<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED July 31, 1997
-------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
--------- ----------
Commission file number 0-1946
------
DART GROUP CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 53-0242973
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 75th Avenue, Landover, Maryland, 20785
-------------------------------------------
(Address of principal executive offices)
(Zip Code)
(301) 226-1200
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
At September 12, 1997, the registrant had 1,764,956 shares outstanding of Class
A Common Stock, $1.00 par value per share, and 327,270 shares outstanding of
Class B Common Stock, $1.00 par value per share. The Class B Stock is the only
voting stock and is not publicly traded.
1
<PAGE> 2
This Amendment No. 1 amends the registrant's Quarterly Report on Form 10-Q (the
"Form 10-Q") for the three months ended July 31, 1997 which was filed on
September 15, 1997. All capitalized terms not otherwise defined herein shall
have the meaning assigned to such terms in the Form 10-Q.
Item 1 (Financial Statements) and Item 2. (Management Discussion and Analysis of
Financial Condition and Results of Operations) are hereby amended to present a
change in depreciation method as a change in accounting principle for Shoppers
Food Warehouse Corporation effective as of the Acquisition date as follows:
2
<PAGE> 3
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended July 31, Ended July 31,
--------------------- --------------------
1997 1996 1997 1996
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Sales $374,217 $163,798 $738,721 $320,326
Other interest and other income 1,896 1,333 2,916 2,741
-------- -------- -------- --------
376,113 165,131 741,637 323,067
-------- -------- -------- --------
Expenses:
Cost of sales, store occupancy
and warehousing 293,159 128,805 575,047 250,611
Selling and administrative 77,343 35,102 149,574 69,308
Depreciation and amortization 7,165 3,499 13,628 6,930
Interest 6,059 2,161 12,837 4,336
Closed store reserve (1,500) - (1,500) -
-------- -------- -------- --------
382,226 169,567 749,586 331,185
-------- -------- -------- --------
Loss before income taxes, equity
in affiliate,
minority interests,
extraordinary item and
cumulative effect of
Shoppers Food accounting change (6,113) (4,436) (7,949) (8,118)
Income taxes (benefit) (1,173) (871) (2,753) (1,217)
-------- -------- -------- --------
Loss before equity in affiliate,
minority interests,
extraordinary item and
cumulative effect of
Shoppers Food accounting change (4,940) (3,565) (5,196) (6,901)
Equity in affiliate - 2,740 - 5,124
Minority interests in
loss of consolidated
subsidiaries 2,302 527 3,801 1,012
-------- -------- -------- --------
Loss before
extraordinary item and
cumulative effect of Shoppers
Food accounting change (2,638) (298) (1,395) (765)
Extraordinary item:
Loss on early extinguishment
of debt, net of income taxes
of $2,150 (3,126) - (3,126) -
Cumulative effect of Shoppers
Food accounting change, net
of income taxes of $1.344 - - 1,729 -
-------- -------- -------- --------
Net loss $ (5,764) $ (298) $ (2,792) $ (765)
======== ======== ======== ========
</TABLE>
(continued on next page)
3
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DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended July 31, Ended July 31,
--------------------- --------------------
1997 1996 1997 1996
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Loss per share:
Loss before extraordinary item
and cumulative effect of
change in accounting
principle $ (1.36) $ (.30) $ (.83) $ (.66)
Extraordinary item:
Loss on early extinguishment
of debt, net (1.40) - (1.40) -
Cumulative effect of change
in Shoppers Food accounting
principle, net - - .78 -
-------- -------- -------- -------
Net loss per share $ (2.76) $ (.30) $ (1.45) $ (.66)
======== ======== ======== =======
Weighted average shares
outstanding 2,090 2,074 2,089 2,074
======== ======== ======== =======
Dividends per share of Class
A Common Stock $ .033 $ .033 $ .066 $ .066
======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
July 31, January 31,
ASSETS 1997 1997
---------- -----------
<S> <C> <C>
Current Assets:
Cash $ 15,486 $ 12,382
Short-term instruments 31,524 27,276
Marketable debt securities 29,046 5,714
Restricted Proceeds 50,218 -
Accounts receivable 16,468 14,699
Income taxes refundable 4,445 3,802
Merchandise inventories 251,645 218,619
Deferred income tax benefit 7,765 7,324
Other current assets 7,848 6,445
-------- --------
Total Current Assets 414,445 296,261
-------- --------
Property and Equipment, at cost:
Furniture, fixtures and equipment 173,131 104,541
Buildings and leasehold improvements 33,588 29,873
Land 1,034 1,034
Property under capital leases 31,859 24,472
-------- --------
239,612 159,920
Accumulated depreciation and amortization 123,160 80,849
-------- --------
116,452 79,071
-------- --------
Share of equity in Shoppers Food
Warehouse Corp. - 52,802
-------- --------
Goodwill, net of accumulated amortization
of $2,357 and $271 148,755 1,890
-------- --------
Deferred income tax benefit 18,036 14,375
-------- --------
Other assets 23,073 5,773
-------- --------
Total Assets $720,761 $450,172
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
5
<PAGE> 6
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
July 31, January 31,
LIABILITIES 1997 1997
---------- -----------
<S> <C> <C>
Current Liabilities:
Current portion of mortgages payable $ 193 $ 1,106
Accounts payable, trade 132,679 102,942
Income taxes payable 2,429 3,322
Accrued salaries and employee benefits 26,568 18,766
Accrued taxes other than income taxes 11,461 9,738
Current portion of reserve for closed
facilities and restructuring 6,800 5,701
Other accrued liabilities 69,893 64,215
Current portion of obligations under capital leases 209 209
-------- --------
Total Current Liabilities 250,232 205,999
-------- --------
Mortgages payable 322 353
-------- --------
Crown Books' credit facility 16,487 -
-------- --------
Obligations under capital leases 42,041 30,373
-------- --------
Reserve for closed facilities and restructuring 25,117 27,341
-------- --------
Deferred income taxes 4,845 -
-------- --------
Shoppers Food Senior Notes due 2004 200,000 -
-------- --------
Other Liabilities 2,068 -
-------- --------
Commitments and Contingencies
Minority interests 63,955 67,750
-------- --------
Stockholders' Equity
Class A common stock, non-voting, par value $1.00
per share; 3,000,000 shares authorized; 1,964,858
and 1,962,403 shares issued, respectively 1,965 1,962
Class B common stock, voting par value $1.00 per
share; 500,000 shares authorized and issued 500 500
Paid-in capital 79,033 78,841
Notes receivable-shareholder (65,130) (65,130)
Unrealized gains (losses) on short-term investments 30 (22)
Retained earnings 101,333 104,242
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 115,694 118,356
-------- --------
Total Liabilities and Stockholders' Equity $720,761 $450,172
