosed in Dart's Quarterly Report on
Form 10-Q for the quarter ended July 31, 1996, there have been no material
developments in any legal proceeding reported in the Annual Report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Document
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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 16, 1996 By Herbert H. Haft
-------------------- ------------------------------
HERBERT H. HAFT
Chief Executive Officer
Date December 16, 1996 Mark A. Flint
-------------------- ------------------------------
MARK A. FLINT
Senior Vice President and
Chief Financial Officer
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