<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] for the fiscal year ended January 31, 1997
----------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
to
- ----------- ------------
Commission file number 0-1946
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DART GROUP CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 53-0242973
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer 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) 731-1200
----------------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, Par Value $1.00 per share
- -------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x . No .
---- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
At May 1, 1997, the registrant had 1,761,640 shares of Class A Common Stock
outstanding, and the aggregate market value of such shares held by
non-affiliates of the registrant was approximately $119,485,000. The Class B
Common Stock, of which there are 327,270 shares outstanding, is the only
voting stock and is not publicly traded.
All of the Registrant's voting stock, Class B Common Stock, is held by
affiliates.
The exhibit index begins at page 162 of this Form 10-K.
1
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
PART I
------ Page
----
<S> <C> <C>
Item 1. Business..................................................... 3
Item 2. Properties................................................... 18
Item 3. Legal Proceedings............................................ 22
Item 4. Submission of Matters to a Vote of
Security Holders........................................... 31
PART II
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Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters................................ 32
Item 6. Selected Financial Data...................................... 33
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................. 35
Item 8. Financial Statements and Supplementary Data.................. 51
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 109
PART III
--------
Item 10. Directors and Executive Officers of the
Registrant................................................. 110
Item 11. Executive Compensation....................................... 114
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 124
Item 13. Certain Relationships and Related Transactions............... 128
PART IV
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Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................... 130
</TABLE>
2
<PAGE> 3
PART I
Forward-looking Statements
Statements in this report that are not historical in nature, including
references to beliefs, anticipations or expectations, are forward-looking. Such
statements are subject to a wide variety of risks and uncertainties that could
cause actual results to differ materially from those projected, including the
results of ongoing litigation affecting the Company (defined below), the
Company's ability to open new stores and close other stores, the effect of
national and regional economic conditions, the availability of capital to fund
operations and other risks described from time to time in the Company's filings
with the Securities and Exchange Commission. The Company undertakes no
obligation and does not intend to update, revise or otherwise publicly release
the results of any revisions to these forward-looking statements, which
revisions may be made to reflect any future events or circumstances, other than
through its regular quarterly and annual financial statements, and through the
accompanying discussion and analysis contained in the Company's Quarterly
Reports on Form 10-Q and Annual Report on Form 10-K.
Item 1. Business
Dart Group Corporation ("Dart") was incorporated in Delaware in 1960 and
operates retail discount auto parts stores through Trak Auto Corporation ("Trak
Auto"), retail discount book stores through Crown Books Corporation ("Crown
Books"), retail discount beverage stores through Total Beverage Corporation
("Total Beverage"), a retail discount grocery business through Shoppers Food
Warehouse Corp. ("Shoppers Food")and, until May 1996, a real estate company
through Cabot-Morgan Real Estate Company ("CMREC"). Dart, Trak Auto, Crown
Books, Total Beverage, Shoppers Food, CMREC and Dart's other direct and
indirect wholly-owned and majority-owned subsidiaries and majority-owned
partnerships are referred to collectively as the "Company". Dart owns 67.1% of
the outstanding common stock of Trak Auto, 52.3% of the outstanding common
stock of Crown Books, 100% of the common stock of Total Beverage and 100% of
the outstanding common stock of CMREC. Since fiscal 1989, Dart has owned at
least 50% of the outstanding common stock of Shoppers Food. On February 6,
1997, Dart acquired the remaining shares of Shoppers Food's outstanding common
stock. The common stocks of Trak Auto and Crown Books are quoted on The Nasdaq
National Market ("Nasdaq") under the symbols TRKA and CRWN, respectively.
On January 31, 1997, there were 286 Trak Auto, 168 Crown Books, 34 Shoppers
Food and three Total Beverage stores.
Trak Auto Operations
Operations
Trak Auto operates retail discount auto parts stores in the metropolitan areas
of Washington, D.C.; Richmond, Virginia; Chicago, Illinois; Los Angeles,
3
<PAGE> 4
Item 1. Business (Continued)
California; Pittsburgh, Pennsylvania and Milwaukee, Wisconsin. In addition,
Trak Auto has begun opening stores in central Pennsylvania.
Trak Auto is engaged in the retail sale of a wide range of automobile parts and
accessories for the do-it-yourself market. Trak Auto's products include "hard
parts" (such as alternators, starters, shock absorbers, fan belts, spark plugs,
mufflers, thermostats, and wheel bearings), as well as motor oil, oil filters,
headlights, batteries, waxes, polishes, anti-freeze and windshield wipers. A
typical "Classic Trak" store carries 10,000 different item numbers or SKU's.
Trak Auto does not sell tires and does not provide automotive service or
installation.
Super Trak operates retail auto parts stores that offer more services and
merchandise than the "Classic Trak" stores described above. Super Trak stores
carry approximately 5,000 more SKU's, concentrated primarily in application
parts categories. Additionally, Super Trak stores feature special order
services that permit customers to access virtually any automotive part,
including engines. The stores also offer extensive technical assistance through
computerized parts look-up, instruction for repairs, free use of specialized
tools, and factory trained parts personnel.
During the year ended January 28, 1995, Trak Auto expanded its Super Trak
concept to include Super Trak Warehouse stores. These stores are typically
between 13,000 and 25,000 square feet and carry approximately 30,000 SKU's. The
added SKU's are composed of additional application parts.
Trak Auto has successfully opened or converted 122 Super Traks and 44 Super
Trak Warehouse stores. Trak Auto plans to continue to convert Classic Trak
stores into Super Trak and Super Trak Warehouse stores and to open new stores
as opportunities present themselves in Trak Auto's six metropolitan markets as
well as new markets.
Trak Auto generally purchases merchandise directly from a large number of
manufacturers and suppliers. Trak Auto's distribution system is computerized
utilizing an automated replenishment and perpetual inventory system to generate
shipments of product from distribution centers in Landover, Maryland;
Bridgeview, Illinois and Ontario, California. The required items are generally
assembled and packaged for delivery in the order in which they will be unpacked
and displayed on the shelves at the retail stores, promoting store efficiency.
Inventories are monitored both at the stores and in the distribution centers to
determine purchase requirements. Trak Auto has a computerized point of sale
("POS") register system in every store. Trak Auto uses scanners to identify
most merchandise at the register and uses a price look-up function to price the
sale. Most merchandise is pre-labeled with bar codes provided by the
manufacturers.
4
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Item 1. Business (Continued)
Trak Auto's merchandising philosophy is to develop strong consumer recognition
and acceptance of its name by use of mass-media advertising to promote a broad
selection of products at low prices. Trak Auto emphasizes quality customer
service through knowledgeable personnel and advanced technology such as
electronic parts look-up, POS and computerized do-it-yourself aids in all
stores.
Classic Trak stores range in size from approximately 5,000 to 6,000 square
feet, Super Trak stores range in size from 6,000 to 11,000 square feet, and
Super Trak Warehouse stores range in size from approximately 13,000 to 25,000
square feet. Trak Auto's stores use modern fixtures and equipment and the
interiors have been standardized, so that the interiors of new stores can be
assembled quickly. The stores are open seven days a week. No store contributed
more than 1.0% to Trak Auto's consolidated sales during the year ended February
1, 1997.
The following table sets forth by metropolitan area the locations of Trak
Auto's stores for each of the last five fiscal years.
<TABLE>
<CAPTION>
Number of Stores
at end of fiscal year
----------------------------
Metropolitan Area 1993 1994 1995 1996 1997
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Chicago, Illinois 99 97 86 79 82
Los Angeles, California 119 116 104 96 93
Pittsburgh, Pennsylvania - - - 14 16
Central Pennsylvania - - - - 2
Richmond, Virginia 15 15 11 10 9
Milwaukee, Wisconsin - - - - 7
Washington, D.C. 84 86 81 77 77
---- ---- ---- ---- ----
Total 317 314 282 276 286
</TABLE>
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.
5
<PAGE> 6
Item 1. Business (Continued)
<TABLE>
<CAPTION>
Super Trak Stores 1993 1994 1995 1996 1997
- ----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Opened during the year 12 62 34 17 14
Closed or converted to Super Trak Warehouse
during the year - 1 1 10 5
Super Trak Warehouse Stores
- ---------------------------
Opened during the year - - 7 23 14
Classic Trak Stores
- -------------------
Opened during the year 6 1 - - -
Closed or converted to Super Trak or Super
Trak Warehouse during the year 34 65 72 36 13
Total Open at End of Year
- -------------------------
Super Trak Stores 12 73 106 113 122
Super Trak Warehouse Stores - - 7 30 44
Classic Trak Stores 305 241 169 133 120
</TABLE>
During the fourth quarter of fiscal 1996, Trak Auto acquired the assets of 14
stores in Pittsburgh, PA, for approximately $6.2 million. This acquisition
places Trak Auto with the largest market share in a viable new market. The
stores were remodeled and converted to the Trak Auto concept during the year
ended February 1, 1997. Additional sites are currently being negotiated with
the intention of growing this new market to greater than 20 stores over the
next two years.
Trak Auto believes that its superstore concept presents significant growth
opportunities and intends to open new Super Trak and Super Trak Warehouse
stores in existing and possibly new markets. As of February 1, 1997, Trak Auto
had entered into lease agreements to open seven new stores.
Trak Auto intends to continue its practice of reviewing the profitability
trends and prospects of existing stores. Trak Auto may from time to time close,
relocate or sell stores (or groups of stores) that are not satisfying certain
performance objectives.
Store Closings and Restructuring Costs
Trak Auto continually evaluates its store operations and the need to close,
relocate, or expand stores or convert existing Classic Trak stores into Super
Trak or Super Trak Warehouse stores. Trak Auto recognizes store closing costs
when management decides to close a store. In prior years, Trak Auto has also
recognized the anticipated costs for closing, relocating, expanding and
converting existing stores to the Super Trak and Super Trak Warehouse concept.
The costs associated with store closings and restructuring efforts are
primarily unrecoverable lease obligations (rent, real estate taxes and common
area charges, net of estimated sublease income) and the book value of leasehold
6
<PAGE> 7
Item 1. Business (Continued)
improvements as of the actual or estimated store closing date.
As of February 1, 1997, Trak Auto had reserves of $2,644,000 for store closings
and restructuring. The restructuring reserve relates to 15 stores that have
been closed or converted into Super Trak or Super Trak Warehouse stores and an
additional nine stores identified to be closed or converted but which have
remained open. The closed store reserve relates to 16 Classic Trak and Super
Trak stores that were closed apart from Trak Auto's restructuring efforts. The
activity in the closed store and restructuring reserves during the last two
years are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
1997 1996
--------- ----------
<S> <C> <C>
Reserves, beginning of year $ 4,491 $ 6,945
Less: Net provision recorded/(charges) (1,847) (2,454)
-------- --------
Reserves, end of year $ 2,644 $ 4,491
======== ========
</TABLE>
Included in the activity for fiscal 1997 is an increase of the closed store and
restructuring reserves of approximately $402,000 and included in the activity
for fiscal 1996 is an increase in the reserves of $673,000.
The lease obligation allocable to related party leases is approximately
$969,000. The closed store and restructuring reserves as of February 1, 1997
are expected to be utilized as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Fiscal Year Total
------------ ---------
<S> <C>
1998 $ 1,047
1999 836
2000 335
2001 167
2002 128
2003-2005 131
-------
Total $ 2,644
</TABLE> =======
The amount recorded for future lease obligations has been estimated at 95% of
the total lease obligation after the closing date because Trak Auto believes
that certain alternatives (subleasing and favorable lease buy-outs) to
abandonment may be available. Since the recorded reserve represents an estimate
based upon anticipated closing dates and the book value of the leasehold
improvements at the time the store is closed, the actual amount of costs
associated with store closings are subject to change.
Trak Auto will continue to evaluate the performance and future viability of its
stores and may close or convert additional stores in the future.
7
<PAGE> 8
Item 1. Business (Continued)
Crown Books Operations
Operations
Crown Books is a retailer operating discount specialty stores. These stores
offer popular hardback and paperback books, newspapers, magazines, books on
tape, videos, reference materials and other items and accessories.
Crown Books responds to the demand for books at value prices and provides
quality service to its customers. Crown Books sells hardbacks on The New York
Times best seller list at 40% below the publishers' suggested retail prices,
paperbacks on The New York Times best seller list at 25% below the publishers'
suggested retail prices, other new books at 10% to 25% below the publishers'
suggested retail prices. Crown Books sells publishers' over-stock, reprints and
former best sellers at significant discounts from the publishers' original
suggested retail prices. In addition, Crown Books allows customers at all
stores to special order books not stocked in inventory. Merchandise is
generally purchased directly from a large number of publishers and suppliers.
Crown Books is not dependent on any single publisher or supplier.
Crown Books advertises extensively, primarily through newspapers stressing its
value pricing policy. Crown Books satisfies regional and local consumer
preferences by tailoring the selections and quantities of books that it makes
available in individual stores. Crown Books also arranges for special
appearances and book autographing sessions with recognized authors to attract
customers and to build and reinforce customer awareness of its stores.
All major merchandising decisions concerning pricing, advertising and
promotional campaigns, as well as the initial ordering of inventory for each
store, are managed centrally at Crown Books' headquarters in Landover,
Maryland. Approximately 80% of the merchandise is shipped directly from
publishers to the stores. Best sellers and other books that are purchased in
large quantities are often shipped directly from the publishers to Crown Books'
regional warehouses for distribution to the stores. Inventories are monitored
both at stores and in the central office in Landover, Maryland, to determine
purchase requirements. In general, unsold books and magazines can be returned
to the publishers for credit.
Super Crown Books operates discount retail book superstores. The first Super
Crown Books store opened in 1990 and Crown Books has continued to expand the
Super Crown Books concept. The stores carry as many as 80,000 titles, nearly
eight times the number of titles as a "classic" Crown Books ("Classic Crown
Books") store. Super Crown Books stores also carry a wider selection of non-
book products and accessories.
Classic Crown Books stores range in size from approximately 2,000 to 6,000
square feet and Super Crown Books stores range in size from approximately 6,000
8
<PAGE> 9
Item 1. Business (Continued)
to 35,000 square feet. The new prototype superstore is targeted to
occupy 15,000 square feet. It is based on an ongoing assessment of what
contributes to Crown Books' customers' shopping experience. This includes a new
floor layout with convenient adjacencies; upgraded fixtures, signage and
lighting; and expanded non-book merchandise such as book accessories, CDs and
computer software. The Super Crown Books stores permit more effective and
economic utilization of space. The interior of Crown Books' stores is
standardized, so that the stores can be assembled quickly. Most of the stores
are open seven days a week.
All Super Crown Books stores and all Classic Crown Books stores have
computerized point of sale and inventory management systems ("systems"). The
systems enable store personnel to scan bar coded merchandise resulting in less
time to process the sales transaction with more accurate pricing. The systems
are designed to provide detailed inventory information on an item basis to
store management.
In selecting specific store sites, Crown Books considers numerous factors,
including local demographics, desirability of available leasing arrangements,
proximity to existing Crown Books operations and competitors, and overall
retail activity. Crown Books generally clusters its stores in selected market
areas to maximize advertising, distribution and management resources. Within a
selected market area, Crown Books generally locates its stores in strip
shopping centers and urban street locations. Compared to large enclosed malls,
Crown Books believes that the strip shopping centers and urban street locations
typically charge less rent and provide greater consumer awareness and
convenience.
The following table sets forth by metropolitan area the locations of Crown
Books' stores for each of the last five fiscal years:
<TABLE>
<CAPTION>
Number of Stores
at end of fiscal year
----------------------------------
Metropolitan Area: 1993 1994 1995 1996 1997
- ------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Washington, D.C. 59 60 47 43 40
Los Angeles, California 76 68 59 51 47
Chicago, Illinois 43 43 37 32 36
San Francisco, California 30 31 24 20 20
San Diego, California 20 17 12 9 5
Houston, Texas 3 6 6 6 8
Seattle, Washington 16 15 11 11 12
---- ---- ---- --- ----
Total 247 240 196 172 168
==== ==== ==== ==== ====
</TABLE>
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.
9
<PAGE> 10
Item 1. Business (Continued)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Super Crown Books stores:
- -------------------------
(including new prototype)
Opened during the year 13 37 12 16 27
Closed during the year - 4 3 2 2
Classic Crown Books stores:
- ---------------------------
Opened during the year - 5 2 - -
Closed during the year 20 45 55 38 29
Remodeled during the year 2 - - - -
Total Stores Open at end of year:
- ---------------------------------
New Prototype Super Crown - - 9 25 54
Prior Format Super Crown Books 28 61 61 59 55
Classic Crown Books 219 179 126 88 59
</TABLE>
Crown Books believes that its superstore concept presents growth opportunities
and intends to open new Super Crown Books stores in existing and new markets.
As of February 1, 1997, Crown Books had entered into lease agreements
to open nine new stores. In addition, Crown Books intends to continue its
practice of reviewing the profitability trends and prospects of existing stores
and may close or relocate under-performing stores.
Restructuring Reserves
In fiscal years 1993 and 1994, Crown Books determined that a number of the
smaller Classic Crown Books stores were not competitive in an industry moving
to larger stores. Consequently, Crown Books recorded restructuring charges
totaling $12,800,000 during these two years for the anticipated costs for
closing, relocating, expanding and converting existing stores to the Super
Crown Books concept. These costs primarily represent unrecoverable lease
obligations (net of estimated sublease income) and the book value of leasehold
improvements at the estimated closing date. The activity in the restructuring
reserves during the last two years was as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
1997 1996
---------- ---------
<S> <C> <C>
Restructuring Reserve, beginning of year $ 7,025 $ 10,515
Less: Payments and charges (1,653) (1,439)
Reversal of reserves (3,865) (2,051)
-------- --------
Restructuring Reserve, end of year $ 1,507 $ 7,025
======== ========
</TABLE>
In fiscal 1997 and 1996, Crown Books reversed a portion of the restructuring
reserve as a result of (i) management's decision not to close certain stores
that had been scheduled for closing, (ii) stores that were closed under
negotiated lease settlements that were more favorable than expected, and (iii)
the postponement of certain store closings.
10
<PAGE> 11
Item 1. Business (Continued)
The remaining restructuring reserve relates to 14 stores, of which four have
been closed as of February 1, 1997, with lease obligations ranging from one to
96 months. The lease obligation allocable to related party leases is
approximately $474,000. The restructuring reserve is expected to be utilized as
follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Lease Leasehold
Fiscal Obligations Improvements
Year (Cash Outflows) & Fixtures Total
-------- --------------- ------------ --------
<S> <C> <C> <C> <C>
1998 $ 532 $ 164 $ 696
1999 269 6 275
2000 215 19 234
2001 66 - 66
2002 59 - 59
2003-2005 177 - 177
--------- --------- ---------
Total $ 1,318 $ 189 $ 1,507
========= ========= =========
</TABLE>
Since the recorded restructuring reserve represents an estimate based upon
anticipated store closing dates and the book value of the leasehold
improvements at the time a store is closed, the actual amounts of costs
associated with store closings may be different from the reserve.
Store Closing Reserve
Crown Books continually evaluates its store operations and the need to close
stores that do not perform satisfactorily. Crown Books recognizes store closing
costs when management decides to close a store. The costs primarily represent
unrecoverable lease obligations (net of estimated sublease income) and the book
value of leasehold improvements at the estimated closing date. The activity in
the closed store reserve during the last two fiscal years is as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
1997 1996
--------- ---------
<S> <C> <C>
Closed Store Reserve, Beginning of Year $ 10,850 $ 20,241
Less: Payments and charges (1,764) (2,648)
Reversal of reserves (1,052) (6,743)
-------- --------
Closed Store Reserve, end of year $ 8,034 $ 10,850
======== ========
</TABLE>
In fiscal 1997 and 1996, Crown Books reversed a portion of the closed store
reserve as a result of (i) management's decision not to close certain stores
that had been scheduled for closing, (ii) stores that were closed under
negotiated lease settlements that were more favorable than expected, and (iii)
the postponement of certain store closings.
The remaining closed store reserve relates to 69 stores, of which 13 have been
closed as of February 1, 1997, with lease obligations ranging from one to 54
months. The lease obligation allocable to related party leases is approximately
11
<PAGE> 12
Item 1. Business (Continued)
$1,555,000. The closed store reserve is expected to be utilized as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Lease Leasehold
Fiscal Obligations Improvements
Year (Cash Outflows) & Fixtures Total
-------- --------------- ------------ --------
<S> <C> <C> <C>
1998 $ 1,960 $ 642 $ 2,602
1999 2,040 198 2,238
2000 1,437 141 1,578
2001 805 - 805
2002 383 49 432
2003-2005 284 95 379
--------- -------- --------
Total $ 6,909 $ 1,125 $ 8,034
========= ======== ========
</TABLE>
Since the recorded closed store reserve represents an estimate based upon
anticipated store closing dates and the book value of the leasehold
improvements at the time the store is closed, the actual costs are subject to
change and may be different from the reserve. Crown Books will continue to
evaluate the performance and future viability of its remaining stores and may
close additional stores. Crown Books has not recorded reserves for any such
future possible store closings.
Shoppers Food Operations
Shoppers Food is a leading supermarket operator in the Washington, D.C.
metropolitan area, operating 34 stores which target the price-conscious
segments of the market in densely populated urban and suburban areas under the
"Shoppers Food Warehouse" and "Shoppers Club" names. Shoppers Food operates
warehouse-style, price impact supermarkets that are positioned to offer the
lowest overall prices in its marketing area by passing on to the consumer
savings achieved through labor efficiencies and lower overhead and advertising
costs associated with the warehouse format, while providing the product
selection and variety associated with a conventional format. Shoppers Food
stores generally offer products at prices which range between approximately
10-20% below those of its primary supermarket competitors.
In-store operations are designed to allow customers to perform certain labor-
intensive services usually offered in conventional supermarkets. For example,
Shoppers Food stores generally do not provide full-time staff to support the
bakery, meat and seafood refrigerated cases and floral departments; however,
they offer a complete line of produce, fresh baked goods, freshly packaged meat
and seafood products and floral assortments and provide service in these
departments at the customer's request. Merchandise is presented on
warehouse-style racks in full cartons, reducing labor-intensive unpacking, and
customers bag their own groceries. Shoppers Food stores also have service
delicatessens with some stores offering hot and cold prepared food and
self-service soup and salad bars.
12
<PAGE> 13
Item 1. Business (Continued)
Shoppers Food stores generally are constructed with high ceilings to
accommodate warehouse racking with overhead pallet storage. Wide aisles
accommodate forklifts and, compared to conventional supermarkets, a higher
percentage of total store space is devoted to retail selling because the top of
the warehouse-style grocery racks on the sales floor are used to store
inventory, which reduced the need for large back room storage and restocking
trips.
Notwithstanding the "warehouse" name, physical features and low-price
reputation, Shoppers Food stores have more in common with conventional
supermarket chains than with so-called "warehouse clubs." No membership fee is
charged at the Shoppers Food stores, which offer a selection of popular-sized
national brands and private label products as well as high quality produce,
meat and fish. The product offerings are similar to those of conventional
supermarkets with slightly more emphasis on larger package sizes and with less
emphasis on extensive brand and size selection. All of the Shoppers Food
supermarkets contain a bakery, a delicatessen and a floral department, while 18
stores have a beer and wine department.
The stores are generally in good condition and typically require only routine
maintenance.
The following table sets forth the total number of open stores as of the end of
each of the last five fiscal years and the number of stores opened, closed and
remodeled during each of the last five years.
<TABLE>
<CAPTION>
Number of Stores
at end of fiscal year
----------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Open 34 35 33 34 34
Opened during the year 4 2 - 1 -
Closed during the year 1 1 2 - -
Remodeled during the year 1 2 - - 2
</TABLE>
During fiscal 1989, Dart acquired in excess of 50% of the common stock of
Shoppers Food (then known as Jumbo Food Stores). In June 1994, one of the other
shareholders (Kenneth Herman) of Shoppers Food exercised his right to reacquire
one share of Shoppers Food Class B common stock, thereby reducing Dart's
ownership to exactly 50%. As a result, the accounts of Shoppers Food are
consolidated with Dart's through May 28, 1994 and, thereafter, Dart has
recorded Shoppers Food's operating results on the equity basis.
On December 16, 1996, Dart submitted offers to either (i) sell all of Dart's
50% equity interest in Shoppers Food or (ii) buy the other 50% equity interest
in Shoppers Food; in either case for a cash price of $210 million. On December
18, 1996, the other stockholders (Kenneth M. Herman, the founder of Shoppers
Food, and certain of his family members and family trusts) accepted Dart's
offer to purchase all of their shares of capital stock of Shoppers Food.
13
<PAGE> 14
Item 1. Business (Continued)
On February 6, 1997, Dart acquired the other 50% interest in Shoppers Food for
$210 million (the "Acquisition"). Dart financed the Acquisition through the
application of $137.2 million in net proceeds raised from an offering of
Increasing Rate Senior Notes due 2000 (the "Senior Notes") of SFW Acquisition
Corp., a newly created wholly-owned subsidiary of Dart, and $72.8 million of
bridge financing. Immediately after the Acquisition, SFW Acquisition Corp.
merged into Shoppers Food (with Shoppers Food becoming obligor on the Senior
Notes) and Shoppers Food repaid the bridge financing from its existing cash and
the liquidation of certain short-term investments.
Dart intends to analyze the options available to it with regard to Shoppers
Food, which options include, among others, a refinancing of the Senior Notes or
a sale of all or part of Shoppers Food.
Total Beverage Corporation
Total Beverage operates retail discount beverage superstores in the Washington,
D.C. metropolitan area and plans to open stores in the Chicago, Illinois
metropolitan area. The stores carry a wide range of foreign and domestic
beers and wines as well as non-alcoholic beverages. Dart organized Total
Beverage Corporation on January 26, 1993 and purchased the assets for the first
store on February 27, 1993 from Shoppers Food for approximately $1,494,000.
Since then, Total Beverage opened four more stores, two of which subsequently
were closed due to disappointing sales volume.
The following table sets forth the number of stores open at the end of each
fiscal year and the number of stores opened or closed during each fiscal year.
<TABLE>
<CAPTION>
Number of Stores
at end of fiscal year
--------------------------
1994 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total open at end of year 3 2 4 3
Opened during the year 3 - 2 -
Closed during the year - 1 - 1
</TABLE>
Cabot-Morgan Real Estate Company
CMREC, a wholly-owned subsidiary, owned the majority interest in five real
estate joint ventures that owned four shopping centers and an office building
in the Washington, D.C. metropolitan area. The remaining partnership interests
in these joint ventures were owned by partnerships in which the partners are
members of the Haft family. As part of the RSH Settlement (defined below),
Ronald S. Haft and entities controlled by him received 99% of the ordinary
income and loss generated from these properties.
In May 1996, the five properties owned by the CMREC real estate joint ventures
were sold pursuant to the terms of the RSH Settlement. As a result of the sale
and pursuant to the terms of the RSH Settlement, Dart received $2.0 million of
14
<PAGE> 15
Item 1. Business (Continued)
the proceeds for its retained interest in the joint ventures and Ronald S. Haft
repaid an $11.6 million note to Dart plus accrued interest. In addition,
approximately $32.6 million of CMREC's share of the net proceeds from the sale
of the properties are held in escrow and will be payable to Ronald S. Haft if
certain transactions contemplated by the RSH Settlement are effected. Combined
Properties, Inc., a Haft controlled entity, managed the shopping centers and
office building for the joint ventures. Trak Auto, Crown Books, Shoppers Food
and Total Beverage have stores in some of these shopping centers.
Competition
The market for the products offered by the Company's retail discount specialty
operations is highly competitive. The stores compete with retail outlets,
including drug stores, supermarkets, department stores, hardware stores,
variety stores, auto parts stores and book stores. Competitors range from small
independent stores to large regional and national chains, many of which have
greater resources than the Company. The stores encounter strong competition
with respect to the prices at which they sell their products and services.
Seasonality
Crown Books' sales, net income and working capital for the quarter ended
January 31 have historically been substantially higher than for any of the
previous three quarters. Crown Books' inventory and accounts payable have
historically been higher at the end of the third quarter than for any other
quarter for the year. The fourth quarter results of operations have
historically been sufficient to satisfy to a substantial degree the third
quarter accounts payable requirements.
Trak Auto's business is somewhat seasonal in nature, with the highest sales
occurring in the second and third fiscal quarters (May through October). Sales
for the combined second and third quarters in each of the fiscal years 1997 and
1996 were approximately 52% of total annual sales. Extremely hot or cold
weather tends to enhance sales by causing a higher incidence of parts failure,
thus increasing sales of seasonal products. Rain or snow, however, tends to
reduce sales by causing deferral of elective maintenance.
Management does not believe Dart's other partially or wholly-owned businesses
are affected by seasonality to any material extent.
Employees
On January 31, 1997, the Company (excluding Shoppers Food) employed
approximately 3,760 full-time and 3,500 part-time persons. The Company
considers its relationship with its employees to be good.
15
<PAGE> 16
Item 1. Business (Continued)
Changes in Management
On September 7, 1994, the Board of Directors of Dart established an Executive
Committee comprised of Dart's outside directors to conduct the affairs of Dart
with respect to matters that were the subject of disputes between the Chairman
of the Board and Chief Executive Officer of Dart, Herbert H. Haft, and the then
President and Chief Operating Officer of Dart, Ronald S. Haft. On October 11,
1994, the Board of Directors of Trak Auto, Crown Books and Total Beverage each
established an Executive Committee of their respective Boards of Directors
comprised of the same outside directors, with authority parallel to that of
Dart's Executive Committee. The disputes between Herbert H. Haft and Ronald S.
Haft concerning issues involving Dart have been extensive. Accordingly, the
Executive Committee assumed day-to-day involvement in these disputed issues and
other matters affecting Dart, in particular matters relating to litigation to
which Dart is a party. While the Executive Committee remains involved in the
day-to-day affairs of Dart, its continuing role is dependent upon future
developments.
In connection with the RSH Settlement (defined below), Ronald S. Haft resigned
his positions as a director and officer of Dart and each of its subsidiaries.
The Standstill Order (defined below) contemplates that Ronald S. Haft will
continue as a director of Dart while the Standstill Order is in effect.
(Herbert H. Haft contends that Ronald S. Haft is no longer a director.)
In October 1994, Robert A. Marmon was appointed to serve on an interim basis as
Treasurer and Chief Financial Officer of Dart and Crown Books and as Principal
Financial Officer of Trak Auto. Effective February 29, 1996, Mr. Marmon
resigned as Treasurer and Chief Financial Officer of Dart and as an officer of
Dart's subsidiaries. In September 1996, Mark A. Flint was appointed Senior Vice
President and Chief Financial Officer of Dart and Treasurer of Trak Auto and
Crown Books. In February 1997, Mr. Flint also became President of Shoppers
Food.
Settlement with Ronald S. Haft
On October 6, 1995, Dart and Ronald S. Haft entered into a settlement of
certain litigation and other related transactions (collectively, the "RSH
Settlement"). For a more detailed discussion of the RSH Settlement, see Note 6
to Dart's Consolidated Financial Statements (Item 8 - Financial Statements and
Supplementary Data) and Dart's Current Report on Form 8-K, dated October 10,
1995. The RSH Settlement transactions are subject to legal challenge. See Item
3 - Legal Proceedings. If sustained, the RSH Settlement transactions were
intended to have the effect, by their terms, of transferring majority control
of Dart's voting stock to one or more voting trustees under a Voting Trust
Agreement (the "Voting Trust Agreement"), by and among Ronald S. Haft, Dart and
Larry G. Schafran and Sidney B. Silverman, as initial Voting Trustees. On
December 28, 1995, the initial Voting Trustees resigned and appointed Richard
16
<PAGE> 17
Item 1. Business (Continued)
B. Stone as successor Voting Trustee. If the RSH Settlement transactions are
not sustained, there could be a significant effect on the Company's financial
statements, the extent of which cannot be readily determined.
Standstill Order
In connection with legal challenges to the RSH Settlement, on December 6, 1995,
the Delaware Court of Chancery entered a Standstill Order (the "Standstill
Order"), which restricts certain actions by Dart. Without further order of the
court, Dart may not (i) change its Certificate of Incorporation or Bylaws; (ii)
change the current composition of Dart's Board of Directors (Herbert H. Haft,
Ronald S. Haft, Larry G. Schafran, Bonita A. Wilson and Douglas M. Bregman) or
any of its subsidiaries; (iii) change the current Haft family officers of Dart
or any of its subsidiaries; or (iv) issue any additional securities of Dart or
any of its subsidiaries (except employee stock options issued in the ordinary
course of business). In addition, without first giving Herbert H. Haft and
certain other litigants not less than seven days' written notice, Dart may not
take any extraordinary actions, including but not limited to actions that would
result in (a) the liquidation of Dart or any of its subsidiaries, (b) the sale
of any major subsidiary of Dart or (c) the disadvantage of any Class B
stockholder of Dart through any debt transaction. For purposes of the
Standstill Order, the phrase "extraordinary actions" means any transaction,
contract or agreement, the value of which exceeds $3 million. See Item 3 Legal
Proceedings.
Segment Information
See Note 16 to the Consolidated Financial Statements (Item 8 - Financial
Statements and Supplementary Data).
17
<PAGE> 18
Item 2. Properties
Dart Group Corporation
Dart leases its headquarters building and distribution center of approximately
271,000 square feet in Landover, Maryland from a private partnership in which
members of the Haft family own all of the beneficial interests. The lease is
for 30 years and six months, commenced in 1985, and provides for increasing
rental payments over the term of the lease. The current annual rental is
$2,121,000 and the lease requires the additional payment of maintenance,
utilities, insurance and real estate taxes. Dart has sublet 210,000 square feet
of the headquarters building and distribution center to Trak Auto and 28,000
square feet to Crown Books.
In addition, Dart has a lease agreement with the aforementioned partnership for
land near the headquarters building and distribution center. The lease is
coterminous with the headquarters building and distribution center lease and
provides for current annual rental of $37,000 with increases of 3% per year.
Dart, Trak Auto and Crown Books each pay a pro-rata share of the rent in
proportion to their use of the headquarters building and distribution center.
As part of the RSH Settlement, Ronald S. Haft agreed to transfer the real
estate and partnership interests controlled by him in the headquarters and
distribution center to Dart (or its subsidiaries) and to reduce the rent. These
transfers and rent reductions are subject to contingencies, including
bankruptcy court approval, mortgagee approval, challenges brought by Herbert H.
Haft concerning the extent of Ronald S. Haft's ownership interest in the
property and claims asserted by Robert M. Haft and Linda G. Haft regarding the
extent to which Ronald S. Haft controls the aforementioned partnerships. See
Note 6 to Dart's Consolidated Financial Statements (Item 8 - Financial
Statements and Supplemental Data).
Trak Auto
All of Trak Auto's 286 stores are leased. As of February 1, 1997, the total
minimum payments for Trak Auto's retail stores (excluding closed stores)
aggregated approximately $131,198,000 to lease expiration dates. The lease
expiration dates (without regard to renewal options) range from 1997 to 2015.
Twenty-three of these leases are with entities in which members of the Haft
family have all or substantially all the beneficial interest and two are
subleased from Crown Books.
Trak Auto leases a 176,000 square foot warehouse located in Bridgeview,
Illinois from a private partnership in which Haft family members own all of the
partnership interests. The lease is for thirty years and six months, commenced
in 1984, and provides for rental payments increasing approximately 15% every
five years over the term of the lease. The current annual rental is $754,000.
The lease also requires Trak Auto to pay for maintenance, utilities, insurance
and real estate taxes on the warehouse. As co-tenant, Dart is jointly and
18
<PAGE> 19
Item 2. Properties (Continued)
severally liable for the lease obligations.
Trak Auto also leases a 317,000 square foot warehouse located in Ontario,
California from a private partnership in which Haft family members own all of
the partnership interests. The lease is for 20 years and provides for
increasing rental payments, based upon the Consumer Price Index for the Los
Angeles area, over the term of the lease. The lease commenced in 1989. The
current annual rental is $1,469,000. The lease also requires Trak Auto to pay
for maintenance, utilities, insurance and real estate taxes on the warehouse.
As part of the RSH Settlement, Ronald S. Haft agreed to transfer the real
estate and partnership interests controlled by him in the Bridgeview and
Ontario warehouses to Dart (or its subsidiaries) and to reduce Dart's rent.
These transfers and rent reduction are subject to contingencies, including
bankruptcy court approval, mortgagee approval, challenges brought by Herbert H.
Haft concerning the extent of Ronald S. Haft's ownership interest in the
property and claims asserted by Robert M. Haft and Linda G. Haft regarding the
extent to which Ronald S. Haft controls the partnership owning the Bridgeview
property. See Note 6 to Dart's Consolidated Financial Statements (Item 8 -
Financial Statements and Supplemental Data).
Crown Books
All of Crown Books' 168 stores are leased. As of February 1, 1997, the total
minimum payments for Crown Books' retail stores (excluding closed stores)
aggregated approximately $135,087,000 to the lease expiration dates. The lease
expiration dates (without regard to renewal options) range from 1997 to 2010.
Ten of these leases are with entities in which members of the Haft family have
all or substantially all the beneficial interest.
Crown Books leases 23,300 square feet of office and warehouse space in Addison,
Illinois. The lease commenced in January 1993 and has a term of ten years with
one five-year renewal option. The annual rent is $143,000 for the each of the
first five years and increases to $156,000 for each of the second five years.
The lease also obligates Crown Books to pay maintenance, utilities, insurance
and real estate taxes.
Shoppers Food
Shoppers Food leases all of its 34 stores. As of February 6, 1997, the total
minimum payments for Shoppers Food's retail stores under lease aggregated
approximately $165,453,000 to the lease expiration dates. The lease expiration
dates (without regard to renewal options) range from 1997 to 2016. At February
6, 1997, ten of these leases were with entities in which members of the Haft
family own all or substantially all the beneficial interest.
Shoppers Food also has a lease agreement with a limited partnership, in which
19
<PAGE> 20
Item 2. Properties (Continued)
members of the Haft family own half of the beneficial interests, for
approximately 86,000 square feet of space in an office building in Lanham,
Maryland. The lease commenced January 1991, is for 20 years and the current
annual rental is $1,247,000. Shoppers Food has sublet approximately 30,000
square feet of the office to unaffiliated third parties.
Total Beverage
Total Beverage's three stores are leased. As of February 1, 1997, the total
minimum payments for Total Beverage's retail stores under lease aggregated
approximately $11,722,000 to the lease expiration dates. The lease expiration
dates (without regard to renewal options) range from 2002 to 2005. Two lease
agreements are with partnerships in which members of the Haft family own all or
substantially all the beneficial interest.
Pennsy Warehouse Facility
As previously disclosed, the Executive Committee undertook a legal review of
leases covering approximately 533,800 square feet of space in certain
warehouses located on Pennsy Drive, Landover, Maryland (the "Pennsy Leases").
By their terms, the Pennsy Leases, which expire in 2016, require annual rental
payments of $855,000 subject to escalations based on increases in the Consumer
Price Index. The lease terms also require the lessee to pay real estate taxes,
insurance, utilities and maintenance expenses. Trak Auto, Crown Books and
Shoppers Food utilize space in Warehouses II, III and III Addition at a
variable rental (approximately $268,000 per year) dependent on square footage
used. This arrangement continues on a month-to-month basis. Warehouse I is
vacant. As a result of the Executive Committee's review, on February 10, 1995,
Dart filed a complaint in the Circuit Court for Prince George's County,
Maryland, alleging breaches of fiduciary duty, waste and other irregularities
by certain members of the Haft family and others in connection with the Pennsy
Leases and, in particular, with the resumption of rental payments for these
warehouses in 1991 following the bankruptcy of the prior tenant. The complaint
seeks rescission of the Pennsy Leases, restitution of rent paid since 1991 and
other monetary damages. With respect to Pennsy Warehouse II, III and III
Addition (but not Pennsy Warehouse I), Dart is paying only that portion of its
rent necessary to cover debt service. The balance of the rent called for in
these leases is being paid into escrow, pending resolution of this litigation.
See Item 3. - Legal Proceedings and Notes 4,5,7, and 8 to the Consolidated
Financial Statements.
As part of the RSH Settlement, Ronald S. Haft and Dart agreed to various
transactions relating to the Pennsy Leases. The primary intent of these
transactions was to transfer ownership of Pennsy Warehouses II, III and III
Addition to a Dart-controlled company in which Ronald S. Haft retains an
interest, to later transfer Ronald S. Haft's interest in that company to Dart
and to reduce the excessive rents paid by Dart. As a result of the RSH
Settlement, Dart paid the debt service on the mortgages on Warehouses II and
III during fiscal 1997.
20
<PAGE> 21
Item 2. Properties (Continued)
In addition, Dart paid the debt service on the mortgage on Warehouse I to the
landlord and the difference between the rent and the debt service on the
mortgages on Warehouse I, II and III to an escrow account in fiscal 1997.
The total amount paid in fiscal 1997 was $855,000. The transactions are
subject to challenges brought by Herbert H. Haft concerning the extent of
Ronald S. Haft's ownership interest in certain of the properties. In the event
the RSH Settlement is not sustained, the accounting treatment of the
transferred interests could be significantly affected. See Note 6 to Dart's
Consolidated Financial Statements (Item 8 Financial Statements and Supplemental
Data) and Item 3 - Legal Proceedings.
The Executive Committees of Dart, Crown Books and Trak Auto have also
undertaken a legal review of non-Pennsy Warehouse leasing arrangements and real
estate related transactions between the Company and Haft-owned entities. On
December 17, 1996, Dart, Crown Books and Trak Auto filed a lawsuit against
Herbert H. Haft (Chairman of each such company) claiming breach of fiduciary
duty, fraud and waste in connection with certain of these lease transactions
(other than the Pennsy Leases) with certain partnerships owned beneficially by
members of the Haft family. See Item 3 - Legal Proceedings - Lawsuit Against
Herbert H. Haft Concerning Haft-Owned Real Estate.
21
<PAGE> 22
Item 3. Legal Proceedings
Derivative Litigation
In September 1993, Alan R. Kahn and the Tudor Trust (the "Kahn Derivative
Plaintiffs"), shareholders of Dart, filed a lawsuit in the Delaware Court of
Chancery for New Castle County naming as defendants Herbert H. Haft, Ronald S.
Haft, Douglas M. Bregman, Bonita A. Wilson, Combined Properties, Inc. ("CPI"),
Combined Properties Limited Partnership and Capital Resources Limited
Partnership. The suit is brought derivatively and names as nominal defendants
Dart, Trak Auto, Crown Books, Shoppers Food, Total Beverage and CMREC.
The complaint, as amended on January 12, 1995, alleges waste, breach of
fiduciary duty, violation of securities laws and entrenchment in connection
with various lease agreements between the Combined Properties defendants and
Dart and its subsidiaries, the termination of Robert M. Haft, the compensation
paid to Ronald S. Haft and Herbert H. Haft, the employment agreement entered
into by Ronald S. Haft and Dart on August 1, 1993 (the "RSH Employment
Agreement"), the sale of 172,730 shares of Class B Common Stock by Herbert H.
Haft to Ronald S. Haft, and the compensation paid to the Executive Committee.
Plaintiffs seek an accounting of unspecified damages incurred by Dart, voiding
of the options sold to Ronald S. Haft, appointment of a temporary custodian to
manage the affairs of Dart or to oversee its recapitalization or sale and costs
and attorneys' fees.
On April 27, 1995, the Kahn Derivative Plaintiffs and the Special Litigation
Committee of Dart's Board of Directors filed a Stipulation and Order which, if
entered by the court, would (i) dismiss claims against Douglas M. Bregman and
Bonita A. Wilson and (ii) realign Dart as a party plaintiff to the amended
complaint. The court has not yet acted upon this Stipulation.
In November 1993, Robert M. Haft filed a lawsuit in the Delaware Court of
Chancery for New Castle County. The lawsuit names as defendants Herbert H.
Haft, Ronald S. Haft, Douglas M. Bregman, and Bonita A. Wilson, and also names
Dart as a nominal defendant. The complaint derivatively alleges interested
director transactions, breach of fiduciary duty and waste in connection with
the RSH Employment Agreement. Robert M. Haft also brings individual claims for
breach of contract and dilution of voting rights in connection with the sale of
shares of Class B Common Stock by Herbert H. Haft to Ronald S. Haft and the RSH
Employment Agreement. The complaint seeks rescission of the sale of such shares
and the RSH Employment Agreement, unspecified damages from the individual
directors, and costs and attorneys' fees.
In January 1994, a Special Litigation Committee consisting of two outside,
independent directors of Dart, Crown Books and Trak Auto was appointed by the
Board of Directors to assess, on behalf of Dart, whether to pursue, settle or
abandon the claims asserted in these two derivative lawsuits. (Since the death
of one member in December 1994, the Special Litigation Committee has consisted
of one director.) In September 1994, the Special Litigation Committee moved for
22
<PAGE> 23
Item 3. Legal Proceedings (Continued)
dismissal of certain claims in those derivative lawsuits and for realignment of
the parties to permit Dart to prosecute other claims in those derivative
lawsuits. Thereafter, the Special Litigation Committee amended its motion and
advised the court that it had instituted certain lawsuits concerning related
party real estate transactions, (see the Pennsy Warehouse Litigation, described
below), and was considering asserting additional claims, certain of which have
since been asserted in (see the Lawsuit Against Herbert H. Haft Concerning
Haft- Owned Real Estate, described below). The amended motion is still pending
before the court.
In connection with the RSH Settlement, on October 11, 1995, the plaintiff
shareholders, Ronald S. Haft, CPI, Dart, Trak Auto and Crown Books entered into
a Stipulation and Agreement of Compromise, Settlement and Release (the
"Stipulation"). Pursuant to the Stipulation, the claims against Ronald S. Haft
and CPI will be dismissed on the merits and with prejudice as against the
shareholder plaintiffs and Dart and its subsidiaries, if the RSH Settlement and
dismissal of these claims are approved by the Delaware Court of Chancery.
In September 1994, Jolien Lou, a purported shareholder of Crown Books, filed a
lawsuit in the Delaware Court of Chancery for New Castle County naming as
defendants Herbert H. Haft, Glenn E. Hemmerle, Ronald S. Haft, Douglas M.
Bregman, H. Ridgely Bullock, Larry G. Schafran and Bonita A. Wilson. The suit
is brought derivatively and names Crown Books as nominal defendant. The
complaint, as amended on February 24, 1995, alleges waste and breach of
fiduciary duty in connection with the termination of Robert M. Haft from his
position at Crown Books in 1993 and in connection with the management of Crown
Books. The amended complaint also alleges legal malpractice against a lawyer
advising Dart at that time. Plaintiff seeks unspecified damages incurred by
Crown Books, and costs and attorneys' fees. Ronald S. Haft and Glenn E.
Hemmerle have been dismissed without prejudice from this lawsuit. The amended
complaint does not name as a defendant H. Ridgely Bullock, who died subsequent
to the filing of the original complaint. Crown Books and other defendants have
filed a motion to dismiss this lawsuit.
Given that these derivative lawsuits are brought in the name of Dart and its
subsidiaries, recovery in them would inure to the benefit of Dart and its
subsidiaries if the claims are successfully litigated or settled. Therefore, in
the opinion of management, resolution of these actions will not have a material
adverse effect on the consolidated financial condition or results of operations
of the Company.
Pennsy Warehouse Litigation
In fiscal 1995, the Executive Committee of Dart's Board of Directors undertook
a legal review of the Pennsy Leases. By their terms, the Pennsy Leases, which
expire in 2016, require annual rental payments of $855,000 subject to
escalation based on increases in the Consumer Price Index. The lease terms also
require
23
<PAGE> 24
Item 3. Legal Proceedings (Continued)
the lessee to pay real estate taxes, insurance, utilities, and maintenance
expenses. At January 31, 1997, Dart had reserved approximately $18.5 million
for the obligations represented by the Pennsy Leases.
As a result of this review, on February 10, 1995, Dart filed a complaint (the
"Pennsy Warehouse Litigation") in the Circuit Court for Prince George's County,
Maryland, alleging breaches of fiduciary duty, waste and other irregularities
by certain members of the Haft family and others in connection with the Pennsy
Leases and, in particular, with the resumption of rental payments for these
warehouses in 1991 following the bankruptcy of the prior tenant, Dart Drug
Stores, Inc. The complaint seeks rescission of the Pennsy Leases, restitution
of approximately $6 million of rent and other expenses paid since 1991 and
other monetary damages.
Robert M. Haft Release Litigation
On June 12, 1995, Robert M. Haft filed a complaint in the Superior Court of the
District of Columbia against Dart seeking (i) an order declaring that a claimed
release bars Dart from bringing suit against him in the Pennsy Warehouse
Litigation, (ii) an injunction to bar Dart from filing certain other categories
of future complaints against him based on the so-called release and (iii)
compensation for the costs of defense of the Pennsy Warehouse Litigation. The
"release" relied upon in this litigation is also asserted by Robert M. Haft and
Gloria G. Haft in the Pennsy Warehouse Litigation. On February 27, 1996, the
Superior Court ruled that this action should be stayed pending resolution of
the Pennsy Warehouse Litigation.
Robert M. Haft Stock Option Litigation
On February 10, 1995, Robert M. Haft filed a complaint in the United States
District Court for the District of Delaware against Dart seeking specific
performance or damages in connection with the refusal of Dart to issue shares
of Class A Common Stock to him pursuant to his exercise of certain options
purportedly granted to him by Dart. Robert M. Haft allegedly received these
options on three separate occasions: (i) pursuant to the Dart Drug Corporation
Executive Non-Qualified Stock Option Plan (the "1983 Plan"), under which Robert
M. Haft allegedly received options to purchase 120,000 shares of Class A Common
Stock; (ii) pursuant to the Dart Drug Corporation 1987 Executive Non-Qualified
Stock Option Plan (the "1987 Plan"), under which Robert M. Haft allegedly
received options to purchase 99,750 shares of Class A Common Stock; and (iii)
pursuant to a Stock Option Agreement (the "1989 Agreement") dated as of August
30, 1989, among Dart, Dart/SFW Corp. ("Dart/SFW") and Robert M. Haft, under
which Robert M. Haft allegedly received options to purchase 10 shares (or 10%)
of common stock of Dart/SFW.
Dart is contesting the validity of the options granted to Robert M. Haft
pursuant to the 1983 Plan, the 1987 Plan and the 1989 Agreement. Dart filed a
24
<PAGE> 25
Item 3. Legal Proceedings (Continued)
counterclaim on July 17, 1995 asking that the stock option plans and stock
option agreement that are the subject of the litigation be declared void,
rescinded and unenforceable.
Herbert H. Haft Proxy Litigation
In connection with Herbert H. Haft's sale of 172,730 shares of Class B Common
Stock to Ronald S. Haft on July 28, 1993 (the "Stock Sale Agreement"), Ronald
S. Haft purportedly granted Herbert H. Haft an irrevocable proxy (the "Proxy")
to vote these shares of stock to the same extent and with the same effect as
Ronald S. Haft might or could do under any applicable laws or regulations
governing the rights and powers of shareholders of Dart," until Herbert H.
Haft's death or incapacitation. On June 30, 1995, Ronald S. Haft sent a letter
to Herbert H. Haft purportedly revoking this proxy.
On July 18, 1995, Ronald S. Haft filed a lawsuit against Herbert H. Haft and,
nominally, Dart in the Delaware Court of Chancery for New Castle County for
Herbert H. Haft's alleged breach of contract and breach of fiduciary duties to
Ronald S. Haft and to Dart in connection with the Proxy (Ronald S. Haft v.
Herbert H. Haft, et al., Civ. A. No. 14425). In this action, Ronald S. Haft
seeks a declaration that the Proxy is revocable or would be revocable under
certain conditions, as well as costs and attorneys' fees. Ronald S. Haft also
requests that the court require Dart to refuse to recognize the validity of the
Proxy. On August 9, 1995, Herbert H. Haft filed an Answer and Counterclaim
denying liability and requesting rescission of the Stock Sale Agreement because
of Ronald S. Haft's alleged breach of contract and other grounds. On September
25, 1995, Dart filed its answer in this action. Both Ronald S. Haft and Herbert
H. Haft have moved for summary judgment in this lawsuit. On November 14, 1995,
the court denied Ronald S. Haft's motion for summary judgment; Herbert H.
Haft's motion for summary judgment remains pending.
As part of the RSH Settlement, on October 6, 1995, Dart purchased from Ronald
S. Haft the 172,730 shares of Class B Common Stock that were subject to the
Proxy and placed the shares in treasury. See Note 6 to Dart's Consolidated
Financial Statements (Item 8 - Financial Statements and Supplemental Data).
Section 225 Action by Robert, Gloria and Linda Haft
On October 17, 1995, Robert M. Haft, Gloria G. Haft and Linda G. Haft
(collectively, "RGL") filed a lawsuit captioned Gloria G. Haft, et al. v. Larry
G. Schafran, et al., Del. Ch., Civ. A. No. 14620 (the "Section 225 Action"), in
the Delaware Court of Chancery for New Castle County naming as defendants Dart
and all of its directors. RGL seek an order, under Section 225 of the Delaware
General Corporation Law, declaring that RGL validly removed all of Dart's
directors and replaced them with three individuals (John L. Mason, Ellen V.
Sigal and Michael Ryan), whom RGL purport to have elected. Such purported
election is premised on RGL's contention that RGL own a majority of Dart's
25
<PAGE> 26
Item 3. Legal Proceedings (Continued)
voting stock because, they argue, (i) the 172,730 Class B shares subject to
Herbert H. Haft's proxy have been purchased by Dart and may not be voted and
(ii) the shares of Class B Common Stock placed in a voting trust (the "Trust
Shares") by Ronald S. Haft pursuant to the RSH Settlement also are not entitled
to vote because they have been unlawfully issued or they should be deemed to be
owned by Dart.
Dart's position is that this lawsuit is without merit and that the purported
action by RGL to reconstitute the Board of Directors is invalid. On October 27,
1995, Dart filed a motion for summary judgment.
Challenge to RSH Settlement by Herbert H. Haft
On November 6, 1995, Herbert H. Haft filed a lawsuit captioned Herbert H. Haft
v. Dart Group Corporation, et al., Del. Ch., Civ. A. No. 14685, in the Delaware
Court of Chancery for New Castle County naming as defendants Dart, all of its
directors except Herbert H. Haft, RGL, John L. Mason, Ellen V. Sigal and Michael
Ryan. Herbert H. Haft seeks a judgment (i) declaring the RSH Settlement
unlawful, hence null and void; (ii) declaring either that 172,730 shares of
Class B Common Stock belong to him, were wrongfully sold by Ronald S. Haft to
Dart, and that Herbert H. Haft is entitled to restitution of such shares or,
alternatively, that his purportedly irrevocable proxy on the 172,730 shares
continues to be valid; (iii) declaring that Herbert H. Haft retains voting
control of Dart or, at a minimum, 34.55% of Dart's voting power; (iv) declaring
that the Trust Shares may not be lawfully voted; and (v) declaring that
defendants John L. Mason, Ellen V. Sigal and Michael Ryan are not duly elected
directors of Dart.
Dart's position is that this lawsuit, except for the declaration sought that
defendants John L. Mason, Ellen V. Sigal and Michael Ryan are not duly elected
directors of Dart, is without merit. Herbert H. Haft disagrees with Dart's
position.
On December 5, 1996, Herbert H. Haft filed a motion for partial summary
judgment in which he asserted two arguments based upon Section 160(c) of the
Delaware General Corporation Law. Section 160(c) provides that the shares of
capital stock "belonging to" a corporation are not entitled to vote. Herbert H.
Haft maintained that (i) notwithstanding Section 160(c), the 172,730 Class B
shares that Dart purchased in the RSH Settlement on October 6, 1995 do not
"belong to" Dart and are still subject to the Proxy, and (ii) Section 160(c)
does not permit the Trust Shares to be voted because those shares "belong to"
Dart, not Ronald S. Haft. Dart opposed this motion for partial summary judgment
and, on March 14, 1997, the Delaware Chancery Court denied Herbert H. Haft's
motion in its entirety.
A trial date has not yet been scheduled. In the event Herbert H. Haft prevails
at trial, there could be a significant effect in the accounting treatment for
26
<PAGE> 27
Item 3. Legal Proceedings (Continued)
the RSH Settlement that has been reflected in the Company's financial
statements. See Note 6 to Dart's Consolidated Financial Statements (Item 8).
Standstill Order
In connection with the legal challenges to the RSH Settlement raised by RGL and
Herbert H. Haft, on December 6, 1995, the Delaware Court of Chancery entered
the Standstill Order, which restricts certain actions by Dart. Without further
order of the court, Dart may not (i) change its Certificate of Incorporation or
Bylaws; (ii) change the current composition of Dart's Board of Directors
(Herbert H. Haft, Ronald S. Haft, Larry G. Schafran, Bonita A. Wilson and
Douglas M. Bregman) or any of its subsidiaries; (iii) change the current Haft
family officers of Dart or any of its subsidiaries; or (iv) issue any
additional securities of Dart or any of its subsidiaries (except employee stock
options issued in the ordinary course of business). In addition, without first
giving Herbert H. Haft and the other parties to the Section 225 Action not less
than seven days written notice, Dart may not take any extraordinary actions,
including but not limited to actions that would result in (a) the liquidation
of Dart or any of its subsidiaries, (b) the sale of any major subsidiary of
Dart or (c) the disadvantage of any Class B stockholder of Dart through any
debt transaction. For purposes of the Standstill Order, the phrase
"extraordinary actions" means any transaction, contract or agreement, the value
of which exceeds $3.0 million.
Lawsuit Against Herbert H. Haft Concerning Haft-Owned Real Estate
On December 17, 1996, Dart, Crown Books and Trak Auto filed a lawsuit captioned
Dart Group Corporation, et al. v. Herbert H. Haft, Civ. A. No. 96-26474, in the
Circuit Court for Prince George's County, Maryland, seeking damages from
Herbert H. Haft for breach of fiduciary duty, fraud and waste arising from a
series of lease transactions (other than the Pennsy Warehouse Leases) between
Dart and certain partnerships owned beneficially by members of the Haft family.
The complaint alleges that Herbert H. Haft exploited the dominance and control
he enjoyed as an officer, director and controlling stockholder of Dart to
enrich himself and other members of the Haft family unlawfully and unfairly at
the expense of the public stockholders of Dart, Crown Books and Trak Auto. In
particular, the complaint charges that Herbert H. Haft (i) caused Trak Auto to
surrender favorable retail store leases and subleases in Haft-owned shopping
centers in exchange for new leases less favorable to Trak Auto; (ii) required
Crown Books to relinquish its favorable lease in a particular shopping center
in suburban Washington, D.C. and to enter into a new lease with a Haft family
partnership for a new location in the same shopping center at a rent rate equal
to 450 percent of the prior lease; (iii) caused Dart, Crown Brooks and Trak
Auto to enter into exorbitant long-term leases for warehouse and distribution
facilities that were purchased and developed by Haft family partnerships for
the purpose of leasing those facilities to these companies as captive tenants;
(iv) induced Dart and Trak Auto to lease retroactively from a Haft family
partnership
27
<PAGE> 28
Item 3. Legal Proceedings (Continued)
a 2.66 acre wooded lot for which the companies had no use; and (v) caused Trak
Auto to purchase certain used warehouse equipment from a Haft family
partnership for more than 700 percent of the price contemplated by the original
equipment lease.
Lawsuit Against Herbert H. Haft in Washington, D.C.
On December 17, 1996, Dart, Crown Books and Trak Auto also filed a lawsuit
captioned Dart Group Corporation, et al. v. Herbert H. Haft, Civ. A. No. 96-CV-
2788, in the U.S. District Court for the District of Columbia naming Herbert H.
Haft as defendant. In this action, Dart, Crown Books and Trak Auto have
advanced claims for breach of fiduciary duty, civil conspiracy and tortious
interference with contracts. The companies allege that Herbert H. Haft
wrongfully imposed Robert M. Haft's excessively generous employment contracts
upon Dart and Crown Books, later breached those contracts for personal reasons
and then, due in large part to a personal conflict of interest, mishandled the
defense to Robert M. Haft's wrongful termination lawsuit. Dart, Crown Books and
Trak Auto seek to recover the approximately $38 million paid to Robert M. Haft
in satisfaction of the judgment in his wrongful termination suit, approximately
$5 million in attorneys' fees incurred by the companies in defense of that
litigation, and punitive damages.
Possible Settlements
On April 21, 1997, Dart reached a conditional settlement agreement in principle
with Herbert H. Haft. If the settlement contemplated by the conditional
agreement in principle is implemented, Herbert H. Haft would retire from his
positions as Chairman of Dart, Shoppers Food, Trak Auto and Crown Books.
Herbert H. Haft also would relinquish his claim to voting control of Dart.
Under the settlement contemplated by the conditional agreement in principle,
Herbert H. Haft would sell to Dart, Trak Auto and Crown Books all of his
shares of stock and stock options in these companies. The settlement also would
terminate Herbert H. Haft's employment agreement with Dart and resolve all
outstanding litigation and disputes between Dart and Herbert H. Haft. Herbert
H. Haft would also assign certain real estate interests to Dart.
Herbert H. Haft would receive approximately $30 million from Dart if the
settlement is implemented. Herbert H. Haft would also receive an additional
$11.6 million from escrowed funds previously paid by Dart to Ronald S. Haft as
part of the RSH Settlement (plus $700,000 interest on those funds). The
conditional agreement in principle also contemplates that Dart would make a $10
million loan to a partnership owned by Herbert H. Haft and Ronald Haft, which
loan would be secured by such partnership's interests in three shopping centers
located in suburban Washington, D.C. and would be personally guaranteed by
Ronald S. Haft.
Implementation of the conditional agreement in principle is subject to the
negotiation of
28
<PAGE> 29
Item 3. Legal Proceedings (Continued)
a definitive settlement agreement satisfactory to Dart and Dart's receipt of
satisfactory advice from its investment bankers. The conditional agreement in
principle states that it will terminate if a definitive settlement agreement is
not entered into by May 9, 1997.
The conditional agreement in principle is also conditioned on Dart's entering
into a supplemental settlement with Ronald S. Haft and a comprehensive
settlement with RGL. Negotiations with respect to these related settlements are
currently underway. Current settlement discussions contemplate that Dart, Trak
Auto and Crown Books would collectively pay approximately $50 million in
exchange for all of RGL's equity interests in these companies and certain real
estate interests. There can be no assurance that such settlements will be
reached or as to the terms or timing of any settlement, if one occurs.
Closing of the transactions contemplated by the conditional agreement
in principle also is subject to (i) final and non-appealable action by the
Delaware Court of Chancery or the Delaware Supreme Court approving all of the
terms of the settlement, terminating certain putative derivative actions
pending with respect to Dart and Crown Books in the Delaware Court of Chancery,
and approving the RSH Settlement and the supplemental settlement between Dart
and Ronald S. Haft, and (ii) final and non-appealable action by the U.S.
Bankruptcy Court approving the effectiveness of Chapter 11 plans of
reorganization for certain real estate entities owned by Haft family members.
There can be no assurance that a definitive settlement agreement between Dart
and Herbert H. Haft will be entered into and that the transactions contemplated
by the conditional agreement in principle will be implemented.
Any settlement with RGL (including any financing of such settlement) would
require further order of the Delaware Court of Chancery under the Standstill
Order and could be opposed by Herbert H. Haft if Dart does not settle with him.
A closing of any settlement with RGL would be subject to available financing
and the proposed settlement with Herbert H. Haft would be subject to the
receipt of advice by Dart from its financial advisor that adequate financing
would be available at closing. Dart and its subsidiaries do not presently have
cash available to pay the approximately $90 million (including the loan of $10
million) contemplated by the possible settlements but are considering various
options to finance them. See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources.
Other
In the normal course of business, the Company is involved in various claims and
litigation. In the opinion of management, liabilities, if any, will not have
29
<PAGE> 30
Item 3. Legal Proceedings (Continued)
a material adverse effect upon the consolidated financial condition and results
of operations of the Company.
The Company recorded legal expenses of approximately $22.4 million, $7.2
million and $18.4 million during the years ended January 31, 1997, 1996 and
1995, respectively. These amounts include estimated future expenses that likely
will be necessary to resolve all litigation discussed above.
30
<PAGE> 31
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
31
<PAGE> 32
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Class A Common Stock is quoted on the Nasdaq under the symbol DARTA. The
following table sets forth the range of the high and low sale prices for the
Class A Common Stock, as reported by the Nasdaq, and the dividends declared for
the fiscal quarters indicated.
<TABLE>
<CAPTION>
Class A Common Stock
- -------------------- Dividends
Declared
Quarter Ended High Low Per Share
- ------------- -------- ------- ---------
<S> <C> <C> <C>
April 30, 1995 98 73 .03 1/3
July 31, 1995 96 83 3/4 .03 1/3
October 31, 1995 100 79 .03 1/3
January 31, 1996 96 1/2 88 1/4 .03 1/3
April 30, 1996 95 1/8 81 3/4 .03 1/3
July 31, 1996 96 1/2 75 .03 1/3
October 31, 1996 87 3/4 99 1/2 .03 1/3
January 31, 1997 100 84 .03 1/3
</TABLE>
There were approximately 320 record holders of the Class A Common Stock as of
April 30, 1997.
No public trading market exists for the Class B Common Stock. Dart has never
paid dividends to the holders of Class B Common Stock and does not expect to do
so in the foreseeable future. There were four record holders of the Class B
Common Stock as of April 30, 1997. See Item 3 - Legal Proceedings.
32
<PAGE> 33
Item 6. Selected Financial Data
Income Statement Data: (dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ 668,089 $ 678,136 $ 967,428 $1,376,543 $1,272,677
Expenses 696,491 690,819 1,047,149 1,369,574 1,251,458
Unusual items - - - - 3,894
Income (loss) before
minority interests
and income from
unconsolidated
subsidiary (28,186) (18,832) (78,022) (225) 11,652
Income (loss) from
unconsolidated
subsidiary 11,405 10,055 (5) - -
Minority interests (1) 88 (4,647) 4,235 (6,512) (8,143)
Income (loss) before
extraordinary item and
cumulative effect of
accounting change (16,693) (13,424) (73,792) (6,737) 3,509
Extraordinary item:
Repurchase of
debentures - - - - (885)
Cumulative effect of
change in accounting
principle (2) - - - - 1,135
---------- ---------- ---------- ---------- ----------
Net Income (loss) $ (16,693) $ (13,424) $ (73,792) $ (6,737) $ 3,759
========== ========== ========== ========== ==========
Per share data:
Income (loss) before
extraordinary item and
cumulative effect of
accounting change $ (8.73) $ (7.36) $ (39.57) $ (4.10) $ 1.91
Extraordinary item:
Repurchase of
debentures - - - - (.48)
Cumulative effect of
change in account-
ing principle (2) - - - .62
---------- ---------- ---------- ---------- ----------
Net Income (loss) $ (8.73) $ (7.36) $ (39.57) $ (4.10) $ 2.05
========== ========== ========== ========== ==========
Cash dividends
declared per share
of Class A common
stock $ 0.13 $ 0.13 $ 0.13 $ 0.13 $ 0.13
========== ========== ========== ========== ==========
</TABLE>
33
<PAGE> 34
Item 6. Selected Financial Data (Continued)
<TABLE>
<CAPTION>
Balance Sheet Data (dollars in thousands)
- ------------------ Fiscal Year
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Working capital $ 90,262 $119,101 $180,415 $281,242 $267,801
Total assets (1) 450,172 470,565 706,489 802,898 722,379
Long-term obligations 58,067 67,641 170,417 151,818 120,231
Stockholders' Equity 118,356 134,576 199,363 274,307 279,239
</TABLE>
(1) As of January 31, 1997 Dart owned 67.1% of the common stock of Trak
Auto and 52.3% of the common stock of Crown Books.
The accounts of Shoppers Food are consolidated with Dart's through
May 28, 1994, but not thereafter, as a result of a reduction of
Dart's ownership to 50%. Dart's investment in Shoppers Food is
reflected in the financial statements using the equity method of
accounting for periods subsequent to May 28, 1994.
The accounts of the CMREC joint ventures are consolidated with
Dart's through October 6, 1995, but not thereafter, because, as a
result of the RSH Settlement, CMREC's economic interests in these
partnerships were reduced. In the event the RSH Settlement is not
sustained, the accounting treatment of the transfer of the CMREC
economic interests could be significantly affected.
(2) The 1993 cumulative effect of a change in accounting principles was
the result of Trak Auto's adopting Statement of Financial Accounting
Standard No. 109, Accounting for Income Taxes.
34
<PAGE> 35
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General Information
Dart does not conduct operations except through its subsidiaries, Trak Auto,
Crown Books, Total Beverage and, after February 6, 1997, Shoppers Food. Because
Dart has no operations other than through its subsidiaries, the results of
operations for Dart are reflected in the results of operations set forth below
under headings relating to each subsidiary. As a holding company, Dart has
served primarily to provide administrative support and strategic oversight and
direction to its subsidiaries and their businesses.
Dart's publicly traded Class A Common Stock has no right to vote. Dart's voting
stock, the Class B Common Stock, has been beneficially owned by Haft family
members.
The termination of Robert M. Haft as President and Chief Operating Officer of
Dart and as Chief Executive Officer and President of Crown Books in 1993, the
appointment of Ronald S. Haft as President and Chief Operating Officer of Dart
and the ensuing disagreements between Ronald S. Haft and Herbert H. Haft in
1994 has resulted in significant disputes over which Haft family members
control Dart. As a result of these disputes, Dart has been involved in
significant litigation involving Haft family members. See Item 3 - Legal
Proceedings.
On September 7, 1994, the Board of Directors of Dart established an Executive
Committee comprised of Dart's outside directors to conduct the affairs of Dart
with respect to matters that were the subject of disputes between the Chairman
of the Board and Chief Executive Officer of Dart, Herbert H. Haft, and the then
President and Chief Operating Officer of Dart, Ronald S. Haft. On October 11,
1994, the Boards of Directors of Trak Auto, Crown Books and Total Beverage each
established an Executive Committee of their respective Board of Directors
comprised of the same outside directors, with authority parallel to that of
Dart's Executive Committee. The disputes between Herbert H. Haft and Ronald S.
Haft concerning issues involving Dart have been extensive. Accordingly, the
Executive Committee assumed day-to-day involvement in these disputed issues and
other matters affecting Dart, in particular matters relating to litigation to
which Dart is a party. While the Executive Committee remains involved in the
day-to-day affairs of Dart, its continuing role is dependent upon future
developments.
On October 6, 1995, Dart and Ronald S. Haft entered into the RSH Settlement.
See Note 6 to Dart's Consolidated Financial Statements (Item 8 - Financial
Statements and Supplementary Data). The RSH Settlement transactions are subject
to legal challenge. See Item 3 - Legal Proceedings. If sustained, the RSH
Settlement transactions were intended to have the effect, by their terms, of
transferring majority control of Dart's voting stock to one or more
35
<PAGE> 36
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
voting trustees under the Voting Trust Agreement. On December 28, 1995, the
initial Voting Trustees resigned and appointed Richard B. Stone as successor
Voting Trustee.
In connection with legal challenges to the RSH Settlement, on December 6, 1995,
the Delaware Court of Chancery entered the Standstill Order, which restricts
certain actions by Dart. Without further order of the court, Dart may not (i)
change its Certificate of Incorporation or Bylaws; (ii) change the current
composition of Dart's Board of Directors (Herbert H. Haft, Ronald S. Haft,
Larry G. Schafran, Bonita A. Wilson and Douglas M. Bregman) or any of its
subsidiaries; (iii) change the current Haft family officers of Dart or any of
its subsidiaries; or (iv) issue any additional securities of Dart or any of its
subsidiaries (except employee stock options issued in the ordinary course of
business). In addition, without first giving Herbert H. Haft and certain other
litigants not less than seven days written notice, Dart may not take any
extraordinary actions, including but not limited to actions that would result
in (a) the liquidation of Dart or any of its subsidiaries, (b) the sale of any
major subsidiary of Dart or (c) the disadvantage of any Class B stockholder of
Dart through any debt transaction. For purposes of the Standstill Order, the
phrase "extraordinary actions" means any transaction, contract or agreement,
the value of which exceeds $3 million.
Management believes that litigation between the Company and Haft family members
has had an adverse impact on the Company's results of operations, financial
position and liquidity. During fiscal 1997, Dart and Crown Books paid
approximately $21.0 million and $16.9 million (including interest of
approximately $3.3 million), respectively to Robert M. Haft for satisfaction of
a judgement awarded to him in March 1995 (the "RMH Judgement"). During fiscal
1996, the RSH Settlement reduced cash by approximately $50 million and
shareholders' equity by approximately $56 million. Also during fiscal 1997 and
1996, in connection with the RSH Settlement and litigation involving Haft
family members, the Company paid approximately $10.4 million and $12.4 million
respectively, in legal fees. Management believes that the continued uncertainty
relating to the control of Dart and the surrounding litigation has affected the
Company's reputation among banks, vendors and landlords and made the Company's
efforts to recruit highly-qualified personnel more difficult. The uncertainty
surrounding control of Dart (and the associated effects of such uncertainty)
may continue until pending litigation is adjudicated or settled.
Dart is engaged in discussions with Haft family members to explore
opportunities to settle litigation pending between the parties. On April 21,
1997, Dart reached a conditional settlement agreement in principle with Herbert
H. Haft. See Item 3 - Legal Proceedings - Possible Settlements. There can be no
assurance that any definitive settlement will be reached or as to the terms or
timing of any settlement, if one occurs.
36
<PAGE> 37
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Outlook
Except for historical information, statements in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are forward-
looking. Actual results may differ materially due to a variety of factors,
including the results of ongoing litigation (or settlements of litigation), the
Company's ability to effectively compete in the highly competitive retail book
store and automotive parts aftermarket industries, the effect of national and
regional economic conditions, and the availability of capital to fund
operations. The Company undertakes no obligation and does not intend to update,
revise or otherwise publicly release the result of any revisions to these
forward-looking statements that may be made to reflect future events or
circumstances.
The litigation and any settlement of litigation involving the Haft family
members could pose a threat to Dart's liquidity. See "Possible Settlements"
below.
