<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 August 1, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from __________ to
___________
Commission file number 0-12202
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TRAK AUTO CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1281465
- ----------------------------------------------- ----------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3300 75th Avenue, Landover, Maryland, 20785
-------------------------------------------
(Address of principal executive office)
(Zip Code)
(301) 226-1200
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
At September 14, 1998, the registrant had 5,909,179 shares of Common Stock,
$.01 par value per share, outstanding.
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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.
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TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Thirteen Twenty-Six
Weeks Ended Weeks Ended
--------------------- ---------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 59,071 $ 90,523 $112,394 $172,128
Interest and other income 530 243 1,133 396
-------- -------- -------- --------
59,601 90,766 113,527 172,524
-------- -------- -------- --------
Expenses:
Cost of sales, store occupancy
and warehousing 46,482 69,869 88,722 132,134
Selling and administrative 14,811 20,172 29,865 37,639
Depreciation and amortization 1,095 1,801 2,116 3,860
Interest expense 937 941 1,873 1,864
Closed store reversal (578) - (1,568) -
-------- -------- -------- --------
62,747 92,783 121,008 175,497
-------- -------- -------- --------
Loss before income taxes (3,146) (2,017) (7,481) (2,973)
Income taxes (benefit) (1,394) (1,074) (2,955) (1,332)
-------- -------- -------- --------
Net loss $ (1,752) $ (943) $ (4,526) $ (1,641)
======== ======== ======== ========
Per share data:
Basic loss per share $ (.30) $ (.16) $ (.77) $ (.28)
Diluted loss per share (.30) (.16) (.77) (.28)
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
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TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
August 1, January 31,
ASSETS 1998 1998
---------- ----------
<S> <C> <C>
Current Assets:
Cash $ 7,453 $ 5,914
Short-term instruments 5,827 11,973
Marketable debt securities 612 666
Accounts receivable 6,302 8,653
Note Receivable from Dart Group 15,000 3,215
Merchandise inventories 64,191 67,027
Prepaid income taxes 4,146 3,670
Deferred income taxes 7,871 9,844
Other current assets 4,368 3,194
-------- --------
Total Current Assets 115,770 114,156
-------- --------
Property and Equipment, at cost:
Furniture, fixtures and equipment 54,487 54,767
Leasehold improvements 9,929 9,970
Property under capital leases 22,032 22,032
-------- --------
86,448 86,769
Accumulated Depreciation
and Amortization 52,279 50,513
-------- --------
34,169 36,256
-------- --------
Other Assets 59 93
-------- --------
Note Receivable from Dart Group - 15,000
-------- --------
Deferred Income Taxes 12,125 8,001
-------- --------
Total Assets $162,123 $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
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
August 1, January 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
---------- ----------
<S> <C> <C>
Current Liabilities:
Accounts payable, trade $ 35,440 $ 41,325
Accrued expenses -
Salary and benefits 10,555 11,177
Taxes other than income 5,281 5,518
Other 15,248 11,688
Current portion of obligations under
capital leases 282 282
Due to affiliate - 177
-------- --------
Total Current Liabilities 66,806 70,167
-------- --------
Obligations Under Capital Leases 26,760 26,846
-------- --------
Reserve for Closed Stores and
Restructuring 7,348 10,751
-------- --------
Total Liabilities 100,914 107,764
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.01 per
share; 15,000,000 shares authorized;
6,437,869 shares issued 64 64
Paid-in capital 46,481 46,481
Unrealized investment gains - 7
Retained earnings 23,391 27,917
Treasury stock, 528,690 shares
of common stock, at cost (8,727) (8,727)
-------- --------
Total Stockholders' Equity 61,209 65,742
-------- --------
Total Liabilities and Stockholders'
Equity $162,123 $173,506
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
5
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TRAK AUTO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
------------------------
August 1, August 2,
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (4,526) $ (1,641)
Adjustments to reconcile loss to net cash
provided by operating activities:
Depreciation and amortization 2,116 3,860
Provision for closed stores (1,568) -
Interest in excess of capital lease payments - 176
Change in assets and liabilities:
Accounts receivable 2,351 1,632
Merchandise inventories 2,836 445
Due from affiliate - (109)
Prepaid income taxes (476) -
Other current assets (1,174) 104
Deferred income taxes (2,151) (478)
Other assets 34 133
Accounts payable, trade (5,885) 3,824
Accrued expenses 2,704 (1,338)
Due to affiliate (177) (18)
Income taxes payable - (892)
Reserve for closed stores (1,438) (542)
-------- --------
