<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED October 31, 1995
----------------
( ) 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)
<TABLE>
<S> <C>
Delaware 53-0242973
------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
3300 75th Avenue, Landover, Maryland, 20785
---------------------------------------------
(Address of principal executive offices)
(Zip Code)
(301) 731-1200
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
------- --------
At December 14, 1995, the registrant had 1,746,800 shares outstanding of Class
A Common Stock, $1.00 par value per share, and 327,270 shares outstanding of
Class B Common Stock, $1.00 par value per share. The Class B Stock is the only
voting stock and is not publicly traded.
Page 1 of 32 pages
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Certain consolidated financial statements included herein have been
prepared by Dart Group Corporation (the "Corporation"), without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Corporation believes that the disclosures are adequate to make the
information presented not misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Corporation's report on Form 10-K for the fiscal year ended
January 31, 1995.
2
<PAGE> 3
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 31, October 31, October 31, October 31,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $155,662,000 $162,841,000 $457,820,000 $747,715,000
Income from bankers'
acceptances - - - 429,000
Real estate revenue 3,409,000 5,050,000 13,155,000 14,536,000
Other interest and
other income 2,413,000 1,759,000 7,828,000 7,067,000
------------ ------------ ------------ ------------
161,484,000 169,650,000 478,803,000 769,747,000
------------ ------------ ------------ ------------
Expenses:
Cost of sales,
store occupancy
and warehousing 121,726,000 126,722,000 357,546,000 596,569,000
Selling and
administrative 37,302,000 84,176,000 103,729,000 184,678,000
Depreciation and
amortization 3,873,000 4,108,000 11,926,000 16,505,000
Interest 3,115,000 2,807,000 11,141,000 9,235,000
Write-down value of
Cabot Morgan
Real Estate 14,562,000 - 14,562,000 -
Closed facility
reserve (3,326,000) 46,303,000 (6,435,000) 46,303,000
Restructuring charge (1,231,000) - (1,797,000) -
------------ ------------ ------------ ------------
176,021,000 264,116,000 490,672,000 853,290,000
------------ ------------ ------------ ------------
Loss before income
taxes, equity
in affiliate and
minority interests (14,537,000) (94,466,000) (11,869,000) (83,543,000)
Income taxes (benefit) 1,028,000 (12,173,000) 3,278,000 (6,745,000)
------------ ------------ ------------ ------------
Loss before equity
in affiliate and
minority interests (15,565,000) (82,293,000) (15,147,000) (76,798,000)
Equity in affiliate 709,000 2,327,000 4,314,000 4,499,000
Minority interests
in (income) loss
of consolidated
subsidiaries and
partnerships (472,000) 11,369,000 (2,089,000) 7,662,000
------------ ------------ ------------ ------------
Net loss $(15,328,000) $(68,597,000) $(12,922,000) $(64,637,000)
============ ============ ============ ============
</TABLE>
(continued on following page)
3
<PAGE> 4
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
October 31, October 31, October 31, October 31,
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Loss per common
share and common
share equivalents:
Net loss $ (8.16) $ (36.91) $ (7.11) $ (34.98)
=========== =========== ============ ===========
Weighted average
common share and
common share
equivalents
outstanding 1,889,000 1,867,000 1,889,000 1,867,000
=========== =========== =========== ===========
Dividends per share
of Class A Common
Stock $ .033 $ .033 $ .099 $ .099
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 31, January 31,
1995 1995
------------ ------------
<S> <C> <C>
Current Assets:
Cash $ 14,268,000 $ 17,984,000
Short-term instruments, including
$37,216,000 and $44,346,000 held
by majority owned subsidiaries at
October 31, 1995 and January 31, 1995,
respectively 54,576,000 84,390,000
Marketable debt securities 44,497,000 89,330,000
Accounts receivable 7,167,000 10,108,000
Merchandise inventories 226,768,000 195,675,000
Deferred income tax benefit 14,267,000 17,799,000
Other current assets 3,918,000 1,988,000
------------ ------------
Total Current Assets 365,461,000 417,274,000
------------ ------------
Property and Equipment, at cost:
Furniture, fixtures and equipment 85,341,000 76,713,000
Buildings and leasehold improvements 28,857,000 165,017,000
Land 1,034,000 33,396,000
Property under capital leases 27,129,000 27,129,000
------------ ------------
142,361,000 302,255,000
Accumulated Depreciation and
Amortization 67,233,000 76,451,000
------------ ------------
75,128,000 225,804,000
------------ ------------
Other Assets 1,631,000 8,643,000
------------ ------------
Note Receivable - Ronald S. Haft 11,621,000 -
------------ ------------
Share of Equity in Shoppers Food
Warehouse Corporation 40,254,000 40,983,000
------------ ------------
Retained Interest in Cabot-Morgan
Real Estate Joint Ventures 2,000,000 -
------------ ------------
Excess of Purchase Price Over Net Assets
Acquired net of accumulated
amortization of $127,000 1,783,000 -
------------ ------------
Deferred Income Tax Benefit 12,974,000 13,785,000
------------ ------------
Total Assets $510,852,000 $706,489,000
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
5
<PAGE> 6
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 31, January 31,
1995 1995
------------ ------------
<S> <C> <C>
Current Liabilities:
Current portion of mortgages payable $ 1,145,000 $ 1,981,000
Accounts payable, trade 131,544,000 106,292,000
Income taxes payable 1,608,000 7,148,000
Accrued salaries and employee benefits 15,942,000 17,934,000
Accrued taxes other than income taxes 10,085,000 9,475,000
Accrued judgement in favor of
Robert M. Haft 34,047,000 32,199,000
Current portion of reserve for closed
facilities and restructuring 9,530,000 11,330,000
Other accrued liabilities 39,035,000 50,132,000
Current portion of obligations under
capital leases 91,000 368,000
------------ ------------
Total Current Liabilities 243,027,000 236,859,000
------------ ------------
Mortgages Payable 737,000 79,620,000
------------ ------------
Obligations Under Capital Leases 30,112,000 29,792,000
------------ ------------
Reserve for Closed Facilities and
Restructuring 35,258,000 61,005,000
------------ ------------
Commitments and Contingencies
Minority Interests 66,810,000 99,850,000
------------ ------------
Stockholders' Equity
Class A common stock, non-voting,
par value $1.00 per share; 3,000,000
shares authorized; 1,949,065 and
1,660,678, shares issued, respectively 1,949,000 1,661,000
Class B common stock, voting par value
$1.00 per share; 500,000 shares
authorized; 500,000 and 302,952 shares
issued, respectively 500,000 303,000
Paid-in capital 77,795,000 65,384,000
Notes receivable - shareholder (65,130,000) -
Unrealized gain (loss) on short-term
investments 111,000 (1,024,000)
Retained earnings 121,720,000 134,788,000
</TABLE>
6
<PAGE> 7
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 31, January 31,
1995 1995
------------ ------------
<S> <C> <C>
Treasury stock, 202,340 shares of Class
A common stock, at cost (1,749,000) (1,749,000)
Treasury stock, 172,730 shares of Class
B Common Stock, at cost (288,000) -
------------ ------------
Total Stockholders' Equity 134,908,000 199,363,000
------------ ------------
Total Liabilities and Stockholders' Equity $510,852,000 $706,489,000
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
7
<PAGE> 8
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 31,
-----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (12,922,000) $ (64,637,000)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 8,814,000 13,201,000
Write-off deferred compensation - 1,424,000
Equity in affiliate (4,271,000) (5,549,000)
Provision for (reversal of) closed
