<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 February 1, 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 0-12202
------------
TRAK AUTO CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 52-1281465
- ------------------------------------ ------------------------------
(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)
</TABLE>
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:
Common Stock, Par Value $.01 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 5,909,279 shares of Common Stock outstanding
and the aggregate market value of such shares held by non-affiliates of the
registrant was approximately $20,562,000.
DOCUMENTS INCORPORATED BY REFERENCE
1996 Proxy Statement for annual stockholders' meeting to be held June 27,
1997.....................................................Part III Items 10-13
The exhibit index begins at page 73 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Part II
-------
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . 31
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . 64
Part III
--------
Item 10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 65
Part IV
-------
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
</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 result 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
Trak Auto Corporation ("Trak Auto") was incorporated in Delaware in 1983 and
operates retail discount auto parts stores. The term "Company" refers
collectively to Trak Auto and its wholly-owned subsidiaries, including Trak
Corporation, Super Trak Corporation ("Super Trak") and Trak DHC Corporation.
Dart Group Corporation ("Dart") owns 67.1% of Trak Auto's outstanding common
stock, par value $.01 per share (the "Common Stock").
Operations
The Company operates retail discount auto parts stores in the metropolitan
areas of Washington, D.C.; Richmond, Virginia; Chicago, Illinois; Los Angeles,
California; Pittsburgh, Pennsylvania and Milwaukee, Wisconsin. In addition,
the Company has begun opening stores in central Pennsylvania.
The Company is engaged in the retail sale of a wide range of automobile parts
and accessories for the do-it-yourself market. The Company'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. The Company 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
3
<PAGE> 4
Item 1. Business (Continued)
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, the Company 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.
The Company has successfully opened or converted 122 Super Traks and 44 Super
Trak Warehouse stores. The Company 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 the Company's six metropolitan markets
as well as new markets.
The Company generally purchases merchandise directly from a large number of
manufacturers and suppliers. The Company'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. The Company has a computerized point of sale
("POS") register system in every store. The Company 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.
The Company'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. The Company 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. The Company'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 the Company's consolidated sales during the year ended
February 1, 1997.
The following table sets forth by metropolitan area the locations of the
Company's stores for each of the last five fiscal years.
4
<PAGE> 5
Item 1. Business (Continued)
<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.
<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, the Company acquired the assets of 14
stores in Pittsburgh, PA, for approximately $6.2 million. This acquisition
places the Company 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.
The Company 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, the
Company had entered into lease agreements to open seven new stores.
5
<PAGE> 6
Item 1. Business (Continued)
The Company intends to continue its practice of reviewing the profitability
trends and prospects of existing stores. The Company 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
The Company 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. The Company recognizes store closing
costs when management decides to close a store. In prior years, the Company
has also recognized the anticipated costs for closing, relocating, expanding
and converting existing stores to the Super Trak and Super Trak Warehouse
concepts. The costs associated with store closings 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, the Company had reserves of $2,644,000 for store
closings and restructurings. 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 the Company'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
restructure reserves net provision of approximately $402,000 and included in
the activity for fiscal 1996 is an additional net provision of $673,000. This
activity is included in selling and administrative expenses in the Company's
Consolidated Statements of Operations.
6
<PAGE> 7
Item 1. Business (Continued)
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 the Company 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.
The Company will continue to evaluate the performance and future viability of
its stores and may close or convert additional stores in the future.
Relationship with Dart
Dart provides the Company with certain general and administrative services.
Dart also pays certain "common expenses" for the Company and its affiliates and
allocates such expenses on a judgmental basis. Dart charged the Company
approximately $1,111,000 for such services in the year ended February 1, 1997.
In addition, the Company provides similar services to Dart and its other
subsidiaries. The Company charged Dart and its other subsidiaries
approximately $1,447,000 for such services in the year ended February 1, 1997.
See Note 4 to the Consolidated Financial Statements and Item 2.- Properties.
Competition
The business in which the Company is engaged is highly competitive. The
Company competes with local, regional and national retail sellers of automobile
parts and accessories. To some extent, the Company competes with garages,
service stations, automobile dealers, supermarkets, and department, hardware
and other stores. Some of the Company's competitors offer installation
services, which are not offered by the Company. Many of its competitors have
greater resources than the Company and the Company encounters strong price
competition.
7
<PAGE> 8
Item 1. Business (Continued)
Seasonality
The Company'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 fiscal years 1997 and
1996 were 52% of total annual sales. The Company's business is also affected
by weather conditions. 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.
Employees
On February 1, 1997, the Company employed approximately 2,160 full-time and
1,550 part-time persons engaged in retail, warehouse and administrative
operations. The Company considers its relationship with its employees to be
good.
Executive Officers
The following table sets forth the names, ages and positions of the executive
officers of Trak Auto. Executive officers are appointed to serve until the
meeting of the Board of Directors following the next annual meeting of
stockholders or until their successors are appointed.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Herbert H. Haft 76 Chairman of the Board
and Chief Executive Officer
R. Keith Green 46 President and Director
David B. MacGlashan 53 Senior Vice President and
Chief Financial Officer
Robert E. Brann 45 Executive Vice President
Dennis N. Weiss 51 Vice President, Real Estate
</TABLE>
Herbert H. Haft has been Chairman of the Board and Chief Executive Officer of
Trak Auto since its incorporation in 1983. Mr. Haft is the founder of Dart and
has been its Chairman and Chief Executive Officer since 1960. He is also
Chairman of each of Dart's other subsidiaries, including Crown Books
Corporation ("Crown Books") and Total Beverage Corporation ("Total Beverage"),
and a director of Shoppers Food Warehouse Corp. ("Shoppers Food"), which became
a wholly-owned subsidiary of Dart on February 6, 1997. On February 6, 1997, Mr.
Haft was elected Co-Chairman of Shoppers Food.
R. Keith Green has been President of Trak Auto since 1990 and a Director of
Trak Auto since 1991. From 1987 to 1990, Mr. Green was President and Chief
Executive Officer of Whitlock Corporation. Prior to 1987, he served as Vice
President of Stores of Auto Zone.
8
<PAGE> 9
Item 1. Business (Continued)
David B. MacGlashan has been Senior Vice President and Chief Financial Officer
of Trak Auto since December 1995. From 1991 to 1995, he was Principal
Accounting Officer of Trak Auto. From 1987 to 1991, Mr. MacGlashan was Vice
President of Finance and Chief Financial Officer of WSR, Inc. (formerly
Whitlock Corporation). Prior to 1987, he served as Chief Financial Officer of
I. B. Diffusion Ltd.
Robert E. Brann has been Executive Vice President of Trak Auto since 1990.
From 1989 to 1990, Mr. Brann was Vice President of Merchandising of Trak Auto.
Prior to 1989, he served as Vice President of Merchandising and later Vice
President of Store Operations and Administration of Franks Nursery and Crafts.
Dennis N. Weiss has been Vice President of Real Estate of Trak Auto since 1987.
There is no family relationship between any director and executive officer of
Trak Auto.
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"). 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 B. Stone as successor Voting Trustee.
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
9
<PAGE> 10
Item 1. Business (Continued)
Standstill Order, the phrase "extraordinary actions" means any transaction,
contract or agreement, the value of which exceeds $3 million. See Item 3 -
Legal Proceedings.
10
<PAGE> 11
Item 2. Properties
The Company subleases from Dart 210,000 square feet of a warehouse and office
facility, located in Landover, Maryland, which it shares with Crown Books. The
sublease is for 30 years and six months, provides for rental payments
increasing approximately 15% every five years over the term of the sublease and
commenced in 1985. The current annual rental is $1,497,000. The sublease also
requires the additional payment of maintenance, utilities, insurance and real
estate taxes allocable to the space subleased. Dart originally leased the
entire 271,000 square foot warehouse and office facility from a private
partnership in which Haft family members owned all of the partnership
interests. The Company's sublease is on the same terms as Dart's lease from
the Haft family partnership.
Dart has a lease agreement with a Haft family-owned entity for vacant land near
the Company's warehouse in Landover, Maryland. The lease is for the same
period as the warehouse and office facility lease described above and the
Company's current annual rental is $26,000 with increases of three percent per
year. Dart, the Company and Crown Books each pay a pro-rata share of the rent
in proportion to their use of the headquarters building and distribution
center.
The Company has an agreement with Dart to sublease 6,500 square feet in a
warehouse facility, adjacent to the above warehouse and office facility. Dart
leases the property from a partnership in which Haft family members own all of
the partnership interests (the "Pennsy Leases"). The sublease commenced April
1992 with a term of one year (with nine one-year option periods). Under the
sublease agreement the annual rent is $21,000 and increases to $24,000 for each
of the last five option periods. The sublease agreement also requires the
Company to pay approximately $6,000 annually for its full share of any common
area charges, real estate taxes and insurance premiums. The Company has given
notice to terminate the sublease and hold over in the warehouse on a
month-to-month basis. The Company also has an arrangement with Dart to use
additional space in the warehouse facility. The rental is variable dependent
on square footage used. In fiscal 1997 the rental was $150,000. The
arrangement also requires the Company to pay a prorated share of utilities,
real estate taxes and maintenance.
The Company 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, provides
for rental payments increasing approximately 15% every five years over the term
of the lease and commenced in 1984. The current annual rental is $754,000.
The lease also requires the Company to pay for maintenance, utilities,
insurance and real estate taxes on the warehouse. Under the terms of the lease
agreement, Dart is jointly and severally liable for the lease obligations.
The Company 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
11
<PAGE> 12
Item 2. Properties (Continued)
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 the Company 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 Landover, Maryland,
Bridgeview, Illinois and Ontario, California office and warehouse facilities to
Dart (or its subsidiaries) and to reduce 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 partnership interests.
The Company leases all of its 286 retail stores. As of February 1, 1997, the
total remaining minimum annual payments for the Company's retail stores
(excluding closed stores) were $131,198,000 to the lease expiration dates. The
lease and license expiration dates (without regard to renewal options) range
from 1997 to 2015. Twenty-three of these leases are with entities in which the
Haft family has substantially all the beneficial interest, two are subleased
from Crown Books and one is subleased from Shoppers Food (a total of 26
leases). These 26 leases provide for various termination dates that range from
1997 to 2024 and require payment of future minimum rentals aggregating
$46,884,000 (including renewal options) at February 1, 1997. These lease
agreements also require payment of a percentage of sales in excess of a stated
minimum. Annual fees and rentals paid to Haft-owned entities for stores and
office and warehouse space was $6,449,000 in the year ended February 1, 1997.
On February 10, 1995, after a legal review by Dart's 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, Trak Auto and Crown Books have also undertaken a
legal review of other leasing arrangements and real estate related transactions
between Dart, the Company or Crown Books, 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 (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.
12
<PAGE> 13
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 and other affiliated companies.
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
13
<PAGE> 14
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 Pennsy Warehouse Litigation, described
below), and was considered 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.
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 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.
14
<PAGE> 15
Item 3. Legal Proceedings (Continued)
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.
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.
Section 225 Action by Robert, Gloria and Linda Haft
On October 17, 1995, Robert M. Haft, Gloria G. Haft and Linda G. Haft
15
<PAGE> 16
Item 3. Legal Proceedings (Continued)
(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
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"
16
<PAGE> 17
Item 3. Legal Proceedings (Continued)
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.
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 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 the McLean Chain Bridge Road
Shopping Center 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
17
<PAGE> 18
Item 3. Legal Proceedings (Continued)
purchased and developed by Haft family partnerships for the purpose of leasing
those facilities to these companies as captive tenants; (iv) induced Dart and
Trak Auto to lease retroactively from a Haft family partnership a 2.66 acre
wooded lot for which the companies had no use; and (v) caused Trak Auto to
purchase certain used warehouse equipment from a Haft family partnership for
more than 700 percent of the price contemplated by the original equipment
lease.
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 (D.D.C.) 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 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.
18
<PAGE> 19
Item 3. Legal Proceedings (Continued)
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 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
19
<PAGE> 20
Item 3. Legal Proceedings (Continued)
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 $1,685,000, $780,000 and
$640,000 during the years ended February 1, 1997, February 3, 1996 and January
28, 1995, respectively.
20
<PAGE> 21
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
21
<PAGE> 22
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Common Stock is quoted on the Nasdaq National Market ("Nasdaq") under the
symbol TRKA. The following table sets forth the range of the high and low sale
prices for the Common Stock, as reported by the Nasdaq, for the fiscal quarters
indicated.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
April 29, 1995 20 7/8 16 7/8
July 29, 1995 17 3/4 15 3/8
October 28, 1995 16 1/2 14 9/16
February 3, 1996 16 1/4 15
May 4, 1996 20 1/2 14 3/4
August 3, 1996 17 3/4 16
October 2, 1996 17 3/4 16 1/4
February 1, 1997 17 1/4 14
</TABLE>
There were approximately 130 record holders of the Common Stock as of April 30,
1996.
The Company has not paid dividends during the past two fiscal years and does
not expect to pay dividends in the foreseeable future.
22
<PAGE> 23
Item 6. Selected Financial Data
INCOME STATEMENT DATA: (in thousands, except per share and sales % data)
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales $345,984 $342,242 $348,599 $334,798 $315,793
Interest and other income 1,586 2,358 1,887 1,562 1,759
Cost of sales, store occupancy
and warehousing 262,472 253,582 256,210 255,669 233,472
Selling and Administrative 72,452 69,626 69,260 70,838 66,053
Depreciation and Amortization 7,495 6,292 6,004 6,756 6,029
Interest expense 3,705 3,638 3,849 3,561 3,521
Restructuring charge - - - - 7,400
Unusual item - - - - 3,894
Income (loss) before
income taxes 1,446 11,462 15,163 (464) 4,971
Income before cumulative
effect of change in
accounting principle 1,446 7,290 10,265 81 3,355
Cumulative effect of change
in accounting principle - - - - 1,658
Net income 1,084 7,290 10,265 81 5,013
Per share data:
Income before cumulative
effect of change in
accounting principle $ .18 $ 1.23 $ 1.67 $ .01 $ .57
Cumulative effect of change
in accounting principle - - - - .28
Net income $ .18 $ 1.23 $ 1.67 $ .01 $ .85
Weighted average common
share and common share
equivalents outstanding 5,942 5,928 6,139 6,107 5,928
Percentage increase
(decrease) in sales
Total stores 1.1% (1.8)% 4.1% 6.0% (1.2)%
Comparative stores (1.7)% (2.7)% 2.1% 1.3% 2.6%
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA: (dollars in thousands)
at end of Fiscal Year
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current assets $136,813 $133,993 $137,306 $129,805 $119,831
Current liabilities 80,298 75,348 75,293 75,737 59,662
Working capital 56,515 58,645 62,013 54,068 60,169
Total assets 192,220 187,595 187,649 179,149 165,104
Long-term obligation 28,509 30,064 31,797 33,737 36,159
Stockholders' equity 83,413 82,183 80,559 69,675 69,283
</TABLE>
23
<PAGE> 24
Item 7. Management's Discussion and Analysis of Financial Conditions
and Results of Operations
Control of Dart
Dart owns 67.1% of the outstanding common stock of Trak Auto. 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. Because Herbert
H. Haft is and Ronald S. Haft was an executive officer and/or director of Trak
Auto, on October 11, 1994, the Board of Directors of Trak Auto established an
Executive Committee 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 and Trak Auto have
been extensive. Accordingly, the respective Executive Committees assumed day-
to-day involvement in these disputed issues and other matters affecting Dart
and Trak Auto, in particular matters relating to litigation to which Dart or
Trak Auto 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,
which is 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 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
24
<PAGE> 25
Item 7. Management's Discussion and Analysis of Financial Conditions
and Results of Operations (Continued)
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.
Although the impact cannot be precisely measured, management believes that the
continued uncertainty relating to the control of Dart and the surrounding
litigation has adversely 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 adverse 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 any occurs.
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 automotive aftermarket industry,
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 Company 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). The Company believes that as superstores mature, operating
expenses as a percentage of sales will decrease.
25
<PAGE> 26
Item 7. Management's Discussion and Analysis of Financial Conditions
and Results of Operations (Continued)
The Company intends to continue its practice of reviewing the profitability
trends and prospects of existing stores. The Company may from time to time
close, relocate or sell stores (or groups of stores) that are not satisfying
certain performance objectives.
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.
Management believes that the markets in which it operates will remain highly
competitive in the foreseeable future and, as a result, that the Company will
be challenged to improve operating results in fiscal 1998.
Liquidity and Capital Resources
Cash, including short-term instruments, is the Company's primary source of
liquidity. Cash, including short-term instruments, increased by $6,166,000 to
$11,723,000 at February 1, 1997 from $5,557,000 at February 3, 1996. The
increase was primarily the result of the dispositions and maturities of
marketable debt securities.
Operating activities provided $1,027,000 to the Company for the 52 weeks ended
February 1, 1997 ("fiscal 1997") compared to $7,598,000 for the 53 weeks ended
February 3, 1996 ("fiscal 1996"). The decrease was primarily due to payments
for increased merchandise inventory levels and a decrease in operating results.
Investing activities provided $5,000,000 to the Company in fiscal 1997 compared
to using $20,041,000 of the Company's funds in fiscal 1996. The change was
primarily due to the dispositions and maturities of United States Treasury
Bills and Notes in fiscal 1997 compared to the net purchase of United States
Treasury Bills and the Pittsburgh acquisition in fiscal 1996.
Financing activities provided $139,000 to the Company in fiscal 1997 from the
proceeds from exercises of stock options.
The Company funds its requirements for working capital and capital expenditures
with net cash generated from operations, existing cash resources and, if
necessary, borrowings under the Company's new revolving credit facility. The
Company's primary capital requirements relate to remodelings and new store
openings (including purchases of inventory and the costs of store fixtures and
leasehold improvements). As of February 1, 1997, the Company had entered into
lease agreements to open seven new stores.
26
<PAGE> 27
Item 7. Management's Discussion and Analysis of Financial Conditions
and Results of Operations (Continued)
In December 1996, the Company 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 the Company'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.
The Company did not borrow under the credit facility during the year ended
February 1, 1997.
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.
At February 1, 1997
Working capital decreased $2,130,000 to $56,515,000 in fiscal 1997 primarily
due to capital expenditures for new or converted Super Trak and Super Trak
Warehouse stores.
At February 3, 1996
Working capital decreased to $58,645,000 in fiscal 1996 primarily as a result
of the costs associated with the entry into the Pittsburgh market, capital
27
<PAGE> 28
Item 7. Management's Discussion and Analysis of Financial Conditions
and Results of Operations (Continued)
expenditures for new store openings and the repurchase of outstanding common
stock. These uses of working capital were partially offset by operating
results.
Results of Operations
Year Ended February 1, 1997 Compared to the Year Ended February 3, 1996
During fiscal 1997, the Company 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, the Company 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 the
Company'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
sales week in fiscal 1996 was approximately $6,000,000. Comparable sales
(stores open more than one year) decreased 1.7% in fiscal 1997 compared to the
52 weeks ended February 3, 1996. Sales for comparable Super Trak Warehouse
stores increased 0.3% in fiscal 1997. Sales for comparable Super Trak stores
decreased 1.6% in fiscal 1997. Sales for comparable Classic Trak stores
decreased 2.3% in fiscal 1997. Sales for Super Trak and Super Trak Warehouse
stores represented 64.6% of total sales during fiscal 1997 compared to 56.2%
for fiscal 1996.
Interest and other income decreased by $772,000 in fiscal 1997 when compared to
fiscal 1996. The decrease was primarily due to reduced interest income as a
result of a decrease in funds available for short-term investments.
Cost of sales, store occupancy and warehousing expenses as a percentage of
sales were 75.9% in fiscal 1997 compared to 74.1% in fiscal 1996. The
increases were primarily due to a decrease in gross margins as a result of
competitive pressures, higher store occupancy costs for larger stores with
newer leases, and increased distribution costs due to broader geographical
delivery areas and increased SKU's supplied to Super Trak Warehouse stores.
Selling and administrative expenses as a percentage of sales were 20.9% in
fiscal 1997 compared to 20.3% in fiscal 1996. The increase was primarily due
to increased payroll costs.
Depreciation and amortization expenses increased $1,203,000 in fiscal 1997
compared to fiscal 1996. The increase was primarily due to increases in store
28
<PAGE> 29
Item 7. Management's Discussion and Analysis of Financial Conditions
and Results of Operations (Continued)
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
earnings while a permanent tax difference remained relatively unchanged.
Year Ended February 3, 1996 Compared to the Year Ended January 28, 1995
During fiscal 1996, the Company 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, the Company had 276 stores,
including 113 Super Trak stores and 30 Super Trak Warehouse stores.
Sales of $342,242,000 for fiscal 1996 decreased by $6,357,000 or 1.8% compared
to fiscal 1995. The decrease was primarily due to lower sales during the 13
weeks ended April 29, 1995 compared to the 13 weeks ended April 30, 1994, as a
result of the mild winter conditions in Chicago and Washington, D.C.
metropolitan areas. (Extremely cold weather tends to enhance sales by causing a
higher incidence of parts failure and the need for anti-freeze). In addition,
sales were down due to a net decrease in the number of stores. The sales
decrease was partially offset by 53 weeks of sales during fiscal 1996 compared
to 52 weeks of sales in fiscal 1995. The extra sales week was approximately
$6,000,000. Comparable sales (stores open more than one year) decreased 2.7%
in fiscal 1996 compared to the 53 weeks ended February 4, 1995. Sales for
comparable Super Trak stores increased 0.1% in fiscal 1996. Sales for
comparable Classic Trak stores decreased 3.9% in fiscal 1996. Sales for Super
Trak and Super Trak Warehouse stores represented 56.2% of total sales during
fiscal 1996 compared to 42.6% for fiscal 1995.
Interest and other income increased by $471,000 in fiscal 1996 when compared to
fiscal 1995. The increase was primarily due to higher interest rates on the
Company'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.
The Company recorded closed store reserves of $418,000 and $1,580,000 in fiscal
29
<PAGE> 30
Item 7. Management's Discussion and Analysis of Financial Conditions
and Results of Operations (Continued)
1996 and 1995, respectively. These reserves are for future lease obligations
and net book value of leasehold improvements for underperforming 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.
Effects of Inflation
Inflation in the past several years has not had a significant impact on the
Company's business. The Company believes it will be able to recover future
cost increases due to inflation by increasing selling prices.
30
<PAGE> 31
Item 8. Financial Statements and Supplementary Data
Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants 32
Consolidated Balance Sheets 33
Consolidated Statements of Operations 35
Consolidated Statements of Stockholders' Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 39
</TABLE>
31
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO TRAK AUTO CORPORATION:
We have audited the accompanying consolidated balance sheets of Trak Auto
Corporation (a Delaware corporation and a majority-owned subsidiary of Dart
Group Corporation) and subsidiaries as of February 1, 1997 and February 3,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
February 1, 1997. 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 Trak Auto Corporation and
subsidiaries as of February 1, 1997 and February 3, 1996, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 1, 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 and in fiscal
1995 changed its method of accounting for its LIFO inventories.
ARTHUR ANDERSEN LLP
Washington, D.C.