Net cash provided by (used for) operating
activities $ (7,354) $ 5,156
-------- --------
Cash Flows from Investing Activities:
Capital expenditures $ (432) $ (1,189)
Maturities of United States Treasury Bills - 50
Proceeds from repayment of note receivable
from Dart Group 3,215 -
Sale/Maturities of marketable debt securities 50 502
Sale/Maturities of United States Treasury Notes - 1,150
-------- --------
Net cash provided by investing activities $ 2,833 $ 513
-------- --------
Cash Flows from Financing Activities:
Principal payments under capital
lease obligations $ (86) $ (105)
-------- --------
Net cash used for financing activities $ (86) $ (105)
-------- --------
Net Increase (Decrease) in Cash and Equivalents $ (4,607) $ 5,564
Cash and Equivalents at Beginning of Period 17,887 11,723
-------- --------
Cash and Equivalents at End of Period $ 13,280 $ 17,287
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,873 $ 1,864
</TABLE>
The accompanying notes are an integral part of these statements.
6
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TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 1, 1998 and August 2, 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 August 1,
1998 and August 2, 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 August 1, 1998 and August 2, 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 26 weeks ended August 1, 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. Dilutive stock
options represent the only difference between basic and diluted earnings per
share.
NOTE 3 - INTERIM INVENTORY ESTIMATES
The Company's inventories are priced at the lower of last-in, first-out cost or
market. As of August 1, 1998 and January 31, 1998, inventories determined on a
first-in, first-out basis would have been greater by $3,908,000 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 took a physical inventory at all of
its stores during the 13 weeks ended August 1, 1998.
7
<PAGE> 8
TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 1, 1998 and August 2, 1997
(Unaudited)
NOTE 4 - 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.
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 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 it
as of December 18, 1999 or on any anniversary date thereafter upon 60-days
prior written notice to the Company.
As of August 1, 1998, there were no borrowings outstanding under the Facility.
NOTE 5 - TRANSACTIONS WITH AFFILIATE
The Company entered into a loan agreement on January 27, 1998 with Dart Group
Corporation ("Dart"), which owns approximately 67.1% of the Company's common
stock. 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. Subsequent to August 1,
1998, Dart paid down $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.
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TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 1, 1998 and August 2, 1997
(Unaudited)
NOTE 6 - MERGER
Merger of Dart
On April 9, 1998, Dart entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Richfood Holdings, Inc. ("Richfood Holdings") and a
subsidiary of Richfood Holdings ("Acquisition Subsidiary"). Pursuant to the
terms of the Merger Agreement, Richfood Holdings (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 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 Holdings. 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 Holdings indirectly owns 67.1% of the outstanding Common Stock
of the Company.
Richfood Holdings 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 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 the class actions
is $4.5 million. Subsequent to August 1, 1998, the Company funded $4.5
million in escrow for payments to class members. The Company expects to
recover a portion of this sum from its insurance carriers, however, the Company
is unable to estimate the amount, if any, 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.
NOTE 9 - PITTSBURGH MARKET
On January 31, 1998, Trak Auto closed its 15 stores in the Pittsburgh,
9
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TRAK AUTO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
August 1, 1998 and August 2, 1997
(Unaudited)
Pennsylvania market and recorded a provision for closed stores of approximately
$14.9 million. During the 26 weeks ended August 1, 1998, Trak Auto reversed
approximately $1.6 million of this reserve due to the negotiation of favorable
lease terminations.
10
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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 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 Holdings has expressed its
intent to cause Dart to divest its ownership of the Company as soon as
practicable (see Note 6 to the Consolidated Financial Statements). The Company
has formed an independent committee of the Board of Directors and 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 shareholders 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 Holdings to be followed by a spin-off of such equity
interest to Richfood Holding's 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 15 stores in Pittsburgh, Pennsylvania.
