<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 28, 1995
----------------
( ) 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 0-11457
-------
CROWN BOOKS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-1227415
--------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3300 75th Avenue, Landover, Maryland, 20785
-------------------------------------------
(Address of principal executive offices)
(Zip Code)
(301) 731-1200
----------------------------------------------------
(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 December 11, 1995, the registrant had 5,388,973 shares of Common Stock, $.01
par value per share, outstanding.
Page 1 of 26 pages
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Certain consolidated financial statements included herein have been
prepared by Crown Books Corporation ("Crown Books"), 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 Crown
Books 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 Crown Books' report on Form 10-K for the fiscal year ended January
28, 1995.
2
<PAGE> 3
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------- --------------------------
October 28, October 29, October 28, October 29,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 60,250,000 $ 68,374,000 $185,161,000 $206,195,000
Interest and
other income 734,000 463,000 2,161,000 1,506,000
------------ ------------ ------------ ------------
60,984,000 68,837,000 187,322,000 207,701,000
------------ ------------ ------------ ------------
Expenses:
Cost of sales,
store occupancy
and warehousing 50,434,000 57,133,000 154,309,000 170,925,000
Selling and
administrative 12,112,000 28,804,000 35,107,000 49,545,000
Depreciation and
amortization 1,314,000 1,276,000 4,081,000 3,856,000
Interest expense 311,000 77,000 896,000 228,000
Closed store
reserve (998,000) 18,865,000 (4,107,000) 18,865,000
Restructuring
charge (1,231,000) - (1,797,000) -
------------ ------------ ----------- ------------
61,942,000 106,155,000 188,489,000 243,419,000
------------ ------------ ----------- ------------
Income (loss)
before
income taxes (958,000) (37,318,000) (1,167,000) (35,718,000)
Income taxes
(benefit) (288,000) (12,310,000) (363,000) (11,734,000)
------------ ------------ ----------- ------------
Net income (loss) $ (670,000) $(25,008,000) $ (804,000) $(23,984,000)
============ ============ =========== ============
Weighted average
common shares
and common share
equivalents
outstanding 5,389,000 5,389,000 5,389,000 5,389,000
============ ============ =========== ============
Per share data:
Net income (loss) $ (.12) $ (4.64) $ (.15) $ (4.45)
============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 28, January 28,
1995 1995
------------ ------------
<S> <C> <C>
Current Assets:
Cash $ 6,008,000 $ 4,226,000
Short-term instruments 19,702,000 25,408,000
Marketable debt securities 22,604,000 35,106,000
Accounts receivable 2,985,000 3,832,000
Merchandise inventories 123,993,000 102,433,000
Prepaid income taxes 2,421,000 -
Deferred income tax benefit 7,962,000 10,957,000
Due from affiliate 50,000 -
Other current assets 1,160,000 369,000
------------ ------------
Total Current Assets 186,885,000 182,331,000
------------ ------------
Property and Equipment, at cost:
Furniture, fixtures and equipment 28,873,000 24,936,000
Leasehold improvements 17,822,000 18,063,000
Property under capital leases 1,406,000 1,406,000
------------ ------------
48,101,000 44,405,000
Accumulated Depreciation and Amortization 24,364,000 21,401,000
------------ ------------
23,737,000 23,004,000
------------ ------------
Deferred Income Tax Benefit 7,270,000 7,911,000
------------ ------------
Other Assets 163,000 133,000
------------ ------------
Total Assets $218,055,000 $213,379,000
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 28, January 28,
1995 1995
------------ ------------
<S> <C> <C>
Current Liabilities:
Accounts payable, trade $ 79,441,000 $ 55,695,000
Income taxes payable - 5,046,000
Accrued expenses -
Salary and benefits 2,757,000 4,895,000
Taxes other than income 3,680,000 3,981,000
Robert M. Haft judgment 13,987,000 13,342,000
Other 11,714,000 14,639,000
Current portion of reserve for closed
stores and restructuring 6,936,000 7,839,000
Current portion of obligations under
capital leases - 24,000
Due to affiliate - 92,000
------------ ------------
Total Current Liabilities 118,515,000 105,553,000
------------ ------------
Obligations Under Capital Leases 1,627,000 1,582,000
------------ ------------
Reserve for Closed Stores
and Restructuring 14,960,000 22,917,000
------------ ------------
Total Liabilities 135,102,000 130,052,000
------------ ------------
Stockholders' Equity:
Common stock, par value $.01 per share;
20,000,000 shares authorized, 5,612,611
shares issued as of October 28, 1995
and January 28, 1995, respectively 56,000 56,000
Note receivable, net of discount (112,000) (103,000)
Paid-in capital 43,809,000 43,809,000
Unrealized (loss) on short-term
investments (9,000) (448,000)
Retained earnings 42,393,000 43,197,000
Treasury stock, 223,638 shares of
common stock, at cost (3,184,000) (3,184,000)
------------ -----------
Total Stockholders' Equity 82,953,000 83,327,000
------------ -----------
Total Liabilities and
