<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED October 31, 1998
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( ) 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)
<TABLE>
<S> <C>
Delaware 52-1281465
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
</TABLE>
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
At December 14, 1998, the registrant had 5,909,179 shares of Common Stock, $.01
par value per share, outstanding.
1
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PART I
Item 1. Financial Statements
The consolidated financial statements included herein have been prepared by Trak
Auto Corporation ("Trak Auto") without audit, (except for the consolidated
balance sheet as of January 31, 1998, which has been derived from the audited
consolidated balance sheet as of that date) 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
January 31, 1998.
2
<PAGE> 3
TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
----------------------- -----------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 57,232 $ 85,672 $ 169,626 $ 257,800
Interest and other income 438 377 1,571 773
--------- --------- --------- ---------
57,670 86,049 171,197 258,573
--------- --------- --------- ---------
Expenses:
Cost of sales, store
occupancy and
warehousing 43,184 65,934 131,906 198,068
Selling and
administrative expenses 12,278 15,635 42,143 53,274
Provision for loss on sale
of California operations - 10,493 - 10,493
Depreciation and
amortization 1,048 1,925 3,164 5,785
Interest expense 936 927 2,809 2,791
Closed store provision (1,509) 87 (3,077) 87
--------- ---------- --------- ---------
55,937 95,001 176,945 270,498
--------- --------- --------- ---------
Income(loss)before income
taxes 1,733 (8,952) (5,748) (11,925)
Income taxes(benefit) 665 (2,492) (2,290) (3,824)
--------- --------- --------- --------
Net income(loss) $ 1,068 $ (6,460) $ (3,458) $ (8,101)
========= ========= ========= ========
Per share data:
Basic earnings (loss)
per share $ .18 $ ( 1.09) $ (.59) $ ( 1.37)
Diluted earnings (loss)
per share $ .18 $ ( 1.09) $ (.59) $ ( 1.37)
Weighted average common
shares and common share
equivalents outstanding:
Basic 5,909 5,909 5,909 5,909
Diluted 5,909 5,909 5,909 5,909
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 31, January 31,
ASSETS 1998 1998
---------- ----------
<S> <C> <C>
Current Assets:
Cash $ 6,005 $ 5,914
Short-term instruments 7,510 11,973
Marketable debt securities 610 666
Restricted escrow funds 4,500 -
Accounts receivable 7,025 8,653
Income taxes refundable 4,850 -
Note Receivable from Dart Group 11,000 3,215
Merchandise inventories 61,928 67,027
Prepaid income taxes - 3,670
Deferred income taxes 8,002 9,844
Other current assets 4,107 3,194
-------- --------
Total Current Assets 115,537 114,156
-------- --------
Property and Equipment, at cost:
Furniture, fixtures and equipment 54,467 54,767
Leasehold improvements 9,774 9,970
Property under capital leases 22,032 22,032
-------- --------
86,273 86,769
Accumulated Depreciation and Amortization 53,045 50,513
-------- --------
33,228 36,256
-------- --------
Other Assets 42 93
-------- --------
Note Receivable from Dart Group - 15,000
-------- --------
Deferred Income Taxes 11,327 8,001
-------- --------
Total Assets $160,134 $173,506
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 31, January 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
---------- ----------
<S> <C> <C>
Current Liabilities:
Accounts payable, trade $ 33,482 $ 41,325
Accrued expenses -
Salary and benefits 11,042 11,177
Taxes other than income 5,116 5,518
Other 13,950 9,605
Current portion of closed store and
restructuring reserve 2,083 2,083
Current portion of obligations under
capital leases 282 282
Due to affiliate 221 177
-------- --------
Total Current Liabilities 66,176 70,167
-------- --------
Obligations Under Capital Leases 26,716 26,846
-------- --------
Reserve for Closed Stores and
Restructuring 4,961 10,751
-------- --------
Total Liabilities 97,853 107,764
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.01 per
share; 15,000,000 shares authorized;
and 6,437,869 shares issued 64 64
Paid-in capital 46,481 46,481
Unrealized investment gains 4 7
Retained earnings 24,459 27,917
Treasury stock, 528,690 shares
of common stock, at cost (8,727) (8,727)
-------- --------
Total Stockholders' Equity 62,281 65,742
-------- --------
Total Liabilities and Stockholders'
Equity $160,134 $173,506
======== ========
</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, (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
---------------------------
October 31, November 1,
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (3,458) $ (8,101)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 3,164 5,785