stores and restructuring charges (6,852,000) 46,413,000
Write-down Cabot Morgan Real Estate
joint ventures 14,562,000 -
Change in assets and liabilities:
Accounts receivable 2,869,000 4,517,000
Merchandise inventories (31,568,000) (52,361,000)
Other current assets (2,298,000) (18,000)
Deferred tax benefits 3,773,000 (13,350,000)
Other assets 47,000 264,000
Accounts payable, trade 25,252,000 25,681,000
Income taxes payable (5,540,000) (2,194,000)
Accrued salaries and employee benefits (1,047,000) 29,751,000
Accrued taxes other than income taxes 610,000 (1,188,000)
Other accrued liabilities (4,365,000) 13,059,000
Reserve for closed facilities (6,517,000) (2,207,000)
Minority interests 3,652,000 (8,264,000)
------------ -------------
Net cash used in
operating activities $ (15,801,000) $ (15,458,000)
------------- --------------
Cash Flows from Securities and Capital
Investment Activities:
Capital expenditures $ (12,013,000) $ (10,247,000)
Proceeds from Shoppers Food dividend 5,000,000 -
Distributions from Cabot Morgan
Real Estate joint ventures 4,888,000 -
Decrease in cash and cash equivalents
as a result of deconsolidation of
Cabot-Morgan Real Estate joint ventures
and Shoppers Food Warehouse Corp.,
respectively (5,713,000) (61,014,000)
Acquisition of treasury shares by subsidiary (6,904,000) -
Purchases of bankers' acceptances - (28,198,000)
Maturities of bankers' acceptances - 90,505,000
</TABLE>
8
<PAGE> 9
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 31,
-------------------------------
1995 1994
------------- -------------
<S> <C> <C>
Sales of United States Treasury Bills 12,328,000 34,823,000
Purchases of United States Treasury Bills (27,819,000) (169,668,000)
Maturities of United States Treasury Bills 22,810,000 87,866,000
Sales of marketable debt securities 35,974,000 176,765,000
Purchases of marketable debt securities (3,199,000) (213,909,000)
Maturities of marketable debt securities 5,850,000 6,771,000
Proceeds from reverse repurchase
agreements and unsettled trades of
marketable debt securities - 18,019,000
------------- -------------
Net cash provided by (used in)
securities and capital
investment activities $ 31,202,000 $ (68,287,000)
------------- -------------
Cash Flows from Financing Activities:
Cash dividends $ (146,000) $ (145,000)
Stock options exercised 197,000 368,000
Proceeds from (repayment of) an option
to acquire common stock 985,000 (985,000)
Distributions to Ronald S. Haft (49,547,000) -
Distributions paid to minority partner - (1,776,000)
Principal payments under mortgage
obligations (75,000) (934,000)
Principal payments under capital
lease obligations (345,000) (260,000)
------------- -------------
Net cash used in
financing activities $ (48,931,000) $ (3,732,000)
------------- -------------
Net Increase (Decrease) in Cash and
Equivalents $ (33,530,000) $ (87,477,000)
Cash and Equivalents at Beginning
of Year 102,374,000 156,233,000
------------- -------------
Cash and Equivalents at End of Period $ 68,844,000 $ 68,756,000
============= =============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for:
Interest $ 8,324,000 $ 9,235,000
Income taxes 5,095,000 9,216,000
</TABLE>
9
<PAGE> 10
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 31,
-------------------------------
1995 1994
------------- -------------
<S> <C> <C>
Reconciliation of Cash and Equivalents
to Balance Sheet Captions:
Cash $ 14,268,000 $ 15,707,000
Short-term investment of majority-owned
subsidiaries utilized in their 54,576,000 53,049,000
------------- -------------
operating cash management
$ 68,844,000 $ 68,756,000
============ =============
</TABLE>
10
<PAGE> 11
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1994
(1) General:
The accompanying consolidated financial statements reflect the accounts of
Dart Group Corporation (the "Corporation") and its direct and indirect
wholly-owned and majority-owned subsidiaries and majority-owned partnerships,
including Trak Auto Corporation ("Trak Auto"), Crown Books Corporation ("Crown
Books"), Total Beverage Corporation ("Total Beverage"), Cabot-Morgan Real
Estate Company ("CMREC"), and Dart Group Financial Corporation ("Dart
Financial"). The accounts of Shoppers Food Warehouse Corp. ("Shoppers Food")
are consolidated with the Corporation's financial statements through May 28,
1994, but not thereafter, as a result of a reduction of the Corporation's
ownership to 50%. The Corporation's investment in Shoppers Food is reflected
in the financial statements using the equity method of accounting for periods
subsequent to May 28, 1994. The accounts of CMREC's real estate joint ventures
are consolidated with the Corporation's financial statements through October 6,
1995, but not thereafter, as a result of a settlement of certain litigation
between the Corporation and Ronald S. Haft (see Note 5). The Corporation, Trak
Auto, Crown Books, Shoppers Food (for periods through May 28, 1994), Total
Beverage, CMREC and Dart Financial and the Corporation's other direct and
indirect wholly-owned and majority-owned subsidiaries and majority-owned
partnerships are referred to collectively as the "Company". All significant
intercompany accounts and transactions have been eliminated. The unaudited
statements as of October 31, 1995 and 1994 reflect, in the opinion of
management, all adjustments (normal and recurring in nature) necessary to
present fairly the consolidated financial position as of October 31, 1995 and
1994 and the results of operations and cash flows for the periods indicated.
The results of operations for the nine months ended October 31, 1995 are
not necessarily indicative of the results to be achieved for the full fiscal
year.
Certain reclassifications have been made to the January 31, 1995 balance
sheet in order to conform to the current period presentation.
(2) Earnings Per Common Share and Common Share Equivalents:
Earnings per share is based on the weighted average number of the
Corporation's non-voting Class A Common Stock, $1.00 par value per share
("Class A Common Stock") and voting Class B Common Stock, $1.00 par value per
share ("Class B Common Stock") and common stock equivalents (certain stock
options) outstanding during the period. In reporting earnings per share, the
11
<PAGE> 12
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1994
2) Earnings Per Common Share and Common Share Equivalents (Continued):
Corporation's interest in the earnings of its majority-owned subsidiaries and
equity investees is adjusted for the dilutive effect, if any, of these
subsidiaries' and investees' outstanding stock options. The difference between
primary earnings per share and fully diluted earnings per share is not
significant for either period.
(3) Short-term Instruments and Marketable Debt Securities:
At October 31, 1995, the Company's short-term instruments included United
States Treasury Bills and money market funds. Marketable debt securities
included United States Treasury Notes, corporate notes, municipal securities
and United States Agency Securities Acceptances.
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and reevaluates such determination at
each balance sheet date. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale.
Securities available for sale are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. At October 31, 1995, market value of short-term instruments and
marketable debt securities was $111,000 greater than cost (adjusted for income
taxes). At October 31, 1995, 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.
(4) Interim Inventory Estimates:
Trak Auto inventories are priced at the lower of last-in, first-out
("LIFO") cost or market. At October 31, 1995 and January 31, 1995, Trak Auto
inventories determined on a lower of first-in, first-out ("FIFO") cost or
market basis would have been greater by $6,216,000 and $5,870,000,
respectively. Crown Books' and Total Beverage's inventories are priced at the
lower of FIFO cost or market.
