<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED November 1, 1997.
----------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
----------
-----------
Commission file number 0-11457
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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) 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 December 15, 1997, the registrant had 5,288,973 shares of Common Stock, $.01
par value per share, outstanding.
1
<PAGE> 2
PART I
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' annual report on Form 10-K for the fiscal year ended
February 1, 1997.
2
<PAGE> 3
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Thirty-nine
Weeks Ended Weeks Ended
----------------------- -----------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Sales $ 65,676 $ 63,281 $199,237 $192,306
Interest and other income 10 39 194 884
-------- -------- -------- --------
65,686 63,320 199,431 193,190
-------- -------- -------- --------
Expenses:
Cost of sales, store
occupancy and
warehousing 59,046 52,609 170,587 158,355
Selling and administrative 18,424 13,601 47,319 39,692
Depreciation and
amortization 1,572 1,422 4,894 4,265
Interest expense 451 201 1,150 892
Closed store reversal - (1,052) - (1,052)
Restructuring reversal - (3,865) - (3,865)
-------- -------- -------- --------
79,493 62,916 223,950 198,287
-------- -------- -------- --------
Income (loss) before income
taxes (13,807) 404 (24,519) (5,097)
Income taxes (benefits) (5,167) 294 (9,042) (1,880)
Valuation allowance for
deferred tax assets 16,997 - 16,997 -
-------- -------- -------- --------
Net income (loss) $(25,637) $ 110 $(32,474) $ (3,217)
======== ======== ======== ========
Weighted average common
shares outstanding 5,289 5,309 5,289 5,362
======== ======== ======== ========
Net income(loss)per share $ (4.85) $ .02 $ (6.14) $ (.60)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
November 1, February 1,
ASSETS 1997 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash $ 3,708 $ 3,377
Short-term instruments 7 12,674
Accounts receivable 3,706 7,962
Income taxes refundable 584 3,802
Merchandise inventories 122,966 110,036
Deferred income tax benefit - 830
Other current assets 3,732 2,902
-------- --------
Total Current Assets 134,703 141,583
-------- --------
Property and Equipment, at cost:
Furniture, fixtures and equipment 41,412 36,033
Leasehold improvements 15,982 16,122
Property under capital leases 1,187 1,187
-------- --------
58,581 53,342
Accumulated Depreciation and Amortization 30,025 27,963
-------- --------
28,556 25,379
-------- --------
Deferred Income Taxes - 8,404
-------- --------
Other Assets 620 1,531
-------- --------
Total Assets $163,879 $176,897
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
November 1, February 1,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1997
----------- -----------
<S> <C> <C>
Current Liabilities:
Accounts payable, trade $ 57,737 $ 54,787
Accrued expenses
Salaries and benefits 3,675 3,290
Taxes other than income 3,561 4,011
Other 19,507 18,916
Current portion of reserve for closed
stores and restructuring 3,298 3,298
Due to affiliate 78 213
-------- --------
Total Current Liabilities 87,856 84,515
-------- --------
Revolving Credit Facility 17,167 -
-------- --------
Obligations Under Capital Lease 1,719 1,684
-------- --------
Reserve for Closed Stores
and Restructuring 5,156 6,243
-------- --------
Total Liabilities 111,898 92,442
-------- --------
Commitments and Contingencies
Stockholders' Equity:
Common stock, par value $.01 per share;
20,000,000 shares authorized,
5,612,611 shares issued 56 56
Paid-in capital 43,809 43,809
Retained earnings 13,567 46,041
Treasury stock, 323,638 shares of
common stock, at cost (5,451) (5,451)
-------- --------
Total Stockholders' Equity 51,981 84,455
-------- --------
Total Liabilities and Stockholders' Equity $163,879 $176,897
======== ========
</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
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine
Weeks Ended
-----------------------
November 1, November 2,
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(32,474) $ (3,217)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 4,894 4,265
Reversal of closed stores and restructuring
charges - (4,917)
Valuation allowance for deferred tax assets 16,997 -
Interest in excess of capital lease payments 35 -
Loss on disposal of fixed assets 935 -
Changes in assets and liabilities:
Accounts receivable 4,256 (83)
Merchandise inventories (12,930) (36,671)
Prepaid and refundable income taxes 3,218 (6,937)
Other current assets (830) (2,138)
Accounts payable, trade 2,950 26,107
Accrued expenses 526 3,893
Payment to Robert M. Haft - (14,749)
Due to affiliate (135) (374)
Deferred income taxes (7,763) 4,993
Income taxes payable - -