Stockholders' Equity $218,055,000 $213,379,000
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
5
<PAGE> 6
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
---------------------------
October 28, October 29,
1995 1994
------------- ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (804,000) $(23,984,000)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Write-off deferred compensation - 1,424,000
Depreciation and amortization 4,081,000 3,856,000
Provision for (reversal of) closed stores
and restructuring charges (5,904,000) 18,865,000
Change in assets and liabilities:
Accounts receivable 1,130,000 2,398,000
Merchandise inventories (21,560,000) (49,986,000)
Prepaid income taxes (2,421,000) -
Other current assets (791,000) 38,000
Due from affiliate (63,000) -
Accounts payable, trade 23,746,000 17,650,000
Accrued expenses (4,683,000) 13,735,000
Due to affiliate (92,000) 30,000
Income taxes payable (5,046,000) (2,339,000)
Deferred income taxes 3,323,000 (11,327,000)
Other assets (30,000) 149,000
Reserve for closed stores (2,777,000) (1,000,000)
------------ ------------
Net cash used in operating
activities $(11,891,000) $(30,491,000)
------------ ------------
Cash Flows from Investing Activities:
Capital expenditures $ (4,980,000) $ (2,463,000)
Purchase of United States Treasury Notes (2,200,000) (102,468,000)
Disposition of United States Treasury
Notes 13,760,000 84,197,000
Sale of corporate note - 1,445,000
Purchase of corporate notes - (1,541,000)
Purchases of United States Agency Note - (1,492,000)
Sale of United States Agency Note 150,000 -
Purchase of municipal securities - (6,124,000)
Maturities of municipal securities 850,000 -
Sale of municipal securities 411,000 9,136,000
Proceeds from reverse repurchase
agreements and unsettled trades of
municipal securities - 12,228,000
------------ ------------
</TABLE>
6
<PAGE> 7
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
---------------------------
October 28, October 29,
1995 1994
------------ ------------
<S> <C> <C>
Net cash provided by (used in)
investing activities $ 7,991,000 $( 7,082,000)
----------- ------------
Cash Flows from Financing Activities:
Principal payments under capital lease
obligations $ (24,000) $ (22,000)
------------ ------------
Net cash used in financing activities $ (24,000) $ (22,000)
------------ ------------
Net Decrease in Cash and Equivalents $ (3,924,000) $(37,595,000)
Cash and Equivalents at Beginning of
Year 29,634,000 65,744,000
------------ ------------
Cash and Equivalents at End of
Period $ 25,710,000 $ 28,149,000
============ ============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for:
Interest $ 251,000 $ 228,000
Income taxes 3,748,000 2,111,000
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 28, 1995 and October 29, 1994
(Unaudited)
(1) General:
The accompanying consolidated financial statements reflect the accounts
of Crown Books Corporation ("Crown Books") and its wholly-owned subsidiaries.
Crown Books 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 bookstores. The unaudited statements as of October 28, 1995 and October
29, 1994 reflect, in the opinion of management, all adjustments (normal and
recurring in nature) necessary to present fairly the consolidated financial
position as of October 28, 1995 and October 29, 1994 and the results of
operations and cash flows for the periods indicated.
The results of operations for the quarter ended October 28, 1995 are not
necessarily indicative of the results to be achieved for the full fiscal year.
Certain reclassifications have been made to the January 28, 1995 balance
sheet in order to conform to the current period presentation.
(2) Net Income Per Common Share and Common Share Equivalents:
Net income per common share has been computed using the weighted average
number of shares of common stock and common stock equivalents (certain stock
options) outstanding during the period. The difference between primary net
income per common share and fully diluted net income per common share is not
significant for the periods presented.
(3) Interim Inventory Estimates:
The Company's inventories are priced at lower of cost or market using
the first-in, first-out method or market.
The Company takes a physical count of its store and warehouse
inventories at least semi-annually. The Company uses a gross profit method to
determine inventories for the quarters when complete physical counts are not
taken. A physical inventory was not taken for the thirty-nine weeks ended
October 28, 1995.
8
<PAGE> 9
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 28, 1995 and October 29, 1994
(Unaudited)
(4) Short-term Instruments and Marketable Debt Securities:
The Company's short-term instruments include United States Treasury
Bills and money market funds. Marketable debt securities include United States
Treasury Notes, corporate notes and municipal securities.
Management determines the appropriate classification of its investments
in debt securities at the time of purchase and reevaluates such determination
at each 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 October 28, 1995, market value was $9,000 less than
cost (adjusted for income taxes). At October 28, 1995, 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.