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
6
<PAGE> 7
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended July 31,
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (2,792) $ (765)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 12,685 6,930
Loss on early extinguishment of debt 5,276 -
Amortization of deferred financing costs 943 -
Cumulative effect of Shoppers Food accounting
change ( 1,729) -
Provision for closed facilities and restructuring (885) 966
Loss on disposal of fixed assets 269 -
Interest in excess of capital lease payment 378 -
Equity in affiliate - (5,124)
Changes in assets and liabilities net of effects of
consolidation of Shoppers Food Warehouse Corp.:
Accounts receivable 7,475 (4,137)
Income taxes refundable or prepaid 1,413 (3,050)
Merchandise inventories (3,116) (13,052)
Other current assets (1,403) (4,133)
Deferred income tax benefits (3,456) (1,047)
Other assets 530 116
Accounts payable, trade (12,093) 16,493
Income taxes payable (2,844) 2,351
Accrued salaries and employee benefits 2,916 1,189
Accrued taxes other than income taxes (1,180) 978
Other current liabilities (3,581) (672)
Other liabilities (380) -
Reserve for closed facilities (1,515) (3,565)
Minority interests (3,801) (881)
--------- ---------
Net cash used for operating activities $ (6,890) $ (7,403)
--------- ---------
Cash Flows from Securities and Capital
Investment Activities:
Capital expenditures $ (11,213) $ (7,997)
Proceeds from sale of Cabot-Morgan Real Estate
joint venture - 2,000
Cash and cash equivalents of Shoppers Food
Warehouse Corp. at February 1, 1997 13,739 -
Acquisition of 50% equity in Shoppers Food
Warehouse Corp. (210,000) -
Purchases of United States Treasury Bills (5,960) (40,165)
Disposition of United States Treasury Bills 987 6,288
Maturities of United States Treasury Bills - 28,523
Purchases of marketable debt securities (18,506) -
Disposition of marketable debt securities 90,558 417
</TABLE>
(Continued on next page)
7
<PAGE> 8
DART GROUP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended July 31,
----------------------
1997 1996
--------- ----------
<S> <C> <C>
Maturities of marketable debt securities 4,560 5,894
--------- ---------
Net cash used for securities and capital
investment activities $(135,835) $ (5,040)
--------- ---------
Cash Flows from Financing Activities:
Cash dividends $ (117) $ (116)
Proceeds from Note Receivable - Ronald S. Haft - 11,621
Net borrowing under Crown Books' credit facility 16,487 -
Payments for deferred financing and
acquisition costs (16,003) -
Proceeds from Increasing Rate Notes Due 2000 140,000 -
Redemption of Increasing Rate Notes Due 2000 (140,000) -
Proceeds from issuance of Senior
Notes dues 2004 200,000 -
Funds restricted for settlements (50,218) -
Proceeds from stock options exercised 195 717
Principal payments under mortgage
obligations (162) (148)
Principal payments under capital
lease obligations (105) (50)
-------- --------
Net cash provided by financing activities $150,077 $ 12,024
-------- --------
Net increase (decrease) in Cash and Equivalents $ 7,352 $ (419)
Cash and Equivalents at Beginning of Period 39,658 54,780
-------- --------
Cash and Equivalents at End of Period $ 47,010 $ 54,361
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the three months for:
Interest $ 10,255 $ 3,282
Income taxes 1,700 673
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE> 9
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 31, 1997 and 1996
(Unaudited)
NOTE 1 - GENERAL
The accompanying consolidated financial statements reflect the accounts of Dart
Group Corporation ("Dart") and its direct and indirect wholly-owned and
majority-owned subsidiaries including Trak Auto Corporation ("Trak Auto"), Crown
Books Corporation ("Crown Books"), Total Beverage Corporation ("Total Beverage")
and Shoppers Food Warehouse Corp. ("Shoppers Food"). The accounts of Shoppers
Food are consolidated with Dart's financial statements as of February 6, 1997,
as a result of Dart's acquisition of the 50% equity interest that it did not
previously own. Dart, Trak Auto, Crown Books, Total Beverage and Shoppers Food
and Dart's other direct and indirect wholly-owned and majority-owned
subsidiaries are referred to collectively as the "Company". All significant
intercompany accounts and transactions have been eliminated. The unaudited
statements as of July 31, 1997 and 1996 reflect, in the opinion of management,
all adjustments (normal and recurring in nature) necessary to present fairly the
consolidated financial position as of July 31, 1997 and 1996 and the results of
operations and cash flows for the periods indicated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Accordingly, actual results could differ from those
estimates.
The results of operations for the three months ended July 31, 1997 are not
necessarily indicative of the results to be achieved for the full fiscal year.
NOTE 2 - EARNINGS PER SHARE
Earnings per share is based on the weighted average number of Dart's Class A and
Class B common stock, $1.00 par value per share. Common stock equivalents are
antidilutive in all periods presented. 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 is not significant for either period.
NOTE 3 - SHORT-TERM INSTRUMENTS AND MARKETABLE DEBT SECURITIES
At July 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 and
United States Agency Securities Acceptances.
Management determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determination at each
9
<PAGE> 10
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 31, 1997 and 1996
(Unaudited)
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 July 31, 1997, the market value of short-term instruments and
marketable debt securities was $30,000 greater than cost (adjusted for income
taxes). At July 31, 1997, Shoppers Food investments were classified as
held-to-maturity and are recorded at cost. At July 31, 1997, the Company had no
investments that qualified as trading securities.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and interest are included in interest income. Realized gains
and losses are included in other income or expense. The cost of securities sold
is based on the specific identification method.
Included in short-term instruments and marketable debt securities were
$93,715,000 and $21,094,000 held by majority-owned and wholly-owned subsidiaries
at July 31, 1997 and January 31, 1997, respectively. Shoppers Food short-term
instruments and marketable debt securities are included for July 31, 1997 but
not January 31, 1997.
NOTE 4 - INTERIM INVENTORY ESTIMATES
Trak Auto and Shoppers Food inventories are priced at the lower of last-in,
first-out ("LIFO") cost or market. At July 31, 1997, Trak Auto and Shoppers Food
inventories determined on a lower of first-in, first-out ("FIFO") cost or market
basis would have been greater by $11,747,000 and at January 31, 1997, Trak Auto
inventory on a FIFO basis would have been greater by $6,733,000. Crown Books'
and Total Beverage's inventories are priced at the lower of FIFO cost or market.
