<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED November 1, 1997
----------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
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Commission file number 0-12202
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TRAK AUTO CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 52-1281465
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3300 75th Avenue, Landover, Maryland, 20785
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(Address of principal executive office)
(Zip Code)
(301) 226-1200
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ----
At December 15, 1997, the registrant had 5,909,679 shares of Common Stock,
$.01 par value per share, outstanding.
1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Certain consolidated financial statements included herein have been prepared
by Trak Auto Corporation ("Trak Auto"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although Trak Auto believes
that the disclosures are adequate to make the information presented not
misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in Trak Auto's annual report on Form 10-K for the fiscal year ended
February 1, 1997.
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TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
----------------------------- ----------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Sales $ 85,672 $ 87,953 $ 257,800 $ 265,397
Interest and other income 377 585 773 1,359
--------- --------- --------- ---------
86,049 88,538 258,573 266,756
--------- --------- --------- ---------
Expenses:
Cost of sales, store occupancy and
warehousing 65,934 67,262 198,068 200,812
Selling and
administrative 15,722 18,438 53,361 54,695
Provision for loss on sale
of California operations 10,493 - 10,493 -
Depreciation and
amortization 1,925 1,802 5,785 5,556
Interest expense 927 923 2,791 2,769
--------- --------- --------- ---------
95,001 88,425 270,498 263,832
--------- --------- --------- ---------
Income(loss)before income
taxes (8,952) 113 (11,925) 2,924
Income taxes(benefit) (2,492) (42) (3,824) 915
--------- --------- --------- ---------
Net income(loss) $ (6,460) $ 155 $ (8,101) $ 2,009
========= ========= ========= =========
Weighted average common
shares and common share
equivalents outstanding 5,909 5,955 5,909 5,944
========= ========= ========= =========
Net income(loss)per share $ (1.09) $ .03 $ (1.37) $ .34
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
November 1, February 1,
ASSETS 1997 1997
----------- ------------
<S> <C> <C>
Current Assets:
Cash $ 7,428 $ 5,782
Short-term instruments 9,926 5,941
Marketable debt securities 690 2,479
Accounts receivable 7,778 6,841
Merchandise inventories 106,495 106,193
Deferred income taxes 6,900 6,494
Other current assets 3,211 3,083
-------- --------
Total Current Assets 142,428 136,813
-------- --------
Property and Equipment, at cost:
Furniture, fixtures and equipment 64,667 63,675
Leasehold improvements 11,791 12,103
Property under capital leases 22,032 22,032
-------- --------
98,490 97,810
Accumulated Depreciation and Amortization 55,097 49,876
-------- --------
43,393 47,934
-------- --------
Other Assets 1,302 1,502
-------- --------
Deferred Income Taxes 9,443 5,971
-------- --------
Total Assets $196,566 $192,220
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
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TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
November 1, February 1,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997
---------- -----------
<S> <C> <C>
Current Liabilities:
Accounts payable, trade $ 51,018 $ 47,690
Income taxes payable 1,557 1,581
Accrued expenses
Salaries and benefits 13,044 11,440
Taxes other than income 6,428 5,569
Other 21,020 13,791
Current portion of obligations under
capital leases 209 209
Due to affiliate 50 18
-------- --------
Total Current Liabilities 93,326 80,298
-------- --------
Obligations Under Capital Leases 27,044 26,912
-------- --------
Reserve for Closed Stores and
Restructuring 875 1,597
-------- --------
Total Liabilities 121,245 108,807
-------- --------
Stockholders' Equity:
Common stock, par value $.01 per share;
15,000,000 shares authorized;
6,437,869 and 6,437,469 shares issued,
respectively 64 64
Paid-in capital 46,481 46,476
Unrealized investment gains 7 3
Retained earnings 37,489 45,590
Treasury stock 528,190 shares
of common stock, at cost (8,720) (8,720)
-------- --------
Total Stockholders' Equity 75,321 83,413
-------- --------
Total Liabilities and Stockholders'
Equity $196,566 $192,220
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
5
<PAGE> 6
TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine
Weeks Ended
----------------------------------------
November 1, November 2,
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ (8,101) $ 2,009
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 5,785 5,556
Interest in excess of capital lease payments 289 -
Provision for closed stores 87 -
Provision for loss on sale of California
operations 10,493 -
Provision for deferred taxes (3,245) -
Change in assets and liabilities:
Accounts receivable (937) (3,465)
Merchandise inventories 182 (7,872)
Other current assets (128) (2,305)
