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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] for the fiscal year ended January 31, 1997
----------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
to
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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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3300 75th Avenue, Landover, Maryland 20785
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 731-1200
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, Par Value $1.00 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x . No .
---- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
At May 1, 1997, the registrant had 1,761,640 shares of Class A Common Stock
outstanding, and the aggregate market value of such shares held by
non-affiliates of the registrant was approximately $119,485,000. The Class B
Common Stock, of which there are 327,270 shares outstanding, is the only
voting stock and is not publicly traded.
All of the Registrant's voting stock, Class B Common Stock, is held by
affiliates.
The exhibit index begins at page 162 of this Form 10-K.
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Table of Contents
PART I
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Item 1. Business..................................................... 3
Item 2. Properties................................................... 18
Item 3. Legal Proceedings............................................ 22
Item 4. Submission of Matters to a Vote of
Security Holders........................................... 31
PART II
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Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters................................ 32
Item 6. Selected Financial Data...................................... 33
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................. 35
Item 8. Financial Statements and Supplementary Data.................. 51
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 109
PART III
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Item 10. Directors and Executive Officers of the
Registrant................................................. 110
Item 11. Executive Compensation....................................... 114
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 124
Item 13. Certain Relationships and Related Transactions............... 128
PART IV
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Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................... 130
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PART I
Forward-looking Statements
Statements in this report that are not historical in nature, including
references to beliefs, anticipations or expectations, are forward-looking. Such
statements are subject to a wide variety of risks and uncertainties that could
cause actual results to differ materially from those projected, including the
results of ongoing litigation affecting the Company (defined below), the
Company's ability to open new stores and close other stores, the effect of
national and regional economic conditions, the availability of capital to fund
operations and other risks described from time to time in the Company's filings
with the Securities and Exchange Commission. The Company undertakes no
obligation and does not intend to update, revise or otherwise publicly release
the results of any revisions to these forward-looking statements, which
revisions may be made to reflect any future events or circumstances, other than
through its regular quarterly and annual financial statements, and through the
accompanying discussion and analysis contained in the Company's Quarterly
Reports on Form 10-Q and Annual Report on Form 10-K.
Item 1. Business
Dart Group Corporation ("Dart") was incorporated in Delaware in 1960 and
operates retail discount auto parts stores through Trak Auto Corporation ("Trak
Auto"), retail discount book stores through Crown Books Corporation ("Crown
Books"), retail discount beverage stores through Total Beverage Corporation
("Total Beverage"), a retail discount grocery business through Shoppers Food
Warehouse Corp. ("Shoppers Food")and, until May 1996, a real estate company
through Cabot-Morgan Real Estate Company ("CMREC"). Dart, Trak Auto, Crown
Books, Total Beverage, Shoppers Food, 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". Dart owns 67.1% of
the outstanding common stock of Trak Auto, 52.3% of the outstanding common
stock of Crown Books, 100% of the common stock of Total Beverage and 100% of
the outstanding common stock of CMREC. Since fiscal 1989, Dart has owned at
least 50% of the outstanding common stock of Shoppers Food. On February 6,
1997, Dart acquired the remaining shares of Shoppers Food's outstanding common
stock. The common stocks of Trak Auto and Crown Books are quoted on The Nasdaq
National Market ("Nasdaq") under the symbols TRKA and CRWN, respectively.
On January 31, 1997, there were 286 Trak Auto, 168 Crown Books, 34 Shoppers
Food and three Total Beverage stores.
Trak Auto Operations
Operations
Trak Auto operates retail discount auto parts stores in the metropolitan areas
of Washington, D.C.; Richmond, Virginia; Chicago, Illinois; Los Angeles,
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Item 1. Business (Continued)
California; Pittsburgh, Pennsylvania and Milwaukee, Wisconsin. In addition,
Trak Auto has begun opening stores in central Pennsylvania.
Trak Auto is engaged in the retail sale of a wide range of automobile parts and
accessories for the do-it-yourself market. Trak Auto's products include "hard
parts" (such as alternators, starters, shock absorbers, fan belts, spark plugs,
mufflers, thermostats, and wheel bearings), as well as motor oil, oil filters,
headlights, batteries, waxes, polishes, anti-freeze and windshield wipers. A
typical "Classic Trak" store carries 10,000 different item numbers or SKU's.
Trak Auto does not sell tires and does not provide automotive service or
installation.
Super Trak operates retail auto parts stores that offer more services and
merchandise than the "Classic Trak" stores described above. Super Trak stores
carry approximately 5,000 more SKU's, concentrated primarily in application
parts categories. Additionally, Super Trak stores feature special order
services that permit customers to access virtually any automotive part,
including engines. The stores also offer extensive technical assistance through
computerized parts look-up, instruction for repairs, free use of specialized
tools, and factory trained parts personnel.
During the year ended January 28, 1995, Trak Auto expanded its Super Trak
concept to include Super Trak Warehouse stores. These stores are typically
between 13,000 and 25,000 square feet and carry approximately 30,000 SKU's. The
added SKU's are composed of additional application parts.
Trak Auto has successfully opened or converted 122 Super Traks and 44 Super
Trak Warehouse stores. Trak Auto plans to continue to convert Classic Trak
stores into Super Trak and Super Trak Warehouse stores and to open new stores
as opportunities present themselves in Trak Auto's six metropolitan markets as
well as new markets.
Trak Auto generally purchases merchandise directly from a large number of
manufacturers and suppliers. Trak Auto's distribution system is computerized
utilizing an automated replenishment and perpetual inventory system to generate
shipments of product from distribution centers in Landover, Maryland;
Bridgeview, Illinois and Ontario, California. The required items are generally
assembled and packaged for delivery in the order in which they will be unpacked
and displayed on the shelves at the retail stores, promoting store efficiency.
Inventories are monitored both at the stores and in the distribution centers to
determine purchase requirements. Trak Auto has a computerized point of sale
("POS") register system in every store. Trak Auto uses scanners to identify
most merchandise at the register and uses a price look-up function to price the
sale. Most merchandise is pre-labeled with bar codes provided by the
manufacturers.
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Item 1. Business (Continued)
Trak Auto's merchandising philosophy is to develop strong consumer recognition
and acceptance of its name by use of mass-media advertising to promote a broad
selection of products at low prices. Trak Auto emphasizes quality customer
service through knowledgeable personnel and advanced technology such as
electronic parts look-up, POS and computerized do-it-yourself aids in all
stores.
Classic Trak stores range in size from approximately 5,000 to 6,000 square
feet, Super Trak stores range in size from 6,000 to 11,000 square feet, and
Super Trak Warehouse stores range in size from approximately 13,000 to 25,000
square feet. Trak Auto's stores use modern fixtures and equipment and the
interiors have been standardized, so that the interiors of new stores can be
assembled quickly. The stores are open seven days a week. No store contributed
more than 1.0% to Trak Auto's consolidated sales during the year ended February
1, 1997.
The following table sets forth by metropolitan area the locations of Trak
Auto's stores for each of the last five fiscal years.
Number of Stores
at end of fiscal year
----------------------------
Metropolitan Area 1993 1994 1995 1996 1997
- ----------------- ---- ---- ---- ---- ----
Chicago, Illinois 99 97 86 79 82
Los Angeles, California 119 116 104 96 93
Pittsburgh, Pennsylvania - - - 14 16
Central Pennsylvania - - - - 2
Richmond, Virginia 15 15 11 10 9
Milwaukee, Wisconsin - - - - 7
Washington, D.C. 84 86 81 77 77
---- ---- ---- ---- ----
Total 317 314 282 276 286
The following tables set forth the number of stores of each of Classic Trak,
Super Trak, and Super Trak Warehouse that were opened, closed or remodeled
during each of the last five fiscal years, as well as the total number of such
stores as of the end of each such fiscal year.
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Item 1. Business (Continued)
Super Trak Stores 1993 1994 1995 1996 1997
- ----------------- ---- ---- ---- ---- ----
Opened during the year 12 62 34 17 14
Closed or converted to Super Trak Warehouse
during the year - 1 1 10 5
Super Trak Warehouse Stores
- ---------------------------
Opened during the year - - 7 23 14
Classic Trak Stores
- -------------------
Opened during the year 6 1 - - -
Closed or converted to Super Trak or Super
Trak Warehouse during the year 34 65 72 36 13
Total Open at End of Year
- -------------------------
Super Trak Stores 12 73 106 113 122
Super Trak Warehouse Stores - - 7 30 44
Classic Trak Stores 305 241 169 133 120
During the fourth quarter of fiscal 1996, Trak Auto acquired the assets of 14
stores in Pittsburgh, PA, for approximately $6.2 million. This acquisition
places Trak Auto with the largest market share in a viable new market. The
stores were remodeled and converted to the Trak Auto concept during the year
ended February 1, 1997. Additional sites are currently being negotiated with
the intention of growing this new market to greater than 20 stores over the
next two years.
Trak Auto believes that its superstore concept presents significant growth
opportunities and intends to open new Super Trak and Super Trak Warehouse
stores in existing and possibly new markets. As of February 1, 1997, Trak Auto
had entered into lease agreements to open seven new stores.
Trak Auto intends to continue its practice of reviewing the profitability
trends and prospects of existing stores. Trak Auto may from time to time close,
relocate or sell stores (or groups of stores) that are not satisfying certain
performance objectives.
Store Closings and Restructuring Costs
Trak Auto continually evaluates its store operations and the need to close,
relocate, or expand stores or convert existing Classic Trak stores into Super
Trak or Super Trak Warehouse stores. Trak Auto recognizes store closing costs
when management decides to close a store. In prior years, Trak Auto has also
recognized the anticipated costs for closing, relocating, expanding and
converting existing stores to the Super Trak and Super Trak Warehouse concept.
The costs associated with store closings and restructuring efforts are
primarily unrecoverable lease obligations (rent, real estate taxes and common
area charges, net of estimated sublease income) and the book value of leasehold
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Item 1. Business (Continued)
improvements as of the actual or estimated store closing date.
As of February 1, 1997, Trak Auto had reserves of $2,644,000 for store closings
and restructuring. The restructuring reserve relates to 15 stores that have
been closed or converted into Super Trak or Super Trak Warehouse stores and an
additional nine stores identified to be closed or converted but which have
remained open. The closed store reserve relates to 16 Classic Trak and Super
Trak stores that were closed apart from Trak Auto's restructuring efforts. The
activity in the closed store and restructuring reserves during the last two
years are as follows:
(dollars in thousands)
1997 1996
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Reserves, beginning of year $ 4,491 $ 6,945
Less: Net provision recorded/(charges) (1,847) (2,454)
-------- --------
Reserves, end of year $ 2,644 $ 4,491
======== ========
Included in the activity for fiscal 1997 is an increase of the closed store and
restructuring reserves of approximately $402,000 and included in the activity
for fiscal 1996 is an increase in the reserves of $673,000.
The lease obligation allocable to related party leases is approximately
$969,000. The closed store and restructuring reserves as of February 1, 1997
are expected to be utilized as follows:
(dollars in thousands)
Fiscal Year Total
------------ ---------
1998 $ 1,047
1999 836
2000 335
2001 167
2002 128
2003-2005 131
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Total $ 2,644
=======
The amount recorded for future lease obligations has been estimated at 95% of
the total lease obligation after the closing date because Trak Auto believes
that certain alternatives (subleasing and favorable lease buy-outs) to
abandonment may be available. Since the recorded reserve represents an estimate
based upon anticipated closing dates and the book value of the leasehold
improvements at the time the store is closed, the actual amount of costs
associated with store closings are subject to change.
Trak Auto will continue to evaluate the performance and future viability of its
stores and may close or convert additional stores in the future.
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Item 1. Business (Continued)
Crown Books Operations
Operations
Crown Books is a retailer operating discount specialty stores. These stores
offer popular hardback and paperback books, newspapers, magazines, books on
tape, videos, reference materials and other items and accessories.
Crown Books responds to the demand for books at value prices and provides
quality service to its customers. Crown Books sells hardbacks on The New York
Times best seller list at 40% below the publishers' suggested retail prices,
paperbacks on The New York Times best seller list at 25% below the publishers'
suggested retail prices, other new books at 10% to 25% below the publishers'
suggested retail prices. Crown Books sells publishers' over-stock, reprints and
former best sellers at significant discounts from the publishers' original
suggested retail prices. In addition, Crown Books allows customers at all
stores to special order books not stocked in inventory. Merchandise is
generally purchased directly from a large number of publishers and suppliers.
Crown Books is not dependent on any single publisher or supplier.
Crown Books advertises extensively, primarily through newspapers stressing its
value pricing policy. Crown Books satisfies regional and local consumer
preferences by tailoring the selections and quantities of books that it makes
available in individual stores. Crown Books also arranges for special
appearances and book autographing sessions with recognized authors to attract
customers and to build and reinforce customer awareness of its stores.
All major merchandising decisions concerning pricing, advertising and
promotional campaigns, as well as the initial ordering of inventory for each
store, are managed centrally at Crown Books' headquarters in Landover,
Maryland. Approximately 80% of the merchandise is shipped directly from
publishers to the stores. Best sellers and other books that are purchased in
large quantities are often shipped directly from the publishers to Crown Books'
regional warehouses for distribution to the stores. Inventories are monitored
both at stores and in the central office in Landover, Maryland, to determine
purchase requirements. In general, unsold books and magazines can be returned
to the publishers for credit.
Super Crown Books operates discount retail book superstores. The first Super
Crown Books store opened in 1990 and Crown Books has continued to expand the
Super Crown Books concept. The stores carry as many as 80,000 titles, nearly
eight times the number of titles as a "classic" Crown Books ("Classic Crown
Books") store. Super Crown Books stores also carry a wider selection of non-
book products and accessories.
Classic Crown Books stores range in size from approximately 2,000 to 6,000
square feet and Super Crown Books stores range in size from approximately 6,000
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Item 1. Business (Continued)
to 35,000 square feet. The new prototype superstore is targeted to
occupy 15,000 square feet. It is based on an ongoing assessment of what
contributes to Crown Books' customers' shopping experience. This includes a new
floor layout with convenient adjacencies; upgraded fixtures, signage and
lighting; and expanded non-book merchandise such as book accessories, CDs and
computer software. The Super Crown Books stores permit more effective and
economic utilization of space. The interior of Crown Books' stores is
standardized, so that the stores can be assembled quickly. Most of the stores
are open seven days a week.
All Super Crown Books stores and all Classic Crown Books stores have
computerized point of sale and inventory management systems ("systems"). The
systems enable store personnel to scan bar coded merchandise resulting in less
time to process the sales transaction with more accurate pricing. The systems
are designed to provide detailed inventory information on an item basis to
store management.
In selecting specific store sites, Crown Books considers numerous factors,
including local demographics, desirability of available leasing arrangements,
proximity to existing Crown Books operations and competitors, and overall
retail activity. Crown Books generally clusters its stores in selected market
areas to maximize advertising, distribution and management resources. Within a
selected market area, Crown Books generally locates its stores in strip
shopping centers and urban street locations. Compared to large enclosed malls,
Crown Books believes that the strip shopping centers and urban street locations
typically charge less rent and provide greater consumer awareness and
convenience.
The following table sets forth by metropolitan area the locations of Crown
Books' stores for each of the last five fiscal years:
Number of Stores
at end of fiscal year
----------------------------------
Metropolitan Area: 1993 1994 1995 1996 1997
- ------------------ ---- ---- ---- ---- ----
Washington, D.C. 59 60 47 43 40
Los Angeles, California 76 68 59 51 47
Chicago, Illinois 43 43 37 32 36
San Francisco, California 30 31 24 20 20
San Diego, California 20 17 12 9 5
Houston, Texas 3 6 6 6 8
Seattle, Washington 16 15 11 11 12
---- ---- ---- --- ----
Total 247 240 196 172 168
==== ==== ==== ==== ====
The following tables set forth the number of stores of each of Classic Crown
Books and Super Crown Books that were opened, closed or remodeled during each
of the last five fiscal years, as well as the total number of such stores as of
the end of each fiscal year.
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Item 1. Business (Continued)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Super Crown Books stores:
- -------------------------
(including new prototype)
Opened during the year 13 37 12 16 27
Closed during the year - 4 3 2 2
Classic Crown Books stores:
- ---------------------------
Opened during the year - 5 2 - -
Closed during the year 20 45 55 38 29
Remodeled during the year 2 - - - -
Total Stores Open at end of year:
- ---------------------------------
New Prototype Super Crown - - 9 25 54
Prior Format Super Crown Books 28 61 61 59 55
Classic Crown Books 219 179 126 88 59
Crown Books believes that its superstore concept presents growth opportunities
and intends to open new Super Crown Books stores in existing and new markets.
As of February 1, 1997, Crown Books had entered into lease agreements
to open nine new stores. In addition, Crown Books intends to continue its
practice of reviewing the profitability trends and prospects of existing stores
and may close or relocate under-performing stores.
Restructuring Reserves
In fiscal years 1993 and 1994, Crown Books determined that a number of the
smaller Classic Crown Books stores were not competitive in an industry moving
to larger stores. Consequently, Crown Books recorded restructuring charges
totaling $12,800,000 during these two years for the anticipated costs for
closing, relocating, expanding and converting existing stores to the Super
Crown Books concept. These costs primarily represent unrecoverable lease
obligations (net of estimated sublease income) and the book value of leasehold
improvements at the estimated closing date. The activity in the restructuring
reserves during the last two years was as follows:
(dollars in thousands)
1997 1996
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Restructuring Reserve, beginning of year $ 7,025 $ 10,515
Less: Payments and charges (1,653) (1,439)
Reversal of reserves (3,865) (2,051)
-------- --------
Restructuring Reserve, end of year $ 1,507 $ 7,025
======== ========
In fiscal 1997 and 1996, Crown Books reversed a portion of the restructuring
reserve as a result of (i) management's decision not to close certain stores
that had been scheduled for closing, (ii) stores that were closed under
negotiated lease settlements that were more favorable than expected, and (iii)
the postponement of certain store closings.
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Item 1. Business (Continued)
The remaining restructuring reserve relates to 14 stores, of which four have
been closed as of February 1, 1997, with lease obligations ranging from one to
96 months. The lease obligation allocable to related party leases is
approximately $474,000. The restructuring reserve is expected to be utilized as
follows:
(dollars in thousands)
Lease Leasehold
Fiscal Obligations Improvements
Year (Cash Outflows) & Fixtures Total
-------- --------------- ------------ --------
1998 $ 532 $ 164 $ 696
1999 269 6 275
2000 215 19 234
2001 66 - 66
2002 59 - 59
2003-2005 177 - 177
--------- --------- ---------
Total $ 1,318 $ 189 $ 1,507
========= ========= =========
Since the recorded restructuring 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 amounts of costs
associated with store closings may be different from the reserve.
Store Closing Reserve
Crown Books continually evaluates its store operations and the need to close
stores that do not perform satisfactorily. Crown Books recognizes store closing
costs when management decides to close a store. The costs primarily represent
unrecoverable lease obligations (net of estimated sublease income) and the book
value of leasehold improvements at the estimated closing date. The activity in
the closed store reserve during the last two fiscal years is as follows:
(dollars in thousands)
1997 1996
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Closed Store Reserve, Beginning of Year $ 10,850 $ 20,241
Less: Payments and charges (1,764) (2,648)
Reversal of reserves (1,052) (6,743)
-------- --------
Closed Store Reserve, end of year $ 8,034 $ 10,850
======== ========
In fiscal 1997 and 1996, Crown Books reversed a portion of the closed store
reserve as a result of (i) management's decision not to close certain stores
that had been scheduled for closing, (ii) stores that were closed under
negotiated lease settlements that were more favorable than expected, and (iii)
the postponement of certain store closings.
The remaining closed store reserve relates to 69 stores, of which 13 have been
closed as of February 1, 1997, with lease obligations ranging from one to 54
months. The lease obligation allocable to related party leases is approximately
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Item 1. Business (Continued)
$1,555,000. The closed store reserve is expected to be utilized as follows:
(dollars in thousands)
Lease Leasehold
Fiscal Obligations Improvements
Year (Cash Outflows) & Fixtures Total
-------- --------------- ------------ --------
1998 $ 1,960 $ 642 $ 2,602
1999 2,040 198 2,238
2000 1,437 141 1,578
2001 805 - 805
2002 383 49 432
2003-2005 284 95 379
--------- -------- --------
Total $ 6,909 $ 1,125 $ 8,034
========= ======== ========
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 the store is closed, the actual costs are subject to
change and may be different from the reserve. Crown Books will continue to
evaluate the performance and future viability of its remaining stores and may
close additional stores. Crown Books has not recorded reserves for any such
future possible store closings.
Shoppers Food Operations
Shoppers Food is a leading supermarket operator in the Washington, D.C.
metropolitan area, operating 34 stores which target the price-conscious
segments of the market in densely populated urban and suburban areas under the
"Shoppers Food Warehouse" and "Shoppers Club" names. Shoppers Food operates
warehouse-style, price impact supermarkets that are positioned to offer the
lowest overall prices in its marketing area by passing on to the consumer
savings achieved through labor efficiencies and lower overhead and advertising
costs associated with the warehouse format, while providing the product
selection and variety associated with a conventional format. Shoppers Food
stores generally offer products at prices which range between approximately
10-20% below those of its primary supermarket competitors.
In-store operations are designed to allow customers to perform certain labor-
intensive services usually offered in conventional supermarkets. For example,
Shoppers Food stores generally do not provide full-time staff to support the
bakery, meat and seafood refrigerated cases and floral departments; however,
they offer a complete line of produce, fresh baked goods, freshly packaged meat
and seafood products and floral assortments and provide service in these
departments at the customer's request. Merchandise is presented on
warehouse-style racks in full cartons, reducing labor-intensive unpacking, and
customers bag their own groceries. Shoppers Food stores also have service
delicatessens with some stores offering hot and cold prepared food and
self-service soup and salad bars.
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Item 1. Business (Continued)
Shoppers Food stores generally are constructed with high ceilings to
accommodate warehouse racking with overhead pallet storage. Wide aisles
accommodate forklifts and, compared to conventional supermarkets, a higher
percentage of total store space is devoted to retail selling because the top of
the warehouse-style grocery racks on the sales floor are used to store
inventory, which reduced the need for large back room storage and restocking
trips.
Notwithstanding the "warehouse" name, physical features and low-price
reputation, Shoppers Food stores have more in common with conventional
supermarket chains than with so-called "warehouse clubs." No membership fee is
charged at the Shoppers Food stores, which offer a selection of popular-sized
national brands and private label products as well as high quality produce,
meat and fish. The product offerings are similar to those of conventional
supermarkets with slightly more emphasis on larger package sizes and with less
emphasis on extensive brand and size selection. All of the Shoppers Food
supermarkets contain a bakery, a delicatessen and a floral department, while 18
stores have a beer and wine department.
The stores are generally in good condition and typically require only routine
maintenance.
The following table sets forth the total number of open stores as of the end of
each of the last five fiscal years and the number of stores opened, closed and
remodeled during each of the last five years.
Number of Stores
at end of fiscal year
----------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Total Open 34 35 33 34 34
Opened during the year 4 2 - 1 -
Closed during the year 1 1 2 - -
Remodeled during the year 1 2 - - 2
During fiscal 1989, Dart acquired in excess of 50% of the common stock of
Shoppers Food (then known as Jumbo Food Stores). In June 1994, one of the other
shareholders (Kenneth Herman) of Shoppers Food exercised his right to reacquire
one share of Shoppers Food Class B common stock, thereby reducing Dart's
ownership to exactly 50%. As a result, the accounts of Shoppers Food are
consolidated with Dart's through May 28, 1994 and, thereafter, Dart has
recorded Shoppers Food's operating results on the equity basis.
On December 16, 1996, Dart submitted offers to either (i) sell all of Dart's
50% 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. On December
18, 1996, the other stockholders (Kenneth M. Herman, the founder of Shoppers
Food, and certain of his family members and family trusts) accepted Dart's
offer to purchase all of their shares of capital stock of Shoppers Food.
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Item 1. Business (Continued)
On February 6, 1997, Dart acquired the other 50% interest in Shoppers Food for
$210 million (the "Acquisition"). Dart financed the Acquisition through the
application of $137.2 million in net proceeds raised from an offering of
Increasing Rate Senior Notes due 2000 (the "Senior Notes") of SFW Acquisition
Corp., a newly created wholly-owned subsidiary of Dart, and $72.8 million of
bridge financing. Immediately after the Acquisition, SFW Acquisition Corp.
merged into Shoppers Food (with Shoppers Food becoming obligor on the Senior
Notes) and Shoppers Food repaid the bridge financing from its existing cash and
the liquidation of certain short-term investments.
Dart intends to analyze the options available to it with regard to Shoppers
Food, which options include, among others, a refinancing of the Senior Notes or
a sale of all or part of Shoppers Food.
Total Beverage Corporation
Total Beverage operates retail discount beverage superstores in the Washington,
D.C. metropolitan area and plans to open stores in the Chicago, Illinois
metropolitan area. The stores carry a wide range of foreign and domestic
beers and wines as well as non-alcoholic beverages. Dart organized Total
Beverage Corporation on January 26, 1993 and purchased the assets for the first
store on February 27, 1993 from Shoppers Food for approximately $1,494,000.
Since then, Total Beverage opened four more stores, two of which subsequently
were closed due to disappointing sales volume.
The following table sets forth the number of stores open at the end of each
fiscal year and the number of stores opened or closed during each fiscal year.
Number of Stores
at end of fiscal year
--------------------------
1994 1995 1996 1997
---- ---- ---- ----
Total open at end of year 3 2 4 3
Opened during the year 3 - 2 -
Closed during the year - 1 - 1
Cabot-Morgan Real Estate Company
CMREC, a wholly-owned subsidiary, owned the majority interest in five real
estate joint ventures that owned four shopping centers and an office building
in the Washington, D.C. metropolitan area. The remaining partnership interests
in these joint ventures were owned by partnerships in which the partners are
members of the Haft family. As part of the RSH Settlement (defined below),
Ronald S. Haft and entities controlled by him received 99% of the ordinary
income and loss generated from these properties.
In May 1996, the 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
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15
Item 1. Business (Continued)
the proceeds for its retained interest in the joint ventures and Ronald S. Haft
repaid an $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. Combined
Properties, Inc., a Haft controlled entity, managed the shopping centers and
office building for the joint ventures. Trak Auto, Crown Books, Shoppers Food
and Total Beverage have stores in some of these shopping centers.
Competition
The market for the products offered by the Company's retail discount specialty
operations is highly competitive. The stores compete with retail outlets,
including drug stores, supermarkets, department stores, hardware stores,
variety stores, auto parts stores and book stores. Competitors range from small
independent stores to large regional and national chains, many of which have
greater resources than the Company. The stores encounter strong competition
with respect to the prices at which they sell their products and services.
Seasonality
Crown Books' sales, net income and working capital for the quarter ended
January 31 have historically been substantially higher than for any of the
previous three quarters. Crown Books' inventory and accounts payable have
historically been higher at the end of the third quarter than for any other
quarter for the year. The fourth quarter results of operations have
historically been sufficient to satisfy to a substantial degree the third
quarter accounts payable requirements.
Trak Auto's business is somewhat seasonal in nature, with the highest sales
occurring in the second and third fiscal quarters (May through October). Sales
for the combined second and third quarters in each of the fiscal years 1997 and
1996 were approximately 52% of total annual sales. Extremely hot or cold
weather tends to enhance sales by causing a higher incidence of parts failure,
thus increasing sales of seasonal products. Rain or snow, however, tends to
reduce sales by causing deferral of elective maintenance.
Management does not believe Dart's other partially or wholly-owned businesses
are affected by seasonality to any material extent.
Employees
On January 31, 1997, the Company (excluding Shoppers Food) employed
approximately 3,760 full-time and 3,500 part-time persons. The Company
considers its relationship with its employees to be good.
15
16
Item 1. Business (Continued)
Changes in Management
On September 7, 1994, the Board of Directors of Dart established an Executive
Committee comprised of Dart's outside directors to conduct the affairs of Dart
with respect to matters that were the subject of disputes between the Chairman
of the Board and Chief Executive Officer of Dart, Herbert H. Haft, and the then
President and Chief Operating Officer of Dart, Ronald S. Haft. On October 11,
1994, the Board of Directors of Trak Auto, Crown Books and Total Beverage each
established an Executive Committee of their respective Boards of Directors
comprised of the same outside directors, with authority parallel to that of
Dart's Executive Committee. The disputes between Herbert H. Haft and Ronald S.
Haft concerning issues involving Dart have been extensive. Accordingly, the
Executive Committee assumed day-to-day involvement in these disputed issues and
other matters affecting Dart, in particular matters relating to litigation to
which Dart is a party. While the Executive Committee remains involved in the
day-to-day affairs of Dart, its continuing role is dependent upon future
developments.
In connection with the RSH Settlement (defined below), Ronald S. Haft resigned
his positions as a director and officer of Dart and each of its subsidiaries.
The Standstill Order (defined below) contemplates that Ronald S. Haft will
continue as a director of Dart while the Standstill Order is in effect.
(Herbert H. Haft contends that Ronald S. Haft is no longer a director.)
In October 1994, Robert A. Marmon was appointed to serve on an interim basis as
Treasurer and Chief Financial Officer of Dart and Crown Books and as Principal
Financial Officer of Trak Auto. Effective February 29, 1996, Mr. Marmon
resigned as Treasurer and Chief Financial Officer of Dart and as an officer of
Dart's subsidiaries. In September 1996, Mark A. Flint was appointed Senior Vice
President and Chief Financial Officer of Dart and Treasurer of Trak Auto and
Crown Books. In February 1997, Mr. Flint also became President of Shoppers
Food.
Settlement with Ronald S. Haft
On October 6, 1995, Dart and Ronald S. Haft entered into a settlement of
certain litigation and other related transactions (collectively, the "RSH
Settlement"). For a more detailed discussion of the RSH Settlement, see Note 6
to Dart's Consolidated Financial Statements (Item 8 - Financial Statements and
Supplementary Data) and Dart's Current Report on Form 8-K, dated October 10,
1995. The RSH Settlement transactions are subject to legal challenge. See Item
3 - Legal Proceedings. If sustained, the RSH Settlement transactions were
intended to have the effect, by their terms, of transferring majority control
of Dart's voting stock to one or more voting trustees under a Voting Trust
Agreement (the "Voting Trust Agreement"), by and among Ronald S. Haft, Dart and
Larry G. Schafran and Sidney B. Silverman, as initial Voting Trustees. On
December 28, 1995, the initial Voting Trustees resigned and appointed Richard
16
17
Item 1. Business (Continued)
B. Stone as successor Voting Trustee. If the RSH Settlement transactions are
not sustained, there could be a significant effect on the Company's financial
statements, the extent of which cannot be readily determined.
Standstill Order
In connection with legal challenges to the RSH Settlement, on December 6, 1995,
the Delaware Court of Chancery entered a Standstill Order (the "Standstill
Order"), which restricts certain actions by Dart. Without further order of the
court, Dart may not (i) change its Certificate of Incorporation or Bylaws; (ii)
change the current composition of Dart's Board of Directors (Herbert H. Haft,
Ronald S. Haft, Larry G. Schafran, Bonita A. Wilson and Douglas M. Bregman) or
any of its subsidiaries; (iii) change the current Haft family officers of Dart
or any of its subsidiaries; or (iv) issue any additional securities of Dart or
any of its subsidiaries (except employee stock options issued in the ordinary
course of business). In addition, without first giving Herbert H. Haft and
certain other litigants not less than seven days' written notice, Dart may not
take any extraordinary actions, including but not limited to actions that would
result in (a) the liquidation of Dart or any of its subsidiaries, (b) the sale
of any major subsidiary of Dart or (c) the disadvantage of any Class B
stockholder of Dart through any debt transaction. For purposes of the
Standstill Order, the phrase "extraordinary actions" means any transaction,
contract or agreement, the value of which exceeds $3 million. See Item 3 Legal
Proceedings.
Segment Information
See Note 16 to the Consolidated Financial Statements (Item 8 - Financial
Statements and Supplementary Data).
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18
Item 2. Properties
Dart Group Corporation
Dart leases its headquarters building and distribution center of approximately
271,000 square feet in Landover, Maryland from a private partnership in which
members of the Haft family own all of the beneficial interests. The lease is
for 30 years and six months, commenced in 1985, and provides for increasing
rental payments over the term of the lease. The current annual rental is
$2,121,000 and the lease requires the additional payment of maintenance,
utilities, insurance and real estate taxes. Dart has sublet 210,000 square feet
of the headquarters building and distribution center to Trak Auto and 28,000
square feet to Crown Books.
In addition, Dart has a lease agreement with the aforementioned partnership for
land near the headquarters building and distribution center. The lease is
coterminous with the headquarters building and distribution center lease and
provides for current annual rental of $37,000 with increases of 3% per year.
Dart, Trak Auto and Crown Books each pay a pro-rata share of the rent in
proportion to their use of the headquarters building and distribution center.
As part of the RSH Settlement, Ronald S. Haft agreed to transfer the real
estate and partnership interests controlled by him in the headquarters and
distribution center to Dart (or its subsidiaries) and to reduce the rent. These
transfers and rent reductions are subject to contingencies, including
bankruptcy court approval, mortgagee approval, challenges brought by Herbert H.
Haft concerning the extent of Ronald S. Haft's ownership interest in the
property and claims asserted by Robert M. Haft and Linda G. Haft regarding the
extent to which Ronald S. Haft controls the aforementioned partnerships. See
Note 6 to Dart's Consolidated Financial Statements (Item 8 - Financial
Statements and Supplemental Data).
Trak Auto
All of Trak Auto's 286 stores are leased. As of February 1, 1997, the total
minimum payments for Trak Auto's retail stores (excluding closed stores)
aggregated approximately $131,198,000 to lease expiration dates. The lease
expiration dates (without regard to renewal options) range from 1997 to 2015.
Twenty-three of these leases are with entities in which members of the Haft
family have all or substantially all the beneficial interest and two are
subleased from Crown Books.
Trak Auto leases a 176,000 square foot warehouse located in Bridgeview,
Illinois from a private partnership in which Haft family members own all of the
partnership interests. The lease is for thirty years and six months, commenced
in 1984, and provides for rental payments increasing approximately 15% every
five years over the term of the lease. The current annual rental is $754,000.
The lease also requires Trak Auto to pay for maintenance, utilities, insurance
and real estate taxes on the warehouse. As co-tenant, Dart is jointly and
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19
Item 2. Properties (Continued)
severally liable for the lease obligations.
Trak Auto also leases a 317,000 square foot warehouse located in Ontario,
California from a private partnership in which Haft family members own all of
the partnership interests. The lease is for 20 years and provides for
increasing rental payments, based upon the Consumer Price Index for the Los
Angeles area, over the term of the lease. The lease commenced in 1989. The
current annual rental is $1,469,000. The lease also requires Trak Auto to pay
for maintenance, utilities, insurance and real estate taxes on the warehouse.
As part of the RSH Settlement, Ronald S. Haft agreed to transfer the real
estate and partnership interests controlled by him in the Bridgeview and
Ontario warehouses to Dart (or its subsidiaries) and to reduce Dart's rent.
These transfers and rent reduction are subject to contingencies, including
bankruptcy court approval, mortgagee approval, challenges brought by Herbert H.
Haft concerning the extent of Ronald S. Haft's ownership interest in the
property and claims asserted by Robert M. Haft and Linda G. Haft regarding the
extent to which Ronald S. Haft controls the partnership owning the Bridgeview
property. See Note 6 to Dart's Consolidated Financial Statements (Item 8 -
Financial Statements and Supplemental Data).
Crown Books
All of Crown Books' 168 stores are leased. As of February 1, 1997, the total
minimum payments for Crown Books' retail stores (excluding closed stores)
aggregated approximately $135,087,000 to the lease expiration dates. The lease
expiration dates (without regard to renewal options) range from 1997 to 2010.
Ten of these leases are with entities in which members of the Haft family have
all or substantially all the beneficial interest.
Crown Books leases 23,300 square feet of office and warehouse space in Addison,
Illinois. The lease commenced in January 1993 and has a term of ten years with
one five-year renewal option. The annual rent is $143,000 for the each of the
first five years and increases to $156,000 for each of the second five years.
The lease also obligates Crown Books to pay maintenance, utilities, insurance
and real estate taxes.
Shoppers Food
Shoppers Food leases all of its 34 stores. As of February 6, 1997, the total
minimum payments for Shoppers Food's retail stores under lease aggregated
approximately $165,453,000 to the lease expiration dates. The lease expiration
dates (without regard to renewal options) range from 1997 to 2016. At February
6, 1997, ten of these leases were with entities in which members of the Haft
family own all or substantially all the beneficial interest.
Shoppers Food also has a lease agreement with a limited partnership, in which
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20
Item 2. Properties (Continued)
members of the Haft family own half of the beneficial interests, for
approximately 86,000 square feet of space in an office building in Lanham,
Maryland. The lease commenced January 1991, is for 20 years and the current
annual rental is $1,247,000. Shoppers Food has sublet approximately 30,000
square feet of the office to unaffiliated third parties.
Total Beverage
Total Beverage's three stores are leased. As of February 1, 1997, the total
minimum payments for Total Beverage's retail stores under lease aggregated
approximately $11,722,000 to the lease expiration dates. The lease expiration
dates (without regard to renewal options) range from 2002 to 2005. Two lease
agreements are with partnerships in which members of the Haft family own all or
substantially all the beneficial interest.
Pennsy Warehouse Facility
As previously disclosed, the Executive Committee undertook a legal review of
leases covering approximately 533,800 square feet of space in certain
warehouses located on Pennsy Drive, Landover, Maryland (the "Pennsy Leases").