April 25, 1997
32
<PAGE> 33
TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and equivalents $ 5,782 $ 5,411
Short-term instruments 5,941 146
Marketable debt securities 2,479 16,656
Accounts receivable 6,841 4,709
Merchandise inventories 106,193 99,471
Deferred income taxes 6,494 6,566
Other current assets 3,083 1,034
--------- ---------
Total Current Assets 136,813 133,993
--------- ---------
Property and Equipment, at cost:
Furniture, fixtures and equipment 63,675 56,982
Leasehold improvements 12,103 10,196
Property under capital leases 22,032 22,032
--------- ---------
97,810 89,210
Accumulated Depreciation and Amortization 49,876 42,324
--------- ---------
47,934 46,886
--------- ---------
Other Assets 1,502 1,787
--------- ---------
Deferred Income Taxes 5,971 4,929
--------- ---------
Total Assets $ 192,220 $ 187,595
========= =========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE> 34
TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable, trade $ 47,690 $ 46,431
Income taxes payable 1,581 698
Accrued expenses-
Salaries and benefits 11,440 11,463
Taxes other than income 5,569 5,185
Other 13,791 11,399
Current portion of obligations under
capital leases 209 101
Due to affiliate 18 71
--------- ---------
Total Current Liabilities 80,298 75,348
--------- ---------
Obligations under Capital Leases 26,912 26,802
--------- ---------
Reserve for Store Closings and Restructuring 1,597 3,167
--------- ---------
Other - 95
--------- ---------
Total Liabilities 108,807 105,412
--------- ---------
Commitments and Contingencies
Stockholders' Equity
Common stock, par value $.01 per share;
15,000,000 shares authorized; 6,437,469
and 6,416,058 shares issued, respectively 64 64
Paid-in capital 46,476 46,236
Unrealized investment gains 3 97
Retained earnings 45,590 44,506
Treasury stock, 528,190 shares of
common stock at cost (8,720) (8,720)
--------- ---------
Total Stockholders' Equity 83,413 82,183
--------- ---------
Total Liabilities and Stockholders'
Equity $ 192,220 $ 187,595
========= =========
</TABLE>
See notes to consolidated financial statements.
34
<PAGE> 35
TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
----------------------------------
February 1, February 3, January 28,
1997 1996 1995
---------- ---------- ----------
(52 weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C>
Sales $345,984 $342,242 $348,599
Interest and other income 1,586 2,358 1,887
-------- -------- --------
347,570 344,600 350,486
-------- -------- --------
Cost of sales, store occupancy
and warehousing 262,472 253,582 256,210
Selling and administrative 72,452 69,626 69,260
Depreciation and amortization 7,495 6,292 6,004
Interest expense 3,705 3,638 3,849
-------- -------- --------
346,124 333,138 335,323
-------- -------- --------
Income before income taxes 1,446 11,462 15,163
Income taxes 362 4,172 4,898
-------- -------- --------
Net income $ 1,084 $ 7,290 $ 10,265
======== ======== ========
Weighted average common share and
common share equivalents outstanding 5,942 5,928 6,139
======== ======== ========
Per share data:
Net income $ .18 $ 1.23 $ 1.67
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 36
TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars and shares in thousands)
<TABLE>
<CAPTION>
Years Ended
----------------------------------
February 1, February 3, January 28,
1997 1996 1995
---------- ---------- ----------
(52 weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C>
Common Stock:
Balance, beginning of period $ 64 $ 63 $ 63
Stock options exercised - 1 -
-------- -------- --------
Balance, end of period $ 64 $ 64 $ 63
======== ======== ========
Paid-in Capital:
Balance, beginning of period $ 46,236 $ 45,206 $ 44,477
Stock options exercised 240 1,030 729
-------- -------- --------
Balance, end of period $ 46,476 $ 46,236 $ 45,206
======== ======== ========
Unrealized Investment Gains (Losses) $ 3 $ 97 $ (110)
======== ======== ========
Retained Earnings:
Balance, beginning of period $ 44,506 $ 37,216 $ 26,951
Net income 1,084 7,290 10,265
-------- -------- --------
Balance, end of period $ 45,590 $ 44,506 $ 37,216
======== ======== ========
Treasury Stock:
Balance, beginning of period $ (8,720) $ (1,816) $ (1,816)
Common Stock repurchased - (6,904) -
-------- -------- --------
Balance, end of period $ (8,720) $ (8,720) $ (1,816)
======== ======== ========
Common Stock Outstanding:
Balance, beginning of period 5,888 6,114 6,053
Stock Options Exercised 21 84 61
Common Stock repurchased - (310) -
-------- -------- --------
Balance, end of period 5,909 5,888 6,114
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 37
TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended
----------------------------------
February 1, February 3, January 28,
1997 1996 1995
---------- ---------- ----------
(52 weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,084 $ 7,290 $ 10,265
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 7,495 6,292 6,004
Provision for store closings and
restructuring 402 418 1,580
Changes in assets and liabilities:
Accounts receivable (2,132) 738 1,004
Merchandise inventories (6,722) (6,871) 4,165
Due from affiliate - - 205
Other current assets (2,049) 36 (80)
Deferred income taxes (525) 1,227 (3,382)
Other assets 285 42 (8)
Accounts payable, trade 1,259 (4,088) 477
Accrued expenses 3,345 4,953 255
Due to affiliate (53) (137) -
Income taxes payable 883 305 (762)
Reserve for closed stores (2,245) (2,607) (1,894)
-------- -------- --------
Net cash provided by
operating activities $ 1,027 $ 7,598 $ 17,829
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures $ (8,638) $ (7,835) $ (7,953)
Purchase of Pittsburgh store assets - (5,767) -
Purchases of United States Treasury
Bills - (19,550) (31,274)
Dispositions of United States
Treasury Bills 4,299 8,180 11,850
Maturities of United States
Treasury Bills 3,345 3,368 21,407
Purchases of United States Treasury
Notes - (499) (36,380)
Dispositions of United States
Treasury Notes - 500 33,097
Dispositions of marketable
debt securities 4,370 1,092 4,540
Maturities of marketable
debt securities 1,624 470 -
</TABLE>
37
<PAGE> 38
TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended
----------------------------------
February 1, February 3, January 28,
1997 1996 1995
---------- ---------- ----------
(52 weeks) (53 weeks) (52 weeks)
<S> <C> <C>
Cash Flows from Investing Activities (Continued):
Dispositions of reverse
repurchase agreements - - (1,023)
Purchases of marketable
debt securities - - (2,811)
-------- -------- --------
Net cash provided by (used in)
investing activities $ 5,000 $(20,041) $ (8,547)
------- -------- --------
Cash Flows from Financing Activities:
Principal payments under capital
lease obligations $ (101) $ (261) $ (212)
Purchase of treasury shares - (6,904) -
Proceeds from exercises of stock
options 240 1,031 729
-------- -------- --------
Net cash provided by (used in)
financing activities $ 139 $ (6,134) $ 517
-------- -------- --------
Net Increase (Decrease) in Cash
and Equivalents $ 6,166 $(18,577) $ 9,799
Cash and Equivalents at Beginning
of Year (Note 1) 5,557 24,134 14,335
-------- -------- --------
Cash and Equivalents at End
of Year (Note 1) $ 11,723 $ 5,557 $ 24,134
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 3,705 $ 3,638 $ 3,849
Income taxes 450 3,339 8,948
Supplemental Schedule of Noncash Activities:
Write-off book value of fixed assets to
restructuring and closed store reserves $ - $ 521 $ 1,038
</TABLE>
See notes to consolidated financial statements.
38
<PAGE> 39
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements reflect the accounts of Trak
Auto Corporation ("Trak Auto") and its wholly-owned subsidiaries. Trak Auto and
its wholly-owned subsidiaries are referred to collectively as the "Company".
All significant intercompany accounts and transactions have been eliminated.
The Company is engaged in the business of operating specialty retail stores in
the United States.
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.
Fiscal Year
The Company's fiscal year ends on the Saturday nearest to January 31. The
fiscal year ended February 3, 1996 included 53 weeks and all other fiscal years
presented include 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 a 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
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 municipal
securities.
Management determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determination at each
39
<PAGE> 40
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
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 February 1, 1997, market value was $3,000 greater than cost, net of
income taxes. At February 1, 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 interest and other income. 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 February 1, 1997:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Due in one year or less $ 1,184
Due after one year through three years 765
Due after three years $ 530
--------
$ 2,479
========
</TABLE>
Expected maturities may differ from contractual maturities because the issuers
of securities may have the right to prepay obligations without prepayment
penalties.
Fair Value of Financial Instruments
The fair values of current financial assets and liabilities are approximately
the reported carrying amounts.
Merchandise Inventories
The Company's inventories are priced at the lower of last-in, first-out
("LIFO") cost or market. At February 1, 1997 and February 3, 1996, inventories
determined on a first-in, first-out basis would have been greater by $6,733,000
and $6,579,000, respectively.
Effective January 30, 1994, the Company 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, the Company uses an index
published by the United States Bureau of Labor Statistics. Previously, an
index
40
<PAGE> 41
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
determined by the Company based upon inventory cost changes between financial
reporting periods, was utilized. This change has been accounted for as a
change in accounting principle 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 fiscal 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
Property and equipment are recorded at cost. The Company depreciates
furniture, fixtures and most equipment generally over a ten-year period using
the straight-line method. Computer equipment is depreciated over a five-year
period using the straight-line method. Effective February 2, 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 the estimated useful life, not to exceed five years. This change will be
made as management has determined that these costs benefit future periods. All
stores and some equipment are leased. Improvements to leased premises are
amortized 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 $8,253,000 and $7,333,000 as of
February 1, 1997 and February 3, 1996, respectively.
Preopening Expenses
All costs of a noncapital nature incurred in opening a new store are charged to
expense as incurred.
Advertising Expense
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
41
<PAGE> 42
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
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 deducting such
receivables from amounts payable to the related vendors.
Earnings Per Share
Earnings per share is computed using the weighted average number of shares of
common stock and common stock equivalents (certain stock options) outstanding
during the periods. The difference between primary earnings per common share
and fully diluted earnings per common share was not significant for the periods
presented.
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 its fiscal
year ending February 1, 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 13).
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
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.
42
<PAGE> 43
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
Reclassifications
Certain reclassifications have been made to prior year statements to conform to
current year presentation.
NOTE 2 - INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 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 consists of the following:
<TABLE>
<CAPTION>
(dollars in thousands)
Fiscal Years
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 1,279 $ 2,474 $ 5,255
State 53 477 847
------- -------- --------
1,332 2,951 6,102
Deferred:
Federal (730) 829 (1,301)
State (240) 392 97
-------- -------- --------
$ 362 $ 4,172 $ 4,898
======== ======== ========
</TABLE>
43
<PAGE> 44
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
The effective tax rate 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% 35% 35%
Income taxes at Federal statutory rate $ 492 $ 4,012 $ 5,307
Increase (decrease) in taxes
resulting from:
State income taxes, net of Federal
income tax benefit 4 439 609
Tax exempt municipal bond interest
income (12) (64) (108)
Utilization of former Trak West
net operating loss (208) (225) (225)
Effect of change in deferred tax
valuation allowance - - (728)
Travel and entertainment 26 18 23
Other 60 (8) 20
-------- -------- --------
Income taxes $ 362 $ 4,172 $ 4,898
======== ======== ========
Effective tax rate 25.0% 36.4% 32.3%
======== ======== ========
</TABLE>
44
<PAGE> 45
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
The effect of each type of temporary difference and carryforward that generates
a significant portion of deferred tax assets is as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
February 1, February 3,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Capitalized leases treated as operating
leases for tax purposes $ 2,399 $ 2,396
Depreciation 2,344 1,031
Uniform capitalization of inventory costs 2,098 2,161
Reserve for stores closings and
restructuring charges 1,037 1,798
Accrued rent 616 508
Preacquisition basis adjustment for Trak West 164 262
Accrued vacation reserve 537 498
Accrued self-insurance reserve 2,312 2,253
Deferred compensation 138 -
Deferred acquisition costs 81 -
State tax credit carryforward 757 767
Deferred income 65 83
Capital loss carryfoward 73 75
Other 175 80
--------- ---------
Deferred tax assets 12,796 11,912
Deferred tax liability:
Book basis of asset acquired as a
result of involuntary conversion (331) (417)
--------- ---------
Net deferred tax asset $ 12,465 $ 11,495
========= =========
</TABLE>
The Company established a valuation allowance of $728,000 against its deferred
tax asset in fiscal 1993. During the year ended January 28, 1995, the Company
reversed the $728,000 valuation allowance.
In the opinion of management, the deferred tax asset will be realized through
projected future earnings. The Company has achieved taxable income in each of
the last three years. The Company has a $202,000 capital loss carryforward
which will expire in fiscal year 2010. During the year ended February 3, 1996,
the Company entered into a tax sharing agreement with Dart, which would become
effective, if and when the Company is consolidated with Dart's income tax
returns.
45
<PAGE> 46
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
NOTE 3 - RESTRUCTURING AND CLOSED STORE CHARGES
The Company 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. The Company recognizes store closing
costs when management decides to close a store. In prior years, the Company
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, the Company had reserves of $2,644,000 for store
closings and restructurings. 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 the Company'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
restructure reserves net provision of approximately $402,000 and included in
the activity for fiscal 1996 is an additional net provision of $673,000. This
activity is included in selling and administrative expenses in the Consolidated
Statements of Operations.
46
<PAGE> 47
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
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>
Fiscal (in thousands)
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 the Company 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.
The Company will continue to evaluate the performance and future viability of
its stores and may close or convert additional stores in the future.
NOTE 4 - TRANSACTIONS WITH AFFILIATES
Dart Group Corporation ("Dart"), which currently owns 67.1% of the Company's
outstanding common stock, provides the Company with certain general and
administrative services. In addition, the Company provided similar services
to Dart and its other subsidiaries. In management's opinion, the intercompany
charges for these services were equal to the costs incurred by Dart or the
Company, as the case may be, to provide these functions. It is not practicable
for the Company to estimate the cost it would have incurred for these services
if it had operated as an unaffiliated entity.
In addition to the intercompany charges for general and administrative
services, Dart charged the Company, on a monthly basis, for actual expenses
which related directly to the Company's operations. Substantially all such
charges were supported by invoices from unrelated parties designating the
Company as recipient of the related goods or services or were for matters
related to all of Dart's affiliated companies and were allocated on a
judgmental basis by
47
<PAGE> 48
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
management. Amounts receivable from or payable to affiliate relate to
transactions made on behalf of the Company by Dart or on behalf of Dart by the
Company.
In the Company's opinion, the methods used for allocating costs described above
constitute a reasonable basis on which to allocate such costs.
The following table summarizes the intercompany transactions:
<TABLE>
<CAPTION>
(dollars in thousands)
Fiscal Years
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Due to (from) Affiliate,
Beginning of year $ 71 $ 185 $ (20)
-------- -------- --------
Expense charges-
Direct rentals (Note 6) 1,625 1,382 1,339
Salaries from Dart 1,111 865 712
Salaries to Dart (1,447) (1,235) (468)
Other expenses 4,529 5,154 2,893
-------- -------- --------
5,818 6,166 4,476
-------- -------- --------
Payments (5,871) (6,280) (4,271)
-------- -------- --------
Due to (from) Affiliate, End of year $ 18 $ 71 $ 185
======== ======== ========
</TABLE>
In fiscal 1997 and 1996, other expenses reflect insurance premiums paid by Dart
previously paid directly by the Company. All transactions with Dart included
above are free of interest and made under current payment terms that, in
management's opinion, are comparable to those with unrelated parties. The
average balances of amounts due to affiliate were $73,000, $526,000, and
$355,000 for the years ended February 1, 1997, February 3, 1996 and January 28,
1995, respectively.
NOTE 5 - 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"). The RSH Settlement transactions are subject to legal challenges.
See Note 9. 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, by and among Ronald S. Haft, Dart and Larry G. Schafran and
Sidney B. Silverman,
48
<PAGE> 49
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
as initial Voting Trustees. On December 28, 1995, the initial Voting Trustees
resigned and appointed Richard B. Stone as successor Voting Trustee.
As part of the RSH Settlement, Ronald S. Haft consented to the termination of
all of his outstanding stock options to purchase up to 10,000 shares of Trak
Auto's common stock.
NOTE 6 - COMMITMENTS
Lease Commitments
The Company leases stores, warehouses, leasehold improvements, fixtures and
equipment. Renewal options are available on the majority of leases. In some
instances, store leases require the payment of contingent rentals and license
fees based on sales in excess of specified minimums. Certain properties are
subleased with various expiration dates. Certain capital leases have purchase
options at fair market value at the end of the lease.
Following is a schedule of future minimum payments under capital leases and
non-cancelable operating leases and license agreements which have initial or
remaining terms in excess of one year at February 1, 1997. The imputed
interest rate on capital leases is 14.8% in the aggregate.
<TABLE>
<CAPTION>
(dollars in thousands)
Fiscal Capital Leases Operating
Year (see Related Party Leases) Leases
------ -------------------------- ---------
<S> <C> <C>
1998 $ 3,720 $ 25,164
1999 3,917 22,952
2000 3,943 19,066
2001 4,074 15,238
2002 4,185 12,275
2003-2017 59,146 41,110
---------- ---------
Total 78,985 $ 135,805
Less-Imputed interest 51,864 =========
----------
Present value of net
minimum lease payments 27,121
Less-Current maturities 209
----------
Long-term capital lease
obligations $ 26,912
==========
</TABLE>
The above table includes $2,085,000 for store operating leases where the store
has been closed and the lease obligation has been accrued in the restructuring
49
<PAGE> 50
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
or store closing reserves. Minimum operating lease obligations have not been
reduced by total future minimum sublease rentals of $1,509,000 receivable in
the future under noncancelable leases.
Rent expense and license fees for operating leases and license agreements are
as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Fiscal Years
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rentals $ 21,963 $ 19,695 $ 18,906
Contingent rentals 349 363 564
-------- -------- --------
Total $ 22,312 $ 20,058 $ 19,470
======== ======== ========
</TABLE>
Related Party Leases and License Agreements
Members of the Haft family beneficially own all the issued and outstanding
voting stock of Dart. Under the RSH Settlement, a majority of Dart's voting
stock is held in a voting trust for Ronald S. Haft as beneficial owner. Of the
Company's 286 stores and three warehouses (discussed below) as of February 1,
1997, 23 stores and the three warehouses were held under leases from entities
in which Haft family members own substantially all the beneficial interest.
Two stores are subleased from Crown Books Corporation ("Crown Books"), an
affiliate of Dart. One store is subleased from Shoppers Food Warehouse Corp.,
a wholly- owned subsidiary of Dart. These 26 store lease and sublease
agreements provide for various termination dates which, assuming renewal
options are exercised, range from 1997 to 2024, and require the payment of
future minimum license fees and rentals aggregating $46,884,000 at February 1,
1997. These agreements also require payment of a percentage of sales in excess
of a stated minimum, and are included in the lease and license commitments
table above as operating leases. Annual fees and rentals for licenses, leases
and subleases involving the Haft family were $6,449,000, $6,295,000, and
$5,991,000 for fiscal 1997, 1996 and 1995, respectively.
The Company 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, which is for 30 years and six months (which
commenced in 1984), 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 the payment of maintenance, utilities,
insurance and taxes on the warehouse. Under the terms of the lease agreement,
Dart is jointly and severally liable for the lease obligations. This lease
agreement has been classified as a capital lease and is included under the
50
<PAGE> 51
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
Capital Leases caption of the lease commitment table above.
The Company subleases from Dart 210,000 square feet of a warehouse and office
facility located in Landover, Maryland which it shares with Dart and Crown
Books. The sublease is for 30 years and six months, provides for rental
payments increasing approximately 15% every five years over the term of the
sublease and commenced in 1985. The current annual rental is $1,497,000. The
sublease agreement also requires the payment for maintenance, utilities,
insurance and taxes allocable to the space subleased. Dart originally leased
the entire 271,000 square foot warehouse and office facility from a private
partnership in which Haft family members owned all of the partnership
interests. The Company's sublease is on the same terms as Dart's lease and is
classified as a capital lease and is included under the Capital Leases caption
of the lease commitment table above.
Dart has a lease agreement with a Haft family-owned entity for vacant land near
the Company's warehouse in Landover, Maryland. The lease is for the same
period as the headquarters building and distribution center lease described
above and the Company's current annual rental is $26,000 with increases of
three percent per year. Dart, the Company and Crown Books each pay a pro-rata
share of the rent in proportion to their use of the headquarters building and
distribution center.
On April 20, 1992, the Company entered into an agreement with Dart to sublease
6,500 square feet in a warehouse facility, adjacent to the above warehouse and
office facility. Dart leases the property from a partnership in which Haft
family members own all of the partnership interests (the "Pennsy Leases").
The term of the sublease is one year (with nine one-year option periods).
Under the sublease agreement, the annual rent is $21,000 and increases to
$24,000 for each of the last five option periods. The sublease agreement also
requires the Company to pay approximately $6,000 annually for its full share of
any common area charges, real estate taxes and insurance premiums. The Company
has given notice to terminate this sublease and hold over in the warehouse on a
month-to-month basis. The Company also has an arrangement with Dart to use
additional space in the warehouse facility. The rental is variable dependent
on square footage used. In fiscal 1997 the rental was $ 150,000. The
arrangement also requires the Company to pay a prorated share of utilities,
real estate taxes and maintenance. The Pennsy Leases are currently the subject
of litigation.
The Company has a lease agreement with a Haft family-owned entity for a 317,000
square foot distribution center in Ontario, California. The lease is for 20
years, commenced in 1989, and provides for increasing rental payments, based
51
<PAGE> 52
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
upon the Consumer Price Index for the Los Angeles area, over the term of the
lease. Current annual rental is $1,469,000 per year. The lease requires the
payment for maintenance, utilities, insurance and taxes. This lease agreement
has been classified as a capital lease and is included under the Capital Leases
caption in the lease commitment table above.
As part of the RSH Settlement, Ronald S. Haft agreed to transfer the real
estate and partnership interests controlled by him in the Landover, Maryland,
Bridgeview, Illinois and Ontario, California offices and warehouse facilities
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.
On February 10, 1995, after a legal review by Dart's Executive Committee, Dart
filed a complaint for rescission of the Pennsy Leases and for the return of
rent paid since 1991 on such leases. The Executive Committees of Dart, Trak
Auto and Crown Books have also undertaken a legal review of other leasing
arrangements and real estate related transactions between Dart, the Company and
Crown Books, 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
(other than the Pennsy Leases) with certain partnerships owned beneficially by
members of the Haft family.
Employment Arrangements
The Company has entered into employment agreements with several key employees.
The employment agreements are for a one-year or two-year terms and are
automatically extended one year or two years at the end of the fiscal year
unless the individual is terminated with cause. The agreements provide for
annual compensation increases following review and performance appraisal by the
Compensation Committee of the Board of Directors.
NOTE 7 - 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
52
<PAGE> 53
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
increasing the purchase price to $20.50 per share, and made certain other
changes. When the offer expired on February 28, 1995, Trak Auto had
repurchased approximately 310,000 shares for a total consideration of
$6,363,000 plus expenses of approximately $541,000.
NOTE 8 - BOARD OF DIRECTORS
In January 1994, the Board of Directors of Dart established a Special
Litigation Committee to assess, on behalf of the Company, whether to pursue,
settle or abandon, claims raised in the derivative lawsuits filed against the
Company. See Note 9 for a discussion of the derivative lawsuits.
