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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 for the fiscal year ended January 31, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________ to _________
Commission file number 0-1946
DART GROUP CORPORATION
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 53-0242973
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3300 75th Avenue, Landover, Maryland 20785
- -------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 226-1200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00 per share
---------------------------
(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 April 30, 1998, the registrant had 1,208,250 shares of Common Stock
outstanding. The aggregate market value of such shares held by non-affiliates of
the registrant, based on the closing price of the Common Stock as reported on
the Nasdaq National Market on April 30, 1998, was approximately $192,292,000.
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Table of Contents
PART I
Page
----
Item 1. Business............................................................. 3
Item 2. Properties........................................................... 22
Item 3. Legal Proceedings.................................................... 25
Item 4. Submission of Matters to a Vote of
Security Holders................................................... 33
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters........................................ 34
Item 6. Selected Financial Data.............................................. 35
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................................... 37
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk........................................................ 57
Item 8. Financial Statements and Supplementary Data.......................... 58
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................. 119
PART III
Item 10. Directors and Executive Officers of the
Registrant......................................................... 120
Item 11. Executive Compensation............................................... 123
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................................... 132
Item 13. Certain Relationships and Related Transactions....................... 134
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................ 135
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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
without limitation the consummation of the Merger (as defined below), the
ability of the Company (as defined below) to open new stores and close other
stores, the sufficiency of recorded reserves for restructuring and store
closings, the availability of capital to fund operations generally and
particularly with respect to uncertainties regarding the operations and
liquidity of Crown Books (as defined below), the ability of Crown Books to
renegotiate existing credit arrangements or enter into new credit arrangements,
the effect of national and regional economic conditions, the effect of
increased competition in the markets in which the Company operates 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
GENERAL
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 grocery business through Shoppers Food Warehouse Corp.
("Shoppers") and retail discount beverage stores through Total Beverage
Corporation ("Total Beverage"). Dart, Trak Auto, Crown Books, Shoppers, Total
Beverage 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 and 100% of the outstanding
common stock of Shoppers and Total Beverage. Dart has owned at least 50% of the
outstanding common stock of Shoppers since fiscal 1989. On February 6, 1997,
Dart acquired the shares of Shoppers's outstanding common stock that it did not
already own and Shoppers became a wholly-owned subsidiary of Dart. On April 13,
1998, Dart agreed to sell Total Beverage for a cash purchase price equal to
Total Beverage's stockholders equity as of the closing (adjusted to remove
certain intercompany obligations) plus an agreed upon premium approximately $8.2
million after elimination of intercompany debt (which amount is subject to
adjustment). See the section of this Item 1 entitled "Total Beverage
Corporation-Recent Developments". On January 31, 1998, there were 181 Trak Auto,
179 Crown Books, 37 Shoppers and five Total Beverage stores. The common stock,
par value $1.00 per share, of Dart (the "Common Stock") is traded on the Nasdaq
National Market under the symbol DART and the common stocks of Trak Auto and
Crown Books are traded on the Nasdaq National Market under the symbols TRKA and
CRWN, respectively. The common stock of Shoppers and Total Beverage is not
publicly traded.
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Item 1. Business (Continued)
PLANNED MERGER
On April 9, 1998, Dart entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Richfood Holdings, Inc. ("Richfood Holdings") and a subsidiary
of Richfood Holdings ("Acquisition Subsidiary") pursuant to which Dart has
agreed to become a wholly owned subsidiary of Richfood Holdings. Pursuant to the
terms of the Merger Agreement, Richfood Holdings has agreed to (1) make a cash
tender offer (the "Offer") for (a) all of the issued and outstanding shares of
Common Stock at a price of $160.00 per share and (b) all options to acquire
shares of Common Stock at a price equal to the excess, if any, of $160.00 over
the strike price of each such option (collectively, the "Merger Consideration")
and (2) take all steps necessary to cause Acquisition Subsidiary to merge with
and into Dart (the "Merger") in a transaction in which (a) Dart will become a
wholly owned subsidiary of Richfood Holdings, (b) the remaining outstanding
shares of Common Stock will be cancelled and become convertible into the right
to receive $160.00 in cash, and (c) the remaining outstanding options to acquire
Common Stock will become convertible into the right to receive in cash the
excess, if any, of $160.00 over the strike price of such options.
The Offer is subject to a number of customary conditions. The Merger is subject
to the tender in the Offer of a majority of shares of Common Stock on a fully
diluted basis and to other customary conditions, including the receipt of
regulatory approvals and the absence of material adverse effects on the business
or financial conditions of Dart and its subsidiaries, taken as a whole, with
certain limited exceptions. There can be no assurance that either the Offer or
the Merger will be consummated.
TRAK AUTO CORPORATION
Operations
Trak Auto operates retail discount auto parts stores in the metropolitan areas
of Washington, D.C., Richmond, Virginia, Chicago, Illinois and Milwaukee,
Wisconsin, and in central Pennsylvania. During the year ended January 31, 1998,
Trak Auto sold its operations in the Los Angeles, California market and closed
its Pittsburgh, Pennsylvania operations.
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. Trak
Auto does not sell tires and does not provide automotive service or
installation.
Trak Auto characterizes its stores as "Classic Trak" stores,"Super Trak" stores
and "Super Trak Warehouse" stores. Classic Trak stores are typically between
5,000 and 6,000 square feet and carry 10,000 different product item numbers or
"SKU's."
Super Trak stores are typically between 6,000 and 11,000 square feet and carry
approximately 5,000 more SKU's than Classic Trak stores, concentrated primarily
in hard part categories. Additionally, Super Trak stores feature special order
services that permit customers to access virtually any automotive part,
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Item 1. Business (Continued)
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.
Super Trak Warehouse stores are typically between 11,000 and 24,000 square feet
and carry approximately 30,000 SKU's. The added SKU's are composed of additional
application parts.
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 January 31, 1998.
Trak Auto believes that Super Trak stores represent the strongest segment of its
business. Since 1993, Trak Auto has successfully opened or converted 87 Super
Trak stores excluding the Los Angeles and Pittsburgh markets. Trak Auto
anticipates that all of its new stores will be Super Trak stores in existing and
possibly new markets. As of January 31, 1998, Trak Auto had entered into lease
agreements to open two new stores in Chicago, Illinois.
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 and
Bridgeview, Illinois. 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.
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.
The following table sets forth by metropolitan area the locations of Trak Auto's
stores for each of the last five fiscal years.
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Item 1. Business (Continued)
Number of Stores
at end of fiscal year
----------------------------------------
Metropolitan Area 1994 1995 1996 1997 1998
- ----------------- ---- ---- ---- ---- ----
Chicago, Illinois 97 86 79 82 81
Los Angeles, California 116 104 96 93 --
Pittsburgh, Pennsylvania -- -- 14 16 --
Central Pennsylvania -- -- -- 2 7
Richmond, Virginia 15 11 10 9 9
Milwaukee, Wisconsin -- -- -- 7 8
Washington, D.C 86 81 77 77 76
--- --- --- --- ---
Total 314 282 276 286 181
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.
Super Trak Stores 1994 1995 1996 1997 1998
- ----------------- ---- ---- ---- ---- ----
Opened during the year 62 34 17 14 9
Closed or converted to Super Trak Warehouse
during the year 1 1 10 5 12
Sold during the year -- -- -- -- 32
Super Trak Warehouse Stores
- ---------------------------
Opened during the year -- 7 23 14 1
Closed or converted to Super Trak during
the year -- -- -- -- 5
Sold during the year -- -- -- -- 14
Classic Trak Stores
- -------------------
Opened during the year 1 -- -- -- --
Closed or converted to Super Trak or Super
Trak Warehouse during the year 65 72 36 13 16
Sold during the year -- -- -- -- 36
Total Open at End of Year
- -------------------------
Super Trak Stores 73 106 113 122 87
Super Trak Warehouse Stores -- 7 30 44 26
Classic Trak Stores 241 169 133 120 68
Sales and Closings of Stores
On October 6, 1997, Trak Auto entered into a purchase agreement (the "Purchase
Agreement") with CSK Auto, Inc. ("CSK") pursuant to which Trak Auto agreed to
sell to CSK its interest in its California operations (including inventory,
store fixtures and the assignment of store leases). Trak Auto and CSK closed the
transaction on December 8, 1997 for an aggregate purchase price of approximately
$32.8 million. Ninety percent (90%) of the aggregate purchase price, or $30.2
million, was paid in cash at the closing. The remaining ten percent (10%) was
paid upon finalization of the inventory valuation. Trak Auto realized a pre-tax
loss of $8.2 million (net of a reduction in the LIFO reserve of approximately
$2.3 million) on the sale to cover losses associated with the sale of assets and
exposure under remaining lease obligations. Trak Auto has
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Item 1. Business (Continued)
recorded these estimated losses in the accompanying Consolidated Statements of
Operations.
On January 31, 1998, Trak Auto closed 15 stores in the Pittsburgh, Pennsylvania
market. The stores were closed as a result of disappointing operating results
and Trak Auto recorded a loss of approximately $14.9 million in connection with
the closing of the Pittsburgh area 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 Closing Reserves
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 concepts.
The costs associated with store closings 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
store closing date.
As of January 31, 1998, Trak Auto had a reserve of $12,838,000 for store
closings. The reserve relates to 30 stores that have been closed. The activity
in the closed store reserve during the last two years is as follows:
(dollars in thousands)
1998 1997
-------- --------
Reserves, beginning of year $ 2,644 $ 4,491
Net provision recorded/(charges) 10,194 (1,847)
-------- --------
Reserves, end of year $ 12,838 $ 2,644
======== ========
The increase in fiscal 1998 is primarily due to closing 15 stores in the
Pittsburgh, Pennsylvania market as a result of the poor performance of the
stores.
The total unrealizable store lease obligation of Trak Auto at January 31, 1998
is $12,838,000 and the amount of such unrealizable lease obligation allocable to
related party leases is approximately $834,000. The closed store reserve as of
January 31, 1998 is expected to be utilized as follows:
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Item 1. Business (Continued)
(dollars in thousands)
Fiscal
Year Total
--------- -------
1999 $ 2,086
2000 1,434
2001 1,271
2002 1,107
2003 969
2004-2005 5,971
-------
Total $12,838
=======
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.
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 CORPORATION
New Management
With the exception of the Vice President of Merchandising, all of Crown Books'
corporate officers have been retained by Crown Books near or subsequent to
January 31, 1998. The president joined Crown Books in mid-January. The Vice
President of Operations and the new Chief Financial Officer joined Crown Books
in February. The Chief Information Officer joined Crown Books in March.
Liquidity Issues
Crown Books has suffered substantial declines in financial performance and
substantial deterioration of its business in recent years and is currently
exploring alternatives for maintaining adequate liquidity. Negotiations are
underway with Crown Books principal vendor to extend the payment schedule of
accounts payable due to the vendor, but no agreement has been reached. There can
be no assurance that this vendor or other vendors will continue to ship
inventory to Crown Books or that there will not be further significant decline
in Crown Books' business and financial condition.
Under the terms and conditions of its revolving credit facility, Crown Book is
currently permitted to borrow up to a maximum of $25 million. As of April 28,
1998, Crown Books had borrowed $22.2 million under its credit facility and had
$2.8 million in availability. Crown Books is negotiating with its lenders either
to increase its borrowing capacity under its existing credit facility or to
enter into a new credit facility with increased borrowing capacity. Management
of Crown Books believes that it will either amend its existing facilities or
enter a new credit facility in May 1998. There can be no assurance, however,
that Crown Books will succeed in its attempt to increase its existing credit
facility or obtain a new credit facility. If Crown Books is not successful in
increasing its borrowing availability or otherwise improving its liquidity
situation, there can be no assurance that Crown Books will have sufficient
liquidity to operate its business and remain a going concern. The accompanying
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Item 1. Business (Continued)
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should Crown Books be unable to
continue as a going concern.
Internal Controls
During the year ended January 31, 1998, under its prior management team, Crown
Books implemented a new accounts payable/inventory system without the system
being completely tested and interfaced with the store systems. As a result of
implementation problems with the system, Crown Books has been unable to
determine in an accurate and timely manner the purchases and amounts payable for
each vendor throughout the year. Additionally, reconciliations of certain key
general ledger accounts, including cash, accounts payable and inventory, were
not performed on a timely basis during the year and the adjustment to reconcile
the general ledger to the physical inventory at year-end was unusually high.
Significant effort was required in connection with the year-end financial
statement closing process to reconcile these accounts, determine the nature of
any reconciling items and record adjustments to correct errors or omissions to
these accounts.
Since February 1998, Crown Books, under its new management, has invested a
substantial effort and made improvements in the controls and procedures relating
to the above mentioned items. To date these improvements have not resolved the
problems and efforts need to continue to enable Crown Books to produce accurate
financial data in a timely and efficient manner. As a result of the foregoing
issues, Crown Books' independent public accountants advised Crown Books that in
their view, there is a material weakness in Crown Books' internal control
structure. Management of Crown Books intends to continue its efforts to improve
internal control and procedures.
Operations
Crown Books operates retail discount book 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 15% 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.
Crown Books characterizes its stores as "Classic Crown Books" stores and "Super
Crown Books" stores. Classic Crown Books stores range in size from approximately
2,000 to 6,000 square feet and carry from approximately 25,000 to 40,000 titles.
Super Crown Books stores range in size from approximately 6,000 to 35,000 square
feet, carry as many as 80,000 titles and also carry a wider selection of
non-book products and accessories. The interior of Crown Books's
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Item 1. Business (Continued)
stores is standardized, so that the stores can be assembled quickly. Most of the
stores are open seven days a week.
The new prototype Super Crown Books store is targeted to occupy 15,000 square
feet, although Crown Books recognizes that opportunities exist in smaller-size
locations. The new prototype is based on an ongoing assessment of what
contributes to Crown Books's 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.
Crown Books believes that its superstore concept presents growth opportunities
and intends to open new Super Crown Books stores. Crown Books immediate focus is
on existing markets, but it may consider expansion into new markets. As of
January 31, 1998, Crown Books had entered into lease agreements to open four new
stores.
In the past, Crown Books purchased its merchandise from a large number of
publishers and suppliers for direct shipment to the stores and to its three
internal warehouses for distribution to the stores. In January 1998, Crown Books
decided to outsource the majority of its warehouse operations through Ingram's
warehouse system. Crown Books' buyers continue to work with the publishers and
suppliers to select merchandise for the stores. Although this merchandise passes
through the Ingram warehouses, it is tracked separately from Ingram's other
inventory. Crown Books still collects promotional fees due from the publishers
and suppliers. Crown Books also places orders through other warehouse sources
and directly from publishers and suppliers so that Crown Books is not dependent
on any single publisher or supplier.
Crown Book 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's headquarters in Landover,
Maryland. Inventories are monitored both at stores and in the Crown Books'
headquarters to determine purchase requirements. In general, unsold books and
magazines can be returned to the publishers for credit.
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-by-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
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Item 1. Business (Continued)
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's stores for each of the last five fiscal years:
Number of Stores
at end of fiscal year
----------------------------------------
Metropolitan Area: 1994 1995 1996 1997 1998
- ------------------ ---- ---- ---- ---- ----
Chicago, Illinois 43 37 32 36 37
Dallas, Texas -- -- -- -- 3
Houston, Texas 6 6 6 8 11
Los Angeles, California 68 59 51 47 43
Philadelphia, Pennsylvania -- -- -- -- 4
San Diego, California 17 12 9 5 8
San Francisco, California 31 24 20 20 21
Seattle, Washington 15 11 11 12 13
Washington, D.C 60 47 43 40 39
--- --- --- --- ---
Total 240 196 172 168 179
=== === === === ===
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.
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Super Crown Books stores:
- -------------------------
(including new prototype)
Opened during the year 37 12 16 27 26
Closed during the year 4 3 2 2 4
Classic Crown Books stores:
- ---------------------------
Opened during the year 5 2 -- -- --
Closed during the year 45 55 38 29 11
Total Stores Open at end of year:
- ---------------------------------
New prototype superstore -- 9 25 54 79
Prior Format Super Crown
Books stores 61 61 59 55 52
Classic Crown Books stores 179 126 88 59 48
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
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Item 1. Business (Continued)
to larger stores. Consequently, Crown Books recorded restructuring charges
totaling $12,800,000 during these two years for the anticipated costs for
closing certain of the smaller Classic Crown Books stores and relocating,
expanding and converting certain of such 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 three fiscal years was as follows:
(dollars in thousands)
1998 1997 1996
-------- -------- --------
Restructuring Reserve, beginning of year $ 1,507 $ 7,025 $ 10,515
Less: Payments and charges (426) (1,653) (1,439)
Reversal of reserves, net (88) (3,865) (2,051)
-------- -------- --------
Restructuring Reserve, end of year $ 993 $ 1,507 $ 7,025
======== ======== ========
During the last three fiscal years, Crown Books reversed portions of the
restructuring reserve as a result of (i) management decisions 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 nine stores, of which four have
been closed as of January 31, 1998, with lease obligations ranging from one to
84 months. The lease obligation allocable to related party leases is
approximately $415,000. The restructuring reserve is expected to be utilized as
follows:
(dollars in thousands)
Lease Leasehold
Fiscal Obligations Improvements
Year (Cash Outflows) & Fixtures Total
--------- --------------- ------------ ---------
1999 $ 223 $ -- $ 223
2000 347 4 351
2001 100 -- 100
2002 61 -- 61
2003 61 -- 61
2004-2005 197 -- 197
--------- --------- ---------
Total $ 989 $ 4 $ 993
========= ========= =========
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 three fiscal years is as follows:
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Item 1. Business (Continued)
(dollars in thousands)
1998 1997 1996
-------- -------- --------
Closed Store Reserve, beginning of year $ 8,034 $ 10,850 $ 20,241
Less: Payments and charges (1,667) (1,764) (2,648)
Reversal of reserves, net (1,546) (1,052) (6,743)
-------- -------- --------
Closed Store Reserve, end of year $ 4,821 $ 8,034 $ 10,850
======== ======== ========
During the last three fiscal years, Crown Books reversed portions of the closed
store reserve as a result of (i) management decisions 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 41 stores, of which 12 have been
closed as of January 31, 1998, with lease obligations ranging from one to 71
months. The lease obligation allocable to related party leases is approximately
$582,000. The closed store reserve is expected to be utilized as follows:
(dollars in thousands)
Lease Leasehold
Fiscal Obligations Improvements
Year (Cash Outflows) & Fixtures Total
--------- --------------- ------------ --------
1999 $ 1,193 $ 405 $ 1,598
2000 1,386 136 1,522
2001 890 101 991
2002 470 45 515
2003 109 -- 109
2004-2005 86 -- 86
--------- -------- --------
Total $ 4,134 $ 687 $ 4,821
========= ======== ========
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 CORPORATION
Operations
Shoppers is a leading supermarket operator in Greater Washington, D.C. (as
defined below), operating 37 stores that target the price-conscious segment of
the market in densely populated suburban areas under the "Shoppers Food
Warehouse" and "Shoppers Club" names. Shoppers operates warehouse-style, price
impact supermarkets that are each positioned to offer the lowest overall prices
in its market area by passing on to the consumer savings achieved through labor
efficiencies and lower overhead associated with the warehouse format, while
providing the product selection and quality associated with a conventional
format. Shoppers' store equipment and facilities are generally in good
condition. Shoppers stores are generally open 18 hours per day seven days a week
(allowing for shelf restocking while the stores are closed) and offer a full
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Item 1. Business (Continued)
range of fresh produce, fresh baked goods, fresh meats and seafood, frozen
foods, traditional grocery items and certain non-food items such as health and
beauty aids, cookware, greeting cards, magazines and seasonal items. Shoppers'
stores also have service delicatessens with some stores offering hot and cold
prepared food and self-service soup and salad bars.
Shoppers' stores offer products at prices that generally range from 15% to 20%
below those of its primary supermarket competitors. Merchandise is presented on
warehouse-style racks in full cartons, reducing labor-intensive unpacking and
customers bag their own groceries. In-store operations are also designed to
allow customers to perform certain labor-intensive services usually offered in
conventional supermarkets. For example, Shoppers' stores generally do not
provide service staff to support the bakery and floral departments or the meat
and seafood refrigerated cases, although the stores provide service in these
departments at the request of customers.
Shoppers' 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 square footage is devoted to retail selling because the top of the
warehouse-style grocery racks on the sales floor are used to store inventory,
which reduces the need for large backroom storage and restocking trips.
Notwithstanding the "warehouse" name, physical features and low-price
reputation, Shoppers' stores have more in common with conventional supermarket
chains than with so-called "warehouse clubs." No membership fee is charged at
Shoppers stores, which offer a selection of popular-sized national brands and
private label products as well as high quality produce, meat and seafood. 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 37 of Shoppers' supermarkets have a
delicatessen, a bakery and a floral department while 21 stores have a beer and
wine department.
While similar in most respects to conventional supermarket operators, Shoppers
distinguishes itself by providing low-price leadership while still emphasizing
quality. Shoppers does this by offering an unusual combination of higher-end
specialty departments with self-service and discount price features. In
addition, unlike traditional supermarkets, Shoppers stores offer a greater
selection of "club size" products, along with popular-sized brands. Through this
approach, Shoppers has established a unique niche among supermarket operators in
Greater Washington, D.C.
Shoppers' stores range in size from approximately 20,000 to 77,000 total square
feet and average approximately 47,000 square feet. The Shoppers stores can be
categorized by size as follows: (i) 10 stores smaller than 40,000 square feet;
(ii) 12 stores ranging from 40,000 to 50,000 square feet; and (iii) 15 stores
larger than 50,000 square feet. The stores in the first category generally
represent older stores located in densely populated areas in which little or no
supermarket expansion could be expected due to the limited availability of real
estate locations. Despite their age and size, as a group, these stores generally
continue to perform well in terms of sales per square foot and profitability.
The next size category represents stores which more closely
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Item 1. Business (Continued)
resemble the store sizes operated by conventional supermarket competitors in the
local area. Finally, the category representing the largest size stores includes
the eight "Shoppers Club" supermarkets (averaging approximately 67,800 total
square feet per store). These larger size supermarkets generally have more space
devoted to specialty departments and offer more "club pack" size products.
Shoppers is the largest supermarket chain targeting the price-conscious segment
in Greater Washington, D.C. The two primary competitors of Shoppers are Giant
Food, Inc. ("Giant") and Safeway Inc. ("Safeway"), both of which operate in the
higher-service, higher-price segment. Overall, Shoppers has the third largest
market share in Greater Washington, D.C. On a combined basis, Shoppers, Giant
and Safeway have 84% of the market share in this area. Shoppers' share of the
Greater Washington, D.C. market has increased from 11.9% in 1992 to 13.6% in
1997; Shoppers believes that it exceeds the fourth largest competitor by almost
four times. During the same period, Giant's market share decreased from 45.9% to
42.9% while Safeway's market share increased from 27.1% to 27.5%.
"Greater Washington, D.C." includes Washington, D.C.; Calvert, Charles,
Frederick, Montgomery and Prince George's counties in Maryland; Arlington,
Fairfax, Loudoun, Prince William and Stafford counties in Virginia; and the
independent cities of Alexandria, Fairfax and Falls Church in Virginia. Shoppers
does not, however, operate any stores in the city of Washington, D.C.
Store Expansion and Remodeling
Shoppers strategy is to open large new stores and upgrade existing stores.
Shoppers opened three new stores since July 1997 and has signed a lease to open
one new store (between 65,000 and 75,000 square feet) during the next fiscal
year. Also during this period, Shoppers is considering expanding or remodeling
at least two stores. Since 1992, Shoppers has opened 15 new stores (while
closing four stores) and remodeled seven stores. Of its existing 37 stores, 27
are larger than 40,000 square feet, and all but one of these 27 stores were
opened, remodeled or expanded during the last ten years. Shoppers believes that
its existing supermarkets generally have well-established locations with
favorable lease terms (including multiple options), are in good condition and
require only routine maintenance.
The following chart sets forth certain information concerning Shoppers stores
during the past five fiscal years:
Fiscal Year
--------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Number of Stores at Beginning of Period 35 35 33 34 34
New Stores Opened 1 0 1 0 3
Stores Closed 1 2 0 0 0
-- -- -- -- --
Stores at End of Period 35 33 34 34 37
Remodeled/Expanded 2 1 0 2 0
In fiscal 1998, Shoppers opened a 74,864 square foot store in Fredericksburg,
Virginia, a 68,974 square foot store in Falls Church, Virginia and a 76,774
square foot store in Alexandria, Virginia. In the following two fiscal years,
Shoppers expects to open stores in College Park, Maryland and Landover,
Maryland.
15
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Item 1. Business (Continued)
Product Selection
Shoppers believes that in recent years consumers have shown an increasing
preference for food stores that offer not only the wide variety of food and
non-food items carried by conventional supermarkets, but also an expanded
assortment of high-quality specialty food items and fresh produce. To respond to
this trend, Shoppers offers a complete line of produce, fresh baked goods,
freshly packaged meat and seafood products and floral assortments and provides
service in these departments at the customer's request. This strategy provides
consumers with a wider selection of better quality products and convenience
foods, while shifting its sales mix toward higher gross margin products.