By their terms, the Pennsy Leases, which expire in 2016, require annual rental
payments of $855,000 subject to escalations based on increases in the Consumer
Price Index. The lease terms also require the lessee to pay real estate taxes,
insurance, utilities and maintenance expenses. Trak Auto, Crown Books and
Shoppers Food utilize space in Warehouses II, III and III Addition at a
variable rental (approximately $268,000 per year) dependent on square footage
used. This arrangement continues on a month-to-month basis. Warehouse I is
vacant. As a result of the Executive Committee's review, on February 10, 1995,
Dart filed a complaint in the Circuit Court for Prince George's County,
Maryland, alleging breaches of fiduciary duty, waste and other irregularities
by certain members of the Haft family and others in connection with the Pennsy
Leases and, in particular, with the resumption of rental payments for these
warehouses in 1991 following the bankruptcy of the prior tenant. The complaint
seeks rescission of the Pennsy Leases, restitution of rent paid since 1991 and
other monetary damages. With respect to Pennsy Warehouse II, III and III
Addition (but not Pennsy Warehouse I), Dart is paying only that portion of its
rent necessary to cover debt service. The balance of the rent called for in
these leases is being paid into escrow, pending resolution of this litigation.
See Item 3. - Legal Proceedings and Notes 4,5,7, and 8 to the Consolidated
Financial Statements.
As part of the RSH Settlement, Ronald S. Haft and Dart agreed to various
transactions relating to the Pennsy Leases. The primary intent of these
transactions was to transfer ownership of Pennsy Warehouses II, III and III
Addition to a Dart-controlled company in which Ronald S. Haft retains an
interest, to later transfer Ronald S. Haft's interest in that company to Dart
and to reduce the excessive rents paid by Dart. As a result of the RSH
Settlement, Dart paid the debt service on the mortgages on Warehouses II and
III during fiscal 1997.
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21
Item 2. Properties (Continued)
In addition, Dart paid the debt service on the mortgage on Warehouse I to the
landlord and the difference between the rent and the debt service on the
mortgages on Warehouse I, II and III to an escrow account in fiscal 1997.
The total amount paid in fiscal 1997 was $855,000. The transactions are
subject to challenges brought by Herbert H. Haft concerning the extent of
Ronald S. Haft's ownership interest in certain of the properties. In the event
the RSH Settlement is not sustained, the accounting treatment of the
transferred interests could be significantly affected. See Note 6 to Dart's
Consolidated Financial Statements (Item 8 Financial Statements and Supplemental
Data) and Item 3 - Legal Proceedings.
The Executive Committees of Dart, Crown Books and Trak Auto have also
undertaken a legal review of non-Pennsy Warehouse leasing arrangements and real
estate related transactions between the Company and Haft-owned entities. On
December 17, 1996, Dart, Crown Books and Trak Auto filed a lawsuit against
Herbert H. Haft (Chairman of each such company) claiming breach of fiduciary
duty, fraud and waste in connection with certain of these lease transactions
(other than the Pennsy Leases) with certain partnerships owned beneficially by
members of the Haft family. See Item 3 - Legal Proceedings - Lawsuit Against
Herbert H. Haft Concerning Haft-Owned Real Estate.
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22
Item 3. Legal Proceedings
Derivative Litigation
In September 1993, Alan R. Kahn and the Tudor Trust (the "Kahn Derivative
Plaintiffs"), shareholders of Dart, filed a lawsuit in the Delaware Court of
Chancery for New Castle County naming as defendants Herbert H. Haft, Ronald S.
Haft, Douglas M. Bregman, Bonita A. Wilson, Combined Properties, Inc. ("CPI"),
Combined Properties Limited Partnership and Capital Resources Limited
Partnership. The suit is brought derivatively and names as nominal defendants
Dart, Trak Auto, Crown Books, Shoppers Food, Total Beverage and CMREC.
The complaint, as amended on January 12, 1995, alleges waste, breach of
fiduciary duty, violation of securities laws and entrenchment in connection
with various lease agreements between the Combined Properties defendants and
Dart and its subsidiaries, the termination of Robert M. Haft, the compensation
paid to Ronald S. Haft and Herbert H. Haft, the employment agreement entered
into by Ronald S. Haft and Dart on August 1, 1993 (the "RSH Employment
Agreement"), the sale of 172,730 shares of Class B Common Stock by Herbert H.
Haft to Ronald S. Haft, and the compensation paid to the Executive Committee.
Plaintiffs seek an accounting of unspecified damages incurred by Dart, voiding
of the options sold to Ronald S. Haft, appointment of a temporary custodian to
manage the affairs of Dart or to oversee its recapitalization or sale and costs
and attorneys' fees.
On April 27, 1995, the Kahn Derivative Plaintiffs and the Special Litigation
Committee of Dart's Board of Directors filed a Stipulation and Order which, if
entered by the court, would (i) dismiss claims against Douglas M. Bregman and
Bonita A. Wilson and (ii) realign Dart as a party plaintiff to the amended
complaint. The court has not yet acted upon this Stipulation.
In November 1993, Robert M. Haft filed a lawsuit in the Delaware Court of
Chancery for New Castle County. The lawsuit names as defendants Herbert H.
Haft, Ronald S. Haft, Douglas M. Bregman, and Bonita A. Wilson, and also names
Dart as a nominal defendant. The complaint derivatively alleges interested
director transactions, breach of fiduciary duty and waste in connection with
the RSH Employment Agreement. Robert M. Haft also brings individual claims for
breach of contract and dilution of voting rights in connection with the sale of
shares of Class B Common Stock by Herbert H. Haft to Ronald S. Haft and the RSH
Employment Agreement. The complaint seeks rescission of the sale of such shares
and the RSH Employment Agreement, unspecified damages from the individual
directors, and costs and attorneys' fees.
In January 1994, a Special Litigation Committee consisting of two outside,
independent directors of Dart, Crown Books and Trak Auto was appointed by the
Board of Directors to assess, on behalf of Dart, whether to pursue, settle or
abandon the claims asserted in these two derivative lawsuits. (Since the death
of one member in December 1994, the Special Litigation Committee has consisted
of one director.) In September 1994, the Special Litigation Committee moved for
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23
Item 3. Legal Proceedings (Continued)
dismissal of certain claims in those derivative lawsuits and for realignment of
the parties to permit Dart to prosecute other claims in those derivative
lawsuits. Thereafter, the Special Litigation Committee amended its motion and
advised the court that it had instituted certain lawsuits concerning related
party real estate transactions, (see the Pennsy Warehouse Litigation, described
below), and was considering asserting additional claims, certain of which have
since been asserted in (see the Lawsuit Against Herbert H. Haft Concerning
Haft- Owned Real Estate, described below). The amended motion is still pending
before the court.
In connection with the RSH Settlement, on October 11, 1995, the plaintiff
shareholders, Ronald S. Haft, CPI, Dart, Trak Auto and Crown Books entered into
a Stipulation and Agreement of Compromise, Settlement and Release (the
"Stipulation"). Pursuant to the Stipulation, the claims against Ronald S. Haft
and CPI will be dismissed on the merits and with prejudice as against the
shareholder plaintiffs and Dart and its subsidiaries, if the RSH Settlement and
dismissal of these claims are approved by the Delaware Court of Chancery.
In September 1994, Jolien Lou, a purported 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, as amended on February 24, 1995, alleges waste and breach of
fiduciary duty in connection with the termination of Robert M. Haft from his
position at Crown Books in 1993 and in connection with the management of Crown
Books. The amended complaint also alleges legal malpractice against a lawyer
advising Dart at that time. Plaintiff seeks unspecified damages incurred by
Crown Books, and costs and attorneys' fees. Ronald S. Haft and Glenn E.
Hemmerle have been dismissed without prejudice from this lawsuit. The amended
complaint does not name as a defendant H. Ridgely Bullock, who died subsequent
to the filing of the original complaint. Crown Books and other defendants have
filed a motion to dismiss this lawsuit.
Given that these derivative lawsuits are brought in the name of Dart and its
subsidiaries, recovery in them would inure to the benefit of Dart and its
subsidiaries if the claims are successfully litigated or settled. Therefore, in
the opinion of management, resolution of these actions will not have a material
adverse effect on the consolidated financial condition or results of operations
of the Company.
Pennsy Warehouse Litigation
In fiscal 1995, the Executive Committee of Dart's Board of Directors undertook
a legal review of the Pennsy Leases. By their terms, the Pennsy Leases, which
expire in 2016, require annual rental payments of $855,000 subject to
escalation based on increases in the Consumer Price Index. The lease terms also
require
23
24
Item 3. Legal Proceedings (Continued)
the lessee to pay real estate taxes, insurance, utilities, and maintenance
expenses. At January 31, 1997, Dart had reserved approximately $18.5 million
for the obligations represented by the Pennsy Leases.
As a result of this review, on February 10, 1995, Dart filed a complaint (the
"Pennsy Warehouse Litigation") in the Circuit Court for Prince George's County,
Maryland, alleging breaches of fiduciary duty, waste and other irregularities
by certain members of the Haft family and others in connection with the Pennsy
Leases and, in particular, with the resumption of rental payments for these
warehouses in 1991 following the bankruptcy of the prior tenant, Dart Drug
Stores, Inc. The complaint seeks rescission of the Pennsy Leases, restitution
of approximately $6 million of rent and other expenses paid since 1991 and
other monetary damages.
Robert M. Haft Release Litigation
On June 12, 1995, Robert M. Haft filed a complaint in the Superior Court of the
District of Columbia against Dart seeking (i) an order declaring that a claimed
release bars Dart from bringing suit against him in the Pennsy Warehouse
Litigation, (ii) an injunction to bar Dart from filing certain other categories
of future complaints against him based on the so-called release and (iii)
compensation for the costs of defense of the Pennsy Warehouse Litigation. The
"release" relied upon in this litigation is also asserted by Robert M. Haft and
Gloria G. Haft in the Pennsy Warehouse Litigation. On February 27, 1996, the
Superior Court ruled that this action should be stayed pending resolution of
the Pennsy Warehouse Litigation.
Robert M. Haft Stock Option Litigation
On February 10, 1995, Robert M. Haft filed a complaint in the United States
District Court for the District of Delaware against Dart seeking specific
performance or damages in connection with the refusal of Dart to issue shares
of Class A Common Stock to him pursuant to his exercise of certain options
purportedly granted to him by Dart. Robert M. Haft allegedly received these
options on three separate occasions: (i) pursuant to the Dart Drug Corporation
Executive Non-Qualified Stock Option Plan (the "1983 Plan"), under which Robert
M. Haft allegedly received options to purchase 120,000 shares of Class A Common
Stock; (ii) pursuant to the Dart Drug Corporation 1987 Executive Non-Qualified
Stock Option Plan (the "1987 Plan"), under which Robert M. Haft allegedly
received options to purchase 99,750 shares of Class A Common Stock; and (iii)
pursuant to a Stock Option Agreement (the "1989 Agreement") dated as of August
30, 1989, among Dart, Dart/SFW Corp. ("Dart/SFW") and Robert M. Haft, under
which Robert M. Haft allegedly received options to purchase 10 shares (or 10%)
of common stock of Dart/SFW.
Dart is contesting the validity of the options granted to Robert M. Haft
pursuant to the 1983 Plan, the 1987 Plan and the 1989 Agreement. Dart filed a
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25
Item 3. Legal Proceedings (Continued)
counterclaim on July 17, 1995 asking that the stock option plans and stock
option agreement that are the subject of the litigation be declared void,
rescinded and unenforceable.
Herbert H. Haft Proxy Litigation
In connection with Herbert H. Haft's sale of 172,730 shares of Class B Common
Stock to Ronald S. Haft on July 28, 1993 (the "Stock Sale Agreement"), Ronald
S. Haft purportedly granted Herbert H. Haft an irrevocable proxy (the "Proxy")
to vote these shares of stock to the same extent and with the same effect as
Ronald S. Haft might or could do under any applicable laws or regulations
governing the rights and powers of shareholders of Dart," until Herbert H.
Haft's death or incapacitation. On June 30, 1995, Ronald S. Haft sent a letter
to Herbert H. Haft purportedly revoking this proxy.
On July 18, 1995, Ronald S. Haft filed a lawsuit against Herbert H. Haft and,
nominally, Dart in the Delaware Court of Chancery for New Castle County for
Herbert H. Haft's alleged breach of contract and breach of fiduciary duties to
Ronald S. Haft and to Dart in connection with the Proxy (Ronald S. Haft v.
Herbert H. Haft, et al., Civ. A. No. 14425). In this action, Ronald S. Haft
seeks a declaration that the Proxy is revocable or would be revocable under
certain conditions, as well as costs and attorneys' fees. Ronald S. Haft also
requests that the court require Dart to refuse to recognize the validity of the
Proxy. On August 9, 1995, Herbert H. Haft filed an Answer and Counterclaim
denying liability and requesting rescission of the Stock Sale Agreement because
of Ronald S. Haft's alleged breach of contract and other grounds. On September
25, 1995, Dart filed its answer in this action. Both Ronald S. Haft and Herbert
H. Haft have moved for summary judgment in this lawsuit. On November 14, 1995,
the court denied Ronald S. Haft's motion for summary judgment; Herbert H.
Haft's motion for summary judgment remains pending.
As part of the RSH Settlement, on October 6, 1995, Dart purchased from Ronald
S. Haft the 172,730 shares of Class B Common Stock that were subject to the
Proxy and placed the shares in treasury. See Note 6 to Dart's Consolidated
Financial Statements (Item 8 - Financial Statements and Supplemental Data).
Section 225 Action by Robert, Gloria and Linda Haft
On October 17, 1995, Robert M. Haft, Gloria G. Haft and Linda G. Haft
(collectively, "RGL") filed a lawsuit captioned Gloria G. Haft, et al. v. Larry
G. Schafran, et al., Del. Ch., Civ. A. No. 14620 (the "Section 225 Action"), in
the Delaware Court of Chancery for New Castle County naming as defendants Dart
and all of its directors. RGL seek an order, under Section 225 of the Delaware
General Corporation Law, declaring that RGL validly removed all of Dart's
directors and replaced them with three individuals (John L. Mason, Ellen V.
Sigal and Michael Ryan), whom RGL purport to have elected. Such purported
election is premised on RGL's contention that RGL own a majority of Dart's
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26
Item 3. Legal Proceedings (Continued)
voting stock because, they argue, (i) the 172,730 Class B shares subject to
Herbert H. Haft's proxy have been purchased by Dart and may not be voted and
(ii) the shares of Class B Common Stock placed in a voting trust (the "Trust
Shares") by Ronald S. Haft pursuant to the RSH Settlement also are not entitled
to vote because they have been unlawfully issued or they should be deemed to be
owned by Dart.
Dart's position is that this lawsuit is without merit and that the purported
action by RGL to reconstitute the Board of Directors is invalid. On October 27,
1995, Dart filed a motion for summary judgment.
Challenge to RSH Settlement by Herbert H. Haft
On November 6, 1995, Herbert H. Haft filed a lawsuit captioned Herbert H. Haft
v. Dart Group Corporation, et al., Del. Ch., Civ. A. No. 14685, in the Delaware
Court of Chancery for New Castle County naming as defendants Dart, all of its
directors except Herbert H. Haft, RGL, John L. Mason, Ellen V. Sigal and Michael
Ryan. Herbert H. Haft seeks a judgment (i) declaring the RSH Settlement
unlawful, hence null and void; (ii) declaring either that 172,730 shares of
Class B Common Stock belong to him, were wrongfully sold by Ronald S. Haft to
Dart, and that Herbert H. Haft is entitled to restitution of such shares or,
alternatively, that his purportedly irrevocable proxy on the 172,730 shares
continues to be valid; (iii) declaring that Herbert H. Haft retains voting
control of Dart or, at a minimum, 34.55% of Dart's voting power; (iv) declaring
that the Trust Shares may not be lawfully voted; and (v) declaring that
defendants John L. Mason, Ellen V. Sigal and Michael Ryan are not duly elected
directors of Dart.
Dart's position is that this lawsuit, except for the declaration sought that
defendants John L. Mason, Ellen V. Sigal and Michael Ryan are not duly elected
directors of Dart, is without merit. Herbert H. Haft disagrees with Dart's
position.
On December 5, 1996, Herbert H. Haft filed a motion for partial summary
judgment in which he asserted two arguments based upon Section 160(c) of the
Delaware General Corporation Law. Section 160(c) provides that the shares of
capital stock "belonging to" a corporation are not entitled to vote. Herbert H.
Haft maintained that (i) notwithstanding Section 160(c), the 172,730 Class B
shares that Dart purchased in the RSH Settlement on October 6, 1995 do not
"belong to" Dart and are still subject to the Proxy, and (ii) Section 160(c)
does not permit the Trust Shares to be voted because those shares "belong to"
Dart, not Ronald S. Haft. Dart opposed this motion for partial summary judgment
and, on March 14, 1997, the Delaware Chancery Court denied Herbert H. Haft's
motion in its entirety.
A trial date has not yet been scheduled. In the event Herbert H. Haft prevails
at trial, there could be a significant effect in the accounting treatment for
26
27
Item 3. Legal Proceedings (Continued)
the RSH Settlement that has been reflected in the Company's financial
statements. See Note 6 to Dart's Consolidated Financial Statements (Item 8).
Standstill Order
In connection with the legal challenges to the RSH Settlement raised by RGL and
Herbert H. Haft, on December 6, 1995, the Delaware Court of Chancery entered
the Standstill Order, which restricts certain actions by Dart. Without further
order of the court, Dart may not (i) change its Certificate of Incorporation or
Bylaws; (ii) change the current composition of Dart's Board of Directors
(Herbert H. Haft, Ronald S. Haft, Larry G. Schafran, Bonita A. Wilson and
Douglas M. Bregman) or any of its subsidiaries; (iii) change the current Haft
family officers of Dart or any of its subsidiaries; or (iv) issue any
additional securities of Dart or any of its subsidiaries (except employee stock
options issued in the ordinary course of business). In addition, without first
giving Herbert H. Haft and the other parties to the Section 225 Action not less
than seven days written notice, Dart may not take any extraordinary actions,
including but not limited to actions that would result in (a) the liquidation
of Dart or any of its subsidiaries, (b) the sale of any major subsidiary of
Dart or (c) the disadvantage of any Class B stockholder of Dart through any
debt transaction. For purposes of the Standstill Order, the phrase
"extraordinary actions" means any transaction, contract or agreement, the value
of which exceeds $3.0 million.
Lawsuit Against Herbert H. Haft Concerning Haft-Owned Real Estate
On December 17, 1996, Dart, Crown Books and Trak Auto filed a lawsuit captioned
Dart Group Corporation, et al. v. Herbert H. Haft, Civ. A. No. 96-26474, in the
Circuit Court for Prince George's County, Maryland, seeking damages from
Herbert H. Haft for breach of fiduciary duty, fraud and waste arising from a
series of lease transactions (other than the Pennsy Warehouse Leases) between
Dart and certain partnerships owned beneficially by members of the Haft family.
The complaint alleges that Herbert H. Haft exploited the dominance and control
he enjoyed as an officer, director and controlling stockholder of Dart to
enrich himself and other members of the Haft family unlawfully and unfairly at
the expense of the public stockholders of Dart, Crown Books and Trak Auto. In
particular, the complaint charges that Herbert H. Haft (i) caused Trak Auto to
surrender favorable retail store leases and subleases in Haft-owned shopping
centers in exchange for new leases less favorable to Trak Auto; (ii) required
Crown Books to relinquish its favorable lease in a particular shopping center
in suburban Washington, D.C. and to enter into a new lease with a Haft family
partnership for a new location in the same shopping center at a rent rate equal
to 450 percent of the prior lease; (iii) caused Dart, Crown Brooks and Trak
Auto to enter into exorbitant long-term leases for warehouse and distribution
facilities that were purchased and developed by Haft family partnerships for
the purpose of leasing those facilities to these companies as captive tenants;
(iv) induced Dart and Trak Auto to lease retroactively from a Haft family
partnership
27
28
Item 3. Legal Proceedings (Continued)
a 2.66 acre wooded lot for which the companies had no use; and (v) caused Trak
Auto to purchase certain used warehouse equipment from a Haft family
partnership for more than 700 percent of the price contemplated by the original
equipment lease.
Lawsuit Against Herbert H. Haft in Washington, D.C.
On December 17, 1996, Dart, Crown Books and Trak Auto also filed a lawsuit
captioned Dart Group Corporation, et al. v. Herbert H. Haft, Civ. A. No. 96-CV-
2788, in the U.S. District Court for the District of Columbia naming Herbert H.
Haft as defendant. In this action, Dart, Crown Books and Trak Auto have
advanced claims for breach of fiduciary duty, civil conspiracy and tortious
interference with contracts. The companies allege that Herbert H. Haft
wrongfully imposed Robert M. Haft's excessively generous employment contracts
upon Dart and Crown Books, later breached those contracts for personal reasons
and then, due in large part to a personal conflict of interest, mishandled the
defense to Robert M. Haft's wrongful termination lawsuit. Dart, Crown Books and
Trak Auto seek to recover the approximately $38 million paid to Robert M. Haft
in satisfaction of the judgment in his wrongful termination suit, approximately
$5 million in attorneys' fees incurred by the companies in defense of that
litigation, and punitive damages.
Possible Settlements
On April 21, 1997, Dart reached a conditional settlement agreement in principle
with Herbert H. Haft. If the settlement contemplated by the conditional
agreement in principle is implemented, Herbert H. Haft would retire from his
positions as Chairman of Dart, Shoppers Food, Trak Auto and Crown Books.
Herbert H. Haft also would relinquish his claim to voting control of Dart.
Under the settlement contemplated by the conditional agreement in principle,
Herbert H. Haft would sell to Dart, Trak Auto and Crown Books all of his
shares of stock and stock options in these companies. The settlement also would
terminate Herbert H. Haft's employment agreement with Dart and resolve all
outstanding litigation and disputes between Dart and Herbert H. Haft. Herbert
H. Haft would also assign certain real estate interests to Dart.
Herbert H. Haft would receive approximately $30 million from Dart if the
settlement is implemented. Herbert H. Haft would also receive an additional
$11.6 million from escrowed funds previously paid by Dart to Ronald S. Haft as
part of the RSH Settlement (plus $700,000 interest on those funds). The
conditional agreement in principle also contemplates that Dart would make a $10
million loan to a partnership owned by Herbert H. Haft and Ronald Haft, which
loan would be secured by such partnership's interests in three shopping centers
located in suburban Washington, D.C. and would be personally guaranteed by
Ronald S. Haft.
Implementation of the conditional agreement in principle is subject to the
negotiation of
28
29
Item 3. Legal Proceedings (Continued)
a definitive settlement agreement satisfactory to Dart and Dart's receipt of
satisfactory advice from its investment bankers. The conditional agreement in
principle states that it will terminate if a definitive settlement agreement is
not entered into by May 9, 1997.
The conditional agreement in principle is also conditioned on Dart's entering
into a supplemental settlement with Ronald S. Haft and a comprehensive
settlement with RGL. Negotiations with respect to these related settlements are
currently underway. Current settlement discussions contemplate that Dart, Trak
Auto and Crown Books would collectively pay approximately $50 million in
exchange for all of RGL's equity interests in these companies and certain real
estate interests. There can be no assurance that such settlements will be
reached or as to the terms or timing of any settlement, if one occurs.
Closing of the transactions contemplated by the conditional agreement
in principle also is subject to (i) final and non-appealable action by the
Delaware Court of Chancery or the Delaware Supreme Court approving all of the
terms of the settlement, terminating certain putative derivative actions
pending with respect to Dart and Crown Books in the Delaware Court of Chancery,
and approving the RSH Settlement and the supplemental settlement between Dart
and Ronald S. Haft, and (ii) final and non-appealable action by the U.S.
Bankruptcy Court approving the effectiveness of Chapter 11 plans of
reorganization for certain real estate entities owned by Haft family members.
There can be no assurance that a definitive settlement agreement between Dart
and Herbert H. Haft will be entered into and that the transactions contemplated
by the conditional agreement in principle will be implemented.
Any settlement with RGL (including any financing of such settlement) would
require further order of the Delaware Court of Chancery under the Standstill
Order and could be opposed by Herbert H. Haft if Dart does not settle with him.
A closing of any settlement with RGL would be subject to available financing
and the proposed settlement with Herbert H. Haft would be subject to the
receipt of advice by Dart from its financial advisor that adequate financing
would be available at closing. Dart and its subsidiaries do not presently have
cash available to pay the approximately $90 million (including the loan of $10
million) contemplated by the possible settlements but are considering various
options to finance them. See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources.
Other
In the normal course of business, the Company is involved in various claims and
litigation. In the opinion of management, liabilities, if any, will not have
29
30
Item 3. Legal Proceedings (Continued)
a material adverse effect upon the consolidated financial condition and results
of operations of the Company.
The Company recorded legal expenses of approximately $22.4 million, $7.2
million and $18.4 million during the years ended January 31, 1997, 1996 and
1995, respectively. These amounts include estimated future expenses that likely
will be necessary to resolve all litigation discussed above.
30
31
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
31
32
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Class A Common Stock is quoted on the Nasdaq under the symbol DARTA. The
following table sets forth the range of the high and low sale prices for the
Class A Common Stock, as reported by the Nasdaq, and the dividends declared for
the fiscal quarters indicated.
Class A Common Stock
- -------------------- Dividends
Declared
Quarter Ended High Low Per Share
- ------------- -------- ------- ---------
April 30, 1995 98 73 .03 1/3
July 31, 1995 96 83 3/4 .03 1/3
October 31, 1995 100 79 .03 1/3
January 31, 1996 96 1/2 88 1/4 .03 1/3
April 30, 1996 95 1/8 81 3/4 .03 1/3
July 31, 1996 96 1/2 75 .03 1/3
October 31, 1996 87 3/4 99 1/2 .03 1/3
January 31, 1997 100 84 .03 1/3
There were approximately 320 record holders of the Class A Common Stock as of
April 30, 1997.
No public trading market exists for the Class B Common Stock. Dart has never
paid dividends to the holders of Class B Common Stock and does not expect to do
so in the foreseeable future. There were four record holders of the Class B
Common Stock as of April 30, 1997. See Item 3 - Legal Proceedings.
32
33
Item 6. Selected Financial Data
Income Statement Data: (dollars in thousands, except per share data)
Fiscal Year
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Revenues $ 668,089 $ 678,136 $ 967,428 $1,376,543 $1,272,677
Expenses 696,491 690,819 1,047,149 1,369,574 1,251,458
Unusual items - - - - 3,894
Income (loss) before
minority interests
and income from
unconsolidated
subsidiary (28,186) (18,832) (78,022) (225) 11,652
Income (loss) from
unconsolidated
subsidiary 11,405 10,055 (5) - -
Minority interests (1) 88 (4,647) 4,235 (6,512) (8,143)
Income (loss) before
extraordinary item and
cumulative effect of
accounting change (16,693) (13,424) (73,792) (6,737) 3,509
Extraordinary item:
Repurchase of
debentures - - - - (885)
Cumulative effect of
change in accounting
principle (2) - - - - 1,135
---------- ---------- ---------- ---------- ----------
Net Income (loss) $ (16,693) $ (13,424) $ (73,792) $ (6,737) $ 3,759
========== ========== ========== ========== ==========
Per share data:
Income (loss) before
extraordinary item and
cumulative effect of
accounting change $ (8.73) $ (7.36) $ (39.57) $ (4.10) $ 1.91
Extraordinary item:
Repurchase of
debentures - - - - (.48)
Cumulative effect of
change in account-
ing principle (2) - - - .62
---------- ---------- ---------- ---------- ----------
Net Income (loss) $ (8.73) $ (7.36) $ (39.57) $ (4.10) $ 2.05
========== ========== ========== ========== ==========
Cash dividends
declared per share
of Class A common
stock $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13
========== ========== ========== ========== ==========
33
34
Item 6. Selected Financial Data (Continued)
Balance Sheet Data (dollars in thousands)
- ------------------ Fiscal Year
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
Working capital $ 90,262 $119,101 $180,415 $281,242 $267,801
Total assets (1) 450,172 470,565 706,489 802,898 722,379
Long-term obligations 58,067 67,641 170,417 151,818 120,231
Stockholders' Equity 118,356 134,576 199,363 274,307 279,239
(1) As of January 31, 1997 Dart owned 67.1% of the common stock of Trak
Auto and 52.3% of the common stock of Crown Books.
The accounts of Shoppers Food are consolidated with Dart's through
May 28, 1994, but not thereafter, as a result of a reduction of
Dart's ownership to 50%. Dart's investment in Shoppers Food is
reflected in the financial statements using the equity method of
accounting for periods subsequent to May 28, 1994.
The accounts of the CMREC joint ventures are consolidated with
Dart's through October 6, 1995, but not thereafter, because, as a
result of the RSH Settlement, CMREC's economic interests in these
partnerships were reduced. In the event the RSH Settlement is not
sustained, the accounting treatment of the transfer of the CMREC
economic interests could be significantly affected.
(2) The 1993 cumulative effect of a change in accounting principles was
the result of Trak Auto's adopting Statement of Financial Accounting
Standard No. 109, Accounting for Income Taxes.
34
35
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Information
Dart does not conduct operations except through its subsidiaries, Trak Auto,
Crown Books, Total Beverage and, after February 6, 1997, Shoppers Food. Because
Dart has no operations other than through its subsidiaries, the results of
operations for Dart are reflected in the results of operations set forth below
under headings relating to each subsidiary. As a holding company, Dart has
served primarily to provide administrative support and strategic oversight and
direction to its subsidiaries and their businesses.
Dart's publicly traded Class A Common Stock has no right to vote. Dart's voting
stock, the Class B Common Stock, has been beneficially owned by Haft family
members.
The termination of Robert M. Haft as President and Chief Operating Officer of
Dart and as Chief Executive Officer and President of Crown Books in 1993, the
appointment of Ronald S. Haft as President and Chief Operating Officer of Dart
and the ensuing disagreements between Ronald S. Haft and Herbert H. Haft in
1994 has resulted in significant disputes over which Haft family members
control Dart. As a result of these disputes, Dart has been involved in
significant litigation involving Haft family members. See Item 3 - Legal
Proceedings.
On September 7, 1994, the Board of Directors of Dart established an Executive
Committee comprised of Dart's outside directors to conduct the affairs of Dart
with respect to matters that were the subject of disputes between the Chairman
of the Board and Chief Executive Officer of Dart, Herbert H. Haft, and the then
President and Chief Operating Officer of Dart, Ronald S. Haft. 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
comprised of the same outside directors, with authority parallel to that of
Dart's Executive Committee. The disputes between Herbert H. Haft and Ronald S.
Haft concerning issues involving Dart have been extensive. Accordingly, the
Executive Committee assumed day-to-day involvement in these disputed issues and
other matters affecting Dart, in particular matters relating to litigation to
which Dart is a party. While the Executive Committee remains involved in the
day-to-day affairs of Dart, its continuing role is dependent upon future
developments.
On October 6, 1995, Dart and Ronald S. Haft entered into the RSH Settlement.
See Note 6 to Dart's Consolidated Financial Statements (Item 8 - Financial
Statements and Supplementary Data). The RSH Settlement transactions are subject
to legal challenge. See Item 3 - Legal Proceedings. If sustained, the RSH
Settlement transactions were intended to have the effect, by their terms, of
transferring majority control of Dart's voting stock to one or more
35
36
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
voting trustees under the Voting Trust Agreement. On December 28, 1995, the
initial Voting Trustees resigned and appointed Richard B. Stone as successor
Voting Trustee.
In connection with legal challenges to the RSH Settlement, on December 6, 1995,
the Delaware Court of Chancery entered the Standstill Order, which restricts
certain actions by Dart. Without further order of the court, Dart may not (i)
change its Certificate of Incorporation or Bylaws; (ii) change the current
composition of Dart's Board of Directors (Herbert H. Haft, Ronald S. Haft,
Larry G. Schafran, Bonita A. Wilson and Douglas M. Bregman) or any of its
subsidiaries; (iii) change the current Haft family officers of Dart or any of
its subsidiaries; or (iv) issue any additional securities of Dart or any of its
subsidiaries (except employee stock options issued in the ordinary course of
business). In addition, without first giving Herbert H. Haft and certain other
litigants not less than seven days written notice, Dart may not take any
extraordinary actions, including but not limited to actions that would result
in (a) the liquidation of Dart or any of its subsidiaries, (b) the sale of any
major subsidiary of Dart or (c) the disadvantage of any Class B stockholder of
Dart through any debt transaction. For purposes of the Standstill Order, the
phrase "extraordinary actions" means any transaction, contract or agreement,
the value of which exceeds $3 million.
Management believes that litigation between the Company and Haft family members
has had an adverse impact on the Company's results of operations, financial
position and liquidity. During fiscal 1997, Dart and Crown Books paid
approximately $21.0 million and $16.9 million (including interest of
approximately $3.3 million), respectively to Robert M. Haft for satisfaction of
a judgement awarded to him in March 1995 (the "RMH Judgement"). During fiscal
1996, the RSH Settlement reduced cash by approximately $50 million and
shareholders' equity by approximately $56 million. Also during fiscal 1997 and
1996, in connection with the RSH Settlement and litigation involving Haft
family members, the Company paid approximately $10.4 million and $12.4 million
respectively, in legal fees. Management believes that the continued uncertainty
relating to the control of Dart and the surrounding litigation has affected the
Company's reputation among banks, vendors and landlords and made the Company's
efforts to recruit highly-qualified personnel more difficult. The uncertainty
surrounding control of Dart (and the associated effects of such uncertainty)
may continue until pending litigation is adjudicated or settled.
Dart is engaged in discussions with Haft family members to explore
opportunities to settle litigation pending between the parties. On April 21,
1997, Dart reached a conditional settlement agreement in principle with Herbert
H. Haft. See Item 3 - Legal Proceedings - Possible Settlements. There can be no
assurance that any definitive settlement will be reached or as to the terms or
timing of any settlement, if one occurs.
36
37
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
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 (or settlements of litigation), the
Company's ability to effectively compete in the highly competitive retail book
store and automotive parts aftermarket industries, 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 and any settlement of litigation involving the Haft family
members could pose a threat to Dart's liquidity. See "Possible Settlements"
below.
On February 6, 1997, Dart acquired the other 50% interest in Shoppers Food that
it did not already own for $210 million (the "Acquisition"). Dart financed the
Acquisition through the application of $137.2 million in net proceeds raised
from an offering of Increasing Rate Senior Notes due 2000 (the "Senior Notes")
of SFW Acquisition Corp., a newly created wholly-owned subsidiary of Dart, and
a $72.8 million bridge loan. Immediately after the Acquisition, SFW Acquisition
Corp. merged into Shoppers Food (with Shoppers Food becoming obligor on the
Senior Notes) and Shoppers Food repaid the bridge loan from existing cash and
liquidation of short-term investments. Dart intends to analyze the options
available to it with regard to Shoppers Food, which options include, among
others, refinancing of the Senior Notes or a sale of all or part of Shoppers
Food. Any such transaction may require further order of the Delaware Court of
Chancery under the Standstill Order and may be opposed by Herbert H. Haft or
the other parties to the Section 225 Action.
Crown Books' believes that its superstore concept presents growth opportunities
and intends to open new superstores in existing and possibly new markets.
Realizing these opportunities is dependent upon the successful performance of
the superstores. 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. Crown Books' believes that, as the superstores mature and as the
number of stores and total sales increases, operating expenses as a percentage
of sales will decrease.
The retail book market is highly competitive. Crown Books and the two largest
book chains continue to open additional new stores each year in Crown Books'
markets, thereby continuing to increase the overall level of competition.
Management believes that the markets in which it operates will remain highly
37
38
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
competitive in the foreseeable future and, as a result, Crown Books will be
challenged to significantly improve operating results in fiscal 1998.
Trak Auto believes that its superstore concept presents significant growth
opportunities and intends to open new Super Trak and Super Trak Warehouse
stores in existing and possibly new markets. In the past, these superstores
have generated higher sales at locations converted from Classic Trak stores as
well as higher gross margins as a result of a change in product mix (increased
hard parts). Trak Auto believes that as superstores mature, operating expenses
as a percentage of sales will decrease.
The automotive aftermarket is a highly competitive market place. As a result,
the industry is consolidating with independent operators and small chains
either going out of business or being acquired by larger competitors.
Additionally, the do-it-yourself customer base is shrinking due to the
increased complexity of automobiles, increased incidences of leasing, and the
availability of well maintained leased vehicles entering the used car market.
Trak Auto's management believes that the markets in which it operates will
remain highly competitive in the foreseeable future and, as a result, that Trak
Auto will be challenged to improve operating results in fiscal 1998.
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
currently anticipates closing approximately 29 Classic Crown Books stores,
12 non-prototype Super Crown Books stores and relocating one prototype Super
Crown Books store during fiscal 1998.
Liquidity and Capital Resources
Cash, including short-term instruments and U.S. government and other marketable
debt 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 $41,956,000 to $45,372,000 at January 31, 1997 from $87,328,000 at
January 31, 1996. This decrease was primarily due to the payment of the RMH
Judgment, to 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 and a $5.0 million dividend received from Shoppers Food.
For the year ended January 31, 1997, the Company realized a pre-tax yield of
approximately 5.2% on United States Treasury Bills and approximately 6.4% on
the marketable debt securities.