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. Because Herbert
H. Haft is and Ronald S. Haft was an executive officer and/or director of Trak
Auto, on October 11, 1994, the Board of Directors of Trak Auto established an
Executive Committee 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 and Trak Auto have
been extensive. Accordingly, the respective Executive Committees assumed
day-to-day involvement in these disputed issues and other matters affecting
Dart and Trak Auto, in particular matters relating to litigation to which Dart
or Trak Auto 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.
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 on January 4, 1994, have been
compensated at a salary rate of $250 per hour plus reimbursement of expenses.
Compensation paid by Dart and its subsidiaries, including the Company, to
members of the Executive Committees for their services on those committees
totaled $1,299,000, $1,263,000 and $666,000 in fiscal 1997, 1996 and 1995
respectively ($423,000, $421,000 and $166,000 paid by the Company in fiscal
1997, 1996 and 1995 respectively). Compensation paid by Dart and its
subsidiaries, including the Company, to members of the Special Litigation
Committee for their service on that committee totaled $269,000 ($27,000 paid by
the Company) in fiscal 1995, exclusive of expense reimbursement. There were no
fees paid to members of the Special Litigation Committee in fiscal 1997 or
fiscal 1996.
53
<PAGE> 54
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
NOTE 9 - LITIGATION
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 and other affiliated companies.
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
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 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, the Pennsy Leases, and was considered asserting additional
54
<PAGE> 55
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
claims, certain of which have since been asserted in subsequent litigation
filed against Herbert H. Haft. The amended motion is still pending before the
court.
In connection with the October 1995 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.
Herbert H. Haft Proxy Litigation
Herbert H. Haft sold 172,730 shares of Dart Class B Common Stock to Ronald S.
Haft on July 28, 1993 (the "Stock Sale Agreement") and Ronald S. Haft
purportedly granted Herbert H. Haft an irrevocable proxy (the "Proxy") to vote
these shares of stock. On June 30, 1995, Ronald S. Haft purportedly revoked
the 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 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 placed the
55
<PAGE> 56
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
shares in treasury.
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.
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.
56
<PAGE> 57
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
Standstill Order
In connection with the legal challenges to the RSH Settlement raised by RGL and
Herbert H. Haft, on December 6, 1995, the court entered a Standstill Order.
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, the
Standstill Order restricts certain significant corporate actions by Dart
without first giving Herbert H. Haft and the other parties to the Section 225
Action not less than seven days written notice.
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 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
57
<PAGE> 58
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
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), part of which is deferred, contemplated by the possible settlements
but are considering various options to finance them.
58
<PAGE> 59
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
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 $1,685,000, $780,000 and
$640,000 during the years ended February 1, 1997, February 3, 1996 and January
28, 1995, respectively.
NOTE 10 - CREDIT AGREEMENT
In December 1996, the Company entered into a revolving credit facility (the
"Facility") with a finance company to borrow up to $25.0 million. The Company
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 the
Company's ratio of debt to tangible net worth. Borrowings are limited to
eligible inventory levels, as defined, and are secured by the Company's
inventory, accounts receivable, and proceeds from the sale of such assets. The
Facility contains certain restrictive covenants including limitations on
additional indebtedness, advances to affiliates and payments (limited to $25.0
million) or guarantees (limited to $20.0 million of the $25.0 million) to
settle disputes with Haft family members and includes 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% on the
unused principal balance, as defined. No single advance may be outstanding for
more than 36 months. The Company 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
the Company.
In addition, the Company has a $750,000 commercial letter of credit facility
for use in importing merchandise.
59
<PAGE> 60
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
At February 1, 1997, there had been no borrowing under the Facility and no
borrowings under the letters of credit facility.
NOTE 11 - PITTSBURGH ACQUISITION
On January 27, 1996, the Company acquired the inventory and fixed assets of 14
auto part stores in Pittsburgh, Pennsylvania for approximately $6,200,000. The
purchase price included approximately $1,582,000 for favorable lease rights
which is being amortized over the primary term of the leases and any option
periods beginning before February 1999.
NOTE 12 - EMPLOYEES' BENEFIT PLANS
The Company maintains a non-contributory profit-sharing plan for all full-time
employees with one year of continuous employment. The Company's annual
contribution to the plan is based on a discretionary percentage of the
Company's consolidated net income, as defined in the plan, and as determined by
the Board of Directors. The Company's contributions were approximately
$99,000, $379,000 and $770,000 in fiscal 1997, 1996 and 1995, respectively.
In June 1995, the Company established a 401(k) Retirement Plan for all
employees projected to work 1,000 hours after 90 days continuous employment.
The Company is obligated to contribute an amount equal to 25% of the employees
deferral up to 6%. The Company's contribution was approximately $346,000 and
$250,000 for fiscal 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 $15,000 in fiscal 1997.
NOTE 13 - STOCK OPTION PLANS
The Company has two stock option plans and accounts for the plans under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for the plans been determined consistent with SFAS No. 123,
the Company's net income and earnings per share would have been reduced to the
following pro forma amounts:
60
<PAGE> 61
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
<TABLE>
<CAPTION>
(dollars in thousands, except per share data)
Fiscal Year
1997 1996
------------ -----------
<S> <C> <C>
Net Income:
As Reported $ 1,084 $ 7,290
Pro Forma 737 7,208
Net Income per share:
As Reported $ .18 $ 1.23
Pro Forma .12 1.22
</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.
Trak Auto Corporation 1993 Stock Option Plan
The Company may grant options for up to 1,250,000 shares under the Trak Auto
Corporation 1993 Stock Option Plan (the "1993 Option Plan"). The 1993 Option
Plan is for officers, directors and key employees and will terminate June 30,
2003. The option exercise price equals the market price on the date of grant.
Options vest fully after three years and expire after five years.
Information concerning the 1993 Option Plan:
<TABLE>
<CAPTION>
Number Option Price Weighted Average
Outstanding at of Options per Share Exercise Price
---------- ------------- ----------------
<S> <C> <C> <C>
January 29, 1994 114,690 $ 12.50 $ 12.50
Granted 6,000 14.00 14.00
Exercised (7,078) 12.50 12.50
Forfeited (7,763) 12.50 12.50
------- ------------- -------
Outstanding at
January 28, 1995 105,849 12.50-14.00 12.59
Granted 207,925 14.00-16.125 15.29
Exercised (16,132) 12.50-14.00 12.57
Forfeited (29,354) 12.50-16.125 13.24
------- ------------- -------
Outstanding at
February 3, 1996 268,288 12.50-16.125 14.61
Granted 193,800 16.75 16.75
Exercised (10,223) 12.50-16.125 13.13
Forfeited (15,585) 12.50-16.75 14.78
------- ------------- -------
Outstanding at
February 1, 1997 436,280 $12.50-16.75 $ 15.59
======= ============= =======
</TABLE>
61
<PAGE> 62
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
Options to purchase 149,512 shares were exercisable at February 1, 1997 and
780,287 options remained available for grant. At February 1, 1997, the
weighted average contractual life of the options outstanding was 3.5 years.
The weighted average fair value of options granted was $7.49 and $7.21 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% no expected dividends; expected lives of 5.0 years; and expected
volatility of 40.0%.
The grant of 81,935 employee stock options by the Board of Directors (pending
court approval) in December 1994, were approved by the Delaware court in April
1995.
Trak Auto Corporation Stock Option Plan
The Trak Auto Corporation Stock Option Plan (the "Option Plan") provided for
option grants to officers, directors and key employees of Trak Auto and its
parent and subsidiaries. Under the Option Plan no new options could be granted
after January 31, 1993.
Information concerning the Option Plan:
<TABLE>
<CAPTION>
Number Option Price Weighted Average
of Options per Share Exercise Price
---------- ------------- ----------------
<S> <C> <C> <C>
Outstanding
January 29, 1994 224,891 $ 6.00-13.75 $ 10.58
Exercised (53,883) 6.00-12.50 9.52
Forfeited (12,354) 6.00-13.75 11.27
Expired (2,383) 9.75-10.725 10.36
------- ------------- --------
Outstanding
January 28, 1995 156,271 6.00-13.75 10.89
Exercised (68,468) 6.00-13.75 10.45
Forfeited (3,470) 12.50 12.50
Expired (400) 10.25 10.25
------- ------------- --------
Outstanding
February 3, 1996 83,933 6.00-13.75 11.18
Exercised (11,188) 6.00-12.50 9.47
Forfeited (2,234) 12.50 12.50
------- ------------- --------
Outstanding
February 1, 1997 70,511 $ 6.60-13.75 $ 11.41
======= ============= ========
</TABLE>
62
<PAGE> 63
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fiscal Years Ended February 1, 1997, February 3, 1996
And January 28, 1995
Options to purchase 70,511 shares were exercisable and outstanding at February
1, 1997 of which; 60,511 have exercise prices between $10.725 and $13.75 per
share, with a weighted average exercise price of $12.21 per share and a
weighted average contractual life of 1.6 years; and 10,000 have an exercise
price of $6.60 per share and a contractual life of 3.4 years.
The Board of Directors of the Company has authorized certain officers and
directors of the Company to apply for loans from the Company to exercise their
vested stock options. Under the plan approved by the Board, the loans must
bear interest at the prime rate, adjusted annually, be secured by all of the
stock acquired by exercise of the options, be repaid out of the first proceeds
of sale of the stock or at the end of three years, whichever is earlier, and
the borrower must demonstrate to the Company'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 the Company.
NOTE 14 - INTERIM FINANCIAL DATA - (UNAUDITED)
Selected interim financial data for the years ended February 1, 1997 and
February 3, 1996 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands, except for per share amounts)
QUARTER ENDED: FEBRUARY 1, NOVEMBER 2, JULY 3, APRIL 4,
1997 1996 1996 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 80,587 $ 87,953 $ 90,428 $ 87,016
Gross Profit (1) 18,927 20,691 21,867 22,027
Net Income (Loss)(2) (925) 155 674 1,180
Net Income (Loss) Per
Share (3) $ (.16) $ .03 $ .11 $ .20
<CAPTION>
QUARTER ENDED: FEBRUARY 3, OCTOBER 28, JULY 29, APRIL 29,
1996 1995 1995 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 87,998 $ 88,226 $ 86,407 $ 79,611
Gross Profit (1) 22,683 22,770 22,720 20,487
Net Income (2) 1,117 2,164 2,893 1,116
Net Income Per Share (3) $ .19 $ .37 $ .49 $ .18
</TABLE>
(1) After deduction for cost of sales, store occupancy and warehousing.
(2) After deduction of store closing reserve during the 4th Quarter.
(3) The sum of these amounts may not equal the annual amount because
of changes in the average number of shares outstanding during the
year.
63
<PAGE> 64
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures
Inapplicable.
64
<PAGE> 65
PART III
The following Items 10 through 13 are incorporated herein by reference to the
Company's definitive Proxy Statement to be filed with the Commission pursuant
to Regulation 14A.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
65
<PAGE> 66
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
<TABLE>
<S> <C>
(a)(1) Financial Statements
See Item 8.
(a)(2) Schedules (Consolidated) -
All schedules are omitted because the required information is
inapplicable or it is presented in the consolidated
financial statements or related notes.
(a)(3) Exhibits
3.1 Certificate of Incorporation of Trak Auto Corporation as amended by
Certificate of Amendment dated October 30, 1987 (incorporated by
reference to Exhibit 3a to Trak Auto's 1988 Form 10-K).
3.2 By-laws, amended and restated September 14, 1993 (incorporated by
reference to Exhibit 3b to Trak Auto's 1994 Form 10-K).
10.1 Lease Agreement dated January 1, 1980 between Oxon Hill Plaza, Inc.,
Agent and Nominee for Combined Properties Corporation, and Trak Auto
Corporation (incorporated by reference to Trak Auto's registration
statement Form S-1, Reg. No. 2-82430). (606)
10.2 License Agreement dated March 4, 1983 between Dart Drug Corporation
and Trak Auto Corporation; Addendum to Lease Agreement dated June 1,
1976 between Kaufman Company S. Greenhoot Fischer, Carol B. Fisher
and Dart Vienna, Inc.; Lease Agreement dated April 14, 1960
(incorporated by reference to Trak Auto's registration statement Form
S-1, Reg. No. 2-82430). (616)
10.3 Lease Agreement dated May 26, 1981 between Maryland City Plaza, Inc.,
Agent and Nominee for Combined Properties Corporation, and Trak Auto
Corporation (incorporated by reference to Trak Auto's registration
statement Form S-1, Reg. No. 2-82430). (623)
10.4 Lease Agreement dated May 26, 1981 between Bradlick, Inc., Agent and
Nominee for Combined Properties Corporation, and Trak Auto Corporation
(incorporated by reference to Trak Auto's registration statement Form S-1,
Reg. No. 2-82430). (629)
10.5 Agreement, dated March 31, 1983, between Dart Drug Corporation and
Trak Auto East Corporation (incorporated by reference to Trak Auto's
registration statement Form S-1, Reg. No. 2-82430).
</TABLE>
66
<PAGE> 67
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K (Continued)
<TABLE>
<S> <C>
10.6 Lease Agreement dated April 27, 1984, between Trak Chicago Limited
Partnership I and Trak Auto Corporation (incorporated by reference to
Trak Auto's registration statement Form S-1, Reg. No. 2-82430).
10.7 Sublease Agreement dated December 26, 1984, between Dart Group
Corporation and Trak Auto Corporation (75th Avenue) (incorporated by
reference to Exhibit 10(hhhh) to Trak Auto's 1985 Form 10-K).
10.8 Indemnity Agreement, dated June 9, 1986, by and between Dart Group
Corporation and Trak Auto Corporation (incorporated by reference to
Exhibit 10(pppp) to Trak Auto's 1987 Form 10-K).
10.9 1988 Trak Auto Corporation Deferred Compensation Plan for Directors,
effective January 1, 1988 (incorporated by reference to Exhibit
10(ssss) to Trak Auto's 1988 Form 10-K).
10.10 Lease Agreement dated February 3, 1989 between Trak Auto Corporation and
Combined Properties/Ontario Limited Partnership (incorporated by
reference to Exhibit 10(tttt) to Trak Auto's 1989 Form 10-K).
10.11 Lease Agreement dated February 3, 1988 between Trak Corporation and
Haft/Equities - General (incorporated by reference to Exhibit 10(uuuu)
to Trak Auto's 1989 Form 10-K).
10.12 Lease Agreement dated June 17, 1987 between Trak Auto West, Inc. and
Haft/Equities/Rose Hill Limited Partnership (incorporated by reference
to Exhibit 10(vvvv) to Trak Auto's 1989 Form 10-K). (670)
10.13 Lease Agreement dated May 18, 1990 between Retail Lease Acquisition
Limited Partnership and Trak Corporation and License Termination Agreement
date March 31, 1990 between Retail Lease Acquisition Limited Partnership
and Trak Corporation re: Enterprise (incorporated by reference to Exhibit
10(ccccc) to Trak Auto's 1991 Form 10-K)(614).
10.14 Lease Agreement dated May 18, 1990 between Retail Lease Acquisition Limited
Partnership and Trak Corporation and License Termination Agreement date March 31, 1990
between Retail Lease Acquisition Limited Partnership and Trak Corporation re: Rolling
Valley (incorporated by reference to Exhibit 10 (ddddd) to Trak Auto's 1991 Form 10-K)
(630).
10.15 Lease Agreement dated May 18, 1990 between Combined Properties Limited Partnership
and Trak Corporation and Lease Termination Agreement date March 31, 1990 between
Combined Properties Limited Partnership, Retail Lease Acquisition Limited
Partnership and Trak
</TABLE>
67
<PAGE> 68
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K (Continued)
<TABLE>
<S> <C>
Corporation re: White Flint (incorporated by reference to Exhibit
10(eeeee) to Trak Auto's 1991 Form 10-K) (632).
10.16 Lease Agreement dated November 6, 1990 between CP Acquisition Limited
Partnership and Trak Corporation and Settlement Agreement dated November 6,
1990 between CP Acquisition Limited Partnership and Trak Corporation re:
Aspen Manor (incorporated by reference to Exhibit 10(fffff) to Trak Auto's
1991 Form 10-K) (615).
10.17 Lease Agreement dated November 6, 1990 between CP Acquisition Limited
Partnership and Trak Corporation and Settlement Agreement dated November
6, 1990 between CP Acquisition Limited Partnership and Trak Corporation re:
Lee and Harrison (incorporated by reference to Exhibit 10(ggggg) to Trak
Auto's 1991 Form 10-K)(633).
10.18 Lease Agreement dated November 6, 1990 between CP Acquisition Limited
Partnership and Trak Corporation and Settlement Agreement dated November 6,
1990 between CP Acquisition Limited Partnership and Trak Corporation re:
Penn Daw (incorporated by reference to Exhibit 10(hhhhh) to Trak Auto's
1991 Form 10-K)(642).
10.19 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 (incorporated by reference to Exhibit 10(iiiii) to Trak
Auto's 1991 Form 10-K) (656).
10.20 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 (incorporated by reference
to Exhibit 10 (jjjjj) to Trak Auto's 1991 Form 10-K)(619).
10.21 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 (incorporated by reference to Exhibit 10(kkkkk) to Trak Auto's
1991 Form 10-K)(662).
10.22 Lease agreement dated December 23, 1991 between Combined Properties Limited
Partnership and Trak Corporation re: Manaport Plaza Shopping Center
(incorporated by reference to Exhibit 10 (lllll) to Trak Auto's 1992 Form 10-K)
(607).
10.23 Amendment of lease dated December 24, 1991 between
</TABLE>
68
<PAGE> 69
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K (Continued)
<TABLE>
<S> <C>
Haft/Equities-Bladen Limited Partnership and Trak Corporation re:
Bladen Plaza (incorporated by reference to Exhibit 10(mmmmm) to Trak
Auto's 1992 Form 10-K). (662)
10.24 Sublease Agreement dated February 19, 1992 between Crown Books Corporation
and Trak Corporation re: Vienna (incorporated by reference to Exhibit
10(nnnnn) to Trak Auto's 1992 Form 10-K)(616).
10.25 Sublease agreement dated February 12, 1991 between Crown Books Corporation
and Trak Corporation re: McLean Shopping Center(incorporated by reference
to Exhibit 10(ooooo) to Trak Auto's 1992 Form 10-K) (627).
10.26 Sublease Agreement dated April 20, 1992 between Dart Group Corporation and
Trak Corporation re: Pennsy Drive Whse 3 (incorporated by reference to Exhibit
10(ppppp) to Trak Auto's 1992 Form 10-K).
10.27 Amendment of lease dated December 11, 1992 between Combined Properties
Limited Partnership and Super Trak Corporation re: Oxon Hill (incorporated
by reference to Exhibit 10(qqqqq) to Trak Auto's 1993 Form 10-K). (606)
10.28 Amendment of lease dated December 1, 1992 between Haft/Equities-Bladen
Limited Partnership and Super Trak Corporation re: Bladen Plaza
(incorporated by reference to Exhibit 10(rrrrr) to Trak Auto's 1993
Form 10-K). (662)
10.29 Amendment of lease dated January 8, 1993 between Retail Lease Acquisition
Limited Partnership and Trak Corporation re: Chantilly Plaza (incorporated
by reference to Exhibit 10(sssss) to Trak Auto's 1992 Form 10-K). (609)
10.30 Trak Auto Corporation 1993 Stock Option Plan (incorporated by reference to
Trak Auto's registration statement Form S-8, Reg. No. 33-53389).
10.31 Amendment of lease dated February 4, 1993 between Retail Lease Acquisition
Limited Partnership and Super Trak re: College Plaza (incorporated by reference
to Exhibit 10(wwwww) to Trak Auto's 1994 Form 10-K). (610)
10.32 Amendment of lease dated September 13, 1993 between Combined Properties
Limited Partnership and Super Trak Corporation re: Fair City Mall
(incorporated by reference to Exhibit 10(xxxxx) to Trak Auto's 1994
Form 10-K). (605)
</TABLE>
69
<PAGE> 70
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K (Continued)
<TABLE>
<S> <C>
10.33 Amendment of lease dated September 13, 1993 between Combined
Properties Limited Partnership and Super Trak Corporation re:
Maryland City (incorporated by reference to Exhibit 10(yyyyy)
to Trak Auto's 1994 Form 10-K). (623)
10.34 Second Amendment of lease dated March 31, 1994 between Combined
Properties Limited Partnership and Super Trak Corporation re:
Oxon Hill (incorporated by reference to Exhibit 10 (zzzzz) to
Trak Auto's 1994 Form 10-K) (606).
10.35 Third Amendment of lease dated March 31, 1994 between Combined
Properties/Montebello Limited Partnership and Trak Auto West, Inc.
Re: Montebello (incorporated by reference to Exhibit 10(B) to
Trak Auto's 1994 Form 10-K). (197)
10.36 Lease Agreement dated September 29, 1993 between Combined Properties/Reseda
Associates Limited Partnership and Super Trak Corporation re: Reseda
(incorporated by reference to Exhibit 10(c) to Trak Auto's 1994 Form 10-K).
(193)
10.37 Amendment of lease dated June 30, 1994 between Combined Properties
Limited Partnership and Super Trak Corporation re: Bradlick
(incorporated by reference to Exhibit 10.42 to Trak Auto's 1995
Form 10-K)(629).
10.38 Employment Agreement between Trak Auto and R. Keith Green dated January
25, 1995 (incorporated by reference to Exhibit 10.43 to Trak Auto's
1995 Form 10-K).
10.39 Tax Allocation Agreement dated December 27, 1994 between Dart Group
Corporation and Trak Auto Corporation (incorporated by reference to
Exhibit 10.44 to Trak Auto's 1995 Form 10-K).
10.40 Employment Agreement between Trak Auto and Robert Brann dated as of
January 24, 1995 (incorporated by reference to Exhibit 10.46 to Trak
Auto's 1995 Form 10-K).
10.41 Employment Agreement between Trak Auto and David MacGlashan dated as
of January 24, 1995 (incorporated by reference to Exhibit 10.48 to
Trak Auto's 1995 Form 10-K).
10.42 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 Trak Auto Corporation on Form
</TABLE>
70
<PAGE> 71
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K (Continued)
<TABLE>
<S> <C>
10-Q for the period ended October 28, 1995).
10.43 Financing Agreement, dated December 18, 1996, between Trak Auto
Corporation and The CIT Group/Business Credit, Inc.
11 Statement on Computation of Per Share Net Income.
21 Subsidiaries of Trak Auto Corporation
23 Consent of Independent Public Accountants
27 Financial Statement Schedules
(b) Reports on Form 8-K
</TABLE>
Trak Auto filed no Current Reports on Form 8-K during the
fourth quarter of the fiscal year ended February 1, 1997
71
<PAGE> 72
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.
TRAK AUTO CORPORATION
Date: May 1, 1997 By: R. Keith Green
-------------------- -------------------------
R. Keith Green
Director and President
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.
<TABLE>
<S> <C>
Date: May 1, 1997 R. Keith Green
----------------------- --------------------------------
R. Keith Green
Director and President
Date: May 1, 1997 Herbert H. Haft
----------------------- --------------------------------
Herbert H. Haft
Chairman of the Board of
Directors and Chief Executive
Officer
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 David B. MacGlashan
----------------------- --------------------------------
David B. MacGlashan
Senior Vice President and
Chief Financial Officer
</TABLE>
72
<PAGE> 73
TRAK AUTO CORPORATION
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Page
- ------- ----
<S> <C>
10.43 Financing Agreement, dated December 18, 1996, between
Trak Auto Corporation and The CIT Group/Business
Credit, Inc.