(5) Other Events:
On October 6, 1995, the Executive Committee and the Special Litigation
Committee of the Board of Directors of Dart Group Corporation ("Dart"), which
owns 51.4% of the Company's outstanding common stock, approved a settlement of
certain litigation between Dart and Ronald S. Haft and other related
transactions between Dart and Ronald S. Haft (collectively, the "Settlement").
Immediately thereafter, Dart and Ronald S. Haft entered into a Settlement
Agreement and various related agreements. The Settlement transactions are
subject to legal challenge. See Item 1 of Part II (Legal Proceedings). If
sustained, the Settlement transactions are intended to have the effect, by
their terms, of transferring majority control of Dart's voting stock to voting
trustees (the "Voting Trustees") under a Voting Trust Agreement, by and among
Ronald S. Haft, Dart and Larry G. Schafran and Sidney B. Silverman, as initial
Voting Trustees. On October 8, 1995, the Board of Directors of Dart ratified
and approved the Settlement.
9
<PAGE> 10
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 28, 1995 and October 29, 1994
(Unaudited)
(5) Other Events (Continued):
As part of the Settlement, Ronald S. Haft consented to termination of
all of his outstanding stock options to purchase up to 10,000 shares of Crown
Books common stock.
10
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
Cash, including short-term instruments, is the Company's primary source
of liquidity. Cash, including short-term instruments, decreased by $3,924,000
to $25,710,000 at October 28, 1995 from $29,634,000 at January 28, 1995. The
decrease in cash was primarily due to capital expenditures and current period
operating activities.
Operating activities used $11,891,000 of the Company's financial
resources for the thirty-nine weeks ended October 28, 1995, compared to
$30,491,000 for the same period one year ago. The change was due primarily to
decreased merchandise inventory purchases during the thirty-nine weeks ended
October 28, 1995 as a result of closing over 60 stores since January 1, 1995.
The Company's cash decreased as a result of current operating results and
payment for current expenses and merchandise inventory.
Investing activities provided $7,991,000 to the Company during the
thirty-nine weeks ended October 28, 1995. Sales of United States Treasury Notes
were partially offset by capital expenditures for computer systems upgrades and
new store fixed assets.
Financing activities used $24,000 of the Company's funds during the
thirty-nine weeks ended October 28, 1995 for payments under capital lease
obligations.
The Company anticipates that funds necessary to fund net capital
expenditures for new store openings and remodelings, meet capital lease
obligations, purchase inventory for new and existing stores and meet current
and long-term liabilities will come from operations and current assets. The
Company anticipates closing approximately 68 classic Crown Books stores and 12
Super Crown Books stores during the next 24 months and has plans to open
approximately 30 Super Crown Books stores during the next twelve months. The
Company anticipates that costs incurred in opening a new Super Crown Books
store will be approximately $1,100,000, including inventory, store fixtures,
leasehold improvements and certain other costs. At October 28, 1995, the
Company had signed leases for seventeen new store locations for Super Crown
Books stores.
During the past three fiscal years, the Company has recorded charges in
connection with store closings and restructurings. During the year ended
January 30, 1993, the Company recorded a restructuring charge of $6,600,000 for
anticipated costs associated with a restructuring plan to close, relocate,
expand and convert approximately 50 Classic Crown Books stores to a Super Crown
Books format. During the thirty-nine weeks ended October 28, 1995, the Company
charged approximately $970,000 against this reserve in connection with
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources, Continued
the closing, relocation, expansion or conversion of approximately 17 stores.
These charges consisted primarily of unrecoverable lease costs (including
buyouts of remaining lease terms) and the remaining book value of leasehold
improvements and store fixtures for stores that have closed. Also during the
thirty-nine weeks ended October 28, 1995, the Company reversed $1,231,000 of
this reserve for costs relating to stores that were closed under negotiated
lease settlement terms that were more favorable than originally anticipated and
for changes in planned closing dates for other stores.
In the year ended January 29, 1994, the Company determined that seven
of the smaller Super Crown Books stores (typically 6,000 - 10,000 square feet)
opened in prior years were no longer competitive in the current market
environment and in light of the industry's movement to larger stores.
Accordingly, the Company recorded an additional restructuring charge of
$6,200,000 in the year ended January 29, 1994, representing the anticipated
costs (unrecoverable lease costs and the remaining book value of leasehold
improvements and store fixtures subsequent to management's estimate of the
stores' closing dates) associated with closing, relocating and converting these
stores to the new, larger prototype. During the thirty-nine weeks ended
October 28, 1995, the Company charged $33,000 against this reserve in
connection with the closing and relocation of one store to the larger
prototype. Also during this period, the Company concluded that one store
originally scheduled for closure will no longer be closed and reversed
approximately $566,000 of the restructuring reserve. The Company presently
expects to complete the restructuring related to the five remaining stores
during the next 12 months.