Deferred income taxes (542) (373)
Accounts payable, trade 3,328 10,652
Accrued expenses (802) 152
Due to affiliate 32 (115)
Income taxes payable (24) 727
Other assets 200 213
Reserve for closed facilities (809) (2,138)
-------- --------
Net cash provided by
operating activities $ 5,808 $ 3,041
-------- --------
Cash Flows from Investing Activities:
Capital expenditures $ (1,727) $ (6,583)
Maturities of United States Treasury Notes 1,150 4,370
Disposition of United States Treasury Notes - -
Purchase of United States Treasury Notes - -
Maturities of United States Treasury Bills 50 -
Maturities of marketable debt securities 502 1,574
Disposition of marketable debt securities - -
-------- --------
Net cash used for investing
activities $ (25) $ (639)
-------- --------
Cash Flows from Financing Activities:
Principal payments under capital
lease obligations $ (157) $ (75)
Proceeds from exercise of stock
options 5 222
-------- --------
Net cash provided by (used for)
financing activities $ (152) $ 147
-------- --------
</TABLE>
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TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine
Weeks Ended
------------------------
November 1, November 2,
1997 1996
---------- ------------
<S> <C> <C>
Net Increase in Cash and Equivalents $ 5,631 $ 2,549
Cash and Equivalents at Beginning of Year 11,723 13,559
-------- --------
Cash and Equivalents at End of Period $ 17,354 $ 16,108
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during quarter for:
Interest $ 2,791 $ 2,769
Income taxes - 673
</TABLE>
The accompanying notes are an integral part of these statements.
7
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TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 1, 1997 and November 2, 1996
(Unaudited)
NOTE 1 - GENERAL
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 unaudited statements as of November 1,
1997 and November 2, 1996 reflect, in the opinion of management, all
adjustments (normal and recurring in nature) necessary to present fairly the
consolidated financial position as of November 1, 1997 and November 2, 1996 and
the results of operations and cash flows for the periods indicated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from
those estimates.
The results of operations for the quarter ended November 1, 1997 are not
necessarily indicative of the results to be achieved for the full fiscal year.
NOTE 2 - EARNINGS PER SHARE
Earnings per share is 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 net income (loss) per
common share and fully diluted net income (loss) per common share is not
significant for the periods presented.
NOTE 3 - INTERIM INVENTORY ESTIMATES
The Company's inventories are priced at the lower of last-in, first-out cost
or market. At November 1, 1997 and February 1, 1997, inventories determined on
a first-in, first-out basis would have been greater by $6,995,000 and
$6,733,000 respectively.
The Company takes a physical count of its store inventories semiannually and
the Company uses a gross profit method combined with available perpetual
inventory information to determine inventories for quarters when complete
physical counts are not taken. The company did not take a physical inventory
for the quarter ended November 1, 1997.
8
<PAGE> 9
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 1, 1997 and November 2, 1996
(Unaudited)
NOTE 4 - SHORT-TERM INSTRUMENTS AND MARKETABLE DEBT SECURITIES
The Company's short-term instruments included United States Treasury Bills,
with a maturity of three months or less, and money market funds. Marketable
debt securities included United States Treasury Bills with a maturity of
greater than three months, United States Treasury Notes and United States
Agency Securities.
Management determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determination at each
balance sheet date. Debt securities for which the Company does not have the
intent or ability to hold to maturity are classified as available-for-sale.
Securities available-for-sale are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. At November 1, 1997, market value was approximately $7,000 greater
than cost, net of income taxes, and 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.
NOTE 5 - SUBSEQUENT EVENT
On October 6, 1997, Trak Auto entered into a purchase agreement (the "Purchase
Agreement") with CSK Auto, Inc. ("CSK") pursuant to which Trak Auto has agreed
to sell to CSK its interest in its California operations (including inventory,
store fixtures and the assignment of store leases). Trak Auto and CSK closed
the transaction on December 8, 1997 for an aggregate purchase price of
approximately $33.6 million. Ninety percent (90%) of the aggregate purchase
price, or $30.2 million, was paid in cash at the closing. The remaining ten
percent (10%) will be paid pending finalization of any purchase price
adjustments. The Company expects to realize a pre-tax loss, estimated to be
$10.5 million on the sale to cover losses associated with the sale of assets
and exposure under remaining lease obligations. The Company has recorded this
estimated loss in the accompanying Consolidated Statements of Operations,
which is subject to the final purchase price adjustment.