Shoppers' largest supermarkets now carry over 25,000 SKU's. Its merchandising
program is designed to offer customers a wide selection of products at prices
that generally range from 15% to 20% below those of its primary supermarket
competitors. Shoppers accomplishes this by carrying slightly fewer items than
its local supermarket competitors, primarily through pursuing less duplication
of products in smaller sizes. This program also includes a critical assessment
of existing store layouts, shelving, and product mix. Shoppers monitors SKUs to
identify slow-moving products that may be replaced with new products.
Shoppers stores carry a variety of grocery and general merchandise under private
label names, including "Richfood" and "Shoppers Food Warehouse," which currently
account for approximately 7% of its sales. Private label products are of a
quality generally comparable to that of national brands, at significantly lower
prices, while Shoppers' gross margins on private label products are generally
higher than on national brands.
Purchasing, Warehousing and Distribution
Shoppers purchases approximately one-half of its grocery inventory from Richfood
of PA, Inc., formerly Super Rite Foods, Inc. ("Richfood"), a wholly-owned
subsidiary of Richfood Holdings. For a description of the pending merger between
Dart and a wholly owned subsidiary of Richfood Holdings, see the heading
entitled "Planned Merger" in this Item 1. Because its stores receive most of
their deliveries from Richfood almost daily, Shoppers maintains only minimal dry
grocery warehouse storage space. Richfood's large volume purchasing results in
significant cost savings to Shoppers. While Shoppers is under no obligation to
purchase any particular quantity of products or minimum dollar amounts of
inventory from Richfood, Shoppers has agreed to use Richfood as its
"substantially exclusive supplier" for non-perishable dry-grocery, frozen and
dairy products (other than milk) and for health and beauty aids.
Shoppers also purchases products and items sold in its supermarkets from a wide
variety of sources other than Richfood. In particular, Shoppers purchases most
of its perishable products from sources other than Richfood.
Shoppers currently leases and operates a produce warehouse and a grocery
warehouse that are collectively approximately 60,000 square feet. Each store
submits orders to the warehouses through a centralized processing system.
Merchandise ordered from the warehouses is normally delivered to the stores the
next day. Shoppers distributes produce and grocery products from its warehouses
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Item 1. Business (Continued)
through a fleet of Shoppers-owned tractor and trailers. Shoppers estimates that
all Shoppers stores are located within a 90-minute drive of the warehouses.
Advertising and Promotion
Shoppers uses a broad-based advertising program to emphasize its "Low Price"
image. Over two million, 12 page four color circulars are printed and
distributed in the Washington Post to subscribers and to nonsubscribers via the
"Post-Plus" program which insures that the circulars are placed in every home in
the market. The "Low price" image is reinforced with television and radio
campaign supported by vendors and Shoppers funds.
The media broadcasts support the Bonus Saving Program in which manufactures'
allowances are passed to customers, giving them lower priced products.
Broadcasts also support Shoppers Discounted Program, whereby pre-priced items
are discounted 10% to 40% for the customer. Extensive in-store point of purchase
signs are located throughout the stores to communicate Shoppers low price image.
Shoppers is committed to offer customers low prices and quality products in a
complete food shopping experience. During the fiscal year end January 31, 1998,
Shoppers focused its energies and resources on re-emphasizing its long term
image as a "Low Price" leader. This program was kicked off by reducing 10,000
prices throughout the stores.
TOTAL BEVERAGE CORPORATION
Recent Developments
On April 13, 1998, Dart agreed to sell Total Beverage for a cash
purchase price equal to Total Beverage's stockholders equity as of the closing
(adjusted to remove certain intercompany obligations) plus an agreed upon
premium. The closing of the transaction is expected to occur in May 1998. The
closing is subject to customary conditions and there can be no assurance that
the closing will occur.
Operations
Total Beverage operates three retail discount beverage superstores in the
Washington, D.C. metropolitan area and two 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. Since then, Total Beverage opened six new
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.
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Item 1. Business (Continued)
Number of Stores
at end of fiscal year
----------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Total open at end of year 3 2 4 3 5
Opened during the year 3 -- 2 -- 2
Closed during the year -- 1 -- 1 --
CABOT-MORGAN REAL ESTATE COMPANY
Prior to May 1996, Cabot-Morgan Real Estate Company, a wholly-owned subsidiary
of Dart ("CMREC"), 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 minority partnership interests in these
joint ventures were owned by partnerships in which the partners were 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
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. Combined Properties,
Inc., a Haft controlled entity, managed the shopping centers and office building
for the joint ventures. Trak Auto, Crown Books, Shoppers and Total Beverage have
stores in some of these shopping centers.
COMPETITION
The business in which Trak Auto is engaged is highly competitive. Trak Auto
competes with local, regional and national retail sellers of automobile parts
and accessories. To some extent, Trak Auto competes with garages, service
stations, automobile dealers, supermarkets, and department, hardware and other
stores. Some of the Trak Auto's competitors offer installation services, which
are not offered by the Trak Auto. Many of its competitors have greater resources
than Trak Auto and Trak Auto encounters strong price competition.
The business in which Crown Books is engaged is highly competitive. Crown Books
competes with one or more of Borders Group, Inc., ("Borders"), Barnes & Noble,
Inc., Books-a-Million, Waldenbooks and other chains and independent bookstores
and major national book clubs in all Crown Books markets. During fiscal 1998,
Internet competition grew significantly from Amazon.com, Inc. and Barnes &
Noble. Borders and Bertelsmann have also announced plans for major sites on the
Internet. In addition, Crown Books competes with drug stores, supermarkets,
department stores, club stores, computer stores, airport vendors and others that
make incidental sales of books and magazines. Some of Crown Books competitors
offer larger selections and more amenities (e.g., coffee bars) than Crown Books,
and some of its competitors have greater resources than Crown Books. Price
competition occurs in all of the Crown Books markets.
The supermarket industry is highly competitive and characterized by narrow
profit margins. Shoppers' competitors include national, regional and local
supermarket chains, independent grocery stores, specialty food stores, warehouse
club stores, drug stores and convenience stores. Supermarket chains generally
compete on the basis of location, quality of products, service, price, product
variety and store condition. Shoppers competes by providing its customers with
18
19
Item 1. Business (Continued)
exceptional value by offering quality produce and fresh foods, self-service
specialty departments, and a selection of national brand groceries and private
label goods, all at competitive prices. Shoppers monitors the prices offered by
its competitors on a weekly basis and uses a computerized price management
system to verify pricing positions. Shoppers' ability to remain competitive in
its markets depends in part on its ability to remodel and update its stores in
response to remodelings and a new store openings by its competitors, which in
turn will require the continued availability of financing.
The number and type of competitors vary by location. Shoppers' two principal
competitors are conventional supermarket chains, Giant and Safeway, which have
market shares in Greater Washington, D.C. of 42.9% and 27.5%, respectively.
Shoppers believes that Shoppers' market share of 13.6% exceeds the fourth
largest competitor by almost four times. However, Shoppers believes that it will
face increased competition in the future from other supermarket chains and
intends to compete aggressively against existing and new competition.
The market for the products sold by Total Beverage is highly competitive. The
stores compete with retail outlets, including supermarkets, convenience stores
and other beverage stores. Competitors range from independent stores to regional
and national chains many of which have greater resources than Total Beverage.
The stores encounter strong competition with respect to price and selection.
SEASONALITY
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 the fiscal years 1998 and 1997
were approximately 54% and 52%, respectively, 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.
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. However, this was not true in fiscal 1998. Due to disappointing
operating performance throughout fiscal 1998, Crown Books made major reductions
in inventory in the fourth quarter in an effort to increase working capital.
Management does not believe Dart's other partially or wholly-owned businesses
are affected by seasonality to any material extent.
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20
Item 1. Business (Continued)
EMPLOYEES
On January 31, 1998, the Company employed approximately 4,600 full-time and
6,600 part-time persons. The Company considers its relationship with its
employees to be good.
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 then
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. For a
description of such disputes and their resolutions, see Item 3. - Legal
Proceedings. 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 were
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 was then a party. The Executive Committee
remains active in the day-to-day affairs of the Company. Its continuing role is
dependent on future developments.
In October 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). Among other things, the RSH Settlement transferred 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
B. Stone as successor Voting Trustee.
On September 24, 1997, Richard B. Stone, in his capacity as Voting Trustee, and
Herbert H. Haft, in his capacity as the holder of the purported Proxy from
Ronald S. Haft to vote 172,730 shares of Dart's Class B common stock, removed
Larry G. Schafran from Dart's Board of Directors and appointed Richard B. Stone
to Dart's Board of Directors. For a description of the Proxy, see Item 3 - Legal
Proceedings - Herbert H. Haft Proxy Litigation. In addition, Richard B. Stone
was named Chairman of the Executive Committee of Dart's Board of Directors, and
Acting Chief Executive Officer of Dart and he replaced Larry G. Schafran as a
director of Trak Auto, Crown Books, Shoppers and Total Beverage. Richard B.
Stone also assumed the positions of Acting Chief Executive Officer of Trak Auto
and Chairman of the Executive Committee of both Trak Auto and Crown Books.
On October 21, 1997, Howard M. Metzenbaum and Harry M. Linowes were elected to
fill new positions on the Board of Directors of Dart, which was increased from
five to seven members. On December 19, 1997, Richard B. Stone, in his capacity
as Voting Trustee, and Herbert H. Haft, in his capacity as the holder of the
purported Proxy, executed a unanimous written consent in lieu of an annual
20
21
Item 1. Business (Continued)
meeting of stockholders pursuant to which (i) Dart's bylaws were amended to
provide for a board of directors composed of four directors and (ii) Richard B.
Stone, Howard M. Metzenbaum, Harry M. Linowes and Herbert H. Haft were elected
directors of Dart. Accordingly, Ronald S. Haft is no longer a director of Dart.
At the same time, Douglas M. Bregman and Bonita A. Wilson jointly stepped down
as directors and Executive Committee members of Dart and its subsidiaries.
In February 1998, pursuant to the Settlements (as defined in Item 3 - Legal
Proceedings), Herbert H. Haft, among other things, (i) resigned from all of his
positions with Dart and its subsidiary corporations, (ii) relinquished his claim
to voting control of Dart and (iii) terminated his employment contract with
Dart. In addition, all outstanding litigation and disputes between Dart and
Herbert H. Haft were dismissed or resolved. For a description of the
Settlements, see Item 3 - Legal Proceedings - Resolution of Haft Family and
Related Litigation.
In February 1998, Richard B. Stone was appointed Chief Executive Officer of Dart
and each of its subsidiaries instead of Acting Chief Executive Officer of Dart
and each of its subsidiaries.
SEGMENT INFORMATION
See Note 16 to the Consolidated Financial Statements (Item 8 - Financial
Statements and Supplementary Data).
21
22
Item 2. Properties
Dart Group Corporation
Dart originally leased 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 owned all of the beneficial
interests, and Dart sublet portions of the facility to each of Trak Auto and
Crown Books. As a result of the Settlements, a Dart subsidiary now owns the
office and distribution center. Dart continues to sublet approximately 210,000
square feet of the headquarters building and distribution center to Trak Auto
and approximately 28,000 square feet to Crown Books. The subleases require
rental and pro-rata payments for maintenance utilities, insurance and real
estate taxes on the same terms as the original lease to Dart. The lease and
subleases have a term of 30 years and six months, commencing in 1985 and provide
for increasing rental payments over the term of the lease or subleases, as
applicable.
In addition, Dart leased land near the headquarters building and distribution
center from the aforementioned partnership. The lease was coterminous with the
headquarters building and distribution center lease. As a result of the
Settlements, Dart now owns the land. The land remains vacant and unused.
Trak Auto
All of Trak Auto's 181 stores are leased. As of January 31, 1998, the total
minimum payments for Trak Auto's retail stores aggregated approximately
$85,404,000 to lease expiration dates (excluding closed stores) and $98,032,000
to lease expiration dates (including closed stores). The lease expiration dates
(without regard to renewal options) range from 1998 to 2014. Twenty-two 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 distribution center located in
Bridgeview, Illinois. The lease was with a private partnership in which Haft
family members owned all of the partnership interests. As a result of the
Settlements, a Dart subsidiary now owns the distribution center and Trak Auto
leases the distribution center from Dart. 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 rent is $754,000. The lease also requires Trak Auto to pay for
maintenance, utilities, insurance and real estate taxes on the distribution
center.
Trak Auto also leases a 317,000 square foot distribution center 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 $1,516,000. The lease also requires Trak Auto to pay
for maintenance, utilities, insurance and real estate taxes on the distribution
center.
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23
Item 2. Properties (Continued)
As part of the RSH Settlement, Ronald S. Haft agreed to transfer the real estate
and partnership interests controlled by him in the Ontario distribution center
to Dart (or its subsidiaries). The transfer is subject to contingencies,
including bankruptcy court approval and mortgagee approval. See Note 6 to Dart's
Consolidated Financial Statements (Item 8 - Financial Statements and
Supplemental Data).
Crown Books
All of Crown Books' 179 stores are leased. As of January 31, 1998, the total
minimum payments for Crown Books' retail stores and equipment aggregated
approximately $178,489,000 to the lease expiration dates (excluding closed
stores) and approximately $180,111,000 to the lease expiration dates (including
closed stores). The lease expiration dates (without regard to renewal options)
range from 1998 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 was $143,000 for the each of the
first five years and increased 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 leases all 37 of its stores. As of January 31, 1998, the total minimum
payments for Shoppers's retail stores under lease aggregated approximately
$218,053,000 to the lease expiration dates. The lease expiration dates (without
regard to renewal options) range from 1998 to 2017. At January 31, 1998, ten of
these leases were with entities in which members of the Haft family own all or
substantially all the beneficial interest.
Shoppers also has a lease agreement with a limited partnership, in which members
of the Haft family own half of the beneficial interest and members of the Herman
family (the former owners of the 50% interest in Shoppers acquired on February
6, 1997) 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 $1,317,000.
Shoppers has sublet approximately 34,000 square feet of the office to
unaffiliated third parties.
Total Beverage
Total Beverage's five stores are leased. As of January 31, 1998, the total
minimum payments for Total Beverage's retail stores under lease aggregated
approximately $13,832,000 to the lease expiration dates. The lease expiration
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24
Item 2. Properties (Continued)
dates (without regard to renewal options) range from 1998 to 2008. Two lease
agreements are with partnerships in which members of the Haft family own all or
substantially all the beneficial interest.
Pennsy Warehouse Facility
Prior to March 1995, Dart was paying Haft family owned partnerships rent on
leases covering approximately 533,800 square feet in three warehouses located on
Pennsy Drive, Landover, Maryland (the "Pennsy Warehouses"). By their terms, the
leases, which expire in 2016, required annual rental payments of $855,000 with
escalations based on increases in the Consumer Price Index. The lease terms also
required the lessee to pay real estate taxes, insurance, utilities and
maintenance expenses.
In February 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 Warehouse leases and, in particular, with the resumption of
rental payments for these warehouses in 1991 following the bankruptcy of the
prior tenant. The complaint sought rescission of the Pennsy Warehouse leases,
restitution of rent paid since 1991 and other monetary damages. As a result,
Dart began paying the landlord only that portion of its rent necessary to cover
debt service. The balance of the rent called for in these leases was paid into
escrow, pending resolution of this litigation. See Item 3. - Legal Proceedings
and Notes 6, 7, and 8 to the Consolidated Financial Statements.
As part of the RSH Settlement in October 1995, Ronald S. Haft and Dart agreed to
various transactions relating to the Pennsy Warehouses. The primary intent of
these transactions was to transfer ownership of the Pennsy Warehouses to a
Dart-controlled company. As a result of the RSH Settlement, since November 1995
Dart paid the debt service on the mortgages directly to the mortgagees on
Warehouses II and III, the debt service on the mortgage on Warehouse I to the
landlord and the difference between the rent and the debt service on all the
Pennsy Warehouse leases to an escrow account. The amounts paid in each of the
last three fiscal years was $855,000. The transactions were subject to
challenges brought by Herbert H. Haft concerning the extent of Ronald S. Haft's
ownership interest in certain of the properties. As a result of the Settlements
(described in Item 3 - Legal Proceedings) Dart now owns the warehouses and the
litigation was dismissed.
Trak Auto, Crown Books and Shoppers have arrangements with Dart to utilize space
in Warehouses II and III at a variable rental (approximately $350,000 per year)
dependent on square footage used. This arrangement continues on a month-to-month
basis. Trak Auto, Crown Books and Shoppers pay their pro-rata share of
utilities, real estate taxes, maintenance and insurance. Warehouse I is vacant.
24
25
Item 3. Legal Proceedings
Lawsuits Against Trak Auto
In January 1998 Trak Auto was named as a defendant in two class action lawsuits
(Richard Amezcua, Augustin Dominquez, and other members of the general public
similarly situated v. Trak Auto Corporation, Superior Court of California.
Action No. BC 183900) and (D'Artanyon Tett, Linda Wendt and individuals on
behalf of themselves and all others similarly situated v. Trak Auto
Corporation., Superior Court of the State of California. Action No. BC 186931)
involving former California employees of the Company alleging improper wage and
hour practices. The suit claims that former salaried employees should have been
paid overtime. Management and outside legal counsel are in the process of
evaluating these claims. Trak Auto is unable to express an opinion as to the
merit, if any, or potential liability, if any, of these lawsuits as of the
filing date of this report.
Resolution of Haft Family and Related Litigation
The litigation discussed below involving Dart, its affiliates and members of the
Haft family settled prior to January 31, 1998. On February 5, 1998, Dart closed
the settlement agreement with Herbert H. Haft (the "HHH Settlement") and a
Second Supplemental Settlement Agreement with Ronald S. Haft ("Second
Supplemental Agreement"). The RSH Settlement, the First Supplemental Agreement,
the Second Supplemental Agreement, the RGL Settlement and the HHH Settlement are
collectively referred to herein as the "Settlements". The RSH Settlement, the
First Supplemental Agreement, the Second Supplemental Agreement and the RGL
Settlement are described below. As part of the closing of the HHH Settlement,
Herbert H. Haft (i) sold to Dart all of his shares of, and options to purchase,
Dart Class A Common Stock, and sold his capital stock of Dart's subsidiaries
Trak Auto and Crown Books,(ii) resigned from all of his positions with Dart and
its subsidiary corporations, (iii) relinquished his claim to voting control of
Dart, and (iv) terminated his employment agreement with Dart. In addition, all
outstanding litigation and disputes between Dart and Herbert H. Haft were
resolved. As consideration for the HHH Settlement, Dart paid Herbert H. Haft
approximately $28 million at the closing. In connection with the closing of the
Settlements, Dart also made a $10 million loan to a partnership owned by Ronald
S. Haft, the proceeds of which were used to repay a $10 million note to Herbert
H. Haft. As a result of the consummation of the Settlements, all litigation
between Dart and members of the Haft family has been settled and dismissed, and
the Company is no longer subject to the Standstill Order previously imposed by
the Delaware Court of Chancery.
In October, 1995, Dart entered into a settlement agreement with Ronald S. Haft,
to settle certain litigation to which Dart was a party ("RSH Settlement").
Pursuant to the RSH Settlement, Ronald S. Haft transferred 172,730 shares of
Dart's Class B Common Stock, par value $1.00 (Dart's sole voting stock prior to
February, 1998 when Dart discontinued its dual class common stock structure,
"Class B Common Stock"), in exchange for 288,312 shares of Dart's Class A Common
Stock, par value $1.00 (Dart's non-voting, publicly traded class of stock prior
to February, 1998, "Class A Common Stock"). Ronald S. Haft also exercised an
option to purchase 197,048 shares of Class B Common Stock, and paid the exercise
price by paying cash and issuing a promissory notes to Dart for approximately
$27.4 million. Dart also loaned Ronald S. Haft approximately, $37.9 million and
he issued Dart a $37.7 million promissory note to Dart. Then, Ronald S. Haft
25
26
Item 3. Legal Proceedings (Continued)
placed the 288,312 shares of Class A Common Stock and the Class B Common Stock
which he owned or in which he had an interest, into a voting trust. Dart also
(i) transferred approximately $11.6 million to Ronald S. Haft in exchange for an
additional promissory note (which was repaid in May 1996), and (ii) entered into
a variety of agreements with Ronald S. Haft regarding the sale of certain
properties owned by Dart or affiliates of Dart at that time. As a part of the
RSH Settlement, Ronald S. Haft resigned all positions he had with Dart and its
subsidiaries and consented to the termination of all of his outstanding options
with Dart and its affiliates.
On November 19, 1997, the real estate related transactions contemplated in the
First Supplemental Agreement to the RSH Settlement were closed and include:
completion of bankruptcy plans of reorganization for partnerships owning Dart's
headquarters in Landover, Maryland and a distribution center leased to Trak Auto
in Bridgeview, Illinois; payment by Dart of $7 million to reduce outstanding
mortgage loans on these properties, which thereafter are wholly-owned by Dart
and/or its affiliates; and Ronald S. Haft paid $2.2 million to Dart from
escrowed funds previously earmarked for Ronald S. Haft.
Trak Auto advanced approximately $3.3 million to a wholly-owned subsidiary of
Dart for the Bridgeview distribution center portion of the First Supplemental
Agreement and the RGL Settlement. The $3.3 million advance is in the form of a
promissory note and is expected to be repaid in May 1998.
The Second Supplemental Agreement to the RSH Settlement closed in February 1998
and Dart required that the shares held in Voting Trust for the benefit of Ronald
S. Haft be transferred to Dart. Dart purchased the shares in the Voting Trust
from Ronald S. Haft by offsetting the $27.4 million and $37.7 million Notes
Receivable from him and a cash payment of approximately $0.7 million. The Class
A and Class B Common Stock from Voting Trust was placed in treasury and on
February 17, 1998, the Class A Common Stock and Class B Common Stock were
reclassified as Common Stock.
On September 26, 1997, Dart closed an agreement, dated August 16, 1997, to
settle certain litigation and enter other related transactions (the "RGL
Settlement") with Robert M. Haft, Gloria G. Haft, Linda G. Haft and certain
related parties (collectively, "RGL").
Pursuant to the RGL Settlement Dart purchased from RGL 104,976 shares of Dart
Class B Common Stock for $14.7 million and 77,244 shares of Dart Class A Common
Stock for $6.8 million. In addition, Dart paid $9.3 million to RGL to terminate
all options held or claimed by RGL to purchase shares of Dart Class A Common
Stock and Dart paid $9.7 million to Robert M. Haft, Linda G. Haft and certain
related parties to terminate putative options to purchase 15 shares of Dart/SFW
Corp. Pursuant to the RGL Settlement, the Company dismissed all of its claims
against each of RGL. Trak Auto and Crown Books also paid a total $250,000 to RGL
to terminate a small number of options to purchase shares of common stock of
Crown Books and Trak Auto. In addition, Dart acquired all of Robert M. Haft and
Linda G. Haft's respective interest in partnerships owning Dart's headquarters
building in Landover, Maryland and a warehouse leased by Trak Auto, in
Bridgeview, Illinois for $4.4 million.
26
27
Item 3. Legal Proceedings (Continued)
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 was brought derivatively and named as nominal defendants
Dart, Trak Auto, Crown Books, Shoppers, Total Beverage and CMREC. The complaint,
as amended on January 12, 1995, alleged waste, breach of fiduciary duty,
violation of securities laws and entrenchment in connection with various lease
agreements between the CPI 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 sought 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 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 this derivative lawsuit. (After the death of one
member in December 1994, the Special Litigation Committee consisted of one
director.) In September 1994, the Special Litigation Committee moved for
dismissal of certain claims and for realignment of the parties to permit Dart to
prosecute other claims in the derivative lawsuit. 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 were subsequently asserted. See
the Lawsuit Against Herbert H. Haft Concerning Haft-Owned Real Estate, described
below. The Court did not act upon the amended motion.
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
was brought derivatively and named Crown Books as nominal defendant. The
complaint, as amended on February 24, 1995, alleged 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 alleged legal malpractice against a lawyer
advising Dart at that time. Plaintiff sought unspecified damages incurred by
Crown Books, and costs and attorneys' fees. Ronald S. Haft and Glenn E. Hemmerle
were dismissed without prejudice from this lawsuit. The amended complaint did
not name as a defendant H. Ridgely Bullock, who died subsequent to the filing of
the original complaint. Crown Books and other defendants filed a motion to
dismiss this lawsuit.
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28
Item 3. Legal Proceedings (Continued)
As a result of the Settlements, all derivative litigation has been dismissed
with prejudice (except for the legal practice claim which was dismissed without
prejudice) and Dart paid approximately $3.5 million in attorney's fees to
derivative plaintiffs' counsel (approximately $0.5 million of such fees are
payable in December 1998).
Pennsy Warehouse Litigation
In fiscal 1995, the Executive Committee of Dart's Board of Directors undertook a
legal review of leases on three warehouses (the "Pennsy Warehouse"). By their
terms, the Pennsy Warehouse leases, which expire in 2016, required annual rental
payments of $855,000, subject to escalation based on increases in the Consumer
Price Index. The lease terms also required 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 Warehouse 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, alleged breaches of fiduciary duty, waste and other irregularities by
certain members of the Haft family and others in connection with the Pennsy
Warehouse 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 sought rescission of the Pennsy Warehouse leases,
restitution of rent paid since 1991 and other monetary damages.