On February 6, 1997, Dart acquired the other 50% interest in Shoppers Food that
it did not already own for $210 million (the "Acquisition"). Dart financed the
Acquisition through the application of $137.2 million in net proceeds raised
from an offering of Increasing Rate Senior Notes due 2000 (the "Senior Notes")
of SFW Acquisition Corp., a newly created wholly-owned subsidiary of Dart, and
a $72.8 million bridge loan. Immediately after the Acquisition, SFW Acquisition
Corp. merged into Shoppers Food (with Shoppers Food becoming obligor on the
Senior Notes) and Shoppers Food repaid the bridge loan from existing cash and
liquidation of short-term investments. Dart intends to analyze the options
available to it with regard to Shoppers Food, which options include, among
others, refinancing of the Senior Notes or a sale of all or part of Shoppers
Food. Any such transaction may require further order of the Delaware Court of
Chancery under the Standstill Order and may be opposed by Herbert H. Haft or
the other parties to the Section 225 Action.
Crown Books' believes that its superstore concept presents growth opportunities
and intends to open new superstores in existing and possibly new markets.
Realizing these opportunities is dependent upon the successful performance of
the superstores. In the past, superstores have generated higher sales at
converted locations as well as higher gross margins as a result of a change in
product mix. Crown Books' believes that, as the superstores mature and as the
number of stores and total sales increases, operating expenses as a percentage
of sales will decrease.
The retail book market is highly competitive. Crown Books and the two largest
book chains continue to open additional new stores each year in Crown Books'
markets, thereby continuing to increase the overall level of competition.
Management believes that the markets in which it operates will remain highly
37
<PAGE> 38
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
competitive in the foreseeable future and, as a result, Crown Books will be
challenged to significantly improve operating results in fiscal 1998.
Trak Auto believes that its superstore concept presents significant growth
opportunities and intends to open new Super Trak and Super Trak Warehouse
stores in existing and possibly new markets. In the past, these superstores
have generated higher sales at locations converted from Classic Trak stores as
well as higher gross margins as a result of a change in product mix (increased
hard parts). Trak Auto believes that as superstores mature, operating expenses
as a percentage of sales will decrease.
The automotive aftermarket is a highly competitive market place. As a result,
the industry is consolidating with independent operators and small chains
either going out of business or being acquired by larger competitors.
Additionally, the do-it-yourself customer base is shrinking due to the
increased complexity of automobiles, increased incidences of leasing, and the
availability of well maintained leased vehicles entering the used car market.
Trak Auto's management believes that the markets in which it operates will
remain highly competitive in the foreseeable future and, as a result, that Trak
Auto will be challenged to improve operating results in fiscal 1998.
Trak Auto, Crown Books and Total Beverage intend to continue their practice of
reviewing the profitability trends and prospects of existing stores. These
companies may from time to time close, relocate or sell stores (or groups of
stores) that are not satisfying certain performance objectives. Crown Books
currently anticipates closing approximately 29 Classic Crown Books stores,
12 non-prototype Super Crown Books stores and relocating one prototype Super
Crown Books store during fiscal 1998.
Liquidity and Capital Resources
Cash, including short-term instruments and U.S. government and other marketable
debt securities, is the Company's primary source of liquidity. Cash, including
short-term instruments and U.S. government and other marketable debt securities
decreased by $41,956,000 to $45,372,000 at January 31, 1997 from $87,328,000 at
January 31, 1996. This decrease was primarily due to the payment of the RMH
Judgment, to funding loss operations at Dart and Crown Books and to capital
expenditures for Trak Auto and Crown Books. The decrease was partially offset
by funds received from Ronald S. Haft as a result of the sale of CMREC joint
ventures and a $5.0 million dividend received from Shoppers Food.
For the year ended January 31, 1997, the Company realized a pre-tax yield of
approximately 5.2% on United States Treasury Bills and approximately 6.4% on
the marketable debt securities.
38
<PAGE> 39
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Operating activities used $42,840,000 of the Company's funds for the year ended
January 31, 1997 compared to $30,718,000 for the same period one year ago. The
primary use of cash for the year ended January 31, 1997 was for payment of the
RMH Judgment, Crown Books merchandise inventory purchases and for funding loss
operations at Dart and Crown Books.
Investing activities provided $15,775,000 to the Company for the year ended
January 31, 1997, compared to $17,287,000 for the same period last year. The
net dispositions of United States Treasury Bills and marketable debt securities
provided cash in the current year and was partially offset by capital
expenditures.
Financing activities provided $11,943,000 to the Company during the year ended
January 31, 1997 primarily as a result of the repayment of a $11.6 million note
receivable from Ronald S. Haft. Financing activities used $49,179,000 of the
Company's funds during the year ended January 31, 1996 primarily due to
distributions of approximately $50.0 million to Ronald S. Haft in connection
with the RSH Settlement. In February 1997, the Company used $72.0 million of
Shoppers Food's existing cash and $137.2 million in net proceeds received from
the sale of the Senior Notes to finance the Acquisition. If Shoppers Food is
not sold in fiscal 1998, the Company expects to refinance the Senior Notes, the
interest rate on which increases 50 basis points every three months commencing
on August 1, 1997. The indenture under which the Senior Notes were issued
contains various restrictive covenants, including a limitation on the payment
of dividends by Shoppers Food to Dart. Any refinancing agreement would likely
contain similar restrictive covenants.
Historically, Dart and each of its subsidiaries generally funded their
respective requirements for working capital and capital expenditures with net
cash generated from operations and existing cash resources. However, the
Company's cash, including marketable debt securities, decreased by
approximately $42.0 million in fiscal 1997 and $104.4 million in fiscal 1996.
In fiscal 1997, Crown Books and Trak Auto entered into revolving credit
facilities.
Dart's working capital needs primarily consist of funding any operating losses
of Total Beverage, payroll and legal fees. Dart expects to meet its working
capital needs in fiscal 1998 from existing cash and short-term investments and
a $10.0 million dividend declared by Shoppers Food in February 1997 (permitted
by the Senior Note indenture).
The primary capital requirements of Crown Books relate to new store openings
and investments in management information systems. Crown Books believes that
the resources required for a new store generally approximate $800,000,
including inventory purchases, net of accounts payable, and the costs of store
fixtures and leasehold improvements, net of landlord contributions. During
39
<PAGE> 40
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
fiscal 1998, Crown Books expects to open approximately 40 Super Crown
Books stores (but may open fewer stores) requiring cash expenditures of
approximately $32.0 million. Crown Books has entered into lease agreements to
open nine new Super Crown Books stores, in fiscal 1998. Crown Books expects to
have cash expenditures of approximately $2.5 million related to stores that
have been closed or will be closed, in fiscal 1998. Crown Books expects to meet
its working capital and capital expenditures with cash generated from improving
its inventory turnover, its operations and borrowing under its revolving credit
agreement. Crown Books had $25.0 million available for borrowing under its
revolving credit facility at February 1, 1997. There can be no assurances that
Crown Books will have adequate resources to meet its cash flow requirements for
projected store openings if it does not improve its inventory turnover.
In connection with its expansion program, Crown Books anticipates increasing
its borrowing under its revolving credit facility, subject to limitations
contained in the loan agreement. To increase the limit from $25.0 million
to $35.0 million, Crown Books is required to maintain a minimum tangible
net worth of $73.0 million as of the fiscal year end preceding the
election and for each fiscal year end thereafter, and to maintain a minimum
tangible net worth of $70.0 million as of the election date and thereafter, in
addition to other covenants. To increase the limit from $35.0 million to $50.0
million, Crown Books is required to maintain a minimum tangible net worth of
$75.0 million as of the fiscal year end preceding the election and for each
fiscal year end thereafter, in addition to other covenants. As of February 1,
1997, Crown Books' tangible net worth was $84.5 million. There can be no
assurance that Crown Books' tangible net worth will meet the requirements to
increase its revolving credit facility availability above the current $25.0
million limit. There also can be no assurance that if the limit is increased
above $25.0 million, that Crown Books' will maintain the required minimum
tangible net worth and that it would be able to pay down the revolving credit
facility as required.
Trak Auto funds its requirements for working capital and capital expenditures
with net cash generated from operations and existing cash resources. Trak
Auto's primary capital requirements relate to remodelings and new store
openings (including inventory purchases and the costs of store fixtures and
leasehold improvements). As of February 1, 1997, Trak Auto had entered into
lease agreements to open seven new stores.
In December 1996, Trak Auto entered into a revolving credit facility with a
finance company to borrow up to $25.0 million. The credit facility has an
original term of three years. Borrowings are limited to eligible inventory
levels and are secured by Trak Auto's inventory, accounts receivable and
proceeds from the sale of those assets. The credit facility contains certain
restrictive covenants and a maximum leverage ratio covenant. The covenants
include a limitation of $25.0 million on amounts paid (including a $20.0 million
limitation on amounts guaranteed) to settle disputes with Haft family members.
40
<PAGE> 41
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Trak Auto did not borrow under the credit facility during the year ended
February 1, 1997.
Shoppers Food has four signed lease agreements for new stores to be opened over
the next 12 to 18 months. Shoppers Food expects to fund working capital needs,
capital expenditures for new stores and interest payments on the Senior Notes
with cash provided by operations.
Total Beverage is considering locations for new stores and may open one or more
new stores in fiscal 1998 in the Chicago, Illinois metropolitan area.
Funding of Possible Settlements
Dart has reached a conditional settlement agreement in principle with Herbert
H. Haft and is currently negotiating a possible settlement with RGL as well as
a possible supplemental settlement agreement with Ronald S. Haft. See Item 3 -
Legal Proceedings - Possible Settlements. The aggregate payments estimated to
be paid by Dart and its subsidiaries in connection with these possible
settlements is approximately $90 million (including a loan of $10 million),
part of which would be deferred. It is anticipated that Dart would pay
substantially all of this amount, though a portion (yet to be determined) could
be allocated to Trak Auto and Crown Books. Allocation of any actual settlement
obligations among the companies would be in proportion to reflect relative
benefits each company receives, as determined by their boards of directors
after consultation with outside advisors.
Dart and its subsidiaries do not presently have cash available to pay the
approximately $90 million contemplated by the possible settlements, but are
considering various options to finance them, if they occur. Dart may sell all
or part of Shoppers Food or, if it is not sold, use Shoppers Food's existing
cash and proceeds from new debt financing by Shoppers Food. However, there can
be no assurance that Dart would obtain any such financing or as to the terms of
any financing, if it is obtained. Trak Auto and Crown Books anticipate that
they would pay their portion of the settlement obligations from borrowings
under their respective credit facilities.
It has been suggested that Dart sell one or all of its subsidiaries and
possibly liquidate. Dart has no plan to liquidate. However, Dart has explored
the possible sale of Shoppers Food and may be open to the possibility of other
strategic opportunities.
At January 31, 1997
Working capital decreased $28,839,000 to $90,262,000 during the year ending
January 31, 1997. The decrease was primarily due to capital expenditures for
41
<PAGE> 42
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
new Trak Auto and Crown Books stores; Dart, Crown Books and Total Beverage
operating losses and decreased operating results at Trak Auto. The decreases
were partially offset by a $5.0 million cash dividend from Shoppers Food and
the repayment of a $11.6 million note receivable from Ronald S. Haft.
At January 31, 1996
Working capital decreased $61,314,000 to $119,101,000 during the year ending
January 31, 1996. The decrease was primarily due to loans made to Ronald S.
Haft in connection with the RSH Settlement, capital expenditures for new Trak
Auto and Crown Books stores and Trak Auto's Pittsburgh acquisition and common
stock repurchase and was partially offset by Trak Auto's operating results and
a cash dividend payment from Shoppers Food and CMREC joint venture
distributions.
Results of Operations
"Fiscal 1997" means the year ended January 31, 1997, with respect to Dart, and
the year ended February 1, 1997, with respect to Trak Auto, Crown Books and
Total Beverage. "Fiscal 1996" means the year ended January 31, 1996, with
respect to Dart, and the year ended February 3, 1996, with respect to Trak
Auto, Crown Books and Total Beverage. "Fiscal 1995" means the year ended
January 31, 1995, with respect to Dart, and the year ended January 28, 1995,
with respect to Trak Auto, Crown Books and Total Beverage.
Fiscal 1997 Compared to Fiscal 1996
Trak Auto
During fiscal 1997, Trak Auto opened or converted 14 Super Trak stores and 14
Super Trak Warehouse stores and closed or converted 13 Classic Trak stores and
five Super Trak stores. At February 1, 1997, Trak Auto had 286 stores,
including 122 Super Trak stores and 44 Super Trak Warehouse stores.
Sales of $345,984,000 for fiscal 1997 (52 weeks) increased by $3,742,000 or
1.1% compared to fiscal 1996 (53 weeks). The increase was primarily due to Trak
Auto's entry into the Pittsburgh, Pennsylvania market in January 1996 and to
increased sales in the Washington, D.C. and Chicago, Illinois markets during
the first quarter of fiscal 1997 resulting from harsh winter conditions. The
increases were partially offset by a decline in sales for the Los Angeles,
California market where three stores were closed in fiscal 1997. The extra week
of sales in fiscal 1996 was approximately $6,000,000. Comparable sales (stores
open more than one year) decreased 1.7% in fiscal 1997 compared to the 52 weeks
ended February 3, 1996. Sales for comparable Super Trak Warehouse stores
increased 0.3% in fiscal 1997. Sales for comparable Super Trak stores decreased
1.6% in fiscal 1997. Sales for
42
<PAGE> 43
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
comparable Classic Trak stores decreased 2.3% in fiscal 1997. Sales for Super
Trak and Super Trak Warehouse stores represented 64.6% of total sales during
fiscal 1997 compared to 56.2% for fiscal 1996.
Interest and other income decreased by $772,000 in fiscal 1997 when compared to
fiscal 1996. The decrease was primarily due to reduced interest income as a
result of a decrease in funds available for short-term investments.
Cost of sales, store occupancy and warehousing expenses as a percentage of
sales were 75.9% in fiscal 1997 compared to 74.1% in fiscal 1996. The increases
were primarily due to a decrease in gross margins as a result of competitive
pressures, higher store occupancy costs for larger stores with newer leases,
and increased distribution costs due to broader geographical delivery areas and
increased SKU's supplied to Super Trak Warehouse stores.
Selling and administrative expenses as a percentage of sales were 20.9% in
fiscal 1997 compared to 20.3% in fiscal 1996. The increase was primarily due to
increased payroll costs.
Depreciation and amortization expenses increased $1,203,000 in fiscal 1997
compared to fiscal 1996. The increase was primarily due to increases in store
fixed assets as a result of the opening and conversion of stores to Super Trak
or Super Trak Warehouse stores and the stores in new markets.
Interest expense increased $67,000 in fiscal 1997 compared to fiscal 1996.
Net income decreased $6,206,000 from $7,290,000 in fiscal 1996 to $1,084,000 in
fiscal 1997 as a result of the foregoing factors.
The effective income tax rate was 25.0% in fiscal 1997 compared to 36.4% in
fiscal 1996. The decrease was primarily the result of a decrease in taxable
income while a permanent tax difference remained relatively unchanged.
Crown Books
During fiscal 1997, Crown Books opened 27 Super Crown Books stores while
closing 29 Classic Crown Books stores and two Super Crown Books stores. At
February 1, 1997, Crown Books had 168 stores, including 109 Super Crown Books
stores.
Sales of $287,737,000 for fiscal 1997 (52 weeks) increased by $4,262,000 or
1.5% compared to fiscal 1996(53 weeks). The increase was primarily due to the
27 new Super Crown Books stores opened during the year and the maturity of
Super Crown Books stores opened in fiscal 1996. Comparable sales (sales for
stores open for 13 months) decreased 2.1% for fiscal 1997. However, comparable
sales for the new prototype superstore increased 5.1% during fiscal
43
<PAGE> 44
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
1997. Sales for Super Crown Books stores represented 78.4% of total sales for
fiscal 1997 compared to 66.7% of total sales for fiscal 1996. Super Crown Books
sales of $225,543,000 for fiscal 1997 increased 19.2% over sales for fiscal
1996. Sales for comparable Super Crown Books stores, however, decreased 1.9% in
fiscal 1997. Sales for comparable classic Crown Books stores decreased 2.7%
during fiscal 1997.
Interest and other income decreased by $1,929,000 during fiscal 1997 when
compared to fiscal 1996. The decrease was due to reduced interest income as a
result of decreased funds available for short-term investments.
Cost of sales, store occupancy and warehousing expenses as a percentage of
sales were 81.2% for fiscal 1997 compared to 81.8% for fiscal 1996. The
decrease was primarily due to increased gross margins as a result of taking
advantage of vendor discounts, an improvement in the sales mix and a change in
the sales discount policy and were partially offset by increased store
occupancy costs.
Selling and administrative expenses as a percentage of sales were 18.9% for
fiscal 1997 compared to 18.0% for fiscal 1996. The increase was primarily due
to increased store and administrative payroll costs.
Depreciation expense increased $292,000 for fiscal 1997 compared to fiscal
1996. The increase was primarily due to an increase in fixed assets as a result
of new Super Crown Books stores.
Interest expense decreased by $164,000 due to reduced interest expense for the
RMH Judgement as a result of its payment in August 1996. The increase was
partially offset by interest on borrowings under the Crown Books revolving
credit facility.
During fiscal 1997, Crown Books reversed approximately $3,865,000 of its
restructuring reserve and approximately $1,052,000 of its closed store reserve.
The reversals resulted from (i) management's decision not to close certain
stores, (ii) stores that were closed under negotiated lease settlements that
were more favorable than expected and(iii) the postponement of certain store
closing dates. The remaining closed store and restructuring reserves relate to
83 stores with lease obligations primarily through the next three fiscal years.
Crown Books had a net loss of $860,000 in fiscal 1997 compared to net income of
$3,704,000 in fiscal 1996 as a result of the foregoing factors.
Crown Books has recorded a tax benefit of $578,000 in fiscal 1997 as compared
to income tax expense $1,977,000 in fiscal 1996. In fiscal 1997, the effective
tax rate was 40.2% compared to 34.8% in fiscal 1996 due primarily to
44
<PAGE> 45
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
state income tax benefits associated with Crown Books net operating losses.
Total Beverage
During the year ended January 31, 1997, Total Beverage closed one store due to
disappointing sales volume. At January 31, 1997, Total Beverage had three
stores.
Total Beverage sales were $30,097,000 during fiscal 1997 compared to
$29,444,000 for fiscal 1996. The increase was due primarily to sales at the
newest store in McLean, VA.
Cost of sales and store occupancy as a percentage of sales were 81.2% during
fiscal 1997 compared to 82.0% for fiscal 1996. The decrease was primarily due
to increased gross margins, primarily due to the results at the McLean, VA
store compared to the results of the store that was closed.
Selling and administrative expenses as a percentage of sales were 21.7% during
fiscal 1997 compared to 22.1% in fiscal 1996 primarily due to reduced
advertising costs.
Total Beverage recorded a net operating loss of $1,132,000 during fiscal 1997
compared to a net operating loss of $1,422,000 (excluding accrual and reversal
of closed store reserves) during fiscal 1996. The net operating loss in fiscal
1997 included approximately $638,000 paid to outside consultants that were
retained to assist in the development and implementation of a strategic
business plan.
Dart Group and Other Corporate
Interest and other income decreased $3,344,000 during fiscal 1997 when compared
to fiscal 1996. The decrease was primarily due to reduced funds available for
short-term investment as a result of funds disbursed pursuant to the RSH
Settlement in fiscal 1996 and the RMH Judgement in fiscal 1997.
Administrative expenses increased $10,549,000 during fiscal 1997 primarily due
to accrued legal expenses.
Interest expense decreased $1,056,000 during fiscal 1997 due to reduced
interest as a result of payment on the RMH Judgment.
Dart's investment in Shoppers Food is reflected in the accompanying financial
statements using the equity method of accounting for periods subsequent to May
28, 1994.
Shoppers Food revenue for the the year ended February 1, 1997 was
45
<PAGE> 46
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
$862,395,000. Operating income for the year ended February 1, 1997 includes
approximately a $400,000 increase in accrued insurance, $850,000 increase in
closed store reserve and $456,000 in salary increases. Depreciation and
amortization expense was $8,720,000 for the year ended February 1, 1997.
Trak Auto, Crown Books and Shoppers Food file separate income tax returns.
CMREC and Total Beverage are included in Dart's income tax returns. However,
effective with the income tax return for the twelve months ended January 31,
1998, Shoppers Food will be included in Dart's income tax return. Dart's
current net operating loss was not tax benefitted as a result of the complete
utilization of all available carrybacks.
As a result of Dart's operating loss for fiscal 1997, a net tax operating loss
carryforward of $27,609,000 was created. Dart's cumulative total net tax
operating loss carryforward is $66,102,000. All net operating loss
carryforwards will expire by fiscal 2012. In addition, Dart has an Alternative
Minimum Tax credit carryforward of approximately $1,010,000. Dart has a
deferred tax valuation allowance of $33,474,000 as of January 31, 1997.
Management continues to evaluate the adequacy of this valuation allowance.
Fiscal 1996 Compared to Fiscal 1995
Trak Auto
During fiscal 1996, Trak Auto opened or converted 17 Super Trak stores and 23
Super Trak Warehouse stores and closed or converted 36 Classic Trak stores and
ten Super Trak stores. At February 3, 1996, Trak Auto had 276 stores, including
113 Super Trak stores and 30 Super Trak Warehouse stores.
Sales of $342,242,000 for fiscal 1996 decreased by $6,357,000 or 1.8% compared
to fiscal 1995. The decrease was primarily due to lower sales during the 13
weeks ended April 29, 1995 compared to the 13 weeks ended April 30, 1994, as a
result of the mild winter conditions in Chicago and Washington, D.C.
metropolitan areas. (Extremely cold weather tends to enhance sales by causing a
higher incidence of parts failure and the need for anti-freeze). In addition,
sales were down due to a net decrease in the number of stores. The sales
decrease was partially offset by 53 weeks of sales during fiscal 1996 compared
to 52 weeks of sales in fiscal 1995. The extra sales week was approximately
$6,000,000. Comparable sales (stores open more than one year) decreased 2.7% in
fiscal 1996 compared to the 53 weeks ended February 4, 1995. Sales for
comparable Super Trak stores increased 0.1% in fiscal 1996. Sales for
comparable Classic Trak stores decreased 3.9% in fiscal 1996. Sales for Super
Trak and Super Trak Warehouse stores represented 56.2% of total sales during
fiscal 1996 compared to 42.6% for fiscal 1995.
Interest and other income increased by $471,000 in fiscal 1996 when compared
46
<PAGE> 47
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
to fiscal 1995. The increase was primarily due to higher interest rates on
Trak Auto's short-term investments.
Cost of sales, store occupancy and warehousing expenses (excluding closed store
reserves) as a percentage of sales were 74.1% in fiscal 1996 compared to 73.0%
in fiscal 1995. The increases were primarily due to a decrease in net
advertising income as a result of increased advertising costs and increased
occupancy costs for Super Trak and Super Trak Warehouse stores and were
partially offset by increased gross margins.
Trak Auto recorded closed store reserves of $418,000 and $1,580,000 in fiscal
1996 and fiscal 1995, respectively. These reserves are for future lease
obligations and net book value of leasehold improvements for under performing
stores.
Selling and administrative expenses as a percentage of sales were 20.3% in
fiscal 1996 compared to 19.9% in fiscal 1995. The increase was primarily due to
increased payroll costs as a percentage of sales (actual payroll dollars
remained almost the same) and to increased health benefit costs.
Depreciation and amortization expenses increased $288,000 in fiscal 1996
compared to fiscal 1995. The increase was primarily the result of increased
fixed assets for new Super Trak and Super Trak Warehouse stores.
Interest expense decreased $211,000 in fiscal 1996 compared to fiscal 1995.
Net income decreased $2,975,000 (29.0%) from $10,265,000 in fiscal 1995 to
$7,290,000 in fiscal 1996 as a result of the foregoing factors.
The effective income tax rate was 36.4% in fiscal 1996 compared to 32.3% in
fiscal 1995. The increase was primarily the result of the valuation allowance
reversal in fiscal 1995 and is partially offset by a lower pre-tax income in
fiscal 1996 compared to fiscal 1995.
Crown Books
During fiscal 1996, Crown Books opened 16 Super Crown Books stores while
closing 38 Classic Crown Books stores and two Super Crown Books stores. These
Super Crown Books stores were closed as a result of opening larger stores in
the same area. At February 3, 1996, Crown Books had 172 stores, including 84
Super Crown Books stores.
Sales of $283,475,000 for fiscal 1996 decreased by $22,131,000 or 7.2% compared
to fiscal 1995. The decrease is primarily due to the net decrease in the number
of stores as a result of Crown Books's continuing transition to the new
superstore concept. Comparable sales (sales for stores open for fifteen
47
<PAGE> 48
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
months) decreased 3.3% for fiscal 1996, however, comparable sales for the new
prototype superstore increased 11% during the 14 weeks ended February 3, 1996.
Sales for Super Crown Books stores represented 66.7% of total sales for fiscal
1996 compared to 54.7% of total sales for fiscal 1995. Super Crown Books sales
of $189,142,000 for fiscal 1996 increased 12.9% over the sales for fiscal 1995
and sales for comparable Super Crown Books stores decreased 1.8%. Sales for
comparable classic Crown Books stores decreased 5.7% during fiscal 1996.
Interest and other income increased by $647,000 during fiscal 1996 when
compared to fiscal 1995. The increase is primarily due to higher interest rates
on Crown Books's short-term investments.
Cost of sales, store occupancy and warehousing expenses as a percentage of
sales were 81.8% for fiscal 1996 compared to 81.2% for fiscal 1995. The
increases were primarily due to higher occupancy costs associated with the
Super Crown format and were partially offset by increased gross margins.
Selling and administrative expenses as a percentage of sales were 18.0% for
fiscal 1996 compared to 20.4% for fiscal 1995. The decrease was primarily due
to the prior year accruals for Robert M. Haft's judgment and legal costs.
Excluding these accruals, selling and administrative expenses as a percentage
of sales were 16.2% for fiscal 1995. The increase in selling and administrative
expenses, excluding the accruals, was primarily due to increased payroll and
advertising costs and costs associated with Crown Books' Executive Committee.
Depreciation expense increased $239,000 for fiscal 1996 compared to fiscal
1995. The increase was primarily due to increased fixed assets for new Super
Crown Books stores, an upgrade in the point-of-sale register system and
additional computer hardware.
Interest expense increased by $314,000 primarily due to interest accrued on
the judgment against Crown Books in favor of Robert M. Haft.
The closed store reserve was reversed by $6,743,000 in fiscal 1996 compared to
an increase (expense) in such reserve of $18,865,000 in fiscal 1995. In
addition, the restructuring reserve was reversed by $2,051,000 in fiscal 1996.
The reversals in the store closing and restructuring reserves in fiscal 1996
resulted from (i) stores that were closed under negotiated lease settlements
that were more favorable than expected, (ii) the postponement of certain store
closings and (iii) management's decision not to close two stores that had been
scheduled for closing.
Crown Books had net income of $3,704,000 in fiscal 1996 compared to a net loss
of $19,380,000 in fiscal 1995 as a result of the foregoing factors.
48
<PAGE> 49
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Crown Books has recorded income tax expense of $1,977,000 in fiscal 1996 as
compared to tax benefit of $7,951,000 for fiscal 1995. In fiscal 1996, the
effective tax rate was 34.8% compared to (29.1)% in fiscal 1995 due primarily
to the $2,500,000 valuation recorded in the third quarter of fiscal 1995.
Total Beverage
During fiscal 1996, Total Beverage opened two new stores that increased its
number of stores to four.
Total Beverage sales were $29,444,000 during fiscal 1996 compared to
$23,925,000 for fiscal 1995. The increase was due primarily to additional
stores. Comparable store sales increased 2.4% when compared to fiscal 1995.
Cost of sales and store occupancy as a percentage of sales were 82.0% during
fiscal 1996 compared to 83.4% for fiscal 1995. The decrease was primarily due
to increased gross margins and a decrease in store occupancy costs, as a
percentage of sales.
During fiscal 1996, Total Beverage reversed its closed store reserve of
$4,719,000 as a result of a buyout of the remainder of the lease term. Total
Beverage had recorded the closed store reserve of approximately $5.6 million
during fiscal 1995. In addition, during fiscal 1996, management concluded that
one of the stores opened during that year would be closed in fiscal 1997 due to
disappointing sales volume. Total Beverage recorded a new closed store reserve
of approximately $3.0 million for the future lease obligations at that
location.
Before the reversal and accrual of the closed store reserves, Total Beverage
recorded a net operating loss of $1,422,000 during fiscal 1996 compared to a
net operating loss of $2,567,000 (excluding the $5.6 million closed store
reserve) during fiscal 1995.
Cabot Morgan Real Estate
During fiscal 1996, Dart recorded a loss of $14.6 million for the write-down to
fair market value of the five properties that CMREC owns through joint ventures
with partnerships in which the partners are members of the Haft family.
As part of the RSH Settlement, Dart and CMREC agreed to the sale of these five
properties. The sales occurred in May 1996 on terms arranged by Ronald S. Haft.
Under terms of the RSH Settlement, CMREC received $2.0 million for its retained
interest in the joint ventures from such sales. As a result of these
arrangements, the real estate joint ventures were no longer consolidated with
the Company's financial statements as of October 6, 1995.
49
<PAGE> 50
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Dart Group and Other Corporate
Income from unconsolidated subsidiary was $10,055,000 in fiscal 1996 as a
result of an increase in Dart's equity interest in Shoppers Food which has been
reflected on Dart's financial statements using the equity method of accounting.
Interest and other income increased $521,000 during fiscal 1996 when compared
to fiscal 1995. The increase was primarily due to Dart's decision to invest in
United States Treasury Bills as bankers' acceptances matured during the first
half of fiscal 1995. In addition, interest rates were higher on Dart's
short-term investments.
Administrative expenses (excluding $54.0 million in reserves recorded last
year) increased approximately $2.4 million during fiscal 1996, primarily due to
compensation expense for Ronald S. Haft's employment contract (see Note 6 to
the Consolidated Financial Statements) and costs associated with the Executive
Committee and continuing legal expenses.
Interest expense increased by $2,717,000 during fiscal 1996 compared to fiscal
1995. The increase was due to interest accrued for the Robert M. Haft
judgment and Pennsy Lease reserve.
Trak Auto, Crown Books and Shoppers Food file separate income tax returns.
CMREC, Total Beverage and Dart Financial are included in Dart's income tax
returns.
As a result of Dart's operating loss for fiscal 1996, a net tax operating loss
carryforward of $26,140,000 and a capital loss carryforward of $14,594,000 was
created. Dart's cumulative total net tax operating loss carryforward is
$44,475,000. Dart has not completely utilized net operating loss carryforwards
from prior years and will carryforward its current net operating loss. All net
operating loss and capital loss carryforwards will expire by fiscal 2011. In
addition, Dart has an Alternative Minimum Tax credit carryforward of
approximately $1,010,000. Dart has a deferred tax valuation allowance of
$30,925,000 as of January 31, 1996. Management will continue to evaluate the
need for a valuation allowance on a periodic basis.
Effects of Inflation
Inflation in the past three years has had no significant impact on the
Company's business. Dart believes that Trak Auto, Crown Books, Shoppers
Food and Total Beverage will recover most cost increases due to inflation by
increasing selling prices.
50
<PAGE> 51
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Financial Statements Page
- -------------------- ----
<S> <C>
Report of Independent Public Accountants 52
Consolidated Balance Sheets 53
Consolidated Statements of Operations 55
Consolidated Statements of Stockholders' Equity 56
Consolidated Statements of Cash Flows 58
Notes to Consolidated Financial Statements 61
</TABLE>
51
<PAGE> 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO DART GROUP CORPORATION:
We have audited the accompanying consolidated balance sheets of Dart Group
Corporation (a Delaware corporation) and subsidiaries as of January 31, 1997
and 1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
January 31, 1997. These financial statements are the responsibility of Dart's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dart Group Corporation and
subsidiaries as of January 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three fiscal years in the
period ended January 31, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in fiscal 1997
the Company changed its method of accounting for cash equivalents. In fiscal
1995, Trak Auto Corporation, a subsidiary, changed its method of accounting for
its LIFO inventory.
ARTHUR ANDERSEN LLP
Washington, D. C.
April 25, 1997
52
<PAGE> 53
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
January 31,
-----------------------
ASSETS 1997 1996
------------ ----------
<S> <C> <C>
Current Assets:
Cash and equivalents $ 12,382 $ 13,967
Short-term instruments 27,276 40,813
Marketable debt securities 5,714 32,548
Accounts receivable 14,699 8,965
Income taxes refundable 3,802 -
Merchandise inventories 218,619 205,615
Deferred income tax benefit 7,324 13,915
Other current assets 6,445 2,199
--------- ---------
Total Current Assets 296,261 318,022
--------- ---------
Property and Equipment, at cost:
Furniture, fixtures and equipment 104,541 91,311
Buildings and leasehold improvements 29,873 28,105
Land 1,034 1,034
Property under capital leases 24,472 24,472
--------- ---------
159,920 144,922
Accumulated Depreciation and Amortization 80,849 68,559
--------- ---------
79,071 76,363
Other Assets 5,773 3,145
--------- ---------
Note Receivable - Ronald S. Haft - 11,621
--------- ---------
Share of Equity in Shoppers Food
Warehouse Corporation 52,802 46,397
--------- ---------
Retained Interest in Cabot-Morgan
Real Estate Joint Ventures - 2,000
--------- ---------
Excess of Purchase Price Over Net Assets
Acquired net of accumulated
amortization of $382,000 and $175,000 1,890 1,735
--------- ---------
Deferred Income Tax Benefit 14,375 11,282
--------- ---------
Total Assets $ 450,172 $ 470,565
========= =========
</TABLE>
See notes to consolidated financial statements.
53
<PAGE> 54
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
January 31,
-----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------ ----------
<S> <C> <C>
Current Liabilities:
Current portion of mortgages payable $ 1,106 $ 1,028
Accounts payable, trade 102,942 89,095
Income taxes payable 3,322 967
Accrued salaries and employee benefits 18,766 18,456
Accrued taxes other than income taxes 9,738 7,669
Accrued judgment in favor of Robert M. Haft - 34,579
Current portion of reserve for closed
facilities and restructuring 5,701 6,970
Other accrued liabilities 64,215 40,056
Current portion of obligations under
capital leases 209 101
--------- ---------
Total Current Liabilities 205,999 198,921
--------- ---------
Mortgages Payable 353 660
--------- ---------
Obligations Under Capital Leases 30,373 30,165
--------- ---------
Reserve for Closed Facilities and Restructuring 27,341 36,816
--------- ---------
Commitments and Contingencies
Minority Interests 67,750 69,427
--------- ---------
Stockholders' Equity:
Class A Common Stock, non-voting, par
value $1.00 per share; 3,000,000 shares
authorized; 1,962,403 and 1,949,223 shares
issued, respectively 1,962 1,949
Class B Common Stock, voting, par value $1.00
per share; 500,000 shares authorized
and issued 500 500
Paid-in capital 78,841 77,879
Notes receivable - shareholder (65,130) (65,130)
Unrealized gains (losses) on short-term
investments (22) 246
Retained earnings 104,242 121,169
Treasury stock, 202,340 shares of
Class A common stock, at cost (1,749) (1,749)
Treasury stock, 172,730 shares of
Class B common stock, at cost (288) (288)
--------- ---------
Total Stockholders' Equity 118,356 134,576
--------- ---------
Total Liabilities and Stockholders' Equity $ 450,172 $ 470,565
========= =========
</TABLE>
See notes to consolidated financial statements.
54
<PAGE> 55
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended January 31,
--------------------------------------
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Sales $ 663,818 $ 655,161 $ 936,606
Real estate revenue - 13,155 19,977
Other interest and other income 4,271 9,820 10,845
---------- ---------- ----------
668,089 678,136 967,428
---------- ---------- ----------
Expenses:
Cost of sales, store occupancy
and warehousing 520,746 509,136 735,010
Selling and administrative 159,229 146,209 233,692
Depreciation and amortization 14,040 15,453 19,086
Interest 6,993 13,175 13,448
Write-down of Cabot-Morgan
Real Estate joint ventures - 14,562 -
Restructuring (reversal) charge (3,865) (2,051) -
Closed facility (reversal)
reserve (652) (5,665) 45,913
---------- ---------- ----------
696,491 690,819 1,047,149
---------- ---------- ----------
Loss before income taxes, equity
in affiliate and minority
interests (28,402) (12,683) (79,721)
Income taxes (benefit) (216) 6,149 (1,699)
---------- ---------- ----------
Loss before equity in affiliate
and minority interests (28,186) (18,832) (78,022)
Equity in affiliate 11,405 10,055 (5)
Minority interests in (income)
loss of consolidated
subsidiaries and partnerships 88 (4,647) 4,235
---------- ---------- ----------
Net Loss $ (16,693) $ (13,424) $ (73,792)
========== ========== ==========
Loss per share $ (8.73) $ (7.88) $ (39.57)
========== ========== ==========
</TABLE>
See notes to the consolidated financial statements.
55
<PAGE> 56
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended January 31,
---------------------------------
1997 1996 1995
----------- -------- ---------
<S> <C> <C> <C>
Common Stock:
Class A-
Balance, beginning of period $ 1,949 $ 1,661 $ 1,656
Stock options exercised 13 - 5
Shares issued - 288 -
-------- -------- --------
Balance, end of period $ 1,962 $ 1,949 $ 1,661
======== ======== ========
Class B-
Balance, beginning of period $ 500 $ 303 $ 303
Stock options exercised - 197 -
-------- -------- --------
Balance, end of period $ 500 $ 500 $ 303
======== ======== ========
Paid-in Capital:
Balance, beginning of period $ 77,879 $ 65,384 $ 65,323
Stock options exercised 951 18 368
Purchase (refund) of (Class B)
stock option - 985 (985)
RSH Settlement - 10,701 -
Effect of subsidiary stock
options exercised 11 791 678
-------- -------- --------
Balance, end of period $ 78,841 $ 77,879 $ 65,384
======== ======== ========
Note Receivable-Shareholder:
Balance, beginning of period $(65,130) $ - $ -
RSH Settlement - (65,130) -
-------- -------- --------
Balance, end of period $(65,130) $(65,130) $ -
======== ======== ========
Unrealized Investment gains (losses): $ (22) $ 246 $ (1,024)
======== ======== ========
Treasury Stock:
Class A-
Balance, beginning and end of period $ (1,749) $ (1,749) $ (1,749)
======== ======== ========
Class B-
Balance, beginning of period $ (288) $ - $ -
Common stock reacquired - (288)
-------- -------- --------
Balance, end of period $ (288) $ (288) $
======== ======== ========
Retained Earnings:
Balance, beginning of period $121,169 $134,788 $208,774
Net loss (16,693) (13,424) (73,792)
Dividends paid (234) (195) (194)
-------- -------- --------
Balance, end of period $104,242 $121,169 $134,788
======== ======== ========
</TABLE>
56
<PAGE> 57
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, CONTINUED
(dollars and shares in thousands, except dividends per share)
<TABLE>
<CAPTION>
Years Ended January 31,
---------------------------------
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Dividends paid per share:
Class A Common Stock $ .13 $ .13 $ .13
======== ======== ========
Class B Common Stock $ - $ - $ -
======== ======== ========
Common Stock Outstanding:
Class A-
Balance, beginning of period 1,747 1,458 1,453
Stock options exercised 13 1 5
Shares issued - 288 -
-------- -------- --------
Balance, end of period 1,760 1,747 1,458
======== ======== ========
Class B-
Balance, beginning of period 327 303 303
Stock options exercised - 197 -
Common stock reacquired - (173) -
-------- -------- --------
Balance, end of period 327 327 303
======== ======== ========
</TABLE>
See notes to the consolidated financial statements.
57
<PAGE> 58
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended January 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(16,693) $(13,424) $(73,792)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 14,040 12,341 15,782
Write down Cabot-Morgan
Real Estate joint ventures - 14,562 -
Write-off deferred compensation - - 1,424
Equity in affiliate (11,405) (10,414) (1,045)
Provision for litigation 17,000 2,169 10,280
Provision for (reversal of) closing
facilities and restructuring (3,534) (6,125) 45,913
Change in assets and liabilities:
Accounts receivable (5,734) 1,518 2,088
Merchandise inventories (13,004) (7,137) (19,099)
Prepaid and refundable
income taxes (3,802) - -
Other current assets (4,246) (579) 636
Deferred income tax benefit 4,177 5,911 (16,172)
Other assets (2,609) 148 166
Accounts payable, trade 13,847 (16,938) (15,463)
Income taxes payable 2,355 (6,181) 2,436
Accrued salaries and employee
benefits 1,457 2,516 31,916
Accrued taxes other than
income taxes 2,069 (1,806) (401)
Other accrued liabilities 7,654 (5,937) 10,272
Payment to Robert M. Haft (35,726) - -
Reserve for closed facilities (6,658) (7,680) (3,574)
Minority interest (2,028) 6,338 (4,788)
-------- -------- --------
Net cash used for
operating activities $(42,840) $(30,718) $(13,421)
-------- -------- --------
Cash Flows from Securities and Capital
Investment Activities:
Capital expenditures $(17,112) $(16,688) $(15,150)
Purchase of Pittsburgh store assets - (5,767) -
Proceeds from Shoppers Food dividend 5,000 5,000 -
Distributions from Cabot-Morgan Real
Estate joint ventures - 4,888 -
Proceeds from sale of Cabot-Morgan
joint ventures 2,000 - -
</TABLE>
58
<PAGE> 59
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended January 31,
---------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Securities and Capital
Investment Activities (Continued):
Decrease in cash and cash equivalents
as a result of the deconsolidation
of Cabot-Morgan Real Estate
joint ventures and Shoppers Food
Warehouse Corp., respectively $ - $ (5,713) $(61,014)
Acquisition of treasury stock by
Trak Auto - (6,904) -
Maturities of bankers' acceptances - - 90,505
Purchases of bankers' acceptances - - (28,198)
Sales of United States Treasury Bills 21,032 70,002 102,742
Maturities of United States Treasury
Bills 36,351 11,163 210,697
Purchases of United States Treasury
Bills (40,152) (98,866) (267,954)
Purchases of marketable debt securities (1,500) (3,199) (223,509)
Sales of marketable debt securities 3,612 56,951 200,585
Maturities of marketable debt securities 6,544 6,420 12,309
Dispositions from reverse
repurchase agreements $ - - (929)
-------- -------- --------
Net cash provided by (used for)
securities and capital
investment activities $ 15,775 $ 17,287 $ 20,084
-------- -------- --------
Cash Flows from Financing Activities:
Cash dividends $ (234) $ (195) $ (194)
Proceeds from Note Receivable -
Ronald S. Haft 11,621 - -
Loans to Ronald S. Haft - (49,547) -
Stock options exercised 964 215 368
Contributions (distributions)
from (to) partner - - (1,776)
Proceeds from(refund of)option to
acquire common stock 985 (985)
Principal payments under mortgage
obligations (307) (269) (1,202)
Principal payments under capital
lease obligations (101) (368) (346)
-------- -------- --------
Net cash provided by(used for)
financing activities $ 11,943 $(49,179) $ (4,135)
-------- -------- --------
</TABLE>
59
<PAGE> 60
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended January 31,
-----------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Net increase(decrease)in Cash and
Equivalents $(15,122) $(62,610) $ 2,528
Cash and Equivalents at Beginning
of Year (Note 1) 54,780 117,390 114,862
-------- -------- --------
Cash and Equivalents at End of
Year (Note 1) $ 39,658 $ 54,780 $117,390
======== ======== ========
Supplemental Disclosures of Cash
Flow Information:
Net Cash paid (refunded) during
the year for:
Interest $ 7,485 $ 4,532 $ 12,799
Income taxes (2,305) 6,468 11,846
</TABLE>
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.
<TABLE>
<CAPTION>
Supplemental disclosure of noncash activities:
<S> <C> <C> <C>
Write-off book value of fixed assets
to restructuring and closed store
reserves $ 552 $ 1,207 $ 1,802
</TABLE>
See notes to consolidated financial statements.
60
<PAGE> 61
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
NOTE - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements reflect the accounts of Dart
Group Corporation ("Dart") and its direct and indirect, wholly-owned and
majority-owned subsidiaries and majority-owned partnerships, including Trak
Auto Corporation ("Trak Auto"), Crown Books Corporation ("Crown Books"), Total
Beverage Corporation ("Total Beverage"), Cabot-Morgan Real Estate Company
("CMREC") and Dart Group Financial Corporation ("Dart Financial"). The accounts
of Shoppers Food Warehouse Corp. ("Shoppers Food") are consolidated with Dart's
financial statements through May 28, 1994, but not thereafter, as a result of a
reduction of Dart's ownership to 50%. Dart's investment in Shoppers Food is
reflected in the financial statements using the equity method of accounting for
periods subsequent to May 28, 1994 (see Note 3). The accounts of CMREC's real
estate joint ventures are consolidated with Dart's financial statements through
October 5, 1995, but not thereafter, as a result of a settlement of certain
litigation between Dart and Ronald S. Haft (the "RSH Settlement") (see Note 6).
Dart, Trak Auto, Crown Books, Shoppers Food (for periods through May 28, 1994),
Total Beverage, CMREC, Dart Financial and Dart's other direct and indirect
wholly-owned and majority-owned subsidiaries and majority-owned partnerships
are referred to collectively as the "Company". All significant intercompany
accounts and transactions have been eliminated.
On February 6, 1997, Dart acquired the other 50% interest in Shoppers Food (see
Note 6). For periods after February 6, 1997, the accounts of Shoppers Food will
be consolidated with Dart's financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from
those estimates.
Risk Factors
In the past, Dart and each of its subsidiaries generally funded their
respective requirements for working capital and capital expenditures with net
cash generated from operations and existing cash resources. However, the
Company's cash and investments decreased by approximately $ 42.0 million in
fiscal 1997 and $104.4 million in fiscal 1996, primarily as a result of
61
<PAGE> 62
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
payments of $37.9 million to Robert M. Haft for satisfaction of a judgment
awarded to him (the "RMH Judgment") (See Note 8), loans of $49.5 million made
to Ronald S. Haft in connection with the RSH Settlement, expenditures by Crown
Books for store closings and the opening of new superstores, Trak Auto's
expansion into the Pittsburgh market and the store operating losses of Crown
Books and Total Beverage and extraordinary legal and other fees.
If Dart settles litigation with Haft family members (see Note 8), Dart will
need additional cash to fund its working capital needs, which includes funding
any operating losses of Total Beverage. Any significant financing transaction
or other extraordinary transaction that would provide additional cash may
require further order of the court under a Standstill Order (see Note 8) and
may be opposed by Haft family members who are not party to a settlement. In
addition, if certain challenges to the RSH Settlement are successful, the
accounting treatment may be materially different than that recorded in the
accompanying financial statements (see Note 6).
Fiscal Year
Dart's fiscal year ends on January 31 each year. Trak Auto, Crown Books,
Shoppers Food and Total Beverage are reported to the Saturday closest to
January 31. Trak Auto's, Crown Books', Shoppers Food's and Total Beverage's
fiscal year ended February 3, 1996 included 53 weeks and all other fiscal years
presented included 52 weeks.
Cash and Equivalents
Effective in fiscal 1997, and applied retroactively to all years presented
herein, the Company changed its accounting policy to include only investments
with an original maturity of three months or less as cash equivalents. The
impact of this change was to reclassify amounts previously presented in the
accompanying consolidated balance sheets and statements of cash flows.
Short-Term Instruments and Marketable Debt Securities
At January 31, 1997, the Company's short-term instruments include United States
Treasury Bills, with a maturity of three months or less, and money market
funds. Marketable debt securities include United States Treasury Bills, with a
maturity greater than three months, United States Treasury Notes, corporate
notes, municipal securities and United States Agency Securities Acceptances.
Management determines the appropriate classification of its investments in
62
<PAGE> 63
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
debt securities at the time of purchase and reevaluates such determination at
each balance sheet date. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available-for-
sale. Securities available-for-sale are carried at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. At January 31, 1997, the market value of short-term
instruments and marketable debt securities was $22,000 less than cost (adjusted
for income taxes). At January 31, 1997, the Company had no investments that
qualified as trading or held-to-maturity.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and interest are included in interest income. Realized gains
and losses are included in other income or expense. The cost of securities sold
is based on the specific identification method. The following table (which
excludes money market funds) presents the estimated fair value of debt
securities available for sale by contractual maturity at January 31, 1997:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Due in one year or less $ 3,122
Due in one to three years 1,562
Due after three years 1,030
--------
$ 5,714
========
</TABLE>
Expected maturities may differ from contractual maturities because the issuers
of securities may have the right to prepay obligations without prepayment
penalties.
Included in short-term instruments and marketable debt securities were
$21,094,000 and $46,091,000 held by majority-owned subsidiaries at January 31,
1997 and January 31, 1996, respectively.
Fair Value of Financial Instruments
The fair values of current financial assets and liabilities are approximately
the reported carrying amounts. The carrying amounts of the Company's mortgages
payable are based on outstanding principal, and the fair values of these
mortgages were estimated based on borrowing rates currently available for bank
loans with similar terms.
Merchandise Inventories and Cost of Sales
Trak Auto inventories are priced at the lower of last-in, first-out ("LIFO")
63
<PAGE> 64
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
cost or market. Crown Books' and Total Beverage's inventories are priced at the
lower of first-in, first-out, ("FIFO") cost or market. At January 31, 1997,
1996 and 1995, Trak Auto's inventories would have been greater by $6,733,000,
$6,579,000 and $5,870,000, respectively, if they had been valued on the lower
of FIFO cost or market basis.
Effective January 30, 1994, Trak Auto changed its method for determining the
index used to calculate the cost basis of the LIFO inventory for financial and
income tax reporting purposes. Under the new method, Trak Auto uses an index
published by United States Bureau of Labor Statistics. Previously, an index
determined by Trak Auto based upon inventory cost changes between financial
reporting periods, was utilized. This change was accounted for as a change in
accounting method in the accompanying financial statements. Due to limitations
in the availability of historical information, it is not possible to determine
the effect, if any, on net income for the year ending January 28, 1995 of the
corresponding cumulative catch-up adjustment or on retained earnings at January
30, 1994. Accordingly, the change in method was accounted for on a prospective
basis from January 30, 1994 and the effect on per share data, if any, is not
available.
Property and Equipment and Depreciation
Property and equipment are recorded at cost. The Company depreciates furniture,
fixtures and equipment generally over a ten-year period using the straight-line
method. Effective February 1, 1997, the Company will change its accounting
policy from expensing purchased computer software costs in the year of
acquisition to capitalizing and depreciating these costs over its estimated
useful life but not more than five years. This change will be made as
management has determined that these costs benefit future periods. Computer
equipment is depreciated over a five-year period using the straight-line
method. All stores and some equipment are leased. Improvements to leased
premises are amortized generally over a ten-year period, or the term of the
lease, whichever is shorter. Assets (primarily buildings) financed through
asset-based financing arrangements are depreciated over the lives of the
leases. Accumulated amortization for assets under capital lease was $9,159,000
and $8,159,000 as of January 31, 1997 and 1996, respectively.
Preopening Expenses
All costs of a noncapital nature incurred in opening a new store are charged to
expense during the year as incurred.
64
<PAGE> 65
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Advertising Expenses
The Company records the costs of advertising as expense as the costs are
incurred.
Self-Insurance Programs
The Company is self-insured for certain levels of general liability, workers
compensation and employee medical coverage. Estimated costs of these
self-insurance programs are accrued at the expected value of projected
settlements for known and anticipated claims.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of short-term instruments, marketable debt securities and
accounts receivable from vendors. The Company restricts investment of temporary
cash investments to United States Treasury Bills and Notes and corporate notes
and municipal securities with a high credit standing. Credit risk on accounts
receivable is minimized as a result of the ability to generally deduct such
receivables from amounts payable to the related vendors.
New Accounting Standards
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for Long Lived Assets and Long-Lived Assets to be Disposed Of
and SFAS No. 123, Accounting for Stock Based Compensation, during the year
ending January 31, 1997. Implementation of SFAS No. 121 did not have a
material impact on the Company's consolidated financial statements. The
Company has disclosed the fair value of options granted as permitted by SFAS
No. 123 (see Note 12).
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
Earnings Per Share. SFAS No. 128 replaces the presentation of primary earnings
per share, previously presented by the Company, with basic earnings per share
and requires a reconciliation of the numerator and denominator of basic
earnings per share to fully diluted earnings per share. Fully diluted earnings
per share is computed similarly to the previous requirements. The Company will
be required to adopt SFAS No. 128 in the fourth quarter of fiscal 1998 and to
restate all previously presented earnings per share data. The presentation of
the Company's basic earnings per share under SFAS No. 128 is not materially
different than the amounts presented herein as primary earnings per share.
65
<PAGE> 66
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Industry Segments
The Company operates specialty retail, grocery and beverage stores.
Dividends
The holders of Class A Common Stock are entitled to receive, when and as
declared by the Board of Directors, noncumulative preferential dividends of up
to thirty cents per share. If Class A dividends reach thirty cents per share,
in any fiscal year, holders of Class B Common Stock are entitled to receive
dividends not exceeding thirty cents per share. Any dividends cumulatively in
excess of thirty cents per share would be shared as if they constituted a
single class of stock. During the years ended January 31, 1997, 1996 and 1995,
Dart paid dividends to the holders of Class A Common Stock at thirteen cents
per share and has not paid dividends to holders of Class B Common Stock.
Earnings Per Share
Earnings per share is based on the weighted average number of Dart's Class A
Common Stock, $1.00 par value per share ("Class A Common Stock") and Class B
Common Stock, $1.00 par value per share ("Class B Common Stock") and common
stock equivalents (certain stock options) outstanding during the period. In
reporting earnings per share, Dart's interest in the earnings of its
majority-owned subsidiaries is adjusted for the dilutive effect, if any, of
these subsidiaries' outstanding stock options. The difference between primary
earnings per share and fully diluted earnings per share was not significant for
any period. Weighted average shares and share equivalents for the three years
ended January 31, 1997, 1996 and 1995 were 2,076,000, 1,862,000 and 1,871,000,
respectively. The inclusion of the options for Class B Common Stock related to
Ronald S. Haft's employment agreement had no impact on reported earnings per
share in fiscal 1995 because they were anti-dilutive.
Reclassifications
Certain reclassifications have been made to prior year statements to conform to
the current year presentation.
66
<PAGE> 67
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
NOTE 2 - INCOME TAXES
Because of its percentage ownership, Dart does not report the results of
operations of Crown Books, Trak Auto or Shoppers Food in its Federal or state
tax returns. The Company's tax provision therefore, represents the combined tax
provisions of Dart, Crown Books, Trak Auto, Total Beverage and Shoppers Food
(through May 28, 1994).
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. This standard requires, among other things,
recognition of future tax benefits and liabilities, measured by enacted tax
rates, attributable to deductible temporary differences between financial
statement and income tax bases of assets and liabilities and for tax net
operating loss carryforwards, to the extent that realization of such benefits
is more likely than not.
The provision (benefit) for income taxes on income before minority interests,
equity in affiliate and extraordinary items consists of the following:
<TABLE>
<CAPTION>
(dollars in thousands)
Fiscal Years
--------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ (2,747) $ (241) $ 9,474
State (967) 3 1,839
-------- -------- --------
(3,714) (238) 11,313
Deferred:
Federal 2,703 5,020 (11,076)
State 795 1,367 (1,936)
-------- -------- --------
$ (216) $ 6,149 $ (1,699)
======== ======== ========
</TABLE>
67
<PAGE> 68
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
The combined effective tax rate on income before income taxes and minority
interest is reconciled to the Federal statutory rate as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Fiscal Years
---------------------------------
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Federal statutory rate 34% 34% 34%
Income taxes at Federal statutory rate $ (9,657) $ (4,312) $(27,105)
Increase (decrease) in taxes
resulting from:
Federal and state net operating
loss carryforward not benefitted 4,740 5,886 5,905
State income taxes, net of
Federal income tax benefit (72) 685 (89)
Minority interest of CMREC taxed
as minority partner - (168) (195)
Exclusion of Shoppers Food dividend 340 (1,360) -
Interest on note receivable-
shareholder 1,818 581 -
CMREC interest in Total Beverage
closed store reserve - 824 (970)
Amortization of Goodwill 70 59 (154)
Valuation allowance 2,549 4,225 21,279
Tax exempt municipal bond interest
income (50) (255) (494)
Utilization of former
Trak West net operating loss (208) (225) (225)
Other 254 209 349
-------- -------- --------
Income tax provision (benefit) $ (216) $ 6,149 $ (1,699)
======== ======== ========
Effective tax rate .8% 48.5% 2.1%
======== ======== ========
</TABLE>
68
<PAGE> 69
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
The effect of each type of temporary difference and carryforward is as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Years Ended January 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Deferred Tax Assets:
- -------------------
Reserves for other liabilities $ 173 $ 218
Capitalized leases treated as operating
leases for tax purposes 2,860 2,832
Depreciation 4,182 2,215
Uniform capitalization of inventory
costs 3,057 2,996
Reserve for store closings and restructuring 11,478 15,291
Accrued rent 1,434 1,029
Deferred income 65 83
Certain officers' bonuses 678 465
Tax loss carryforwards 26,816 15,740
Tax credit carryforwards 2,168 1,777
Basis adjustment as a result of purchase
accounting for Trak West 164 262
Unrealized investment losses 4 4
Accrued vacation 537 498
Accrued self-insurance reserves 2,644 2,661
Accrued legal reserves 3,922 2,632
Reserve for stock options 5,678 3,298
Litigation accruals - 12,992
Capital loss carryforward 5,239 5,229
Other 751 279
--------- ---------
Deferred Tax Assets 71,850 70,501
Valuation allowance (35,974) (33,425)
--------- ---------
Net Deferred Tax Assets 35,876 37,076
Deferred Tax Liabilities:
- ------------------------
Basis difference in Shoppers Food investment 13,846 11,462
Book basis of assets acquired as a result
of involuntary conversion 331 417
--------- ---------
Deferred Tax Liabilities 14,177 11,879
--------- ---------
Net Deferred Tax Asset $ 21,699 $ 25,197
========= =========
</TABLE>
69
<PAGE> 70
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
A summary of the Company's valuation allowance as of January 31, 1997 and 1996
by Company is provided below:
<TABLE>
<CAPTION>
(dollars in thousands)
Fiscal Years
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Crown Books $ 2,500 $ 2,500
Trak Auto - -
Dart Group Corporation 33,474 30,925
--------- ---------
$ 35,974 $ 33,425
========= =========
</TABLE>
During the year ended January 31, 1997, Dart recorded an increase in its
valuation allowance of $2,549,000 as a result of continuing net operating
losses.
Dart does not recognize deferred tax liabilities on the excess of the amount
for financial reporting over the tax basis of the investment in its
consolidated majority owned subsidiaries. In fiscal 1995, Shoppers Food was
deconsolidated and Dart announced that it had under consideration the
liquidation of its interest. Accordingly, as of January 31, 1997, Dart has
provided deferred taxes of $13,846,000 and reduced its valuation allowance by
the same amount.
As a result of Dart's operating loss for the year ended January 31, 1997, a tax
net operating loss carryforward of $27,609,000 was created. Dart's cumulative
total tax net operating loss carryforward is $66,102,000. All net operating
loss carryforwards will expire by fiscal 2012. In addition, Dart has an
Alternative Minimum Tax credit carryforward of approximately $1,010,000.
Dart will continue to evaluate on a periodic basis its need for a valuation
allowance.
NOTE 3 - TRANSACTIONS WITH AFFILIATES
Shoppers Food Warehouse Corp.
In fiscal 1989, Dart acquired in excess of 50% of the common stock of Shoppers
Food, which operates the Shoppers Food Warehouse discount grocery chain in the
Washington, D.C. metropolitan area. In June 1994, one of the other shareholders
of Shoppers Food exercised his right to reacquire one share of Shoppers Food
Class B common stock, thereby reducing Dart's ownership to exactly 50%. As a
result, the accounts of Shoppers Food are consolidated with
70
<PAGE> 71
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Dart's through May 28, 1994, but not thereafter. Dart's investment in Shoppers
Food is reflected in the financial statements using the equity method of
accounting for periods subsequent to May 28, 1994. Under the equity method, the
Company's investment is shown in the balance sheet as a single line under Share
of Equity in Shoppers Food Warehouse. Accordingly, assets and liabilities of
Shoppers Food previously shown in the accounts of the Company have been
aggregated and are included in this item. The unamortized difference between
the original purchase price of Shoppers Food and the net assets acquired of
$11,260,000 is also included in this item and is amortized over ten years from
the acquisition date. Similarly, the sales and expenses of Shoppers Food, which
were previously included in the accounts of the Company, have been aggregated
subsequent to May 28, 1994 and reflected in the caption Equity in Affiliate on
the Consolidated Statements of Income.
For purposes of the Statements of Cash Flows only, the accounts of Shoppers
Food have been deconsolidated at January 31, 1994. Accordingly, the Company's
consolidated cash position was decreased by $61,014,000 (representing cash and
cash equivalents held by Shoppers Food at January 31, 1995) and net income
excluded Dart's share of Shoppers Food net income for the year ended January
31, 1995.
Subsequent Event
On December 16, 1996, Dart submitted offers to either (i) sell all of Dart's
50% equity interest in Shoppers Food or (ii) buy the other 50% equity interest
in Shoppers Food, in either case for a cash price of $210 million. On December
18, 1996, the other stockholders (Kenneth M. Herman, the founder of Shoppers
Food, and certain of his family members and family trusts) accepted Dart's
offer to purchase all of their shares of capital stock of Shoppers Food.
On February 6, 1997, Dart acquired the other 50% interest in Shoppers Food for
$210 million (the "Acquisition"). As a result, the accounts of Shoppers Food
will be consolidated with the Company effective February 6, 1997. Dart financed
the Acquisition through the application of $137.2 million in net proceeds
raised from an offering of Increasing Rate Senior Notes due 2000 (the "Senior
Notes") of SFW Acquisition Corp., a newly created wholly-owned subsidiary of
Dart, and $72.8 million of bridge financing. Immediately after the Acquisition,
SFW Acquisition Corp. merged into Shoppers Food (with Shoppers Food becoming
obligor on the Senior Notes) and Shoppers Food repaid the bridge financing from
its existing cash and the liquidation of certain short-term investments.
71
<PAGE> 72
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Dart intends to analyze the options available to it with regard to Shoppers
Food, which options include, among others, a refinancing of the Senior Notes or
a sale of all or part of Shoppers Food.
Summary Income Data for Deconsolidated Subsidiary
The following information reflects the results of Shoppers Food for the years
ended January 31, 1997 and 1996:
<TABLE>
<CAPTION>
(dollars in thousands)
1997 1996
---------- ----------
<S> <C> <C>
Revenue $862,395 $841,701
Gross Profit 156,404 143,481
Net Income 21,251 14,652
</TABLE>
The amounts included in net income above do not reflect the amortization of the
difference between Dart's original purchase price and the equity in net assets
or certain tax contingencies recorded by the Company. The following is a
reconciliation of the net income as reported by Shoppers Food with the equity
in affiliate as reported on the Company's Consolidated Statement of Operations:
<TABLE>
<CAPTION>
(dollars in thousands)
1997 1996
--------- ----------
<S> <C> <C>
Shoppers Food Net Income $ 21,251 $ 14,652
50% of Shoppers Food Net income $ 10,626 $ 7,326
Amortization of Excess Purchase Price
over Net Assets Acquired (1,126) (1,126)
Reversal of certain tax contingencies 1,905 3,700
Other - 155
-------- --------
$ 11,405 $ 10,055
======== ========
</TABLE>
The following information presents summarized balance sheet information of
Shoppers Food as of January 31, 1997 and 1996.
<TABLE>
<CAPTION>
(dollars in thousands)
(unaudited)
1997 1996
-------- ---------
<S> <C> <C>
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
</TABLE>
72
<PAGE> 73
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
In fiscal 1989 Dart/SFW Corp. ("Dart/SFW") was formed with the apparent intent
that Dart would hold 80 of Dart/SFW's 100 authorized shares of capital stock.
However, Dart/SFW's organizational documents are incomplete. Dart/SFW
purportedly granted options to purchase the other 20 shares of its capital
stock to members of the Haft family. There is no record that a transfer of
Dart's 50% interest in Shoppers Food to Dart/SFW occurred. Dart and Dart/SFW
executed agreements which by their express terms provide for options to Herbert
H. Haft and Robert M. Haft to each acquire up to 10% of the stock of Dart/SFW
on a fully diluted basis. These agreements state that the options became
exercisable in August 1994 and expire in August 2004 and that the optionees
have the right to require Dart to repurchase the shares at their then fair
market value at any time within three years after receipt of the shares.
Herbert H. Haft assigned his options equally to Ronald S. Haft and Linda G.
Haft. (see Note 5). As part of the RSH Settlement, Ronald S. Haft consented to
the termination of his options. See Note 6.
The Executive Committee of the Board of Directors (the "Executive Committee")
(see Note 12) has undertaken a legal review of these options and, as a result,
is contesting their validity. Robert M. Haft has filed a lawsuit seeking
specific performance of these options. See Notes 8 and 12. Pending the outcome
of this lawsuit, Dart accrues the estimated fair value of the stock over the
exercise price of the options provided for in these agreements net of Ronald S.
Haft's options which were terminated as a result of the RSH Settlement.
Exercise of Subsidiary Stock Options
Trak Auto and Crown Books stock options have been granted to officers,
directors and key employees. As these options are exercised, the number of
minority shares outstanding, and accordingly, the minority share of the
ownership of Trak Auto and Crown Books, increases. The difference attributable
to Dart's change in ownership percentage for these subsidiaries is reflected in
Paid-in Capital.
NOTE 4 - COMMITMENTS
Lease Commitments
The Company leases stores, warehouses, leasehold improvements, fixtures and
equipment. Renewal options are available on the majority of the leases. In some
instances, store leases require the payment of contingent rentals and license
fees based on sales in excess of specified minimums. Certain properties are
subleased with various expiration dates. Certain capital
73
<PAGE> 74
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
leases have purchase options at fair market value at the end of the lease.
Following is a schedule by fiscal year of future minimum payments under capital
leases, license agreements and non-cancelable operating leases having initial
or remaining terms in excess of one year at January 31, 1997 (excluding
Shoppers Food). The schedule below includes the operating leases of Dart and
its consolidated subsidiaries. The imputed interest rate on the capital leases
is 15.6% in the aggregate.
<TABLE>
<CAPTION>
(dollars in thousands)
Fiscal Capital Leases Operating
Year Buildings Leases
- ------ -------------- --------
<S> <C> <C>
1998 $ 4,344 $ 52,985
1999 4,604 46,603
2000 4,630 38,358
2001 4,760 33,202
2002 4,871 26,987
2003-2017 71,936 84,480
-------- ---------
95,145 $ 282,615
=========
Less-Imputed interest 64,563
------
Present value of net minimum
lease payments 30,582
Less-Current maturities 209
--------
Long-term capital lease
obligations $ 30,373
========
</TABLE>
The table above includes $6,260,000 for store operating leases where the stores
have been closed and the lease obligations have been accrued in the
restructuring or store closing reserves. Minimum operating lease obligations
have not been reduced by total future minimum sublease rental of $2,408,000
receivable in the future under ten leases. There are no sublease arrangements
for the capital leases.
Rent expense for operating leases and license arrangements are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Year Ended January 31,
--------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Minimum rentals $ 46,965 $ 42,250 $ 41,200
Contingent rentals 381 506 738
-------- -------- --------
$ 47,346 $ 42,756 $ 41,938
======== ======== ========
</TABLE>
74
<PAGE> 75
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Capital Lease Arrangements With Related Parties
Dart has a lease with a private partnership in which Haft family members own
all of the partnership interests, for a 271,000 square foot headquarters
building and distribution center in Landover, Maryland. The lease is for 30
years and six months, commenced in 1985 and provides for increasing rental
payments over the term of the lease. The current annual rental is $2,121,000.
The lease requires payments for maintenance, utilities, insurance and taxes.
The distribution center was constructed by the partnership at a cost of
approximately $8,300,000. Dart has sublet approximately 238,000 square feet to
Trak Auto and Crown Books at a per square foot charge which is equal to Dart's
per square foot cost under the master lease. Dart has a lease agreement with
the aforementioned partnership for land near the headquarters building and
distribution center. The lease is coterminous with the headquarters building
and distribution center lease and provides for current annual rental of $37,000
with increases of 3% per year. Dart, Trak Auto and Crown Books each pay a
pro-rata share in proportion to their use of the headquarters building and
distribution center.
Dart's majority-owned subsidiary, Trak Auto, entered into an agreement to lease
a 176,000 square foot distribution center in Bridgeview, Illinois from a
private partnership in which Haft family members own all of the partnership
interests. The lease is for 30 years and six months, commenced in 1984 and
provides for rental payments increasing approximately 15% every five years over
the term of the lease. The current annual rental is $754,000. The lease
requires payment of maintenance, utilities, insurance and taxes. Dart is
jointly and severally liable for the lease obligations. The partnership
purchased the distribution center on March 12, 1984 for approximately
$3,100,000.
Trak Auto has an agreement to lease a distribution center in Ontario,
California from a private partnership in which Haft family members own all of
the partnership interests. The lease is for 20 years and commenced in 1989. The
lease also provides for increasing rental payments, based upon the Consumer
Price Index for the Los Angeles area, over the term of the lease. The current
annual rental is $1,469,000. The lease requires payment of maintenance,
utilities, insurance and taxes. The partnership purchased the distribution
center for approximately $10,800,000.
The capital lease arrangements described above are all included in the lease
commitment table.
75
<PAGE> 76
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Shoppers Food, has a lease agreement for a 86,000 square foot office building
in Lanham, Maryland from a private partnership in which Haft family members own
all of the partnership interests. The lease is for 20 years and commenced in
1991. The lease provides for yearly increasing rental payments, based upon the
Consumer Price Index for the Washington, D.C. Metropolitan Statistical Area;
however, the increases shall not be more than 6% or less than 3%. The current
annual rental is $1,309,000. The lease requires payment of maintenance,
utilities, insurance and taxes. The partnership purchased the office building
for approximately $8,700,000 in July 1990. There are currently three
unaffiliated subtenants in the office building. These subtenants are leasing
approximately 30,000 square feet for a current annual rent of $574,000.
Pennsy Warehouse Leases
For a description of Dart's obligations under leases for three warehouses
located at 3301 Pennsy Drive, Landover, Maryland (the "Pennsy Leases"), see
Note 7.
Store Operating Lease Payments to Related Parties
During the fiscal years ended January 31, 1997, 1996 and 1995, respectively,
Trak Auto made rental payments of approximately $2,882,000, $2,914,000 and
$2,893,000 and Crown Books made rental payments of approximately $1,691,000,
$2,136,000, and $2,035,000 to partnerships in which members of the Haft family
own all or substantially all of the beneficial interests for both open and
closed stores. Shoppers Food made rental payments of approximately $5,384,000,
$5,985,000 and $5,327,000 (during Shoppers Food fiscal years ended June 29,
1996, July 1, 1995 and July 2, 1994, respectively) to partnerships in which
members of the Haft family own all or substantially all of the beneficial
interests. Total Beverage made rental payments of approximately $1,149,000,
$984,000 and $893,000 in fiscal 1997, 1996 and 1995, respectively. None of the
stores involved were acquired by the partnerships within the past two years.
In addition to the Executive Committee's legal review of the Pennsy Leases,
which resulted in litigation filed by Dart on February 10, 1995, the Executive
Committees of Dart, Trak Auto and Crown Books have undertaken a legal review of
other leasing arrangements and real estate related transactions between the
Company, on the one hand, and Haft-owned entities, on the other hand. On
December 17, 1996, Dart, Crown Books and Trak Auto filed a lawsuit against
Herbert H. Haft (Chairman of each such company) claiming breach of fiduciary
duty, fraud and waste in connection with certain of these lease transactions
76
<PAGE> 77
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
(other than the Pennsy Leases) with certain partnerships owned beneficially by
members of the Haft family.
Future Minimum Lease Payments to Related Parties
Dart's subsidiaries and affiliate, Trak Auto, Crown Books, Shoppers Food and
Total Beverage lease certain real property from Haft family owned partnerships.
The leased properties consist of 45 stores, three warehouses and the Shoppers
office building but, exclude the Pennsy Leases. These leases (other than the
Pennsy Leases) provide for various termination dates, which, assuming renewal
options are exercised, range from 1997 to 2031 and require the payment of
minimum rentals aggregating approximately $236,129,000 to the lease expiration
dates. Minimum rentals under these leases are approximately $111,739,000 to the
expiration of their original terms. Certain of these leases also require the
payment of a percentage of sales in excess of a stated minimum, as well as real
estate taxes and Consumer Price Index increases.
NOTE 5 - INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
(see Note 4)
Haft Family Employment Agreements and Other Compensation Arrangements
In April 1974, Dart entered into an employment agreement with Herbert H. Haft,
Chairman and Chief Executive Officer. The agreement, as amended, is renewable
each year for a successive ten-year term. The agreement, as amended, provides
for a base salary of $544,500 for the year ended January 31, 1986 and for
increases in base salary each year thereafter by the greater of (i) $12,000
plus ten percent of the base salary for the preceding fiscal year or (ii) the
increase in the cost of living. The agreement, as amended, further provides for
an annual bonus equal to 1 1/2% of Dart's consolidated pretax profit not
reduced as a result of transactions which are not ordinary and a supplemental
bonus based on certain performance criteria for the three-year period ended
January 31, 1988 and each three-year period thereafter. The supplemental bonus
equals the greatest of (i) 3% of the increase in the aggregate market value of
the Class A Common Stock on the last day of the three-year period over such
market value on the first day of such period; (ii) 3% of any excess in Dart's
consolidated stockholders' equity on the last day of the three-year period over
such stockholders' equity on the first day of such period; (iii) 3% of the
aggregate consolidated net income during the three-year period; and (iv) his
base salary and annual bonus for the last year of the three-year period.
Pursuant to the agreement, Herbert H. Haft may elect to receive all or part of
his compensation in the form of an option for shares of the Class A Common
Stock or defer receipt of all or part of such compensation. The
77
<PAGE> 78
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
agreement, as amended, also provides that Dart must lend to Herbert H. Haft the
funds necessary to purchase a $3,000,000 life insurance policy on his life
and/or the life of his former wife, Gloria Haft. Dart has elected not to charge
interest on the loan. In 1993, a shareholder derivative action was filed
challenging certain aspects of this employment agreement. In 1995, the Special
Litigation Committee concluded that it is in the best interests of Dart that
claims challenging Herbert H. Haft's employment agreement be dismissed except
to the extent that the validity of the "evergreen" provision (successive
ten-year terms) of the agreement is challenged.