Trak Auto, Crown Books and Total Beverage take a physical count of their
12
<PAGE> 13
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1994
(4) Interim Inventory Estimates (Continued):
store and warehouse inventories semi-annually. Physical inventories were not
taken for the quarter ended October 31, 1995. The Company uses a gross profit
method combined with available perpetual inventory information to determine
Trak Auto's, Crown Books', and Total Beverage's inventories for quarters when
complete physical counts are not taken.
(5) Other Events:
Settlement Agreement with Ronald S. Haft
On October 6, 1995, the Executive Committee and the Special Litigation
Committee of the Board of Directors of the Corporation approved a settlement of
certain litigation between the Corporation and Ronald S. Haft and other related
transactions between the Corporation and Ronald S. Haft (collectively, the
"Settlement"). Immediately thereafter, Dart and Ronald S. Haft entered into a
Settlement Agreement (the "Settlement Agreement") and various related
agreements. The Settlement transactions are subject to legal challenge (See
Item 1 of Part II - Legal Proceedings). If sustained, the Settlement
transactions are intended to have the effect, by their terms, of transferring
majority control of the Corporation's voting stock to voting trustees (the
"Voting Trustees") under a Voting Trust Agreement (the "Voting Trust
Agreement"), by and among Ronald S. Haft, the Corporation and Larry G. Schafran
and Sidney B. Silverman as initial Voting Trustees. On October 8, 1995, the
Board of Directors of the Corporation ratified and approved the Settlement.
Herbert H. Haft dissented.
Terms of Settlement with Ronald S. Haft
The Corporation has recorded the following transactions in accordance
with the Settlement.
The Corporation recorded the purchase of an option for 197,048 shares of
Class B Common Stock by Ronald S. Haft. These options had not previously been
recognized by the Corporation. 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 of Ronald S. Haft in the principal amount $27,389,672 (the
"$27.4 Million Note"). The
13
<PAGE> 14
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1994
(5) Other Events (Continued):
$27.4 Million Note is due June 30, 2000, subject to earlier prepayment in the
event of a disposition of the shares of stock held by the Voting Trustees.
Interest on the $27.4 Million Note accrues at 8% and is due at maturity.
Immediately after issuance of the 197,048 shares of Class B Common Stock to
Ronald S. Haft, he assigned such shares to the Voting Trustees.
Ronald S. Haft transferred to the Corporation 172,730 shares of Class B
Common Stock in exchange for 288,312 shares of Class A Common Stock. The
288,312 shares of Class A Common Stock have been placed into the Voting Trust
established under the Voting Trust Agreement and the 172,730 shares of Class B
Common Stock have become treasury shares, which are not entitled to vote.
Prior to the Settlement, Herbert H. Haft exercised voting rights with respect
to such Class B shares. (Among the pending legal challenges to the Settlement
transactions is Herbert H. Haft's claim that he owned the 172,730 shares of
Class B Common Stock at the time of the Settlement, so that their transfer to
the Corporation was invalid).
The Corporation transferred $37,925,710 to Ronald S. Haft and received
from him a $37,740,162 secured promissory note (the "$37.7 Million Note"),
which is due June 30, 2000, subject to earlier prepayment in the event of a
disposition of the shares of stock held by the Voting Trustees. Interest
accrues at 8% and is due at maturity.
The $27.4 Million Note and the $37.7 Million Note are recorded as Notes
Receivable - Shareholder on the Company's balance sheet and have been included
as a component of Stockholders' Equity.
The Corporation transferred an additional $11,621,276 to Ronald S. Haft
in escrow, and such funds have been tendered to Herbert H. Haft (but such funds
had not been accepted by Herbert H. Haft as of October 31, 1995) 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 the
Corporation, Ronald S. Haft has given the Corporation a secured promissory note
of $11,621,276 (the "$11.6 Million Note"), which is due June 30, 2000, subject
to earlier prepayment upon the sale of the CMREC properties (discussed below).
The $11.6 Million Note bears interest at an annual rate of 6.61% and shall be
due December 31 of each year beginning December 31, 1995.
14
<PAGE> 15
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1994
(5) Other Events (Continued):
The Corporation and CMREC have agreed to the sale of the five properties
which CMREC owns through joint ventures with Haft-owned entities. The sale
will occur on terms to be arranged by Ronald S. Haft during the next five
years. CMREC has assigned its interests in the joint ventures and the proceeds
of the sales to Ronald S. Haft (except for $2.0 million which remains as
CMREC's investment in the joint ventures). Ronald S. Haft is required to apply
the first sale proceeds toward payment of the $11.6 Million Note. As a result
of these arrangements, the real estate joint ventures are no longer
consolidated with the Company's financial statements as of October 6, 1995.
In addition, the Corporation recorded a loss of $14.5 million for the
write-down of the CMREC partnership interest to fair value.
Ronald S. Haft and the Corporation have agreed to various transactions
relating to certain warehouse and office facility properties that the
Corporation and/or Trak Auto lease from Haft-owned entities (collectively, the
"Warehouse Transactions"). The properties include the Corporation's
headquarters in Landover, Maryland, Trak Auto's distribution centers in
Ontario, California and Bridgeview, Illinois (the "Distribution Centers") and
some of the Corporation's former warehouse and office facility in Landover,
Maryland (the "Pennsy Warehouses"). The primary intent of the Warehouse
Transactions is to transfer interests controlled by Ronald S. Haft in some or
all of the properties to entities controlled by the Corporation, and amend the
leases to reduce or, in the case of the Pennsy Warehouses, eliminate the rents
being paid by the Corporation or Trak Auto. The Warehouse Transactions are
subject to contingencies, including bankruptcy court and mortgagee approval to
the extent any is necessary and to challenges brought by Herbert H. Haft
concerning the extent of Ronald S. Haft's ownership interest in certain of the
properties. As of October 31, 1995, the Corporation has only recorded its
interest in three of the four Pennsy Warehouses. These interests were recorded
at an amount equal to the mortgages on these warehouses. The Corporation has
reduced the reserve for Pennsy Warehouse Leases approximately $14.0 million,
recorded as additional Paid-in-Capital, out of an estimated $22.0 million
contemplated upon completion of the Warehouse Transactions. The Corporation
and/or Trak Auto expect to continue to fund the rental payments on the
remaining properties until such time as the various contingencies surrounding
these transfers are resolved. Accordingly, the Corporation has not recorded
the buyout of the lease obligations for the Distribution Centers. These
properties continue to be accounted for as capital leases. Accordingly, the
capital lease obligation of $30.2 million and the net book value of $ 16.5
million have not been reversed
15
<PAGE> 16
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1994
(5) Other Events (Continued):
and the corresponding fair value of the Distribution Centers and related
mortgages have not been recorded. Resolution of the contingencies surrounding
the Distribution Centers is not expected to have a material effect on the
Company's financial statements.
As part of the Settlement, Ronald S. Haft resigned all of his positions
as a Director and officer of the Corporation and all of its subsidiaries, and
consented to the termination of his employment agreement. The Standstill Order
(described below) contemplates that Ronald S. Haft will continue as a Director
of the Corporation while the Standstill Order is in effect. (Herbert H. Haft
contends that Ronald S. Haft is no longer a Director). The Corporation 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 the Corporation and its subsidiaries, including options for five
shares of Dart/SFW Corp., a subsidiary of the Corporation that owns 50% of
Shoppers Food. As a result, the Corporation reduced its accrual for its
expense associated with the Dart/SFW Corp. options of approximately $2.8
million, resulting in additional Paid-in-Capital.