As part of the RSH Settlement, Ronald S. Haft and Dart agreed to various
transactions relating to the Pennsy Warehouse leases. The primary intent of
these transactions was to transfer ownership of Pennsy Warehouses II and III to
a Dart-controlled company in which Ronald S. Haft retained 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 has paid
the debt service on the mortgages on Warehouses II and III since then. 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 since the RSH
Settlement. The amounts paid in each of the last three fiscal years was $855,000
per year.
The Executive Committees of Dart, Crown Books and Trak Auto also undertook a
legal review in fiscal 1995 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 (then 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 Warehouse leases) with certain partnerships
owned beneficially by members of the Haft family.
As a result of the Settlements, this litigation has been dismissed with
prejudice.
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29
Item 3. Legal Proceedings (Continued)
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
sought a declaration that the Proxy was revocable or would be revocable under
certain conditions, as well as costs and attorneys' fees. Ronald S. Haft also
requested 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 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 was not ruled upon.
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 placed the
shares in treasury. See Note 6 to Dart's Consolidated Financial Statements (Item
8 - Financial Statements and Supplemental Data).
As a result of the Settlements, this litigation has been dismissed with
prejudice.
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), Robert M. Haft, Gloria G. Haft and Linda G.
Haft (collectively "RGL"), John L. Mason, Ellen V. Sigal and Michael Ryan.
Herbert H. Haft sought 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.
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30
Item 3. Legal Proceedings (Continued)
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 Court of Chancery denied Herbert H. Haft's motion in its
entirety.
As a result of the Settlements, all claims in this litigation against or on
behalf of Dart have been dismissed with prejudice.
Standstill Order
In connection with the legal challenges to the RSH Settlement raised by RGL and
by Herbert H. Haft, on December 6, 1995, the Delaware Court of Chancery entered
the Standstill Order, which restricted certain actions by Dart. Without further
order of the court, Dart could not (i) change its Certificate of Incorporation
or Bylaws; (ii) change the composition of Dart's Board of Directors or any of
its subsidiaries; (iii) change the 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
could 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" meant any transaction, contract or
agreement, the value of which exceeds $3.0 million.
As a result of the Delaware Court of Chancery approval of the Settlements in
November 1997, Dart is no longer subject to the Standstill Order.
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 alleged 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 charged 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
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Item 3. Legal Proceedings (Continued)
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
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.
As a result of the Settlements, this litigation has been dismissed with
prejudice.
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
advanced claims for breach of fiduciary duty, civil conspiracy and tortious
interference with contracts. The companies alleged 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 sought 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.
As a result of the Settlements, this litigation has been dismissed with
prejudice.
Shareholder Litigation
On April 24, 1998, Jerry Krim ("Plaintiff") filed a putative class action in the
Court of Chancery for the State of Delaware in and for the County of New Castle
(the "Complaint"). The Complaint asserts a cause of action sounding in breach of
fiduciary duty against the Company, each of the Company's directors (the
"Director Defendants"), Richfood Holdings, Inc. and a subsidiary of Richfood
Holdings ("Acquisition Subsidiary").
The Complaint alleges that the Director Defendants, in agreeing to the Merger of
the Company with Acquisition Subsidiary, breached their fiduciary duties owed to
the Company's stockholders to take all necessary steps to ensure that the
stockholders will receive the maximum value realizable for their shares in any
merger or acquisition of the Company. For example, Plaintiff alleges that the
Director Defendants failed to adequately evaluate the Company's value as a
potential merger or acquisition candidate and/or did not act to enhance the
Company's value as such a candidate, and failed to implement "a bidding
mechanism to foster a fair auction of Dart to the highest bidder". The
31
32
Item 3. Legal Proceedings (Continued)
Complaint alleges that Richfood Holdings pressed the Company and the Director
Defendants "into agreeing to deal exclusively with Richfood Holdings and thereby
breach their fiduciary obligations," which allegedly makes Richfood Holdings and
Acquisition Subsidiary liable to Plaintiff and the class. The Complaint also
alleges that the Director Defendants engaged in all or part of the allegedly
unlawful acts, plans, schemes or transactions complained of and thus aided and
abetted the alleged breach of fiduciary duty. The Complaint seeks an injunction
preventing Acquisition Subsidiary and Richfood Holdings from consummating the
tender offer, an injunction preventing the Company, Richfood Holding and the
Acquisition Subsidiary from consummating the Merger and unspecified monetary
damages.
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, if established, upon the consolidated financial
condition and results of operations of the Company.
The Company recorded legal expenses of approximately $2.7 million, $22.4 million
and $7.2 million during the years ended January 31, 1998, 1997 and 1996,
respectively. These amounts include amounts paid as well as estimated future
expenses that likely will be necessary to resolve all litigation discussed
above.
32
33
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
33
34
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Prior to February 15, 1998, Dart maintained two classes of common stock,
designated Class A Common Stock and Class B Common Stock. Pursuant to the
Amended and Restated Certificate of Incorporation of Dart dated as of February
16, 1998, distinctions among classes of Dart common stock were eliminated and
each share of Class A Common Stock and each share of Class B Common Stock were
reclassified as one share of Common Stock. The Common Stock is traded on the
NASDAQ National Market under the symbol "DART." The Amended and Restated
Certificate of Incorporation of Dart was adopted in connection with the closings
of the HHH Settlement and the Second Supplemental Agreement. See Item 3. herein.
Prior to February 15, 1998, the Class A Common Stock was traded on the Nasdaq
National Market 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
on the Nasdaq National Market, and the dividends declared for the fiscal
quarters indicated. For current sale price information with respect to the
Common Stock, Dart stockholders should consult publicly available sources.
Dividends
Declared
Quarter Ended High Low Per Share
- ------------- ------- ------- ---------
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
April 30, 1997 108 88 1/2 .03 1/3
July 31, 1997 111 96 1/2 .03 1/3
October 31, 1997 116 1/4 99 1/4 .03 1/3
January 31, 1998 119 1/2 104 .03 1/3
There were approximately 280 record holders of the Class A Common Stock and
approximately 270 record holders of the Common Stock as of February 14, 1998 and
April 30, 1998, respectively.
No public trading market existed for the Class B Common Stock and Dart never
paid dividends to the holders of Class B Common Stock.
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35
Item 6. Selected Financial Data
Income Statement Data: (dollars in thousands, except per share data)
Fiscal Year
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Revenues $ 1,518,127 $ 668,089 $ 678,136 $ 1,967,428 $ 1,376,543
Expenses 1,588,874 696,491 690,819 1,047,149 1,369,574
Income (loss) before
minority interests
and income from
unconsolidated
subsidiary (69,224) (28,186) (18,832) (78,022) (225)
Income (loss) from
unconsolidated
subsidiary -- 11,405 10,055 (5) --
Minority interests (1) 29,019 88 (4,647) (4,235) (6,512)
Income (loss) before
extraordinary item and
cumulative effect of
accounting change (40,205) (16,693) (13,424) (73,792) (6,737)
Extraordinary item:
Early extinguishment of
debt (3,126) -- -- -- --
Cumulative effect of
change in accounting
principle (2) 1,729 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss $ (41,602) $ (16,693) $ (13,424) $ (73,792) $ (6,737)
=========== =========== =========== =========== ===========
Per share data:
Income (loss) before
extraordinary item and
cumulative effect of
accounting change $ (19.81) $ (8.04) $ (7.21) $ (41.97) $ (3.85)
Extraordinary item:
Early extinguishment of
debt (1.54) -- -- -- --
Cumulative effect of
change in accounting
principle (2) .85 -- -- -- --
Net loss
Basic $ (20.50) $ (8.04) $ (7.21) $ (41.97) $ (3.85)
Dilutive (3) (20.50) (8.73) (7.88) (42.11) (4.10)
Cash dividends
declared per share
of Class A common
stock $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13
=========== =========== =========== =========== ===========
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36
Item 6. Selected Financial Data (Continued)
Balance Sheet Data: (dollars in thousands)
Fiscal Year
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Working capital $ 73,534 $ 90,262 $119,101 $180,415 $281,242
Total assets (1) 605,835 450,172 470,565 706,489 802,898
Long-term obligations 239,244 58,067 67,641 170,417 151,818
Stockholders' equity 43,629 118,356 134,576 199,363 274,307
(1) As of January 31, 1998 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 are consolidated with Dart's through May 28,
1994. As a result of a reduction of Dart's ownership to 50% Dart's
investment in Shoppers is reflected in the financial statements using
the equity method of accounting for periods from May 28, 1994 until
February 5, 1997. As a result of Dart's acquisition of the remaining
50% interest in Shoppers, on February 6, 1997, the accounts of Shoppers
are consolidated thereafter.
As a result of the RSH Settlement the accounts of the CMREC joint
ventures are consolidated with Dart's through October 6, 1995, but not
thereafter.
(2) The 1999 cumulative effect of a change in accounting principles was the
result of Shoppers adopting Dart's straight-line method of
depreciation.
(3) The dilutive loss per share includes the dilutive effect, if any, of
subsidiary outstanding stock options.
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37
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, Shoppers and Total Beverage. 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 common stock, the Class A Common Stock, had no right to
vote until February 15, 1998. Prior to the Settlements, Dart's voting stock, the
Class B Common Stock, was beneficially owned by Haft family members.
SUBSEQUENT EVENTS
On April 9, 1998, Dart entered into the Merger Agreement with Richfood Holdings
and Acquisition Subsidiary pursuant to which Dart has agreed to become a wholly
owned subsidiary of Richfood Holdings. Pursuant to the terms of the Merger
Agreement, Richfood Holdings will (1) make the Offer for all of the issued and
outstanding shares of common stock of Dart at a price of $160.00 per share and
(2) take all steps necessary to cause Acquisition Subsidiary to merge with and
into Dart in a transaction in which Dart will become a wholly owned subsidiary
of Richfood Holdings.
The Merger is subject to the tender in the Offer of a majority of the shares of
common stock of Dart on a fully diluted basis and to other customary conditions,
including the receipt of regulatory approvals and the absence of material
adverse effects on the business or financial conditions of Dart and its
subsidiaries, taken as a whole with limited exceptions. There can be no
assurance that either the Offer or the Merger will be consummated.
On April 13, 1998, Dart agreed to sell Total Beverage for a cash purchase price
equal to Total Beverage's stockholders equity as of the closing (adjusted to
remove certain intercompany obligations) plus an agreed upon premium. The
closing of the transaction is expected to occur in May 1998. The closing is
subject to customary conditions and there can be no assurance that the closing
will occur.
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 without limitation the consummation of the Merger, the
ability of the Company to open new stores and close other stores, the
sufficiency of recorded reserves for restructuring and store closings, the
availability of capital to fund operations generally, and particularly with
respect to uncertainties regarding the operations and liquidity of Crown Books,
the ability of Crown Books to renegotiate existing credit arrangements or enter
into new credit arrangements, the effect of national and regional economic
conditions, the effect of increased competition in the markets in which the
Company operates and other risks described from time to time in the Company's
37
38
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
filings with the Securities and Exchange Commission. 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.
Trak Auto believes that its superstore concept represents the strongest segment
of its business and anticipates that all of its new stores will be opened within
this concept as Super Trak 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.
During the last three years, Crown Books' business strategy has been to pursue
growth opportunities by opening new Super Crown Books stores. Realizing these
opportunities is dependent upon the successful performance of the superstores
and adequate liquidity. Adequate liquidity is dependent upon successfully
improving store performance, improving inventory turnover and reducing expenses.
In prior years, Super Crown Books stores have generated higher sales at
converted locations. During the last five fiscal quarters, the new prototype
superstores have performed below Crown Books' expectations. New management of
Crown Books is making significant revisions to the design and layout of the new
superstore prototype which Crown management believes will enhance its
performance. After considering the actual results achieved by the superstores,
together with liquidity constraints, Crown Books has significantly reduced its
expansion plans. There are serious concerns with respect to Crown Books ability
to maintain adequate liquidity. See - Liquidity and Capital Resources -
General.
The retail book market is highly competitive. 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 of
Crown Books believes that the markets in which it operates will remain highly
competitive in the foreseeable future and, as a result, Crown Books will be
significantly challenged to improve operating results.
Shoppers is the third leading supermarket operator in Greater Washington, D.C.
Shoppers operates in a highly competitive marketplace and its ability to remain
competitive depends in part on its ability to open new stores and remodel and
update existing stores, which will require the continued availability of capital
resources.
38
39
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Trak Auto and Crown Books 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.
As a result of this ongoing review, on October 6, 1997, Trak Auto sold its
California operations. While the California operations represented approximately
thirty percent (30%) of annual revenues the operating results have historically
been weak and declining because of the highly competitive Los Angeles market.
Trak Auto sold all inventory, store fixtures and assigned store leases, but has
retained the obligation on the distribution center in Ontario, California. The
transaction closed on December 8, 1997. Trak Auto recorded a pre-tax loss
related to this transaction of $8.2 million (net of a reduction in the LIFO
reserve of $2.3 million). In addition, on January 31, 1998 Trak Auto closed 15
stores in the Pittsburgh, Pennsylvania market due to continuing poor
performance.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash, short-term instruments and U.S. government and other marketable debt
securities, are the Company's primary source of liquidity. Cash, including
short-term instruments and U.S. government and other marketable debt securities
increased by $46.1 million to $91.5 million at January 31, 1998 from $45.4
million at January 31, 1997. The increase was due to the consolidation of
Shoppers cash and marketable debt securities. Approximately $38.0 million of the
January 31, 1998 balance was paid out on February 5, 1998 pursuant to the HHH
Settlement (see Item 3 - Legal Proceedings).
For the year ended January 31, 1998, the Company realized a pre-tax yield of
approximately 5.3% on United States Treasury Bills and approximately 5.8% on the
other marketable debt securities.
Operating activities used $20,279,000 of the Company's funds for the twelve
months ended January 31, 1998 compared to $42,840,000 during the same period one
year ago. The decrease in the use of funds was primarily due to the payment to
Robert M. Haft last year. Shoppers' operations and the Crown Books inventory
return provided cash to the Company that was offset primarily by payments for
the RGL Settlement and liabilities from Trak Auto's California operations.
Investing activities used $95,279,000 of the Company's funds for the twelve
months ended January 31, 1998, compared to providing $15,775,000 during the same
period last year. The primary use of funds was for the Acquisition of the 50%
equity interest in Shoppers (see Note 3 to the Consolidated Financial
Statements). Capital expenditures were $23,618,000 (including Shoppers) during
the twelve months ended January 31, 1998 compared to $17,112,000 (excluding
Shoppers) during the twelve months ended January 31, 1997.
Financing activities provided $162,240,000 to the Company during the twelve
months ended January 31, 1998 due to the proceeds from the Senior Notes at
39
40
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Shoppers and was partially offset by payments for deferred financing and
acquisition costs at Shoppers and funds used for the RGL Settlement.
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 Shoppers balances at January 31, 1997) including
marketable debt securities, decreased by approximately $62.6 million in fiscal
1998, $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 and
Shoppers entered into a revolving credit facility in fiscal 1998.
Dart's working capital needs primarily consist of funding any operating losses
of Total Beverage, payroll, legal fees and debt service. Dart expects to meet
its working capital needs in fiscal 1999 from existing cash, short-term
investments, possible dividends from Shoppers as permitted by covenants of the
Senior Notes and proceeds from the sale of Total Beverage.
Trak Auto funds its requirements for working capital and capital expenditures
with net cash generated from operations, existing cash resources and, if
necessary, borrowings under its credit facility. 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
January 31, 1998, Trak Auto had entered into lease agreements to open two new
Super Trak or Super Trak Warehouse stores. During fiscal 1998, Trak Auto loaned
Dart $15.0 million for the Settlements. Trak Auto used a portion of the proceeds
from the sale of its California operations for the loan.
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.
As of January 31, 1998 Trak Auto had not borrowed under the credit facility.
The primary capital requirements of Crown Books relate to new store openings,
upgrading existing locations, and investments in management information systems.
Crown Books believes that the net cash expenditures incurred in opening a new
store generally approximate $1.0 million including inventory purchases, net of
accounts payable, and the costs of store fixtures and leasehold improvements,
net of landlord contributions. During fiscal 1999, Crown Books expects to open
no more than five new Super Crown Books stores requiring cash expenditures of
approximately $5.0 million. As of January 31, 1998, Crown Books entered into
lease agreements for four of the new Super Crown Books stores in fiscal 1999.
Crown Books expects to have cash expenditures of approximately $1.4 million
related to stores that have been closed or will be closed, in fiscal 1999.
40
41
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Crown Books has suffered substantial declines in financial performance and
substantial deterioration of its business in recent years and is currently
exploring alternatives for maintaining adequate liquidity. Negotiations are
under way with Crown Books' principal vendor to extend the payment schedule of
accounts payable due to this vendor, or other vendors but no agreement has been
reached. There can be no assurance that the vendor will continue to ship
inventory to Crown Books or that there will not be further significant declines
in Crown Books' business and financial condition.
Under the terms and conditions of its revolving credit facility, Crown Book is
currently permitted to borrow up to a maximum of $25 million. As of April 28,
1998, Crown Books had borrowed $22.2 million under its credit facility and had
$2.8 million in availability. Crown Books is negotiating with its lenders either
to increase its borrowing capacity under its existing credit facility or to
enter into a new credit facility with increased borrowing capacity. Management
of Crown Books believes that it will either amend its existing facilities or
enter a new credit facility in May 1998. There can be no assurance, however,
that Crown Books will succeed in its attempt to increase its existing credit
facility or obtain a new credit facility. If Crown Books is not successful in
increasing its borrowing availability or otherwise improving its liquidity
situation, there can be no assurance that Crown Books will have sufficient
liquidity to operate its business and remain a going concern. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should Crown Books be unable to
continue as a going concern.
As part of its effort to improve its inventory turns and improve liquidity,
Crown Books undertook an inventory returns initiative among other steps. Under
the inventory returns initiative, Crown Books returned approximately $25.0
million in inventory after December 1997, in addition to its normal seasonal
returns. Crown Books' sales were severely impacted during this return, but the
return resulted in Crown Books replacing older, slower-selling merchandise with
newer, faster-selling merchandise.
Shoppers estimates that it will make capital expenditures of approximately $9.4
million in the 52 weeks ended January 31, 1999. Such expenditures relate to
three new store openings as well as routine expenditures for equipment and
maintenance. Management expects that these capital expenditures will be financed
primarily through cash flow from operations and, if necessary, the revolving
credit facility.
In February 1997, $137.2 million of the net proceeds from the sale of the
Increasing Rate Notes and $72.8 million of Shoppers cash, cash equivalents and
short-term investments were used to fund the Acquisition (see Note 3 to the
Consolidated Financial Statements). In addition, Shoppers paid approximately
$6.9 million in fees and expenses incurred by Dart in connection with the
Acquisition.
41
42
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
In June 1997, Shoppers refinanced the Increasing Rate Notes with $200.0 million
aggregate principal amount of its Senior Notes due 2004 (the "Senior Notes").
The net proceeds of the offering were approximately $193.5 million. Shoppers
used approximately $143.5 million of the net proceeds to repay its Increasing
Rate Notes due 2000 (including accrued and unpaid interest through the estimated
date of redemption). The remaining net proceeds were paid to Dart for a
settlement with Robert M., Gloria G. and Linda G. Haft on September 26, 1997 in
the form of a $40.0 million dividend and a $10 million loan. In January 1998,
Shoppers loaned Dart an additional $25.0 million for the HHH Settlement.
Shoppers' interest expense consists primarily of interest on the Senior Notes
and capital lease obligations. Interest expense increased approximately $19.4
million from $1.6 million during the year ended February 1, 1997 to $21.1
million during the year ended January 31, 1998 due to the interest paid on the
Increasing Rate Notes, which were issued on February 6, 1997 and redeemed on
June 25, 1997 and interest accrued on the Senior Notes.
Shoppers believes that cash flows from its operations and, if necessary,
borrowings under a $25.0 million revolving credit facility will be adequate to
meet its anticipated requirements for working capital, debt service, capital
expenditures over the next few years. However, there can be no assurances that
Shoppers will generate sufficient cash flow from operations.
Management believes that the Settlement (discussed above) between the Company
and Haft family members has had an adverse impact on the Company's results of
operations, financial position and liquidity. Dart paid approximately $41.0
million to RGL during fiscal 1998 and paid Herbert H. Haft approximately $28.0
million on February 6, 1998. Dart also made a $10 million loan to a partnership
owned by Herbert H. Haft and Ronald S. Haft, which loan is personally guaranteed
by Ronald S. Haft and is secured by the partnership's interest in three shopping
centers located in suburban Washington, D.C. and by a one-half indirect interest
in an office building in Lanham, Maryland leased by Shoppers. 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 stockholders' equity by approximately $56 million.
Also during fiscal 1998, 1997 and 1996, in connection with the RSH Settlement
and litigation involving Haft family members, the Company paid approximately
$7.0 million, $10.4 million and $12.4 million respectively, in legal fees.
Management believes that the 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 and retain
highly-qualified personnel more difficult.
42
43
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
WORKING CAPITAL
At January 31, 1998
Working capital decreased $24,237,000 to $73,525,000 during the year ended
January 31, 1998. The decrease was primarily due to funding operating losses for
Dart, Crown Books and Total Beverage, capital expenditures and negative working
capital at Shoppers which was not consolidated with the Company at January 31,
1997.
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 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 and the repayment
of a $11.6 million note receivable from Ronald S. Haft.
RESULTS OF OPERATIONS
"Fiscal 1998" means the year ended January 31, 1998 for Dart and all
subsidiaries. "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, Shoppers 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 1998 compared to Fiscal 1997
Trak Auto
During fiscal 1998, Trak Auto opened nine Super Trak stores and one Super Trak
Warehouse store. Including the Pittsburgh, Pennsylvania store closings, Trak
Auto closed or converted 16 Classic Trak stores, closed or converted 12 Super
Trak stores and closed or converted five Super Trak warehouse stores. As a
result of the sale of its California operations, the Company reduced the number
of Classic Trak stores by 36, Super Trak stores by 32 and Super Trak Warehouses
by 14. At January 31, 1998, Trak Auto had 181 stores, including 87 Super Trak
stores and 26 Super Trak Warehouse stores.
Sales of $319,440,000 for fiscal 1998(52 weeks) decreased by $26,544,000 or 7.7%
compared to fiscal 1997 (52 weeks). The decrease was primarily due to the mild
winter conditions in the Midwest and East coast markets during the first quarter
as well as the sale of the operations and weak performance of the stores in the
highly competitive Los Angeles market. Comparable sales (stores open more than
one year) decreased 8.7% in fiscal 1998 compared to fiscal 1997. Sales for
comparable Super Trak Warehouse stores decreased 6.2% in fiscal 1998. Sales for
comparable Super Trak stores decreased 9.9% in
43
44
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
fiscal 1998. Sales for comparable Classic Trak stores decreased 8.3% in fiscal
1998. Sales for Super Trak and Super Trak Warehouse stores represented 69.8% of
total sales during fiscal 1998 compared to 64.6% for fiscal 1997.
Interest and other income increased by $595,000 in fiscal 1998 when compared to
fiscal 1997. The increase was primarily due to increased recoveries from audits
of prior years vendor allowances and an increase in interest income.
Cost of sales, store occupancy and warehousing expenses as a percentage of sales
were 77.2% in fiscal 1998 compared to 75.9% in fiscal 1997. The increases were
primarily due to 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 21.6% in
fiscal 1998 compared to 20.8% in fiscal 1997. The increase was primarily due to
increased payroll costs, as a percentage of sales, (actual payroll dollars in
fiscal 1998 were less than fiscal 1997) and to the HHH Settlement (see Note 6 to
the Consolidated Financial Statement).
The provision for loss on sale of California operations of $8,193,000 is an
estimate of the loss associated with the sale of Trak Auto's California assets
(see Note 11 to the Consolidated Financial Statements).
Depreciation and amortization expenses increased $986,000 in fiscal 1998
compared to fiscal 1997. The increase was due to the write-off of favorable
lease rights in conjunction with closing the Pittsburgh stores and was partially
offset by a reduction in depreciation as a result of fixed assets becoming fully
depreciated and fixed assets sold or taken out of service.
Interest expense increased $48,000 in fiscal 1998 compared to fiscal 1997.
The Company recorded a closed store provision of $13.9 million in fiscal 1998
for the stores closed in the Pittsburgh market.
Trak Auto had a net loss of $17,673,000 in fiscal 1998 compared to net income of
$1,084,000 in fiscal 1997. The net loss was primarily the result of the
foregoing factors primarily the closed store reserve and the loss from the sale
of the California operations.
The effective income tax rate was 37.4% in fiscal 1998 compared to 25.0% in
fiscal 1997. The increase was primarily the result of a net operating loss
generated and fully utilized while a permanent tax difference remained
relatively unchanged.
Crown Books
During fiscal 1998, Crown Books opened 26 Super Crown Books stores while closing
eleven Classic Crown Books stores and four Super Crown Books stores. At January
31, 1998, Crown Books had 179 stores, including 131 Super Crown Books stores.