NOTE 6 - CREDIT AGREEMENTS
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
9
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TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 1, 1997 and November 2, 1996
(Unaudited)
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 a maximum leverage ratio covenant.
Interest on prime rate loans is payable monthly. Interest and principal on
LIBOR loans is payable between one and six months from the borrowing date.
LIBOR loans are subject to a prepayment penalty and may be continued for a
subsequent one to six month period. LIBOR loans may be converted to prime rate
loans and visa versa. The Facility includes a facility fee of .25% per annum
on the unused principal balance, as defined. No single advance may be
outstanding for more than 36 months. 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.
As of November 1, 1997, there had been no borrowings under these credit
agreements.
NOTE 7 - PROPERTY, EQUIPMENT AND DEPRECIATION
Effective February 2, 1997 the Company changed its accounting policy from
expensing purchased computer software costs in the year of acquisition to
capitalizing and depreciating these costs over the estimated useful life not to
exceed five years. Management has determined that these costs benefit future
periods.
During the 39 weeks ended November 1, 1997, the Company did not record
amortization of purchased computer software as the software was not placed into
service. The effect of capitalizing purchased computer software was to reduce
the Company's loss by approximately $80,000 ($.01 per share) net of income tax
benefits.
NOTE 8 - SETTLEMENT OF LITIGATION
Settlement with Robert, Gloria and Linda Haft
On September 26, 1997, the Company and Dart Group Corporation ("Dart"), which
owns 67.1% of the Company's outstanding common stock, closed the transactions
contemplated in an agreement, dated August 16, 1997 to settle certain
litigation and enter other related transactions (the "RGL Settlement") with
Robert M. Haft, Gloria G. Haft, Linda G. Haft and certain related parties
(collectively, "RGL").
10
<PAGE> 11
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 1, 1997 and November 2, 1996
(Unaudited)
The transactions completed by the closing of the RGL Settlement between Dart
and RGL include: the purchase by Dart from RGL (or related parties) of 104,976
shares of Dart Class B Common Stock and 77,244 shares of Dart Class A Common
Stock; the termination of options held or claimed by RGL to purchase shares of
Dart Class A Common Stock; the termination of putative options to purchase 15
shares of Dart/SFW Corp., and the termination of a small number of options to
purchase shares of common stock of the Company and Crown Books Corporation
("Crown Books"), an affiliate of Dart. Dart paid RGL a total of approximately
$41.0 million in connection with these transactions of which Trak Auto
contributed approximately $205,000 for the Trak Auto stock options. Pursuant
to the RGL Settlement, Trak Auto also dismissed all claims against RGL.
In addition, Dart acquired all of Robert M. Haft and Linda G. Haft's interests
in partnerships owning Dart's headquarters building in Landover, Maryland and a
warehouse leased by the Trak Auto, in Bridgeview, Illinois for $4.4 million.
Subsequent to November 1,1997, Trak Auto funded $1.3 million towards the
Bridgeview portion of the payment. It is contemplated that the $1.3 million
will ultimately become an equity contribution by Trak Auto in the warehouse.
The closing of the RGL Settlement, resulted in the termination of the pending
claim by RGL to control of Dart and the settlement of all litigation between
them and Dart and its subsidiaries.
Settlement with Herbert H. Haft and Ronald S. Haft
On October 16, 1997, Dart announced settlements (the "Settlements") with
Herbert H. Haft and Ronald S. Haft pursuant to a settlement agreement with
Herbert H. Haft (the "HHH Settlement Agreement"), a First Supplemental
Settlement Agreement with Ronald S. Haft (the "First Supplemental Agreement")
and a Second Supplemental Settlement Agreement with Ronald S. Haft (the "Second
Supplemental Agreement"). The Settlements were subsequently approved by the
Delaware Court of Chancery on November 24, 1997.
The transactions contemplated in the HHH Settlement Agreement include: the
purchase by Dart from Herbert H. Haft of all his shares of, and options to
purchase, Dart Class A Common Stock; that Herbert H. Haft will resign from all
of his positions with Dart and its subsidiary corporations; that Herbert H.
Haft will relinquish his claim to voting control of Dart and that Herbert H.