Trak Auto, Shoppers Food and Total Beverage take a physical count of their store
and warehouse inventories semi-annually. Crown Books takes a physical count of
its inventories annually. Trak Auto and Total Beverage took complete physical
inventories for the quarter ended July 31, 1997 and Shoppers Food took physical
inventories in 24 of its 35 stores for the quarter ended July 31, 1997. Shoppers
Food takes physical inventories of its perishable departments monthly at every
store. The Company uses a gross profit method combined with available perpetual
inventory information to determine Trak Auto's, Crown Books', and Total
Beverage's inventories for quarters when complete physical counts are not taken.
NOTE 5 - CREDIT AGREEMENTS
Trak Auto
In December 1996, Trak Auto entered into a revolving credit facility (the
"Facility") with a finance company to borrow up to $25.0 million. Trak Auto
10
<PAGE> 11
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 31, 1997 and 1996
(Unaudited)
intends to use proceeds from drawdowns under the Facility for working capital
and other corporate purposes. The Facility has an original term of three years.
Borrowings under the Facility bear interest at rates ranging from prime rate
minus 0.50% to prime rate plus 0.25%, for prime rate loans, and LIBOR plus 1.5%
to LIBOR plus 2.25%, for LIBOR loans. Interest rates are based upon Trak Auto's
ratio of debt to tangible net worth. Borrowings are limited to eligible
inventory levels, as defined, and are secured by Trak Auto's inventory, accounts
receivable, and proceeds from the sale of such assets. The Facility contains
certain restrictive covenants including limitations on additional indebtedness,
advances to affiliates and payments (limited to $25.0 million) or guarantees
(limited to $20.0 million of the $25.0 million) to settle disputes with Haft
family members and a maximum leverage ratio covenant.
Interest on prime rate loans is payable monthly. Interest and principal on LIBOR
loans is payable between one and six months from the borrowing date. LIBOR loans
are subject to a prepayment penalty and may be continued for a subsequent one to
six month period. LIBOR loans may be converted to prime rate loans and visa
versa. The Facility includes a facility fee of .25% per annum on the unused
principal balance, as defined. No single advance may be outstanding for more
than 36 months. Trak Auto may terminate the Facility upon 60-days prior written
notice to the lender and the lender may terminate it as of December 18, 1999 or
on any anniversary date thereafter upon 60-days prior written notice to Trak
Auto.
In addition, Trak Auto has a $750,000 commercial letter of credit facility for
use in importing merchandise.
As of August 2, 1997, there had been no borrowings under these credit
agreements.
Crown Books
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.
Borrowings under the credit facility include revolving loans and letters of
credit which bear interest at a rate equal to the prime rate (as defined in the
credit agreement) and LIBOR loans which bear interest at LIBOR plus 2.25%.
Interest on prime rate borrowings is payable monthly. Interest and principal on
LIBOR loans is payable between one and six months from the borrowing date. LIBOR
loans are subject to a prepayment penalty and may be continued for subsequent
one to six month periods. LIBOR loans may be converted to prime rate loans and
vice versa. The agreement includes a facility fee of .25% per annum on the
unused principal balance, as defined. No single advance may be outstanding for
more than 36 months.
Borrowings under the credit facility are secured by Crown Books' inventory,
accounts receivable and proceeds from the sale of such assets of Crown Books.
11
<PAGE> 12
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 31, 1997 and 1996
(Unaudited)
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 the 26 weeks ended August 2, 1997 were $22,148,000 and the outstanding
balance as of August 2, 1997 was $16,487,000. Crown Books had $8.5 million
available for borrowing at August 2, 1997. In connection with its expansion
plans, Crown Books will need to increase 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 and weighted average interest rate for the 26 weeks ended August 2,
1997 were $8,148,000 and 8.5%.
NOTE 6 - MINORITY INTEREST
The $63,955,000 of minority interests reflected in the Consolidated Balance
Sheet as of July 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 (loss) attributed to the minority shareholders of Trak Auto was
$(541,000) and $607,000 for the six months ended July 31, 1997 and 1996,
respectively, and $(311,000) and $221,000 for the three months ended July 31,
1997 and 1996, respectively. Loss attributed to the minority shareholders of
Crown Books was $(3,260,000) and $(1,619,000) for the six months ended July 31,
1997 and 1996, respectively, and $(1,991,000) and $(748,000) for the three
months ended July 31, 1997 and 1996, respectively.
NOTE 7 - SHOPPERS FOOD WAREHOUSE CORP.
Acquisition
On February 6, 1997, Dart acquired the 50% equity interest in Shoppers Food that
it did not already own for $210.0 million (the "Acquisition"). Dart financed the
Acquisition through the application of $137.2 million in net proceeds from the
offering of $140.0 million Increasing Rate Senior Notes due 2000 (the
"Increasing Rate Notes") of SFW Acquisition Corp., a newly created wholly-owned
subsidiary of Dart and $72.8 million of bridge financing. Immediately after the
12
<PAGE> 13
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 31, 1997 and 1996
(Unaudited)
Acquisition, SFW Acquisition Corp. merged into Shoppers Food (with Shoppers Food
becoming obligor on the Increasing Rate Notes), Shoppers Food repaid the bridge
financing and paid the deferred acquisition costs and deferred financing costs
of approximately $7.2 million from its existing cash and short-term investments.
The operating results of Shoppers Food from February 1, 1997 to February 6, 1997
were not material. The unaudited pro forma information, for Dart consolidated,
presented below reflects the Acquisition as if it had occurred on February 1,
1996. These results are not necessarily indicative of future operating results
or of what would have occurred had the acquisition been consummated at that
time.
<TABLE>
<CAPTION>
Pro Forma
(in thousands, except per share data)
Three Months Ended Six Months Ended
August 3, 1996 August 3, 1996
------------------ -------------------
<S> <C> <C>
Revenue $ 375,890 $ 743,206
Net income (loss) (393) (1,839)
Net income (loss) per share (.88) (1.02)
</TABLE>
The Acquisition was recorded using the purchase method of accounting. The
purchase price has been allocated to the assets and liabilities of Shoppers Food
and the remaining excess purchase price over the net assets acquired of $148,858
million represents goodwill which will be amortized over 40 years. In connection
with the Acquisition, Shoppers Food adopted Dart's method of depreciating
property and equipment on a straight-line basis. Prior to the Acquisition,
Shoppers Food used accelerated depreciation methods. The related cumulative
effect of the accounting change has been reflected in the accompanying
consolidated statements of operations. If this change were applied
retroactively it would not be material to any periods presented.