Interest in excess of capital lease payments - 289
Provision for closed stores (3,077) 87
Provision for loss on sale of California
operations - 10,493
Provision for deferred taxes 1,842 (3,245)
Change in assets and liabilities:
Accounts receivable 1,628 (937)
Restricted escrow (4,500) -
Income taxes refundable/prepaid (1,180) -
Merchandise inventories 5,099 182
Other current assets (913) (128)
Deferred income taxes (3,326) (542)
Accounts payable, trade (7,843) 3,328
Accrued expenses 3,811 (826)
Due to affiliate 44 32
Other assets 51 200
Reserve for closed facilities (1,903) (809)
-------- --------
Net cash provided by (used for)
operating activities $(10,561) $ 5,808
-------- --------
Cash Flows from Investing Activities:
Capital expenditures $ (949) $ (1,727)
Sale/Maturities of United States Treasury Notes - 1,150
Proceeds from repayment of notes receivable
from Dart Group Corporation 7,215 -
Maturities of United States Treasury Bills - 50
Sale/Maturities of marketable debt securities 53 502
-------- --------
Net cash provided by (used for) investing
activities $ 6,319 $ (25)
-------- --------
Cash Flows from Financing Activities:
Principal payments under capital
lease obligations $ (130) $ (157)
Proceeds from exercise of stock options - 5
-------- --------
Net cash used for financing activities $ (130) $ (152)
-------- --------
Net increase (decrease) in Cash and Equivalents $ (4,372) $ 5,631
Cash and Equivalents at beginning of Period 17,887 11,723
-------- --------
Cash and Equivalents at end of Period $ 13,515 $ 17,354
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,809 $ 2,791
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998 and November 1, 1997
(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 October 31, 1998 and November 1,
1997 reflect, in the opinion of management, all adjustments (normal and
recurring in nature) necessary to present fairly the consolidated financial
position of the Company as of October 31, 1998 and November 1, 1997 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 39 weeks ended October 31, 1998 are not
necessarily indicative of the results to be achieved for the fiscal year ended
January 30, 1999.
NOTE 2 - EARNINGS PER SHARE
The computation of diluted earnings per share is based on the weighted average
number of common shares and common stock equivalents outstanding during the
periods presented. Common Stock equivalents were anti-dilutive for all periods
presented. The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share, in the fourth quarter of fiscal 1998 and
has restated all previously presented earnings per share.
NOTE 3 - INTERIM INVENTORY ESTIMATES
The Company's inventories are priced at the lower of last-in, first-out ("LIFO")
cost or market. As of October 31, 1998 and January 31, 1998, inventories
determined on a first-in, first-out basis would have been greater by $3,955,000
and $3,846,000, respectively.
The Company takes a physical count of its store inventories semi-annually 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 physical inventories at
its stores during the 13 weeks ended October 31, 1998.
7
<PAGE> 8
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
October 31, 1998 and November 1, 1997
(Unaudited)
NOTE 4 - MERGER OF DART GROUP CORPORATION
On April 9, 1998, Dart Group Corporation ("Dart"), which owns approximately
67.1% of the Company's outstanding common stock, entered into an Agreement and
Plan of Merger (the "Merger Agreement") with Richfood Holdings, Inc.
("Richfood") and a subsidiary of Richfood ("Acquisition Subsidiary"). Pursuant
to the terms of the Merger Agreement, Richfood (i) made a cash tender offer (the
"Offer") for all the issued and outstanding shares of common stock of Dart at a
price of $160.00 per share, net to the seller in cash, and (ii) caused
Acquisition Subsidiary to merge with and into Dart (the "Merger") in a
transaction in which Dart became a wholly owned subsidiary of Richfood. The
Offer closed on May 13, 1998 and the Merger was effective on May 18, 1998. As a
result of the Offer and the Merger, Richfood indirectly owns approximately 67.1%
of the outstanding common stock of the Company.
Richfood has expressed its intent to cause Dart to divest its ownership of the
Company as soon as practicable. The impact, if any, resulting from a divestiture
of the Company by Dart has not been considered in these financial statements.
NOTE 5 - TRANSACTIONS WITH AFFILIATE
The Company entered into a loan agreement on January 27, 1998 with Dart. The
agreement was subsequently amended on April 28, 1998. Under the terms of the
loan agreement, as amended, Dart borrowed $15.0 million from Trak Auto, the
repayment of which is secured by the common stock of Trak Auto owned by Dart.