38
39
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Operating activities used $42,840,000 of the Company's funds for the year ended
January 31, 1997 compared to $30,718,000 for the same period one year ago. The
primary use of cash for the year ended January 31, 1997 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 $15,775,000 to the Company for the year ended
January 31, 1997, compared to $17,287,000 for the same period last year. The
net dispositions of United States Treasury Bills and marketable debt securities
provided cash in the current year and was partially offset by capital
expenditures.
Financing activities provided $11,943,000 to the Company during the year ended
January 31, 1997 primarily as a result of the repayment of a $11.6 million note
receivable from Ronald S. Haft. Financing activities used $49,179,000 of the
Company's funds during the year ended January 31, 1996 primarily due to
distributions of approximately $50.0 million to Ronald S. Haft in connection
with the RSH Settlement. In February 1997, the Company used $72.0 million of
Shoppers Food's existing cash and $137.2 million in net proceeds received from
the sale of the Senior Notes to finance the Acquisition. If Shoppers Food is
not sold in fiscal 1998, the Company expects to refinance the Senior Notes, the
interest rate on which increases 50 basis points every three months commencing
on August 1, 1997. The indenture under which the Senior Notes were issued
contains various restrictive covenants, including a limitation on the payment
of dividends by Shoppers Food to Dart. Any refinancing agreement would likely
contain similar restrictive covenants.
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
Company's cash, including marketable debt securities, decreased by
approximately $42.0 million in fiscal 1997 and $104.4 million in fiscal 1996.
In fiscal 1997, Crown Books and Trak Auto entered into revolving credit
facilities.
Dart's working capital needs primarily consist of funding any operating losses
of Total Beverage, payroll and legal fees. Dart expects to meet its working
capital needs in fiscal 1998 from existing cash and short-term investments and
a $10.0 million dividend declared by Shoppers Food in February 1997 (permitted
by the Senior Note indenture).
The primary capital requirements of Crown Books relate to new store openings
and investments in management information systems. Crown Books believes that
the resources required for a new store generally approximate $800,000,
including inventory purchases, net of accounts payable, and the costs of store
fixtures and leasehold improvements, net of landlord contributions. During
39
40
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
fiscal 1998, Crown Books expects to open approximately 40 Super Crown
Books stores (but may open fewer stores) requiring cash expenditures of
approximately $32.0 million. Crown Books has entered into lease agreements to
open nine new Super Crown Books stores, in fiscal 1998. Crown Books expects to
have cash expenditures of approximately $2.5 million related to stores that
have been closed or will be closed, in fiscal 1998. Crown Books expects to meet
its working capital and capital expenditures with cash generated from improving
its inventory turnover, its operations and borrowing under its revolving credit
agreement. Crown Books had $25.0 million available for borrowing under its
revolving credit facility at February 1, 1997. There can be no assurances that
Crown Books will have adequate resources to meet its cash flow requirements for
projected store openings if it does not improve its inventory turnover.
In connection with its expansion program, Crown Books anticipates increasing
its borrowing under its revolving credit facility, subject to limitations
contained in the loan agreement. To increase the limit from $25.0 million
to $35.0 million, Crown Books is required to maintain a minimum tangible
net worth of $73.0 million as of the fiscal year end preceding the
election and for each fiscal year end thereafter, and to maintain a minimum
tangible net worth of $70.0 million as of the election date and thereafter, in
addition to other covenants. To increase the limit from $35.0 million to $50.0
million, Crown Books is required to maintain a minimum tangible net worth of
$75.0 million as of the fiscal year end preceding the election and for each
fiscal year end thereafter, in addition to other covenants. As of February 1,
1997, Crown Books' tangible net worth was $84.5 million. There can be no
assurance that Crown Books' tangible net worth will meet the requirements to
increase its revolving credit facility availability above the current $25.0
million limit. There also can be no assurance that if the limit is increased
above $25.0 million, that Crown Books' will maintain the required minimum
tangible net worth and that it would be able to pay down the revolving credit
facility as required.
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 and new store
openings (including inventory purchases and the costs of store fixtures and
leasehold improvements). As of February 1, 1997, Trak Auto had entered into
lease agreements to open seven new stores.
In December 1996, Trak Auto entered into a revolving credit facility with a
finance company to borrow up to $25.0 million. The credit facility has an
original term of three years. Borrowings are limited to eligible inventory
levels and are secured by Trak Auto's inventory, accounts receivable and
proceeds from the sale of those assets. The credit facility contains certain
restrictive covenants and a maximum leverage ratio covenant. The covenants
include a limitation of $25.0 million on amounts paid (including a $20.0 million
limitation on amounts guaranteed) to settle disputes with Haft family members.
40
41
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Trak Auto did not borrow under the credit facility during the year ended
February 1, 1997.
Shoppers Food has four signed lease agreements for new stores to be opened over
the next 12 to 18 months. Shoppers Food expects to fund working capital needs,
capital expenditures for new stores and interest payments on the Senior Notes
with cash provided by operations.
Total Beverage is considering locations for new stores and may open one or more
new stores in fiscal 1998 in the Chicago, Illinois metropolitan area.
Funding of Possible Settlements
Dart has reached a conditional settlement agreement in principle with Herbert
H. Haft and is currently negotiating a possible settlement with RGL as well as
a possible supplemental settlement agreement with Ronald S. Haft. See Item 3 -
Legal Proceedings - Possible Settlements. The aggregate payments estimated to
be paid by Dart and its subsidiaries in connection with these possible
settlements is approximately $90 million (including a loan of $10 million),
part of which would be deferred. It is anticipated that Dart would pay
substantially all of this amount, though a portion (yet to be determined) could
be allocated to Trak Auto and Crown Books. Allocation of any actual settlement
obligations among the companies would be in proportion to reflect relative
benefits each company receives, as determined by their boards of directors
after consultation with outside advisors.
Dart and its subsidiaries do not presently have cash available to pay the
approximately $90 million contemplated by the possible settlements, but are
considering various options to finance them, if they occur. Dart may sell all
or part of Shoppers Food or, if it is not sold, use Shoppers Food's existing
cash and proceeds from new debt financing by Shoppers Food. However, there can
be no assurance that Dart would obtain any such financing or as to the terms of
any financing, if it is obtained. Trak Auto and Crown Books anticipate that
they would pay their portion of the settlement obligations from borrowings
under their respective credit facilities.
It has been suggested that Dart sell one or all of its subsidiaries and
possibly liquidate. Dart has no plan to liquidate. However, Dart has explored
the possible sale of Shoppers Food and may be open to the possibility of other
strategic opportunities.
At January 31, 1997
Working capital decreased $28,839,000 to $90,262,000 during the year ending
January 31, 1997. The decrease was primarily due to capital expenditures for
41
42
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
new Trak Auto and Crown Books stores; Dart, Crown Books and Total Beverage
operating losses and decreased operating results at Trak Auto. The decreases
were partially offset by a $5.0 million cash dividend from Shoppers Food and
the repayment of a $11.6 million note receivable from Ronald S. Haft.
At January 31, 1996
Working capital decreased $61,314,000 to $119,101,000 during the year ending
January 31, 1996. The decrease was primarily due to loans made to Ronald S.
Haft in connection with the RSH Settlement, capital expenditures for new Trak
Auto and Crown Books stores and Trak Auto's Pittsburgh acquisition and common
stock repurchase and was partially offset by Trak Auto's operating results and
a cash dividend payment from Shoppers Food and CMREC joint venture
distributions.
Results of Operations
"Fiscal 1997" means the year ended January 31, 1997, with respect to Dart, and
the year ended February 1, 1997, with respect to Trak Auto, Crown Books and
Total Beverage. "Fiscal 1996" means the year ended January 31, 1996, with
respect to Dart, and the year ended February 3, 1996, with respect to Trak
Auto, Crown Books and Total Beverage. "Fiscal 1995" means the year ended
January 31, 1995, with respect to Dart, and the year ended January 28, 1995,
with respect to Trak Auto, Crown Books and Total Beverage.
Fiscal 1997 Compared to Fiscal 1996
Trak Auto
During fiscal 1997, Trak Auto opened or converted 14 Super Trak stores and 14
Super Trak Warehouse stores and closed or converted 13 Classic Trak stores and
five Super Trak stores. At February 1, 1997, Trak Auto had 286 stores,
including 122 Super Trak stores and 44 Super Trak Warehouse stores.
Sales of $345,984,000 for fiscal 1997 (52 weeks) increased by $3,742,000 or
1.1% compared to fiscal 1996 (53 weeks). The increase was primarily due to Trak
Auto's entry into the Pittsburgh, Pennsylvania market in January 1996 and to
increased sales in the Washington, D.C. and Chicago, Illinois markets during
the first quarter of fiscal 1997 resulting from harsh winter conditions. The
increases were partially offset by a decline in sales for the Los Angeles,
California market where three stores were closed in fiscal 1997. The extra week
of sales in fiscal 1996 was approximately $6,000,000. Comparable sales (stores
open more than one year) decreased 1.7% in fiscal 1997 compared to the 52 weeks
ended February 3, 1996. Sales for comparable Super Trak Warehouse stores
increased 0.3% in fiscal 1997. Sales for comparable Super Trak stores decreased
1.6% in fiscal 1997. Sales for
42
43
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
comparable Classic Trak stores decreased 2.3% in fiscal 1997. Sales for Super
Trak and Super Trak Warehouse stores represented 64.6% of total sales during
fiscal 1997 compared to 56.2% for fiscal 1996.
Interest and other income decreased by $772,000 in fiscal 1997 when compared to
fiscal 1996. The decrease was primarily due to reduced interest income as a
result of a decrease in funds available for short-term investments.
Cost of sales, store occupancy and warehousing expenses as a percentage of
sales were 75.9% in fiscal 1997 compared to 74.1% in fiscal 1996. The increases
were primarily due to a decrease in gross margins as a result of competitive
pressures, higher store occupancy costs for larger stores with newer leases,
and increased distribution costs due to broader geographical delivery areas and
increased SKU's supplied to Super Trak Warehouse stores.
Selling and administrative expenses as a percentage of sales were 20.9% in
fiscal 1997 compared to 20.3% in fiscal 1996. The increase was primarily due to
increased payroll costs.
Depreciation and amortization expenses increased $1,203,000 in fiscal 1997
compared to fiscal 1996. The increase was primarily due to increases in store
fixed assets as a result of the opening and conversion of stores to Super Trak
or Super Trak Warehouse stores and the stores in new markets.
Interest expense increased $67,000 in fiscal 1997 compared to fiscal 1996.
Net income decreased $6,206,000 from $7,290,000 in fiscal 1996 to $1,084,000 in
fiscal 1997 as a result of the foregoing factors.
The effective income tax rate was 25.0% in fiscal 1997 compared to 36.4% in
fiscal 1996. The decrease was primarily the result of a decrease in taxable
income while a permanent tax difference remained relatively unchanged.
Crown Books
During fiscal 1997, Crown Books opened 27 Super Crown Books stores while
closing 29 Classic Crown Books stores and two Super Crown Books stores. At
February 1, 1997, Crown Books had 168 stores, including 109 Super Crown Books
stores.
Sales of $287,737,000 for fiscal 1997 (52 weeks) increased by $4,262,000 or
1.5% compared to fiscal 1996(53 weeks). The increase was primarily due to the
27 new Super Crown Books stores opened during the year and the maturity of
Super Crown Books stores opened in fiscal 1996. Comparable sales (sales for
stores open for 13 months) decreased 2.1% for fiscal 1997. However, comparable
sales for the new prototype superstore increased 5.1% during fiscal
43
44
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
1997. Sales for Super Crown Books stores represented 78.4% of total sales for
fiscal 1997 compared to 66.7% of total sales for fiscal 1996. Super Crown Books
sales of $225,543,000 for fiscal 1997 increased 19.2% over sales for fiscal
1996. Sales for comparable Super Crown Books stores, however, decreased 1.9% in
fiscal 1997. Sales for comparable classic Crown Books stores decreased 2.7%
during fiscal 1997.
Interest and other income decreased by $1,929,000 during fiscal 1997 when
compared to fiscal 1996. The decrease was due to reduced interest income as a
result of decreased funds available for short-term investments.
Cost of sales, store occupancy and warehousing expenses as a percentage of
sales were 81.2% for fiscal 1997 compared to 81.8% for fiscal 1996. The
decrease was primarily due to increased gross margins as a result of taking
advantage of vendor discounts, an improvement in the sales mix and a change in
the sales discount policy and were partially offset by increased store
occupancy costs.
Selling and administrative expenses as a percentage of sales were 18.9% for
fiscal 1997 compared to 18.0% for fiscal 1996. The increase was primarily due
to increased store and administrative payroll costs.
Depreciation expense increased $292,000 for fiscal 1997 compared to fiscal
1996. The increase was primarily due to an increase in fixed assets as a result
of new Super Crown Books stores.
Interest expense decreased by $164,000 due to reduced interest expense for the
RMH Judgement as a result of its payment in August 1996. The increase was
partially offset by interest on borrowings under the Crown Books revolving
credit facility.
During fiscal 1997, 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) management's decision not to close certain
stores, (ii) stores that were closed under negotiated lease settlements that
were more favorable than expected and(iii) the postponement of certain store
closing dates. The remaining closed store and restructuring reserves relate to
83 stores with lease obligations primarily through the next three fiscal years.
Crown Books had a net loss of $860,000 in fiscal 1997 compared to net income of
$3,704,000 in fiscal 1996 as a result of the foregoing factors.
Crown Books has recorded a tax benefit of $578,000 in fiscal 1997 as compared
to income tax expense $1,977,000 in fiscal 1996. In fiscal 1997, the effective
tax rate was 40.2% compared to 34.8% in fiscal 1996 due primarily to
44
45
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
state income tax benefits associated with Crown Books net operating losses.
Total Beverage
During the year ended January 31, 1997, Total Beverage closed one store due to
disappointing sales volume. At January 31, 1997, Total Beverage had three
stores.
Total Beverage sales were $30,097,000 during fiscal 1997 compared to
$29,444,000 for fiscal 1996. The increase was due primarily to sales at the
newest store in McLean, VA.
Cost of sales and store occupancy as a percentage of sales were 81.2% during
fiscal 1997 compared to 82.0% for fiscal 1996. The decrease was primarily due
to increased gross margins, primarily due to the results at the McLean, VA
store compared to the results of the store that was closed.
Selling and administrative expenses as a percentage of sales were 21.7% during
fiscal 1997 compared to 22.1% in fiscal 1996 primarily due to reduced
advertising costs.
Total Beverage recorded a net operating loss of $1,132,000 during fiscal 1997
compared to a net operating loss of $1,422,000 (excluding accrual and reversal
of closed store reserves) during fiscal 1996. The net operating loss in fiscal
1997 included approximately $638,000 paid to outside consultants that were
retained to assist in the development and implementation of a strategic
business plan.
Dart Group and Other Corporate
Interest and other income decreased $3,344,000 during fiscal 1997 when compared
to fiscal 1996. The decrease was primarily due to reduced funds available for
short-term investment as a result of funds disbursed pursuant to the RSH
Settlement in fiscal 1996 and the RMH Judgement in fiscal 1997.
Administrative expenses increased $10,549,000 during fiscal 1997 primarily due
to accrued legal expenses.
Interest expense decreased $1,056,000 during fiscal 1997 due to reduced
interest as a result of payment on the RMH Judgment.
Dart's investment in Shoppers Food is reflected in the accompanying financial
statements using the equity method of accounting for periods subsequent to May
28, 1994.
Shoppers Food revenue for the the year ended February 1, 1997 was
45
46
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
$862,395,000. Operating income for the year ended February 1, 1997 includes
approximately a $400,000 increase in accrued insurance, $850,000 increase in
closed store reserve and $456,000 in salary increases. Depreciation and
amortization expense was $8,720,000 for the year ended February 1, 1997.
Trak Auto, Crown Books and Shoppers Food file separate income tax returns.
CMREC and Total Beverage are included in Dart's income tax returns. However,
effective with the income tax return for the twelve months ended January 31,
1998, Shoppers Food will be included in Dart's income tax return. 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 fiscal 1997, a net tax operating loss
carryforward of $27,609,000 was created. Dart's cumulative total net tax
operating loss carryforward is $66,102,000. 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 $33,474,000 as of January 31, 1997.
Management continues to evaluate the adequacy of this valuation allowance.
Fiscal 1996 Compared to Fiscal 1995
Trak Auto
During fiscal 1996, Trak Auto opened or converted 17 Super Trak stores and 23
Super Trak Warehouse stores and closed or converted 36 Classic Trak stores and
ten Super Trak stores. At February 3, 1996, Trak Auto had 276 stores, including
113 Super Trak stores and 30 Super Trak Warehouse stores.
Sales of $342,242,000 for fiscal 1996 decreased by $6,357,000 or 1.8% compared
to fiscal 1995. The decrease was primarily due to lower sales during the 13
weeks ended April 29, 1995 compared to the 13 weeks ended April 30, 1994, as a
result of the mild winter conditions in Chicago and Washington, D.C.
metropolitan areas. (Extremely cold weather tends to enhance sales by causing a
higher incidence of parts failure and the need for anti-freeze). In addition,
sales were down due to a net decrease in the number of stores. The sales
decrease was partially offset by 53 weeks of sales during fiscal 1996 compared
to 52 weeks of sales in fiscal 1995. The extra sales week was approximately
$6,000,000. Comparable sales (stores open more than one year) decreased 2.7% in
fiscal 1996 compared to the 53 weeks ended February 4, 1995. Sales for
comparable Super Trak stores increased 0.1% in fiscal 1996. Sales for
comparable Classic Trak stores decreased 3.9% in fiscal 1996. Sales for Super
Trak and Super Trak Warehouse stores represented 56.2% of total sales during
fiscal 1996 compared to 42.6% for fiscal 1995.
Interest and other income increased by $471,000 in fiscal 1996 when compared
46
47
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
to fiscal 1995. The increase was primarily due to higher interest rates on
Trak Auto's short-term investments.
Cost of sales, store occupancy and warehousing expenses (excluding closed store
reserves) as a percentage of sales were 74.1% in fiscal 1996 compared to 73.0%
in fiscal 1995. The increases were primarily due to a decrease in net
advertising income as a result of increased advertising costs and increased
occupancy costs for Super Trak and Super Trak Warehouse stores and were
partially offset by increased gross margins.
Trak Auto recorded closed store reserves of $418,000 and $1,580,000 in fiscal
1996 and fiscal 1995, respectively. These reserves are for future lease
obligations and net book value of leasehold improvements for under performing
stores.
Selling and administrative expenses as a percentage of sales were 20.3% in
fiscal 1996 compared to 19.9% in fiscal 1995. The increase was primarily due to
increased payroll costs as a percentage of sales (actual payroll dollars
remained almost the same) and to increased health benefit costs.
Depreciation and amortization expenses increased $288,000 in fiscal 1996
compared to fiscal 1995. The increase was primarily the result of increased
fixed assets for new Super Trak and Super Trak Warehouse stores.
Interest expense decreased $211,000 in fiscal 1996 compared to fiscal 1995.
Net income decreased $2,975,000 (29.0%) from $10,265,000 in fiscal 1995 to
$7,290,000 in fiscal 1996 as a result of the foregoing factors.
The effective income tax rate was 36.4% in fiscal 1996 compared to 32.3% in
fiscal 1995. The increase was primarily the result of the valuation allowance
reversal in fiscal 1995 and is partially offset by a lower pre-tax income in
fiscal 1996 compared to fiscal 1995.
Crown Books
During fiscal 1996, Crown Books opened 16 Super Crown Books stores while
closing 38 Classic Crown Books stores and two Super Crown Books stores. These
Super Crown Books stores were closed as a result of opening larger stores in
the same area. At February 3, 1996, Crown Books had 172 stores, including 84
Super Crown Books stores.
Sales of $283,475,000 for fiscal 1996 decreased by $22,131,000 or 7.2% compared
to fiscal 1995. The decrease is primarily due to the net decrease in the number
of stores as a result of Crown Books's continuing transition to the new
superstore concept. Comparable sales (sales for stores open for fifteen
47
48
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
months) decreased 3.3% for fiscal 1996, however, comparable sales for the new
prototype superstore increased 11% during the 14 weeks ended February 3, 1996.
Sales for Super Crown Books stores represented 66.7% of total sales for fiscal
1996 compared to 54.7% of total sales for fiscal 1995. Super Crown Books sales
of $189,142,000 for fiscal 1996 increased 12.9% over the sales for fiscal 1995
and sales for comparable Super Crown Books stores decreased 1.8%. Sales for
comparable classic Crown Books stores decreased 5.7% during fiscal 1996.
Interest and other income increased by $647,000 during fiscal 1996 when
compared to fiscal 1995. The increase is primarily due to higher interest rates
on Crown Books's short-term investments.
Cost of sales, store occupancy and warehousing expenses as a percentage of
sales were 81.8% for fiscal 1996 compared to 81.2% for fiscal 1995. The
increases were primarily due to higher occupancy costs associated with the
Super Crown format and were partially offset by increased gross margins.
Selling and administrative expenses as a percentage of sales were 18.0% for
fiscal 1996 compared to 20.4% for fiscal 1995. The decrease was primarily due
to the prior year accruals for Robert M. Haft's judgment and legal costs.
Excluding these accruals, selling and administrative expenses as a percentage
of sales were 16.2% for fiscal 1995. The increase in selling and administrative
expenses, excluding the accruals, was primarily due to increased payroll and
advertising costs and costs associated with Crown Books' Executive Committee.
Depreciation expense increased $239,000 for fiscal 1996 compared to fiscal
1995. The increase was primarily due to increased fixed assets for new Super
Crown Books stores, an upgrade in the point-of-sale register system and
additional computer hardware.
Interest expense increased by $314,000 primarily due to interest accrued on
the judgment against Crown Books in favor of Robert M. Haft.
The closed store reserve was reversed by $6,743,000 in fiscal 1996 compared to
an increase (expense) in such reserve of $18,865,000 in fiscal 1995. In
addition, the restructuring reserve was reversed by $2,051,000 in fiscal 1996.
The reversals in the store closing and restructuring reserves in fiscal 1996
resulted from (i) stores that were closed under negotiated lease settlements
that were more favorable than expected, (ii) the postponement of certain store
closings and (iii) management's decision not to close two stores that had been
scheduled for closing.
Crown Books had net income of $3,704,000 in fiscal 1996 compared to a net loss
of $19,380,000 in fiscal 1995 as a result of the foregoing factors.
48
49
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Crown Books has recorded income tax expense of $1,977,000 in fiscal 1996 as
compared to tax benefit of $7,951,000 for fiscal 1995. In fiscal 1996, the
effective tax rate was 34.8% compared to (29.1)% in fiscal 1995 due primarily
to the $2,500,000 valuation recorded in the third quarter of fiscal 1995.
Total Beverage
During fiscal 1996, Total Beverage opened two new stores that increased its
number of stores to four.
Total Beverage sales were $29,444,000 during fiscal 1996 compared to
$23,925,000 for fiscal 1995. The increase was due primarily to additional
stores. Comparable store sales increased 2.4% when compared to fiscal 1995.
Cost of sales and store occupancy as a percentage of sales were 82.0% during
fiscal 1996 compared to 83.4% for fiscal 1995. The decrease was primarily due
to increased gross margins and a decrease in store occupancy costs, as a
percentage of sales.
During fiscal 1996, Total Beverage reversed its closed store reserve of
$4,719,000 as a result of a buyout of the remainder of the lease term. Total
Beverage had recorded the closed store reserve of approximately $5.6 million
during fiscal 1995. In addition, during fiscal 1996, management concluded that
one of the stores opened during that year would be closed in fiscal 1997 due to
disappointing sales volume. Total Beverage recorded a new closed store reserve
of approximately $3.0 million for the future lease obligations at that
location.
Before the reversal and accrual of the closed store reserves, Total Beverage
recorded a net operating loss of $1,422,000 during fiscal 1996 compared to a
net operating loss of $2,567,000 (excluding the $5.6 million closed store
reserve) during fiscal 1995.
Cabot Morgan Real Estate
During fiscal 1996, Dart recorded a loss of $14.6 million for the write-down to
fair market value of the five properties that CMREC owns through joint ventures
with partnerships in which the partners are members of the Haft family.
As part of the RSH Settlement, Dart and CMREC agreed to the sale of these five
properties. The sales occurred in May 1996 on terms arranged by Ronald S. Haft.
Under terms of the RSH Settlement, CMREC received $2.0 million for its retained
interest in the joint ventures from such sales. As a result of these
arrangements, the real estate joint ventures were no longer consolidated with
the Company's financial statements as of October 6, 1995.
49
50
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Dart Group and Other Corporate
Income from unconsolidated subsidiary was $10,055,000 in fiscal 1996 as a
result of an increase in Dart's equity interest in Shoppers Food which has been
reflected on Dart's financial statements using the equity method of accounting.
Interest and other income increased $521,000 during fiscal 1996 when compared
to fiscal 1995. The increase was primarily due to Dart's decision to invest in
United States Treasury Bills as bankers' acceptances matured during the first
half of fiscal 1995. In addition, interest rates were higher on Dart's
short-term investments.
Administrative expenses (excluding $54.0 million in reserves recorded last
year) increased approximately $2.4 million during fiscal 1996, primarily due to
compensation expense for Ronald S. Haft's employment contract (see Note 6 to
the Consolidated Financial Statements) and costs associated with the Executive
Committee and continuing legal expenses.
Interest expense increased by $2,717,000 during fiscal 1996 compared to fiscal
1995. The increase was due to interest accrued for the Robert M. Haft
judgment and Pennsy Lease reserve.
Trak Auto, Crown Books and Shoppers Food file separate income tax returns.
CMREC, Total Beverage and Dart Financial are included in Dart's income tax
returns.
As a result of Dart's operating loss for fiscal 1996, a net tax operating loss
carryforward of $26,140,000 and a capital loss carryforward of $14,594,000 was
created. Dart's cumulative total net tax operating loss carryforward is
$44,475,000. Dart has not completely utilized net operating loss carryforwards
from prior years and will carryforward its current net operating loss. All net
operating loss and capital loss carryforwards will expire by fiscal 2011. In
addition, Dart has an Alternative Minimum Tax credit carryforward of
approximately $1,010,000. Dart has a deferred tax valuation allowance of
$30,925,000 as of January 31, 1996. Management will continue to evaluate the
need for a valuation allowance on a periodic basis.
Effects of Inflation
Inflation in the past three years has had no significant impact on the
Company's business. Dart believes that Trak Auto, Crown Books, Shoppers
Food and Total Beverage will recover most cost increases due to inflation by
increasing selling prices.
50
51
Item 8. Financial Statements and Supplementary Data
Financial Statements Page
- -------------------- ----
Report of Independent Public Accountants 52
Consolidated Balance Sheets 53
Consolidated Statements of Operations 55
Consolidated Statements of Stockholders' Equity 56
Consolidated Statements of Cash Flows 58
Notes to Consolidated Financial Statements 61
51
52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO DART GROUP CORPORATION:
We have audited the accompanying consolidated balance sheets of Dart Group
Corporation (a Delaware corporation) and subsidiaries as of January 31, 1997
and 1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
January 31, 1997. These financial statements are the responsibility of Dart's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dart Group Corporation and
subsidiaries as of January 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three fiscal years in the
period ended January 31, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in fiscal 1997
the Company changed its method of accounting for cash equivalents. In fiscal
1995, Trak Auto Corporation, a subsidiary, changed its method of accounting for
its LIFO inventory.
ARTHUR ANDERSEN LLP
Washington, D. C.
April 25, 1997
52
53
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
January 31,
-----------------------
ASSETS 1997 1996
------------ ----------
Current Assets:
Cash and equivalents $ 12,382 $ 13,967
Short-term instruments 27,276 40,813
Marketable debt securities 5,714 32,548
Accounts receivable 14,699 8,965
Income taxes refundable 3,802 -
Merchandise inventories 218,619 205,615
Deferred income tax benefit 7,324 13,915
Other current assets 6,445 2,199
--------- ---------
Total Current Assets 296,261 318,022
--------- ---------
Property and Equipment, at cost:
Furniture, fixtures and equipment 104,541 91,311
Buildings and leasehold improvements 29,873 28,105
Land 1,034 1,034
Property under capital leases 24,472 24,472
--------- ---------
159,920 144,922
Accumulated Depreciation and Amortization 80,849 68,559
--------- ---------
79,071 76,363
Other Assets 5,773 3,145
--------- ---------
Note Receivable - Ronald S. Haft - 11,621
--------- ---------
Share of Equity in Shoppers Food
Warehouse Corporation 52,802 46,397
--------- ---------
Retained Interest in Cabot-Morgan
Real Estate Joint Ventures - 2,000
--------- ---------
Excess of Purchase Price Over Net Assets
Acquired net of accumulated
amortization of $382,000 and $175,000 1,890 1,735
--------- ---------
Deferred Income Tax Benefit 14,375 11,282
--------- ---------
Total Assets $ 450,172 $ 470,565
========= =========
See notes to consolidated financial statements.
53
54
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
January 31,
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------ ----------
Current Liabilities:
Current portion of mortgages payable $ 1,106 $ 1,028
Accounts payable, trade 102,942 89,095
Income taxes payable 3,322 967
Accrued salaries and employee benefits 18,766 18,456
Accrued taxes other than income taxes 9,738 7,669
Accrued judgment in favor of Robert M. Haft - 34,579
Current portion of reserve for closed
facilities and restructuring 5,701 6,970
Other accrued liabilities 64,215 40,056
Current portion of obligations under
capital leases 209 101
--------- ---------
Total Current Liabilities 205,999 198,921
--------- ---------
Mortgages Payable 353 660
--------- ---------
Obligations Under Capital Leases 30,373 30,165
--------- ---------
Reserve for Closed Facilities and Restructuring 27,341 36,816
--------- ---------
Commitments and Contingencies
Minority Interests 67,750 69,427
--------- ---------
Stockholders' Equity:
Class A Common Stock, non-voting, par
value $1.00 per share; 3,000,000 shares
authorized; 1,962,403 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 78,841 77,879
Notes receivable - shareholder (65,130) (65,130)
Unrealized gains (losses) on short-term
investments (22) 246
Retained earnings 104,242 121,169
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 118,356 134,576
--------- ---------
Total Liabilities and Stockholders' Equity $ 450,172 $ 470,565
========= =========
See notes to consolidated financial statements.
54
55
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
Years Ended January 31,
--------------------------------------
1997 1996 1995
----------- ---------- -----------
Sales $ 663,818 $ 655,161 $ 936,606
Real estate revenue - 13,155 19,977
Other interest and other income 4,271 9,820 10,845
---------- ---------- ----------
668,089 678,136 967,428
---------- ---------- ----------
Expenses:
Cost of sales, store occupancy
and warehousing 520,746 509,136 735,010
Selling and administrative 159,229 146,209 233,692
Depreciation and amortization 14,040 15,453 19,086
Interest 6,993 13,175 13,448
Write-down of Cabot-Morgan
Real Estate joint ventures - 14,562 -
Restructuring (reversal) charge (3,865) (2,051) -
Closed facility (reversal)
reserve (652) (5,665) 45,913
---------- ---------- ----------
696,491 690,819 1,047,149
---------- ---------- ----------
Loss before income taxes, equity
in affiliate and minority
interests (28,402) (12,683) (79,721)
Income taxes (benefit) (216) 6,149 (1,699)
---------- ---------- ----------
Loss before equity in affiliate
and minority interests (28,186) (18,832) (78,022)
Equity in affiliate 11,405 10,055 (5)
Minority interests in (income)
loss of consolidated
subsidiaries and partnerships 88 (4,647) 4,235
---------- ---------- ----------
Net Loss $ (16,693) $ (13,424) $ (73,792)
========== ========== ==========
Loss per share $ (8.73) $ (7.88) $ (39.57)
========== ========== ==========
See notes to the consolidated financial statements.
55
56
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Years Ended January 31,
---------------------------------
1997 1996 1995
----------- -------- ---------
Common Stock:
Class A-
Balance, beginning of period $ 1,949 $ 1,661 $ 1,656
Stock options exercised 13 - 5
Shares issued - 288 -
-------- -------- --------
Balance, end of period $ 1,962 $ 1,949 $ 1,661
======== ======== ========
Class B-
Balance, beginning of period $ 500 $ 303 $ 303
Stock options exercised - 197 -
-------- -------- --------
Balance, end of period $ 500 $ 500 $ 303
======== ======== ========
Paid-in Capital:
Balance, beginning of period $ 77,879 $ 65,384 $ 65,323
Stock options exercised 951 18 368
Purchase (refund) of (Class B)
stock option - 985 (985)
RSH Settlement - 10,701 -
Effect of subsidiary stock
options exercised 11 791 678
-------- -------- --------
Balance, end of period $ 78,841 $ 77,879 $ 65,384
======== ======== ========
Note Receivable-Shareholder:
Balance, beginning of period $(65,130) $ - $ -
RSH Settlement - (65,130) -
-------- -------- --------
Balance, end of period $(65,130) $(65,130) $ -
======== ======== ========
Unrealized Investment gains (losses): $ (22) $ 246 $ (1,024)
======== ======== ========
Treasury Stock:
Class A-
Balance, beginning and end of period $ (1,749) $ (1,749) $ (1,749)
======== ======== ========
Class B-
Balance, beginning of period $ (288) $ - $ -
Common stock reacquired - (288)
-------- -------- --------
Balance, end of period $ (288) $ (288) $
======== ======== ========
Retained Earnings:
Balance, beginning of period $121,169 $134,788 $208,774
Net loss (16,693) (13,424) (73,792)
Dividends paid (234) (195) (194)
-------- -------- --------
Balance, end of period $104,242 $121,169 $134,788
======== ======== ========
56
57
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
(dollars and shares in thousands, except dividends per share)
Years Ended January 31,
---------------------------------
1997 1996 1995
--------- -------- --------
Dividends paid per share:
Class A Common Stock $ .13 $ .13 $ .13
======== ======== ========
Class B Common Stock $ - $ - $ -
======== ======== ========
Common Stock Outstanding:
Class A-
Balance, beginning of period 1,747 1,458 1,453
Stock options exercised 13 1 5
Shares issued - 288 -
-------- -------- --------
Balance, end of period 1,760 1,747 1,458
======== ======== ========
Class B-
Balance, beginning of period 327 303 303
Stock options exercised - 197 -
Common stock reacquired - (173) -
-------- -------- --------
Balance, end of period 327 327 303
======== ======== ========
See notes to the consolidated financial statements.
57
58
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended January 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
Cash Flows from Operating Activities:
Net loss $(16,693) $(13,424) $(73,792)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 14,040 12,341 15,782
Write down Cabot-Morgan
Real Estate joint ventures - 14,562 -
Write-off deferred compensation - - 1,424
Equity in affiliate (11,405) (10,414) (1,045)
Provision for litigation 17,000 2,169 10,280
Provision for (reversal of) closing
facilities and restructuring (3,534) (6,125) 45,913
Change in assets and liabilities:
Accounts receivable (5,734) 1,518 2,088
Merchandise inventories (13,004) (7,137) (19,099)
Prepaid and refundable
income taxes (3,802) - -
Other current assets (4,246) (579) 636
Deferred income tax benefit 4,177 5,911 (16,172)
Other assets (2,609) 148 166
Accounts payable, trade 13,847 (16,938) (15,463)
Income taxes payable 2,355 (6,181) 2,436
Accrued salaries and employee
benefits 1,457 2,516 31,916
Accrued taxes other than
income taxes 2,069 (1,806) (401)
Other accrued liabilities 7,654 (5,937) 10,272
Payment to Robert M. Haft (35,726) - -
Reserve for closed facilities (6,658) (7,680) (3,574)
Minority interest (2,028) 6,338 (4,788)
-------- -------- --------
Net cash used for
operating activities $(42,840) $(30,718) $(13,421)
-------- -------- --------
Cash Flows from Securities and Capital
Investment Activities:
Capital expenditures $(17,112) $(16,688) $(15,150)
Purchase of Pittsburgh store assets - (5,767) -
Proceeds from Shoppers Food dividend 5,000 5,000 -
Distributions from Cabot-Morgan Real
Estate joint ventures - 4,888 -
Proceeds from sale of Cabot-Morgan
joint ventures 2,000 - -
58
59
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(dollars in thousands)
Years Ended January 31,
---------------------------------
1997 1996 1995
---------- --------- ---------
Cash Flows from Securities and Capital
Investment Activities (Continued):
Decrease in cash and cash equivalents
as a result of the deconsolidation
of Cabot-Morgan Real Estate
joint ventures and Shoppers Food
Warehouse Corp., respectively $ - $ (5,713) $(61,014)
Acquisition of treasury stock by
Trak Auto - (6,904) -
Maturities of bankers' acceptances - - 90,505
Purchases of bankers' acceptances - - (28,198)
Sales of United States Treasury Bills 21,032 70,002 102,742
Maturities of United States Treasury
Bills 36,351 11,163 210,697
Purchases of United States Treasury
Bills (40,152) (98,866) (267,954)
Purchases of marketable debt securities (1,500) (3,199) (223,509)
Sales of marketable debt securities 3,612 56,951 200,585
Maturities of marketable debt securities 6,544 6,420 12,309
Dispositions from reverse
repurchase agreements $ - - (929)
-------- -------- --------
Net cash provided by (used for)
securities and capital
investment activities $ 15,775 $ 17,287 $ 20,084
-------- -------- --------
Cash Flows from Financing Activities:
Cash dividends $ (234) $ (195) $ (194)
Proceeds from Note Receivable -
Ronald S. Haft 11,621 - -
Loans to Ronald S. Haft - (49,547) -
Stock options exercised 964 215 368
Contributions (distributions)
from (to) partner - - (1,776)
Proceeds from(refund of)option to
acquire common stock 985 (985)
Principal payments under mortgage
obligations (307) (269) (1,202)
Principal payments under capital
lease obligations (101) (368) (346)
-------- -------- --------
Net cash provided by(used for)
financing activities $ 11,943 $(49,179) $ (4,135)
-------- -------- --------
59
60
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(dollars in thousands)
Years Ended January 31,
-----------------------------------
1997 1996 1995
----------- ---------- ----------
Net increase(decrease)in Cash and
Equivalents $(15,122) $(62,610) $ 2,528
Cash and Equivalents at Beginning
of Year (Note 1) 54,780 117,390 114,862
-------- -------- --------
Cash and Equivalents at End of
Year (Note 1) $ 39,658 $ 54,780 $117,390
======== ======== ========
Supplemental Disclosures of Cash
Flow Information:
Net Cash paid (refunded) during
the year for:
Interest $ 7,485 $ 4,532 $ 12,799
Income taxes (2,305) 6,468 11,846
Supplemental disclosure of noncash financing activities:
In fiscal 1996, as a result of a settlement of certain litigation with Ronald
S. Haft, the Company exchanged 288,312 shares of Class A Common Stock for
172,730 shares of Class B Common Stock and the Company received a promissory
note for $27,389,672 for the exercise of 197,048 options for shares of Class B
Common Stock.