Refinancing
In June 1997, Shoppers Food refinanced the Increasing Rate Notes with $200.0
million aggregate principal amount 9 3/4% Senior Notes due June 15, 2004 (the
"Senior Notes"). The net proceeds from the Senior Notes was $193.5 million
(after fees and expenses of approximately $6.5 million) of which $143.3 million
was used to repay the Increasing Rate Notes (including interest) and $50.0
million (the "Restricted Proceeds") is available to Dart if Dart closes a Haft
family settlement. If the closing of a Haft settlement has not occurred on or
before June 30, 1998, then Shoppers Food must use the Restricted Proceeds to
redeem $50 million aggregate principal amount of the Senior Notes. Interest on
the Senior Notes accrued from the date of issuance and is payable semi-annually
in arrears on each June 15 and December 15, commencing December 15, 1997. The
Senior Notes have certain covenants including limitations on additional
indebtedness and are guaranteed by the capital stock of Shoppers Food.
13
<PAGE> 14
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 31, 1997 and 1996
(Unaudited)
NOTE 8 - PROPERTY, EQUIPMENT AND DEPRECIATION
Effective February 1, 1997, the Company changed its accounting policy from
expensing purchased computer software costs in the year of acquisition to
capitalizing and depreciating these costs over the estimated useful life not to
exceed five years. Management has determined that these costs benefit future
periods.
During the quarter ended July 31, 1997, the Company recorded amortization of
computer costs of approximately $270,000. The effect of capitalizing purchased
computer software was to decrease the Company's loss by approximately $1.8
million net of income tax benefits.
NOTE 9 - SUBSEQUENT EVENT
On August 18, 1997, Dart entered into an agreement to settle certain litigation
and enter into other related transactions (the "RGL Settlement") with Robert M.
Haft, Gloria G. Haft, Linda G. Haft and certain related parties (collectively,
"RGL"). Under the RGL Settlement, Dart will purchase from RGL 104,976 shares of
Dart Class B Common Stock for $14.7 million and 77,244 shares of Dart Class A
Common Stock for $6.8 million. In addition, Dart will pay to RGL $9.3 million to
terminate all options for shares of Dart Class A Common Stock that they hold or
claim and Dart will pay to Robert M. Haft, Linda G. Haft and certain related
parties $9.7 million to terminate putative options to purchase shares of
Dart/SFW Corp. The Company will pay $250,000 to RGL to terminate any and all
rights to purchase shares of the capital stock of Trak Auto and Crown Books.
The RGL Settlement also contemplates the completion of bankruptcy plans of
reorganization for the Haft owned partnerships owning Dart's headquarters
building in Landover, Maryland and a distribution center leased by Trak Auto in
Bridgeview, Illinois. Under these bankruptcy plans the Company would pay $4.4
million to Robert M. Haft and Linda G. Haft (50% of which would be provided by
release of Dart funds previously escrowed by Ronald S. Haft) for their interests
in these two properties. In addition, the Company would pay $7.0 million to
reduce the outstanding mortgage loans on these properties, which thereafter will
be wholly-owned by Dart or its affiliates.
14
<PAGE> 15
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 31, 1997 and 1996
(Unaudited)
The pro forma Consolidated Balance Sheet presented below reflects the RGL
Settlement and related plans of reorganization as if they had occurred on July
31, 1997 (in thousands).
<TABLE>
<CAPTION>
Unaudited
-----------------------------------------
Historical Pro Forma
July 31, Pro Forma July 31,
ASSETS 1997 Adjustments 1997
------------ ----------- ----------
<S> <C> <C> <C>
Current Assets:
Cash $ 15,486 $ (1,319)(a) $ 14,167
Short-term instruments 31,524 31,524
Restricted proceeds 50,218 (50,218)(a) -
Marketable debt securities 29,046 29,046
Accounts receivable 16,468 16,468
Income taxes refundable 4,445 4,445
Merchandise inventories 251,645 251,645
Deferred income tax benefit 7,765 7,765
Other current assets 7,848 7,848
--------- --------- ---------
Total Current Assets 414,445 (51,537) 362,908
--------- --------- ---------
Property and Equipment, at cost:
Furniture, fixtures and
equipment 173,131 173,131
Buildings and leasehold
improvements 33,588 33,588
Land 1,034 19,758 (b) 20,792
Property under capital
leases 31,859 (24,472)(c) 7,387
--------- --------- ---------
239,612 (4,714) 234,898
Accumulated depreciation
and amortization 123,160 (9,659)(c) 113,501
--------- --------- ---------
116,452 4,945 121,397
--------- --------- ---------
Goodwill 148,755 148,755
--------- ---------
Deferred income tax benefit 18,036 18,036
--------- ---------
Other assets 23,073 23,073
--------- --------- ---------
Total Assets $ 720,761 $ (46,592) $ 674,169
========= ========= =========
</TABLE>
15
<PAGE> 16
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Unaudited
---------------------------------------
Historical Pro Forma
July 31, Pro Forma July 31,
LIABILITIES 1997 Adjustments 1997
------------ ----------- ----------
<S> <C> <C> <C>
Current Liabilities:
Current portion of
mortgages payable $ 193 $ 600 (d) $ 793
Accounts payable, trade 132,679 132,679
Income taxes payable 2,429 2,429
Accrued salaries and
employee benefits 26,568 26,568
Accrued taxes other than
income taxes 11,461 11,461
Current portion of reserve
for closed facilities
and restructuring 6,800 6,800
Other accrued liabilities 69,893 (18,325)(d) 51,568
Current portion of obligations
under capital leases 209 (209)(c) -
--------- --------- ---------
Total Current Liabilities 250,232 (17,934) 232,298
--------- --------- ---------
Mortgages payable 322 25,846 26,168
--------- --------- ---------
Crown Books' credit facility 16,487 16,487
--------- ---------
Obligations under capital
leases 42,041 (30,492)(c) 11,549
--------- --------- ---------
Reserve for closed facilities
and restructuring 25,117 25,117
--------- ---------
Deferred income taxes 4,845 4,845
--------- ---------
Shoppers Food Senior Notes 200,000 200,000
--------- ---------
Other Liabilities 2,068 2,068
--------- ---------
Commitments and Contingencies
Minority interests 63,955 (82)(e) 63,873
--------- --------- ---------
Stockholders' Equity
Class A common stock 1,965 1,965
Class B common stock 500 500
Paid-in capital 79,033 79,033
Notes receivable-shareholder (65,130) (65,130)
Unrealized losses on
short-term investments 30 30
Retained earnings 101,333 (2,474)(f) 98,859
Treasury Stock, Class A
common stock (1,749) (6,759)(g) (8,508)
Treasury Stock, Class B
common (288) (14,697)(h) (14,985)
--------- --------- ---------
Total Stockholders' Equity 115,694 (23,930) 91,764
--------- --------- ---------
Total Liabilities and
Stockholders' Equity $ 720,761 $ (46,592) $ 674,169
========= ========= =========
</TABLE>
16
<PAGE> 17
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 31, 1997 and 1996
(Unaudited)
Notes to the Pro Forma Balance Sheet
(a) Reduction in cash and restricted proceeds as follows:
<TABLE>
<S> <C>
Purchase of Class B Shares $ 14,697
Purchase of Class A Shares 6,759
Purchase of Class A options 9,287
Purchase Dart/SFW options 9,700
Payment for real estate partnership
interests 2,200
Purchase of Trak Auto and Crown
Book options 250
Payments to real estate mortgage
holders 7,000
Fees related to transaction 1,644
---------
Total $ 51,537
=========
</TABLE>
(b) Record purchase of real estate contemplated in October 1995 settlement
with Ronald S. Haft and completed with RGL Settlement.