The loan bears interest at a rate equal to the prime rate as set forth in The
Wall Street Journal, plus one and one-half percent (1.5%). Interest is payable
monthly and the principal is payable in two equal installments on February 3,
1999 and July 31, 1999. During August 1998, Dart paid the Company $4.0 million
of the principal amount of this loan.
In addition, the Company advanced Dart approximately $3.2 million in November
1997, which was evidenced by a promissory note. Dart repaid the $3.2 million
advance during the 13 weeks ended August 1, 1998.
NOTE 6 - 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 borrowings 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 and advances to affiliates.
8
<PAGE> 9
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
October 31, 1998 and November 1, 1997
(Unaudited)
Interest on prime rate loans is payable monthly. Interest and principal on LIBOR
loans are payable between one and six months from the borrowing date. LIBOR
loans are subject to a prepayment penalty and (subject to certain conditions)
may be continued for a subsequent one to six month period. LIBOR loans may be
converted to prime rate loans and vice 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 the Facility as of December 18, 1999 or on any anniversary date
thereafter upon 60-days prior written notice to the Company.
As of October 31, 1998, there were no borrowings outstanding under the Facility.
NOTE 7 - LITIGATION
In January 1998, Trak Auto was named as a defendant in two class action lawsuits
(Richard Amezcua, Augustin Dominquez, and other members of the general public
similarly situated v. Trak Auto Corporation, Superior Court of California.
Action No. BC183900 and D'Artanyon Tett, Linda Wendt and individuals on behalf
of themselves and all others similarly situated v. Trak Auto Corporation,
Superior Court of the State of California. Action No. BC 186931) involving
former California employees of the Company alleging improper wage and hour
practices. The suits claimed that former salaried employees should have been
paid overtime.
The Company has entered into a settlement agreement pursuant to which the
maximum exposure of the Company to members of the classes in both class action
lawsuits is $4.5 million. The Company recorded a provision of $2.0 million
during the 13 weeks ended May 2, 1998 and $2.0 million during the 13 weeks ended
August 1, 1998 for the settlement and the amounts have been recorded as Selling
and Administrative Expenses on the Consolidated Statements of Operations. During
August 1998, the Company funded $4.5 million in escrow for payments to class
members of these lawsuits, classified on the Consolidated Balance Sheets as
Restricted Escrow Funds. The Company expects to recover a significant portion of
this sum from its insurance carriers, however, the Company is unable to estimate
the recoverable amount at this time.
NOTE 8 - SALE OF CALIFORNIA OPERATIONS
In October 1997, Trak Auto entered into an agreement with CSK Auto, Inc. ("CSK")
pursuant to which Trak Auto 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 in December 1997 for an
aggregate purchase price of approximately $32.8 million. The Company realized a
pre-tax loss of approximately $8.2 million on the transaction (net of a
reduction in the LIFO reserve of approximately $2.3 million, recorded during the
13 weeks ended January 31, 1998).
9
<PAGE> 10
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
October 31, 1998 and November 1, 1997
(Unaudited)
NOTE 9 - PITTSBURGH, PENNSYLVANIA OPERATIONS
On January 31, 1998, Trak Auto closed its 15 stores in the Pittsburgh,
Pennsylvania market and recorded a provision for closed stores of approximately
$14.9 million. During the current fiscal year, the Company has been able to
negotiate favorable early terminations for a number of the store leases.
Accordingly, during the 39 and 13 weeks ended October 31, 1998, the Company
reversed approximately $3.1 million and $1.5 million of the closed store
reserve, respectively.
10
<PAGE> 11
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, without limitation, the possible sale of the Company (as
discussed below), the ability of the Company to open new stores and close other
stores, the sufficiency of recorded reserves for store closings, the
availability of capital to fund operations, the effect of national and regional
economic conditions 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 that may be made
to reflect future events or circumstances.
In connection with its acquisition of Dart, Richfood has expressed its intent to
cause Dart to divest its ownership of the Company as soon as practicable (see
Note 4 to the Consolidated Financial Statements). The Company has engaged a
financial advisor to pursue strategic alternatives with respect to the
disposition of Dart's ownership of the Company that are intended to maximize
value to all of the Company's stockholders in connection with such disposition.