Supplemental disclosure of noncash activities:
Write-off book value of fixed assets
to restructuring and closed store
reserves $ 552 $ 1,207 $ 1,802
See notes to consolidated financial statements.
60
61
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
NOTE - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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"), Cabot-Morgan Real Estate Company
("CMREC") and Dart Group Financial Corporation ("Dart Financial"). The accounts
of Shoppers Food Warehouse Corp. ("Shoppers Food") are consolidated with Dart's
financial statements through May 28, 1994, but not thereafter, as a result of a
reduction of Dart's ownership to 50%. Dart'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 3). The accounts of CMREC's real
estate joint ventures are 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") (see Note 6).
Dart, Trak Auto, Crown Books, Shoppers Food (for periods through May 28, 1994),
Total Beverage, CMREC, Dart Financial 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.
On February 6, 1997, Dart acquired the other 50% interest in Shoppers Food (see
Note 6). For periods after February 6, 1997, the accounts of Shoppers Food will
be consolidated with Dart's financial statements.
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.
Risk Factors
In the past, 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
Company's cash and investments decreased by approximately $ 42.0 million in
fiscal 1997 and $104.4 million in fiscal 1996, primarily as a result of
61
62
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
payments of $37.9 million to Robert M. Haft for satisfaction of a judgment
awarded to him (the "RMH Judgment") (See Note 8), loans of $49.5 million made
to Ronald S. Haft in connection with the RSH Settlement, expenditures by Crown
Books for store closings and the opening of new superstores, Trak Auto's
expansion into the Pittsburgh market and the store operating losses of Crown
Books and Total Beverage and extraordinary legal and other fees.
If Dart settles litigation with Haft family members (see Note 8), Dart will
need additional cash to fund its working capital needs, which includes funding
any operating losses of Total Beverage. Any significant financing transaction
or other extraordinary transaction that would provide additional cash may
require further order of the court under a Standstill Order (see Note 8) and
may be opposed by Haft family members who are not party to a settlement. In
addition, if certain challenges to the RSH Settlement are successful, the
accounting treatment may be materially different than that recorded in the
accompanying financial statements (see Note 6).
Fiscal Year
Dart's fiscal year ends on January 31 each year. Trak Auto, Crown Books,
Shoppers Food and Total Beverage are reported to the Saturday closest to
January 31. Trak Auto's, Crown Books', Shoppers Food's and Total Beverage's
fiscal year ended February 3, 1996 included 53 weeks and all other fiscal years
presented included 52 weeks.
Cash and Equivalents
Effective in fiscal 1997, and applied retroactively to all years presented
herein, the Company changed its accounting policy to include only investments
with an original maturity of three months or less as cash equivalents. The
impact of this change was to reclassify amounts previously presented in the
accompanying consolidated balance sheets and statements of cash flows.
Short-Term Instruments and Marketable Debt Securities
At January 31, 1997, the Company's short-term instruments include United States
Treasury Bills, with a maturity of three months or less, and money market
funds. Marketable debt securities include United States Treasury Bills, with a
maturity greater than three months, United States Treasury Notes, corporate
notes, municipal securities and United States Agency Securities Acceptances.
Management determines the appropriate classification of its investments in
62
63
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
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 January 31, 1997, the market value of short-term
instruments and marketable debt securities was $22,000 less than cost (adjusted
for income taxes). At January 31, 1997, 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. The following table (which
excludes money market funds) presents the estimated fair value of debt
securities available for sale by contractual maturity at January 31, 1997:
(dollars in thousands)
Due in one year or less $ 3,122
Due in one to three years 1,562
Due after three years 1,030
--------
$ 5,714
========
Expected maturities may differ from contractual maturities because the issuers
of securities may have the right to prepay obligations without prepayment
penalties.
Included in short-term instruments and marketable debt securities were
$21,094,000 and $46,091,000 held by majority-owned subsidiaries at January 31,
1997 and January 31, 1996, respectively.
Fair Value of Financial Instruments
The fair values of current financial assets and liabilities are approximately
the reported carrying amounts. The carrying amounts of the Company's mortgages
payable are based on outstanding principal, and the fair values of these
mortgages were estimated based on borrowing rates currently available for bank
loans with similar terms.
Merchandise Inventories and Cost of Sales
Trak Auto inventories are priced at the lower of last-in, first-out ("LIFO")
63
64
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
cost or market. Crown Books' and Total Beverage's inventories are priced at the
lower of first-in, first-out, ("FIFO") cost or market. At January 31, 1997,
1996 and 1995, Trak Auto's inventories would have been greater by $6,733,000,
$6,579,000 and $5,870,000, respectively, if they had been valued on the lower
of FIFO cost or market basis.
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 was 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, on net income for the year ending January 28, 1995 of the
corresponding cumulative catch-up adjustment or on retained earnings at January
30, 1994. Accordingly, the change in method was accounted for on a prospective
basis from January 30, 1994 and the effect on per share data, if any, is not
available.
Property and Equipment and Depreciation
Property and equipment are recorded at cost. The Company depreciates furniture,
fixtures and equipment generally over a ten-year period using the straight-line
method. Effective February 1, 1997, the Company will change its accounting
policy from expensing purchased computer software costs in the year of
acquisition to capitalizing and depreciating these costs over its estimated
useful life but not more than five years. This change will be made as
management has determined that these costs benefit future periods. Computer
equipment is depreciated over a five-year period using the straight-line
method. All stores and some equipment are leased. Improvements to leased
premises are amortized generally over a ten-year period, or the term of the
lease, whichever is shorter. Assets (primarily buildings) financed through
asset-based financing arrangements are depreciated over the lives of the
leases. Accumulated amortization for assets under capital lease was $9,159,000
and $8,159,000 as of January 31, 1997 and 1996, respectively.
Preopening Expenses
All costs of a noncapital nature incurred in opening a new store are charged to
expense during the year as incurred.
64
65
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Advertising Expenses
The Company records the costs of advertising as expense as the costs are
incurred.
Self-Insurance Programs
The Company is self-insured for certain levels of general liability, workers
compensation and employee medical coverage. Estimated costs of these
self-insurance programs are accrued at the expected value of projected
settlements for known and anticipated claims.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of short-term instruments, marketable debt securities and
accounts receivable from vendors. The Company restricts investment of temporary
cash investments to United States Treasury Bills and Notes and corporate notes
and municipal securities with a high credit standing. Credit risk on accounts
receivable is minimized as a result of the ability to generally deduct such
receivables from amounts payable to the related vendors.
New Accounting Standards
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for Long Lived Assets and Long-Lived Assets to be Disposed Of
and SFAS No. 123, Accounting for Stock Based Compensation, during the year
ending January 31, 1997. Implementation of SFAS No. 121 did not have a
material impact on the Company's consolidated financial statements. The
Company has disclosed the fair value of options granted as permitted by SFAS
No. 123 (see Note 12).
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
Earnings Per Share. SFAS No. 128 replaces the presentation of primary earnings
per share, previously presented by the Company, with basic earnings per share
and requires a reconciliation of the numerator and denominator of basic
earnings per share to fully diluted earnings per share. Fully diluted earnings
per share is computed similarly to the previous requirements. The Company will
be required to adopt SFAS No. 128 in the fourth quarter of fiscal 1998 and to
restate all previously presented earnings per share data. The presentation of
the Company's basic earnings per share under SFAS No. 128 is not materially
different than the amounts presented herein as primary earnings per share.
65
66
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Industry Segments
The Company operates specialty retail, grocery and beverage stores.
Dividends
The holders of Class A Common Stock are entitled to receive, when and as
declared by the Board of Directors, noncumulative preferential dividends of up
to thirty cents per share. If Class A dividends reach thirty cents per share,
in any fiscal year, holders of Class B Common Stock are entitled to receive
dividends not exceeding thirty cents per share. Any dividends cumulatively in
excess of thirty cents per share would be shared as if they constituted a
single class of stock. During the years ended January 31, 1997, 1996 and 1995,
Dart paid dividends to the holders of Class A Common Stock at thirteen cents
per share and has not paid dividends to holders of Class B Common Stock.
Earnings Per Share
Earnings per share is based on the weighted average number of Dart's Class A
Common Stock, $1.00 par value per share ("Class A Common Stock") and Class B
Common Stock, $1.00 par value per share ("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 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 was not significant for
any period. Weighted average shares and share equivalents for the three years
ended January 31, 1997, 1996 and 1995 were 2,076,000, 1,862,000 and 1,871,000,
respectively. The inclusion of the options for Class B Common Stock related to
Ronald S. Haft's employment agreement had no impact on reported earnings per
share in fiscal 1995 because they were anti-dilutive.
Reclassifications
Certain reclassifications have been made to prior year statements to conform to
the current year presentation.
66
67
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
NOTE 2 - INCOME TAXES
Because of its percentage ownership, Dart does not report the results of
operations of Crown Books, Trak Auto or Shoppers Food in its Federal or state
tax returns. The Company's tax provision therefore, represents the combined tax
provisions of Dart, Crown Books, Trak Auto, Total Beverage and Shoppers Food
(through May 28, 1994).
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This standard requires, among other things,
recognition of future tax benefits and liabilities, measured by enacted tax
rates, attributable to deductible temporary differences between financial
statement and income tax bases of assets and liabilities and for tax net
operating loss carryforwards, to the extent that realization of such benefits
is more likely than not.
The provision (benefit) for income taxes on income before minority interests,
equity in affiliate and extraordinary items consists of the following:
(dollars in thousands)
Fiscal Years
--------------------------------
1997 1996 1995
--------- --------- ---------
Current:
Federal $ (2,747) $ (241) $ 9,474
State (967) 3 1,839
-------- -------- --------
(3,714) (238) 11,313
Deferred:
Federal 2,703 5,020 (11,076)
State 795 1,367 (1,936)
-------- -------- --------
$ (216) $ 6,149 $ (1,699)
======== ======== ========
67
68
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
The combined effective tax rate on income before income taxes and minority
interest is reconciled to the Federal statutory rate as follows:
(dollars in thousands)
Fiscal Years
---------------------------------
1997 1996 1995
---------- ---------- ---------
Federal statutory rate 34% 34% 34%
Income taxes at Federal statutory rate $ (9,657) $ (4,312) $(27,105)
Increase (decrease) in taxes
resulting from:
Federal and state net operating
loss carryforward not benefitted 4,740 5,886 5,905
State income taxes, net of
Federal income tax benefit (72) 685 (89)
Minority interest of CMREC taxed
as minority partner - (168) (195)
Exclusion of Shoppers Food dividend 340 (1,360) -
Interest on note receivable-
shareholder 1,818 581 -
CMREC interest in Total Beverage
closed store reserve - 824 (970)
Amortization of Goodwill 70 59 (154)
Valuation allowance 2,549 4,225 21,279
Tax exempt municipal bond interest
income (50) (255) (494)
Utilization of former
Trak West net operating loss (208) (225) (225)
Other 254 209 349
-------- -------- --------
Income tax provision (benefit) $ (216) $ 6,149 $ (1,699)
======== ======== ========
Effective tax rate .8% 48.5% 2.1%
======== ======== ========
68
69
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
The effect of each type of temporary difference and carryforward is as follows:
(dollars in thousands)
Years Ended January 31,
--------------------------
1997 1996
------------ -----------
Deferred Tax Assets:
- -------------------
Reserves for other liabilities $ 173 $ 218
Capitalized leases treated as operating
leases for tax purposes 2,860 2,832
Depreciation 4,182 2,215
Uniform capitalization of inventory
costs 3,057 2,996
Reserve for store closings and restructuring 11,478 15,291
Accrued rent 1,434 1,029
Deferred income 65 83
Certain officers' bonuses 678 465
Tax loss carryforwards 26,816 15,740
Tax credit carryforwards 2,168 1,777
Basis adjustment as a result of purchase
accounting for Trak West 164 262
Unrealized investment losses 4 4
Accrued vacation 537 498
Accrued self-insurance reserves 2,644 2,661
Accrued legal reserves 3,922 2,632
Reserve for stock options 5,678 3,298
Litigation accruals - 12,992
Capital loss carryforward 5,239 5,229
Other 751 279
--------- ---------
Deferred Tax Assets 71,850 70,501
Valuation allowance (35,974) (33,425)
--------- ---------
Net Deferred Tax Assets 35,876 37,076
Deferred Tax Liabilities:
- ------------------------
Basis difference in Shoppers Food investment 13,846 11,462
Book basis of assets acquired as a result
of involuntary conversion 331 417
--------- ---------
Deferred Tax Liabilities 14,177 11,879
--------- ---------
Net Deferred Tax Asset $ 21,699 $ 25,197
========= =========
69
70
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
A summary of the Company's valuation allowance as of January 31, 1997 and 1996
by Company is provided below:
(dollars in thousands)
Fiscal Years
-----------------------
1997 1996
---------- ----------
Crown Books $ 2,500 $ 2,500
Trak Auto - -
Dart Group Corporation 33,474 30,925
--------- ---------
$ 35,974 $ 33,425
========= =========
During the year ended January 31, 1997, Dart recorded an increase in its
valuation allowance of $2,549,000 as a result of continuing net operating
losses.
Dart does not recognize deferred tax liabilities on the excess of the amount
for financial reporting over the tax basis of the investment in its
consolidated majority owned subsidiaries. In fiscal 1995, Shoppers Food was
deconsolidated and Dart announced that it had under consideration the
liquidation of its interest. Accordingly, as of January 31, 1997, Dart has
provided deferred taxes of $13,846,000 and reduced its valuation allowance by
the same amount.
As a result of Dart's operating loss for the year ended January 31, 1997, a tax
net operating loss carryforward of $27,609,000 was created. Dart's cumulative
total tax net operating loss carryforward is $66,102,000. 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 will continue to evaluate on a periodic basis its need for a valuation
allowance.
NOTE 3 - TRANSACTIONS WITH AFFILIATES
Shoppers Food Warehouse Corp.
In fiscal 1989, Dart acquired in excess of 50% of the common stock of Shoppers
Food, which operates the Shoppers Food Warehouse discount grocery chain in the
Washington, D.C. metropolitan area. 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 Dart's ownership to exactly 50%. As a
result, the accounts of Shoppers Food are consolidated with
70
71
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Dart's through May 28, 1994, but not thereafter. Dart'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 is 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, 1995) and net income
excluded Dart's share of Shoppers Food net income for the year ended January
31, 1995.
Subsequent Event
On December 16, 1996, Dart submitted offers to either (i) sell all of Dart's
50% 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. On December
18, 1996, the other stockholders (Kenneth M. Herman, the founder of Shoppers
Food, and certain of his family members and family trusts) accepted Dart's
offer to purchase all of their shares of capital stock of Shoppers Food.
On February 6, 1997, Dart acquired the other 50% interest in Shoppers Food for
$210 million (the "Acquisition"). As a result, the accounts of Shoppers Food
will be consolidated with the Company effective February 6, 1997. Dart financed
the Acquisition through the application of $137.2 million in net proceeds
raised from an offering of Increasing Rate Senior Notes due 2000 (the "Senior
Notes") of SFW Acquisition Corp., a newly created wholly-owned subsidiary of
Dart, and $72.8 million of bridge financing. Immediately after the Acquisition,
SFW Acquisition Corp. merged into Shoppers Food (with Shoppers Food becoming
obligor on the Senior Notes) and Shoppers Food repaid the bridge financing from
its existing cash and the liquidation of certain short-term investments.
71
72
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Dart intends to analyze the options available to it with regard to Shoppers
Food, which options include, among others, a refinancing of the Senior Notes or
a sale of all or part of Shoppers Food.
Summary Income Data for Deconsolidated Subsidiary
The following information reflects the results of Shoppers Food for the years
ended January 31, 1997 and 1996:
(dollars in thousands)
1997 1996
---------- ----------
Revenue $862,395 $841,701
Gross Profit 156,404 143,481
Net Income 21,251 14,652
The amounts included in net income above do not reflect the amortization of the
difference between Dart's original purchase price and the equity in net assets
or certain tax contingencies recorded by the Company. The following is a
reconciliation of the net income as reported by Shoppers Food with the equity
in affiliate as reported on the Company's Consolidated Statement of Operations:
(dollars in thousands)
1997 1996
--------- ----------
Shoppers Food Net Income $ 21,251 $ 14,652
50% of Shoppers Food Net income $ 10,626 $ 7,326
Amortization of Excess Purchase Price
over Net Assets Acquired (1,126) (1,126)
Reversal of certain tax contingencies 1,905 3,700
Other - 155
-------- --------
$ 11,405 $ 10,055
======== ========
The following information presents summarized balance sheet information of
Shoppers Food as of January 31, 1997 and 1996.
(dollars in thousands)
(unaudited)
1997 1996
-------- ---------
Current Assets $150,259 $139,734
Total Assets 179,008 163,452
Current Liabilities 57,479 55,490
Total Liabilities 74,520 70,216
Stockholders' Equity 104,488 93,236
72
73
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
In fiscal 1989 Dart/SFW Corp. ("Dart/SFW") was formed with the apparent intent
that Dart would hold 80 of Dart/SFW's 100 authorized shares of capital stock.
However, Dart/SFW's organizational documents are incomplete. Dart/SFW
purportedly granted options to purchase the other 20 shares of its capital
stock to members of the Haft family. There is no record that a transfer of
Dart's 50% interest in Shoppers Food to Dart/SFW occurred. Dart and Dart/SFW
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 Dart to repurchase the shares at their then fair
market value at any time within three years after receipt of the shares.
Herbert H. Haft assigned his options equally to Ronald S. Haft and Linda G.
Haft. (see Note 5). As part of the RSH Settlement, Ronald S. Haft consented to
the termination of his options. See Note 6.
The Executive Committee of the Board of Directors (the "Executive Committee")
(see Note 12) has undertaken a legal review of these options and, as a result,
is contesting their validity. Robert M. Haft has filed a lawsuit seeking
specific performance of these options. See Notes 8 and 12. Pending the outcome
of this lawsuit, Dart accrues the estimated fair value of the stock over the
exercise price of the options provided for in these agreements net of Ronald S.
Haft's options which were terminated as a result of the RSH Settlement.
Exercise of Subsidiary Stock Options
Trak Auto and Crown Books stock options have been granted to officers,
directors and key employees. As these options are exercised, the number of
minority shares outstanding, and accordingly, the minority share of the
ownership of Trak Auto and Crown Books, increases. The difference attributable
to Dart's change in ownership percentage for these subsidiaries is reflected in
Paid-in Capital.
NOTE 4 - COMMITMENTS
Lease Commitments
The Company leases stores, warehouses, leasehold improvements, fixtures and
equipment. Renewal options are available on the majority of the leases. In some
instances, store leases require the payment of contingent rentals and license
fees based on sales in excess of specified minimums. Certain properties are
subleased with various expiration dates. Certain capital
73
74
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
leases have purchase options at fair market value at the end of the lease.
Following is a schedule by fiscal year of future minimum payments under capital
leases, license agreements and non-cancelable operating leases having initial
or remaining terms in excess of one year at January 31, 1997 (excluding
Shoppers Food). The schedule below includes the operating leases of Dart and
its consolidated subsidiaries. The imputed interest rate on the capital leases
is 15.6% in the aggregate.
(dollars in thousands)
Fiscal Capital Leases Operating
Year Buildings Leases
- ------ -------------- --------
1998 $ 4,344 $ 52,985
1999 4,604 46,603
2000 4,630 38,358
2001 4,760 33,202
2002 4,871 26,987
2003-2017 71,936 84,480
-------- ---------
95,145 $ 282,615
=========
Less-Imputed interest 64,563
------
Present value of net minimum
lease payments 30,582
Less-Current maturities 209
--------
Long-term capital lease
obligations $ 30,373
========
The table above includes $6,260,000 for store operating leases where the stores
have been closed and the lease obligations have been accrued in the
restructuring or store closing reserves. Minimum operating lease obligations
have not been reduced by total future minimum sublease rental of $2,408,000
receivable in the future under ten leases. There are no sublease arrangements
for the capital leases.
Rent expense for operating leases and license arrangements are as follows:
(dollars in thousands)
Year Ended January 31,
--------------------------------
1997 1996 1995
--------- --------- ---------
Minimum rentals $ 46,965 $ 42,250 $ 41,200
Contingent rentals 381 506 738
-------- -------- --------
$ 47,346 $ 42,756 $ 41,938
======== ======== ========
74
75
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Capital Lease Arrangements With Related Parties
Dart has a lease with a private partnership in which Haft family members own
all of the partnership interests, for a 271,000 square foot headquarters
building and distribution center in Landover, Maryland. The lease is for 30
years and six months, commenced in 1985 and provides for increasing rental
payments over the term of the lease. The current annual rental is $2,121,000.
The lease requires payments for maintenance, utilities, insurance and taxes.
The distribution center was constructed by the partnership at a cost of
approximately $8,300,000. Dart has sublet approximately 238,000 square feet to
Trak Auto and Crown Books at a per square foot charge which is equal to Dart's
per square foot cost under the master lease. Dart has a lease agreement with
the aforementioned partnership for land near the headquarters building and
distribution center. The lease is coterminous with the headquarters building
and distribution center lease and provides for current annual rental of $37,000
with increases of 3% per year. Dart, Trak Auto and Crown Books each pay a
pro-rata share in proportion to their use of the headquarters building and
distribution center.
Dart's majority-owned subsidiary, Trak Auto, entered into an agreement to lease
a 176,000 square foot distribution center in Bridgeview, Illinois from a
private partnership in which Haft family members own all of the partnership
interests. The lease is for 30 years and six months, commenced in 1984 and
provides for rental payments increasing approximately 15% every five years over
the term of the lease. The current annual rental is $754,000. The lease
requires payment of maintenance, utilities, insurance and taxes. Dart is
jointly and severally liable for the lease obligations. The partnership
purchased the distribution center on March 12, 1984 for approximately
$3,100,000.
Trak Auto has an agreement to lease a distribution center in Ontario,
California from a private partnership in which Haft family members own all of
the partnership interests. The lease is for 20 years and commenced in 1989. The
lease also provides for increasing rental payments, based upon the Consumer
Price Index for the Los Angeles area, over the term of the lease. The current
annual rental is $1,469,000. The lease requires payment of maintenance,
utilities, insurance and taxes. The partnership purchased the distribution
center for approximately $10,800,000.
The capital lease arrangements described above are all included in the lease
commitment table.
75
76
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Shoppers Food, has a lease agreement for a 86,000 square foot office building
in Lanham, Maryland from a private partnership in which Haft family members own
all of the partnership interests. The lease is for 20 years and commenced in
1991. The lease provides for yearly increasing rental payments, based upon the
Consumer Price Index for the Washington, D.C. Metropolitan Statistical Area;
however, the increases shall not be more than 6% or less than 3%. The current
annual rental is $1,309,000. The lease requires payment of maintenance,
utilities, insurance and taxes. The partnership purchased the office building
for approximately $8,700,000 in July 1990. There are currently three
unaffiliated subtenants in the office building. These subtenants are leasing
approximately 30,000 square feet for a current annual rent of $574,000.
Pennsy Warehouse Leases
For a description of Dart's obligations under leases for three warehouses
located at 3301 Pennsy Drive, Landover, Maryland (the "Pennsy Leases"), see
Note 7.
Store Operating Lease Payments to Related Parties
During the fiscal years ended January 31, 1997, 1996 and 1995, respectively,
Trak Auto made rental payments of approximately $2,882,000, $2,914,000 and
$2,893,000 and Crown Books made rental payments of approximately $1,691,000,
$2,136,000, and $2,035,000 to partnerships in which members of the Haft family
own all or substantially all of the beneficial interests for both open and
closed stores. Shoppers Food made rental payments of approximately $5,384,000,
$5,985,000 and $5,327,000 (during Shoppers Food fiscal years ended June 29,
1996, July 1, 1995 and July 2, 1994, respectively) to partnerships in which
members of the Haft family own all or substantially all of the beneficial
interests. Total Beverage made rental payments of approximately $1,149,000,
$984,000 and $893,000 in fiscal 1997, 1996 and 1995, respectively. None of the
stores involved were acquired by the partnerships within the past two years.
In addition to the Executive Committee's legal review of the Pennsy Leases,
which resulted in litigation filed by Dart on February 10, 1995, the Executive
Committees of Dart, Trak Auto and Crown Books have undertaken a legal review of
other leasing arrangements and real estate related transactions between the
Company, on the one hand, and Haft-owned entities, on the other hand. On
December 17, 1996, Dart, Crown Books and Trak Auto filed a lawsuit against
Herbert H. Haft (Chairman of each such company) claiming breach of fiduciary
duty, fraud and waste in connection with certain of these lease transactions
76
77
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
(other than the Pennsy Leases) with certain partnerships owned beneficially by
members of the Haft family.
Future Minimum Lease Payments to Related Parties
Dart's subsidiaries and affiliate, Trak Auto, Crown Books, Shoppers Food and
Total Beverage lease certain real property from Haft family owned partnerships.
The leased properties consist of 45 stores, three warehouses and the Shoppers
office building but, exclude the Pennsy Leases. These leases (other than the
Pennsy Leases) provide for various termination dates, which, assuming renewal
options are exercised, range from 1997 to 2031 and require the payment of
minimum rentals aggregating approximately $236,129,000 to the lease expiration
dates. Minimum rentals under these leases are approximately $111,739,000 to the
expiration of their original terms. Certain of these leases also require the
payment of a percentage of sales in excess of a stated minimum, as well as real
estate taxes and Consumer Price Index increases.
NOTE 5 - INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
(see Note 4)
Haft Family Employment Agreements and Other Compensation Arrangements
In April 1974, Dart entered into an employment agreement with Herbert H. Haft,
Chairman and Chief Executive Officer. The agreement, as amended, is renewable
each year for a successive ten-year term. The agreement, as amended, provides
for a base salary of $544,500 for the year ended January 31, 1986 and for
increases in base salary each year thereafter by the greater of (i) $12,000
plus ten percent of the base salary for the preceding fiscal year or (ii) the
increase in the cost of living. The agreement, as amended, further provides for
an annual bonus equal to 1 1/2% of Dart's consolidated pretax profit not
reduced as a result of transactions which are not ordinary and a supplemental
bonus based on certain performance criteria for the three-year period ended
January 31, 1988 and each three-year period thereafter. The supplemental bonus
equals the greatest of (i) 3% of the increase in the aggregate market value of
the Class A Common Stock on the last day of the three-year period over such
market value on the first day of such period; (ii) 3% of any excess in Dart's
consolidated stockholders' equity on the last day of the three-year period over
such stockholders' equity on the first day of such period; (iii) 3% of the
aggregate consolidated net income during the three-year period; and (iv) his
base salary and annual bonus for the last year of the three-year period.
Pursuant to the agreement, Herbert H. Haft may elect to receive all or part of
his compensation in the form of an option for shares of the Class A Common
Stock or defer receipt of all or part of such compensation. The
77
78
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
agreement, as amended, also provides that Dart must lend to Herbert H. Haft the
funds necessary to purchase a $3,000,000 life insurance policy on his life
and/or the life of his former wife, Gloria Haft. Dart has elected not to charge
interest on the loan. In 1993, a shareholder derivative action was filed
challenging certain aspects of this employment agreement. In 1995, the Special
Litigation Committee concluded that it is in the best interests of Dart that
claims challenging Herbert H. Haft's employment agreement be dismissed except
to the extent that the validity of the "evergreen" provision (successive
ten-year terms) of the agreement is challenged.
In fiscal 1989 Dart/SFW Corp. ("Dart/SFW") was formed with the apparent intent
that Dart would hold 80 of Dart/SFW's 100 authorized shares of capital stock.
However, Dart/SFW's organizational documents are incomplete. In fiscal 1990,
Dart and Dart/SFW signed agreements with Herbert H. Haft and Robert M. Haft
that purportedly granted to each of them an option to purchase up to ten shares
of the common stock of Dart/SFW, or 10 percent of such stock on a fully diluted
basis, for $192,688 per share. Under the agreements, each such option is
exercisable in whole or in part during the period beginning on August 30, 1995
and ending on August 30, 2004; provided that such options become immediately
exercisable in the event of a Major Business Change (as defined in the option
agreements) and for a period of ten years thereafter. At any time within three
years after receipt of the Dart/SFW shares pursuant to the exercise of an
option, Herbert H. Haft or Robert M. Haft, as the case may be, may require Dart
to purchase all or part of such shares at their then fair market value, as
determined by an independent appraiser selected by Dart's Board of Directors.
Pursuant to agreements dated January 11, 1990, Herbert H. Haft assigned and
transferred his option to acquire ten shares of Dart/SFW to his two children,
Ronald S. Haft and Linda G. Haft, and Robert M. Haft assigned and transferred
options to acquire six shares of Dart/SFW to Trusts established for the benefit
of his two children, Michael A. Haft and Nicholas G. Haft. As part of the RSH
Settlement, Ronald S. Haft consented to the termination of his Dart/SFW
options.
The Executive Committee has undertaken a legal review of these options and, as
a result, is contesting their validity. Robert M. Haft has filed a lawsuit
seeking specific performance from Dart of these options. See Notes 8 and 12.
Dart accrues the estimated fair value of the Dart/SFW stock over the exercise
price of the options provided for in these agreements net of Ronald S. Haft's
options which terminated as a result of the RSH Settlement.
A 1987 resolution of Dart's Board of Directors (the "1987 Resolution") stated
that it would be appropriate for Herbert H. Haft and Robert M. Haft each to
78
79
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
have the option to participate individually in acquisitions of other companies
by Dart. Their participation is to be on the same terms and conditions as
management of the acquired company might participate. Alternatively they may
purchase ten percent of Dart's interest in the acquired company on an
equivalent basis as Dart.
On February 22, 1995, the court ruled that this resolution entitled Robert M.
Haft to purchase for $149,000 ten percent of Dart's interest in the entity that
acquired the assets of Total Beverage's Chantilly, Virginia store. In June
1995, Herbert H. Haft advised the Board of Directors of his claim that the 1987
Resolution entitles him to a call on a 10% interest in Total Beverage
Corporation. The Executive Committee has advised Herbert H. Haft of its
opposition to this claim.
Incentive Stock Agreement
In fiscal 1990, Crown Books entered into an incentive stock agreement (the
"ISA") with Robert M. Haft, the former President of Crown Books. Under the
terms of the ISA, Crown Books issued 100,000 shares of common stock to Robert
M. Haft, subject to certain restrictions, in return for a non-interest bearing
promissory note, discounted at an 11% effective interest rate, of $203,750, due
January 2, 2004. The ISA provided that the stock certificate representing the
100,000 shares stated that the shares were subject to certain transfer
restrictions. Crown Books had the right to repurchase all or a portion of the
shares, subject to certain conditions, in the event Robert M. Haft voluntarily
terminated employment with Crown Books. Pursuant to the terms of the ISA, if
Crown Books terminated Robert M. Haft without cause, it must issue 100,000
shares of unrestricted common stock to him.
Crown Books recognized deferred compensation to Robert M. Haft under the ISA
with a combination of amortization of the discount on the note ($11,000
annually) and straight-line recognition of the difference between the market
price of Crown Books common stock on the date of grant and the purchase price
for the shares subject to the ISA ($194,000 annually).
When Robert M. Haft's employment with Crown Books terminated in June 1993,
Crown Books maintained that he had voluntarily terminated his employment, and
therefore Crown Books had a right to repurchase these shares. In August 1993,
Robert M. Haft filed a lawsuit against Dart, Crown Books and Trak Auto that,
among other claims, contested the right of Crown Books to repurchase the
shares, and alleged that Crown Books had terminated Robert M. Haft without
cause. The jury and the court in this litigation found in favor of Robert M.
Haft on these claims. On March 23, 1995 the court entered final judgement
79
80
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
that Robert M. Haft was entitled to damages in the amount of $2,146,250, plus
interest, for Robert M. Haft's claims with respect to the ISA.
As a result of this litigation Crown Books expensed the remaining unamortized
deferred compensation totaling $1,424,000 (before income taxes) associated with
the ISA in the year ending January 31, 1996. In August 1996, Crown Books paid
Robert M. Haft approximately $2,146,000 (plus interest) for the 100,000 shares.
Crown books recorded the purchase of the shares as treasury stock.
Other Management Employment Agreements
The Company has entered into employment agreements with several key employees.
The agreements are for a one-year or two-year terms and are automatically
extended one to two years unless the individual is terminated with cause. The
agreements provide for annual increases following review and performance
appraisal by the Compensation Committee of the Board of Directors.
Executive Committee and Special Litigation Committee
In January 1994, the Board of Directors of Dart established a Special
Litigation Committee to assess, on behalf of Dart, whether to pursue, settle or
abandon, claims raised in the derivative lawsuits filed against Dart. See Note
8 for a discussion of the derivative lawsuits.
The Board of Directors of Dart established an Executive Committee of the Board
of Directors on September 7, 1994. The Executive Committee has the authority to
conduct the affairs of Dart with respect to matters that are the subject of
disputes between the Chairman of the Board and Chief Executive Officer, Herbert
H. Haft, and the then President and Chief Operating Officer of Dart, Ronald S.
Haft. Members of the Executive Committee are Douglas M. Bregman, Larry G.
Schafran and Bonita Wilson, with Mr. Schafran as the Chairman of the Executive
Committee. Any and all actions of the Executive Committee are required to be
approved 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 Boards of Directors with authority
parallel to that of Dart's Executive Committee.
Members of the Executive Committee are compensated at a rate of $275 per hour
plus reimbursement of expenses. Members of the Special Litigation Committee of
the Board of Directors have been compensated at a rate of $250 per hour plus
reimbursement of expenses. During the years ended January 31, 1997 and January
31, 1996, the compensation paid by Dart and its subsidiaries to members of the
respective Executive Committees for their services on those
80
81
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
committees totaled $1,299,000 and $1,263,000, respectively. Compensation paid
by Dart and its subsidiaries to members of the Special Litigation Committee for
their service on that committee during the year ended January 31, 1995 was
$269,000, exclusive of expense reimbursement. There were no fees paid to
members of the Special Litigation Committee in fiscal 1997 and 1996.
NOTE 6 - SETTLEMENT WITH RONALD S. HAFT
In October 1995, Dart and Ronald S. Haft entered into the RSH Settlement. The
RSH Settlement transactions are subject to legal challenges (see Note 8). If
sustained, the RSH Settlement transactions were intended to have the effect, by
their terms, of transferring majority control of Dart's voting stock to one or
more voting trustees (the "Voting Trustees") under a Voting Trust Agreement
(the "Voting Trust Agreement"), by and among Ronald S. Haft, Dart and Larry G.
Schafran and Sidney B. Silverman as initial Voting Trustees. On December 28,
1995, the initial Voting Trustees resigned and appointed Richard B. Stone as
successor Voting Trustee. If the RSH Settlement is not sustained, it would
significantly affect the accounting treatment for the settlement as reflected
in the accompanying financial statements as described below.
Terms of Settlement with Ronald S. Haft
Dart has recorded the following RSH Settlement transactions:
Dart recorded the purchase of an option for 197,048 shares of Class B Common
Stock by Ronald S. Haft. The option had not previously been recognized by Dart.
In addition, the option to purchase such shares, pursuant to Ronald S. Haft's
employment agreement, was amended to increase the exercise price from $89.65 to
$140.00 per share. These 197,048 shares of Class B Common Stock were issued to
Ronald S. Haft pursuant to his exercise of the option in exchange for $197,048
in cash and a secured promissory note from Ronald S. Haft in the principal
amount $27,389,672 (the "$27.4 Million Note"). The $27.4 Million Note is due
June 30, 2000, subject to earlier prepayment in the event of a disposition of
the shares of stock held by the Voting Trustees. Interest on the $27.4 Million
Note accrues at 8% and is due at maturity. Immediately after issuance of the
197,048 shares of Class B Common Stock to Ronald S. Haft, he assigned to the
Voting Trustees such shares as well as 25,246 shares of Class B Common Stock
that he owned previously.
Ronald S. Haft transferred to Dart 172,730 shares of Class B Common Stock in
exchange for 288,312 shares of Class A Common Stock. The 288,312 shares of
Class A Common Stock have been placed into the Voting Trust established under
the Voting Trust Agreement and the 172,730 shares of Class B Common Stock have
81
82
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
become treasury shares, which are not entitled to vote. Prior to the RSH
Settlement, Herbert H. Haft exercised voting rights with respect to such Class
B shares. In addition, Ronald S. Haft assigned to the Voting Trust 86,173
shares of Dart Class A Common Stock (subject to competing claims as to 58,029
of those shares) and agreed to assign to the Voting Trust an additional 33,333
shares of Dart Class A Common Stock currently pledged as security for a bank
debt of Ronald S. Haft.