Other assets (289) (1,016)
Reserve for closed stores (885) (2,147)
------- --------
Net cash used in operating activities $(21,495) $(32,991)
-------- --------
Cash Flows from Investing Activities:
Capital expenditures $ (8,008) $ (5,598)
Maturities of United States Treasury Bills - -
Maturities of municipal securities - 550
Sales of municipal securities - 3,611
-------- --------
Net cash used in investing activities $ (8,008) $ (1,437)
-------- --------
Cash Flows from Financing Activities:
Net borrowing under revolving credit facility $ 17,167 $ 9,368
Payment to Robert M. Haft for treasury shares - (2,146)
-------- --------
Net cash provided by financing activities $ 17,167 $ 7,222
-------- --------
Net Decrease in Cash and Equivalents $(12,336) $(27,206)
Cash and Equivalents at Beginning of Year 16,051 30,765
-------- --------
Cash and Equivalents at End of Period $ 3,715 $ 3,559
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,150 $ 892
Income taxes(refund) ( 4,500) -
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 1, 1997 and November 2, 1996
(Unaudited)
NOTE 1 - GENERAL
The accompanying consolidated financial statements reflect the accounts of
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 discount
specialty retail book stores in the United States. The stores offer books,
newspapers, magazines and related accessories. The unaudited statements as of
November 1, 1997 and November 2, 1996 reflect, in the opinion of management,
all adjustments (normal and recurring in nature) necessary to present fairly
the consolidated financial position as of November 1, 1997 and November 2, 1996
and the results of operations and cash flows for the periods indicated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from
those estimates.
The results of operations for the 13 weeks ended November 1, 1997 are not
necessarily indicative of the results of operations to be achieved for the full
fiscal year.
NOTE 2 - EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares of
common stock. Common stock equivalents are antidilutive for all periods
presented. The difference between primary earnings per common share and fully
diluted earnings per common share was not significant for the periods
presented.
NOTE 3 - INTERIM INVENTORY ESTIMATES
The Company's inventories are priced at the 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
annually. The Company uses a gross profit method to determine inventories for
quarters when complete physical counts are not taken. The Company did not take
a physical inventory for the quarter ended November 1, 1997.
7
<PAGE> 8
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 1, 1997 and November 2, 1996
(Unaudited)
NOTE 4 - INCOME TAXES
During the 13 weeks ended November 1, 1997, the Company concluded that it was
more likely than not that the Company would not realize deferred income tax
benefits of approximately $17.0 million as a result of ongoing net operating
losses. Accordingly, the Company increased its valuation allowance for
deferred tax assets from $2.5 million to $19.5 million. The Company will
continue to evaluate the need for the valuation allowance for deferred tax
assets.
NOTE 5 - CREDIT AGREEMENT
On September 12, 1996, the Company entered into a revolving credit facility
with a finance company to borrow up to $50.0 million. While the Company's
tangible net worth is less than $70.0 million, the Company is limited to
borrowing a maximum of $25.0 million under the current terms of the revolving
credit facility. As of November 1, 1997 the Company's tangible net worth was
less than $52.0 million. As of November 2, 1996, outstanding borrowings were
$9,368,000 which were paid-off as of January 1, 1997. The outstanding balance
as of November 1, 1997 was $17,167,000 and the maximum borrowings outstanding
at any one time during the 39 weeks ended November 1, 1997 were $22,148,000.
The average borrowings and weighted average interest rate for the 39 weeks
ended November 1, 1997 were $10,791,000 and 8.5%. The Company intends to use
proceeds from draw-downs under the credit facility for working capital and
other corporate purposes. The credit facility has an original term of three
years. Borrowings under the credit facility include revolving loans and letters
of credit which bear interest at a rate equal to the prime rate (as defined in
the credit agreement) and LIBOR loans which bear interest at LIBOR plus 2.25%.
Interest on prime rate borrowings is payable monthly. Interest and principal
on LIBOR loans is payable between one and six months from the borrowing date.
LIBOR loans are subject to a prepayment penalty and may be continued for
subsequent one to six month periods. LIBOR loans may be converted to prime
rate loans and vice versa. The agreement 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.