Such transaction could take one or more of the following forms: (i) a sale of
Dart's equity interest in the Company, or a distribution of such equity interest
to Richfood to be followed by a spin-off of such equity interest to Richfood
shareholders; (ii) a sale of all the outstanding equity of the Company pursuant
to a merger, tender offer or other share exchange; (iii) a sale of all or
substantially all of the assets of the Company, followed by a distribution of
the net proceeds thereof to the Company's stockholders; (iv) a recapitalization
of the Company; or (v) a liquidation of the Company. There can be no assurance
that any transaction will be effected or, if effected, will be at a price in
excess of the current market price per common share.
The Company believes that its Super Trak superstore concept represents the
strongest segment of its business and anticipates that all of its new stores
will be opened as Super Trak stores in existing and possibly new markets. In the
past, superstores that were converted from Classic Trak stores have generated
higher sales and 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, in December
1997, the Company sold its California operations and on January 31, 1998 the
Company closed its 15 stores in the Pittsburgh, Pennsylvania market area.
The automotive aftermarket is highly competitive. 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, the increased incidence of leasing, and the availability of well
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
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.
Financial Condition
The Company's cash, including short-term instruments, merchandise inventory,
and accounts payable, decreased during the 39 weeks ended October 31, 1998
primarily due to the sale of the Company's California operations and the
closing of the Company's stores located in the Pittsburgh, Pennsylvania market.
In addition, cash received from Dart in payment of certain outstanding loan
balances was primarily used to fund an escrow account for the settlement of
the California litigation (see Note 7 to the Consolidated Financial Statements).
Liquidity and Capital Resources
Cash, including short-term instruments, is the Company's primary source of
liquidity. Cash, including short-term instruments, decreased by $4.4 million to
$13.5 million at October 31, 1998 from $17.9 million at January 31, 1998. The
decrease was primarily due to funding the current period operating loss, funding
$4.5 million in escrow for settlement of litigation (see Note 7 to the
Consolidated Financial Statements) and payments on year end accounts payable
balances from the California and Pittsburgh, Pennsylvania markets. The decrease
was partially offset by funds received from Dart for loan repayments (see Note 5
to the Consolidated Financial Statements).
Operating activities used $10.6 million of the Company's funds during the 39
weeks ended October 31, 1998 compared to providing $5.8 million during the 39
weeks ended November 1, 1997. The change was primarily due to funding the
current period operating loss, funding $4.5 million in escrow for settlement of
litigation and final payments on year end accounts payable balances from the
Company's exiting the California and Pittsburgh, Pennsylvania markets.
Investing activities provided $6.3 million to the Company during the 39 weeks
ended October 31, 1998 compared to using $25,000 of the Company's cash during
the 39 weeks ended November 1, 1997. The change was primarily due to Dart's
repayments of loans of approximately $7.2 million to the Company. Capital
expenditures decreased to $0.9 million during the 39 weeks ended October 31,
1998 from $1.7 million during the 39 weeks ended November 1, 1997.
Financing activities used $130,000 of the Company's funds during the 39 weeks
ended October 31, 1998 for principal payments for capital lease obligations.
The Company funds its requirements for working capital and capital expenditures
with net cash generated from operations, existing cash resources, income tax
refunds and, if necessary, borrowings under the 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 October 31, 1998, the Company had entered into an amendment
to an existing store lease for additional space and had not entered into any
agreements for new store locations.
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Results of Operations
39 Weeks and 13 Weeks Ended October 31, 1998 Compared to the 39 Weeks and 13
Weeks Ended November 1, 1997
The Company sold its California operations and closed its Pittsburgh,
Pennsylvania stores during fiscal 1998. These stores represented approximately
$83.2 million and $26.6 million in sales during the 39 and 13 weeks ended
November 1, 1997, respectively. The Company has not restated its results of
operations for the 39 and 13 weeks ended November 1, 1997 or provided financial
statements on a pro forma basis.
During the 39 weeks ended October 31, 1998, Trak Auto opened six Super Trak
stores, closed two Super Trak stores and closed or converted to the Super Trak
format, ten Classic Trak stores. As of October 31, 1998, Trak Auto had 175
stores, including 91 Super Trak stores and 26 Super Trak Warehouse stores.