The activity in restructuring reserve during the thirty-nine weeks
ending October 28, 1995 is summarized as follows:
<TABLE>
<S> <C>
Restructuring Reserve as of January 28, 1995 $10,515,000
Less: Costs charged against reserve (1,003,000)
Reversal of reserve (1,797,000)
-----------
Restructuring reserve as of October 28, 1995 $ 7,715,000
===========
</TABLE>
A comprehensive review of the Company was begun by its new Chief
Operating Officer and interim Chief Financial Officer shortly after their
appointments in October of 1994. That review, which continued into February of
1995, identified opportunities to improve the Company's profitability,
organization, staffing, computer systems, and operating controls. The initial
review found that the Company still had a majority of its stores in the
original Classic Crown Books stores format and concluded that many of these
Classic Crown Books stores were not generating, and were not expected to
generate, a return on
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources, Continued
investment sufficient to justify their continued operation and that the
Company's competitors had moved to a much larger format. The Company
determined to act aggressively to implement the larger Super Crown format begun
as part of its earlier restructuring and close approximately 150 of these small
and under-performing stores over the succeeding 36 months. As a result, the
Company recorded a closed store reserve of $18.9 million for the costs to be
incurred in these closings in fiscal 1995. At October 28, 1995, 66 of these
stores have been closed and the remaining stores are expected to close over the
next 24 months.
During the thirty-nine weeks ended October 28, 1995, the Company charged
certain costs for closed stores relating to unrecoverable lease costs and
leasehold improvements against the closed store reserve. The Company reversed
approximately $2,000,000 of the reserve for a store that will no longer be
closed in Houston, Texas, pursuant to a Board of Directors August 10, 1995
decision to remain in the Houston market and due to improving operating
performance of that store. An additional $2,107,000 of the reserve was
reversed for costs relating to other stores that were closed under negotiated
lease settlement terms that were more favorable than originally anticipated and
changes in planned closing dates for other stores.
The activity in the closed store reserve during the thirty-nine weeks
ending October 28, 1995 is summarized as follows:
<TABLE>
<S> <C>
Closed store reserve as of January 28, 1995 $20,241,000
Less: Cost charged against the reserve (1,953,000)
Reversal of reserve for closed stores (4,107,000)
-----------
Closed store reserve as of October 28, 1995 $14,181,000
===========
</TABLE>
The Company will continue to evaluate the performance and future
viability of its remaining stores and may close additional stores in the
future. No reserves for these stores have been recorded. The closings of
these small and underperforming stores may, where appropriate, be coordinated
with the opening of Super Crown Books stores in those markets where the Company
plans to maintain or expand its presence. A commitment has been made to
accelerate the opening of stores in the Super Crown Books format.
At October 29, 1994, the Company planned opening 28 new Super Crown
Books store over the next twelve months. At October 28, 1995 the Company had
opened eleven Super Crown Books stores since October 29, 1994 and subsequent to
October 28, 1995 opened eight additional Super Crown Books stores. Management
plans the opening of an additional 30 Super Crown Books stores varying in size
from 12,000 to 18,000 square feet over the next twelve months. These stores
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources, Continued
will total approximately 450,000 square feet of new space.
The review discussed above also identified the need for changes in
officers and key employees to address the other opportunities identified for
improving the Company's performance. In this regard, the Company has recruited
and hired senior management to address particular issues identified, including
a senior management information systems specialist; a senior loss prevention
specialist; a senior human resource specialist; a chief financial officer; a
senior merchandiser; and two senior regional operations managers. Recruiting
of other key personnel is underway including: a senior operations manager;
additional management information specialists; and experienced district and
sales managers at several levels.
Finally, as a result of the review discussed above, an increased focus
on enhancing store profitability through efforts to re-engineer operating
processes, procedures and further improve information system capabilities was
initiated. The Company believes that opportunities exist to enhance store
operating performance through the use of updated methodologies and technology.
The Company anticipates that the efforts relating to improved personnel
in strategic areas and local store management will continue and will have a
positive impact on the Company's results of operations in the future.
The Company believes that its current liquid assets are sufficient to
fund its program of store closings, restructuring and expansion. Super Crown
Books stores have generated increased sales at converted locations as well as
increased gross margins as a result of the change in product mix. The Company
believes that by leasing large stores it can obtain more favorable rates and
that as the stores mature, operating expense as a percentage of sales, will
decrease.
The liquid assets maintained by the Company are intended to fund the
expansion of the Company's retail business through the opening of stores in new
markets, converting Classic Crown Books stores to Super Crown Books stores and
the opening of additional stores in existing markets, and to fund other
corporate activities.
Crown Books' Board of Directors has authorized the repurchase of up to
500,000 shares of its outstanding common stock. The Company has repurchased in
open market transactions 223,638 shares of its common stock as of October 28,
1995. The last repurchase of such shares was in April 1990. The Company may
purchase additional shares in the future if market conditions are favorable.