As a result of the Settlement the Corporation reduced its accrual for
legal expenses by approximately $2.0 million for litigation involving the
Pennsy Warehouses. However, the Corporation accrued or paid an additional $3.5
million for legal and/or consulting services associated with the Settlement.
The Settlement is the subject of legal challenges raised by Robert M.
Haft, Gloria Haft and Linda Haft and, separately, by Herbert H. Haft. In
connection with such legal challenges, the Delaware Court of Chancery entered a
Standstill Order, which restricts certain actions of the Corporation until
further order of the court. See Item 1 of Part II (Legal Proceedings).
(6) Credit Agreement:
The Corporation has entered into a $10 million revolving credit
agreement with Trak Auto. The credit agreement is intended to be used for
Trak Auto's short-term working capital purposes. Any advance under this credit
agreement bears interest at an annual rate equal to the prime rate as set
forth in the
16
<PAGE> 17
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1994
(6) Credit Agreement (Continued):
"Money Rates" column of the Wall Street Journal, as such rate may change from
time to time, plus one percent (1%). Interest shall be paid monthly in arrears
and the agreement expires on May 1, 1996. At October 31, 1995, there had been
no borrowings under this credit agreement.
(7) Minority Interests:
The $66,810,000 of minority interests reflected in the Consolidated Balance
Sheet as of October 31, 1995 represents the portion of Trak Auto and Crown
Books equity owned by the public shareholders of Trak Auto and Crown Books.
Income attributed to the minority shareholders of Trak Auto was $1,986,000 and
$2,849,000 for the nine months ended October 31, 1995 and 1994, respectively
and $696,000 and $768,000 for the three months ended October 31, 1995 and 1994,
respectively. Income (loss) attributed to the minority shareholders of Crown
Books was $(391,000) and $(11,668,000) for the nine months ended October 31,
1995 and 1994, respectively and $(326,000) and $(12,166,000) for the three
months ended October 31, 1995 and 1994, respectively. Income attributed to the
minority ownership of Shoppers Food was $1,050,000 for the nine months ended
October 31, 1994 (no income for Shoppers Food was attributed to minority
interest for periods after May 28, 1994). Income attributed to the minority
ownership of the real estate partnerships was $494,000 for the nine months
ended October 31, 1995 and $102,000 for the three months under October 31, 1995
(no income for the real estate partnerships was attributed to the minority
interest for periods after October 6, 1995).
17
<PAGE> 18
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1994
(8) Transactions With Affiliates:
The following information reflects the results of Shoppers Food for the
nine months and three months ended October 31, 1995 and 1994.
<TABLE>
<CAPTION>
Three months ended Nine months ended
October 31, 1995 October 31, 1995
--------------------- -------------------
<S> <C> <C>
Revenue $206,257,000 $608,235,000
Gross Profit 33,170,000 101,737,000
Net Income 1,626,000 9,953,000
</TABLE>
<TABLE>
<CAPTION>
October 31, 1994 October 31, 1994
--------------------- -------------------
<S> <C> <C>
Revenue $195,524,000 $596,528,000
Gross Profit 36,238,000 103,836,000
Net Income 4,670,000 11,010,000
</TABLE>
(9) Tender Offer:
On December 21, 1994, Trak Auto offered to buy back from its
shareholders approximately 24% of its outstanding common stock, or 1,500,000
shares, at a price of $17.50 per share. On February 6, 1995, Trak Auto amended
the offer by increasing the purchase price to $20.50 per share, and made
certain other changes. When the offer expired on February 28, 1995, Trak Auto
had repurchased approximately 310,000 shares for a total consideration of
$6,363,000 plus expenses of approximately $541,000.
As a result of the repurchase, the Corporation's interest in Trak Auto
increased to 68.0%. The repurchase has been accounted for as a step
acquisition, minority interest decreased approximately $4,994,000 with a
related increase in goodwill of $1,910,000, which is being amortized over ten
years.
18
<PAGE> 19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
Cash, including short-term instruments and U.S. government and other
securities, is the Company's primary source of liquidity. Cash, including
short-term instruments and U.S. government and other marketable debt securities
decreased by $78,363,000 to $113,341,000 at October 31, 1995 from $191,704,000
at January 31, 1995. This decrease was primarily due to distributions to Ronald
S. Haft as part of the Settlement (see Note 5 to the Consolidated Financial
Statements), Trak Auto's repurchase of approximately 310,000 shares of its
outstanding common stock, capital expenditures and operating activities.
For the quarter ended October 31, 1995, the Company realized a pre-tax
yield of approximately 5.7% on United States Treasury Bills and approximately
6.3% on the marketable debt securities.
Operating activities used $15,801,000 of the Company's funds for the nine
months ended October 31, 1995 compared to $15,458,000 of the Company's funds
for the same period one year ago. The primary use of cash for the nine months
ended October 31, 1995 was for payments for Trak Auto and Crown Books increased
levels of merchandise inventory, payments against the Company's closed facility
and restructuring reserves and payment of current liabilities.
Investing activities provided $31,202,000 to the Company for the nine
months ended October 31, 1995, compared to using $68,287,000 for the same
period last year. The primary source of funds for the nine months ended October
31, 1995 was the sale and maturity of marketable debt securities and net
disposition of United States Treasury Bills and was partially offset by Trak
Auto's repurchase of its outstanding common stock, the deconsolidation of the
CMREC joint ventures and by capital expenditures. The primary use of funds for
the nine months ended October 31, 1994 was due to the deconsolidation of
Shoppers Food.
The Company used $48,931,000 and $3,732,000 for net financing activities
for the nine months ended October 31, 1995 and 1994, respectively. The primary
use of funds during the nine months ended October 31, 1995 was due to the
distributions to Ronald S. Haft as part of the Settlement (see Note 5 to the
Consolidated Financial Statements).
Crown Books Closed Store and Restructuring Reserves
During the past three fiscal years, Crown Books has recorded charges in
connection with store closings and restructurings. During the year ended
January 30, 1993, Crown Books recorded a restructuring charge of $6,600,000 for
anticipated costs associated with a restructuring plan to close, relocate,
expand and convert approximately 50 Classic Crown Books stores to a Super Crown
19
<PAGE> 20
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations, (Continued)
Liquidity and Capital Resources, Continued
Books format. During the thirty-nine weeks ended October 28, 1995, Crown Books
charged approximately $970,000 against this reserve in connection with the
closing, relocation, expansion or conversion of approximately 17 stores. These
charges consisted primarily of unrecoverable lease costs (including buyouts of
remaining lease terms) and the remaining book value of leasehold improvements
and store fixtures for stores that have closed. Also during the thirty-nine
weeks ended October 28, 1995, Crown Books reversed $1,231,000 of this reserve
for costs relating to stores that were closed under negotiated lease settlement
terms that were more favorable than originally anticipated and for changes in
planned closing dates for other stores.
In the year ended January 29, 1994, Crown Books determined that seven
of the smaller Super Crown Books stores (typically 6,000 - 10,000 square feet)
opened in prior years were no longer competitive in the current market
environment and in light of the industry's movement to larger stores.