For the 39 weeks ended October 31, 1998, sales decreased by $88.2 million, or
34.2%, to $169.6 million compared to the 39 weeks ended November 1, 1997 and
sales for the 13 weeks ended October 31, 1998 decreased by $28.4 million, or
33.2%, to $57.2 million compared to the 13 weeks ended November 1, 1997. The
decreases were primarily due to Trak Auto's sale of its California operations in
December 1997 and closure of its Pittsburgh, Pennsylvania stores on January 31,
1998. Comparable sales (stores open more than one year) decreased 3.9% and 3.5%
in the 39 and 13 weeks ended October 31, 1998, respectively, compared to the 39
and 13 weeks ended November 1, 1997. The decreases in comparable sales were
primarily due to an increase in competition in the markets in which the Company
operates. Sales for Super Trak and Super Trak Warehouse stores represented 73.4%
and 74.0% of total sales during the 39 and 13 weeks ended October 31, 1998,
respectively, compared to 69.3% and 70.5% for the 39 and 13 weeks ended November
1, 1997, respectively.
Interest and other income increased by $0.8 million to $1.6 million during the
39 weeks ended October 31, 1998 when compared to the 39 weeks ended November 1,
1997 and interest and other income increased by approximately $61,000 during the
13 weeks ended October 31, 1998 compared to the 13 weeks ended November 1, 1997.
The increases were primarily due to interest received from Dart on outstanding
loan balances (see Note 5 to the Consolidated Financial Statements).
Cost of sales, store occupancy and warehousing expenses as a percentage of sales
were 77.8% and 75.5% in the 39 and 13 weeks ended October 31, 1998,
respectively, compared to 76.8% and 77.0% in the 39 and 13 weeks ended November
1, 1997. The increase during the 39 weeks ended October 31, 1998 was primarily
due to a decrease in advertising and other purchase related allowances from
vendors. The decrease during the 13 weeks ended October 31, 1998 was primarily
due to a favorable change in the mix of goods sold.
Selling and administrative expenses as a percentage of sales were 24.8% and
21.5% in the 39 and 13 weeks ended October 31, 1998, respectively, compared to
20.7% and 18.2% in the 39 and 13 weeks ended November 1, 1997. The increases
were primarily due to increased net advertising costs during the 39 and 13 weeks
ended October 31, 1998 and a $4.0 million provision for the settlement of two
lawsuits during
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
the 39 weeks ended October 31, 1998 (see Note 7 to the Consolidated Financial
Statements). In addition, corporate expenses increased as a percentage of sales.
Actual corporate expenses were less than the prior year but represented a larger
percentage of the Company's sale base.
Depreciation and amortization expenses decreased $2.6 million, or 45.3%, in the
39 weeks ended October 31, 1998, compared to the 39 weeks ended November 1, 1997
and decreased $0.9 million, or 45.6%, in the 13 weeks ended October 31, 1998,
compared to the 13 weeks ended November 1, 1997. The decreases were primarily
due to a decrease in depreciation expense related to the reduction in fixed
assets as a result of the sale of the California operations and the closing of
the stores located in the Pittsburgh, Pennsylvania market.
During the 39 and 13 weeks ended October 31, 1998, the Company reversed
approximately $3.1 million and $1.5 million, respectively, of its closed store
reserve as a result of negotiating favorable lease terminations for stores
closed in the Pittsburgh, Pennsylvania market compared to recording a closed
store expense of approximately $0.1 million during the 39 and 13 weeks ended
November 1, 1997.
During the 39 and 13 weeks ended November 1, 1997, the Company recorded an
estimated pre-tax loss of $10.5 million associated with the sale of its
California operations (see Note 8 to the Consolidated Financial Statements).
During the 39 weeks ended October 31, 1998, the Company recorded an income tax
benefit of $2.3 million. The Company generated a net operating loss of
approximately $5.2 million during the 39 weeks ended October 31, 1998 of which
$1.1 million can be carried back to prior tax years and $4.1 million can be
carried forward. The net operating loss carryforward will expire in fiscal year
2019; however as a result of the Richfood acquisition of Dart, utilization of
the Company's net operating loss carryforwards may be limited. Management
believes that it is more likely than not that all tax carryforwards are
realizable.
Net income for the 13 weeks ended October 31, 1998 was approximately $1.1
million compared to a net loss of $6.5 million during the 13 weeks ended
November 1, 1997. The net loss of $3.5 million during the 39 weeks ended October
31, 1998 decreased by $4.6 million from the net loss of $8.1 million during the
39 weeks ended November 1, 1997. Net income during the 13 weeks ended October
31, 1998 was primarily due to the reversal of approximately $1.5 million in
closed store reserves. In addition, the Company recorded operating income for
the first time since the third quarter of last year. The net loss for the 39
weeks ended October 31, 1998 was primarily due to the $4.0 million litigation
settlement and operating losses, partially offset by the $3.1 million closed
store reversal. The net losses during the 39 and 13 weeks ended November 1, 1997
were primarily due to the $10.5 million loss recognized in connection with the
sale of the Company's California operations.