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Sales of $185,161,000 for the thirty-nine weeks ended October 28, 1995
decreased by $21,034,000 or 10.2% over the same period one year ago while sales
of $60,250,000 for the thirteen weeks ended October 28, 1995 decreased by
$8,124,000 or 11.9% over the same period one year ago. The decreases were
primarily the result of closing 67 stores since January 1, 1995. Comparable
sales (sales for stores open for fifteen months) decreased 4.3% and 3.7% during
the thirty-nine weeks and thirteen week periods. Sales for Super Crown Books
stores represented 64.1% and 53.6% of total sales for the thirty-nine weeks
ended October 28, 1995 and October 29, 1994, respectively and 66.9% and 55.3%
of total sales for the thirteen weeks ended October 28, 1995 and October 29,
1994, respectively. Super Crown Books stores sales of $118,694,000 and
$40,331,000 for thirty-nine weeks and thirteen weeks ended October 28, 1995,
respectively, increased 7.3% and 6.6% over the same periods in the prior year.
Sales for comparable Super Crown Books stores decreased 2.4% and 1.9% for the
thirty-nine and thirteen weeks ended October 28, 1995, respectively. Classic
Crown Books stores' sales of $66,467,000 and $19,919,000 for the thirty-nine
weeks and thirteen weeks ended October 28, 1995, respectively, decreased 30.5%
and 34.8% from the same periods in the prior year and sales for comparable
classic Crown Books stores decreased 7.0% and 6.7% during the thirty-nine and
thirteen weeks ended October 28, 1995.
During the thirty-nine weeks ended October 28, 1995, the Company closed
29 Classic Crown Books stores and one Super Crown Books store. At October 28,
1995, the Company had 173 stores, including 76 Super Crown Books stores.
Subsequent to October 28, 1995, the Company closed three additional classic
stores and opened eight Super Crown Books stores.
Interest and other income increased by $655,000 and $271,000 during the
thirty-nine and thirteen weeks ended October 28, 1995, respectively, when
compared to the same periods one year ago. The increases were primarily due to
higher interest rates on the Company's short-term investments.
Cost of sales, store occupancy and warehousing as a percentage of sales
were 83.3% and 83.7% for the thirty-nine weeks and thirteen weeks ended October
28, 1995 compared to 82.9% and 83.6% for the same periods last year,
respectively. The increases are primarily due to store occupancy costs
associated with the Super Crown Books format and were partially offset by
increased store margins as a result of a favorable change in the sales mix as
well as improved controls over store shrink and purchasing.
Selling and administrative expenses as a percentage of sales were 19.0%
and 20.1% for the thirty-nine weeks and thirteen weeks ended October 28, 1995
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations, Continued
compared to 24.0% and 42.1% for the same periods last year. The decreases were
due primarily to the prior year accruals for Robert M. Haft's judgement and
legal costs. Excluding these accruals, selling and administrative expenses as
a percentage of sales were 15.5% and 16.4% during the thirty-nine and thirteen
weeks ended October 29, 1995. The increased selling and administrative
expenses, excluding the accruals, were primarily due to increased payroll and
advertising costs and continuing costs associated with Crown Books' Executive
Committee.
Depreciation expense increased $225,000 for the thirty-nine weeks ended
October 28, 1995 compared to the same period one year ago. The increase was
primarily due to increased fixed assets for new Super Crown Books stores, an
upgrade to the point-of-sale register system and additional computer hardware
at the distribution centers.
Interest expense increased by $668,000 due to interest accrued for the
Robert M. Haft judgment.
During the thirty-nine weeks and thirteen weeks ended October 28, 1995,
the Company reversed approximately $4,107,000 and $998,000 of its closed store
reserve. In addition, the Company reversed $1,797,000 and $1,231,000 of its
restructure reserves during the thirty-nine weeks and thirteen weeks ended
October 28, 1995 (see Liquidity and Capital Resources).
The Company recorded a tax benefit of $1,022,000 for the thirty-nine
weeks ended October 28, 1995, as compared to a tax benefit of $11,734,000 for
the same period one year ago. The Company recorded a $2,500,000, valuation
allowance in fiscal year 1995 due to the uncertainty relating to the timing of
the reversal of certain of taxable temporary differences during periods when
the Company has taxable income.
The Company is required to adopt the Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan.
Implementation of the standard is not expected to have a significant impact on
the financial statements.
The Company is also required to adopt SFAS No. 121, Accounting for Long
Lived Assets, no later than its fiscal year ending February 1, 1997. The
Company has not determined the impact of this recently issued accounting
standard on the Company's consolidated financial statements.