In fiscal 1989 Dart/SFW Corp. ("Dart/SFW") was formed with the apparent intent
that Dart would hold 80 of Dart/SFW's 100 authorized shares of capital stock.
However, Dart/SFW's organizational documents are incomplete. In fiscal 1990,
Dart and Dart/SFW signed agreements with Herbert H. Haft and Robert M. Haft
that purportedly granted to each of them an option to purchase up to ten shares
of the common stock of Dart/SFW, or 10 percent of such stock on a fully diluted
basis, for $192,688 per share. Under the agreements, each such option is
exercisable in whole or in part during the period beginning on August 30, 1995
and ending on August 30, 2004; provided that such options become immediately
exercisable in the event of a Major Business Change (as defined in the option
agreements) and for a period of ten years thereafter. At any time within three
years after receipt of the Dart/SFW shares pursuant to the exercise of an
option, Herbert H. Haft or Robert M. Haft, as the case may be, may require Dart
to purchase all or part of such shares at their then fair market value, as
determined by an independent appraiser selected by Dart's Board of Directors.
Pursuant to agreements dated January 11, 1990, Herbert H. Haft assigned and
transferred his option to acquire ten shares of Dart/SFW to his two children,
Ronald S. Haft and Linda G. Haft, and Robert M. Haft assigned and transferred
options to acquire six shares of Dart/SFW to Trusts established for the benefit
of his two children, Michael A. Haft and Nicholas G. Haft. As part of the RSH
Settlement, Ronald S. Haft consented to the termination of his Dart/SFW
options.
The Executive Committee has undertaken a legal review of these options and, as
a result, is contesting their validity. Robert M. Haft has filed a lawsuit
seeking specific performance from Dart of these options. See Notes 8 and 12.
Dart accrues the estimated fair value of the Dart/SFW stock over the exercise
price of the options provided for in these agreements net of Ronald S. Haft's
options which terminated as a result of the RSH Settlement.
A 1987 resolution of Dart's Board of Directors (the "1987 Resolution") stated
that it would be appropriate for Herbert H. Haft and Robert M. Haft each to
78
<PAGE> 79
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
have the option to participate individually in acquisitions of other companies
by Dart. Their participation is to be on the same terms and conditions as
management of the acquired company might participate. Alternatively they may
purchase ten percent of Dart's interest in the acquired company on an
equivalent basis as Dart.
On February 22, 1995, the court ruled that this resolution entitled Robert M.
Haft to purchase for $149,000 ten percent of Dart's interest in the entity that
acquired the assets of Total Beverage's Chantilly, Virginia store. In June
1995, Herbert H. Haft advised the Board of Directors of his claim that the 1987
Resolution entitles him to a call on a 10% interest in Total Beverage
Corporation. The Executive Committee has advised Herbert H. Haft of its
opposition to this claim.
Incentive Stock Agreement
In fiscal 1990, Crown Books entered into an incentive stock agreement (the
"ISA") with Robert M. Haft, the former President of Crown Books. Under the
terms of the ISA, Crown Books issued 100,000 shares of common stock to Robert
M. Haft, subject to certain restrictions, in return for a non-interest bearing
promissory note, discounted at an 11% effective interest rate, of $203,750, due
January 2, 2004. The ISA provided that the stock certificate representing the
100,000 shares stated that the shares were subject to certain transfer
restrictions. Crown Books had the right to repurchase all or a portion of the
shares, subject to certain conditions, in the event Robert M. Haft voluntarily
terminated employment with Crown Books. Pursuant to the terms of the ISA, if
Crown Books terminated Robert M. Haft without cause, it must issue 100,000
shares of unrestricted common stock to him.
Crown Books recognized deferred compensation to Robert M. Haft under the ISA
with a combination of amortization of the discount on the note ($11,000
annually) and straight-line recognition of the difference between the market
price of Crown Books common stock on the date of grant and the purchase price
for the shares subject to the ISA ($194,000 annually).
When Robert M. Haft's employment with Crown Books terminated in June 1993,
Crown Books maintained that he had voluntarily terminated his employment, and
therefore Crown Books had a right to repurchase these shares. In August 1993,
Robert M. Haft filed a lawsuit against Dart, Crown Books and Trak Auto that,
among other claims, contested the right of Crown Books to repurchase the
shares, and alleged that Crown Books had terminated Robert M. Haft without
cause. The jury and the court in this litigation found in favor of Robert M.
Haft on these claims. On March 23, 1995 the court entered final judgement
79
<PAGE> 80
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
that Robert M. Haft was entitled to damages in the amount of $2,146,250, plus
interest, for Robert M. Haft's claims with respect to the ISA.
As a result of this litigation Crown Books expensed the remaining unamortized
deferred compensation totaling $1,424,000 (before income taxes) associated with
the ISA in the year ending January 31, 1996. In August 1996, Crown Books paid
Robert M. Haft approximately $2,146,000 (plus interest) for the 100,000 shares.
Crown books recorded the purchase of the shares as treasury stock.
Other Management Employment Agreements
The Company has entered into employment agreements with several key employees.
The agreements are for a one-year or two-year terms and are automatically
extended one to two years unless the individual is terminated with cause. The
agreements provide for annual increases following review and performance
appraisal by the Compensation Committee of the Board of Directors.
Executive Committee and Special Litigation Committee
In January 1994, the Board of Directors of Dart established a Special
Litigation Committee to assess, on behalf of Dart, whether to pursue, settle or
abandon, claims raised in the derivative lawsuits filed against Dart. See Note
8 for a discussion of the derivative lawsuits.
The Board of Directors of Dart established an Executive Committee of the Board
of Directors on September 7, 1994. The Executive Committee has the authority to
conduct the affairs of Dart with respect to matters that are the subject of
disputes between the Chairman of the Board and Chief Executive Officer, Herbert
H. Haft, and the then President and Chief Operating Officer of Dart, Ronald S.
Haft. Members of the Executive Committee are Douglas M. Bregman, Larry G.
Schafran and Bonita Wilson, with Mr. Schafran as the Chairman of the Executive
Committee. Any and all actions of the Executive Committee are required to be
approved without a dissenting vote. On October 11, 1994, the Boards of
Directors of Trak Auto, Crown Books and Total Beverage each established an
Executive Committee of their respective Boards of Directors with authority
parallel to that of Dart's Executive Committee.
Members of the Executive Committee are compensated at a rate of $275 per hour
plus reimbursement of expenses. Members of the Special Litigation Committee of
the Board of Directors have been compensated at a rate of $250 per hour plus
reimbursement of expenses. During the years ended January 31, 1997 and January
31, 1996, the compensation paid by Dart and its subsidiaries to members of the
respective Executive Committees for their services on those
80
<PAGE> 81
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
committees totaled $1,299,000 and $1,263,000, respectively. Compensation paid
by Dart and its subsidiaries to members of the Special Litigation Committee for
their service on that committee during the year ended January 31, 1995 was
$269,000, exclusive of expense reimbursement. There were no fees paid to
members of the Special Litigation Committee in fiscal 1997 and 1996.
NOTE 6 - SETTLEMENT WITH RONALD S. HAFT
In October 1995, Dart and Ronald S. Haft entered into the RSH Settlement. The
RSH Settlement transactions are subject to legal challenges (see Note 8). If
sustained, the RSH Settlement transactions were intended to have the effect, by
their terms, of transferring majority control of Dart's voting stock to one or
more voting trustees (the "Voting Trustees") under a Voting Trust Agreement
(the "Voting Trust Agreement"), by and among Ronald S. Haft, Dart and Larry G.
Schafran and Sidney B. Silverman as initial Voting Trustees. On December 28,
1995, the initial Voting Trustees resigned and appointed Richard B. Stone as
successor Voting Trustee. If the RSH Settlement is not sustained, it would
significantly affect the accounting treatment for the settlement as reflected
in the accompanying financial statements as described below.
Terms of Settlement with Ronald S. Haft
Dart has recorded the following RSH Settlement transactions:
Dart recorded the purchase of an option for 197,048 shares of Class B Common
Stock by Ronald S. Haft. The option had not previously been recognized by Dart.
In addition, the option to purchase such shares, pursuant to Ronald S. Haft's
employment agreement, was amended to increase the exercise price from $89.65 to
$140.00 per share. These 197,048 shares of Class B Common Stock were issued to
Ronald S. Haft pursuant to his exercise of the option in exchange for $197,048
in cash and a secured promissory note from Ronald S. Haft in the principal
amount $27,389,672 (the "$27.4 Million Note"). The $27.4 Million Note is due
June 30, 2000, subject to earlier prepayment in the event of a disposition of
the shares of stock held by the Voting Trustees. Interest on the $27.4 Million
Note accrues at 8% and is due at maturity. Immediately after issuance of the
197,048 shares of Class B Common Stock to Ronald S. Haft, he assigned to the
Voting Trustees such shares as well as 25,246 shares of Class B Common Stock
that he owned previously.
Ronald S. Haft transferred to Dart 172,730 shares of Class B Common Stock in
exchange for 288,312 shares of Class A Common Stock. The 288,312 shares of
Class A Common Stock have been placed into the Voting Trust established under
the Voting Trust Agreement and the 172,730 shares of Class B Common Stock have
81
<PAGE> 82
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
become treasury shares, which are not entitled to vote. Prior to the RSH
Settlement, Herbert H. Haft exercised voting rights with respect to such Class
B shares. In addition, Ronald S. Haft assigned to the Voting Trust 86,173
shares of Dart Class A Common Stock (subject to competing claims as to 58,029
of those shares) and agreed to assign to the Voting Trust an additional 33,333
shares of Dart Class A Common Stock currently pledged as security for a bank
debt of Ronald S. Haft.
Dart transferred $37,925,710 in cash to Ronald S. Haft and received from him a
$37,740,162 secured promissory note (the "$37.7 Million Note"), which is due
June 30, 2000, subject to earlier prepayment in the event of a disposition of
the shares of stock held by the Voting Trustees. Interest accrues at 8% and is
due at maturity.
A Buy/Sell/Offering Agreement between Dart and Ronald S. Haft governs the
ultimate disposition of the shares held by the Voting Trustee. That agreement
gives Ronald S. Haft the right to "put" to Dart the stock held by the Voting
Trustee at any time between January 1, 1997 and December 31, 1999, subject to
certain conditions. Dart has an option to "call" the shares held by the Voting
Trustee, if they have not previously been disposed of as described above, at
any time during the first seven months of the year 2000.
The $37.7 Million Note and the $27.4 Million Note that Ronald S. Haft has given
to Dart in connection with the RSH Settlement both have a stated maturity date
of June 30, 2000, but will be due and payable upon the closing of a "put" or
"call" under the Buy/Sell/Offering Agreement. The price of the shares purchased
by Dart upon the closing of a "put" or "call" would be offset against the
principal and interest due on these two promissory notes. With respect to the
222,294 shares of Class B Common Stock held by the Voting Trustee, Ronald S.
Haft may (instead of including them in the "put") exchange them for 244,523
shares of Class A Common Stock (i.e., a 1.1 to 1 exchange ratio) and offer
those 244,523 shares of Class A Common Stock to the public. Dart has an option
to "call" the shares held by the Voting Trustee, if they have not previously
been disposed of as described above, at any time during the first seven months
of the year 2000.
All of the 222,294 Class B shares in the Voting Trust, as well as the related
voting trust certificates issued to Ronald S. Haft under the Voting Trust
Agreement, have been pledged to Dart and CMREC as security for certain loans
made to Ronald S. Haft and other obligations of Ronald S. Haft arising under
the RSH Settlement.
The $27.4 Million Note and the $37.7 Million Note are recourse subject to
82
<PAGE> 83
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
certain limitations and are recorded as Notes Receivable - Shareholder on the
Company's balance sheet and have been included as a component of Stockholders'
Equity.
Dart transferred an additional $11,621,276 in cash to Ronald S. Haft in escrow,
and such funds have been tendered to Herbert H. Haft as prepayment of a Ronald
S. Haft promissory note to Herbert H. Haft, which promissory note was
originally given as partial payment for the 172,730 shares of Class B Common
Stock discussed above. In exchange for a loan of $11,621,276 from Dart, Ronald
S. Haft gave Dart a secured promissory note of $11,621,276 (the "$11.6 Million
Note"), due June 30, 2000, subject to earlier prepayment upon the sale of the
CMREC properties (discussed below). The $11.6 Million Note accrued interest at
an annual rate of 6.61%, payable December 31 of each year beginning December
31, 1995.
As part of the RSH Settlement, Dart and CMREC agreed to the sale of the five
properties which CMREC owned through joint ventures with Haft-owned entities.
Until a sale CMREC retained a $2.0 million interest in the properties and CMREC
received 1% of the ordinary income and losses generated by the joint ventures
and was a general partner in the joint ventures. (Ronald S. Haft and entities
controlled by him received the remaining 99%.) As a result, the real estate
joint ventures were no longer consolidated with the Company's financial
statements as of October 6, 1995. In connection with the agreement to sell the
five properties, therefore, Dart recorded a loss of $14.6 million for the
write-down of the CMREC partnership interest to fair value based upon an
independent third party valuation. Prior to settlement discussions with Ronald
S. Haft, Dart and CMREC had no intention to dispose of these assets.
In May 1996, the five properties were sold pursuant to the terms of the RSH
Settlement. As a result of the sale, Dart received $2.0 million of the proceeds
for its retained interest in the joint ventures and Ronald S. Haft repaid the
$11.6 Million Note to Dart plus accrued interest. In addition, approximately
$32.6 million of CMREC's share of the net proceeds from the sale of the
properties are held in escrow and will be payable to Ronald S. Haft if certain
transactions contemplated by the RSH Settlement are effected.
Ronald S. Haft and Dart have agreed to various transactions relating to certain
warehouse and office facility properties that Dart and/or Trak Auto lease from
Haft-owned entities (collectively, the "Warehouse Transactions"). The
properties include Dart's headquarters in Landover, Maryland, Trak Auto's
distribution centers in Ontario, California and Bridgeview, Illinois (the
"Distribution Centers") and some of Dart's former warehouse and office facility
in Landover, Maryland (the "Pennsy Warehouses"). The primary intent
83
<PAGE> 84
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
of the Warehouse Transactions is to transfer interests controlled by Ronald S.
Haft in some or all of the properties to entities controlled by Dart, and amend
the leases to reduce or, in the case of the Pennsy Warehouses, eliminate the
rents being paid by Dart or Trak Auto. The Warehouse Transactions are subject
to contingencies, including bankruptcy court and mortgagee approval to the
extent any is necessary, to challenges brought by Herbert H. Haft concerning
the extent of Ronald S. Haft's ownership interest in certain of the properties
and with respect to the properties in Landover, Maryland and Bridgeview,
Illinois, claims asserted by Robert M. Haft and Linda G. Haft regarding the
extent to which Ronald S. Haft controls the partnerships owning such
properties. As of January 31, 1997, Dart has only recorded its interest in two
of the three Pennsy Warehouses. These interests were recorded at an amount
equal to the mortgages on these warehouses. Dart reduced the reserve for Pennsy
Warehouse Leases by approximately $14.0 million, recorded as additional
Paid-in-Capital. Dart and/or Trak Auto expect to continue to fund the rental
payments on the remaining properties until such time as the various
contingencies surrounding these transfers are resolved. Accordingly, Dart has
not recorded the buyout of the lease obligations for the Distribution Centers.
These properties continue to be accounted for as capital leases. Accordingly,
the capital lease obligation of $30.2 million and the net book value of $16.5
million has not been reversed and the corresponding fair values of the
Distribution Centers and related mortgages have not been recorded. Depending
upon the outcome of these contingencies, the accounting treatment of the
transfer (described above) in the financial statements could be significantly
affected.
As part of the RSH Settlement, Ronald S. Haft resigned all of his positions as
a director and officer of Dart and all of its subsidiaries, and consented to
the termination of his employment agreement. The Standstill Order (described
below) contemplates that Ronald S. Haft will continue as a director of Dart
while the Standstill Order is in effect. (Herbert H. Haft contends that Ronald
S. Haft is no longer a director.) Dart recorded compensation expense of $2.0
million for the present value of the remainder of the contract and reversed all
prior accruals under the employment contract resulting in additional
Paid-in-Capital of approximately $2.5 million.
Ronald S. Haft consented to termination of all of his outstanding stock options
from Dart and its subsidiaries, including options for five shares of Dart/SFW
Corp. As a result, in fiscal 1996 Dart reduced its accrual by approximately
$2.8 million for its expense associated with the Dart/SFW Corp. options,
resulting in additional Paid-in-Capital. The total unpaid accrued balances of
$5.3 million related to both the termination of Ronald S. Hafts' employment
contract and Dart/SFW Corp. options were recorded as additions to
84
<PAGE> 85
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Paid-in-Capital as they were considered reductions in the costs of the RSH
Settlement.
As a result of the RSH Settlement, Dart also reduced its accrual for legal
expenses by approximately $2.0 million for litigation involving the Pennsy
Warehouses. However, Dart accrued or paid an additional $3.5 million for legal
and/or consulting services associated with the RSH Settlement.
The RSH Settlement is the subject of legal challenges raised by Robert M.
Haft, Gloria Haft and Linda Haft and, separately, by Herbert H. Haft. In
connection with such legal challenges, the court entered a Standstill Order,
which restricts certain actions of Dart until further order of the court. See
Note 8.
The documents implementing the RSH Settlement contain certain provisions
intended to protect Dart's interests if a challenge to the RSH Settlement is
accepted by the court. In general terms, these provisions include the
following:
a) If the court does not approve the settlement in the Kahn action (see
Note 8), Dart will have the right to cause the RSH Settlement
transactions to be reversed, except that (i) Ronald S. Haft will have
up to two years to repay the $37.7 Million Note, (ii) the Warehouse
Transactions will proceed and (iii) the sale of CMREC joint venture
properties will stand, but without any assignment to Ronald S. Haft of
CMREC's portion of the sale proceeds.
b) If Herbert H. Haft succeeds through his rescission claim in reacquiring
ownership of the 172,730 shares of Class B Common Stock transferred by
Ronald S. Haft to Dart as part of the RSH Settlement, repayment of
$24.2 million of the principal amount of the $37.7 Million Note will be
due within two years and the 288,312 shares of Dart Class A Common
Stock issued to Ronald S. Haft under the RSH Settlement will be
returned to Dart.
c) If a court rules that Ronald S. Haft cannot transfer the 172,730 shares
of Class B Common Stock to Dart because of the impact on Herbert H.
Haft's preexisting proxy from Ronald S. Haft to vote those shares, then
$8.0 million of the CMREC sale proceeds will be held in escrow until
the transfer occurs and may, under certain circumstances be returned to
Dart.
d) If a court determines that the 197,048 shares of Class B Common Stock
issued to Ronald S. Haft are not validly issued or that the Voting
Trustees are not entitled to vote the shares they hold, then Dart will
have the same
85
<PAGE> 86
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
rights (discussed above) as in the event that the Court does not
approve the settlement of the Kahn lawsuit. Alternatively, Dart could
elect that the 197,048 shares of Class B Common Stock be returned to
Dart, that the $27.4 million promissory note be canceled and that
Ronald S. Haft pay $8.0 million to Dart within two years.
NOTE 7 - PENNSY WAREHOUSE LEASES
The Pennsy Leases cover a 533,800 square foot facility consisting of office
space and three warehouses once occupied and used by the Dart Drugstore chain,
a predecessor of Dart. The warehouses and office space are not required by Dart
for its operations. These warehouses are owned by partnerships in which members
of the Haft family own all the general and limited partnership interests. The
office space and warehouses were built by Haft partnerships between 1965 and
1974; Warehouse I and the offices were built in 1965, Warehouse II in 1971 and
Warehouse III was built in 1974. The facility is located at 3301 Pennsy Drive,
Landover, Maryland.
Trak Auto, Crown Books and Shoppers Food utilize space in Warehouses II and III
at a variable rental (approximately $268,000 per year) dependent on square
footage used. This arrangement continues on a month-to-month basis. The
arrangement requires Trak Auto, Crown Books and Shoppers Food each to pay for
its share of common area maintenance, real estate taxes and insurance premiums.
The buildings have fallen into disrepair. Deferred maintenance is estimated at
between $2.0 million and $3.0 million. On November 21, 1994, Dart's Executive
Committee received a report indicating the presence of friable asbestos in
Warehouses I and II as well as the existence of asbestos located in certain
intact floor tiles in Warehouse III. Some asbestos-containing material has
fallen on particular store fixtures and material stored in Warehouse I.
However, tests demonstrated that the level of airborne asbestos did not exceed
the legal limits. With respect to Warehouse III, Dart has determined that the
presence of asbestos-containing materials in the floor tiles did not render
Warehouse III unsafe, because the materials were intact and the asbestos was
non-friable. No friable asbestos was located in the portion of Warehouse III
used by Trak Auto, Crown Books and Shoppers Food.
The removal of asbestos from Warehouse II and III was completed in March 1996
and thereafter Trak Auto, Crown Books and Shoppers Food started to use space in
Warehouse II. Dart is continuing to repair Warehouses II and III.
Warehouse I remains secured and unused.
86
<PAGE> 87
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
The Pennsy Leases expire September 30, 2016 and provide for increasing rental
payments based on the Consumer Price Index. The leases are "triple net" leases,
in that, in addition to rental payments, Dart is responsible for all expenses,
including but not limited to real estate taxes, all utilities, insurance and
maintenance. These estimated outflows would substantially impair the future
cash flows of Dart. In 1994, Dart's Executive Committee undertook a legal
review of the subject leases from their inception. As a result of this legal
review, on February 10, 1995, Dart filed a complaint for rescission of the
Pennsy Leases and for the return of rent paid since the reassumption of the
Pennsy Leases. If the RSH Settlement is not sustained and the leases remain
enforceable, Dart will pay in excess of $68.2 million in rent to the Haft
interests, plus an additional $13.9 million in "triple net" expenses. The net
present value of future payments, discounted at a rate of 6%, and eliminating
the effect of estimated future inflation of 4%, is approximately $32.2 million.
At the end of the lease term Dart retains no residual value in either the land
or buildings.
During fiscal 1995, Dart revised its expectations of future sublease income and
increased the reserve for the obligations represented by these leases to $32.3
million from $9.6 million, an increase of $22.7 million. As part of the RSH
Settlement (see Note 6), Ronald S. Haft agreed to transfer the real estate and
the partnership interests controlled by him in the Pennsy Leases to Dart. The
transfer of the partnership interest reduced Dart's obligation under the
leases. Accordingly, Dart reversed $14.0 million of the reserve with respect to
Warehouses II and III. The transfer contemplated in the RSH Settlement is
subject to contingencies, including bankruptcy court with respect to Warehouse
II and III and mortgagee approval to the extent any is necessary, and to
challenges brought by Herbert H. Haft concerning the extent of Ronald S. Haft's
ownership interest in certain of the properties. Depending upon the outcome of
these contingencies, the accounting treatment of the transfer (described above)
in the financial statements could be significantly affected.
The following summarizes the activity in the reserve:
<TABLE>
<CAPTION>
(dollars in thousands)
1997 1996
---------- ----------
<S> <C> <C>
Reserve, beginning of year $ 18,467 $ 31,892
Add: Interest accrued 981 1,655
Less: Payments made (880) (1,080)
Reversal of reserve - (14,000)
--------- ---------
Reserve, end of year $ 18,568 $ 18,467
========= =========
</TABLE>
87
<PAGE> 88
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
NOTE 8 - LITIGATION
Robert M. Haft Litigation
In August 1996, Dart and Crown Books paid approximately $21.0 million and $16.9
million, respectively, (including interest of approximately $3.3 million) for
satisfaction of the RMH Judgment. The Company accrued approximately $32.2 of
the RMH Judgment in fiscal 1995 and accrued interest monthly. Pursuant to the
RMH Judgment, Crown Books also paid $2.1 million to Robert M. Haft for 100,000
shares of Crown Books common stock. Crown Books recorded these shares as
treasury shares. The Company has filed a lawsuit against Herbert H. Haft to
recover these amounts.
Derivative Litigation
In September 1993, Alan R. Kahn and the Tudor Trust (the "Kahn Derivative
Plaintiffs"), shareholders of Dart, filed a lawsuit naming as defendants
Herbert H. Haft, Ronald S. Haft, Douglas M. Bregman, Bonita A. Wilson,
Combined Properties, Inc. ("CPI"), Combined Properties Limited Partnership and
Capital Resources Limited Partnership. The suit is brought derivatively and
names as nominal defendants Dart, Trak Auto, Crown Books, Shoppers Food, Total
Beverage and CMREC.
The complaint, as amended on January 12, 1995, alleges waste, breach of
fiduciary duty, violation of securities laws and entrenchment in connection
with various lease agreements between the Combined Properties defendants and
Dart and its subsidiaries, the termination of Robert M. Haft, the compensation
paid to Ronald S. Haft and Herbert H. Haft, the employment agreement entered
into by Ronald S. Haft and Dart on August 1, 1993 (the "RSH Employment
Agreement"), the sale of 172,730 shares of Class B Common Stock by Herbert H.
Haft to Ronald S. Haft, and the compensation paid to the Executive Committee.
Plaintiffs seek an accounting of unspecified damages incurred by Dart, voiding
of the options sold to Ronald S. Haft, appointment of a temporary custodian to
manage the affairs of Dart or to oversee its recapitalization or sale and costs
and attorneys' fees.
In November 1993, Robert M. Haft filed a lawsuit naming as defendants Herbert
H. Haft, Ronald S. Haft, Douglas M. Bregman, and Bonita A. Wilson, and also
names Dart as a nominal defendant. The complaint derivatively alleges
interested director transactions, breach of fiduciary duty and waste in
connection with the RSH Employment Agreement. Robert M. Haft also brings
individual claims for breach of contract and dilution of voting rights in
connection with the sale of shares of Class B Common Stock by Herbert H. Haft
88
<PAGE> 89
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
to Ronald S. Haft and the RSH Employment Agreement. The complaint seeks
rescission of the sale of such shares and the RSH Employment Agreement,
unspecified damages from the individual directors, and costs and attorneys'
fees.
In January 1994, a Special Litigation Committee was appointed by the Board of
Directors to assess, on behalf of Dart, whether to pursue, settle or abandon
the claims asserted in these two derivative lawsuits. In September 1994, the
Special Litigation Committee moved for dismissal of certain claims in these
derivative lawsuits and for realignment of the parties to permit Dart to
prosecute other claims in those derivative lawsuits. Thereafter, the Special
Litigation Committee amended its motion and advised the court that it had
instituted certain lawsuits concerning related party real estate transactions,
(see the Pennsy Warehouse Litigation, described below), and was considering
asserting additional claims, certain of which have since been asserted in (see
the Lawsuit Against Herbert H. Haft Concerning Haft-Owned Real Estate, see Item
3 - Legal Proceedings). The amended motion is still pending before the court.
In connection with the RSH Settlement, the plaintiff shareholders, Ronald S.
Haft, CPI, Dart, Trak Auto and Crown Books entered into a Stipulation and
Agreement of Compromise, Settlement and Release (the "Stipulation"). Pursuant
to the Stipulation, the claims against Ronald S. Haft and CPI will be dismissed
on the merits and with prejudice as against the shareholder plaintiffs and Dart
and its subsidiaries, if the RSH Settlement and dismissal of these claims are
approved by the court.
Given that these actions are brought in the name of Dart and its subsidiaries,
recovery in them would inure to the benefit of Dart and its subsidiaries if the
claims are successfully litigated or settled. Therefore, in the opinion of
management, resolution of these actions will not have a material adverse effect
on the consolidated financial condition or results of operations of the
Company.
Pennsy Warehouse Litigation
In fiscal 1995, the Executive Committee of Dart's Board of Directors undertook
a legal review of the Pennsy Leases. As a result, in February 1995, Dart filed
a complaint (the "Pennsy Warehouse Litigation") alleging breaches of fiduciary
duty, waste and other irregularities by certain members of the Haft family and
others in connection with the Pennsy Leases and, in particular, with the
resumption of rental payments for these warehouses in 1991. The complaint seeks
rescission of the Pennsy Leases, restitution of approximately
89
<PAGE> 90
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
$5.0 million of rent and other expenses paid since 1991 and other monetary
damages.
Robert M. Haft Stock Option Litigation
On February 10, 1995, Robert M. Haft filed a complaint against Dart seeking
specific performance or damages in connection with the refusal of Dart to issue
shares of Class A Common Stock to him pursuant to his exercise of certain
options purportedly granted to him by Dart. Robert M. Haft allegedly received
these options on three separate occasions: (i) pursuant to the Dart Drug
Corporation Executive Non-Qualified Stock Option Plan (the "1983 Plan"), under
which Robert M. Haft allegedly received options to purchase 120,000 shares of
Class A Common Stock; (ii) pursuant to the Dart Drug Corporation 1987 Executive
Non-Qualified Stock Option Plan (the "1987 Plan"), under which Robert M. Haft
allegedly received options to purchase 99,750 shares of Class A Common Stock;
and (iii) pursuant to a Stock Option Agreement (the "1989 Agreement") dated as
of August 30, 1989, among Dart, Dart/SFW Corp. ("Dart/SFW") and Robert M. Haft,
under which Robert M. Haft allegedly received options to purchase 10 shares (or
10%) of common stock of Dart/SFW.
Dart is contesting the validity of the options granted to Robert M. Haft
pursuant to the 1983 Plan, the 1987 Plan and the 1989 Agreement. Dart filed a
counterclaim on July 17, 1995 asking that the stock option plans and stock
option agreement that are the subject of the litigation be declared void,
rescinded and unenforceable.
Herbert H. Haft Proxy Litigation
In connection with Herbert H. Haft's sale of 172,730 shares of Class B Common
Stock to Ronald S. Haft on July 28, 1993 (the "Stock Sale Agreement"), Ronald
S. Haft purportedly granted Herbert H. Haft an irrevocable proxy (the "Proxy")
to vote these shares of stock. In June 1995, Ronald S. Haft purportedly revoked
this proxy.
On July 18, 1995, Ronald S. Haft filed a lawsuit against Herbert H. Haft and,
nominally, Dart for Herbert H. Haft's alleged breach of contract and breach of
fiduciary duties to Ronald S. Haft and to Dart in connection with the Proxy. In
this action, Ronald S. Haft seeks a declaration that the Proxy is revocable or
would be revocable under certain conditions, as well as costs and attorneys'
fees. Ronald S. Haft also requests that the court require Dart to refuse to
recognize the validity of the Proxy. On August 9, 1995, Herbert H. Haft filed
an Answer and Counterclaim denying liability and requesting rescission of the
Stock Sale Agreement because of Ronald S. Haft's alleged
90
<PAGE> 91
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
breach of contract and other grounds. On September 25, 1995, Dart filed its
answer in this action. Both Ronald S. Haft and Herbert H. Haft moved for
summary judgment in this lawsuit. On November 14, 1995, the court denied Ronald
S. Haft's motion for summary judgment; Herbert H. Haft's motion for summary
judgment remains pending.
As part of the RSH Settlement, Dart purchased from Ronald S. Haft the 172,730
shares of Class B Common Stock that were subject to the Proxy and the shares
have become treasury shares (see Note 6).
Section 225 Action by Robert, Gloria and Linda Haft
On October 17, 1995, Robert M. Haft, Gloria G. Haft and Linda G. Haft
(collectively, "RGL") filed a lawsuit (the "Section 225 Action"), naming as
defendants Dart and all of its directors. RGL seek an order, under Section 225
of the Delaware General Corporation Law, declaring that RGL validly removed all
of Dart's directors and replaced them with three individuals (John L. Mason,
Ellen V. Sigal and Michael Ryan), whom RGL purport to have elected. Such
purported election is premised on RGL's contention that RGL own a majority of
Dart's voting stock because, they argue, (i) the 172,730 Class B shares subject
to Herbert H. Haft's proxy have been purchased by Dart and may not be voted and
(ii) the shares of Class B Common Stock placed in a voting trust (the "Trust
Shares") by Ronald S. Haft pursuant to the RSH Settlement also are not entitled
to vote because they have been unlawfully issued or they should be deemed to be
owned by Dart.
Dart's position is that this lawsuit is without merit and that the purported
action by RGL to reconstitute the Board of Directors is invalid. On October
27, 1995, Dart filed a motion for summary judgment.
Challenge to RSH Settlement by Herbert H. Haft
On November 6, 1995, Herbert H. Haft filed a lawsuit naming as defendants Dart,
and certain of its directors. Herbert H. Haft seeks a judgment (i) declaring
the RSH Settlement unlawful, hence null and void; (ii) declaring either that
172,730 shares of Class B Common Stock belong to him, were wrongfully sold by
Ronald S. Haft to Dart, and that Herbert H. Haft is entitled to restitution of
such shares or, alternatively, that his purportedly irrevocable proxy on the
172,730 shares continues to be valid; (iii) declaring that Herbert H. Haft
retains voting control of Dart or, at a minimum, 34.55% of Dart's voting power;
(iv) declaring that the Trust Shares may not be lawfully voted; and (v) other
matters.
91
<PAGE> 92
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
On December 5, 1996, Herbert H. Haft filed a motion for partial summary
judgment. Dart opposed this motion for partial summary judgment and, on March
14, 1997, the court denied Herbert H. Haft's motion in its entirety.
A trial date has not yet been scheduled. In the event Herbert H. Haft prevails
at trial, there could be a significant effect on the accounting treatment for
the RSH Settlement that has been reflected in the Company's financial
statements. See Note 6.
Standstill Order
In connection with legal challenges to the RSH Settlement, on December 6, 1995,
the Delaware Court of Chancery entered a Standstill Order (the "Standstill
Order"), which restricts certain actions by Dart. Without further order of the
court, Dart may not (i) change its Certificate of Incorporation or Bylaws; (ii)
change the current composition of Dart's Board of Directors (Herbert H. Haft,
Ronald S. Haft, Larry G. Schafran, Bonita A. Wilson and Douglas M. Bregman) or
any of its subsidiaries; (iii) change the current Haft family officers of Dart
or any of its subsidiaries; or (iv) issue any additional securities of Dart or
any of its subsidiaries (except employee stock options issued in the ordinary
course of business). In addition, without first giving Herbert H. Haft and
certain other litigants not less than seven days' written notice, Dart may not
take any extraordinary actions, including but not limited to actions that would
result in (a) the liquidation of Dart or any of its subsidiaries, (b) the sale
of any major subsidiary of Dart or (c) the disadvantage of any Class B
stockholder of Dart through any debt transaction. For purposes of the
Standstill Order, the phrase "extraordinary actions" means any transaction,
contract or agreement, the value of which exceeds $3 million.
Possible Settlements
On April 21, 1997, Dart reached a conditional settlement agreement in principle
with Herbert H. Haft. If the settlement contemplated by the conditional
agreement in principle is implemented, Herbert H. Haft would retire from his
positions as Chairman of Dart, Shoppers Food, Trak Auto and Crown Books.
Herbert H. Haft also would relinquish his claim to voting control of Dart.
Under the settlement contemplated by the conditional agreement in principle,
Herbert H. Haft would sell to Dart, Trak Auto and Crown Books all of his shares
of stock and stock options in these companies. The settlement also would
terminate Herbert H. Haft's employment agreement with Dart and resolve all
outstanding litigation and disputes between Dart and Herbert H. Haft. Herbert
H. Haft
92
<PAGE> 93
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
would also assign certain real estate interests to Dart.
Herbert H. Haft would receive approximately $30 million from Dart if the
settlement is implemented. Herbert H. Haft would also receive an additional
$11.6 million from escrowed funds previously paid by Dart to Ronald S. Haft as
part of the RSH Settlement (plus $700,000 interest on those funds). The
conditional agreement in principle also contemplates that Dart would make a $10
million loan to a partnership owned by Herbert H. Haft and Ronald S. Haft,
which loan would be secured by such partnership's interests in three shopping
centers located in suburban Washington, D.C. and would be personally guaranteed
by Ronald S. Haft.
Implementation of the conditional agreement in principle is subject to the
negotiation of a definitive settlement agreement satisfactory to Dart and
Dart's receipt of satisfactory advice from its investment bankers. The
conditional agreement in principle states that it will terminate if a
definitive settlement agreement is not entered into by May 9, 1997.
The conditional agreement in principle is also conditioned on Dart's entering
into a supplemental settlement with Ronald S. Haft and a comprehensive
settlement with RGL. Negotiations with respect to these related settlements are
currently underway. Current settlement discussions contemplate that Dart, Trak
Auto and Crown Books would collectively pay approximately $50 million in
exchange for all of RGL's equity interests in these companies and certain real
estate interests. There can be no assurance that such settlements will be
reached or as to the terms or timing of any settlement, if one occurs.
Closing of the transactions contemplated by the conditional agreement in
principle also is subject to (i) final and non-appealable action by the
Delaware Court of Chancery or the Delaware Supreme Court approving all of the
terms of the settlement, terminating certain putative derivative actions
pending with respect to Dart and Crown Books in the Delaware Court of Chancery,
and approving the RSH Settlement and the supplemental settlement between Dart
and Ronald Haft, and (ii) final and non-appealable action by the U.S.
Bankruptcy Court approving the effectiveness of Chapter 11 plans of
reorganization for certain real estate entities owned by Haft family members.
There can be no assurance that a definitive settlement agreement between Dart
and Herbert H. Haft will be entered into and that the transactions contemplated
by the conditional agreement in principle will be implemented.
93
<PAGE> 94
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Any settlement with RGL (including any financing of such settlement) would
require further order of the Delaware Court of Chancery under the Standstill
Order and could be opposed by Herbert H. Haft if Dart does not settle with him.
A closing of any settlement with RGL would be subject to available financing
and the proposed settlement with Herbert H. Haft would be subject to the
receipt of advice by Dart from its financial advisor that adequate financing
would be available at closing. Dart and its subsidiaries do not presently have
cash available to pay the approximately $90 million (including the loan of $10
million) contemplated by the possible settlements but are considering various
options to finance them.
Other
In the normal course of business, the Company is involved in various claims and
litigation. In the opinion of management, liabilities, if any, will not have a
material adverse effect upon the consolidated financial condition and results
of operations of the Company.
The Company recorded legal expenses of approximately $22.4 million, $7.2
million and $18.4 million during the years ended January 31, 1997, 1996 and
1995, respectively. These amounts include estimated future expenses that likely
will be necessary to resolve all litigation discussed above.
NOTE 9 - CREDIT FACILITIES
On September 12, 1996, Crown Books entered into a revolving credit facility
with a finance company to borrow up to $50 million. Crown Books intends to use
proceeds from draw-downs under the credit facility for working capital and
other corporate purposes. The agreement has an original term of three years.
Borrowing under the credit facility include revolving loans and letters of
credit which bear interest at a rate equal to the prime rate (as defined in the
credit agreement) and LIBOR loans which bear interest at LIBOR plus 2.25%.
Interest on prime rate borrowings is payable monthly. Interest and principal on
LIBOR loans is payable between one and six months from the borrowing date.
LIBOR loans are subject to a prepayment penalty and may be continued for
subsequent one to six month periods. LIBOR loans may be converted to prime rate
loans and vice versa. The agreement includes a facility fee of .25% on the
unused principal balance, as defined. No single advance may be outstanding for
more than 36 months.
Borrowings under the credit facility are secured by Crown Books' inventory,
accounts receivable and proceeds from the sale of such assets of Crown Books.
94
<PAGE> 95
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
The credit facility also contains certain restrictive covenants,
including a limitation on the incurrence of additional indebtedness and places
a $13.1 million limitation on payments to settle disputes with Haft family
members. There are additional covenants related to tangible net worth. Loans
under the credit facility are subject to limitations based upon eligible
inventory levels, as defined in the agreement. Crown Books may terminate the
credit facility upon 60-days prior written notice to the lender and the lender
may terminate it as of September 12, 1999 or on any anniversary date thereafter
upon 60-days prior written notice to Crown Books. During fiscal 1997 Crown
Books began borrowing under the credit facility. The maximum borrowings
outstanding at any one time during fiscal 1997 were $15,621,000 and there was
no outstanding balance as of February 1, 1997. Crown Books had $25.0 million
available for borrowing at February 1, 1997. In connection with its expansion
program, Crown Books anticipates increasing its borrowing under its revolving
credit facility, subject to limitations contained in the loan agreement. To
increase the limit from $25.0 million to $35.0 million, Crown Books is required
to maintain a minimum tangible net worth of $73.0 million as of the fiscal year
end preceding the election and for each fiscal year end thereafter, and to
maintain a minimum tangible net worth of $70.0 million as of the election date
and thereafter, in addition to other covenants. To increase the limit from
$35.0 million to $50.0 million, Crown Books is required to maintain a minimum
tangible net worth of $75.0 million as of the fiscal year end preceding the
election and for each fiscal year end thereafter, in addition to other
covenants. The average borrowings (calculated from the inception of the
agreement) and weighted average interest rate for fiscal 1997 were $4,263,000
and 8.25%.
In December 1996, Trak Auto entered into a revolving credit facility (the "Trak
Auto Facility") with a finance company to borrow up to $25.0 million. Trak Auto
intends to use proceeds from drawdowns under the Trak Auto Facility for working
capital and other corporate purposes. The Trak Auto Facility has an original
term of three years. Borrowings under the Trak Auto Facility bear interest at
rates ranging from prime rate minus 0.50% to prime rate plus 0.25%, for prime
rate loans, and LIBOR plus 1.5% to LIBOR plus 2.25%, for LIBOR loans. Interest
rates are based upon Trak Auto's ratio of debt to tangible net worth.
Borrowings are limited to eligible inventory levels, as defined and are secured
by Trak Auto's inventory, accounts receivable, and proceeds from the sale of
such assets. The Trak Auto Facility contains certain restrictive covenants
including limitations on additional indebtedness, advances to affiliates and
payments (limited to $25.0 million) or guarantees (limited to $20.0 million of
the $25.0 million) to settle disputes with Haft family members and includes a
maximum leverage ratio covenant.
95
<PAGE> 96
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Interest on prime rate loans is payable monthly. Interest and principal on
LIBOR loans is payable between one and six months from the borrowing date.
LIBOR loans are subject to a prepayment penalty and may be continued for a
subsequent one to six month period. LIBOR loans may be converted to prime rate
loans and visa versa. The Trak Auto Facility includes a facility fee of .25% on
the unused principal balance, as defined. No single advance may be outstanding
for more than 36 months. Trak Auto may terminate the Trak Auto Facility upon
60-days prior written notice to the lender and the lender may terminate it as
of December 18, 1999 or on any anniversary date thereafter upon 60-days prior
written notice to Trak Auto.
Trak Auto currently has a $750,000 commercial letter of credit facility with
NationsBank for use in importing of merchandise.
At January 31, 1997, there were no borrowings under the Trak Auto Facility and
no borrowings under the letter of credit facility.
NOTE 10 - RESTRUCTURING AND STORE CLOSING CHARGES
Trak Auto
Trak Auto continually evaluates its store operations and the need to close,
relocate, or expand stores or convert existing Classic Trak stores into Super
Trak or Super Trak Warehouse stores. Trak Auto recognizes store closing costs
when management decides to close a store. In prior years, Trak Auto has also
recognized the anticipated costs for closing, relocating, expanding and
converting existing stores to the Super Trak and Super Trak Warehouse concept.
The costs associated with store closings and restructuring efforts are
primarily unrecoverable lease obligations (rent, real estate taxes and common
area charges, net of estimated sublease income) and the book value of leasehold
improvements as of the actual or estimated store closing date.
As of February 1, 1997, Trak Auto had reserves of $2,644,000 for store closings
and restructuring. The restructuring reserve relates to 15 stores that have
been closed or converted into Super Trak or Super Trak Warehouse stores and an
additional nine stores identified to be closed or converted but which have
remained open. The closed store reserve relates to 16 Classic Trak and Super
Trak stores that were closed apart from Trak Auto's restructuring efforts. The
activity in the closed store and restructuring reserves during the last two
years are as follows:
96
<PAGE> 97
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(dollars in thousands)
1997 1996
--------- --------
<S> <C> <C>
Reserves, beginning of year $ 4,491 $ 6,945
Less: Net provision recorded/(charges) (1,847) (2,454)
-------- --------
Reserves, end of year $ 2,644 $ 4,491
======== ========
</TABLE>
Included in the closed store provision for fiscal 1997 is an increase of the
closed store and restructuring reserves of approximately $402,000 and included
in the closed store provision for fiscal 1996 is an increase of the reserves of
$673,000.
The lease obligation allocable to related party leases is approximately
$969,000. The closed store and restructuring reserves as of February 1, 1997
are expected to be utilized as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Fiscal Year Total
----------- ---------
<S> <C>
1998 $ 1,047
1999 836
2000 335
2001 167
2002 128
2003-2005 131
-------
Total $ 2,644
=======
</TABLE>
The amount recorded for future lease obligations has been estimated at 95% of
the total lease obligation after the closing date because Trak Auto believes
that certain alternatives (subleasing and favorable lease buy-outs) to
abandonment may be available. Since the recorded reserves represents an
estimate based upon anticipated closing dates and the book value of the
leasehold improvements at the time the store is closed, the actual amount of
costs associated with store closings are subject to change.
Trak Auto will continue to evaluate the performance and future viability of its
stores and may close or convert additional stores in the future.
Crown Books
Restructuring Reserve
In fiscal years 1993 and 1994, Crown Books determined that a number of the
smaller Classic Crown Books stores were not competitive in an industry moving
to larger stores. Consequently, Crown Books recorded restructuring charges
97
<PAGE> 98
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
totaling $12,800,000 during these two years for the anticipated costs for
closing, relocating, expanding and converting existing stores to the Super
Crown Books concept. These costs primarily represent unrecoverable lease
obligations (net of estimated sublease income) and the book value of leasehold
improvements at the estimated closing date. The activity in the restructuring
reserves during the last two years was as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
1997 1996
----------- ----------
<S> <C> <C>
Restructuring Reserve, beginning of year $ 7,025 $ 10,515
Less: Payments and charges (1,653) (1,439)
Reversal of reserves (3,865) (2,051)
-------- --------
Restructuring Reserve, end of year $ 1,507 $ 7,025
======== ========
</TABLE>
In fiscal 1997 and 1996, Crown Books reversed a portion of the restructuring
reserve as a result of (i) management's decision not to close certain stores
that had been scheduled for closing, (ii) stores that were closed under
negotiated lease settlements that were more favorable than expected, and (iii)
the postponement of certain store closings.
The remaining restructuring reserve relates to 14 stores, of which four have
been closed as of February 1, 1997, with lease obligations ranging from one to
96 months. The lease obligation allocable to related party leases is
approximately $474,000. The restructuring reserve is expected to be utilized as
follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Lease Leasehold
Fiscal Obligations Improvements
Year (Cash Outflows) & Fixtures Total
-------- --------------- ------------ --------
<S> <C> <C> <C>
1998 $ 532 $ 164 $ 696
1999 269 6 275
2000 215 19 234
2001 66 - 66
2002 59 - 59
2003-2005 177 - 177
--------- --------- ---------
Total $ 1,318 $ 189 $ 1,507
========= ========= =========
</TABLE>
Since the recorded restructuring reserve represents an estimate based upon
anticipated store closing dates and the book value of the leasehold
improvements at the time a store is closed, the actual amounts of costs
associated with store closings may be different from the reserve.
98
<PAGE> 99
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Store Closing Reserve
Crown Books continually evaluates its store operations and the need to close
stores that do not perform satisfactorily. Crown Books recognizes store closing
costs when management decides to close a store. The costs primarily represent
unrecoverable lease obligations (net of estimated sublease income) and the book
value of leasehold improvements at the estimated closing date. The activity in
the closed store reserve during the last two fiscal years is as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
1997 1996
--------- ---------
<S> <C> <C>
Closed Store Reserve, beginning of year $ 10,850 $ 20,241
Less: Payments and charges (1,764) (2,648)
Reversal of reserves (1,052) (6,743)
-------- --------
Closed Store Reserve, end of year $ 8,034 $ 10,850
======== ========
</TABLE>
In fiscal 1997 and 1996, Crown Books reversed a portion of the closed store
reserve as a result of (i) management's decision not to close certain stores
that had been scheduled for closing, (ii) stores that were closed under
negotiated lease settlements that were more favorable than expected, and (iii)
the postponement of certain store closings.
The remaining closed store reserve relates to 69 stores, of which 13 have been
closed as of February 1, 1997, with lease obligations ranging from one to 54
months. The lease obligation allocable to related party leases is approximately
$1,555,000. The closed store reserve is expected to be utilized as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Lease Leasehold
Fiscal Obligations Improvements
Year (Cash Outflows) & Fixtures Total
-------- --------------- ------------ ----------
<S> <C> <C> <C>
1998 $ 1,960 $ 642 $ 2,602
1999 2,040 198 2,238
2000 1,437 141 1,578
2001 805 - 805
2002 383 49 432
2003-2005 284 95 379
--------- -------- --------
Total $ 6,909 $ 1,125 $ 8,034
========= ======== ========
</TABLE>
Since the recorded closed store reserve represents an estimate based upon
anticipated store closing dates and the book value of the leasehold
improvements at the time the store is closed, the actual costs are subject to
change and may be different from the reserve. Crown Books will continue to
99
<PAGE> 100
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
evaluate the performance and future viability of its remaining stores and may
close additional stores. Crown Books has not recorded reserves for any such
future possible store closings.
Total Beverage
Due to poor operating performance, Total Beverage's Bull Run store was closed
during the fourth quarter of fiscal 1995. Dart reserved approximately
$2,800,000 for future lease obligations and a portion of the fixtures net of
recoveries expected through CMREC. As a result of a negotiated settlement of
the lease obligation, Dart reversed $2,420,000 of this reserve during the
fiscal year ended January 31, 1996.
In addition, management of Dart and Total Beverage concluded that a Total
Beverage store opened during fiscal 1996 would be closed in fiscal 1997. The
decision was based on the store's disappointing sales volume. Accordingly,
Total Beverage recorded a closed store reserve of approximately $3.0 million,
primarily for future lease obligations and the write-off of leasehold
improvements and a portion of the store's fixtures. At January 31, 1997 Total
Beverage has $2.6 million remaining in the closed store reserve.
NOTE 11 - MINORITY INTERESTS
The $67,750,000 of minority interests reflected in the Consolidated Balance
Sheet as of January 31, 1997 represents the minority portion of Trak Auto and
Crown Books equity owned by the public shareholders of Trak Auto and Crown
Books. Income attributed to the minority shareholders of Trak Auto was
$354,000, $2,351,000 and $3,569,000 for the years ended January 31, 1997, 1996
and 1995, respectively. Income (loss) attributed to the minority shareholders
of Crown Books was $(442,000), $1,802,000, and $(9,428,000) for the years ended
January 31, 1997, 1996 and 1995, respectively. Income attributed to the
minority ownership of Shoppers Food for the year ended January 31, 1995 was
$1,050,000 (no income for Shoppers Food was attributed to minority interest for
periods after May 28, 1994). Income attributed to the minority ownership of the
CMREC real estate joint ventures was $494,000 and $574,000 for the years ended
January 31, 1996 and 1995, respectively (no income for the real estate joint
ventures was attributed to the minority interest for periods after October 5,
1995).
NOTE 12 - STOCK OPTION PLANS
The Company has two stock option plans and accounts for the plans under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
100
<PAGE> 101
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
compensation cost for the plans been determined consistent with SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
(dollars in thousands, except per share data)
Fiscal Year
Net loss 1997 1996
---------- -------
<S> <C> <C>
As Reported $(16,693) $(13,424)
Pro Forma (16,921) (13,489)
Net loss per share
As Reported $ (8.73) $ (7.88)
Pro Forma (8.84) (7.92)
</TABLE>
The effects of applying SFAS No. 123 in the pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
1995.
Dart Group Corporation 1992 Stock Option Plan
Dart has adopted a stock option plan (the "1992 Plan") for officers, key
employees and directors. The total number of shares that may be issued under
the 1992 Plan is 400,000 and the 1992 Plan will terminate June 2, 2002. Options
granted pursuant to the 1992 Plan may be incentive stock options, as defined in
Section 422 of the Internal Revenue Code or may be non-qualified options. The
option exercise price equals the market price on the date of the grant. Options
vest fully after three years and expire after five years.
Information concerning stock options under the 1992 Plan is as follows:
<TABLE>
<CAPTION>
Number Option Price Weighted Average
of Shares Per Share Exercise Price
--------- ------------- ----------------
<S> <C> <C> <C>
Outstanding at January 31, 1994 55,750 $ 74.00-89.65 $ 81.48
Granted 6,000 73.00 73.00
Exercised (2,333) 74.00-81.50 76.68
Forfeited (5,067) 74.00-81.50 80.73
------- ------------ -------
Outstanding at January 31, 1995 54,350 73.00-89.65 80.82
Granted 19,400 73.00-85.75 81.53
Exercised (233) 73.00-81.50 78.47
Forfeited (11,750) 73.00-89.65 81.08
------- ------------ -------
Outstanding at January 31, 1996 61,767 73.00-89.65 81.01
Granted 18,700 92.00-95.00 92.12
Exercised (3,180) 73.00-85.75 78.36
Forfeited (752) 73.00-85.75 80.78
------- ------------- -------
Outstanding at January 31, 1997 76,535 $ 73.00-95.00 $ 83.83
======= ============= =======
</TABLE>
101
<PAGE> 102
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
At January 31, 1997, options for 316,219 shares remain available for grant,
45,528 options were exercisable and the weighted average contractual life of
the options outstanding was 2.9 years. The weighted average fair value of
options granted was $32.18 and $29.97 for options granted during fiscal 1997
and 1996, respectively. The fair value of each option grant is estimated on the
date of the grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in fiscal 1997 and 1996,
respectively: risk free rates of approximately 6.0%; expected dividend rates of
$.13 per share; expected lives of 5.0 years; and expected volatility of 25.0%.
The grant of 6,425 employee stock options by the Board of Directors (pending
court approval) in December 1994 was approved by the court in April 1995.
Dart Group Corporation 1981 Stock Option Plan
Dart has a 1981 stock option plan (the "1981 Plan") in which directors,
officers and key employees participate. Options granted under this plan fully
vested after three years and expired after five years. The 1981 Plan terminated
December 4, 1991 and no more options could be granted under the 1981 Plan after
that date.
Information concerning stock options under the 1981 Plan is as follows:
<TABLE>
<CAPTION>
Number Option Price Weighted Average
of Shares Per Share Exercise Price
--------- ------------- ----------------
<S> <C> <C> <C>
Outstanding at January 31, 1994 82,500 $65.00-104.50 $ 89.84
Exercised (2,582) 65.00- 90.00 73.20
Forfeited (4,668) 67.25- 99.00 78.82
Expired (13,750) 95.00-104.50 102.95
-------- ------------- -------
Outstanding at January 31, 1995 61,500 71.50-104.50 88.45
Expired (21,500) 84.97- 99.00 91.85
-------- ------------- -------
Outstanding at January 31, 1996 40,000 71.50-104.50 86.63
Exercised (10,000) 71.50 71.50
-------- ------------- -------
Outstanding at January 31, 1997 30,000 $71.50-104.50 $ 91.67
======== ============= =======
</TABLE>
At January 31, 1997 there were 30,000 options exercisable under the 1981 Plan
and the weighted average contractual life was 2.4 years.
The Board of Directors of Dart has authorized certain officers and directors of
Dart to apply for loans from Dart to exercise their vested stock options. Under
the plan approved by the Board of Directors, the loans must bear interest at
the prime rate, adjusted annually, be secured by all of the stock
102
<PAGE> 103
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
acquired by exercise of the options, be repaid out of the first proceeds of
sale of stock or at the end of three years, whichever is earlier, and the
borrower must demonstrate to Dart's chief financial officer both that it would
be difficult to dispose of the number of shares on the open market and that he
or she presents a reasonable credit risk to Dart. The Board of Directors for
both Trak Auto and Crown Books have authorized such loans to certain officers
and directors of Trak Auto and Crown Books.
1983 Executive Non-Qualified Stock Option Plan
The discussion in the next paragraph regarding the 1983 Plan (defined below) is
qualified in its entirety by the succeeding paragraph, which discusses Dart's
challenge to the validity of the 1983 Plan and the options granted thereunder.
In 1983, the Board of Directors of Dart voted to approve an executive
non-qualified stock option plan (the "1983 Plan"), for a total of 199,500
shares of Class A Common Stock. In 1983 options for 177,500 shares were
purportedly granted under the 1983 Plan. The exercise price at the time of the
grant was equal to 100% of the fair market value ($82.50 per share) of the
Class A Common Stock. The 1983 Plan provides that in the event of a "major
business change" the exercise price of options held by persons who are
employees of Dart on the day immediately preceding such a change is reduced to
$20.00 per share. The Board of Directors previously determined that the sale of
Dart's drug store division in 1985 constituted a major business change under
the terms of the amended version of the 1983 Plan adopted in September 1983.
According to this determination, outstanding options for 154,400 shares would
be exercisable at $20.00 per share and options for 3,990 shares would be
exercisable at $82.50 per share. Options granted under the 1983 Plan purport to
be exercisable until 1998. No options were exercised in fiscal 1997, 1996 and
1995.
Robert M. Haft has attempted to exercise options to purchase 120,000 shares
under the 1983 Plan. The Executive Committee has undertaken a legal review of
the 1983 Plan. Based upon this legal review, the Executive Committee has
determined to cause Dart to contest the validity of the options purportedly
granted to Robert M. Haft under the 1983 Plan, on the grounds, inter alia, that
the grants did not conform with Delaware law, that they are a waste of
corporate assets, and that they were obtained by interested directors in breach
of their fiduciary duties to Dart, without the approval of fully- informed,
disinterested directors. Robert M. Haft has instituted litigation to enforce
his alleged options under the 1983 Plan. See Note 8. Dart makes no assurance
regarding the ultimate resolution to its challenge to the
103
<PAGE> 104
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
validity of these options.
1987 Executive Non-Qualified Stock Option Plan
The discussion in the next paragraph regarding the 1987 Plan (defined below) is
qualified in its entirety by the succeeding paragraph, which discusses Dart's
challenge to the validity of the 1987 Plan and the options granted thereunder.
In September 1987, the Board of Directors of Dart voted to approve the 1987
Executive Non-Qualified Stock Option Plan (the "1987 Plan"). The terms of the
1987 Plan provide for the granting of options to purchase, in the aggregate,
199,500 shares of Class A Common Stock and the purported granting to each of
Herbert H. Haft and Robert M. Haft of options to purchase 99,750 shares of
Class A Common Stock at an exercise price of $148.50 per share, or fair market
value at the time of the grant. The exercise price is reduced to $36 per share
in the event of a "major business change". On December 9, 1987, the Board of
Directors adopted a resolution stating that these options are to be canceled
and new options for the same number of shares issued with an exercise price of
$68.25 per share, which would be reduced to $16.40 per share in the event of a
"major business change", as defined under the 1987 Plan. Options granted under
the 1987 Plan purportedly are exercisable on or after April 1, 1988 and prior
to September 30, 2002. The options are only transferable by will or by the laws
of descent and distribution.
Robert M. Haft has attempted to exercise options under the 1987 Plan. The
Executive Committee has undertaken a legal review of the 1987 Plan and based
upon this legal review, Dart has contested the validity of the 1987 Plan and
the option grants thereunder, on the grounds, inter alia, that the grants did
not conform with Delaware law, and that they were obtained by interested
directors and Haft family members in breach of their fiduciary duties to Dart,
without the approval of fully-informed, disinterested directors.
Robert M. Haft has initiated litigation to enforce his alleged options under
the 1987 Plan. In his complaint, Robert M. Haft contends that Dart's June 30,
1988 purchase of its interest in Shoppers Food and Robert M. Haft's June 1993
termination each constituted a major business change under the 1987 Plan
allowing him to exercise his options for a price of $16.40 per share. See Note
8. Dart makes no assurance regarding the ultimate resolution to its challenge
to the validity of these options.
Stock options granted for Trak Auto would not, if exercised, have a material
dilutive effect on Dart's equity interest.
104
<PAGE> 105
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
Stock options granted for Crown Books would, if all were exercised, reduce
Dart's ownership percentage to 48.2%
NOTE 13 - EMPLOYEES' BENEFIT PLANS
Dart, Trak Auto and Crown Books maintain separate non-contributory
profit-sharing plans for all full-time employees with one year of continuous
employment. Annual contributions to the plans are based on a discretionary
percentage of net income, as defined in the respective plan, and as determined
by the respective Board of Directors. Contributions paid or accrued for Dart's,
Trak Auto's and Crown Books' plans for the years ended January 31, 1997, 1996
and 1995 were $99,000, $379,000, and $1,040,000, respectively.
In June 1995, the Company established a 401(k) retirement plan for all eligible
employees. The Company is obligated to contribute an amount equal to 25% of the
employees' deferrals up to 6%. The Company's contributions were $489,000 and
$330,000 for the years ended January 31, 1997 and 1996, respectively.
In March 1996, the Company established a nonqualified deferred compensation
plan for certain officers and key employees of the Company. The Company
contributes an amount equal to 25% of the employees deferral in the
nonqualified deferred compensation plan and the 401(k) plan together up to 6%.
The contribution was $22,000 in fiscal 1997.
NOTE 14 - TENDER OFFER
On December 21, 1994, Trak Auto offered to buy back from its shareholders
approximately 24% of its outstanding common stock, or 1,500,000 shares, at a
price of $17.50 per share. On February 6, 1995, Trak Auto amended the offer by
increasing the purchase price to $20.50 per share, and made certain other
changes. When the offer expired on February 28, 1996, Trak Auto had repurchased
approximately 310,000 shares for a total consideration of $6,363,000 plus
expenses of approximately $541,000.
As a result of the repurchase, Dart's interest in Trak Auto increased to 68.0%
at that time. The repurchase was accounted for as a step acquisition, resulting
in a decrease in minority interest of approximately $4,994,000 and an increase
in goodwill of $1,910,000, which is being amortized over 10 years.
NOTE 15 - SEGMENT INFORMATION
The Company's three primary business segments are retail specialty, retail
105
<PAGE> 106
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
grocery and beverage and, until May 1996, real estate. The segment information
presented does not contain revenue, income from operations and depreciation for
Shoppers Food after May 28, 1994 and for CMREC after October 6, 1995. The
following is a summary of selected consolidated information for the business
segments during January 31, 1997, 1996 and 1995:
106
<PAGE> 107
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(dollars in thousands)
Year Ended January 31,
Revenue: 1997 1996 1995
---------- ---------- -------
<S> <C> <C> <C>
Retail, specialty $636,314 $631,011 $658,381
Retail, grocery and beverage 30,195 29,508 284,706
Real estate - 13,426 20,645
Other 1,580 4,191 3,696
-------- -------- --------
$668,089 $678,136 $967,428
======== ======== ========
Income (loss) from operations:
Retail, specialty $ 3,445 $ 18,178 $(10,308)
Retail, grocery and beverage (1,130) 373 (5,013)
Real estate - 6,356 9,722
Other (1) (26,599) (32,603) (67,570)
-------- -------- --------
Total operating profit (24,284) (7,696) (73,169)
Interest income 2,875 8,507 7,457
Interest expense (6,993) (13,494) (14,009)
-------- -------- --------
Loss before income taxes $(28,402) $(12,683) $(79,721)
======== ======== ========
Identifiable assets:
Retail, specialty $369,117 $368,447 $400,801
Retail, grocery and beverage 7,722 8,382 7,314
Real estate - - 168,802
Other (1) 72,954 93,736 129,572
-------- -------- --------
$449,793 $470,565 $706,489
======== ======== ========
Depreciation and Amortization Expense:
Retail, specialty $ 13,202 $ 11,707 $ 11,180
Retail, grocery and beverage 298 223 2,453
Real estate - 3,112 4,528
Other (1) 540 411 925
-------- -------- --------
$ 14,040 $ 15,453 $ 19,086
======== ======== ========
Capital Expenditures:
Retail, specialty $ 16,438 $ 14,651 $ 11,669
Retail, grocery and beverage 175 887 489
Real estate - - 2,457
Other 499 1,150 171
-------- -------- --------
$ 17,112 $ 16,688 $ 14,786
======== ======== ========
</TABLE>
(1) Includes Dart and consolidating eliminations and adjustments.
107
<PAGE> 108
DART GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
NOTE 16 - INTERIM FINANCIAL DATA (Unaudited)
Selected interim financial data for the fiscal years ended 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
(dollars in thousands, except per share data)
Three Months Ended
-------------------------------------------------
JANUARY 31, OCTOBER 31, JULY 31, APRIL 30,
1997 1996 1996 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $186,159 $158,863 $165,131 $157,936
Gross profit (1) 40,757 32,600 34,993 34,722
Net Loss $(14,764) $ (1,164) $ (298) $ (467)
======== ======== ======== ========
Earnings per share
Net Loss (2) $ (7.32) $ (.66) $ (.30) $ (.36)
======== ======== ======== ========
JANUARY 31, OCTOBER 31, JULY 31, APRIL 30,
1996 1995 1995 1995
---------- ---------- ---------- ----------
Revenue $199,333 $161,484 $164,489 $152,830
Gross profit (1) 45,751 33,936 33,852 32,486
Net Income (Loss) $ (501) $(15,328) $ 1,492 $ 913
======== ======== ======== ========
Earnings per share
Net Income (Loss)(2) $ ( .57) $ (8.16) $ .66 $ .31
======== ======== ======== ========
</TABLE>
(1) After deduction for cost of sales, store occupancy and warehousing
expenses.
(2) The sum of these amounts may not equal the annual amount because of
the changes in the average number of shares outstanding during the
year.
108
<PAGE> 109
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Inapplicable.
109
<PAGE> 110
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of Dart are as follows.
<TABLE>
<CAPTION>
Name Age Position with the Registrant
<S> <C> <C>
Herbert H. Haft 76 Chairman of the Board of Directors
and Chief Executive Officer
Mark A. Flint 50 Senior Vice President, Chief Financial
Officer and Treasurer
Elliot R. Arditti 42 Senior Vice President, Secretary and
Corporate Counsel
Terry J. Sharp 44 Senior Vice President of Human Resources
and Operations
Keith W. Hammer 39 Senior Vice President and Chief
Information Officer
Bonita A. Wilson 55 Director
Douglas M. Bregman 47 Director
Larry G. Schafran 58 Director
Ronald S. Haft 38 Director
</TABLE>
Subject to the Standstill Order, directors are elected annually by the holders
of the Class B Common Stock. Subject to the Standstill Order, officers serve at
the discretion of the Board of Directors. For a discussion of the Standstill
Order, see Item 3 - Legal Proceedings.
Herbert H. Haft, the founder of Dart, has been Chief Executive Officer and
Chairman of the Board of Dart since 1960. He was Co-Chairman or Chairman of the
Board of Directors of Crown Books from its organization until December 1991,
when he became Chairman of Crown Books previous Executive Committee. Mr. Haft
became Chairman of the Board of Directors of Crown Books, again, in June 1993.
Mr. Haft has been Chairman of the Board of Directors and Chief Executive
Officer of Trak Auto since its organization in March 1983. Mr. Haft has been a
director of Shoppers Food since April 1989 and was elected Co-Chairman of
Shoppers Food on February 6, 1997. Herbert H. Haft is or claims to be a general
partner in approximately 15 partnerships that are debtors-in-possession under
Title 11, Chapter 11 of the U.S. Bankruptcy Code.
Mark A. Flint has been the Senior Vice President and Chief Financial Officer
110
<PAGE> 111
Item 10. Directors and Executive Officers of the Registrant (Continued)
of Dart since September 1996. Prior to joining Dart, Mr. Flint spent 14 years
serving in a series of capacities as Senior vice President and Chief Financial
Officer, Chairman of the Executive Committee, and a member of the Board of
Directors of Peter J. Schmitt Holdings, Inc., a multi-state $1.3 billion food
retailer and distributor, where he was responsible for corporate development,
mergers and acquisitions, finance and information technology. Mr. Flint was
elected a director of Shoppers Food on February 6, 1997. He has also served as
President of Shoppers Food since February 1997.
Elliot R. Arditti has been Senior Vice President, Corporate Counsel since June
1995 and Secretary since June 1993. He joined Dart in January 1984 as Associate
Counsel. He was appointed Assistant Vice President, Corporate Counsel in
September 1986 and Vice President, Corporate Counsel in December 1987.
Terrance J. Sharp was appointed Senior Vice President of Human Resources and
Operations in March 1997. He joined Dart in June 1995 as Vice President of
Human Resources. Prior to joining Dart, Mr. Sharp was Director of Personnel
Operations at Circuit City Stores, Inc. from 1988 to June 1995.
Keith W. Hammer was appointed Senior Vice President and Chief Information
Officer of Dart and Crown Books in April 1997. Mr. Hammer served as Vice
President and Chief Information Officer to Crown Books since his appointment
in January 1996. Mr. Hammer joined Crown Books in December 1994 as Assistant
Vice President, Information Systems. Prior to that, Mr. Hammer was Director
of Corporate Systems at Circuit City Stores, Inc.
Bonita A. Wilson has been a retailing executive with Dalton Brody since October
1993. Ms. Wilson was a Sales Manager with Saks Jandel from January 1994 until
June 1994 and prior to that she was a retailing executive with the May Company.
Ms. Wilson was elected to serve as a director of each of Dart, Trak Auto and
Crown Books in June 1993 and was elected to serve as a director of Shoppers
Food on February 6, 1997.
Douglas M. Bregman is a partner in the law firm of Bregman, Berbert &
Schwartz, specializing in commercial real estate law. Mr. Bregman is also an
Adjunct Professor of Law at the Georgetown University Law Center. Mr. Bregman
was elected to serve as a director of each of Dart, Trak Auto and Crown Books
in June 1993 and was elected to serve as a director of Shoppers Food on
February 6, 1997.
Larry G. Schafran is managing general partner of L.G. Schafran and Associates,
a New York based real estate investment and development firm, and is the
Chairman of Delta-Omega Technologies, Inc. and is a director of Publicker
Industries, Inc., Capsure Holdings, Corp. and Glasstech, Inc. Mr. Schafran is
also a Trustee of the National Income Real Estate Trust. Mr. Schafran has
previously held the positions of vice president and director of Webb & Knapp,
Inc. and its successor General Property Corp. Mr. Schafran was elected
111
<PAGE> 112
Item 10. Directors and Executive Officers of the Registrant (Continued)
a director of Dart, Trak Auto and Crown Books on December 20, 1993 and was
elected Co-Chairman of the board of directors of Shoppers Food on February 6,
1997.
Ronald S. Haft was Dart's President and Chief Operating Officer from August
1, 1993 until November 1995 when he resigned all his positions as a director
and officer of Dart and all of its subsidiaries. The Standstill Order (see
Item 3 - Legal Proceedings) contemplates that Ronald S. Haft will continue as
a director of Dart while that Standstill Order is in effect. (Herbert H. Haft
contends that Ronald S. Haft is no longer a director). Mr. Haft has been
President of Combined Properties, Inc. ("CPI"), a real estate management
company, since 1984, and is also Chief Executive Officer of CPI. Mr. Haft was
elected a director of Dart, Trak Auto, and Crown Books on July 28, 1993.
Ronald S. Haft is a general partner in approximately 15 partnerships that are
debtors-in-possession under Title 11, Chapter 11 of the U.S. Bankruptcy Code.
Pursuant to the terms of the Bylaws of Dart, the term of each director expires
at the 1997 Annual Meeting of Stockholders or until a successor is elected and
qualified. The Standstill Order provides, however, that until further order of
the Delaware Chancery Court, Dart may not (nor may it recognize any stockholder
action that would), (i) change the current composition of the board of
directors of Dart or any of its subsidiaries or (ii) change the current Haft
family officers of Dart or any of its subsidiaries. See Item 3.
- - Legal Proceedings.
The other officers of Dart are:
Ronald T. Rice joined Dart in October 1981. He was appointed Assistant Vice
President in 1987 and Controller in December 1992.
Kenneth M. Sobien joined Dart in August 1988. He was appointed Assistant
Treasurer in July 1994.
Herbert H. Haft is the father of Ronald S. Haft. There is no other family
relationship between any director and executive officer of Dart.
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires Dart's officers and directors, and persons who beneficially own more
than ten percent of a registered class of Dart's equity securities, to file
reports of ownership of Dart's securities and changes in such ownership with
the Securities and Exchange Commission (the "SEC"). Officers, directors and ten
percent shareholders are required by SEC regulations to furnish Dart with
copies of all Section 16(a) forms they file.
Based solely upon its review of such forms received by it, Dart believes that
during the fiscal year ended January 31, 1997, all filing requirements
applicable to its officers, directors and ten percent shareholders were
112
<PAGE> 113
Item 10. Directors and Executive Officers of the Registrant (Continued)
complied with.
113
<PAGE> 114
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth in summary form all compensation for all
services rendered in all capacities to Dart and its subsidiaries for the three
years ended January 31, 1997 to (i) the Chief Executive Officer of Dart, (ii)
the members of the Executive Committee of Dart, (iii) the other most highly
compensated executive officers of Dart and (collectively, the "Named Executive
Officers").
<TABLE>
<CAPTION>
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)
- --------------- ----- --------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Herbert H. Haft 1997 1,590,000 - 66,000(3) - 30,000
Chief Executive 1996 1,531,000 - 69,000(4) - 30,000
Officer 1995 1,531,000 1,334,000 76,000(5) - 25,000(6)
Larry G. Schafran 1997 - - 1,073,000(7) 5,500 -
Chairman of the 1996 - - 1,059,500(8) 5,500 -
Executive 1995 - - 533,500(9) 5,000 -
Committee (16)
Bonita A. Wilson 1997 - - 227,500(10) 5,500 -
Member of the 1996 - - 205,800(11) 5,500 -
Executive 1995 - - 118,000(12) 5,500 -
Committee (16)
Douglas M. 1997 - - 242,700(13) 5,500 -
Bregman 1996 - - 231,000(14) 5,500 -
Member of the 1995 - - 128,100(15) 5,500 -
Executive
Committee (16)
Terry J. Sharp 1997 221,800 - - 5,200 69,900(17)
Senior Vice 1996 115,400 30,000 - 4,750 25,000(18)
President of
Human Resources
and Operations
Dennis N. Weiss 1997 286,000 - - 6,200 4,000
Former Executive 1996 301,000 - - 8,650 1,000
Vice President 1995 245,000 - - - 2,000
(19)
</TABLE>
114
<PAGE> 115
Item 11. Executive Compensation (Continued)
(1) Excludes perquisites and other personal benefits, unless the aggregate
amount of such compensation is at least $50,000 or 10% of the total
annual salary and bonus reported for the Named Executive Officer.