44
45
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Sales of $297,506,000 for fiscal 1998 (52 weeks) increased by $9,768,000 or 3.4%
compared to fiscal 1997(52 weeks). The increase was primarily due to the 26 new
Super Crown Books stores opened during the year. Comparable sales (sales for
stores open for 13 months) decreased 5.9% for fiscal 1998. Sales for Super Crown
Books stores represented 83.9% of total sales for fiscal 1998 compared to 78.4%
of total sales for fiscal 1997. Super Crown Books sales of $249,655,000 for
fiscal 1998 increased 11.7% over sales for fiscal 1997. Sales for comparable
Super Crown Books stores, however, decreased 6.2% in fiscal 1998. Sales for
comparable classic Crown Books stores decreased 4.4% during fiscal 1998.
Interest and other income decreased by $717,000 during fiscal 1998 when compared
to fiscal 1997. 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 87.6% for fiscal 1998 compared to 81.3% for fiscal 1997. The increase was
primarily due to decreased gross margins as a result of increased promotional
discounts, increased purchases from wholesalers, increased reserves for books
returned to publishers and increased shrink. The increase was also due to higher
occupancy costs for new larger stores and the effect of the decline in
comparable store sales on occupancy costs, as a percentage of sales, in existing
stores.
Selling and administrative expenses as a percentage of sales were 22.9% for
fiscal 1998 compared to 18.9% for fiscal 1997. The increase was primarily due to
increased payroll and advertising costs and the continuing consulting services
for new management information systems, primarily the accounts payable and
merchandising system.
Depreciation and amortization expense increased $102,000 for fiscal 1998
compared to fiscal 1997. The increase was primarily due to an increase in fixed
assets as a result of new Super Crown Books stores and to the amortization of
computer software.
Interest expense increased by $382,000 due to increased borrowings under the
revolving credit facility.
During fiscal 1998 Crown Books recorded a tax benefit of approximately $15.0
million and increased its valuation allowance for deferred income tax assets
$23.0 million. See Note 2 to the Consolidated Financial Statements.
Crown Books had a net loss of $48,650,000 in fiscal 1998 compared to a net loss
of $860,000 in fiscal 1997 primarily as a result of the decline in comparable
store sales and gross margins together with increasing store expenses, the
continuing cost associated with implementation of new management information
systems, the increased advertising costs and the increase in the tax valuation
allowance.
45
46
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Shoppers Food
Shoppers opened three new stores in fiscal 1998 for a store count of 37 at
January 31, 1998.
Sales increased by $4.9 million, from $850.9 million during the 52 weeks ended
February 1, 1997 to $855.8 million during the 52 weeks ended January 31, 1998.
The sales increases were due to the three new stores opened since July 1997.
Comparable store sales decreased 4.5% during the 52 weeks ended January 31,
1998. The decrease in comparable store sales was primarily due to the new stores
drawing customers from existing stores and competitive market conditions.
Gross profit increased by $8.3 million (4.3%), from $190.9 million during the 52
weeks ended February 1, 1997 to $199.2 million during the 52 weeks ended January
31, 1998. Gross profit, as a percentage of sales, increased to 23.3% during the
52 weeks ended January 31, 1998 from 22.4% during the 52 weeks ended February 1,
1997. The increases were primarily due to a more proactive pricing strategy on
selected items, a reduction in the number of items which are offered at special
discounts on a weekly basis in stores, a higher allowance income achieved
through increased vendor participation and a reduction in the charge to
operations for LIFO, from $0.9 million during the 52 weeks ended February 1,
1997 to $0.4 million during the 52 weeks ended January 31, 1998.
Selling and administrative expenses increased by $6.1 million (3.9%), from
$154.6 million during the 52 weeks ended February 1, 1997 to $160.7 million
during the 52 weeks ended January 31, 1998. Selling and administrative expenses,
as a percentage of sales, increased from 18.2% during the 52 weeks February 1,
1997 to 18.8% during the 52 weeks ended January 31, 1998. The increases were
primarily attributable to increased payroll costs associated with negotiated
union rates and to expenses associated with the new stores opened since July
1997.
Depreciation and amortization increased by $2.4 million from $8.7 million during
the 52 weeks ended February 1, 1997 to $11.1 million during the 52 weeks ended
January 31, 1998. The increases were primarily due to additional depreciation
and amortization associated with goodwill and lease rights, as well as with
fixed assets purchased for the new stores opened since July 1997 offset by a
reduction of assets becoming fully depreciated in 1997. In connection with the
Acquisition, Shoppers commenced using Dart's method of depreciating property and
equipment on a straight-line basis. Prior to the Acquisition, Shoppers used
accelerated methods. The cumulative effect of this change in accounting
principle has been recorded in the financial statements for the 52 weeks ended
January 31, 1998. Depreciation expense for the 52 weeks ended February 1, 1997
would have been $0.6 million more using the straight-line basis.
Operating income was $27.4 million for the 52 weeks ended January 31, 1998
compared to $27.6 million during the same period in the prior year. The decrease
was primarily due to higher selling and administrative expenses and
46
47
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
increased depreciation and amortization and was partially offset by the
increase in gross profit.
Interest income decreased $2.4 million during the 52 weeks ended January 31,
1998 compared to the 52 weeks ended February 1, 1997 due to a reduction of funds
available for short-term investing as a result of the repayment of the bridge
financing associated with Acquisition.
Interest expense increased approximately $19.4 million from $1.6 million during
the 52 weeks ended February 1, 1997 to $21.1 million during the 52 weeks ended
January 31, 1998 as a result of interest paid on the Increasing Rate Notes,
interest accrued on the Senior Notes and the amortization of financing costs.
The effective income tax rate for the 52 weeks ended January 31, 1998 was 48.5%
compared to 35.7% for the 52 weeks ended February 1, 1997. The increase was
primarily attributable to nondeductible amortization of acquisition related
goodwill.
On June 26, 1997 Shoppers sold $200 million aggregate principal amount of its
9.75% senior notes due 2004. On July 25, 1997 the proceeds were used to repay
$143.3 million (including approximately $3.3 million of accrued and unpaid
interest) of the existing Increasing Rate Notes and to pay $50.0 million into an
escrow account used by Dart when it consummated a settlement with certain of its
shareholders. As a result of this transaction, $5.3 million, representing an
unamortized portion of the financing costs incurred to secure initial senior
indebtedness, were expensed as an extraordinary item, net of taxes of
approximately $2.2 million.
Net income decreased by $16.9 million, from $20.6 million during the 52 weeks
ended February 1, 1997 to $3.7 million during the 52 weeks ended January 31,
1998. These decrease was primarily attributable to increased interest expense
associated with Shopper's indebtedness and the extraordinary item discussed
above offset by the cumulative effect of the change in accounting principle.
Total Beverage
During the year ended January 31, 1998, Total Beverage opened two new stores in
the Chicago, Illinois metropolitan area. At January 31, 1998, Total Beverage had
five stores.
Total Beverage sales were $32,818,000 during fiscal 1998 compared to $30,097,000
for fiscal 1997. The increase was due primarily to sales at the two new stores.
Comparable store sales increased 1.7% in fiscal 1998 compared to fiscal 1997.
Cost of sales and store occupancy as a percentage of sales were 83.2% during
fiscal 1998 compared to 81.2% for fiscal 1997. The increase was primarily due to
the entry into the Chicago market where margins are lower and new competition in
the Virginia market.
47
48
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Selling and administrative expenses as a percentage of sales were 21.0% during
fiscal 1998 compared to 21.7% in fiscal 1997. The decrease was primarily due to
strategic business plan costs in fiscal 1997 partially offset by costs incurred
in opening the Chicago market.
Total Beverage recorded a net operating loss of $1,822,000 during fiscal 1998
(excluding reversal of a closed store reserve) compared to a net operating loss
of $1,132,000 (excluding accrual and reversal of closed store reserves) during
fiscal 1997. The net operating loss in fiscal 1998 was primarily due to start-up
costs for the Chicago stores.
Dart Group and Other Corporate
Interest and other income decreased approximately $971,000 during fiscal l998
when compared to fiscal 1997. The decrease was primarily due to reduced funds
available for short-term investment.
Administrative expenses decreased $6,067,000 during fiscal 1998 primarily due to
certain legal expenses accrued in fiscal l997 and partially reversed in fiscal
1998. The decrease was offset by expenses associated with the Settlements and
related transactions.
Interest expense decreased $133,000 during fiscal 1998 due to reduced interest
as a result of payment on the RMH Judgment during fiscal 1997 and was partially
offset by mortgage interest.
Dart reversed approximately $9.2 million for the Pennsy Warehouse closed
facility reserve as a result of the Settlements.
Trak Auto and Crown Books file separate income tax returns. Shoppers and Total
Beverage are included in Dart's income tax returns.
As a result of Dart's operating loss for fiscal 1998, a net tax operating loss
carryforward of approximately $39.5 million was created. Dart's cumulative total
net tax operating loss carryforward is approximately $105.6 million. The net
operating loss carryforwards will expire in varying amounts through fiscal 2013.
In addition, Dart has an Alternative Minimum Tax credit carryforward of
approximately $1.0 million. Dart has a deferred tax valuation allowance of $48.6
million as of January 31, 1998. Management continues to evaluate the adequacy of
this valuation allowance.
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
48
49
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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 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
49
50
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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 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 81.3% 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 state income
tax benefits associated with Crown Books net operating losses.
50
51
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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 is reflected in the accompanying financial
statements using the equity method of accounting for periods subsequent to May
28, 1994.
Shoppers revenue for the year ended February 1, 1997 was $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 filed 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,
51
52
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
1998, Shoppers is 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 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.
52
53
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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 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.
53
54
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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. 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.
54
55
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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.
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 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 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
55
56
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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.
INTERNAL CONTROLS
During the year ended January 31, 1998, under its prior management team, Crown
Books implemented a new accounts payable/inventory system without the system
being completely tested and interfaced with the store systems. As a result of
implementation problems with the system, Crown Books has been unable to
determine in an accurate and timely manner the purchases and amounts payable for
each vendor throughout the year. Additionally, reconciliations of certain key
general ledger accounts, including cash, accounts payable and inventory, were
not performed on a timely basis during the year and the adjustments to reconcile
the general ledger to the physical inventory at year-end was unusually high.
Significant effort was required in connection with the year-end financial
statement closing process to reconcile these accounts, determine the nature of
any reconciling items and record adjustments to correct errors or omissions to
these accounts.
Since February 1998, Crown Books, under its new management, has invested a
substantial effort and made improvements in the controls and procedures relating
to the above mentioned items. To date these improvements have not resolved the
problems and efforts need to continue to enable Crown Books to produce accurate
financial data in a timely and efficient manner. As a result of the foregoing
issues, Crown Books' independent public accountants advised Crown Books that in
their view, there is a material weakness in Crown Books' internal control
structure. Management of Crown Books intends to continue its efforts to improve
internal control and procedures.
YEAR 2000 COMPLIANCE
The Company is currently in the process of conducting a review of the impact of
Year 2000 on its information systems, as well as reviewing its impact on
relationships with key customers and vendors. Based on this preliminary review,
Trak Auto, Crown Books and Shoppers store systems will need to be replaced as
the original software vendors are not supporting the Year 2000 modifications.
The Company intends to implement a new general ledger system and accounts
payable system by the end of fiscal 1999. Dart has implemented a new payroll
system that is Year 2000 compliant and currently plans to implement that system
at Trak Auto and Crown Books. Although a plan to ensure minimal disruption to
the Company's operations will be developed, there can be no certainty that there
will be sufficient time to implement a comprehensive plan by the Year 2000.
Currently, the aggregate costs associated with this program have not been
estimated.
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 and Total Beverage
will recover most cost increases due to inflation by increasing selling prices.
56
57
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
57
58
Item 8. Financial Statements and Supplementary Data
Financial Statements Page
- -------------------- ----
Report of Independent Public Accountants 59
Consolidated Balance Sheets 60-61
Consolidated Statements of Operations 62-63
Consolidated Statements of Stockholders' Equity 64-65
Consolidated Statements of Cash Flows 66-68
Notes to Consolidated Financial Statements 69-118
58
59
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, 1998 and
1997 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, 1998. 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 Dart Group Corporation and
subsidiaries as of January 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 31, 1998 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 and in fiscal
1998, the Company changed its accounting policy for purchased computer software
costs. Additionally, as discussed in Note 1 Shoppers Food Warehouse Corp.
changed its method of depreciating property and equipment.
ARTHUR ANDERSEN LLP
Washington, D. C.
April 28, 1998
59
60
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
January 31,
---------------------
ASSETS 1998 1997
-------- --------
Current Assets:
Cash and equivalents $ 13,214 $ 12,382
Short-term instruments (includes $38.5 million
held for Haft Settlements and related matters) 73,126 27,276
Marketable debt securities 5,126 5,714
Accounts receivable 22,899 14,699
Income taxes refundable -- 3,802
Merchandise inventories 181,840 218,619
Prepaid income taxes 5,528 --
Deferred income taxes 14,098 7,324
Other current assets 9,155 6,445
-------- --------
Total Current Assets 324,986 296,261
-------- --------
Property and Equipment, at cost:
Furniture, fixtures and equipment 162,339 104,541
Leasehold improvements 27,457 29,873
Land and buildings 16,420 1,034
Property under capital leases 18,864 24,472
-------- --------
225,080 159,920
Accumulated Depreciation and Amortization 112,261 80,849
-------- --------
112,819 79,071
-------- --------
Share of Equity in Shoppers Food
Warehouse Corporation -- 52,802
-------- --------
Goodwill, net of accumulated
amortization of $4,330 and $382 146,781 1,890
-------- --------
Deferred Income Taxes -- 14,375
-------- --------
Other Assets 21,249 5,773
-------- --------
Total Assets $605,835 $450,172
======== ========
See notes to consolidated financial statements.
60
61
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
January 31,
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
--------- ---------
Current Liabilities:
Current portion of mortgages payable $ 680 $ 1,106
Accounts payable, trade 136,317 102,942
Income taxes payable -- 3,322
Accrued interest 2,654 --
Accrued salaries and employee benefits 20,871 18,766
Accrued taxes other than income taxes 12,462 9,738
Current portion of reserve for closed
facilities and restructuring 4,441 5,701
Accrue payments to Herbert H. Haft 27,967 --
Other accrued liabilities 45,778 64,215
Current portion of obligations under
capital leases 282 209
--------- ---------
Total Current Liabilities 251,452 205,999
--------- ---------
Mortgages Payable 15,743 353
--------- ---------
Obligations Under Capital Leases 23,501 30,373
--------- ---------
Reserve for Closed Facilities and Restructuring 25,370 27,341
--------- ---------
Deferred income taxes 1,624 --
--------- ---------
Shoppers Food Senior Notes due 2004 200,000 --
--------- ---------
Other Liabilities 5,789 --
--------- ---------
Commitments and Contingencies (see Note 4)
Minority Interests 38,727 67,750
--------- ---------
Stockholders' Equity:
Class A Common Stock, non-voting, par
value $1.00 per share; 3,000,000 shares
authorized; 1,979,827 and 1,962,403 shares
issued, respectively 1,980 1,962
Class B Common Stock, voting, par value $1.00
per share; 500,000 shares authorized
and issued 500 500
Paid-in capital 80,259 78,841
Notes receivable - shareholder (65,130) (65,130)
Unrealized gains (losses) on short-term
investments 6 (22)
Retained earnings 62,407 104,242
Treasury stock, 810,149 and 202,340
shares, respectively, of Class A
common stock, at cost (21,408) (1,749)
Treasury stock, 500,000 and 172,730
shares, respectively, of Class B
common stock, at cost (14,985) (288)
--------- ---------
Total Stockholders' Equity 43,629 118,356
--------- ---------
Total Liabilities and Stockholders' Equity $ 605,835 $ 450,172
========= =========
See notes to consolidated financial statements.
61
62
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
Years Ended January 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
Sales $ 1,505,532 $ 663,818 $ 655,161
Real estate revenue -- -- 13,155
Interest and other income 12,595 4,271 9,820
----------- ----------- -----------
1,518,127 668,089 678,136
----------- ----------- -----------
Expenses:
Cost of sales, store occupancy
and warehousing 1,190,799 520,746 509,136
Selling and administrative 329,986 159,229 146,209
Provision for loss on sale of
Trak Auto California
operations 8,193 -- --
Depreciation and amortization 26,242 14,040 15,453
Interest 27,911 6,993 13,175
Write-down of Cabot-Morgan
Real Estate joint ventures -- -- 14,562
Write-off Crown Books impaired
assets 4,275 -- --
Restructuring (reversal) charge (88) (3,865) (2,051)
Closed facility (reversal)
reserve 1,556 (652) (5,665)
----------- ----------- -----------
1,588,874 696,491 690,819
----------- ----------- -----------
Loss before income taxes, equity
in affiliate, minority
interests, extraordinary item
and cumulative effect of
accounting change (70,747) (28,402) (12,683)
Income tax (benefit) (1,523) (216) 6,149
----------- ----------- -----------
Loss before equity in affiliate,
minority interests, extraordinary
item and cumulative effect of
accounting change (69,224) (28,186) (18,832)
Equity in affiliate -- 11,405 10,055
Minority interests in (income)
loss of consolidated
subsidiaries and partnerships 29,019 88 (4,647)
----------- ----------- -----------
Loss before extraordinary item
and cumulative effect of
accounting change (40,205) (16,693) (13,424)
Extraordinary item:
Loss on early extinguishment
of debt, net of income taxes
of $2,150 (3,126) -- --
Cumulative effect of Shoppers
accounting change, net
of income taxes of $1,344 1,729 -- --
----------- ----------- -----------
Net Loss $ (41,602) $ (16,693) $ (13,424)
=========== =========== ===========
62
63
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
Years Ended January 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Loss per share (Basic and Diluted):
Loss before extraordinary item $ (19.81) $ (8.73) $ (7.88)
Extraordinary item:
Loss on early extinguishment
of debt, net (1.54) -- --
Cumulative effect of Shoppers
accounting change, net .85 -- --
--------- --------- ---------
Basic loss per share $ (20.50) $ (8.73) $ (7.88)
Diluted loss per share (20.50) (8.73) (7.88)
Weighted Average shares
outstanding
Basic 2,030 2,076 1,862
Diluted 2,030 2,076 1,862
See notes to the consolidated financial statements.
63
64
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Years Ended January 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Common Stock:
Class A-
Balance, beginning of period $ 1,962 $ 1,949 $ 1,661
Stock options exercised 18 13 --
Shares issued -- -- 288
--------- --------- ---------
Balance, end of period $ 1,980 $ 1,962 $ 1,949
========= ========= =========
Class B-
Balance, beginning of period $ 500 $ 500 $ 303
Stock options exercised -- -- 197
--------- --------- ---------
Balance, end of period $ 500 $ 500 $ 500
========= ========= =========
Paid-in Capital:
Balance, beginning of period $ 78,841 $ 77,879 $ 65,384
Stock options exercised 1,418 951 18
Purchase of (Class B)stock option -- -- 985
RSH Settlement -- -- 10,701
Effect of subsidiary stock
options exercised -- 11 791
--------- --------- ---------
Balance, end of period $ 80,259 $ 78,841 $ 77,879
========= ========= =========
Note Receivable-Shareholder:
Balance, beginning of period $ (65,130) $ (65,130) $ --
RSH Settlement -- -- (65,130)
--------- --------- ---------
Balance, end of period $ (65,130) $ (65,130) $ (65,130)
========= ========= =========
Unrealized Investment gains (losses): $ 6 $ (22) $ 246
========= ========= =========
Treasury Stock:
Class A-
Balance, beginning of period $ (1,749) $ (1,749) $ (1,749)
Common stock reacquired (19,659) -- --
--------- --------- ---------
Balance, end of period $ (21,408) $ (1,749) $ (1,749)
========= ========= =========
Class B-
Balance, beginning of period $ (288) $ (288) $ --
Common stock reacquired (14,697) -- (288)
--------- --------- ---------
Balance, end of period $ (14,985) $ (288) $ (288)
========= ========= =========
Retained Earnings:
Balance, beginning of period $ 104,242 $ 121,169 $ 134,788
Net loss (41,602) (16,693) (13,424)
Dividends paid (233) (234) (195)
--------- --------- ---------
Balance, end of period $ 62,407 $ 104,242 $ 121,169
========= ========= =========
64
65
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
(dollars and shares in thousands, except dividends per share)
Years Ended January 31,
----------------------------------
1998 1997 1996
------- ------- -------
Dividends paid per share:
Class A Common Stock $ .13 $ .13 $ .13
======= ======= =======
Class B Common Stock $ -- $ -- $ --
======= ======= =======
Common Stock Outstanding:
Class A-
Balance, beginning of period 1,760 1,747 1,458
Stock options exercised 17 13 1
Common stock reacquired (607) -- --
Shares issued -- -- 288
------- ------- -------
Balance, end of period 1,170 1,760 1,747
======= ======= =======
Class B-
Balance, beginning of period 327 327 303
Stock options exercised -- -- 197
Common stock reacquired (327) -- (173)
------- ------- -------
Balance, end of period -- 327 327
======= ======= =======
See notes to the consolidated financial statements.
65
66
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended January 31,
----------------------------------
1998 1997 1996
-------- -------- --------
Cash Flows from Operating Activities:
Net loss $(41,602) $(16,693) $(13,424)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 26,242 14,040 12,341
Amortization of deferred financing cost 1,214 -- --
Loss on early extinguishment of debt 5,276 -- --
Write down Cabot-Morgan
Real Estate joint ventures -- -- 14,562
Provision for compensation associated
with HHH settlement 787 -- --
Valuation allowances for deferred tax
assets 22,971 -- --
Provision for impaired assets 4,275 -- --
Provision for loss on sale of Trak
Auto California operations 8,193 -- --
Cumulation effect of accounting change (1,729) -- --
Loss on disposal of fixed assets 935 -- --
Interest in excess of capital lease
payment 294 -- --
Equity in affiliate -- (11,405) (10,414)
Provision for litigation (7,000) 17,000 2,169
Provision for (reversal of) closing
facilities and restructuring 2,568 (3,534) (6,125)
Change in assets and liabilities:
Accounts receivable 1,862 (5,734) 1,518
Merchandise inventories 34,650 (13,004) (7,137)
Prepaid and refundable
income taxes 330 (3,802) --
Other current assets (2,710) (4,246) (579)
Deferred income tax (18,575) 4,177 5,911
Other assets 1,204 (2,609) 148
Accounts payable, trade (8,445) 13,847 (16,938)
Income taxes payable (4,713) 2,355 (6,181)
Accrued salaries and employee
benefits 997 1,457 2,516
Accrued taxes other than
income taxes (179) 2,069 (1,806)
Other accrued liabilities (13,769) 7,654 (5,937)
Payment to Robert M. Haft -- (35,726) --
Reserve for closed facilities (4,324) (6,658) (7,680)
Minority interest (29,031) (2,028) 6,338
-------- -------- --------
Net cash used for
operating activities $(20,279) $(42,840) $(30,718)
-------- -------- --------
(Continued on following page)
66
67
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended January 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Cash Flows from Securities and Capital
Investment Activities:
Capital expenditures $ (23,618) $ (17,112) $ (16,688)
Proceeds from sale of California assets 32,828 -- --
Acquisition of partnership interest in
real estate (4,400) -- --
Purchase of Pittsburgh store assets -- -- (5,767)
Proceeds from Shoppers dividends -- 5,000 5,000
Cash and equivalents of Shoppers Food
Warehouse Corp. at February 6, 1997 13,739 -- --
Acquisition of 50% equity in Shoppers
Food Warehouse Corp. (210,000) -- --
Distributions from Cabot-Morgan Real
Estate joint ventures -- -- 4,888
Proceeds from sale of Cabot-Morgan
joint ventures -- 2,000 --
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)
Acquisition of treasury stock by
Trak Auto -- -- (6,904)
Sales of United States Treasury Bills 987 21,032 70,002
Maturities of United States Treasury
Bills 4,973 36,351 11,163
Purchases of United States Treasury
Bills (5,960) (40,152) (98,866)
Purchases of marketable debt securities (37,170) (1,500) (3,199)
Sales of marketable debt securities 115,559 3,612 56,951
Maturities of marketable debt
securities 17,783 6,544 6,420
--------- --------- ---------
Net cash provided by (used for)
securities and capital
investment activities $ (95,279) $ 15,775 $ 17,287
--------- --------- ---------
Cash Flows from Financing Activities:
Cash dividends $ (233) $ (234) $ (195)
Proceeds from Note Receivable -
Ronald S. Haft -- 11,621 --
Loans to Ronald S. Haft -- -- (49,547)
Stock options exercised 1,436 964 215
Proceeds from Increasing Rate Notes
Due 2000 140,000 -- --
Payments for deferred financing and
acquisition costs (16,643) -- --
Redemption of Increasing Rate Notes
Due 2000 (140,000) -- --
(Continued on following page)
67
68
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(dollars in thousands)
Years Ended January 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Cash Flows from Financing Activities (continued)
Proceeds from issuance of Senior
Notes due 2004 $ 200,000 $ -- $ --
Funds restricted for settlement (50,218) -- --
Release of restricted funds 50,000 -- --
Purchase of treasury stock (21,456) -- --
Proceeds from option to acquire
common stock -- -- 985
Principal payments under mortgage
obligations (357) (307) (269)
Principal payments under capital
lease obligations (289) (101) (368)
--------- --------- ---------
Net cash provided by(used for)
financing activities $ 162,240 $ 11,943 $ (49,179)
--------- --------- ---------
Net increase(decrease)in Cash and
Equivalents $ 46,682 $ (15,122) $ (62,610)
Cash and Equivalents at Beginning
of Year (Note 1) 39,658 54,780 117,390
--------- --------- ---------
Cash and Equivalents at End of
Year (Note 1) $ 86,340 $ 39,658 $ 54,780
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Net Cash paid (refunded) during
the year for:
Interest $ 24,083 $ 7,485 $ 4,532
Income taxes (1,380) (2,305) 6,468
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.