(c) Reverse capital lease assets and lease obligations for purchased real
estate.
(d) Record mortgage obligations for purchased real estate net of payments
to mortgage holders.
(e) Record effect to minority interest for purchase of subsidiary stock
options.
(f) Net effect to the Statement of Operations for purchase of stock
options.
(g) Record purchase of Class A Shares.
(h) Record purchase of Class B Shares.
The RGL Settlement requires a supplemental settlement arrangement between Dart
and Ronald S. Haft, which has not yet been completed and which cannot be
assured. The closing of these transactions is scheduled for late September,
subject to the satisfaction of various conditions. Closing of these
transactions cannot be assured.
The RGL Settlement, if consummated, would result in the termination of the
pending claim by Robert, Gloria and Linda Haft to control of Dart and the
settlement of all litigation between them and Dart and its subsidiaries.
Dart anticipates that $50.0 million proceeds from a recent private placement of
senior notes by Shoppers Food will be used to fund these transactions. A portion
of the cost of these transactions may be allocated to Trak Auto and, possibly,
Crown Books. No such allocations have yet been determined.
17
<PAGE> 18
DART GROUP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
July 31, 1997 and 1996
(Unaudited)
Settlement Discussions with Herbert Haft
The previously-announced settlement discussions between Dart and Herbert H. Haft
have not produced a settlement agreement at this time, though discussions are
continuing. There can be no assurance that a settlement agreement between Dart
and Herbert H. Haft will be entered into or that, even if a settlement agreement
with Herbert H. Haft is entered into, that the settlement transactions will
close.
18
<PAGE> 19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Outlook
Except for historical information, statements in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are
forward-looking. Actual results may differ materially due to a variety of
factors, including the results of ongoing litigation (or settlement litigation),
the Company's ability to effectively compete in the highly competitive retail
book store, automotive aftermarket and grocery businesses, 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 "Funding of Possible
Settlements" below.
Crown Books' believes that its superstore concept presents growth opportunities
and intends to open new Super Crown Books stores in existing and new markets.
Realizing these opportunities is dependent upon the successful performance of
the superstores and adequate liquidity. In the past, Super Crown Books stores
have generated higher sales at converted locations as well as higher gross
margins as a result of a favorable change in product mix. During the last three
fiscal quarters, the new prototype superstores have performed below Crown Books'
expectations. Crown Books is considering certain revisions to the new superstore
prototype that may enhance its performance. Without a significant improvement in
the performance of all superstores, Crown Books would not expect operating
expenses, as a percentage of sales, to decrease as the new stores mature.
The retail book market is highly competitive. The two largest book chains
continue to open additional new stores each year in Crown Books' markets,
thereby continuing to increase the overall level of competition. Management
believes that the markets in which it operates will remain highly competitive in
the foreseeable future and, as a result, Crown Books will be significantly
challenged to improve operating results in fiscal 1998.
Trak Auto believes that its superstore concept represents the strongest segment
of its business and anticipates that all of its new stores will be opened within
this concept as Super Trak 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-
19
<PAGE> 20
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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.
Shoppers Food is the third leading supermarket operator in the greater
Washington, D.C. metropolitan area. Shoppers Food operates in a highly
competitive marketplace and its ability to remain competitive depends in part on
its ability to open new stores and remodel and update existing stores which will
require the continued availability of capital resources.
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 seven Classic Crown Books stores,
two non-prototype Super Crown Books stores and relocating one prototype Super
Crown Books store during fiscal 1998.
Liquidity and Capital Resources
Cash, short-term instruments and U.S. government and other marketable debt
securities, are the Company's primary source of liquidity. Cash, including
short-term instruments and U.S. government and other marketable debt securities
increased by $80.9 million to $126.3 million at July 31, 1997 from $45.4 million
at January 31, 1997. This increase was due to the consolidation of $84.3 million
of Shoppers Food cash and marketable debt securities including the $50.0 million
of Restricted Proceeds from the Shoppers Food debt refinancing.
For the quarter ended July 31, 1997, the Company realized a pre-tax yield of
approximately 5.3% on United States Treasury Bills and approximately 5.9% on the
other marketable debt securities.
Operating activities used $6,890,000 of the Company's funds for the six months
ended July 31, 1997 compared to $7,403,000 during the same period one year ago.
During the six months ended July 31, 1997 cash was used primarily for Crown
Books payments for merchandise inventory and funding loss operations at Crown
Books and Dart and was partially offset by cash generated by Trak Auto and Total
Beverage operations.
Investing activities used $135,835,000 of the Company's funds for the six months
ended July 31, 1997, compared to $5,040,000 during the same period last year.
The primary use of funds was primarily for the Acquisition of the 50% equity
interest in Shoppers Food (see Note 7 to the Consolidated Financial Statements).
Capital expenditures were $11,213,000 (including Shoppers Food) during the six
months ended July 31, 1997 compared to $7,997,000 (excluding Shoppers Food)
during the six months ended July 31, 1996.
Financing activities provided $150,077,000 to the Company during the six months
ended July 31, 1997 due to the proceeds from the Senior Notes at Shoppers Food
and the revolving line of credit at Crown Books and was partially offset by
payments for deferred financing and acquisition costs at Shoppers Food and funds
20
<PAGE> 21
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
restricted for possible settlements with the Hafts.
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
$78.1 million (net of the Restricted Proceeds from Shoppers Senior Notes) during
the six months ended July 31, 1997, $42.0 million in fiscal 1997 and $104.4
million in fiscal 1996. In fiscal 1997, Crown Books and Trak Auto entered into
revolving credit facilities and Shoppers Food is negotiating a revolving credit
facility.
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, short-term investments and
possible dividends from Shoppers Food as permitted by covenants of the Senior
Notes.