Borrowings under the credit facility are secured by the Company's inventory,
accounts receivable and proceeds from the sale of such assets of the Company.
The credit facility also contains certain restrictive covenants, including a
limitation on the incurrence of additional indebtedness and places a $13.1
million limitation on payments to settle disputes with Haft family members.
There are additional covenants related to tangible net worth. Loans under the
credit facility are subject to limitations based upon eligible inventory
levels, as defined in the agreement. The Company may terminate the credit
facility upon 60-days prior written notice to the lender and the lender may
terminate it as of September 12, 1999 or on any anniversary date thereafter
upon 60-days prior written notice to the Company. The Company had $7.8 million
available for borrowing at November 1, 1997.
8
<PAGE> 9
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 1, 1997 and November 2, 1996
(Unaudited)
The Company may need to increase its borrowing under its revolving credit
facility, though its ability to do so is subject to conditions contained in
the loan agreement that the Company does not meet. To increase
the limit from $25.0 million to $35.0 million, the Company is required to
maintain a minimum tangible net worth of $73.0 million as of the fiscal year
end preceding the election and for each fiscal year end thereafter, and to
maintain a minimum tangible net worth of $70.0 million as of the election date
and thereafter, in addition to other covenants. To increase the limit from
$35.0 million to $50.0 million, the Company is required to maintain a minimum
tangible net worth of $75.0 million as of the fiscal year end preceding the
election and for each fiscal year end thereafter, in addition to other
covenants. The Company has initiated preliminary discussions with its credit
facility lender to request an increase in the credit limit to $50.0 million
without the tangible net worth requirement. However, there can be no assurance
that such an agreement will occur.
NOTE 6 - PROPERTY, EQUIPMENT AND DEPRECIATION
Effective February 2, 1997, the Company changed its accounting policy from
expensing purchased computer software costs in the year of acquisition to
capitalizing and depreciating these costs over the estimated useful life not to
exceed five years. Management has determined that these costs benefit future
periods.
During the 39 weeks ended November 1, 1997, the Company recorded amortization
of purchased computer software costs of approximately $394,000. The effect of
capitalizing purchased computer software was to reduce the Company's loss by
approximately $1,214,000 ($.23 per share) net of income tax benefits.
NOTE 7 - SETTLEMENT OF LITIGATION
Settlement with Robert, Gloria and Linda Haft
On September 26, 1997, the Company and Dart Group Corporation ("Dart"), which
owns 52.3% of the Company's outstanding common stock, closed the transactions
contemplated in an agreement, dated August 16, 1997, to settle certain
litigation and enter other related transactions (the "RGL Settlement") with
Robert M. Haft, Gloria G. Haft, Linda G. Haft and certain related parties
(collectively, "RGL").
The transactions completed by the closing of the RGL Settlement include: the
purchase by Dart from RGL (or related parties) of 104,976 shares of Dart Class
B Common Stock and 77,244 shares of Dart Class A Common Stock; the termination
of options held or claimed by RGL to purchase shares of Dart Class A Common
Stock; the termination of putative options to purchase 15 shares of Dart/SFW
Corp., and the termination of a small number of options to purchase shares of
common stock of the Company and Trak Auto Corporation ("Trak Auto"), an
affiliate of Dart. Dart paid RGL a total of approximately
9
<PAGE> 10
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 1, 1997 and November 2, 1996
(Unaudited)
$41.0 million in connection with these transactions. In addition, Dart acquired
all of Robert M. Haft and Linda G. Haft's respective interest in partnerships
owning Dart's headquarters building in Landover, Maryland and a warehouse
leased by Trak Auto, in Bridgeview, Illinois for $4.4 million.
The closing of the RGL Settlement, resulted in the termination of the pending
claim by RGL to control of Dart and the settlement of all litigation between
them and Dart and its subsidiaries.
Pursuant to the RGL Settlement, the Company dismissed all of its claims against
each of RGL. In addition, approximately $45,000 of the cost of these
transactions has been allocated to the Company.