Dart transferred $37,925,710 in cash to Ronald S. Haft and received from him a
$37,740,162 secured promissory note (the "$37.7 Million Note"), which is due
June 30, 2000, subject to earlier prepayment in the event of a disposition of
the shares of stock held by the Voting Trustees. Interest accrues at 8% and is
due at maturity.
A Buy/Sell/Offering Agreement between Dart and Ronald S. Haft governs the
ultimate disposition of the shares held by the Voting Trustee. That agreement
gives Ronald S. Haft the right to "put" to Dart the stock held by the Voting
Trustee at any time between January 1, 1997 and December 31, 1999, subject to
certain conditions. Dart has an option to "call" the shares held by the Voting
Trustee, if they have not previously been disposed of as described above, at
any time during the first seven months of the year 2000.
The $37.7 Million Note and the $27.4 Million Note that Ronald S. Haft has given
to Dart in connection with the RSH Settlement both have a stated maturity date
of June 30, 2000, but will be due and payable upon the closing of a "put" or
"call" under the Buy/Sell/Offering Agreement. The price of the shares purchased
by Dart upon the closing of a "put" or "call" would be offset against the
principal and interest due on these two promissory notes. With respect to the
222,294 shares of Class B Common Stock held by the Voting Trustee, Ronald S.
Haft may (instead of including them in the "put") exchange them for 244,523
shares of Class A Common Stock (i.e., a 1.1 to 1 exchange ratio) and offer
those 244,523 shares of Class A Common Stock to the public. Dart has an option
to "call" the shares held by the Voting Trustee, if they have not previously
been disposed of as described above, at any time during the first seven months
of the year 2000.
All of the 222,294 Class B shares in the Voting Trust, as well as the related
voting trust certificates issued to Ronald S. Haft under the Voting Trust
Agreement, have been pledged to Dart and CMREC as security for certain loans
made to Ronald S. Haft and other obligations of Ronald S. Haft arising under
the RSH Settlement.
The $27.4 Million Note and the $37.7 Million Note are recourse subject to
82
83
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
certain limitations and are recorded as Notes Receivable - Shareholder on the
Company's balance sheet and have been included as a component of Stockholders'
Equity.
Dart transferred an additional $11,621,276 in cash to Ronald S. Haft in escrow,
and such funds have been tendered to Herbert H. Haft as prepayment of a Ronald
S. Haft promissory note to Herbert H. Haft, which promissory note was
originally given as partial payment for the 172,730 shares of Class B Common
Stock discussed above. In exchange for a loan of $11,621,276 from Dart, Ronald
S. Haft gave Dart a secured promissory note of $11,621,276 (the "$11.6 Million
Note"), due June 30, 2000, subject to earlier prepayment upon the sale of the
CMREC properties (discussed below). The $11.6 Million Note accrued interest at
an annual rate of 6.61%, payable December 31 of each year beginning December
31, 1995.
As part of the RSH Settlement, Dart and CMREC agreed to the sale of the five
properties which CMREC owned through joint ventures with Haft-owned entities.
Until a sale CMREC retained a $2.0 million interest in the properties and CMREC
received 1% of the ordinary income and losses generated by the joint ventures
and was a general partner in the joint ventures. (Ronald S. Haft and entities
controlled by him received the remaining 99%.) As a result, the real estate
joint ventures were no longer consolidated with the Company's financial
statements as of October 6, 1995. In connection with the agreement to sell the
five properties, therefore, Dart recorded a loss of $14.6 million for the
write-down of the CMREC partnership interest to fair value based upon an
independent third party valuation. Prior to settlement discussions with Ronald
S. Haft, Dart and CMREC had no intention to dispose of these assets.
In May 1996, the five properties were sold pursuant to the terms of the RSH
Settlement. As a result of the sale, Dart received $2.0 million of the proceeds
for its retained interest in the joint ventures and Ronald S. Haft repaid the
$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.
Ronald S. Haft and Dart have agreed to various transactions relating to certain
warehouse and office facility properties that Dart and/or Trak Auto lease from
Haft-owned entities (collectively, the "Warehouse Transactions"). The
properties include Dart's headquarters in Landover, Maryland, Trak Auto's
distribution centers in Ontario, California and Bridgeview, Illinois (the
"Distribution Centers") and some of Dart's former warehouse and office facility
in Landover, Maryland (the "Pennsy Warehouses"). The primary intent
83
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
of the Warehouse Transactions is to transfer interests controlled by Ronald S.
Haft in some or all of the properties to entities controlled by Dart, and amend
the leases to reduce or, in the case of the Pennsy Warehouses, eliminate the
rents being paid by Dart or Trak Auto. The Warehouse Transactions are subject
to contingencies, including bankruptcy court and mortgagee approval to the
extent any is necessary, to challenges brought by Herbert H. Haft concerning
the extent of Ronald S. Haft's ownership interest in certain of the properties
and with respect to the properties in Landover, Maryland and Bridgeview,
Illinois, claims asserted by Robert M. Haft and Linda G. Haft regarding the
extent to which Ronald S. Haft controls the partnerships owning such
properties. As of January 31, 1997, Dart has only recorded its interest in two
of the three Pennsy Warehouses. These interests were recorded at an amount
equal to the mortgages on these warehouses. Dart reduced the reserve for Pennsy
Warehouse Leases by approximately $14.0 million, recorded as additional
Paid-in-Capital. Dart and/or Trak Auto expect to continue to fund the rental
payments on the remaining properties until such time as the various
contingencies surrounding these transfers are resolved. Accordingly, Dart has
not recorded the buyout of the lease obligations for the Distribution Centers.
These properties continue to be accounted for as capital leases. Accordingly,
the capital lease obligation of $30.2 million and the net book value of $16.5
million has not been reversed and the corresponding fair values of the
Distribution Centers and related mortgages have not been recorded. Depending
upon the outcome of these contingencies, the accounting treatment of the
transfer (described above) in the financial statements could be significantly
affected.
As part of the RSH Settlement, Ronald S. Haft resigned all of his positions as
a director and officer of Dart and all of its subsidiaries, and consented to
the termination of his employment agreement. The Standstill Order (described
below) contemplates that Ronald S. Haft will continue as a director of Dart
while the Standstill Order is in effect. (Herbert H. Haft contends that Ronald
S. Haft is no longer a director.) Dart recorded compensation expense of $2.0
million for the present value of the remainder of the contract and reversed all
prior accruals under the employment contract resulting in additional
Paid-in-Capital of approximately $2.5 million.
Ronald S. Haft consented to termination of all of his outstanding stock options
from Dart and its subsidiaries, including options for five shares of Dart/SFW
Corp. As a result, in fiscal 1996 Dart reduced its accrual by approximately
$2.8 million for its expense associated with the Dart/SFW Corp. options,
resulting in additional Paid-in-Capital. The total unpaid accrued balances of
$5.3 million related to both the termination of Ronald S. Hafts' employment
contract and Dart/SFW Corp. options were recorded as additions to
84
85
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Paid-in-Capital as they were considered reductions in the costs of the RSH
Settlement.
As a result of the RSH Settlement, Dart also reduced its accrual for legal
expenses by approximately $2.0 million for litigation involving the Pennsy
Warehouses. However, Dart accrued or paid an additional $3.5 million for legal
and/or consulting services associated with the RSH Settlement.
The RSH Settlement is the subject of legal challenges raised by Robert M.
Haft, Gloria Haft and Linda Haft and, separately, by Herbert H. Haft. In
connection with such legal challenges, the court entered a Standstill Order,
which restricts certain actions of Dart until further order of the court. See
Note 8.
The documents implementing the RSH Settlement contain certain provisions
intended to protect Dart's interests if a challenge to the RSH Settlement is
accepted by the court. In general terms, these provisions include the
following:
a) If the court does not approve the settlement in the Kahn action (see
Note 8), Dart will have the right to cause the RSH Settlement
transactions to be reversed, except that (i) Ronald S. Haft will have
up to two years to repay the $37.7 Million Note, (ii) the Warehouse
Transactions will proceed and (iii) the sale of CMREC joint venture
properties will stand, but without any assignment to Ronald S. Haft of
CMREC's portion of the sale proceeds.
b) If Herbert H. Haft succeeds through his rescission claim in reacquiring
ownership of the 172,730 shares of Class B Common Stock transferred by
Ronald S. Haft to Dart as part of the RSH Settlement, repayment of
$24.2 million of the principal amount of the $37.7 Million Note will be
due within two years and the 288,312 shares of Dart Class A Common
Stock issued to Ronald S. Haft under the RSH Settlement will be
returned to Dart.
c) If a court rules that Ronald S. Haft cannot transfer the 172,730 shares
of Class B Common Stock to Dart because of the impact on Herbert H.
Haft's preexisting proxy from Ronald S. Haft to vote those shares, then
$8.0 million of the CMREC sale proceeds will be held in escrow until
the transfer occurs and may, under certain circumstances be returned to
Dart.
d) If a court determines that the 197,048 shares of Class B Common Stock
issued to Ronald S. Haft are not validly issued or that the Voting
Trustees are not entitled to vote the shares they hold, then Dart will
have the same
85
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
rights (discussed above) as in the event that the Court does not
approve the settlement of the Kahn lawsuit. Alternatively, Dart could
elect that the 197,048 shares of Class B Common Stock be returned to
Dart, that the $27.4 million promissory note be canceled and that
Ronald S. Haft pay $8.0 million to Dart within two years.
NOTE 7 - PENNSY WAREHOUSE LEASES
The Pennsy 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 Dart. The warehouses and office space are not required by Dart
for its operations. These warehouses are owned by partnerships in which members
of the Haft family own all 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 were built in 1965, Warehouse II in 1971 and
Warehouse III was built in 1974. The facility is located at 3301 Pennsy Drive,
Landover, Maryland.
Trak Auto, Crown Books and Shoppers Food utilize space in Warehouses II and III
at a variable rental (approximately $268,000 per year) dependent on square
footage used. This arrangement continues on a month-to-month basis. The
arrangement requires Trak Auto, Crown Books and Shoppers Food each to pay for
its share of common area maintenance, real estate taxes and insurance premiums.
The buildings have fallen into disrepair. Deferred maintenance is estimated at
between $2.0 million and $3.0 million. On November 21, 1994, Dart's Executive
Committee 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 I.
However, tests demonstrated that the level of airborne asbestos did not exceed
the legal limits. With respect to Warehouse III, Dart has determined that the
presence of asbestos-containing materials in the floor tiles did not render
Warehouse III unsafe, because the materials were intact and the asbestos was
non-friable. No friable asbestos was located in the portion of Warehouse III
used by Trak Auto, Crown Books and Shoppers Food.
The removal of asbestos from Warehouse II and III was completed in March 1996
and thereafter Trak Auto, Crown Books and Shoppers Food started to use space in
Warehouse II. Dart is continuing to repair Warehouses II and III.
Warehouse I remains secured and unused.
86
87
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
The Pennsy 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, Dart is responsible for all expenses,
including but not limited to real estate taxes, all utilities, insurance and
maintenance. These estimated outflows would substantially impair the future
cash flows of Dart. In 1994, Dart's Executive Committee undertook a legal
review of the subject leases from their inception. As a result of this legal
review, on February 10, 1995, Dart filed a complaint for rescission of the
Pennsy Leases and for the return of rent paid since the reassumption of the
Pennsy Leases. If the RSH Settlement is not sustained and the leases remain
enforceable, Dart 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 rate of 6%, and eliminating
the effect of estimated future inflation of 4%, is approximately $32.2 million.
At the end of the lease term Dart retains no residual value in either the land
or buildings.
During fiscal 1995, Dart 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. As part of the RSH
Settlement (see Note 6), Ronald S. Haft agreed to transfer the real estate and
the partnership interests controlled by him in the Pennsy Leases to Dart. The
transfer of the partnership interest reduced Dart's obligation under the
leases. Accordingly, Dart reversed $14.0 million of the reserve with respect to
Warehouses II and III. The transfer contemplated in the RSH Settlement is
subject to contingencies, including bankruptcy court with respect to Warehouse
II and III and mortgagee approval to the extent any is necessary, and to
challenges brought by Herbert H. Haft concerning the extent of Ronald S. Haft's
ownership interest in certain of the properties. Depending upon the outcome of
these contingencies, the accounting treatment of the transfer (described above)
in the financial statements could be significantly affected.
The following summarizes the activity in the reserve:
(dollars in thousands)
1997 1996
---------- ----------
Reserve, beginning of year $ 18,467 $ 31,892
Add: Interest accrued 981 1,655
Less: Payments made (880) (1,080)
Reversal of reserve - (14,000)
--------- ---------
Reserve, end of year $ 18,568 $ 18,467
========= =========
87
88
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
NOTE 8 - LITIGATION
Robert M. Haft Litigation
In August 1996, Dart and Crown Books paid approximately $21.0 million and $16.9
million, respectively, (including interest of approximately $3.3 million) for
satisfaction of the RMH Judgment. The Company accrued approximately $32.2 of
the RMH Judgment in fiscal 1995 and accrued interest monthly. Pursuant to the
RMH Judgment, Crown Books also paid $2.1 million to Robert M. Haft for 100,000
shares of Crown Books common stock. Crown Books recorded these shares as
treasury shares. The Company has filed a lawsuit against Herbert H. Haft to
recover these amounts.
Derivative Litigation
In September 1993, Alan R. Kahn and the Tudor Trust (the "Kahn Derivative
Plaintiffs"), shareholders of Dart, filed a lawsuit naming as defendants
Herbert H. Haft, Ronald S. Haft, Douglas M. Bregman, Bonita A. Wilson,
Combined Properties, Inc. ("CPI"), Combined Properties Limited Partnership and
Capital Resources Limited Partnership. The suit is brought derivatively and
names as nominal defendants Dart, Trak Auto, Crown Books, Shoppers Food, Total
Beverage and CMREC.
The complaint, as amended on January 12, 1995, alleges waste, breach of
fiduciary duty, violation of securities laws and entrenchment in connection
with various lease agreements between the Combined Properties defendants and
Dart and its subsidiaries, the termination of Robert M. Haft, the compensation
paid to Ronald S. Haft and Herbert H. Haft, the employment agreement entered
into by Ronald S. Haft and Dart on August 1, 1993 (the "RSH Employment
Agreement"), the sale of 172,730 shares of Class B Common Stock by Herbert H.
Haft to Ronald S. Haft, and the compensation paid to the Executive Committee.
Plaintiffs seek an accounting of unspecified damages incurred by Dart, voiding
of the options sold to Ronald S. Haft, appointment of a temporary custodian to
manage the affairs of Dart or to oversee its recapitalization or sale and costs
and attorneys' fees.
In November 1993, Robert M. Haft filed a lawsuit naming as defendants Herbert
H. Haft, Ronald S. Haft, Douglas M. Bregman, and Bonita A. Wilson, and also
names Dart as a nominal defendant. The complaint derivatively alleges
interested director transactions, breach of fiduciary duty and waste in
connection with the RSH Employment Agreement. Robert M. Haft also brings
individual claims for breach of contract and dilution of voting rights in
connection with the sale of shares of Class B Common Stock by Herbert H. Haft
88
89
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
to Ronald S. Haft and the RSH Employment Agreement. The complaint seeks
rescission of the sale of such shares and the RSH Employment Agreement,
unspecified damages from the individual directors, and costs and attorneys'
fees.
In January 1994, a Special Litigation Committee was appointed by the Board of
Directors to assess, on behalf of Dart, whether to pursue, settle or abandon
the claims asserted in these two derivative lawsuits. In September 1994, the
Special Litigation Committee moved for dismissal of certain claims in these
derivative lawsuits and for realignment of the parties to permit Dart to
prosecute other claims in those derivative lawsuits. Thereafter, the Special
Litigation Committee amended its motion and advised the court that it had
instituted certain lawsuits concerning related party real estate transactions,
(see the Pennsy Warehouse Litigation, described below), and was considering
asserting additional claims, certain of which have since been asserted in (see
the Lawsuit Against Herbert H. Haft Concerning Haft-Owned Real Estate, see Item
3 - Legal Proceedings). The amended motion is still pending before the court.
In connection with the RSH Settlement, the plaintiff shareholders, Ronald S.
Haft, CPI, Dart, Trak Auto and Crown Books entered into a Stipulation and
Agreement of Compromise, Settlement and Release (the "Stipulation"). Pursuant
to the Stipulation, the claims against Ronald S. Haft and CPI will be dismissed
on the merits and with prejudice as against the shareholder plaintiffs and Dart
and its subsidiaries, if the RSH Settlement and dismissal of these claims are
approved by the court.
Given that these actions are brought in the name of Dart and its subsidiaries,
recovery in them would inure to the benefit of Dart and its subsidiaries if the
claims are successfully litigated or settled. Therefore, in the opinion of
management, resolution of these actions will not have a material adverse effect
on the consolidated financial condition or results of operations of the
Company.
Pennsy Warehouse Litigation
In fiscal 1995, the Executive Committee of Dart's Board of Directors undertook
a legal review of the Pennsy Leases. As a result, in February 1995, Dart filed
a complaint (the "Pennsy Warehouse Litigation") alleging breaches of fiduciary
duty, waste and other irregularities by certain members of the Haft family and
others in connection with the Pennsy Leases and, in particular, with the
resumption of rental payments for these warehouses in 1991. The complaint seeks
rescission of the Pennsy Leases, restitution of approximately
89
90
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
$5.0 million of rent and other expenses paid since 1991 and other monetary
damages.
Robert M. Haft Stock Option Litigation
On February 10, 1995, Robert M. Haft filed a complaint against Dart seeking
specific performance or damages in connection with the refusal of Dart to issue
shares of Class A Common Stock to him pursuant to his exercise of certain
options purportedly granted to him by Dart. Robert M. Haft allegedly received
these options on three separate occasions: (i) pursuant to the Dart Drug
Corporation Executive Non-Qualified Stock Option Plan (the "1983 Plan"), under
which Robert M. Haft allegedly received options to purchase 120,000 shares of
Class A Common Stock; (ii) pursuant to the Dart Drug Corporation 1987 Executive
Non-Qualified Stock Option Plan (the "1987 Plan"), under which Robert M. Haft
allegedly received options to purchase 99,750 shares of Class A Common Stock;
and (iii) pursuant to a Stock Option Agreement (the "1989 Agreement") dated as
of August 30, 1989, among Dart, Dart/SFW Corp. ("Dart/SFW") and Robert M. Haft,
under which Robert M. Haft allegedly received options to purchase 10 shares (or
10%) of common stock of Dart/SFW.
Dart is contesting the validity of the options granted to Robert M. Haft
pursuant to the 1983 Plan, the 1987 Plan and the 1989 Agreement. Dart filed a
counterclaim on July 17, 1995 asking that the stock option plans and stock
option agreement that are the subject of the litigation be declared void,
rescinded and unenforceable.
Herbert H. Haft Proxy Litigation
In connection with Herbert H. Haft's sale of 172,730 shares of Class B Common
Stock to Ronald S. Haft on July 28, 1993 (the "Stock Sale Agreement"), Ronald
S. Haft purportedly granted Herbert H. Haft an irrevocable proxy (the "Proxy")
to vote these shares of stock. In June 1995, Ronald S. Haft purportedly revoked
this proxy.
On July 18, 1995, Ronald S. Haft filed a lawsuit against Herbert H. Haft and,
nominally, Dart for Herbert H. Haft's alleged breach of contract and breach of
fiduciary duties to Ronald S. Haft and to Dart in connection with the Proxy. In
this action, Ronald S. Haft seeks a declaration that the Proxy is revocable or
would be revocable under certain conditions, as well as costs and attorneys'
fees. Ronald S. Haft also requests that the court require Dart to refuse to
recognize the validity of the Proxy. On August 9, 1995, Herbert H. Haft filed
an Answer and Counterclaim denying liability and requesting rescission of the
Stock Sale Agreement because of Ronald S. Haft's alleged
90
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
breach of contract and other grounds. On September 25, 1995, Dart filed its
answer in this action. Both Ronald S. Haft and Herbert H. Haft moved for
summary judgment in this lawsuit. On November 14, 1995, the court denied Ronald
S. Haft's motion for summary judgment; Herbert H. Haft's motion for summary
judgment remains pending.
As part of the RSH Settlement, Dart purchased from Ronald S. Haft the 172,730
shares of Class B Common Stock that were subject to the Proxy and the shares
have become treasury shares (see Note 6).
Section 225 Action by Robert, Gloria and Linda Haft
On October 17, 1995, Robert M. Haft, Gloria G. Haft and Linda G. Haft
(collectively, "RGL") filed a lawsuit (the "Section 225 Action"), naming as
defendants Dart and all of its directors. RGL seek an order, under Section 225
of the Delaware General Corporation Law, declaring that RGL validly removed all
of Dart's directors and replaced them with three individuals (John L. Mason,
Ellen V. Sigal and Michael Ryan), whom RGL purport to have elected. Such
purported election is premised on RGL's contention that RGL own a majority of
Dart's voting stock because, they argue, (i) the 172,730 Class B shares subject
to Herbert H. Haft's proxy have been purchased by Dart and may not be voted and
(ii) the shares of Class B Common Stock placed in a voting trust (the "Trust
Shares") by Ronald S. Haft pursuant to the RSH Settlement also are not entitled
to vote because they have been unlawfully issued or they should be deemed to be
owned by Dart.
Dart's position is that this lawsuit is without merit and that the purported
action by RGL to reconstitute the Board of Directors is invalid. On October
27, 1995, Dart filed a motion for summary judgment.
Challenge to RSH Settlement by Herbert H. Haft
On November 6, 1995, Herbert H. Haft filed a lawsuit naming as defendants Dart,
and certain of its directors. Herbert H. Haft seeks a judgment (i) declaring
the RSH Settlement unlawful, hence null and void; (ii) declaring either that
172,730 shares of Class B Common Stock belong to him, were wrongfully sold by
Ronald S. Haft to Dart, and that Herbert H. Haft is entitled to restitution of
such shares or, alternatively, that his purportedly irrevocable proxy on the
172,730 shares continues to be valid; (iii) declaring that Herbert H. Haft
retains voting control of Dart or, at a minimum, 34.55% of Dart's voting power;
(iv) declaring that the Trust Shares may not be lawfully voted; and (v) other
matters.
91
92
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
On December 5, 1996, Herbert H. Haft filed a motion for partial summary
judgment. Dart opposed this motion for partial summary judgment and, on March
14, 1997, the court denied Herbert H. Haft's motion in its entirety.
A trial date has not yet been scheduled. In the event Herbert H. Haft prevails
at trial, there could be a significant effect on the accounting treatment for
the RSH Settlement that has been reflected in the Company's financial
statements. See Note 6.
Standstill Order
In connection with legal challenges to the RSH Settlement, on December 6, 1995,
the Delaware Court of Chancery entered a Standstill Order (the "Standstill
Order"), which restricts certain actions by Dart. Without further order of the
court, Dart may not (i) change its Certificate of Incorporation or Bylaws; (ii)
change the current composition of Dart's Board of Directors (Herbert H. Haft,
Ronald S. Haft, Larry G. Schafran, Bonita A. Wilson and Douglas M. Bregman) or
any of its subsidiaries; (iii) change the current Haft family officers of Dart
or any of its subsidiaries; or (iv) issue any additional securities of Dart or
any of its subsidiaries (except employee stock options issued in the ordinary
course of business). In addition, without first giving Herbert H. Haft and
certain other litigants not less than seven days' written notice, Dart may not
take any extraordinary actions, including but not limited to actions that would
result in (a) the liquidation of Dart or any of its subsidiaries, (b) the sale
of any major subsidiary of Dart or (c) the disadvantage of any Class B
stockholder of Dart through any debt transaction. For purposes of the
Standstill Order, the phrase "extraordinary actions" means any transaction,
contract or agreement, the value of which exceeds $3 million.
Possible Settlements
On April 21, 1997, Dart reached a conditional settlement agreement in principle
with Herbert H. Haft. If the settlement contemplated by the conditional
agreement in principle is implemented, Herbert H. Haft would retire from his
positions as Chairman of Dart, Shoppers Food, Trak Auto and Crown Books.
Herbert H. Haft also would relinquish his claim to voting control of Dart.
Under the settlement contemplated by the conditional agreement in principle,
Herbert H. Haft would sell to Dart, Trak Auto and Crown Books all of his shares
of stock and stock options in these companies. The settlement also would
terminate Herbert H. Haft's employment agreement with Dart and resolve all
outstanding litigation and disputes between Dart and Herbert H. Haft. Herbert
H. Haft
92
93
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
would also assign certain real estate interests to Dart.
Herbert H. Haft would receive approximately $30 million from Dart if the
settlement is implemented. Herbert H. Haft would also receive an additional
$11.6 million from escrowed funds previously paid by Dart to Ronald S. Haft as
part of the RSH Settlement (plus $700,000 interest on those funds). The
conditional agreement in principle also contemplates that Dart would make a $10
million loan to a partnership owned by Herbert H. Haft and Ronald S. Haft,
which loan would be secured by such partnership's interests in three shopping
centers located in suburban Washington, D.C. and would be personally guaranteed
by Ronald S. Haft.
Implementation of the conditional agreement in principle is subject to the
negotiation of a definitive settlement agreement satisfactory to Dart and
Dart's receipt of satisfactory advice from its investment bankers. The
conditional agreement in principle states that it will terminate if a
definitive settlement agreement is not entered into by May 9, 1997.
The conditional agreement in principle is also conditioned on Dart's entering
into a supplemental settlement with Ronald S. Haft and a comprehensive
settlement with RGL. Negotiations with respect to these related settlements are
currently underway. Current settlement discussions contemplate that Dart, Trak
Auto and Crown Books would collectively pay approximately $50 million in
exchange for all of RGL's equity interests in these companies and certain real
estate interests. There can be no assurance that such settlements will be
reached or as to the terms or timing of any settlement, if one occurs.
Closing of the transactions contemplated by the conditional agreement in
principle also is subject to (i) final and non-appealable action by the
Delaware Court of Chancery or the Delaware Supreme Court approving all of the
terms of the settlement, terminating certain putative derivative actions
pending with respect to Dart and Crown Books in the Delaware Court of Chancery,
and approving the RSH Settlement and the supplemental settlement between Dart
and Ronald Haft, and (ii) final and non-appealable action by the U.S.
Bankruptcy Court approving the effectiveness of Chapter 11 plans of
reorganization for certain real estate entities owned by Haft family members.
There can be no assurance that a definitive settlement agreement between Dart
and Herbert H. Haft will be entered into and that the transactions contemplated
by the conditional agreement in principle will be implemented.
93
94
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Any settlement with RGL (including any financing of such settlement) would
require further order of the Delaware Court of Chancery under the Standstill
Order and could be opposed by Herbert H. Haft if Dart does not settle with him.
A closing of any settlement with RGL would be subject to available financing
and the proposed settlement with Herbert H. Haft would be subject to the
receipt of advice by Dart from its financial advisor that adequate financing
would be available at closing. Dart and its subsidiaries do not presently have
cash available to pay the approximately $90 million (including the loan of $10
million) contemplated by the possible settlements but are considering various
options to finance them.
Other
In the normal course of business, the Company is involved in various claims and
litigation. In the opinion of management, liabilities, if any, will not have a
material adverse effect upon the consolidated financial condition and results
of operations of the Company.
The Company recorded legal expenses of approximately $22.4 million, $7.2
million and $18.4 million during the years ended January 31, 1997, 1996 and
1995, respectively. These amounts include estimated future expenses that likely
will be necessary to resolve all litigation discussed above.
NOTE 9 - CREDIT FACILITIES
On September 12, 1996, Crown Books entered into a revolving credit facility
with a finance company to borrow up to $50 million. Crown Books intends to use
proceeds from draw-downs under the credit facility for working capital and
other corporate purposes. The agreement has an original term of three years.
Borrowing under the credit facility include revolving loans and letters of
credit which bear interest at a rate equal to the prime rate (as defined in the
credit agreement) and LIBOR loans which bear interest at LIBOR plus 2.25%.
Interest on prime rate borrowings is payable monthly. Interest and principal on
LIBOR loans is payable between one and six months from the borrowing date.
LIBOR loans are subject to a prepayment penalty and may be continued for
subsequent one to six month periods. LIBOR loans may be converted to prime rate
loans and vice versa. The agreement includes a facility fee of .25% on the
unused principal balance, as defined. No single advance may be outstanding for
more than 36 months.
Borrowings under the credit facility are secured by Crown Books' inventory,
accounts receivable and proceeds from the sale of such assets of Crown Books.
94
95
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
The credit facility also contains certain restrictive covenants,
including a limitation on the incurrence of additional indebtedness and places
a $13.1 million limitation on payments to settle disputes with Haft family
members. There are additional covenants related to tangible net worth. Loans
under the credit facility are subject to limitations based upon eligible
inventory levels, as 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 on any anniversary date thereafter
upon 60-days prior written notice to Crown Books. During fiscal 1997 Crown
Books began borrowing under the credit facility. The maximum borrowings
outstanding at any one time during fiscal 1997 were $15,621,000 and there was
no outstanding balance as of February 1, 1997. Crown Books had $25.0 million
available for borrowing at February 1, 1997. In connection with its expansion
program, Crown Books anticipates increasing its borrowing under its revolving
credit facility, subject to limitations contained in the loan agreement. To
increase the limit from $25.0 million to $35.0 million, Crown Books is required
to maintain a minimum tangible net worth of $73.0 million as of the fiscal year
end preceding the election and for each fiscal year end thereafter, and to
maintain a minimum tangible net worth of $70.0 million as of the election date
and thereafter, in addition to other covenants. To increase the limit from
$35.0 million to $50.0 million, Crown Books is required to maintain a minimum
tangible net worth of $75.0 million as of the fiscal year end preceding the
election and for each fiscal year end thereafter, in addition to other
covenants. The average borrowings (calculated from the inception of the
agreement) and weighted average interest rate for fiscal 1997 were $4,263,000
and 8.25%.
In December 1996, Trak Auto entered into a revolving credit facility (the "Trak
Auto Facility") with a finance company to borrow up to $25.0 million. Trak Auto
intends to use proceeds from drawdowns under the Trak Auto Facility for working
capital and other corporate purposes. The Trak Auto Facility has an original
term of three years. Borrowings under the Trak Auto Facility bear interest at
rates ranging from prime rate minus 0.50% to prime rate plus 0.25%, for prime
rate loans, and LIBOR plus 1.5% to LIBOR plus 2.25%, for LIBOR loans. Interest
rates are based upon Trak Auto's ratio of debt to tangible net worth.
Borrowings are limited to eligible inventory levels, as defined and are secured
by Trak Auto's inventory, accounts receivable, and proceeds from the sale of
such assets. The Trak Auto Facility contains certain restrictive covenants
including limitations on additional indebtedness, advances to affiliates and
payments (limited to $25.0 million) or guarantees (limited to $20.0 million of
the $25.0 million) to settle disputes with Haft family members and includes a
maximum leverage ratio covenant.
95
96
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Interest on prime rate loans is payable monthly. Interest and principal on
LIBOR loans is payable between one and six months from the borrowing date.
LIBOR loans are subject to a prepayment penalty and may be continued for a
subsequent one to six month period. LIBOR loans may be converted to prime rate
loans and visa versa. The Trak Auto Facility includes a facility fee of .25% on
the unused principal balance, as defined. No single advance may be outstanding
for more than 36 months. Trak Auto may terminate the Trak Auto Facility upon
60-days prior written notice to the lender and the lender may terminate it as
of December 18, 1999 or on any anniversary date thereafter upon 60-days prior
written notice to Trak Auto.
Trak Auto currently has a $750,000 commercial letter of credit facility with
NationsBank for use in importing of merchandise.
At January 31, 1997, there were no borrowings under the Trak Auto Facility and
no borrowings under the letter of credit facility.
NOTE 10 - RESTRUCTURING AND STORE CLOSING CHARGES
Trak Auto
Trak Auto continually evaluates its store operations and the need to close,
relocate, or expand stores or convert existing Classic Trak stores into Super
Trak or Super Trak Warehouse stores. Trak Auto recognizes store closing costs
when management decides to close a store. In prior years, Trak Auto has also
recognized the anticipated costs for closing, relocating, expanding and
converting existing stores to the Super Trak and Super Trak Warehouse concept.
The costs associated with store closings and restructuring efforts are
primarily unrecoverable lease obligations (rent, real estate taxes and common
area charges, net of estimated sublease income) and the book value of leasehold
improvements as of the actual or estimated store closing date.
As of February 1, 1997, Trak Auto had reserves of $2,644,000 for store closings
and restructuring. The restructuring reserve relates to 15 stores that have
been closed or converted into Super Trak or Super Trak Warehouse stores and an
additional nine stores identified to be closed or converted but which have
remained open. The closed store reserve relates to 16 Classic Trak and Super
Trak stores that were closed apart from Trak Auto's restructuring efforts. The
activity in the closed store and restructuring reserves during the last two
years are as follows:
96
97
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
(dollars in thousands)
1997 1996
--------- --------
Reserves, beginning of year $ 4,491 $ 6,945
Less: Net provision recorded/(charges) (1,847) (2,454)
-------- --------
Reserves, end of year $ 2,644 $ 4,491
======== ========
Included in the closed store provision for fiscal 1997 is an increase of the
closed store and restructuring reserves of approximately $402,000 and included
in the closed store provision for fiscal 1996 is an increase of the reserves of
$673,000.
The lease obligation allocable to related party leases is approximately
$969,000. The closed store and restructuring reserves as of February 1, 1997
are expected to be utilized as follows:
(dollars in thousands)
Fiscal Year Total
----------- ---------
1998 $ 1,047
1999 836
2000 335
2001 167
2002 128
2003-2005 131
-------
Total $ 2,644
=======
The amount recorded for future lease obligations has been estimated at 95% of
the total lease obligation after the closing date because Trak Auto believes
that certain alternatives (subleasing and favorable lease buy-outs) to
abandonment may be available. Since the recorded reserves represents an
estimate based upon anticipated closing dates and the book value of the
leasehold improvements at the time the store is closed, the actual amount of
costs associated with store closings are subject to change.
Trak Auto will continue to evaluate the performance and future viability of its
stores and may close or convert additional stores in the future.
Crown Books
Restructuring Reserve
In fiscal years 1993 and 1994, Crown Books determined that a number of the
smaller Classic Crown Books stores were not competitive in an industry moving
to larger stores. Consequently, Crown Books recorded restructuring charges
97
98
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
totaling $12,800,000 during these two years for the anticipated costs for
closing, relocating, expanding and converting existing stores to the Super
Crown Books concept. These costs primarily represent unrecoverable lease
obligations (net of estimated sublease income) and the book value of leasehold
improvements at the estimated closing date. The activity in the restructuring
reserves during the last two years was as follows:
(dollars in thousands)
1997 1996
----------- ----------
Restructuring Reserve, beginning of year $ 7,025 $ 10,515
Less: Payments and charges (1,653) (1,439)
Reversal of reserves (3,865) (2,051)
-------- --------
Restructuring Reserve, end of year $ 1,507 $ 7,025
======== ========
In fiscal 1997 and 1996, Crown Books reversed a portion of the restructuring
reserve as a result of (i) management's decision not to close certain stores
that had been scheduled for closing, (ii) stores that were closed under
negotiated lease settlements that were more favorable than expected, and (iii)
the postponement of certain store closings.
The remaining restructuring reserve relates to 14 stores, of which four have
been closed as of February 1, 1997, with lease obligations ranging from one to
96 months. The lease obligation allocable to related party leases is
approximately $474,000. The restructuring reserve is expected to be utilized as
follows:
(dollars in thousands)
Lease Leasehold
Fiscal Obligations Improvements
Year (Cash Outflows) & Fixtures Total
-------- --------------- ------------ --------
1998 $ 532 $ 164 $ 696
1999 269 6 275
2000 215 19 234
2001 66 - 66
2002 59 - 59
2003-2005 177 - 177
--------- --------- ---------
Total $ 1,318 $ 189 $ 1,507
========= ========= =========
Since the recorded restructuring 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 amounts of costs
associated with store closings may be different from the reserve.
98
99
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Store Closing Reserve
Crown Books continually evaluates its store operations and the need to close
stores that do not perform satisfactorily. Crown Books recognizes store closing
costs when management decides to close a store. The costs primarily represent
unrecoverable lease obligations (net of estimated sublease income) and the book
value of leasehold improvements at the estimated closing date. The activity in
the closed store reserve during the last two fiscal years is as follows:
(dollars in thousands)
1997 1996
--------- ---------
Closed Store Reserve, beginning of year $ 10,850 $ 20,241
Less: Payments and charges (1,764) (2,648)
Reversal of reserves (1,052) (6,743)
-------- --------
Closed Store Reserve, end of year $ 8,034 $ 10,850
======== ========
In fiscal 1997 and 1996, Crown Books reversed a portion of the closed store
reserve as a result of (i) management's decision not to close certain stores
that had been scheduled for closing, (ii) stores that were closed under
negotiated lease settlements that were more favorable than expected, and (iii)
the postponement of certain store closings.