Haft will terminate his employment contract with Dart. In addition, all
outstanding litigation and disputes between Dart and Herbert H. Haft will be
resolved. As consideration for the Settlements, Dart will pay Herbert H. Haft
approximately $28 million upon closing, including $9.25 million which may be
deferred until June 1, 1998 if the closing occurs before then. Dart will also
make a $10 million loan to a partnership owned by Herbert H. Haft and Ronald S.
Haft, which loan will be personally guaranteed by Ronald S. Haft and will be
secured by the partnership's interest in three shopping centers located in
suburban Washington, D.C. and by a one-half indirect interest in an office
building in Lanham, Maryland leased by a Dart subsidiary.
11
<PAGE> 12
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 1, 1997 and November 2, 1996
(Unaudited)
The transactions contemplated in the First Supplemental Agreement include:
completion of bankruptcy plans of reorganization for partnerships owning Dart's
headquarters in Landover, Maryland and a warehouse leased to Trak Auto in
Bridgeview, Illinois; payment by Dart of $7 million to reduce outstanding
mortgage loans on these properties, which will thereafter be wholly-owned by
Dart and/or its affiliates and Ronald S. Haft will pay $2.2 million to Dart
from escrowed funds previously earmarked for Ronald S. Haft. On November 19,
1997, the transactions contemplated in the First Supplemental Agreement
were closed. Trak Auto advanced to a wholly-owned subsidiary of Dart
$2.0 million for the Bridgeview, Illinois portion of the $7.0 million mortgage
payments. The $2.0 million together with the $1.3 million (discussed above)
may ultimately become an equity interest in that subsidiary.
The closing of the settlement transactions with Herbert H. Haft are expected to
occur in early 1998. There can be no assurance that the closing will occur.
Under the Second Supplemental Agreement, after the closing of the transaction
contemplated in the HHH Settlement Agreement, Dart will be entitled to require
that the shares now held in a Voting Trust for the benefit of Ronald S. Haft to
be transferred to Dart.
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<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Outlook
Except for historical information, statements in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are
forward-looking. Actual results may differ materially due to a variety of
factors, including the results of ongoing litigation affecting the Company, the
Company's ability to open new stores and close other stores, 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 represents the strongest
segment of its business and anticipates that all of its new stores will be
opened within this concept as Super Trak and Super Trak Warehouse stores in
existing and possibly new markets. In the past, these superstores have
generated higher sales at locations converted from Classic Trak stores as well
as higher gross margins as a result of a change in product mix (increased hard
parts). The Company believes that as superstores mature, operating expenses as
a percentage of sales will decrease.
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. As a result of this ongoing review, on October
6, 1997, the Company entered into an agreement to sell its California
operations. While the California operations represented approximately thirty
percent (30%) of annual revenues the operating results have historically been
weak and declining because of the highly competitive Los Angeles market. The
Company sold all inventory, store fixtures and assigned store leases, but has
retained the lease obligation on the distribution center in Ontario, California.
The transaction closed on December 8, 1997. The Company recorded an estimated
loss related to this transaction of $10.5 million, which is subject to final
purchase price adjustments.
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 $5,631,000 to
$17,354,000 at November 1, 1997 from $11,723,000 at February 1, 1997. This
increase was due primarily to cash generated by operations, the maturity of
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
marketable debt securities, collection of year-end receivables and timing of
payments for inventory purchases.
Operating activities provided $5,808,000 to the Company during the 39 weeks
ended November 1, 1997 compared to $3,041,000 for the 39 weeks ended November
2, 1996. The increase was primarily due to current period operations and the
timing of payments for inventory purchases.
Investing activities used $25,000 of the Company's funds during the 39 weeks
ended November 1, 1997 compared to $639,000 for the 39 weeks November 2, 1996.
Maturities of United States Treasury Notes was the primary source of funds in
the current year that was offset by capital expenditures.
Financing activities used $152,000 of the Company's cash during the 39 weeks
ended November 1, 1997 for principal payments under capital lease obligations.
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. As of November 1, 1997, the Company had not borrowed under the credit
facility.
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 its 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 November 1, 1997, the Company had entered into lease agreements to open
eight new Super Trak or Super Trak Warehouse stores.
Funding of Possible Settlements
Dart and certain of its subsidiaries (including Trak Auto) have closed an
agreement to settle certain litigation and enter other related transactions
with Robert M. Haft, Gloria G. Haft, Linda G. Haft and certain related parties.