Settlements with Herbert H. Haft and Ronald S. Haft
On October 16, 1997, Dart announced settlements (the "Settlements") with
Herbert H. Haft and Ronald S. Haft pursuant to a settlement agreement with
Herbert H. Haft (the "HHH Settlement Agreement"), a First Supplemental
Settlement Agreement with Ronald S. Haft (the "First Supplemental Agreement")
and a Second Supplemental Settlement Agreement with Ronald S. Haft (the "Second
Supplemental Agreement"). The Settlements were subsequently approved by the
Delaware Court of Chancery on November 24, 1997.
The transactions contemplated in the HHH Settlement Agreement include: the
purchase by Dart from Herbert H. Haft of all his shares of, and options to
purchase, Dart Class A Common Stock; that Herbert H. Haft will resign from all
of his positions with Dart and its subsidiary corporations; that Herbert H.
Haft will relinquish his claim to voting control of Dart; and that Herbert H.
Haft will terminate his employment contract with Dart. In addition, all
outstanding litigation and disputes between Dart and Herbert H. Haft will be
resolved. As consideration for the Settlements, Dart will pay Herbert H. Haft
approximately $28 million upon closing, including $9.25 million which may be
deferred until June 1, 1998 if the closing occurs before then. Dart will also
make a $10 million loan to a partnership owned by Herbert H. Haft and Ronald S.
Haft, which loan will be personally guaranteed by Ronald S. Haft and will be
secured by the partnership's interest in three shopping centers located in
suburban Washington, D.C. and by a one-half indirect interest in an office
building in Lanham, Maryland leased by a Dart subsidiary. It is anticipated
that Dart would pay substantially all of this amount, though a portion (yet to
be determined) could be allocated to Trak Auto and Crown Books.
The transactions contemplated in the First Supplemental Agreement include:
completion of bankruptcy plans of reorganization for partnerships owning Dart's
headquarters in Landover, Maryland and a warehouse leased to Trak Auto in
Bridgeview, Illinois; payment by Dart of $7 million to reduce outstanding
mortgage loans
10
<PAGE> 11
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 1, 1997 and November 2, 1996
(Unaudited)
on these properties, which will thereafter be wholly-owned by Dart and/or its
affiliates; and Ronald S. Haft will pay $2.2 million to Dart from escrowed funds
previously earmarked for Ronald S. Haft.
On November 19, 1997, the transactions contemplated in the First Supplemental
Agreement were closed.
The closing of the settlement transactions with Herbert H. Haft are expected
to occur in early 1998. There can be no assurance that the closing will occur.
Under the Second Supplemental Agreement, after the closing of the transactions
contemplated in the HHH Settlement Agreement Dart will be entitled to require
that the shares now held in a Voting Trust for the benefit of Ronald S. Haft be
transferred to Dart.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Outlook
Except for historical information, the statements in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking. Actual results may differ materially due to a variety of
factors, including the results of ongoing litigation affecting the Company, the
Company's ability to open new stores and close other stores, the Company's
ability to effectively compete in the retail book store industry, the effect of
national and regional economic conditions, and the availability of capital to
fund operations. The Company undertakes no obligation and does not intend to
update, revise or otherwise publicly release the result of any revisions to
these forward-looking statements that may be made to reflect future events or
circumstances.
During the last three years the Company's business strategy has been to pursue
growth opportunities by opening new Super Crown Books stores. Realizing these
opportunities is dependent upon the successful performance of the superstores
and adequate liquidity. Adequate liquidity is dependent upon successfully
improving store performance, improving inventory turnover and reducing
expenses.
In prior years Super Crown Books stores have generated higher sales at
converted locations as well as higher gross margins as a result of a change in
product mix. During the last four fiscal quarters, the new prototype
superstores have performed below the Company's expectations. The Company is
considering certain revisions to the new superstore prototype that may enhance
its performance. After considering the actual results achieved by the
superstores, together with liquidity constraints, the Company has significantly
reduced its expansion plans. Without a significant improvement in the
performance of all superstores, the Company would not expect operating
expenses, as a percentage of sales, to decrease as the new stores mature.
The Company intends to continue its practice of reviewing the profitability
trends and prospects of existing stores and close or relocate under-performing
stores. The Company closed seven Classic Crown Books stores and four Super
Crown Books stores and relocated one prototype Super Crown Books store during
the 39 weeks ending November 1, 1997. The Company anticipates closing an
additional seven Classic Crown Books stores during the remainder of fiscal
1998.