(2) Includes allocations to the accounts of the Named Executive Officers
pursuant to the profit-sharing and 401(k) plans of the Company and,
with respect to Herbert H. Haft in each fiscal year, $30,000 imputed
interest on life insurance loans.
(3) Includes fees received as a director of Dart ($15,000), Trak Auto
($15,000), Crown Books ($15,000), auto usage ($16,000) and health, life
and disability insurance ($5,000).
(4) Includes fees received as a director of Dart ($15,000), Trak Auto
($15,000), Crown Books ($15,000) and Dart Group Financial Corporation
(DGFC")($2,500),auto usage ($16,000) and health, life and disability
insurance ($5,000).
(5) Includes fees received as a director of Dart ($15,000), Trak Auto
($15,000), Crown Books ($15,000) and DGFC $10,000), auto usage
($16,000) and health, life and disability insurance ($5,000).
(6) Excludes $147,000, which represents the payments by Dart to Gloria Haft
and the cost to Dart of certain health benefits for her. Gloria Haft
ceased to be an employee of Dart in June 1993. Dart continued to pay
her compensation at the rate, and provide her with benefits and health
insurance as, provided in her employment agreement with the Company
until October 1994. Gloria Haft contends that a contract between
Herbert H. Haft and Gloria Haft, requires that if the Company failed
to continue paying Gloria Haft under her employment agreement before
May 31, 2004, then Herbert H. Haft would pay Gloria Haft the amounts
she would have been entitled to receive under the employment agreement.
A controversy exists concerning whether Gloria Haft is entitled to any
payments and, if so, whether these payments and benefits were
obligations of Dart or Herbert H. Haft. Herbert H. Haft denies that
these payments and benefits are his obligations.
(7) Includes fees received as a member of the Executive Committee of Dart
($326,800), Trak Auto ($326,800) and Crown Books ($326,800); fees
received as a director of Dart ($24,300), Trak Auto ($18,300) and Crown
Books ($18,300); apartment usage ($26,700) and health insurance
($5,000).
(8) Includes fees received as a member of the Executive Committee of Dart
($325,000), Trak Auto ($325,000) and Crown Books ($325,000); fees
received as a director of Dart ($19,200), Trak Auto ($17,200) and Crown
Books ($16,700); apartment usage ($26,400) and health insurance
($5,000).
(9) Includes fees received as a member of the Executive Committee of Dart
($157,600), Trak Auto ($92,400) and Crown Books ($92,400); fees
received as a member of the Special Litigation Committee of Dart
($59,300), Trak Auto ($13,200) and Crown Books ($59,300); fees received
as a director of Dart ($17,000), Trak Auto ($17,000) and Crown Books
($17,000); apartment usage ($6,600) and health insurance ($1,700).
115
<PAGE> 116
Item 11. Executive Compensation (Continued)
(10) Includes fees received as a member of the Executive Committee of Dart
($52,900), Trak Auto ($52,900) and Crown Books ($52,900); fees received
as a director of Dart ($24,600), Trak Auto ($19,600) and Crown Books
($19,600); and health insurance ($5,000).
(11) Includes fees received as a member of the Executive Committee of Dart
($45,100), Trak Auto ($45,100) and Crown Books ($45,100); fees received
as a director of Dart ($22,500), DGFC ($2,500), Trak Auto ($20,500) and
Crown Books ($20,000); and health insurance ($5,000).
(12) Includes fees received as a member of the Executive Committee of Dart
($20,400), Trak Auto ($12,500) and Crown Books ($12,500); fees received
as a director of Dart ($20,300), DGFC ($10,000), Trak Auto ($20,300)
and Crown Books ($20,300); and health insurance ($1,700).
(13) Includes fees received as a member of the Executive Committee of Dart
($58,300), Trak Auto($58,300), and Crown Books ($58,300); fees received
as a director of Dart ($23,600), Trak Auto ($19,600) and Crown Books
($19,600); and health insurance ($5,000).
(14) Includes fees received as a member of the Executive Committee of Dart
($53,500), Trak Auto ($53,500) and Crown Books ($53,500); fees received
as a director of Dart ($22,500), DGFC ($2,500), Trak Auto ($20,500) and
Crown Books ($20,000); and health insurance ($5,000).
(15) Includes fees received as a member of the Executive Committee of Dart
($32,500), Trak Auto ($11,500) and Crown Books ($11,500); fees received
as a director of Dart ($20,300), DGFC ($10,000), Trak Auto ($20,300)
and Crown Books ($20,300); and health insurance ($1,700).
(16) In 1994, Larry G. Schafran, Bonita A. Wilson and Douglas M. Bregman
were appointed members of the Executive Committees of Dart, Trak Auto,
Crown Books and Total Beverage. Members of the Executive Committee are
compensated at a rate of $275 per hour. See Item 11 - Executive
Compensation - Compensation of Directors.
(17) Includes relocation fees and taxes thereon ($68,700) and allocation to
401(k) account ($1,200).
(18) Includes sign-on bonus.
(19) In April 1997, Mr. Weiss transferred from Executive Vice President,
Real Estate of Dart to Executive Vice President, Real Estate of Trak
Auto.
116
<PAGE> 117
Item 11. Executive Compensation (Continued)
Option Grants in Last Fiscal Year
This table provides information with respect to grants of options for shares of
common stock of Dart and its subsidiaries to the Named Executive Officers
during fiscal 1997 and the exercise or base price, expiration date and
estimates of the potential realizable values of such options.
<TABLE>
<CAPTION>
Individual Grants
- -------------------------------------------------------- Potential Real-
% of Total izable Value at
Options Assumed Annual
Granted Rates of Stock
to Emp- Exer- Price Appreci-
loyees cise Market ation for Option
Options in or Base Price Expir- Term (5)
Granted Fiscal Price Date of ation -----------------
Name (#) (4) Year ($/Sh) Grant Date 5% ($) 10% ($)
---- ------- ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Herbert H.
Haft None
Larry G. 1,500(1) 8.0 92.00 92.00 7-31-01 38,100 84,300
Schafran 1,500(2) .8 16.75 16.75 7-31-01 6,900 15,300
2,500(3) 1.4 12.375 12.375 7-31-01 8,500 18,900
Bonita A. 1,500(1) 8.0 92.00 92.00 7-31-01 38,100 84,300
Wilson 1,500(2) .8 16.75 16.75 7-31-01 6,900 15,300
2,500(3) 1.4 12.375 12.375 7-31-01 8,500 18,900
Douglas M. 1,500(1) 8.0 92.00 92.00 7-31-01 38,100 84,300
Bregman 1,500(2) .8 16.75 16.75 7-31-01 6,900 15,300
2,500(3) 1.4 12.375 12.375 7-31-01 8,500 18,900
Terry J. 1,200(1) 6.4 92.00 92.00 7-31-01 30,500 67,400
Sharp 2,000(2) 1.0 16.75 16.75 7-31-01 9,300 20,500
2,000(3) 1.1 12.375 12.375 7-31-01 5,800 12,800
Dennis N. 1,200(1) 6.4 92.00 92.00 7-31-01 30,500 67,400
Weiss 2,500(2) 1.3 16.75 16.75 7-31-01 11,600 25,600
2,500(3) 1.4 12.375 12.375 7-31-01 8,500 18,900
</TABLE>
(1) Represents options for Class A Shares.
(2) Represents options for Trak Auto Common Stock.
(3) Represents options for Crown Books Common Stock.
117
<PAGE> 118
Item 11. Executive Compensation (Continued)
(4) Class A, Trak Auto and Crown Books options become exercisable over time.
One-third become exercisable one year from the date of grant, an
additional one-third become exercisable two years from the date of grant
and the last third become exercisable three years from the date of grant.
Options expire five years from the date of grant. Options are granted at
market price on the date of grant. All options granted to executive
officers are ISO's under the Internal Revenue Code. ISO's entitle the
option holder to special tax treatment provided that the option holder
satisfies certain holding periods with respect to shares acquired on the
exercise of options. In general, if the holding periods are satisfied,
the option holder will incur no taxable income by reason of exercise of
the option, and Dart will not receive an income tax deduction by reason
of the exercise. The option holder will recognize gain or loss upon a
subsequent sale of the common stock, based on the difference between the
amount for which the stock is sold, and the option price paid. Options
granted to members of the Executive Committee are non-qualified options.
The stock option plans of each of Dart, Trak Auto and Crown Books specify
that each director who is not an employee shall receive 1,500, 1,500 and
2,500 options, respectively, each year. The options expire five years
from the date of grant.
(5) Potential realizable value is based on an assumption that the price of
the Common Stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the five year option
term. These numbers are calculated based on the rules and regulations
promulgated by the Securities and Exchange Commission and do not
reflect the Company's estimate of future stock price growth.
118
<PAGE> 119
Item 11. Executive Compensation (Continued)
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-
End Option Values
Each of the Named Executive Officers, the following table sets forth
information about stock options exercised during fiscal 1997 and the value of
unexercised options as of January 31, 1997.
<TABLE>
<CAPTION>
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
- ---- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Herbert H. Haft 10,000(1) 185,000 129,750(4) 3,420,700(4)
- -
- (2) - 6,668 11,700
- -
- (3) - 30,000 -
- -
Larry G. Schafran - (1) - 2,250 28,300
2,250 14,100
- (2) - 4,500 400
- -
- (3) - 7,500 -
- -
Bonita A. Wilson - (1) - 3,750 45,600
2,250 14,100
- (2) - 6,000 3,000
- -
- (3) - 10,000 -
- -
Douglas M. Bregman - (1) - 3,750 45,600
2,250 14,100
- (2) - 6,000 3,000
- -
- (3) - 10,000 -
-
Terry J. Sharp - (1) - 250 1,800
1,700 4,800
- (2) - 666 -
3,334 -
- (3) - 666 -
3,334 -
</TABLE>
119
<PAGE> 120
Item 11. Executive Compensation (Continued)
<TABLE>
<CAPTION>
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
- ---- --------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Dennis N. Weiss 1,582(1) 24,600 534 7,300
1,734 5,100
2,332(2) 7,500 1,249 100
4,169 -
- (3) - 2,165 -
4,435 -
</TABLE>
(1) Represents options for Class A Common Stock.
(2) Represents options for Trak Auto common stock.
(3) Represents options for Crown Books common stock.
(4) These stock options include options for 10,000 shares under the 1983
Plan and 99.750 shares under the 1987 Plan, the validity of which is
subject to challenge by Dart. See Item 3. -- Legal Proceedings.
Compensation of Directors
Members of the Board of Directors of Dart, Trak Auto and Crown Books are each
paid $15,000 per year. Larry G. Schafran, Bonita A. Wilson and Douglas M.
Bregman are members of the audit committee for Dart, Trak Auto and Crown Books
and are compensated $5,000 per year. Douglas M. Bregman, Larry G. Schafran and
Bonita A. Wilson are members of the compensation committee of Dart, Trak Auto
and Crown Books and are not compensated for their work on that committee.
On September 7, 1994, the Board of Directors of Dart established an Executive
Committee comprised of Dart's outside directors to conduct the affairs of Dart
with respect to matters that were the subject of dispute between the Chairman
of the Board and Chief Executive Officer of Dart, Herbert H. Haft, and the then
President and Chief Operating Officer of Dart, Ronald S. Haft. On October 11,
1994, the Boards of Directors of Trak Auto, Crown Books and Total Beverage each
established an Executive Committee of their respective Board of Directors
comprised of the same outside directors, with authority parallel to that of
Dart's Executive Committee. The Executive Committee currently consists of
Douglas M. Bregman, Larry G. Schafran and Bonita A. Wilson, with Mr. Schafran
as the Chairman of the Executive Committee. The disputes between Herbert H.
Haft and Ronald S. Haft concerning issues involving Dart have been extensive.
Accordingly, the Executive Committee assumed day-to-day involvement in these
disputed issues and other matters affecting Dart, in particular matters
relating to litigation to which Dart is a party. While the Executive Committee
remains involved in the day-to-day affairs of Dart, its continuing role is
dependent upon future developments.
In connection with the RSH Settlement, Ronald S. Haft resigned his positions
as a director and officer of Dart and each of its subsidiaries. The
120
<PAGE> 121
Item 11. Executive Compensation (Continued)
Standstill Order contemplates that Ronald S. Haft will continue as a director
of Dart while the Standstill Order is in effect. (Herbert H. Haft contends that
Ronald S. Haft is no longer a director.)
Members of the Executive Committee are compensated at a rate of $275 per hour
plus reimbursement of expenses. Members of the Special Litigation Committee of
the Board of Directors, which was established in January 1995, have been
compensated at a rate of $250 per hour plus reimbursement of expenses. For the
years ended January 31, 1997 and 1996, the aggregate compensation paid by Dart
and its subsidiaries to members of the respective Executive Committees for
their services on those committees approximated $1,299,000 and $1,263,000,
respectively. There were no fees paid to the Special Litigation Committee in
fiscal 1997 and 1996. See Item 11-Executive Compensation-Summary Compensation
Table.
The stock option plans of each of Dart, Trak Auto and Crown Books specify that
each director who is not an employee shall receive 1,500, 1,500 and 2,500
options, respectively, each year. The options expire five years from the date
of grant.
In September 1987, Dart adopted the 1988 Dart Group Corporation Deferred
Compensation Plan for Directors, effective January 1, 1988 (the "Compensation
Plan"). The Compensation Plan permits Dart's directors to defer the payment of
all or a specified part of future compensation payable for services as
director, including fees for serving on or attending meetings of committees of
the board of directors. Each director may elect, on or before January 31 of any
year to defer payment of compensation, payable on or after the first day of
February following such election, for services to be performed during the
twelve-month period commencing on such February 1 and ending on January 31 of
the following calendar year (the "Plan Year"). After such an election, all
subsequent compensation will be deferred until the director notifies Dart,
prior to the commencement of any Plan Year, that compensation for future Plan
Years is to be paid on a current basis.
Deferred compensation will not be paid to the director as earned, but will be
held in Dart's general funds and credited to a bookkeeping account maintained
by Dart in the name of the director. Each participating director will be
treated as a creditor of Dart with respect to such funds. Deferred compensation
will be paid to directors in a lump sum on the fifteenth day of February of the
Plan Year after retirement, unless the director elects, at the time he
exercises the deferral option, to be paid in up to ten annual installments.
Employment Contracts
In April 1974, Dart entered into an employment agreement with Herbert H. Haft,
Chairman and Chief Executive Officer. The agreement, as amended, is renewable
121
<PAGE> 122
Item 11. Executive Compensation (Continued)
each year for a successive ten-year term. The agreement, as amended, provides
for a base salary of $544,500 for the year ended January 31, 1986 and for
increases in base salary each year thereafter by the greater of (i) $12,000
plus ten percent of the base salary for the preceding fiscal year or (ii) the
increase in the cost of living. The agreement, as amended, further provides for
an annual bonus equal to 1 1/2% of Dart's consolidated pretax profit not
reduced as a result of transactions that are not ordinary and a supplemental
bonus based on certain performance criteria for the three-year period ended
January 31, 1988 and each three-year period thereafter. The supplemental bonus
equals the greatest of (i) 3% of the increase in the aggregate market value of
the Class A Common Stock on the last day of the three-year period over such
market value on the first day of such period; (ii) 3% of any excess in Dart's
consolidated stockholders' equity on the last day of the three-year period over
such stockholders' equity on the first day of such period; (iii) 3% of the
aggregate consolidated net income during the three-year period; and (iv) his
base salary and annual bonus for the last year of the three-year period.
Pursuant to the agreement, Herbert H. Haft may elect to receive all or part of
his compensation in the form of an option for shares of the Class A Common
Stock or defer receipt of all or part of such compensation. The agreement, as
amended, also provides that Dart must lend to Herbert H. Haft the funds
necessary to purchase a $3,000,000 life insurance policy on his life and/or the
life of his former wife, Gloria Haft. Dart has elected not to charge interest
on the loan. In 1993, a shareholder derivative action was filed challenging
certain aspects of this employment agreement. In 1995, the Special Litigation
Committee concluded that it is in the best interests of Dart that claims
challenging Herbert H. Haft's employment agreement be dismissed except to the
extent that the validity of the "evergreen" provision (successive ten-year
terms) of the agreement is challenged. See Item 3. Legal Proceedings -
Derivative Litigation.
In January 1995, Dart entered into a two-year employment agreement with Dennis
N. Weiss, Executive Vice President - Real Estate of a term ending on January
31, 1997. The agreement provides for an annual base salary of $260,000, subject
to annual increases as determined by the Compensation Committee of the Board of
Directors.
On May 22, 1995, Dart entered into a one-year employment agreement with Terry
J. Sharp, Senior Vice President of Human Resources and Operations. The
agreement is renewable for successive one-year terms and provides for an annual
base salary of $200,000, subject to annual increases as determined by the
Compensation Committee of the Board of Directors.
On September 16, 1996, Dart entered into a two-year employment agreement with
Mark A. Flint, Senior Vice President, Chief Financial Officer and Treasurer.
The agreement is renewable for successive one-year terms. The agreement
provides for an annual base salary of $285,000, subject to annual increases as
determined by the Compensation Committee of the Board of Directors.
122
<PAGE> 123
Item 11. Executive Compensation (Continued)
Compensation Committee Interlocks and Insider Participation
The Compensation Committee comprises Dart's outside, non-employee Directors
(Douglas M. Bregman, Larry G. Schafran and Bonita A. Wilson). No member of
the Compensation Committee has a relationship that would constitute an
interlocking relationship with executive officers or directors of another
entity.
123
<PAGE> 124
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 31, 1997, certain information with
respect to the following persons: (i) all stockholders known by the Company to
be the beneficial owners of more than five percent of Class B Common Stock,
(ii) each of Dart's current Directors, (iii) the Named Executive Officers, and
(iv) the Directors and Named Executive Officers as a group. Certain information
in the table is based upon information contained in filings made by the
beneficial owner of Class A Common Stock with the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
Directors and Executive Officers:
- ---------------------------------
Approximate
Title of No. of Percentage
Name Class Shares of Class
- ---- -------- -------- ----------
<S> <C> <C> <C>
Herbert H. Haft Class A (1) 252,497 13.36 (2)
3300 75th Avenue Class B (3) - -
Landover, MD 20785 Trak Auto (4) 7,168 .12
Crown Books (5) 30,500 .57
Ronald S. Haft Class A (6)(7) 408,688 23.22 (2)
Class B (6)(8) 222,294 67.92
Dennis N. Weiss Class A (9) 534 .03 (2)
Trak Auto (10) 1,249 .02
Crown Books (11) 2,297 .04
Bonita A. Wilson Class A (12) 3,750 .21 (2)
Trak Auto (13) 6,000 .10
Crown Books (14) 10,000 .19
Douglas M. Bregman Class A (12) 3,750 .21 (2)
Trak Auto (13) 6,000 .10
Crown Books (14) 10,000 .19
Larry G. Schafran Class A (15) 2,250 .13 (2)
Trak Auto (16) 4,500 .08
Crown Books (17) 7,500 .14
Mark A. Flint None
Terry J. Sharp Class A (18) 250 .01 (2)
Trak Auto (19) 666 .01
Crown Books (19) 666 .01
- -----------------
All Directors and Class A (20) 671,719 35.35 (2)
Executive Officers as Class B 222,294 67.92
a group (8 persons) Trak Auto (21) 25,583 .43
Crown Books (22) 60,963 1.14
</TABLE>
124
<PAGE> 125
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Continued)
<TABLE>
<CAPTION>
Other Beneficial Owners:
- ----------------------- Approximate
Title of No. of Percentage
Name Class Shares of Class
- ---- -------- ------ -------------
<S> <C> <C> <C>
Richard B. Stone, Class A (6)(7) 374,485 21.28 (2)
as Voting Trustee Class B (6)(8) 222,294 67.92
for Ronald S. Haft
4508 Foxhall Crescents
Court, N.W.
Washington, D.C. 20007
Robert M. Haft Class B (8) 25,246 7.71
Trak Auto (23) 40,000 .67
Crown Books (24) 130,000 2.42
Gloria G. Haft Class B 54,484 16.65
Trak Auto 500 .01
Crown Books 500 .01
Linda G. Haft Class B (8) 25,246 7.71
Crown Books 500 .01
</TABLE>
(1) Includes 129,750 shares subject to exercisable stock options. These
stock options include options for 10,000 shares under the 1983 Plan and
99,750 shares under the 1987 Plan, the validity of which is subject to
challenge by Dart. See Item 3. - Legal Proceedings.
(2) Calculated based upon a class including shares subject to exercisable
stock options under the 1983 Plan and the 1987 Plan, which Plans are
subject to challenge by Dart. See Item 3. - Legal Proceedings.
(3) Herbert H. Haft has filed a lawsuit seeking a judgement declaring
that 172,730 shares of Class B Common Stock belong to him, that they
were wrongfully sold by Ronald S. Haft to Dart and that Herbert H.
Haft is entitled to restitution of such shares or, alternatively,
that his purported irrevocable proxy on the 172,730 shares continues
to be valid.
See Item 3 - Legal Proceedings.
(4) Includes 6,668 shares subject to exercisable stock options.
(5) Includes 30,000 shares subject to exercisable options.
(6) Under the Voting Trust Agreement, Richard B. Stone, as Voting Trustee,
has sole voting power over 374,485 Class A shares and 222,294 Class
B shares and Ronald S. Haft has sole investment power over such
shares, subject to (i) the rights of Dart to exercise a call option
to purchase the shares, as provided in the Buy/Sell/Offering
Agreement entered into by Ronald S. Haft and Dart, and (ii) the
rights of Dart and CMREC under a Stock and Trust Certificate Pledge
Agreement made by Ronald S. Haft in favor of the initial Voting
Trustees, as collateral agents and bailees
125
<PAGE> 126
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Continued)
for Dart and CMREC. The Voting Trustee may vote the shares in such
manner as he deems to be "in the best interests of Dart and all of
its shareholders as a single class." The Voting Trust Agreement will
terminate on August 1, 2000, unless terminated earlier or later
pursuant to the terms of the Voting Trust Agreement. The RSH
Settlement transactions, including the Voting Trust Agreement, are
subject to legal challenge. See Item 3 - Legal Proceedings and
Dart's Current Report on Form 8-K, dated October 10, 1995.
(7) 58,029 Class A shares are subject to competing claims of Robert M. Haft
and Linda G. Haft.
(8) In a letter dated February 6, 1996, Donald R. Bourassa, Executive Vice
President of Combined Properties, Inc., wrote Dart, purportedly on behalf
of Haft-Equities General Limited Partnership ("Haft-Equities"), claiming
that 25,246 Class B shares held by each by each of Robert M. Haft, Linda
G. Haft and the Voting Trustee may belong to Haft-Equities. Ronald S.
Haft claims beneficial ownership of such 25,246 Class B shares held by
the Voting Trustee but he does not claim beneficial ownership of 25,246
Class B shares owned by each of Robert M. Haft and Linda G. Haft.
(9) Includes 534 shares subject to exercisable stock options.
(10) Includes 1,249 shares subject to exercisable stock options.
(11) Includes 2,297 shares subject to exercisable stock options.
(12) Includes 3,750 shares subject to exercisable stock options.
(13) Includes 6,000 shares subject to exercisable stock options.
(14) Includes 10,000 shares subject to exercisable stock options.
(15) Includes 2,250 shares subject to exercisable stock options.
(16) Includes 4,500 shares subject to exercisable stock options.
(17) Includes 7,500 shares subject to exercisable stock options.
(18) Includes 250 shares subject to exercisable stock options.
(19) Includes 666 shares subject to exercisable stock options.
(20) Includes 140,254 shares subject to exercisable stock options.
(21) Includes 25,083 shares subject to exercisable stock options.
(22) Includes 60,463 shares subject to exercisable stock options.
(23) Includes 40,000 shares subject to exercisable stock options.
(24) Includes 80,000 shares subject to exercisable stock options and 100
shares of Crown Books held by his wife.
126
<PAGE> 127
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Continued)
Potential Change in Control
The RSH Settlement transactions are subject to pending litigation and, through
such litigation each of RGL and Herbert H. Haft seeks control of Dart. See Item
3 - Legal Proceedings. If sustained, the RSH Settlement transactions were
intended to have the effect, by their terms, of transferring majority control
of Dart's voting stock to one or more voting trustees under the Voting Trust
Agreement. On December 28, 1995, the initial Voting Trustees resigned and
appointed Richard B. Stone as successor Voting Trustee.
If the RSH Settlement is sustained by the Delaware Court of Chancery, a
Buy/Sell/Offering Agreement between Dart and Ronald S. Haft will govern the
ultimate disposition of the shares held by the Voting Trustee. That agreement
gives Ronald S. Haft the right to "put" to Dart the stock held by the Voting
Trustee at any time between January 1, 1997 and December 31, 1999, subject to
certain conditions. With respect to the 222,294 shares of Class B Common Stock
held by the Voting Trustee, Ronald S. Haft may (instead of including them in
the "put") exchange them for 244,523 shares of Class A Common Stock (i.e., a
1.1 to 1 exchange ratio) and offer those 244,523 shares of Class A Common Stock
to the public. Dart has an option to "call" the shares held by the Voting
Trustee, if they have not previously been disposed of as described above, at
any time during the first seven months of the year 2000.
All of the 222,294 Class B shares in the Voting Trust, as well as the related
voting trust certificates issued to Ronald S. Haft under the Voting Trust
Agreement, have been pledged to Dart and CMREC as security for certain loans
made to Ronald S. Haft and other obligations of Ronald S. Haft arising under
the RSH Settlement.
127
<PAGE> 128
Item 13. Certain Relationships and Related Transactions
On October 6, 1995, Dart and Ronald S. Haft entered into a settlement agreement
and various related agreements comprising the RSH Settlement. The RSH
Settlement transactions are briefly described in Item 5 of Dart's Form 8- K,
dated October 10, 1995, which is incorporated herein by reference. See also
Note 6 to Dart's Consolidated Financial Statements (Item 8 - Financial
Statements and Supplementary Data). The RSH Settlement transactions are subject
to legal challenge. See Item 3 - Legal Proceedings.
Under the terms of the Voting Trust Agreement, the Voting Trustee is entitled
to compensation at a rate of $275.00 per hour for time reasonably spent in
rendering services under the Voting Trust Agreement. Such compensation is to be
paid from funds available in the Voting Trust and, to the extent such funds are
insufficient, by Dart. During the year ended January 31, 1997, Dart paid
$343,000 in such compensation to Richard B. Stone, as Voting Trustee.
Dart, Trak Auto, Crown Books, Shoppers Food and Total Beverage lease certain
real property from Haft family-owned partnerships. Rental payments related to
such leases approximated $15.5 million during the year ended January 31, 1997.
The leased properties consist of 45 stores, three warehouses and the Shoppers
Food headquarters building, but excluding the Pennsy Leases. These leases
(excluding the Pennsy Leases), which have expiration terms ranging from 1997 to
2031, require the payment of minimum rentals aggregating approximately $111.7
million (excluding option periods). Certain of these leases also require the
payment of a percentage of sales in excess of a stated minimum, real estate
tax, insurance, maintenance and utilities.
On February 10, 1995, after a legal review by the Executive Committee, Dart
filed a complaint for rescission of the Pennsy Leases and for the return of
rent paid since 1991 on such leases. See Item 3. - Legal Proceedings. The
Executive Committees of Dart, Crown Books and Trak Auto have also undertaken a
legal review of other leasing arrangements and real estate related transactions
involving the Company and Haft-owned entities. See Item 2. Properties. On
December 17, 1996, Dart, Crown Books and Trak Auto filed a lawsuit against
Herbert H. Haft (Chairman of each such company) claiming breach of fiduciary
duty, fraud and waste arising from a series of lease transactions (other than
the Pennsy Leases) with certain partnerships owned beneficially by members of
the Haft family. See Item 3 - Legal Proceedings Lawsuit Against Herbert H. Haft
Concerning Haft-Owned Real Estate.
CMREC owned the majority interest in five real estate partnerships that owned
four shopping centers and an office building in the Washington, D.C.
metropolitan area. The remaining partnership interests were owned by
partnerships in which the partners are members of the Haft family. As part of
the RSH Settlement, these five properties were sold in May 1996. See Note 6 to
the Company's Consolidated Financial Statements. Combined Properties, Inc., a
Haft-controlled entity, managed the shopping centers and office building for
the partnerships. Trak Auto, Crown Books, Shoppers Food and Total Beverage
128
<PAGE> 129
Item 13. Certain Relationships and Related Transactions (Continued)
leased eight stores in some of these shopping centers and made aggregate rental
payments to CMREC of approximately $289,000 during the year ended January 31,
1997 (prior to the sale of the properties in May 1996).
On April 21, 1997, Dart reached a conditional settlement agreement with Herbert
H. Haft. See Item 3. -- Legal Proceedings.
129
<PAGE> 130
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
See Item 8 for Dart Group Corporation Consolidated Financial
Statements (Shoppers Food Warehouse Corp. is included on an
equity basis for periods after May 28, 1994).
Set forth below are the most recent audited
financial statements of Shoppers Food Warehouse
Corp. for the 31 weeks ended February 1, 1997.
130
<PAGE> 131
INDEX TO FINANCIAL STATEMENTS
OF SHOPPERS FOOD WAREHOUSE CORP.
<TABLE>
<S> <C>
Report of Independent Public Accountants 132
Consolidated Balance Sheets as of February 1, 1997, June 29, 1996, and July 1,
1995 133
Consolidated Statements of Income for the Thirty One Weeks Ended February 1,
1997 and the Three Years Ended June 29, 1996, July 1, 1995 and July 2, 1994 134
Consolidated Statements of Changes in Stockholders' Equity for the Thirty One
Weeks Ended February 1, 1997 and the Three Years Ended June 29, 1996, July 1,
1995 and July 2, 1994 135
Consolidated Statement of Cash Flows for the Thirty One Weeks Ended February 1,
1997 and the Three Years Ended June 29, 1996, July 1, 1995 and July 2, 1994 136
Notes to Consolidated Financial Statements as of February 1, 1997, June 29,
1996, and July 1, 1995 137
</TABLE>
131
<PAGE> 132
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Shoppers Food Warehouse Corp.:
We have audited the accompanying consolidated balance sheets of Shoppers Food
Warehouse Corp. (a Delaware corporation) and subsidiaries, as of February 1,
1997, June 29, 1996, and July 1, 1995, and the related consolidated statements
of income, stockholders' equity and cash flows for the thirty-one weeks ended
February 1, 1997, and for each of the three years in the period ended June 29,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Shoppers Food Warehouse Corp.
and subsidiaries as of February 1, 1997, June 29, 1996 and July 1, 1995, and
the results of their operations and their cash flows for the thirty-one weeks
ended February 1, 1997 and for each of the three years in the period ended June
29, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
April 5, 1997
132
<PAGE> 133
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FEBRUARY 1, JUNE 29, JULY 1,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current Assets:
Cash and Cash Equivalents 13,739 $3,560 $38,650
Short Term Investments 94,999 103,080 58,353
Accounts Receivable 9,244 7,708 7,633
Merchandise Inventories 29,699 28,342 27,253
Prepaid Expenses 2,056 1,022 956
Income Tax Receivable - 273 -
Due From Affiliate 522 522 522
------- -------- -------
Total Current Assets 150,259 144,507 133,367
------- -------- -------
Property and Equipment, at Cost
Land and Buildings 9,120 9,120 9,120
Store and Warehouse Equipment 78,737 75,827 71,195
Office and Automotive Equipment 3,767 3,727 3,655
Leasehold Improvements 4,412 2,655 2,477
----- -------- -------
96,036 91,329 86,447
Accumulated Depreciation and Amortization (73,944) (69,944) (63,504)
------ -------- -------
Net Property and Equipment 22,092 21,385 22,943
------ -------- -------
Deferred Income Taxes 5,853 4,289 4,577
Other Assets 804 841 1,116
-------- -------- -------
Total Assets $179,008 $171,022 $162,003
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable 41,830 39,865 38,275
Accrued Expenses-
Salaries and Benefits 4,886 5,220 4,931
Taxes, Other Than Income 2,903 1,996 1,934
Other 6,469 5,150 4,623
Income Taxes Payable 1,391 0 2,152
-------- -------- -------
Total Current Liabilities 57,479 52,231 51,915
-------- -------- -------
Capital Lease Obligation 10,035 10,069 9,950
Deferred Income 2,448 412 1,218
Deferred Rent Liability 4,558 4,277 3,590
-------- -------- -------
Total Liabilities 74,520 66,989 66,673
-------- -------- -------
Stockholders' Equity
Class A Common Stock, Nonvoting, Par Value $5 Per Share,
25,000 Shares Authorized, 23,333-1/3 Shares Issued and Outstanding 117 117 117
Class B Common Stock, Voting, Par Value $5 Per Share,
25,000 Shares Authorized, 10,000 Shares Issued and Outstanding 50 50 50
Retained Earnings 104,321 103,866 95,163
-------- -------- ------
Total Stockholders' Equity 104,488 104,033 95,330
-------- -------- ------
Total Liabilities and Stockholders' Equity $179,008 $171,022 $162,003
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
133
<PAGE> 134
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
31 WEEKS ENDED FIFTY-TWO WEEKS ENDED
----------------------- -------------------------------------------
FEBRUARY 1, JUNE 29, JULY 1, JULY 2,
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales 511,025 835,971 790,842 750,340
Cost Of Sales 398,129 651,986 616,521 593,063
------- ------- ------- -------
Gross Profit 112,896 183,985 174,321 157,277
Selling and Administrative Expenses 94,304 149,570 136,798 127,643
Depreciation and Amortization 4,573 8,913 8,529 10,785
----- ----- ----- ------
Operating Income 14,019 25,502 28,994 18,849
Interest Income 3,526 5,789 4,682 2,189
Interest Expense 710 1,771 1,451 1,426
--- ----- ----- -----
Income Before Income Taxes
and Extraordinary Item 16,835 29,520 32,225 19,612
Provision for Income Taxes 6,380 10,593 13,938 7,541
------ ------ ------ ------
Income Before Extraordinary Item 10,455 18,927 18,287 12,071
------ ------ ------ ------
Extraordinary Gain (Loss)- Insurance Proceeds
From Fire, Net Of Income Tax (Benefit) Provision
Of ($131), $826 and $502 In 1996, 1995, and 1994,
Respectively (See Note 5) - (224) 1,239 858
- ---- ----- ---
Net Income 10,455 18,703 19,526 12,929
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
134
<PAGE> 135
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------
CLASS A CLASS B RETAINED
NONVOTING VOTING EARNINGS TOTAL
--------- -------
<S> <C> <C> <C> <C>
Balance, July 2, 1994 $117 $50 $75,637 $75,804
Net income - - 19,526 19,526
- - ------ ------
Balance, July 1, 1995 117 50 95,163 95,330
Net income 18,703 18,703
Shareholder distribution - - (10,000) (10,000)
- - ------ ------
Balance, June 29, 1996 117 50 103,866 104,033
Net income 10,455 10,455
Shareholder distribution - - (10,000) (10,000)
- - ------ ------
Balance, February 1, 1997 $117 $50 $104,321 $104,488
==== === ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
135
<PAGE> 136
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
31 WEEKS ENDED FIFTY-TWO WEEKS ENDED
-------------- ------------------------------
FEBRUARY 1, JUNE 29, JULY 1, JULY 2,
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $10,455 $18,703 $19,526 $12,929
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 4,573 8,913 8,529 10,785
Increase in deferred income taxes (1,564) 288 (1,058) (594)
Loss (Gain) on disposition of assets - - 34 (15)
Effect of insurance receivable on income - - - (104)
Interest expense in excess of capital lease payments - 119 208 240
Increase in deferred rent liability 281 687 553 1,082
Changes in operating assets and liabilities:
Accounts receivable (1,536) (75) 1,028 (3,952)
Merchandise inventories (1,357) (1,089) 1,810 (2,455)
Prepaid expenses (1,034) (66) (63) (53)
Due from affiliate - - 490 -
Other assets 37 275 (252) (354)
Accounts payable 1,965 1,590 2,009 1,544
Accrued expenses 1,892 878 (1,023) 241
Income taxes payable 1,664 (2,425) 1,307 144
Deferred income 2,036 (806) (1,191) (1,177)
----- ---- ------ ------
Net cash provided by operating activities 17,412 26,992 31,907 18,261
------ ------ ------ ------
Cash flows from investing activities :
Capital expenditures (5,280) (7,355) (4,693) (5,112)
Proceeds from sale of fixed assets - - - 15
Purchases and Sales of Short-Term Investments, net 8,081 (44,727) (55,781) (1,962)
----- ------ ------ ------
Net cash provided by (used in) investing activities 2,801 (52,082) (60,474) (7,059)
----- ------ ------ ------
Cash flows from financing activities:
Shareholder distribution (10,000) (10,000) - -
Payments on Capital Lease (34) - - -
--- - - -
Net cash used in financing activities (10,034) (10,000) - -
------- ------- - -
Net increase (decrease) in cash and cash equivalents 10,179 (35,090) (28,567) 11,202
Cash and cash equivalents, beginning of period 3,560 38,650 67,217 56,015
----- ------ ------ ------
Cash and cash equivalents, end of period $13,739 $3,560 $38,650 $67,217
------- ------ ------- -------
Supplemental disclosure of cash flow information :
Cash paid during the fiscal year for-
Income taxes $6,300 $12,487 $12,091 $8,525
Interest $710 $1,771 $1,451 $1,456
---- ------ ------ ------
Supplemental disclosure of noncash financing activity :
In fiscal year 1994, the Company recorded an insurance receivable
and wrote-off certain assets with a net book value of $708,000
due to fire damage
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
136
<PAGE> 137
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include Shoppers Food Warehouse Corp. (a
Delaware corporation) and its subsidiaries, collectively the "Company." All
significant intercompany accounts and transactions have been eliminated. As of
February 1, 1997, June 29, 1996, and July 1, 1995, the Company operated 34, 34
and 33 warehouse-style grocery stores, respectively, in Maryland and Virginia.
FISCAL YEAR
In connection with the acquisition (see Note 6), the Company changed its fiscal
year end to the Saturday closest to January 31. Previously the Company's fiscal
year ended on the Saturday closest to June 30. A fiscal year end coinciding
with the Saturday closest to a month end results in a 52 or 53 week year. The
fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994 contained 52
weeks. The period ended February 1, 1997 contained 31 weeks.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary cash investments with
maturities of three months or less to be cash equivalents. The majority of
these are invested in U.S. Treasury Notes.
SHORT TERM INVESTMENTS
Effective July 1994, the company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company carries debt securities at amortized cost as
it has both the positive intent and ability to hold these investments to
maturity. The effect of adopting SFAS No. 115 did not materially impact the
Company's financial position or results of its operations. At February 1,
1997, June 29, 1996, and July 1, 1995 short-term investments consisted of U.S.
Government Treasury Notes
137
<PAGE> 138
with original maturities of more than three months which management intended to
hold to maturity. Short term investments carried as of February 1, 1997 mature
at various dates from February 15, 1997 to November 15, 1997. Subsequent to
year-end, management liquidated a substantial amount of its short-term
investments in order to reduce the debt associated with the acquisition by Dart
Group Corporation ("Dart") of 50 percent equity in the Company that it did not
own (see Note 6).
MERCHANDISE INVENTORIES
The Company's inventories are priced at the lower of cost or market. Cost is
determined using the last-in, first-out method. If replacement cost (which
approximates the first-in, first-out method) had been used, inventories would
have been greater by approximately $4,375,000, $3,845,000 and $2,940,000 as
of February 1, 1997, June 29, 1996 and July 1, 1995 respectively. Net income
would have been higher by approximately $530,000 for the period ended February
1, 1997, and $905,000, $877,000, and $364,000, for the fiscal years ended June
29, 1996, July 1, 1995, and July 2, 1994, respectively.
ACCOUNTS RECEIVABLE
Accounts receivable include amounts due from vendors for coupons remitted,
cooperative advertising, merchandise rebates, as well as interest receivable on
treasury notes.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company depreciates property
and equipment using accelerated methods over the estimated useful lives of the
assets, generally five to seven years.
ACCRUED INSURANCE CLAIMS
The Company maintains self funded coverage with respect to general, workers
compensation, and health insurance liabilities. Claims for general and
workers' compensation are administered through insurance companies, which
estimate the obligation of reported claims. An estimate of the obligation for
health insurance claims is accrued at year-end and is based on historical data.
Expenses arising from claims are accrued as claims become subject to
estimation. Self-insurance liabilities are based on claims filed plus an
additional amount for incurred but not reported claims. These liabilities are
not discounted.
INCOME TAXES
The Company provides a deferred tax expense or benefit equal to the change in
the net deferred tax asset during the year in accordance with SFAS No. 109
"Accounting for Income Taxes." Deferred income taxes represent the future net
tax effects resulting from temporary differences between the financial
statements and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
138
<PAGE> 139
STORE OPENING AND CLOSING COSTS
All costs of a noncapital nature incurred in opening a new store are charged to
expense as incurred. The Company opened one new store during each of the
fiscal years ended June 29, 1996 and July 2, 1994. No stores were opened
during the year ended July 1, 1995 and the period ended February 1, 1997.
The costs associated with store closings are charged to selling and
administrative expense when management makes the decision to close a store.
Such costs consist primarily of lease payments and other carrying costs of
holding the facility , net of estimated sublease income.
DEFERRED INCOME
The Company has entered into various agreements with vendors and suppliers
which provide for the payment of cash or the receipt of merchandise at the
beginning or during the contract period. These amounts are deferred and
amortized over the expected lives of the contracts.
LONG LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value should be assessed. Impairment
is measured by comparing the carrying value to the estimated undiscounted
future cash flows expected to result from the use of the assets and their
eventual disposition. The Company has determined that as of February 1, 1997,
there has been no impairment in the carrying value of long-lived assets.
CONCENTRATION OF CREDIT RISK
The Company's assets that are exposed to credit risk consist primarily of cash
and cash equivalents, short-term investments, and accounts receivable. The
Company maintains cash and cash equivalents with major banks in its
marketplace. The Company performs periodic evaluations of the relative credit
standing of the financial institutions with which it does business. The
company's short-term investments are invested in U.S. Government Treasury
Notes. The Company's accounts receivable balance results primarily from the
amounts due from its vendors for various promotional programs. The company
periodically reviews its accounts receivable balance and allows for
uncollectible accounts.
CURRENT ASSETS AND CURRENT LIABILITIES
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
the disclosure of the fair value of a financial instrument for which it is
practicable to estimate the value and the methods and significant assumptions
used to estimate the value. At February 1, 1997, June 29, 1996, and July 1,
1995 the carrying amount of current assets and current liabilities approximates
fair value due to the short maturity of those instruments.
139
<PAGE> 140
2. DISPOSITION OF TOTAL BEVERAGE CORP.:
In October 1992, the Company opened Total Beverage Corp. ("Total Beverage"), a
discount beverage retail store. On February 27, 1993, the company entered into
an Asset Purchase Agreement (the Agreement) to sell Total Beverage to Dart.
As proceeds from the sale, the Company received approximately $1,493,000 in a
note receivable (the "Note"). Under the terms of the Agreement, the Company is
required to reimburse the Buyer for 25 percent of future operating losses of
Total Beverage, as defined in the Agreement, over a three year period. To the
extent of such losses, the Company will remit funds first by reducing amounts
due under the Note and then by remitting payment to the buyer. The Note and
accrued interest were due in February 1995. The Company has reflected the
Note, net of a $1,000,000 reserve, in the accompanying balance sheets as of
February 1, 1997, June 29, 1996, and July 1, 1995 respectively. Management
believes the reserve is adequate to provide for any reductions in the Note.
3. OTHER ACCRUED EXPENSES:
Other accrued expenses consist of the following (in thousands)
<TABLE>
<CAPTION>
February 1, 1997 June 29, 1996 July 1, 1995
---------------- ------------- ------------
<S> <C> <C> <C>
Accrued insurance $3,441 $2,719 $2,262
Reserve for store closing 1,513 853 853
Gift certificates outstanding 1,090 928 815
Other 425 650 693
------ ------ ------
Total $6,469 $5,150 $4,623
====== ====== ======
</TABLE>
140
<PAGE> 141
4. INCOME TAXES:
The provision for income taxes is comprised of the following (in thousands).
<TABLE>
<CAPTION>
THIRTY-ONE
WEEKS ENDED FISCAL YEAR ENDED
----------- -----------------
FEBRUARY 1, 1997 JUNE 29, 1996 JULY 1, 1995 JULY 2, 1994
---------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Current income tax provision:
Federal $7,412 $9,624 $13,422 $7,582
State 532 681 1,574 1,088
Deferred income tax
provision (benefit) (1,564) 288 (1,058) (1,129)
------ --- ------ ------
$6,380 $10,593 $13,938 $7,541
====== ======= ======= ======
</TABLE>
This effective income tax rate is reconciled to the Federal statutory rate as
follows:
<TABLE>
<CAPTION>
THIRTY-ONE
WEEKS ENDED FISCAL YEAR ENDED
----------- -----------------
FEBRUARY 1, 1997 JUNE 29, 1996 JULY 1, 1995 JULY 2, 1994
---------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Federal statutory rate 35 % 35% 35% 35%
Increase in taxes resulting from:
State income taxes, net of Federal
income tax benefit 2.0 2.0 3.1 3.0
Revision of estimate for tax accruals - - 3.7 -
Other 0.9 (1.1) 1.5 0.4
--- ---- --- ---
Effective tax rate 37.9% 35.9% 43.3% 38.4%
===== ===== ===== =====
</TABLE>
141
<PAGE> 142
Temporary differences which give rise to the deferred tax assets and
liabilities on a consolidated basis are as follows (in thousands).
<TABLE>
<CAPTION>
THIRTY-ONE
WEEKS ENDED FISCAL YEAR ENDED
---------------- -----------------
FEBRUARY 1, 1997 JUNE 29, 1996 JULY 1, 1995
---------------- ------------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Loss on disposition of Total Beverage $ 374 $ 374 $ 381
Reserves for store closings and other 566 319 325
Deferred Rent 1,705 1,600 1,433
Capital Lease 505 517 946
Employee Benefits 2,241 1,843 1,472
Deferred Income 435 154 557
Other 326 89 -
--- -- ---
$ 6,152 $ 4,896 $ 5,114
======= ======= =======
Deferred tax liabilities:
Depreciation (299) (607) (526)
Other - - (11)
---- ---- ----
(299) (607) (537)
==== ==== ====
Net deferred tax asset $ 5,853 $ 4,289 $ 4,577
======= ======= =======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company
believes that no valuation allowance is necessary as of February 1, 1997, June
29, 1996, and July 1, 1995 due to its history of profitable operations.
5. COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' AGREEMENT
The Company's stockholders are party to a stockholders' agreement dated June
28, 1988 (the "Stockholder Agreement"), that specifies how a stockholder can
transfer ownership of their interest in the Company's stock. In June 1996 and
September 1996, the Company declared cash dividends payable to its
stockholders. Subsequent to February 1, 1997, Dart purchased the remaining 50%
interest in the Company that it did not already own (see Note 6).
142
<PAGE> 143
401(k) PLAN
Prior to fiscal year 1995 the Company maintained a noncontributory profit
sharing plan (the "Plan") for all employees with one year of full time
continuous service. Discretionary contributions were made by the Company in
trust for the exclusive benefit of employees who qualified under the Plan. The
Board of Directors authorized a contribution of $300,000 to the Plan for the
fiscal year ended July 2, 1994. During fiscal 1995, a Company replaced the
Plan with a defined contribution 401(k) plan (the "New Plan"). The New Plan
is available to substantially all employees over the age of 21 who have
completed one year of continuous service. Discretionary contributions are made
by the Company in trust for the exclusive benefit of employees who participate
in the New Plan. The Board of Directors authorized a contribution of $400,000
to the New Plan for both fiscal years ending June 29, 1996 and July 1, 1995.
For the thirty-one weeks ended February 1, 1997, the Company has accrued
$233,000 related to its projected fiscal year 1997 contribution. All amounts
contributed to the New Plan are included in accrued salaries and benefits in
the accompanying financial statements.
MULTIEMPLOYER PLANS
The Company makes contributions to multiemployer plans for its union employees.
Such contributions, net of employee contributions, totaled approximately
$440,000, $6,205,000, $282,000, for pension, health and welfare, and legal
benefit plans, respectively, for the thirty-one weeks ended February 1, 1997.
Contributions to the pension, health and welfare, and legal benefit plans
totaled approximately $838,000, $10,373,000, and $466,000, respectively, for
the year ended June 29, 1996, $787,000, $8,701,000 and $408,000, respectively,
for the year ended July 1, 1995 and $745,000, $7,437,000 and $382,000,
respectively, for year ended July 2, 1994.
LEASE COMMITMENTS
The Company leases warehouse and retail store facilities under noncancelable
lease agreements ranging from 1 to 20 years. Renewal options are available on
the majority of the leases for one or more periods of five years each. Most
leases require the payment of taxes and maintenance costs, and some leases
provide for additional rentals based on sales in excess of specified minimums.
All store leases have stated periodic rental increases. The increases are
amortized over the lives of the leases. Rent expense includes approximately
$281,000, $687,000, $802,000 and $832,000 of amortized rental increases for the
period ended February 1, 1997, and for the year ended June 29, 1996, July 1,
1995, and July 2, 1994 respectively.
143
<PAGE> 144
Following is a schedule of annual future minimum payments under the capital
lease for office space, assuming future annual increases of 6 percent, and
noncancelable operating leases, which have initial or remaining terms in excess
of one year at February 1, 1997 (in thousands).
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASE LEASES
----------- ----- ------
<S> <C> <C>
1998 $1,316 $13,038
1999 1,395 13,115
2000 1,478 12,957
2001 1,567 12,665
2002 1,661 12,291
Thereafter 19,742 107,833
------ -------
Total $27,159 $171,899
========
Less- Imputed Interest 17,124
------
Present Value of net minimum
lease payments $10,035
Less- Current maturities -
------
Long -term capital lease obligations $10,035
=======
</TABLE>
Rent expense for operating leases charged to operations is as follows (in
thousands)
<TABLE>
<CAPTION>
THIRTY-ONE
WEEKS ENDED FISCAL YEAR ENDED
----------- -----------------
FEBRUARY 1, 1997 JUNE 29, 1996 JULY 1, 1995 JULY 2, 1994
---------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Minimum rentals $7,288 $12,021 $10,925 $11,034
Contingent rentals 3,770 4,006 4,054 4,052
----- ----- ----- -----
Total $11,058 $16,027 $14,979 $15,086
======= ======= ======= ========
</TABLE>
RELATED-PARTY LEASES
In July 1990, the Company entered into an agreement to lease an 86,000 square
foot office building in Lanham, Maryland, from a private partnership (the
"Partnership") which is owned by stockholders of the Company. The lease is for
20 years and it commenced December 10, 1990. The lease provides for yearly
increasing rental payments, based upon the Consumer Price Index
144
<PAGE> 145
for the Washington D.C., metropolitan statistical area; however, the annual
increases will not be more than 6 percent or less than 3 percent. Rental
payments for the thirty-one weeks ended February 1, 1997 and for fiscal years
ended June 29, 1996, July 1, 1995, and July 2, 1994 were approximately
$744,000, $1,246,000, $1,210,000, and $1,175,000 respectively, and all
payments over the life of the lease total approximately $34,400,000. The
Company is accounting for the lease as a capital lease. Due to fixed rental
increases during the term of the lease, lease payments exceeded interest
expense by approximately $34,000 for the thirty-one weeks ended February
1,1997. Interest expense exceeded lease payments by $254,000, $292,000, and
$321,000 for the fiscal years ended June 29, 1996, July 1, 1995, and July 2,
1994, respectively. Assuming future annual rental increases of 6 percent, the
capital lease obligation will continue to increase through November 2000, at
which time accumulated interest expense recognized for financial reporting
purposes will exceed lease payments by approximately $1,800,000. The lease
requires the Company to pay for maintenance, utilities, insurance, and taxes.
The Partnership purchased the office building for approximately $8,663,000 in
July of 1990.
During the period ended February 1, 1997, and the fiscal years ended June 29,
1996, July 1, 1995, and July 2, 1994, the Company made rental payments of
approximately $3,573,000, $5,384,000, $5,985,000, and $5,327,000 respectively
on store leases to partnerships related to stockholders of the Company. As of
February 1, 1997, the Company had ten store operating leases with partnerships
related to stockholders of the Company. The remaining future minimum payments
under these leases exclusive of option periods are approximately $70,820,000
and expire through 2014.
The Company made payments of approximately $198,000, $278,000, $246,000, and
$246,000 during the thirty-one weeks ended February 1, 1997, and each of the
fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994 for warehouse
operating leases to a partnership owned by stockholders of the Company and to a
corporation related to stockholders of the Company. As of February 1, 1997,
the remaining future minimum annual payments under these leases are
approximately $1,386,000 and expire in 2002.
SUBLEASING AGREEMENTS
The Company subleases space within one store for the sale of beer and wine to
an entity affiliated with its officers. The Company received rental income of
approximately $57,865, $155,000, $155,000, and $123,000 in the thirty-one
weeks ended February 1, 1997, and in the fiscal years ended June 29, 1996,
July 1, 1995, and July 2, 1994 respectively, from this entity, which is
included in selling and administrative expenses.
As of February 1, 1997, there were three unaffiliated subtenants in the office
building. The subtenants are leasing approximately 30,000 square feet. The
subleases expire between January 1998 and September 2000. The Company received
rental income of approximately $321,000. $551,000, $530,000 and $615,000 in
the period ending February 1, 1997 and in the fiscal years ended June 29, 1996,
July 1, 1995, and July 2, 1994 respectively from its subtenants.
145
<PAGE> 146
During the period ended June 29, 1996 the Company began leasing space to a
corporation related to the stockholders of the Company. The Company received
rental income of approximately $91,000 and $140,000 during the period ended
February 1,1997 and during the fiscal year ended June 29, 1996.
LINE-OF CREDIT AGREEMENT / LETTERS OF CREDIT
The Company has a $35,000,000 line-of-credit with a local bank, with interest
payable at the prime rate. The Company has authorized the local bank to issue
letters of credit in connection with the Company's workers' compensation
insurance. There were no borrowings on this line in the seven months ended
February 1, 1997. As of February 1, 1997, June 29, 1996, and July 1, 1995, the
Company's line of credit was reduced by outstanding letters of credit of
approximately $6,724,000, $6,424,000 and $6,135,000, respectively. The line of
credit expired on March 31, 1997, however, the letters of credit will mature at
various dates throughout 1998.
LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to operations. In the
opinion of management, it is unlikely that any exposure from these actions will
have a material impact on the Company's financial position.
OTHER
In June of 1994, the Company had one store which incurred significant fire
damage. The Company recorded the insurance settlement on the store's
inventory, fixed assets, reimbursable payroll costs, and other business
interruption costs. This resulted in the recognition of an extraordinary gain,
net of taxes, in the accompanying financial statements of $1,239,000 and
$858,000, during the fiscal years ended July 1, 1995, and July 2, 1994,
respectively. The extraordinary gain recorded in fiscal year 1994 was net of
associated costs to write-off assets with a net book value of $708,000. During
the fiscal year ended June 29, 1996, the insurance claim was settled in full
and the Company recorded an extraordinary loss, net of taxes, of $224,000 to
reflect the remaining amount received for insurance proceeds, net of associated
costs.
6. SUBSEQUENT EVENTS
On December 16, 1996, Dart submitted offers, pursuant to the Stockholders'
Agreement governing Dart's investment in the Company, to either (i) sell all of
Dart's 50 percent equity interest in the Company or (ii) buy the 50 percent
equity interest in the Company that it did not own, in either case for a cash
price of $210 million. On December 18, 1996, the other stockholders accepted
Dart's offer to purchase their shares (the "Shares") of capital stock of the
Company. Under the terms of the Stockholders' Agreement, Dart's acquisition
(the "Acquisition") of the shares was to take place within 60 days of such
acceptance.
146
<PAGE> 147
On February 6, 1997, Dart acquired the remaining 50% interest in the Company.
To effect the Acquisition, Dart's wholly owned subsidiary, SFW Acquisition
Corp., issued $140,000,000 in Increasing Rate Senior Notes due in 2000 ("Senior
Notes") and funded the remaining portion of the purchase price with bridge
financing. Immediately following the Acquisition, Dart liquidated a
substantial amount of the Company's short-term investments to repay the bridge
financing and fee associated with the transaction. In addition, the Company
was merged with SFW Acquisition Corp. and the Company became the obligor of the
Senior Notes. Also, on February 6, 1997, the Company authorized a $10,000,000
dividend to stockholders of record on February 7, 1997.
7. RESULTS OF OPERATION AND PRO FORMA DATA FOR THE 52 WEEKS ENDED FEBRUARY 1,
1997 (UNAUDITED)
The pro forma results reflect the pushdown of all acquisition entries as if the
acquisition discussed in Note 6 had occurred as of February 4, 1996.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
FEBRUARY 1, 1997 FEBRUARY 1, 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Sales $850,875 850,875
Cost of Sales 659,929 659,929
-------- -------
Gross Profit 190,946 190,946
Selling and Administrative Expenses 154,534 154,534
Depreciation and Amortization 8,720 13,180
----- ------
Operating Income 27,692 23,232
Interest Income 5,985 874
Interest Expense 1,645 20,892
----- ------
Net Income before Taxes 32,032 3,214
Provision for Income Taxes 11,495 2,494
------ -----
NET INCOME 20,537 720
====== ====
</TABLE>
147
<PAGE> 148
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
(a) (2) Exhibits...............................................
3.1 Certificate of Incorporation, incorporated herein by reference to
Exhibit #3a to the Company's Form S-1 Registration Statement File
#2-99831) filed with the Securities and Exchange Commission ("Dart
1985 S1").
3.2 Certificate of Amendment of the Certificate of Incorporation of Dart
Group Corporation dated January 13, 1987 (incorporated by reference
to Dart Fiscal Year 1987 10-K).
3.3 Bylaws, amended and restated as of September 14, 1993(incorporated
by reference to Dart Fiscal Year 1987 10-K).
4.1 Indenture dated as of February 6, 1997 by and among SFW Acquisition
Corp., SFW Holding Corp. and Norwest Bank Minnesota, National
Association.
4.2 First Supplemental Indenture dated as of February 6, 1997 by and
among Shoppers Food Warehouse Corp., SFW Holding Corp. and Norwest
Bank Minnesota, National Association.
4.3 Shoppers Food Warehouse Global Security.
9.1 Voting Trust Agreement, dated as of October 6, 1996, by and among
Ronald S. Haft, Dart Group Corporation and Larry G. Schafran and
Sidney B. Silverman, as initial voting trustees (incorporated by
reference to Exhibit 9 to the Current Report of Dart Group
Corporation on Form 8-K filed on October 10, 1996).
10.1 Employment agreement with Herbert H. Haft, as amended (incorporated
by reference to Dart Fiscal Year 1988 10-K).
10.2 Dart Drug Corporation Executive Non-Qualified Stock Option Plan,
incorporated herein by reference to exhibit (10o) to the Company's
Form 10-K filed with the SEC on May 1, 1984.
10.3 Lease dated December 26, 1984 between Dart Group Corporation and
Seventy-Fifth Avenue Associates (incorporated by reference to Dart
Fiscal Year 1986 10-K).
10.4 Sublease dated December 26, 1984 between Dart Group Corporation and
Trak Auto Corporation (incorporated by reference to Dart Fiscal Year
1986 10-K).
10.5 Sublease dated December 26, 1984 between Dart Group Corporation and
Crown Books Corporation (incorporated by reference to Dart
148
<PAGE> 149
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
Fiscal Year 1986 10-K).
10.6 Lease dated April 27, 1984 between Trak Chicago Limited Partnership
I and Trak Auto Corporation (incorporated by reference to Dart
Fiscal Year 1986 10-K).
10.7 Dart Group Corporation 1981 Stock Option Plan, as amended
(incorporated by reference to Dart Fiscal Year 1987 10-K).
10.8 Indemnity Agreement by and between Dart Group Corporation and Crown
Books Corporation dated June 9, 1986 incorporated herein by
reference to Exhibit 10(zzzz) to the Crown 1987 10-K.
10.9 Indemnity Agreement, dated June 9, 1986, by and between Dart Group
Corporation and Trak Auto Corporation herein incorporated by
reference to Exhibit 10(pppp) to the Trak 1987 10-K.
10.10 Dart Group Corporation Deferred Compensation Plan for Directors,
effective January 1, 1988 (incorporated by reference to Dart Fiscal
Year 1988 10-K).
10.11 Lease agreement dated November 22, 1988 between Dart Group
Corporation and Seventy-Fifth Avenue Associates (incorporated by
reference to Dart Fiscal Year 1989 10-K).
10.12 Lease agreement dated January 27, 1989 between Trak Auto Corporation
and Combined Properties/Ontario Limited Partnership herein
incorporated by reference to Exhibit 10(tttt) filed with Trak Auto
Corporation Fiscal Year 1989 Form 10-K, No. 0-12202 ("Fiscal 1989
Trak 10-K").
10.13 Lease agreement dated February 27, 1988 between Trak Corporation and
Haft/Equities-General, herein incorporated by reference to Exhibit
10(uuuu) filed with Fiscal 1989 Trak 10-K.
10.14 Lease agreement dated June 17, 1987 between Trak Auto West, Inc. and
Haft/Equities/Rose Hill Limited Partnership, herein incorporated by
reference to Exhibit 10(vvvv) filed with Fiscal 1989 Trak 10-K.
10.15 Trak Auto Amended Stock Option Plan, herein incorporated by
reference to Exhibit 10(yyyy) filed with Fiscal 1990 Trak 10-K.
10.16 Lease agreement dated January 5, 1990 between Combined Properties
Limited Partnership and Crown Books Corporation re: Turnpike
Shopping Center (815), herein incorporated by reference to Exhibit
10(iiiii) filed with Fiscal 1990 Crown 10- K.
149
<PAGE> 150
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.17 Lease agreement dated January 5, 1990 between Combined Properties
Limited Partnership and Crown Books Corporation re: the Plaza at
Landmark (165), herein incorporated by reference to Exhibit
10(jjjjj) filed with Fiscal 1990 Crown 10-K.
10.18 Lease agreement dated January 5, 1990 between Combined Properties
Limited Partnership and Crown Books Corporation re: Manaport Plaza
Shopping Center (804), herein incorporated by reference to Exhibit
10(kkkkk) filed with Fiscal 1990 Crown 10- K.
10.19 Lease agreement dated October 31, 1990 between CP Acquisitions
Limited Partnership and Crown Books Corporation re: McLean Shopping
Center (803), herein incorporated by reference to Exhibit 10(lllll)
Crown Books Corporation Fiscal Year 1991 Form 10-K No. 0-11457
("Fiscal 1991 Crown 10-K").
10.20 Lease agreement dated March 20, 1991 between Charles County
Associates Limited Partnership and Crown Books Corporation re:
Charles County Plaza (833), herein incorporated by reference to
Exhibit 10(nnnnn) Fiscal 1991 Crown 10-K.
10.21 Lease agreement dated May 11, 1990 between Combined
Properties/Greenbriar Limited Partnership and Crown Books
Corporation, the First Amendment dated September 13, 1990 and the
Second Amendment dated March 14, 1991 re: Greenbriar Town Center
(104), herein incorporated by reference to Exhibit 10(ooooo) Fiscal
1991 Crown 10-K.
10.22 Lease agreement dated May 18, 1990 between Combined Properties
Limited Partnership and Trak Corporation and Lease Termination
Agreement dated March 31, 1990 between Combined Properties Limited
Partnership, Retail Lease Acquisition Limited Partnership and Trak
Corporation re: Fair City Mall (605), herein incorporated by
reference to Exhibit 10(zzzz) Trak Auto Corporation Fiscal Year 1991
Form 10-K No. 0-12202 ("Fiscal 1991 Trak 10-K").
10.23 Lease agreement dated May 18, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation and License Termination
Agreement dated March 31, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation re: Chantilly Plaza (609),
herein incorporated by reference to Exhibit 10(aaaaa) Fiscal 1991
Trak 10-K.
10.24 Lease agreement dated May 18, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation and
150
<PAGE> 151
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
License Termination Agreement 4 dated March 31, 1990 between Retail
Lease Acquisition Limited Partnership and Trak Corporation re:
College Plaza (610), herein incorporated by reference to Exhibit 10
(bbbbb)Fiscal 1991 Trak 10-K.
10.25 Lease agreement dated May 18, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation and License Termination
Agreement dated March 31, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation re: Enterprise (614),
herein incorporated by reference to Exhibit 10(ccccc) Fiscal 1991
Trak 10-K.
10.26 Lease agreement dated May 18, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation and License Termination
Agreement dated March 31, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation re: Rolling Valley (630),
herein incorporated by reference to Exhibit 10(ddddd) Fiscal 1991
Trak 10-K.
10.27 Lease agreement dated May 18, 1990 between Combined Properties
Limited Partnership and Trak Corporation and Lease Termination
Agreement dated March 31, 1990 between Combined Properties Limited
Partnership, Retail Lease Acquisition Limited Partnership and Trak
Corporation re: White Flint (632), herein incorporated by reference
to Exhibit 10(eeeee) Fiscal 1991 Trak 10-K.
10.28 Lease agreement dated November 6, 1990 between CP Acquisition
Limited Partnership and Trak Corporation and Settlement Agreement
dated November 6, 1990 between CP Acquisitions Limited Partnership
and Trak Corporation re: Aspen Manor (615), herein incorporated by
reference to Exhibit 10(fffff) Fiscal 1991 Trak 10-K.
10.29 Lease agreement dated November 6, 1990 between CP Acquisition
Limited Partnership and Trak Corporation and Settlement Agreement
dated November 6, 1990 between CP Acquisitions Limited Partnership
and Trak Corporation re: Lee and Harrison (633), herein incorporated
by reference to Exhibit 10(ggggg) Fiscal 1991 Trak 10-K.
10.30 Lease agreement dated November 6, 1990 between CP Acquisition
Limited Partnership and Trak Corporation and Settlement Agreement
dated November 6, 1990 between CP Acquisitions Limited Partnership
and Trak Corporation re: Penn Daw (642), herein incorporated by
reference to Exhibit 10(hhhhh) Fiscal 1991 Trak 10-K.
151
<PAGE> 152
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.31 Lease agreement dated November 6, 1990 between Combined Properties
Limited Partnership and Trak Corporation and Settlement Agreement
dated November 6, 1990 between Combined Properties Limited
Partnership and Trak Corporation re: Fairfax Circle (656), herein
incorporated by reference to Exhibit 10(iiiii) Fiscal 1991 Trak
10-K.
10.32 Lease agreement dated March 23, 1990 between Combined
Properties/Silver Hill Limited Partnership and Trak Corporation and
Termination Agreement dated April 13, 1990 between Combined
Properties/Silver Hill Limited Partnership and Trak Corporation re:
Silver Hill (619), herein incorporated by reference to Exhibit
10(jjjjj) Fiscal 1991 Trak 10-K.
10.33 Lease agreement dated November 6, 1990 between Haft/Equities- Bladen
Limited Partnership and Trak Corporation and Lease Termination
Agreement dated November 6, 1990 between Haft/Equities-Bladen
Limited Partnership and Trak Corporation re: Bladen Plaza (662),
herein incorporated by reference to Exhibit 10(kkkkk) Fiscal 1991
Trak 10-K (incorporated by reference to Dart Fiscal Year 1991 10-K).
10.34 Lease agreement dated July 19, 1990 between Combined Properties/4600
Forbes Limited Partnership and Shoppers Food Warehouse Corp.
(incorporated by reference to Dart Fiscal Year 1991 10-K).
10.35 Lease Agreement dated December 27, 1982 between Combined Properties
Limited Partnership and Jumbo Food Stores VA, Inc., Amendment dated
September 8, 1988 and Amendment dated September 25, 1990 re: Fair
City Mall (incorporated by reference to Dart Fiscal Year 1991 10-K).
10.36 Lease Agreement dated June 28, 1983 between Combined Properties
Limited Partnership and Jumbo Food Stores VA, Inc., Amendment dated
September 8, 1988, Amendment May 10, 1990 and Amendment dated
September 25, 1990 re: Rolling Valley Mall (incorporated by
reference to Dart Fiscal Year 1991 10-K).
10.37 Lease Agreement dated September 11, 1987 between Combined Properties
Limited Partnership and Jumbo Food Stores Md., Inc., Amendment dated
September 25, 1990 re: Maryland City Plaza (incorporated by
reference to Dart Fiscal Year 1991 10-K).
10.38 Lease Agreement dated July 7, 1989 between Combined
Properties/Silver Hill Limited Partnership and Jumbo Food Stores
Md., Inc., Amendment dated May 10, 1990 and Amendment dated
September 25, 1990 re: Silver Hill Plaza (incorporated
152
<PAGE> 153
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
by reference to Dart Fiscal Year 1992 10-K).
10.39 Lease agreement dated June 21, 1988 between Combined Properties
Limited Partnership and Jumbo Food Stores Md., Inc., First Amendment
dated July 7, 1989, Second Amendment dated September 25, 1990, re:
Enterprise Plaza (incorporated by reference to Dart Fiscal Year 1992
10-K).
10.40 Lease agreement dated December 23, 1991 between Combined Properties
Limited Partnership and Trak Corporation, re: Manaport Plaza (607),
herein incorporated by reference to Exhibit 10(lllll) Trak Auto
Corporation Fiscal Year 1992 Form 10-K No. 0-12202 ("Fiscal 1992
Trak 10-K").
10.41 Amendment of lease dated December 24, 1991 between
Haft/Equities-Bladen Limited Partnership and Trak Corporation, re:
Bladen Plaza (662), herein incorporated by reference to Exhibit
10(mmmmm) filed with Fiscal 1992 Trak 10-K.
10.42 Sublease agreement dated February 19, 1992 between Crown Books
Corporation and Trak Corporation, re: Vienna (616), herein
incorporated by reference to Exhibit 10 (nnnn) filed with Fiscal
1992 Trak 10-K
10.43 Sublease agreement dated February 12, 1992 between Crown Books
Corporation and Trak Corporation, re: McLean Shopping Center (627),
herein incorporated by reference to Exhibit 10(ooooo) filed with
Fiscal 1992 Trak 10-K.
10.44 Lease agreement dated May 8, 1991 between Combined Properties
Limited Partnership and Crown Books Corporation, re: Montgomery
Village (827), herein incorporated by reference to Exhibit 10(qqqqq)
filed with Crown Books Corporation Fiscal Year 1992 Form 10-K No.
0-11457.
10.45 Dart Group Corporation 1992 Stock Option Plan incorporated herein by
reference to Dart 1993 S-8 file No. 33-57010.
10.46 Amendment of lease dated December 11, 1992 between Combined
Properties Limited Partnership and Super Trak Corporation re: Oxon
Hill (606), herein incorporated by reference to Exhibit 10(qqqqq)
filed with Trak Auto Corporation Fiscal Year 1993 Form 10-K No.
0-12202 ("Fiscal 1993 Trak 10-K").
10.47 Amendment of lease dated December 1, 1992 between
Haft/Equities-Bladen Limited Partnership and Super Trak Corporation
re: Bladen Plaza (662), herein incorporated by reference to Exhibit
10(rrrrr) filed with Fiscal 1993 Trak 10- K.
153
<PAGE> 154
10.48 Amendment of lease dated January 8, 1993 between Retail Lease
Acquisition Limited Partnership and Trak Corporation re: Chantilly
Plaza (609), herein incorporated by reference to Exhibit 10(sssss)
filed with Fiscal 1993 Trak 10-K.
10.49 Amendment of lease dated December 1, 1992 between Combined
Properties/Montebello Limited Partnership and Super Trak re:
Montebello (520), herein incorporated by reference to Exhibit
10(uuuuu) filed with Fiscal 1993 Trak 10-K.
10.50 Third Amendment dated June 4, 1992 and Fourth Amendment dated June
15, 1992 to the Lease agreement between Combined Properties Limited
Partnership and Crown Books Corporation re: Greenbriar Town Center
(104), herein incorporated by reference to Exhibit 10(sssss) filed
with Crown Books Corporation Fiscal Year 1992 Form 10-K No. 0-11457
("Fiscal 1993 Crown 10-K").
10.51 Third Amendment dated June 17, 1992 to the Lease agreement between
Combined Properties Limited Partnership and Jumbo Food Stores MD.,
Inc., Re: Enterprise Plaza (incorporated by reference to Dart Fiscal
Year 1993 10-K).
10.52 Lease agreement dated November 1, 1990 between Penn Daw Associates
Limited Partnership (A Haft Controlled Entity) and Shoppers Food
Warehouse VA Corporation, the First Amendment dated February 13,
1991 Re: Penn Daw Shopping Center (incorporated by reference to Dart
Fiscal Year 1993 10-K).
10.53 Amendment of lease dated February 4, 1993 between Retail Lease
Acquisition Limited Partnership and Super Trak re: College Plaza
(610), herein incorporated by reference to Exhibit 10 (wwwww) filed
with Trak Auto Corporation Fiscal Year 1995 Form 10-K No 0-12202
("Fiscal 1995 Trak 10-K").
10.54 Amendment of lease dated September 13, 1993 between Combined
Properties Limited Partnership and Super Trak re: Fair City Mall
(605), herein incorporated by reference to Exhibit 10(xxxxx) filed
with Fiscal 1995 Trak 10-K.
10.55 Amendment of lease dated September 13, 1993 between Combined
Properties Limited Partnership and Super Trak re: Maryland City
(623), herein incorporated by reference to Exhibit 10(yyyyy) filed
with Fiscal 1995 Trak 10-K.
10.56 Second Amendment of lease dated March 31, 1995 between Combined
Properties Limited Partnership and Super Trak Corporation re:
154
<PAGE> 155
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
Oxon Hill (606), herein incorporated by reference to Exhibit 10
(zzzzz) filed with Fiscal 1995 Trak 10-K.