Trak Auto contributed approximately $205,000 for this settlement in addition to
its dismissal of claims against RGL. Subsequent to November 1,1997, in
exchange for a $3.3 million demand note from a wholly-owned subsidiary of Dart,
Trak Auto funded payments of approximately $1.3 million to Robert M. Haft and
Linda G. Haft to acquire their interests in a partnership that owns a warehouse
leased by Trak Auto in Bridgeview, Illinois and $2.0 million to the
wholly-owned Dart subsidiary to reduce the principal mortgage balance on that
property. It is contemplated that the $3.3 million note will ultimately become
an equity contribution by Trak in the Dart subsidiary.
Dart and certain of its subsidiaries (including Trak Auto) have entered
agreements to settle certain related transactions with Herbert H. Haft and
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Ronald S. Haft. As consideration for the Settlements, Dart will pay Herbert H.
Haft approximately $28 million upon closing, including $9.25 million which may
be deferred until June 1, 1998 if the closing occurs before then. Dart will
also make a $10 million loan to a partnership owned by Herbert H. Haft and
Ronald S. Haft, which loan will be personally guaranteed by Ronald S. Haft and
will be secured by the partnership's interest in three shopping centers located
in suburban Washington, D.C. and by a one-half indirect interest in an office
building in Lanham, Maryland leased by a Dart subsidiary. It is anticipated
that Dart would pay substantially all of this amount, though a portion (yet to
be determined) could be allocated to Crown Books Corporation ("Crown Books"),
an affiliate of Dart and to Trak Auto. 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. Trak Auto anticipates that it would
pay its portion of the settlement obligations from borrowings under its credit
facility.
Results of Operations
During the 39 weeks ended November 1, 1997, the Company opened seven new Super
Trak and two new Super Trak Warehouse stores and closed or converted 16 classic
Trak stores, closed one Super Trak store and converted one Super Trak Warehouse
to a Super Trak. At November 1, 1997, the Company had 277 stores, including
128 Super Trak stores and 45 Super Trak Warehouse stores.
Sales of $257,800,000 during the 39 weeks ended November 1, 1997 decreased by
$7,597,000 or 2.9% compared to sales for the 39 weeks ended November 2, 1996
while sales of $85,672,000 during the 13 weeks ended November 1, 1997 decreased
$2,281,000 or 2.6% compared to sales for the same period one year ago. The
sales decrease during the 39 weeks ended November 1, 1997 was primarily due to
the mild winter conditions in the Midwest and East coast markets during the
first quarter as well as the weak performance of the stores in the highly
competitive Los Angeles market. Comparable sales (stores open more than one
year) decreased 8.0% and 7.5% for the 39 and 13 weeks ended November 1, 1997.
Sales for comparable Super Trak and Super Trak Warehouse stores decreased 8.0%
and 7.6% for the 39 and 13 weeks ended November 1, 1997, respectively. Sales
for comparable classic Trak stores decreased 7.8% and 7.1% for the 39 and 13
weeks ended November 1, 1997, respectively. Sales for Super Trak and Super
Trak Warehouse stores represented 69.3% and 70.5% of total sales during the 39
and 13 weeks ended November 1, 1997 compared to 58.3% and 60.0% for the 39 and
13 weeks ended November 2, 1996, respectively.
Interest and other income decreased by $586,000 and $208,000 for the 39 and 13
weeks ended November 1, 1997, respectively, when compared to the prior year,
largely due to reduced income from subleased store locations and reduced
recoveries from audits of prior years vendor allowances.
Cost of sales, store occupancy and warehousing expenses as a percentage of
sales were 76.8% and 77.0% for the 39 and 13 weeks ended November 1, 1997
compared to 75.7% and 76.5% for the same periods in the prior year. The
increases were primarily due to increased occupancy and distribution costs.
Selling and administrative expenses were 20.7% and 18.4% as a percentage of
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
sales for the 39 and 13 weeks ended November 1, 1997 compared to 20.7% and
21.0% for the 39 and 13 weeks ended November 2, 1996. The decrease for the 13
week period was primarily due to increased advertising credits that offset the
advertising expenses incurred during the first half of the fiscal year. The
Company has reduced payroll costs, however for the 39 week period payroll
costs, as a percentage of sales remains higher than last year due to the sales
decrease during the first quarter of this year.
The provision for loss on sale of California operations of $10,493,000 is an
estimate of the loss associated with the sale of the Company's California
assets and exposure under remaining lease obligations (see Note 5 to the
Consolidated Financial Statements).