In fiscal 1998 as a result of the settlement with Herbert H. Haft, the Company
accrued approximately $28.0 million. This amount includes $12.9 million for the
purchase of 122,747 shares of Class A Common Stock.
Supplemental disclosure of noncash activities:
Write-off book value of fixed assets
to restructuring and closed store
reserves $1,549 $ 552 $1,207
See notes to consolidated financial statements.
68
69
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
NOTE 1 - 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"), Shoppers
Food Warehouse Corp. ("Shoppers"), Total Beverage Corporation ("Total Beverage")
and Cabot-Morgan Real Estate Company ("CMREC"). Dart, Trak Auto, Crown Books,
Shoppers, Total Beverage, CMREC and Dart's other direct and indirect
wholly-owned and majority-owned subsidiaries and majority-owned partnerships are
referred to collectively as the "Company". All significant intercompany accounts
and transactions have been eliminated.
The accounts of Shoppers are not consolidated with Dart's financial statements
for periods from May 28, 1994 until February 6, 1997 as a result of a reduction
of Dart's ownership to 50% on May 28, 1994 (see Note 3). Dart's investment in
Shoppers is reflected in the financial statements using the equity method of
accounting for periods from May 28, 1994 until February 6, 1997. On February 6,
1997, Dart acquired the 50% interest in Shoppers that it did not own for $210.0
million (the "Acquisition") (see Note 3). For periods after February 6, 1997,
the accounts of Shoppers are consolidated with Dart's financial statements.
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).
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 $62.6 million in fiscal 1998, $
42.0 million in fiscal 1997 and $104.4 million in fiscal 1996; primarily as a
result of 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
69
70
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
store operating losses of Crown Books and Total Beverage and extraordinary legal
and other fees. Subsequent to January 31, 1998, Dart paid Herbert H. Haft
approximately $28.0 million and loaned Ronald S. Haft $10.0 million for
settlements of litigation and related transactions (the "HHH Settlement").
Dart owns 52.3% of Crown Books Corporation. Crown Books has experienced
recurring losses and decreases in comparable store sales over the past several
years. Additionally, as of January 31, 1998, Crown Books has current liabilities
of approximately $85 million and current assets excluding merchandise
inventories of $24 million dollars and has $25 million available under its
revolving credit facility. As of January 31, 1998 $22.2 million was borrowed
under this facility. As a result of the recurring losses and the limited
borrowing capacity currently available, Crown Books is experiencing liquidity
problems that raise substantial doubt about its ability to continue as a going
concern.
Crown Books new management team is negotiating with the lenders to restructure
the revolving credit facility to allow Crown Books to borrow up to $50.0 million
subject to certain restrictions with respect to inventory to loan ratios. The
lenders expect to issue a letter of commitment, subject to the findings of the
remainder of their due diligence, for the $50.0 million credit facility in early
May 1998 with an anticipated closure and funding shortly thereafter.
Additionally, management has developed a plan to stabilize store sales and
reduce operating costs and intends to negotiate extended payment terms with its
vendors. While management believes all these actions will enable Crown Books to
meet its obligations when they become due, there can be no assurance that Crown
Books will be successful in obtaining the additional financing, extending
vendor terms and implementing its operating plan in a manner that ensures the
Company will have sufficient liquidity to operate its business and remain a
going concern. If the negotiations with the lenders and the vendors are not
successful and alternative financing sources are not available, the Company
will consider reorganization protection alternatives under bankruptcy laws. The
Company currently has no plans to liquidate.
If Crown Books does not continue, Dart will need to assess the realizability of
its investment in Crown Books and its responsibility for any obligations of
Crown Books. As of January 31, 1998, Dart's investment in Crown Books is
approximately $18.7 million and has a loan to Crown Books of $418,000. Dart has
also guaranteed certain leases in the aggregate amount of $6 million, which they
would be responsible for if Crown Books were to become insolvent. Crown Books
also pays Dart rent for the corporate headquarters building and reimburses Dart
for certain administrative functions which are currently shared by the
Companies.
Additionally, there is a $7.5 million payment due from Dart to Trak Auto on
February 3, 1999 (see Note3).
Fiscal Year
Dart's fiscal year ends on January 31 each year. Trak Auto, Crown Books,
Shoppers and Total Beverage are reported to the Saturday closest to January 31.
Trak Auto's, Crown Books', Shoppers' and Total Beverage's fiscal year ended
February 3, 1996 included 53 weeks and all other fiscal years presented included
52 weeks.
70
71
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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, 1998 and 1997, the Company's short-term instruments include
United States Treasury Bills and United States Agency Securities, 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, and United States
Agency Securities.
Management determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determination at each
balance sheet date. Debt securities for which the Company does not have the
intent or ability to hold to maturity are classified as available-for-sale.
Securities available-for-sale are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. At January 31, 1998, the market value of short-term instruments and
marketable debt securities was $6,000 greater than cost (adjusted for income
taxes). At January 31, 1998, 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 presents
the estimated fair value of marketable debt securities available for sale by
contractual maturity at January 31, 1998:
(dollars in thousands)
Due in one year or less $ 3,950
Due in one to three years 1,176
-------
$ 5,126
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
$25,686,000 and $21,094,000 held by majority-owned subsidiaries at January 31,
1998 and January 31, 1997, respectively.
71
72
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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.
The fair value for Shoppers fixed rate Senior Notes is based on quoted market
prices. The fair value of Shopper's Senior Notes on January 31, 1998 was
approximately $201.5 million.
Merchandise Inventories and Cost of Sales
Trak Auto and Shoppers inventories are priced at the lower of last-in, first-out
("LIFO") 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, 1998, 1997 and 1996, Trak Auto's inventories would have been greater by
$3,846,000, $6,733,000 and $6,579,000, respectively, and at January 31, 1998 and
1997 Shoppers' inventories would have been greater by $4,743,000 and $4,375,000,
respectively, if they had been valued on the lower of FIFO cost or market basis.
Trak Auto had a reduction in the LIFO reserve of approximately $2.3 million as a
result of the sale of its California operations (see Note 11). This amount has
been recorded in the Statement of Operations as a reduction in the loss on the
sale of Trak Auto's California operations.
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 changed 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 was made as management has determined that
these costs benefit future periods. During fiscal 1998, the Company recorded
amortization of purchased computer software of approximately $608,000. The
effect of capitalizing purchased computer software was to decrease the Company's
loss by approximately $1.8 million ($.89 per share) net of income tax benefits.
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 $5,263,000 and
$9,159,000 as of January 31, 1998 and 1997, respectively.
72
73
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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. Crown Books has determined that as of January 31, 1998, there was
an impairment in the carrying value of certain long-lived assets and recorded
approximately a $4.3 million reserve for those assets.
Preopening Expenses
All costs of a noncapital nature incurred in opening a new store are charged to
expense during the year as incurred.
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
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
Reporting Comprehensive Income. SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company will adopt SFAS No.
130 in the first quarter of fiscal 1999 and will provide the necessary
disclosures.
73
74
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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, 1998, 1997 and 1996, 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
The computation of diluted 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 year. Common stock equivalents were anti-dilutive for all periods
presented. The Company adopted SFAS No. 128, Earnings Per Share, in the fourth
quarter of fiscal 1998 and have restated all previously presented earnings per
share. Dilutive stock options represent the only difference between basic and
diluted earnings per share.
In reporting earnings per share, Dart's interest in the earnings of its
majority-owned subsidiaries has been adjusted for the dilutive effect, if any,
of these subsidiaries' outstanding stock options in fiscal 1997 and fiscal 1996.
Weighted average shares and share equivalents for the three years ended January
31, 1998, 1997 and 1996 were 2,030,000, 2,076,000 and 1,862,000, respectively.
Reclassifications
Certain reclassifications have been made to prior year statements to conform to
the current year presentation.
NOTE 2 - INCOME TAXES
Because of its percentage ownership, Dart does not report the results of
operations of Crown Books or Trak Auto in its Federal or state tax returns.
Effective for the year ended January 31, 1998, Shoppers will be reported in
Dart's Federal income tax return. The Company's tax provision therefore,
represents the combined tax provisions of Dart, Crown Books, Trak Auto, Total
Beverage and Shoppers.
74
75
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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
----------------------------------------
1998 1997 1996
-------- -------- --------
Current:
Federal $(18,410) $ (2,747) $ (241)
State (492) (967) 3
-------- -------- --------
(18,902) (3,714) (238)
Deferred:
Federal (17,404) 154 795
State (3,344) 795 1,367
Valuation allowance 38,127 2,549 4,225
-------- -------- --------
$ (1,523) $ (216) $ 6,149
======== ======== ========
75
76
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
The combined effective tax rate on income before income taxes, equity in
affiliate and minority interest, extraordinary item and cumulative effect of
accounting change is reconciled to the Federal statutory rate as follows:
(dollars in thousands)
Fiscal Years
------------------------------------
1998 1997 1996
-------- -------- --------
Federal statutory rate 34% 34% 34%
Income taxes at Federal statutory rate $(24,054) $ (9,657) $ (4,312)
Increase (decrease) in taxes resulting from:
Federal and state net operating
loss carryforward not benefitted (17,384) 4,740 5,886
State income taxes, net of
Federal income tax benefit (2,106) (72) 685
Minority interest of CMREC taxed
as minority partner -- -- (168)
Exclusion of Shoppers dividend -- 340 (1,360)
Interest on note receivable-
shareholder 1,963 1,818 581
CMREC interest in Total Beverage
closed store reserve -- -- 824
Amortization of Goodwill 1,308 70 59
Increased in valuation allowance 38,127 2,549 4,225
Tax exempt municipal bond interest
income (24) (50) (255)
Treasury stock acquisition costs 489 -- --
Utilization of former
Trak West net operating loss (174) (208) (225)
Other 332 254 209
-------- -------- --------
Income tax provision (benefit) $ (1,523) $ (216) $ 6,149
======== ======== ========
Effective tax rate 2.2% .8% 48.5%
======== ======== ========
76
77
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
As a result of the Acquisition certain differences between financial reporting
and tax basis of assets have arisen. These purchase accounting adjustments are
not reflected in the current year deferred provision for income taxes.
The effect of each type of temporary difference and carryforward is as follows:
(dollars in thousands)
As of January 31,
----------------------
1998 1997
-------- --------
Deferred Tax Assets:
Reserves for other liabilities $ 2,402 $ 173
Capitalized leases treated as operating
leases for tax purposes 3,474 2,860
Depreciation 3,518 4,182
Uniform capitalization of inventory
costs 2,051 3,057
Reserve for store closings and restructuring 11,401 11,478
Accrued rent 2,313 1,434
Deferred income 930 65
Accrued salaries 176 678
Net operating loss carryforwards 55,721 26,816
Tax credit carryforwards 1,310 2,168
Basis adjustment as a result of purchase
accounting for Trak West 164 164
Accrued vacation 927 537
Accrued self-insurance reserves 6,730 2,644
Accrued legal reserves -- 3,922
Reserve for stock options -- 5,678
Deferred compensation 206 --
Bad debt reserves 457 --
Asset disposal reserve 983 --
Capital loss carryforward 2,841 5,239
Other 761 755
-------- --------
Deferred Tax Assets 96,365 71,850
Valuation allowance (74,101) (35,974)
-------- --------
Net Deferred Tax Assets 22,264 35,876
-------- --------
Deferred Tax Liabilities:
Basis difference in Shoppers investment -- 13,846
Favorable lease rights 4,329 --
Asset acquisition basis adjustment 5,192 --
Book basis of assets acquired as a result
of involuntary conversion 269 331
-------- --------
Deferred Tax Liabilities 9,790 14,177
-------- --------
Net Deferred Tax Asset $ 12,474 $ 21,699
======== ========
77
78
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
A summary of the Company's valuation allowance as of January 31, 1998 and 1997
by Company is provided below:
(dollars in thousands)
Fiscal Years
----------------------------
1998 1997
------- -------
Crown Books $25,471 $ 2,500
Trak Auto -- --
Shoppers -- --
Dart 48,630 33,474
------- -------
$74,101 $35,974
======= =======
During the year ended January 31, 1998, Dart recorded an increase in its
valuation allowance of approximately $15.2 million as a result of continuing net
operating losses and the reversal of certain deferred tax liabilities.
As a result of Dart's operating loss for the year ended January 31, 1998, a tax
net operating loss carryforward of approximately $39.5 million was created.
Dart's cumulative total tax net operating loss carryforward is approximately
$105.6 million. The net operating loss carryforwards will expire in varying
amounts through fiscal 2013. In addition, Dart has an Alternative Minimum Tax
credit carryforward of approximately $1.0 million.
Dart will continue to evaluate on a periodic basis its need for a valuation
allowance.
During fiscal 1998, Crown Books concluded that it was more likely than not that
it would not realize deferred income tax benefits of approximately $23.0 million
as a result of ongoing net operating losses. Accordingly, Crown Books increased
its valuation allowance for deferred tax assets from $2.5 million to $25.5
million. Crown Books will continue to evaluate the need for the valuation
allowance for deferred tax assets. Crown Books has a cumulative net operating
loss carryforward of approximately $41.7 million which expires in varying
amounts through 2013.
Under the provisions of the Tax Reform Act of 1986, the utilization of the
Company's net operating loss carryforwards may be limited, if substantial
changes in stock ownership takes place.
Shoppers Food Warehouse Tax Sharing Agreement
In February 1997, Dart and Shoppers entered into a tax sharing agreement whereby
the federal and certain state and local income tax returns of Shoppers will be
consolidated in the income tax returns to be filed by Dart. This tax sharing
arrangement will allow Dart to utilize its net operating loss carryforwards and
Shoppers tax liabilities will be paid to Dart as if Shoppers filed a separate
return.
78
79
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
NOTE 3 - TRANSACTIONS WITH AFFILIATES
Shoppers Food Warehouse Corp.
In fiscal 1989, Dart acquired in excess of 50% of the common stock of Shoppers,
which operates the Shoppers Warehouse discount grocery chain in the Washington,
D.C. metropolitan area. In June 1994, one of the other shareholders of Shoppers
exercised his right to reacquire one share of Shoppers Class B common stock,
thereby reducing Dart's ownership to exactly 50%. As a result, Dart's investment
in Shoppers is reflected in the financial statements using the equity method of
accounting for fiscal 1997 and fiscal 1996. Under the equity method, the Dart's
investment is shown in the balance sheet as a single line under Share of Equity
in Shoppers Food Warehouse. The unamortized difference between the original
purchase price of Shoppers 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, have been aggregated in fiscal
1997 and fiscal 1996 and reflected in the caption Equity in Affiliate on the
Consolidated Statements of Operations.
Summary Income Data for Deconsolidated Subsidiary
The following information reflects the results of Shoppers 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 with the equity in
affiliate as reported on the Company's Consolidated Statements of Operations:
(dollars in thousands)
1997 1996
-------- --------
Shoppers Net Income $ 21,251 $ 14,652
-------- --------
50% of Shoppers 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
======== ========
79
80
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
The following information presents summarized balance sheet information of
Shoppers 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
On February 6, 1997, Dart acquired the other 50% interest in Shoppers for $210
million. As a result, the accounts of Shoppers are 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 "Increasing Rate 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 (with Shoppers becoming obligor on the Increasing
Rate Notes) and Shoppers repaid the bridge financing from its existing cash and
the liquidation of certain short-term investments.
The operating results of Shoppers from February 1, 1997 to February 6, 1997 were
not material. The unaudited pro forma information, for Dart consolidated,
presented below reflects the Acquisition as if it had occurred on February 1,
1996. The pro forma results reflect amortization of intangibles and deferred
financing costs, interest on the acquisition related debt as well as
depreciation adjustments for Shoppers new basis of assets as of the Acquisition.
These results are not necessarily indicative of future operating results or of
what would have occurred had the acquisition been consummated at that time.
Pro Forma
(in thousands, except per share data)
Twelve Months Ended
January 31, 1997
----------------
Revenue $ 1,526,377
Net loss (9,233)
Net loss per share (4.45)
The Acquisition was recorded using the purchase method of accounting. The
purchase price has been allocated to the assets and liabilities of Shoppers and
the remaining excess purchase price over the net assets acquired of $148,858
million represents goodwill which will be amortized over 40 years. In connection
with the Acquisition, Shoppers adopted Dart's method of depreciating property
and equipment on a straight-line basis. Prior to the Acquisition, Shoppers used
accelerated depreciation methods. The related cumulative effect of the
accounting change has been reflected in the accompanying Consolidated Statements
of Operations. If the change were applied retroactively it would not be material
to any periods presented.
80
81
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
In June 1997, Shoppers refinanced the Increasing Rate Notes with $200.0 million
aggregate principal amount 9 3/4% Senior Notes due June 15, 2004 (the "Senior
Notes"). The net proceeds from the Senior Notes was $193.5 million (after fees
and expenses of approximately $6.5 million) of which $143.5 million was used to
repay the Increasing Rate Notes (including interest) and $50.0 million (the
"Restricted Proceeds") was paid to Dart in the form of a $40.0 million dividend
and a $10.0 million loan for a Haft family settlement (see Note 6 for a
discussion of the RGL Settlement). Interest on the Senior Notes accrued from
the date of issuance and is payable semi-annually in arrears on each June 15
and contain December 15, commencing December 15, 1997. The Senior Notes are
effectively subordinated in right of payment to all secured indebtedness of
Shoppers and contain certain restrictive covenants including, limitation on
restricted payments, limitation on indebtedness, limitation on investments,
loans and advances, limitation on liens, limitation on transactions with
affiliates, restriction on mergers, consolidations and transfers of assets,
limitation on lines of business, limitations on asset sales and limitation on
issuance and sale of capital stock of subsidiaries. In addition, Shoppers is
restricted, as to the amount, of declaring or paying any dividends or making
distributions of Shoppers's capital stock accounts.
On September 26, 1997, Shoppers loaned Dart $10.0 million from the Restricted
Proceeds that Dart used for the RGL Settlement. The loan is in the form of a
promissory note that bears interest at 9 3/4% per annum compounded annually.
Interest and principal are payable on June 15, 2004, however Dart could make
interest payments prior to that time.
On January 28, 1998, Shoppers loaned Dart $25.0 million that Dart used for the
HHH Settlement. The loan is in the form of a promissory note that bears interest
at 9 3/4% per annum compounded annually. Interest and principal are payable on
June 15, 2004, however Dart could make interest payments prior to that time.
Trak Auto Corporation Loan
On April 28, 1998, Dart and Trak Auto amended a loan agreement whereby Dart
borrowed $15.0 million from Trak Auto on January 28, 1998. The loan is secured
by the common stock of Trak Auto, bears interest at a rate equal to the prime
rate as set forth in the Wall Street Journal plus one and one-half percent
(1.5%) and is payable in two installments (one-half on February 3, 1999 and
one-half on July 31, 1999).
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.
81
82
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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 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, 1998. The schedule below
includes the operating leases of Dart and its consolidated subsidiaries. The
imputed interest rate on the capital leases is 9.9% in the aggregate.
(dollars in thousands)
Fiscal Capital Leases Operating
Year Buildings Leases
- ------ -------------- --------
1999 $ 2,872 $ 65,597
2000 2,939 59,656
2001 3,112 56,071
2002 3,155 50,399
2003 3,315 45,701
2004-2017 27,904 233,984
-------- ---------
43,297 $ 511,408
=========
Less-Imputed interest 19,514
--------
Present value of net minimum
lease payments 23,783
Less-Current maturities 282
--------
Long-term capital lease
obligations $ 23,501
========
The table above includes $14,250,000 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 $1,345,000
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:
82
83
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(dollars in thousands)
Year Ended January 31,
---------------------------------------
1998 1997 1996
------- ------- -------
Minimum rentals $66,074 $46,965 $42,250
Contingent rentals 5,657 381 506
------- ------- -------
$71,731 $47,346 $42,756
======= ======= =======
Capital Lease Arrangements With Related Parties
Dart originally leased a 271,000 square foot headquarters building and
distribution center in Landover, Maryland from a private partnership in which
Haft family members owned all of the partnership interests. The lease was for 30
years and six months, commenced in 1985 and provided for increasing rental
payments over the term of the lease. The original lease required 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 original master lease. The subleases with Trak Auto and Crown Books require
pro-rata payments for maintenance, utilities, insurance and taxes and have the
same terms as the original lease. Dart had a lease agreement with the
aforementioned partnership for land near the headquarters building and
distribution center. The lease was coterminous with the headquarters building
and distribution center lease and rental was approximately $32,000 in fiscal
1998. Trak Auto and Crown Books each paid a pro-rata share 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 and land to Dart (or its subsidiaries) and to reduce the rent. These
transfers and rent reductions were 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 controlled the aforementioned partnerships. As a
result of the various Haft family settlements (see Note 6), Dart now owns the
distribution center and office facility and land and the subleases with Trak
Auto and Crown Books remain in effect for the distribution center and office
facility, but not the land which remains unused.
Dart's majority-owned subsidiary, Trak Auto leased a 176,000 square foot
distribution center in Bridgeview, Illinois from a private partnership in which
Haft family members owned all of the partnership interests. As a result of the
various Haft family settlements, a Dart subsidiary now owns the Bridgeview
distribution center and Trak Auto leases it from Dart. 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 rent is $754,000. The lease requires payment of
83
84
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
maintenance, utilities, insurance and taxes. The partnership originally
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 $1,516,000. The lease requires payment of maintenance,
utilities, insurance and taxes. The partnership purchased the distribution
center for approximately $10,800,000. As part of the RSH Settlement , Ronald S.
Haft agreed to transfer the real estate and partnership interests controlled by
him to Dart (or Dart's subsidiaries). These transfers were subject to
contingencies including, bankruptcy court approval, mortgagee approval and
challenges and claims by other members of the Haft family concerning Ronald S.
Haft's ownership interests in the real estate or control of the partnership. As
a result of the various Haft family settlements (see Note 6), Haft family
challenges and claims no longer exist but the contingencies of bankruptcy court
approval and mortgagee approval remain.
Shoppers, 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
one-half of the partnership interests and members of the Herman family (the
former owners of the 50% interest in Shoppers acquired on February 6, 1997) own
one-half of the partnership interests. The lease is for 20 years and commenced
in 1990. 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 $1,317,000. The lease requires payment of maintenance,
utilities, insurance and taxes. The partnership purchased the office building
for approximately $8,663,000 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 $600,000.
The capital lease arrangements described above are all included in the lease
commitment table.
Store Operating Lease Payments to Former Related Parties
During the fiscal years ended January 31, 1998, 1997 and 1996, respectively,
Trak Auto made rental payments of approximately $2,741,000, $2,882,000 and
$2,914,000 and Crown Books made rental payments of approximately $1,716,000,
$1,691,000, and $2,136,000 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 made rental payments of approximately $5,911,000,
$5,384,000 and $5,958,000 (during Shoppers fiscal years ended June 29, 1996,
July 1, 1995 and July 2, 1994, respectively) to partnerships in which members
84
85
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
of the Haft family own all or substantially all of the beneficial interests.
Total Beverage made rental payments of approximately $1,027,000, $1,149,000 and
$984,000 in fiscal 1998, 1997 and 1996, respectively.
Year 2000 Compliance
Trak Auto is currently in the process of conducting a review of the impact of
Year 2000 on its information systems, as well as reviewing its impact on
relationships with key customers and vendors. Based on the results to date of
this review, much of the Company's store hardware, and software used to run the
hardware and provide information will have to be replaced in order to be Year
2000 compliant. Additionally, the Company's warehouse distribution and
merchandising system is not Year 2000 compliant and could potentially begin to
affect operations as early as the coming fiscal year. Trak Auto is considering
a plan to ensure minimal disruption to the Company, however, there can be no
guarantee that the plan will be adopted in its current form or that there will
be sufficient time to implement the plan by the Year 2000. The aggregate costs
associated with the plan are currently estimated at $5.7 million for the store
related hardware and software plus unidentified internal and contracted labor
costs to modify and enhance store, warehouse distribution and merchandising
systems.
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,
then the Chairman and Chief Executive Officer of Dart. The agreement, as
amended, was renewable each year for a successive ten-year term. The agreement,
as amended, provided 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
provided 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 agreement, as amended, also provided 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. Herbert H. Haft consented to the
termination of the agreement pursuant to HHH Settlement (see Note 6).
In fiscal 1989 Dart/SFW Corp. ("Dart/SFW") was formed with the apparent intent
that Dart/SFW would hold Dart's 50% interest in Shoppers and that Dart would
hold 80 of Dart/SFW's 100 authorized shares of capital stock. However,
Dart/SFW's organizational documents are incomplete. There is no record that a
transfer of Dart's 50% interest in Shoppers to Dart/SFW occurred. 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
85
86
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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 equally 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 equally 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 and as part of the RGL Settlement (see Note 6) Linda and
Robert Haft options were repurchased for $9.7 million.