The retail book market is highly competitive. The two largest book chains
continue to open additional new stores each year in the Company's markets,
thereby continuing to increase the overall level of competition. Management
believes that the markets in which it operates will remain highly competitive
in the foreseeable future and, as a result, the Company will be significantly
challenged to improve operating results.
Dart and Crown Books have had preliminary discussions with certain third
parties concerning the possible sale of Dart's 52.3% interest in Crown Books or
the sale of all Crown Books. There can be no assurance that any such
discussions will occur or continue in the future or will result in any
agreement for any such sale or as to the terms or timing of any such sale, if
one occurs.
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources
Cash, including short-term instruments, has historically been the Company's
primary source of liquidity. However, during the 39 weeks ended November 1,
1997, the Company borrowed under its revolving credit facility. Cash,
including short-term instruments, decreased by approximately $12,336,000 to
$3,715,000 at November 1, 1997 from $16,051,000 at February 1, 1997. The
decrease was primarily due to payments for merchandise inventory, capital
expenditures and funding continued operating losses. These decreases in cash
were offset by borrowings under the Company's revolving credit facility and an
income tax refund.
Operating activities used $21,495,000 of the Company's cash resources for the
39 weeks ended November 1, 1997, compared to $32,991,000 for the same period
one year ago. The cash was used primarily for payments for merchandise
inventory and funding current operating losses.
The Company used $8,008,000 for capital expenditures during the 39 weeks ended
November 1, 1997 compared to capital expenditures of $5,598,000 during the 39
weeks ended November 2, 1996.
Financing activities provided $17,167,000 to the Company during the 39 weeks
ended November 1, 1997 from net borrowings under the credit facility.
The Company's primary working capital and capital requirements relate to new
store openings and investments in management information systems. The Company
believes that the net cash expenditures incurred in opening a new store
generally approximate $800,000, including purchases of inventory, net of
accounts payable, and the costs of store fixtures and leasehold improvements,
net of landlord contributions. As of December 15, 1997, the Company opened 26
Super Crown Books stores and relocated one prototype store during fiscal 1998
requiring cash expenditures of approximately $20.8 million. As of December 15,
1997 the Company entered into lease agreements for four Super Crown Books
stores to be opened in fiscal 1999. In addition the Company expects to have
cash expenditures related to stores that have been closed or will be closed of
approximately $1.2 million in fiscal 1998.
The Company anticipates funding its requirements for working capital and
capital expenditures over the next 12 months with cash generated from
significantly improving its inventory turnover, inventory returns from stores
being closed, income tax refunds and borrowings under its existing revolving
credit facility. The Company had $7.8 million available for borrowing under
its revolving credit facility at November 1, 1997 (see Note 5 to the
Consolidated Financial Statements). As of November 1, 1997, the Company's
tangible net worth was less than $52.0 million. While the Company's tangible
net worth is less than $70.0 million, the Company is limited to borrowing a
maximum of $25.0 million under the current terms of the revolving credit
facility. The Company does not anticipate that its tangible net worth will
meet the requirements to increase its borrowings under the credit facility
above the current $25 million limit. The Company has initiated preliminary
discussions with its credit facility lender to request an increase in its credit
limit to $50.0 million without the tangible net worth requirement. However,
there can be no assurance that such an agreement will occur.
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
As part of its effort to improve its inventory turns and improve liquidity, the
Company is undertaking an inventory returns initiative among other steps.
Under the inventory returns initiative, the Company anticipates returning
approximately $25.0 million of inventory after December 1997, in addition to
its normal seasonal returns. The Company expects to substantially maintain its
title selection throughout the process. If the Company does not successfully
complete the inventory returns initiative described above, and continues to
manage its inventory turnover at this higher rate, the Company may not have
adequate liquidity for working capital and capital expenditures, including new
stores.
Funding of Settlements
Dart and certain of its subsidiaries (including Crown Books) have closed an
agreement to settle certain litigation and other related transactions with
Robert M. Haft, Gloria G. Haft, Linda G. Haft and certain related parties. In
addition to its dismissal of claims against RGL, Crown Books' portion of that
settlement was approximately $45,000.
Dart and certain of its subsidiaries have entered into agreements to settle
certain litigation and certain related transactions with Herbert H. Haft and
Ronald S. Haft. As consideration for the Settlements, Dart will pay Herbert H.