The remaining closed store reserve relates to 69 stores, of which 13 have been
closed as of February 1, 1997, with lease obligations ranging from one to 54
months. The lease obligation allocable to related party leases is approximately
$1,555,000. The closed store reserve is expected to be utilized as follows:
(dollars in thousands)
Lease Leasehold
Fiscal Obligations Improvements
Year (Cash Outflows) & Fixtures Total
-------- --------------- ------------ ----------
1998 $ 1,960 $ 642 $ 2,602
1999 2,040 198 2,238
2000 1,437 141 1,578
2001 805 - 805
2002 383 49 432
2003-2005 284 95 379
--------- -------- --------
Total $ 6,909 $ 1,125 $ 8,034
========= ======== ========
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 the store is closed, the actual costs are subject to
change and may be different from the reserve. Crown Books will continue to
99
100
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
evaluate the performance and future viability of its remaining stores and may
close additional stores. Crown Books has not recorded reserves for any such
future possible store closings.
Total Beverage
Due to poor operating performance, Total Beverage's Bull Run store was closed
during the fourth quarter of fiscal 1995. Dart reserved approximately
$2,800,000 for future lease obligations and a portion of the fixtures net of
recoveries expected through CMREC. As a result of a negotiated settlement of
the lease obligation, Dart reversed $2,420,000 of this reserve during the
fiscal year ended January 31, 1996.
In addition, management of Dart and Total Beverage concluded that a Total
Beverage store opened during fiscal 1996 would be closed in fiscal 1997. The
decision was based on the store's disappointing sales volume. Accordingly,
Total Beverage recorded a closed store reserve of approximately $3.0 million,
primarily for future lease obligations and the write-off of leasehold
improvements and a portion of the store's fixtures. At January 31, 1997 Total
Beverage has $2.6 million remaining in the closed store reserve.
NOTE 11 - MINORITY INTERESTS
The $67,750,000 of minority interests reflected in the Consolidated Balance
Sheet as of January 31, 1997 represents the minority portion of Trak Auto and
Crown Books equity owned by the public shareholders of Trak Auto and Crown
Books. Income attributed to the minority shareholders of Trak Auto was
$354,000, $2,351,000 and $3,569,000 for the years ended January 31, 1997, 1996
and 1995, respectively. Income (loss) attributed to the minority shareholders
of Crown Books was $(442,000), $1,802,000, and $(9,428,000) for the years ended
January 31, 1997, 1996 and 1995, respectively. Income attributed to the
minority ownership of Shoppers Food for the year ended January 31, 1995 was
$1,050,000 (no income for Shoppers Food was attributed to minority interest for
periods after May 28, 1994). Income attributed to the minority ownership of the
CMREC real estate joint ventures was $494,000 and $574,000 for the years ended
January 31, 1996 and 1995, respectively (no income for the real estate joint
ventures was attributed to the minority interest for periods after October 5,
1995).
NOTE 12 - STOCK OPTION PLANS
The Company has two stock option plans and accounts for the plans under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
100
101
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
compensation cost for the plans been determined consistent with SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
(dollars in thousands, except per share data)
Fiscal Year
Net loss 1997 1996
---------- -------
As Reported $(16,693) $(13,424)
Pro Forma (16,921) (13,489)
Net loss per share
As Reported $ (8.73) $ (7.88)
Pro Forma (8.84) (7.92)
The effects of applying SFAS No. 123 in the pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995.
Dart Group Corporation 1992 Stock Option Plan
Dart has adopted a stock option plan (the "1992 Plan") for officers, key
employees and directors. The total number of shares that may be issued under
the 1992 Plan is 400,000 and the 1992 Plan will terminate June 2, 2002. Options
granted pursuant to the 1992 Plan may be incentive stock options, as defined in
Section 422 of the Internal Revenue Code or may be non-qualified options. The
option exercise price equals the market price on the date of the grant. Options
vest fully after three years and expire after five years.
Information concerning stock options under the 1992 Plan is as follows:
Number Option Price Weighted Average
of Shares Per Share Exercise Price
--------- ------------- ----------------
Outstanding at January 31, 1994 55,750 $ 74.00-89.65 $ 81.48
Granted 6,000 73.00 73.00
Exercised (2,333) 74.00-81.50 76.68
Forfeited (5,067) 74.00-81.50 80.73
------- ------------ -------
Outstanding at January 31, 1995 54,350 73.00-89.65 80.82
Granted 19,400 73.00-85.75 81.53
Exercised (233) 73.00-81.50 78.47
Forfeited (11,750) 73.00-89.65 81.08
------- ------------ -------
Outstanding at January 31, 1996 61,767 73.00-89.65 81.01
Granted 18,700 92.00-95.00 92.12
Exercised (3,180) 73.00-85.75 78.36
Forfeited (752) 73.00-85.75 80.78
------- ------------- -------
Outstanding at January 31, 1997 76,535 $ 73.00-95.00 $ 83.83
======= ============= =======
101
102
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
At January 31, 1997, options for 316,219 shares remain available for grant,
45,528 options were exercisable and the weighted average contractual life of
the options outstanding was 2.9 years. The weighted average fair value of
options granted was $32.18 and $29.97 for options granted during fiscal 1997
and 1996, respectively. The fair value of each option grant is estimated on the
date of the grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in fiscal 1997 and 1996,
respectively: risk free rates of approximately 6.0%; expected dividend rates of
$.13 per share; expected lives of 5.0 years; and expected volatility of 25.0%.
The grant of 6,425 employee stock options by the Board of Directors (pending
court approval) in December 1994 was approved by the court in April 1995.
Dart Group Corporation 1981 Stock Option Plan
Dart has a 1981 stock option plan (the "1981 Plan") in which directors,
officers and key employees participate. Options granted under this plan fully
vested after three years and expired after five years. The 1981 Plan terminated
December 4, 1991 and no more options could be granted under the 1981 Plan after
that date.
Information concerning stock options under the 1981 Plan is as follows:
Number Option Price Weighted Average
of Shares Per Share Exercise Price
--------- ------------- ----------------
Outstanding at January 31, 1994 82,500 $65.00-104.50 $ 89.84
Exercised (2,582) 65.00- 90.00 73.20
Forfeited (4,668) 67.25- 99.00 78.82
Expired (13,750) 95.00-104.50 102.95
-------- ------------- -------
Outstanding at January 31, 1995 61,500 71.50-104.50 88.45
Expired (21,500) 84.97- 99.00 91.85
-------- ------------- -------
Outstanding at January 31, 1996 40,000 71.50-104.50 86.63
Exercised (10,000) 71.50 71.50
-------- ------------- -------
Outstanding at January 31, 1997 30,000 $71.50-104.50 $ 91.67
======== ============= =======
At January 31, 1997 there were 30,000 options exercisable under the 1981 Plan
and the weighted average contractual life was 2.4 years.
The Board of Directors of Dart has authorized certain officers and directors of
Dart to apply for loans from Dart to exercise their vested stock options. Under
the plan approved by the Board of Directors, the loans must bear interest at
the prime rate, adjusted annually, be secured by all of the stock
102
103
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
acquired by exercise of the options, be repaid out of the first proceeds of
sale of stock or at the end of three years, whichever is earlier, and the
borrower must demonstrate to Dart's chief financial officer both that it would
be difficult to dispose of the number of shares on the open market and that he
or she presents a reasonable credit risk to Dart. The Board of Directors for
both Trak Auto and Crown Books have authorized such loans to certain officers
and directors of Trak Auto and Crown Books.
1983 Executive Non-Qualified Stock Option Plan
The discussion in the next paragraph regarding the 1983 Plan (defined below) is
qualified in its entirety by the succeeding paragraph, which discusses Dart's
challenge to the validity of the 1983 Plan and the options granted thereunder.
In 1983, the Board of Directors of Dart voted to approve an executive
non-qualified stock option plan (the "1983 Plan"), for a total of 199,500
shares of Class A Common Stock. In 1983 options for 177,500 shares were
purportedly granted under the 1983 Plan. The exercise price at the time of the
grant was equal to 100% of the fair market value ($82.50 per share) of the
Class A Common Stock. The 1983 Plan provides that in the event of a "major
business change" the exercise price of options held by persons who are
employees of Dart on the day immediately preceding such a change is reduced to
$20.00 per share. The Board of Directors previously determined that the sale of
Dart's drug store division in 1985 constituted a major business change under
the terms of the amended version of the 1983 Plan adopted in September 1983.
According to this determination, outstanding options for 154,400 shares would
be exercisable at $20.00 per share and options for 3,990 shares would be
exercisable at $82.50 per share. Options granted under the 1983 Plan purport to
be exercisable until 1998. No options were exercised in fiscal 1997, 1996 and
1995.
Robert M. Haft has attempted to exercise options to purchase 120,000 shares
under the 1983 Plan. The Executive Committee has undertaken a legal review of
the 1983 Plan. Based upon this legal review, the Executive Committee has
determined to cause Dart to contest the validity of the options purportedly
granted to Robert M. Haft under the 1983 Plan, on the grounds, inter alia, that
the grants did not conform with Delaware law, that they are a waste of
corporate assets, and that they were obtained by interested directors in breach
of their fiduciary duties to Dart, without the approval of fully- informed,
disinterested directors. Robert M. Haft has instituted litigation to enforce
his alleged options under the 1983 Plan. See Note 8. Dart makes no assurance
regarding the ultimate resolution to its challenge to the
103
104
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
validity of these options.
1987 Executive Non-Qualified Stock Option Plan
The discussion in the next paragraph regarding the 1987 Plan (defined below) is
qualified in its entirety by the succeeding paragraph, which discusses Dart's
challenge to the validity of the 1987 Plan and the options granted thereunder.
In September 1987, the Board of Directors of Dart voted to approve the 1987
Executive Non-Qualified Stock Option Plan (the "1987 Plan"). The terms of the
1987 Plan provide for the granting of options to purchase, in the aggregate,
199,500 shares of Class A Common Stock and the purported granting to each of
Herbert H. Haft and Robert M. Haft of options to purchase 99,750 shares of
Class A Common Stock at an exercise price of $148.50 per share, or fair market
value at the time of the grant. The exercise price is reduced to $36 per share
in the event of a "major business change". On December 9, 1987, the Board of
Directors adopted a resolution stating that these options are to be canceled
and new options for the same number of shares issued with an exercise price of
$68.25 per share, which would be reduced to $16.40 per share in the event of a
"major business change", as defined under the 1987 Plan. Options granted under
the 1987 Plan purportedly are exercisable on or after April 1, 1988 and prior
to September 30, 2002. The options are only transferable by will or by the laws
of descent and distribution.
Robert M. Haft has attempted to exercise options under the 1987 Plan. The
Executive Committee has undertaken a legal review of the 1987 Plan and based
upon this legal review, Dart has contested the validity of the 1987 Plan and
the option grants thereunder, on the grounds, inter alia, that the grants did
not conform with Delaware law, and that they were obtained by interested
directors and Haft family members in breach of their fiduciary duties to Dart,
without the approval of fully-informed, disinterested directors.
Robert M. Haft has initiated litigation to enforce his alleged options under
the 1987 Plan. In his complaint, Robert M. Haft contends that Dart's June 30,
1988 purchase of its interest in Shoppers Food and Robert M. Haft's June 1993
termination each constituted a major business change under the 1987 Plan
allowing him to exercise his options for a price of $16.40 per share. See Note
8. Dart makes no assurance regarding the ultimate resolution to its challenge
to the validity of these options.
Stock options granted for Trak Auto would not, if exercised, have a material
dilutive effect on Dart's equity interest.
104
105
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Stock options granted for Crown Books would, if all were exercised, reduce
Dart's ownership percentage to 48.2%
NOTE 13 - EMPLOYEES' BENEFIT PLANS
Dart, Trak Auto and Crown Books maintain separate non-contributory
profit-sharing plans for all full-time employees with one year of continuous
employment. Annual contributions to the plans are based on a discretionary
percentage of net income, as defined in the respective plan, and as determined
by the respective Board of Directors. Contributions paid or accrued for Dart's,
Trak Auto's and Crown Books' plans for the years ended January 31, 1997, 1996
and 1995 were $99,000, $379,000, and $1,040,000, respectively.
In June 1995, the Company established a 401(k) retirement plan for all eligible
employees. The Company is obligated to contribute an amount equal to 25% of the
employees' deferrals up to 6%. The Company's contributions were $489,000 and
$330,000 for the years ended January 31, 1997 and 1996, respectively.
In March 1996, the Company established a nonqualified deferred compensation
plan for certain officers and key employees of the Company. The Company
contributes an amount equal to 25% of the employees deferral in the
nonqualified deferred compensation plan and the 401(k) plan together up to 6%.
The contribution was $22,000 in fiscal 1997.
NOTE 14 - TENDER OFFER
On December 21, 1994, Trak Auto offered to buy back from its shareholders
approximately 24% of its outstanding common stock, or 1,500,000 shares, at a
price of $17.50 per share. On February 6, 1995, Trak Auto amended the offer by
increasing the purchase price to $20.50 per share, and made certain other
changes. When the offer expired on February 28, 1996, Trak Auto had repurchased
approximately 310,000 shares for a total consideration of $6,363,000 plus
expenses of approximately $541,000.
As a result of the repurchase, Dart's interest in Trak Auto increased to 68.0%
at that time. The repurchase was accounted for as a step acquisition, resulting
in a decrease in minority interest of approximately $4,994,000 and an increase
in goodwill of $1,910,000, which is being amortized over 10 years.
NOTE 15 - SEGMENT INFORMATION
The Company's three primary business segments are retail specialty, retail
105
106
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
grocery and beverage and, until May 1996, real estate. The segment information
presented does not contain revenue, income from operations and depreciation for
Shoppers Food after May 28, 1994 and for CMREC after October 6, 1995. The
following is a summary of selected consolidated information for the business
segments during January 31, 1997, 1996 and 1995:
106
107
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
(dollars in thousands)
Year Ended January 31,
Revenue: 1997 1996 1995
---------- ---------- -------
Retail, specialty $636,314 $631,011 $658,381
Retail, grocery and beverage 30,195 29,508 284,706
Real estate - 13,426 20,645
Other 1,580 4,191 3,696
-------- -------- --------
$668,089 $678,136 $967,428
======== ======== ========
Income (loss) from operations:
Retail, specialty $ 3,445 $ 18,178 $(10,308)
Retail, grocery and beverage (1,130) 373 (5,013)
Real estate - 6,356 9,722
Other (1) (26,599) (32,603) (67,570)
-------- -------- --------
Total operating profit (24,284) (7,696) (73,169)
Interest income 2,875 8,507 7,457
Interest expense (6,993) (13,494) (14,009)
-------- -------- --------
Loss before income taxes $(28,402) $(12,683) $(79,721)
======== ======== ========
Identifiable assets:
Retail, specialty $369,117 $368,447 $400,801
Retail, grocery and beverage 7,722 8,382 7,314
Real estate - - 168,802
Other (1) 72,954 93,736 129,572
-------- -------- --------
$449,793 $470,565 $706,489
======== ======== ========
Depreciation and Amortization Expense:
Retail, specialty $ 13,202 $ 11,707 $ 11,180
Retail, grocery and beverage 298 223 2,453
Real estate - 3,112 4,528
Other (1) 540 411 925
-------- -------- --------
$ 14,040 $ 15,453 $ 19,086
======== ======== ========
Capital Expenditures:
Retail, specialty $ 16,438 $ 14,651 $ 11,669
Retail, grocery and beverage 175 887 489
Real estate - - 2,457
Other 499 1,150 171
-------- -------- --------
$ 17,112 $ 16,688 $ 14,786
======== ======== ========
(1) Includes Dart and consolidating eliminations and adjustments.
107
108
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
NOTE 16 - INTERIM FINANCIAL DATA (Unaudited)
Selected interim financial data for the fiscal years ended 1997 and 1996 are as
follows:
(dollars in thousands, except per share data)
Three Months Ended
-------------------------------------------------
JANUARY 31, OCTOBER 31, JULY 31, APRIL 30,
1997 1996 1996 1996
---------- ---------- ---------- ----------
Revenue $186,159 $158,863 $165,131 $157,936
Gross profit (1) 40,757 32,600 34,993 34,722
Net Loss $(14,764) $ (1,164) $ (298) $ (467)
======== ======== ======== ========
Earnings per share
Net Loss (2) $ (7.32) $ (.66) $ (.30) $ (.36)
======== ======== ======== ========
JANUARY 31, OCTOBER 31, JULY 31, APRIL 30,
1996 1995 1995 1995
---------- ---------- ---------- ----------
Revenue $199,333 $161,484 $164,489 $152,830
Gross profit (1) 45,751 33,936 33,852 32,486
Net Income (Loss) $ (501) $(15,328) $ 1,492 $ 913
======== ======== ======== ========
Earnings per share
Net Income (Loss)(2) $ ( .57) $ (8.16) $ .66 $ .31
======== ======== ======== ========
(1) After deduction for cost of sales, store occupancy and warehousing
expenses.
(2) The sum of these amounts may not equal the annual amount because of
the changes in the average number of shares outstanding during the
year.
108
109
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Inapplicable.
109
110
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of Dart are as follows.
Name Age Position with the Registrant
Herbert H. Haft 76 Chairman of the Board of Directors
and Chief Executive Officer
Mark A. Flint 50 Senior Vice President, Chief Financial
Officer and Treasurer
Elliot R. Arditti 42 Senior Vice President, Secretary and
Corporate Counsel
Terry J. Sharp 44 Senior Vice President of Human Resources
and Operations
Keith W. Hammer 39 Senior Vice President and Chief
Information Officer
Bonita A. Wilson 55 Director
Douglas M. Bregman 47 Director
Larry G. Schafran 58 Director
Ronald S. Haft 38 Director
Subject to the Standstill Order, directors are elected annually by the holders
of the Class B Common Stock. Subject to the Standstill Order, officers serve at
the discretion of the Board of Directors. For a discussion of the Standstill
Order, see Item 3 - Legal Proceedings.
Herbert H. Haft, the founder of Dart, has been Chief Executive Officer and
Chairman of the Board of Dart since 1960. He was Co-Chairman or Chairman of the
Board of Directors of Crown Books from its organization until December 1991,
when he became Chairman of Crown Books previous Executive Committee. Mr. Haft
became Chairman of the Board of Directors of Crown Books, again, in June 1993.
Mr. Haft has been Chairman of the Board of Directors and Chief Executive
Officer of Trak Auto since its organization in March 1983. Mr. Haft has been a
director of Shoppers Food since April 1989 and was elected Co-Chairman of
Shoppers Food on February 6, 1997. Herbert H. Haft is or claims to be a general
partner in approximately 15 partnerships that are debtors-in-possession under
Title 11, Chapter 11 of the U.S. Bankruptcy Code.
Mark A. Flint has been the Senior Vice President and Chief Financial Officer
110
111
Item 10. Directors and Executive Officers of the Registrant (Continued)
of Dart since September 1996. Prior to joining Dart, Mr. Flint spent 14 years
serving in a series of capacities as Senior vice President and Chief Financial
Officer, Chairman of the Executive Committee, and a member of the Board of
Directors of Peter J. Schmitt Holdings, Inc., a multi-state $1.3 billion food
retailer and distributor, where he was responsible for corporate development,
mergers and acquisitions, finance and information technology. Mr. Flint was
elected a director of Shoppers Food on February 6, 1997. He has also served as
President of Shoppers Food since February 1997.
Elliot R. Arditti has been Senior Vice President, Corporate Counsel since June
1995 and Secretary since June 1993. He joined Dart in January 1984 as Associate
Counsel. He was appointed Assistant Vice President, Corporate Counsel in
September 1986 and Vice President, Corporate Counsel in December 1987.
Terrance J. Sharp was appointed Senior Vice President of Human Resources and
Operations in March 1997. He joined Dart in June 1995 as Vice President of
Human Resources. Prior to joining Dart, Mr. Sharp was Director of Personnel
Operations at Circuit City Stores, Inc. from 1988 to June 1995.
Keith W. Hammer was appointed Senior Vice President and Chief Information
Officer of Dart and Crown Books in April 1997. Mr. Hammer served as Vice
President and Chief Information Officer to Crown Books since his appointment
in January 1996. Mr. Hammer joined Crown Books in December 1994 as Assistant
Vice President, Information Systems. Prior to that, Mr. Hammer was Director
of Corporate Systems at Circuit City Stores, Inc.
Bonita A. Wilson has been a retailing executive with Dalton Brody since October
1993. Ms. Wilson was a Sales Manager with Saks Jandel from January 1994 until
June 1994 and prior to that she was a retailing executive with the May Company.
Ms. Wilson was elected to serve as a director of each of Dart, Trak Auto and
Crown Books in June 1993 and was elected to serve as a director of Shoppers
Food on February 6, 1997.
Douglas M. Bregman is a partner in the law firm of Bregman, Berbert &
Schwartz, specializing in commercial real estate law. Mr. Bregman is also an
Adjunct Professor of Law at the Georgetown University Law Center. Mr. Bregman
was elected to serve as a director of each of Dart, Trak Auto and Crown Books
in June 1993 and was elected to serve as a director of Shoppers Food on
February 6, 1997.
Larry G. Schafran is managing general partner of L.G. Schafran and Associates,
a New York based real estate investment and development firm, and is the
Chairman of Delta-Omega Technologies, Inc. and is a director of Publicker
Industries, Inc., Capsure Holdings, Corp. and Glasstech, Inc. Mr. Schafran is
also a Trustee of the National Income Real Estate Trust. Mr. Schafran has
previously held the positions of vice president and director of Webb & Knapp,
Inc. and its successor General Property Corp. Mr. Schafran was elected
111
112
Item 10. Directors and Executive Officers of the Registrant (Continued)
a director of Dart, Trak Auto and Crown Books on December 20, 1993 and was
elected Co-Chairman of the board of directors of Shoppers Food on February 6,
1997.
Ronald S. Haft was Dart's President and Chief Operating Officer from August
1, 1993 until November 1995 when he resigned all his positions as a director
and officer of Dart and all of its subsidiaries. The Standstill Order (see
Item 3 - Legal Proceedings) contemplates that Ronald S. Haft will continue as
a director of Dart while that Standstill Order is in effect. (Herbert H. Haft
contends that Ronald S. Haft is no longer a director). Mr. Haft has been
President of Combined Properties, Inc. ("CPI"), a real estate management
company, since 1984, and is also Chief Executive Officer of CPI. Mr. Haft was
elected a director of Dart, Trak Auto, and Crown Books on July 28, 1993.
Ronald S. Haft is a general partner in approximately 15 partnerships that are
debtors-in-possession under Title 11, Chapter 11 of the U.S. Bankruptcy Code.
Pursuant to the terms of the Bylaws of Dart, the term of each director expires
at the 1997 Annual Meeting of Stockholders or until a successor is elected and
qualified. The Standstill Order provides, however, that until further order of
the Delaware Chancery Court, Dart may not (nor may it recognize any stockholder
action that would), (i) change the current composition of the board of
directors of Dart or any of its subsidiaries or (ii) change the current Haft
family officers of Dart or any of its subsidiaries. See Item 3.
- - Legal Proceedings.
The other officers of Dart are:
Ronald T. Rice joined Dart in October 1981. He was appointed Assistant Vice
President in 1987 and Controller in December 1992.
Kenneth M. Sobien joined Dart in August 1988. He was appointed Assistant
Treasurer in July 1994.
Herbert H. Haft is the father of Ronald S. Haft. There is no other family
relationship between any director and executive officer of Dart.
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires Dart's officers and directors, and persons who beneficially own more
than ten percent of a registered class of Dart's equity securities, to file
reports of ownership of Dart's securities and changes in such ownership with
the Securities and Exchange Commission (the "SEC"). Officers, directors and ten
percent shareholders are required by SEC regulations to furnish Dart with
copies of all Section 16(a) forms they file.
Based solely upon its review of such forms received by it, Dart believes that
during the fiscal year ended January 31, 1997, all filing requirements
applicable to its officers, directors and ten percent shareholders were
112
113
Item 10. Directors and Executive Officers of the Registrant (Continued)
complied with.
113
114
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth in summary form all compensation for all
services rendered in all capacities to Dart and its subsidiaries for the three
years ended January 31, 1997 to (i) the Chief Executive Officer of Dart, (ii)
the members of the Executive Committee of Dart, (iii) the other most highly
compensated executive officers of Dart and (collectively, the "Named Executive
Officers").
Long Term
Compensation
Annual Compensation Awards
--------------------------------- -----------------
Other All
Annual Stock Other
Name of Compen- Options Compen-
Principal Fiscal sation Granted sation
Position Year Salary($) Bonus($) ($) (1) (#) ($) (2)
- --------------- ----- --------- -------- ---------- ------- --------
Herbert H. Haft 1997 1,590,000 - 66,000(3) - 30,000
Chief Executive 1996 1,531,000 - 69,000(4) - 30,000
Officer 1995 1,531,000 1,334,000 76,000(5) - 25,000(6)
Larry G. Schafran 1997 - - 1,073,000(7) 5,500 -
Chairman of the 1996 - - 1,059,500(8) 5,500 -
Executive 1995 - - 533,500(9) 5,000 -
Committee (16)
Bonita A. Wilson 1997 - - 227,500(10) 5,500 -
Member of the 1996 - - 205,800(11) 5,500 -
Executive 1995 - - 118,000(12) 5,500 -
Committee (16)
Douglas M. 1997 - - 242,700(13) 5,500 -
Bregman 1996 - - 231,000(14) 5,500 -
Member of the 1995 - - 128,100(15) 5,500 -
Executive
Committee (16)
Terry J. Sharp 1997 221,800 - - 5,200 69,900(17)
Senior Vice 1996 115,400 30,000 - 4,750 25,000(18)
President of
Human Resources
and Operations
Dennis N. Weiss 1997 286,000 - - 6,200 4,000
Former Executive 1996 301,000 - - 8,650 1,000
Vice President 1995 245,000 - - - 2,000
(19)
114
115
Item 11. Executive Compensation (Continued)
(1) Excludes perquisites and other personal benefits, unless the aggregate
amount of such compensation is at least $50,000 or 10% of the total
annual salary and bonus reported for the Named Executive Officer.
(2) Includes allocations to the accounts of the Named Executive Officers
pursuant to the profit-sharing and 401(k) plans of the Company and,
with respect to Herbert H. Haft in each fiscal year, $30,000 imputed
interest on life insurance loans.
(3) Includes fees received as a director of Dart ($15,000), Trak Auto
($15,000), Crown Books ($15,000), auto usage ($16,000) and health, life
and disability insurance ($5,000).
(4) Includes fees received as a director of Dart ($15,000), Trak Auto
($15,000), Crown Books ($15,000) and Dart Group Financial Corporation
(DGFC")($2,500),auto usage ($16,000) and health, life and disability
insurance ($5,000).
(5) Includes fees received as a director of Dart ($15,000), Trak Auto
($15,000), Crown Books ($15,000) and DGFC $10,000), auto usage
($16,000) and health, life and disability insurance ($5,000).
(6) Excludes $147,000, which represents the payments by Dart to Gloria Haft
and the cost to Dart of certain health benefits for her. Gloria Haft
ceased to be an employee of Dart in June 1993. Dart continued to pay
her compensation at the rate, and provide her with benefits and health
insurance as, provided in her employment agreement with the Company
until October 1994. Gloria Haft contends that a contract between
Herbert H. Haft and Gloria Haft, requires that if the Company failed
to continue paying Gloria Haft under her employment agreement before
May 31, 2004, then Herbert H. Haft would pay Gloria Haft the amounts
she would have been entitled to receive under the employment agreement.
A controversy exists concerning whether Gloria Haft is entitled to any
payments and, if so, whether these payments and benefits were
obligations of Dart or Herbert H. Haft. Herbert H. Haft denies that
these payments and benefits are his obligations.
(7) Includes fees received as a member of the Executive Committee of Dart
($326,800), Trak Auto ($326,800) and Crown Books ($326,800); fees
received as a director of Dart ($24,300), Trak Auto ($18,300) and Crown
Books ($18,300); apartment usage ($26,700) and health insurance
($5,000).
(8) Includes fees received as a member of the Executive Committee of Dart
($325,000), Trak Auto ($325,000) and Crown Books ($325,000); fees
received as a director of Dart ($19,200), Trak Auto ($17,200) and Crown
Books ($16,700); apartment usage ($26,400) and health insurance
($5,000).
(9) Includes fees received as a member of the Executive Committee of Dart
($157,600), Trak Auto ($92,400) and Crown Books ($92,400); fees
received as a member of the Special Litigation Committee of Dart
($59,300), Trak Auto ($13,200) and Crown Books ($59,300); fees received
as a director of Dart ($17,000), Trak Auto ($17,000) and Crown Books
($17,000); apartment usage ($6,600) and health insurance ($1,700).
115
116
Item 11. Executive Compensation (Continued)
(10) Includes fees received as a member of the Executive Committee of Dart
($52,900), Trak Auto ($52,900) and Crown Books ($52,900); fees received
as a director of Dart ($24,600), Trak Auto ($19,600) and Crown Books
($19,600); and health insurance ($5,000).
(11) Includes fees received as a member of the Executive Committee of Dart
($45,100), Trak Auto ($45,100) and Crown Books ($45,100); fees received
as a director of Dart ($22,500), DGFC ($2,500), Trak Auto ($20,500) and
Crown Books ($20,000); and health insurance ($5,000).
(12) Includes fees received as a member of the Executive Committee of Dart
($20,400), Trak Auto ($12,500) and Crown Books ($12,500); fees received
as a director of Dart ($20,300), DGFC ($10,000), Trak Auto ($20,300)
and Crown Books ($20,300); and health insurance ($1,700).
(13) Includes fees received as a member of the Executive Committee of Dart
($58,300), Trak Auto($58,300), and Crown Books ($58,300); fees received
as a director of Dart ($23,600), Trak Auto ($19,600) and Crown Books
($19,600); and health insurance ($5,000).
(14) Includes fees received as a member of the Executive Committee of Dart
($53,500), Trak Auto ($53,500) and Crown Books ($53,500); fees received
as a director of Dart ($22,500), DGFC ($2,500), Trak Auto ($20,500) and
Crown Books ($20,000); and health insurance ($5,000).
(15) Includes fees received as a member of the Executive Committee of Dart
($32,500), Trak Auto ($11,500) and Crown Books ($11,500); fees received
as a director of Dart ($20,300), DGFC ($10,000), Trak Auto ($20,300)
and Crown Books ($20,300); and health insurance ($1,700).
(16) In 1994, Larry G. Schafran, Bonita A. Wilson and Douglas M. Bregman
were appointed members of the Executive Committees of Dart, Trak Auto,
Crown Books and Total Beverage. Members of the Executive Committee are
compensated at a rate of $275 per hour. See Item 11 - Executive
Compensation - Compensation of Directors.
(17) Includes relocation fees and taxes thereon ($68,700) and allocation to
401(k) account ($1,200).
(18) Includes sign-on bonus.
(19) In April 1997, Mr. Weiss transferred from Executive Vice President,
Real Estate of Dart to Executive Vice President, Real Estate of Trak
Auto.
116
117
Item 11. Executive Compensation (Continued)
Option Grants in Last Fiscal Year
This table provides information with respect to grants of options for shares of
common stock of Dart and its subsidiaries to the Named Executive Officers
during fiscal 1997 and the exercise or base price, expiration date and
estimates of the potential realizable values of such options.
Individual Grants
- -------------------------------------------------------- Potential Real-
% of Total izable Value at
Options Assumed Annual
Granted Rates of Stock
to Emp- Exer- Price Appreci-
loyees cise Market ation for Option
Options in or Base Price Expir- Term (5)
Granted Fiscal Price Date of ation -----------------
Name (#) (4) Year ($/Sh) Grant Date 5% ($) 10% ($)
---- ------- ------- ------ ------- ------- ------- -------
Herbert H.
Haft None
Larry G. 1,500(1) 8.0 92.00 92.00 7-31-01 38,100 84,300
Schafran 1,500(2) .8 16.75 16.75 7-31-01 6,900 15,300
2,500(3) 1.4 12.375 12.375 7-31-01 8,500 18,900
Bonita A. 1,500(1) 8.0 92.00 92.00 7-31-01 38,100 84,300
Wilson 1,500(2) .8 16.75 16.75 7-31-01 6,900 15,300
2,500(3) 1.4 12.375 12.375 7-31-01 8,500 18,900
Douglas M. 1,500(1) 8.0 92.00 92.00 7-31-01 38,100 84,300
Bregman 1,500(2) .8 16.75 16.75 7-31-01 6,900 15,300
2,500(3) 1.4 12.375 12.375 7-31-01 8,500 18,900
Terry J. 1,200(1) 6.4 92.00 92.00 7-31-01 30,500 67,400
Sharp 2,000(2) 1.0 16.75 16.75 7-31-01 9,300 20,500
2,000(3) 1.1 12.375 12.375 7-31-01 5,800 12,800
Dennis N. 1,200(1) 6.4 92.00 92.00 7-31-01 30,500 67,400
Weiss 2,500(2) 1.3 16.75 16.75 7-31-01 11,600 25,600
2,500(3) 1.4 12.375 12.375 7-31-01 8,500 18,900
(1) Represents options for Class A Shares.
(2) Represents options for Trak Auto Common Stock.
(3) Represents options for Crown Books Common Stock.
117
118
Item 11. Executive Compensation (Continued)
(4) Class A, Trak Auto and Crown Books options become exercisable over time.
One-third become exercisable one year from the date of grant, an
additional one-third become exercisable two years from the date of grant
and the last third become exercisable three years from the date of grant.
Options expire five years from the date of grant. Options are granted at
market price on the date of grant. All options granted to executive
officers are ISO's under the Internal Revenue Code. ISO's entitle the
option holder to special tax treatment provided that the option holder
satisfies certain holding periods with respect to shares acquired on the
exercise of options. In general, if the holding periods are satisfied,
the option holder will incur no taxable income by reason of exercise of
the option, and Dart will not receive an income tax deduction by reason
of the exercise. The option holder will recognize gain or loss upon a
subsequent sale of the common stock, based on the difference between the
amount for which the stock is sold, and the option price paid. Options
granted to members of the Executive Committee are non-qualified options.
The stock option plans of each of Dart, Trak Auto and Crown Books specify
that each director who is not an employee shall receive 1,500, 1,500 and
2,500 options, respectively, each year. The options expire five years
from the date of grant.
(5) Potential realizable value is based on an assumption that the price of
the Common Stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the five year option
term. These numbers are calculated based on the rules and regulations
promulgated by the Securities and Exchange Commission and do not
reflect the Company's estimate of future stock price growth.
118
119
Item 11. Executive Compensation (Continued)
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-
End Option Values
Each of the Named Executive Officers, the following table sets forth
information about stock options exercised during fiscal 1997 and the value of
unexercised options as of January 31, 1997.
Number of Value of
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
Herbert H. Haft 10,000(1) 185,000 129,750(4) 3,420,700(4)
- -
- (2) - 6,668 11,700
- -
- (3) - 30,000 -
- -
Larry G. Schafran - (1) - 2,250 28,300
2,250 14,100
- (2) - 4,500 400
- -
- (3) - 7,500 -
- -
Bonita A. Wilson - (1) - 3,750 45,600
2,250 14,100
- (2) - 6,000 3,000
- -
- (3) - 10,000 -
- -
Douglas M. Bregman - (1) - 3,750 45,600
2,250 14,100
- (2) - 6,000 3,000
- -
- (3) - 10,000 -
-
Terry J. Sharp - (1) - 250 1,800
1,700 4,800
- (2) - 666 -
3,334 -
- (3) - 666 -
3,334 -
119
120
Item 11. Executive Compensation (Continued)
Number of Value of
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
Dennis N. Weiss 1,582(1) 24,600 534 7,300
1,734 5,100
2,332(2) 7,500 1,249 100
4,169 -
- (3) - 2,165 -
4,435 -
(1) Represents options for Class A Common Stock.
(2) Represents options for Trak Auto common stock.
(3) Represents options for Crown Books common stock.
(4) These stock options include options for 10,000 shares under the 1983
Plan and 99.750 shares under the 1987 Plan, the validity of which is
subject to challenge by Dart. See Item 3. -- Legal Proceedings.
Compensation of Directors
Members of the Board of Directors of Dart, Trak Auto and Crown Books are each
paid $15,000 per year. Larry G. Schafran, Bonita A. Wilson and Douglas M.
Bregman are members of the audit committee for Dart, Trak Auto and Crown Books
and are compensated $5,000 per year. Douglas M. Bregman, Larry G. Schafran and
Bonita A. Wilson are members of the compensation committee of Dart, Trak Auto
and Crown Books and are not compensated for their work on that committee.
On September 7, 1994, the Board of Directors of Dart established an Executive
Committee comprised of Dart's outside directors to conduct the affairs of Dart
with respect to matters that were the subject of dispute between the Chairman
of the Board and Chief Executive Officer of Dart, Herbert H. Haft, and the then
President and Chief Operating Officer of Dart, Ronald S. Haft. 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
comprised of the same outside directors, with authority parallel to that of
Dart's Executive Committee. The Executive Committee currently consists of
Douglas M. Bregman, Larry G. Schafran and Bonita A. Wilson, with Mr. Schafran
as the Chairman of the Executive Committee. The disputes between Herbert H.
Haft and Ronald S. Haft concerning issues involving Dart have been extensive.
Accordingly, the Executive Committee assumed day-to-day involvement in these
disputed issues and other matters affecting Dart, in particular matters
relating to litigation to which Dart is a party. While the Executive Committee
remains involved in the day-to-day affairs of Dart, its continuing role is
dependent upon future developments.
In connection with the RSH Settlement, Ronald S. Haft resigned his positions
as a director and officer of Dart and each of its subsidiaries. The
120
121
Item 11. Executive Compensation (Continued)
Standstill Order contemplates that Ronald S. Haft will continue as a director
of Dart while the Standstill Order is in effect. (Herbert H. Haft contends that
Ronald S. Haft is no longer a director.)