The primary capital requirements of Crown Books relate to new store openings and
investments in management information systems. Crown Books believes that the net
cash expenditures incurred in opening 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 fiscal 1998, Crown Books expects to open approximately 25 Super Crown
Books stores requiring cash expenditures of approximately $20.0 million. As of
September 12, 1997, Crown Books has opened nine stores and has entered into
lease agreements to open 16 new Super Crown Books stores in fiscal 1998 and four
in fiscal 1999 and has entered into an agreement for additional space in an
existing store 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 in
fiscal 1998 with cash generated from improving its inventory turnover, inventory
from stores closed during fiscal 1998, income tax refunds and borrowing under
its revolving credit agreement. Crown Books had $8.5 million available for
borrowing under its revolving credit facility at August 2, 1997. As of August 2,
1997, Crown Books had not improved its inventory turnover as anticipated. Crown
Books continues to take steps to improve its inventory turnover on an ongoing
basis. Without significant improvement in Crown Books' inventory turnover, Crown
Books may not have adequate liquidity to continue its expansion plans.
In connection with its expansion plan, Crown Books will need to increase 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
21
<PAGE> 22
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
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 and August 3,
1997, Crown Books' tangible net worth was $84.5 million and $77.6 million,
respectively. 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. As of August 2, 1997,
Crown Books' net deferred tax asset was $12.8 million. If Crown Books'
performance does not significantly improve, Crown Books may conclude that it
will need to reserve for the asset's recovery. If this event occurs, Crown
Books' tangible net worth would likely decrease below $70 million and as a
result, Crown Books' borrowing under the credit facility would be limited to $25
million. If Crown Books' borrowing is limited to $25 million and its performance
does not sufficiently improve, the Crown Books intends to significantly reduce
its expansion plans and take other actions to improve liquidity.
Trak Auto funds its requirements for working capital and capital expenditures
with net cash generated from operations, existing cash resources and, if
necessary, borrowings under its credit facility. Trak Auto's primary capital
requirements relate to remodelings and new store openings (including inventory
purchases and the costs of store fixtures and leasehold improvements). As of
August 2, 1997, Trak Auto had entered into lease agreements to open seven new
Super Trak or Super Trak Warehouse 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.
As of August 2, 1997 Trak Auto had not borrowed under the credit facility.
Shoppers Food estimates that it will make capital expenditures of approximately
$11.5 million in the 52 weeks ended January 31, 1998. Such expenditures relate
to three new store openings as well as routine expenditures for equipment and
maintenance. Management expects that these capital expenditures will be financed
primarily through cash flow from operations and a new revolving credit facility.
Capital expenditures related to two stores scheduled to open in the following
fiscal year are estimated to be approximately $7.0 million.
In February 1997, $137.2 million of the net proceeds from the sale of the
Increasing Rate Notes and $72.8 million of Shoppers Food cash, cash equivalents
and short-term investments were used to fund the Acquisition. In addition,
Shoppers Food paid approximately $7.2 million in fees and expenses incurred by
Dart in connection with the Acquisition.
Shoppers Food's interest expense consists primarily of interest on the
Increasing Rate Notes and capital lease obligations. Interest expense increased
22
<PAGE> 23
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
$8.3 million from $1.1 million during the 26 weeks ended August 3, 1996 to $9.4
million during the 26 weeks ended August 2, 1997 due to the interest paid on the
Increasing Rate Notes, which were issued on February 6, 1997 and redeemed on
June 25, 1997 and interest accrued on the Senior Notes.
Shoppers Food believes that cash flows from its operations and borrowings under
a new revolving credit facility that it is seeking will be adequate to meet its
anticipated requirements for working capital, debt service and capital
expenditures over the next few years. However, there can be no assurances that
Shoppers Food will generate sufficient cash flow from operations or that it will
be able to borrow under a new revolving credit facility.
In June 1997, Shoppers Food refinanced the Increasing Rate Notes with $200.0
million aggregate principal amount of its Senior Notes due 2004 (the "Senior
Notes"). The net proceeds of the offering were approximately $193.5 million.
Shoppers Food used approximately $143.5 million of the net proceeds to repay its
Increasing Rate Notes due 2000 (including accrued and unpaid interest through
the estimated date of redemption). The remaining net proceeds are available to
Dart if and when Dart consummates a settlement with Herbert H. Haft and/or
Robert M., Gloria G. and Linda G. Haft or, if not used for such settlement on or
prior to June 30, 1998, would be used to redeem $50.0 million aggregate
principal amount of the Senior Notes at 101% of the principal amount thereof.
Total Beverage is considering locations for new stores. Total Beverage opened
one new store in August 1997 in the Chicago, Illinois metropolitan area and may
open another store in fiscal 1998.
Funding of Possible Settlements
Dart and its principal subsidiaries have entered into an agreement to settle
certain litigation and enter other related transactions with Robert M. Haft,
Gloria G. Haft, Linda G. Haft and certain related parties. In addition,
settlement discussions are continuing with each of Herbert H. Haft and Ronald S.
Haft. The aggregate payments estimated to be paid by Dart and its subsidiaries
in connection with these possible settlements, if all of them occur, would be
approximately $92 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.
Cash requirements associated with the RGL Settlement and the related plans of
reorganization are approximately $52 million. At the closing of the RGL
Settlement, if it occurs, Dart will receive from Shoppers Food $50 million of
proceeds from the sale of the Senior Notes that has been held in escrow pending
such a settlement. Dart presently has not determined a financing plan for the
possible settlement under discussion with Herbert H. Haft, which possible
settlement would involve total payments of approximately $40 million (including
a loan of $10 million). Trak Auto and Crown Books anticipate that they would pay
their portion of the settlement obligations from borrowings under their
23
<PAGE> 24
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
respective credit facilities.
It has been suggested that Dart sell one or all of its subsidiaries and possibly
liquidate. Dart has no plans to liquidate and, although Dart has considered
selling all or part of its equity interest in Shoppers Food, Dart presently has
no intention of doing so. However, Dart may be open to the possibility of other
strategic opportunities. Dart and Crown have had preliminary discussions with
certain third parties concerning the possible sale of Dart's interest in Crown
Books or the sale of all of Crown Books. There can be no assurance that any such
discussions will continue or will result in any agreement for any such sale or
as to the terms or timing of any such sale, if one occurs.
Results of Operations
Trak Auto
During the 26 weeks ended August 2, 1997, Trak Auto opened five new Super Trak
and two new Super Trak Warehouse stores and closed or converted four classic
Trak stores and converted one Super Trak Warehouse to a Super Trak. At August 2,
1997, Trak Auto had 289 stores, including 128 Super Trak stores and 45 Super
Trak Warehouse stores.