11 Statement on Computation of Per Share Net Income
21 Subsidiaries of Trak Auto Corporation
23 Consent of Independent Public Accountants
27 Financial Statement Schedules
</TABLE>
73
<PAGE> 1
EXHIBIT 10.43
FINANCING AGREEMENT
BY AND BETWEEN
THE CIT GROUP/BUSINESS CREDIT, INC.
(AS LENDER)
AND
TRAK AUTO CORPORATION
SUPER TRAK AUTO CORPORATION
TRAK CORPORATION
(AS BORROWERS)
DATED AS OF DECEMBER 18, 1996
1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. Definitions 4
SECTION 2. Conditions Precedent 14
SECTION 3. Revolving Loans 18
SECTION 4. Letters of Credit 24
SECTION 5. Collateral 26
SECTION 6. Representations, Warranties and Covenants 28
SECTION 7. Interest, Fees and Expenses 34
SECTION 8. Powers 38
SECTION 9. Events of Default and Remedies 39
SECTION 10. Termination 42
SECTION 11. Indemnities 42
SECTION 12. Miscellaneous 43
</TABLE>
2
<PAGE> 3
This Financing Agreement (this "Financing Agreement") dated as of
December 18, 1996 is made by and between THE CIT GROUP/BUSINESS CREDIT, INC.
(hereinafter "CITBC"), a New York corporation, with offices located at 900
Ashwood, Parkway, Atlanta, GA 30338 and TRAK AUTO CORPORATION, ("TAC"), Super
Trak Corporation ("STC") and Trak Corporation ("TC") (TAC, STC and TC may be
hereinafter referred to individually as a "Company" and collectively as the
"Companies"), each a Delaware corporation, with a principal place of business at
3300 75th Avenue, Landover, Maryland 20785.
SECTION 1. DEFINITIONS
ACCOUNTS shall mean all of the Companies', now existing and future: (a) accounts
(as defined in the UCC) created by or arising from all of the Companies sales of
Inventory and all rights to payment under and with respect to (i) promissory
notes and (ii) bank or non-bank credit cards, and all accounts arising from
sales made under any of the Companies' trade names or styles, or through any of
the Companies' subsidiaries, (b) unpaid seller's or lessor's rights (including
rescission, replevin, reclamation and stoppage in transit) relating to the
foregoing or arising therefrom; (c) rights to any Inventory represented by any
of the foregoing, including rights to returned or repossessed goods; (d)
reserves and credit balances arising in the Concentration Account and hereunder;
(e) guarantees or collateral for any of the foregoing; (f) insurance policies or
rights relating to any of the foregoing; and (g) cash and non-cash proceeds of
any and all the foregoing.
ADMINISTRATIVE FEE shall mean the fee payable to CITBC in accordance with and
pursuant to, the provisions of Paragraph 14 of Section 7 of this Financing
Agreement to offset the costs and expenses of CITBC in connection with record
keeping, periodic examinations and analyzing and evaluating the Collateral.
ANNIVERSARY DATE shall mean the date occurring three (3) years from the Closing
Date and the same date in every year thereafter.
APPLICABLE MARGIN shall mean the increment over, or below, as the case may be
the Chase Rate or Libor as determined at the beginning of each Fiscal Quarter
based upon the Funded Debt Ratio calculated as at the end of the prior Fiscal
Quarter and as certified by the Chief Financial Officer or Treasurer of TAC on
behalf of the Companies and shall be equal to:
3
<PAGE> 4
<TABLE>
<CAPTION>
FUNDED DEBT INCREMENT OVER CHASE INCREMENT OVER
RATIO RATE LIBOR
- ----- ---- -----
<S> <C> <C>
Less than .20 to 1 negative 0.50% 1.50%
Equal to or greater than
.20 to 1 but less than
.36 to l negative 0.25% 1.75%
Equal to or greater than
.36 to 1 but less than
.51 to l 0.00% 2.00%
Equal to or greater than
.51 to 1 0.25% 2.25%
</TABLE>
Notwithstanding the foregoing the Applicable Margin in effect from the Closing
Date until the first day of the first Fiscal Quarter commencing thereafter shall
be negative 0.25% with respect to the Chase Rate and 1.75% with respect to
Libor.
AVAILABILITY shall mean, at any time of determination, the excess of the
Borrowing Base over the outstanding aggregate amount of all Obligations
(including the outstanding aggregate amount of Letters of Credit) of the
Companies.
BLOCKED ACCOUNTS shall mean those accounts owned by, and in the name of the
Companies which are blocked in favor of CITBC and designated by CITBC for the
deposit of proceeds of Collateral.
BORROWING BASE shall have the meaning provided in Paragraph 1 of Section 3 of
this Financing Agreement.
BUSINESS DAY shall mean (a) for all purposes other than those covered by clause
(b) below, any day that CITBC and Chase Bank are open for business excluding
Saturday, Sunday and any day that either is a legal holiday under the laws of
the State of New York, Georgia or Maryland or is a day on which banking
institutions located in such State are closed and (b) with respect to all
notices, determinations, fundings and payments in connection with Libor, any
date that is a Business Day as described in clause (a)
4
<PAGE> 5
above that is also a day for trading by and between banks in dollar deposits in
the applicable interbank Libor market.
CAPITAL EXPENDITURES for any period shall mean the aggregate of all expenditures
of TAC and its subsidiaries during such period that, in conformity with GAAP,
are required to be included in or reflected by the property, plant or equipment
or similar fixed asset account reflected in the balance sheet of the Companies.
CAPITAL LEASE shall mean any lease of property (whether real, personal or mixed)
which, in conformity with GAAP is accounted for as a capital lease or a Capital
Expenditure on the consolidated balance sheet of TAC and its subsidiaries
provided, however, that for purposes of this definition, store leases, whether
or not capitalized on the books of TAC and its subsidiaries, will not be treated
as a Capital Lease.
CHASE BANK shall mean the survivor of the merger of The Chase Manhattan Bank,
N.A. into Chemical Bank with the latter having survived and changed its name to
Chase Bank.
CHASE RATE shall mean the rate of interest per annum announced by Chase Bank
from time to time ac its prime rate in effect at its principal office in the
City of New York. (The prime rate is not intended to be the lowest rate of
interest charged by Chase Bank to its borrowers).
CHASE RATE LOANS shall mean all or any portion of the Revolving Loans for which
the Chase Rate is used for interest rate calculations.
CLOSING DATE shall mean the date that this Financing Agreement has been fully
executed and delivered to CITBC.
CLOSING FEE shall mean the fee payable to CITBC in accordance with, and pursuant
to, the provisions of Paragraph 18 of Section 7 of this Financing Agreement.
COLLATERAL shall mean all present and future Inventory, Accounts Documents of
Title, and Other Collateral of the Companies and the proceeds of any and all of
the foregoing.
5
<PAGE> 6
CONCENTRATION ACCOUNT shall have the meaning provided in Paragraph 4 of Section
3 of this Financing Agreement.
CONSOLIDATED BALANCE SHEET shall mean a consolidated balance sheet for TAC and
its subsidiaries, eliminating all intercompany transactions and prepared in
accordance with GAAP.
CONSOLIDATED CURRENT ASSETS shall mean, wherever used throughout this Financing
Agreement, those assets of TAC and its subsidiaries which, in accordance with
GAAP on a basis consistent with the latest audited consolidated statements of
TAC. are classified as "current".
CONSOLIDATED CURRENT LIABILITIES shall mean, wherever used throughout this
Financing Agreement, those liabilities of TAC and its subsidiaries which, in
accordance with GAAP on a basis consistent with the latest audited consolidated
statements of TAC, are classified as "current", provided however, that
notwithstanding GAAP, the Revolving Loans and the current portion of Permitted
Indebtedness shall be considered "Current Liabilities."
CREDIT CARD RECEIVABLES AGREEMENT shall mean a Credit Card Receivables Agreement
substantially in the form of Exhibit A hereto and delivered to CITBC and signed
by the Companies and an issuer of credit cards accepted by the Companies.
CUSTOMARILY PERMITTED LIEN shall mean
(a) liens of local or state authorities for franchise or other like
taxes, provided the aggregate amounts of such liens shall not exceed $150,000 in
the aggregate at any one time;
(b) statutory liens of landlords and liens of carriers, warehousemen,
mechanics, materialmen and other like liens imposed by law, created in the
ordinary course of business and for amounts not yet due (or which are being
contested in good faith by appropriate proceedings or other appropriate actions
which are sufficient to prevent imminent foreclosure of such liens) and with
respect to which adequate reserves or other appropriate provisions are being
maintained in accordance with GAAP; and
(c) pledges or deposits made (and the liens thereon) in the ordinary
course of business (including, without limitation,
6
<PAGE> 7
security deposits for leases, indemnity bonds, surety bonds and appeal bonds) or
in connection with workers' compensation, unemployment insurance, stock option
plans, 401(k) plans, non-qualified deferred compensation arrangement, profit
sharing plans, and other types of social security benefits or to secure the
performance of tenders, bids, contracts (other than for the repayment or
guarantee of borrowed money or purchase money obligations), statutory
obligations and other similar obligations arising as a result of progress
payments under government contracts.
DEFAULT shall mean any event specified in Section 9, Paragraph 1 hereof, whether
or not any requirement for the giving of notice, the lapse of time, or both, has
occurred.
DEFAULT RATE OF INTEREST shall mean the Chase Rate plus two percent (2%) per
annum, which CITBC shall be entitled to charge the Companies on all Obligations
due CITBC by the Companies to the extent provided in Paragraph 2 of Section 9 of
this Financing Agreement.
DOCUMENTATION FEE shall mean CITBC's reasonable fees, exclusive of Out-of-Pocket
Expenses, intended to compensate CITBC for the use of CITBC's in-house Legal
Department and facilities subsequent to the Closing Date in documenting any and
all modifications, waivers, releases, amendments, supplemental documentation or
additional collateral with respect to this Financing Agreement, the other Loan
Documents, the Collateral and/or the Obligations.
DOCUMENTS OF TITLE shall mean all present and future documents (as defined in
the UCC) and any and all warehouse receipts, bills of lading, shipping
documents, chattel paper, instruments and similar documents, all whether
negotiable or not and all goods and Inventory relating thereto and all cash and
non-cash proceeds of the foregoing.
ELIGIBLE INVENTORY shall mean Inventory which meets the following
qualifications: (i) it is lawfully owned by the Companies and is subject to a
valid, perfected, first priority lien in favor of CITBC and not subject to any
lien, other than Permitted Encumbrances, and is not held on consignment and may
be lawfully sold; (ii) it is (A) located in one of the Companies' distribution
centers, warehouses or store locations or (B) located in other
7
<PAGE> 8
locations in the continental United States as CITBC shall have approved in
writing from time to time, which approval shall be given upon the Companies
providing CITBC with evidence, reasonably satisfactory to CITBC, of (1) CITBC's
perfected, first priority lien on all Inventory located in such locations and
(2) the absence of any other liens on any Inventory located in such locations,
which evidence may include the results of UCC, tax and judgment lien searches in
such locations and acknowledgment copies of UCC financing statements naming the
Companies, as debtors, and CITBC, as secured party, filed in such locations;
(iii) it is determined in the reasonable judgment of CITBC to be, when taken as
a whole, substantially similar in quality and mix (having regard for seasonal
variations) to the Inventory maintained by the Companies in recent historical
operations prior to the Closing Date; (iv) it is Inventory that has been valued
after deducting the greater of 15% of gross Inventory or the aggregate amount of
reserves for (1) shrinkage, (2) Inventory to be returned to suppliers, (3)
Inventory in-transit to third parties (other than the Companies' agents or
warehouses), (4) supplies, (5) consignment Inventory, (6) rejected, defective,
damaged, aged or otherwise unsalable Inventory, (7) an amount equal to two times
the monthly rent for each location for which CITBC has not received a Landlord
Waiver, (8) displays, (9) special order Inventory, (10) slow moving and obsolete
Inventory, (11) the amount of all sales taxes collected by the Companies and not
yet remitted to the authority to which such taxes are owed, and (12) other
reserves required by CITBC in the exercise of its reasonable business judgment.
The amount of such reserves shall be determined solely by CITBC in its
reasonable business judgment using standards consistently applied. Such
standards shall take into consideration amounts representing historically, the
Companies' reserves, discounts, returns, claims, credits and allowances,
EQUIPMENT shall mean all of the Companies' present and hereafter acquired
equipment (as defined in the UCC) and any and all machinery, motor vehicles,
furnishings and fixtures, and all additions, substitutions and replacements
thereof, wherever located, together with all attachments, components, parts,
equipment and accessories installed thereon or affixed thereto and all proceeds
of whatever sort.
8
<PAGE> 9
ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended
from time to time and the rules and regulations promulgated thereunder from time
to time.
EVENT(S) OF DEFAULT shall have the meaning provided for in Section 9, Paragraph
1 of this Financing Agreement.
EXECUTIVE OFFICER shall mean any of the President, Chief Executive
Officer, Chief Financial Officer, Treasurer or Secretary of the Company.
FISCAL PERIOD shall mean each of (i) the two (2) four (4) week periods and (ii)
one (1) five (5) week period of each Fiscal Quarter.
FISCAL QUARTER shall mean each thirteen (13) week period of each Fiscal Year.
FISCAL YEAR shall mean each 52 or 53 week period ending on the Saturday closest
to January 31.
FUNDED DEBT shall mean the aggregate of interest bearing debt (whether paid in
kind, accrued or paid) of TAC and its subsidiaries whether secured or unsecured,
including without limitation, all Capital Lease obligations and all
reimbursement obligations under letters of credit and acceptances.
FUNDED DEBT RATIO shall mean the ratio of Funded Debt to Tangible Net Worth.
GAAP shall mean generally accepted accounting principles in the United States of
America as in effect from time to time and for the period as to which such
accounting principles are to apply that in the event the Companies modify their
accounting procedures as applied as of the Closing Date, the Companies shall
provide such statements of reconciliation as shall be in form and substance
reasonably acceptable to CITBC.
GUARANTORS shall mean Trak DHC Corporation, a Delaware corporation, Riverdale
Trak Acquisition Inc., a Maryland corporation, each a wholly owned subsidiary of
TAC.
9
<PAGE> 10
GUARANTY shall mean a guaranty, in the form attached hereto as Exhibit G
guaranteeing the obligations of the Companies to CITBC.
HAFT SETTLEMENT TRANSACTION shall mean any transaction entered into or payments
(including payments to affiliates) made by the Companies in connection with any
settlements previously entered into or which may be entered into among members
of the Haft family and Dart Group Corporation and/or any of its affiliates
(including the Companies) including any direct or indirect acquisition of
interests in entities owning real properties currently leased or subleased by
the Companies and the assumption by such entities of mortgage debt on such
properties; provided, however, that (i) any such payments by the Companies
(excluding payments made in connection with such assumed mortgage debt) shall
not exceed $25,000,000 in the aggregate, and (ii) any guarantees issued by the
Companies in connection therewith shall not exceed $20,000,000 in the aggregate.
INDEBTEDNESS shall mean, without duplication, all liabilities, contingent or
otherwise, which are any of the following: (a) obligations in respect of money
(borrowed or otherwise due or owing to third parties) or for the deferred
purchase price of property, services or assets, other than Inventory or (b)
Capital Leases.
INVENTORY shall mean all of the Companies present and hereafter acquired
inventory (as defined in the UCC) and any and all merchandise and goods, and all
additions, substitutions and replacements thereof, wherever located, together
with all goods and materials, wherever located, used or usable in manufacturing,
processing, packaging or shipping same and in all stages of production and all
cash and non-cash proceeds thereof of whatever sort.
ISSUING BANK shall mean the bank, which shall be chosen by CITBC and approved by
the Companies, issuing Letters of Credit for or on behalf of the Companies.
LANDLORD WAIVER shall mean a waiver executed by a landlord of a premises not
owned by the Companies but otherwise leased, used, or otherwise occupied
thereby, in form and substance satisfactory to CITBC, containing provisions
that, inter alia, (i) waive any lien such party may have on any of the Inventory
and (ii) grant to CITBC
10
<PAGE> 11
access rights to the premises substantially in the form attached hereto as
Exhibit E.
LETTERS OF CREDIT shall mean all letters of credit issued with the assistance of
CITBC by the Issuing Bank for or on behalf of the Companies.
LETTER OF CREDIT GUARANTY shall mean the guaranty delivered by CITBC to the
Issuing Bank of the Companies' reimbursement obligation under the Issuing Bank's
reimbursement agreement, application for letter of credit or other like
document.
LETTER OF CREDIT GUARANTY FEE shall mean the fee CITBC may charge the Companies
under Paragraph 12 of Section 7 of this Financing Agreement for (i) issuing the
Letter of Credit Guaranty and/or (ii) otherwise aiding the Companies in
obtaining Letters of Credit pursuant to this Financing Agreement.
LETTER OF CREDIT SUBLINE shall mean the aggregate amount of Letters of Credit
the Companies may establish or open pursuant to Section 4 of this Financing
Agreement, which amount (a) shall not exceed $5,000,000 and (b) shall be deemed
to be a subline within the Line of Credit.
LEVERAGE RATIO shall mean the ratio of Total Liabilities to Tangible Net Worth.
LIBOR LOANS shall mean, at any time of determination for each applicable Libor
Period, the prevailing London Interbank Offered Rate paid in London on one (1)
month, two (2) month, three (3) month or six (6) month dollar deposits from
other banks as quoted by Chase Bank.
LIBOR LOAN shall mean all or any portion of the Revolving Loans for which the
Libor Rate is used for interest rate calculations together with the Applicable
Margin.
LIBOR PERIOD shall mean the one (1) month, two (2) month, three (3) month or six
(6) month Libor Period with respect to Libor Loans, as selected by the Companies
pursuant to Section 7 of this Financing Agreement.
11
<PAGE> 12
LIBOR PREPAYMENT PENALTY shall mean, for any payment of principal of any Libor
Loan prior to the end of an applicable Libor Period, an amount computed pursuant
to the following formula:
(R - T) x P x D
---------------
365
R = interest rate applicable to the Libor Loan
T = effective interest rate per annum at which any readily
marketable bonds or other obligations of the United States,
selected at CITBC 's sole discretion, maturing on or near the
last day of the then applicable Libor Period and in
approximately the same principal amount as such Libor Loan can
be purchased by CITBC on the day of such prepayment of
principal
P = the amount of principal prepaid
D = the number of days remaining in the Libor Period as of
the date of such prepayment
The Companies shall pay such amount within five (5) Business Days of
presentation by CITBC to the Companies of a statement setting forth such amount
and CITBC's calculation thereof pursuant hereto, which statement shall be
conclusive on the Companies absent manifest error.
LIBOR TRANCHE shall mean the whole or any portion of the Revolving Loans for
which a Libor selection, continuation, or conversion from a Chase Rate was made
by the Companies.
LINE OF CREDIT shall mean the aggregate commitment of CITBC to (i) make
Revolving Loans pursuant to Section 3 of this Financing Agreement to the
Companies and (ii) assist the Companies in opening Letters of Credit pursuant to
Section 4 of this Financing Agreement, in the aggregate amount of $25,000,000
(inclusive of the Letter of Credit Subline).
LINE OF CREDIT FEE shall mean the fee due CITBC at the end of each month for the
Line of Credit and shall be determined by multiplying (a) the difference between
i)(x) $10,000,000 until such time as the Revolving Loan balance together with
Letters of Credit exceeds $10,000,000 at any time, (y) $20,000,000 until such
time as the Revolving Loan balance together with Letters of Credit exceeds
$20,000,000 at any time, or (z) $25,000,000 and ii) the sum of
12
<PAGE> 13
x) the average daily balance of Revolving Loans for said month plus y) the
average daily balance of outstanding Letters of Credit of the Companies for said
month by (b) twenty-five hundredths of one percent (.25%) per annum for the
number of days in said month based on a 360 day year.
LOAN DOCUMENT shall mean this Financing Agreement, the Guaranty, and any other
agreements and documents referenced herein or contemplated hereby or executed
from time to time in connection with this Financing Agreement, as the same may
be renewed, amended, modified, extended, or supplemented from time to time.
MORTGAGE WAIVER shall mean, a waiver executed by each mortgagee of a premises
owned by the Companies, in the form attached hereto as Exhibit H containing
provisions that, inter alia, (i) waive any lien such party may have on any of
the Inventory of the Companies and (ii) grant to CITBC access rights to the
premises.
OBLIGATIONS shall mean all loans and advances made or to be made by CITBC to the
Companies or to others for the Companies' account pursuant to this Financing
Agreement or any of the Loan Documents: any and all indebtedness and obligations
which may at any time be owing by the Companies to CITBC howsoever arising,
whether now in existence or incurred by the Companies from time to time
hereafter: whether secured by pledge, lien upon or security interest in any of
the Companies' assets or property or the assets or property of any other person,
firm, entity or corporation; whether such indebtedness is absolute or
contingent, joint or several, matured or unmatured, direct or indirect and
whether the Companies are liable to CITBC for such indebtedness as principal,
surety, endorser, guarantor or otherwise. Obligations shall also include
indebtedness owing to CITBC by the Companies under this Financing Agreement, any
other Loan Document, or under any other agreement or arrangement now or
hereafter entered into between the Companies and CITBC; indebtedness or
obligations incurred by, or imposed on, CITBC as a result of environmental
claims (other than as a result of actions of CITBC) arising out of the
Companies' operations, premises or waste disposal practices or sites; the
Companies' liability to CITBC as maker or endorser on any promissory note or
other instrument for the payment of money; the Companies' liability to CITBC
under any instrument of guaranty or indemnity, or arising under any guaranty,
endorsement or undertaking which CITBC may make or issue to others for the
Companies' account, including any
13
<PAGE> 14
accommodation extended with respect to applications for Letters of Credit,
CITBC's acceptance of drafts or CITBC's endorsement of notes or other
instruments for the Companies' account and benefit.
OTHER COLLATERAL shall mean all now owned and hereafter acquired deposit
accounts maintained with any bank or financial institutions; all cash and other
monies and property in the possession or control of CITBC; all books, records,
ledger cards, disks and related data processing software at any time evidencing
or containing information relating to any of the Collateral described herein or
otherwise necessary or helpful in the collection thereof or realization thereon,
and all cash and non-cash proceeds of the foregoing.
OUT-OF-POCKET EXPENSES shall mean, as applicable to the transactions
contemplated by this Financing Agreement, all of CITBC's present and future
reasonable expenses incurred directly relating to this Financing Agreement or
any other Loan Document, whether incurred heretofore or hereafter, which
expenses shall include, without being limited to, the cost of record searches,
all costs and expenses incurred by CITBC in opening bank accounts, depositing
checks, receiving and transferring funds, and any charges imposed on CITBC due
to "insufficient funds" of checks deposited into Blocked Accounts or the
Concentration Account and CITBC's standard fee relating thereto, any amounts
paid by CITBC, incurred by, or charged to CITBC by the Issuing Bank under the
Letter of Credit Guaranty or the Companies' reimbursement agreement, application
for letter of credit or other like document which pertain either directly or
indirectly to such Letters of Credit, and CITBC's standard fees relating to the
Letters of Credit and any drafts thereunder, local counsel fees and
disbursements, title insurance premiums, real estate survey costs, the fees and
taxes relative to the filing of financing statements, and all expenses, costs
and fees set forth in Paragraph 3 of Section 9 of this Financing Agreement.