Members of the Executive Committee are compensated at a 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 1995, have been
compensated at a rate of $250 per hour plus reimbursement of expenses. For the
years ended January 31, 1997 and 1996, the aggregate compensation paid by Dart
and its subsidiaries to members of the respective Executive Committees for
their services on those committees approximated $1,299,000 and $1,263,000,
respectively. There were no fees paid to the Special Litigation Committee in
fiscal 1997 and 1996. See Item 11-Executive Compensation-Summary Compensation
Table.
The stock option plans of each of Dart, Trak Auto and Crown Books specify that
each director who is not an employee shall receive 1,500, 1,500 and 2,500
options, respectively, each year. The options expire five years from the date
of grant.
In September 1987, Dart adopted the 1988 Dart Group Corporation Deferred
Compensation Plan for Directors, effective January 1, 1988 (the "Compensation
Plan"). The Compensation Plan permits Dart's directors to defer the payment of
all or a specified part of future compensation payable for services as
director, including fees for serving on or attending meetings of committees of
the board of directors. Each director may elect, on or before January 31 of any
year to defer payment of compensation, payable on or after the first day of
February following such election, for services to be performed during the
twelve-month period commencing on such February 1 and ending on January 31 of
the following calendar year (the "Plan Year"). After such an election, all
subsequent compensation will be deferred until the director notifies Dart,
prior to the commencement of any Plan Year, that compensation for future Plan
Years is to be paid on a current basis.
Deferred compensation will not be paid to the director as earned, but will be
held in Dart's general funds and credited to a bookkeeping account maintained
by Dart in the name of the director. Each participating director will be
treated as a creditor of Dart with respect to such funds. Deferred compensation
will be paid to directors in a lump sum on the fifteenth day of February of the
Plan Year after retirement, unless the director elects, at the time he
exercises the deferral option, to be paid in up to ten annual installments.
Employment Contracts
In April 1974, Dart entered into an employment agreement with Herbert H. Haft,
Chairman and Chief Executive Officer. The agreement, as amended, is renewable
121
122
Item 11. Executive Compensation (Continued)
each year for a successive ten-year term. The agreement, as amended, provides
for a base salary of $544,500 for the year ended January 31, 1986 and for
increases in base salary each year thereafter by the greater of (i) $12,000
plus ten percent of the base salary for the preceding fiscal year or (ii) the
increase in the cost of living. The agreement, as amended, further provides for
an annual bonus equal to 1 1/2% of Dart's consolidated pretax profit not
reduced as a result of transactions that are not ordinary and a supplemental
bonus based on certain performance criteria for the three-year period ended
January 31, 1988 and each three-year period thereafter. The supplemental bonus
equals the greatest of (i) 3% of the increase in the aggregate market value of
the Class A Common Stock on the last day of the three-year period over such
market value on the first day of such period; (ii) 3% of any excess in Dart's
consolidated stockholders' equity on the last day of the three-year period over
such stockholders' equity on the first day of such period; (iii) 3% of the
aggregate consolidated net income during the three-year period; and (iv) his
base salary and annual bonus for the last year of the three-year period.
Pursuant to the agreement, Herbert H. Haft may elect to receive all or part of
his compensation in the form of an option for shares of the Class A Common
Stock or defer receipt of all or part of such compensation. The agreement, as
amended, also provides that Dart must lend to Herbert H. Haft the funds
necessary to purchase a $3,000,000 life insurance policy on his life and/or the
life of his former wife, Gloria Haft. Dart has elected not to charge interest
on the loan. In 1993, a shareholder derivative action was filed challenging
certain aspects of this employment agreement. In 1995, the Special Litigation
Committee concluded that it is in the best interests of Dart that claims
challenging Herbert H. Haft's employment agreement be dismissed except to the
extent that the validity of the "evergreen" provision (successive ten-year
terms) of the agreement is challenged. See Item 3. Legal Proceedings -
Derivative Litigation.
In January 1995, Dart entered into a two-year employment agreement with Dennis
N. Weiss, Executive Vice President - Real Estate of a term ending on January
31, 1997. The agreement provides for an annual base salary of $260,000, subject
to annual increases as determined by the Compensation Committee of the Board of
Directors.
On May 22, 1995, Dart entered into a one-year employment agreement with Terry
J. Sharp, Senior Vice President of Human Resources and Operations. The
agreement is renewable for successive one-year terms and provides for an annual
base salary of $200,000, subject to annual increases as determined by the
Compensation Committee of the Board of Directors.
On September 16, 1996, Dart entered into a two-year employment agreement with
Mark A. Flint, Senior Vice President, Chief Financial Officer and Treasurer.
The agreement is renewable for successive one-year terms. The agreement
provides for an annual base salary of $285,000, subject to annual increases as
determined by the Compensation Committee of the Board of Directors.
122
123
Item 11. Executive Compensation (Continued)
Compensation Committee Interlocks and Insider Participation
The Compensation Committee comprises Dart's outside, non-employee Directors
(Douglas M. Bregman, Larry G. Schafran and Bonita A. Wilson). No member of
the Compensation Committee has a relationship that would constitute an
interlocking relationship with executive officers or directors of another
entity.
123
124
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 31, 1997, certain information with
respect to the following persons: (i) all stockholders known by the Company to
be the beneficial owners of more than five percent of Class B Common Stock,
(ii) each of Dart's current Directors, (iii) the Named Executive Officers, and
(iv) the Directors and Named Executive Officers as a group. Certain information
in the table is based upon information contained in filings made by the
beneficial owner of Class A Common Stock with the Securities and Exchange
Commission.
Directors and Executive Officers:
- ---------------------------------
Approximate
Title of No. of Percentage
Name Class Shares of Class
- ---- -------- -------- ----------
Herbert H. Haft Class A (1) 252,497 13.36 (2)
3300 75th Avenue Class B (3) - -
Landover, MD 20785 Trak Auto (4) 7,168 .12
Crown Books (5) 30,500 .57
Ronald S. Haft Class A (6)(7) 408,688 23.22 (2)
Class B (6)(8) 222,294 67.92
Dennis N. Weiss Class A (9) 534 .03 (2)
Trak Auto (10) 1,249 .02
Crown Books (11) 2,297 .04
Bonita A. Wilson Class A (12) 3,750 .21 (2)
Trak Auto (13) 6,000 .10
Crown Books (14) 10,000 .19
Douglas M. Bregman Class A (12) 3,750 .21 (2)
Trak Auto (13) 6,000 .10
Crown Books (14) 10,000 .19
Larry G. Schafran Class A (15) 2,250 .13 (2)
Trak Auto (16) 4,500 .08
Crown Books (17) 7,500 .14
Mark A. Flint None
Terry J. Sharp Class A (18) 250 .01 (2)
Trak Auto (19) 666 .01
Crown Books (19) 666 .01
- -----------------
All Directors and Class A (20) 671,719 35.35 (2)
Executive Officers as Class B 222,294 67.92
a group (8 persons) Trak Auto (21) 25,583 .43
Crown Books (22) 60,963 1.14
124
125
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Continued)
Other Beneficial Owners:
- ----------------------- Approximate
Title of No. of Percentage
Name Class Shares of Class
- ---- -------- ------ -------------
Richard B. Stone, Class A (6)(7) 374,485 21.28 (2)
as Voting Trustee Class B (6)(8) 222,294 67.92
for Ronald S. Haft
4508 Foxhall Crescents
Court, N.W.
Washington, D.C. 20007
Robert M. Haft Class B (8) 25,246 7.71
Trak Auto (23) 40,000 .67
Crown Books (24) 130,000 2.42
Gloria G. Haft Class B 54,484 16.65
Trak Auto 500 .01
Crown Books 500 .01
Linda G. Haft Class B (8) 25,246 7.71
Crown Books 500 .01
(1) Includes 129,750 shares subject to exercisable stock options. These
stock options include options for 10,000 shares under the 1983 Plan and
99,750 shares under the 1987 Plan, the validity of which is subject to
challenge by Dart. See Item 3. - Legal Proceedings.
(2) Calculated based upon a class including shares subject to exercisable
stock options under the 1983 Plan and the 1987 Plan, which Plans are
subject to challenge by Dart. See Item 3. - Legal Proceedings.
(3) Herbert H. Haft has filed a lawsuit seeking a judgement declaring
that 172,730 shares of Class B Common Stock belong to him, that they
were wrongfully sold by Ronald S. Haft to Dart and that Herbert H.
Haft is entitled to restitution of such shares or, alternatively,
that his purported irrevocable proxy on the 172,730 shares continues
to be valid.
See Item 3 - Legal Proceedings.
(4) Includes 6,668 shares subject to exercisable stock options.
(5) Includes 30,000 shares subject to exercisable options.
(6) Under the Voting Trust Agreement, Richard B. Stone, as Voting Trustee,
has sole voting power over 374,485 Class A shares and 222,294 Class
B shares and Ronald S. Haft has sole investment power over such
shares, subject to (i) the rights of Dart to exercise a call option
to purchase the shares, as provided in the Buy/Sell/Offering
Agreement entered into by Ronald S. Haft and Dart, and (ii) the
rights of Dart and CMREC under a Stock and Trust Certificate Pledge
Agreement made by Ronald S. Haft in favor of the initial Voting
Trustees, as collateral agents and bailees
125
126
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Continued)
for Dart and CMREC. The Voting Trustee may vote the shares in such
manner as he deems to be "in the best interests of Dart and all of
its shareholders as a single class." The Voting Trust Agreement will
terminate on August 1, 2000, unless terminated earlier or later
pursuant to the terms of the Voting Trust Agreement. The RSH
Settlement transactions, including the Voting Trust Agreement, are
subject to legal challenge. See Item 3 - Legal Proceedings and
Dart's Current Report on Form 8-K, dated October 10, 1995.
(7) 58,029 Class A shares are subject to competing claims of Robert M. Haft
and Linda G. Haft.
(8) In a letter dated February 6, 1996, Donald R. Bourassa, Executive Vice
President of Combined Properties, Inc., wrote Dart, purportedly on behalf
of Haft-Equities General Limited Partnership ("Haft-Equities"), claiming
that 25,246 Class B shares held by each by each of Robert M. Haft, Linda
G. Haft and the Voting Trustee may belong to Haft-Equities. Ronald S.
Haft claims beneficial ownership of such 25,246 Class B shares held by
the Voting Trustee but he does not claim beneficial ownership of 25,246
Class B shares owned by each of Robert M. Haft and Linda G. Haft.
(9) Includes 534 shares subject to exercisable stock options.
(10) Includes 1,249 shares subject to exercisable stock options.
(11) Includes 2,297 shares subject to exercisable stock options.
(12) Includes 3,750 shares subject to exercisable stock options.
(13) Includes 6,000 shares subject to exercisable stock options.
(14) Includes 10,000 shares subject to exercisable stock options.
(15) Includes 2,250 shares subject to exercisable stock options.
(16) Includes 4,500 shares subject to exercisable stock options.
(17) Includes 7,500 shares subject to exercisable stock options.
(18) Includes 250 shares subject to exercisable stock options.
(19) Includes 666 shares subject to exercisable stock options.
(20) Includes 140,254 shares subject to exercisable stock options.
(21) Includes 25,083 shares subject to exercisable stock options.
(22) Includes 60,463 shares subject to exercisable stock options.
(23) Includes 40,000 shares subject to exercisable stock options.
(24) Includes 80,000 shares subject to exercisable stock options and 100
shares of Crown Books held by his wife.
126
127
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Continued)
Potential Change in Control
The RSH Settlement transactions are subject to pending litigation and, through
such litigation each of RGL and Herbert H. Haft seeks control of Dart. See Item
3 - Legal Proceedings. If sustained, the RSH Settlement transactions were
intended to have the effect, by their terms, of transferring majority control
of Dart's voting stock to one or more voting trustees under the Voting Trust
Agreement. On December 28, 1995, the initial Voting Trustees resigned and
appointed Richard B. Stone as successor Voting Trustee.
If the RSH Settlement is sustained by the Delaware Court of Chancery, a
Buy/Sell/Offering Agreement between Dart and Ronald S. Haft will govern the
ultimate disposition of the shares held by the Voting Trustee. That agreement
gives Ronald S. Haft the right to "put" to Dart the stock held by the Voting
Trustee at any time between January 1, 1997 and December 31, 1999, subject to
certain conditions. With respect to the 222,294 shares of Class B Common Stock
held by the Voting Trustee, Ronald S. Haft may (instead of including them in
the "put") exchange them for 244,523 shares of Class A Common Stock (i.e., a
1.1 to 1 exchange ratio) and offer those 244,523 shares of Class A Common Stock
to the public. Dart has an option to "call" the shares held by the Voting
Trustee, if they have not previously been disposed of as described above, at
any time during the first seven months of the year 2000.
All of the 222,294 Class B shares in the Voting Trust, as well as the related
voting trust certificates issued to Ronald S. Haft under the Voting Trust
Agreement, have been pledged to Dart and CMREC as security for certain loans
made to Ronald S. Haft and other obligations of Ronald S. Haft arising under
the RSH Settlement.
127
128
Item 13. Certain Relationships and Related Transactions
On October 6, 1995, Dart and Ronald S. Haft entered into a settlement agreement
and various related agreements comprising the RSH Settlement. The RSH
Settlement transactions are briefly described in Item 5 of Dart's Form 8- K,
dated October 10, 1995, which is incorporated herein by reference. See also
Note 6 to Dart's Consolidated Financial Statements (Item 8 - Financial
Statements and Supplementary Data). The RSH Settlement transactions are subject
to legal challenge. See Item 3 - Legal Proceedings.
Under the terms of the Voting Trust Agreement, the Voting Trustee is entitled
to compensation at a rate of $275.00 per hour for time reasonably spent in
rendering services under the Voting Trust Agreement. Such compensation is to be
paid from funds available in the Voting Trust and, to the extent such funds are
insufficient, by Dart. During the year ended January 31, 1997, Dart paid
$343,000 in such compensation to Richard B. Stone, as Voting Trustee.
Dart, Trak Auto, Crown Books, Shoppers Food and Total Beverage lease certain
real property from Haft family-owned partnerships. Rental payments related to
such leases approximated $15.5 million during the year ended January 31, 1997.
The leased properties consist of 45 stores, three warehouses and the Shoppers
Food headquarters building, but excluding the Pennsy Leases. These leases
(excluding the Pennsy Leases), which have expiration terms ranging from 1997 to
2031, require the payment of minimum rentals aggregating approximately $111.7
million (excluding option periods). Certain of these leases also require the
payment of a percentage of sales in excess of a stated minimum, real estate
tax, insurance, maintenance and utilities.
On February 10, 1995, after a legal review by the Executive Committee, Dart
filed a complaint for rescission of the Pennsy Leases and for the return of
rent paid since 1991 on such leases. See Item 3. - Legal Proceedings. The
Executive Committees of Dart, Crown Books and Trak Auto have also undertaken a
legal review of other leasing arrangements and real estate related transactions
involving the Company and Haft-owned entities. See Item 2. Properties. On
December 17, 1996, Dart, Crown Books and Trak Auto filed a lawsuit against
Herbert H. Haft (Chairman of each such company) claiming breach of fiduciary
duty, fraud and waste arising from a series of lease transactions (other than
the Pennsy Leases) with certain partnerships owned beneficially by members of
the Haft family. See Item 3 - Legal Proceedings Lawsuit Against Herbert H. Haft
Concerning Haft-Owned Real Estate.
CMREC owned the majority interest in five real estate partnerships that owned
four shopping centers and an office building in the Washington, D.C.
metropolitan area. The remaining partnership interests were owned by
partnerships in which the partners are members of the Haft family. As part of
the RSH Settlement, these five properties were sold in May 1996. See Note 6 to
the Company's Consolidated Financial Statements. Combined Properties, Inc., a
Haft-controlled entity, managed the shopping centers and office building for
the partnerships. Trak Auto, Crown Books, Shoppers Food and Total Beverage
128
129
Item 13. Certain Relationships and Related Transactions (Continued)
leased eight stores in some of these shopping centers and made aggregate rental
payments to CMREC of approximately $289,000 during the year ended January 31,
1997 (prior to the sale of the properties in May 1996).
On April 21, 1997, Dart reached a conditional settlement agreement with Herbert
H. Haft. See Item 3. -- Legal Proceedings.
129
130
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
See Item 8 for Dart Group Corporation Consolidated Financial
Statements (Shoppers Food Warehouse Corp. is included on an
equity basis for periods after May 28, 1994).
Set forth below are the most recent audited
financial statements of Shoppers Food Warehouse
Corp. for the 31 weeks ended February 1, 1997.
130
131
INDEX TO FINANCIAL STATEMENTS
OF SHOPPERS FOOD WAREHOUSE CORP.
Report of Independent Public Accountants 132
Consolidated Balance Sheets as of February 1, 1997, June 29, 1996, and July 1,
1995 133
Consolidated Statements of Income for the Thirty One Weeks Ended February 1,
1997 and the Three Years Ended June 29, 1996, July 1, 1995 and July 2, 1994 134
Consolidated Statements of Changes in Stockholders' Equity for the Thirty One
Weeks Ended February 1, 1997 and the Three Years Ended June 29, 1996, July 1,
1995 and July 2, 1994 135
Consolidated Statement of Cash Flows for the Thirty One Weeks Ended February 1,
1997 and the Three Years Ended June 29, 1996, July 1, 1995 and July 2, 1994 136
Notes to Consolidated Financial Statements as of February 1, 1997, June 29,
1996, and July 1, 1995 137
131
132
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Shoppers Food Warehouse Corp.:
We have audited the accompanying consolidated balance sheets of Shoppers Food
Warehouse Corp. (a Delaware corporation) and subsidiaries, as of February 1,
1997, June 29, 1996, and July 1, 1995, and the related consolidated statements
of income, stockholders' equity and cash flows for the thirty-one weeks ended
February 1, 1997, and for each of the three years in the period ended June 29,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Shoppers Food Warehouse Corp.
and subsidiaries as of February 1, 1997, June 29, 1996 and July 1, 1995, and
the results of their operations and their cash flows for the thirty-one weeks
ended February 1, 1997 and for each of the three years in the period ended June
29, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
April 5, 1997
132
133
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FEBRUARY 1, JUNE 29, JULY 1,
1997 1996 1995
---- ---- ----
Current Assets:
Cash and Cash Equivalents 13,739 $3,560 $38,650
Short Term Investments 94,999 103,080 58,353
Accounts Receivable 9,244 7,708 7,633
Merchandise Inventories 29,699 28,342 27,253
Prepaid Expenses 2,056 1,022 956
Income Tax Receivable - 273 -
Due From Affiliate 522 522 522
------- -------- -------
Total Current Assets 150,259 144,507 133,367
------- -------- -------
Property and Equipment, at Cost
Land and Buildings 9,120 9,120 9,120
Store and Warehouse Equipment 78,737 75,827 71,195
Office and Automotive Equipment 3,767 3,727 3,655
Leasehold Improvements 4,412 2,655 2,477
----- -------- -------
96,036 91,329 86,447
Accumulated Depreciation and Amortization (73,944) (69,944) (63,504)
------ -------- -------
Net Property and Equipment 22,092 21,385 22,943
------ -------- -------
Deferred Income Taxes 5,853 4,289 4,577
Other Assets 804 841 1,116
-------- -------- -------
Total Assets $179,008 $171,022 $162,003
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable 41,830 39,865 38,275
Accrued Expenses-
Salaries and Benefits 4,886 5,220 4,931
Taxes, Other Than Income 2,903 1,996 1,934
Other 6,469 5,150 4,623
Income Taxes Payable 1,391 0 2,152
-------- -------- -------
Total Current Liabilities 57,479 52,231 51,915
-------- -------- -------
Capital Lease Obligation 10,035 10,069 9,950
Deferred Income 2,448 412 1,218
Deferred Rent Liability 4,558 4,277 3,590
-------- -------- -------
Total Liabilities 74,520 66,989 66,673
-------- -------- -------
Stockholders' Equity
Class A Common Stock, Nonvoting, Par Value $5 Per Share,
25,000 Shares Authorized, 23,333-1/3 Shares Issued and Outstanding 117 117 117
Class B Common Stock, Voting, Par Value $5 Per Share,
25,000 Shares Authorized, 10,000 Shares Issued and Outstanding 50 50 50
Retained Earnings 104,321 103,866 95,163
-------- -------- ------
Total Stockholders' Equity 104,488 104,033 95,330
-------- -------- ------
Total Liabilities and Stockholders' Equity $179,008 $171,022 $162,003
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
133
134
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
31 WEEKS ENDED FIFTY-TWO WEEKS ENDED
----------------------- -------------------------------------------
FEBRUARY 1, JUNE 29, JULY 1, JULY 2,
1997 1996 1995 1994
---- ---- ---- ----
Sales 511,025 835,971 790,842 750,340
Cost Of Sales 398,129 651,986 616,521 593,063
------- ------- ------- -------
Gross Profit 112,896 183,985 174,321 157,277
Selling and Administrative Expenses 94,304 149,570 136,798 127,643
Depreciation and Amortization 4,573 8,913 8,529 10,785
----- ----- ----- ------
Operating Income 14,019 25,502 28,994 18,849
Interest Income 3,526 5,789 4,682 2,189
Interest Expense 710 1,771 1,451 1,426
--- ----- ----- -----
Income Before Income Taxes
and Extraordinary Item 16,835 29,520 32,225 19,612
Provision for Income Taxes 6,380 10,593 13,938 7,541
------ ------ ------ ------
Income Before Extraordinary Item 10,455 18,927 18,287 12,071
------ ------ ------ ------
Extraordinary Gain (Loss)- Insurance Proceeds
From Fire, Net Of Income Tax (Benefit) Provision
Of ($131), $826 and $502 In 1996, 1995, and 1994,
Respectively (See Note 5) - (224) 1,239 858
- ---- ----- ---
Net Income 10,455 18,703 19,526 12,929
====== ====== ====== ======
The accompanying notes are an integral part of these consolidated statements.
134
135
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
COMMON STOCK
------------
CLASS A CLASS B RETAINED
NONVOTING VOTING EARNINGS TOTAL
--------- -------
Balance, July 2, 1994 $117 $50 $75,637 $75,804
Net income - - 19,526 19,526
- - ------ ------
Balance, July 1, 1995 117 50 95,163 95,330
Net income 18,703 18,703
Shareholder distribution - - (10,000) (10,000)
- - ------ ------
Balance, June 29, 1996 117 50 103,866 104,033
Net income 10,455 10,455
Shareholder distribution - - (10,000) (10,000)
- - ------ ------
Balance, February 1, 1997 $117 $50 $104,321 $104,488
==== === ======== ========
The accompanying notes are an integral part of these consolidated statements.
135
136
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
31 WEEKS ENDED FIFTY-TWO WEEKS ENDED
-------------- ------------------------------
FEBRUARY 1, JUNE 29, JULY 1, JULY 2,
1997 1996 1995 1994
---- ---- ---- ----
Cash flows from operating activities:
Net income $10,455 $18,703 $19,526 $12,929
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 4,573 8,913 8,529 10,785
Increase in deferred income taxes (1,564) 288 (1,058) (594)
Loss (Gain) on disposition of assets - - 34 (15)
Effect of insurance receivable on income - - - (104)
Interest expense in excess of capital lease payments - 119 208 240
Increase in deferred rent liability 281 687 553 1,082
Changes in operating assets and liabilities:
Accounts receivable (1,536) (75) 1,028 (3,952)
Merchandise inventories (1,357) (1,089) 1,810 (2,455)
Prepaid expenses (1,034) (66) (63) (53)
Due from affiliate - - 490 -
Other assets 37 275 (252) (354)
Accounts payable 1,965 1,590 2,009 1,544
Accrued expenses 1,892 878 (1,023) 241
Income taxes payable 1,664 (2,425) 1,307 144
Deferred income 2,036 (806) (1,191) (1,177)
----- ---- ------ ------
Net cash provided by operating activities 17,412 26,992 31,907 18,261
------ ------ ------ ------
Cash flows from investing activities :
Capital expenditures (5,280) (7,355) (4,693) (5,112)
Proceeds from sale of fixed assets - - - 15
Purchases and Sales of Short-Term Investments, net 8,081 (44,727) (55,781) (1,962)
----- ------ ------ ------
Net cash provided by (used in) investing activities 2,801 (52,082) (60,474) (7,059)
----- ------ ------ ------
Cash flows from financing activities:
Shareholder distribution (10,000) (10,000) - -
Payments on Capital Lease (34) - - -
--- - - -
Net cash used in financing activities (10,034) (10,000) - -
------- ------- - -
Net increase (decrease) in cash and cash equivalents 10,179 (35,090) (28,567) 11,202
Cash and cash equivalents, beginning of period 3,560 38,650 67,217 56,015
----- ------ ------ ------
Cash and cash equivalents, end of period $13,739 $3,560 $38,650 $67,217
------- ------ ------- -------
Supplemental disclosure of cash flow information :
Cash paid during the fiscal year for-
Income taxes $6,300 $12,487 $12,091 $8,525
Interest $710 $1,771 $1,451 $1,456
---- ------ ------ ------
Supplemental disclosure of noncash financing activity :
In fiscal year 1994, the Company recorded an insurance receivable
and wrote-off certain assets with a net book value of $708,000
due to fire damage
The accompanying notes are an integral part of these consolidated statements.
136
137
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include Shoppers Food Warehouse Corp. (a
Delaware corporation) and its subsidiaries, collectively the "Company." All
significant intercompany accounts and transactions have been eliminated. As of
February 1, 1997, June 29, 1996, and July 1, 1995, the Company operated 34, 34
and 33 warehouse-style grocery stores, respectively, in Maryland and Virginia.
FISCAL YEAR
In connection with the acquisition (see Note 6), the Company changed its fiscal
year end to the Saturday closest to January 31. Previously the Company's fiscal
year ended on the Saturday closest to June 30. A fiscal year end coinciding
with the Saturday closest to a month end results in a 52 or 53 week year. The
fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994 contained 52
weeks. The period ended February 1, 1997 contained 31 weeks.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary cash investments with
maturities of three months or less to be cash equivalents. The majority of
these are invested in U.S. Treasury Notes.
SHORT TERM INVESTMENTS
Effective July 1994, the company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company carries debt securities at amortized cost as
it has both the positive intent and ability to hold these investments to
maturity. The effect of adopting SFAS No. 115 did not materially impact the
Company's financial position or results of its operations. At February 1,
1997, June 29, 1996, and July 1, 1995 short-term investments consisted of U.S.
Government Treasury Notes
137
138
with original maturities of more than three months which management intended to
hold to maturity. Short term investments carried as of February 1, 1997 mature
at various dates from February 15, 1997 to November 15, 1997. Subsequent to
year-end, management liquidated a substantial amount of its short-term
investments in order to reduce the debt associated with the acquisition by Dart
Group Corporation ("Dart") of 50 percent equity in the Company that it did not
own (see Note 6).
MERCHANDISE INVENTORIES
The Company's inventories are priced at the lower of cost or market. Cost is
determined using the last-in, first-out method. If replacement cost (which
approximates the first-in, first-out method) had been used, inventories would
have been greater by approximately $4,375,000, $3,845,000 and $2,940,000 as
of February 1, 1997, June 29, 1996 and July 1, 1995 respectively. Net income
would have been higher by approximately $530,000 for the period ended February
1, 1997, and $905,000, $877,000, and $364,000, for the fiscal years ended June
29, 1996, July 1, 1995, and July 2, 1994, respectively.
ACCOUNTS RECEIVABLE
Accounts receivable include amounts due from vendors for coupons remitted,
cooperative advertising, merchandise rebates, as well as interest receivable on
treasury notes.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company depreciates property
and equipment using accelerated methods over the estimated useful lives of the
assets, generally five to seven years.
ACCRUED INSURANCE CLAIMS
The Company maintains self funded coverage with respect to general, workers
compensation, and health insurance liabilities. Claims for general and
workers' compensation are administered through insurance companies, which
estimate the obligation of reported claims. An estimate of the obligation for
health insurance claims is accrued at year-end and is based on historical data.
Expenses arising from claims are accrued as claims become subject to
estimation. Self-insurance liabilities are based on claims filed plus an
additional amount for incurred but not reported claims. These liabilities are
not discounted.
INCOME TAXES
The Company provides a deferred tax expense or benefit equal to the change in
the net deferred tax asset during the year in accordance with SFAS No. 109
"Accounting for Income Taxes." Deferred income taxes represent the future net
tax effects resulting from temporary differences between the financial
statements and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
138
139
STORE OPENING AND CLOSING COSTS
All costs of a noncapital nature incurred in opening a new store are charged to
expense as incurred. The Company opened one new store during each of the
fiscal years ended June 29, 1996 and July 2, 1994. No stores were opened
during the year ended July 1, 1995 and the period ended February 1, 1997.
The costs associated with store closings are charged to selling and
administrative expense when management makes the decision to close a store.
Such costs consist primarily of lease payments and other carrying costs of
holding the facility , net of estimated sublease income.
DEFERRED INCOME
The Company has entered into various agreements with vendors and suppliers
which provide for the payment of cash or the receipt of merchandise at the
beginning or during the contract period. These amounts are deferred and
amortized over the expected lives of the contracts.
LONG LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value should be assessed. Impairment
is measured by comparing the carrying value to the estimated undiscounted
future cash flows expected to result from the use of the assets and their
eventual disposition. The Company has determined that as of February 1, 1997,
there has been no impairment in the carrying value of long-lived assets.
CONCENTRATION OF CREDIT RISK
The Company's assets that are exposed to credit risk consist primarily of cash
and cash equivalents, short-term investments, and accounts receivable. The
Company maintains cash and cash equivalents with major banks in its
marketplace. The Company performs periodic evaluations of the relative credit
standing of the financial institutions with which it does business. The
company's short-term investments are invested in U.S. Government Treasury
Notes. The Company's accounts receivable balance results primarily from the
amounts due from its vendors for various promotional programs. The company
periodically reviews its accounts receivable balance and allows for
uncollectible accounts.
CURRENT ASSETS AND CURRENT LIABILITIES
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
the disclosure of the fair value of a financial instrument for which it is
practicable to estimate the value and the methods and significant assumptions
used to estimate the value. At February 1, 1997, June 29, 1996, and July 1,
1995 the carrying amount of current assets and current liabilities approximates
fair value due to the short maturity of those instruments.
139
140
2. DISPOSITION OF TOTAL BEVERAGE CORP.:
In October 1992, the Company opened Total Beverage Corp. ("Total Beverage"), a
discount beverage retail store. On February 27, 1993, the company entered into
an Asset Purchase Agreement (the Agreement) to sell Total Beverage to Dart.
As proceeds from the sale, the Company received approximately $1,493,000 in a
note receivable (the "Note"). Under the terms of the Agreement, the Company is
required to reimburse the Buyer for 25 percent of future operating losses of
Total Beverage, as defined in the Agreement, over a three year period. To the
extent of such losses, the Company will remit funds first by reducing amounts
due under the Note and then by remitting payment to the buyer. The Note and
accrued interest were due in February 1995. The Company has reflected the
Note, net of a $1,000,000 reserve, in the accompanying balance sheets as of
February 1, 1997, June 29, 1996, and July 1, 1995 respectively. Management
believes the reserve is adequate to provide for any reductions in the Note.
3. OTHER ACCRUED EXPENSES:
Other accrued expenses consist of the following (in thousands)
February 1, 1997 June 29, 1996 July 1, 1995
---------------- ------------- ------------
Accrued insurance $3,441 $2,719 $2,262
Reserve for store closing 1,513 853 853
Gift certificates outstanding 1,090 928 815
Other 425 650 693
------ ------ ------
Total $6,469 $5,150 $4,623
====== ====== ======
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4. INCOME TAXES:
The provision for income taxes is comprised of the following (in thousands).
THIRTY-ONE
WEEKS ENDED FISCAL YEAR ENDED
----------- -----------------
FEBRUARY 1, 1997 JUNE 29, 1996 JULY 1, 1995 JULY 2, 1994
---------------- ------------- ------------ ------------
Current income tax provision:
Federal $7,412 $9,624 $13,422 $7,582
State 532 681 1,574 1,088
Deferred income tax
provision (benefit) (1,564) 288 (1,058) (1,129)
------ --- ------ ------
$6,380 $10,593 $13,938 $7,541
====== ======= ======= ======
This effective income tax rate is reconciled to the Federal statutory rate as
follows:
THIRTY-ONE
WEEKS ENDED FISCAL YEAR ENDED
----------- -----------------
FEBRUARY 1, 1997 JUNE 29, 1996 JULY 1, 1995 JULY 2, 1994
---------------- ------------- ------------ ------------
Federal statutory rate 35 % 35% 35% 35%
Increase in taxes resulting from:
State income taxes, net of Federal
income tax benefit 2.0 2.0 3.1 3.0
Revision of estimate for tax accruals - - 3.7 -
Other 0.9 (1.1) 1.5 0.4
--- ---- --- ---
Effective tax rate 37.9% 35.9% 43.3% 38.4%
===== ===== ===== =====
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142
Temporary differences which give rise to the deferred tax assets and
liabilities on a consolidated basis are as follows (in thousands).
THIRTY-ONE
WEEKS ENDED FISCAL YEAR ENDED
---------------- -----------------
FEBRUARY 1, 1997 JUNE 29, 1996 JULY 1, 1995
---------------- ------------- ------------
Deferred tax assets:
Loss on disposition of Total Beverage $ 374 $ 374 $ 381
Reserves for store closings and other 566 319 325
Deferred Rent 1,705 1,600 1,433
Capital Lease 505 517 946
Employee Benefits 2,241 1,843 1,472
Deferred Income 435 154 557
Other 326 89 -
--- -- ---
$ 6,152 $ 4,896 $ 5,114
======= ======= =======
Deferred tax liabilities:
Depreciation (299) (607) (526)
Other - - (11)
---- ---- ----
(299) (607) (537)
==== ==== ====
Net deferred tax asset $ 5,853 $ 4,289 $ 4,577
======= ======= =======
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company
believes that no valuation allowance is necessary as of February 1, 1997, June
29, 1996, and July 1, 1995 due to its history of profitable operations.
5. COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' AGREEMENT
The Company's stockholders are party to a stockholders' agreement dated June
28, 1988 (the "Stockholder Agreement"), that specifies how a stockholder can
transfer ownership of their interest in the Company's stock. In June 1996 and
September 1996, the Company declared cash dividends payable to its
stockholders. Subsequent to February 1, 1997, Dart purchased the remaining 50%
interest in the Company that it did not already own (see Note 6).
142
143
401(k) PLAN
Prior to fiscal year 1995 the Company maintained a noncontributory profit
sharing plan (the "Plan") for all employees with one year of full time
continuous service. Discretionary contributions were made by the Company in
trust for the exclusive benefit of employees who qualified under the Plan. The
Board of Directors authorized a contribution of $300,000 to the Plan for the
fiscal year ended July 2, 1994. During fiscal 1995, a Company replaced the
Plan with a defined contribution 401(k) plan (the "New Plan"). The New Plan
is available to substantially all employees over the age of 21 who have
completed one year of continuous service. Discretionary contributions are made
by the Company in trust for the exclusive benefit of employees who participate
in the New Plan. The Board of Directors authorized a contribution of $400,000
to the New Plan for both fiscal years ending June 29, 1996 and July 1, 1995.
For the thirty-one weeks ended February 1, 1997, the Company has accrued
$233,000 related to its projected fiscal year 1997 contribution. All amounts
contributed to the New Plan are included in accrued salaries and benefits in
the accompanying financial statements.
MULTIEMPLOYER PLANS
The Company makes contributions to multiemployer plans for its union employees.
Such contributions, net of employee contributions, totaled approximately
$440,000, $6,205,000, $282,000, for pension, health and welfare, and legal
benefit plans, respectively, for the thirty-one weeks ended February 1, 1997.
Contributions to the pension, health and welfare, and legal benefit plans
totaled approximately $838,000, $10,373,000, and $466,000, respectively, for
the year ended June 29, 1996, $787,000, $8,701,000 and $408,000, respectively,
for the year ended July 1, 1995 and $745,000, $7,437,000 and $382,000,
respectively, for year ended July 2, 1994.
LEASE COMMITMENTS
The Company leases warehouse and retail store facilities under noncancelable
lease agreements ranging from 1 to 20 years. Renewal options are available on
the majority of the leases for one or more periods of five years each. Most
leases require the payment of taxes and maintenance costs, and some leases
provide for additional rentals based on sales in excess of specified minimums.
All store leases have stated periodic rental increases. The increases are
amortized over the lives of the leases. Rent expense includes approximately
$281,000, $687,000, $802,000 and $832,000 of amortized rental increases for the
period ended February 1, 1997, and for the year ended June 29, 1996, July 1,
1995, and July 2, 1994 respectively.
143
144
Following is a schedule of annual future minimum payments under the capital
lease for office space, assuming future annual increases of 6 percent, and
noncancelable operating leases, which have initial or remaining terms in excess
of one year at February 1, 1997 (in thousands).