10.57 Lease Amendment dated November 22, 1993 between Combined Properties
Limited Partnership and Super Trak Corporation re: Landmark (658),
herein incorporated by reference to Exhibit 10(A) filed with Fiscal
1995 Trak 10-K.
10.58 Second Amendment of Lease dated August 19, 1993 and Third Amendment
of lease dated August 30, 1993 between Combined Properties Limited
Partnership and Super Crown Books Corporation re: Landmark (165),
herein incorporated by reference to Exhibit 10(wwwww) filed with
Crown Books Corporation Fiscal Year 1995 Form 10-K No. 0-11457
("Fiscal 1995 Crown 10-K").
10.59 Lease Agreement dated August 19, 1993 between Retail Lease
acquisition Limited Partnership and Super Crown Books Corporation
re: White Flint Plaza (132), herein incorporated by reference to
Fiscal 1995 Crown 10-K.
10.60 Agreement dated August 16, 1993 between Combined Properties Limited
Partnership and Total Beverage Corp. and First Amendment of Lease
dated February 24, 1995 re: Landmark (203) (incorporated by
reference to Dart Fiscal Year 1995 Form 10-K).
10.61 Trak Auto 1993 Stock Option Plan, herein incorporated by reference
to Exhibit 10(vvvvv) filed with Fiscal 1995 10-K.
10.62 Crown Books 1993 Stock Option Plan, herein incorporated by reference
to Exhibit 10(yyyyy) filed with Fiscal 1995 Crown 10- K.
10.63 Amendment of lease dated June 30, 1994 between Combined Properties
Limited Partnership and Super Trak Corporation re: Bradlick (629),
herein incorporated by reference to Exhibit 10.45 filed with Trak
Auto Corporation Fiscal Year 1996 Form 10-K No. 0-12202 ("Fiscal
1995 Trak 10-K").
10.64 Employment Agreement between R. Keith Green and Trak Auto
Corporation dated January 25, 1995, herein incorporated by reference
to Exhibit 10.46 to Fiscal 1995 Trak 10-K.
10.65 Tax Allocation Agreement dated December 27, 1994 between Dart Group
Corporation and Trak Auto Corporation, herein incorporated by
reference to Exhibit 10.47 to Fiscal 1996 Trak 10-K.
155
<PAGE> 156
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.66 Loan Agreement dated February 6, 1995 between Dart Group Corporation
and Trak Auto Corporation, herein incorporated by reference to
Exhibit 99(a)(16) to Amendment No. 2 to Trak Auto Corporation
Statement on Schedule 13E-4/A, Commission File No. 5-34497, filed
with the Commission on February 6, 1995.
10.67 Employment Agreement between E. Steve Stevens and Crown Books
Corporation dated February 1, 1997, herein incorporated by reference
to Exhibit 10.25 filed with Crown Books Corporation Fiscal year 1997
Form 10-K No. 0-11457.
10.68 Employment Agreement between Dennis N. Weiss and Dart Group
Corporation dated January 25, 1995, herein incorporated by reference
to Exhibit 10.94 filed with Dart Group Corporation Fiscal year 1995
Form 10-K ("Fiscal 1996 Dart 10-K").
10.69 Form of Indemnification Agreement dated as of September 21, 1994 by
and between Dart Group Corporation and each of Ronald S. Haft,
Herbert H. Haft, Douglas M. Bregman, Bonita Wilson, H. Ridgely
Bullock and Larry G. Schafran, herein incorporated by reference to
Exhibit 10.95 filed with Fiscal 1995 Dart 10-K.
10.70 Settlement Agreement, dated as of October 6, 1995, by and between
Dart Group Corporation and Ronald S. Haft (incorporated by reference
to Exhibit 10.1 to the Current Report of Dart Group Corporation on
Form 8-K filed on October 10, 1995).
10.71 Buy/Sell/Offering Agreement, dated as of October 6, 1995, by and
between Dart Group Corporation and Ronald S. Haft (incorporated by
reference to Exhibit 10.2 to the Current Report of Dart Group
Corporation on Form 8-K filed on October 10, 1995).
10.72 Amendment No. 1 to Employment Agreement, dated October 6, 1995, by
and between Dart Group Corporation and Ronald S. Haft (incorporated
by reference to Exhibit 10.3 to the Current Report of Dart Group
Corporation on Form 8-K filed on October 10, 1996.
10.73 Promissory Note, dated October 6, 1995, executed by Ronald S. Haft
in favor of Dart Group Corporation in the principal amount of
$37,740,162.00 (incorporated by reference to Exhibit 10.4 to the
Current Report of Dart Group Corporation on Form 8-K filed on
October 10, 1995).
10.74 Promissory Note, dated October 6, 1995, executed by Ronald S. Haft
in favor of Dart Group Corporation in the principal amount of
$27,389,672.00 (incorporated by reference to Exhibit 10.5 to
156
<PAGE> 157
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
the Current Report of Dart Group Corporation on Form 8-K filed on
October 10, 1995).
10.75 Restricted Account Security Agreement, dated as of October 6, 1995,
by and among Ronald S. Haft, Dart Group Corporation and Settlement
Corp., as escrow agent (incorporated by reference to Exhibit 10.7 to
the Current Report of Dart Group Corporation on Form 8-K filed on
October 10, 1995).
10.76 Stock and Trust Certificate Pledge Agreement, dated as of October 6,
1995, made by Ronald S. Haft in favor of Larry G. Schafran and
Sidney B. Silverman, as collateral agents and bailees for Dart Group
Corporation and Cabot-Morgan Real Estate Company (incorporated by
reference to Exhibit 10.9 to the Current Report of Dart Group
Corporation on Form 8-K filed on October 10, 1995).
10.77 Pledge of Undisputed Partnership Interests, dated as of October 6,
1995, executed by Ronald S. Haft and certain of his affiliates in
favor of Dart Group Corporation (incorporated by reference to
Exhibit 10.10 to the Current Report of Dart Group Corporation on
Form 8-K filed on October 10, 1995).
10.78 Pledge of Disputed Partnership Interests, dated as of October 6,
1995, executed by Ronald S. Haft and certain of his affiliates in
favor of Dart Group Corporation (incorporated by reference to
Exhibit 10.11 to the Current Report of Dart Group Corporation on
Form 8-K filed on October 10, 1995).
10.79 Partnership Stock Pledge Agreement, dated as of October 6, 1995, in
favor of Dart Group Corporation (incorporated by reference to
Exhibit 10.12 to the Current Report of Dart Group Corporation on
Form 8-K filed on October 10, 1995).
10.80 Mutual Release, dated as of October 6, 1995, by and between each of
Dart Group Corporation, Crown Books Corporation, Trak Auto
Corporation, Cabot-Morgan Real Estate Company, Dart/SFW Corporation,
and each of Ronald S. Haft and Combined Properties, Inc.
(incorporated by reference to Exhibit 10.13 to the Current Report of
Dart Group Corporation on Form 8-K filed on October 10, 1995).
10.81 Real Estate Master Agreement, dated as of October 6, 1996, by and
among Ronald S. Haft, Dart Group Corporation and Cabot- Morgan Real
Estate Company (incorporated by reference to Exhibit 10.14 to the
Current Report of Dart Group Corporation on Form 8-K filed on
October 10, 1995).
157
<PAGE> 158
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.82 Escrow and Security Agreement, dated as of October 6, 1996, by and
among Ronald S. Haft, certain of his affiliates, Dart Group
Corporation, Cabot-Morgan Real Estate Company and Settlementcorp, as
escrow agent (incorporated by reference to Exhibit 10.15 to the
Current Report of Dart Group Corporation on Form 8-K filed on
October 10, 1995).
10.83 Purchase Agreement [Pennsy Drive Warehouse], dated October 6, 1995,
by and between Ronald S. Haft and Dart Group Corporation
(incorporated by reference to Exhibit 10.16 to the Current Report of
Dart Group Corporation on Form 8-K filed on October 10, 1995.
10.84 Purchase Agreement [Warehouse Partnership Interests], dated October
6, 1995, by and between Ronald S. Haft and Dart group Corporation
(incorporated by reference to Exhibit 10.17 to the Current Report of
Dart Group Corporation on Form 8-K filed on October 10, 1995).
10.85 Disputed Partnership Interest Purchase Agreement, dated October 6,
1995, by and between Ronald S. Haft and Dart group Corporation
(incorporated by reference to Exhibit 10.18 to the Current Report of
Dart Group Corporation on Form 8-K filed on October 10, 1995).
10.86 Termination of Employment Agreement, dated as of October 6, 1995, by
and between Dart Group Corporation and Ronald S. Haft (incorporated
by reference to Exhibit 10.19 to the Current Report of Dart Group
Corporation on Form 8-K filed on October 10, 1995).
10.87 Subscription Agreement, dated as of October 6, 1995, by and between
Dart Group Corporation and Ronald S. Haft (incorporated by reference
to Exhibit 10.20 to the Current Report of Dart Group Corporation on
Form 8-K filed on October 10, 1995).
10.88 Standstill Order entered on December 6, 1995 by the Delaware
Chancery Court in Gloria G. Haft, et al. v. Larry G. Schafran, et
al. (Del. Ch. Civ. A. No. 14620) and Herbert H. Haft v. Dart Group
Corporation, et al. (Del. Ch. Civ. A. No. 14685) (incorporated by
reference to Exhibit 99.1 to the Quarterly Report of Dart Group
Corporation on Form 10-Q for the period ended October 28, 1995).
10.89 Financing Agreement dated September 12, 1996 between Crown Books
Corporation and The CIT Group/Business Credit, Inc. (herein
incorporated by reference to Exhibit 10.1 filed with Crown Books
Corporation Form 10-Q filed September 16, 1996).
158
<PAGE> 159
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
10.90 Financing Agreement dated December 18, 1996 between Trak Auto
Corporation and The CIT Group/Business Credit, Inc. (herein
incorporated by reference to Exhibit 10.48 filed with Trak Auto
Corporation's Form 10-K for the year ended February 1, 1997.
10.91 Registration Rights Agreement dated as of February 6, 1997 by and
among SFW Acquisition Corp., SFW Holding Company and Wasserstein
Perella Securities, Inc.
10.92 Employment Agreement, dated September 16, 1996, between Mark A.
Flint and Dart Group Corporation (herein incorporated by reference
to Dart Group Corporation Form 10-Q filed September 16, 1996).
10.93 Employment Agreement, dated May 22, 1995, between Terry J. Sharp and
Dart Group Corporation.
10.94 Conditional Settlement Agreement in Principle, dated April 21, 1997
between Dart Group Corporation and Herbert H. Haft.
11 Statement on Computation of Per Share Earnings.
21 Subsidiaries of Dart.
23 Consent of Independent Public Accountants.
27 Financial Statement Schedules
Note: Dart Drug Corporation changed its name to Dart Group
Corporation on July 3, 1984.
(b) Reports on Form 8-K - During the fourth quarter of fiscal year end
January 31, 1997, Dart filed two Current Reports on Form 8- K.
1. Dart filed a Current Report on Form 8-K on December 17, 1996
reporting under Item 5 (Other Events) its offer to either sell its
interest in Shoppers Food to Kenneth Herman and members of his
family or buy the Herman's interest in Shoppers Food.
2. Dart filed a Current Report on Form 8-K on December 30, 1996
reporting under Item 5 (Other Events) Kenneth Hermans acceptance of
Darts offer to purchase the Herman's interest in Shoppers Food.
Subsequent to January 31, 1997, Dart filed two Current Reports on
Form 8-K.
159
<PAGE> 160
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(Continued)
1. Dart filed a Current Report on Form 8-K on February 20, 1997, as
amended on April 21, 1997, reporting under Item 2 (Acquisitions or
Disposition of Assets) and Item 7 (Financial Statements and
Exhibits) Dart's acquisition of the remaining 50% interest in
Shoppers Food.
2. Dart filed a Current Report on Form 8-K on April 25, 1997 reporting
under Item 5 (Other Events) and Item 7 (Financial Statements and
Exhibits) a conditional settlement agreement in principle that Dart
reached with Herbert H. Haft on April 21, 1997.
160
<PAGE> 161
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DART GROUP CORPORATION
Date:May 1, 1997 By: Herbert H. Haft
----------- ---------------
Herbert H. Haft
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date:May 1, 1997 Herbert H. Haft
----------- ---------------------------------
Herbert H. Haft
Chairman of the Board of Directors
and Chief Executive Officer
Date:May 1, 1997 Ronald S. Haft
----------- ---------------------------------
Ronald S. Haft
Director
Date:May 1, 1997 Bonita A. Wilson
----------- ---------------------------------
Bonita A. Wilson
Director
Date:May 1, 1997 Douglas M. Bregman
----------- ---------------------------------
Douglas M. Bregman
Director
Date:May 1, 1997 Larry G. Schafran
----------- ---------------------------------
Larry G. Schafran
Director
Date:May 1, 1997 Mark A. Flint
----------- ---------------------------------
Mark A. Flint
Senior Vice President, Chief
Financial Officer and Treasurer
161
<PAGE> 162
DART GROUP CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Page
4.1 Indenture dated as of February 6, 1997 by and among SFW
Acquisition Corp., SFW Holding Company and Norwest Bank
Minnesota, National Association.
4.2 First Supplemental Indenture dated as of February 6, 1997 by
and among Shoppers Food Warehouse Corp., SFW Holding Corp. and
Norwest Bank Minnesota, National
Association.
4.3 Shoppers Food Warehouse Global Security.
10.91 Registration Rights Agreement dated as of February 6,1997 by
and among SFW Acquisition Corp., SFW Holding Company and
Wasserstein Perella Securities, Inc.
10.93 Employment Agreement, dated May 22, 1995, between Terry J.
Sharp and Dart Group Corporation.
10.94 Conditional Settlement Agreement in Principle, dated April 21,
1997 between Dart Group Corporation and Herbert H. Haft.
11 Statement on Computation of Per Share Earnings.
21 Subsidiaries of Dart Group Corporation.
23 Consent of Independent Public Accountants.
27 Financial Data Schedules
162
<PAGE> 1
EXHIBIT 4.1
SFW ACQUISITION CORP.
Increasing Rate Senior Notes due 2000
----------------------
INDENTURE
Dated as of February 6, 1997
----------------------
SFW HOLDING CORP.
Guarantor
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Trustee
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE................................................................1
Section 1.1. Definitions..............................................................................1
Section 1.2. Other Definitions.......................................................................14
Section 1.3. Incorporation by Reference of Trust Indenture Act.......................................14
Section 1.4. Rules of Construction...................................................................15
ARTICLE 2. THE SECURITIES...........................................................................................15
Section 2.1. Form and Dating.........................................................................15
Section 2.2. Execution and Authentication............................................................16
Section 2.3. Registrar and Paying Agent..............................................................17
Section 2.4. Paying Agent to Hold Money in Trust.....................................................17
Section 2.5. Holder Lists............................................................................18
Section 2.6. Transfer and Exchange...................................................................18
Section 2.7. Replacement Securities..................................................................19
Section 2.8. Outstanding Securities..................................................................19
Section 2.9. Treasury Securities.....................................................................20
Section 2.10. Temporary Securities....................................................................20
Section 2.11. Cancellation............................................................................20
Section 2.12. Defaulted Interest......................................................................21
Section 2.13. Deposit of Moneys.......................................................................21
Section 2.14. CUSIP Number............................................................................21
Section 2.15. Restrictive Legends.....................................................................21
Section 2.16. Book-Entry Provisions for Global Security...............................................24
Section 2.17. Special Transfer Provisions.............................................................25
ARTICLE 3. REDEMPTION...............................................................................................27
Section 3.1. Notices to Trustee......................................................................27
Section 3.2. Selection of Securities to be Redeemed..................................................27
Section 3.3. Notice of Redemption....................................................................27
Section 3.4. Effect of Notice of Redemption..........................................................28
Section 3.5. Deposit of Redemption Price.............................................................28
Section 3.6. Securities Redeemed in Part.............................................................28
ARTICLE 4. COVENANTS................................................................................................29
Section 4.1. Payment of Securities...................................................................29
Section 4.2. SEC Reports.............................................................................29
Section 4.3. Compliance Certificate..................................................................29
Section 4.4. Stay, Extension and Usury Laws..........................................................30
Section 4.5. Limitation on Restricted Payments.......................................................31
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Section 4.6. Continued Existence.....................................................................32
Section 4.7. Limitation on Indebtedness..............................................................33
Section 4.8. Taxes...................................................................................34
Section 4.9. Repurchase at Holder's Option Upon Change in Control....................................34
Section 4.10. Limitation on Transactions with Affiliates..............................................36
Section 4.11. Limitation on Lines of Business.........................................................37
Section 4.12. Dividends and Other Payment Restrictions Affecting Subsidiaries.........................37
Section 4.13. Further Assurance to the Trustee........................................................38
Section 4.14. Limitation on Investments, Loans and Advances...........................................38
Section 4.15. Limitation on Liens.....................................................................38
Section 4.16. Maintenance of Office or Agency.........................................................39
Section 4.17. Tax Sharing Agreement...................................................................39
Section 4.18. Management Services Agreement...........................................................40
Section 4.19. The Merger with Shoppers................................................................40
Section 4.20. Limitation on Asset Sales...............................................................40
Section 4.21. Repayment of Bridge Loan................................................................42
Section 4.22. Limitation on Issuance and Sale of Capital Stock of Subsidiaries........................42
ARTICLE 5. SUCCESSORS...............................................................................................43
Section 5.1. When Company May Merge. etc.............................................................43
Section 5.2. Successor Corporation Substituted.......................................................44
ARTICLE 6. DEFAULTS AND REMEDIES....................................................................................44
Section 6.1. Events of Default.......................................................................44
Section 6.2. Acceleration............................................................................45
Section 6.3. Other Remedies..........................................................................46
Section 6.4. Waiver of Existing and Past Defaults....................................................46
Section 6.5. Control by Majority.....................................................................46
Section 6.6. Limitation on Suits.....................................................................47
Section 6.7. Rights of Holders to Receive Payment....................................................47
Section 6.8. Collection Suit by Trustee..............................................................47
Section 6.9. Trustee May File Proofs of Claim........................................................48
Section 6.10. Priorities..............................................................................48
Section 6.11. Undertaking for Costs...................................................................48
Section 6.12. Rights and Remedies Cumulative..........................................................48
Section 6.13. Delay or Omission Not Waiver............................................................49
ARTICLE 7. TRUSTEE..................................................................................................49
Section 7.1. Duties of Trustee.......................................................................49
Section 7.2. Rights of Trustee.......................................................................50
Section 7.3. Individual Rights of Trustee............................................................51
Section 7.4. Trustee's Disclaimer....................................................................51
Section 7.5. Notice of Defaults......................................................................51
</TABLE>
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<TABLE>
<S> <C>
Section 7.6. Reports by Trustee to Holders...........................................................52
Section 7.7. Compensation and Indemnity..............................................................52
Section 7.8. Replacement of Trustee..................................................................53
Section 7.9. Successor Trustee by Merger, etc........................................................54
Section 7.10. Eligibility; Disqualification...........................................................54
Section 7.11. Preferential Collection of Claims Against Company.......................................54
ARTICLE 8. DISCHARGE OF INDENTURE...................................................................................54
Section 8.1. Termination of Company's Obligations....................................................54
Section 8.2. Legal Defeasance and Covenant Defeasance................................................55
Section 8.3. Application of Trust Money..............................................................59
Section 8.4. Repayment to Company....................................................................59
Section 8.5. Reinstatement...........................................................................59
ARTICLE 9. AMENDMENTS...............................................................................................60
Section 9.1. Without Consent of Holders..............................................................60
Section 9.2. With Consent of Holders.................................................................61
Section 9.3. Compliance with Trust Indenture Act.....................................................62
Section 9.4. Revocation and Effect of Consents.......................................................62
Section 9.5. Notation on or Exchange of Securities...................................................63
Section 9.6. Trustee Protected.......................................................................63
ARTICLE 10. GUARANTEE................................................................................................63
Section 10.1. Guarantee...............................................................................63
Section 10.2. Limitation on Liability.................................................................65
Section 10.3. Successors and Assigns..................................................................65
Section 10.4. No Waiver...............................................................................65
Section 10.5. Modification............................................................................66
Section 10.6. Execution and Delivery of Guarantee.....................................................66
Section 10.7. Certain Bankruptcy Events...............................................................66
ARTICLE 11. SECURITY AND PLEDGE OF COLLATERAL........................................................................67
Section 11.1. Grant of Security Interest..............................................................67
Section 11.2. Delivery of Collateral..................................................................68
Section 11.3. Representations and Warranties..........................................................68
Section 11.4. Further Assurances......................................................................69
Section 11.5. Dividends; Voting Rights................................................................70
Section 11.6. Trustee Appointed Attorney-in-Fact......................................................72
Section 11.7. Trustee May Perform.....................................................................72
Section 11.8. Trustee's Duties........................................................................72
Section 11.9. Remedies upon Event of Default..........................................................72
Section 11.10. Application of Proceeds.................................................................74
</TABLE>
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<TABLE>
<S> <C>
Section 11.11. Continuing Lien.........................................................................74
Section 11.12. Certificates and Opinions...............................................................74
Section 11.13. Release; Other Liens....................................................................75
ARTICLE 12. MISCELLANEOUS............................................................................................75
Section 12.1. Trust Indenture Act Controls............................................................75
Section 12.2. Notices.................................................................................75
Section 12.3. Communication by Holders with Other Holders.............................................77
Section 12.4. Certificate and Opinion as to Conditions Precedent......................................77
Section 12.5. Statements Required in Certificate or Opinion of Counsel................................77
Section 12.6. Rules by Trustee and Agents.............................................................78
Section 12.7. Legal Holidays..........................................................................78
Section 12.8. No Recourse Against Others..............................................................78
Section 12.9. Counterparts............................................................................78
Section 12.10. Governing Law...........................................................................78
Section 12.11. No Adverse Interpretation of Other Agreements...........................................79
Section 12.12. Successors..............................................................................79
Section 12.13. Severability............................................................................79
Section 12.14. Table of Contents, Headings. Etc........................................................79
</TABLE>
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<TABLE>
<CAPTION>
Exhibits and Schedules
<S> <C>
Exhibit A Form of Security
Exhibit B Form of Certificate to be delivered in connection with transfers to Non-QIB
Accredited Investors
Exhibit C Form of Certificate to be delivered in connection with transfers pursuant to
Regulation S
Schedule I Pledged Shares
</TABLE>
v
<PAGE> 7
INDENTURE, dated as of February 6, 1997, by and among SFW Acquisition
Corp., a Delaware corporation (the "Company"), SFW Holding Company, a Delaware
corporation (the "Guarantor") and Norwest Bank Minnesota, National Association,
as trustee (the "Trustee").
Each party agrees as follows for the benefit of the other parties
hereto and for the equal and ratable benefit of the Holders of the Company's
Increasing Rate Senior Notes due 2000:
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.1. Definitions.
"Acquired Indebtedness" means (i) with respect to any Person that
becomes a Subsidiary of the Company (or is merged with or into the Company or
any of its Subsidiaries) after the Issue Date, Indebtedness of such Person or
any of its subsidiaries existing at the time such Person becomes a Subsidiary of
the Company (or is merged with or into the Company or any of its Subsidiaries)
and which was not incurred in connection with, or in contemplation of, such
Person becoming a Subsidiary of the Company (or being merged with or into the
Company or any of its Subsidiaries) and (ii) with respect to the Company or any
of its Subsidiaries, any Indebtedness assumed by the Company or any of its
Subsidiaries in connection with the acquisition of any assets from another
Person (other than the Company or any of its Subsidiaries), and which was not
incurred by such other Person in connection with, or in contemplation of, such
acquisition.
"Acquisition" means the acquisition by the Company for $210 million in
cash of the remaining 50% of the issued and outstanding shares of Capital Stock
of Shoppers that is not currently owned by the Company.
"Adjusted Consolidated Net Income" means, with respect to any Person,
for any period, the Consolidated Net Income of such Person for such period plus
any non-cash charges relating to the amortization of goodwill resulting from the
Acquisition.
"Affiliate" means, as applied to any Person, any other Person directly
or indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, is defined to mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agent" means any Registrar, Paying Agent or co-registrar or any
successor thereto.
<PAGE> 8
"Asset Acquisition" means (i) any capital contribution (by means of
transfer of cash or other property to others or payment for property or services
for the account or use of others, or otherwise) to, or purchase or acquisition
of Capital Stock in, any other Person by the Company or any of its Subsidiaries,
pursuant to which such Person shall become a Subsidiary of the Company or any of
its Subsidiaries or shall be merged with or into the Company or any of its
Subsidiaries or (ii) any acquisition by the Company or any of its Subsidiaries
of the assets of any Person which constitute substantially all of an operating
unit or business of such Person.
"Asset Sale" means, with respect to any Person, any direct or indirect
sale, issuance, conveyance, lease, assignment, transfer or other disposition or
series of sales, transfers or other dispositions (including without limitation,
by merger or consolidation or by exchange of assets and whether by operation of
law or otherwise) made by such Person or any of its Subsidiaries to any Person
other than such Person or one of its Wholly Owned Subsidiaries (or, in the case
of a sale, transfer or other disposition by a Subsidiary, to any Person other
than the Company or a directly or indirectly Wholly Owned Subsidiary) of any
assets of such Person or any of its Subsidiaries including, without limitation,
assets consisting of any Capital Stock or other securities held by such Person
or any of its Subsidiaries, and any Capital Stock issued by any Subsidiary of
such Person, in each case, outside of the ordinary course of business,
excluding, however, any sale, transfer or other disposition, or series of
related sales, transfers or other dispositions (i) resulting in Net Cash
Proceeds to the Company and the Subsidiaries of $250,000 or less or (ii) of Cash
Equivalents or inventory in the ordinary course of business or obsolete
equipment in the ordinary course of business consistent with past practices of
Shoppers or (iii) the lease or sublease of any real or personal property in the
ordinary course of business or (iv) the proceeds of such Asset Sale which are
not applied in accordance with Section 4.20 and which, together with all other
such Asset Sale proceeds do not exceed $5 million.
"Bankruptcy Law" means Title 11, U.S. Code or any similar Federal,
state or foreign law for the relief of debtors.
"Board of Directors" means the Board of Directors of the Company or
any committee of the Board duly authorized to act under this Indenture.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person,
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Bridge Loan" means up to $75 million in bridge financing expected to
be provided by NationsBank, N.A. to the Company to fund the Acquisition.
"Business Day" means any day other than a Legal Holiday.
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<PAGE> 9
"Capital Stock" means with respect to any Person, any and all shares,
partnership, membership or other interests, participations or other equivalents
(however designated, whether voting or non-voting) of such Person's capital
stock, whether now outstanding or issued after the date of this Indenture, and
any and all rights, warrants or options exchangeable into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or
other amounts under a lease of (or other agreement conveying the right to use)
any property (whether real, personal or mixed) that is required to be classified
and accounted for as a capital lease obligation under GAAP, and, for the purpose
of this Indenture, the amount of such obligation at any date shall be the
capitalized amount thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof, or obligations
issued by an agency or instrumentality thereof and backed by the full faith and
credit of the United States of America, (ii) commercial paper rated the highest
grade by Moody's and S&P and maturing not more than one year from the date of
creation thereof, (iii) time deposits with, and certificates of deposit and
banker's acceptances issued by, any bank having capital surplus and undivided
profits aggregating at least $500 million and maturing not more than one year
from the date of creation thereof, (iv) repurchase agreements that are secured
by a perfected security interest in an obligation described in clause (i) and
are with any bank described in clause (iii), (v) shares of any money market
mutual fund that (a) has at least 95% of its assets invested continuously in the
types of investments referred to in clauses (i) and (ii) above, (b) has net
assets of not less than $500 million, and (c) has the highest rating obtainable
from either S&P or Moody's and (vi) readily marketable direct obligations issued
by any state of the United States of America or any political subdivision
thereof having one of the two highest rating categories obtainable from either
Moody's or S&P.
"Common Stock" of any Person means Capital Stock of such Person that
does not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Company" means the party named as such above until a successor
replaces it in accordance with the applicable provisions of this Indenture and
thereafter means its successor.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (a) the Net Income of any Person (the "other Person") in
which the Person in question or one of its Subsidiaries has a joint interest
with a third party (which interest does not cause the Net Income of such other
Person to be consolidated into the Net Income of the Person in question in
accordance with GAAP) shall be included only to the extent of the amount of
dividends or
3
<PAGE> 10
distributions paid to the Person in question or one of its Subsidiaries, (b) the
Net Income of any Subsidiary of the Person in question that is subject to any
restriction or limitation on the payment of dividends or the making of other
distributions shall be excluded to the extent of such restriction or limitation,
(c) (i) the Net Income (or loss) of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition and
(ii) any net gain or loss resulting from an Asset Acquisition or Asset Sale by
the Person in question or any of its Subsidiaries shall be excluded, and (d)
extraordinary gains and losses and any one-time increase or decrease to Net
Income recorded because of the adoption of new accounting policies, practices or
standards required or permitted by GAAP shall be excluded.
"Consolidated Net Worth" means with respect to any Person at any date
of determination, the consolidated equity represented by the shares of such
Person's Capital Stock (other than Disqualified Stock) at such date, as
determined on a consolidated basis in accordance with GAAP and adjusted to
exclude all upward revaluations and other write-ups in the book value of any
asset of such Person or a Subsidiary of such Person subsequent to the Issue
Date.
"Credit Facility" means Shoppers' uncommitted, revolving
line-of-credit facility with NationsBank, N.A. in the aggregate principal amount
at any time outstanding not to exceed $35,000,000, and any replacement, renewal,
refinancing or extension thereof of up to $35,000,000, provided that such
replacement, renewal, refinancing or extension is in accordance with Section
4.7(c)(ii).
"Custodian" means any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law.
"Dart" means Dart Group Corporation, a Delaware corporation.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default under this Indenture.
"Definitive Securities" means Securities that are substantially in the
form attached hereto as Exhibit A.
"Depository" means, with respect to the Securities issuable or issued
in whole or in part in global form, the Person specified in Section 2.3 as the
Depository with respect to the Securities, until a successor shall have been
appointed and become such pursuant to the applicable provisions of this
Indenture, and, thereafter "Depository" shall mean or include such successor.
"Disqualified Stock" means any Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable, in each case, at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or is exchangeable for Indebtedness, or
4
<PAGE> 11
redeemable at the option of the holder thereof, in whole or in part, on or prior
to the Stated Maturity of the Securities.
"EBITDA" means, with respect to any Person, for any period (all as
determined on a consolidated basis in accordance with GAAP), Consolidated Net
Income of such Person in such period plus (a) to the extent reflected in the
income statement of such Person, (i) income taxes, (ii) Interest Expense, (iii)
depreciation and amortization, (iv) LIFO charges, (v) the amount of any
restructuring reserve or charge, and (vi) other non-cash charges reducing
Consolidated Net Income minus (b) to the extent reflected in such income
statement, interest income and non-cash items (excluding the reversal of any
non-cash charge to the extent such non-cash charge reduced Consolidated Net
Income in a prior period) which had the effect of increasing Consolidated Net
Income for such period.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"Exchange Notes" means Indebtedness of Shoppers identical in all
material respects to the Securities issued on the Issue Date (except that the
Exchange Notes will not contain terms with respect to transfer restrictions)
that is issued by Shoppers in exchange for such Securities.
"Exchange Offer" means the offer by the Company and the Guarantor to
exchange the Exchange Notes and Guarantee thereof for the Securities issued on
the Issue Date and Guarantee thereof made pursuant to the Registration Rights
Agreement.
"Fair Market Value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length free market transaction, for
cash, between a willing seller and a willing buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. With respect to any
Person, Fair Market Value shall be determined by the Board of Directors of such
Person acting in good faith and shall be evidenced by a Board Resolution
delivered to the Trustee.
"Four Quarter Period" means the four most recent full fiscal quarters
(each, a "Period") for which financial information is available; provided,
however, that for any Periods occurring during a 53-week fiscal year, the term
of such Periods will be adjusted accordingly.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the date hereof and as such principles may
be amended from time to time, including, without limitation, those set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession.
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<PAGE> 12
"Global Security" means one or more permanent global securities in
registered form, substantially in the form attached hereto as Exhibit A.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any other Person
and any obligation, direct or indirect, contingent or otherwise, of such Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness of such other Person (whether arising by virtue of
partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such indebtedness of the payment thereof or
to protect such obligee against loss in respect thereof (in whole or in part).
The term "Guarantee" used as a verb has a corresponding meaning.
"Guarantor" means SFW Holding Corp., a Delaware corporation.
"Holder" or "Securityholder" means a Person in whose name a Security
is registered.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except trade payables incurred in the ordinary course that have
not remained unpaid for greater than ninety (90) days past their original due
date, or accrued liabilities arising in the ordinary course of business which
are not overdue or which are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and for which adequate
reserves have been made, (v) all obligations of such Person as lessee relating
to a Capitalized Lease Obligation, (vi) all Indebtedness of other Persons
secured by a Lien on any asset of such Person, whether or not such Indebtedness
is assumed by such Person, (vii) all Indebtedness of other Persons guaranteed by
such Person (but only to the extent of the amount actually guaranteed), (viii)
to the extent not otherwise included in this definition, obligations under
currency agreements, interest rate agreements and commodity agreements and (ix)
any and all deferrals, renewals, extensions and refunding of, or amendments,
modifications or supplements to, any of the foregoing. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date.
"Institutional Accredited Investor" means an institutional "accredited
investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under
the Securities Act).
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<PAGE> 13
"Indenture" means this Indenture as amended or supplemented from time
to time in accordance with the terms hereof.
"Interest Coverage Ratio" means, for any Person, on a consolidated
basis, the ratio of (i) EBITDA for such Person and its Subsidiaries during the
Four Quarter Period immediately preceding the date of the incurrence of the
proposed Indebtedness giving rise to the need to calculate the Interest Coverage
Ratio (the "Transaction Date") to (ii) Interest Expense of such Person for such
Four Quarter Period. For purposes of this definition, "EBITDA" and "Interest
Expense" shall be calculated after giving effect on a pro forma basis for such
Four Quarter Period to (i) the incurrence or repayment of any Indebtedness of
such Person or any of its Subsidiaries at any time during or subsequent to the
last day of the Four Quarter Period and on or prior to the Transaction Date, as
if such incurrence or repayment and the application of the proceeds thereof, as
the case may be, occurred on the first day of the Four Quarter Period, (ii) any
Asset Sales or other asset dispositions of such Person and its Subsidiaries
occurring at any time during or subsequent to the last day of the Four Quarter
Period and on or prior to the Transaction Date, as if such Asset Sale or other
asset disposition and the applications of the proceeds therefrom occurred on the
first day of the Four Quarter Period and (iii) any acquisition of assets or
Capital Stock of an entity (occurring by merger or otherwise) occurring at any
time during or subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such acquisition occurred on the first day
of the Four Quarter Period. If such Person or any of its Subsidiaries directly
or indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if such
Person or any Subsidiary of such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating "Interest
Expense": (a) interest on any Indebtedness under a revolving credit facility
shall be computed based upon the average daily balance of such Indebtedness
during the Four Quarter Period; and (b) if interest on any Indebtedness actually
incurred on the Transaction Date may be determined optionally at an interest
rate based upon a prime or similar rate, a eurocurrency interbank offered rate,
or other rates, then the interest rate in effect on the Transaction Date will be
deemed to have been in effect during the Four Quarter Period.
"Interest Expense" means, for any Person for any period, (i) total
interest obligations (paid or accrued) of such Person in respect of its
Indebtedness, determined on a consolidated basis and in accordance with GAAP
(including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capitalized
Lease Obligations, commissions, discounts and other fees and charges incurred in
respect of letters of credit or bankers' acceptance financing); minus (ii) the
amortization of deferred financing costs; minus, (iii) the excess, if any of (a)
the interest expense calculated on a straight-line basis for increasing-rate
indebtedness on a pro forma basis for any period over (b) the interest expense
calculated in accordance with the actual interest rate scheduled for the period,
or plus (iv) the excess, if any of (a) the interest expense calculated in
accordance with the actual interest rate
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<PAGE> 14
scheduled for the period over (b) the interest expense calculated on a straight
line basis for increasing-rate indebtedness on a pro forma basis for any period.
"Interest Payment Date" shall have the meaning assigned to such term
in paragraph 1 of the Securities.
"Investment" means any direct or indirect advance, loan or other
extension of credit or capital contribution to such other Person (by means of
any transfer of cash or other property to others or any payment for property or
services for the account or use of others including the purchase of property
from another Person subject to an understanding or agreement, contingent as
otherwise, to resell such property to such other Person), or any commitment to
make any such advance, loan, extension or capital contribution (but excluding
accounts receivable in the ordinary course) or any purchase or acquisition
(whether for cash, property, services, securities or otherwise) of, Capital
Stock, bonds, notes, debentures, options, warranty or similar instruments issued
by any Person from such other Person or the designation by the Board of
Directors of the Company or any Subsidiary to be an Unrestricted Subsidiary. The
Company shall be deemed to make an "Investment" in an amount equal to the fair
market value of the net assets of any Subsidiary determined by the Board of
Directors of the Company in good faith at the time that such Subsidiary is
designated an Unrestricted Subsidiary, and any property transferred to an
Unrestricted Subsidiary from the Company or one of its Subsidiaries, shall be
deemed an Investment valued at its fair market value, determined by the Board of
Directors of the Company in good faith at the time of such transfer.
"Issue Date" means the date of original issuance of the Securities
under this Indenture.
"Legal Holiday" means a Saturday, Sunday or a day on which banking
institutions in the States of New York or Maryland or the state in which the
principal corporate trust office of the Trustee are required or authorized by
law or other governmental action to be closed.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof, or any
agreement to give any security interest).
"Liquidated Damages" means all liquidated damages then owing pursuant
to Section 5 of the Registration Rights Agreement.
"Management Services Agreement" means the Management Services
Agreement dated as of the date of the Acquisition, between Dart and the Company.
"Maturity Date" means February 6, 2000.
"Merger" means the merger under Delaware Law of the Company with and
into Shoppers which is to occur as soon as practicable after the Acquisition but
in no event more than 15 days
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<PAGE> 15
following the Acquisition, pursuant to which Shoppers shall become a successor
to the Company under Section 5.2 of this Indenture.
"Moody's" means Moody's Investors Service, Inc. or if Moody's
Investors Service, Inc. shall cease rating debt securities having a maturity at
original issuance of at least one year and such ratings business shall have been
transferred to a successor Person, such successor Person; provided, however,
that if Moody's Investors Service, Inc. ceases rating debt securities having a
maturity at original issuance of at least one year and its ratings business with
respect thereto shall not have been transferred to any successor Person, then
"Moody's" shall mean any other nationally recognized rating agency (other than
S&P) that rates debt securities having a maturity at original issuance of at
least one year and that shall have been designated by the Company by a written
notice given to the Trustee.
"Net Cash Proceeds" means (a) in the case of any Asset Sale or any
issuance and sale by any person of Capital Stock, the aggregate net cash
proceeds and Cash Equivalents received by such Person after payment of expenses,
taxes, commissions and the like incurred in connection therewith (and, in the
case of any Asset Sale, net of the amount of cash applied to repay Indebtedness
secured by the asset involved in such Asset Sale) and (b) in the case of any
conversion or exchange of any outstanding Indebtedness or Disqualified Stock of
such Person for or into shares of Capital Stock of the Company, the sum of (i)
the fair market value of the proceeds received by the Company in connection with
the issuance of such Indebtedness or Disqualified Stock on the date of such
issuance and (ii) any additional amount paid by the holder to the Company upon
such conversion or exchange.
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which under the terms
thereof (including any related instruments, documents or filings) neither the
Company nor any of its Restricted Subsidiaries (a) provides credit support of
any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness) and (b) is directly or indirectly liable (as a
guarantor or otherwise); and (ii) no default with respect to which (including
any rights that the holders thereof may have to take enforcement action against
an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both)
any holder of any other Indebtedness of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
"Offering" means the offering by the Company of $140,000,000 aggregate
principal amount of its Increasing Rate Senior Notes due 2000.
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<PAGE> 16
"Officer" means, with respect to any Person, the Chairman of the
Board, the Chairman of the Executive Committee of the Board, the Chief Executive
Officer, the President, the Chief Operating Officer, the Chief Financial
Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary,
any Assistant Secretary or any Vice President of such Person.
"Officers' Certificate" means a certificate signed by two Officers,
one of whom must be the Chairman of the Board, the Chairman of the Executive
Committee of the Board, the President, the Treasurer or a Vice-President of the
Company, that meets the requirements of Sections 12.4 and 12.5 hereof.
"Opinion of Counsel" means a written opinion reasonably satisfactory
in form and substance to the Trustee from legal counsel who is reasonably
acceptable to the Trustee, that meets the requirements of Sections 12.4 and 12.5
hereof. The counsel may be an employee of or counsel to the Company or the
Trustee.
"Permitted Investments" means (i) certificates of deposit with final
maturities of 1 year or less issued by United States commercial banks having
capital and surplus in excess of $100,000,000; (ii) commercial paper with a
grade of no less than A-1 or the equivalent thereof by S&P or P-1 or the
equivalent thereof by Moody's; (iii) direct obligations of the United States
Government or a United States agency with a maturity of 1 year or less; (iv)
money market with a rating of A or greater; and (v) shares of money market
mutual or similar funds having assets in excess of $100,000,000.
"Permitted Liens" means, with respect to any Person, any Lien arising
by reason of (a) any judgment, decree or order of any court, so long as such
Lien is being contested in good faith and is adequately bonded, and any
appropriate legal proceedings which may have been duly initiated for the review
of such judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have expired;
(b) taxes, assessments, governmental charges or claims not yet delinquent or
which are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have made
therefor; (c) security for payment of workers' compensation or other insurance
or social security legislation; (d) security for the performance of tenders,
contracts (other than contracts for the payment of money) or leases (excluding
any Capitalized Lease Obligations) incurred in the ordinary course of business;
(e) deposits to secure public or statutory obligations, or in lieu of surety,
performance or appeal bonds, entered into in the ordinary course of business;
(f) judgment and attachment Liens with respect to judgments and attachments not
giving rise to an Event of Default; (g) Liens arising by operation of law in
favor of carriers, warehousemen, landlords, mechanics, materialmen, laborers,
employees or suppliers, incurred in the ordinary course of business and as to
which a reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made therefor, which are not yet delinquent
or are being contested in good faith by negotiations or by appropriate
proceedings which suspend the collection thereof; (h) easements, rights-of-way,
zoning and similar covenants and
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restrictions and other similar encumbrances or title defects which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or materially
interfere with the ordinary conduct of the business of such Person or any of its
Subsidiaries; provided, such liens are not incurred in connection with any
borrowing of money or any commitment to loan any money or extend any credit; (i)
liens arising in the ordinary course of business in favor of custom and revenue
authorities arising as a matter of law to secure payment of custom duties; (j)
leases or subleases granted to others not interfering in any material respect
with the ordinary conduct of the business of the Company or of any of its
Subsidiaries or which do not in any case materially detract from the value of
the property subject thereto (as such property is used by the Company or one or
more of its Subsidiaries); (k) liens arising from filing precautionary UCC
financing statements relating solely to leases not prohibited by this Indenture;
and (l) liens arising in connection with Permitted Secured Indebtedness.
"Permitted Secured Indebtedness" means (a) Capitalized Lease
Obligations of the Company incurred in the ordinary course of business; (b) any
Indebtedness secured by purchase money Liens upon or in any property either
acquired by the Company in the ordinary course of business with the proceeds
thereof or assumed by the Company pursuant to an Investment not prohibited by
this Indenture; provided, however, that (i) any such purchase money Lien shall
not extend to or cover any property other than the property being acquired and
(ii) the Fair Market Value of the property being acquired is greater than or
equal to the amount of such purchase money Lien; (c) any Indebtedness of the
Company pursuant to the Bridge Loan; and (d) any Indebtedness of the Company
pursuant to the Credit Facility.
"Person" means any individual, corporation, partnership, association,
trust or any other entity or organization, including a government or political
subdivision or any agency or instrumentality thereof.
"QIB" has the meaning assigned to the term "qualified institutional
buyer" in Rule 144A.
"Registration Rights Agreement" means the Registration Rights
Agreement dated as of even date herewith, by and among the Company and the other
parties named on the signature pages thereof, as such agreement may be amended,
modified or supplemented from time to time.
"Restricted Security" has the meaning assigned to such term in Rule
144(a)(3) under the Securities Act.
"Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A under the Securities Act.
"SEC" means the Securities and Exchange Commission.
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<PAGE> 18
"Securities" means the securities described above and issued under
this Indenture in the form of Exhibit A hereto. After the consummation of the
Exchange Offer, references to the Securities shall mean the Exchange Notes and
(if any) the Securities issued on the Issue Date pursuant to this Indenture.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Securities Custodian" means, with respect to the Securities in global
form, initially, the Trustee and any successor entity thereto or such other
Person as appointed by the Company from time to time in accordance with the
provisions of this Indenture.
"Shoppers" means Shoppers Food Warehouse Corp., a Delaware
corporation.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such regulation is in effect on
the date hereof.
"S&P" means Standard & Poor's Corporation or, if Standard & Poor's
Corporation shall cease rating debt securities having a maturity at original
issuance of at least one year and such ratings business shall have been
transferred to a successor Person, such successor Person; provided, however,
that if Standard & Poor's Corporation ceases rating debt securities having a
maturity at original issuance of at least one year and its ratings business with
respect thereto shall not have been transferred to any successor Person, then
"S&P" shall mean any other nationally recognized rating agency (other than
Moody's) that rates debt securities having a maturity at original issuance of at
least one year and that shall have been designated by the Company by a written
notice given to the Trustee.
"Stated Maturity" means, (i) with respect to any debt security, the
date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of such Person or a combination
thereof; for purposes of this Indenture, no Unrestricted Subsidiary shall be a
subsidiary of the Company or any of its Subsidiaries.
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"Tax Sharing Agreement" means the Tax Sharing Agreement dated as of
the date of the Acquisition, between Dart and the Company.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections
77aaa-77bbbb) as in effect on the date of execution of this Indenture, except as
otherwise provided in Section 9.3.
"Trustee" means the party named as such above until a successor
replaces it in accordance with the applicable provisions of this Indenture and
thereafter means the successor.
"Trust Officer" means any officer or corporate trust assistant officer
of the Trustee assigned by the Trustee to administer its corporate trust
matters.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company
(other than the Subsidiaries of Shoppers existing as of the date hereof or any
successor to any of them) that at the time of determination shall have been
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution and (ii) any Subsidiary of an Unrestricted Subsidiary; but, in
each case, only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company; (c) is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Capital Stock or (y) to maintain or
preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of the
Company or any of its Restricted Subsidiaries; and (e) has at least one director
on its board of directors that is not a director or executive officer of the
Company or any of its Restricted Subsidiaries and has at least one executive
officer that is not a director or executive officer of the Company or any of its
Restricted Subsidiaries. Any such designation by the Board of Directors shall be
evidenced to the Trustee by filing with the Trustee a certified copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
indicating that such designation complies with the foregoing conditions and was
permitted under Section 4.5 hereof. If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of this
Indenture and Indebtedness of such Subsidiary shall be deemed to be incurred by
a Restricted Subsidiary of the Company as of such date. The Board of Directors
of the Company may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of the Company of any
Indebtedness of such Unrestricted Subsidiary which is outstanding at the time of
such designation and such designation shall only be permitted if (A) no Default
or Event of Default would be in existence immediately following such designation
and (B) the Company
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<PAGE> 20
shall have delivered to the Trustee an Officers' Certificate indicating that
such designation complies with the foregoing conditions.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such
Person all of the outstanding Capital Stock or other ownership interests of
which shall at the time be owned by such person or by one or more Wholly Owned
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Subsidiaries of such Person.
Section 1.2. Other Definitions.
<TABLE>
<CAPTION>
Term Defined in Section
---- ------------------
<S> <C>
"Affiliate Transaction"............................................................................................4.10
"Agent Members"....................................................................................................2.16
"Change in Control" ................................................................................................4.9
"Change in Control Payment Date"....................................................................................4.9
"Change in Control Repurchase Price"................................................................................4.9
"Collateral".......................................................................................................11.1
"Company Notice.....................................................................................................4.9
"Default Amount"....................................................................................................6.2
"DTC"...............................................................................................................2.1
"Event of Default"..................................................................................................6.1
"Net Cash Proceeds Offer"..........................................................................................4.20
"Obligations"......................................................................................................10.1
"Paying Agent"......................................................................................................2.3
"Permitted Indebtedness"............................................................................................4.7
"Pledged Shares"...................................................................................................11.1
"Private Placement Legend".........................................................................................2.15
"Proceeds Purchase Date"...........................................................................................4.20
"Registrar".........................................................................................................2.3
"Repurchase Date"...................................................................................................4.9
"Restricted Payments"...............................................................................................4.5
"Secured Obligations"..............................................................................................11.1
"U.S. Government Obligations".......................................................................................8.2
"Voting Trustee"....................................................................................................4.9
</TABLE>
Section 1.3. Incorporation by Reference of Trust Indenture Act.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
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The following TIA terms used in this Indenture have the following
meanings:
"indenture securities" means the Securities;
"indenture security holder" means a Holder or a
Securityholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional Trustee" means the
Trustee;
"obligor" on the Securities means the Company and any
successor obligor upon the Securities.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule under the TIA
have the meanings so assigned to them.
Section 1.4. Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the plural,
include the singular;
(5) provisions apply to successive events and transactions; and
(6) references to sections of or rules under the Securities Act
shall be deemed to include substitute, replacement or successor sections or
rules adopted by the SEC from time to time.
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<PAGE> 22
ARTICLE 2.
THE SECURITIES
Section 2.1. Form and Dating.
The Definitive Securities, the Global Security and the Trustee's
certificate of authentication with respect thereto shall be substantially in the
form of Exhibit A to this Indenture. The Securities may have notations, legends
or endorsements required by law, stock exchange rules or usage. Each Security
shall be dated the date of its authentication. The Securities shall be in
denominations of $1,000 and integral multiples thereof. The Securities shall not
be issuable in bearer form.
The terms and provisions contained in the Securities shall constitute,
and are hereby expressly made, a part of this Indenture and to the extent
applicable, the Company and the Trustee, by their execution and delivery of this
Indenture, expressly agree to such terms and provisions and to be bound thereby.
Securities offered and sold to Institutional Accredited Investors will
be issued in the form of permanent certificated Securities, in definitive, fully
registered form without interest coupons (substantially in the form of Exhibit A
attached hereto).
Securities offered and sold in an offshore transaction in reliance on
Regulation S under the Securities Act shall be issued in the form of permanent
certificated Securities in registered form without interest coupons
(substantially in the form of Exhibit A attached hereto).
Securities offered and sold in reliance on Rule 144A will be
represented initially by a single permanent global note, in definitive, fully
registered form without interest coupons (substantially in the form of Exhibit A
attached hereto) and will be deposited with the Trustee as custodian for The
Depository Trust Company or its successors ("DTC"), Depository of the Global
Security, duly executed by the Company and authenticated by the Trustee as
hereinafter provided. The Global Security shall represent such of the
outstanding Securities as shall be specified therein and shall provide that it
shall represent the aggregate amount of outstanding Securities from time to time
endorsed thereon and that the aggregate amount of outstanding Securities
represented thereby may from time to time be reduced or increased, as
appropriate, by adjustments made on the records of the Trustee, as custodian for
the Depository, to reflect exchanges and redemptions. Any endorsement of a
Global Security to reflect the amount of any increase or decrease in the amount
of outstanding Securities represented thereby shall be made by the Trustee or
the Securities Custodian, at the direction of the Trustee, in accordance with
instructions given by the Holder thereof as required in Section 2.6.
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Section 2.2. Execution and Authentication.
Two Officers shall sign the Securities for the Company by manual or
facsimile signature. The Company's seal shall be reproduced on the Securities
and may be in facsimile form.
If an Officer whose signature is on a Security was an Officer at the
time of such execution but no longer holds that office at the time the Security
is authenticated, the Security shall nevertheless be valid.
A Security shall not be valid until authenticated by the manual
signature of an authorized signatory of the Trustee. The signature shall be
conclusive evidence that the Security has been authenticated under this
Indenture. The Guarantor shall endorse all Securities issued by the Company
under this Indenture.
The Trustee shall authenticate Securities for original issue up to one
hundred forty million dollars ($140,000,000) and shall authenticate Exchange
Notes from time to time for issue only in exchange for a like principal amount
of Securities, in each case upon a written order of the Company in the form of
an Officers' Certificate to a Trust Officer directing the Trustee to
authenticate the Securities or the Exchange Notes, as the case may be, and
certifying that all conditions precedent to the issuance of the Securities
contained herein have been complied with; provided that Exchange Notes shall be
issuable only upon the valid surrender for cancellation of Securities issued on
the Issue Date of a like aggregate principal amount in accordance with the
Registration Rights Agreement. Upon the written order of the Company in the form
of an Officers' Certificate, the Trustee shall authenticate Securities in
substitution of Securities issued on the Issue Date to reflect any name change
of the Company. The aggregate principal amount of Securities outstanding at any
time may not exceed one hundred forty million dollars ($140,000,000), except as
provided in Section 2.7 hereof.
The Trustee may appoint an authenticating agent acceptable to and at
the expense of the Company to authenticate Securities. An authenticating agent
may authenticate Securities whenever the Trustee may do so. Each reference in
this Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent to deal with the
Company or an Affiliate of the Company.
Section 2.3. Registrar and Paying Agent.
The Company shall maintain an office or agency where (a) Securities
may be presented or surrendered for registration of transfer or for exchange
("Registrar"), (b) Securities may be presented or surrendered for payment
("Paying Agent") and (c) notices and demands to or upon the Company and the
Guarantor in respect of the Securities and this Indenture may be served. The
Registrar shall keep a register of the Securities and of their transfer and
exchange. The Company may appoint one or more co-registrars and one or more
additional paying agents. The term "Registrar" includes any co-registrar and the
term "Paying Agent" includes any additional
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<PAGE> 24
paying agent. The Company may change any Paying Agent or Registrar without
notice to any Holder. The Company shall notify the Trustee in writing of the
name and address of any Agent not a party to this Indenture. The Company or any
of its Subsidiaries may act as Paying Agent or Registrar, except that for the
purposes of Articles 3 and 8 and Sections 2.4, 4.9 and 4.20, neither the Company
nor any affiliate of the Company shall act as Paying Agent. The Company
initially appoints the Trustee as Registrar and Paying Agent until such time as
the Trustee has resigned or a successor has been appointed.
The Company initially appoints DTC to act as Depository with respect
to the Global Security.
The Company initially appoints the Trustee to act as Securities
Custodian with respect to the Global Security.
Section 2.4. Paying Agent to Hold Money in Trust.
The Company shall require each Paying Agent (other than the Trustee)
to agree in writing that the Paying Agent will hold in trust for the benefit of
Holders or the Trustee all money held by the Paying Agent for the payment of
principal of or interest on the Securities, and will notify the Trustee of any
default by the Company or the Guarantor in making any such payment. While any
such default continues, the Trustee may require a Paying Agent to pay all money
held by it to the Trustee and account for any money disbursed by it. The Company
at any time may require a Paying Agent to pay all money held by it to the
Trustee and account for any money disbursed by it. Upon payment over to the
Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have
no further liability for the money. If the Company or a Subsidiary acts as
Paying Agent, it shall segregate and hold in a separate trust fund for the
benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy
or reorganization proceedings relating to the Company, the Trustee shall serve
as Paying Agent for the Securities.
Section 2.5. Holder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Holders and shall otherwise comply with TIA Section 312(a). If the Trustee is
not the Registrar, the Company shall furnish to the Trustee at least three
Business Days before each Interest Payment Date and, at such other times as the
Trustee may request in writing, within five Business Days of such request a list
in such form and as of such date as the Trustee may reasonably require, and
which the Trustee may conclusively rely upon, of the names and addresses of
Holders, and the Company shall otherwise comply with TIA Section 312(a).
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<PAGE> 25
Section 2.6. Transfer and Exchange.
When Securities are presented to the Registrar with a request to
register the transfer of such Securities or to exchange such Securities for an
equal principal amount of Securities of other authorized denominations, the
Registrar shall register the transfer or make the exchange as requested if its
requirements for such transaction are met; provided, however, that the
Securities surrendered for transfer or exchange shall be duly endorsed or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Registrar, duly executed by the Holder thereof or its attorney
duly authorized in writing. To permit registrations of transfers and exchanges,
the Company shall execute and the Trustee shall authenticate Securities at the
Registrar's request. No service charge shall be made for any registration of
transfer or exchange, but the Company may require payment of a sum sufficient to
cover any transfer tax or similar governmental charge payable in connection
therewith (other than any such transfer taxes or similar governmental charge
payable upon exchanges or transfers pursuant to Sections 2.2, 2.7, 2.10, 3.6,
4.9, 4.20 or 9.5). The Registrar shall not be required to register the transfer
of or exchange of any Security (i) during a period beginning at the opening of
business 15 days before the mailing of a notice of redemption of Securities and
ending at the close of business on the day of such mailing and (ii) selected for
redemption in whole or in part pursuant to Article 3, except the unredeemed
portion of any Security being redeemed in part.
Any Holder of the Global Security shall, by acceptance of such Global
Security, agree that transfers of beneficial interests in such Global Security
may be effected only through a book-entry system maintained by the Holder of
such Global Security (or its agent), and that ownership of a beneficial interest
in the Global Security shall be required to be reflected in a book entry.
Section 2.7. Replacement Securities.
If any mutilated Security is surrendered to the Trustee, the Registrar
or Securities Custodian, or the Company and the Trustee receive evidence to
their satisfaction of the destruction, loss or theft of any Security, the
Company shall issue, the Guarantor shall endorse and the Trustee, upon the
written order of the Company signed by an Officer, shall authenticate a
replacement Security if the Trustee's requirements are met. If required by the
Trustee or the Company, an indemnity bond must be supplied by the Holder that is
sufficient in the judgment of the Trustee and the Company to protect the
Company, the Trustee, any Agent and any authenticating agent from any loss which
any of them may suffer if a Security is replaced. The Company may charge such
Holder for its reasonable expenses in replacing a Security.
Every replacement Security is an additional obligation of the Company
and shall be entitled to all benefits of this Indenture equally and
proportionately with all other Securities duly issued hereunder.
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<PAGE> 26
The provisions of this Section 2.7 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities.
Section 2.8. Outstanding Securities.
The Securities outstanding at any time are all the Securities
authenticated by the Trustee except for those cancelled by it, those delivered
to it for cancellation, those reductions in the interest in a Global Security
effected by the Trustee hereunder, and those described in this Section as not
outstanding.
If a Security is replaced pursuant to Section 2.7 hereof (other than a
mutilated Security surrendered for replacement), it ceases to be outstanding
unless the Trustee receives proof satisfactory to it that the replaced Security
is held by a bona fide purchaser. A mutilated Security ceases to be outstanding
upon surrender of such Security and replacement thereof pursuant to Section 2.7
hereof.
If the principal amount of any Security is considered paid under
Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to
accrue.
If the Paying Agent (other than the Company, a Subsidiary or an
Affiliate of any thereof) holds, on a redemption date or maturity date, money
sufficient to pay all of the principal and interest due on the Securities
payable on that date, and is not prohibited from paying such money to the
Holders thereof pursuant to the terms of this Indenture, then on and after that
date such Securities shall be deemed to be no longer outstanding and shall cease
to accrue interest.
Except as set forth in Section 2.9 hereof, a Security does not cease
to be outstanding because the Company or an Affiliate holds the Security.
Section 2.9. Treasury Securities.
In determining whether the Holders of the required principal amount of
Securities have concurred in any direction, waiver or consent, Securities owned
by the Company, the Guarantor or by any Person directly or indirectly
controlling or controlled by or under direct or indirect common control with the
Company shall be considered as though not outstanding, except that for the
purposes of determining whether the Trustee shall be protected in relying on any
such direction, waiver or consent, only Securities that a Trust Officer of the
Trustee knows are so owned shall be so disregarded.
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<PAGE> 27
Section 2.10. Temporary Securities.
Until Definitive Securities are ready for delivery, the Company may
prepare, the Guarantor shall endorse and the Trustee shall authenticate
temporary Securities upon a written order of the Company in the form of an
Officers' Certificate delivered or caused to be delivered to a Trust Officer.
Temporary Securities shall be substantially in the form of Definitive Securities
but may have variations that the Company considers appropriate for temporary
Securities. Without unreasonable delay, the Company shall prepare, the Guarantor
shall endorse and the Trustee shall authenticate, upon receipt of a written
order of the Company in the form of an Officers' Certificate which shall specify
the amount of the temporary Securities to be authenticated and the date on which
the temporary Securities are to be authenticated, Definitive Securities in
exchange for temporary Securities.
Holders of temporary Securities shall be entitled to all benefits of
this Indenture.
Section 2.11. Cancellation.
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Securities surrendered to them for registration of transfer, exchange or
payment. The Trustee, or at the direction of the Trustee, the Registrar or the
Paying Agent (other than the Company or a Subsidiary), and no one else shall
cancel all Securities surrendered for registration of transfer, exchange,
payment, replacement or cancellation and certification of their destruction
(subject to the record retention requirements of the Exchange Act) shall be
delivered to the Company unless, by a written order, signed by an Officer, the
Company shall direct that cancelled Securities be returned to it. The Company
may not issue new Securities to replace Securities that it has paid or that have
been delivered to the Trustee for cancellation. If the Company or the Guarantor
shall acquire any of the Securities, such acquisition shall not operate as a
redemption or satisfaction of the Indebtedness represented by such Securities
unless and until the same are surrendered to the Trustee for cancellation
pursuant to this Section 2.11.
Section 2.12. Defaulted Interest.
If the Company defaults in a payment of interest on the Securities, it
shall pay the defaulted interest in any lawful manner plus, to the extent
lawful, interest payable on the defaulted interest, to the Persons who are
Holders on a subsequent special record date, in each case at the rate provided
in the Securities and in Section 4.1 hereof. The Company shall, with the consent
of the Trustee, fix each such special record date and payment date. At least 15
days before the subsequent special record date, the Company (or upon the written
request of the Company, the Trustee, in the name of and at the expense of the
Company) shall mail to each Holder a notice that states the subsequent special
record date, the related payment date and the amount of such interest to be
paid. The Company may also pay defaulted interest in any other lawful manner.
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Section 2.13. Deposit of Moneys.
Prior to 11:00 a.m. New York City time on each Interest Payment Date
and the maturity date, the Company shall have deposited with the Paying Agent in
immediately available funds money sufficient to make cash payments, if any, due
on such Interest Payment Date or maturity date, as the case may be, in a timely
manner which permits the Paying Agent to remit payment to the Holders on such
Interest Payment Date or maturity date, as the case may be.
Section 2.14. CUSIP Number.
The Company in issuing the Securities may use one or more "CUSIP"
numbers, and if so, the Trustee shall use the CUSIP numbers in notices of
redemption or exchange as a convenience to Holders; provided that any such
notice may state that no representation is made as to the correctness or
accuracy of the CUSIP number printed in the notice or on the Securities, and
that reliance may be placed only on the other identification numbers printed on
the Securities.
Section 2.15. Restrictive Legends.
Each Global Security and Definitive Security that constitutes a
Restricted Security shall bear the following legend (the "Private Placement
Legend") on the face thereof until after the third anniversary of the later of
the Issue Date and the last date on which the Company or any Affiliate of the
Company was the owner of such Security (or any predecessor security) (or such
shorter period of time as permitted by Rule 144(k) under the Securities Act or
any successor provision thereunder) (or such longer period of time as may be
required under the Securities Act or applicable state securities laws in the
opinion of counsel for the Company, unless otherwise agreed by the Company and
the Holder thereof):
"THIS SENIOR NOTE HAS NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR
FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT
AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER
THE SECURITIES ACT), (B) IT IS AN INSTITUTIONAL
"ACCREDITED INVESTOR" (AS DEFINED IN RULE 501
(a)(1), (2), (3) or (7) OF REGULATION D UNDER THE
SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED
INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS
ACQUIRING THIS SENIOR NOTE IN AN OFFSHORE
TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE
SECURITIES ACT; (2) AGREES THAT IT WILL NOT, WITHIN
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<PAGE> 29
THREE YEARS AFTER THE ORIGINAL ISSUANCE OF THIS
SENIOR NOTE, RESELL OR OTHERWISE TRANSFER THIS
SENIOR NOTE EXCEPT (A) TO THE COMPANY OR ANY
SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO
A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH
RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE
UNITED STATES TO AN INSTITUTIONAL ACCREDITED
INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO
THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THIS SENIOR NOTE (THE
FORM OF WHICH LETTER CAN BE OBTAINED FROM THE
TRUSTEE) AND AN OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE
WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED
STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE
WITH RULE 904 UNDER THE SECURITIES ACT, (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION
PROVIDED BY RULE 144 OR ANY OTHER APPLICABLE
EXEMPTION UNDER THE SECURITIES ACT (IF AVAILABLE)
OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND ( 3) AGREES
THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS
SENIOR NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY
TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH
ANY TRANSFER OF THIS SENIOR NOTE WITHIN THREE YEARS
AFTER THE ORIGINAL ISSUANCE OF THE SENIOR NOTE, IF
THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL
ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH
TRANSFER, FURNISH TO THE TRUSTEE AND THE COMPANY
SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS EITHER OF THEM MAY REASONABLY
REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE
PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT. AS USED HEREIN, THE TERMS
"OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S.
PERSON" HAVE THE MEANINGS GIVEN TO THEM BY
REGULATION S UNDER THE SECURITIES ACT. THE
INDENTURE CONTAINS A PROVISION REQUIRING THE
TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS
SENIOR NOTE IN VIOLATION OF THE FOREGOING
RESTRICTIONS."
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<PAGE> 30
Each Global Security shall also bear the following legend on the face
thereof:
"UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN
PART FOR SECURITIES IN DEFINITIVE FORM, THIS
SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE
BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY,
OR BY ANY SUCH NOMINEE OF THE DEPOSITORY, OR BY THE
DEPOSITORY OR NOMINEE OF SUCH SUCCESSOR DEPOSITORY
OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A
NOMINEE OF SUCH SUCCESSOR DEPOSITORY. UNLESS THIS
CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A
NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC
(AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN."
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED
TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES
OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF
THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS
MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH
IN SECTION 2.17 OF THE INDENTURE."
Section 2.16. Book-Entry Provisions for Global Security.
(a) The Global Security initially shall (i) be
registered in the name of Cede & Co., as nominee of the Depository, (ii) be
delivered to the Trustee as custodian for such Depository and (iii) bear legends
as set forth in Section 2.15.
Members of, or participants in, the Depository ("Agent
Members") shall have no rights under this Indenture with respect to any Global
Security held on their behalf by the Depository, or the Trustee as its
custodian, or under the Global Security, and the Depository may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of the Global Security for all purposes whatsoever.
Notwithstanding the
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<PAGE> 31
foregoing, nothing herein shall prevent the Company, the Trustee or any agent of
the Company or the Trustee from giving effect to any written certification,
proxy or other authorization furnished by the Depository or impair, as between
the Depository and its Agent Members, the operation of customary practices
governing the exercise of the rights of a holder of any Security.
(b) Transfers of the Global Security shall be limited
to transfers to the Depository, its successors or their respective nominees.
Interests of beneficial owners in the Global Security may be transferred or
exchanged for Definitive Securities in accordance with the rules and procedures
of the Depository and the provisions of Section 2.17. In addition, Definitive
Securities shall be transferred to all beneficial owners in exchange for their
beneficial interests in the Global Security if (i) the Depository notifies the
Company that it is unwilling or unable to continue as Depository for the Global
Security and a successor depositary is not appointed by the Company within 90
days of such notice or (ii) an Event of Default has occurred and is continuing
and the Registrar has received a request from the Depository to issue Definitive
Securities.
(c) In connection with any transfer or exchange of a
portion of the beneficial interest in the Global Security to beneficial owners
pursuant to paragraph (b), the Registrar shall (if one or more Definitive
Securities are to be issued) reflect on its books and records the date and a
decrease in the principal amount of the Global Security in an amount equal to
the principal amount of the beneficial interest in the Global Security to be
transferred, and the Company shall execute, and the Trustee shall authenticate
and deliver, one or more Definitive Securities of like tenor and amount.
(d) In connection with the transfer of the entire
Global Security to beneficial owners pursuant to paragraph (b), the Global
Security shall be deemed to be surrendered to the Trustee for cancellation, and
the Company shall execute, and the Trustee shall authenticate and deliver, to
each beneficial owner identified by the Depository in exchange for its
beneficial interest in the Global Security, an equal aggregate principal amount
of Definitive Securities of authorized denominations.
(e) Any Definitive Security constituting a Restricted
Security delivered in exchange for an interest in the Global Security pursuant
to paragraph (b) or (c) shall, except as otherwise provided by paragraphs
(a)(i)(x) and (c) of Section 2.17, bear the legend regarding transfer
restrictions applicable to the Definitive Securities set forth in Section 2.15.
(f) The Holder of the Global Security may grant proxies
and otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Securities.
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<PAGE> 32
Section 2.17. Special Transfer Provisions.
(a) Transfers to Non-QIB Institutional Accredited
Investors and Non-U.S. Persons. The following provisions shall apply with
respect to the registration of any proposed transfer of a Security constituting
a Restricted Security to any Institutional Accredited Investor which is not a
QIB or to any non-U.S. Person:
(i) the Registrar shall register the transfer of any
Security constituting a Restricted Security, whether or not such
Security bears the Private Placement Legend, if (x) the requested
transfer is after the third anniversary of the Issue Date (provided,
however, that neither the Company nor any Affiliate of the Company has
held any beneficial interest in such Security, or portion thereof, at
any time on or prior to the third anniversary of the Issue Date), or
(y) (l) in the case of a transfer to an Institutional Accredited
Investor which is not a QIB (excluding non-U.S. Persons), the proposed
transferee has delivered to the Registrar a certificate substantially
in the form of Exhibit B hereto or (2) in the case of a transfer to a
non-U.S. Person, the proposed transferor has delivered to the
Registrar a certificate substantially in the form of Exhibit C hereto;
and
(ii) if the proposed transferor is an Agent Member
holding a beneficial interest in the Global Security, upon receipt by
the Registrar of (x) the certificate, if any, required by paragraph
(i) above and (y) instructions given in accordance with the
Depository's and the Registrar's procedures,
whereupon (a) the Registrar shall reflect on its books and records the date and
(if the transfer does not involve a transfer of outstanding Definitive
Securities) a decrease in the principal amount of the Global Security in an
amount equal to the principal amount of the beneficial interest in the Global
Security to be transferred, and (b) the Company shall execute and the Trustee
shall authenticate and deliver one or more Definitive Securities of like tenor
and amount.
(b) Transfers to QIBs. The following provisions shall
apply with respect to the registration of any proposed transfer of a Security
constituting a Restricted Security to a QIB (excluding transfers to non-U.S.
Persons):
(i) the Registrar shall register the transfer if such
transfer is being made by a proposed transferor who has checked the
box provided for on the form of Security stating, or has otherwise
advised the Company and the Registrar in writing, that the sale has
been made in compliance with the provisions of Rule 144A to a
transferee who has signed the certification provided for on the form
of Security stating, or has otherwise advised the Company and the
Registrar in writing, that it is purchasing the Security for its own
account, or an account with respect to which it exercises sole
investment discretion and that it and any such account is a QIB within
the meaning of Rule 144A, and is aware that the sale to it is being
made in reliance on Rule 144A and acknowledges that it has received
such information regarding the Company as it has requested pursuant to
Rule
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<PAGE> 33
144A or has determined not to request such information and that it is
aware that the transferor is relying upon its foregoing
representations in order to claim the exemption from registration
provided by Rule 144A; and
(ii) if the proposed transferee is an Agent Member, and
the Securities to be transferred consist of Definitive Securities
which after transfer are to be evidenced by an interest in the Global
Security, upon receipt by the Registrar of instructions given in
accordance with the Depository's and the Registrar's procedures, the
Registrar shall reflect on its books and records the date and an
increase in the principal amount of the Global Security in an amount
equal to the principal amount of the Definitive Securities to be
transferred, and the Trustee shall cancel the Definitive Securities so
transferred.
(c) Private Placement Legend. Upon the transfer,
exchange or replacement of Securities not bearing the Private Placement Legend,
the Registrar shall deliver Securities that do not bear the Private Placement
Legend. Upon the transfer, exchange or replacement of Securities bearing the
Private Placement Legend, the Registrar shall deliver only Securities that bear
the Private Placement Legend unless (i) the circumstance contemplated by
paragraph (a)(i)(x) of this Section 2.17 exist or (ii) there is delivered to the
Registrar an opinion of counsel reasonably satisfactory to the Company and the
Trustee to the effect that neither such legend nor the related restrictions on
transfer are required in order to maintain compliance with the provisions of the
Securities Act.
(d) General. By its acceptance of any Security bearing
the Private Placement Legend, each Holder of such a Security acknowledges the
restrictions on transfer of such Security set forth in this Indenture and in the
Private Placement Legend and agrees that it will transfer such Security only as
provided in this Indenture.
The Registrar shall retain copies of all letters, notices and
other written communications received pursuant to Section 2.16 or this Section
2.17. The Company shall have the right to inspect and make copies of all such
letters, notices or other written communications at any reasonable time upon the
giving of reasonable written notice to the Registrar.
ARTICLE 3.
REDEMPTION
Section 3.1. Notices to Trustee.
If the Company elects to redeem Securities pursuant to the optional
redemption provisions of paragraph 5 of the Securities, it shall notify the
Trustee of the redemption date, the principal amount of Securities to be
redeemed and the redemption price.
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<PAGE> 34
The Company shall give each notice provided for in this Section at
least 30 days but not more than 60 days before the redemption date (unless a
shorter notice period shall be satisfactory to the Trustee).
Section 3.2. Selection of Securities to be Redeemed.
If less than all of the Securities are to be redeemed, the Trustee
shall select the Securities to be redeemed pro rata, by lot or by any other
method that the Trustee considers fair and appropriate. The Trustee shall make
the selection not more than 60 days and not less than 30 days before the
redemption date from Securities outstanding not previously called for
redemption. The Trustee may select for redemption portions of the principal
amount of Securities that have denominations larger than $1,000. Securities and
portions of them it selects shall be in amounts of $1,000 or integral multiples
of $1,000. Provisions of this Indenture that apply to Securities called for
redemption also apply to portions of Securities called for redemption. The
Trustee shall notify the Company promptly of the Securities or portions of
Securities to be called for redemption.