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 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. As part of
the RGL Settlement (see Note 6) Robert M. Haft consented to the termination of
his option. 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. Dart has agreed to pay Herbert H. Haft $385,000 for his
option upon the closing of the sale of Total Beverage.
Crown Books 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
86
87
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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 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
On February 12, 1998, Dart entered into an employment agreement with Richard B.
Stone, Chairman and Chief Executive Officer. The agreement is for a three year
term and is renewable for one additional year after expiration of the stated
term. The agreement provides for a base salary of $550,000 per year and
additional compensation comprised of three components: (i) the immediate grant
of 30,000 nonqualified options to purchase Dart Class A Common Stock (ii) the
immediate grant of 6,000 shares of Dart Class A Common Stock, vesting of such
shares is dependent upon the sale of Trak Auto, Crown Books, Total Beverage and
Shoppers and (iii) variable cash bonuses based on the total sale of the Company
at dates specified in the agreement. The base salary will be reviewed at least
annually and may be increased but not decreased. All options and shares vest
after 4 1/2 years and the term of the options is five years.
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. Total
commitments under these agreements are approximately $6.1 million.
87
88
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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. 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. The Executive Committee members were Douglas M. Bregman, Larry G.
Schafran and Bonita Wilson, with Mr. Schafran as the Chairman of the Executive
Committee until the fourth quarter of fiscal 1998. The current members of the
Executive Committee are Richard B. Stone, Howard M. Metzenbaum and Harry M.
Linowes. Any and all actions of the Executive Committee are required to be
approved without a dissenting vote. The Executive Committee remains active in
the day-to-day affairs of the Company. Its continuing role is dependent on
future developments.
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 were compensated at a rate of $250 per hour plus
reimbursement of expenses. During the years ended January 31, 1998, 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
committees totaled $1,137,000, $1,299,000 and $1,263,000, respectively. There
were no fees paid to members of the Special Litigation Committee in fiscal 1998,
1997 or 1996.
NOTE 6 - SETTLEMENTS WITH THE HAFT FAMILY
Settlement with Ronald S. Haft
In October 1995, Dart and Ronald S. Haft entered into the RSH Settlement. The
RSH Settlement transactions were subject to legal challenges (see Note 8). 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.
Dart recorded the following RSH Settlement transactions in fiscal 1996:
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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 was due
June 30, 2000, subject to earlier prepayment in the event of a disposition of
the shares of stock held by the Voting Trustees. The note was cancelled by Dart
on February 17, 1998. Interest on the $27.4 Million Note accrued at 8%.
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 were placed into the Voting Trust established under the Voting
Trust Agreement and the 172,730 shares of Class B Common Stock became treasury
shares, which were 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 which was 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 was due
June 30, 2000, subject to earlier prepayment in the event of a disposition of
the shares of stock held by the Voting Trustees. The note was cancelled by Dart
on February 17, 1998. Interest accrued at 8% and was due at maturity.
A Buy/Sell/Offering Agreement between Dart and Ronald S. Haft governed the
ultimate disposition of the shares held by the Voting Trustee. That agreement
gave 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 had an option to "call" the shares held by the Voting
Trustee, if they had not previously been disposed of as described above, at any
time during the first seven months of the year 2000. Dart exercised its "call"
on February 17, 1998. The price of the shares purchased by Dart upon the closing
of the "call" was offset against the principal and interest due on these two
promissory notes.
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, were pledged to Dart and CMREC as security for certain loans made
89
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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 were recourse subject to
certain limitations and are recorded as Notes Receivable - Shareholder on the
Company's balance sheet and are 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 were 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.
During fiscal 1997, the five CMREC 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 are payable to Ronald S. Haft if
certain transactions contemplated by the RSH Settlement are effected.
Pursuant to the RSH Settlement, Ronald S. Haft and Dart 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 of the Warehouse Transactions was to
90
91
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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 had 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 the Pennsy Warehouses (see Note 7) by approximately
$14.0 million, recorded as additional Paid-in-Capital. Dart and/or Trak Auto
continued to fund the rental payments on the remaining properties pending
resolution of the surrounding these transfers.
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 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 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 was 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
restricted certain actions of Dart until further order of the court.
See Note 8.
91
92
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
Settlement with Robert, Gloria and Linda Haft
On September 26, 1997, Dart and it subsidiaries closed the transactions
contemplated in an agreement, dated August 16, 1997, to settle certain
litigation and enter other related transactions (the "RGL Settlement") with
Robert M. Haft, Gloria G. Haft, Linda G. Haft and certain related parties
(collectively, "RGL").
Pursuant to the RGL Settlement, Dart purchased from RGL 104,976 shares of Dart
Class B Common Stock for $14.7 million and 77,244 shares of Dart Class A Common
Stock for $6.8 million. In addition, Dart paid $9.3 million to RGL to terminate
all options held or claimed by RGL to purchase shares of Dart Class A Common
Stock and Dart paid $9.7 million to Robert M. Haft, Linda G. Haft and certain
related parties to terminate putative options to purchase 15 shares of Dart/SFW
Corp. Pursuant to the RGL Settlement, the Company dismissed all of its claims
against each of RGL. The Company also paid a total of $250,000 to RGL to
terminate a small number of options to purchase shares of common stock of Crown
Books and Trak Auto.
In addition, Dart acquired all of Robert M. Haft and Linda G. Haft's respective
interest in partnerships owning Dart's headquarters building in Landover,
Maryland and a distribution center leased by Trak Auto, in Bridgeview, Illinois
for $4.4 million. Trak Auto advanced Dart approximately $1.3 million towards the
Bridegview portion of the payment.
The closing of the RGL Settlement, resulted in the termination of the pending
claim by RGL to control of Dart and the settlement of all litigation between
them and Dart and its subsidiaries.
Settlements with Herbert H. Haft and Ronald S. Haft
On October 16, 1997, Dart announced settlements (the "Settlements") with Herbert
H. Haft and Ronald S. Haft pursuant to the HHH Settlement, a First Supplemental
Settlement Agreement with Ronald S. Haft (the "First Supplemental Agreement")
and a Second Supplemental Settlement Agreement with Ronald S. Haft (the "Second
Supplemental Agreement"). The Settlements were subsequently approved by the
Delaware Court of Chancery on November 24, 1997.
The HHH Settlement closed on February 5, 1998 and included the following
transactions: the purchase by Dart from Herbert H. Haft of all his shares of,
and options to purchase, Dart Class A Common Stock; that Herbert H. Haft
resigned from all of his positions with Dart and its subsidiary corporations;
that Herbert H. Haft relinquished his claim to voting control of Dart; and that
Herbert H. Haft terminated his employment contract with Dart. In addition, all
outstanding litigation and disputes between Dart and Herbert H. Haft are
resolved. Consummation of the Settlements also means that the Company is no
longer subject to the Standstill Order (see Note 8). As consideration for the
Settlements, Dart paid Herbert H. Haft approximately $28 million upon closing.
An accrual for the HHH Settlement of approximately
92
93
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
$28.0 million has been reflected in Dart's January 31, 1998 Consolidated
Financial Statements. Subsequent to January 31, 1998 and in connection with the
closing of the Settlements, Dart also made a $10 million loan to a partnership
owned by Herbert H. Haft and Ronald S. Haft. The loan is personally guaranteed
by Ronald S. Haft and is secured by the partnership's interest in three shopping
centers located in suburban Washington, D.C. and by a one-half indirect interest
in an office building in Lanham, Maryland leased by Shoppers. Dart paid
substantially all of this amount with a loan of $25 million from Shoppers and a
loan of $15 million from Trak Auto. In addition, certain derivative litigation
(see Note 8) was dismissed and Dart paid approximately $3.5 million to
derivative plaintiffs' counsel in January 1998 (approximately $0.5 million is
payable in December 1998). Prior to January 31, 1998, Trak Auto and Crown Books
paid Dart approximately $1.4 million and $0.8 million, respectively, for the HHH
Settlement.
The transactions in the First Supplemental Agreement include: completion of
bankruptcy plans of reorganization for partnerships owning Dart's headquarters
in Landover, Maryland and a distribution center leased to Trak Auto in
Bridgeview, Illinois; payment by Dart of $7 million to reduce outstanding
mortgage loans on these properties, which thereafter are wholly-owned by Dart
and/or its affiliates; and payment by Ronald S. Haft of $2.2 million to Dart
from escrowed funds previously earmarked for Ronald S. Haft.
On November 19, 1997, the real estate related transactions contemplated in the
First Supplemental Agreement were closed. Trak Auto advanced an additional $2.0
million to a wholly-owned Dart subsidiary for the Bridgeview distribution
center. The $2.0 million and the $1.3 million (discussed above) is in the form
of a promissory note and is expected to be repaid in May 1998.
The Second Supplemental Agreement closed in February 1998. Under the Second
Supplemental Agreement, Dart required that the shares held in Voting Trust for
the benefit of Ronald S. Haft to be transferred to Dart. Dart purchased the
shares in the Voting Trust from Ronald S. Haft by offsetting the $27.4 million
and $37.4 million Notes Receivable from him and a cash payment of approximately
$0.7 million. The Class A and Class B common stock from the Voting Trust was
placed in treasury and on February 17, 1998, Dart's Class A Common Stock and
Class B Common Stock were reclassified as Common Stock.
NOTE 7 - PENNSY WAREHOUSES
The Pennsy Warehouse leases cover a 533,800 square foot facility in Landover,
Maryland consisting of office space and three warehouses once occupied and used
by the Dart Drug chain, a former subsidiary of Dart. Dart resumed paying rent on
the Pennsy Warehouses in 1991 following bankruptcy of the prior tenant, however,
the warehouses and office space are not required by Dart for its operations.
These warehouses were owned by partnerships in which members of the Haft family
owned all the general and limited partnership interests. The office space and
warehouses were built by Haft partnerships between 1965 and 1974.
93
94
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
The Pennsy Warehouse 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 and at the end of the lease term Dart retains no
residual value in either the land or buildings. In 1994, Dart's Executive
Committee undertook a legal review of the Pennsy Warehouse leases from their
inception. As a result of this legal review, on February 10, 1995, Dart filed a
complaint for rescission of the Pennsy Warehouse leases and for the return of
rent paid since the reassumption of the Pennsy Warehouse leases (see Note 8).
During fiscal 1995, Dart revised its expectations of future sublease income and
increased the reserve for the obligations represented by these leases by $22.7
million to $32.3 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 Warehouses to Dart. The transfer of the partnership
interest reduced Dart's obligation under the leases. Accordingly, in fiscal 1996
Dart reversed $14.0 million of the reserve with respect to Warehouses II and
III. The transfer contemplated in the RSH Settlement was subject to
contingencies, including bankruptcy court and mortgagee approval, and to
challenges brought by Herbert H. Haft concerning the extent of Ronald S. Haft's
ownership interest in certain of the properties. As a result of the Settlements,
a wholly-owned subsidiary of Dart now owns all the Pennsy Warehouses, all
contingencies have been settled and Dart reversed an additional $9.2 million of
the reserve primarily attributable to the reduction of the rental payments. The
remaining reserve of $10.0 million is for repairing the entire facility to
rentable or salable use. In addition, Dart has recorded the land and building
(approximately $4.8 million based on independent appraisals) and mortgage for
all the Pennsy Warehouses.
The following summarizes the activity in the reserve:
(dollars in thousands)
1998 1997 1996
-------- -------- --------
Reserve, beginning of year $ 18,568 $ 18,467 $ 31,892
Add: Interest accrued 1,100 981 1,655
Less: Payments made (466) (880) (1,080)
Reversal of reserve (9,202) -- (14,000)
-------- -------- --------
Reserve, end of year $ 10,000 $ 18,568 $ 18,467
======== ======== ========
Trak Auto, Crown Books and Shoppers have an arrangement to utilize space in
Warehouses II and III at a variable rental (approximately $350,000 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 each to pay
for its share of common area maintenance, real estate taxes and insurance
premiums.
94
95
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
In November 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. However, tests
demonstrated that the level of airborne asbestos did not exceed the legal
limits. Dart 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. Removal of
all asbestos from Warehouse II and III was completed in March 1996 and
thereafter Trak Auto, Crown Books and Shoppers started to use space in Warehouse
II. Warehouse I remains secured and unused.
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.
Resolution of Haft Family and Related Litigation
The litigation discussed below involving Dart, its affiliates and members of the
Haft family was settled prior to January 31, 1998. On February 5, 1998, Dart
closed the settlement agreement with Herbert H. Haft (the "HHH Settlement") and
a Second Supplemental Settlement Agreement with Ronald S. Haft ("Second
Supplemental Agreement") (collectively, the "Settlements"). As part of the
closing of the HHH Settlement, Herbert H. Haft (i) sold to Dart all of his
shares of, and options to purchase, Dart Class A Common Stock, and his capital
stock of Dart's subsidiaries Trak Auto Corporation ("Trak Auto") and Crown Books
Corporation ("Crown Books"),(ii) resigned from all of his positions with Dart
and its subsidiary corporations, (iii) relinquished his claim to voting control
of Dart, and (iv) terminated his employment agreement with Dart. In addition,
all outstanding litigation and disputes between Dart and Herbert H. Haft were
resolved. As consideration for the HHH Settlement, Dart paid Herbert H. Haft
approximately $28.0 million at the closing. An accrual for the HHH Settlement of
approximately $28.0 million has been reflected in the January 31, 1998,
Consolidated Financial Statements. Subsequent to January 31, 1998, in connection
with the closing of the Settlements, Dart also made a $10 million loan to a
partnership owned by Ronald S. Haft, the proceeds of which were used to repay a
$10 million note to Herbert H. Haft. Consummation of the Settlements also means
that all litigation (discussed below) between Dart and members of the Haft
family has been settled and dismissed, and the Company is no longer subject to
the
95
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
Standstill Order (discussed below) previously imposed by the Delaware Court of
Chancery.
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 was brought derivatively and named as nominal defendants
Dart, Trak Auto, Crown Books, and Dart subsidiaries Shoppers, Total Beverage and
CMREC. The complaint, as amended on January 12, 1995, alleged waste, breach of
fiduciary duty, violation of securities laws and entrenchment in connection with
various lease agreements between the CPI 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 sought 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 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 this derivative lawsuit. (After 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
dismissal of certain claims and for realignment of the parties to permit Dart to
prosecute other claims in the derivative lawsuit. 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 were subsequently asserted. See
the Lawsuit Against Herbert H. Haft Concerning Haft-Owned Real Estate, described
below. The Court did not act upon the amended motion.
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
was brought derivatively and named Crown Books as nominal defendant. The
complaint, as amended on February 24, 1995, alleged 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 alleged legal malpractice against a lawyer
96
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
advising Dart at that time. Plaintiff sought unspecified damages incurred by
Crown Books, and costs and attorneys' fees. Ronald S. Haft and Glenn E. Hemmerle
were dismissed without prejudice from this lawsuit. The amended complaint did
not name as a defendant H. Ridgely Bullock, who died subsequent to the filing of
the original complaint. Crown Books and other defendants filed a motion to
dismiss this lawsuit.
As a result of the Settlements, the derivative lawsuits have been dismissed with
prejudice (except for the legal malpractice which was dismissed without
prejudice) and Dart paid approximately $3.5 million in attorney's fees to
derivative plaintiffs' counsel (approximately $0.5 remains payable in December
1998).
Pennsy Warehouse Litigation
In fiscal 1995, the Executive Committee of Dart's Board of Directors undertook a
legal review of leases on three warehouses (the "Pennsy Warehouse"). By their
terms, the Pennsy Warehouse leases, which expire in 2016, required annual rental
payments of $855,000, subject to escalation based on increases in the Consumer
Price Index. The lease terms also required the lessee to pay real estate taxes,
insurance, utilities, and maintenance expenses. At January 31, 1997, Dart had
reserved approximately $18.6 million for the obligations represented by the
Pennsy Warehouse 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
Warehouse 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 sought rescission of the Pennsy Warehouse leases,
restitution of rent paid since 1991 and other monetary damages.
As part of the RSH Settlement, Ronald S. Haft and Dart agreed to various
transactions relating to the Pennsy Warehouse leases. The primary intent of
these transactions was to transfer ownership of Pennsy Warehouses II and III to
a Dart-controlled company in which Ronald S. Haft retained 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 has paid
the debt service on the mortgages on Warehouses II and III since then. 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 since the RSH
Settlement. The total amount paid in each of the last three fiscal years was
$855,000.
The Executive Committees of Dart, Crown Books and Trak Auto also undertook a
legal review in fiscal 1995 of non-Pennsy Warehouse leasing arrangements and
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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 (then 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 Warehouse leases) with certain partnerships
owned beneficially by members of the Haft family.
As a result of the Settlements, this litigation has been dismissed with
prejudice.
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
sought a declaration that the Proxy was revocable or would be revocable under
certain conditions, as well as costs and attorneys' fees. Ronald S. Haft also
requested 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 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 was not acted upon.
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 placed the
shares in treasury. See Note 6 to Dart's Consolidated Financial Statements (Item
8 - Financial Statements and Supplemental Data).
As a result of the Settlements, this litigation has been dismissed with
prejudice.
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
98
99
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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 sought a judgment (i) declaring the RSH Settlement
unlawful, hence null and void; (ii) declaring either that 172,730 shares of
Class B Common Stock belonging 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.
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 Court of Chancery denied Herbert H. Haft's motion in its
entirety.
As a result of the Settlements, all claims in this litigation against or on
behalf of Dart have been dismissed with prejudice.
Standstill Order
In connection with the legal challenges to the RSH Settlement raised by RGL and
by Herbert H. Haft, on December 6, 1995, the Delaware Court of Chancery entered
the Standstill Order, which restricted certain actions by Dart. Without further
order of the court, Dart could not (i) change its Certificate of Incorporation
or Bylaws; (ii) change the composition of Dart's Board of Directors or any of
its subsidiaries; (iii) change the 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
could 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" meant any transaction, contract or
agreement, the value of which exceeds $3.0 million.
99
100
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
As a result of the Settlements and subsequent approval by the Delaware Court of
Chancery, Dart is no longer subject to the Standstill Order.
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 alleged 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 charged 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
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.
As a result of the Settlements, this litigation has been dismissed with
prejudice.
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
advanced claims for breach of fiduciary duty, civil conspiracy and tortious
interference with contracts. The companies alleged 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 sought to recover the approximately $38 million paid to Robert
M. Haft in satisfaction of the judgment in his wrongful termination suit,
100
101
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
approximately $5 million in attorneys' fees incurred by the companies in defense
of that litigation, and punitive damages.
As a result of the Settlements, this litigation has been dismissed with
prejudice.
Shareholder Litigation
On April 24, 1998, Jerry Krim ("Plaintiff") filed a putative class action in the
Court of Chancery for the State of Delaware in and for the County of New Castle
(the "Complaint"). The Complaint asserts a cause of action sounding in breach of
fiduciary duty against the Company, each of the Company's directors (the
"Director Defendants"), Richfood Holdings, Inc. ("Richfood Holdings") and a
subsidiary of Richfood Holdings ("Acquisition Subsidiary").
The Complaint alleges that the Director Defendants, in agreeing to the Merger
(see Note 17 for a description of the Merger) of the Company with Acquisition
Subsidiary, breached their fiduciary duties owed to the Company's stockholders
to take all necessary steps to ensure that the stockholders will receive the
maximum value realizable for their shares in any merger or acquisition of the
Company. For example, Plaintiff alleges that the Director Defendants failed to
adequately evaluate the Company's value as a potential merger or acquisition
candidate and/or did not act to enhance the Company's value as such a candidate,
and failed to implement "a bidding mechanism to foster a fair auction of Dart to
the highest bidder". The Complaint alleges that Richfood Holdings pressed the
Company and the Director Defendants "into agreeing to deal exclusively with
Richfood Holdings and thereby breach their fiduciary obligations," which
allegedly makes Richfood Holdings and Acquisition Subsidiary liable to Plaintiff
and the class. The Complaint also alleges that the Director Defendants engaged
in all or part of the allegedly unlawful acts, plans, schemes or transactions
complained of and thus aided and abetted the alleged breach of fiduciary duty.
The Complaint seeks an injunction preventing Acquisition Subsidiary and Richfood
Holdings from consummating the tender offer, an injunction preventing the
Company, Richfood Holding and the Acquisition Subsidiary from consummating the
Merger and unspecified monetary damages.
Other
In January 1998 Trak Auto was named as a defendant in two class action lawsuits
(Richard Amezcua, Augustin Dominquez, and other members of the general public
similarly situated v. Trak Auto Corporation, Superior Court of California.
Action No. BC183900) and (D'Artanyon Tett, Linda Wendt and individuals on behalf
of themselves and all others similarly situated v. Trak Auto Corporation.,
Superior Court of the State of California. Action No. BC 186931) involving
former California employees of the Company alleging improper wage and hour
practices. The suit claims that former salaried employees should have been paid
overtime. Management and outside legal counsel are in the process of evaluating
these claims. Trak Auto is unable to express an
101
102
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
opinion as to the merit, if any, or potential liability, if any, of these
lawsuits as of the filing date of this report.
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, if established, upon the consolidated financial
condition and results of operations of the Company.
The Company recorded legal expenses of approximately $2.7 million, $22.4 million
and $7.2 million during the years ended January 31, 1998, 1997 and 1996,
respectively. These amounts include estimated future expenses that likely will
be necessary to resolve all litigation discussed above.
NOTE 9 - CREDIT FACILITIES
Crown Books
On September 12, 1996, Crown Books entered into a revolving credit facility with
a finance company to borrow up to $50.0 million. While Crown Books's tangible
net worth is less than $70.0 million, Crown Books is limited to borrowing a
maximum of $25.0 million under the current terms of the revolving credit
facility. As of January 31, 1998 Crown Books's tangible net worth was $35.8
million. Outstanding borrowings during fiscal 1998 and fiscal 1997 were paid-off
as of January 1, 1998 and 1997, respectively. The maximum borrowings outstanding
at any one time during the 52 weeks ended January 31, 1998 were $22,148,000. The
average borrowings and weighted average interest rate for the 52 weeks ended
January 31, 1998 were $10,061,000 and 8.5%. Crown Books intends to use proceeds
from draw-downs under the credit facility for working capital and other
corporate purposes. The credit facility has an original term of three years.
Borrowings 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% per annum 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's inventory,
accounts receivable and proceeds from the sale of such assets of Crown Books.
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
102
103
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
terminate it as of September 12, 1999 or on any anniversary date thereafter upon
60-days prior written notice to Crown Books. Crown Books had $25.0 million
available for borrowing at January 31, 1998.
Crown Books may need to increase its borrowing under its revolving credit
facility, though its ability to do so is subject to conditions contained in the
loan agreement that it does not meet. 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. Crown Books is negotiating with its
lenders either to increase its borrowing capacity under its existing credit
facility or to enter into a new credit facility with increase borrowing
capacity. Management of Crown Books believes that it will either amend its
existing facilities or enter a new credit facility in May 1998. There can be no
assurance, however, that Crown Books will succeed in its attempt to obtain a new
credit facility.
Trak Auto
In December 1996, Trak Auto entered into a revolving credit facility (the
"Facility") with a finance company to borrow up to $25.0 million. Trak Auto
intends to use proceeds from drawdowns under the Facility for working capital
and other corporate purposes. The Facility has an original term of three years.
Borrowings under the 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 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 an interest rate that fluctuates with Trak Auto's
ratio of funded debt to equity.
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 Facility includes a facility fee of .25% per annum on the unused
principal balance, as defined. No single advance may be outstanding for more
than 36 months. Trak Auto may terminate the Facility upon 60-days prior written
notice to the lender and the lender may terminate
103
104
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
it as of December 18, 1999 or on any anniversary date thereafter upon 60-days
prior written notice to Trak Auto.
In addition, Trak Auto has a $750,000 commercial letter of credit facility for
use in importing merchandise.
At January 31, 1998, there had been no borrowing under the Facility and no
borrowings under the letters of credit facility.
Shoppers Food
Senior Notes
In June 1997, Shoppers refinanced its Increasing Rate Notes with $200.0 million
aggregate principal amount of 9 3/4% Senior Notes due 2004 (the "Senior
Notes")(see Note 3). The net proceeds from the Senior Notes was $193.5 million
(after fees and expenses of approximately $6.5 million) of which $143.5 million
was used to repay the Increasing Rate Notes (including interest) and $50.0
million (the "Restricted Proceeds") was paid to Dart in the form of a $40
million dividend and a $10 million loan (see Note 6) for settlements with
certain Dart shareholders (Haft family members). Interest on the Senior Notes
accrued from the date of issuance and is payable semi-annually in arrears on
each June 15 and December 15, commencing December 15, 1997. The Senior Notes are
effectively subordinated in right of payment to all secured indebtedness of the
Company and certain restrictive covenants including, limitation on restricted
payments, limitation on indebtedness, limitation on investments, loans and
advances, limitation on liens, limitation on transactions with affiliates,
restriction on mergers, consolidations and transfers of assets, limitation on
lines of business, limitations on asset sales and limitation on issuance and
sale of capital stock of subsidiaries. In addition, the Company is restricted,
as to the amount, of declaring or paying any dividends or making distributions
of the Company's capital stock accounts.
The Senior Notes are fully and unconditionally guaranteed by SFW Holding Corp.