Accordingly, Crown Books recorded an additional restructuring charge of
$6,200,000 in the year ended January 29, 1994, representing the anticipated
costs (unrecoverable lease costs and the remaining book value of leasehold
improvements and store fixtures subsequent to management's estimate of the
stores' closing dates) associated with closing, relocating and converting these
stores to the new, larger prototype. During the thirty-nine weeks ended
October 28, 1995, Crown Books charged $33,000 against this reserve in
connection with the closing and relocation of one store to the larger
prototype. Also during this period, Crown Books concluded that one store
originally scheduled for closure will no longer be closed and reversed
approximately $566,000 of the restructuring reserve. Crown Books presently
expects to complete the restructuring related to these six stores during the
next 12 months.
The activity in restructuring reserve during the thirty-nine weeks
ending October 28, 1995 is summarized as follows:
<TABLE>
<S> <C>
Restructuring Reserve as of January 28, 1995 $10,515,000
Less: Costs charged against reserve (1,003,000)
Reversal of reserve (1,797,000)
-----------
Restructuring reserve as of October 28, 1995 $ 7,715,000
===========
</TABLE>
During the thirty-nine weeks ended October 28, 1995, Crown Books charged
certain costs for closed stores relating to unrecoverable lease costs and
leasehold improvements against the closed store reserve. Crown Books reversed
approximately $2,000,000 of the reserve for a store that will no longer be
closed in Houston, Texas, pursuant to a Crown Books' Board of Directors August
10, 1995 decision to remain in the Houston market and due to improving
operating performance of that store. An additional $2,107,000 of the reserve
was reversed
20
<PAGE> 21
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations, (Continued)
Liquidity and Capital Resources, Continued
for costs relating to other stores that were closed under negotiated lease
settlement terms that were more favorable than originally anticipated and
changes in planned closing dates for other stores.
The activity in the closed store reserve during the thirty-nine weeks
ending October 28, 1995 is summarized as follows:
<TABLE>
<S> <C>
Closed store reserve as of January 28, 1995 $20,241,000
Less: Cost charged against the reserve (1,953,000)
Reversal of reserve for closed stores (4,107,000)
-----------
Closed store reserve as of October 28, 1995 $14,181,000
===========
</TABLE>
Crown Books will continue to evaluate the performance and future
viability of its remaining stores and may close additional stores in the
future. No reserves for these stores have been recorded. The closings of
these small and under performing stores may, where appropriate, be coordinated
with the opening of Super Crown Books stores in those markets where Crown Books
plans to maintain or expand its presence. A commitment has been made to
accelerate the opening of stores in the Super Crown Books format.
At October 29, 1994, Crown Books planned opening 28 new Super Crown
Books stores over the next twelve months. At October 28, 1995 Crown Books had
opened eleven Super Crown Books stores since October 29, 1994 and subsequent to
October 28, 1995 opened eight Super Crown Books stores. Crown Books'
management plans the opening of an additional 30 Super Crown Books stores
varying in size from 12,000 to 18,000 square feet over the next twelve months.
These stores will total approximately 450,000 square feet of new space.
At October 31, 1995, Crown Books had signed leases for seventeen new Super
Crown Books store locations. Trak Auto had signed leases for eight new Super
Trak or Super Trak Warehouse stores and signed amendments for additional space
at three existing stores for Super Trak or Super Trak Warehouse stores.
The Company anticipates that funds necessary to fund these capital
expenditures, as well as purchase inventory for new stores, meet the Company's
long-term lease obligations, and pay current liabilities will come from
operations and existing current assets.
The liquid assets maintained by the Company are intended to fund the
expansion of the Company's retail business through the opening of stores in new
markets, converting selected existing stores to superstores and opening
additional stores in existing markets.
21
<PAGE> 22
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations, (Continued)
Results of Operations
Trak Auto
During the thirty-nine weeks ended October 28, 1995, Trak Auto opened or
converted five Super Trak stores and 13 Super Trak Warehouse stores, and closed
or converted eight Super Trak stores and 25 classic Trak stores. At October
28, 1995, Trak Auto had 267 stores, including 103 Super Trak stores and 20
Super Trak Warehouse stores.
Sales of $254,244,000 during the thirty-nine weeks ended October 28, 1995
decreased by $12,171,000 or 4.6% compared to the same period one year ago while
sales of $88,226,000 during the thirteen weeks ended October 28, 1995 decreased
$622,000 or .7% compared to the same period one year ago. The decreases were
primarily attributable to a net decrease in the number of stores and, during
the thirteen weeks ended April 29, 1995, to the overall mild winter conditions
in Chicago and Washington, D.C. and the rains and flooding in Los Angeles.
Comparable sales (stores open more than one year) decreased 3.9% and 0.7%,
respectively, for the thirty-nine weeks and thirteen weeks ended October 28,
1995. Sales for comparable Super Trak Stores decreased 2.6% for the
thirty-nine weeks and remained unchanged for the thirteen weeks ended October
28, 1995. Sales for comparable classic Trak stores decreased 5.0% and 1.5% for
the thirty-nine weeks and thirteen weeks ended October 28, 1995. Sales for
Super Trak and Super Trak Warehouse stores represented 55.3% and 57.5% of total
sales during the thirty-nine weeks and thirteen weeks ended October 28, 1995
compared to 40.7% and 45.2 % for the thirty-nine weeks and thirteen weeks
ended October 29, 1994.
Interest and other income increased by $559,000 and $113,000 during the
thirty-nine weeks and thirteen weeks ended October 28, 1995, respectively when
compared to the prior year, largely due to higher interest rates on Trak Auto's
short-term investments.
Cost of sales, store occupancy and warehousing expenses as a percentage
of sales were 74.1% and 74.2% for the thirty-nine weeks and thirteen weeks
ended October 28, 1995 compared to 72.6 % and 73.0% (excluding the $2,080,000
closed store reserve) for the same periods in the prior year. The increases
were due primarily to higher occupancy costs for Super Trak and Super Trak
Warehouse stores and were partially offset by increased store margins.
Selling and administrative expenses were 20.1% and 19.8% as a percentage of
sales for the thirty-nine weeks and thirteen weeks ended October 28, 1995
compared to 19.8% and 20.0% for the thirty-nine weeks and thirteen weeks ended
October 29, 1994. The increase for the thirty-nine weeks was due primarily to
22
<PAGE> 23
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations, (Continued)
Results of Operations, Continued
increased payroll costs as a percentage of sales (actual payroll dollars
decreased) and to increased health benefit costs. The decrease for the
thirteen weeks was due primarily to improved payroll leveraging against sales.
Depreciation and amortization expenses decreased $631,000 for the
thirty-nine weeks ended October 28, 1995 compared to the same period one year
ago. The decrease was due to the store point-of-sale register system being
fully depreciated.
The effective income tax rate was 37.1% for the thirty-nine weeks ended
October 28, 1995 compared to 30.7% for the thirty-nine weeks ended October 29,
1994. The increase was attributable to a reversal of Deferred Tax Valuation
allowance during the thirty nine week period ending October 29, 1994. As of
October 29, 1995, Trak Auto has a capital loss carryforward of $180,000, which
will expire in the year 2010.