PERFECTION CERTIFICATE shall mean the Perfection Certificate substantially in
the form of Exhibit C attached hereto signed by an Executive Officer and
delivered to CITBC.
PERMITTED ENCUMBRANCES shall mean: (i) Customarily Permitted Liens; (ii) liens
granted to CITBC by the Companies; (iii) liens of judgment creditors provided
such liens do not exceed, in the
14
<PAGE> 15
aggregate, at any time, $250,000 (other than liens bonded or insured to the
reasonable satisfaction of CITBC); (iv) liens for taxes not yet due and payable
or which are being diligently contested in good faith by the Companies by
appropriate proceedings and for which adequate reserves or other appropriate
provisions are being maintained in accordance with GAAP and which liens are not
x) senior to the liens of CITBC or y) for taxes due the United States of America
or any state thereof having similar priority status.
PERMITTED INDEBTEDNESS shall mean: (i) current Indebtedness maturing in less
than one year and incurred in the ordinary course of the Companies' business for
raw materials, supplies, Equipment, services, taxes, rent or labor; (ii)
Indebtedness arising under the Letters of Credit and this Financing Agreement;
(iii) deferred taxes, obligations under store leases incurred in the ordinary
course of business and other expenses incurred in the ordinary course of the
Companies' business; (iv) Indebtedness arising from operating and Capital Leases
of Equipment which shall not exceed $30,000,000 at any time outstanding,
provided that the Companies shall not incur more than $10,000,000 of such
Indebtedness in any Fiscal Year; (v) Indebtedness arising from Capital Leases of
Real Estate which shall not exceed $30,000,000 at any time outstanding; (vi)
Indebtedness arising from letters of credit issued including letters of credit
issued to pay premiums on insurance policies which shall not exceed $10,000,000
at any time outstanding; and (vii) other Indebtedness (including existing
letters of credit) existing on the Closing Date and listed in the most recent
financial statement delivered to CITBC or otherwise disclosed to CITBC in
writing prior to the Closing Date.
REAL ESTATE shall mean the Companies' fee and/or leasehold interests in real
property.
REVOLVING LOAN NOTICE OF BORROWING shall have the meaning set forth in Paragraph
1 of Section 3 of this Financing Agreement.
REVOLVING LOANS shall mean the loans and advances made, from time to time, to or
for the account of the Companies by CITBC pursuant to Section 3 of this
Financing Agreement.
TANGIBLE NET WORTH shall mean, the amount by which a) all assets of
TAC and its subsidiaries that would, in accordance with GAAP, be
15
<PAGE> 16
classified as tangible assets, on a basis consistent with the latest annual
audited statement of TAC, provided, however, that amounts due from affiliates
shall not be considered a tangible asset, exceed b) Total Liabilities of TAC and
its subsidiaries.
TOTAL LIABILITIES shall mean at any date of determination, total liabilities of
TAC and its subsidiaries as determined in accordance with GAAP, on a basis
consistent with the latest audited statements of TAC.
UCC shall mean the Uniform Commercial Code as in effect in the State of New York
and as the same may be amended from time to time.
WAREHOUSE LETTER shall mean a letter executed by a public warehouse in which
Inventory (other than Inventory in such warehouses while such Inventory is
clearing customs) of the Companies is stored, in the form attached hereto as
Exhibit I containing provisions including, but not limited to (i) a confirmation
of CITBC's lien on such Inventory and (ii) instructions to the warehouseman
regarding release of the Inventory.
WORKING CAPITAL shall mean an amount equal to Consolidated Current Assets minus
Consolidated Current Liabilities.
SECTION 2. CONDITIONS PRECEDENT
A. CONDITIONS TO INITIAL EXTENSION OF CREDIT
The obligation of CITBC to make the initial loans hereunder is subject to the
satisfaction of, or waiver of, immediately prior to or concurrently with the
making of such loans, the following conditions precedent (the "Initial
Conditions Precedent"):
1. LIEN SEARCHES - CITBC shall have received tax, judgment and UCC
searches satisfactory to CITBC for all locations presently occupied or used by
the Companies or any of the Guarantors.
2. CASUALTY INSURANCE - The Companies shall have delivered to CITBC
certificates of insurance and all of the requirements as set forth in Section 6,
Paragraph 5 of this Financing Agreement shall have been satisfied.
16
<PAGE> 17
3. UCC FILINGS - Any documents (including without limitation,
financing statements) required to be filed in order to create, in favor of
CITBC, a valid, perfected first priority lien in the Collateral with respect to
which a security interest may be perfected by a filing under the UCC shall have
been properly filed in each office in each jurisdiction required in order to
create in favor of CITBC a perfected lien on the Collateral, CITBC shall have
received acknowledgment copies of all such filings (or, in lieu thereof, CITBC
shall have received other evidence satisfactory to CITBC that all such filings
have been made); and CITBC shall have received evidence that all necessary
filing fees and all taxes or other expenses related to such filings have been
paid in full.
4. EXAMINATION & VERIFICATION - CITBC shall have completed to its
satisfaction an examination and verification of the Inventory, and books and
records of the Companies and the Guarantors.
5. GUARANTY - Each of the Guarantors shall have executed and
delivered to CITBC a Guaranty.
6. Intentionally Omitted
7. OPINIONS - Counsel for the Companies and the Guarantors shall have
delivered to CITBC opinions satisfactory to CITBC opining, inter alia, that,
subject to the (i) filing, priority and remedies provisions of the UCC, (ii) the
provisions of the Bankruptcy Code, insolvency statutes or other like laws, (iii)
the equity powers of a court of law: (a) each Guaranty of the Guarantors is
valid, binding and enforceable according to its terms; (b) all of the Loan
Documents, including without limitation this Financing Agreement, are x) valid,
binding and enforceable according to their terms, y) are duly authorized,
executed and delivered and z) do not violate any terms, provisions,
representations or covenants in the charter or by-laws of either the Companies
or the Guarantors (as the case may be) or, to the best knowledge of such
counsel, of any loan agreement, mortgage, deed of trust, note, security or
pledge agreement or indenture to which the Companies are a signatory or by which
any Companies or their assets are bound.
17
<PAGE> 18
8. PERFECTION CERTIFICATE - An Executive Officer shall have executed
and delivered to CITBC a Perfection Certificate substantially in the form of
Exhibit C hereto.
9. INVENTORY CONFIRMATION - An Executive Officer shall have executed
and delivered to CITBC an Inventory Confirmation substantially in the form of
Exhibit B hereto.
10. CITBC COMMITMENT LETTER - The Companies shall have fully complied,
to the satisfaction of CITBC, with all of the terms and conditions of the
commitment letter, dated October 22, 1996, issued by CITBC to, and accepted by,
TAC.
11. BOARD RESOLUTIONS - CITBC shall have received a copy of the
resolutions of the Board of Directors of (A) the Companies authorizing the
execution, delivery and performance of (i) this Financing Agreement and (ii) any
related agreements and (B) each Guarantor authorizing the execution and
performance of the Guaranty and any documents executed in connection therewith,
in each case certified by the Secretary or Assistant Secretary thereof as of the
date hereof, together with a certificate of the Secretary or Assistant Secretary
thereof as to the incumbency and signature of the officers thereof executing
this Financing Agreement, the Guaranty and any certificate or other documents to
be delivered by it pursuant hereto, together with evidence of the incumbency of
such Secretary or Assistant Secretary.
12. CORPORATE ORGANIZATION - CITBC shall have received (i) a copy of
the Articles or Certificate of Incorporation of each of the Companies and each
Guarantor certified by the Secretary of State or respective agency of its
state(s) of incorporation, and (ii) a copy of the By-Laws (as amended through
the date hereof) of each of the Companies and each Guarantor, certified by the
Secretary or Assistant Secretary thereof.
13. GOOD STANDING CERTIFICATES - CITBC shall have received good
standing certificates from the Secretaries of State or respective agency of each
of the Companies' and each Guarantor's state of incorporation and in each
jurisdiction where the failure to qualify to do business would have a material
adverse effect on the business of the Companies, each certificate to be dated
not more than 60 days prior to the Closing Date.
18
<PAGE> 19
14. OFFICER'S CERTIFICATE - CITBC shall have received an executed
Officer's Certificate of the Companies, satisfactory in form and substance to
CITBC, certifying that (i) the representations and warranties contained herein
are true and correct in all material respects on and as of the date hereof: (ii)
the Companies are in compliance with all of the terms and provisions set forth
herein; and (iii) no Default or Event of Default has occurred.
15. ABSENCE OF DEFAULT - No Default, Event of Default or material
adverse change in the financial condition, business, prospects, profits,
operations or assets of TAC and its subsidiaries shall have occurred since
August 3, 1996, except as may result from the Haft Settlement Transactions.
16. LEGAL RESTRAINTS/LITIGATION - At the date of execution of this
Financing Agreement, except as set forth on Schedule 2 or in TAC's Form 10-K and
Form 10-Q for the fiscal year ended February 3, 1996 and the fiscal quarter
ended August 3, 1996, respectively, there are no actions, suits or arbitration
proceedings (whether or not purportedly on behalf of the Companies) pending or,
to the knowledge of the Companies, threatened against the Companies, or
maintained by the Companies at law or in equity before any governmental body
which may reasonably be expected to be adversely determined and, if adversely
determined, may reasonably be expected to have a material adverse effect on the
financial condition, property or operations of TAC and its subsidiaries.
17. DISBURSEMENT AUTHORIZATIONS - The Companies shall have delivered
to CITBC all information reasonably necessary for CITBC to issue wire transfer
instructions on behalf of the Companies for the Revolving Loans including, but
not limited to, disbursement authorizations in form reasonably acceptable to
CITBC.
18. INVENTORY REPORTING - CITBC shall have received a satisfactory
inventory valuation conducted by an independent third party acceptable to CITBC.
19. WAREHOUSE LETTERS - Except for those premises for which a reserve
will be taken, CITBC shall have received from each public warehouse in which
Inventory (other than Inventory in such warehouses while such Inventory is
clearing customs) of the Companies is stored, a Warehouse Letter.
19
<PAGE> 20
20. LANDLORD WAIVERS - Except for those premises for which a reserve
will be taken, CITBC shall have received from each landlord of any premises not
owned by a Company but otherwise leased, used, or occupied thereby, a Landlord
Waiver.
21. BANK ACCOUNTS - As of the Closing Date, each Company shall have
(i) entered into blocked account agreements for each of its depository accounts
(other than its operating accounts) in form and substance reasonably
satisfactory to CITBC; (ii) established a Concentration Account and shall have
transferred to CITBC legal title to same; (iii) required the credit card
companies with which it transacts business to remit balances to a Blocked
Account and/or a Concentration Account: and (iv) delivered to CITBC executed
instruction letter(s), all in form and substance satisfactory to CITBC,
confirming all of the foregoing items.
22. COLLECTION ACCOUNT - The Companies shall have established a
system of bank accounts with respect to the collection of Accounts and the
deposit of proceeds of Inventory as shall be reasonably acceptable to CITBC in
all respects.
23. LOAN DOCUMENTS - The Companies shall have executed and delivered
to CITBC this Financing Agreement and all other Loan Documents necessary to
consummate the lending arrangement contemplated between the Companies and CITBC.
24. NOTICE BY DART - The Companies shall have furnished to CITBC
evidence satisfactory to the Company that Dart Group Corporation ("Dart") has
given not less than seven (7) days prior written notice to counsel of record to
each of the parties (other than Dart) to an action filed on October 17, 1995
captioned Gloria G. Haft et al. v. Larry G. Schafran et al., Del. Ch., Civ. A.
No. 14620 and an action filed on November 6, 1995 captioned Herbert H. Haft v.
Dart Group Corporation et al., Del. Ch. Civ. A. No. 14685 that the Companies are
proposing to enter into a secured $25 million revolving credit facility with
CITBC (and other lenders it may select), which will include a $5 million letter
of credit subfacility, to be used for Working Capital and other corporate
purposes.
25. BORROWING BASE CERTIFICATE - TAC, on behalf of the Companies,
shall have executed and delivered to CITBC a Borrowing Base Certificate setting
forth the computation of the Borrowing
20
<PAGE> 21
Base and Availability as of or immediately prior to the Closing Date, which
shall indicate an excess Availability of $5,000,000 as of the Closing Date.
Except as otherwise set forth hereinabove, upon the execution of this Financing
Agreement and the initial disbursement of loans hereunder, all of the Initial
Conditions Precedent shall have been deemed satisfied except as the Companies
and CITBC shall otherwise agree herein or in a separate writing.
B. CONDITIONS TO EACH EXTENSION OF CREDIT
Except to the extent expressly set forth in this Financing Agreement, the
agreement of CITBC to make any extension of credit requested to be made by it to
the Companies on any date (including without limitation, the initial extension
of credit) is subject to the satisfaction of the following conditions precedent:
1. REPRESENTATIONS AND WARRANTIES - Each of the representations and
warranties made by the Companies in or pursuant to this Financing Agreement
shall be true and correct in all material respects on and as of such date as if
made on and as of such date. Each borrowing by the Companies hereunder shall
constitute a representation and warranty by the Companies as of the date of such
loan or advance that each of the representations, warranties and covenants
contained in the Financing Agreement have been satisfied and are true and
correct, except as the Companies and CITBC shall otherwise agree herein or in a
separate writing.
2. NO DEFAULT - No Default shall have occurred (i) that has not been
cured to the satisfaction of CITBC or waived in writing by CITBC and/or no Event
of Default shall have occurred that has not been waived in writing by CITBC on
such date or (ii) after giving effect to the extension of credit requested to be
made on such date.
3. BORROWING BASE - Except as may be otherwise agreed to from time to
time by CITBC and the Companies in writing, and subject to Paragraph 1 of
Section 3 of this Financing Agreement, after giving effect to the extension of
credit requested to be made by the Companies on such date, the aggregate
outstanding amount of the Revolving Loans and outstanding Letters of Credit
owing by the
21
<PAGE> 22
Companies will not exceed either the Line of Credit or Availability.
4. ADDITIONAL MATTERS - All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
transactions contemplated by this Financing Agreement and all other Loan
Documents, shall be reasonably satisfactory in form and substance to CITBC and
(to the extent that such proceedings, documents, instruments and other matters
relate to the Collateral or CITBC) CITBC shall have received such other
documents and legal opinions in respect of any aspect or consequence of the
transactions contemplated hereby or thereby, as CITBC shall reasonably request.
SECTION 3. REVOLVING LOANS
1. CITBC agrees, subject to the terms and conditions of this
Financing Agreement from time to time, and within x) Availability and y) the
Line of Credit, but subject to CITBC's right to make "over advances", to make
loans and advances to the Companies pursuant to an irrevocable Revolving Loan
Notice of Borrowing substantially in the form attached hereto as Exhibit F
("Revolving Loan Notice of Borrowing") on a revolving basis (i.e., subject to
the limitations set forth herein, the Companies may borrow, repay and re-borrow
Revolving Loans). Such loans and advances shall be in amounts up to forty
percent (40%) of the aggregate value of Eligible inventory of the Companies
determined at the lower of cost or market less reserves which CITBC from time to
time in its sole discretion, exercised reasonably, may deem appropriate (the
"Borrowing Base"). All Revolving Loan Notices of Borrowing must be received by
an officer of CITBC no later than 1:00 p.m. New York time of the day on which
such loans and advances are required. Should CITBC for any reason honor requests
for advances in excess of the limitations set forth herein, such advances shall
be considered "over advances" and shall be made in CITBC's sole discretion,
subject to any additional terms CITBC deems necessary. No single advance of over
advance hereunder may be outstanding more than thirty-six (36) months from the
date of such advance.
2. In furtherance of the continuing assignment and security
interest in the Companies' Inventory and Accounts, the Companies
22
<PAGE> 23
will, at least weekly, execute and deliver to CITBC in such form and manner as
CITBC may reasonably require, solely for CITBC's convenience in maintaining
records of such Collateral, such confirmatory schedules of Inventory and
Accounts, and estimated (in accordance with the Companies present business
practices) sales of Inventory and other Collateral as CITBC may reasonably
require and are available or can be reasonably made available from the
Companies' existing systems, provided that such weekly confirmatory schedules
shall be followed by a monthly report confirming the actual amounts thereof.
Upon an Event of Default, CITBC may at its sole option, but at the Companies'
expense, conduct one or more complete physical inventories and/or reappraisals
of the Companies' Inventory. Failure to provide CITBC with any of the foregoing
shall in no way affect, diminish, modify or otherwise limit the security
interests granted herein. The Companies hereby authorize CITBC to regard their
printed name or rubber stamp signature on assignment schedules or invoices as
the equivalent of a manual signature by one of the Companies' authorized
officers or agents.
3. Each of the Companies hereby represents and warrants that: each
Account and all sales of Inventory are based on bona fide sales and delivery of
Inventory in the ordinary course of the Companies' business. Each of the
Companies hereby further represents and warrants that the Inventory being sold
and the proceeds thereof and the Accounts created thereby are the exclusive
property of the Companies and are not and shall not be subject to any lien,
consignment arrangement, encumbrance, security interest or financing statement
whatsoever, other than the Permitted Encumbrances. The invoices evidencing
Accounts or credit card receipts evidencing credit card sales are in the name of
one of the Companies and except for disputes, offsets, defenses, counterclaims,
returns or credits, all arising in the ordinary course of the Companies'
business or except as may be promptly disclosed to CITBC, the purchasers of such
Inventory owe and are obligated to pay the amount stated in the invoices or
credit card receipts. The Companies confirm to CITBC that any and all taxes or
fees relating to their business, sales, the Accounts or Inventory relating
thereto, are their sole responsibility and that same will be paid or cause to be
paid by the Companies when due unless contested in good faith and adequate
reserves have been made for the payment therefor and that none of said taxes or
fees represent a lien on or claim against the proceeds of any sale of Inventory.
The Companies agree to issue credit memoranda promptly. Each of
23
<PAGE> 24
the Companies also warrants and represents that it is a duly and validly
existing corporation and is qualified in all jurisdictions where the failure to
so qualify would have a material adverse effect on the business of such Company.
The Companies agree to maintain such books and records regarding Accounts as
CITBC may reasonably require and agrees that the books and records of the
Companies will reflect CITBC's interest in the Accounts. CITBC confirms that (i)
it has examined the Companies' books and records regarding Accounts and (ii) in
the absence of a change in circumstances (including, without limitation, a
change in GAAP) such books and records are presently in a form acceptable to
CITBC. All of the books and records of the Companies will be available to CITBC
at normal business hours, including any records handled or maintained for the
Companies by any other company or entity.
4. Until CITBC has advised the Companies to the contrary after the
occurrence of an Event of Default, the Companies may and will, consistent with
the Companies' existing business practices, enforce, collect and receive all
amounts owing on the Accounts for CITBC's benefit and on CITBC's behalf, but at
the Companies' expense; such privilege shall terminate automatically upon the
institution by or against the Companies of any proceeding under any bankruptcy
or insolvency law or, at the election of CITBC, upon the occurrence of any other
Event of Default and until such Event of Default is waived in writing by CITBC.
All checks or cash from the sale of Inventory will be deposited promptly to the
Blocked Accounts. Notwithstanding the foregoing sentence, the Companies shall be
entitled to retain cash at each store operated by the Companies (or at the
respective operating bank account(s) for each such store) in such amounts as are
necessary for the day to day operation of each such store consistent with past
practices in respect of each such store. Pursuant to separate written
arrangements between CITBC and each institution at which a Blocked Account is
located, each such institution has agreed, or will agree, to remit the funds
contained in the Blocked Account to a concentration account owned by CITBC (the
"Concentration Account"). To the extent that the Companies now or hereafter have
any credit card sales, the Companies shall require that all amounts due them
under credit card sales be remitted by the credit card companies to the
Concentration Account pursuant to a Credit Card Receivables Agreement. The
institution holding the Concentration Account will be instructed by CITBC that
when it is satisfied that such funds on deposit are "good funds", such
institution shall, until CITBC has
24
<PAGE> 25
notified it to the contrary, promptly remit such "good funds" to an operating
account of the Companies. After the occurrence of a Default and at any time when
Availability is less than twenty percent (20%) of the Line of Credit, CITBC
shall have the right to notify the institution holding the Concentration Account
to remit such "good funds" in the Concentration Account to CITBC's bank account
in New York, New York. At such time as such Default is cured or waived and
Availability is not less than twenty percent (20%) of the Line of Credit, CITBC
shall promptly notify the institution holding the Concentration Account to remit
such "good funds" to an operating account of the Companies. All amounts received
by CITBC will be credited to the Obligations upon CITBC's receipt of "collected
funds" at CITBC's bank account in New York. New York on the Business Day of
receipt if received no later than 1:00 P.M. (New York time) or on the next
succeeding Business Day if received after 1:00 pm. (New York time). No checks,
drafts or other instrument received by CITBC shall constitute final payment to
CITBC unless and until such instruments have actually been collected. If the
Companies have no Revolving Loans outstanding and there is then no Event of
Default, then CITBC shall remit within one (1) Business Day to the operating
account of the Company or to such other account, all in the United States of
America, of the Company (other than any payroll account) as the Company may
designate, any credit balances remaining in CITBC's bank account.
5. The Companies agree to notify CITBC promptly of any matters
materially affecting the value, enforceability or collectability of any material
Account, individually or in the aggregate, and of all material customer
disputes, offsets, defenses, counterclaims, returns, rejections and all
reclaimed or repossessed merchandise or goods. The Companies agree to issue
credit memoranda promptly (with duplicates to CITBC upon request after the
occurrence of an Event of Default) upon accepting returns or granting
allowances, and may continue to do so until CITBC has notified the Companies
that an Event of Default has occurred and that all future credits or allowances
are to be made only after CITBC's prior written approval. Upon the occurrence of
an Event of Default and until such time as such Event of Default is waived in
writing by CITBC and on notice from CITBC, the Companies agree that all
returned, reclaimed or repossessed merchandise or goods shall be set aside by
the Companies, marked with CITBC's name and held by the Companies for CITBC's
account as owner and assignee.
25
<PAGE> 26
6. (a) Subject to paragraph 6(b) below, CITBC shall maintain a
separate account on its books in the Companies name in which the Companies will
be charged with loans and advances made by CITBC to them or for their account,
and with any other Obligations, including any and all Out-of-Pocket Expenses
which CITBC may incur in connection with the exercise by or for CITBC of any of
the rights or powers herein conferred upon CITBC, or in the prosecution or
defense of any action or proceeding to enforce or protect any rights of CITBC in
connection with this Financing Agreement, the other Loan Documents or the
Collateral assigned hereunder, or any Obligations owing to CITBC by the
Companies. The Companies will be credited with all amounts received by CITBC
from the Companies or from others for the Companies' account, including, as
above set forth, all amounts received by CITBC in payment of Accounts and
Inventory and such amounts will be applied to payment of the Obligations. In no
event shall prior recourse to any security granted to or by the Companies be a
prerequisite to CITBC's right to demand payment of any Obligation. Further, it
is understood that CITBC shall have no obligation whatsoever to perform in any
respect any of the Companies' contracts, lease agreements, or obligations
relating to the Collateral.