("Holdings"), the immediate parent of Shoppers. Holdings holds 100% of the
common stock of Shoppers and is wholly-owned subsidiary of Dart. The guarantee
is secured by a first priority security interest in the capital stock of
Shoppers owned by Holdings.
Revolving Credit Facility
On December 22, 1997, Shoppers entered into a revolving loan and security
agreement (the "Credit Facility") to borrow up to $25 million. Shoppers intends
to use proceeds from drawdowns from the Credit Facility for working capital and
other corporate purposes. The Credit Facility has an original term of five years
and may be renewed for up to two additional one year periods. Borrowings under
the Credit Facility shall bear interest at rates ranging from prime rate minus
0.25% to prime rate plus 0.25%, for prime rate
104
105
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
loans, or LIBOR plus 1.5% to LIBOR plus 2.0%, for LIBOR loans. Shoppers may
elect prime rate loans or LIBOR loans. Interest rates are based upon Shoppers's
net income determined in accordance with Generally Accepted Accounting
Principles; plus, income taxes, interest expense (net of interest income),
amortization and depreciation expenses, LIFO expense, other non-cash charges
(excluding accruals for cash expenses made in the ordinary course of business)
and losses from sales or other dispositions of assets; less, gains from sales or
other dispositions and extraordinary or non-recurring gains, but not net of
extraordinary or non-recurring cash losses ("EBITDA"). Borrowings are limited to
eligible accounts, as defined, less any letters of credit outstanding and are
secured by Shoppers's inventory and certain accounts receivable. Interest on
prime rate loans is payable monthly and interest on LIBOR loans is payable
between one and three months. The Credit Facility includes a fee on the unused
principal balance of 0.375% per annum until January 31, 1999 and a variable rate
from .25% to .50% based on EBITDA. Letters of Credit issued under the Credit
Facility cannot exceed $10.0 million and Shoppers must pay a fee of 1.75 percent
to 1.25 percent, based on the level of EBITDA, of the daily outstanding balance
of the letters of credit. The Credit Facility has certain restrictive covenants
including the maintenance of specified EBITDA levels. As of January 31, 1998,
Shoppers had not borrowed under the Credit Facility.
As of January 31, 1998, February 1, 1997, June 29, 1996, and July 1, 1995.
Shoppers had outstanding letters of credit of approximately $6,597,000,
$6,724,000, $6,424,000, and $6,135,000; respectively. One of there letters of
credit expired March 1, 1998, three others are expected to expire on May 1, 1998
and the remaining letter of credit expires on June 4, 1998. One has been
replaced with a surety bond and the others will be secured by replacement
letters of credit.
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 concepts.
The costs associated with store closings 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
store closing date.
As of January 31, 1998, Trak Auto had a reserve of $12,838,000 for store
closings. The reserve relates to 30 stores that have been closed. The activity
in the closed store reserve during the last two years is as follows:
105
106
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(dollars in thousands)
1998 1997
------- -------
Reserves, beginning of year $ 2,644 $ 4,491
Net provision recorded/(charges) 10,194 (1,847)
------- -------
Reserves, end of year $12,838 $ 2,644
======= =======
The increase in fiscal 1998 is primarily due to closing 15 stores in the
Pittsburgh, Pennsylvania market as a result of the poor performance of the
stores.
The total unrealizable store lease obligation of Trak Auto as of January 31,
1998 is $12,838,000 and the amount of such unrealizable lease obligation
allocable to related party leases is approximately $834,000. The closed store
reserve as of January 31, 1998 is expected to be utilized as follows:
(dollars in thousands)
Fiscal
Year Total
---- -----
1999 $ 2,086
2000 1,434
2001 1,271
2002 1,107
2003 969
2004-2005 5,971
-------
Total $12,838
=======
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.
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 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 certain
of the smaller Classic Crown Books stores, relocating, expanding and converting
certain of such 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 three fiscal years was as
follows:
106
107
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(dollars in thousands)
1998 1997 1996
-------- -------- --------
Restructuring Reserve, beginning of year $ 1,507 $ 7,025 $ 10,515
Less: Payments and charges (426) (1,653) (1,439)
Reversal of reserves, net (88) (3,865) (2,051)
-------- -------- --------
Restructuring Reserve, end of year $ 993 $ 1,507 $ 7,025
======== ======== ========
During the last three fiscal years, Crown Books reversed portions of the
restructuring reserve as a result of (i) management decisions 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 nine stores, of which four have
been closed as of January 31, 1998, with lease obligations ranging from one to
84 months. The lease obligation allocable to related party leases is
approximately $485,000. The restructuring reserve is expected to be utilized as
follows:
(dollars in thousands)
Lease Leasehold
Fiscal Obligations Improvements
Year (Cash Outflows) & Fixtures Total
---- --------------- ---------- -----
1999 $223 $ -- $223
2000 347 4 351
2001 100 -- 100
2002 61 -- 61
2003 61 -- 61
2004-2005 197 -- 197
---- ---- ----
Total $989 $ 4 $993
==== ==== ====
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 three fiscal years is as follows:
107
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
(dollars in thousands)
1998 1997 1996
-------- -------- --------
Closed Store Reserve, beginning of year $ 8,034 $ 10,850 $ 20,241
Less: Payments and charges (1,667) (1,764) (2,648)
Reversal of reserves, net (1,546) (1,052) (6,743)
-------- -------- --------
Closed Store Reserve, end of year $ 4,821 $ 8,034 $ 10,850
======== ======== ========
During each of the last three fiscal years, Crown Books reversed portions of the
closed store reserve as a result of (i) management decisions 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 41 stores, of which 12 have been
closed as of January 31, 1998, with lease obligations ranging from one to 71
months. The lease obligation allocable to related party leases is approximately
$582,000. The closed store reserve is expected to be utilized as follows:
(dollars in thousands)
Lease Leasehold
Fiscal Obligations Improvements
Year (Cash Outflows) & Fixtures Total
---- --------------- ---------- -----
1999 $1,193 $ 405 $1,598
2000 1,386 136 1,522
2001 890 101 991
2002 470 45 515
2003 109 -- 109
2004-2005 86 -- 86
------ ------ ------
Total $4,134 $ 687 $4,821
====== ====== ======
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.
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 $2.8
million 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 $2.4 million 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
108
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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. As a result of a negotiated
settlement with the landlord for the future lease obligations, the Company
reversed approximately $1.6 million of this reserve during fiscal 1998. At
January 31, 1998, Total Beverage had no closed store reserves.
Shoppers Food
Shoppers has a reserve for closed stores of approximately $0.4 million at
January 31, 1998. The reserve relates to one store that was closed in October
1994 and represents the remaining lease obligations.
NOTE 11 - SALE OF CALIFORNIA OPERATIONS
On October 6, 1997, Trak Auto entered into a purchase agreement (the "Purchase
Agreement") with CSK Auto, Inc. ("CSK") pursuant to which Trak Auto agreed to
sell to CSK its interest in its California operations (including inventory,
store fixtures and the assignment of store leases). Trak Auto and CSK closed the
transaction on December 8, 1997 for an aggregate purchase price of approximately
$32.8 million. Ninety percent (90%) of the aggregate purchase price, or $30.2
million, was paid in cash at the closing. The remaining ten percent (10%) was
paid upon finalization of the inventory valuation. Trak Auto realized a pre-tax
loss of $8.2 million (net of a reduction in the LIFO reserve of approximately
$2.3 million) on the sale to cover losses associated with the sale of assets and
exposure under remaining lease obligations. Trak Auto has recorded this
estimated loss in the accompanying Consolidated Statements of Operations.
NOTE 12 - MINORITY INTERESTS
The $38,727,000 of minority interests reflected in the Consolidated Balance
Sheet as of January 31, 1998 represents the minority portion of Trak Auto and
Crown Books equity owned by the public shareholders of Trak Auto and Crown
Books. Income (loss) attributed to the minority shareholders of Trak Auto was
$(5,823,000), $354,000 and $2,351,000 for the years ended January 31, 1998, 1997
and 1996, respectively. Income (loss) attributed to the minority shareholders of
Crown Books was $(23,196,000), $(442,000), and $1,802,000 for the years ended
January 31, 1998, 1997 and 1996, respectively. Income attributed to the minority
ownership of Shoppers for the year ended January 31, 1995 was $1,050,000 (no
income for Shoppers 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 for the year ended January 31, 1996 (no income for
the real estate joint ventures was attributed to the minority interest for
periods after October 5, 1995).
109
110
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
NOTE 13 - 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
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 1998 1997 1996
---------- ---------- ----------
As Reported $ (41,602) $ (16,693) $ (13,424)
Pro Forma (42,136) (16,921) (13,489)
Net loss per share
As Reported $ (20.50) $ (8.73) $ (7.88)
Pro Forma (21.76) (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.
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: risk free rates of approximately 5.4% in fiscal 1998 and
approximately 6.0% in fiscal 1997 and 1996; expected dividend rates of $.13 per
share; expected lives of 5.0 years; and expected volatility of 25.0%.
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.
110
111
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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, 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
Granted 38,225 105.00-110.00 105.65
Exercised (17,424) 73.00-92.00 82.02
Forfeited (12,939) 73.00-92.00 83.15
------- -------------- -------
Outstanding at January 31, 1998 84,397 $ 73.00-110.00 $ 94.20
======= ============== =======
At January 31, 1998, options for 290,933 shares remain available for grant,
33,347 options were exercisable. Options outstanding for 3,675 shares have an
exercise price of $73.00 per share and a contractual life of 1.5 years, options
outstanding for 75,722 shares have exercise prices between $81.40 and $105.00
per share and a weighted average contractual life of 2.9 years and options
outstanding for 5,000 shares have an exercise price of $110.00 per share and a
contractual life of 4.9 years. The weighted average fair value of options
granted was $35.34, $32.18 and $29.97 for options granted during fiscal 1998,
1997, and 1996, respectively.
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.
111
112
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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, 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
Forfeited (30,000) 71.50-104.50 91.67
------- -------------- -------
Outstanding at January 31, 1998 -- $ -- $ --
======= ============== =======
During the year ended January 31, 1998, all outstanding options were terminated.
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 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
112
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
to be exercisable until May 1998. No options were exercised in fiscal 1998, 1997
and 1996.
Robert M. Haft has attempted to exercise options to purchase 120,000 shares
under the 1983 Plan. The Executive Committee undertook a legal review of the
1983 Plan. Based upon this legal review, the Executive Committee 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 instituted litigation to enforce his alleged options under the 1983
Plan. Pursuant to the RGL Settlement and the HHH Settlement, Dart paid Robert M.
Haft and Herbert H. Haft approximately $7.0 million for their options under the
1983 Plan and all claims were released and all litigation was dismissed.
Subsequent to January 31, 1998, Dart reached agreements with the holders of the
20,400 options for $20.00 per share. The agreements required Dart, among other
things, to register the option shares with Securities and Exchange Commission in
exchange for amending the exercise price to $51.25 per share. As a result, all
of the $20.00 options were exercised prior to April 1, 1998.
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 attempted to exercise options under the 1987 Plan. The Executive
Committee undertook a legal review of the 1987 Plan and based upon this legal
review, Dart has contested the validity of the 1987 Plan and the
113
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
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 initiated litigation to enforce his alleged options under the
1987 Plan. In his complaint, Robert M. Haft contends that Dart's fiscal 1989
purchase of its original 50% interest in Shoppers 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. Pursuant
to the RGL Settlement and the HHH Settlement, Dart paid Robert M. Haft and
Herbert H. Haft approximately $6.0 million for the options under the 1987 Plan
and all claims were released and all litigation was dismissed.
Stock options granted for Trak Auto would not, if exercised, have a material
dilutive effect on Dart's equity interest.
Stock options granted for Crown Books would, if all were exercised, reduce
Dart's ownership percentage to 48.6%
NOTE 14 - 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 and 1996
were $99,000, and $379,000, respectively. There were no accruals for fiscal
1998.
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 matching accrual was approximately
$540,000, $489,000 and $330,000 for the years ended January 31, 1998, 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 Company's matching
accrual was approximately $16,000 in fiscal 1998 and $22,000 in fiscal 1997.
Prior to fiscal year 1995 Shoppers maintained a noncontributory profit sharing
plan (the "Plan") for all employees with one year of full time continuous
service. During fiscal 1995, Shoppers 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
114
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
continuous service. Discretionary contributions are made by Shoppers 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 the
52 weeks ended June 29, 1996 and July 1, 1995 and $233,000 for the 31 weeks
ended February 1, 1997. For the 52 weeks ended January 31, 1998 the Company has
accrued $400,000 for its contributions to the New Plan.
Shoppers makes contributions to multiemployer plans for its union employees.
Such contributions, net of employee contributions, totaled approximately
$842,000, $10,725,000 and $487,000 for pension, health and welfare and legal
benefit plans, respectively, for the 52 weeks ended January 31, 1998 and
$440,000, $6,205,000, and $282,000, for pension, health and welfare, and legal
benefit plans, respectively, for the 31 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
52 weeks ended June 29, 1996, and $787,000, $8,701,000 and $408,000,
respectively, for the 52 weeks ended July 1, 1995.
115
116
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
NOTE 15 - SEGMENT INFORMATION
The Company's three primary business segments are retail specialty, retail
grocery and beverage and, until May 1996, real estate. The segment information
presented contains revenue, income from operations and depreciation and
amortization for Shoppers for fiscal 1998 only and does not contain such
information for CMREC after October 6, 1995. The following is a summary of
selected consolidated information for the business segments during January 31,
1998, 1997 and 1996:
(dollars in thousands)
Year Ended January 31,
-------------------------------------------
Revenue: 1998 1997 1996
----------- ----------- -----------
Retail, specialty $ 619,416 $ 636,314 $ 631,011
Retail, grocery and beverage 897,740 30,195 29,508
Real estate -- -- 13,426
Other (1) 971 1,580 4,191
----------- ----------- -----------
$ 1,518,127 $ 668,089 $ 678,136
=========== =========== ===========
Income (loss) from operations:
Retail, specialty $ (64,484) $ 3,445 $ 18,178
Retail, grocery and beverage 27,296 (1,130) 373
Real estate -- -- 6,356
Other (1) (10,997) (26,599) (32,603)
----------- ----------- -----------
Total operating profit (48,185) (24,284) (7,696)
Interest income 5,349 2,875 8,507
Interest expense (27,911) (6,993) (13,494)
----------- ----------- -----------
Loss before income taxes $ (70,747) $ (28,402) $ (12,683)
=========== =========== ===========
Identifiable assets:
Retail, specialty $ 300,432 $ 369,117 $ 368,447
Retail, grocery and beverage 298,276 7,722 8,382
Real estate -- -- --
Other (1) 15,128 72,954 93,763
----------- ----------- -----------
$ 613,836 $ 449,793 $ 470,565
=========== =========== ===========
Depreciation and Amortization Expense:
Retail, specialty $ 14,290 $ 13,202 $ 11,707
Retail, grocery and beverage 11,382 298 223
Real estate -- -- 3,112
Other (1) 570 540 411
----------- ----------- -----------
$ 26,242 $ 14,040 $ 15,453
=========== =========== ===========
Capital Expenditures:
Retail, specialty $ 11,611 $ 16,438 $ 14,651
Retail, grocery and beverage 11,773 175 887
Other 234 499 1,150
----------- ----------- -----------
$ 23,618 $ 17,112 $ 16,688
=========== =========== ===========
(1) Includes Dart and consolidating eliminations and adjustments.
116
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DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
NOTE 16 - INTERIM FINANCIAL DATA (Unaudited)
Selected interim financial data for the fiscal years ended 1998 and 1997 are as
follows:
(dollars in thousands, except per share data)
Three Months Ended
------------------------------------------------------------
JANUARY 31, OCTOBER 31, JULY 31, APRIL 30,
1998 1997 1997 1997
----------- ----------- -------- ---------
Revenue $ 397,862 $ 378,628 $ 376,113 $ 365,524
Gross profit (1) 74,796 76,263 81,058 82,616
Net Income (Loss) $ (15,589) $ (23,221) $ (5,764) $ 2,972
========= ========= ========= =========
Earnings per share
Net Income (Loss) (2) $ (7.68) $ (11.47) $ (2.68) $ 1.19
========= ========= ========= =========
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 Income (Loss) $ (14,764) $ (1,164) $ (298) $ (467)
========= ========= ========= =========
Earnings per share
Net Income (Loss)(2) $ (7.32) $ (.66) $ (.30) $ (.36)
========= ========= ========= =========
(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.
NOTE 17 - SUBSEQUENT EVENTS
On April 9, 1998, Dart entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Richfood Holdings, Inc. ("Richfood Holdings") and a subsidiary
of Richfood Holdings ("Acquisition Subsidiary") pursuant to which Dart has
agreed to become a wholly owned subsidiary of Richfood Holdings. Pursuant to the
terms of the Merger Agreement, Richfood Holdings has agreed to (1) make a cash
tender offer (the "Offer") for (a) all of the issued and outstanding shares of
Common Stock at a price of $160.00 per share and (b) all options to acquire
shares of Common Stock at a price equal to the excess, if any, of $160.00 over
the strike price of each such option (collectively, the "Merger Consideration")
and (2) take all steps necessary to cause Acquisition Subsidiary to merge with
and into Dart (the "Merger") in a transaction in which (a) Dart will become a
wholly owned subsidiary of Richfood Holdings, (b) the remaining outstanding
shares of Common Stock will be cancelled and become convertible into the right
to receive $160.00 in cash, and (c) the remaining outstanding options to acquire
Common Stock will become convertible into the right to receive in cash the
excess, if any, of $160.00 over the strike price of such options.
117
118
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
The Offer is subject to a number of customary conditions. The Merger is subject
to the tender in the Offer of a majority of shares of Common Stock on a fully
diluted basis and to other customary conditions, including the receipt of
regulatory approvals and the absence of material adverse effects on the business
or financial conditions of Dart and its subsidiaries, taken as a whole, with
certain limited exceptions. There can be no assurance that either the Offer or
the Merger will be consummated. Richfood Holdings has stated its intentions to
divest Dart's non-core business lines Trak Auto and Crown Books. There are no
adjustments reflected in the accompanying financial statements for the
impairment of the carrying value, if any, of these businesses in excess of their
market value.
On April 13, 1998, Dart agreed to sell Total Beverage for a cash purchase price
equal to Total Beverage's stockholders equity as of the closing (adjusted to
remove certain intercompany obligations plus an agreed upon premium). The
closing of the transaction is expected to occur in May 1998. The closing is
subject to customary conditions and there can be no assurance that the closing
will occur. Dart expects to record a gain on the sale of approximately $1.5
million which will be deferred and amortized as the Company is released from its
contingent liability on five stores leases.
118
119
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Inapplicable.
119
120
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
- ---- --- ----------------------------
Richard B. Stone 69 Chairman of the Board of Directors
and Chief Executive Officer
Dennis N. Weiss 52 Executive Vice President, Real Estate
Mark A. Flint 51 Senior Vice President, Chief Financial
Officer and Treasurer
Elliot R. Arditti 43 Senior Vice President, Secretary and
Corporate Counsel
Terry J. Sharp 45 Senior Vice President of Human Resources
Harry M. Linowes 70 Director
Howard M. Metzenbaum 80 Director
Directors are elected annually by the holders of the Common Stock. Officers
serve at the discretion of the Board of Directors.
Richard B. Stone was appointed Chairman of the Board and Chief Executive Officer
in February 1998. He served as Acting Chairman of the Board and Acting Chief
Executive Officer since October 1997. He is also Chairman and Chief Executive
Officer of each of Dart's other subsidiaries, including Trak Auto, Crown Books,
Shoppers and Total Beverage. From December 1995 to February 1998, Senator Stone
was the Voting Trustee of a trust that held all of the voting stock of Dart
prior to the settlement of the Haft family litigations. From 1992 to 1994,
Senator Stone was a Director of International Service System. He served as
United States Ambassador to Denmark from 1992 to 1993, and he is currently a
member of the Council of American Ambassadors. He was Chief Operating Officer of
Capital Bank, N.A. from 1989 to 1991, and was Vice Chairman of the Board of
Directors of Capital Bank, N.A. from 1985 to 1991. Senator Stone served as
President Reagan's Special Envoy for Central American Affairs and
Ambassador-at-Large from 1983 to 1984. He was a United States Senator from 1975
to 1981, representing the State of Florida.
Dennis N. Weiss joined Dart in August 1981, as Director of Real Estate. He was
appointed Vice President, Real Estate, in June 1983, Senior Vice President, Real
Estate, in September 1986, and Executive Vice President, Real Estate in December
1987.
Mark A. Flint has been the Senior Vice President and Chief Financial Officer 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
120
121
Item 10. Directors and Executive Officers of the Registrant (Continued)
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 on February 6, 1997. He has also served as
President of Shoppers from February 1997 until August 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. He has
been acting in leadership roles with my civic organizations.
Terrance J. Sharp was appointed Senior Vice President of Human Resources 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.
Harry M. Linowes has been a Director of Dart and its subsidiaries since October
21, 1997. Mr. Linowes is a Certified Public Accountant and a consultant. Prior
to his retirement, Mr. Linowes served as a Senior Partner of BDO Seidman, L.L.P.
Accountants and Consultants ("BDO Seidman") from 1992 to 1996, and as Managing
Partner from 1986 to 1992. In 1986, Mr. Linowes, then the Managing Partner of
Leopold & Linowes, oversaw the merger of that firm with BDO Seidman. Mr. Linowes
has served as President of the Board of Trustees of the D.C. Institute of
Certified Public Accountants, as President of the Washington, D.C. Estate
Planning Counsel, and as Chairman of the Executive Committee of CPA Associates
(an international association of CPA firms). He has been active in leadership
roles with many civic organizations.
Howard M. Metzenbaum has been a Director of Dart and its subsidiaries since
October 21,1997. He currently serves on the Board of the Public Citizen and
National Peace Garden and he serves as Chairman of the Board of the Consumer
Federation of America. He served also as Senator from the State of Ohio between
1977 and 1995, and from January 1974 to December 1974. Senator Metzenbaum was
practicing attorney prior to joining the United States Senate. He was head of
the firms Metzenbaum, Gaines, Schwartz Arupansky, Finley and Stern. Senator
Metzenbaum was Chairman of the Board of COMCORP from 1969 to 1974. Prior to
1974, he served as Chairman of the Board of ITT Consumer Services Corp. ("ITT")
and as a director of Capital National Bank of Cleveland and Society National
Bank of Cleveland for several years. From 1958 to 1966, he served as Chairman of
the Board of the Airport Parking Company of America, which later merged with
ITT.
Pursuant to the terms of the Bylaws of Dart, the term of each director expires
at the 1998 Annual Meeting of Stockholders or until a successor is elected and
qualified.
The other officers of Dart are:
Dale A. Morris became Chief Information Officer of Dart in December 1997. Prior
to this position Mr. Morris served as Director, Enterprise Systems for Dart
since March 1997. For six months prior to this, Mr. Morris was Director,
Corporate Systems for Crown Books. Prior to joining Crown Books, Mr. Morris
121
122
Item 10. Directors and Executive Officers of the Registrant (Continued)
was owner and principal consultant of Automation & Management Consulting, a firm
he founded to provide automation consulting services in the health care
industry. Mr. Morris held key information technology management positions in a
twenty year career with Philip Morris, USA and Philip Morris, International.
Ronald T. Rice joined Dart in October 1981. He was appointed Vice President in
February 1998, 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.
There is no 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, 1998, all filing requirements
applicable to its officers, directors and ten percent shareholders were complied
with except that Richard B. Stone, Harry M. Linowes and Howard M. Metzenbaum did
not file their respective Form 3's on a timely basis. Such Form 3's were filed
late.
122
123
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, 1998 to (i) the Chief Executive Officer of Dart,(ii) the other
four most highly compensated executive officers of Dart(iii) the current and
former members of the Executive Committee of Dart, and (iv) the former Chief
Executive Officer (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) (#) ($) (2)
- ---------------- ---- --------- -------- -------- ------- -------
Richard B. Stone 1998 -- -- 343,000(4) -- --
Chief Executive
Officer (3)
Mark A. Flint 1998 292,800 -- -- 10,500 3,000
Chief Financial 1997 91,100 5,000 -- 750 --
Officer (5)
Terry J. Sharp 1998 240,800 -- -- 5,750 3,800(6)
Senior Vice 1997 221,800 -- -- 5,200 69,900(7)
President of 1996 115,400 30,000 -- 4,750 25,000(8)
Human Resources
Elliot R. Arditti 1998 190,900 -- -- 4,300 3,000
Senior VP, Secretary 1997 188,400 -- -- 4,150 3,000
and Corporate 1996 206,400 -- -- 450 3,000
Counsel
Dennis N. Weiss 1998 275,400 -- -- 6,500 3,000
Executive Vice 1997 275,400 -- -- 6,200 4,100
President 1996 301,000 -- -- 5,800 1,000
Members of the Executive Committee
- ----------------------------------
Howard M. 1998 -- -- 75,000(9) -- --
Metzenbaum (20)
Harry M. Linowes 1998 -- -- 41,800(10) -- --
(20)
Larry G. Schafran 1998 -- -- 701,400(11) 5,500 --
Former Chairman 1997 -- -- 1,073,000(12) 5,500 --
(20) 1996 -- -- 1,059,500(13) 5,500 --
123
124
Item 11. Executive Compensation (Continued)
Long Term
Compensation
Annual Compensation Awards
-------------------------------------------- ------------------------
Other All
Annual Stock Other
Name of Compen- Options Compen-
Principal Fiscal sation Granted sation
Position Year Salary($) Bonus($) ($) (1) (#) ($) (2)
- ---------------- ---- --------- -------- -------- ------- -------
Bonita A. Wilson 1998 -- -- 268,200(14) 5,500 --
Former Member 1997 -- -- 227,500(15) 5,500 --
(20) 1996 -- -- 205,800(16) 5,500 --
Douglas M. Bregman 1998 -- -- 285,900(17) 5,500 --
Former Member 1997 -- -- 242,700(18) 5,500 --
(20) 1996 -- -- 231,000(19) 5,500 --
Former Officer
Herbert H. Haft 1998 1,531,000 -- 66,000(22) -- 30,000
Chief Executive 1997 1,531,000 -- 66,000(22) -- 30,000
Officer (21) 1996 1,531,000 -- 69,800(23) -- 30,000
(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) Mr. Stone was elected Chief Executive Officer in February 1998. He was
Acting Chief Executive Officer since October 1997. During fiscal 1998
Mr. Stone was compensated at a rate of $275 per hour.