Depreciation and amortization expenses increased $229,000 for the 39 weeks
ended November 1, 1997 compared to the same period one year ago. The increase
was due to increased fixed assets for new stores, particularly in the Milwaukee
market.
Interest expense of approximately $2,791,000 during the 39 weeks ended November
1, 1997 was for interest under capital lease obligations.
The Company recorded an income tax benefit of $3,824,000 during the 39 weeks
ended November 1, 1997. The tax benefit is the result of the Company's
$11,925,000 net operating loss.
Effect of New Financial Accounting Standard
In February 1997, the Financial Accounting Standards Board issued a Statement
of Financial Accounting Standards ("SFAS") No. 128 Earnings Per Share. SFAS
No. 128 replaces the presentation of primary earnings per share, previously
presented by the Company, with basic earnings per share and requires a
reconciliation of the numerator and denominator of basic earnings per share to
fully diluted earnings per share. Fully diluted earnings per share is computed
similarly to the previous requirements. The Company will be required to adopt
SFAS No. 128 in the fourth quarter of fiscal 1998 and to restate all previously
presented earnings per share data. The presentation of the Company's basic
earnings per share under SFAS No. 128 is greater than the amounts presented
herein as primary earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
Reporting Comprehensive Income. SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company will adopt SFAS No.
130 in the first quarter of fiscal 1999 and will provide the necessary
disclosures.
16
<PAGE> 17
PART II
Item 1. Legal Proceedings
Material legal proceedings pending against Trak Auto are described in its
Annual Report on Form 10-K for the year ended February 1, 1997 and, with
respect to material developments in such earlier reported legal proceedings,
see below.
Consummation of Settlement with Robert, Gloria and Linda Haft
On September 26, 1997 Dart Group Corporation ("Dart") closed the
transactions contemplated in the Settlement Agreement dated August 16, 1997
(the "RGL Settlement Agreement") with Robert, Gloria and Linda Haft. Although
the closing of the transactions contemplated in the Settlement Agreement was
conditioned in part upon the completion of bankruptcy plans of reorganization
for the partnerships owning the Company's headquarters building in Landover, MD
(75th Avenue Associates Limited Partnership) and a warehouse leased by the
Company's subsidiary, Trak Auto Corporation (Trak Chicago Limited Partnership),
those bankruptcy plans had not closed as of September 26, 1997. Instead, the
Company acquired all of Robert Haft's and Linda Haft's respective interests in
such partnerships for a purchase price of $4,400,000. As contemplated in the
RGL Settlement Agreement, Robert Gloria and Linda Haft have terminated their
pending claims to control Dart and all litigation between them and Dart and its
subsidiaries has been settled and dismissed.
Settlements with Herbert H. Haft and Ronald S. Haft.
Dart has entered into settlements with Herbert H. Haft and Ronald S. Haft
pursuant to a settlement agreement with Herbert H. Haft (the "HHH Settlement
Agreement"), a First Supplemental Settlement Agreement with Ronald S. Haft (the
"First Supplemental Agreement") and a Second Supplemental Settlement Agreement
with Ronald S. Haft (the "Second Supplemental Agreement"). The Boards of
Directors of Dart, Crown Books Corporation ("Crown Books"), a Dart subsidiary
and Trak Auto have approved the settlements.
The transactions contemplated in the First Supplemental Agreement were
closed on or about November 20, 1997. In connection with that closing, Dart
received $2,200,000 from Ronald S. Haft, which payment was made in connection
with Dart's acquisition of Robert and Linda Haft's respective interests in Trak
Chicago Limited Partnership and 75th Avenue Associates Limited Partnership, as
originally contemplated in the RGL Settlement Agreement.
The closing of the transactions contemplated in the HHH Settlement Agreement
and the Second Supplemental Agreement were conditioned upon a determination by
the Delaware Court of Chancery that all of the terms of those settlements were
fair and reasonable to Dart and its subsidiaries. After notice was provided to
shareholders of Dart, Crown Books and Trak Auto, and a fairness hearing was
held, the Delaware Chancery Court approved the settlements as fair and
reasonable and authorized the dismissal of derivative litigation in which
Herbert H. Haft, Ronald S. Haft and certain Dart directors were defendants.