Sales of $172,128,000 during the 26 weeks ended August 2, 1997 decreased by
$5,316,000 or 3.0% compared to sales for the 26 weeks ended August 3, 1996 while
sales of $90,523,000 during the 13 weeks ended August 2, 1997 increased $95,000
or 0.1% compared to sales for the same period one year ago. The sales decrease
during the 26 weeks ended August 3, 1996 was primarily due to the mild winter
conditions in the Midwest and East coast markets as well as the weak performance
of the stores in the highly competitive Los Angeles market, during the first
quarter. Comparable sales (stores open more than one year) decreased 8.2% and
6.4% for the 26 and 13 weeks ended August 2, 1997. Sales for comparable Super
Trak and Super Trak Warehouse stores decreased 8.3% and 7.0% for the 26 and 13
weeks ended August 2, 1997, respectively. Sales for comparable classic Trak
stores decreased 8.1% and 5.3% for the 26 and 13 weeks ended August 2, 1997,
respectively. Sales for Super Trak and Super Trak Warehouse stores represented
68.7% and 71.5% of total sales during the 26 and 13 weeks ended August 2, 1997
compared to 63.7% and 64.5% for the 26 and 13 weeks ended August 3, 1996,
respectively.
Interest and other income decreased by $378,000 and $121,000 for the 26 and 13
weeks ended August 2, 1997, respectively, when compared to the prior year,
largely due to reduced income from subleased store locations and reduced
recoveries from audits of prior years vendor allowances.
Cost of sales, store occupancy and warehousing expenses as a percentage of sales
were 76.8% and 77.2% for the 26 and 13 weeks ended August 2, 1997 compared to
75.3% and 75.8% for the same periods in the prior year. The increases were
primarily due to increased occupancy and distribution costs.
Selling and administrative expenses were 21.9% and 22.3% as a percentage of
sales for the 26 and 13 weeks ended August 2, 1997 compared to 20.4% for both
the 26 and 13 weeks ended August 3, 1996. The increases for the 26 and 13 weeks
24
<PAGE> 25
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
were due primarily to increased advertising costs (largely due to Trak Auto's
entry into the Milwaukee market) and increased payroll costs, as a percentage of
sales, due to the decrease in sales during the first quarter.
Depreciation and amortization expenses increased $106,000 for the 26 weeks ended
August 2, 1997 compared to the same period one year ago. The increase was due to
increased fixed assets for new stores particularly in the Milwaukee
market.
Interest expense of approximately $1,864,000 during the 26 weeks ended August 2,
1997 was for interest under capital lease obligations.
The Company recorded an income tax benefit of $1.3 million during the 26 weeks
ended August 2, 1997. The tax benefit is the result of Trak Auto's $2,973,000
net operating loss.
Crown Books
During the 26 weeks ended August 2, 1997, the Company opened eight Super Crown
Books stores and closed six Classic Crown Books stores and two Super Crown Books
store. At August 2, 1997, the Company had 168 stores, including 115 Super Crown
Books stores.
Sales of $133,561,000 for the 26 weeks ended August 2, 1997 increased by
$4,536,000 or 3.5% compared to the 26 weeks ended August 3, 1996 while sales of
$67,018,000 for the 13 weeks ended August 2, 1997 increased by $485,000 or 0.7%
compared to the 13 weeks ended August 3, 1996. Comparable sales (sales for
stores open for 13 months) decreased 5.6% and 8.1% during the 26 and 13 weeks,
respectively. Sales for all Super Crown Books stores represented 82.3% and 82.6%
of total sales for the 26 and 13 weeks ended August 2, 1997, respectively,
compared to 74.7% and 75.9% for the 26 and 13 weeks ended August 3, 1996,
respectively. Sales for all Super Crown Books stores of $109,974,000 and
$55,339,000 for the 26 and 13 weeks ended August 2, 1997 increased 14.1% and
9.6% over the prior year and sales for comparable Super Crown Books stores
decreased 6.1% and 8.6%. Comparable sales for the new superstore prototype
decreased 5.8% and 8.2% for the 26 and 13 weeks ended August 2, 1997. The
Company's superstores consist of the original superstores of 6,000 to 10,000
square feet and the new superstore prototype targeted to occupy 15,000 square
feet.
Interest and other income decreased by $661,000 and $344,000 during the 26 and
13 weeks ended August 2, 1997 when compared to the same periods one year ago.
The decreases were primarily due to reduced interest income as a result of the
decrease in funds available for short-term investments.
Cost of sales, store occupancy and warehousing as a percentage of sales were
83.5% and 84.6% for the 26 and 13 weeks ended August 2, 1997 compared to 82.0%
and 82.1% for the same periods one year ago. The increases were due to increased
store occupancy costs and decreased gross margins.
Selling and administrative expenses as a percentage of sales were 21.6% and
22.0% for the 26 and 13 weeks ended August 2, 1997 compared to 20.2% and 19.8%
for the same periods one year ago. The increases were due primarily to
25
<PAGE> 26
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
increased payroll costs and consulting fees for new management information
systems.
Depreciation and amortization expense increased $479,000 for the 26 weeks ended
August 2, 1997 compared to the same period one year ago primarily due to the
increase in fixed assets for new superstores and to the amortization of computer
software.
Interest expense was $699,000 during the 26 weeks ended August 2, 1997 compared
to $691,000 during the 26 weeks ended August 3, 1996. Interest expense during
the 26 weeks ended August 2, 1997 was primarily due to interest on borrowings
under the credit facility while interest expense during the 26 weeks ended
August 3, 1996 was primarily due to interest on the Robert M. Haft judgement
paid in August 1996.
Shoppers Food
The Company opened one new store in July 1997 for a store count of 35 at August
2, 1997. Subsequent to August 2, 1997, the Company opened its 36th store.
Sales decreased by $0.2 million, from $419.7 million during the 26 weeks ended
August 3, 1996 to $419.5 million during the 26 weeks ended August 2, 1997. Sales
decreased by $1.1 million, from $210.6 million during the 13 weeks ended August
3, 1996 to $209.5 million during the 13 weeks ended August 2, 1997. Comparable
store sales decreased 0.5% and 1.5% during the 26 weeks and 13 weeks ended
August 2, 1997, respectively. The decreases were the result of extremely
competitive market conditions which affect the geographical area in which the
Company operates including the expansion of other supermarket chains into this
market.
Gross profit increased by $3.0 million (3.1%), from $96.2 million during the 26
weeks ended August 3, 1996 to $99.2 million during the 26 weeks ended August 2,
1997 and increased by $0.5 million (1.0%), from $48.2 million during the 13
weeks ended August 3, 1996 to $48.7 million during the 13 weeks ended August 2,
1997. Gross profit, as a percentage of sales, increased to 23.6% and 23.3%
during the 26 weeks and 13 weeks ended August 2, 1997, respectively from 22.9%
for both the 26 weeks and 13 weeks ended August 3, 1996. The increases were
primarily due to a more proactive pricing strategy on selected items, to a
reduction in the number of items which are offered at special discounts on a
weekly basis in stores, and to a higher allowance income achieved through
increased vendor participation.