The automotive aftermarket is a highly competitive market place. As a result,
the industry is consolidating with independent operators and small chains that
are 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
11
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
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.
Liquidity and Capital Resources
Cash, including short-term instruments, is the Company's primary source of
liquidity. Cash, including short-term instruments, decreased by $4,607,000 to
$13,280,000 at August 1, 1998 from $17,887,000 at January 31, 1998. The
decrease was primarily due to funding the current period operating loss and
payments on year end accounts payable balances from the California and
Pittsburgh, Pennsylvania markets.
Operating activities used $7,354,000 of the Company's funds during the 26 weeks
ended August 1, 1998 compared to providing $5,156,000 during the 26 weeks ended
August 2, 1997. The change was primarily due to funding the current period
operating loss and final payments on year end accounts payable balances from
the Company's exiting the California and Pittsburgh, Pennsylvania markets.
Investing activities provided $2,833,000 to the Company during the 26 weeks
ended August 1, 1998 compared to providing $513,000 to the Company during the
26 weeks ended August 2, 1997. The increase was due to Dart's repayment of a
$3.2 million advance from Trak Auto. Capital expenditures decreased to
$432,000 during the 26 weeks ended August 1, 1998 from $1,189,000 during the 26
weeks ended August 2, 1997.
Financing activities used $86,000 of the Company's funds during the 26 weeks
ended August 1, 1998 for 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, expected
income tax refunds and, if necessary, borrowings under the Company's 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 August 1, 1998, the
Company had entered into lease agreements to open two new stores and an
amendment to an existing lease for additional space.
Results of Operations
26 Weeks and 13 Weeks Ended August 1, 1998 Compared to the 26 Weeks and 13
Weeks Ended August 2, 1997
The Company sold its California operations and closed its Pittsburgh,
Pennsylvania stores during fiscal 1998. These stores represented
approximately $56.6 million and $28.6 million in sales during the 26 and 13
weeks ended August 2, 1997, respectively. The Company has not restated its
results of operations for the 26 and 13 weeks ended August 2, 1997 on a pro
forma basis.
During the 26 weeks ended August 1, 1998, Trak Auto opened three Super Trak
stores and closed or converted six Classic Trak stores. As of August 1, 1998,
Trak Auto had 178 stores, including 89 Super Trak stores and 26 Super Trak
Warehouse stores.
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<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
For the 26 weeks ended August 1, 1998 sales decreased by $59,734,000 or 34.7%
to $112,394,000 compared to the 26 weeks ended August 2, 1997 and sales for the
13 weeks ended August 1, 1998 decreased by $31,452,000 or 34.7% to $59,071,000
compared to the 13 weeks ended August 2, 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 4.1% and 5.6% in the 26 and 13
weeks ended August 1, 1998, respectively, compared to the 26 and 13 weeks ended
August 2, 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 73.0% and 73.3% of
total sales during the 26 and 13 weeks ended August 1, 1998 compared to 68.7%
and 71.5% for the 26 and 13 weeks ended August 2, 1997.
Interest and other income increased by $737,000 and $287,000 to $1,133,000 and
$530,000 in the 26 and 13 weeks ended August 1, 1998, respectively when
compared to the 26 and 13 weeks ended August 2, 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 78.9% and 78.7% in the 26 and 13 weeks ended August 1, 1998,
respectively, compared to 76.8% and 77.2% in the 26 and 13 weeks ended August 2,
1997. The increases were primarily due to a decrease in gross profit as a
result of an unfavorable change in the sales mix and increased promotional
items.
Selling and administrative expenses as a percentage of sales were 26.6% and
25.1% in the 26 and 13 weeks ended August 1, 1998, respectively, compared to
21.9% and 22.3% in the 26 and 13 weeks ended August 2, 1997. The increases
were primarily due to increased net advertising costs and a $4.0 million
provision for the California lawsuits (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 while sales
decreased as a result of the sale of the California operations and the closure
of the Pittsburgh, Pennsylvania stores.
Depreciation and amortization expenses decreased $1,744,000, or 45.2%, in the
26 weeks ended August 1, 1998 compared to the 26 weeks ended August 2, 1997.
The decrease was due to the reduction in fixed assets as a result of the sale
of the California operations and closing the Pittsburgh, Pennsylvania stores.