(4) Includes fees received as a Member of Executive Committee of Dart
($111,400); fees received as Voting Trustee ($220,400); fees received
as a director of Dart ($3,750), Trak Auto ($3,750) and Crown Books
($3,750); and health insurance.
(5) Mr. Flint joined Dart as Senior Vice President and Chief Financial
Officer in September 1996.
(6) Includes relocation fees and taxes thereon ($800) and Company match to
retirement account of $3,000.
(7) Includes relocation fees and taxes thereon ($68,700) and allocation to
retirement account ($1,200).
(8) Includes sign-on bonus.
(9) Includes fees received as a Member of the Executive Committee of Dart
($20,500), Trak Auto ($20,500) and Crown Books ($20,500) and fees as a
director of Dart ($4,500), Trak Auto ($4,500) and Crown Books ($4,500).
(10) Includes fees received as a Member of the Executive Committee of Dart
($9,100) Trak Auto ($9,100) and Crown Books ($9,100) and fees received
as a director of Dart ($4,500), Trak Auto ($5,500) and Crown Books
($4,500).
(11) Includes fees received as a Member of the Executive Committee of Dart
($208,600), Trak Auto ($208,600) and Crown Books ($208,600); fees
received as a director of Dart ($17,700), Trak Auto ($14,200) and Crown
Books ($14,700); apartment usage ($24,000) and health insurance
($5,000).
124
125
Item 11. Executive Compensation (Continued)
(12) 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).
(13) 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).
(14) Includes fees received as a Member of the Executive Committee of Dart
($67,400), Trak Auto ($67,400) and Crown Books ($67,400); fees received
as a director of Dart ($22,600), Trak Auto ($19,200) and Crown Books
($19,200); and health insurance ($5,000).
(15) 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).
(16) 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).
(17) Includes fees received as a Member of the Executive Committee of Dart
($73,300), Trak Auto ($73,300) and Crown Books ($73,300); fees received
as a director of Dart ($22,000), Trak Auto ($20,000) and Crown Books
($19,000); and health insurance ($5,000).
(18) 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).
(19) 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).
(20) In fiscal 1998, Howard M. Metzenbaum and Harry M. Linowes were
appointed directors and Members of the Executive Committees of Dart and
its subsidiaries. Larry G. Schafran, Bonita A. Wilson and Douglas M.
Bregman were Members of the Executive Committees of Dart and its
subsidiaries from 1997 until the fourth quarter of fiscal 1998. Members
of the Executive Committee are compensated at a rate of $275 per hour.
See Item 11 - Executive Compensation - Compensation of Directors.
(21) Herbert H. Haft resigned all of his positions with Dart and all of its
subsidiaries, effective February 5, 1998 pursuant to a settlement
agreement between him and Dart and all of its subsidiaries. See Item 3
- Legal Proceedings - Settlements with Herbert H. Haft and Ronald S.
Haft.
(22) 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).
(23) 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 ($5,000).
125
126
Item 11. Executive Compensation (Continued)
Option Grants in Last Fiscal Year
This table provides information with respect to grants of options for shares of
common stock of Dart and its subsidiaries to the Named Executive Officers during
fiscal 1998 and the exercise or base price, expiration date and estimates of the
potential realizable values of such options.
Individual Grants
- ------------------------------------------------------------------------------------------------------ Potential Real-
% of Total izable Value at
Options Assumed Annual
Granted Rates of Stock
to Emp- Exer- Price Appreci-
loyees cise Market ation for Option
Options in or Base Price Expir- Term (5)
Granted Fiscal Price Date of ation -------------------
Name (#) (4) Year ($/Sh) Grant Date 5% ($) 10% ($)
---- ------- ------ ------ ------- ------ ------ -------
Richard B.
Stone None
Mark A. 2,500(1) 6.5 105.00 105.00 7-31-02 72,500 160,300
Flint 4,000(2) 1.9 13.00 13.00 7-31-02 14,400 31,700
4,000(3) 2.4 9.375 9.375 7-31-02 10,400 22,900
Terry J. 1,750(1) 4.9 105.00 105.00 7-31-02 50,800 112,200
Sharp 2,000(2) 1.2 13.00 13.00 7-31-02 7,200 15,900
2,000(3) 0.9 9.375 9.375 7-31-02 5,200 11,400
Elliot R. 900(1) 2.3 105.00 105.00 7-31-02 26,100 57,700
Arditti 2,500(2) 1.2 13.00 13.00 7-31-02 9,000 19,800
900(3) 0.5 9.375 9.375 7-31-02 2,300 5,100
Dennis N. 1,500(1) 3.9 105.00 105.00 7-31-02 43,500 96,200
Weiss 2,500(2) 1.2 13.00 13.00 7-31-02 9,000 19,800
2,500(3) 1.5 9.375 9.375 7-31-02 6,500 14,300
Members of the Executive Committee
- ----------------------------------
Howard M.
Metzenbaum None
Harry M.
Linowes None
Larry G. 1,500(1) 3.9 105.00 105.00 7-31-02 43,500 96,200
Schafran 1,500(2) 0.7 13.00 13.00 7-31-02 5,400 11,900
2,500(3) 1.5 9.375 9.375 7-31-02 6,500 14,300
Bonita A. 1 500(1) 3.9 105.00 105.00 7-31-02 43,500 96,200
Wilson 1,500(2) 0.7 13.00 13.00 7-31-02 5,400 11,900
2,500(3) 1.5 9.375 9.375 7-31-02 6,500 14,300
126
127
Item 11. Executive Compensation (Continued)
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% ($)
---- ------- ------ ------ ------- ------ ------ -------
Douglas M. 1,500(1) 3.9 105.00 105.00 7-31-02 43,500 96,200
Bregman 1,500(2) 0.7 13.00 13.00 7-31-02 5,400 11,900
2,500(3) 1.5 9.375 9.375 7-31-02 6,500 14,300
Former Officer
- --------------
Herbert H.
Haft None
(1) Represents options for shares of Common Stock.
(2) Represents options for Trak Auto Common Stock.
(3) Represents options for Crown Books Common Stock.
(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.
127
128
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, 1998.
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 ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
Richard B. Stone None -- -- --
Mark A. Flint --(1) -- 250 2,400
3,000 4,800
--(2) -- -- --
4,000 --
--(3) -- -- --
4,000 --
Terry J. Sharp 900(1) 11,200 -- --
2,800 14,700
--(2) -- 1,998 --
4,002 --
--(3) -- 1,998 --
4,002 --
Elliott R. Arditti --(1) -- 1,182 26,600
1,518 8,500
--(2) -- 2,783 --
4,567 --
--(3) -- 1,700 --
1,800 --
Dennis N. Weiss 1,200(1) 28,500 266 3,300
2,302 11,700
--(2) , 2,917 --
5,001 --
--(3) -- 4,099 --
5,001 --
Members of the Executive Committee
- ----------------------------------
Howard M. Metzenbaum None -- -- --
Harry M. Linowes None -- -- --
Larry G. Schafran 2,250(1) 59,800 1,125 11,700
2,250 16,400
--(2) -- 6,000 --
-- --
--(3) -- 10,000 --
-- --
128
129
Item 11. Executive Compensation (Continued)
Number of Value of
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable
- ---- --------------- ------------ ------------- -------------
Bonita A. Wilson 3,750(1) 103,700 1,125 11,700
2,250 16,400
--(2) -- 7,500 --
-- --
--(3) -- 12,500 --
-- --
Douglas M. Bregman 500(1) 11,300 4,750 100,700
2,250 16,400
--(2) -- 7,500 --
-- --
--(3) -- 12,500 --
-- --
Former Officer
- ---------------
Herbert H. Haft None -- 119,750(4) 4,681,800(4)
-- --
6,668 --
-- --
20,000 --
-- --
(1) Represents options for Common Stock.
(2) Represents options for Trak Auto common stock.
(3) Represents options for Crown Books common stock.
(4) On February 5, 1998, the Company paid Mr. Haft approximately $3.9
million for his stock options from Dart, Trak Auto and Crown Books
pursuant to a settlement agreement between him and Dart and all of its
subsidiaries. See Item 3. Legal Proceedings - Settlement with Herbert
H. Haft and Ronald S. Haft.
Compensation of Directors
Members of the Board of Directors of Dart, Trak Auto and Crown Books are each
paid $15,000 per year. Richard B. Stone, Howard M. Metzenbaum and Harry M.
Linowes are members of the audit committee for Dart, Trak Auto and Crown Books
and are compensated $5,000 per year. Richard B. Stone, Howard M. Metzenbaum and
Harry M. Linowes 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 then
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
129
130
Item 11. Executive Compensation (Continued)
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 Richard B. Stone, Howard M. Metzenbaum and Harry M. Linowes with Mr. Stone as
the Chairman of the Executive Committee. The disputes between Herbert H. Haft
and Ronald S. Haft concerning issues involving Dart were 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 was a party. While the Executive Committee remains involved in the
day-to-day affairs of Dart including, but not limited to Management and outside
legal counsel are in the process of evaluating these claims. Trak Auto is unable
to express an opinion as to the merit, if any, or potential liability, if any,
as of the filing date of this report. The Executive Committee remains active in
the day-to-day affairs of the Company. Its continuing role is dependent upon
future developments.
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, 1998, 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 $1,137,000, $1,299,000 and
$1,263,000, respectively. There were no fees paid to the Special Litigation
Committee in fiscal 1998, 1997 or 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
130
131
Item 11. Executive Compensation (Continued)
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
On February 12, 1998, Dart entered into an employment agreement with Richard B.
Stone, Chairman and Chief Executive Officer. The agreement is for a three year
term and is renewable for one additional year after expiration of the stated
term. The agreement provides for a base salary of $550,000 per year and
additional compensation comprised of three components: (i) the immediate grant
of 30,000 nonqualified options to purchase Dart Common Stock (ii) the immediate
grant of 6,000 shares of Dart Common Stock, vesting of such shares is dependent
upon the sale of Trak Auto, Crown Books, Total Beverage and Shoppers and (iii)
variable cash bonuses based on the total sale of the Company at dates specified
in the agreement. The base salary will be reviewed at least annually and may be
increased but not decreased. All options and shares vest after 4 1/2 years and
the term of the options is five years.
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.
In January 1995, Dart entered into a year employment agreement with Elliot R.
Arditti, Senior Vice President, Secretary and Corporate Counsel. The agreement
provides for an annual base salary of $145,200 subject to increase determined by
the Compensation Committee of the Board of Directors.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee comprises Dart's outside, non-employee Directors
(Howard M. Metzenbaum and Harry M. Linowes). No member of the Compensation
Committee has a relationship that would constitute an interlocking
relationship with executive officers or directors of another entity.
131
132
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 31, 1998, 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 the 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 the Common Stock with the Securities and Exchange Commission.
Directors and Executive Officers:
Approximate
Title of No. of Percentage
Name Class Shares of Class
- ---- ----- ------ --------
Richard B. Stone Common Stock 6,000 .50
Mark A. Flint Common Stock (1) 250 --
Terry J. Sharp Trak Auto (2) 1,998 --
Crown Books (2) 1,998 --
Elliott R. Arditti Common Stock (3) 1,232 .10
Trak Auto (4) 4,133 .07
Crown Books (5) 1,700 --
Dennis N. Weiss Common Stock (6) 266 --
Trak Auto (7) 2,917 .05
Crown Books (8) 4,099 .08
Howard M. Metzenbaum None
Harry M. Linowes None
Larry G. Schafran Common Stock (9) 1,500 .12
Trak Auto (10) 6,000 .10
Crown Books (11) 7,500 .14
Bonita A. Wilson Common Stock (9) 1,125 .09
Trak Auto (11) 7,500 .13
Crown Books (12) 12,500 .24
Douglas M. Bregman Common Stock (13) 4,750 .39
Trak Auto (11) 7,500 .13
Crown Books (12) 12,500 .24
- -----------------
All Directors and Common Stock (14) 15,123 1.25
Executive Officers as Trak Auto (15) 30,048 .51
a group (10 persons) Crown Books (16) 40,297 .76
Southeastern Asset Common Stock 328,030 27.28
Management Inc.
6410 Poplar Ave., Suite 900
Memphis, TN 38119 (17)
132
133
Item 12. Security Ownership of Certain Beneficial Owners and Management
(1) Includes 250 shares subject to exercisable stock options.
(2) Includes 1,998 shares subject to exercisable stock options.
(3) Includes 1,182 shares subject to exercisable stock options.
(4) Includes 2,783 shares subject to exercisable stock options.
(5) Includes 1,700 shares subject to exercisable stock options.
(6) Includes 266 shares subject to exercisable stock options.
(7) Includes 2,917 shares subject to exercisable stock options.
(8) Includes 4,099 shares subject to exercisable stock options.
(9) Includes 1,125 shares subject to exercisable stock options.
(10) Includes 6,000 shares subject to exercisable stock options.
(11) Includes 7,500 shares subject to exercisable stock options.
(12) Includes 12,500 shares subject to exercisable stock options.
(13) Includes 4,750 shares subject to exercisable stock options.
(14) Includes 15,123 shares subject to exercisable stock options.
(15) Includes 28,698 shares subject to exercisable stock options.
(16) Includes 40,297 shares subject to exercisable stock options.
(17) As reported in schedule 13 G filed March 9, 1998.
133
134
Item 13. Certain Relationships and Related Transactions
Dart, Trak Auto, Crown Books, Shoppers and Total Beverage lease certain real
property from Haft family-owned partnerships. As a result of the various
settlements with members of the Haft family, effective February 6, 1998 the
Haft's are no longer related parties. Rental payments related to such leases
approximated $16.6 million during the year ended January 31, 1998. The leased
properties consist of 44 stores, three warehouse and the Shoppers headquarters
building. These leases which have expiration terms ranging from 1998 to 2014,
required the payment of minimum rentals aggregating approximately $148.0 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.
134
135
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
(a) (2) Exhibits..............................................
2.1 Agreement and Plan of Merger by and among Richfood
Holdings, Inc., DGC Acquisition, Inc. and Dart Group
Corporation (incorporated by reference to Exhibit 99.1
filed with Dart's Current Report on Form 8-K dated
April 9, 1998.
3.1 Certificate of Amendment of the Certificate of
Incorporation of Dart Group Corporation dated February
12, 1998 (incorporated by reference to Exhibit 99.3 to
Dart Form 8-K filed February 18, 1998.
3.2 Bylaws, amended and restated as of February 16, 1998.
4.1 Indenture dated as of June 26, 1997 by and among
Shoppers Food Warehouse Corp., SFW Holding Corp. and
Norwest Bank Minnesota, National Association.
(incorporated by reference to Exhibit 4.1 to Shoppers
Food Warehouse Corp. Form S-4 Registration No. 333-
32825 filed August 5, 1997).
4.2 Shoppers Food Warehouse Global Security dated June 26,
1997. (incorporated by reference to Exhibit 4.1 to
Shoppers Food Warehouse Corp. Form S-4 Registration
No. 333-32825 filed August 5, 1997).
10.1 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.
10.2 Lease dated December 26, 1984 between Dart Group
Corporation and Seventy-Fifth Avenue Associates
(incorporated by reference to Dart Fiscal Year 1986
10-K).
10.3 Sublease dated December 26, 1984 between Dart Group
Corporation and Trak Auto Corporation (incorporated by
reference to Dart Fiscal Year 1986 10-K).
10.4 Sublease dated December 26, 1984 between Dart Group
Corporation and Crown Books Corporation (incorporated
by reference to Dart Fiscal Year 1986 10-K).
10.5 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).
10.6 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.
135
136
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.7 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.
10.8 Dart Group Corporation Deferred Compensation Plan for
Directors, effective January 1, 1988 (incorporated by
reference to Dart Fiscal Year 1988 10-K).
10.9 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).
10.10 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").
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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").
10.17 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.
136
137
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.18 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.
10.19 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").
10.20 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.
10.21 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: College
Plaza (610), herein incorporated by reference to
Exhibit 10(bbbbb) Fiscal 1991 Trak 10-K.
10.22 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.
10.23 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: Rolling
Valley (630), herein incorporated by reference to
Exhibit 10(ddddd) Fiscal 1991 Trak 10-K.
10.24 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.
10.25 Lease agreement dated November 6, 1990 between CP
Acquisition Limited Partnership and Trak Corporation
and Settlement
137
138
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
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.
10.26 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.
10.27 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.
10.28 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.
10.29 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.
10.30 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).
10.31 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).
10.32 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).
10.33 Lease Agreement dated June 28, 1983 between Combined
Properties Limited Partnership and Jumbo Food Stores
VA, Inc., Amendment
138
139
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
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).
10.34 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).
10.35 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 by reference to Dart Fiscal Year
1992 10-K).
10.36 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).
10.37 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").
10.38 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.
10.39 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
10.40 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.
10.41 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.
10.42 Dart Group Corporation 1992 Stock Option Plan
incorporated herein by reference to Dart 1993 S-8 file
No. 33-57010.
10.43 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
139
140
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10(qqqqq) filed with Trak Auto Corporation Fiscal Year
1993 Form 10-K No. 0-12202 ("Fiscal 1993 Trak 10-K").
10.44 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.
10.45 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.
10.46 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.
10.47 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").
10.48 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).
10.49 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).
10.50 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").
10.51 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.
10.52 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.
140
141
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.53 Second Amendment of lease dated March 31, 1995 between
Combined Properties Limited Partnership and Super Trak
Corporation re: Oxon Hill (606), herein incorporated
by reference to Exhibit 10 (zzzzz) filed with Fiscal
1995 Trak 10-K.
10.54 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.
10.55 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").
10.56 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.
10.57 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).
10.58 Trak Auto 1993 Stock Option Plan, herein incorporated
by reference to Exhibit 10(vvvvv) filed with Fiscal
1995 10-K.
10.59 Crown Books 1993 Stock Option Plan, herein
incorporated by reference to Exhibit 10(yyyyy) filed
with Fiscal 1995 Crown 10-K.
10.60 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").
10.61 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.
10.62 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.
10.63 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
141
142
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
Corporation Statement on Schedule 13E-4/A, Commission
File No. 5-34497, filed with the Commission on
February 6, 1995.
10.64 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").
10.65 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.
10.66 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).
10.67 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).
10.68 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).
10.69 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).
10.70 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 Settlement corp, 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).
10.71 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).
10.72 Financing Agreement dated September 12, 1996 between
Crown Books
142
143
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
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).
10.73 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.
10.74 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).
10.75 Employment Agreement, dated May 22, 1995, between
Terry J. Sharp and Dart Group Corporation (here in
incorporated by reference to Exhibit 10.93 to Dart
Group Corporation Form 10-K for the year ended January
31, 1997).
10.76 Settlement Agreement, dated August 18, 1997, by and
among Dart Group Corporation, Crown Books Corporation,
Trak Auto Corporation, SFW Holding Corp. and Shoppers
Food Warehouse Corp. and Robert M. Haft, Gloria G.
Haft and Linda G. Haft (incorporated by reference to
Exhibit 99.2 to Dart's Form 8-K filed on August 19,
1997).
10.77 Employment Agreement dated August 18, 1997 between
Shoppers Food Warehouse Corp. and William White
(incorporated by reference Exhibit 10.2 to Dart Form
10-Q filed September 15, 1997).
10.78 Settlement Agreement dated October 17, 1997 between
Dart Group Corporation and Herbert H. Haft
(incorporated by reference Exhibit 99.2 to Dart Form
8-K filed October 31,1997).
10.79 First Supplemental Settlement Agreement dated as of
October 15, 1997 made by and among Ronald S. Haft and
Dart Group Corporation (incorporated by reference to
Exhibit 99.3 to Dart Form 8-K filed October 31, 1997).
10.80 Second Supplemental Settlement Agreement dated as of
October 15, 1997 between Ronald S. Haft and Dart Group
Corporation (incorporated by reference to Exhibit 99.4
to Dart 8-K filed October 31, 1997).
10.81 Form of Indemnification Agreement dated as of November
20, 1997, incorporated by reference to Item 9.-
Exhibit to Dart's Form 14D-9 filed April 15, 1997).
10.82 Employment Agreement between Anna L. Currence and
Crown Books Corporation dated January 12, 1998
(incorporated by reference to Exhibit 10.21 filed with
Crown Books Corporation Fiscal Year 1998 Form 10-K No.
0-11457).
143
144
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.83 Employment Agreement dated December 15, 1997 between
Dale A. Morris and Dart Group Corporation.
10.84 Revolving Loan and Security Agreement dated December
22, 1997 between Shoppers Food Warehouse Corp. and
Heller Financial, Inc. as agent and as lender
(incorporated by reference to Exhibit 10.2 to Shoppers
Food Warehouse Corp. Form 10-K for the year ended
January 31, 1998).
10.85 Amended to Buy/Sell Offering Agreement, dated as of
January 30, 1998, by and between Dart Group
Corporation and Ronald S. Haft (incorporated by
reference to Exhibit 99.2 to Dart Form 8-K filed
February 18, 1998).
10.86 Employment Agreement dated February 12, 1998 between
Richard B. Stone and Dart Group Corporation and
Promissory Note from Richard B. Stone to Dart Group
Corporation.
10.87 Rights Agreement dated February 17, 1998 between Dart
Group Corporation and the Bank of New York
(incorporated by reference to Exhibit 1 to Dart Form
8-A filed February 18, 1998).
10.88 Amended and Restated Loan Agreement dated April 28,
1998 between Dart Group Corporation and Trak Auto
Corporation and Pledge Agreement between Dart Group
Corporation and Trak Auto Corporation dated January
27, 1998 (incorporated by reference to Exhibit 10.46
filed with Trak Auto Corporation Form 10-K for the
year ended January 31, 1998).
10.89 Promissory Notes dated September 26, 1997 and January
28, 1998 from Dart Group Corporation to Shoppers Food
Warehouse Corporation (incorporated by reference to
Exhibit 10.3 filed with Shoppers Food Warehouse Corp.
Form 10-K for the year ended January 31, 1998.
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 ended January 31, 1998 Dart filed one
Current Reports on Form 8-K.
1. Dart filed a Current Report on Form 8-K on December
23, 1997 reporting under Item 2 (Acquisition or
Disposition of Assets) the closing of the sale of Trak
Auto's California operations.
144
145
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
Subsequent to January 31, 1998, Dart filed two Current
Reports on Form 8-K.
1. Dart filed a Current Report on Form 8-K on February
18, 1998 reporting under Item 1. (Changes in Control
of Registrant) and Item 5 (other events) the closing
of a settlement agreement with Herbert H. Haft and a
supplemental agreement with Ronald S. Haft, Dart's
repurchase of Ronald S. Haft's stock held in a voting
trust and Dart granting its Class A Common Stock
voting power.
2. Dart filed a Current Report on Form 8-K on April 9,
1998 reporting under Item 5 (Other Events) and Item 7
(Financial Statements, Pro Forma Financial Information
and Exhibits) that Dart and Richfood Holdings, Inc.
Had entered into an agreement of merger.
145
146
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, 1998 By: Richard B. Stone
----------- ----------------------------------
Richard B. Stone
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, 1998 By: Richard B. Stone
----------- ----------------------------------
Richard B. Stone
Chairman of the Board of Directors
and Chief Executive Officer
Date: May 1, 1998 Howard M. Metzenbaum
----------- ----------------------------------
Howard M. Metzenbaum
Director
Date: May 1, 1998 Harry M. Linowes
----------- ----------------------------------
Harry M. Linowes
Director
Date: May 1, 1998 Mark A. Flint
----------- ----------------------------------
Mark A. Flint
Senior Vice President, Chief
Financial Officer and Treasurer
146
147
DART GROUP CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
3.2 Bylaws, amended and restated as of February 16, 1998.
10.83 Employment Agreement dated December 15, 1997 between
Dale A. Morris and Dart Group Corporation.
10.86 Employment Agreement dated February 12, 1998 between
Richard B. Stone and Dart Group Corporation and
Promissory Note from Richard B. Stone to Dart Group
Corporation.
11 Statement on Computation of Per Share Earnings.
21 Subsidiaries of Dart Group Corporation.
23 Consent of Independent Public Accountants.
27 Financial Data Schedules
147