Haft approximately $28 million upon closing, including $9.25 million which may
be deferred until June 1, 1998 if the closing occurs before then. Dart will
also make a $10 million loan to a partnership owned by Herbert H. Haft and
Ronald S. Haft, which loan will be personally guaranteed by Ronald S. Haft and
will be secured by the partnership's interest in three shopping centers located
in suburban Washington, D.C. and by a one-half indirect interest in an office
building in Lanham, Maryland leased by a Dart subsidiary. It is anticipated
that Dart would pay substantially all of this amount, though a portion (yet to
be determined) could be allocated to Trak Auto Corporation ("Trak Auto"), an
affiliate of Dart, and Crown Books. Allocation of any actual settlement
obligations among the companies would be in proportion to reflect relative
benefits each company receives, as determined by their boards of directors
after consultation with outside advisors. Crown Books anticipates that it
would pay its portion of the settlement obligations from borrowings under its
credit facility.
Results of Operations
During the 39 weeks ended November 1, 1997, the Company opened 18 Super Crown
Books stores, relocated one prototype Super Crown Books store and closed seven
Classic Crown Books stores and four Super Crown Books stores. At November 1,
1997, the Company had 174 stores, including 123 Super Crown Books stores.
Sales of $199,237,000 for the 39 weeks ended November 1, 1997 increased by
$6,931,000 or 3.6% compared to the 39 weeks ended November 2, 1996 while sales
of $65,676,000 for the 13 weeks ended November 1, 1997 increased by $2,395,000
or 3.8% compared to the 13 weeks ended November 2, 1996. Comparable sales
(sales for stores open for 13 months) decreased 5.7% and 6.1% during the 39 and
13 weeks, respectively. Sales for Super Crown Books
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
stores of $165,247,000 and $55,250,000 for the 39 and 13 weeks ended November
1, 1997 increased 13.1% and 11.6%, respectively, over the prior year and sales
for comparable Super Crown Books stores decreased 6.3% and 6.6%, respectively.
Comparable sales for the new superstore prototype decreased 6.3% and 7.3% for
the 39 and 13 weeks ended November 1, 1997. The Company's superstores consist
of the original superstores of 6,000 to 10,000 square feet and the new
superstore prototype targeted to occupy 15,000 square feet.
Interest and other income decreased by $690,000 and $29,000 during the 39 and
13 weeks ended November 1, 1997 when compared to the same periods one year ago.
The decreases were primarily due to reduced interest income as a result of the
decrease in funds available for short-term investments.
Cost of sales, store occupancy and warehousing as a percentage of sales were
85.6% and 89.9% for the 39 and 13 weeks ended November 1, 1997 compared to
82.3% and 83.1% for the same periods one year ago. The increases were
primarily due to decreased store margins as a result of increased promotional
discounts, obsolete inventory reserves and increased shrink reserves. The
increases were also due to increased store occupancy costs in new stores and
the effect of the decline in comparable sales on occupancy costs in existing
stores.
Selling and administrative expenses as a percentage of sales were 23.7% and
28.1% for the 39 and 13 weeks ended November 1, 1997 compared to 20.6% and
21.5% for the same periods one year ago. The increases were due primarily to
increased payroll and advertising costs and the ongoing cost of implementing
new management information systems and other consulting fees.
Depreciation and amortization expense increased $629,000 for the 39 weeks ended
November 1, 1997 compared to the same period one year ago primarily due to the
increase in fixed assets for new superstores and to the amortization of
computer software.
Interest expense was $1,150,000 during the 39 weeks ended November 1, 1997
compared to $892,000 during the 39 weeks ended November 2, 1996. Interest
expense during the 39 weeks ended November 1, 1997 was primarily due to
interest on borrowings under the credit facility while interest during the 39
weeks ended November 2, 1996 was primarily due to interest on the Robert M.
Haft judgement which was paid in August 1996.
During the 39 weeks ended November 1, 1997, the Company increased its valuation
allowance for deferred income tax assets by $17.0 million (see Note 4 to the
Consolidated Financial Statements).
Effect of New Financial Accounting Standard
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 Earnings Per Share. SFAS No.