Crown Books
Sales of $185,161,000 for the thirty-nine weeks ended October 28, 1995
decreased by $21,034,000 or 10.2% over the same period one year ago while sales
of $60,250,000 for the thirteen weeks ended October 28, 1995 decreased by
$8,124,000 or 11.9% over the same period one year ago. The decreases were
primarily the result of closing 67 stores since January 1, 1995. Comparable
sales (sales for stores open for fifteen months) decreased 4.3% and 3.7% during
the thirty-nine weeks and thirteen week periods. Sales for Super Crown Books
stores represented 64.1% and 53.6% of total sales for the thirty-nine weeks
ended October 28, 1995 and October 29, 1994, respectively and 66.9% and 55.3%
of total sales for the thirteen weeks ended October 28, 1995 and October 29,
1994, respectively. Super Crown Books stores sales of $118,694,000 and
$40,331,000 for thirty-nine weeks and thirteen weeks ended October 28, 1995,
respectively, increased 7.3% and 6.6% over the same periods in the prior year.
Sales for comparable Super Crown Books stores decreased 2.4% and 1.9% for the
thirty-nine and thirteen weeks ended October 28, 1995, respectively. Classic
Crown Books stores' sales of $66,467,000 and $19,919,000 for the thirty-nine
weeks and thirteen weeks ended October 28, 1995, respectively, decreased 30.5%
and 34.8% from the same periods in the prior year and sales for comparable
classic Crown Books stores decreased 7.0% and 6.7% during the thirty-nine and
thirteen weeks ended October 28, 1995.
During the thirty-nine weeks ended October 28, 1995, Crown Books closed 29
Classic Crown Books stores and one Super Crown Books store. At October 28,
23
<PAGE> 24
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations, (Continued)
Results of Operations, Continued
1995, Crown Books had 173 stores, including 76 Super Crown Books stores.
Subsequent to October 28, 1995, Crown Books closed three additional classic
stores and opened eight Super Crown Books stores.
Interest and other income increased by $655,000 and $271,000 during the
thirty-nine and thirteen weeks ended October 28, 1995, respectively, when
compared to the same periods one year ago. The increases were primarily due to
higher interest rates on Crown Books' short-term investments.
Cost of sales, store occupancy and warehousing as a percentage of sales
were 83.3% and 83.7% for the thirty-nine weeks and thirteen weeks ended October
28, 1995 compared to 82.9% and 83.6% for the same periods last year,
respectively. The increases are primarily due to store occupancy costs
associated with the Super Crown Books format and were partially offset by
increased store margins as a result of a favorable change in the sales mix as
well as improved controls over store shrink and purchasing.
Selling and administrative expenses as a percentage of sales were 19.0%
and 20.1% for the thirty-nine weeks and thirteen weeks ended October 28, 1995
compared to 24.0% and 42.1% for the same periods last year. The decreases were
due primarily to the prior year accruals for Robert M. Haft's judgement and
legal costs. Excluding these accruals, selling and administrative expenses as
a percentage of sales were 15.5% and 16.4% during the thirty-nine and thirteen
weeks ended October 29, 1995. The increased selling and administrative
expenses, excluding the accruals, were primarily due to increased payroll and
advertising costs and continuing costs associated with Crown Books' Executive
Committee.
Depreciation expense increased $225,000 for the thirty-nine weeks ended
October 28, 1995 compared to the same period one year ago. The increase was
primarily due to increased fixed assets for new Super Crown Books stores, an
upgrade to the point-of-sale register system and additional computer hardware
at the distribution centers.
Interest expense increased by $668,000 due to interest accrued for the
Robert M. Haft judgment.
During the thirty-nine weeks and thirteen weeks ended October 28, 1995,
Crown Books reversed approximately $4,107,000 and $998,000 of its closed store
reserve. In addition, Crown Books reversed $1,797,000 and $1,231,000 of its
restructure reserves during the thirty-nine weeks and thirteen weeks ended
October 28, 1995 (see Liquidity and Capital Resources).
24
<PAGE> 25
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations, (Continued)
Results of Operations, Continued
Crown Books recorded a tax benefit of $363,000 for the thirty-nine
weeks ended October 28, 1995, as compared to a tax benefit of $11,734,000 for
the same period one year ago. Crown Books recorded a $2,500,000, valuation
allowance in fiscal year 1995 due to the uncertainty relating to the timing of
the reversal of certain of taxable temporary differences during periods when
Crown Books has taxable income.
Total Beverage
During the nine months ended October 31, 1995, Total Beverage opened two
new stores that increased its number of stores to four.
Total Beverage sales were $18,415,000 and $7,187,000 during the nine
months and three months ended October 31, 1995 compared to $16,629,000 and
$5,620,000 for the same periods one year ago. The increases were due to
comparable store sales increases of 3.1% for the nine months ended October 31,
1995 and to the increased number of stores for the three months ended October
31, 1995.
Cost of sales and store occupancy as a percentage of sales were 81.3%
and 81.2% during the nine months and three months ended October 31, 1995
compared to 85.0% and 83.5% for the same periods one year ago. The decreases
were primarily due to increased store margins and to a lesser extent better
leverage on fixed occupancy costs due to increased sales.
During the three months ended October 31, 1995, Total Beverage reversed
its $4,751,000 closed store reserve 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 the three months ended October 31, 1994.
Before the reversal of the closed store reserve, Total Beverage recorded
net operating losses of $1,110,000 and $428,000 during the nine months and
three months ended October 31, 1995 compared to net operating losses of
$2,578,000 and $1,031,000 during the nine months and three months ended
October 31, 1994. Management of the Corporation and Total Beverage believe
that the Total Beverage concept is viable and that with more stores to absorb
overhead costs, Total Beverage will generate a reasonable return on investment.
Cabot-Morgan Real Estate
See Note 1 to the Consolidated Financial Statements for a description of
the distribution of the CMREC joint ventures to Ronald S. Haft in connection
with the Settlement.
25
<PAGE> 26
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations, (Continued)
Results of Operations, Continued
Dart Group and Other Corporate
Interest and other income increased $1,723,000 and $294,000 during the nine
months and three months ended October 31, 1995 when compared to the same
periods in the prior year. The increase for the nine months ended October 31,
1995 was primarily due to the Corporation's decision to invest in United
States Treasury Bills as its bankers' acceptances matured during the first six
months of last year and in addition, increases for the nine months and three
months were due to higher interest rates on the Corporation's short term
instruments.
Administrative expenses (excluding $54.0 million in reserves recorded last
year) increased $3,191,000 and $2,323,000 during the nine months and three
months ended October 31, 1995, primarily due to the compensation expense of
Ronald S. Haft's employment contract (see Note 5 to the Consolidated Financial
Statements) and costs associated with the Executive Committee and shareholder
litigation.
Interest expense increased by $2,150,000 and $610,000 during the nine
months and three months ended October 31, 1995 when compared to the same
periods in the prior year. The increases were the result of interest accrued
for the Pennsy Warehouse Lease reserve and the Robert M. Haft judgement.
Trak Auto, Crown Books and Shoppers Food file separate income tax returns.
CMREC, Total Beverage and Dart Financial are included in the Corporation's
income tax returns. The Corporation's current net operating loss was not tax
benefitted as a result of the complete utilization of all available carrybacks.
As a result of the Corporation's operating loss for the nine months
ended October 31, 1995, a net tax operating loss carryforward of $22,936,000
and a capital loss carryforward of $11,331,000 was created. The Corporation's
cumulative total net tax operating loss carryforward is $41,271,000. All net
operating loss and capital loss carryforwards will expire by fiscal 2011. In
addition, the Corporation has an Alternative Minimum Tax credit carryforward of
approximately $1,010,000. The Corporation has a deferred tax valuation
allowance of $27,602,000 as of October 31, 1995. Management will continue to
evaluate the need for a valuation allowance on a periodic basis.