Year 2000 Compliance
The year 2000 (the "Y2K") issue is the result of computer systems and computer
software using only two digits rather than four to define a year. As a result,
systems that are date-sensitive may recognize the year "00" as the year 1900
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
rather than the year 2000. Unless remedied, the Y2K issue could result in system
failures, miscalculations and the inability to process necessary transactions or
engage in normal business activity. In addition to computer systems and computer
software, any equipment using embedded microchips, such as controllers and
telephone exchanges, could also be at risk.
The Company is currently conducting a review of the Y2K compliance of its
computer systems and software and its impact on the Company's operations. The
review has focused on three major areas: information technology systems ("IT"),
embedded technology and other systems ("Non-IT"), and key third party
relationships.
Based on the results of this review to date, with respect to IT systems, the
Company believes that its general ledger and accounts payable systems are Y2K
compliant. The Company's warehouse distribution and merchandising system is not
yet Y2K compliant and modification is required. The Company's point of sale
system, both software and hardware, is not Y2K compliant and will need to be
replaced. Based on discussions with its vendors, the Company believes that the
remainder of its IT systems are Y2K compliant, including its primary computer
hardware (AS400's) and related operating systems that process the software
applications discussed above.
The Company has plans to provide minimal disruption to the Company with respect
to its IT Y2K compliance. The aggregate costs associated with the plans are
estimated to be approximately $6.7 million. The Company has spent approximately
$25,000, as of October 31, 1998, none of which has been capitalized. The plans
include: (i) replacing store related hardware and software and (ii) utilizing
internal and third party contractors to modify for Y2K compliance and enhance
the warehouse distribution and merchandising system, accordingly, the Company
has engaged a consulting firm to complete and test Y2K modifications and
enhancements to the warehouse distribution and merchandising system. Completion
of which is anticipated in two phases, the first in mid-January 1999, prior to
the start of the Company's fiscal year ended January 29, 2000, and the second in
July 1999. The plan for store systems is still under consideration. There is no
guarantee that the Company will be successful in adopting the store systems plan
or that such plan will be adopted in sufficient time to allow for the plan to be
fully implemented and tested by the year 2000.
The aforementioned costs are based on management's best estimates, which were
derived from assumptions of future events, including the availability of
resources, third parties and other factors. There can be no assurance that these
estimates will prove to be accurate, and actual results could vary due to
uncertainties. There can be no guarantee that there will be sufficient time to
fully implement the plans and complete testing by the year 2000. The Company
currently has no contingency plans if the implementation is not complete.
The Company believes that the majority of its Non-IT systems are currently Y2K
compliant. Testing of all Non-IT systems is approximately 75% complete and is
expected to be completed by May 1999.
The Company's review of Y2K compliance issues with key vendors, suppliers,
customers and other third parties has not identified any providers that, in the
event of their failure to become Y2K compliant, could materially impact the
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
Company's results of operations. However, there can be no assurance that the
failure of any unrelated third parties to become Y2K complaint in a timely
manner would not have a material adverse effect on the Company's result of
operations or financial position. The Company uses third party vendors to
process payroll and human resource functions. Through discussions with the
payroll and human resource provider, the Company has determined that the current
systems that the third party is providing are not Y2K compliant and will require
replacement. During 1999, the Company and the provider plan to convert these
processes to a system that is Y2K compliant and is currently available from the
provider.
The Company expects the Y2K compliance plan to be funded by cash flow from
operations. No material information technology projects have been deferred as a
result of the Company's Y2K plans.
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 January 31, 1998 (the "Annual Report").
See Note 7 to the Consolidated Financial Statements for a discussion of
litigation.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27.1 Financial Data Schedule
(B) Reports on Form 8-K
None
17
<PAGE> 18
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, 1998 By: /s/ R. KEITH GREEN
--------------------------- ----------------------------
R. KEITH GREEN
President
Date: December 15, 1998 By: /s/ DAVID B. MACGLASHAN
--------------------------- ----------------------------
DAVID B. MACGLASHAN
Senior Vice President and
Chief Financial Officer
18
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