Section 3.3. Notice of Redemption.
At least 30 days but not more than 60 days before a redemption date,
the Company shall mail a notice of redemption by first class mail, postage
prepaid, to each Holder whose Securities are to be redeemed at such Holder's
registered address.
The notice shall identify the Securities to be redeemed and shall
state:
(1) the redemption date;
(2) the redemption price;
(3) if any Security is being redeemed in part, the
portion of the principal amount of such Security to be redeemed and
that, after the redemption date, upon surrender of such Security, a
new Security or Securities in principal amount equal to the unredeemed
portion will be issued;
(4) the name and address of the Paying Agent;
(5) that Securities called for redemption must be
surrendered to the Paying Agent to collect the redemption price;
(6) that interest on Securities called for redemption
ceases to accrue on and after the redemption date; and
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<PAGE> 35
(7) the paragraph of the Securities pursuant to which
the Securities are being redeemed.
At the Company's request, the Trustee shall give notice of redemption
in the Company's name and at its expense.
Section 3.4. Effect of Notice of Redemption.
Notice of redemption shall be deemed to be given when mailed to each
Holder at its last registered address, whether or not the Holder receives such
Notice. Once notice of redemption is mailed, Securities called for redemption
become due and payable on the redemption date at the price set forth in the
Security. A notice of redemption may not be conditional. Upon surrender to the
Trustee or Paying Agent, such Securities called for redemption shall be paid at
the redemption price (which shall include accrued and unpaid interest thereon to
the redemption date) but installments of interest, the maturity of which is on
or prior to the redemption date, shall be payable to Holders of record at the
close of business on the applicable payment dates.
Section 3.5. Deposit of Redemption Price.
On or before 11:00 a.m. New York City time on any redemption date, the
Company shall deposit with the Trustee or with the Paying Agent available funds
sufficient to pay the redemption price of and accrued interest (if payable under
the Securities) on all Securities to be redeemed on that date.
Section 3.6. Securities Redeemed in Part.
Upon surrender of a Security that is redeemed in part, the Company
shall issue, the Guarantor shall endorse and the Trustee shall authenticate for
the Holder at the expense of the Company a new Security equal in principal
amount to the unredeemed portion of the Security surrendered.
ARTICLE 4.
COVENANTS
Section 4.1. Payment of Securities.
The Company shall pay the principal of and interest on the Securities
on the dates and in the manner provided in the Securities and this Indenture.
Principal and interest shall be considered paid on the date due if the Paying
Agent (other than the Company or a Subsidiary of the Company) holds on that date
money designated for and sufficient to pay in cash all principal and interest
then due. The Company shall pay all Liquidated Damages, if any, in the same
manner on the dates and in the amounts set forth in the Registration Rights
Agreement.
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<PAGE> 36
To the extent lawful, the Company shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on (i)
overdue principal, at the rate borne by the Securities, compounded semiannually;
and (ii) overdue installments of interest (without regard to any applicable
grace period) at the same rate, compounded semiannually.
Section 4.2. SEC Reports.
(a) The Company shall deliver to the Trustee within 15 days after
the filing of the same with the SEC, copies of the quarterly and annual reports
and of the information, documents, and other reports (or copies of such portions
of any of the foregoing as the SEC may by rules and regulations prescribe), if
any, which the Company is required to file with the SEC pursuant to Section 13
or 15(d) of the Exchange Act. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the SEC, to the extent permitted by law or
regulation, and provide the Trustee and the Holders of Securities with such
quarterly and annual reports and such information, documents and other reports
specified in Sections 13 and 15(d) of the Exchange Act. The Company also shall
comply with the other provisions of TIA Section 314(a). The Company shall timely
comply with its reporting and filing obligations under the applicable federal
securities laws.
(b) At any time when the Company is not required by applicable law
or regulation to file the aforementioned reports, upon the request of a Holder
of Securities, the Company will promptly furnish or cause to be furnished such
information as is specified pursuant to Rule 144A(d)(4) under the Securities Act
(or any successor provision thereto) to such Holder or to a prospective
purchaser of such Securities designated by such Holder, as the case may be, in
order to permit compliance by such Holder with Rule 144A.
Section 4.3. Compliance Certificate.
The Company shall deliver to the Trustee, within 45 days after the end
of each of the first three quarters of the Company's fiscal year and within 90
days after the end of such fiscal year of the Company, an Officers' Certificate
stating that a review of the activities of the Company and its Subsidiaries
during the preceding fiscal year has been made under the supervision of the
signing Officers with a view to determining whether the Company has kept,
observed, performed and fulfilled its obligations under this Indenture, and
further stating, as to each such Officer signing such certificate, that to the
best of his or her knowledge the Company has kept, observed, performed and
fulfilled each and every covenant contained in this Indenture and is not in
default in the performance or observance of any of the terms, provisions and
conditions hereof (or, if a Default or Event of Default shall have occurred,
describing all such Defaults or Events of Default of which he or she may have
knowledge and what action the Company is taking or proposes to take with respect
thereto), and that, to the best of his or her knowledge, no event has occurred
and remains in existence by reason of which payments on account of the principal
of or interest, if any, on the Securities are prohibited.
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<PAGE> 37
The Company will, so long as any of the Securities are outstanding,
deliver to the Trustee, within five Business days after becoming aware of (i)
any Default, Event of Default or default in the performance of any covenant,
agreement or condition in this Indenture or (ii) any event of default under any
other instrument of Indebtedness to which Section 6.1(v) applies, an Officers'
Certificate specifying such Default, Event of Default or default, describing its
status and what action the Company is taking or proposes to take with respect
thereto.
So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to this Section 4.3 above shall be accompanied by
a written statement of the Company's independent public accountants (who shall
be a firm of established national reputation) that in making the examination
necessary for certification of such financial statements, nothing has come to
their attention that would lead them to believe that the Company has violated
any provisions of Article 4 or Article 5 hereof, or if any such violation has
occurred, specifying the nature and period of existence thereof, it being
understood that such accountants shall not be liable directly or indirectly to
any Person for any failure to obtain knowledge of any such violation.
Section 4.4. Stay, Extension and Usury Laws.
Each of the Company and the Guarantor covenants (to the extent that it
may lawfully do so) that it will not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay, extension
or usury law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and each of the
Company and the Guarantor (to the extent it may lawfully do so) hereby expressly
waives all benefit or advantage of any such law, and covenants that it will not,
by resort to any such law, hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of every
such power as though no such law has been enacted.
Section 4.5. Limitation on Restricted Payments.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend on or make any
distribution on account of the Company's Capital Stock (other than
dividends or distributions payable in Capital Stock (other than
Disqualified Stock) of the Company);
(2) purchase, redeem or otherwise acquire or retire for
value any Capital Stock of the Company, any Subsidiary of the Company
or other Affiliate of the Company (other than any such Capital Stock
owned by the Company or any Subsidiary of the Company);
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<PAGE> 38
(3) purchase, redeem or otherwise acquire or retire for
value any Indebtedness that is pari passu with or subordinated to the
Securities except for payments of: (a) Permitted Secured Indebtedness;
and (b) Permitted Indebtedness, in each case in accordance with the
provisions contained therein, as such provisions may be amended from
time to time, but subject to the provisions of this Indenture;
provided, however, that no such amendments shall cause such Permitted
Indebtedness or Permitted Secured Indebtedness (other than the Credit
Facility) to be scheduled to mature at a date earlier than the Stated
Maturity of the Indebtedness being amended;
(4) permit any Restricted Subsidiary to declare or pay
any dividend on, or make any distribution to the holders (as such) of,
any shares of its Capital Stock except to the Company or a Wholly
Owned Subsidiary (other than dividends or distributions payable in
Capital Stock (other than Disqualified Stock) of it or the Company);
or
(5) make any Investment in any Affiliate (other than
the Company or a wholly owned Restricted Subsidiary of the Company),
all such payments and other actions set forth in clauses (1) through
(5) above being collectively referred to as "Restricted Payments," unless, at
the time of such Restricted Payment:
(i) no Default or Event of Default shall have occurred
and be continuing or shall occur as a consequence
thereof; and
(ii) such Restricted Payment, together with the
aggregate of all other Restricted Payments made by
the Company and its Restricted Subsidiaries after
the date hereof (including Restricted Payments
permitted by the next succeeding paragraph), is
less than the aggregate of (A) 50% of the aggregate
Adjusted Consolidated Net Income of the Company for
the period from and including January 1, 1997 to
the end of the Company's most recently ended fiscal
quarter for which internal financial statements are
available at the time of such Restricted Payment
(or if such Adjusted Consolidated Net Income for
such period is a deficit, 100% of such deficit),
plus (B) an amount equal to the Net Cash Proceeds
received upon the sale or other disposition or
repayment of any Investment made after the Issue
Date which had been treated as a Restricted
Payment.
The foregoing provisions of this Section 4.5 will not prohibit (i) the
repayment of the Bridge Loan, plus interest thereon; (ii) the payment of fees
and expenses associated with the Offering, the Bridge Loan, the Acquisition, the
Merger and related transactions that are either payable by the Company or to be
reimbursed by the Company to Dart; (iii) the payment as soon as practicable
after the Acquisition, but in no event more than 15 days thereafter, of a
$10,000,000 dividend by the Company; (iv) the payment of any dividend within 60
days after the
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<PAGE> 39
date of declaration thereof, if at the record date for such dividend such
payment would have complied with the provisions of this Indenture; and (v) the
redemption, repurchase, retirement or other acquisition of the Securities or any
Capital Stock of the Company in exchange for, or out of the proceeds of, the
substantially concurrent sale (other than to a Restricted Subsidiary of the
Company) of other Capital Stock of the Company (other than any Disqualified
Stock); provided, however, that the repayment of the Bridge Loan, the payment of
the fees and expenses associated with the Offering, the Bridge Loan, plus
interest thereon, the Acquisition, the Merger and related transactions that are
either payable by the Company or to be reimbursed by the Company to Dart, the
payment of the $10,000,000 dividend and the redemption, repurchase, retirement
or other acquisition made in accordance with clauses (i), (ii), (iii) and (v)
above, respectively, shall not be deemed to be Restricted Payments.
Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this Section 4.5 were computed, which calculations may
be based upon the Company's latest available financial statements.
Section 4.6. Continued Existence.
Subject to Article 5 hereof, the Guarantor and the Company will, and
will cause the Company's Restricted Subsidiaries to, do or cause to be done all
things necessary to preserve and keep in full force and effect its existence as
a corporation and will refrain from taking any action that would cause its
existence as a corporation to cease, including without limitation any action
that would result in its liquidation, winding up or dissolution; provided,
however, that the foregoing restriction shall not prohibit the Company from
merging with or into a Restricted Subsidiary or a Restricted Subsidiary from
merging with or into the Company or another Restricted Subsidiary.
Section 4.7. Limitation on Indebtedness.
The Company shall not, and shall not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, assume,
issue, Guarantee or in any manner become liable, contingently or otherwise, for
or with respect to the payment of, any Indebtedness (including any Acquired
Indebtedness) except for (each of which shall be given independent effect):
(a) Indebtedness of the Company under the Securities
and this Indenture;
(b) Permitted Secured Indebtedness;
(c) any replacements, renewals, refinancings and
extensions of Indebtedness incurred under clauses (a) and (b) above
(other than the Bridge Loan), provided that (i) any such replacement,
renewal, refinancing and extension (x) shall not provide for any
mandatory redemption, amortization or sinking fund requirement in an
amount greater
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than or at a time prior to the amounts and times specified in the
Indebtedness being replaced, renewed, refinanced or extended and (y)
shall be contractually subordinated to the Securities at least to the
extent, if at all, that the Indebtedness being replaced, renewed,
refinanced or extended is subordinate to the Securities, (ii) any such
Indebtedness of any Person must be replaced, refinanced or extended
with Indebtedness incurred by such Person or by the Company; and (iii)
the principal amount of Indebtedness incurred pursuant to this clause
(c) (or, if such Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration of the maturity thereof, the original issue price of such
Indebtedness) shall not exceed the sum of the principal amount (or
with respect to Indebtedness which provides for an amount less than
the principal amount there to be due and payable upon a declaration of
acceleration of the maturity thereof, the accredited value thereof) of
Indebtedness so replaced, renewed, refinanced or extended, plus
accrued interest, the amount of any premium required to be paid in
connection with such replacement, renewal, refinancing or extension
pursuant to the terms of such Indebtedness or the amount of any
premium reasonably determined by the Company as necessary to
accomplish such replacement, renewal, refinancing or extension by
means of a tender offer or privately negotiated purchase, and the
amount of fees and expenses incurred in connection therewith;
(d) Indebtedness of the Company or Restricted
Subsidiaries of the Company in an aggregate principal amount not to
exceed $20,000,000 in the aggregate at any one time outstanding
provided that (i) such Indebtedness shall be either contractually
subordinated to or rank pari passu with the Securities and (ii) no
scheduled installment or other required payment of principal or
interest on any such Indebtedness shall be due and payable prior to
the Maturity Date, except for an amount not in excess of $4,000,000;
(e) Indebtedness of the Company or Restricted
Subsidiaries of the Company provided (i) the Interest Coverage Ratio
of the Company for the applicable Four Quarter Period would have been
at least 2.5:1.0 after giving pro forma effect to such incurrence or
issuance and the application of the proceeds therefrom; (ii) such
Indebtedness shall be either contractually subordinated to or rank
pari passu with the Securities; and (iii) no scheduled installment or
other required payment of principal or interest on any such
Indebtedness shall be due and payable prior to the Maturity Date,
except for an amount not in excess of 20% of the principal amount of
such Indebtedness; and
(f) any Investments permitted under Section 4.14 (the
foregoing items in clauses (a) through (f) are referred to as
"Permitted Indebtedness").
Section 4.8. Taxes.
The Company shall, and shall cause each of its Subsidiaries to, pay
prior to delinquency all taxes, assessments and governmental levies, except as
contested in good faith and by
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appropriate proceedings and for which adequate reserves, if any, required by
GAAP shall have been set aside.
Section 4.9. Repurchase at Holder's Option Upon Change in Control.
(a) Upon the occurrence of a Change in Control (as
hereinafter defined), each Holder shall have the right, at such Holder's option,
to require the Company to repurchase all of such Holder's Securities, or any
portion thereof that is an integral multiple of $1,000, on the date (the
"Repurchase Date") that is no later than 60 days after the date of the Company
Notice (as hereinafter defined) for cash at a price equal to the lesser of (i)
the Optional Redemption Price (as defined in the Securities) then in effect or
(ii) 101% of the principal amount of such Securities to be repurchased (the
"Change in Control Repurchase Price"), together with accrued and unpaid
interest, if any, to the Repurchase Date. Within 30 days after the occurrence of
a Change in Control, the Company shall mail to all holders of record of such
Securities a notice (the "Company Notice") of the occurrence of such Change in
Control and of the repurchase right arising as a result thereof. The Company
shall also deliver a copy of the Company Notice to the Trustee. To exercise the
repurchase right, a Holder shall deliver on or before the 30th day after the
date of the Company Notice irrevocable written notice to the Trustee of the
Holder's exercise of such right, together with the Securities with respect to
which the right is being exercised, duly endorsed for transfer to the Company.
The Company Notice shall state:
(1) that the Company Notice is being delivered pursuant
to this Section 4.9 and that all Securities tendered will be accepted
for payment;
(2) the purchase price and the purchase date, which
shall be no later than 60 days from the date such notice is mailed
(the "Change in Control Payment Date");
(3) that any Securities not tendered will continue to
accrue interest;
(4) that, unless the Company defaults in the payment of
the Change in Control Repurchase Price, all Securities accepted for
payment upon a Change in Control shall cease to accrue interest after
the Change in Control Payment Date;
(5) that in order to exercise the repurchase right,
each Holder electing to have any Securities purchased will be required
to (i) deliver irrevocable written notice to the Trustee of such
Holder's exercise of such right, and (ii) surrender the Securities
(duly endorsed for transfer to the Company), with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Securities
completed, and any form of letter of transmittal proposed by the
Company and acceptable to the Trustee and the Paying Agent, to the
Paying Agent at the address specified in the notice, in each case, on
or before 4:00 p.m. New York City time on the 30th day after the date
of the Company Notice; and
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(6) that Holders whose Securities are being purchased
only in part will be issued new Securities equal in principal amount
to the unpurchased portion of the Securities surrendered, which
unpurchased portion must be equal to $1,000 in principal amount or an
integral multiple thereof.
(b) On the Change in Control Payment Date, the Company
shall, to the extent lawful, (1) accept for payment Securities or portions
thereof tendered pursuant to the Change in Control Notice, (2) deposit with the
Paying Agent in immediately available funds an amount equal to the Change in
Control Repurchase Price in respect of all Securities or portions thereof so
tendered, and (3) deliver or cause to be delivered to the Trustee the Securities
so accepted together with an Officers' Certificate stating the Securities or
portions thereof tendered to the Company. The Paying Agent shall promptly mail
to each Holder of Securities so accepted payment in an amount equal to the
purchase price for the Securities, and the Trustee shall promptly authenticate,
and arrange for the Guarantor to endorse, and mail to each Holder a new Security
equal in principal amount to any unpurchased portion of the Securities
surrendered by such Holder, if any; provided, that each such new Security shall
be in principal amount of $1,000 or an integral multiple thereof. The Company
shall cause to be mailed to each Holder the results of any repurchases by
Securityholders pursuant to this Section 4.9 on or as soon as practicable after
the Change in Control Payment Date.
A Change in Control will be deemed to have occurred at such
time as:
(i) any Person (including any syndicate or group deemed
to be a "person" under Section 13(d)(3) of the Exchange Act,
other than Dart, the Company or any employee benefit plan of
the Company or the Guarantor), is or becomes the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange
Act), directly or indirectly, through a purchase, merger or
other acquisition transaction or series of transactions or
otherwise, of shares of Capital Stock of the Company, the
Guarantor or Dart, entitling such Person to exercise 35% or
more of the total voting power of all shares of Capital Stock
of the Company, the Guarantor or Dart, entitled to vote
generally in the election of the directors;
(ii) there occurs any consolidation of the Company with,
or merger of the Company into, any other Person, any merger
of another Person into the Company, or any sales or transfers
of all or substantially all of the assets of the Company to
another Person (other than a merger (x) which does not result
in any reclassification, conversion, exchange or cancellation
of outstanding shares of Capital Stock or (y) which is
effected solely to change the jurisdiction of incorporation
of the Company and results in a reclassification, conversion
or exchange of outstanding shares of Capital Stock into
solely shares of Capital Stock) provided, that no Change in
Control will be deemed to occur pursuant to this clause (ii)
upon the consummation of the Merger; or
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<PAGE> 43
(iii) the replacement of a majority of the Board of
Directors of the Company from the directors who constituted
the Board of Directors of SFW Acquisition Corp. on the Issue
Date, and such replacement shall not have been approved by
either (a) a vote of a majority of the Board of Directors
then still in office who either were (x) members of the Board
of Directors of SFW Acquisition Corp. on the Issue Date or
(y) whose election as a member of the Board of Directors was
approved in the manner provided in this clause (iii) or (b)
the Voting Trustee (as defined below).
Notwithstanding the foregoing, the beneficial ownership of
shares of Capital Stock of Dart under that certain Voting Trust Agreement dated
October 6, 1995 by and among Ronald S. Haft, Dart and Larry G. Schafran and
Sidney B. Silverman, as initial voting trustees, entitling such trust, acting
through its duly appointed voting trustee, or if more than one, trustees (the
"Voting Trustee"), to exercise 35% or more of the total voting power of all
shares of Capital Stock of Dart shall not be deemed to constitute a Change in
Control.
The Company shall comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable in connection with the
repurchase of Securities pursuant to the occurrence of a Change in Control
event. To the extent that the provisions of any securities laws or regulations
conflict with the "Change in Control" provisions herein, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under the "Change in Control" provisions
of this Indenture by virtue thereof.
Section 4.10. Limitation on Transactions with Affiliates.
Neither the Company nor any of its Restricted Subsidiaries nor the
Guarantor shall, from and after the date hereof, sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into any contract, agreement, understanding,
loan, advance or Guarantee with, or for the benefit of, any Affiliate (each of
the foregoing, an "Affiliate Transaction"), unless (a) such Affiliate
Transaction is on terms that are no less favorable to the Company or the
relevant Restricted Subsidiary than those that could have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (b) the Company delivers to the Trustee (i) with respect to
any Affiliate Transaction involving aggregate payments in excess of $250,000, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (a) above and
such Affiliate Transaction is approved by a majority of the disinterested
members of the Board of Directors, and (ii) with respect to any Affiliate
Transaction involving aggregate payments in excess of $1,000,000, an opinion as
to the fairness to the Company or, in the case of a transaction with an
Affiliate and a Restricted Subsidiary, to such Restricted Subsidiary, in each
case from a financial point of view issued by an investment banking firm of
national standing; provided, however, that (i) any employment agreement,
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<PAGE> 44
consulting agreement and indemnification obligations entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Restricted Subsidiary,
(ii) transactions in accordance with the terms of the Tax Sharing Agreement or
the Management Services Agreement, (iii) the payment of reasonable and customary
fees to directors of the Company who are not employees of the Company, (iv)
transactions permitted under Sections 4.5 and 4.14 hereof, and (v) the
anticipated offset by Dart against the promissory note in the principal amount
of approximately $1,493,000 payable by Dart to Shoppers, reflecting certain
claims that Dart and its Subsidiaries have raised against Shoppers, in each
case, shall not be deemed Affiliate Transactions.
Section 4.11. Limitation on Lines of Business.
Neither the Company nor any Restricted Subsidiary of the Company shall
engage in any business other than those businesses in which the Company is
engaged on the date hereof and any other businesses related thereto.
Section 4.12. Dividends and Other Payment Restrictions Affecting
Subsidiaries.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a)(i) pay dividends or
make any other distributions to the Company or any of its Restricted
Subsidiaries (A) on its Capital Stock or (B) with respect to any other interest
or participation in, or measured by, its profits or (ii) pay any Indebtedness
owed to the Company or any of its Restricted Subsidiaries, (b) make loans or
advances to the Company or any of its Restricted Subsidiaries or (c) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for (i) such encumbrances or restrictions existing under or
by reason of this Indenture or applicable law (ii) reasonable and customary
provisions restricting subletting or assignment of any lease entered into in the
ordinary course of business, consistent with industry practices, (iii)
restrictions under any Acquired Indebtedness or any agreement relating to any
property, asset or business acquired by the Company or any of its Subsidiaries,
which restrictions existed at the time of acquisition, were not put in place in
connection with or in anticipation of such acquisition and are not applicable to
any Person, other than the Person acquired or to any property, asset or business
other than the property, asset and business so acquired, (iv) reasonable and
customary restrictions on transfers of all collateral imposed in connection with
Permitted Liens, and (v) replacements of restrictions imposed pursuant to clause
(iii) and this clause (v) that are not more restrictive than those being
replaced and do not apply to any additional property or assets.
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Section 4.13. Further Assurance to the Trustee.
The Company, upon request of the Trustee, shall execute and deliver
such further instruments and do such further acts as may be reasonably necessary
or proper to carry out more effectively the provisions of this Indenture.
Section 4.14. Limitation on Investments, Loans and Advances.
The Company shall not make, and shall not permit any of its Restricted
Subsidiaries to make, any Investment, except: (i) Investments by the Company or
a Restricted Subsidiary of the Company in any Wholly Owned Restricted Subsidiary
of the Company (including any such Investment pursuant to which a Person becomes
a Wholly Owned Restricted Subsidiary of the Company) or in the Company by any
Restricted Subsidiary of the Company; (ii) Investments represented by
receivables created or acquired in the ordinary course of business or the
settlement of such receivables in the ordinary course of business; (iii)
Investments permitted to be made pursuant to Section 4.5; (iv) Investments
represented by advances to employees, officers and directors of the Company or
its Restricted Subsidiaries made in the ordinary course of business and
consistent with reasonable and customary business practices; (v) Permitted
Investments; and (vi) Investments permitted to be made with the Net Cash
Proceeds of Asset Sales pursuant to Section 4.20.
Section 4.15. Limitation on Liens.
The Company shall not, and the Company shall not permit, cause or
suffer any of its Restricted Subsidiaries to, create, incur, assume or suffer to
exist any Lien of any kind upon any of its property or assets now owned or
hereafter acquired by it, except for (a) Liens of Shoppers and its Restricted
Subsidiaries existing as of the Issue Date; (b) Permitted Liens; (c) Liens on
the assets and property of the Company to secure the payment of all or a part of
the purchase price of assets or property acquired in the ordinary course of
business after the Issue Date or to secure Capitalized Lease Obligations,
provided that (i) the aggregate principal amount of Indebtedness secured by such
Liens shall not exceed the lesser of the cost or Fair Market Value of the assets
or property so acquired and (ii) such Liens shall not encumber any assets or
property of the Company or its Subsidiaries other than the assets or property so
acquired and shall attach to such assets or property within 60 days of the
acquisition of such assets or property; (d) leases and subleases of real
property which do not interfere with the ordinary conduct of the business of the
Company or any of its Restricted Subsidiaries, and which are made on customary
and usual terms applicable to similar properties; (e) Liens securing
Indebtedness which is incurred to refinance Indebtedness which has been secured
by a Lien permitted under this Indenture and is permitted to be refinanced under
this Indenture, provided that such Liens do not extend to or cover any property
or assets of the Company or any of its Subsidiaries not securing the
Indebtedness so refinanced; (f) Liens on Acquired Indebtedness, provided that
such Liens (i) are not incurred in connection with, or in contemplation of the
acquisition of the property or assets acquired and (ii) do not extend to or
cover any property or assets of the Company or any of its
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Restricted Subsidiaries (other than the property or assets of the Restricted
Subsidiary so acquired that are subject to such Lien); (g) Liens in favor of the
Trustee under this Indenture; and (h) any replacement, extension or renewal, in
whole or in part, of any Lien described in this or the foregoing clauses
including in connection with any refinancing of the Indebtedness, in whole or in
part, secured by any such Lien, provided that to the extent any such clause
limits the amount secured or the assets subject to such Liens, no extension or
renewal shall increase the amount or the assets subject to such Liens, except
for Liens associated with such additional assets that are otherwise permitted
hereunder. The Guarantor shall not create, incur, assume or suffer to exist any
Lien (other than the Lien created under Article 11) of any kind upon any of its
property or assets (including without limitation Capital Stock of its
Subsidiaries) now owned or hereafter acquired by it.
Notwithstanding the foregoing, Liens shall be permitted by the
previous clauses (a) though (h) only to the extent that any Indebtedness secured
by such Liens is incurred pursuant to and in accordance with the provisions of
this Indenture.
Section 4.16. Maintenance of Office or Agency.
The Company and the Guarantor shall maintain in the Borough of
Manhattan, The City of New York, the office or agency required under Section 2.3
hereof. The Company and the Guarantor shall give prompt, written notice to the
Trustee of the location, and any change in the location, of such office or
agency. If at any time the Company and the Guarantor shall fail to maintain any
such required office or agency or shall fail to furnish the Trustee with the
address thereof, such presentations, surrenders, notices and demands may be made
or served at the address of the Trustee set forth in Section 12.2.
Section 4.17. Tax Sharing Agreement.
The Company shall, and shall cause its Restricted Subsidiaries to,
comply in all material respects with the Tax Sharing Agreement and shall not
amend the Tax Sharing Agreement in any material respect.
Section 4.18. Management Services Agreement.
The Company shall, and shall cause its Restricted Subsidiaries to,
comply in all material respects with the Management Services Agreement and shall
not amend the Management Services Agreement in any material respect.
Section 4.19. The Merger with Shoppers.
The Company shall consummate the Merger as soon as practicable after
the Acquisition (but in no event more than 15 days after the closing of the
Acquisition).
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Section 4.20. Limitation on Asset Sales.
The Company shall not, and shall not cause or permit any of its
Restricted Subsidiaries to, make any Asset Sale, unless (a) the Company or the
applicable Restricted Subsidiary receives consideration at the time of such
Asset Sale at least equal to the fair market value of the assets sold, (b) at
least 85% of the consideration for such Asset Sale (other than assumption of
trade Indebtedness) consists of cash and Cash Equivalents, and (c) upon
consummation of an Asset Sale, the Company will within 365 days of the receipt
of the proceeds therefrom, either: (i) apply or cause its Restricted Subsidiary
to apply the Net Cash Proceeds of any Asset Sale to (1) an investment in
properties and assets that replace the properties and assets that are the
subject of such Asset Sale or (2) an investment in properties and assets that
will be used in the business of the Company and its Restricted Subsidiaries as
existing on the Issue Date; (ii) in the case of a sale of a store or stores,
deem such Net Cash Proceeds to have been applied to the extent of any capital
expenditures made to acquire or construct a replacement store in the general
vicinity of the store sold within 365 days preceding the date of the Asset Sale;
or (iii) after such time as the accumulated Net Cash Proceeds equals or exceeds
$5 million, apply or cause to be applied such Net Cash Proceeds to the purchase
of Securities tendered to the Company for purchase at a price equal to 100% of
the principal amount thereof plus accrued interest thereon to the date of
purchase pursuant to an offer to purchase made by the Company as set forth below
(a "Net Cash Proceeds Offer"); provided, however, that the Company shall have
the right to exclude from the foregoing provisions Asset Sales subsequent to the
Issue Date, the proceeds of which are derived from the sale and substantially
concurrent lease-back of a supermarket and/or related assets or equipment which
is acquired or constructed by the Company or a Restricted Subsidiary subsequent
to the Issue Date; provided, however, that any such sale and substantially
concurrent lease-back occurs within 270 days following such acquisition or the
completion of such construction, as the case may be. Pending the utilization of
any Net Cash Proceeds in the manner (and within the time period) described
above, the Company may use any such Net Cash Proceeds to repay revolving loans
under the Credit Facility without a permanent reduction of the commitment
thereunder.
Notice of a Net Cash Proceeds Offer pursuant to this Section 4.20 will
be mailed to record Holders of Securities as shown on the register of Holders
not less than 325 days nor more than 365 days after the relevant Asset Sale,
with a copy to the Trustee. The notice shall contain all instructions and
materials necessary to enable such Holders to tender Securities pursuant to the
Net Cash Proceeds Offer and shall state the following terms:
(1) that the Net Cash Proceeds Offer is being made
pursuant to Section 4.20 and that all Securities tendered will be accepted for
payment; provided, however, that if the aggregate principal amount of Securities
tendered in the Net Cash Proceeds Offer plus accrued interest at the expiration
of such offer exceeds the aggregate amount of the Net Cash Proceeds Offer, the
Company shall select the Securities to be purchased on a pro rata basis (with
such adjustments as may be deemed appropriate by the Company so that only
Securities in denominations of $1,000 or multiples thereof shall be purchased);
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(2) the purchase price (including the amount of accrued
interest) and the purchase date (which shall be no earlier than 30 days nor
later than 40 days from the date such notice is mailed, other than as may be
required by law) (the "Proceeds Purchase Date");
(3) that any Security not tendered will continue to
accrue interest if interest is then accruing;
(4) that, unless the Company defaults in making payment
therefor, any Security accepted for payment pursuant to the Net Cash Proceeds
Offer shall cease to accrue interest after the Proceeds Purchase Date;
(5) that Holders electing to have a Security purchased
pursuant to a Net Cash Proceeds Offer will be required to surrender the
Security, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Security completed, to the Paying Agent at the address specified
in the notice prior to the close of business on the Business Day prior to the
Proceeds Purchase Date;
(6) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than two Business Days prior to
the Proceeds Purchase Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of the Securities the
Holder delivered for purchase and a statement that such Holder is withdrawing
his election to have such Security purchased;
(7) that Holders whose Securities were purchased only
in part will be issued new Securities equal in principal amount to the
unpurchased portion of the Securities surrendered; provided that each Security
purchased and each new Security issued shall be in an original principal amount
of $1,000 or integral multiples thereof; and
(8) that each Net Cash Proceeds Offer is required to
remain open for at least 20 Business Days or such longer period as may be
required by law.
On or before the Proceeds Purchase Date, the Company shall (i) deposit
with the Paying Agent coin or currency of the United States of America as at the
time of payment shall be the legal tender for the payment of public and private
debts sufficient to pay the purchase price of all Securities to be purchased and
(ii) deliver to the Trustee Securities so accepted together with an Officers'
Certificate stating the Securities or portions thereof being purchased by the
Company. The Paying Agent shall promptly mail to the Holders of Securities so
accepted payment in an amount equal to the purchase price (and the Trustee shall
promptly authenticate and mail or deliver to such Holders a new Security equal
in principal amount to any unpurchased portion of the Security surrendered). The
Company will cause to be mailed to each Holder the results of the Net Cash
Proceeds Offer on or as soon as practicable after the Proceeds Purchase Date.
For purposes of this Section 4.20, the Trustee shall act as the Paying Agent.
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Any amounts remaining after the purchase of Securities pursuant to a
Net Cash Proceeds Offer shall be returned by the Trustee to the Company.
The Company shall comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the purchase
of the Securities pursuant to a Net Cash Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with provisions under
this Section 4.20, the Company shall comply with the applicable securities laws
and regulations and shall not be deemed to have breached its obligations under
this Section 4.20 by virtue thereof.
Section 4.21. Repayment of Bridge Loan.
Immediately following the Merger, the Company shall repay the Bridge
Loan in full and shall pay all interest, costs and fees related thereto.
Section 4.22. Limitation on Issuance and Sale of Capital Stock of
Subsidiaries.
The Company shall not permit any Restricted Subsidiary to issue any
Capital Stock (other than to the Company or to a Restricted Subsidiary) or
permit any Person (other than the Company or a Restricted Subsidiary) to own any
Capital Stock of any Restricted Subsidiary; provided, however, that the Company
and any Restricted Subsidiary may, in any single transaction, sell all but not
less than all, of the issued and outstanding Capital Stock of any Restricted
Subsidiary to any Person in a transaction made in accordance with Section 4.20.
ARTICLE 5.
SUCCESSORS
Section 5.1. When Company May Merge. etc.
The Company shall not consolidate with or merge with or into or sell,
assign, convey, lease, transfer or otherwise dispose of all or substantially all
of its properties and assets to any Person or Persons in a single transaction or
through a series of related transactions or permit any of its Restricted
Subsidiaries to do any of the foregoing, unless: (a) the Company shall be the
continuing Person or the Person formed by or surviving such consolidation or
merger or the Person to which such sale, assignment, conveyance, lease, transfer
or other disposition is made (the "surviving entity") shall be a corporation
organized and validly existing under the laws of the United States or any State
thereof or the District of Columbia; (b) the surviving entity shall expressly
assume, by a supplemental indenture executed and delivered to the Trustee, in
form and substance reasonably satisfactory to the Trustee, all of the
obligations of the Company under the Securities and this Indenture; (c)
immediately before and immediately after giving effect to such transaction, or
series of transactions (including, without limitation, any Indebtedness
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incurred or anticipated to be incurred in connection with or in respect to such
transaction or series of transactions), no Default or Event of Default shall
have occurred and be continuing; (d) the Company or the surviving entity (in the
case of a merger or consolidation involving the Company or any sale, assignment,
conveyance, lease, transfer or other disposition of all or substantially all of
the Company's properties and assets) shall immediately after giving effect to
such transaction or series of transactions (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions) have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction or series of transactions; (e) immediately
after giving effect to such transactions, the Company or the surviving entity
(in the case of a merger or consolidation involving the Company or any sale,
assignment, conveyance, lease, transfer or other disposition of all or
substantially all of the Company's properties and assets) could incur $1.00 of
Indebtedness pursuant to Section 4.7(e); and (f) the Company or the surviving
entity shall have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, in each case stating that such consolidation, merger, sale,
assignment, conveyance, lease, transfer or other disposition and, if a
supplemental indenture is required in connection with such transaction or series
of transactions, such supplemental indenture complies with this Section 5.1 and
that all conditions precedent herein provided relating to the transaction or
series of transactions have been satisfied. The foregoing limitations in clauses
(e) and (f) of this Section 5.1 shall not apply to the Merger. The foregoing
provisions of this Section 5.1 relating to restrictions on mergers,
consolidations and transfers of assets shall also apply to the Guarantor,
provided that with respect to clause (b) the Company shall be deemed to mean the
Guarantor.
Section 5.2. Successor Corporation Substituted.
Upon any consolidation or merger, or any sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company in
accordance with Section 5.1, the successor corporation or partnership formed by
such consolidation or into or with which the Company is merged or to which such
sale, lease, conveyance or other disposition is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person has been named
as the Company herein; provided, however, that the predecessor Company in the
case of a sale, lease, conveyance or other disposition shall not be released
from the obligation to pay the principal of and interest on the Securities.
ARTICLE 6.
DEFAULTS AND REMEDIES
Section 6.1. Events of Default.
"Event of Default," whenever used herein, means any one of the
following events:
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(i) default in the payment of any interest on the
Securities when it becomes due and payable and continuance of such
default for a period of 30 days; or
(ii) default in the payment of the principal of, or
premium, if any, on the Securities when due (including a default in
payment upon the exercise by a Holder of its right to require
repurchase of its Securities pursuant to Section 4.9 of this
Indenture); or
(iii) default in the covenants set forth in Sections 4.19
and 4.21 to consummate the Merger and to repay the Bridge Loan and
related costs, fees and interest by the dates set forth herein; or
(iv) default by the Company or the Guarantor in the
performance, or breach, of any covenant or agreement in this Indenture
(other than defaults specified in clause (i), (ii) or (iii) above),
and continuance of such default or breach for a period of 30 days
after written notice to the Company or the Guarantor, as the case may
be, by the Trustee or to the Company or the Guarantor, as the case may
be, and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Securities; or
(v) failure by the Company, the Guarantor or any
Restricted Subsidiary (a) to make any payment when due with respect to
any other Indebtedness under one or more classes or issues of
Indebtedness which one or more classes or issues of Indebtedness are
in an aggregate principal amount of $5,000,000 or more, and such
failure extends beyond the stated period of grace applicable thereto
or (b) to perform any term, covenant, condition, or provision of one
or more classes or issues of Indebtedness which one or more classes or
issues of Indebtedness are in an aggregate principal amount of
$5,000,000 or more, which failure, in the case of this clause (b),
results in an acceleration of the maturity thereof (whether or not
such right has yet been exercised); or
(vi) one or more judgments, orders or decrees for the
payment of money in excess of $2,500,000, either individually or in an
aggregate amount, shall be entered against the Company, the Guarantor
or any of their respective Restricted Subsidiaries or any of their
respective properties and shall not be discharged and there shall have
been a period of 60 days during which a stay of enforcement of such
judgment or order, by reason of pending appeal or otherwise, shall not
be in effect; or
(vii) a decree, judgment or order by a court of
competent jurisdiction shall have been entered adjudging the Company,
the Guarantor or any of their respective Restricted Subsidiaries that
individually or as a group constitute a Significant Subsidiary, as
bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization of the Company, the Guarantor or such
Significant Subsidiary under any bankruptcy or similar law, and such
decree or order shall have continued undischarged and unstayed for a
period of sixty (60) days; or a decree or order of a court of
competent jurisdiction over the appointment of a receiver, liquidator,
trustee or assignee in bankruptcy or insolvency
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of the Company, the Guarantor or such Significant Subsidiary, or of
the property of any such Person, or for the winding up or liquidation
of the affairs of any such Person, shall have been entered, and such
decree, judgment or order shall have remained in force undischarged
and unstayed for a period of sixty (60) days; or
(viii) this Indenture ceases to be in full force and
effect or ceases to give the Trustee, in any material respect, the
Liens, rights, powers and privileges purported to be created thereby,
in each case, as determined by a court of competent jurisdiction.
Section 6.2. Acceleration.
If an Event of Default (other than an Event of Default specified in
clause (vii) above with respect to the Company) occurs and is continuing, then
the Trustee or the holders of at least 25% in aggregate principal amount of the
outstanding Securities may, by written notice, and the Trustee upon the request
of the Holders of not less than 25% in aggregate principal amount of the
outstanding Securities shall, declare the principal amount plus accrued interest
(if any) on all Securities on the date of such declaration to be due and payable
immediately (the "Default Amount"). Upon such declaration, the Default Amount
shall become due and payable immediately. If an Event of Default specified in
clause (vii) above with respect to the Company occurs and is continuing, then
the Default Amount shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
After a declaration of acceleration, the Holders of a majority in aggregate
principal amount of outstanding Securities may, by notice to the Trustee,
rescind such declaration of acceleration if all existing Events of Default have
been cured or waived, other than nonpayment of the Default Amount that has
become due solely as a result of such acceleration and if the rescission of
acceleration would not conflict with any judgment or decree by a court of
competent jurisdiction. The Holders of a majority in aggregate principal amount
of the outstanding Securities also have the right to waive past defaults
hereunder except a default in the payment of the principal of, premium, if any,
or interest on any Security, or in respect of a covenant or a provision which
cannot be modified or amended without the consent of all Holders.
Section 6.3. Other Remedies.
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy to collect the payment of principal or interest on
the Securities or to enforce the performance of any provision of the Securities
or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.
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Section 6.4. Waiver of Existing and Past Defaults.
Subject to Section 2.9, the Holders of a majority in principal amount
of the then outstanding Securities by written notice to the Trustee may waive an
existing Default or Event of Default and its consequences, except a continuing
Default or Event of Default in the payment of the principal of, or the interest
on, any Security. Upon any such waiver, such Default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other Default or impair any right consequent thereon.
Section 6.5. Control by Majority.
Subject to Section 2.9, the Holders of a majority in principal amount
of the then outstanding Securities may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on it. However, the Trustee may refuse to follow
any direction that conflicts with applicable law or this Indenture, is unduly
prejudicial to the rights of other Securityholders, or would involve the Trustee
in personal liability; provided, however, that the Trustee may take any other
action deemed proper by the Trustee which is not inconsistent with such
direction.
In the event the Trustee takes any action or follows any direction
pursuant to this Indenture, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against any loss or expense caused by
taking such action or following such direction.
Section 6.6. Limitation on Suits.
A Securityholder may pursue a remedy with respect to this Indenture or
the Securities only if:
(1) the Holder gives to the Trustee notice of a
continuing Event of Default;
(2) the Holders of at least 25% in principal amount of
the then outstanding Securities make a written request to the Trustee
to pursue the remedy;
(3) such Holder or Holders offer to the Trustee
indemnity satisfactory to the Trustee against any loss, liability or
expense;
(4) the Trustee does not comply with the request within
15 days after receipt of the request and the offer of indemnity; and
(5) during such 15-day period the Holders of a majority
in principal amount of the then outstanding Securities do not give the
Trustee a direction inconsistent with the request.
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A Securityholder may not use this Indenture to prejudice the rights of another
Securityholder or to obtain a preference or priority over another
Securityholder.
Section 6.7. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of
any Holder of a Security to receive payment of principal and interest on the
Security, on or after the respective due dates expressed in the Security, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of the Holder.
Section 6.8. Collection Suit by Trustee.
If an Event of Default specified in Section 6.1(i) or (ii) occurs and
is continuing, the Trustee may recover judgment in its own name and as trustee
of an express trust against the Company for the whole amount of principal,
interest and Liquidated Damages, if any, remaining unpaid on the Securities and
interest on overdue principal, interest and Liquidated Damages, if any, and such
further amount as shall be sufficient to cover the costs and, to the extent
lawful, expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.
Section 6.9. Trustee May File Proofs of Claim.
The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee and the Securityholders allowed in any judicial proceedings relative to
the Company, its creditors or its property. Nothing contained herein shall be
deemed to authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any Securityholder any plan of reorganization, arrangement, adjustment
or composition affecting the Securities or the rights of any Holder thereof, or
to authorize the Trustee to vote in respect of the claim of any Securityholder
in any such proceeding.
Section 6.10. Priorities.
If the Trustee collects any money pursuant to this Article 6, it shall
pay out the money in the following order:
First: to the Trustee for amounts due under Section 7.7;
Second: to Securityholders for amounts due and unpaid on the
Securities for principal and interest (and Liquidated
Damages), ratably, without preference or priority of any
kind, according to the amounts due and payable on the
Securities for principal and interest, respectively; and
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Third: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Securityholders.
Section 6.11. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section does not apply to a suit by the Trustee, a suit by a Holder
pursuant to Section 6.7, or a suit by Holders of more than 10% in principal
amount of the then outstanding Securities.
Section 6.12. Rights and Remedies Cumulative.
No right or remedy herein conferred upon or reserved to the Trustee or
to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
Section 6.13. Delay or Omission Not Waiver.
No delay or omission by the Trustee or by any Holder of any Security
to exercise any right or remedy arising upon any Event of Default shall impair
the exercise of any such right or remedy or constitute a waiver of any such
Event of Default. Every right and remedy given by this Article 6 or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Holders, as the case may
be.
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ARTICLE 7.
TRUSTEE
The Trustee hereby accepts the trust imposed upon it by this
Indenture and covenants and agrees to perform the same, as herein expressed.
Section 7.1. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in its exercise thereof as a prudent
Person would exercise or use under the circumstances in the conduct of his own
affairs.
(b) Except during the continuance of an Event of Default:
(1) The Trustee need perform only those duties that are
specifically set forth in this Indenture and no others.
(2) In the absence of bad faith on its part, the
Trustee may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon certificates
or opinions furnished to the Trustee and conforming to the
requirements of this Indenture. However, the Trustee shall examine the
certificates and opinions to determine whether or not they conform to
the requirements of this Indenture, but the Trustee need not verify
the contents thereof.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own wilful
misconduct, except that:
(1) This paragraph does not limit the effect of
paragraph (b) of this Section.
(2) The Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer, unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.5.
(d) Every provision of this Indenture that in any way relates to
the Trustee is subject to Sections 7.1 and Section 7.2.
(e) The Trustee may refuse to perform any duty or exercise any
right or power unless it receives indemnity satisfactory to it against any loss,
liability or expense.
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(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
Money held in trust by the Trustee need not be segregated from other funds held
in trust except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
Section 7.2. Rights of Trustee.
(a) The Trustee may rely on any document believed by it to be
genuine and to have been signed or presented by the proper Person. The Trustee
need not investigate any fact or matter stated in the document, but the Trustee,
in its discretion, may make such further inquiry or investigation into such
facts or matters to the extent reasonably deemed necessary by it, and if the
Trustee shall determine to make such further inquiry or investigation, it shall
be entitled upon reasonable notice, to examine the books and records and
premises of the Company, personally or by agent, authorized representative or
attorney.
(b) Before the Trustee acts or refrains from acting pursuant to
the terms of this Indenture or otherwise, subject to Section 5.1, it may require
an Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall
not be liable for any action it takes or omits to take in good faith in reliance
on such Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any Agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers.
(e) The Trustee may consult with counsel of its selection and the
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon.
(f) The Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, notice, request, direction, consent, order, bond,
debenture, or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters as it may
see fit.
(g) The Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request, order or
direction of any of the Holders pursuant to
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the provisions of this Indenture, unless such Holders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
Section 7.3. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company or an
Affiliate with the same rights it would have if it were not Trustee. Any Agent
may do the same with like rights. However, the Trustee is subject to and must
comply with Sections 7.10 and 7.11.
Section 7.4. Trustee's Disclaimer.
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the Company's
use of the proceeds from the Securities, and it shall not be responsible for any
statement of the Company in this Indenture or any statement in the Securities
other than its authentication.
Section 7.5. Notice of Defaults.
If a Default or an Event of Default occurs and is continuing and if it
is actually known to the Trustee, the Trustee shall mail to each Holder of
Securities a notice of the Default or Event of Default within 90 days after it
occurs, unless such Default or an Event of Default shall have been cured or
waived. Except in the case of a Default or an Event of Default in payment on any
Security (including any failure to make any mandatory redemption payment
required hereunder), the Trustee may withhold the notice if and so long as a
committee of its Trust Officers in good faith determines that withholding the
notice is in the best interests of the Holders. The second sentence of this
Section 7.5 shall be in lieu of the proviso to Section 315(b) of the TIA, which
proviso is hereby expressly excluded from this Indenture, as permitted by the
TIA.
The Trustee shall also comply with all notice requirements set forth
in Section 4.3 of this Indenture.
Section 7.6. Reports by Trustee to Holders.
Within 60 days after each May 15 beginning with the May 15 following
the date of this Indenture, the Trustee shall mail to the Holders, at the
Company's expense, a brief report dated as of such reporting date that complies
with TIA Section 313(a) (but if no event described in TIA Section 313(a) has
occurred within the twelve months preceding the reporting date, no report need
be transmitted). The Trustee also shall comply with TIA Section 313(b)(2) to the
extent applicable. The Trustee shall also transmit by mail all reports as
required by TIA Section 313(c).
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A copy of each report at the time of its mailing to Holders shall be
filed with the SEC and each stock exchange or market on which the Securities are
listed or quoted. The Company shall notify the Trustee when the Securities are
listed on any stock exchange or quoted on any market.
Section 7.7. Compensation and Indemnity.
The Company shall pay to the Trustee (in its capacities as Trustee,
Paying Agent and Registrar) from time to time such compensation as may be agreed
in writing between the Company and the Trustee for its services hereunder. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred by it. Such expenses
may include the reasonable compensation, disbursements and out-of-pocket
expenses of the Trustee's Agents and counsel.
The Company shall indemnify and hold harmless the Trustee (in its
capacities as Trustee, Paying Agent and Registrar) against any claim, demand,
expense (including reasonable attorney's fees and expenses), loss or liability
incurred by it except as set forth in the next paragraph. The Trustee shall
notify the Company promptly of any claim for which it may seek indemnity. The
Company shall defend the claim and the Trustee shall cooperate in the defense.
The Trustee may have separate counsel and the Company shall pay the reasonable
fees and expenses of such counsel. The Company need not pay for any settlement
made without its consent, which consent shall not be unreasonably withheld.
The Company need not reimburse any expense or indemnify against any
loss or liability incurred by the Trustee through negligence or bad faith.
To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Securities on all money or property held
or collected by the Trustee, except that held in trust to pay principal and
interest on particular Securities.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(vii) occurs, the expenses and the compensation
for the services are intended to constitute expenses of administration under any
Bankruptcy Law.
Section 7.8. Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section.
The Trustee may resign by so notifying the Company in writing at least
30 days prior to the date of the proposed resignation; provided, however, that
no such resignation shall be effective until a successor Trustee has accepted
its appointment pursuant to this Section 7.8. The
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Holders of a majority in principal amount of the then outstanding Securities may
remove the Trustee by so notifying the Trustee and the Company. The Company may
remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent
or an order for relief is entered with respect to the Trustee under
any Bankruptcy Law;
(3) a Custodian or public officer takes charge of the
Trustee or its property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Securities may appoint
a successor Trustee to replace the successor Trustee appointed by the Company.
If a successor Trustee is not appointed or does not take office within
60 days after the retiring Trustee resigns or is removed, the retiring Trustee,
the Company or the Holders of at least 10% in principal amount of the then
outstanding Securities may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Holder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to the Holders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 7.7. Notwithstanding the replacement of the Trustee
pursuant to this Section 7.8, the Company's obligations under Section 7.7 hereof
shall continue for the benefit of the retiring trustee with respect to expenses
and liabilities incurred by it prior to such replacement.
Section 7.9. Successor Trustee by Merger, etc.
If the Trustee consolidates, merges or converts into, or transfers all
or substantially all of its corporate trust business to, another corporation,
the successor corporation without any further act shall be the successor
Trustee.
Section 7.10. Eligibility; Disqualification.
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This Indenture shall always have a Trustee who satisfies the
requirements of TIA Sections 310(a)(1) and 310(a)(5). The Trustee shall always
have a combined capital and surplus of at least $100,000,000 as set forth in its
most recent published annual report of condition. The Trustee is subject to TIA
Section 310(b), including the optional provision permitted by the second
sentence of TIA Section 310(b)(9). The provisions of TIA Section 310 shall apply
to the Company, as obligor of the Securities.
Section 7.11. Preferential Collection of Claims Against Company.
The Trustee is subject to TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.
The provisions of TIA Section 311 shall apply to the Company, as obligor of the
Securities.
ARTICLE 8.
DISCHARGE OF INDENTURE
Section 8.1. Termination of Company's Obligations.
This Indenture shall cease to be of further effect (except that the
Company's obligations under Sections 7.7 and 8.4 shall survive) as to all
outstanding Securities when all such Securities theretofore authenticated and
delivered (except lost, stolen or destroyed Securities which have been replaced
or paid and Securities for the payment of which money has theretofore been
deposited in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust) have been delivered to the
Trustee for cancellation and the Company has paid all sums payable hereunder. In
addition, the Company may terminate all of its obligations under this Indenture
(except the Company's obligations under Sections 7.7 and 8.4) if:
(1) either (i) pursuant to Article 3, the Company shall
have given notice to the Trustee and mailed a notice of redemption to
each Holder of the redemption of all of the Securities or (ii) all
Securities have otherwise become due and payable hereunder;
(2) the Company shall have irrevocably deposited or
caused to be deposited with the Trustee or a trustee satisfactory to
the Trustee, under the terms of an irrevocable trust agreement in form
and substance satisfactory to the Trustee, as trust funds in trust
solely for the benefit of the Holders for that purpose, money in such
amount as is sufficient without consideration of reinvestment of such
interest, to pay principal of, premium, if any, and interest on the
outstanding Securities to maturity or redemption; provided that the
Trustee shall have been irrevocably instructed to apply such money to
the payment of said principal, premium, if any, and interest with
respect to the Securities;
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(3) no Default or Event of Default with respect to this
Indenture or the Securities shall have occurred and be continuing on
the date of such deposit or shall occur as a result of such deposit
and such deposit will not result in a breach or violation of, or
constitute a default under, any other instrument to which the Company
is a party or by which it is bound;
(4) the Company shall have paid all other sums payable
by it hereunder; and
(5) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent providing for the termination of the Company's
and the Guarantor's obligations under the Securities and this
Indenture have been complied with.
However, the Company's obligations in Sections 2.3, 2.4, 2.5, 2.6, 2.7, 4.1,
7.7, 8.1, 8.4 and 8.5, shall survive until the Securities are no longer
outstanding. Thereafter, only the Company's obligations in Sections 7.7 and 8.4
shall survive.
After a deposit made pursuant to this Section 8.1, the Trustee upon
request shall acknowledge in writing the discharge of the Company's obligations
under this Indenture except for those surviving obligations specified above.
Section 8.2. Legal Defeasance and Covenant Defeasance.
(a) The Company may, at its option by Board Resolution
of the Board of Directors of the Company, at any time, with respect to the
Securities, elect to have either paragraph (b) or paragraph (c) below be applied
to the outstanding Securities upon compliance with the conditions set forth in
paragraph (d).
(b) Upon the Company's exercise under paragraph (a) of
the option applicable to this paragraph (b), the Company shall be deemed to have
been released and discharged from its obligations with respect to the
outstanding Securities on the date the conditions set forth below are satisfied
(hereinafter, "legal defeasance"). For this purpose, such legal defeasance means
that the Company shall be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Securities, which shall thereafter
be deemed to be "outstanding" only for the purpose of paragraph (e) below and
the other Sections of and matters under this Indenture referred to in (i) and
(ii) below, and to have satisfied all its other obligations under such
Securities and this Indenture insofar as such Securities are concerned (and the
Trustee, at the expense of the Company, shall execute proper instruments
acknowledging the same), except for the following which shall survive until
otherwise terminated or discharged hereunder: (i) the rights of Holders of
outstanding Securities to receive solely from the trust fund described in
paragraph (d) below and as more fully set forth in such paragraph, payments in
respect of the principal of, premium, if any, and interest on such Securities
when such payments are due, (ii) the Company's obligations with respect to such
Securities under Sections 2.6, 2.7 and 4.16, and,
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with respect to the Trustee, under Section 7.7, (iii) the rights, powers,
trusts, duties and immunities of the Trustee hereunder and the Company's
obligations in connection herewith, and (iv) this Section 8.2 and Section 8.5.
Subject to compliance with this Section 8.2, the Company may exercise its option
under this paragraph (b) notwithstanding the prior exercise of its option under
paragraph (c) below with respect to the Securities.
(c) Upon the Company's exercise under paragraph (a) of
the option applicable to this paragraph (c), the Company shall be released and
discharged from its obligations under any covenant contained in Article 5 and in
Sections 4.5, 4.7 through 4.12, 4.14 and 4.15 with respect to the outstanding
Securities on and after the date the conditions set forth below are satisfied
(hereinafter, "covenant defeasance"), and the Securities shall thereafter be
deemed to be not "outstanding" for the purpose of any direction, waiver, consent
or declaration or act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder. For this purpose, such covenant defeasance
means that, with respect to the outstanding Securities, the Company may omit to
comply with and shall have no liability in respect of any term, condition or
limitation set forth in any such covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such covenant or by reason of
any reference in any such covenant to any other provision herein or in any other
document and such omission to comply shall not constitute a Default or an Event
of Default under Section 6.1(iv), but, except as specified above, the remainder
of this Indenture and such Securities shall be unaffected thereby.
(d) The following shall be the conditions to
application of either paragraph (b) or paragraph (c) above to the outstanding
Securities:
(i) the Company shall irrevocably have deposited or
caused to be deposited with the Trustee (or another trustee satisfying
the requirements of Section 7.10 who shall agree to comply with the
provisions of this Section 8.2 applicable to it) as trust funds in
trust for the purpose of making the following payments, specifically
pledged as security for, and dedicated solely to, the benefit of the
Holders of such Securities, (x) cash in U.S. dollars or (y) direct
non-callable obligations of, or non-callable obligations guaranteed
by, the United States of America for the payment of which guarantee or
obligation the full faith and credit of the United States is pledged
("U.S. Government Obligations") maturing as to principal, premium, if
any, and interest in such amounts of money and at such times as are
sufficient without consideration of any reinvestment of such interest,
to pay principal of and interest on the outstanding Securities not
later than one day before the due date of any payment, or (z) a
combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to
the Trustee, to pay and discharge and which shall be applied by the
Trustee (or other qualifying trustee) to pay and discharge principal
of, premium, if any, and interest on the outstanding Securities on the
Maturity Date or otherwise in accordance with the terms of this
Indenture and of such Securities; provided, however, that the Trustee
(or other qualifying trustee) shall
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have received an irrevocable written order from the Company
instructing the Trustee (or other qualifying trustee) to apply such
money or the proceeds of such U.S. Government Obligations to said
payments with respect to the Securities;
(ii) no Default or Event of Default or event which with
notice or lapse of time or both would become a Default or an Event of
Default with respect to the Securities shall have occurred and be
continuing on the date of such deposit or, insofar as Section 6.1(vii)
is concerned, at any time during the period ending on the 91st day
after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until the expiration of such
period);
(iii) such legal defeasance or covenant defeasance shall
not cause the Trustee to have a conflicting interest with respect to
any Securities of the Company;
(iv) such legal defeasance or covenant defeasance shall
not result in a breach or violation of, or constitute a Default or
Event of Default under, this Indenture or any other material agreement
or instrument to which the Company or any Restricted Subsidiary is a
party or by which it is bound;
(v) in the case of an election under paragraph (b)
above, the Company shall have delivered to the Trustee an Opinion of
Counsel, stating that (x) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (y) since
the Issue Date, there has been a change in the applicable Federal
income tax law, in either case to the effect that, and based thereon
such opinion shall confirm that, the Holders of the outstanding
Securities will not recognize income, gain or loss for Federal income
tax purposes as a result of such legal defeasance and will be subject
to Federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such legal defeasance
had not occurred;
(vi) in the case of an election under paragraph (c)
above, the Company shall have delivered to the Trustee an Opinion of
Counsel, to the effect that the Holders of the outstanding Securities
will not recognize income, gain or loss for Federal income tax
purposes as a result of such covenant defeasance and will be subject
to Federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such covenant defeasance
had not occurred;
(vii) in the case of an election under either paragraph
(b) or (c) above, an Opinion of Counsel to the effect that, (x) the
trust funds will not be subject to any rights of any other holders of
senior indebtedness including, without limitation, those arising under
this Indenture, after the 91st day following the deposit, and (y)
after the 91st day following the deposit, the trust funds will not be
subject to the effect of any applicable Bankruptcy Law;
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(viii) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent relating to either the legal defeasance under
paragraph (b) above or the covenant defeasance under paragraph (c)
above, as the case may be, have been complied with; and
(ix) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of the Securities
over other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others.
(e) All money and U.S. Government Obligations
(including the proceeds thereof) deposited with the Trustee (or other qualifying
trustee, collectively for purposes of this paragraph (e), the "Trustee")
pursuant to paragraph (d) above in respect of the outstanding Securities shall
be held in trust and applied by the Trustee, in accordance with the provisions
of such Securities and this Indenture, to the payment, either directly or
through any Paying Agent (other than the Company or any Affiliate of the
Company) as the Trustee may determine, to the Holders of such Securities of all
sums due and to become due thereon in respect of principal, premium and
interest, but such money need not be segregated from other funds except to the
extent required by law.
The Company shall pay and indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against the U.S. Government
Obligations deposited pursuant to paragraph (d) above or the principal, premium,
if any, and interest received in respect thereof other than any such tax, fee or
other charge which by law is for the account of the Holders of the outstanding
Securities.
Anything in this Section 8.2 to the contrary notwithstanding,
the Trustee shall deliver or pay to the Company from time to time upon the
request, in writing, by the Company any money or U.S. Government Obligations
held by it as provided in paragraph (d) above which, in the opinion of a
nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, are in excess of the
amount thereof which would then be required to be deposited to effect an
equivalent legal defeasance or covenant defeasance.
Section 8.3. Application of Trust Money.
The Trustee shall hold in trust money or U.S. Government Obligations
deposited with it pursuant to Section 8.1. It shall apply the deposited money
and the money from U.S. Government Obligations through the Paying Agent and in
accordance with this Indenture to the payment of principal and interest on the
Securities.
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Section 8.4. Repayment to Company.
Subject to Section 7.7, the Trustee and the Paying Agent shall
promptly pay to the Company upon request any excess money or securities held by
them at any time.
The Trustee and the Paying Agent shall pay to the Company upon written
request by the Company any money held by them for the payment of principal or
interest that remains unclaimed for one year after the date upon which such
payment shall have become due; provided, however, that the Company shall have
first caused notice of such payment to the Company to be mailed to each Holder
entitled thereto no less than 30 days prior to such payment. After payment to
the Company, the Holders entitled to the money must look to the Company for
payment as general creditors unless an applicable abandoned property law
designates another Person.
Section 8.5. Reinstatement.
If (i) the Trustee or Paying Agent is unable to apply any money in
accordance with Section 8.3 by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application and (ii) the Holders of at least a majority in principal amount of
the then outstanding Securities so request by written notice to the Trustee, the
Company's obligations under this Indenture and the Securities shall be revived
and reinstated as though no deposit had occurred pursuant to Section 8.1 until
such time as the Trustee or Paying Agent is permitted to apply all such money in
accordance with Section 8.3; provided, however, that if the Company makes any
payment of interest on or principal of any Security following the reinstatement
of its obligations, the Company shall be subrogated to the rights of the Holders
of such Securities to receive such payment from the money held by the Trustee or
Paying Agent.
ARTICLE 9.
AMENDMENTS
Section 9.1. Without Consent of Holders.
The Company, when authorized by resolution of its Board of Directors,
and the Trustee may amend, waive or supplement this Indenture or the Securities
without the consent of any Holder:
(1) to cure any ambiguity, defect or inconsistency or
to make any other provisions with respect to matters or questions
arising under this Indenture that shall not be inconsistent with the
provisions of this Indenture; provided that such amendment does not in
the opinion of the Trustee adversely affect the rights of any Holder;
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(2) to mortgage, pledge, hypothecate or grant a
security interest in favor of the Trustee as additional security for
the payment and performance of the obligations hereunder, in any
property or assets, including any which is required to be mortgaged,
pledged or hypothecated, or in which a security interest is required
to be granted, to the Trustee;
(3) to make any change that does not adversely affect
the rights hereunder of any Holder;
(4) to add to the covenants of the Company for the
benefit of the Holders, or to surrender any right or power herein
conferred upon the Company, or to provide any additional rights or
benefits to the Holders;
(5) to evidence the succession of another person to the
Company, and the assumption by any such successor of the obligations
of the Company herein and in the Securities in accordance with Article
5;
(6) to evidence the succession of Shoppers to the
Company, and the assumption by Shoppers of the obligations of the
Company herein and in the Securities;
(7) to set out the form of the Exchange Notes and to
set forth such other matters as are necessary in connection with the
Exchange Offer that do not adversely affect the rights of any Holder;
or
(8) to comply with requirements of the SEC in order to
effect or maintain the qualification of this Indenture under the TIA.
provided that, in each case (except with respect to clause (5) above concerning
the Merger or clause (6) above), the Company has delivered to the Trustee an
Opinion of Counsel and an Officers' Certificate, each stating that such
amendment, waiver or supplement complies with the provisions of this Section
9.1.
Section 9.2. With Consent of Holders.
Subject to the provisions of Section 6.4 and 6.7, the Company and the
Trustee may amend or modify this Indenture or the Securities with the written
consent of the Holders of at least a majority in principal amount of the then
outstanding Securities; provided, however, that, without the consent of each
Holder affected, an amendment, modification or waiver under this Section 9.2 may
not (with respect to any securities held by a non-consenting Holder):
(1) reduce the principal amount outstanding of, extend
the fixed maturity of, or alter the redemption provisions of, the
Securities;
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(2) reduce the rate of or change the time for payment
of interest on any Security;
(3) make any Security payable in money or currency
other than that stated in the Security;
(4) impair the right to initiate suit for the
enforcement of any payment on or with respect to any Security;
(5) make any change that affects the ranking or
security of the Securities;
(6) waive a Default or Event of Default in the payment
of the principal of, Liquidated Damages, if any, or interest on, any
Security;
(7) reduce the percentage in principal amount
outstanding of Securities, holders of which must consent to an
amendment, supplement or waiver or consent to take any action
hereunder or under the Securities; or
(8) following the mailing of a Company Notice, modify
the provisions of this Indenture with respect to such Company Notice
in a manner adverse to any Holder.
In addition, neither the Company nor the Trustee may waive the
covenant relating to a Holder's right to repurchase upon the occurrence of a
Change in Control.
To secure a consent of the Holders under this Section, it shall not be
necessary for the Holders to approve the particular form of any proposed
amendment or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment or waiver under this Section becomes effective, the
Company shall mail to Holders a notice briefly describing the amendment or
waiver. Any failure of the Company to mail such notices, or any defect therein,
shall not, however, in any way, impair or affect the validity of any such
amendment or waiver.
Section 9.3. Compliance with Trust Indenture Act.
Every amendment to this Indenture or the Securities shall be set forth
in a supplemental indenture that complies with the TIA as then in effect.
Section 9.4. Revocation and Effect of Consents.
Until an amendment or waiver becomes effective, a consent to it by a
Holder of a Security is a continuing consent by the Holder and every subsequent
Holder of a Security or portion of a Security that evidences the same debt as
the consenting Holder's Security, even if
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notation of the consent is not made on any Security. However, prior to becoming
effective, any such Holder or subsequent Holder may revoke the consent as to his
Security or portion of a Security if the Trustee receives the notice of
revocation before the date on which the Trustee receives an Officers'
Certificate certifying that the Holders of the requisite principal amount of
Securities have consented to the amendment or waiver.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment or
waiver. If a record date is fixed, then notwithstanding the provisions of the
immediately preceding paragraph, those Persons who were Holders at such record
date (or their duly designated proxies), and only those Persons, shall be
entitled to consent to such amendment or waiver or to revoke any consent
previously given, whether or not such Persons continue to be Holders after such
record date. No consent shall be valid or effective for more than 90 days after
such record date unless consents from Holders of the principal amount of
Securities required hereunder for such amendment or waiver to be effective shall
have also been given and not revoked within such 90-day period.
After an amendment or waiver becomes effective it shall bind every
Holder, unless it is of the type described in any of clauses (1) through (8) of
Section 9.2. In such case, the amendment or waiver shall bind each Holder of a
Security who has consented to it and every subsequent Holder of a Security that
evidences the same debt as the consenting Holder's Security; provided, however,
that any such waiver shall not impair or affect the right of any Holder to
receive payment of principal and premium of and interest on a Security, on or
after the respective dates set for such amounts to become due and payable
expressed in such Security, or to bring suit for the enforcement of any such
payment on or after such respective dates.
Section 9.5. Notation on or Exchange of Securities.
The Trustee (in accordance with the written direction of the Company)
may (at the Company's expense) place an appropriate notation about an amendment,
supplement or waiver on any Security thereafter authenticated. The Company in
exchange for all Securities may issue and the Trustee shall authenticate new
Securities that reflect the amendment or waiver. Failure to make the appropriate
notation or issue a new Security shall not affect the validity and effect of
such amendment, supplement or waiver.
Section 9.6. Trustee Protected.
The Trustee shall execute any amendment, supplement, or waiver
authorized pursuant to this Article 9; provided, however, that the Trustee may,
but shall not be obligated to, execute any such amendment, supplement or waiver
that affects the Trustee's own rights, duties or immunities under this
Indenture. The Trustee shall be entitled to receive, and shall be fully
protected in relying upon, an Opinion of Counsel stating that the execution of
any amendment, supplement or waiver authorized pursuant to this Article 9 is
authorized or permitted by this Indenture.
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ARTICLE 10.
GUARANTEE
Section 10.1. Guarantee.
(a) In consideration of good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, and subject to the provisions of this Article 10, the
Guarantor hereby irrevocably, fully and unconditionally guarantees to
each Holder and to the Trustee and its successors and assigns (i) the
full and punctual payment of principal of and interest on the
Securities when due, whether at maturity, by acceleration, by
redemption or otherwise, and all other monetary obligations of the
Company under this Indenture (including obligations to the Trustee)
and the Securities and (ii) the full and punctual performance within
applicable grace periods of all other obligations of the Company under
this Indenture and the Securities (all the foregoing being hereinafter
collectively called the "Obligations"). The Guarantor further agrees
that the Obligations may be extended or renewed, in whole or in part,
without notice or further assent from the Guarantor, and that the
Guarantor shall remain bound under this Article 10 notwithstanding any
extension or renewal of any Obligation.
(b) The Guarantor waives presentation to, demand of,
payment from and protest to the Company of any of the Obligations and
also waives notice of protest for nonpayment. The Guarantor waives
notice of any default under the Securities or the Obligations. The
Obligations of the Guarantor hereunder shall not be affected by (i)
the failure of any Holder or the Trustee to assert any claim or demand
or to enforce any right or remedy against the Company or any other
Person under this Indenture, the Securities or any other agreement or
otherwise; (ii) any extension or renewal of any thereof; (iii) any
rescission, waiver, amendment or modification of any of the terms or
provisions of this Indenture, the Securities or any other agreement;
(iv) the release of any security held by any Holder or the Trustee for
the Obligations or any of them; (v) the failure of any Holder or
Trustee to exercise any right or remedy against any other guarantor of
the Obligations; or (vi) any change in ownership of the Guarantor.
(c) The Guarantor further agrees that its Guarantee
herein constitutes a guarantee of payment, performance and compliance
when due (and not a guarantee of collection) and waives any right to
require that any resort be had by any Holder or the Trustee to any
security held for payment of the Obligations. The Obligations of the
Guarantor hereunder shall not be subject to any reduction, limitation,
impairment or termination for any reason, including any claim of
waiver, release, surrender, alteration or compromise, and shall not be
subject to any defense of set off, counterclaim, recoupment or
termination whatsoever or by reason of the invalidity, illegality or
unenforceability of the Obligations or otherwise. Without limiting the
generality of the foregoing, the
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obligations of the Guarantor herein shall not be discharged or
impaired or otherwise affected by the failure of any Holder or the
Trustee to assert any claim or demand or to enforce any remedy under
this Indenture, the Securities or any other agreement, by any waiver
or modification of any thereof, by any default, failure or delay,
willful or otherwise, in the performance of the Obligations, or by any
other act or thing or omission or delay to do any other act or thing
which may or might in any manner or to any extent vary the risk of the
Guarantor or would otherwise operate as a discharge of the Guarantor
as a matter of law or equity. The Guarantor further agrees that its
Guarantee herein shall continue to be effective or be reinstated, as
the case may be, if at any time payment, or any part thereof, of
principal of or interest on any Obligation is rescinded or must
otherwise be restored by any Holder or the Trustee upon the bankruptcy
or reorganization of the Company or otherwise.
(d) In furtherance of the foregoing and not in
limitation of any other right which any Holder or the Trustee has at
law or in equity against the Guarantor by virtue hereof, upon the
failure of the Company to pay the principal of or interest on any
Obligation when and as the same shall become due, whether at maturity,
by acceleration, by redemption or otherwise, or to perform or comply
with any other Obligation, the Guarantor hereby promises to and shall,
upon receipt of written demand by the Trustee, forthwith pay, or cause
to be paid, in cash, to the Holders or the Trustee an amount equal to
the sum of (i) the unpaid principal amount of such Obligations, (ii)
accrued and unpaid interest on such Obligations (but only to the
extent not prohibited by law) and (iii) all other monetary Obligations
of the Company to the Holders and the Trustee.
(e) The Guarantor agrees that it shall not be entitled
to any right of subrogation in relation to the Holders in respect of
any Obligations guaranteed hereby until payment in full of all
Obligations. The Guarantor further agrees that, as between it, on the
one hand, and the Holders and the Trustee, on the other hand (i) the
maturity of the Obligations guaranteed hereby may be accelerated as
provided in Article 6 for the purposes of the Guarantor's Guarantee
herein, notwithstanding any stay, injunction or other prohibition
preventing such acceleration in respect of the Obligations guaranteed
hereby, and (ii) in the event of any declaration of acceleration of
such obligations as provided in Article 6, such Obligations (whether
or not due and payable) shall forthwith become due and payable by the
Guarantor for the purposes of this Section.
The Guarantor also agrees to pay any and all costs and
expenses (including reasonable attorneys' fees) incurred by the Trustee or any
Holder in enforcing any rights under this Section.
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Section 10.2. Limitation on Liability.