Interest expense increased $9,000, or 0.5%, in the 26 weeks ended August 1,
1998 compared to the 26 weeks ended August 2, 1997.
During the 26 and 13 weeks ended August 1, 1998, the Company reversed
approximately $1,568,000 and $578,000, respectively, of its closed store
reserve as a result of negotiating favorable lease terminations for stores
closed in the Pittsburgh, Pennsylvania market.
Net losses for the 26 weeks and 13 weeks ended August 1, 1998, were $4,526,000
and $1,752,000, respectively, compared to net losses for the 26 and 13 weeks
ended August 2, 1997 of $1,641,000 and $943,000, respectively. The increased
net losses
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<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations, Continued
were primarily due to the decrease in gross profit and increase in selling and
administrative expenses, as a percentage of sales, and was partially offset by
the closed store reversal.
During the 26 weeks ended August 1, 1998, the Company recorded an income tax
benefit of $2,955,000. The Company generated a net operating loss of
$5,364,000, of which $1,064,000 can be carried back to prior tax years and
$4,300,000 can be carried forward. The net operating loss carryforward will
expire in fiscal year 2019. Management believes that it is more likely than
not that all tax carryforwards are realizable.
Year 2000 Compliance
Trak Auto is currently in the process of conducting a review of the impact of
the Year 2000 on its information systems, as well as reviewing its impact on
relationships with key customers and vendors. Based on the results to date of
this review, much of the Company's store hardware and software will have to be
replaced in order to be Year 2000 compliant. Additionally, the Company's
warehouse distribution and merchandising system is not yet Year 2000 compliant
and could potentially begin to affect the results of operations as early as
fiscal 1999. The Company is considering a plan to ensure minimal disruption to
the Company, however, there can be no guarantee that the plan will be adopted
in its current form or that there will be sufficient time to implement the plan
by the Year 2000. The aggregate costs associated with the plan in its current
form are currently estimated at $5.7 million for the store related hardware and
software plus unidentified internal and contracted labor costs to modify and
enhance store, warehouse distribution and merchandising systems. The Company
has not completed the review of the impact, or developed contingency plans,
with respect to its vendors, on year 2000 compliance.
14
<PAGE> 15
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").
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 the class actions is $4.5 million. Subsequent to August 1,
1998, the Company funded $4.5 million in escrow for payments to class members
of these lawsuits. The Company expects to recover a portion of this sum from
its insurance carriers, however, the Company is unable to estimate the amount,
if any, at this time.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27 Financial Data Schedule
(B) Reports on Form 8-K
During the quarter ended August 1, 1998, Trak Auto Corporation filed one
Current Report on Form 8-K.
On May 28, 1998, Trak Auto Corporation filed a Current Report on Form
8-K reporting under Item 1.-Changes in Control of Registrant, that
Richfood Holdings, Inc. ("Richfood") had acquired control of the
Company. In addition, the size of the Board of Directors was increased
from four to seven members and Messrs. John E. Stokely, John C. Belknap
and Alec C. Covington, each of whom is an executive officer of
Richfood, were elected to the Board.
15
<PAGE> 16
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: September 15, 1998 By: R. KEITH GREEN
----------------------- --------------------------
R. KEITH GREEN
President
Date: September 15, 1998 By: DAVID B. MACGLASHAN
----------------------- --------------------------
DAVID B. MACGLASHAN
Senior Vice President and
Chief Financial Officer
16
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
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<SECURITIES> 612
<RECEIVABLES> 21,302
<ALLOWANCES> 0
<INVENTORY> 64,191
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<DEPRECIATION> 52,279
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<CURRENT-LIABILITIES> 66,806
<BONDS> 26,760
0
0
<COMMON> 64
<OTHER-SE> 61,145
<TOTAL-LIABILITY-AND-EQUITY> 162,123
<SALES> 112,394
<TOTAL-REVENUES> 113,527
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<OTHER-EXPENSES> 30,413
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,873
<INCOME-PRETAX> (7,481)
<INCOME-TAX> (2,955)
<INCOME-CONTINUING> (4,526)
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<NET-INCOME> (4,526)
<EPS-PRIMARY> (.77)
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