Effect of New Financial Accounting Standards
The Company is required to adopt the Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan.
Implementation of the standard is not expected to have a significant impact on
the financial statements.
26
<PAGE> 27
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations, (Continued)
The Company is also required to adopt SFAS No. 121, Accounting for Long
Lived Assets, no later than its fiscal year ending February 1, 1997. The
Company has not determined the impact of this recently issued accounting
standard on The Company's consolidated financial statements.
The Company is also required to adopt Statement of Financial Accounting
Standard No. 123, Accounting for Stock Based Compensation, no later than its
fiscal year ending February 1, 1997. Implementation of this standard is not
expected to have a significant impact on the financial statements.
27
<PAGE> 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Material legal proceedings pending against the Corporation or its
subsidiaries are described (i) in the Corporation's Annual Report on Form 10-K
for the year ended January 31, 1995 (the "Annual Report"), (ii) in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended July 31, 1995
(the "Second Quarter 10-Q"), and (iii) with respect to material developments in
such earlier reported legal proceedings and any new material legal proceedings,
below.
Robert M. Haft Employment Litigation
As discussed in more detail in the Annual Report, on September 20, 1994,
a jury in the case captioned Robert M. Haft v. Dart Group Corporation, et al.
(D. Del., Civ. A. No. 93-384-SLR) found that the Corporation and Crown Books
had breached their respective employment contracts with Robert M. Haft and
awarded him damages against the Corporation and Crown Books.
In October 1995, the U.S. District Court for the District of Delaware
denied the motion of the Corporation and Crown Books for a new trial and/or
reduction of damages. On October 16, 1995, the Corporation, Crown Books and
Trak Auto filed a notice of appeal with the U.S. Court of Appeals for the
Third Circuit.
Derivative Litigation
As discussed in more detail in the Annual Report, in September 1993,
Alan R. Kahn and the Tudor Trust, shareholders of the Corporation, filed a
lawsuit in the case captioned Alan R. Kahn, et al. v. Herbert Haft, et al.
(Del. Ch., Civ. A. No. 13154), naming as defendants Herbert H. Haft, Ronald S.
Haft, Douglas M. Bregman, Bonita A. Wilson, Combined Properties, Inc., Combined
Properties Limited Partnership and Capital Resources Limited Partnership. This
suit was brought derivatively and names as nominal defendants the Corporation,
Trak Auto, Crown Books and certain other subsidiaries of the Corporation. The
complaint, as amended, alleges waste, breach of fiduciary duty, violation of
securities laws and entrenchment.
In connection with a settlement of certain litigation reached between
the Corporation and Ronald S. Haft, on October 11, 1995, the plaintiff
shareholders, Ronald S. Haft, Combined Properties, Inc., the Corporation, Trak
Auto and Crown Books entered into a Stipulation and Agreement of Compromise,
Settlement and Release (the "Stipulation"). Pursuant to the Stipulation, the
claims against Ronald S. Haft and Combined Properties, Inc. will be dismissed
on the merits and with prejudice as against the shareholder plaintiffs and the
Corporation and its subsidiaries, provided, however, that the Settlement and
dismissal of these
28
<PAGE> 29
PART II - OTHER INFORMATION, (Continued)
Item 1. Legal Proceedings, (Continued)
claims are approved by the Delaware Court of Chancery.
Ronald S. Haft Stock Options
As discussed in more detail in the Annual Report, on September 12, 1994,
Ronald S. Haft filed a lawsuit against the Corporation (Ronald S. Haft v. Dart
Group Corporation, Del. Ch., Civ. A. No. 13736) in the Delaware Court of
Chancery for New Castle County seeking a court order that the Corporation issue
certain shares of Class B Common Stock to him and grant him a loan in
connection with his exercise of a stock option. In connection with this
proceeding, on September 14, 1994, a Standstill Agreement (the "Standstill
Agreement") agreed to on behalf of the Corporation and Ronald S. Haft was
ordered by the Delaware Court of Chancery. The Standstill Agreement restricted
certain actions of the Corporation until further order of the court.
In connection with the Settlement, on October 6, 1995, Ronald S. Haft,
the Corporation and the Kahn derivative plaintiffs stipulated to the dismissal
without prejudice of this lawsuit. In filing such stipulation with the court,
the parties recognized that the dismissal of this lawsuit would result in the
termination of the Standstill Agreement.
Herbert H. Haft's Proxy
As discussed in more detail in the Second Quarter 10-Q, on July 18,
1995, Ronald S. Haft filed a lawsuit against Herbert H. Haft and, nominally,
the Corporation, in the Delaware Court of Chancery for New Castle County
(Ronald S. Haft v. Herbert H. Haft, et al., Del. Ch., Civ. A. No. 14425)
seeking, among other things, a declaration that a proxy granted in July 1993 to
Herbert H. Haft by Ronald S. Haft to vote 172,730 shares of Class B Common
Stock is revocable.
On November 14, 1995, the court denied a motion filed by Ronald S. Haft
for summary judgment in this lawsuit.
Challenge to Settlement by Robert, Gloria and Linda Haft
On October 17, 1995, Robert M. Haft, Gloria G. Haft and Linda G. Haft
(collectively, "RGL") filed a lawsuit captioned Gloria G. Haft, et al. v. Larry
G. Schafran, et al., Del. Ch., Civ. A. No. 14620, in the Delaware Court of
Chancery for New Castle County naming as defendants the Corporation and all of
its directors. RGL seek (i) to remove all of the directors of the Corporation
and replace them with three individuals (John L. Mason, Ellen V. Sigal and
Michael Ryan), whom RGL purport to have elected and (ii) a ruling by the court
that the shares of Class B Common Stock placed in a voting trust (the "Trust
29
<PAGE> 30
PART II - OTHER INFORMATION (Continued)
Item 1. Legal Proceedings, (Continued)
Shares") by Ronald S. Haft pursuant to the Settlement are "treasury shares"
owned by the Corporation and, consequently, are not entitled to vote under
Delaware corporate law.
The Corporation's position is that this lawsuit is without merit and
that the purported action by RGL to reconstitute the Board of Directors is
invalid.
Challenge to 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 the
Corporation, all of its directors except Herbert H. Haft, RGL, John L. Mason,
Ellen V. Sigal and Michael Ryan. Herbert H. Haft seeks a judgment (i)
declaring the 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 the Corporation, 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 the Corporation or, at a minimum, 34.55% of
the Corporation'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 the Corporation.
The Corporation's position is that this lawsuit, except for the
declaration sought that defendants John L. Mason, Ellen V. Sigal and Michael
Ryan are not duly elected directors of the Corporation, is without merit.
Herbert H. Haft disagrees with the Corporation's position.
Standstill Order
In connection with the Kahn lawsuit and the legal challenges to the
Settlement raised by RGL and Herbert H. Haft, on December 6, 1995, the Delaware
Court of Chancery entered a Standstill Order (the "Standstill Order"), which
restricts certain actions by the Corporation until further order of the court.
The Standstill Order is incorporated herein by reference and attached hereto as
Exhibit 99.1.