The Company is also required to adopt Statement of Financial Accounting
Standard No. 123, Accounting for Stock Based Compensation, no later than its
16
<PAGE> 17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
fiscal year ending February 1, 1997. Implementation of this standard is not
expected to have a significant impact on the financial statements.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Material legal proceedings pending against Crown Books, its parent or
its subsidiaries are described (i) in Crown Books' Annual Report on Form 10-K
for the year ended January 28, 1995 (the "Annual Report"), (ii) in Crown Books'
Quarterly Report on Form 10-Q for the quarter ended July 29, 1995 (the "Second
Quarter 10-Q"), and (iii) with respect to material developments in such earlier
reported legal proceedings and any new material legal proceedings, below.
Robert M. Haft Employment Litigation
As discussed in more detail in the Annual Report, on September 20, 1994,
a jury in the case captioned Robert M. Haft v. Dart Group Corporation, et al.
(D. Del., Civ. A. No. 93-384-SLR) found that Dart and Crown Books had breached
their respective employment contracts with Robert M. Haft and awarded him
damages against Dart and Crown Books.
In October 1995, the U.S. District Court for the District of Delaware
denied the motion of Dart and Crown Books for a new trial and/or reduction of
damages. On October 16, 1995, Dart, Crown Books and Trak Auto filed a notice
of appeal with the U.S. Court of Appeals for the Third Circuit.
Derivative Litigation
As discussed in more detail in the Annual Report, in September 1993,
Alan R. Kahn and the Tudor Trust, shareholders of Dart, filed a lawsuit in the
case captioned Alan R. Kahn, et al. v. Herbert Haft, et al. (Del. Ch., Civ. A.
No. 13154), naming as defendants Herbert H. Haft, Ronald S. Haft, Douglas M.
Bregman, Bonita A. Wilson, Combined Properties, Inc., Combined Properties
Limited Partnership and Capital Resources Limited Partnership. This suit was
brought derivatively and names as nominal defendants Dart, Trak Auto, Crown
Books and certain other subsidiaries of Dart. The complaint, as amended,
alleges waste, breach of fiduciary duty, violation of securities laws and
entrenchment.
In connection with a settlement of certain litigation reached between
Dart and Ronald S. Haft, on October 11, 1995, the plaintiff shareholders,
Ronald S. Haft, Combined Properties, Inc., Dart, Trak Auto and Crown Books
entered into a Stipulation and Agreement of Compromise, Settlement and Release
(the "Stipulation"). Pursuant to the Stipulation, the claims against Ronald S.
Haft and Combined Properties, Inc. will be dismissed on the merits and with
prejudice as against the shareholder plaintiffs and Dart and its subsidiaries,
provided, however, that the Settlement and dismissal of these claims are
approved by the Delaware Court of Chancery.
18
<PAGE> 19
PART II - OTHER INFORMATION, (Continued)
Item 1. Legal Proceedings, (Continued)
Ronald S. Haft Stock Options
As discussed in more detail in the Annual Report, on September 12, 1994,
Ronald S. Haft filed a lawsuit against Dart (Ronald S. Haft v. Dart Group
Corporation, Del. Ch., Civ. A. No. 13736) in the Delaware Court of Chancery for
New Castle County seeking a court order that Dart issue certain shares of Dart
Class B Common Stock to him and grant him a loan in connection with his
exercise of a stock option. In connection with this proceeding, on September
14, 1994, a Standstill Agreement (the "Standstill Agreement") agreed to on
behalf of Dart and Ronald S. Haft was ordered by the Delaware Court of
Chancery. The Standstill Agreement restricted certain actions of Dart until
further order of the court.
In connection with the Settlement, on October 6, 1995, Ronald S. Haft,
Dart and the Kahn derivative plaintiffs stipulated to the dismissal without
prejudice of this lawsuit. In filing such stipulation with the court, the
parties recognized that the dismissal of this lawsuit would result in the
termination of the Standstill Agreement.
Herbert H. Haft's Proxy
As discussed in more detail in the Second Quarter 10-Q, on July 18,
1995, Ronald S. Haft filed a lawsuit against Herbert H. Haft and, nominally,
Dart, in the Delaware Court of Chancery for New Castle County (Ronald S. Haft
v. Herbert H. Haft, et al., Del. Ch., Civ. A. No. 14425) seeking, among other
things, a declaration that a proxy granted in July 1993 to Herbert H. Haft by
Ronald S. Haft to vote 172,730 shares of Dart Class B Common Stock is
revocable.
On November 14, 1995, the court denied a motion filed by Ronald S. Haft
for summary judgment in this lawsuit.
Challenge to Settlement by Robert, Gloria and Linda Haft
On October 17, 1995, Robert M. Haft, Gloria G. Haft and Linda G. Haft
(collectively, "RGL") filed a lawsuit captioned Gloria G. Haft, et al. v. Larry
G. Schafran, et al., Del. Ch., Civ. A. No. 14620, in the Delaware Court of
Chancery for New Castle County naming as defendants Dart and all of its
directors. RGL seek (i) to remove all of the directors of Dart and replace
19
<PAGE> 20
PART II - OTHER INFORMATION (Continued)
Item 1. Legal Proceedings, (Continued)
them with three individuals (John L. Mason, Ellen V. Sigal and Michael Ryan),
whom RGL purport to have elected and (ii) a ruling by the court that the shares
of Dart Class B Common Stock placed in a voting trust (the "Trust Shares") by
Ronald S. Haft pursuant to the Settlement are "treasury shares" owned by Dart
and, consequently, are not entitled to vote under Delaware corporate law.