128 replaces the presentation of primary earnings per share, previously
presented by the Company, with basic earnings per share and requires a
reconciliation of the numerator and denominator of basic earnings per share to
fully diluted earnings per share. Fully diluted earnings per share is computed
similarly to the previous requirements. The Company will be required to adopt
SFAS No. 128 in the fourth quarter of fiscal 1998 and to
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
restate all previously presented earnings per share data. The presentation of
the Company's basic earnings per share under SFAS No. 128 is not materially
different than the amounts presented herein as primary earnings per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
Reporting Comprehensive Income. SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company will adopt SFAS No.
130 in the first quarter of fiscal 1999 and will provide the necessary
disclosures.
16
<PAGE> 17
PART II
Item 1. Legal Proceedings
Material legal proceedings pending against Crown Books are described in its
Annual Report on Form 10-K for the year ended February 1, 1997 and, with
respect to material developments in such earlier reported legal proceedings,
see below.
Consummation of Settlement with Robert, Gloria and Linda Haft
On September 26, 1997 Dart Group Corporation ("Dart") closed the transactions
contemplated in the Settlement Agreement dated August 16, 1997 (the "RGL
Settlement Agreement") with Robert, Gloria and Linda Haft. As contemplated in
the RGL Settlement Agreement, Robert Gloria and Linda Haft have terminated
their pending claims to control Dart and all litigation between them and Dart
and its subsidiaries (including Crown Books) has been settled and dismissed.
Settlements with Herbert H. Haft and Ronald S. Haft.
Dart has entered into settlements with Herbert H. Haft and Ronald S. Haft
pursuant to a settlement agreement with Herbert H. Haft (the "HHH Settlement
Agreement"), a First Supplemental Settlement Agreement with Ronald S. Haft (the
"First Supplemental Agreement") and a Second Supplemental Settlement Agreement
with Ronald S. Haft (the "Second Supplemental Agreement"). The Boards of
Directors of Dart, Crown Books and Trak Auto Corporation ("Trak Auto"), a Dart
subsidiary, have approved the settlements.
The closing of the transactions contemplated in the HHH Settlement Agreement
and the Second Supplemental Agreement were conditioned upon a determination by
the Delaware Court of Chancery that all of the terms of those settlements were
fair and reasonable to Dart and its subsidiaries. After notice was provided to
shareholders of Dart, Crown Books and Trak Auto, and a fairness hearing was
held, the Delaware Chancery Court approved the settlements as fair and
reasonable and authorized the dismissal of derivative litigation in which
Herbert H. Haft, Ronald S. Haft and certain Dart directors were defendants. It
is expected that the transactions contemplated in the HHH Settlement Agreement
and the Second Supplemental Settlement Agreement will close in January 1998,
although no assurances can be made that the closing will not be delayed beyond
January, 1998. Upon the closing of those settlements, Herbert H. Haft will (a)
sell to Dart all of his shares of Dart Class A Common Stock, and shares of and
options to purchase stock of Trak Auto and Crown Books, (b) retire from all of
his positions with Dart and its subsidiary corporations, (c) relinquish his
claim to voting control of Dart, (d) terminate his employment agreement with
Dart, and (e) sell to Dart various real estate interests. In addition, all
outstanding litigation and disputes between Dart, Trak Auto and Crown Books and
Herbert H. Haft will be dismissed. As consideration for the settlements, Dart
will pay Herbert H. Haft approximately $28 million upon closing, of which
amount $9.25 million may be deferred until June 1, 1998 if the closing occurs
before then. Dart also will make a secured $10 million loan to a partnership
owned by Herbert H. Haft and Ronald S. Haft and Dart and Herbert H. Haft will
exchange mutual general releases. It is contemplated that Crown Books and Trak
Auto may make a contribution to the settlements, although the amount of such
contributions has not been determined.
17
<PAGE> 18
Item 6.
Exhibits and Reports on Form 8-K
(a) Exhibits
Number Document
27 Financing Data Schedule
(b) Reports on Form 8-K
Subsequent to the quarter ended November
1,1997, Crown Books filed one current Report
on Form 8-K.
1. Crown Books filed a Current Report on
Form 8-K on November 5, 1997 reporting
under Item 5 (Other Events) a change in
the composition of Crown Book's Board
of Directors.
18
<PAGE> 19
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 15, 1997 By: RICHARD B. STONE
---------------------- ------------------------------
RICHARD B. STONE
Chief Executive Officer
Date: December 15, 1997 DONALD J. PILCH
---------------------- ------------------------------
DONALD J. PILCH
Vice President and Chief
Financial Officer
19
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