Any term or provision of this Indenture to the contrary
notwithstanding, the maximum, aggregate amount of the obligations guaranteed
hereunder by the Guarantor shall not exceed the maximum amount that can be
hereby guaranteed without rendering this Indenture, as it relates to the
Guarantor, voidable under applicable law relating to fraudulent conveyance or
fraudulent transfer.
Section 10.3. Successors and Assigns.
This Article 10 shall be binding upon the Guarantor and its successors
and assigns and shall inure to the benefit of the successors and assigns of the
Trustee and the Holders and, in the event of any transfer or assignment of
rights by any Holder or the Trustee, the rights and privileges conferred upon
that party in this Indenture and in the Securities shall automatically extend to
and be vested in such transferee or assignee, all subject to the terms and
conditions of this Indenture.
Section 10.4. No Waiver.
Neither a failure nor a delay on the part of either the Trustee or the
Holders in exercising any right, power or privilege under this Article 10 shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any right, power or privilege. The
rights, remedies and benefits of the Trustee and the Holders herein expressly
specified are cumulative and not exclusive of any other rights, remedies or
benefits which either may have under this Article 10 at law, in equity, by
statute or otherwise.
Section 10.5. Modification.
No modification, amendment or waiver of any provision of this Article
10 nor the consent to any departure by the Guarantor therefrom, shall in any
event be effective unless the same shall be in writing and signed by the
Trustee, and then such waiver or consent shall be effective only in the specific
instance and for the purpose for which given. No notice to or demand on the
Guarantor in any case shall entitle the Guarantor to any other or further notice
or demand in the same, similar or other circumstances.
Section 10.6. Execution and Delivery of Guarantee.
To evidence its Guarantee set forth in this Article 10, the
Guarantor agrees that a notation of such Guarantee substantially in the form
annexed hereto as contained in Exhibit A shall be endorsed on each Security
authenticated and delivered by the Trustee and that this Indenture shall be
executed on behalf of the Guarantor by an Officer by manual or facsimile
signature.
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The Guarantor agrees that its Guarantee set forth in this
Article 10 shall remain in full force and effect and shall apply to all the
Securities notwithstanding any failure to endorse on each Security a notation of
such Guarantee.
If an Officer whose signature is on a Security was an Officer
at the time of such execution but no longer holds that office at the time the
Trustee authenticates the Security on which a Guarantee is endorsed, the
Guarantee shall be valid nevertheless.
The delivery of any Security by the Trustee, after the
authentication thereof hereunder, shall constitute due delivery of the Guarantee
set forth in this Indenture on behalf of the Guarantor.
Section 10.7. Certain Bankruptcy Events.
The Guarantor hereby covenants and agrees that in the event
of the insolvency, bankruptcy, dissolution, liquidation or reorganization of the
Company, it shall not file (or join in any filing of), or otherwise seek to
participate in the filing of, any motion or request seeking to stay or to
prohibit (even temporarily) execution on the Guarantee and hereby waives and
agrees not to take the benefit of any such stay of execution, whether under
Section 362 or 105 of the United States Bankruptcy Code or otherwise.
ARTICLE 11.
SECURITY AND PLEDGE OF COLLATERAL
Section 11.1. Grant of Security Interest.
To secure the full and punctual payment by the Guarantor of any
payment due by the Guarantor pursuant to Article 10 and any other amounts owing
under this Indenture pursuant to Section 7.7 when and as the same shall be due
and payable, whether on an Interest Payment Date or the Maturity Date, by
acceleration, repurchase, redemption or otherwise (including, without
limitation, the payment of interest and other amounts which would accrue and
become due but for the filing of a petition in bankruptcy (whether or not a
claim is allowed against the Guarantor for such interest or other amounts in any
such bankruptcy proceeding) or the operation of the automatic stay under Section
362(a) of the Bankruptcy Law), and interest on the overdue principal of and
interest (to the extent permitted by law), if any, on the Securities and the
performance of all other obligations of the Guarantor to the Holders or the
Trustee under this Indenture and the Securities, according to the terms
hereunder or thereunder (collectively, the "Secured Obligations"), the Guarantor
hereby grants to the Trustee, for the benefit of the Trustee and the Holders, a
continuing first priority security interest in all its right, title and interest
in and to the following (collectively, the "Collateral"):
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(i) all of the shares of Capital Stock of the Company and
each other direct Subsidiary of the Guarantor which may exist from
time to time (the "Pledged Shares"), and all certificates representing
such shares and any interest of the Guarantor in the entries on the
books of any financial intermediary pertaining to such shares;
(ii) all additional shares of Capital Stock of the Company,
and each other direct Subsidiary of the Guarantor which may exist from
time to time, from time to time acquired by or issued to the Guarantor
in any manner including shares of Shoppers received pursuant to the
Merger (which shares shall be deemed to be Pledged Shares), and all
certificates representing such additional shares and any interest of
the Guarantor in the entries on the books of any financial
intermediary pertaining to such additional shares; and
(iii) subject to the provisions of Section 11.5, all
dividends, cash, instruments and other property and "proceeds" (as
such term is defined in the Uniform Commercial Code as in effect in
any and all relevant jurisdictions) from time to time received,
receivable or otherwise distributed in respect of or in exchange for
any of the foregoing, and any account in which any Collateral is
deposited or invested, including any earnings thereon.
Section 11.2. Delivery of Collateral.
(a) Any and all cash, certificates or instruments
representing or evidencing the Collateral shall be delivered to and
held by or on behalf of the Trustee pursuant hereto and shall be in
suitable form for transfer by delivery, or shall be accompanied by
duly executed instruments of transfer or assignment in blank, all in
form and substance satisfactory to the Trustee.
(b) The Trustee shall have the right, at any time after the
occurrence and during the continuance of an Event of Default, in its
discretion and without notice to the Guarantor, to transfer to or to
register in the name of the Trustee or any of its nominees any or all
of the Collateral. In addition, the Trustee shall have the right at
any time to exchange certificates or instruments representing or
evidencing Collateral for certificates or instruments of different
denominations.
(c) If an issuer of Pledged Shares is incorporated in a
jurisdiction which does not permit the use of certificates to evidence
equity ownership, then the Guarantor shall, to the extent permitted by
applicable law, record such pledge on the stock register of the issuer
of such Pledged Shares, execute any customary stock pledge forms or
other documents necessary to complete the pledge and give the Trustee
the right to transfer the Pledged Shares under the terms hereof and
provide to the Trustee a written opinion of counsel, in form and
substance satisfactory to it, confirming such pledge.
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Section 11.3. Representations and Warranties.
The Guarantor hereby represents and warrants as follows:
(a) It is the legal, record and beneficial owner of the
Pledged Shares and has good and valid title thereto free and clear of
any Lien, except for the Lien created by this Indenture. Except as set
forth on Schedule I hereto, upon consummation of the Merger, it will
be the legal, record and beneficial owner of all of the outstanding
Capital Stock of Shoppers, and have good and valid title thereto free
and clear of any Lien, except for the Lien created by this Indenture.
No Collateral on the date hereof is evidenced by promissory notes,
certificates or other instruments which have not been delivered to the
Trustee.
(b) It has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Indenture and
to carry out the provisions and conditions hereof (including, without
limitation, the creation and perfection of the security interests in
the Collateral); and this Indenture has been duly authorized, validly
executed and delivered by it, and constitutes the legal, valid and
binding obligation of the Guarantor enforceable against it in
accordance with its terms.
(c) The pledge, assignment and delivery of the Collateral
pursuant to this Indenture creates a valid and continuing Lien on and
perfected first priority security interest in the Collateral in favor
of the Trustee for the benefit of the Holders and the Trustee,
superior and prior to the rights of all other persons therein and
subject to no other Liens.
(d) The Pledged Shares constitute all of the Capital Stock of
each issuer of Pledged Shares owned by the Guarantor; there are no
outstanding rights (including, without limitation, preemptive rights),
warrants or options to acquire, or instruments convertible into or
exchangeable for, any shares of Capital Stock or other equity interest
of or in any issuer of Pledged Shares described on Schedule I hereto
or any contract, commitment, agreement, understanding or arrangement
of any kind relating to the issuance of any such Capital Stock, any
such convertible or exchangeable securities or any such rights,
warrants or options.
(e) The Pledged Shares represent on the date hereof all of
the issued and outstanding shares of Capital Stock of the Company, and
such shares of Capital Stock have been duly authorized and validly
issued for good and valuable consideration and are fully paid and
non-assessable. Immediately following the Merger, the Pledged Shares
will represent all of the issued and outstanding shares of Capital
Stock of Shoppers and such shares will have been duly authorized and
validly issued for good and valuable consideration and are fully paid
and non-assessable.
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(f) None of the Pledged Shares is "margin stock" as such term
is defined in Section 221.1 of Regulation U of the Board of Governors
of the Federal Reserve System.
(g) The Guarantor has no direct Subsidiaries other than the
Company.
Section 11.4. Further Assurances.
(a) The Guarantor agrees that at any time and from time to
time, at the expense of the Guarantor, the Guarantor will promptly
execute and deliver all further instruments and documents and take all
further action that may be necessary or that the Trustee may
reasonably request in order to perfect and protect any Lien granted or
purported to be granted hereby or to enable the Trustee to exercise
and enforce its rights and remedies hereunder with respect to any
Collateral. Without limiting the foregoing, the Guarantor shall, at
the time of any acquisition of additional shares of Capital Stock of
any issuer constituting Pledged Shares pursuant to Section 11.1,
provide to the Trustee a revised Schedule I to reflect any changes
made necessary by such acquisition.
(b) The Guarantor shall have the right from time to time to
execute and deliver in favor of the Trustee for the benefit of the
Holders one or more instruments or other documents evidencing or
providing for additional security for the Securities, which may be in
the form of a pledge of collateral, a negative pledge or otherwise.
Any such instrument or document shall be effective without requiring
execution or delivery by the Trustee and may be terminated pursuant to
the terms thereof by written notice to the Trustee.
Section 11.5. Dividends; Voting Rights.
(a) As long as no Event of Default shall have occurred and
be continuing:
(i) The Guarantor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Pledged Shares or
any part thereof for any purpose not inconsistent with the terms of
this Indenture; provided, however, that no vote shall be cast or
consent, waiver or ratification given or action taken that would (x)
directly or indirectly impair the value of any of the Pledged Shares,
(y) be inconsistent with or violate any provision of this Indenture or
(z) approve any merger or consolidation with or any sale of all or
substantially all of the assets of the issuer of any of the Pledged
Shares except as otherwise provided by the terms of this Indenture;
(ii) The Guarantor shall be entitled to receive and retain,
and to utilize free and clear of the Lien of this Indenture, any and
all dividends or distributions paid with respect to any of the Pledged
Shares; provided, however, that any and all
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(1) dividends and other distributions paid or
payable other than in cash with respect to, and instruments
and other property received, receivable or otherwise
distributed with respect to, or in exchange for, any such
Pledged Shares;
(2) dividends, cash, instruments and other property
and proceeds received, receivable or otherwise distributed on
any Pledged Shares constituting any liquidating dividend or
other liquidating distribution, whether or not in connection
with a reduction of capital, capital surplus or paid-in
surplus, or other similar extraordinary dividend or
distribution; and
(3) cash paid, payable or otherwise distributed in
redemption of, or in exchange for, any Pledged Shares
shall be, and shall be forthwith delivered to the Trustee to hold as,
Collateral and be subject to the Lien of this Indenture and shall, if
received by the Guarantor, be received in trust for the benefit of the
Trustee, be segregated from the other property or funds of the
Guarantor, and be forthwith delivered to the Trustee as Collateral
(with any necessary endorsement and accompanied by any documentation
necessary to ensure and evidence that a first priority security
interest is being created therein); and
(iii) in order to permit the Guarantor to exercise the voting
and other rights which it is entitled to exercise pursuant to Section
11.5(a)(i) above and to receive the dividends, and other payments
which it is authorized to receive and retain pursuant to Section
11.5(a)(ii) above, the Trustee shall, if necessary, upon request of
the Guarantor, execute and deliver (or cause to be executed and
delivered) to the Guarantor all such proxies, payment orders and other
instruments as the Guarantor may reasonably request for such purposes
as shall be specified in such request.
Until actually paid, all rights to any such dividends, distributions
and other payments shall remain subject to the Lien of this Indenture.
(b) Upon the occurrence and during the continuance of an
Event of Default:
(i) all rights of the Guarantor to exercise the voting and
other consensual rights which it would otherwise be entitled to
exercise pursuant to Section 11.5(a)(i) above shall cease, and all
such rights shall thereupon become vested in the Trustee, which shall
thereupon have the sole right to exercise such voting and other
consensual rights during the continuance of such Event of Default;
(ii) all rights of the Guarantor to receive the dividends,
distributions and other payments which it would otherwise be
authorized to receive and retain pursuant to Section 11.5(a)(ii) above
shall cease and all such rights shall thereupon become vested in the
Trustee, which shall thereupon have the sole right to receive and hold
as Collateral
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such dividends, distributions and other payments during the
continuance of such Event of Default, and all such dividends,
distributions, and other payments shall be, forthwith delivered to the
Trustee to hold as Collateral and be subject to the Lien of this
Indenture and shall be segregated from all other Collateral; and
(iii) in order to permit the Trustee to exercise the voting
and other consensual rights which it may be entitled to exercise
pursuant to Section 11.5(b)(i) above, and to receive all dividends,
distributions and other payments which it may be entitled to receive
under Section 11.5(b)(ii) above, the Guarantor shall, if necessary,
upon written notice from the Trustee, from time to time execute and
deliver to the Trustee all such proxies, payment orders and other
instruments as the Trustee may reasonably request.
(c) Upon the cure or waiver of any such Event of Default, so
long as no other Event of Default has occurred and is continuing, all
rights of the Guarantor to receive dividends, distributions and other
payments pursuant to Section 11.5(a)(ii) shall revert to the
Guarantor.
(d) All dividends, distributions and other payments which are
received by the Guarantor contrary to the provisions of Section
11.5(b)(ii) above shall be received in trust for the benefit of the
Trustee, shall be segregated from other funds of the Guarantor and
shall be forthwith paid over to the Trustee as Collateral in the same
form as received by the Guarantor (duly endorsed by the Guarantor to
the Trustee, if required) to be held as Collateral.
(e) The Trustee may join in any plan of voluntary or
involuntary reorganization or readjustment or rearrangement in respect
of any Pledged Shares or any issuer thereof and may accept or
authorize the acceptance of new securities issued in exchange therefor
under any such plan. Any new securities so issued shall be deposited
and pledged with the Trustee under this Indenture.
Section 11.6. Trustee Appointed Attorney-in-Fact.
The Guarantor hereby appoints the Trustee as the Guarantor's
Attorney-in-fact, with full authority in the place and stead of the Guarantor
and in the name of the Guarantor or otherwise, from time to time in the Trustee
s discretion, to take any action and to execute any instrument which the Trustee
may deem necessary or advisable in order to accomplish the purposes of this
Article 11, including to receive, endorse and collect all instruments made
payable to the Guarantor representing any dividend, interest payment or other
distribution in respect to the Collateral or any part thereof and to give full
discharge for the same. This power, being coupled with an interest, is
irrevocable.
Section 11.7. Trustee May Perform.
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If the Guarantor fails to perform any agreement contained in this
Article 11, the Trustee may, but shall not be obligated to, itself perform, or
cause performance of, such agreement, and the expenses of the Trustee incurred
in connection therewith shall be payable by the Guarantor under Section 7.7.
Section 11.8. Trustee's Duties.
The powers conferred on the Trustee under this Article 11 are solely
to protect its interest in the Collateral and shall not impose any duty upon it
to exercise any such powers. Except for the safe custody of any Collateral in
its possession and the accounting for moneys actually received and/or disbursed
by it thereunder, the Trustee shall have no duty as to any Collateral or as to
the taking of any necessary steps to preserve rights against prior parties or
any other rights pertaining to any Collateral.
Section 11.9. Remedies upon Event of Default.
If any Event of Default shall have occurred and be continuing, the
Trustee may sell the Collateral as an entirety or in any such portions as the
Holders of a majority in aggregate principal amount of the Securities then
outstanding shall request in writing, or in the absence of such request, in such
manner as the Trustee deems appropriate. In addition to the other rights and
remedies provided for herein or otherwise available to it, the Trustee may
exercise, as provided in the preceding sentence, all the rights and remedies
provided a secured party upon the default of a debtor under the Uniform
Commercial Code (as in effect in the relevant jurisdiction) at that time.
Any sale of Collateral pursuant to this Section 11.9 may be without
notice, except as specified below, may consist of any part of or all of the
Collateral and may be in one or more parcels at public or private sale, at any
exchange, broker's board or at any of the Trustee's offices or elsewhere, for
cash, on credit or for future delivery, upon such terms as the Trustee may
determine to be commercially reasonable, and the Trustee or any Securityholder
may be the purchaser of any or all of the Collateral so sold and shall
thereafter hold the same, absolutely, free from any right or claim of whatsoever
kind. The Guarantor agrees that, to the extent notice of sale shall be required
by law, at least 5 days' notice to the Guarantor of the time and place of any
public sale or the time after which any private sale is to be made shall
constitute reasonable notification. The Trustee shall not be obligated to make
any sale of Collateral regardless of notice of sale having been given. The
Trustee may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefor, and such sale may, without further notice,
be made at the time and place to which it was so adjourned. The Guarantor hereby
waives any claims against the Trustee arising by reason of the fact that the
price at which any Collateral may have been sold at such a private sale was less
than the price which might have been obtained at a public sale, even if the
Trustee accepts the first offer received and does not offer such Collateral to
more than one offeree.
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The Guarantor hereby waives, to the extent permitted by applicable
law, notice (other than the notice described in the preceding paragraph) or
judicial hearing in connection with the Trustee's disposition of any Collateral,
including, without limitation, any and all prior notice and hearing for any
prejudgment remedy or remedies and any such right which the Guarantor would
otherwise have under law, and the Guarantor hereby further waives, to the extent
permitted by law: (a) all other requirements as to the time, place and terms of
sale or other requirements with respect to the enforcement of the Trustee's
rights hereunder and (b) all rights of redemption, appraisal, valuation, stay,
extension or moratorium now or hereafter in force under any applicable law. Any
sale of, or the grant of options to purchase, or any other realization upon, any
Collateral shall operate to divest all right, title, interest, claim and demand,
either at law or in equity, of the Guarantor therein and thereto, and shall be a
perpetual bar both at law and in equity against the Guarantor and against any
and all persons claiming or attempting to claim the Collateral so sold, optioned
or realized upon, or any part thereof, from, through and under the Guarantor.
The Guarantor recognizes that, by reason of certain prohibitions
contained in the Securities Act and applicable state securities laws, the
Trustee may be compelled, with respect to any sale of all or any part of the
Collateral, to limit purchasers to those who will agree, among other things, to
acquire such securities for their own account, for investment, and not with a
view to the distribution or resale thereof. The Guarantor acknowledges and
agrees that any such sale may result in prices and other terms less favorable to
the seller than if such sale were a public sale without such restrictions and,
notwithstanding such circumstances, agrees that any such sale shall be deemed to
have been made in a commercially reasonable manner. The Trustee shall be under
no obligation to delay the sale of any of the Collateral for the period of time
necessary to permit the issuers of the Collateral to register any securities
constituting such Collateral for public sale under the Securities Act, or under
applicable state securities laws, even if they would agree to do so; provided,
however, in the event that the Trustee determines that it is advisable to
register under or otherwise comply in any way with the Securities Act or any
similar federal or state law, or if such registration or compliance is required
with respect to all or any part of the Collateral prior to the sale thereof by
the Trustee, the Guarantor will use its best efforts to cause such registration
to be effectively made and will reimburse the Trustee and the Holders for any
and all expense incurred by any of them, including, without limitation,
reasonable attorneys' and accountants' fees and expenses, printing fees and
filing fees in connection therewith.
The Guarantor further agrees to do or cause to be done all such other
acts and things as may be reasonably necessary to make such sale or sales of any
portion or all of the Collateral valid and binding and in compliance with any
and all applicable laws, regulations, orders, writs, injunctions, decrees or
awards of any and all courts, arbitrators or governmental bodies having
jurisdiction over any such sale or sales, all at the Guarantor's expense.
Section 11.10. Application of Proceeds.
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Upon the occurrence and during the continuance of an Event of Default
(so long as such acceleration has not been rescinded), any cash held by the
Trustee as Collateral and all cash proceeds received by the Trustee in respect
of any sale of, collection from, or other realization upon, all or any part of
the Collateral, shall be applied by the Trustee in the manner specified in
Section 6.10.
Section 11.11. Continuing Lien.
Except as provided in Section 11.13, this Indenture shall create a
continuing Lien on the Collateral that shall (i) remain in full force and effect
until payment in full of the Securities and any other amounts owing under this
Indenture pursuant to Section 7.7, (ii) be binding upon the Guarantor and its
successors and assigns and (iii) inure to the benefit of the Trustee and its
successors, transferees and assigns.
Section 11.12. Certificates and Opinions.
The Guarantor shall comply with (a) TIA Section 314(b), relating to
Opinions of Counsel regarding the Lien of this Indenture and (b) TIA Section
314(d), relating to, among other matters, the release of Collateral from the
Lien of this Indenture and Officers' Certificates or other documents regarding
fair value of the Collateral, to the extent such provisions are applicable. Any
certificate or opinion required by TIA Section 314(d) may be executed and
delivered by an Officer of the Guarantor to the extent permitted by TIA Section
314(d).
Section 11.13. Release; Other Liens.
(a) Upon satisfaction by the Company of the conditions set forth in
Article 8 to its legal defeasance option, its covenant defeasance option or to
the discharge of this Indenture, the Lien of this Indenture on all the
Collateral shall terminate and all the Collateral shall be released without any
further action on the part of the Trustee or any other person. Upon the release
of any Collateral, the Trustee shall execute and deliver to the Guarantor an
instrument or instruments acknowledging the release of such Collateral from this
Indenture and the discharge of the Lien on such Collateral created by this
Article 11, and will duly assign, transfer and deliver to or upon the order of
the Guarantor (without recourse and with out any representation or warranty)
such Collateral.
(b) The Guarantor shall not create or suffer to exist any Lien upon or
with respect to any of the Pledged Shares, except for the security interests
created by this Indenture.
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ARTICLE 12.
MISCELLANEOUS
Section 12.1. Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies, or conflicts
with another provision which is required to be included in this Indenture by the
TIA, the required provision shall control.
Section 12.2. Notices.
Any notice or communication by the Company, the Guarantor or the
Trustee shall be duly given if in writing and delivered in Person or mailed by
first-class mail (registered or certified, return receipt requested), telex,
telecopier or overnight air courier guaranteeing next day delivery addressed as
follows:
if to the Company:
SFW Acquisition Corp.
3300 75th Avenue
Landover, MD 20785
Attention: Chief Financial Officer
with a copy to:
Dart Group Corporation
3300 75th Avenue
Landover, MD 20785
Attention: Corporate Secretary
if to the Guarantor:
SFW Holding Corp.
3300 75th Avenue
Landover, MD 20785
Attention: Chief Financial Officer
if to the Trustee:
Norwest Bank Minnesota, National Association
6th Street & Marquette Avenue
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Minneapolis, MN 55479-0069
Attention: Corporate Trust Department
The Company, the Guarantor or the Trustee by notice to each other may designate
additional or different addresses for subsequent notices or communications.
All notices and communications (other than those sent to Holders)
shall be deemed to have been duly given: at the time delivered by hand, if
personally delivered; five Business Days after being deposited in the mail,
postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by first class
mail, certified or registered, return receipt requested, or by overnight air
courier guaranteeing next day delivery to its address shown on the register kept
by the Registrar. Any notice or communication shall also be so mailed to any
Person described in TIA Section 313(c), to the extent required by the TIA.
Failure to mail a notice or communication to a Securityholder or any defect in
it shall not affect its sufficiency with respect to other Securityholders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
received it.
If the Company mails a notice or communication to Holders, it shall
mail a copy to the Trustee and each Agent at the same time.
All other notices or communications shall be in writing.
Section 12.3. Communication by Holders with Other Holders.
Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Securities. The
Company, the Trustee, the Registrar and anyone else shall have the protection of
TIA Section 312(c).
Section 12.4. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture (except with respect to the Merger), the Company
shall furnish to the Trustee:
(a) an Officers' Certificate stating that, in the opinion of
the signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
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(b) at the Trustee's reasonable request, an Opinion of
Counsel stating that, in the opinion of such counsel, all such
conditions precedent have been complied with.
Section 12.5. Statements Required in Certificate or Opinion of Counsel.
Each Officers' Certificate or Opinion of Counsel with respect to
compliance with a condition or covenant provided for in this Indenture shall
include:
(1) a statement that the Person making such Officers'
Certificate or Opinion of Counsel has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such Officers' Certificate or Opinion of Counsel are
based;
(3) a statement that, in the opinion of such Person, he or
she has made such examination or investigation as is necessary to
enable him or her to express an informed opinion as to whether or not
such covenant or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such
Person, such condition or covenant has been complied with; provided,
however, that, with respect to certain matters of fact not involving
any legal conclusion, an Opinion of Counsel may, upon the consent of
the parties relying on such opinion, rely on an Officers' Certificate
or certificates of public officials.
Section 12.6. Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or a meeting of
Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
Section 12.7. Legal Holidays.
If a payment date is a Legal Holiday at a place of payment, payment
may be made at that place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.
Section 12.8. No Recourse Against Others.
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Securities or this Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation including with respect to any
certificates delivered thereunder or hereunder. Each Holder by accepting a
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Security waives and releases all such liability. The waiver and release are part
of the consideration for the issue of the Securities.
Section 12.9. Counterparts.
This Indenture may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
Section 12.10. Governing Law.
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO
CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. THE COMPANY AND THE GUARANTOR HEREBY IRREVOCABLY
SUBMIT TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF
MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF
MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS INDENTURE AND THE SECURITIES, AND IRREVOCABLY
ACCEPT FOR THEMSELVES AND IN RESPECT OF THEIR PROPERTY, GENERALLY AND
UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. THE COMPANY AND THE
GUARANTOR IRREVOCABLY WAIVE, TO THE FULLEST EXTENT THEY MAY EFFECTIVELY DO SO
UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION WHICH THEY MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF THE VENUE OR THAT ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE OR ANY HOLDER TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR
OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION.
Section 12.11. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or a Subsidiary of the Company. Any such
indenture, loan or debt agreement may not be used to interpret this Indenture.
Section 12.12. Successors.
All agreements of the Company in this Indenture and the Securities
shall bind its successors. All agreements of the Trustee in this Indenture shall
bind its successors.
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Section 12.13. Severability.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 12.14. Table of Contents, Headings. Etc.
The Table of Contents, Cross-Reference Table, and headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof, and shall in no way
modify or restrict any of the terms or provisions hereof.
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SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, as of the date first written above.
SFW ACQUISITION CORP.
By: /s/ MARK A. FLINT
-----------------------
Name: Mark A. Flint
Title: President
Attest:
/s/ ELLIOT ARDITTI
- ---------------------------
Name: Elliot Arditti
SFW HOLDING CORP.
By: /s/ MARK A. FLINT
-----------------------
Name: Mark A. Flint
Title: President
Attest:
/s/ ELLIOT ARDITTI
- ---------------------------
Name: Elliot Arditti
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By: /s/ CURTIS D. SCHWEGMAN
-----------------------
Name: Curtis D. Schwegman
Title: Assistant Vice President
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<PAGE> 1
EXHIBIT 4.2
FIRST SUPPLEMENTAL INDENTURE
FIRST SUPPLEMENTAL INDENTURE, dated as of February 6, 1997 (this
"First Supplemental Indenture"), by and among Shoppers Food Warehouse Corp., a
Delaware corporation (and the successor by merger to SFW Acquisition Corp.)
(the "Company"), SFW Holding Corp., a Delaware corporation (the "Guarantor")
and Norwest Bank Minnesota, National Association, as trustee (the "Trustee").
WITNESSETH:
WHEREAS, SFW Acquisition Corp. ("Acquisition"), the Guarantor and the
Trustee are parties to an Indenture dated as of the date hereof (the
"Indenture"), providing for the issuance of certain Increasing Rate Senior
Notes due 2000 (the "Securities") of Acquisition in the principal amount of One
Hundred Forty Million Dollars ($140,000,000.00);
WHEREAS, pursuant to Article 10 of the Indenture, the Guarantor has
irrevocably, fully and unconditionally guaranteed to each Holder and to the
Trustee and its successors and assigns the Obligations;
WHEREAS, Section 5.1 of the Indenture permits Acquisition to merge
with or into any Person or Persons, subject to compliance with the conditions
set forth in Section 5.1, including, but not limited to, the requirement that
the Person surviving such merger shall be a corporation organized and validly
existing under the laws of the United States or any State thereof or the
District of Columbia, and shall expressly assume, by a supplemental indenture
thereto, all of the obligations of Acquisition under the Securities and the
Indenture;
WHEREAS, Section 5.2 of the Indenture further provides that upon any
merger in accordance with Section 5.1 of the Indenture, the successor
corporation into or with which Acquisition is merged shall succeed to, and be
substituted for, and may exercise every right and power of, Acquisition under
the Indenture with the same effect as if such successor Person had been named
as the obligor therein;
WHEREAS, on the date hereof, Acquisition has merged with and into the
Company in accordance with Section 253 of the Delaware General Corporation Law
(the "Merger"), with the Company succeeding to the business of Acquisition and
assuming, by operation of law, all of the obligations of Acquisition under the
Securities and the Indenture;
WHEREAS, the Guarantor desires to confirm that its Guarantee shall
apply to the Company's obligations under the Securities and the Indenture, as
supplemented hereby;
WHEREAS, Section 9.1(6) of the Indenture permits "the Company" (which
term, as defined in the Indenture, includes a successor to Acquisition that
replaces Acquisition in accordance with the provisions of the Indenture), when
authorized by resolution of its board of
<PAGE> 2
directors, and the Trustee, to amend, waive or supplement the Indenture or the
Securities without the consent of any Holder to evidence the succession of
Shoppers to Acquisition, and the assumption by Shoppers of the obligations of
Acquisition under the Indenture and in the Securities in accordance with
Article 5 of the Indenture; and
WHEREAS, upon the execution and delivery of this First Supplemental
Indenture by the parties hereto, all things necessary to make the Securities
issued under the Indenture, as amended by this First Supplemental Indenture,
the valid obligation of the Company, and to make the Indenture, as amended by
this First Supplemental Indenture, a valid agreement of the Company, the
Guarantor and the Trustee, in accordance with their and its terms, will have
been done;
NOW, THEREFORE, for and in consideration of the premises and the
mutual covenants contained herein and in the Indenture and for other good and
valuable consideration, the sufficiency and receipt of which are hereby
acknowledged, the parties, intending to be legally bound, agree for the equal
and ratable benefit of all Holders of the Securities as follows:
Section 1. Confirmation of the Indenture; Definitions. This
First Supplemental Indenture supplements the Indenture and shall be a part of
and subject to all the terms thereof and every Holder of Securities heretofore
or hereafter authenticated and delivered under the Indenture shall be bound
hereby. Except as amended and supplemented hereby, the Indenture is hereby
confirmed and reaffirmed in all particulars. Without limiting the generality
of the foregoing, all representations, covenants, agreements, obligations and
rights contained in the Indenture or herein and all security for the same are
and shall be for the equal and proportionate benefit and security of the
Holders of all Securities issued and outstanding under the Indenture, as
amended hereby. Anything in the Indenture or herein to the contrary
notwithstanding, all recitals, definitions, provisions, exhibits and schedules
contained in this First Supplemental Indenture shall take precedence over the
recitals, definitions, provisions, exhibits and schedules contained in the
Indenture to the extent of any conflict between the two.
Section 2. Confirmation by Guarantor of Guarantee. The
Guarantor hereby confirms that its Guarantee shall apply to the Company's
obligations under the Securities and the Indenture, as amended hereby, and that
its Guarantee remains in full force and effect.
Section 3. Assumptions of Obligations. Pursuant to Section 5.1
of the Indenture, the Company as the surviving entity of the Merger expressly
acknowledges and unconditionally assumes all of the obligations of Acquisition
whatsoever under the Indenture. On the date hereof, the Company (as the
surviving corporation of the Merger) shall, by virtue of the assumption
described in the foregoing sentence and the execution and delivery of this
First Supplemental Indenture, succeed to, and be substituted for, and may
exercise every right and power of, and shall be subject to all liabilities of,
Acquisition under the Indenture and the Securities with the same effect as if
the Company had been named as the obligor in the Indenture and the Securities.
Hereafter all references in the Indenture to Acquisition shall be deemed to
refer to the Company and not to Acquisition.
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<PAGE> 3
Section 4. Form of Security. In order to effectuate the
foregoing provisions, the form of Security is hereby replaced in its entirety
by the form of Security annexed hereto as Exhibit A and the Global Security
dated February 6, 1997 is hereby replaced in its entirety by the Global
Security in registered form, substantially in the form attached hereto as
Exhibit A, which Global Security shall be dated February 7, 1997 but shall
accrue interest from February 6, 1997. In addition, Exhibits B and C and
Schedule I to the Indenture are hereby replaced in their entirety by Exhibits B
and C and Schedule I hereto.
Section 5. Effectiveness. This First Supplemental Indenture
shall become effective on the date hereof, subject to the satisfaction of the
following conditions precedent:
(i) No Event of Default. Immediately before and
immediately after giving effect to the Merger (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with or
in respect to the Merger), no Default or Event of Default shall have occurred
and be continuing.
(ii) Board Resolutions. The Company and the Guarantor
shall each have delivered to the Trustee a copy of a Board Resolution,
certified by its Secretary or any Assistant Secretary, duly adopted by its
Board of Directors, authorizing the transactions contemplated by, and the
execution and delivery of, this First Supplemental Indenture.
(iii) Jurisdiction. The Company is a corporation organized
and validly existing under the laws of the State of Delaware.
(iv) Consolidated Net Worth. Immediately after giving
effect to the Merger (including, without limitation, any Indebtedness incurred
or anticipated to be incurred in connection with or in respect of the Merger)
the Company has a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of Acquisition immediately prior to the Merger.
Section 6. Separability Clause. In case any provision in this
First Supplemental Indenture shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
Section 7. Terms Defined in the Indenture. All capitalized
terms not otherwise defined herein shall have the meanings ascribed to them in
the Indenture.
Section 8. Counterparts. This First Supplemental Indenture may
be executed in any number of counterparts, each of which so executed shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same instrument.
3
<PAGE> 4
Section 9. Governing Law. This First Supplemental Indenture
shall be governed by and construed in accordance with the laws set forth in
Section 12.10 of the Indenture.
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed as of the date first above written.
SHOPPERS FOOD WAREHOUSE CORP.
By: /s/ MARK A. FLINT
------------------------------
Name: Mark A. Flint
Title: President
Attest:
/s/ ELLIOT ARDITTI
- -----------------------------
Name: Elliot Arditti
SFW HOLDING CORP.
By: /s/ MARK A. FLINT
------------------------------
Name: Mark A. Flint
Title: President
Attest:
/s/ ELLIOT ARDITTI
- -----------------------------
Name: Elliot Arditti
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By: /s/ CURTIS D. SCHWEGMAN
------------------------------
Name: Curtis D. Schwegman
Title: Assistant Vice President
4
<PAGE> 1
EXHIBIT 4.3
THIS SENIOR NOTE HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED
STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS
EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT), (B) IT IS AN INSTITUTIONAL "ACCREDITED
INVESTOR" (AS DEFINED IN RULE 501 (a)(1), (2), (3) or (7) OF
REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL
ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS
ACQUIRING THIS SENIOR NOTE IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH RULE 904 UNDER THE SECURITIES ACT; (2) AGREES
THAT IT WILL NOT, WITHIN THREE YEARS AFTER THE ORIGINAL
ISSUANCE OF THIS SENIOR NOTE, RESELL OR OTHERWISE TRANSFER
THIS SENIOR NOTE EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY
THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED
INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE
SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH
TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING
CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THIS SENIOR NOTE (THE FORM OF
WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND AN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER
IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE
UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH
RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE
EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 OR ANY OTHER
APPLICABLE EXEMPTION UNDER THE SECURITIES ACT (IF AVAILABLE)
OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND ( 3) AGREES THAT IT WILL DELIVER TO
EACH PERSON TO WHOM THIS SENIOR NOTE IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION
WITH ANY TRANSFER OF THIS SENIOR NOTE WITHIN THREE YEARS AFTER
THE ORIGINAL ISSUANCE OF THE SENIOR NOTE, IF THE PROPOSED
TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER
MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE
COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO
CONFIRM THAT SUCH TRANSFER
<PAGE> 2
IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE
MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES
ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE
TO REFUSE TO REGISTER ANY TRANSFER OF THIS SENIOR NOTE IN
VIOLATION OF THE FOREGOING RESTRICTIONS.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR
SECURITIES IN DEFINITIVE FORM, THIS SECURITY MAY NOT BE
TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TO A NOMINEE
OF THE DEPOSITORY, OR BY ANY SUCH NOMINEE OF THE DEPOSITORY,
OR BY THE DEPOSITORY OR NOMINEE OF SUCH SUCCESSOR DEPOSITORY
OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A NOMINEE OF
SUCH SUCCESSOR DEPOSITORY. UNLESS THIS CERTIFICATE IS
PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME
OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS
MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO.,
HAS AN INTEREST HEREIN."
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO.
OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND
TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED
TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET
FORTH IN SECTION 2.17 OF THE INDENTURE.
2
<PAGE> 3
CUSIP NO.: 825095 AA 0
SHOPPERS FOOD WAREHOUSE CORP.
INCREASING RATE SENIOR NOTE DUE 2000
No. 1 $ 140,000,000
SHOPPERS FOOD WAREHOUSE CORP., a Delaware corporation (the "Company,"
which term includes any successor corporation), for value received promises to
pay to Cede & Co. or registered assigns, the principal sum of One Hundred Forty
Million Dollars ($140,000,000), on February 6, 2000.
Interest Payment Dates: January 31, April 30, July 31 and October 31.
Record Dates: January 16, April 15, July 16 and October 16.
Reference is made to the further provisions of this Security contained
herein, which will for all purposes have the same effect as if set forth at
this place.
IN WITNESS WHEREOF, the Company has caused this Security to be signed
manually or by facsimile by its duly authorized officers.
Dated: February 7, 1997
Attest: SHOPPERS FOOD WAREHOUSE CORP.
/s/ ELLIOT R. ARDITTI By: /s/ MARK A. FLINT
- -------------------------------------- ------------------------------
Name: Elliot R. Arditti Name: Mark A. Flint
Title: Secretary Title: President
Certificate of Authentication
This is one of the Increasing Rate Senior Notes due 2000
referred to in the within-mentioned Indenture.
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, as Trustee
Dated: February 7, 1997 By /s/ CURTIS D. SCHWEGMAN
--------------------------------
Authorized Signatory
3
<PAGE> 4
SHOPPERS FOOD WAREHOUSE CORP.
INCREASING RATE SENIOR NOTE DUE 2000
Capitalized terms used and not otherwise defined herein shall have the
meanings ascribed to them in the Indenture, dated as of February 6, 1997, as
amended by the First Supplemental Indenture, dated as of February 6, 1997 (as
amended, the "Indenture"), and as amended from time to time, by and among
Shoppers Food Warehouse Corp., a Delaware corporation (the "Company"), SFW
Holding Corp., a Delaware corporation (the "Guarantor") and Norwest Bank
Minnesota, National Association, as trustee (the "Trustee").
1. INTEREST.
a. The Company promises to pay interest on the
principal amount of this Security at an initial rate
of 10% per annum, and, to the extent not earlier
redeemed, increasing by 50 basis points on a
quarterly basis thereafter commencing on August 1,
1997, to the following interest rates during the
following periods:
<TABLE>
<CAPTION>
Period Rate
------ ----
<S> <C>
August 1, 1997 through October 31, 1997 10.5%
November 1, 1997 through January 31, 1988 11.0%
February 1, 1998 through April 30, 1998 11.5%
May 1, 1998 through July 31, 1998 12.0%
August 1, 1998 through October 31, 1998 12.5%
November 1, 1998 through January 31, 1999 13.0%
February 1, 1999 through April 30, 1999 13.5%
May 1, 1999 through July 31, 1999 14.0%
August 1, 1999 through October 31, 1999 14.5%
November 1, 1999 to the Maturity Date 15.0%
</TABLE>
The Company shall further pay the Liquidated Damages payable pursuant to
Section 5 of the Registration Rights Agreement. The Company will pay
interest and Liquidated Damages, if any, quarterly on January 31, April 30,
July 31 and October 31 of each year, or if any such day is not a Business
Day, on the next succeeding Business Day (each an "Interest Payment Date").
Interest on the Securities will accrue from the most recent date on which
interest has been paid or, if no interest has been paid, from February 6,
1997; provided, however, that if there is no existing Default in the
payment of interest, and if this Security is authenticated between a record
date referred to on the face hereof and the next succeeding Interest
Payment Date, interest shall accrue from such next succeeding Interest
Payment Date; provided further, however, that the first Interest Payment
Date shall be April 30, 1997.
4
<PAGE> 5
b. To the extent lawful, the Company shall pay
interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on (i) overdue
principal, premium, if any, and Liquidated Damages, if
any, at the rate borne by the Securities, compounded
semiannually; and (ii) overdue installments of
interest, and Liquidated Damages, if any (without
regard to any applicable grace period) at the same
rate, compounded semiannually.
c. Interest will be computed on the basis of a
360-day year of twelve 30-day months.
2. METHOD OF PAYMENT. The Company will pay interest on the
Securities to the Persons who are registered Holders of Securities at the
close of business on the January 16, April 15, July 16 and October 16 next
preceding the applicable Interest Payment Date, even if such Securities are
cancelled after such record date and on or before such Interest Payment
Date. The Securities will be payable as to principal, interest and
Liquidated Damages, if any, at the office or agency of the Company
maintained for such purpose within the City and State of New York, or, at
the option of the Company, payment of interest or Liquidated Damages, if
any, may be made by check mailed to the Holders of the Securities at their
addresses set forth in the register of Holders of Securities, and provided
that payment by wire transfer of immediately available funds or Federal
funds check will be required with respect to principal of and interest and
Liquidated Damages, if any, on the Global Security. Such payment shall be
in currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, the Trustee under the
Indenture will act as Paying Agent and Registrar. The Company may change
any Paying Agent or Registrar without notice to any Holder. The Company or
any of its subsidiaries may, subject to certain exceptions, act in any such
capacity.
4. INDENTURE. The Company issued the Securities under the
Indenture. Each Holder, by accepting the Securities, agrees to be bound by
all the terms and provisions of the Indenture, as the same may be amended
from time to time in accordance with its terms. The terms of the
Securities include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (15
U.S. Code Sections 7aaa-77bbbb) ("TIA"). The Securities are subject to all
such terms, and Holders are referred to the Indenture and the TIA for a
statement of such terms. The Securities are general unsecured obligations
of the Company limited to $140 million in aggregate principal amount, plus
amounts, if any, sufficient to pay interest, premium and Liquidated
Damages, if any, on outstanding Securities as set forth in Paragraph 2
hereof. Payment on each Security and performance by the Company within
applicable grace
5
<PAGE> 6
periods of the other Obligations is guaranteed by the Guarantor pursuant to
Article 10 of the Indenture. In order to secure the Obligations, the
Guarantor has granted a security interest in the Collateral to the Trustee
for the benefit of the Holders of Securities pursuant to the Indenture.
5. REDEMPTION AT THE COMPANY'S OPTION. The Securities will be
redeemable at the option of the Company, in whole or in part, at any time
at the redemption prices (expressed as a percentage of the principal amount
redeemed) set forth below (the "Optional Redemption Price"), together with
accrued and unpaid interest, if any, to the date of redemption, if redeemed
during the period indicated:
<TABLE>
<CAPTION>
Year Optional Redemption Price
---- -------------------------
<S> <C>
February 7, 1997 through July 31, 1997 100%
August 1, 1997 through January 31, 1998 101%
February 1, 1998 through February 5, 2000 103%
</TABLE>
On the Maturity Date, the Securities shall be redeemed by the
Company at 100% of the principal amount thereof, together with accrued and
unpaid interest to the date of redemption.
6. MANDATORY REDEMPTION. Except as set forth in paragraph 8
below, the Company shall not be required to make mandatory redemption
payments with respect to the Securities.
7. NOTICE OF REDEMPTION. Notice of redemption will be mailed at
least 30 days but not more than 60 days before the redemption date to each
Holder whose Securities are to be redeemed at its registered address.
Securities in denominations larger than $1,000 may be redeemed in part but
only in whole multiples of $1,000, unless all of the Securities held by a
Holder are to be redeemed. On and after the redemption date, interest
ceases to accrue on Securities or portions thereof called for redemption as
long as the Company has deposited with the Paying Agent funds in
satisfaction of the redemption price pursuant to the Indenture. If
Securities are redeemed subsequent to a record date with respect to any
Interest Payment Date specified above and on or prior to such Interest
Payment Date, then any accrued interest on such Securities will be paid to
the Holders in whose names such Securities are registered at the close of
business on such record date.
8. CHANGE IN CONTROL OFFER. If a Change in Control occurs, each
Holder of Securities shall have the right, at such Holder's option, to
require the Company to repurchase all of such Holder's Securities, or any
portion thereof that is an integral multiple of $1,000, for cash at a price
equal to the lesser of (i) the applicable Optional Redemption Price then in
effect or (ii) 101% of the principal amount of such Securities to be
repurchased, together with accrued and unpaid interest, if any, to the
Repurchase Date. Within 30 days after the occurrence of a Change in
Control, the Company shall mail a
6
<PAGE> 7
notice to each Holder setting forth the procedures governing the Change in
Control repurchase right as required by the Indenture. A Holder of
Securities may tender or refrain from tendering all or any portion of his
or her Securities at his or her discretion by completing the form entitled
"OPTION OF HOLDER TO ELECT PURCHASE" appearing on this Security and
delivering such form, together with the Securities with respect to which
the repurchase right is being exercised, duly endorsed for transfer to the
Company, to the Trustee within 30 days after receipt of the Company Notice.
Any portion of Securities tendered must be in integral multiples of $1,000.
9. DENOMINATIONS; TRANSFER; EXCHANGE. The Securities are in
registered form, without coupons, in denominations of $1,000 and integral
multiples of $1,000. The transfer of Securities may be registered and
Securities may be exchanged as provided in the Indenture. The Registrar and
the Trustee may require a Holder, among other things, to furnish
appropriate endorsements and transfer documents and the Company may require
a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company need not exchange or register the transfer of any
Security or portion of a Security selected for redemption, except for the
unredeemed portion of any Security being redeemed in part. Also, it need
not exchange or register the transfer of any Securities for a period of 15
days before a selection of Securities to be redeemed or during the period
between a record date and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Security
may be treated as its owner for all purposes.
11. AMENDMENTS AND WAIVERS. Subject to certain exceptions, the
Indenture or the Securities may be amended with the consent of the holders
of at least a majority in principal amount of the Securities then
outstanding. Without the consent of any Holder, the Company and the
Trustee may amend, waive or supplement the Indenture or the Securities to
(i) cure any ambiguity, defect or inconsistency, (ii) mortgage, pledge,
hypothecate or grant a security interest in favor of the Trustee as
additional security for the payment and performance of the obligations
under the Indenture, in any property or assets, including any which is
required to be mortgaged, pledged or hypothecated, or in which a security
interest is required to be granted, to the Trustee, (iii) make any change
that does not adversely affect the rights of any Holder, (iv) to add to
the covenants of the Company for the benefit of the Holders, or to
surrender any right or power conferred upon the Company under the
Indenture, or to provide any additional rights or benefits to the Holders,
(v) to evidence the succession of another Person to the Company, and the
assumption by any such successor of the obligations of the Company herein
and under the Indenture, (vi) to set out the form of the Exchange Notes
and to set forth such other matters as are necessary in connection with
the Exchange Offer that do not adversely affect the rights of any Holder,
or (vii) to maintain the qualification of the Indenture under the TIA.
7
<PAGE> 8
12. DEFAULTS AND REMEDIES. An Event of Default is: default for 30
days in payment of interest on the Securities; default in payment of
principal or premium on the Securities (including a default in payment
upon the exercise by a Holder of the Securities of its right to require
redemption of its Securities pursuant to Section 7 hereof); default by
the Company to consummate the Merger and repay the Bridge Loan and related
costs, fees and interest by the dates set forth in the Indenture; failure
by the Company or the Guarantor for 30 days after notice to it to comply
with any of its other agreements or covenants in the Indenture; certain
defaults under and accelerations prior to maturity of other indebtedness;
certain final judgments which remain undischarged; certain events of
bankruptcy or insolvency; and the cessation of the Indenture to be in full
force and effect or to provide the Trustee, in any material respect, the
Liens, rights, powers and privileges purported to be created thereby. If
an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in aggregate principal amount of the outstanding
Securities may declare all the Securities to be due and payable
immediately, except that in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, all outstanding Securities
become due and payable without further action or notice. Securityholders
may not enforce the Indenture or the Securities except as provided in the
Indenture. The Trustee may require indemnity satisfactory to it before it
enforces the Indenture or the Securities. Subject to certain limitations,
holders of a majority in principal amount of the then outstanding
Securities may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Securityholders notice of any continuing
default (except a default in payment of principal or interest) if it
determines that withholding notice is in their best interests. The Company
must furnish an annual compliance certificate to the Trustee.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual
or any other capacity, may make loans to, accept deposits from, and
perform services for the Company or its Affiliates, and may otherwise deal
with the Company or its Affiliates, as if were not Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Securities or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation, including with respect to any certificates
delivered hereunder or thereunder from any such person. Each Holder by
accepting a Security waives and releases all such liability. The waiver
and release are part of the consideration for the issuance of the
Securities.
15. AUTHENTICATION. This Security shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating
agent.
8
<PAGE> 9
16. ABBREVIATIONS. Customary abbreviations may be used in the
name of a Holder or an assignee, such as: TEN COM (=tenants in common),
TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of
survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A
(=Uniform Gifts to Minors Act).
17. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED
SECURITIES. In addition to the rights provided to Holders of Securities
under the Indenture, Holders of Transfer Restricted Securities shall have
all the rights set forth in the Registration Rights Agreement referred to
above.
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture and/or the Registration Rights
Agreement. Requests may be made to:
Shoppers Food Warehouse Corp.
3300 75th Avenue
Landover, MD 20785
Attention: Chief Financial Officer
18. GOVERNING LAW. The Laws of the State of New York shall govern
this Security and the Indenture, without regard to principles of conflicts
of law.
19. ADJUSTMENTS. This Global Security shall represent such of the
outstanding Securities as shall be specified herein and shall represent
the aggregate amount of outstanding Securities from time to time endorsed
hereon and the aggregate amount of outstanding Securities represented
hereby may from time to time be reduced or increased, as appropriate, by
adjustments made on the records of the Trustee, as custodian for the
Depository, to reflect exchanges and redemptions. Any endorsement of this
Global Security to reflect the amount of any increase or decrease in the
amount of outstanding Securities represented hereby shall be made by the
Trustee or the Securities Custodian, at the direction of the Trustee, in
accordance with instructions given by the Holder hereof as required in
Section 2.6 of the Indenture.
9
<PAGE> 10
GUARANTEE
SFW Holding Corp., a Delaware corporation, hereby unconditionally guarantees to
the Holder of the Senior Note upon which this Guarantee is endorsed the due and
punctual payment, as set forth in the Indenture pursuant to which such Senior
Note and this Guarantee were issued, of the principal of, premium (if any) and
interest on such Senior Note when and as the same shall become due and payable
for any reason according to the terms of such Senior Note and Article 10 of the
Indenture. The Guarantee of the Senior Note upon which this Guarantee is
endorsed will not become effective until the Trustee signs the certificate of
authentication on such Senior Note.
SFW HOLDING CORP.
By /s/ MARK A. FLINT
------------------------
Name: Mark A. Flint
Title: President
10
<PAGE> 11
[FORM OF ASSIGNMENT]
I or we assign this Security to
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type name, address and zip code of assignee)
Please insert Social Security or other
identifying number of assignee
- ------------------------------------------
and irrevocably appoint _____________________ agent to transfer this Security on
the books of the Company. The agent may substitute another to act for him.
Dated: Signed:
---------------------------------- ------------------------------
- --------------------------------------------------------------------------------
(Sign exactly as your name appears on the front of this Security)
Signature Guarantee:
------------------------------------------------------------
In connection with any transfer of this Security occurring
prior to the date which is the earlier of (i) the date of the declaration by the
SEC of the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act") covering resales of this Security (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) the third anniversary of the Issue Date (provided, however,
that neither the Company nor any affiliate of the Company has held any
beneficial interest in such Security, or portion thereof, at any time on or
prior to the third anniversary of the Issue Date), the undersigned confirms that
it has not utilized any general solicitation or general advertising in
connection with the transfer and that this Security is being transferred:
11
<PAGE> 12
(Check One)
(1) to the Company or a subsidiary thereof; or
-----
(2) pursuant to and in compliance with Rule 144A under the
----- Securities Act; or
(3) to an institutional "accredited investor" (as defined in Rule
----- 501(a)(1), (2), (3) or (7) under the Securities Act) that has
furnished to the Trustee a signed letter containing certain
representations and agreements (the form of which letter can
be obtained from the Trustee); or
(4) outside the United States to a "foreign person" in compliance
----- with Rule 904 of Regulation S under the Securities Act; or
(5) pursuant to the exemption from registration provided by Rule
----- 144 under the Securities act; or
(6) pursuant to an effective registration statement under the
----- Securities Act; or
(7) pursuant to another available exemption from the registration
----- requirements of the Securities Act.
Unless one of the boxes is checked, the Trustee will refuse to register any of
the Securities evidenced by this certificate in the name of any person other
than the registered Holder thereof; provided that if box (3), (4), (5) or (7)
is checked, the Company or the Trustee may require, prior to registering any
such transfer of the Securities, in its sole discretion, such legal opinions,
certifications (including an investment letter in the case of box (3) or (4))
and other information as the Trustee or the Company has reasonably requested to
confirm that such transfer is being made pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act.
If none of the foregoing boxes is checked, the Trustee or Registrar shall not
be obligated to register this Security in the name of any person other than the
Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 2.17 of the Indenture shall have
been satisfied.
Dated: Signed:
----------------------------------- ----------------------------
(Sign exactly as name
appears on the other side
of this Security)
Signature Guarantee:
------------------------------------------------------------
12
<PAGE> 13
TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing
this Security for its own account or an account with respect to which if
exercises sole investment discretion and that it and any such account is a
"qualified institutional buyer" within the meaning of Rule 144A under the
Securities Act and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has
determined not to request such information and that it is aware that the
transferor is relying upon the undersigned's foregoing representations in order
to claim the exemption from registration provided by Rule 144A.
Dated:
--------------------------- -----------------------------------
NOTICE: To be executed by an
executive officer
13
<PAGE> 14
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to Section 4.9 or Section 4.20 of the Indenture, check the appropriate
box below:
[ ] Section 4.9 (Change in Control)
[ ] Section 4.20 (Asset Sale)
If you want to elect to have only part of the Security purchased by
the Company pursuant to Section 4.9 or Section 4.20, state the amount you elect
to have purchased: $________
Date: Your Signature:
------------------- ---------------------------
(Sign exactly as your name appears on the
face of this Security)
Tax Identification No.:
-----------
Signature Guarantee:
-------------------------
14
<PAGE> 1
EXHIBIT 10.91
================================================================================
REGISTRATION RIGHTS AGREEMENT
DATED AS OF FEBRUARY 6, 1997
BY AND AMONG
SFW ACQUISITION CORP.,
SFW HOLDING CORP.
AND
WASSERSTEIN PERELLA SECURITIES, INC.
================================================================================
<PAGE> 2
This Registration Rights Agreement (this "Agreement") is made
and entered into as of February 6, 1997 by and among SFW Acquisition Corp., a
Delaware corporation ("Acquisition"), SFW Holding Corp., a Delaware
corporation and the owner of 100% of the capital stock of Acquisition
("Holding"), and Wasserstein Perella Securities, Inc. (the "Initial Purchaser")
who has agreed to purchase Increasing Rate Senior Notes due 2000 of the Company
(as defined) (the "Notes") in an aggregate principal amount of $140,000,000
pursuant to the Purchase Agreement (as defined below).
This Agreement is made pursuant to the Purchase Agreement,
dated as of January 30, 1997 (the "Purchase Agreement"), by and among
Acquisition, Holding, Dart Group Corporation, a Delaware corporation and the
owner, directly or indirectly, of 100% of the capital stock of Holding
("Dart"), and the Initial Purchaser. In order to induce the Initial Purchaser
to purchase the Notes, Acquisition has agreed to provide, and cause the Company
to provide, the registration rights set forth in this Agreement. The execution
and delivery of this Agreement is a condition to the obligations of the Initial
Purchaser set forth in the Purchase Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms
shall have the following meanings:
ACT: The Securities Act of 1933, as amended.
ADDITIONAL INTEREST: As defined in Section 5 hereof.
ADVICE: As defined in Section 6(d) hereof.
BROKER-DEALER: Any broker or dealer registered under the
Exchange Act.
BROKER-DEALER TRANSFER RESTRICTED SECURITIES: Exchange Notes
that are acquired by a Broker-Dealer in the Exchange Offer in exchange for
Notes that such Broker-Dealer acquired for its own account as a result of
market making activities or other trading activities (other than Notes acquired
directly from the Company or any of its affiliates).
BUSINESS DAY: Any day except a Saturday, Sunday or other day
in the States of New York or Maryland or the state in which the principal
corporate trust office of the Trustee, on which banks are authorized to not
open for business.
CLOSING DATE: The date of this Agreement.
COMMISSION: The Securities and Exchange Commission.
<PAGE> 3
COMPANY: Acquisition and upon the consummation of the Merger,
the Surviving Corporation.
CONSUMMATE: An Exchange Offer shall be deemed "Consummated"
for purposes of this Agreement upon the occurrence of (a) the filing and
effectiveness under the Act of the Exchange Offer Registration Statement
relating to the Exchange Notes to be issued in the Exchange Offer, (b) the
maintenance of such Registration Statement continuously effective and the
keeping of the Exchange Offer open for a period not less than the minimum
period required pursuant to Section 3(b) hereof and (c) the delivery by the
Company to the Registrar under the Indenture of Exchange Notes in the same
aggregate principal amount as the aggregate principal amount of Notes tendered
by Holders thereof pursuant to the Exchange Offer.
EFFECTIVENESS TARGET DATE: As defined in Section 5 hereof.
EXCHANGE ACT: The Securities Exchange Act of 1934, as
amended.
EXCHANGE NOTES: The Company's Increasing Rate Senior Exchange
Notes due 2000 to be issued by the Company and guaranteed by Holding pursuant
to the Indenture (a) in the Exchange Offer or (b) upon the request of any
Holder of Notes covered by a Shelf Registration Statement, in exchange for such
Notes.
EXCHANGE OFFER: The registration by the Company under the Act
of the Exchange Notes pursuant to the Exchange Offer Registration Statement
whereby the Company shall offer the Holders of all outstanding Transfer
Restricted Securities the opportunity to exchange all such outstanding Transfer
Restricted Securities held by such Holders for Exchange Notes in an aggregate
principal amount equal to the aggregate principal amount of the Transfer
Restricted Securities tendered in such exchange offer by such Holders.
EXCHANGE OFFER REGISTRATION STATEMENT: The Registration
Statement relating to the Exchange Offer, including the related Prospectus.
EXEMPT RESALES: The transactions in which the Initial
Purchaser proposes to sell the Notes in reliance on Rule 144A under the Act to
certain "qualified institutional buyers," as such term is defined in Rule 144A
under the Act, to certain institutional "accredited investors," as such term is
defined in Rule 501(a)(1), (2), (3) and (7) of Regulation D under the Act and
to non-U.S. persons outside the United States in reliance upon Regulation S
under the Act.
HOLDER: As defined in Section 2(b) hereof.
INDEMNIFIED HOLDER: As defined in Section 8(a) hereof.
INDEMNIFIED PARTY: As defined in Section 8(c) hereof.
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<PAGE> 4
INDEMNIFYING PARTY: As defined in Section 8(c) hereof.
INDENTURE: The Indenture, dated the Closing Date, by and
among Acquisition, Holding and Norwest Bank Minnesota, National Association, as
trustee (the "Trustee"), pursuant to which the Notes are to be issued, as such
Indenture is amended or supplemented from time to time in accordance with the
terms thereof.
INTEREST PAYMENT DATE: As defined in the Indenture and the
Notes.
NASD: National Association of Securities Dealers, Inc.
OFFERING MEMORANDUM: The Offering Memorandum, dated January
30, 1997, and all amendments and supplements thereto, relating to the Company
and the Notes and prepared by Dart, Acquisition and Holding pursuant to the
Purchase Agreement.
PERSON: An individual, partnership, corporation, trust,
unincorporated organization, or other entity, or a government or agency or
political subdivision thereof.
PRELIMINARY OFFERING MEMORANDUM: The preliminary offering
memorandum, dated January 19, 1997, relating to the Company and the Notes.
PROSPECTUS: The prospectus included in a Registration
Statement at the time such Registration Statement is declared effective, as
amended or supplemented by any prospectus supplement and by all other
amendments thereto, including post-effective amendments, and all material
incorporated by reference into such Prospectus.
REGISTRATION DEFAULT: As defined in Section 5 hereof.
REGISTRATION STATEMENT: Any registration statement of the
Company relating to (a) an offering of Exchange Notes pursuant to an Exchange
Offer or (b) the registration for resale of Transfer Restricted Securities
pursuant to the Shelf Registration Statement, in each case, (i) which is filed
pursuant to the provisions of this Agreement and (ii) including the Prospectus
included therein, all amendments and supplements thereto (including
post-effective amendments) and all exhibits and material incorporated by
reference therein.
RESTRICTED BROKER-DEALER: Any Broker-Dealer which holds
Broker-Dealer Transfer Restricted Securities.
SENIOR NOTES: The Notes and the Exchange Notes.
SHELF NOTICE: As defined in Section 4(a) hereof.
SHELF REGISTRATION STATEMENT: As defined in Section 4(a)
hereof.
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<PAGE> 5
SURVIVING CORPORATION: The surviving corporation resulting
from the merger (the "Merger") of Acquisition with and into Shoppers Food
Warehouse Corp. pursuant to the terms of a certificate of ownership and merger
filed by Acquisition with the Secretary of State of the State of Delaware
pursuant to Delaware General Corporation Law Section 253.
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section
77aaa-77bbbb) as in effect on the date of the Indenture.
TRANSFER RESTRICTED SECURITIES: Each Note, until the earliest
to occur of (a) the date on which such Note is exchanged by a Person other than
a broker-dealer for an Exchange Note in the Exchange Offer, (b) following the
exchange by a broker-dealer in the Exchange Offer of a Note for an Exchange
Note, the date on which such Exchange Note is sold to a purchaser who receives
from such broker-dealer on or prior to the date of such sale a copy of the
prospectus contained in the Exchange Offer Registration Statement, (c) the date
on which such Note is effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement, (d) the date
on which such Note may be resold without restriction to the public pursuant to
Rule 144 under the Act, (e) the date on which such Note shall have been
transferred and a new certificate for it not bearing a legend restricting
further transfer shall have been delivered by the Trustee, or (f) the date on
which such Note ceases to be outstanding for purposes of the Indenture.
UNDERWRITERS: As defined in Section 11 hereof.
UNDERWRITTEN REGISTRATION or UNDERWRITTEN OFFERING: A
registration in which securities of the Company are sold to an underwriter for
reoffering to the public.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) Transfer Restricted Securities. The securities
entitled to the benefits of this Agreement are the Transfer Restricted
Securities.
(b) Holders of Transfer Restricted Securities. A Person
is deemed to be a holder of Transfer Restricted Securities (each, a "Holder")
whenever such Person owns Transfer Restricted Securities.
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permitted by
applicable federal law (after the procedures set forth in Section 6(a)(i) below
have been complied with), the Company shall (i) cause to be filed with the
Commission as soon as practicable after the Closing Date, but in no event later
than 180 days after the Closing Date, the Exchange Offer Registration
Statement, (ii) use its best efforts to cause such Exchange Offer Registration
Statement to become effective at the earliest possible time, but in no event
later than 270 days after the Closing Date, (iii) in connection with the
foregoing, (A) file all pre-effective amendments to such Exchange Offer
Registration
-4-
<PAGE> 6
Statement as may be necessary in order to cause such Exchange Offer
Registration Statement to become effective, including the filing of information
pursuant to Rule 430A under the Act and (B) cause all filings, if any, in
connection with the registration and qualification of the Exchange Notes to be
made under the Blue Sky laws of such jurisdictions as are necessary to permit
Consummation of the Exchange Offer and (iv) upon the effectiveness of such
Exchange Offer Registration Statement, commence and Consummate the Exchange
Offer. The Exchange Offer shall be on the appropriate form permitting
registration of the Exchange Notes to be offered in exchange for the Notes that
are Transfer Restricted Securities and to permit sales of Broker-Dealer
Transfer Restricted Securities by Restricted Broker-Dealers as contemplated by
Section 3(c) below.
(b) The Company shall use its best efforts to cause the
Exchange Offer Registration Statement to be effective continuously, and to keep
the Exchange Offer open, for a period of not less than the minimum period
required under applicable federal and state securities laws to Consummate the
Exchange Offer; provided, however, that in no event shall such period be less
than 45 days after the date notice of the Exchange Offer is mailed to the
Holders. The Company shall cause the Exchange Offer to comply with all
applicable federal and state securities laws and all applicable laws,
regulations and/or ordinances, including all applicable tender offer rules and
regulations under the Exchange Act. No securities other than the Notes shall
be included in the Exchange Offer Registration Statement. The Company shall use
its best efforts to cause the Exchange Offer to be Consummated on the earliest
practicable date after the Exchange Offer Registration Statement has become
effective, but in no event later than 45 days thereafter.
(c) A "Plan of Distribution" section shall be included in
the Prospectus contained in the Exchange Offer Registration Statement and such
section shall indicate therein that any Restricted Broker-Dealer who holds
Notes that are Transfer Restricted Securities and that were acquired for the
account of such Broker-Dealer as a result of market-making activities or other
trading activities, may exchange such Notes (other than Transfer Restricted
Securities acquired directly from the Company) pursuant to the Exchange Offer;
however, such Broker-Dealer may be deemed to be an "underwriter" within the
meaning of the Act and must, therefore, deliver a prospectus meeting the
requirements of the Act in connection with its initial sale of each Exchange
Note received by such Broker-Dealer in the Exchange Offer, which prospectus
delivery requirements may be satisfied by the delivery by such Broker-Dealer of
the Prospectus contained in the Exchange Offer Registration Statement. Such
"Plan of Distribution" section shall also contain all other information with
respect to such sales of Broker-Dealer Transfer Restricted Securities by
Restricted Broker-Dealers that the Commission may require in order to permit
such sales pursuant thereto, but such "Plan of Distribution" shall not name any
such Broker-Dealer or disclose the amount of Senior Notes held by any such
Broker-Dealer except to the extent required by the Commission as a result of a
change in policy after the date of this Agreement.
The Company shall use its best efforts to keep the Exchange
Offer Registration Statement continuously effective, supplemented and amended
as required by the provisions of Section 6(c) below to the extent necessary to
ensure that it is available for sales of Broker-Dealer
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<PAGE> 7
Transfer Restricted Securities by Restricted Broker-Dealers in a manner
consistent with clause (b) above.
The Company shall promptly provide sufficient copies of the
latest version of such Prospectus to such Restricted Broker-Dealers upon
request at any time during such period in order to facilitate such sales.
In connection with the Exchange Offer, the Company shall:
(1) mail, or cause to be mailed, to each Holder a
copy of the Prospectus forming part of the Exchange Offer
Registration Statement, together with an appropriate letter of
transmittal and related documents;
(2) utilize the services of a depositary for the
Exchange Offer with an address in the Borough of Manhattan,
The City of New York, which may be the Trustee or an affiliate
thereof;
(3) permit Holders to withdraw tendered Transfer
Restricted Securities at any time prior to the close of
business, New York time, on the last Business Day on which the
Exchange Offer shall remain open; and
(4) otherwise comply in all material respects
with all applicable laws, rules and regulations.
As soon as practicable after the close of the
Exchange Offer, the Company shall:
(1) accept for exchange all Transfer Restricted
Securities validly tendered and not validly withdrawn pursuant
to the Exchange Offer;
(2) deliver to the Trustee for cancellation all
Transfer Restricted Securities so accepted for exchange; and
(3) cause the Trustee to authenticate and deliver
promptly to each Holder tendering such Transfer Restricted
Securities, Exchange Notes equal in principal amount to the
Transfer Restricted Securities of such Holder so accepted
for exchange.
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<PAGE> 8
SECTION 4. SHELF REGISTRATION
(a) SHELF REGISTRATION. If (i) the Company is not
permitted by applicable law or Commission policy to consummate the Exchange
Offer (after the procedures set forth in Section 6(a)(i) below have been
complied with) or (ii) any Holder of a minimum of $750,000 aggregate principal
amount or more of Transfer Restricted Securities notifies the Company within 30
days following the Consummation of the Exchange Offer that (A) such Holder is
prohibited by law or Commission policy from participating in the Exchange
Offer, (B) such Holder may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the Prospectus
contained in the Exchange Offer Registration Statement is not appropriate or
available for such resales by such Holder or (C) such Holder is a Broker-Dealer
and holds Notes acquired directly from the Company or an affiliate of the
Company or (iii) for any other reason the Exchange Offer is not Consummated
within 315 days of the Closing Date, then the Company shall promptly deliver to
the Holders and the Trustee written notice thereof (the "Shelf Notice") and
shall file a Shelf Registration Statement pursuant to the provisions of this
Section 4. If a Shelf Notice is delivered, the Company shall:
(x) cause to be filed on or prior to (1) in the case of a
Registration Statement filed pursuant to clause (i) above, 60 days after the
date on which the Company determines that it is not permitted to file the
Exchange Offer Registration Statement and (2) in the case of a Registration
Statement filed pursuant to clause (ii) above, 60 days after the date on which
the Company receives the notice specified in clause (ii) above, and (3) in any
case, the 315th day after the Closing Date, a shelf registration statement
pursuant to Rule 415 under the Act (which may be an amendment to the Exchange
Offer Registration Statement (in either event, the "Shelf Registration
Statement")), relating to all Transfer Restricted Securities the Holders of
which shall have provided the information required pursuant to Section 4(b)
hereof, and
(y) use its best efforts to cause such Shelf Registration
Statement to become effective on or prior to the date 120 days after the date
on which the Company becomes obligated to file such Shelf Registration
Statement. If, after the Company has filed an Exchange Offer Registration
Statement which satisfies the requirements of Section 3(a) above, the Company
is required to file and make effective a Shelf Registration Statement solely
because the Exchange Offer is not permitted under applicable federal law, then
the filing of the Exchange Offer Registration Statement shall be deemed to
satisfy the requirements of clause (x) above. Such an event shall have no
effect on the requirements of this clause (y) or on the Effectiveness Target
Date as defined in Section 5 below.
The Company shall use its best efforts to keep the Shelf
Registration Statement discussed in this Section 4(a) continuously effective,
supplemented and amended as required by the provisions of Sections 6(b) and (c)
hereof to the extent necessary to ensure that it is available for sales of
Transfer Restricted Securities by the Holders thereof entitled to the benefit
of this Section 4(a), and to ensure that it conforms with the requirements of
this Agreement, the Act and the policies, rules and regulations of the
Commission as announced from time to time, for a period
-7-
<PAGE> 9
expiring on the earlier of (i) the date that all Holders of Transfer Restricted
Securities have resold such securities in the manner set forth and as
contemplated in the Shelf Registration Statement and (ii) three years following
the Closing Date.
(b) PROVISION BY HOLDERS OF CERTAIN INFORMATION IN
CONNECTION WITH THE SHELF REGISTRATION STATEMENT. No Holder of Transfer
Restricted Securities may include any of its Transfer Restricted Securities in
any Shelf Registration Statement pursuant to this Agreement unless and until
such Holder furnishes to the Company in writing, within 20 Business Days after
receipt of a request therefor, such information specified in item 507 of
Regulation S-K under the Act, or otherwise required by the Act or the
Commission for use in connection with any Shelf Registration Statement or
Prospectus or preliminary Prospectus included therein. No Holder of Transfer
Restricted Securities shall be entitled to liquidated damages pursuant to
Section 5 hereof unless and until such Holder shall have provided all such
information required to be provided by such Holder for inclusion therein. Each
Holder as to which any Shelf Registration Statement is being effected agrees to
furnish promptly to the Company in writing, for so long as the Registration
Statement is effective, all information required to be disclosed in order to
make the information previously furnished to the Company by such Holder not
materially misleading.
SECTION 5. LIQUIDATED DAMAGES
Acquisition, Holding and the Initial Purchaser agree that the
Holders will suffer damages if the Company fails to fulfill its obligations
under Section 3 or Section 4 hereof and that it would not be feasible to
ascertain the extent of such damages with precision. Accordingly, if (i) the
Company fails to file any of the Registration Statements required by this
Agreement on or before the date specified for such filing in this Agreement,
(ii) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified in this Agreement for such
effectiveness (the "Effectiveness Target Date"), (iii) the Company fails to
Consummate the Exchange Offer on or prior to the 315th calendar day after the
Closing Date or (iv) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the periods specified in this Agreement without being
succeeded immediately by a post-effective amendment to such Registration
Statement that cures such failure and that is itself declared effective within
a five Business Day period (each such event referred to in clauses (i) through
(iv) above, a "Registration Default"), then commencing on the day following the
date on which such Registration Default occurs, the Company agrees to pay, or
cause to be paid, to each Holder of Transfer Restricted Securities, for the
first 90-day period immediately following the occurrence of such Registration
Default, liquidated damages, in the form of additional cash interest on the
Senior Notes ("Additional Interest"), initially at the rate of 50 basis points
(0.50%) per annum with respect to all Senior Notes constituting Transfer
Restricted Securities held by such Holder for the period that the Registration
Default continues. The rate of Additional
-8-
<PAGE> 10
Interest payable to each Holder shall increase by an additional 50 basis points
(0.50%) per annum with respect to all principal amount of Senior Notes
constituting Transfer Restricted Securities held by such Holder for each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum rate of Additional Interest of 200 basis points (2.00%) per annum.