Dart's position is that this lawsuit is without merit and that the
purported action by RGL to reconstitute the Board of Directors is invalid.
Challenge to Settlement by Herbert H. Haft
On November 6, 1995, Herbert H. Haft filed a lawsuit captioned Herbert
H. Haft v. Dart Group Corporation, et al., Del. Ch., Civ. A. No. 14685, in the
Delaware Court of Chancery for New Castle County naming as defendants Dart, all
of its directors except Herbert H. Haft, RGL, John L. Mason, Ellen V. Sigal and
Michael Ryan. Herbert H. Haft seeks a judgment (i) declaring the Settlement
unlawful, hence null and void; (ii) declaring either that 172,730 shares of
Dart Class B Common Stock belong to him, were wrongfully sold by Ronald S. Haft
to Dart, and that Herbert H. Haft is entitled to restitution of such shares or,
alternatively, that his purportedly irrevocable proxy on the 172,730 shares
continues to be valid; (iii) declaring that Herbert H. Haft retains voting
control of Dart or, at a minimum, 34.55% of Dart's voting power; (iv) declaring
that the Trust Shares may not be lawfully voted; and (v) declaring that
defendants John L. Mason, Ellen V. Sigal and Michael Ryan are not duly elected
directors of Dart.
Dart's position is that this lawsuit, except for the declaration sought
that defendants John L. Mason, Ellen V. Sigal and Michael Ryan are not duly
elected directors of Dart, is without merit.
Standstill Order
In connection with the Kahn lawsuit and the legal challenges to the
Settlement raised by RGL and Herbert H. Haft, on December 6, 1995, the Delaware
Court of Chancery entered a Standstill Order (the "Standstill Order"), which
restricts certain actions by Dart until further order of the court. The
Standstill Order is incorporated herein by reference and attached hereto as
Exhibit 99.1.
20
<PAGE> 21
PART II - OTHER INFORMATION (Continued)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit
Number Document
------ --------
27 Financial Data Schedule
99.1 Standstill Order, dated
December 6, 1995
(b) Reports on Form 8-K
-------------------
Crown Books has filed one Current Report on Form 8-K during the quarter
ended October 28, 1995.
1. Crown Books Corporation filed a Current Report on Form
8-K on October 10, 1995, reporting under Item 1
(Changes in Control of Registrant) and Item 5 (Other
Events) a settlement with Ronald S. Haft.
Crown Books has filed one Form 8-K subsequent to the quarter ended
October 28, 1995.
1. Crown Books Corporation filed a Current Report on Form
8-K reporting under Item 1 (Changes in Control of Registrant)
and Item 5 (Other Events) a lawsuit filed on October 17, 1995
against Dart and its directors by Gloria G. Haft, Robert M.
Haft and Linda G. Haft
21
<PAGE> 22
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.
CROWN BOOKS CORPORATION
Date December 12, 1995 By E. STEVE STEVENS
---------------------- -----------------------------
E. STEVE STEVENS
Senior Executive Vice President
and Chief Operating Officer
Date December 12, 1995 ROBERT A. MARMON
---------------------- ------------------------------
ROBERT A. MARMON
Principal Financial Officer
22
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-START> JAN-29-1995
<PERIOD-END> OCT-28-1995
<CASH> 25,710
<SECURITIES> 22,604
<RECEIVABLES> 2,985
<ALLOWANCES> 0
<INVENTORY> 123,993
<CURRENT-ASSETS> 186,885
<PP&E> 48,101
<DEPRECIATION> 24,364
<TOTAL-ASSETS> 218,055
<CURRENT-LIABILITIES> 118,515
<BONDS> 1,627
<COMMON> 56
0
0
<OTHER-SE> 82,897
<TOTAL-LIABILITY-AND-EQUITY> 218,055
<SALES> 185,161
<TOTAL-REVENUES> 187,322
<CGS> 154,309
<TOTAL-COSTS> 154,309
<OTHER-EXPENSES> 38,185
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 896
<INCOME-PRETAX> (1,167)
<INCOME-TAX> (363)
<INCOME-CONTINUING> (804)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (804)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
<PAGE> 1
Exhibit 99.1
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
GLORIA G. HAFT, ROBERT M. HAFT, )
AND LINDA G. HAFT, )
)
Petitioners, )
v. ) Civil Action No. 14620
)
LARRY G. SCHAFRAN, BONITA WILSON, )
DOUGLAS BREGMAN, RONALD S. HAFT, )
HERBERT H. HAFT, and DART GROUP )
CORPORATION, )
)
Respondents. )
)
- ------------------------------------------------- )
HERBERT H. HAFT, )
)
Plaintiff, )
)
v. ) Civil Action No. 14685
)
DART GROUP CORPORATION, )
RONALD S. HAFT, LARRY G. )
SCHAFRAN, DOUGLAS M. )
BREGMAN, BONITA A. WILSON, )
ROBERT M. HAFT, GLORIA G. HAFT, )
LINDA G. HAFT, JOHN L. MASON )
ELLEN V. SIGAL, and MICHAEL RYAN. )
)
Defendants. )
STANDSTILL ORDER
Upon consideration of the application by the parties to the
above-captioned cases.