Selling and administrative expenses increased by $2.3 million (3.1%), from $74.4
million during the 26 weeks ended August 3, 1996 to $76.7 million during the 26
weeks ended August 2, 1997 and increased by $1.1 million (3.0%), from $38.0
million during the 13 weeks ended August 3, 1996 to $39.1 million during the 13
weeks ended August 2, 1997. Selling and administrative expenses, as a percentage
of sales, increased from 17.7% and 18.0% during the 26 weeks and 13 weeks ended
August 3, 1996 to 18.3% and 18.7% during the 26 weeks and 13 weeks ended August
2, 1997. The increases were primarily attributable to increased payroll costs
associated with negotiated union rates and store remodeling, to expenses
associated with a new store opened in July 1997 and a new store opened
26
<PAGE> 27
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
in August 1997.
Depreciation and amortization increased $1.2 million from $4.8 million during
the 26 weeks ended August 3, 1996 to $6.0 million during the 26 weeks ended
August 2, 1997 and increased $1.0 million from $2.5 million during the 13 weeks
ended August 3, 1996 to $3.5 million during the 13 weeks ended August 2, 1997.
The increases were primarily due to additional depreciation and amortization
associated with goodwill, lease rights and refinancing costs, as well as with
fixed assets purchased for the new store opened in July 1997.
Operating income was $16.5 million and $6.1 million for the 26 weeks and 13
weeks ended August 2, 1997 compared to $17.0 million and $7.8 million during the
same periods in the prior year. The decreases were primarily as a result of
higher selling and administrative expenses and higher depreciation and
amortization expense, partially offset by higher gross profit.
Interest income decreased $1.3 million and $0.3 million during the 26 weeks and
13 weeks ended August 2, 1997 compared to the 26 weeks and 13 weeks ended August
3, 1996 due to a reduction of funds available for short-term investing as a
result of the repayment of the bridge financing associated with Acquisition.
Interest expense increased $8.3 million from $1.1 million during the 26 weeks
ended August 3, 1996 to $9.4 million during the 26 weeks ended August 2, 1997 as
a result of interest paid on the Increasing Rate Notes and interest accrued on
the Senior Notes.
The effective income tax rate for the 26 weeks ended August 2, 1997 was 43.7%
compared to 34.6% for the 26 weeks ended August 3, 1996. The increase was
primarily attributable to nondeductible amortization of acquisition related
goodwill.
On June 26, 1997 the Company sold $200 million aggregate principal amount of its
9.75% senior notes due 2004. Net proceeds were used on July 25, 1997 to repay
$143.3 million (including approximately $3.3 million of accrued and unpaid
interest) of the existing Increasing Rate Notes and to pay $50.0 million into an
escrow account to be used by Dart if and when it consummates a settlement with
certain of its shareholders. As a result of this transaction, $5.3 million,
representing an unamortized portion of the financing costs incurred to secure
initial senior indebtedness, were expensed as an extraordinary item, net of
taxes of approximately $1.9 million.
Net income decreased by $8.8 million, from $12.4 million during the 26 weeks
ended August 3, 1996 to $3.6 million during the 26 weeks ended August 2, 1997
and by $7.2 million, from $5.9 million during the 13 weeks ended August 3, 1996
to a net loss of $1.3 million during the 13 weeks ended August 2, 1997. These
decreases were primarily attributable to increased interest expense associated
with the Company's indebtedness and the extraordinary item discussed above
offset by the cumulative change in accounting principle.
Total Beverage
Sales decreased $349,000 from $13,857,000 during the 26 weeks ended August 3,
1996 to $13,508,000 during the 26 weeks ended August 2, 1997 due to sales last
27
<PAGE> 28
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
year ($721,000) at a store closed in April 1996. Sales increased $296,000 from
$6,837,000 during the 13 weeks ended August 3, 1996 to $7,133,000 during the 13
weeks ended August 2, 1997. Comparable store sales increased 2.8% and 4.3%
during the 26 and 13 weeks ended August 2, 1997, respectively.
Cost of sales and store occupancy as a percentage of sales were 81.5% and 81.2%
during the 26 and 13 weeks ended August 2, 1997 compared to 81.7% and 82.0% for
the same periods one year ago.
Selling and administrative expenses as a percentage of sales were 21.6% and
20.7% during the 26 and 13 weeks ended August 2, 1997 (excluding a reversal of
closed store reserve) compared to 23.5% and 21.4% for the 26 and 13 weeks ended
August 3, 1996.
Total Beverage recorded net income of $918,000 and $1,293,000 during the 26 and
13 weeks ended August 2, 1997 compared to net operating losses of $871,000 and
$292,000 during the 26 and 13 weeks ended August 3, 1996. The net income for the
26 and 13 weeks ended August 2, 1997 included the reversal of a closed store
expense of $1.5 million recorded in fiscal 1996 as a result of a lease
termination agreement with the landlord. The net operating loss for the 26 weeks
and 13 weeks ended August 3, 1996 included approximately $610,000 and $270,000
paid to outside consultants who had been retained to assist in the development
and implementation of a strategic business plan.
Dart Group and Other Corporate
Interest and other income decreased $0.6 million and $0.1 million during the six
months and three months ended July 31, 1997, respectively, when compared to the
same period in the prior year. The decreases were primarily due to reduced funds
available for short-term investments.
Administrative expenses decreased $0.2 million during the six months ended July
31, 1997 primarily due to lower legal expenses as a result of a $17.0 million
legal accrual during the last quarter of fiscal 1997 and current year legal
billings charged to that accrual.
Interest expense decreased by $1.0 million and 0.5 million during the six months
and three months ended July 31, 1997, respectively, when compared to the same
period in the prior year. The decreases were primarily due to interest accrued
for the Robert M. Haft judgement last year.
Trak Auto and Crown Books file separate income tax returns. Total Beverage and
Shoppers Food are included in Dart's income tax returns.
Dart's cumulative total net tax operating loss carryforward is $60,252,000. 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 $45,358,000 as of July 31, 1997.
Management will continue to evaluate the need for a valuation allowance on a
periodic basis.
28
<PAGE> 29
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Effect of New Financial Accounting Standard
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.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
Reporting Comprehensive Income. SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comphrehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company will adopt SFAS No.
130 in the first quarter of fiscal 1999 and will provide the necessary
disclosures.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
Disclosure about Segments of an Enterprise and Related Information which
requires the Company to report financial and descriptive information about its
reportable operating segments. The Company will adopt SFAS No. 131 at its fiscal
year-end January 31, 1999 and will provide the necessary disclosure.
29
<PAGE> 30
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DART GROUP CORPORATION
Date: December 1, 1997 By: Ronald T. Rice
------------------ ---------------------------
RONALD T. RICE
Assistant Vice President
Date: December 1, 1997 Mark A. Flint
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MARK A. FLINT
Senior Vice President and
Chief Financial Officer
30