Dart expects to close the transactions contemplated in the HHH Settlement
Agreement and the Second Supplemental Settlement Agreement in January 1998,
although no assurances can be made that the closing will not be delayed beyond
January, 1998. Upon the closing of those settlements, Herbert H. Haft will (a)
sell to Dart all of his shares of Dart Class A Common Stock, and shares of and
17
<PAGE> 18
Item 1. Legal Proceedings (continued)
options to purchase stock of Trak Auto and Crown Books, (b) retire from all of
his positions with Dart and its subsidiary corporations, (c) relinquish his
claim to voting control of Dart, (d) terminate his employment agreement with
Dart, and (e) sell to Dart various real estate interests. In addition, all
outstanding litigation and disputes between Dart and Herbert H. Haft will be
dismissed. As consideration for the settlements, Dart will pay Herbert H. Haft
approximately $28 million upon closing, of which amount $9.25 million may be
deferred until June 1, 1998 if the closing occurs before then. Dart also will
make a secured $10 million loan to a partnership owned by Herbert H. Haft and
Ronald S. Haft and Dart and Herbert H. Haft will exchange mutual general
releases.
Warehouse Plans of Reorganization.
Prior to November 19, 1997, Dart was the primary lessee or co-lessee of
certain warehouses owned by Seventy-Fifth Avenue Associates Limited Partnership
("Seventy-Fifth") and Trak Chicago Limited Partnership I ("Trak Chicago"; and
together with Seventy-Fifth, the "Warehouse Debtors"). On May 25, 1995, each
of the Warehouse Debtors filed for chapter 11 relief in the United States
Bankruptcy Court for the District of Maryland. On October 31, 1997, orders
were entered in each of the Warehouse Debtors' chapter 11 cases confirming
their Fourth Revised Plans of Reorganization (the "Plans"). The Plans became
effective on November 19, 1997. Through the Plans, Dart acquired, indirectly
through wholly-owned limited liability companies, ownership of the warehouses
and assumed certain obligations related to the warehouses' mortgage debt.
Pursuant to the Plans, Dart's lease of the warehouse previously owned by
Seventy-Fifth was modified prospectively to reduce rent to an amount equal to
debt service on the mortgage loan, and Dart's and Trak Auto's lease of the
warehouse previously owned by Trak Chicago was modified prospectively to
eliminate Dart as a co-lessee, and to reduce rent payable by Trak Auto to an
amount equal to the debt service on the mortgage loan. The foregoing summaries
of the Plans are limited, and further reference is made to Plans themselves and
the orders confirming the Plans, and are incorporated herein as Exhibits 99.1
and 99.2.
It is contemplated that Trak Auto and Crown Books will make some
contribution to the above described settlements, although no determination as
to the amounts of such contributions has been made.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Document
27 Financial Data Schedule
99.1 Debtor's Fourth Revised Plan of Reorganization and
Order Confirming Debtor's Fourth Revised Plan of
Reorganization for Seventy-fifty Avenue
Associates Limited Partnership herein incorporated
by reference to Exhibit 99.1 to the Dart Group
Corporation Form
18
<PAGE> 19
Item 6. Exhibits and Reports on Form 8-K (continued)
10-Q for the quarter ended October 31, 1997 (the
"Dart October 1997 10-Q").
99.2 Debtor's Fourth Revised Plan of Reorganization and
Order Confirming Debtor's Fourth Revised Plan of
Reorganization for Trak Chicago Limited
Partnership I herein incorporated by reference to
Exhibit 99.2 to the Dart October 1997 10-Q.
(b) Reports on Form 8-K
During the quarter ended November 1, 1997, Trak Auto filed
one Current Report on Form 8-K.
1. Trak Auto filed a Current Report on Form 8-K on
October 24, 1997 reporting under Item 5 (Other
Events) that Trak Auto had entered into an
agreement to sell the assets of the stores it
operated in the Los Angeles, California market.
Subsequent to the quarter ended November 1, 1997, Trak Auto
filed one Current Report on Form 8-K.
1. Trak Auto filed a Current Report on Form 8-K on
November 5, 1997 reporting under Item 5 (Other
Events) a change in the composition of Trak Auto's
Board of Directors and that Richard B. Stone had
assumed the position of Acting Chief Executive
Officer.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRAK AUTO CORPORATION
Date: December 15, 1997 By: R. Keith Green
-------------------- ------------------------------
R. KEITH GREEN
President
Date: December 15, 1997 David B. MacGlashan
-------------------- -----------------------------
DAVID B. MACGLASHAN
Senior Vice President and
Chief Financial Officer
20
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