(b) (i) TAC, STC and TC (collectively the "Collective Borrowers")
are engaged in an integrated operation that requires financing on a basis that
permits the availability of credit from time to time to each of the Collective
Borrowers for the continued successful operation of each of the Collective
Borrowers. Each of the Collective Borrowers expects to derive benefit, directly
or indirectly, from such availability since the successful operation of each of
the Collective Borrowers is dependent on the continued successful performance of
the functions of the integrated group. As part of such integrated operations,
the Companies have implemented the following measures:
(1) to increase the efficiency and productivity of each of the
Collective Borrowers, the Collective Borrowers have centralized in TAC
a cash management system which entails, in part, central disbursement
and operating accounts from which TAC provides the working capital
needs of each of the Collective Borrowers and manages and timely pays
the accounts payable of each of the Collective Borrowers:
26
<PAGE> 27
(2) to reduce the operating costs of the Collective Borrowers, TAC, on
behalf of the Collective Borrowers, purchases, or causes to be
purchased in its name for its account all materials, supplies,
inventory and services required by the Collective Borrowers.
To implement further the integrated operations of the Collective Borrowers, the
financing on an integrated basis of such operations and to utilize to the
greatest extent the collective borrowing powers of the Collective Borrowers in
the most effective and cost efficient manner and to avoid adverse effects on the
operating efficiencies of each Collective Borrower and the existing backoffice
practices of the Collective Borrowers, the Collective Borrowers desire that all
Revolving Loans and advances be disbursed solely upon the request of TAC and to
bank accounts managed solely by TAC and that TAC will manage for the benefit of
each Collective Borrower the expenditure and usage of such funds.
If furtherance of the foregoing each Collective Borrower hereby irrevocably
appoints TAC as its sole agent for purposes of administering this Financing
Agreement and the requesting, disbursement and management of all Revolving Loans
and other advances made by CITBC under this Financing Agreement.
(ii) The Collective Borrowers hereby request that CITBC accepts the
collective cash management procedures set forth herein and the appointment of
TAC as agent for the Collective Borrowers. The Collective Borrowers hereby agree
that the handling of the accounts of the Collective Borrowers in a combined
fashion, as more fully set forth herein, is done solely as an accommodation to
the Collective Borrowers and at their request, and that CITBC shall incur no
liability to the Collective Borrowers as a result thereof. To induce CITBC to do
so, and in consideration thereof, each of the Collective Borrowers hereby agrees
to indemnify CITBC and hold CITBC harmless against any and all liability,
expense, loss or claim of a damage or injury, made against CITBC by any of the
Collective Borrowers or by any third party whosoever, arising from or incurred
solely by reason of (1) the method of handling the accounts of the Collective
Borrowers as herein provided, (2) CITBC relying on any instructions of any of
the Collective Borrowers, or (3) any other action taken by CITBC in accordance
with this subparagraph (b) of Paragraph 6 of Section 3 of this Financing
Agreement.
27
<PAGE> 28
(iii) To facilitate the handling of the accounts of the Collective
Borrowers on CITBC's books, the collective Borrowers have requested, and CITBC
has agreed to handle accounts of the Collective Borrowers on CITBC's books on a
combined basis, all in accordance with the following provisions:
(1) In lieu of maintaining separate accounts on CITBC's books
in the name of each of the Collective Borrowers, CITBC shall maintain
one account under the name: Trak Auto Corporation (herein the
"Collective Account"). Confirmatory assignments and/or schedules of
Accounts and Inventory will be made to CITBC by TAC on behalf of the
Collective Borrowers. Loans and advances made by CITBC to any of the
Collective Borrowers will be charged to the Collective Account
indicated above, along with any charges and expenses under this
Financing Agreement. The Collective account will be credited with all
amounts received by CITBC from any of the Collective Borrowers or from
others for their account including all amounts received by CITBC in
payment of Accounts assigned to CITBC as provided in Section 3,
Paragraph 4 in this Financing Agreement.
(2) Each month CITBC will render to TAC on behalf of the
Collective Borrowers one extract of the combined Collective Account
which shall be deemed to be an account stated as to each of the
Collective Borrowers and which will be deemed correct and accepted by
all of the Collective Borrowers unless CITBC receives a written
statement of exceptions from them within thirty (30) days after such
extract has been rendered by CITBC. It is expressly understood and
agreed by each of the Collective Borrowers that CITBC shall have no
obligation to account separately to any of the Collective Borrowers.
(3) Requests for loans and advances may be made by TAC as
agent for the Collective Borrowers and CITBC is hereby authorized and
directed to accept, honor and rely on such instructions and requests,
subject to the limitations and provisions set forth in this Financing
Agreement. It is expressly understood and agreed by each of the
Collective Borrowers that CITBC shall have no responsibility to inquire
into the correctness of the apportionment, allocation, or disposition
of (x) any loans and advances made to any of the Collective Borrowers
or (y) any of CITBC's expenses and
28
<PAGE> 29
charges relating thereto. All loans and advances shall be made for the
Collective Account and the Collective Borrowers shall be jointly and
severally liable for the payment of all Obligations charged to such
account.
(4) Each Collective Borrower hereby unconditionally guarantees
to CITBC the prompt payment in full of (A) all loans and advances made
and to be made by CITBC to any other Collective Borrower under this
Financing Agreement, as well as (B) all other Obligations of the other
Collective Borrowers to CITBC.
(5) All Accounts assigned to CITBC by any of the Collective
Borrowers, all Inventory of the Collective Borrowers and any other
collateral security now or hereafter given to CITBC by any of the
Collective Borrowers (be it Accounts, Inventory or otherwise), shall
secure all loans and advances made by CITBC to any of the Collective
Borrowers, and shall be deemed to be pledged to CITBC as security for
any and all other Obligations of the Collective Borrowers to CITBC as
set forth under this Financing Agreement, or any other agreements
between CITBC and any of the Collective Borrowers.
7. Subject to Paragraph 6(b) above, after the end of each month,
CITBC shall promptly send the Companies a statement showing the accounting for
the charges, loans, advances and other transactions occurring between CITBC and
the Companies during that month. The monthly statements shall be deemed correct
and binding upon the Companies and shall constitute an account stated between
the Companies and CITBC unless CITBC receives a written statement of the
exceptions within thirty (30) days of the date of the monthly statement, absent
manifest error.
8. In the event that the sum of (i) the outstanding balance of
Revolving Loans (after giving effect to all amounts which may be charged to the
Companies' Collective Account hereunder) plus (ii) the outstanding Letters of
Credit exceeds Availability or the Line of Credit (herein the amount of any such
excess shall be referred to as the "Excess"), such Excess shall be due and
payable immediately upon CITBC's demand therefor.
29
<PAGE> 30
SECTION 4. LETTERS OF CREDIT
In order to assist the Companies in establishing or opening Letters of
Credit with an Issuing Bank the Companies have requested CITBC to join in the
applications for such Letters of Credit, and/or guarantee payment or performance
of such Letters of Credit and any drafts or acceptances thereunder through the
issuance of the Letters of Credit Guaranty, thereby lending CITBC's credit to
the Companies and CITBC has agreed to do so. These arrangements shall be handled
by CITBC subject to the terms and conditions set forth below, provided that
subject to the terms, provisions and limitations contained in Section 6,
Paragraph 10 of this Financing Agreement nothing contained herein shall prevent
the Companies from obtaining letters of credit from, by or with the assistance
of, an entity other than CITBC.
1. The amount, purpose and extent of the Letters of Credit and
changes or modifications thereof by the Companies and/or the Issuing Bank of the
terms and conditions thereof shall in all respects be subject to the prior
approval of CITBC in the exercise of its reasonable discretion provided however,
that: a) in no event may the aggregate amount of all such outstanding Letters of
Credit exceed, in the aggregate, at any one time the Letter of Credit Subline,
b) the Letter of Credit and all documentation in connection therewith shall be
in form and substance satisfactory to the Companies, CITBC and the Issuing Bank,
c) the aggregate sum of all outstanding Letters of Credit plus all outstanding
Revolving Loans must be within Availability and the Line of Credit, and d) in no
event may the expiration date of a Letter of Credit be later than thirty (30)
days prior to the most immediate Anniversary Date.
2. CITBC shall have the right, without notice to the Companies, to
charge the Companies' Collective Account on CITBC's books with the amount of any
and all indebtedness, liability or obligation of any kind incurred by CITBC
under the Letter of Credit Guaranty at the earlier of a) payment by CITBC under
the Letter of Credit Guaranty, or b) the occurrence of an Event of Default, any
such charges to be reflected in the monthly statements sent to the Companies by
CITBC. Any payment by CITBC pursuant to any Letter of Credit Guaranty or any
fees, charges or amounts charged to the Companies' Collective Account pursuant
to or in connection with
30
<PAGE> 31
this Section 4 shall be deemed a Revolving Loan hereunder and shall incur
interest at the then prevailing Chase Rate. All such charges to the Companies'
Collective Account referenced in this Paragraph 2 will be reflected in the
monthly statements of account to be sent to the Companies by CITBC in accordance
with Section 3 Paragraph 7 hereof.
3. The Companies agree that any charges incurred by CITBC for the
Companies' account by the Issuing Bank shall be conclusive on CITBC and may be
charged to the Companies' Collective Account.
4. CITBC shall not be responsible for: the existence, character,
quality, quantity, condition, packing, value or delivery of the goods purporting
to be represented by any documents; any difference or variation in the
character, quality, quantity, condition, packing, value or delivery of the goods
from that expressed in the documents; the validity, sufficiency or genuineness
of any documents or of any endorsements thereon, even if such documents should
in fact prove to be in any or all respects invalid, insufficient, fraudulent or
forged; the time, place, manner or order in which shipment is made; partial or
incomplete shipment, or failure or omission to ship any or all of the goods
referred to in the Letters of Credit or documents; any deviation from
instructions; delay, default, or fraud by the shipper and/or anyone else in
connection with the Collateral or the shipping thereof; or any breach of
contract between the shipper or vendors and the Companies.
5. The Companies agree that any action taken by CITBC, if taken in
good faith, or any action taken by any Issuing Bank, under or in connection with
the Letters of Credit, the guarantees, the drafts or acceptances, or the
Collateral, shall be binding on the Companies and shall not put CITBC in any
resulting liability to the Companies. In furtherance thereof, CITBC shall have
the full right and authority to clear and resolve any questions of
non-compliance of documents; to give any instructions as to acceptance or
rejection of any documents or goods covered by Letters of Credit; to execute any
and all steamship or always guaranties (and applications therefore), indemnities
or delivery orders; to grant any extensions of the maturity of, time of payment
for, or time of presentation of, any drafts, acceptances, or documents; and to
agree to any amendments, renewals, extensions, modifications, changes or
cancellations of any of the terms or conditions of any
31
<PAGE> 32
of the applications. Letters of Credit, drafts or acceptances; all in CITBC's
sole name, and the Issuing Bank shall be entitled to comply with and honor any
and all such documents or instruments executed by or received solely from CITBC,
all without any notice to or any consent from the Companies.
6. Without CITBC's express consent and endorsement in writing, the
Companies agree: a) not to execute any applications for steamship or airway
guaranties, indemnities or delivery orders; to grant any extensions of the
maturity of, time of payment for, or time of presentation of, any drafts,
acceptances or documents; or to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of any
of the applications, Letters of Credit, drafts or acceptances; and b) after the
occurrence of an Event of Default which is not waived in writing by CITBC, not
to (i) clear and resolve any questions of non-compliance of documents, or (ii)
give any instructions as to acceptance or rejection of any documents or goods.
7. The Companies agree that any necessary import, export or other
licenses or certificates for the import or handling of the Collateral will be
promptly procured prior to shipment thereof; all foreign and domestic
governmental laws and regulations in regard to the shipment and importation of
the Collateral, or the financing thereof will be promptly and fully complied
with prior to shipment thereof; and any certificates in that regard that CITBC
may at any time request will be promptly furnished. In this connection, the
Companies covenant that all shipments made under any such Letters of Credit will
be in accordance with the laws and regulations of the countries in which the
shipments originate and terminate. The Companies assume all risk, liability and
responsibility for, and agrees to pay and discharge, all present and future
local, state, federal or foreign taxes, duties, or levies, Any embargo,
restriction, laws, customs or regulations of any country, state, city, or other
political subdivision, where the Collateral is or may be located, or wherein
payments are to be made, or wherein drafts may be drawn, negotiated, accepted,
or paid, shall be solely the Companies' risk, liability and responsibility.
8. Upon any payments made to the Issuing Bank under the Letter of
Credit Guaranty, CITBC shall acquire by subrogation, any rights, remedies,
duties or obligations granted or undertaken by the Companies to the Issuing Bank
in any application for Letters of
32
<PAGE> 33
Credit, any standing agreement relating to Letters of Credit or otherwise, all
of which shall be deemed to have been granted to CITBC and apply in all respects
to CITBC and shall be in addition to any rights, remedies, duties or obligations
contained herein.
SECTION 5. COLLATERAL
1. As security for the prompt payment in full of all loans and advances
made and to be made to the Companies from time to time by CITBC pursuant hereto,
as well as to secure the payment in full of the other Obligations, each of the
Companies hereby pledges and grants to CITBC a continuing general lien upon and
security interest in all of its:
(a) present and hereafter acquired Inventory;
(b) present and hereafter acquired Accounts;
(c) present and future Documents of Title;
(d) present and future Other Collateral; and
(e) the proceeds of any and all of the foregoing.
2. The security interests granted hereunder shall extend and
attach to:
(a) All Collateral which is presently in existence and which is owned
by the Companies or in which the Companies have any interest, whether held by
the Companies or others for its account; and
(b) All Inventory and any portion thereof which may be returned,
rejected, reclaimed or repossessed by either CITBC or the Companies from the
Companies' customers, as well as to all supplies, goods, incidentals, packaging
materials, labels and any other items which contribute to the finished goods or
products of the Companies, or to the sale, promotion or shipment thereof.
33
<PAGE> 34
3. The Companies agree to safeguard, protect and hold all Inventory
for CITBC's account and make no disposition thereof, except in the regular
course of its business and as further provided herein. Absent the occurrence of
an Event of Default and notice from CITBC to the Companies to the contrary, as
provided for below, any Inventory may be sold and shipped to customers in the
ordinary course of the Companies' business, on open account and on terms
currently being extended by the Companies to customers or for cash, credit card,
all consistent with its current business practices as of the Closing Date,
provided that all proceeds of all sales (including cash, accounts receivable,
checks, notes, instruments for the payment of money and similar proceeds) are
forthwith transferred, endorsed, and turned over and delivered to CITBC by
deposit to the Blocked Accounts. CITBC shall have the right to withdraw this
permission at any time upon the occurrence of an Event of Default and until such
time as such Event of Default is waived in writing, in which event no further
disposition shall be made of the Inventory by the Companies without CITBC's
prior written approval. Upon the sale, exchange, or other disposition of
Inventory, as herein provided, the security interest in the Inventory provided
for herein shall, without break in continuity and without further formality or
act, continue in, and attach to, all proceeds, including any instruments for the
payment of money, accounts receivable, contract rights, documents of title,
shipping documents, chattel paper and all other cash and non-cash proceeds of
such sale, exchange or disposition. As to any such sale, exchange or other
disposition, CITBC shall have all of the rights of an unpaid seller, including
stoppage in transit, replevin, rescission and reclamation.
4. The rights and security interests granted to CITBC hereunder are
to continue in full force and effect, notwithstanding the termination of this
Financing Agreement or the fact that the Collective Account maintained in TAC's
name on the books of CITBC may from time to time be temporarily in a credit
position, until the final payment in full to CITBC of all Obligations and the
termination of this Financing Agreement. Any delay, or omission by CITBC to
exercise any right hereunder, shall not be deemed a waiver thereof, or be deemed
a waiver of any other right, unless such waiver shall be in writing and signed
by CITBC. A waiver on any one occasion shall not be construed as a bar to or
waiver of any right or remedy on any future occasion.
34
<PAGE> 35
5. To the extent that the Obligations are now or hereafter secured
by any assets or property other than the Collateral or by the guarantee,
endorsement, assets or property of any other person, then CITBC shall have the
right in its sole discretion to determine which rights, security, liens,
security interests or remedies CITBC shall at any time pursue, foreclose upon,
relinquish, subordinate, modify or take any other action with respect to,
without in any way modifying or affecting any of them, or any of CITBC's rights
hereunder.
6. Any reserves or balances to the credit of the Companies and any
other property or assets of the Companies in the possession of CITBC may be held
by CITBC as security for any Obligations and applied in whole or partial
satisfaction of such Obligations when due. The liens and security interests
granted herein and any other lien or security interest CITBC may have in any
other assets of the Companies, shall secure payment and performance of all now
existing and future Obligations.
7. CITBC's sole duty with respect to the custody, safekeeping and
physical preservation of any Collateral in its possession, under Section 9 of
the UCC or otherwise, to the extent the same is applicable, shall be to deal
with it in the same manner as CITBC deals with similar property for its own
account. Absent gross negligence or willful misconduct, neither CITBC nor any of
its directors, officers, employees or agents shall be liable for any failure to
demand, collect or realize upon all or any part of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise dispose
of any Collateral upon the request of the Companies or otherwise.
8. The Companies shall use reasonable efforts to give to CITBC and/or
shall cause the appropriate party to give to CITBC, (i) a Warehouse Letter for
each warehouse arrangement entered into on and after the Closing Date; (ii) a
Landlord Waiver from each landlord of any premises not owned but otherwise
leased, used, or otherwise occupied by the Company on and after the Closing
Date: and (iii) a Mortgagee Waiver for each mortgage granted by the Company on
and after the Closing Date.
9. In accordance with and pursuant to the other terms and
provisions in this Financing Agreement, the failure of the
Companies to provide a Landlord Waiver, Mortgagee Waiver and/or
35
<PAGE> 36
Warehouse Letter as required herein shall, at CITBC's sole election, reduce the
amount of Eligible Inventory as determined by CITBC in its reasonable business
judgment.
SECTION 6. REPRESENTATIONS; WARRANTIES AND COVENANTS
1. Each of the Companies hereby warrants and represents and/or covenants that:
(i) the fair value of each Company's assets exceeds the book value of each
Company's liabilities; (ii) each of the Companies is generally able to pay its
debts as they become due and payable; and (iii) each of the Companies does not
have unreasonably small capital to carry on its business as it is currently
conducted absent extraordinary and unforeseen circumstances. The Companies
further warrant and represent that: (a) except for the Permitted Encumbrances,
the security interests granted herein constitute and shall at all times
constitute valid, first priority and only liens on the Collateral; (b) Schedule
3 hereto correctly and completely sets forth the Companies' chief executive
office and all of the Companies' Collateral locations, and after Filing of
financing statements in the applicable filing clerks' offices in the
jurisdictions listed on the Perfection Certificate, this Financing Agreement
creates a valid, perfected, first priority and only lien on the Collateral
except for the Permitted Encumbrances; (c) except for the Permitted
Encumbrances, the Companies are or will be at the time additional Collateral is
acquired by them the absolute owners of the Collateral with full right to
pledge, sell, consign, transfer and create a security interest therein, free and
clear of any and all claims or liens in favor of others; (d) the Companies will
at their expense forever warrant and, at CITBC's request, defend the same from
any and all claims and demands of any other person with respect to Collateral
(other than the Permitted Encumbrances); (e) the Companies will not grant,
create or permit to exist, any lien upon or security interest in the Collateral;
or any proceeds thereof, in favor of any other person other than the holders of
the Permitted Encumbrances; (f) the representations and warranties in the
Perfection Certificates, as of the Closing Date, are true and correct; and (g)
the Companies do not purchase or acquire Inventory on a consignment basis.
36
<PAGE> 37
2. The Companies agree to maintain books and records pertaining to
the Collateral in such detail, form and scope as CITBC shall reasonably require.
The Companies agree that CITBC or its agents may enter upon the Companies'
premises at any time during normal business hours, and from time to time, for
the purpose of inspecting the Collateral, and any and all records pertaining
thereto. The Companies agree to afford CITBC prior written notice of any change
in the location of any Collateral, other than to locations, that as of the date
thereof, are known to CITBC and at which CITBC has filed financing statements
and otherwise fully perfected its liens thereon. The Companies are also to
advise CITBC promptly, in sufficient detail, of any adverse change that is
material to the business of the Companies relating to the type, quantity or
quality of the Collateral or the security interests granted to CITBC therein.
3. The Companies agree to: execute and deliver to CITBC, from time to
time, solely for CITBC's convenience in maintaining a record of the Collateral,
such written statements, and schedules as CITBC may reasonably require,
designating, identifying or describing the Collateral pledged to CITBC
hereunder. The Companies' failure, however, to promptly give CITBC such
statements, or schedules shall not affect, diminish, modify or otherwise limit
CITBC's security interests in the Collateral.
4. The Companies agree to comply with the requirements of all state
and federal laws in order to grant to CITBC valid, perfected first priority
liens on the Collateral, subject only to the Permitted Encumbrances. CITBC is
hereby authorized by the Companies to file any financing statements covering the
Collateral whether or not the Companies' signature appears thereon. The
Companies agree to do whatever CITBC may reasonably request, from time to time,
by way of: searching records, filing notices of liens, financing statements,
amendments, renewals and continuations thereof: cooperating with CITBC's
custodians; keeping Inventory records; transferring proceeds of Collateral to
CITBC's possession; and performing such further acts as CITBC may reasonably
require in order to effect the purposes of this Financing Agreement.
5. (a) The Companies agree to maintain insurance on the Inventory
(wherever located) under such policies of insurance, with such insurance
companies, in such reasonable amounts and covering such insurable risks as are
at all times reasonably satisfactory to
37
<PAGE> 38
CITBC. CITBC confirms that (i) it has reviewed the Companies' existing insurance
coverage and (ii) in the absence of a material change in circumstances
(including, without limitation, the value or location of Inventory and/or the
nature of such Inventory or the nature of the business conducted by the
Companies) such insurance coverage is presently acceptable to CITBC. All
policies covering the inventory are, to be made payable to CITBC, in case of
loss, under a standard non-contributory "lender" or "secured party" clause and
are to contain such other provisions including, but not limited to, a breach of
warranty clause, as CITBC may require to fully protect CITBC's interest in the
Inventory and to any payments to be made under such policies. All original
policies or true copies thereof are to be delivered to CITBC, premiums to be
paid in accordance with the terms thereof, with the loss payable endorsement in
CITBC's favor, and shall provide for not less than thirty (30) days prior
written notice to CITBC of the exercise of any right of cancellation, material
reduction in amount of insurance, or material change in coverage thereof. At the
Companies' request, or if the Companies fall to maintain such insurance, CITBC
may arrange for such insurance, but at the Companies' expense and without any
responsibility on CITBC's part for: obtaining the insurance, the solvency of the
insurance companies, the adequacy of the coverage, or the collection of claims.
Upon the occurrence of an Event of Default which is not waived in writing, CITBC
shall have the sole right, in the name of CITBC or the Companies, to file claims
under any insurance policies, to receive, receipt and give acquittance for any
payments that may be payable thereunder, and to execute any and all
endorsements, receipts, releases, assignments, reassignments or other documents
that may be necessary to effect the collection, compromise or settlement of any
claims under any such insurance policies.