CAPITAL OPERATING
FISCAL YEAR LEASE LEASES
----------- ----- ------
1998 $1,316 $13,038
1999 1,395 13,115
2000 1,478 12,957
2001 1,567 12,665
2002 1,661 12,291
Thereafter 19,742 107,833
------ -------
Total $27,159 $171,899
========
Less- Imputed Interest 17,124
------
Present Value of net minimum
lease payments $10,035
Less- Current maturities -
------
Long -term capital lease obligations $10,035
=======
Rent expense for operating leases charged to operations is as follows (in
thousands)
THIRTY-ONE
WEEKS ENDED FISCAL YEAR ENDED
----------- -----------------
FEBRUARY 1, 1997 JUNE 29, 1996 JULY 1, 1995 JULY 2, 1994
---------------- ------------- ------------ ------------
Minimum rentals $7,288 $12,021 $10,925 $11,034
Contingent rentals 3,770 4,006 4,054 4,052
----- ----- ----- -----
Total $11,058 $16,027 $14,979 $15,086
======= ======= ======= ========
RELATED-PARTY LEASES
In July 1990, the Company entered into an agreement to lease an 86,000 square
foot office building in Lanham, Maryland, from a private partnership (the
"Partnership") which is owned by stockholders of the Company. The lease is for
20 years and it commenced December 10, 1990. The lease provides for yearly
increasing rental payments, based upon the Consumer Price Index
144
145
for the Washington D.C., metropolitan statistical area; however, the annual
increases will not be more than 6 percent or less than 3 percent. Rental
payments for the thirty-one weeks ended February 1, 1997 and for fiscal years
ended June 29, 1996, July 1, 1995, and July 2, 1994 were approximately
$744,000, $1,246,000, $1,210,000, and $1,175,000 respectively, and all
payments over the life of the lease total approximately $34,400,000. The
Company is accounting for the lease as a capital lease. Due to fixed rental
increases during the term of the lease, lease payments exceeded interest
expense by approximately $34,000 for the thirty-one weeks ended February
1,1997. Interest expense exceeded lease payments by $254,000, $292,000, and
$321,000 for the fiscal years ended June 29, 1996, July 1, 1995, and July 2,
1994, respectively. Assuming future annual rental increases of 6 percent, the
capital lease obligation will continue to increase through November 2000, at
which time accumulated interest expense recognized for financial reporting
purposes will exceed lease payments by approximately $1,800,000. The lease
requires the Company to pay for maintenance, utilities, insurance, and taxes.
The Partnership purchased the office building for approximately $8,663,000 in
July of 1990.
During the period ended February 1, 1997, and the fiscal years ended June 29,
1996, July 1, 1995, and July 2, 1994, the Company made rental payments of
approximately $3,573,000, $5,384,000, $5,985,000, and $5,327,000 respectively
on store leases to partnerships related to stockholders of the Company. As of
February 1, 1997, the Company had ten store operating leases with partnerships
related to stockholders of the Company. The remaining future minimum payments
under these leases exclusive of option periods are approximately $70,820,000
and expire through 2014.
The Company made payments of approximately $198,000, $278,000, $246,000, and
$246,000 during the thirty-one weeks ended February 1, 1997, and each of the
fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994 for warehouse
operating leases to a partnership owned by stockholders of the Company and to a
corporation related to stockholders of the Company. As of February 1, 1997,
the remaining future minimum annual payments under these leases are
approximately $1,386,000 and expire in 2002.
SUBLEASING AGREEMENTS
The Company subleases space within one store for the sale of beer and wine to
an entity affiliated with its officers. The Company received rental income of
approximately $57,865, $155,000, $155,000, and $123,000 in the thirty-one
weeks ended February 1, 1997, and in the fiscal years ended June 29, 1996,
July 1, 1995, and July 2, 1994 respectively, from this entity, which is
included in selling and administrative expenses.
As of February 1, 1997, there were three unaffiliated subtenants in the office
building. The subtenants are leasing approximately 30,000 square feet. The
subleases expire between January 1998 and September 2000. The Company received
rental income of approximately $321,000. $551,000, $530,000 and $615,000 in
the period ending February 1, 1997 and in the fiscal years ended June 29, 1996,
July 1, 1995, and July 2, 1994 respectively from its subtenants.
145
146
During the period ended June 29, 1996 the Company began leasing space to a
corporation related to the stockholders of the Company. The Company received
rental income of approximately $91,000 and $140,000 during the period ended
February 1,1997 and during the fiscal year ended June 29, 1996.
LINE-OF CREDIT AGREEMENT / LETTERS OF CREDIT
The Company has a $35,000,000 line-of-credit with a local bank, with interest
payable at the prime rate. The Company has authorized the local bank to issue
letters of credit in connection with the Company's workers' compensation
insurance. There were no borrowings on this line in the seven months ended
February 1, 1997. As of February 1, 1997, June 29, 1996, and July 1, 1995, the
Company's line of credit was reduced by outstanding letters of credit of
approximately $6,724,000, $6,424,000 and $6,135,000, respectively. The line of
credit expired on March 31, 1997, however, the letters of credit will mature at
various dates throughout 1998.
LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to operations. In the
opinion of management, it is unlikely that any exposure from these actions will
have a material impact on the Company's financial position.
OTHER
In June of 1994, the Company had one store which incurred significant fire
damage. The Company recorded the insurance settlement on the store's
inventory, fixed assets, reimbursable payroll costs, and other business
interruption costs. This resulted in the recognition of an extraordinary gain,
net of taxes, in the accompanying financial statements of $1,239,000 and
$858,000, during the fiscal years ended July 1, 1995, and July 2, 1994,
respectively. The extraordinary gain recorded in fiscal year 1994 was net of
associated costs to write-off assets with a net book value of $708,000. During
the fiscal year ended June 29, 1996, the insurance claim was settled in full
and the Company recorded an extraordinary loss, net of taxes, of $224,000 to
reflect the remaining amount received for insurance proceeds, net of associated
costs.
6. SUBSEQUENT EVENTS
On December 16, 1996, Dart submitted offers, pursuant to the Stockholders'
Agreement governing Dart's investment in the Company, to either (i) sell all of
Dart's 50 percent equity interest in the Company or (ii) buy the 50 percent
equity interest in the Company that it did not own, in either case for a cash
price of $210 million. On December 18, 1996, the other stockholders accepted
Dart's offer to purchase their shares (the "Shares") of capital stock of the
Company. Under the terms of the Stockholders' Agreement, Dart's acquisition
(the "Acquisition") of the shares was to take place within 60 days of such
acceptance.
146
147
On February 6, 1997, Dart acquired the remaining 50% interest in the Company.
To effect the Acquisition, Dart's wholly owned subsidiary, SFW Acquisition
Corp., issued $140,000,000 in Increasing Rate Senior Notes due in 2000 ("Senior
Notes") and funded the remaining portion of the purchase price with bridge
financing. Immediately following the Acquisition, Dart liquidated a
substantial amount of the Company's short-term investments to repay the bridge
financing and fee associated with the transaction. In addition, the Company
was merged with SFW Acquisition Corp. and the Company became the obligor of the
Senior Notes. Also, on February 6, 1997, the Company authorized a $10,000,000
dividend to stockholders of record on February 7, 1997.
7. RESULTS OF OPERATION AND PRO FORMA DATA FOR THE 52 WEEKS ENDED FEBRUARY 1,
1997 (UNAUDITED)
The pro forma results reflect the pushdown of all acquisition entries as if the
acquisition discussed in Note 6 had occurred as of February 4, 1996.
ACTUAL PRO FORMA
FEBRUARY 1, 1997 FEBRUARY 1, 1997
(UNAUDITED) (UNAUDITED)
Sales $850,875 850,875
Cost of Sales 659,929 659,929
-------- -------
Gross Profit 190,946 190,946
Selling and Administrative Expenses 154,534 154,534
Depreciation and Amortization 8,720 13,180
----- ------
Operating Income 27,692 23,232
Interest Income 5,985 874
Interest Expense 1,645 20,892
----- ------
Net Income before Taxes 32,032 3,214
Provision for Income Taxes 11,495 2,494
------ -----
NET INCOME 20,537 720
====== ====
147
148
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
(a) (2) Exhibits...............................................
3.1 Certificate of Incorporation, incorporated herein by reference to
Exhibit #3a to the Company's Form S-1 Registration Statement File
#2-99831) filed with the Securities and Exchange Commission ("Dart
1985 S1").
3.2 Certificate of Amendment of the Certificate of Incorporation of Dart
Group Corporation dated January 13, 1987 (incorporated by reference
to Dart Fiscal Year 1987 10-K).
3.3 Bylaws, amended and restated as of September 14, 1993(incorporated
by reference to Dart Fiscal Year 1987 10-K).
4.1 Indenture dated as of February 6, 1997 by and among SFW Acquisition
Corp., SFW Holding Corp. and Norwest Bank Minnesota, National
Association.
4.2 First Supplemental Indenture dated as of February 6, 1997 by and
among Shoppers Food Warehouse Corp., SFW Holding Corp. and Norwest
Bank Minnesota, National Association.
4.3 Shoppers Food Warehouse Global Security.
9.1 Voting Trust Agreement, dated as of October 6, 1996, by and among
Ronald S. Haft, Dart Group Corporation and Larry G. Schafran and
Sidney B. Silverman, as initial voting trustees (incorporated by
reference to Exhibit 9 to the Current Report of Dart Group
Corporation on Form 8-K filed on October 10, 1996).
10.1 Employment agreement with Herbert H. Haft, as amended (incorporated
by reference to Dart Fiscal Year 1988 10-K).
10.2 Dart Drug Corporation Executive Non-Qualified Stock Option Plan,
incorporated herein by reference to exhibit (10o) to the Company's
Form 10-K filed with the SEC on May 1, 1984.
10.3 Lease dated December 26, 1984 between Dart Group Corporation and
Seventy-Fifth Avenue Associates (incorporated by reference to Dart
Fiscal Year 1986 10-K).
10.4 Sublease dated December 26, 1984 between Dart Group Corporation and
Trak Auto Corporation (incorporated by reference to Dart Fiscal Year
1986 10-K).
10.5 Sublease dated December 26, 1984 between Dart Group Corporation and
Crown Books Corporation (incorporated by reference to Dart
148
149
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
Fiscal Year 1986 10-K).
10.6 Lease dated April 27, 1984 between Trak Chicago Limited Partnership
I and Trak Auto Corporation (incorporated by reference to Dart
Fiscal Year 1986 10-K).
10.7 Dart Group Corporation 1981 Stock Option Plan, as amended
(incorporated by reference to Dart Fiscal Year 1987 10-K).
10.8 Indemnity Agreement by and between Dart Group Corporation and Crown
Books Corporation dated June 9, 1986 incorporated herein by
reference to Exhibit 10(zzzz) to the Crown 1987 10-K.
10.9 Indemnity Agreement, dated June 9, 1986, by and between Dart Group
Corporation and Trak Auto Corporation herein incorporated by
reference to Exhibit 10(pppp) to the Trak 1987 10-K.
10.10 Dart Group Corporation Deferred Compensation Plan for Directors,
effective January 1, 1988 (incorporated by reference to Dart Fiscal
Year 1988 10-K).
10.11 Lease agreement dated November 22, 1988 between Dart Group
Corporation and Seventy-Fifth Avenue Associates (incorporated by
reference to Dart Fiscal Year 1989 10-K).
10.12 Lease agreement dated January 27, 1989 between Trak Auto Corporation
and Combined Properties/Ontario Limited Partnership herein
incorporated by reference to Exhibit 10(tttt) filed with Trak Auto
Corporation Fiscal Year 1989 Form 10-K, No. 0-12202 ("Fiscal 1989
Trak 10-K").
10.13 Lease agreement dated February 27, 1988 between Trak Corporation and
Haft/Equities-General, herein incorporated by reference to Exhibit
10(uuuu) filed with Fiscal 1989 Trak 10-K.
10.14 Lease agreement dated June 17, 1987 between Trak Auto West, Inc. and
Haft/Equities/Rose Hill Limited Partnership, herein incorporated by
reference to Exhibit 10(vvvv) filed with Fiscal 1989 Trak 10-K.
10.15 Trak Auto Amended Stock Option Plan, herein incorporated by
reference to Exhibit 10(yyyy) filed with Fiscal 1990 Trak 10-K.
10.16 Lease agreement dated January 5, 1990 between Combined Properties
Limited Partnership and Crown Books Corporation re: Turnpike
Shopping Center (815), herein incorporated by reference to Exhibit
10(iiiii) filed with Fiscal 1990 Crown 10- K.
149
150
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.17 Lease agreement dated January 5, 1990 between Combined Properties
Limited Partnership and Crown Books Corporation re: the Plaza at
Landmark (165), herein incorporated by reference to Exhibit
10(jjjjj) filed with Fiscal 1990 Crown 10-K.
10.18 Lease agreement dated January 5, 1990 between Combined Properties
Limited Partnership and Crown Books Corporation re: Manaport Plaza
Shopping Center (804), herein incorporated by reference to Exhibit
10(kkkkk) filed with Fiscal 1990 Crown 10- K.
10.19 Lease agreement dated October 31, 1990 between CP Acquisitions
Limited Partnership and Crown Books Corporation re: McLean Shopping
Center (803), herein incorporated by reference to Exhibit 10(lllll)
Crown Books Corporation Fiscal Year 1991 Form 10-K No. 0-11457
("Fiscal 1991 Crown 10-K").
10.20 Lease agreement dated March 20, 1991 between Charles County
Associates Limited Partnership and Crown Books Corporation re:
Charles County Plaza (833), herein incorporated by reference to
Exhibit 10(nnnnn) Fiscal 1991 Crown 10-K.
10.21 Lease agreement dated May 11, 1990 between Combined
Properties/Greenbriar Limited Partnership and Crown Books
Corporation, the First Amendment dated September 13, 1990 and the
Second Amendment dated March 14, 1991 re: Greenbriar Town Center
(104), herein incorporated by reference to Exhibit 10(ooooo) Fiscal
1991 Crown 10-K.
10.22 Lease agreement dated May 18, 1990 between Combined Properties
Limited Partnership and Trak Corporation and Lease Termination
Agreement dated March 31, 1990 between Combined Properties Limited
Partnership, Retail Lease Acquisition Limited Partnership and Trak
Corporation re: Fair City Mall (605), herein incorporated by
reference to Exhibit 10(zzzz) Trak Auto Corporation Fiscal Year 1991
Form 10-K No. 0-12202 ("Fiscal 1991 Trak 10-K").
10.23 Lease agreement dated May 18, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation and License Termination
Agreement dated March 31, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation re: Chantilly Plaza (609),
herein incorporated by reference to Exhibit 10(aaaaa) Fiscal 1991
Trak 10-K.
10.24 Lease agreement dated May 18, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation and
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151
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
License Termination Agreement 4 dated March 31, 1990 between Retail
Lease Acquisition Limited Partnership and Trak Corporation re:
College Plaza (610), herein incorporated by reference to Exhibit 10
(bbbbb)Fiscal 1991 Trak 10-K.
10.25 Lease agreement dated May 18, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation and License Termination
Agreement dated March 31, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation re: Enterprise (614),
herein incorporated by reference to Exhibit 10(ccccc) Fiscal 1991
Trak 10-K.
10.26 Lease agreement dated May 18, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation and License Termination
Agreement dated March 31, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation re: Rolling Valley (630),
herein incorporated by reference to Exhibit 10(ddddd) Fiscal 1991
Trak 10-K.
10.27 Lease agreement dated May 18, 1990 between Combined Properties
Limited Partnership and Trak Corporation and Lease Termination
Agreement dated March 31, 1990 between Combined Properties Limited
Partnership, Retail Lease Acquisition Limited Partnership and Trak
Corporation re: White Flint (632), herein incorporated by reference
to Exhibit 10(eeeee) Fiscal 1991 Trak 10-K.
10.28 Lease agreement dated November 6, 1990 between CP Acquisition
Limited Partnership and Trak Corporation and Settlement Agreement
dated November 6, 1990 between CP Acquisitions Limited Partnership
and Trak Corporation re: Aspen Manor (615), herein incorporated by
reference to Exhibit 10(fffff) Fiscal 1991 Trak 10-K.
10.29 Lease agreement dated November 6, 1990 between CP Acquisition
Limited Partnership and Trak Corporation and Settlement Agreement
dated November 6, 1990 between CP Acquisitions Limited Partnership
and Trak Corporation re: Lee and Harrison (633), herein incorporated
by reference to Exhibit 10(ggggg) Fiscal 1991 Trak 10-K.
10.30 Lease agreement dated November 6, 1990 between CP Acquisition
Limited Partnership and Trak Corporation and Settlement Agreement
dated November 6, 1990 between CP Acquisitions Limited Partnership
and Trak Corporation re: Penn Daw (642), herein incorporated by
reference to Exhibit 10(hhhhh) Fiscal 1991 Trak 10-K.
151
152
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.31 Lease agreement dated November 6, 1990 between Combined Properties
Limited Partnership and Trak Corporation and Settlement Agreement
dated November 6, 1990 between Combined Properties Limited
Partnership and Trak Corporation re: Fairfax Circle (656), herein
incorporated by reference to Exhibit 10(iiiii) Fiscal 1991 Trak
10-K.
10.32 Lease agreement dated March 23, 1990 between Combined
Properties/Silver Hill Limited Partnership and Trak Corporation and
Termination Agreement dated April 13, 1990 between Combined
Properties/Silver Hill Limited Partnership and Trak Corporation re:
Silver Hill (619), herein incorporated by reference to Exhibit
10(jjjjj) Fiscal 1991 Trak 10-K.
10.33 Lease agreement dated November 6, 1990 between Haft/Equities- Bladen
Limited Partnership and Trak Corporation and Lease Termination
Agreement dated November 6, 1990 between Haft/Equities-Bladen
Limited Partnership and Trak Corporation re: Bladen Plaza (662),
herein incorporated by reference to Exhibit 10(kkkkk) Fiscal 1991
Trak 10-K (incorporated by reference to Dart Fiscal Year 1991 10-K).
10.34 Lease agreement dated July 19, 1990 between Combined Properties/4600
Forbes Limited Partnership and Shoppers Food Warehouse Corp.
(incorporated by reference to Dart Fiscal Year 1991 10-K).
10.35 Lease Agreement dated December 27, 1982 between Combined Properties
Limited Partnership and Jumbo Food Stores VA, Inc., Amendment dated
September 8, 1988 and Amendment dated September 25, 1990 re: Fair
City Mall (incorporated by reference to Dart Fiscal Year 1991 10-K).
10.36 Lease Agreement dated June 28, 1983 between Combined Properties
Limited Partnership and Jumbo Food Stores VA, Inc., Amendment dated
September 8, 1988, Amendment May 10, 1990 and Amendment dated
September 25, 1990 re: Rolling Valley Mall (incorporated by
reference to Dart Fiscal Year 1991 10-K).
10.37 Lease Agreement dated September 11, 1987 between Combined Properties
Limited Partnership and Jumbo Food Stores Md., Inc., Amendment dated
September 25, 1990 re: Maryland City Plaza (incorporated by
reference to Dart Fiscal Year 1991 10-K).
10.38 Lease Agreement dated July 7, 1989 between Combined
Properties/Silver Hill Limited Partnership and Jumbo Food Stores
Md., Inc., Amendment dated May 10, 1990 and Amendment dated
September 25, 1990 re: Silver Hill Plaza (incorporated
152
153
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
by reference to Dart Fiscal Year 1992 10-K).
10.39 Lease agreement dated June 21, 1988 between Combined Properties
Limited Partnership and Jumbo Food Stores Md., Inc., First Amendment
dated July 7, 1989, Second Amendment dated September 25, 1990, re:
Enterprise Plaza (incorporated by reference to Dart Fiscal Year 1992
10-K).
10.40 Lease agreement dated December 23, 1991 between Combined Properties
Limited Partnership and Trak Corporation, re: Manaport Plaza (607),
herein incorporated by reference to Exhibit 10(lllll) Trak Auto
Corporation Fiscal Year 1992 Form 10-K No. 0-12202 ("Fiscal 1992
Trak 10-K").
10.41 Amendment of lease dated December 24, 1991 between
Haft/Equities-Bladen Limited Partnership and Trak Corporation, re:
Bladen Plaza (662), herein incorporated by reference to Exhibit
10(mmmmm) filed with Fiscal 1992 Trak 10-K.
10.42 Sublease agreement dated February 19, 1992 between Crown Books
Corporation and Trak Corporation, re: Vienna (616), herein
incorporated by reference to Exhibit 10 (nnnn) filed with Fiscal
1992 Trak 10-K
10.43 Sublease agreement dated February 12, 1992 between Crown Books
Corporation and Trak Corporation, re: McLean Shopping Center (627),
herein incorporated by reference to Exhibit 10(ooooo) filed with
Fiscal 1992 Trak 10-K.
10.44 Lease agreement dated May 8, 1991 between Combined Properties
Limited Partnership and Crown Books Corporation, re: Montgomery
Village (827), herein incorporated by reference to Exhibit 10(qqqqq)
filed with Crown Books Corporation Fiscal Year 1992 Form 10-K No.
0-11457.
10.45 Dart Group Corporation 1992 Stock Option Plan incorporated herein by
reference to Dart 1993 S-8 file No. 33-57010.
10.46 Amendment of lease dated December 11, 1992 between Combined
Properties Limited Partnership and Super Trak Corporation re: Oxon
Hill (606), herein incorporated by reference to Exhibit 10(qqqqq)
filed with Trak Auto Corporation Fiscal Year 1993 Form 10-K No.
0-12202 ("Fiscal 1993 Trak 10-K").
10.47 Amendment of lease dated December 1, 1992 between
Haft/Equities-Bladen Limited Partnership and Super Trak Corporation
re: Bladen Plaza (662), herein incorporated by reference to Exhibit
10(rrrrr) filed with Fiscal 1993 Trak 10- K.
153
154
10.48 Amendment of lease dated January 8, 1993 between Retail Lease
Acquisition Limited Partnership and Trak Corporation re: Chantilly
Plaza (609), herein incorporated by reference to Exhibit 10(sssss)
filed with Fiscal 1993 Trak 10-K.
10.49 Amendment of lease dated December 1, 1992 between Combined
Properties/Montebello Limited Partnership and Super Trak re:
Montebello (520), herein incorporated by reference to Exhibit
10(uuuuu) filed with Fiscal 1993 Trak 10-K.
10.50 Third Amendment dated June 4, 1992 and Fourth Amendment dated June
15, 1992 to the Lease agreement between Combined Properties Limited
Partnership and Crown Books Corporation re: Greenbriar Town Center
(104), herein incorporated by reference to Exhibit 10(sssss) filed
with Crown Books Corporation Fiscal Year 1992 Form 10-K No. 0-11457
("Fiscal 1993 Crown 10-K").
10.51 Third Amendment dated June 17, 1992 to the Lease agreement between
Combined Properties Limited Partnership and Jumbo Food Stores MD.,
Inc., Re: Enterprise Plaza (incorporated by reference to Dart Fiscal
Year 1993 10-K).
10.52 Lease agreement dated November 1, 1990 between Penn Daw Associates
Limited Partnership (A Haft Controlled Entity) and Shoppers Food
Warehouse VA Corporation, the First Amendment dated February 13,
1991 Re: Penn Daw Shopping Center (incorporated by reference to Dart
Fiscal Year 1993 10-K).
10.53 Amendment of lease dated February 4, 1993 between Retail Lease
Acquisition Limited Partnership and Super Trak re: College Plaza
(610), herein incorporated by reference to Exhibit 10 (wwwww) filed
with Trak Auto Corporation Fiscal Year 1995 Form 10-K No 0-12202
("Fiscal 1995 Trak 10-K").
10.54 Amendment of lease dated September 13, 1993 between Combined
Properties Limited Partnership and Super Trak re: Fair City Mall
(605), herein incorporated by reference to Exhibit 10(xxxxx) filed
with Fiscal 1995 Trak 10-K.
10.55 Amendment of lease dated September 13, 1993 between Combined
Properties Limited Partnership and Super Trak re: Maryland City
(623), herein incorporated by reference to Exhibit 10(yyyyy) filed
with Fiscal 1995 Trak 10-K.
10.56 Second Amendment of lease dated March 31, 1995 between Combined
Properties Limited Partnership and Super Trak Corporation re:
154
155
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
Oxon Hill (606), herein incorporated by reference to Exhibit 10
(zzzzz) filed with Fiscal 1995 Trak 10-K.
10.57 Lease Amendment dated November 22, 1993 between Combined Properties
Limited Partnership and Super Trak Corporation re: Landmark (658),
herein incorporated by reference to Exhibit 10(A) filed with Fiscal
1995 Trak 10-K.
10.58 Second Amendment of Lease dated August 19, 1993 and Third Amendment
of lease dated August 30, 1993 between Combined Properties Limited
Partnership and Super Crown Books Corporation re: Landmark (165),
herein incorporated by reference to Exhibit 10(wwwww) filed with
Crown Books Corporation Fiscal Year 1995 Form 10-K No. 0-11457
("Fiscal 1995 Crown 10-K").
10.59 Lease Agreement dated August 19, 1993 between Retail Lease
acquisition Limited Partnership and Super Crown Books Corporation
re: White Flint Plaza (132), herein incorporated by reference to
Fiscal 1995 Crown 10-K.
10.60 Agreement dated August 16, 1993 between Combined Properties Limited
Partnership and Total Beverage Corp. and First Amendment of Lease
dated February 24, 1995 re: Landmark (203) (incorporated by
reference to Dart Fiscal Year 1995 Form 10-K).
10.61 Trak Auto 1993 Stock Option Plan, herein incorporated by reference
to Exhibit 10(vvvvv) filed with Fiscal 1995 10-K.
10.62 Crown Books 1993 Stock Option Plan, herein incorporated by reference
to Exhibit 10(yyyyy) filed with Fiscal 1995 Crown 10- K.
10.63 Amendment of lease dated June 30, 1994 between Combined Properties
Limited Partnership and Super Trak Corporation re: Bradlick (629),
herein incorporated by reference to Exhibit 10.45 filed with Trak
Auto Corporation Fiscal Year 1996 Form 10-K No. 0-12202 ("Fiscal
1995 Trak 10-K").
10.64 Employment Agreement between R. Keith Green and Trak Auto
Corporation dated January 25, 1995, herein incorporated by reference
to Exhibit 10.46 to Fiscal 1995 Trak 10-K.
10.65 Tax Allocation Agreement dated December 27, 1994 between Dart Group
Corporation and Trak Auto Corporation, herein incorporated by
reference to Exhibit 10.47 to Fiscal 1996 Trak 10-K.
155
156
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.66 Loan Agreement dated February 6, 1995 between Dart Group Corporation
and Trak Auto Corporation, herein incorporated by reference to
Exhibit 99(a)(16) to Amendment No. 2 to Trak Auto Corporation
Statement on Schedule 13E-4/A, Commission File No. 5-34497, filed
with the Commission on February 6, 1995.
10.67 Employment Agreement between E. Steve Stevens and Crown Books
Corporation dated February 1, 1997, herein incorporated by reference
to Exhibit 10.25 filed with Crown Books Corporation Fiscal year 1997
Form 10-K No. 0-11457.
10.68 Employment Agreement between Dennis N. Weiss and Dart Group
Corporation dated January 25, 1995, herein incorporated by reference
to Exhibit 10.94 filed with Dart Group Corporation Fiscal year 1995
Form 10-K ("Fiscal 1996 Dart 10-K").
10.69 Form of Indemnification Agreement dated as of September 21, 1994 by
and between Dart Group Corporation and each of Ronald S. Haft,
Herbert H. Haft, Douglas M. Bregman, Bonita Wilson, H. Ridgely
Bullock and Larry G. Schafran, herein incorporated by reference to
Exhibit 10.95 filed with Fiscal 1995 Dart 10-K.
10.70 Settlement Agreement, dated as of October 6, 1995, by and between
Dart Group Corporation and Ronald S. Haft (incorporated by reference
to Exhibit 10.1 to the Current Report of Dart Group Corporation on
Form 8-K filed on October 10, 1995).
10.71 Buy/Sell/Offering Agreement, dated as of October 6, 1995, by and
between Dart Group Corporation and Ronald S. Haft (incorporated by
reference to Exhibit 10.2 to the Current Report of Dart Group
Corporation on Form 8-K filed on October 10, 1995).
10.72 Amendment No. 1 to Employment Agreement, dated October 6, 1995, by
and between Dart Group Corporation and Ronald S. Haft (incorporated
by reference to Exhibit 10.3 to the Current Report of Dart Group
Corporation on Form 8-K filed on October 10, 1996.
10.73 Promissory Note, dated October 6, 1995, executed by Ronald S. Haft
in favor of Dart Group Corporation in the principal amount of
$37,740,162.00 (incorporated by reference to Exhibit 10.4 to the
Current Report of Dart Group Corporation on Form 8-K filed on
October 10, 1995).
10.74 Promissory Note, dated October 6, 1995, executed by Ronald S. Haft
in favor of Dart Group Corporation in the principal amount of
$27,389,672.00 (incorporated by reference to Exhibit 10.5 to
156
157
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
the Current Report of Dart Group Corporation on Form 8-K filed on
October 10, 1995).
10.75 Restricted Account Security Agreement, dated as of October 6, 1995,
by and among Ronald S. Haft, Dart Group Corporation and Settlement
Corp., as escrow agent (incorporated by reference to Exhibit 10.7 to
the Current Report of Dart Group Corporation on Form 8-K filed on
October 10, 1995).
10.76 Stock and Trust Certificate Pledge Agreement, dated as of October 6,
1995, made by Ronald S. Haft in favor of Larry G. Schafran and
Sidney B. Silverman, as collateral agents and bailees for Dart Group
Corporation and Cabot-Morgan Real Estate Company (incorporated by
reference to Exhibit 10.9 to the Current Report of Dart Group
Corporation on Form 8-K filed on October 10, 1995).
10.77 Pledge of Undisputed Partnership Interests, dated as of October 6,
1995, executed by Ronald S. Haft and certain of his affiliates in
favor of Dart Group Corporation (incorporated by reference to
Exhibit 10.10 to the Current Report of Dart Group Corporation on
Form 8-K filed on October 10, 1995).
10.78 Pledge of Disputed Partnership Interests, dated as of October 6,
1995, executed by Ronald S. Haft and certain of his affiliates in
favor of Dart Group Corporation (incorporated by reference to
Exhibit 10.11 to the Current Report of Dart Group Corporation on
Form 8-K filed on October 10, 1995).
10.79 Partnership Stock Pledge Agreement, dated as of October 6, 1995, in
favor of Dart Group Corporation (incorporated by reference to
Exhibit 10.12 to the Current Report of Dart Group Corporation on
Form 8-K filed on October 10, 1995).
10.80 Mutual Release, dated as of October 6, 1995, by and between each of
Dart Group Corporation, Crown Books Corporation, Trak Auto
Corporation, Cabot-Morgan Real Estate Company, Dart/SFW Corporation,
and each of Ronald S. Haft and Combined Properties, Inc.
(incorporated by reference to Exhibit 10.13 to the Current Report of
Dart Group Corporation on Form 8-K filed on October 10, 1995).
10.81 Real Estate Master Agreement, dated as of October 6, 1996, by and
among Ronald S. Haft, Dart Group Corporation and Cabot- Morgan Real
Estate Company (incorporated by reference to Exhibit 10.14 to the
Current Report of Dart Group Corporation on Form 8-K filed on
October 10, 1995).
157
158
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.82 Escrow and Security Agreement, dated as of October 6, 1996, by and
among Ronald S. Haft, certain of his affiliates, Dart Group
Corporation, Cabot-Morgan Real Estate Company and Settlementcorp, as
escrow agent (incorporated by reference to Exhibit 10.15 to the
Current Report of Dart Group Corporation on Form 8-K filed on
October 10, 1995).
10.83 Purchase Agreement [Pennsy Drive Warehouse], dated October 6, 1995,
by and between Ronald S. Haft and Dart Group Corporation
(incorporated by reference to Exhibit 10.16 to the Current Report of
Dart Group Corporation on Form 8-K filed on October 10, 1995.
10.84 Purchase Agreement [Warehouse Partnership Interests], dated October
6, 1995, by and between Ronald S. Haft and Dart group Corporation
(incorporated by reference to Exhibit 10.17 to the Current Report of
Dart Group Corporation on Form 8-K filed on October 10, 1995).
10.85 Disputed Partnership Interest Purchase Agreement, dated October 6,
1995, by and between Ronald S. Haft and Dart group Corporation
(incorporated by reference to Exhibit 10.18 to the Current Report of
Dart Group Corporation on Form 8-K filed on October 10, 1995).
10.86 Termination of Employment Agreement, dated as of October 6, 1995, by
and between Dart Group Corporation and Ronald S. Haft (incorporated
by reference to Exhibit 10.19 to the Current Report of Dart Group
Corporation on Form 8-K filed on October 10, 1995).
10.87 Subscription Agreement, dated as of October 6, 1995, by and between
Dart Group Corporation and Ronald S. Haft (incorporated by reference
to Exhibit 10.20 to the Current Report of Dart Group Corporation on
Form 8-K filed on October 10, 1995).
10.88 Standstill Order entered on December 6, 1995 by the Delaware
Chancery Court in Gloria G. Haft, et al. v. Larry G. Schafran, et
al. (Del. Ch. Civ. A. No. 14620) and Herbert H. Haft v. Dart Group
Corporation, et al. (Del. Ch. Civ. A. No. 14685) (incorporated by
reference to Exhibit 99.1 to the Quarterly Report of Dart Group
Corporation on Form 10-Q for the period ended October 28, 1995).
10.89 Financing Agreement dated September 12, 1996 between Crown Books
Corporation and The CIT Group/Business Credit, Inc. (herein
incorporated by reference to Exhibit 10.1 filed with Crown Books
Corporation Form 10-Q filed September 16, 1996).
158
159
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.90 Financing Agreement dated December 18, 1996 between Trak Auto
Corporation and The CIT Group/Business Credit, Inc. (herein
incorporated by reference to Exhibit 10.48 filed with Trak Auto
Corporation's Form 10-K for the year ended February 1, 1997.
10.91 Registration Rights Agreement dated as of February 6, 1997 by and
among SFW Acquisition Corp., SFW Holding Company and Wasserstein
Perella Securities, Inc.
10.92 Employment Agreement, dated September 16, 1996, between Mark A.
Flint and Dart Group Corporation (herein incorporated by reference
to Dart Group Corporation Form 10-Q filed September 16, 1996).
10.93 Employment Agreement, dated May 22, 1995, between Terry J. Sharp and
Dart Group Corporation.
10.94 Conditional Settlement Agreement in Principle, dated April 21, 1997
between Dart Group Corporation and Herbert H. Haft.
11 Statement on Computation of Per Share Earnings.
21 Subsidiaries of Dart.
23 Consent of Independent Public Accountants.
27 Financial Statement Schedules
Note: Dart Drug Corporation changed its name to Dart Group
Corporation on July 3, 1984.
(b) Reports on Form 8-K - During the fourth quarter of fiscal year end
January 31, 1997, Dart filed two Current Reports on Form 8- K.
1. Dart filed a Current Report on Form 8-K on December 17, 1996
reporting under Item 5 (Other Events) its offer to either sell its
interest in Shoppers Food to Kenneth Herman and members of his
family or buy the Herman's interest in Shoppers Food.
2. Dart filed a Current Report on Form 8-K on December 30, 1996
reporting under Item 5 (Other Events) Kenneth Hermans acceptance of
Darts offer to purchase the Herman's interest in Shoppers Food.
Subsequent to January 31, 1997, Dart filed two Current Reports on
Form 8-K.
159
160
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
1. Dart filed a Current Report on Form 8-K on February 20, 1997, as
amended on April 21, 1997, reporting under Item 2 (Acquisitions or
Disposition of Assets) and Item 7 (Financial Statements and
Exhibits) Dart's acquisition of the remaining 50% interest in
Shoppers Food.
2. Dart filed a Current Report on Form 8-K on April 25, 1997 reporting
under Item 5 (Other Events) and Item 7 (Financial Statements and
Exhibits) a conditional settlement agreement in principle that Dart
reached with Herbert H. Haft on April 21, 1997.
160
161
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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:May 1, 1997 By: Herbert H. Haft
----------- ---------------
Herbert H. Haft
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date:May 1, 1997 Herbert H. Haft
----------- ---------------------------------
Herbert H. Haft
Chairman of the Board of Directors
and Chief Executive Officer
Date:May 1, 1997 Ronald S. Haft
----------- ---------------------------------
Ronald S. Haft
Director
Date:May 1, 1997 Bonita A. Wilson
----------- ---------------------------------
Bonita A. Wilson
Director
Date:May 1, 1997 Douglas M. Bregman
----------- ---------------------------------
Douglas M. Bregman
Director
Date:May 1, 1997 Larry G. Schafran
----------- ---------------------------------
Larry G. Schafran
Director
Date:May 1, 1997 Mark A. Flint
----------- ---------------------------------
Mark A. Flint
Senior Vice President, Chief
Financial Officer and Treasurer
161
162
DART GROUP CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Page
4.1 Indenture dated as of February 6, 1997 by and among SFW
Acquisition Corp., SFW Holding Company and Norwest Bank
Minnesota, National Association.
4.2 First Supplemental Indenture dated as of February 6, 1997 by
and among Shoppers Food Warehouse Corp., SFW Holding Corp. and
Norwest Bank Minnesota, National
Association.
4.3 Shoppers Food Warehouse Global Security.
10.91 Registration Rights Agreement dated as of February 6,1997 by
and among SFW Acquisition Corp., SFW Holding Company and
Wasserstein Perella Securities, Inc.
10.93 Employment Agreement, dated May 22, 1995, between Terry J.
Sharp and Dart Group Corporation.
10.94 Conditional Settlement Agreement in Principle, dated April 21,
1997 between Dart Group Corporation and Herbert H. Haft.
11 Statement on Computation of Per Share Earnings.
21 Subsidiaries of Dart Group Corporation.
23 Consent of Independent Public Accountants.
27 Financial Data Schedules
162