It is this 6th day of December 1995, hereby ORDERED as follows:
1. Until further order of the Delaware Court of Chancery, Dart
Group Corporation ("Dart") will not recognize any stockholder action seeking to
23
<PAGE> 2
change its Certificate of Incorporation or By-Laws;
2. Until further order of the Delaware Court of Chancery, Dart will
not recognize any stockholder action seeking to change the composition of the
incumbent Board of Directors of Dart, consisting of Herbert H. Haft, Ronald S.
Haft, Larry G. Schafran, Bonita A. Wilson and Douglas Bregman, or any of its
subsidiaries;
3. Until further order of the Delaware Court of Chancery, Dart will
not recognize any stockholder action seeking to change the current Haft family
officers of Dart or any of its subsidiaries;
4. Until further order of the Delaware Court of Chancery, Dart will
not change its Certificate of Incorporation or By-Laws;
5. Until further order of the Delaware court of Chancery, Dart will
not change the composition of the incumbent Board of Directors of Dart, as
defined above, or any of its subsidiaries;
6. Until further order of the Delaware Court of Chancery, Dart will
not change the current Haft family officers of Dart or any of its subsidiaries;
7. Until further order of the Delaware Court of Chancery, or the
United States District Court for the District of Delaware in the litigation
pending in that Court for the District of Delaware in the litigation pending in
that Court instituted by Robert M. Haft against Dart and its subsidiaries
arising out of alleged stock options granted to Robert Haft, Dart will not
issue any additional securities in Dart or any of its subsidiaries, except
employee stock options issued or to be issued in the ordinary course of
business (including stock options issued to new employees) and securities
issued pursuant to the exercise of stock options issued to officers and other
employees;
8. Until further order of the Delaware Court of Chancery, Dart,
without first giving the other parties hereto not less than seven (7) days
written notice, will not take any extraordinary actions, including but not
limited to actions that will: (a) liquidate Dart or any of its subsidiaries;
(b) sell any major subsidiary of Dart; or (c) through any debt transaction
disadvantage any Class B stockholder. This paragraph shall not be construed to
affect Dart's ability to take any legal position its (sic) chooses in the
above-captioned cases; to run the businesses of Dart's subsidiaries on a
day-to-day basis in the ordinary course of business consistent with past
practice; or further implement the Settlement Agreement identified below except
as provided in paragraph 9 hereof. For purposes of this Order, "extraordinary
actions" shall mean any transaction, contract or agreement, the value of which
exceeds $3 million;
9. Paragraph 8 shall not preclude Dart or Ronald S. Haft from
24
<PAGE> 3
implementing the Settlement Agreement dated October 6, 1995 between Dart and
Ronald S. Haft (the "Settlement Agreement"), provided however, that nothing
contained in this Order shall be construed to limit the ability of any party to
object or otherwise challenge judicial approval of the Settlement Agreement or
to limit the rights of any party to bring an action for liabilities arising out
of the Settlement Agreement or its implementation;
10. Until further order of the Delaware Court of Chancery, Dart and
Ronald S. Haft shall not transfer the Eleven Million, Six Hundred Twenty-One
Thousand, Two Hundred Seventy-Six Dollars ($11,621,276) that has been deposited
into a separate account of Settlementcorp at Riggs National Bank and which is
subject to a certain Escrow Agreement pursuant to Article 1.1(i) of Settlement
Agreement dated October 6, 1995, between Dart and Ronald S. Haft. Consent to
the entry of this Order does not constitute the entry of an appearance by any
party in any action in which such party has not previously appeared, and is not
a basis for the assertion of in personam jurisdiction with respect to any party
otherwise subject to in personam jurisdiction;
11. This Standstill Order shall continue in effect until further
order of the Delaware Court of Chancery; and
12. The Delaware Court of Chancery shall retain jurisdiction to make
such modifications, amendments, or additions to this Standstill Order as may be
necessary or appropriate upon application of any interest party and for good
cause shown.
SO ORDERED this 6th day of December 1995.
/s/ WILLIAM T. ALLEN
--------------------
Chancellor
25