(b) In the event of any loss or damage by fire or other casualty,
insurance proceeds relating to Inventory shall reduce the Companies' Collective
Account accordingly,
(c) In addition to the insurance required under subparagraph (a) of
this Paragraph 5, the Companies agree to maintain insurance in such amounts and
covering such risks, including interruption of business, as are usually carried
by companies engaged in the same or similar business, CITBC confirms that (i) it
has reviewed the Companies' existing insurance coverage and (ii) in the absence
of
38
<PAGE> 39
a material change in circumstances (including, without limitation, the value or
location of Inventory and/or the nature of such Inventory or the nature of the
business conducted by the Companies) such insurance coverage is presently
acceptable to CITBC.
6. The Companies agree to pay, when due, all taxes, assessments,
claims and other charges (herein "taxes") lawfully levied or assessed upon the
Companies or the Collateral, provided, however, that such taxes, other than
taxes due the United States of America, need not be timely paid if such taxes
are (i) being diligently contested in good faith by the Companies by appropriate
proceeding and (ii) not secured by a lien on the Collateral which lien is senior
to the lien of CITBC. CITBC may, on the Companies' behalf, pay all such taxes
(x) if payment of such is necessary to protect, preserve or dispose of
Collateral or (y) are due the United States of America or (z) if such is
necessary to avoid, or release, any lien on Collateral, which lien is senior to
the lien of CITBC.
7. The Companies: (a) agree to comply with all acts, rules,
regulations and orders of any legislative, administrative or judicial body or
official, which the failure to comply with would have a material and adverse
impact on the Collateral taken as a whole, or any material part thereof, or on
the operation of the Companies' business; provided that the Companies may
contest any acts, rules, regulations, orders and directions of such bodies or
officials in any reasonable manner which will not, in CITBC's reasonable
opinion, materially and adversely effect CITBC's rights or priority in the
Collateral: (b) agree to comply with all environmental statutes, acts, rules,
regulations or orders as presently existing or as adopted or amended in the
future applicable to the ownership and/or use of its real property and operation
of its business which the failure to comply with would have a material and
adverse impact on the Collateral, or any material part thereof, or on the
operation of the business of the Companies; and (c) shall not be deemed to have
breached any provision of this Paragraph 7 if (i) the failure to comply with the
requirements of this Paragraph 7 resulted from good faith error or innocent
omission, (ii) the Companies promptly commence and diligently pursue a cure of
such breach, (iii) such failure is cured within a reasonable time based upon the
circumstances and the amount of work required, but in no event later than the
time frame prescribed by applicable law, and (iv) such failure has not
39
<PAGE> 40
resulted in a material adverse effect on the business, financial condition or
operations of the Companies or on the Collateral. Upon receipt by the Companies
of any notice of non-compliance with any applicable environmental rules or
regulation, of any required expenditures for compliance, any spill or omission
or other regulated "event", or any claim resulting from the Companies' business
or practices or relating to the Collateral, the Companies shall establish such
reserves as may be required by GAAP or, in the alternative or in addition
thereto, CITBC may establish a reserve in such amount as CITBC may require in
its reasonable discretion.
8. Until termination of this Financing Agreement and payment and
satisfaction of all Obligations due hereunder, the Companies will furnish to
CITBC, on Friday of each week with respect to the week ending on the Saturday
immediately preceding such Friday, a Borrowing Base Certificate in the form of
Exhibit D hereto, provided that, prior to the initial extension of any Revolving
Loan or Letter of Credit hereunder such Borrowing Base Certificate shall only be
required to be delivered within fifteen (15) days following the last day of each
Fiscal Period.
9. Until termination of this Financing Agreement and payment and
satisfaction of all Obligations due hereunder, the Companies agree that, unless
CITBC shall have otherwise consented in writing, the Companies will furnish to
CITBC, within ninety (90) days after the end of each Fiscal Year of the
Companies an audited Consolidated Balance Sheet and statements of income, cash
flow and stockholders' equity of TAC and its subsidiaries for such year, audited
by Arthur Andersen LLP or another independent public accountants selected by the
Companies and satisfactory to CITBC in the exercise of its reasonable business
judgment; within one hundred fifty (150) days after the end of each Fiscal Year
of the Companies a management letter as at the close of such year; within
forty-five (45) days after the end of each of the first three Fiscal Quarters of
each Fiscal Year, a Consolidated Balance Sheet as at the end of such period and
statements of income, cash flow and stockholders' equity of TAC including its
subsidiaries, certified by an authorized Financial or accounting officer of the
TAC and within sixty (60) days after the end of each such Fiscal Quarter
comparisons of such financial information to (a) the financial projection
provided to CITBC for the corresponding fiscal period and (b) the prior year's
financial statements as herein described for the corresponding fiscal period in
such prior year
40
<PAGE> 41
(herein "Comparative Financial Reports"); and within forty-five (45) days after
the end of each Fiscal Year, monthly projections for the succeeding Fiscal Year
including a Consolidated Balance Sheet, statements of income, cash flow and
stockholders' equity of the TAC including its subsidiaries; and from time to
time, such further information regarding the business affairs and financial
condition of the Companies as CITBC may reasonably request. Each Financial
statement which the Companies are required to submit hereunder must be
accompanied by an officer's certificate, signed by an Executive Officer,
pursuant to which any one such officer must certify that: (i) the financial
statement(s) are prepared in accordance with GAAP consistently applied in
accordance with past practices and fairly present in all material respects the
financial condition of TAC and its subsidiaries at the end of the particular
accounting period, as well as the operating results of TAC and its subsidiaries
during such accounting period, subject to year-end audit adjustments and with
only such notes as appear therein and (ii) during the particular accounting
period: (x) there has been no default or condition which, with the passage of
time or notice, or both, would constitute a Default or Event of Default under
this Financing Agreement, provided however that if any such officer has
knowledge that any such Default or Event of Default, has occurred during such
period, the existence of and a detailed description of same shall be set forth
in such officer's certificate; and (y) the Companies have not received any
notice of cancellation with respect to their property insurance policies.
10. Until termination of the Financing Agreement and payment and
satisfaction of all Obligations due hereunder, the Companies agree that, without
the prior written consent of CITBC (which consent CITBC may withhold in the
exercise of its sole discretion exercised in accordance with its reasonable
business judgment), except as otherwise herein provided. the Companies will not:
A. Mortgage, assign, pledge, transfer or otherwise permit any
lien, charge, security interest, encumbrance or judgment,
(whether as a result of a purchase money or title retention
transaction, or other security interest, or otherwise) to
exist on any of the Collateral, except for the Permitted
Encumbrances;
B. Incur or create any Indebtedness in excess of $500,000 in
the aggregate, other than the Permitted Indebtedness and
41
<PAGE> 42
Indebtedness incurred in connection with the Haft Settlement
Transactions:
C. Borrow any money on the security of the Companies'
Collateral from sources other than CITBC;
D. Sell, lease, assign, transfer or otherwise dispose of
(i) Collateral, except as otherwise specifically
permitted by this Financing Agreement or in the ordinary
course of business, or (ii) either all or substantially
all of the Companies' assets which do not constitute
Collateral;
E. Merge, consolidate or otherwise alter or modify their
corporate names, principal places of business,
structures, status or existence, or enter into or engage
in any operation or activity materially different from
that presently being conducted by the Companies;
F. Assume, guarantee, endorse, or otherwise become liable
upon the obligations of any person, firm, entity or
corporation, except (i) by the endorsement of negotiable
instruments for deposit or collection or similar
transactions in the ordinary course of business, (ii) for
any lease arrangement of any Company, Guarantor or third
party assumed or guaranteed by the Companies in the
ordinary course of business, and (iii) guarantees
incurred in connection with the Haft Settlement
Transactions;
G. Make any advance or loan to, or any investment in, any
firm, entity, person or corporation other than (i) to
employees, officers and directors in the ordinary course
of business not to exceed $500,000 at any time
outstanding; and (ii) in connection with the Haft
Settlement Transactions;
H. Change the Fiscal Year of the Companies or any of their
subsidiaries; and
I. Permit the Leverage Ratio of TAC, and its consolidated
subsidiaries to be more than 3.5 to 1.O as at the end of
any Fiscal Quarter.
42
<PAGE> 43
11. Each of the Companies represents and warrants that it has complied
in all material respects with and shall continue to comply in all material
respects with all provisions of the Fair Labor Standards Act as set forth in the
United States Code.
12. Each of the Companies represents and warrants that, to the best of
its knowledge, it owns or possesses or has the right to use all of the patents,
trademarks, permits, services marks, tradenames, copyrights, software, customer
lists, franchises, licenses and rights with respect thereto, necessary for the
present and presently planned future conduct of its business, free from and
without any known conflict with any title, interest, lien, restriction or
encumbrance and without any known conflict with rights of others; none of the
foregoing is subject to any outstanding order, decree, judgment or stipulation,
and no proceedings have been instituted or are pending or, to the best knowledge
of the Companies, threatened charging that any of the foregoing was
misappropriated or infringes on the rights of any third party.
13. Without the prior written consent of CITBC, the Companies agree
that, they will not enter into any transaction, including, without limitation,
any purchase, sale, lease, loan or exchange of property with any subsidiary or
affiliate of the Companies unless such transaction shall be on an arm's length
basis on terms no less favorable to the Companies than a transaction with a
third party, except the Haft Settlement Transactions.
14. The Companies agree to advise CITBC in writing of:
a) all expenditures (actual or anticipated) in excess of $150,000,00 for x)
environmental clean-up, y) environmental compliance or z) environmental testing
and the impact of said expenses on the Companies' Working Capital; and b) any
notices the Companies receive from any local, state or federal authority
advising the Companies of any environmental liability (real or potential)
stemming from the Companies' operations, premises, waste disposal practices, or
waste disposal sites used by the Companies and to provide CITBC with copies of
all such notices if so required or requested by CITBC.
43
<PAGE> 44
15. The Companies shall advise CITBC:
(i) thirty (30) days prior to placing any Inventory at any new
store unless CITBC has already filed UCC financing
statement(s) with respect to Inventory located in such
jurisdiction and otherwise taken all actions required to
perfect its lien upon, and security interest in such
Inventory; (ii) on the next Borrowing Base Certificate
delivered to CITBC if the Companies close 10 stores or less
within any consecutive five (5) day period; and (iii) fifteen
(15) days prior to closing more than 10 stores within any
consecutive five (5) day period.
SECTION 7. INTEREST; FEES AND EXPENSES
1. The Revolving Loans made on and after the Closing Date shall bear a variable
rate of interest, as further described below, to be selected by the Companies in
the Revolving Loan Notice of Borrowing effective upon receipt by CITBC, and
given no later than 1:00 p.m. (New York time) on a) in the case of Chase Rate
Loans, the date such borrowings are to be made and b) in the case of Libor
Loans, the third (3rd) Business Day prior to the date such borrowings are to be
made. In the event the Companies fall to timely select a variable interest rate,
the Revolving Loans shall be deemed Chase Rate Loans until the Companies elect
otherwise as herein provided. The Companies may elect either a) the Chase Rate;
b) the Libor; or c) a combination of the Chase Rate and the Libor to be applied
to different tranches of the Revolving Loans.
x) In the event the Companies elect the Chase Rate for all or any part
of the Revolving Loans, the Revolving Loan Notice of Borrowing shall
specify the amount of such loan. The interest rate thereon shall be an
amount equal to (i) the Chase Rate plus or minus (ii) the Applicable
Margin. In the event of any change in the Chase Rate, the interest rate
with respect to a Revolving Loan that is a Chase Rate Loan shall
change, as of the first day of the month following any change.
y) In the event the Companies initially elect the Libor for
all or any part of the Revolving Loans, the Revolving Loan
Notice of Borrowing shall specify (a) the amount of such loan
and (b) the initial Libor Period applicable thereto. The
44
<PAGE> 45
interest rate thereon shall be an amount equal to (i) the applicable
Libor for such Libor Period plus (ii) the Applicable Margin.
2. Provided that x) there is then no Default or Event of Default
and y) the Companies have given an irrevocable written or facsimile Notice of
Variable Interest Rate Conversion/Continuation in accordance with the provisions
of this Paragraph 2, the Companies may I) continue an outstanding Libor Loan for
a subsequent Libor Period it selects and/or II) convert all or any part of any
outstanding variable interest rate on the Revolving Loans (i) from a Chase Rate
to a Libor and/or (ii) from a Libor to a Chase Rate. Whenever the Companies
desire to either convert a variable interest rate or to continue a Libor for a
subsequent Libor Period, the Companies must advise CITBC of its irrevocable
election no later than (a) three (3) Business Days preceding the first day of
the Libor Period if the conversion is from a Chase Rate to a Libor and (b) three
(3) Business Days prior to the end of the then current Libor Period if the
conversion is from a Libor to a Chase Rate. If no such election is timely made
or can be made, CITBC shall use the Chase Rate to compute any variable interest
rate hereunder. Each written or facsimile Notice of Variable Interest Rate
Conversion/Continuation shall (i) identify the loans to be converted or
continued, the aggregate outstanding principal balance thereof and, in the case
of Libor Loans to be continued, the last day of the Libor Period therefor, (ii)
specify the effective date of such conversion or continuation provided, however,
if the loans to be continued or converted are Libor Loans, such continuation or
conversion shall be effective only on the last day of the then current Libor
Period applicable to such loans (subject to Subparagraph (c) below of this
Paragraph), and (iii) specify the Libor Period to be applicable to such
converted or continued Libor Loan.
a) If the Companies elect under this Paragraph to either continue
an outstanding Libor Loan for a subsequent Libor Period or
convert all or any part of a Chase Rate Loan to a Libor Loan,
the interest thereon shall be an amount equal to the Revolving
Loans Libor for such succeeding Libor Period plus the
Applicable Margin.
b) If the Companies elect under this Paragraph to convert
all or any part of a Libor Loan to a Chase Rate Loan, the
45
<PAGE> 46
interest rate thereon shall be an amount equal to the Chase
Rate plus or minus the Applicable Margin.
c) If the last day of a current Libor Period with respect to
a loan that is to be continued as or converted to a Libor
Loan under this Paragraph is not a Business Day, then (i)
such continuation of conversion shall be made on the next
succeeding Business Day and (ii) during the period from
such last day of the current Libor Period to such next
succeeding Business Day, such loan shall bear interest as
if it were a Chase Rate Loan.
d) Any Libor Period pertaining to a Libor Loan that begins on the
last Business Day of a calendar month (or on a day for which
there is no numerically corresponding day in the calendar
month at the end of such Libor Period) shall end on the last
Business Day of the calendar month at the end of such Libor
Period.
e) No Libor Period shall end after the next succeeding
Anniversary Date other than an Anniversary Date as to which
the right of the Companies or CITBC to terminate the Line of
Credit or this Financing Agreement pursuant to Section 10
hereof has elapsed without exercise of such right by either
the Companies or CITBC.
3. Notwithstanding anything to the contrary contained in this
Section 7, there shall not be more than six (6) Libor Tranches outstanding at
any one time.
4. Calculation of all amounts payable to CITBC under this
Financing Agreement with regard to Libor Loans shall be made as though CITBC had
actually funded the Libor Loans through the purchase of deposits in the relevant
market and currency, as the case may be, bearing interest at the rate applicable
to such Libor Loans in an amount equal to the amount of the Libor Loans and
having a maturity comparable to the relevant Libor Period provided, however,
that CITBC may fund each of the Libor Loans in any manner as CITBC sees fit and
the foregoing assumption shall be used only for calculation of amounts payable
under this Financing Agreement.
5. Notwithstanding anything to the contrary contained
herein, if any Libor Loan made under this Financing Agreement is
46
<PAGE> 47
prepaid, by acceleration or otherwise, the Companies must pay to CITBC the
Libor Prepayment Penalty.
6. Notwithstanding anything herein to the contrary, in the event
that a Default that has not been cured to the satisfaction of CITBC or waived
in writing by CITBC or an Event of Default that has not been waived in writing
by CITBC exists at the end of any Libor Period for which Libor Loans are
outstanding, the Companies shall be deemed to have selected to convert all such
Libor Loans at the end of such Libor Period to Chase Rate Loans. Such Libor
Loans shall be so converted without any further action by the Companies, The
principal amount of such loans shall bear interest at a rate equal to the rate
applicable to Chase Rate Loans.
7. If all or a portion of the outstanding principal amount of the
Obligations shall not be paid when due (whether at the stated maturity, by
acceleration or otherwise), such outstanding amount, to the extent it is a Libor
Loan, shall be automatically converted to a Chase Rate Loan at the end of the
last Libor Period therefor for which CITBC on or prior to the date such unpaid
principal amount became due, shall have determined Libor.
8. In the event that CITBC shall have determined in the exercise of
its reasonable business judgement (which determination shall be conclusive and
binding upon the Companies) that by reason of circumstances affecting the
interbank Eurodollar market, adequate and reasonable means do not exist for
ascertaining Libor applicable for any Libor Period with respect to (a) a
proposed loan that the Companies have requested be made as a Libor Loan, (b) a
Libor Loan that will result from the requested conversion of a Chase Rate Loan
into a Libor Loan, or (c) the continuation of a Libor Loan beyond the expiration
of the then current Libor Period with respect thereto. CITBC shall give written
notice of such determination to the Companies at least one (l) day prior to, as
the case may be, the requested borrowing date, conversion date, or the last day
of such Libor Period. If such notice is given (i) any requested Libor Loan shall
be made as a Chase Rate Loan, (ii) any Chase Rate Loan that was to have been
converted to a Libor Loan shall be continued as a Chase Rate Loan, and (iii) any
outstanding Libor Loan shall be converted, on the last day of then current Libor
Period with respect thereto, to a Chase Rate Loan. Until such notice has been
withdrawn by CITBC, no further Libor Loan
47
<PAGE> 48
shall be made nor shall the Companies have the right to convert a Chase Rate
Loan to a Libor Loan.
9. Notwithstanding any other provisions herein, if any law,
regulation, treaty or directive or any change therein or in the interpretation
or application thereof, shall make it unlawful for CITBC to make or maintain
Libor Loans as contemplated herein, the then outstanding Libor Loans, if any,
shall be converted automatically to Chase Rate Loans on the next succeeding
interest payment date or within such earlier period as required by law. The
Companies hereby agree promptly to pay CITBC, upon its demand, any additional
amounts necessary to compensate CITBC for any costs incurred by CITBC in making
any conversion in accordance with this Section 7 including, but not limited to,
any interest or fees payable by CITBC or Chase Bank to lenders of funds obtained
by either of them in order to make or maintain Libor Loans hereunder.
10. The applicable interest rate on Chase Rate Loans shall (i) be
calculated on the average of the daily net balances owing by the Companies to
CITBC in the Collective Account at the close of each day such loans are
outstanding during each month for which the Companies have elected such Chase
Rate and (ii) be prorated for the number of days of such month such loans are
outstanding.
11. All interest on the Chase Rate Loans shall be payable monthly as
of the end of each month and shall be calculated based on a 360 day year. All
interest on each Libor Loan made, converted, and/or continued under this
Financing Agreement shall be payable at the end of the Libor Period therefor on
the outstanding principal balance thereof. CITBC shall be entitled to charge the
Companies' Revolving Loan Account with the applicable interest rate(s) until all
Obligations have been paid in full.
12. In consideration of the Letter of Credit Guaranty of CITBC, the
Companies shall jointly and severally pay CITBC the Letter of Credit Guaranty
Fee which shall be an amount equal to (i) one percent (1%) of the face amount of
each documentary Letter of Credit, payable upon issuance and (ii) one and
one-quarter percent (1 1/4%) per annum, payable monthly, on the face amount of
each standby Letter of Credit less the amount of any and all amounts previously
drawn under the Letter of Credit.
48
<PAGE> 49
13. The Companies shall jointly and severally reimburse or
pay CITBC, as the case may be, for its own account for: a) all Out-
of-Pocket Expenses of CITBC, and b) any applicable Documentation
Fee.
14. The Companies shall jointly and severally pay CITBC an
Administrative Fee in the amount of $33,000 (which amount includes the inventory
appraisal) on the Closing Date and $18,000 per year payable annually thereafter.
The Administrative Fee shall be fully earned when paid and shall not be
refundable or rebatable by reason of prepayment acceleration, upon an Event of
Default, or any other circumstances and shall survive any termination of this
Financing Agreement.
15. Any charges, fees, commissions, costs and expenses charged to
CITBC for the Companies' account by any Issuing Bank in connection with or
arising out of Letters of Credit issued pursuant to this Financing Agreement or
out of transactions relating thereto will be charged to the Companies'
Collective Account in full when charged to or paid by CITBC and when made by any
such Issuing Bank shall be conclusive on CITBC, provided that nothing contained
herein shall alter, diminish or waive any right or remedy which the Companies
may have against any Issuing Bank.
16. Upon the last Business Day of each month, commencing with the
month in which the Closing Date occurs the Companies shall jointly and severally
pay CITBC the Line of Credit Fee.
17. The Companies shall jointly and severally pay, for the account of
CITBC, CITBC's standard charges for, and the fees and expenses of, the CITBC
personnel used by CITBC for reviewing the books and records of the Companies and
for verifying, testing protecting, safeguarding, preserving or disposing of all
or any part of the Collateral provided, however, that the foregoing shall not be
payable until the occurrence of an Event of Default if the Companies are paying
an Administrative Fee.
18. To induce CITBC to enter this Financing Agreement and to extend to
the Companies the Revolving Loans and the Letter of Credit Guaranties the
Companies shall jointly and severally pay to CITBC a Closing Fee in the amount
of $125,000 payable on the Closing Date, provided that a commitment fee of
$75,000 previously
49
<PAGE> 50
paid by the Companies to CITBC shall be credited to the Closing
Fee.
SECTION 8. POWERS
Each of the Companies hereby constitutes CITBC or any person or agent
CITBC may designate as its attorney-in-fact, at the Companies' cost and expense,
to exercise all of the following powers, which being coupled with an interest,
shall be irrevocable until all of the Companies' Obligations to CITBC have been
paid in full:
(a) To receive, take, endorse, sign, assign and deliver, all in the
name of CITBC or the Companies, any and all checks, notes, drafts, and other
documents or instruments relating to the Collateral:
(b) To receive, open and dispose of all mall addressed to the Companies
and to notify postal authorities to change the address for delivery thereof to
such address as CITBC may designate:
(c) To request from customers indebted on Accounts at any time, in the
name of CITBC or the Companies or that of CITBC's designee, information
concerning the amounts owing on the Accounts;
(d) To transmit to customers indebted on Accounts notice of CITBC's
interest therein and to notify customers indebted on Accounts to make payment
directly to CITBC for the Companies' account; and
(e) To take or bring, in the name of CITBC or the Companies, all steps,
actions, suits or proceedings deemed by CITBC necessary or desirable to enforce
or effect collection of the Accounts.
Notwithstanding anything hereinabove contained to the contrary, the
powers set forth in clauses (a), (b), (d) and (e) above in this Section 8 may
only be exercised after the occurrence of an Event of Default and until such
time as such Event of Default is waived in writing by CITBC. In addition, the
powers set forth in clause (c) above of this Section 8 shall only be exercised
in the name of the Companies or a certified public accountant designated
50
<PAGE> 51
by CITBC prior to the occurrence of a Default or an Event of Default.