30
<PAGE> 31
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
DART GROUP CORPORATION
Date December 15, 1995 By Herbert H. Haft
-------------------- -----------------------------
HERBERT H. HAFT
Chief Executive Officer
Date December 15, 1995 Robert A. Marmon
-------------------- -----------------------------
ROBERT A. MARMON
Treasurer and Chief
Financial Officer
</TABLE>
31
<PAGE> 32
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Document
------ ---------
27 Financial Data Schedule
99.1 Standstill Order, dated December 6,
1995
(b) Reports on Form 8-K
The Corporation has filed one Current Report on Form 8-K during the
quarter ended October 31, 1995.
1. The Corporation filed a Current Report on Form 8-K on October
10, 1995, reporting under Item 1 (Changes in Control of
Registrant) and Item 5 (Other Events) a settlement with Ronald
S. Haft. Such Current Report on Form 8-K included a pro forma
balance sheet as of July 31, 1995 and income statement for the
six months ended July 31, 1995, on a preliminary basis, the
effects of the Settlement transactions, as if those
transactions had occurred on July 31, 1995.
The Corporation has filed one Form 8-K subsequent to the quarter ending
October 31, 1995.
1. On November 1, 1995, the Corporation filed a Current Report on
Form 8-K reporting under Item 1 (Changes in Control of
Registrant) and Item 5 (Other Events) a lawsuit filed on
October 17, 1995 against the Corporation and its directors by
Gloria G. Haft, Robert M. Haft and Linda G. Haft.
32
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> OCT-31-1995
<CASH> 68,844
<SECURITIES> 44,497
<RECEIVABLES> 7,167
<ALLOWANCES> 0
<INVENTORY> 226,768
<CURRENT-ASSETS> 365,461
<PP&E> 142,361
<DEPRECIATION> 67,233
<TOTAL-ASSETS> 510,852
<CURRENT-LIABILITIES> 243,027
<BONDS> 30,849
<COMMON> 2,449
0
0
<OTHER-SE> 132,459
<TOTAL-LIABILITY-AND-EQUITY> 510,852
<SALES> 457,820
<TOTAL-REVENUES> 478,803
<CGS> 357,546
<TOTAL-COSTS> 357,546
<OTHER-EXPENSES> 121,985
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,141
<INCOME-PRETAX> (11,869)
<INCOME-TAX> 3,278
<INCOME-CONTINUING> (12,922)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,922)
<EPS-PRIMARY> (7.11)
<EPS-DILUTED> (7.11)
</TABLE>
<PAGE> 1
Exhibit 99.1
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
GLORIA G. HAFT, ROBERT M. HAFT, )
AND LINDA G. HAFT, )
)
Petitioners, )
)
v. ) Civil Action No. 14620
)
LARRY G. SCHAFRAN, BONITA WILSON, )
DOUGLAS BREGMAN, RONALD S. HAFT, )
HERBERT H. HAFT, and DART GROUP )
CORPORATION, )
)
Respondents. )
__________________________________)
HERBERT H. HAFT, )
)
Plaintiff, )
)
v. ) Civil Action No. 14685
)
DART GROUP CORPORATION, )
RONALD S. HAFT, LARRY G. )
SCHAFRAN, DOUGLAS M. )
BREGMAN, BONITA A. WILSON, )
ROBERT M. HAFT, GLORIA G. HAFT, )
LINDA G. HAFT, JOHN L. MASON )
ELLEN V. SIGAL, and MICHAEL RYAN. )
)
Defendants. )
STANDSTILL ORDER
Upon consideration of the application by the parties to the
above-captioned cases.
It is this 6th day of December 1995, hereby ORDERED as follows:
1. Until further order of the Delaware Court of Chancery, Dart
Group Corporation ("Dart") will not recognize any stockholder action seeking to
change
<PAGE> 2
its Certificate of Incorporation or By-Laws;
2. Until further order of the Delaware Court of Chancery, Dart
will not recognize any stockholder action seeking to change the composition of
the incumbent Board of Directors of Dart, consisting of Herbert H. Haft, Ronald
S. Haft, Larry G. Schafran, Bonita A. Wilson and Douglas Bregman, or any of its
subsidiaries;
3. Until further order of the Delaware Court of Chancery, Dart
will not recognize any stockholder action seeking to change the current Haft
family officers of Dart or any of its subsidiaries;
4. Until further order of the Delaware Court of Chancery, Dart
will not change its Certificate of Incorporation or By-Laws;
5. Until further order of the Delaware Court of Chancery, Dart
will not change the composition of the incumbent Board of Directors of Dart, as
defined above, or any of its subsidiaries;
6. Until further order of the Delaware Court of Chancery, Dart
will not change the current Haft family officers of Dart or any of its
subsidiaries;
7. Until further order of the Delaware Court of Chancery, or the
United States District Court for the District of Delaware in the litigation
pending in that Court for the District of Delaware in the litigation pending in
that Court instituted by Robert M. Haft against Dart and its subsidiaries
arising out of alleged stock options granted to Robert Haft, Dart will not
issue any additional securities in Dart or any of its subsidiaries, except
employee stock options issued or to be issued in the ordinary course of
business (including stock options issued to new employees) and securities
issued pursuant to the exercise of stock options issued to officers and other
employees;
8. Until further order of the Delaware Court of Chancery, Dart,
without first giving the other parties hereto not less than seven (7) days
written notice, will not take any extraordinary actions, including but not
limited to actions that will: (a) liquidate Dart or any of its subsidiaries;
(b) sell any major subsidiary of Dart; or (c) through any debt transaction
disadvantage any Class B stockholder. This paragraph shall not be construed to
affect Dart's ability to take any legal position its (sic) chooses in the
above-captioned cases; to run the businesses of Dart's subsidiaries on a
day-to-day basis in the ordinary course of business consistent with past
practice; or further implement the Settlement Agreement identified below except
as provided in paragraph 9 hereof. For purposes of this Order, "extraordinary
actions" shall mean any transaction, contract or agreement, the value of which
exceeds $3 million;
9. Paragraph 8 shall not preclude Dart or Ronald S. Haft from
implementing the Settlement Agreement dated October 6, 1995 between Dart and
Ronald S. Haft (the "Settlement Agreement"), provided however, that nothing
<PAGE> 3
contained in this Order shall be construed to limit the ability of any party to
object or otherwise challenge judicial approval of the Settlement Agreement or
to limit the rights of any party to bring an action for liabilities arising out
of the Settlement Agreement or its implementation;
10. Until further order of the Delaware Court of Chancery, Dart
and Ronald S. Haft shall not transfer the Eleven Million, Six Hundred
Twenty-One Thousand, Two Hundred Seventy-Six Dollars ($11,621,276) that has
been deposited into a separate account of Settlementcorp at Riggs National Bank
and which is subject to a certain Escrow Agreement pursuant to Article 1.1(i)
of Settlement Agreement dated October 6, 1995, between Dart and Ronald S. Haft.
Consent to the entry of this Order does not constitute the entry of an
appearance by any party in any action in which such party has not previously
appeared, and is not a basis for the assertion of in personam jurisdiction with
respect to any party otherwise subject to in personam jurisdiction;
11. This Standstill Order shall continue in effect until further
order of the Delaware Court of Chancery; and
12. The Delaware Court of Chancery shall retain jurisdiction to
make such modifications, amendments, or additions to this Standstill Order as
may be necessary or appropriate upon application of any interested party and for
good cause shown.
SO ORDERED this 6th day of December 1995.
/s/ WILLIAM T. ALLEN
--------------------
Chancellor