Following the cure of all Registration Defaults, the accrual of Additional
Interest will cease. If the Registration Defaults described in either of
clauses (i) or (ii) above arose solely because the applicable Holder or Holders
failed to provide the Company with certain information within the 20 Business
Day period referred to in Section 4(b) hereof (including any information that
subsequently becomes necessary), Additional Interest in respect thereof (but
only with respect to such Holder or Holders) will not begin to accrue until ten
Business Days after such information has been provided to the Company.
The Company shall notify the Trustee within three Business
Days after each and every Registration Default. Any amounts of Additional
Interest due pursuant this Section 5 will be payable in cash quarterly on
January 31, April 30, July 31 and October 31 of each year, to the Holders of
record of Senior Notes on the fifteenth day prior to such interest payment
date. The amount of Additional Interest will be determined by multiplying the
applicable Additional Interest rate by the principal amount of the Transfer
Restricted Securities, multiplied by a fraction, the numerator of which is the
number of days such Additional Interest was applicable during such period
(determined on the basis of a 360-day year comprised of twelve 30-day months
and, in the case of a partial month, the actual number of days elapsed), and
the denominator of which is 360.
All accrued Additional Interest shall be paid to the holder of
the Global Security (as defined in the Indenture) by wire transfer of
immediately available funds or by federal funds check and to Holders of
Definitive Securities (as defined in the Indenture) by mailing checks to their
registered addresses by the Company on each Interest Payment Date. All
obligations of the Company set forth in the preceding paragraph that are
outstanding with respect to any Transfer Restricted Security at the time such
security ceases to be a Transfer Restricted Security shall survive until such
time as all such obligations with respect to such security shall have been
satisfied in full.
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<PAGE> 11
SECTION 6. REGISTRATION PROCEDURES
(a) EXCHANGE OFFER REGISTRATION STATEMENT. In connection
with the Exchange Offer, the Company shall comply with all applicable
provisions of Section 6(c) below, shall use its best efforts to effect such
exchange and to permit the sale of the Broker-Dealer Transfer Restricted
Securities being sold in accordance with the intended method or methods of
distribution thereof, and shall comply with all of the following provisions:
(i) If, following the date hereof there has been
published a change in Commission policy with respect to exchange
offers such as the Exchange Offer, such that in the reasonable opinion
of counsel to the Company there is a question as to whether the
Exchange Offer is permitted by applicable federal law, the Company
hereby agrees to seek a no-action letter or other favorable decision
from the Commission allowing the Company to Consummate an Exchange
Offer for such Notes. The Company hereby agrees to pursue the issuance
of such a decision to the Commission staff level. In connection with
the foregoing, the Company hereby agrees to take all such other
actions as are requested by the Commission or otherwise required in
connection with the issuance of such decision, including without
limitation (A) participating in telephonic conferences with the
Commission, (B) delivering to the Commission staff an analysis
prepared by counsel to the Company setting forth the legal bases, if
any, upon which such counsel has concluded that such an Exchange Offer
should be permitted and (C) diligently pursuing a resolution (which
need not be favorable) by the Commission staff of such submission.
(ii) As a condition to its participation in the Exchange
Offer pursuant to the terms of this Agreement, each Holder of Transfer
Restricted Securities shall furnish, upon the request of the Company,
prior to the Consummation of the Exchange Offer, a written
representation to the Company (which may be contained in the letter of
transmittal contemplated by the Exchange Offer Registration Statement)
to the effect that (A) it is not an affiliate of the Company, (B) it
is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a
distribution of the Exchange Notes to be issued in the Exchange Offer
and (C) it is acquiring the Exchange Notes in its ordinary course of
business. Each Holder hereby acknowledges and agrees that any
Broker-Dealer and any such Holder using the Exchange Offer to
participate in a distribution of the securities to be acquired in the
Exchange Offer (1) could not under Commission policy as in effect on
the date of this Agreement rely on the position of the Commission
enunciated in Morgan Stanley and Co., Inc. (available June 5, 1991)
and Exxon Capital Holdings Corporation (available May 13, 1988), as
interpreted in the Commission's letter to Shearman & Sterling dated
July 2, 1993, and similar no-action letters (including, if applicable,
any no-action letter obtained pursuant to clause (i) above), and (2)
must comply with the registration and prospectus delivery requirements
of the Act in connection with a secondary resale transaction and that
such a secondary resale transaction must be covered by an effective
registration statement containing the selling security holder
information required by Item 507 or 508, as applicable, of Regulation
S-K if the resales are of Exchange Notes
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<PAGE> 12
obtained by such Holder in exchange for Notes acquired by such Holder
directly from the Company or an affiliate thereof.
(iii) Prior to effectiveness of the Exchange Offer
Registration Statement, the Company shall provide a supplemental
letter to the Commission (A) stating that the Company is registering
the Exchange Offer in reliance on the position of the Commission
enunciated in Exxon Capital Holdings Corporation (available May 13,
1988), Morgan Stanley and Co., Inc. (available June 5, 1991) and, if
applicable, any no-action letter obtained pursuant to clause (i)
above, (B) including a representation that the Company has not entered
into any arrangement or understanding with any Person to distribute
the Exchange Notes to be received in the Exchange Offer and that, to
the best of the Company's information and belief, each Holder
participating in the Exchange Offer is acquiring the Exchange Notes in
its ordinary course of business and has no arrangement or
understanding with any Person to participate in the distribution of
the Exchange Notes received in the Exchange Offer and (C) any other
undertaking or representation required by the Commission as set forth
in any no-action letter obtained pursuant to clause (i) above.
(b) SHELF REGISTRATION STATEMENT. In connection with the
Shelf Registration Statement, the Company shall comply with all the provisions
of Section 6(c) below and shall use its best efforts to effect such
registration to permit the sale of the Transfer Restricted Securities being
sold in accordance with the intended method or methods of distribution thereof
(as indicated in the information furnished to the Company pursuant to Section
4(b) hereof), consistent with this Agreement and, pursuant thereto, the Company
will as expeditiously as possible prepare and file with the Commission a
Registration Statement relating to the registration on any appropriate form
under the Act, which form shall be available for the sale of the Transfer
Restricted Securities in accordance with the intended method or methods of
distribution thereof within the specified time periods and otherwise in
accordance with the provisions hereof.
(c) GENERAL PROVISIONS. In connection with any
Registration Statement and any related Prospectus required by this Agreement to
permit the sale or resale of Transfer Restricted Securities (including, without
limitation, any Exchange Offer Registration Statement and the related
Prospectus, to the extent that the same are required to be available to permit
sales of Broker-Dealer Transfer Restricted Securities by Restricted
Broker-Dealers), the Company shall:
(i) use its best efforts to keep such Registration
Statement continuously effective and provide all requisite financial
statements for the period specified in Section 3 or 4 hereof, as
applicable. Upon the occurrence of any event that would cause any such
Registration Statement or the Prospectus contained therein (A) to
contain a material misstatement or omission or (B) not to be effective
and usable for resale of Transfer Restricted Securities during the
period required by this Agreement, the Company shall file promptly an
appropriate amendment to such Registration Statement, (1) in the case
of clause (A), correcting any such misstatement or omission, and (2)
in the case of either clause (A) or (B), use its best efforts to cause
such amendment to be declared effective and such Registration
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<PAGE> 13
Statement and the related Prospectus to become usable for their
intended purposes(s) as soon as practicable thereafter;
(ii) prepare and file with the Commission such amendments
and post-effective amendments to the Registration Statement as may be
necessary to keep the Registration Statement effective for the
applicable period set forth in Section 3 or 4 hereof, as applicable,
or such shorter period as will terminate when all Transfer Restricted
Securities covered by such Registration Statement have been sold;
cause the Prospectus to be supplemented by any required Prospectus
supplement, and as so supplemented to be filed pursuant to Rule 424
under the Act, and to comply fully with Rules 424 and 430A, as
applicable, under the Act in a timely manner; and comply with the
provisions of the Act with respect to the disposition of all
securities covered by such Registration Statement during the
applicable period in accordance with the intended method or methods of
distribution by the sellers thereof set forth in such Registration
Statement or supplement to the Prospectus;
(iii) advise the underwriter(s), if any, and selling
Holders promptly and, if requested by such Persons, confirm such
advice in writing (A) when the Prospectus or any Prospectus supplement
or post-effective amendment has been filed, and, with respect to any
Registration Statement or any post-effective amendment thereto, when
the same has become effective, (B) of any request by the Commission
for amendments to the Registration Statement or amendments or
supplements to the Prospectus or for additional information relating
thereto, (C) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement under the
Act or of the suspension by any state securities commission of the
qualification of the Transfer Restricted Securities for offering or
sale in any jurisdiction, or the initiation of any proceeding for any
of the preceding purposes, or (D) of the existence of any fact or the
happening of any event that makes any statement of a material fact
made in the Registration Statement, the Prospectus, any amendment or
supplement thereto or any document incorporated by reference therein
untrue, or that requires the making of any additions to or changes in
the Registration Statement in order to make the statements therein not
misleading, or that requires the making of any additions to or changes
in the Prospectus in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
If at any time the Commission shall issue any stop order suspending
the effectiveness of the Registration Statement, or any state
securities commission or other regulatory authority shall issue an
order suspending the qualification or exemption from qualification of
the Transfer Restricted Securities under state securities or Blue Sky
laws, the Company shall use its best efforts to obtain the withdrawal
or lifting of such order at the earliest possible time;
(iv) furnish to each selling Holder named in any
Registration Statement or Prospectus and each of the underwriter(s) in
connection with such sale, if any, before filing with the Commission,
copies of any Registration Statement or any Prospectus included
therein or any amendments or supplements to any such Registration
Statement or Prospectus (including all documents incorporated by
reference after the initial filing of such Registration
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<PAGE> 14
Statement), which documents will be subject to the review and comment
of such Holders and underwriter(s) in connection with such sale, if
any, for a period of at least five Business Days, and the Company will
not file any such Registration Statement or Prospectus or any
amendment or supplement to any such Registration Statement or
Prospectus (including all such documents incorporated by reference) to
which the selling Holders of the Transfer Restricted Securities
covered by such Registration Statement or the underwriter(s) in
connection with such sale, if any, shall reasonably object within five
Business Days after the receipt thereof. A selling Holder or
underwriter, if any, shall be deemed to have reasonably objected to
such filing if such Registration Statement, amendment, Prospectus or
supplement, as applicable, as proposed to be filed, contains a
material misstatement or omission or fails to comply with the
applicable requirements of the Act;
(v) promptly prior to the filing of any document that is
to be incorporated by reference into a Registration Statement or
Prospectus, provide copies of such document to the selling Holders and
to the underwriter(s) in connection with such sale, if any, and make
the Company's representatives available during reasonable business
hours for discussion of such document and other customary due
diligence matters, and include such information in such document prior
to the filing thereof as such selling Holders or underwriter(s), if
any, reasonably may request;
(vi) make available at reasonable business hours for
inspection by the selling Holders, any underwriter participating in
any disposition pursuant to such Registration Statement and any
attorney or accountant retained by such selling Holders or any of such
underwriter(s), all financial and other records, pertinent documents
and properties of the Company and cause the Company's officers,
managers and employees to supply all information reasonably requested
by any such Holder, underwriter, attorney or accountant in connection
with such Registration Statement or any post-effective amendment
thereto subsequent to the filing thereof and prior to its
effectiveness;
(vii) if requested by any selling Holders or the
underwriter(s) in connection with such sale, if any, promptly include
in any Registration Statement or Prospectus, pursuant to a supplement
or post-effective amendment, if necessary, such information as such
selling Holders and underwriter(s), if any, may reasonably request to
have included therein, including, without limitation, information
relating to the "Plan of Distribution" of the Transfer Restricted
Securities, information with respect to the principal amount of
Transfer Restricted Securities being sold to such underwriter(s), the
purchase price being paid therefor and any other terms of the offering
of the Transfer Restricted Securities to be sold in such offering; and
make all required filings of such Prospectus supplement or
post-effective amendment as soon as practicable after the Company is
notified of the matters to be included in such Prospectus supplement
or post-effective amendment;
(viii) furnish to each selling Holder and each of the
underwriter(s) in connection with such sale, if any, without charge,
at least one copy of the Registration Statement, as first
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<PAGE> 15
filed with the Commission, and of each amendment thereto, including
all documents incorporated by reference therein and all exhibits
(including exhibits incorporated therein by reference);
(ix) deliver to each selling Holder and each of the
underwriter(s), if any, without charge, as many copies of the
Prospectus (including each preliminary prospectus) and any amendment
or supplement thereto as such Persons reasonably may request; the
Company hereby consents to the use of the Prospectus and any amendment
or supplement thereto by each of the selling Holders and each of the
underwriter(s), if any, in connection with the offering and the sale
of the Transfer Restricted Securities covered by the Prospectus or any
amendment or supplement thereto;
(x) enter into such agreements (including, unless not
required pursuant to Section 10 hereof, an underwriting agreement) and
make such representations and warranties and take all such other
actions in connection therewith in order to expedite or facilitate the
disposition of the Transfer Restricted Securities pursuant to any
Registration Statement contemplated by this Agreement as may be
reasonably requested by any Holder of Transfer Restricted Securities
or underwriter in connection with any sale or resale pursuant to any
Registration Statement contemplated by this Agreement, and in such
connection, whether or not an underwriting agreement is entered into
and whether or not the registration is an Underwritten Registration,
the Company shall: (1) whether or not an underwriting agreement is
entered into and whether or not the registration is an Underwritten
Registration, make such representations and warranties to the Holders
and the underwriter(s), in form, substance and scope as they may
request and as are customarily made by issuers to underwriters in
primary underwritten offerings and covering matters including, but not
limited to, those set forth in the Purchase Agreement; (2) whether or
not an underwriting agreement is entered into and whether or not the
registration is an Underwritten Registration, obtain opinions of
counsel to the Company and updates thereof (which counsel and opinions
(in form, scope and substance) shall be reasonably satisfactory to the
underwriter(s) and the Holders of the Transfer Restricted Securities
being sold) addressed to each selling Holder and underwriter
requesting the same and covering the matters customarily covered in
opinions requested in underwritten offerings and such other matters as
may be reasonably requested by such Holders and underwriters; (3) in
connection with an Underwritten Registration only, obtain "cold
comfort" letters and updates thereof from the Company's independent
certified public accountants addressed to the selling Holders of
Transfer Restricted Securities and underwriters requesting the same,
such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters by underwriters in
connection with primary underwritten offerings; (4) in connection with
an Underwritten Offering only, set forth in full or incorporate by
reference in the underwriting agreement the indemnification provisions
and procedures of Section 8 hereof with respect to all parties to be
indemnified pursuant to said Section; and (5) whether or not an
underwriting agreement is entered into and whether or not the
registration is an Underwritten Registration, deliver such documents
and certificates as may be reasonably requested by the
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<PAGE> 16
Holders of the Transfer Restricted Securities being sold or the
underwriter(s) of such Underwritten Offering to evidence compliance
with clause (1) above and with any customary conditions contained in
the underwriting agreement or other agreement entered into by the
Company pursuant to this clause (x). Nothing contained in this clause
(x) shall require the Company, its counsel or its accountants to make
any representations or warranties, to render any legal opinion or to
deliver any comfort letters that are not true. The above shall be
done at each closing under such underwriting or similar agreement, as
and to the extent thereunder, and if at any time the representations
and warranties of the Company contemplated in clause (1) above cease
to be true and correct, the Company shall so advise the Initial
Purchaser and the underwriter(s), if any, and selling Holders promptly
and if requested by such Persons, shall confirm such advice in
writing;
(xi) prior to any public offering of Transfer Restricted
Securities, cooperate with the selling Holders, the underwriter(s), if
any, and their respective counsel in connection with the registration
and qualification of the Transfer Restricted Securities under the
securities or Blue Sky laws of such jurisdictions as the selling
Holders or underwriter(s), if any, may request and do any and all
other acts or things necessary or advisable to enable the disposition
in such jurisdictions of the Transfer Restricted Securities covered by
the applicable Registration Statement; provided, however, that the
Company shall not be required to register or qualify to do business in
any jurisdiction in which it is not now so qualified or to take any
action that would subject it to the service of process in suits or to
taxation, other than as to matters and transactions relating to the
Registration Statement, in any jurisdiction where it is not now so
subject;
(xii) issue, upon the request of any Holder of Notes
covered by any Registration Statement contemplated by this Agreement,
Exchange Notes having an aggregate principal amount equal to the
aggregate principal amount of Notes surrendered to the Company by such
Holder in exchange therefor or being sold by such Holder; such
Exchange Notes to be registered in the name of such Holder or in the
name of the purchaser(s) of such Senior Notes, as the case may be; in
return, the Notes held by such Holder shall be surrendered to the
Company for cancellation;
(xiii) in connection with any sale of Transfer Restricted
Securities that will result in such securities no longer being
Transfer Restricted Securities, cooperate with the selling Holders and
the underwriter(s), if any, to facilitate the timely preparation and
delivery of certificates representing Transfer Restricted Securities
to be sold and not bearing any restrictive legends; and to register
such Transfer Restricted Securities in such denominations and such
names as the Holders or the underwriter(s), if any, may request at
least two Business Days prior to such sale of Transfer Restricted
Securities consistent with the terms of the Indenture;
(xiv) use its best efforts to cause the Transfer Restricted
Securities covered by the Registration Statement to be registered with
or approved by such other governmental
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<PAGE> 17
agencies or authorities as may be reasonably requested or otherwise
necessary to enable the seller or sellers thereof or the
underwriter(s), if any, to consummate the disposition of such Transfer
Restricted Securities, subject to the proviso contained in clause (xi)
above;
(xv) if any fact or event contemplated by Section
6(c)(iii)(D) above shall exist or have occurred, prepare a supplement
or post-effective amendment to the Registration Statement or related
Prospectus or any document incorporated therein by reference or file
any other required document so that, as thereafter delivered to the
purchasers of Transfer Restricted Securities, the Prospectus will not
contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
(xvi) provide a CUSIP number for all Transfer Restricted
Securities not later than the effective date of a Registration
Statement covering such Transfer Restricted Securities and provide the
Trustee under the Indenture with printed certificates for the Transfer
Restricted Securities which are in a form eligible for deposit with
The Depository Trust Company;
(xvii) cooperate and assist in any filings required to be
made with the NASD and in the performance of any due diligence
investigation by any underwriter (including any "qualified independent
underwriter") that is required to be retained in accordance with the
rules and regulations of the NASD, and use its best efforts to cause
such Registration Statement to become effective and approved by such
governmental agencies or authorities as may be necessary to enable the
Holders selling Transfer Restricted Securities to consummate the
disposition of such Transfer Restricted Securities;
(xviii) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to its security holders with regard to any applicable
Registration Statement, as soon as practicable, a consolidated
earnings statement meeting the requirements of Rule 158 (which need
not be audited) covering a twelve-month period beginning after the
effective date of the Registration Statement (as such term is defined
in paragraph (c) of Rule 158 under the Act);
(xix) cause the Indenture to be qualified under the TIA not
later than the effective date of the first Registration Statement
required by this Agreement, and, in connection therewith, cooperate
with the Trustee and the Holders of Senior Notes to effect such
changes to the Indenture as may be required for such Indenture to be
so qualified in accordance with the terms of the TIA; and execute and
use its best efforts to cause the Trustee to execute, all documents
that may be required to effect such changes and all other forms and
documents required to be filed with the Commission to enable such
Indenture to be so qualified in a timely manner;
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<PAGE> 18
(xx) cause all Transfer Restricted Securities covered by
the Registration Statement to be listed on each securities exchange on
which similar securities issued by the Company are then listed if
requested by the Holders of a majority in aggregate principal amount
of Notes or the managing underwriter(s), if any; and
(xxi) provide promptly to each Holder upon request each
document filed with the Commission pursuant to the requirements of
Section 13 or Section 15(d) of the Exchange Act.
(d) RESTRICTIONS ON HOLDERS. Each Holder as to which any
Registration Statement is being effected agrees to furnish promptly to the
Company all information required to be disclosed in order to make the
information previously furnished to the Company by such Holder not materially
misleading. Each Holder agrees by acquisition of a Transfer Restricted
Security, that, upon receipt of any notice from the Company of the existence of
any fact of the kind described in Section 6(c)(iii)(D) hereof, such Holder will
forthwith discontinue disposition of Transfer Restricted Securities pursuant to
the applicable Registration Statement until such Holder's receipt of the copies
of the supplemented or amended Prospectus contemplated by Section 6(c)(xv)
hereof, or until it is advised in writing (the "Advice") by the Company that
the use of the Prospectus may be resumed, and has received copies of any
additional or supplemental filings that are incorporated by reference in the
Prospectus. If so directed by the Company, each Holder will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in such Holder's possession, of the Prospectus covering such Transfer
Restricted Securities that was current at the time of receipt of such notice.
In the event the Company shall give any such notice, the time period regarding
the effectiveness of such Registration Statement set forth in Section 3 or 4
hereof, as applicable, shall be extended by the number of days during the
period from and including the date of the giving of such notice pursuant to
Section 6(c)(iii)(D) hereof to and including the date when each selling Holder
covered by such Registration Statement shall have received the copies of the
supplemented or amended Prospectus contemplated by Section 6(c)(xv) hereof or
shall have received the Advice.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's performance of
or compliance with this Agreement will be borne by the Company, regardless of
whether a Registration Statement becomes effective, including without
limitation: (i) all registration and filing fees and expenses (including
filings made by the Initial Purchaser or any Holder with the NASD and fees and
disbursements of counsel in connection therewith (including, if applicable, the
fees and expenses of any "qualified independent underwriter" and its counsel,
as may be required by the rules and regulations of the NASD)); (ii) all fees
and expenses of compliance with federal securities and state Blue Sky or
securities laws; (iii) all expenses of printing (including printing
certificates for the Exchange Notes to be issued in the Exchange Offer and
printing of Prospectuses), messenger and delivery services and telephone; (iv)
all fees and disbursements of counsel for the Company and, in accordance with
Section 7(b) below, the Holders of Transfer Restricted Securities; (v) all
application and filing fees in connection with listing the Senior Notes on a
national exchange or automated
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<PAGE> 19
quotation system if required hereunder; and (vi) all fees and disbursements of
independent certified public accountants of the Company (including the expenses
of any special audit and comfort letters required by or incident to such
performance).
The Company will, in any event, bear its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expenses of any annual
audit and the fees and expenses of any Person, including special experts,
retained by the Company.
(b) In connection with any Registration Statement
required by this Agreement, the Company will reimburse the Initial Purchaser
and the Holders of Transfer Restricted Securities being tendered in the
Exchange Offer and/or resold pursuant to the "Plan of Distribution" contained
in the Exchange Offer Registration Statement or registered pursuant to the
Shelf Registration Statement, as applicable, for the reasonable fees and
disbursements of not more than one counsel chosen by the Holders of a majority
in principal amount of the Transfer Restricted Securities for whose benefit
such Registration Statement is being prepared.
SECTION 8. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless (i)
each Holder and (ii) each person, if any, who controls (within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act) any Holder (any of the
persons referred to in this clause (ii) being hereinafter referred to as a
"controlling person") and (iii) the respective officers, directors, partners,
employees, representatives and agents of any Holder or any controlling person
(any person referred to in clause (i), (ii) or (iii) may hereinafter be
referred to as an "Indemnified Holder"), to the fullest extent lawful, from and
against any and all losses, claims, damages, liabilities, judgments, actions
and expenses (including without limitation and as incurred, reimbursement of
all reasonable costs of investigating, preparing, pursuing or defending any
claim or action, or any investigation or proceeding by any governmental agency
or body, commenced or threatened, including the reasonable fees and expenses of
one counsel to the Indemnified Holders) directly or indirectly caused by,
related to, based upon, arising out of or in connection with any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement or Prospectus (or any amendment or supplement thereto),
or any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, except in respect of any Holder insofar as such losses, claims,
damages, liabilities or expenses are caused by an untrue statement or omission
or alleged untrue statement or omission that is made in reliance upon and in
conformity with information relating to such Holder furnished in writing to the
Company by such Holder expressly for use therein; provided, however, that the
Company shall not be liable to Holder under this Section 8(a) to the extent
that any such losses, claims, damages, liabilities or expenses were caused by
the fact that such Holder sold Transfer Restricted Securities to a Person as to
whom it was established that there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the Prospectus as then amended or
supplemented if (i) the Company had furnished copies of such amended or
supplemented Prospectus to such Holder a reasonable time prior to the time of
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<PAGE> 20
written confirmation of sale and (ii) such losses, claims, damages, liabilities
or expenses were caused by an untrue statement or omission or alleged untrue
statement or omission contained in the Prospectus so delivered which was
corrected in such amended or supplemented Prospectus. This indemnity will be
in addition to any liability which the Company may otherwise have. The Company
will also indemnify underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, their
officers and directors and each Person who controls such Persons (within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act) to the same
extent as provided above with respect to the indemnification of the Indemnified
Holders of Transfer Restricted Securities.
(b) Each Holder of Transfer Restricted Securities agrees,
severally and not jointly, to indemnify and hold harmless the Company and its
directors, officers, and any person controlling (within the meaning of Section
15 of the Act or Section 20 of the Exchange Act) the Company, and the
respective officers, directors, partners, employees, representatives and agents
of each such person, to the same extent as the foregoing indemnity from the
Company to each of the Indemnified Holders, but only with respect to claims and
actions based on information relating to such Holder furnished in writing by
such Holder expressly for use in any Registration Statement. In case any action
or proceeding shall be brought against the Company or any such controlling
person in respect of which indemnity may be sought against a Holder of Transfer
Restricted Securities, such Holder shall have the rights and duties given the
Company or its directors or officers or such controlling person shall have the
rights and duties given to each Holder by the preceding paragraph. In no event
shall the liability of any selling Holder hereunder be greater in amount than
the dollar amount of the proceeds received by such Holder upon the sale of the
Transfer Restricted Securities giving rise to such indemnification obligation.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any Person in respect of which
indemnity may be sought pursuant to either Section 8(a) or Section 8(b) hereof,
such Person (the "indemnified party") shall promptly notify the Person against
whom such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceedings
and shall pay the fees and disbursements of such counsel relating to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel, but the fees and expenses of such counsel shall be
at the expense of such indemnified party unless (i) the indemnifying party and
the indemnified party shall have mutually agreed to the retention of such
counsel, or (ii) the indemnifying party fails promptly to assume the defense of
such proceeding or fails to employ counsel reasonably satisfactory to such
indemnified party or parties, or (iii) (A) the named parties to any such
proceeding (including any impleaded parties) include both such indemnified
party or parties and any indemnifying party or an affiliate of such indemnified
party or parties or of any indemnifying party, (B) there may be one or more
defenses available to such indemnified party or parties or such affiliate of
such indemnified party or parties that are different from or additional to
those available to any indemnifying party or such affiliate of any indemnifying
party and (C) such indemnified party or parties shall have been
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<PAGE> 21
advised by such counsel that there may exist a conflict of interest between or
among such indemnified party or parties or such affiliate of such indemnified
party or parties and any indemnifying party or such affiliate of any
indemnifying party, in which case, if such indemnified party or parties
notifies the indemnifying party or parties in writing that it elects to employ
separate counsel of its choice at the expense of the indemnifying parties, the
indemnifying parties shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the indemnifying parties, it being
understood, however, that unless there exists a conflict among indemnified
parties, the indemnifying parties shall not, in connection with any one such
proceeding or separate but substantially similar or related proceedings in the
same jurisdiction, arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (together with appropriate local counsel) at any time for
such indemnified party or parties. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent but,
if settled with such consent or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party or parties
from and against any loss or liability by reason of such settlement or
judgment. No indemnifying party shall, without the prior written consent of
the indemnified party (which consent shall not be unreasonably withheld or
delayed), effect any settlement of any pending or threatened proceeding in
respect of which such indemnified party is a party, and indemnity could have
been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such proceeding.
(d) If the indemnification provided for in this Section 8
is unavailable to an indemnified party under Section 8(a) or Section 8(b)
hereof (other than by reason of exceptions provided in those Sections) in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then each applicable indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses in such proportion as is appropriate to reflect benefits received by
the Company on the one hand and the Holders on the other hand from their sale
of Transfer Restricted Securities or if such allocation is not permitted by
applicable law, the relative fault of the Company on the one hand and of the
Indemnified Holder on the other in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as
well as any other relevant equitable considerations. The relative fault of the
Company on the one hand and of the Indemnified Holder on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact related to information supplied by the Company or by the
Indemnified Holder and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitation set forth in the second paragraph of Section 8(a),
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim.
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<PAGE> 22
The Company and each Holder of Transfer Restricted Securities
agree that it would not be just and equitable if contribution pursuant to this
Section 8(c) were determined by pro rata allocation (even if the Holders were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages, liabilities or expenses
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 8, none of the Holders (and its related Indemnified Holders) shall be
required to contribute, in the aggregate, any amount in excess of the amount by
which the proceeds received by such Holder from the sale of Transfer Restricted
Securities exceeds the amounts of any damages which such Holder has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Holders' obligations to contribute pursuant to this
Section 8(c) are several in proportion to the respective principal amount of
Notes held by each of the Holders hereunder and not joint.
SECTION 9. RULE 144A
The Company hereby agrees with each Holder, for so long as any
Transfer Restricted Securities remain outstanding, to make available, upon
request of any Holder of Transfer Restricted Securities, to any Holder or
beneficial owner of Transfer Restricted Securities in connection with any sale
thereof and any prospective purchaser of such Transfer Restricted Securities
designated by such Holder or beneficial owner, the information required by Rule
144A(d)(4) under the Act in order to permit resales of such Transfer Restricted
Securities pursuant to Rule 144A.
SECTION 10. UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Registration
hereunder unless such Holder (a) agrees to sell such Holder's Transfer
Restricted Securities on the basis provided in any underwriting arrangements
entered into in connection therewith and (b) completes and executes all
reasonable questionnaires, powers of attorney, indemnities, underwriting
agreements, lock-up letters and other documents required under the terms of
such underwriting arrangements.
SECTION 11. SELECTION OF UNDERWRITERS
In any Underwritten Offering, the investment banker or
investment bankers and managers that will administer the offering will be
selected by the Holders of a majority in aggregate principal amount of the
Transfer Restricted Securities included in such offering; provided, however,
that such investment bankers and managers must be reasonably satisfactory to
the Company. Such investment bankers and managers are referred to herein as the
"underwriters."
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<PAGE> 23
SECTION 12. MISCELLANEOUS
(a) REMEDIES. Each Holder, in addition to being entitled
to exercise all rights provided herein, in the Indenture, the Company's or
Holding's respective charter or bylaws, the Purchase Agreement or related
agreements or granted by law, including recovery of Additional Interest or
other damages, will be entitled to specific performance of its rights under
this Agreement. The Company and Holding agree that monetary damages (including
the Additional Interest contemplated hereby) would not be adequate compensation
for any loss incurred by reason of a breach by it of the provisions of this
Agreement and hereby agrees to waive the defense in any action for specific
performance that a remedy at law would be adequate.
(b) NO INCONSISTENT AGREEMENTS. Neither the Company nor
Holding will, on or after the date of this Agreement, enter into any agreement
with respect to its securities that is inconsistent with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions
hereof. Neither the Company nor Holding has previously entered into any
agreement granting any registration rights with respect to its securities to
any Person. The rights granted to the Holders hereunder do not in any way
conflict with and are not inconsistent with the rights granted to the Holders
of the Company's or Holding's securities under any agreement in effect on the
date hereof.
(c) ADJUSTMENTS AFFECTING THE SENIOR NOTES. Neither the
Company nor Holding will take any action, or permit any change to occur, with
respect to the Senior Notes that would materially adversely affect the ability
of the Holders to Consummate any Exchange Offer.
(d) AMENDMENTS AND WAIVERS. The provisions of this
Agreement may not be amended, modified or supplemented, and waivers or consents
to or departures from the provisions hereof may not be given unless the Company
and Holding have obtained the written consent of Holders of a majority of the
outstanding principal amount of Transfer Restricted Securities. Notwithstanding
the foregoing, a waiver or consent to departure from the provisions hereof that
relates exclusively to the rights of Holders whose securities are being
tendered pursuant to the Exchange Offer and that does not affect directly or
indirectly the rights of other Holders whose securities are not being tendered
pursuant to such Exchange Offer may be given by the Holders of a majority of
the outstanding principal amount of Transfer Restricted Securities that are
subject to such Exchange Offer.
(e) NOTICES. All notices and other communications
provided for or permitted hereunder shall be made in writing by hand-delivery,
first-class mail (registered or certified, return receipt requested),
telecopier, or air courier guaranteeing overnight delivery:
(i) if to a Holder, all the address set forth on the
records of the Registrar under the Indenture, with a copy to the Registrar
under the Indenture; and
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<PAGE> 24
(ii) if to the Company:
SFW Acquisition Corp.
3300 75th Avenue
Landover, MD 20785
Attention: President
Telecopier No.: (301) 772-3910
With a copy to:
Dart Group Corporation
3300 75th Avenue
Landover, MD 20785
Attention: Corporate Secretary
Telecopier No.: (301) 773-2707
(iii) if to Holding:
SFW Holding Corp.
3300 75th Avenue
Landover, MD 20785
Attention: President
Telecopier No.: (301) 772-3910
All such notices and communications shall be deemed to have
been duly given at the time delivered by hand, if personally delivered; five
Business Days after being deposited in the mail, postage prepaid, if mailed;
when receipt acknowledged, if telecopied; and on the next business day, if
timely delivered to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands or other communications
shall be concurrently delivered by the Person giving the same to the Trustee at
the address specified in the Indenture.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall inure to
the benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders of Transfer Restricted Securities; provided,
however, that this Agreement shall not inure to the benefit of or be binding
upon a successor or assign of a Holder unless and to the extent such successor
or assign acquired Transfer Restricted Securities directly from such Holder.
(g) COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
-23-
<PAGE> 25
(h) HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO THE CONFLICT OF LAW RULES THEREOF.
(j) SEVERABILITY. In the event that any one or more of
the provisions contained herein, or the application thereof in any
circumstance, is held invalid, illegal or unenforceable, the validity, legality
and enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired
thereby.
(k) ENTIRE AGREEMENT. This Agreement together with the
other Operative Documents (as defined in the Purchase Agreement) is intended by
the parties as a final expression of their agreement and intended to be a
complete and exclusive statement of the agreement and understanding of the
parties hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein with respect to the registration rights granted by the
Company and Holding with respect to the Transfer Restricted Securities. This
Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
(l) THIRD PARTY BENEFICIARIES. Holders of Transfer
Restricted Securities are intended third party beneficiaries of this Agreement
and this Agreement may be enforced by such Persons.
-24-
<PAGE> 26
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
SFW ACQUISITION CORP.
By: /s/ MARK A. FLINT
-------------------------------------
Name: Mark A. Flint
Title: President
SFW HOLDING CORP.
By: /s/ MARK A. FLINT
-------------------------------------
Name: Mark A. Flint
Title: President
WASSERSTEIN PERELLA SECURITIES, INC.
By: /s/ JAMES C. KINGSBERY
---------------------------------
Name: James C. Kingsbery
Title: Treasurer
-25-
<PAGE> 1
EXHIBIT 10.93
May 22, 1995
EMPLOYMENT AGREEMENT
This Agreement dated as of May 22, 1995, by and between Terry Sharp
("Employee"), and DART GROUP CORPORATION, a Delaware corporation ("Employer").
W I T N E S S E T H:
WHEREAS, the parties hereto desire by this Agreement to provide for
the employment of Employee by Employer;
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained in this Agreement, and other good and valuable consideration, the
receipt, sufficiency and adequacy of which the parties conclusively acknowledge,
the parties hereto, intending to be legally bound, agree as follows:
1. EMPLOYMENT
(a) Duties. Employer hereby employs Employee, and Employee
accepts employment by Employer, as Vice President of Human Resources during the
Employment period (as defined in Section 2), with such duties, responsibilities
and authority as are commensurate with and appropriate to such position and as
are from time to time set forth in the bylaws of the Employer and otherwise
delegated to him or her by the Board of Directors of the Employer ("the Board of
Directors"), and shall report to the Chairman of the Board, the President, and
the Board of Directors. Employee agrees to observe and comply with the rules and
regulations of Employer as adopted by the Board of Directors respecting the
performance of his or her duties and to carry out and follow the orders,
policies and directions stated by Employer to him or her from time to time,
provided, however, that such regulations and directions are consistent with the
authority and responsibility of the position specified above.
(b) Full Time Employment. During the Employment period
Employee shall devote all his or her time and attention to his services for
Employer and shall diligently perform his or her duties and responsibilities
under this Agreement. Employee acknowledges that the proper performance of his
or her duties and responsibilities may require the rendering of services not
only during normal business hours, but over and beyond those hours as well.
(c) Place of Employment and Travel. Employee's principal place
of employment shall be at the executive offices of Employer in Landover,
Maryland. If Employer's executive offices are moved from Landover, Maryland,
Employee's principal place of employment shall be changed to the location where
such executive offices are moved. Employee agrees to travel for the performance
of his or her duties under this Agreement as Employer may request from time to
time. If Employers executive offices are relocated a distance greater than 100
miles from Landover, Maryland, Employee's relocation expenses will be paid by
Employer if Employee elects to relocate. At the Employee's option, if Employee
decides not to relocate, the relocation of the executive offices will be deemed
a termination without cause and the Employee will be eligible to receive
severance benefits as outlined in Section 7 (e) of this Agreement.
<PAGE> 2
2. TERM
The term of Employee's employment under this Agreement (the
"Employment Period") shall commence on June 19, 1995 and end on June 19, 1996.
However, Employer and Employee agree that the term of this agreement
automatically extends for an additional one (1) year at the end of each
Employment Period, unless Employee has been, or is being, terminated pursuant to
Section 7..
3. COMPENSATION
(a) Base Salary. Employee's annual base salary shall be Two
Hundred Thousand Dollars ($200,000.00), subject to an annual increase as
recommended to the Board of Directors by the Compensation Committee of the Board
of Directors following review and performance appraisal of Employee, and
following approval by the Board of Directors. Employee's base salary shall be
paid in accordance with Employer's normal payroll procedure.
(b) Withholding Tax. All compensation shall be subject
to the customary withholding tax and other employment taxes as required with
respect to compensation paid by a corporation to an employee.
4. STOCK OPTIONS
(a) Stock Options. Employee shall be eligible for the annual
award of stock options pursuant to the stock option plans under which the
Employee is currently a participant, as determined by the Board(s) of Directors
of the company(s), pursuant to the individual company(s) stock option plan(s).
(b) Exercise upon Certain Terminations of Employment. In the
event of the termination of Employee's employment hereunder for any reason other
than pursuant to Section 7 (d), Employee shall have the right to exercise, on or
before the effective date of the termination of this Agreement, any option which
has vested in Employee hereunder coincident with or prior to the effective date
of the termination of Employee's employment hereunder, subject to the other
terms and conditions of such option plan(s). In addition, in the event of the
termination of Employee's employment due to his or her death, the personal
representative of the Employee shall have the right to exercise any such option
within the later of (i) thirty (30) days notice of such right by employer to
employee's personal representative or (ii) sixty (60) days of the date of
Employee's death.
5. EMPLOYEE BENEFITS
During the Employment Period, Employer shall provide Employee
with the following benefits:
(a) Health Plan Coverage. Employer shall provide Employee with
health benefits, including major medical health insurance and Long Term
Disability (LTD), Accidental Death and Dismemberment (AD&D) and such other
benefits that are in effect at the time of this Agreement for the Employee and
his or her immediate family all in accordance with Employer's "Executive Health
Plan" as now in effect.
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<PAGE> 3
(b) Further Benefits. Employee shall, during the term of this
Agreement (and thereafter to the extent provided herein), be eligible to
participate in all applicable profit sharing and 401 (k) plans and insurance
benefits in effect for all salaried employees of the Employer, together with any
future improvements in such plans or benefits, subject to the eligibility
requirements of such plans. In addition, Employee shall be entitled during the
term of this Agreement, and thereafter to the extent provided for herein or in
any such plan, to receive such other and further benefits as shall be generally
made applicable to key executive employees of the Employer, and such additional
benefits, as may be granted from time-to-time by the Board of Directors, in it's
sole discretion.
(c) Vacation. Employee shall be entitled to paid vacation
leave of three (3) weeks in every year of employment, increased pursuant to
Employer's vacation plan. Any accrued vacation previously earned prior to the
date of this Agreement shall be permanently accrued as a benefit to the Employee
(grand fathered). Effective with this Agreement, all vacation earned subsequent
to the date of this Agreement shall be taken no later than by the end of the
following year or be forfeited, unless prior approval is granted by the
Compensation Committee of the Board of Directors.
(d) Business Expenses. Employer shall reimburse Employee
pursuant to Employer's policy of employee expense reimbursement of all items of
travel, entertainment and miscellaneous expenses reasonably incurred by Employee
on behalf of Employer and presented to Employer on the appropriate voucher.
(e) Automobile Allowance: Employer shall pay to Employee as
an automobile allowance the sum of Six Hundred Fifty Dollars ($650.00) per
month.
6. PROPRIETARY DATA
(a) Trade Secrets and Other Confidential Information. During
the Employment Period and for three (3) years thereafter, Employee shall keep
confidential any data, documents, or financial or other information of a trade
secret or confidential nature relating to Employer's past, present or future
operations (the "Proprietary Data"), shall not disclose the Proprietary Data to
any third parties other than officers, employees or agents of Employer on a
"need to know" basis, shall take all necessary steps to ensure that such
officers, employees or agents keep such Proprietary Data confidential, and shall
use the Proprietary Data only in connection with rendering services to Employer.
Upon the end of the Employment Period, Employee shall promptly return to
Employer the originals and all copies of the Proprietary Data in the possession
of Employee, and shall not use any of the Proprietary Data for his or her own
benefit or for the benefit of any third parties. The covenants contained in this
Section 6 (a) shall not apply to Proprietary Data which is or becomes a matter
of general knowledge in the industry otherwise than by a breach of the
provisions of this Section 6 (a).
(b) Injunctive Relief. Employee acknowledges that the
covenants contained in Sections 6 (a) are necessary for the protection of the
legitimate business interests of Employer and are reasonable limitations of
activities, that the rights of Employer are of a specialized and unique
character, and that immediate and irreparable damage will result to Employer if
Employee fails to or refuses to perform or comply with such covenants.
Therefore, notwithstanding any election by Employer to claim damages from
Employee as a result of any such failure or refusal, Employer may, in addition
to any other remedies and damages available, seek an injunction in a court of
competent
3
<PAGE> 4
jurisdiction to restrain any such failure or refusal (and no bond or other
security shall be required in connection therewith). In that connection,
Employee represents and warrants that his or her expertise and capabilities are
such that performance or compliance with the covenants (and the enforcement
thereof by injunction or otherwise) will not prevent him or her from earning a
livelihood. If a court refuses to enforce the covenants set forth in Section 6
(a) because they are found to be unreasonable, Employee and Employer agree to
abide by any lesser restrictions (for instance, as to duration and geographic
area) that are found to be reasonable.
7. TERMINATION
(a) Definition of Compensation: For purposes of termination,
compensation at the time of termination shall be deemed to include accrued sick
and vacation and salary through the effective date of termination, plus any and
all benefits normally granted by Employer to Employees upon termination.
(b) Death. The Employment Period shall forthwith terminate
upon the death of Employee, whereupon Employer shall not have any further
obligations or liability hereunder except to pay the Employee's estate the
unpaid portion, if any, of Employee's compensation accrued for the period up to
the date of Employee's death.
(c) Total Disability. In the event of the Total Disability (as
that term is hereafter defined) of Employee for a period of four (4) consecutive
calendar months, or for eighty percent (80%) or more of the normal working days
during a period of six (6) consecutive full calendar months, Employer shall have
the right to end the Employment Period by giving Employee ten (10) days' written
notice. Upon the expiration of such ten (10) day period, the Employment Period
shall end and Employer shall not have any further obligations hereunder except
to pay Employee the unpaid portion, if any, of Employee's compensation accrued
for the period up to the date of termination of Employee's employment. As used
in this Agreement, the term "Total Disability" shall mean a mental or physical
condition which, in the opinion of Employer and in the opinion of two consulting
physicians, renders Employee unable or incompetent to carry out his obligations
hereunder, provided, however that said disability must also be in accordance
with disability as defined in the Company's Long Term Disability coverage and,
therefore, employee shall be eligible for such Long Term Disability coverage.
(d) With Cause. Employer shall have the right to terminate the
employment of Employee at any time for cause (as hereinafter defined) upon at
least five (5) days' written notice setting forth the specific details of the
action or inaction of Employee which constitutes cause. For purposes of the
foregoing, "cause" shall mean (i) Employee's commission of any act which shall
be an offense involving moral turpitude under federal, state or local law; (ii)
Employee's conviction of a felony; (iii)Employee's material breach of any of the
terms of this Agreement; or (iv.) Employee's refusal to follow lawful and
reasonable directive(s) of the Board of Directors made in compliance with
Section 1(a) hereof. Upon such termination, Employer shall have no further
obligations or liability hereunder except to pay Employee the unpaid portion, if
any, of Employee's compensation accrued for the period up to the date of
termination of Employee's employment.
(e) Dissatisfaction by Employer Without Cause. If Employer is
at any time and for any reason dissatisfied with Employee's performance
hereunder, Employer shall have the right to terminate the employment of Employee
upon at least thirty (30) days written notice to Employee.
4
<PAGE> 5
If Employer shall terminate the employment of Employee pursuant to this Section
7 (e), the Employment Period shall end at the expiration of the notice period
and Employer shall not have any further obligations or liability hereunder
except (i) to pay Employee the unpaid portion, if any, of Employee's
compensation accrued for the period up to the date of termination of Employee's
employment, together with an additional amount one (1) year of base salary as
severance in accordance with Employer's normal payroll schedule, to commence
immediately following the effective date of the termination of Employee's
employment hereunder; and (ii) to pay to Employee in a lump sum an amount equal
to the number of days of accrued and unused vacation and sick leave times the
Employee's base salary in effect on the date of termination. If new employment
for the Employee commences at any time within the first year of Employee's
termination, the Employer shall remain obligated to make severance payments in
accordance with this section 7 (e). In addition, for purposes of the Employer's
medical, disability, and life insurance programs, Employee shall be considered
and deemed eligible for one (1) year following such termination or until
Employee attains the age of 65 or until similar benefits are paid or extended by
a new employer, whichever first occurs, to be eligible to participate in such
programs of the Employer on the same basis as other officers or employees.
Lastly, Employee shall be entitled to utilize the services of a professional out
placement service, the reasonable cost of which shall be borne by Employer.
(f) Dissatisfaction by Employee. If Employee at any time is
for any reason dissatisfied with the terms and conditions of his or her
employment hereunder, Employee shall have the right to terminate his employment
upon at least thirty (30) days written notice to Employer. If Employee shall
terminate his employment pursuant to this Section 7 (f), the Employment Period
shall end at the expiration of the notice period and Employer shall have no
further obligations or liability hereunder except to pay to Employee the unpaid
portion, if any, of Employee's compensation accrued for the period up to the
date of termination.
8. MISCELLANEOUS
(a) Governing Law. This Agreement shall be governed by
the laws of the State of Delaware applicable to agreements made by and to be
performed by Delaware corporations.
(b) Amendment of Agreement. No amendment or variation of the
terms of this Agreement, with or without consideration, shall be valid unless
made in writing and signed by the Employee and a duly authorized representative
of the Employer (other than Employee).
(c) Waiver of Conditions. Any waiver agreed to between
Employer and Employee of any provision should not be construed as a general
waiver of the provision, or waiver of any other provision of this Agreement.
(d) Entire Agreement. This Agreement together with that
certain Addendum to Employment Agreement and that certain letter agreement, each
dated May 22, 1995, between employer and employee contains the entire agreement
between then parties and supersedes all prior oral and written agreements,
understandings, commitments, and practices between the parties, whether or not
fully performed by Employee before the date of this Agreement.
(e) Headings. The section headings of this Agreement are for
reference purposes only and are to be given no effect in the construction or
interpretation of this Agreement.
5
<PAGE> 6
(f) Notice. All notices, requests and other communications
under this Agreement shall be in writing and shall be deemed given when
delivered personally or upon receipt when sent by an express mail service,
provided that in each case a copy is mailed by first-class, registered mail,
return receipt requested, addressed as follows (or as may otherwise have been
specified by the intended recipient by notice as herein provided)
If to Employee:
Mr. Terry Sharp
10930 Woodland Pond Parkway
Chesterfield, Virginia 23838
If to Employer:
Chief Executive Officer
Dart Group Corporation
3300 75th Avenue
Landover, Maryland 20785
(g) Severability. If any provision of this Agreement is held
invalid or unenforceable, the remainder of this Agreement shall nevertheless
remain in full force and effect. If any provision is held invalid or
unenforceable with respect to particular circumstances, it shall nevertheless
remain in full force and effect in all other circumstances.
(h) Merger or Consolidation. This Agreement shall not be
terminated by any merger, consolidation, transfer of any or all of the assets of
the Employer or voluntary or involuntary dissolution of the Employer. In the
event of a merger or consolidation or upon the transfer of assets, the surviving
or resulting corporation or the transferee of the Employer's assets shall be
bound by and shall have the benefit of the provisions of this Agreement, and the
Employer shall take all actions necessary to ensure that such corporation or
transferee is bound by the provisions of this Agreement. This Agreement shall be
binding upon the Employer notwithstanding any change in the composition of the
Board of Directors or change in ownership of the Employer.
(i) No Covenants. Employee hereby represents and warrants that
he or she is not subject to or bound by any employment contract, restrictive
covenant or other agreement or any order or decree that prevents him or her from
entering into this Agreement or from performing his or her responsibilities as
contemplated by this Agreement.
(j) Attorney's Fees. If a dispute arises with respect to the
Employer's obligations or the Employee's rights under this Agreement, or if any
legal proceedings shall be brought to enforce or interpret any provisions
contained herein, or to recover damages for breach hereof, or in the event of
any other litigation involving this Agreement, Employee shall recover from the
Employer all reasonable attorney's fees and costs and disbursements incurred as
a result of such dispute. In addition, Employee shall recover from Employer all
reasonable attorney's fees and costs and disbursements incurred as a result of
any legal proceeding filed by employee, unless the Employee's pursuit of legal
proceedings is deemed frivolous or in bad faith as determined by the court in
any such action.
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<PAGE> 7
(k) Assignment; Binding Effect. This Agreement shall be
binding upon, and shall inure to the benefit of, and be enforceable by , the
parties hereto and their respective successors and assigns, provided, that (i)
this Agreement is a personal service agreement and no right hereunder may be
assigned by Employee, except that it shall inure to the benefit of and be
enforceable by the Employee's personal or legal representatives, executors or
administrators; and (ii) unless Employer shall have complied with Section 8 (h)
hereof, no right hereunder may be assigned or transferred by Employer by
operation of law or otherwise. Any purported assignment or transfer in violation
of this Section 8 (k) shall be null and void.
IN WITNESS WHEREOF, this Agreement has been signed by a duly
authorized officer of Employer and by Employee as of the date first
above-written
DART GROUP CORPORATION
BY: /S/HERBERT H. HAFT
------------------------------------
HERBERT H. HAFT,
Chairman and Chief Executive Officer
/S/ TERRY SHARP
--------------------------
Signature of Employee
TERRY SHARP
7
<PAGE> 8
ADDENDUM TO
EMPLOYMENT AGREEMENT
This Addendum to Employment Agreement, dated as of May 22, 1995, by and between
Terry Sharp ("Employee"), and Dart Group Corporation, a Delaware Corporation
("Employer").
WITNESSETH:
WHEREAS, Employee and Employer are contemporaneously herewith entering into an
Employment Agreement (the "Agreement") and wish to provide for the supplemental
terms set forth herein;
NOW THEREFORE, in consideration of the mutual covenants and agreements contained
in this Agreement, and other good and valuable consideration, the receipt,
sufficiency and adequacy of which the parties conclusively acknowledge, the
parties hereto, intending to be legally bound, agree as follows:
1. Compensation
(a) Signing Bonus. Upon commencement of Employee's employment
under the Agreement, Employer shall pay Employee as
compensation a bonus of Twenty-Five Thousand ($25,000).
(b) Annual Bonus. Employee shall be entitled to receive at the end
of each year a bonus of up to 15% of his base salary, as
determined by the Board of Directors based upon Employee's
performance of specified performance objectives for the year;
provided, that for the year ending December 31, 1995,
Employee's annual bonus shall not be less than $15,000.
2. Medical Insurance
During any waiting period, if any (including, without limitation, any
waiting period due to any pre-existing condition), prior to the
effectiveness of any medical health insurance coverage pursuant to
Section 5(a) of the Employment Agreement, Employer shall reimburse
Employee for the cost of any "COBRA" coverage necessary during such
waiting period. Such reimbursement shall be "grossed up" such that the
net after tax amount of such reimbursement equals the cost to Employee
of such COBRA coverage. The medical health insurance, long term
disability, accidental death and dismemberment and other insurance
plans provided by Employer for Employee shall at all times at a minimum
provide the coverage to Employee equal to the coverage then provided by
Employer's benefit plans to its other senior executive officers.
3. Stock Options
(a) If Employee remains employed by Employer, then Employer shall
issue to Employee, not later than December 31 in each of 1995,
1996 and 1997, options to
8
<PAGE> 9
purchase not fewer than Three Hundred Seventy (370) shares of
Employer's Class A Common Stock, which options shall be fully
vested upon the date of grant and shall have an exercise price
equal to the fair market value of the stock on the date of
grant.
(b) The number of shares specified in the foregoing Section 3(a)
and Section 4(a) of the Employment Agreement shall be
appropriately adjusted in the event of any stock split,
reverse stock split, or other change in the capital structure
of the Company.
4. Relocation
Employer will pay for the following expenses relating to relocation
from Richmond, Virginia to Maryland in order to work at Dart Group's
Landover, Maryland headquarters.
(a) Packaging and moving your household goods (and storage, if
necessary) by a reputable moving firm of your choice.
(b) The following costs relating to the purchase of a new home in
Maryland:
(i) reasonable legal fees;
(ii) title search and insurance fees;
(iii) applicable recordation and transfer taxes;
(iv) up to one loan origination point;
(v) loan discount points, but only to the extent
necessary to secure an 80%, 30- year mortgage at a
fixed interest rate of 8.5%
(vi) surveyor expenses;
(vii) home inspection contractor expenses; and
(viii) other reasonable and customary Buyer's closing costs.
(c) The following costs related to the sale of your existing home
in Virginia:
(i) reasonable legal fees;
(ii) customary Seller realty fees;
(iii) grantor taxes;
(iv) termite inspection report fees; and
(v) other reasonable and customary Seller's closing
costs.
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<PAGE> 10
(d) To the extent you are required to own two homes
simultaneously:
(i) we shall pay, for a period not to exceed six months
(subject to extension as approved by our Executive
Committee), the lower of the two utilities, real
estate taxes, homeowner's insurance premiums,
mortgages, neighborhood assessment fees, reasonable
ground and house maintenance costs and other
reasonable carrying costs of the second home;
(ii) we will provide you with a bridge loan not to exceed
$80,000 at a rate of prime plus one percent. This
loan is to be repaid from the proceeds of the sale of
your current residence and is subject to execution of
customary loan agreements.
(e) Up to six months of interim living expenses related to a
corporate apartment (not to exceed $1,700 per month) subject
to extension or increase as approved by our Executive
Committee.
(f) To the extent your tax advisor advises you that any of the
foregoing are not deductible moving expenses, then we will pay
you as a "gross up" correction an amount in cash equal to 87%
of such non-deductible expenses (in addition to paying such
expense for you) as additional compensation.
IN WITNESS WHEREOF, this Agreement has been signed by a duly authorized officer
of Employer and by Employee as of the date first above-written.
DART GROUP CORPORATION
By: /S/HERBERT H. HAFT
-------------------------------
Herbert H. Haft, Chairman and
Chief Executive Officer
/S/TERRY SHARP
-------------------------------
Signature of Employee
TERRY SHARP
10
<PAGE> 1
EXHIBIT 10.94
April 21, 1997
Mr. Herbert H. Haft
2501 30th Street, N.W.
Washington, D.C. 20008
Dear Mr. Haft:
This letter sets forth the settlement terms to which Dart Group
Corporation ("Dart") is prepared to agree in principle, subject to the
negotiation and execution of a definitive settlement agreement satisfactory to
Dart in its sole discretion. Dart's willingness to enter into an agreement on
these terms is also subject to its receipt of advice from Wasserstein Perella &
Co. satisfactory to Dart that the proposed transaction is fair to Dart and that
adequate financing will be available at closing.
1. PAYMENTS TO HERBERT HAFT. Total payments to Herbert Haft of
approximately $42,000,000, as follows:
a. $11,619,274 of escrowed funds tendered to Herbert Haft
10/6/95 in repayment of Ronald Haft's 1993 note to
Herbert Haft. Herbert Haft also will receive $700,000 of
accrued interest in escrow account, which will require
the agreement of Ronald Haft pursuant to the Amended
HHH/RSH Settlement (as defined below).
b. $11,120,000 additional cash at closing.
c. $9,250,000 on 1/31/98, or upon earlier sale for cash
(whether through an asset sale, stock sale, merger or
other similar transaction) of Shoppers Food Warehouse
Corp. ("Shoppers"), in whole or in substantial part, or
of Trak Auto Corporation ("Trak") or Crown Books
Corporation ("Crown") in whole. Simple interest on
unpaid amount @ 5% beginning the later of 8/1/97 or the
closing date, payable monthly.
d. $9,300,000, payable in three installments of $3,100,000
each on the first, second and third anniversaries of
closing (with simple interest on unpaid amount @ 5% from
the later of 8/1/97 or the closing date payable with
principal installments), subject to acceleration of any
unpaid installment(s) upon the sale for cash (whether
through an asset sale, stock sale, merger or other
similar transaction) of Shoppers, in whole or in
substantial part, or of Trak or Crown in whole.
Alternatively,
<PAGE> 2
Mr. Herbert H. Haft
April 21, 1997
Page 2
Dart may elect to pay in cash at closing an amount equal
to the present value (calculated at a 10% discount rate)
of these $9,300,000 deferred payments.
e. Dart's full-recourse payment obligations set forth in
subsections 1(c) and 1(d) hereof shall be secured by a
first priority pledge (pari passu with pledge to Gloria,
Robert and Linda Haft) of Trak shares owned by Dart.
f. The definitive settlement agreement will provide for the
allocation of the payments to Herbert Haft set forth in
subsection 1(d) hereof (i) to the May 1997 bonus
provided for under his employment agreement and (ii) the
balance to the termination of any further obligations of
Dart under such employment agreement. Dart will
allocate the other payments to Herbert Haft as Dart
determines to be appropriate.
g. At the closing, Herbert Haft will receive general
releases from Dart, Shoppers, Trak, Crown and Total
Beverage, and their respective affiliates, directors and
officers.
2. TRANSFERS AND BENEFITS TO DART.
a. At closing, Herbert Haft will transfer to Dart 122,747
Class A shares, free of liens, including shares now
pledged for a loan by First Union, and will also
transfer to Dart his claim to all Class A shares that
are subject to conflicting ownership claims among
members of the Haft family.
b. At closing, Herbert Haft will relinquish all options to
purchase stock of Dart, Trak and Crown, as listed on
Schedule I, and (except as provided under item 4(h)
below) any claims to co-investment or other rights with
respect to Total Beverage, Shoppers, Dart/SFW Corp. or
SFW Holding Corp.
c. Herbert Haft's employment agreement will terminate
effective as of closing, with no further obligation by
Dart thereunder, and Herbert Haft will resign all
director and officer positions with Dart and its
affiliates. Prior to closing Dart will continue Herbert
Haft's base salary and benefits provided for in his
employment agreement (including, without limitation,
401-k), but will not be obligated to pay any bonus.
Herbert Haft will be subject to the same
<PAGE> 3
Mr. Herbert H. Haft
April 21, 1997
Page 3
non-interference covenants that Ronald Haft agreed to in
the 10/6/95 settlement.
d. From the date of this letter, Herbert Haft will
cooperate fully and promptly (including voting in favor
of) and not interfere with the amended plans of
reorganization for the 75th Avenue/wooded lot and
Bridgeview warehouses approved by Ronald Haft and Dart,
which may become effective prior to the closing of the
settlement. At closing, Herbert Haft will transfer to
Dart all of his right, title and interest in any Dart
warehouse/office building properties (i.e., Pennsy I,
II, III and III addition and Ontario, Cal.; 75th
Avenue/wooded lot and Bridgeview, Ill., if plans of
reorganization have not theretofore become effective)
and will cooperate fully and promptly with the
implementation of Dart's 10/6/95 settlement with Ronald
Haft with respect to these properties. Dart will at
closing receive a power of attorney from Herbert Haft
for this limited purpose, which power of attorney will
be in form and substance mutually satisfactory to both
Dart and Herbert Haft.
e. At closing, Herbert Haft's claim to a proxy to vote Dart
Class B shares will be extinguished.
f. At the closing, Herbert Haft will deliver a general
release to Dart, Shoppers, Trak, Crown, Total Beverage,
and all of their respective affiliates, directors and
officers.
3. CONDITIONS.
a. Dart's and Herbert Haft's obligation to close the
settlement will be subject to the simultaneous closing
of a comprehensive settlement between Dart and Gloria,
Robert and Linda Haft (the "GRL Settlement") and a
supplemental settlement between Dart and Ronald Haft
(the "Supplemental RSH Settlement"), on terms
satisfactory to the Board of Directors of Dart.
b. From and after the date of this letter, Herbert Haft
will agree not to object to or interfere in any way
with, and will agree to provide any consents that may be
reasonably requested by Dart in connection with any
financing, stock sale, asset sale or other similar
transactions by Dart and/or any of its subsidiaries
after approval by a majority of the
<PAGE> 4
Mr. Herbert H. Haft
April 21, 1997
Page 4
members of the Board of Directors of Dart, Shoppers,
Trak or Crown, provided that such transaction shall not
close before May 15, 1997.
c. Dart acknowledges that the implementation of the Amended
HHH/RSH Settlement will require that Dart make a secured
$10 million loan (guaranteed by Ronald Haft) to the
"Retained Partnership," which will own and pledge 100%
of the equity interests in the Sully Plaza, Maryland
City and Rolling Valley shopping centers (the "$10
Million Loan"). A 50% interest in Shoppers'
headquarters building in Lanham, Maryland will also be
pledged as collateral. Dart's obligation to make the
$10 Million Loan will be subject to the negotiation by
Dart and Ronald Haft of definitive loan terms and
documentation satisfactory to Dart in its sole
discretion and the completion by Dart of due diligence.
4. MISCELLANEOUS NON-MATERIAL ITEMS. The following terms shall be
deemed non-material to the essence of the settlement, so any
party's failure of performance thereof (which such failure
shall be a basis for liability or specific performance) will
not excuse the other party's performance of any other
obligation under the settlement agreement.
a. Holocaust Museum plaque would read "Dart Group
Corporation, Herbert H. Haft, Chairman" (if acceptable to
museum).
b. Dart will make 4 Redskins tickets available for purchase
(at face price) by Herbert Haft for each home game. The
tickets will be for contiguous seats comparable in
quality to Row 19 (seats 16-19) at RFK Stadium. If
Redskins' policy permits Dart to transfer the right to
purchase such tickets to Herbert Haft, Dart will do so
promptly, without any charge to Herbert Haft except to
the extent the Redskins impose a charge for such
transfer.
c. Dart will transfer clean title to the three cars used by
Herbert Haft to him for $62,000, with $15,000 of that
amount to be paid by Robert Haft.
d. Herbert Haft will be entitled to his furniture, art and
memorabilia (to be identified in a schedule attached to
the definitive settlement agreement at the time it is
signed) at Dart's headquarters,
<PAGE> 5
Mr. Herbert H. Haft
April 21, 1997
Page 5
subject to any lien of First Union or other creditors of
Herbert Haft. Dart will not be responsible for
packing/moving costs, towards which Robert Haft has
offered to pay $5,000.
e. Dart will not object to Herbert Haft, at his own
expense, using Arthur Andersen, LLP, as accountants for
tax return preparation services immediately upon signing
and for any purpose after closing.
f. Subject to review of policy terms, Dart will permit
Herbert Haft to continue preexisting life insurance
policies on his life at his expense. The cash value of
the policies and all death benefits will be pledged
(subject to preexisting loans) as collateral for
obligation to repay Dart for all premiums paid on the
policies. Herbert Haft will be responsible for
outstanding policy loans and will be prohibited from
taking new policy loans until Dart is fully paid for
premiums. If possible, the Phoenix Life policy will be
reinstated and brought to date at Herbert Haft's
expense.
g. Dart will consent to Robert Haft's assignment to Herbert
Haft of his co-investment right with respect to Total
Beverage under the U.S. District Court ruling, provided
Herbert Haft must exercise or forego such co-investment
right within six months of the closing. However, Dart
will be entitled to extinguish Herbert Haft's
co-investment right on 30 days prior written notice
(within which 30-day period HHH will continue to be
entitled to exercise the co-investment right), at any
time prior to Herbert Haft's exercise of such right, if
Dart develops a bona fide purchaser, merger partner or
joint venture partner for all or part of Total Beverage.
h. Dart will reimburse Herbert Haft up to $65,000 (and
Robert Haft has offered to reimburse Herbert Haft up to
another $25,000) for reasonable fees of Davis Polk for
reviewing SEC filings and assisting Herbert Haft with
Board meetings of Dart and affiliates since September
1994.
i. Subject to prior due diligence satisfactory to Trak,
Crown and Shoppers (which will be completed prior to
closing), at closing Dart will cause them to deliver
standard tenant's estoppel/no controversy certificates
regarding their respective leases at
<PAGE> 6
Mr. Herbert H. Haft
April 21, 1997
Page 6
the Fair City and Landmark centers. At closing, Trak,
Crown and Shoppers will receive standard landlord's
estoppel/no controversy certificates regarding their
leases at the Fair City and Landmark centers.
5. OTHER.
a. The settlement agreement will confirm that Dart's
existing obligations under its Articles, Bylaws and
Delaware law to indemnify Herbert Haft against
liabilities for actions relating to his positions and
responsibilities as an officer and director of Dart and
its subsidiaries will continue after the closing,
provided that such confirmation will explicitly not
waive any defenses Dart or any of its subsidiaries might
otherwise have to any such indemnification claim. Dart
will have no ongoing requirement to include Herbert Haft
within the coverage of Dart's directors and officers
liability insurance.
b. The closing of the settlement will occur upon Final
Court Approval, subject to delay of up to 90 days after
Final Court Approval to enable Dart to arrange financing
for the settlement and for the GRL Settlement, the
Supplemental RSH Settlement and the $10 Million Loan.
"Final Court Approval" will include, without limitation,
(1) final and non-appealable action by the Delaware
Court of Chancery or the Delaware Supreme Court
approving all of the terms of the settlement,
terminating the pending Kahn and Lou shareholder
derivative actions and approving the 10/6/95 settlement
between Dart and Ronald Haft and the Supplemental RSH
Settlement, and (2) final and non-appealable action by
the U.S. Bankruptcy Court approving the effectiveness
of Chapter 11 plans of reorganization for the Combined
Properties entities.
c. [Non-material paragraph omitted]
<PAGE> 7
Mr. Herbert H. Haft
April 21, 1997
Page 7
d. Herbert Haft will agree that in the event of a
liquidating distribution by Dart at any time, Dart may
elect to cap any and all actual and contingent
liabilities that it or any of its direct or indirect
subsidiaries or any of their respective affiliates may
have to him (e.g., indemnification) by the establishment
of a $1.0 million reserve fund for such purpose,
provided that any unused portion of such reserve fund
may be withdrawn by Dart (or any liquidating trustee
therefor) or distributed to its shareholders at any time
after December 31, 2002.
e. The obligations of Dart under the settlement will not be
obligations of any of Dart's direct or indirect
subsidiaries.
f. Both at the time the definitive settlement agreement is
executed and delivered and at the time of the closing,
both parties will sign an acknowledgment that they have
read each of the documents they have signed, that they
have been fully represented by counsel in connection
with the transaction, and that they will not take the
position at any time that any of the documents they have
signed in connection with the settlement were not in
keeping with their understanding or do not reflect their
agreement.
g. Dart and Herbert Haft will be entitled to specific
performance of the settlement agreement.
h. The definitive settlement agreement will provide for the
suspension of litigation between Dart and Herbert Haft
pending closing of the settlement or termination of the
settlement agreement.
6. TERMINATION.
a. The parties acknowledge that the various dates set forth
herein assume the execution and delivery of a definitive
settlement agreement between Dart and Herbert Haft by
May 15, 1997.
b. The parties expect that definitive agreements for the
GRL Settlement, the Supplemental RSH Settlement,
<PAGE> 8
Mr. Herbert H. Haft
April 21, 1997
Page 8
the $10 Million Loan, the Amended HHH/RSH Settlement and
the Amended HHH/GRL Settlement will be entered into
prior to or simultaneously with the definitive
settlement agreement between Dart and Herbert Haft.
c. Either party may terminate the settlement agreement
prior to closing if Final Court Approval has not been
obtained by November 30, 1997.
If you are prepared to proceed with the negotiation of a definitive
settlement agreement reflecting the foregoing terms, please return a copy of
this letter with your signature in the space provided below.
This letter will terminate upon the earlier of the execution and
delivery by Dart and Herbert Haft of a definitive settlement agreement or May
9, 1997. If this agreement terminates without the execution and delivery of a
definitive settlement agreement, neither party shall have any liability to the
other for breach hereof; provided, however, that if the failure of either party
to proceed in good faith to enter into a settlement agreement consistent with
this letter causes injury to the other party, such party may seek actual
damages not to exceed $3,000,000 in the aggregate. Neither this letter nor any
party's breach hereof shall give rise to any liability to any third party.
This letter (exclusive of any drafts hereof or of any other documents)
sets forth the entire understanding of the parties with respect to the subject
matter hereof. This letter may be amended only by a written document signed by
both Dart and Herbert Haft.
Very truly yours,
DART GROUP CORPORATION
By: /s/ Larry G. Schafran
-------------------------------
Larry G. Schafran
Chairman, Executive Committee
of the Board of Directors
I agree to the foregoing, including and subject to the qualifications set forth
in the penultimate paragraph.
/s/ Herbert H. Haft
- ------------------------
Herbert H. Haft
<PAGE> 1
Exhibit 11
Statement on Computation of
Per Share Earnings
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended January 31,
-----------------------------------
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
Weighted average common
shares outstanding
during the year 2,076 1,862 1,758
Effect of dilutive stock
options; net of shares
assumed repurchased at
average market - - 113
-------- -------- --------
Weighted average common
share and common
share equivalents 2,076 1,862 1,871
======== ======== ========
Net Loss as reported $(16,693) $(13,424) $(73,792)
======== ======== ========
Adjustment for dilative effect
of subsidiary stock options (1,422) (1,249) (244)
-------- -------- --------
Net (Loss) Income Per Earnings
Per Share Calculation $(18,115) $(14,673) $(74,036)
======== ======== ========
Earnings per share:
Net Loss as reported $ (8.73) $ (7.88) $ (39.57)
======== ======== ========
</TABLE>
(1) Not dilutive.
See Note _ to the Consolidated Financial Statements regarding the earnings per
share calculation.
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF DART GROUP CORPORATION
<TABLE>
<CAPTION>
State of Incorporation
<S> <C> <C>
Trak Auto Corporation (67%) Delaware
Crown Books Corporation (51%) Delaware
Shoppers Food Warehouse Corp. (100%) Delaware
Dart Delaware Corporation (100%) Delaware
SFW Holding Corp. (100%) Delaware
Discount Books East, Inc. (100%) Delaware
Trak Auto East Holding Corporation (100%) Delaware
Dart Group Financial Corporation (100%) Delaware
Cabot-Morgan Real Estate Company (100%) Delaware
Trak Corporation (100%)(1) Delaware
Super Trak Corporation (100%)(1) Delaware
Trak DHC Corporation (100%)(1) Delaware
Riverdale Trak Acquisition, Inc. (100%)(1) Delaware
Crown Books East Corporation (100%)(2) Delaware
Crown Books West Corporation (100%)(2) Delaware
Crown Books National (100%)(2) Delaware
Crown DHC Corporation (100%)(2) Delaware
Super Crown Books Corporation (100%)(2) Delaware
Total Beverage Corp. (100%) Delaware
Total Beverage G.B. (100%)(3) Delaware
Shoppers Food Warehouse DC Corp. (100%)(4) District of Columbia
Shoppers Food Warehouse MD Corp. (100%)(4) Maryland
Shoppers Food Warehouse VA Corp. (100%)(4) Virginia
Jumbo Produce, Inc. (100%)(4) District of Columbia
SFW Licensing Corp. (100%)(4) Delaware
</TABLE>
(1) Wholly-owned by Trak Auto Corporation
(2) Wholly-owned by Crown Books Corporation.
(3) Wholly-owned by Total Beverage Corp.
(4) Wholly-owned by Shoppers Food Warehouse Corp.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into Dart Group Corporation's
previously filed registration statements on Forms S-8, File Number 33-57010 and
File Number 33-12149.
ARTHUR ANDERSEN LLP
Washington, D.C.
April 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 39,658
<SECURITIES> 5,714
<RECEIVABLES> 14,699
<ALLOWANCES> 0
<INVENTORY> 218,619
<CURRENT-ASSETS> 296,261
<PP&E> 159,920
<DEPRECIATION> 80,849
<TOTAL-ASSETS> 450,172
<CURRENT-LIABILITIES> 205,999
<BONDS> 30,726
0
0
<COMMON> 2,462
<OTHER-SE> 115,894
<TOTAL-LIABILITY-AND-EQUITY> 450,172
<SALES> 663,818
<TOTAL-REVENUES> 668,089
<CGS> 520,746
<TOTAL-COSTS> 520,746
<OTHER-EXPENSES> 168,752
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,993
<INCOME-PRETAX> (28,402)
<INCOME-TAX> (216)
<INCOME-CONTINUING> (16,693)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,693)
<EPS-PRIMARY> (8.73)
<EPS-DILUTED> (8.73)
</TABLE>