SECTION 9. EVENTS OF DEFAULT AND REMEDIES
1. Notwithstanding anything hereinabove to the contrary, CITBC may
terminate this Financing Agreement immediately upon the occurrence of any of the
following (herein "Events of Default"):
(a) cessation of the business of the Companies, or any one of
them, or the calling of a meeting of the creditors of the
Companies, or any one of them, for purposes of compromising
their debts and obligations:
(b) the failure of the Companies, or any one of them, to
generally meet debts as they mature:
(c) the commencement by or against the Companies, or any one
of them, of any bankruptcy, insolvency, arrangement,
reorganization, receivership or similar proceedings under
any federal or state law provided that in the event of
any involuntary proceeding commenced against the
Companies, such proceeding is not dismissed or discharged
within forty-five (45) days after the commencement
thereof:
(d) breach by the Companies, or any one of them, of any
material warranty, representation or covenant contained
herein (other than those referred to in subparagraph (e)
below), or in the other Loan Documents, provided that
such breach by the Companies of any of the warranties,
representations or covenants referred in this clause (d)
shall not be deemed to be an Event of Default unless and
until such breach shall fail to be remedied to CITBC 's
satisfaction for a period of fifteen (15) days from the
date of such breach;
(e) breach by the Companies, or any one of them, of any
warranty, representation or covenant of Section 3,
Paragraphs 3 (other than the first, third and fifth
51
<PAGE> 52
sentences of Paragraph 3) and 4: Section 5. Paragraph 3;
Section 6, Paragraphs 1, 5, 6, 10 and 11;
(f) failure of the Companies, or any one of them, to pay any
Obligation within five (5) Business Days of the due date
thereof, provided that nothing contained herein shall prohibit
CITBC from charging such amounts to the Companies' Collective
Account on the due date thereof:
(g) the Companies, or any one of them, shall (i) engage
in any "prohibited transaction" as defined in ERISA, (ii)
have any "accumulated funding deficiency" as defined in
ERISA, (iii) have any Reportable Event as defined in
ERISA, (iv) terminate any Plan, as defined in ERISA or
(v) be engaged in any proceeding in which the Pension
Benefit Guaranty Corporation shall seek appointment, or
is appointed, as trustee or administrator of any Plan, as
defined in ERISA, and with respect to this subparagraph
(g) such event or condition x) remains uncured for a
period of thirty (30) days from date of occurrence and y)
could, in the reasonable opinion of CITBC, subject the
Companies to any tax, penalty or other liability material
to the business, operations or financial condition of the
Companies;
(h) the Companies shall be obligated to make payments (excluding
payments made in connection with assumed mortgage debt) in the
aggregate amount of more than $25,000,000 in the aggregate or
to issue any associated unsecured guaranties of more than
$20,000,000 in the aggregate in connection with any Haft
Settlement Transactions:
(i) upon an event of default and acceleration pursuant to any
instrument evidencing Indebtedness of the Companies, or any
one of them, (other than that arising under this Financing
Agreement) in excess of $2,000,000; or
(j) one or more final judgments for the payment of money
aggregating in excess of $2,000,000 (to the extent not fully
covered by insurance) shall be entered against the Companies,
or any one of them, and the Companies shall
52
<PAGE> 53
fail to discharge the same within thirty (30) days from the
date of notice of entry thereof or to appeal therefrom.
2. Upon the occurrence of a Default and/or an Event of Default,
at the option of CITBC, all loans, advances, and extensions of credit provided
for in this Financing Agreement shall be thereafter in CITBC's sole discretion
and the obligation of CITBC to make Revolving Loans and/or open Letters of
Credit shall cease unless such Default is waived in writing by CITBC or cured to
CITBC's satisfaction or such Event of Default is waived in writing by CITBC and
at the option of CITBC upon the occurrence of an Event of Default (i) all
Obligations shall become immediately due and payable: (ii) CITBC may charge the
Companies the Default Rate of Interest on all then outstanding or thereafter
incurred Obligations in lieu of the interest provided for in Section 7 of this
Financing Agreement provided a) CITBC has given the Companies written notice of
the Event of Default, provided, however, that no notice is required if one of
the Events of Default is an Event of Default listed in Paragraph 1(a), (b), or
(c) of this Section 9 and b) the Companies have failed to cure the Event of
Default within fifteen (15) days after x) CITBC provides such notice in
accordance with the provisions of paragraph 6 of Section 12 or y) the occurrence
of one of the Events of Default listed in Paragraph 1(a), (b), or (c) of this
Section 9; and (iii) CITBC may immediately terminate this Financing Agreement
upon notice to the Companies, provided, however, that no notice of termination
is required if the Event of Default is one of an Events of Default listed in
Paragraph 1(a), (b), (c) of this Section 9. The exercise of any option is not
exclusive of any other option which may be exercised at any time by CITBC.
3. Immediately upon the occurrence of any Event of Default,
CITBC may to the extent permitted by law: (a) remove from any premises where
same may be located any and all documents, instruments, files and records, and
any receptacles or cabinets containing same, relating to the Accounts, or CITBC
may use, at the Companies' expense, such of the Companies' personnel, supplies
or space at the Companies' places of business or otherwise, as may be necessary
to properly administer and control the Accounts or the handling of collections
and realizations thereon; (b) bring suit, in the name of the Companies or
CITBC, and generally shall have all other rights respecting said Accounts,
including without limitation
53
<PAGE> 54
the right to: accelerate or extend the time of payment, settle, compromise,
release in whole or in part any amounts owing on any Accounts and issue credits
in the name of the Companies or CITBC; (c) sell, assign and deliver the
Collateral and any returned, reclaimed or repossessed merchandise, with or
without advertisement, at public or private sale, for cash, on credit or
otherwise, at CITBC's sole option and discretion, and CITBC may bid or become a
purchaser at any such sale, free from any right of redemption, which right is
hereby expressly waived by the Companies; (d) foreclose the security interests
created herein by any available judicial procedure, or to take possession of any
or all of the Inventory without judicial process, and to enter any premises
where any Inventory may be located for the purpose of taking possession of or
removing the same and (e) exercise any other rights and remedies provided in
law, in equity, by contract or otherwise. CITBC shall have the right, without
notice or advertisement, to sell, lease, or otherwise dispose of all or any part
of the Collateral whether in its then condition or after further preparation or
processing, in the name of the Companies or CITBC, or in the name of such other
party as CITBC may designate, either at public or private sale or at any
broker's board, in lots or in bulk, for cash or for credit, with or without
warranties or representations, and upon such other terms and conditions as CITBC
in its sole discretion may deem advisable, and CITBC shall have the right to
purchase at any such sale. If any Inventory shall require repairing, maintenance
or preparation, CITBC shall have the right, at its option, to do such of the
aforesaid as is necessary, for the purpose of putting the Inventory in such
saleable form as CITBC shall deem appropriate. The Companies agree, at the
request of CITBC, to assemble the Inventory and to make it available to CITBC at
the premises of the Companies or elsewhere and to make available to CITBC the
premises and facilities of the Companies for the purpose of CITBC's taking
possession of, removing or putting the Inventory in saleable form. However, if
notice of intended disposition of any Collateral is required by law, it is
agreed that ten (10) days notice shall constitute reasonable notification and
full compliance with the law. The net cash proceeds resulting from CITBC's
exercise of any of the foregoing rights, (after deducting all charges, costs and
expenses, including reasonable attorneys fees) shall be applied by CITBC to the
payment of the Obligations, whether due or to become due, in such order as CITBC
may elect, and the Companies shall remain liable to CITBC for any deficiencies,
and CITBC in turn agrees to remit to the Companies or their
54
<PAGE> 55
successors or assigns, any surplus resulting therefrom. The enumeration of the
foregoing rights is not intended to be exhaustive and the exercise of any right
shall not preclude the exercise of any other rights, all of which shall be
cumulative.
SECTION 10. TERMINATION
This Financing Agreement shall have an initial term of three (3) years
from the Closing Date to the first Anniversary Date and shall automatically
continue from Anniversary Date to Anniversary Date unless terminated as provided
for herein. The Companies may terminate this Financing Agreement at any time by
giving CITBC at least sixty (60) days prior written notice of termination
provided that the Companies pay to CITBC immediately on demand the Libor
Prepayment Penalty, if applicable. Termination of this Financing Agreement by
any Company shall constitute termination by all of the Companies. CITBC may
terminate this Financing Agreement on any Anniversary Date by giving the
Companies at least sixty (60) days prior written notice of termination and CITBC
may terminate the Financing Agreement immediately upon the occurrence of an
Event of Default, provided, however, that if the Event of Default is an event
listed in Paragraph 1(a) (b), or (c) of Section 9 of this Financing Agreement.
CITBC may regard the Financing Agreement as terminated and notice to that effect
is not required. All Obligations shall become due and payable as of any
termination hereunder or under Section 9 hereof and, pending a final accounting,
CITBC may withhold any balances in the Companies' Collective Account (unless
supplied with an indemnity satisfactory to CITBC) to cover all of the
Obligations, whether absolute or contingent. All of CITBC's rights, liens and
security interests shall continue after any termination until all Obligations
have been paid and satisfied in full.
SECTION 11. INDEMNITIES
EACH OF THE COMPANIES AGREES THAT EACH OF THE FOLLOWING INDEMNITIES
SHALL SURVIVE TERMINATION OF THIS FINANCING AGREEMENT AS WELL AS THE PAYMENT OF
ALL OBLIGATIONS OR AMOUNTS PAYABLE UNDER THIS FINANCING AGREEMENT:
55
<PAGE> 56
1. EACH OF THE COMPANIES HEREBY INDEMNIFIES CITBC AND AGREES TO DEFEND
AND HOLD CITBC HARMLESS FROM AND AGAINST ANY AND ALL LOSS, DAMAGE, CLAIM,
LIABILITY, INJURY OR EXPENSE WHICH CITBC MAY SUSTAIN OR INCUR (OTHER THAN AS A
RESULT OF PHYSICAL ACTIONS OF CITBC ON ANY OF THE COMPANIES' PREMISES OR ARISING
OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT BY CITBC) IN CONNECTION WITH
ANY CLAIM OR EXPENSE ASSERTED AGAINST CITBC AS A RESULT OF ANY ENVIRONMENTAL
POLLUTION, HAZARDOUS MATERIAL OR ENVIRONMENTAL CLEAN-UP OF ANY OF THE COMPANIES'
REAL PROPERTY OR ANY CLAIM OR EXPENSE WHICH RESULTS FROM ANY OF THE COMPANIES'
OPERATIONS (INCLUDING, BUT NOT LIMITED TO, ANY OF THE COMPANIES' OFF-SITE
DISPOSAL PRACTICES) OR ANY CLAIM OR EXPENSE RELATING TO THE INVENTORY.
2. EACH OF THE COMPANIES HEREBY AGREES TO INDEMNIFY CITBC AND HOLD
CITBC HARMLESS FROM ANY LOSS, COST OR EXPENSE CITBC MAY SUSTAIN OR INCUR AS A
CONSEQUENCE OF THE FAILURE BY ANY OF THE COMPANIES TO COMPLETE ANY BORROWING
HEREUNDER AT A LIBOR AFTER NOTICE THEREOF HAS BEEN GIVEN BY ANY OF THE COMPANIES
TO CITBC, INCLUDING, WITHOUT LIMITATION, ANY LOSS, COST OR EXPENSE INCURRED BY
REASON OF THE LIQUIDATION OR RE,EMPLOYMENT OF DEPOSITS OR OTHER FUNDS ACQUIRED
BY CITBC TO FUND SUCH BORROWING WHEN THE APPLICABLE AMOUNT OF THE REVOLVING
LOANS, AS RESULT OF SUCH FAILURE, IS NOT MADE SUBJECT TO SUCH INTEREST RATES ON
SUCH DATE. CITBC SHALL CERTIFY THE AMOUNT OF ITS LOSS, COST OR EXPENSE TO THE
COMPANIES AND SUCH CERTIFICATION SHALL BE FINAL AND CONCLUSIVE ABSENT MANIFEST
ERROR.
3. EACH OF THE COMPANIES HEREBY INDEMNIFIES CITBC AND HOLDS CITBC
HARMLESS FROM ANY AND ALL LOSS, CLAIM OR LIABILITY INCURRED BY CITBC ARISING
FROM ANY TRANSACTIONS OR OCCURRENCES RELATING TO LETTER OF CREDIT ESTABLISHED OR
OPENED FOR ANY OF THE COMPANIES' ACCOUNT, THE COLLATERAL RELATING THERETO AND
ANY DRAFTS OR ACCEPTANCES THEREUNDER, AND ALL OBLIGATIONS THEREUNDER, INCLUDING
ANY SUCH LOSS OR CLAIM DUE TO ANY ACTION TAKEN BY ANY ISSUING BANK, OTHER THAN
FOR ANY SUCH LOSS, CLAIM OR LIABILITY ARISING OUT OF THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT BY CITBC UNDER THE LETTER OF CREDIT GUARANTY. EACH OF THE
COMPANIES FURTHER AGREES TO HOLD CITBC HARMLESS FROM ANY ERRORS OR OMISSION,
NEGLIGENCE OR MISCONDUCT BY THE ISSUING BANK. THE COMPANIES' OBLIGATION TO CITBC
HEREUNDER SHALL NOT BE MODIFIED OR DIMINISHED FOR ANY REASON OR IN ANY MANNER
WHATSOEVER, OTHER THAN AS A RESULT OF CITBC'S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT.
56
<PAGE> 57
SECTION 12. MISCELLANEOUS
1. Each of the Companies hereby waives diligence, demand, presentment and
protest and any notices thereof as well as notice of nonpayment, notice of
dishonor, notice of intent to accelerate and notice of acceleration. No delay or
omission of CITBC or the Companies to exercise any right or remedy hereunder,
whether before or after the happening of any Default or Event of Default, shall
impair any such right or shall operate as a waiver thereof or as a waiver of any
such Default or Event of Default. No single or partial exercise by CITBC of any
right or remedy precludes any other or further exercise thereof, or precludes
any other right or remedy.
2. THIS WRITTEN AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE
FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO, AND
CAN ONLY BE MODIFIED IN WRITING SIGNED BY THE PARTIES HERETO AND SHALL BIND THE
RESPECTIVE PARTIES HERETO AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
3. In no event shall the Companies, upon demand by CITBC for payment of
any indebtedness relating hereto, by acceleration of the maturity thereof, or
otherwise, be obligated to pay interest and fees in excess of the amount
permitted by law. Regardless of any provision herein or in any agreement made in
connection herewith, CITBC shall never be entitled to receive, charge or apply,
as interest on any indebtedness relating hereto, any amount in excess of the
maximum amount of interest permissible under applicable law. It is the intent of
the Companies and CITBC to conform strictly to all applicable state and federal
usury laws. All agreements between the Companies and CITBC whether now existing
or hereafter arising and whether written or oral, are hereby expressly limited
so that in no contingency or event whatsoever, whether by reason of acceleration
of the maturity hereof or otherwise, shall the amount contracted for, charged or
received by CITBC for the use, forbearance, or detention of the money loaned
hereunder or otherwise, or for the payment or performance of any covenant or
obligation contained herein or in any other document evidencing, securing or
pertaining to the Obligations evidenced hereby which may be legally deemed to be
for the use, forbearance or detention
57
<PAGE> 58
of money, exceed the maximum amount which the Companies are legally entitled to
contract for, charge or collect under applicable state or federal law. If from
any circumstance whatsoever fulfillment of any provision hereof or of such other
documents, at the time performance of such provision shall be due, shall involve
transcending the limit of validity prescribed by law, then the obligation to be
fulfilled shall be automatically reduced to the limit of such validity, and if
from any such circumstance CITBC shall ever receive as interest or otherwise an
amount in excess of the maximum that can be legally collected, then such amount
which would be excessive interest shall be applied to the reduction of the
principal indebtedness hereof and any other amounts due with respect to the
Obligations evidenced hereby, but not to the payment of interest and if such
amount which would be excessive interest exceeds the Obligations and all other
non interest indebtedness described above, then such additional amount shall be
refunded to the Companies. In determining whether or not all sums paid or agreed
to be paid by the Companies in connection with the Obligations to CITBC, under
any specific contingency, exceeds the maximum amount permitted by applicable
law, the Companies and CITBC shall to the maximum extent permitted under
applicable law, (a) characterize any non-principal payment as an expense, fee or
premium rather than as sums paid or agreed to be paid by the Companies in
connection with the Obligations to CITBC, (b) exclude voluntary prepayments and
the effect thereof, and (c) amortize, prorate, allocate and spread in equal
parts, the total amount of all sums paid or agreed to be paid by the Companies
in connection with the Obligations to CITBC throughout the entire contemplated
term of the Obligations so that the interest rate is uniform throughout the
entire term of the Obligations. The terms and provisions of this Paragraph shall
control and supersede every other provision hereof and all other agreements
between the Companies and CITBC.
4. If any provision hereof or of any Loan Document made in connection
herewith is held to be illegal, invalid or unenforceable, such provision shall
be fully severable, and the remaining provisions of the applicable agreement
shall remain in full force and effect and shall not be affected by such
provision's severance. Furthermore, in lieu of any such provision, there shall
be added automatically as a part of the applicable agreement a legal, valid and
enforceable provision as similar in terms to the severed provision as may be
possible.
58
<PAGE> 59
5. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE COMPANIES AND CITBC
EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING
ARISING OUT OF HIS FINANCING AGREEMENT, THE COMPANIES HEREBY IRREVOCABLY WAIVE
PERSONAL SERVICE OF PROCESS AND CONSENT TO SERVICE OF PROCESS BY CERTIFIED OR
REGISTERED MAIL, RETURN RECEIPT REQUESTED.
6. Except as otherwise herein provided, any notice or other
communication required hereunder shall be in writing, and shall be deemed to
have been validly served, given or delivered when hand delivered, including
overnight delivery by a courier service, or sent by telegram or facsimile, or
three (3) days after deposit in the United States mails, with proper first class
postage prepaid and addressed to the party to be notified as follows:
A. if to CITBC, at:
The CIT Group/Business Credit, Inc.
900 Ashwood Parkway
Atlanta, GA 30338
Attn: Regional Credit Manager
Facsimile Number: (770) 551-7899
B. if to the Companies at:
Trak Auto Corporation
3300 75th Avenue
Landover, Maryland 20785
Attn: Mr. David B. MacGlashan
Chief Financial Officer
Facsimile Number: (301) 731-1311
and
Attn: Corporate Secretary
Facsimile Number: (301) 773-2707
with a copy to:
Jones Day, Reavis & Pogue
Metropolitan Square
1450 G Street, NW
Washington, DC 20005-2088
Attention: Kenneth J. Ayres, Esq.
Facsimile Number: (202) 737-2832
59
<PAGE> 60
or to such other address as any party may designate for itself by
like notice.
7. This Financing Agreement and the Loan Documents can be changed
only by a writing signed by both the Companies and CITBC, and shall bind and
benefit the Companies and CITBC and their respective successors and assigns.
8. CITBC may assign its rights and delegate its obligations under
this Financing Agreement and the other Loan Documents or sell participations in
all or any part of the Revolving Loans or any other interest herein to a bank or
other financial institution in which event, the assignee or participant shall
have, to the extent of such assignment or participation, the same rights and
benefits as it would have had if it were CITBC, except as otherwise provided by
the terms of such assignment or participation. CITBC may furnish any information
concerning the Companies and Guarantors in the possession of CITBC from time to
time to assignees and participants (including prospective assignees and
participants) subject to a confidentiality agreement reasonably satisfactory to
the Companies.
9. THIS FINANCING AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO
CONFLICTS OF LAW.
10. This Financing Agreement may be executed in counterparts, all of
which taken together shall constitute one and the same instrument. In making
proof of such agreement, it shall not be necessary to produce or account for any
counterpart other than one signed by the party against which enforcement is
sought.
11. It is agreed that with respect to this Financing Agreement and the
other Loan Documents, as each may be amended, modified, or supplemented from
time to time, signed faxed documents shall be deemed to be of the same force and
effect as an original of a manually signed copy.
12. CITBC agrees to keep any non-public information delivered or made
available to CITBC pursuant to this Financing Agreement confidential from any
person or entity other than persons or entities employed or retained by CITBC
and/or its affiliates who are or are expected to become engaged in evaluating,
approving,
60
<PAGE> 61
structuring or administering, the Revolving Loans or Letters of Credit
hereunder, provided that nothing herein shall prevent CITBC from disclosing such
information as required or requested by any governmental agency or
representative thereof or pursuant to legal process or as required in connection
with the exercise of any remedy under this Financing Agreement.
61
<PAGE> 62
IN WITNESS WHEREOF, the parties hereto have caused this Financing
Agreement to be executed and delivered by their proper and duly authorized
officers as of the date set forth above.
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /s/ MICHAEL LAPRESI
--------------------------
Name: Michael Lapresi
Title: Vice President
TRAK AUTO CORPORATION
By: /s/ DAVID B. MACGLASHAN
--------------------------
Name: David B. MacGlashan
Title: Senior Vice President
and Chief Financial Officer
SUPER TRAK CORPORATION
By: /s/ DAVID B. MACGLASHAN
--------------------------
Name: David B. MacGlashan
Title: Senior Vice President
and Chief Financial Officer
TRAK CORPORATION
By: /s/ DAVID B. MACGLASHAN
--------------------------
Name: David B. MacGlashan
Title: Senior Vice President
and Chief Financial Officer
62
<PAGE> 1
Exhibit 11
STATEMENT ON COMPUTATION OF EARNINGS PER SHARE
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
----------------------------------
February 1, February 3, January 28
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares
outstanding during the year 5,900 5,867 6,078
Effect of dilutive stock options,
net of shares assumed
repurchased at average market
price 42 61 61
-------- -------- --------
Weighted average common share and
common share equivalents 5,942 5,928 6,139
======== ======== ========
Net Income $ 1,084 $ 7,290 $ 10,265
======== ======== ========
Earnings per share:
Net income $ .18 $ 1.23 $ 1.67
======== ======== ========
</TABLE>
The difference between primary net income per common share and fully diluted
net income per common share is not significant for the periods presented.
75
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF TRAK AUTO CORPORATION
<TABLE>
<CAPTION>
State of Incorporation
----------------------
<S> <C> <C>
Trak Corporation (A) (100%) Delaware
Trak DHC Corporation (100%) Delaware
Super Trak Corporation (100%) Delaware
Riverdale Trak Acquisition Inc. (100%) Delaware
</TABLE>
(A) Does business in certain states under the name "Trak Auto Corporation I".
76
<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 Trak Auto Corporation's previously
filed registration statements on Form S-8 (File Number 33-34665 and File Number
33-53389).
ARTHUR ANDERSEN LLP
Washington D.C.
April 30, 1997.
77
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<CASH> 11,723
<SECURITIES> 2,479
<RECEIVABLES> 6,841
<ALLOWANCES> 0
<INVENTORY> 106,193
<CURRENT-ASSETS> 136,813
<PP&E> 97,810
<DEPRECIATION> 49,876
<TOTAL-ASSETS> 192,220
<CURRENT-LIABILITIES> 80,298
<BONDS> 26,912
0
0
<COMMON> 64
<OTHER-SE> 83,349
<TOTAL-LIABILITY-AND-EQUITY> 192,220
<SALES> 345,984
<TOTAL-REVENUES> 347,570
<CGS> 262,472
<TOTAL-COSTS> 262,472
<OTHER-EXPENSES> 79,947
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,705
<INCOME-PRETAX> 1,446
<INCOME-TAX> 362
<INCOME-CONTINUING> 1,084
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,084
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
