<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 10, 1996
-----------------
COMMISSION FILE NUMBER 1-5025
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REVCO D.S., INC.
- - --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1527876
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1925 ENTERPRISE PARKWAY, TWINSBURG, OHIO 44087
- - --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(216) 425-9811
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES X NO
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AS OF MARCH 13, 1996, THERE WERE 68,130,577 SHARES OF COMMON STOCK OUTSTANDING.
<PAGE> 2
REVCO D.S., INC.
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INDEX
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<TABLE>
<CAPTION>
Page No.
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
February 10, 1996 and June 3, 1995 3
Condensed Consolidated Statements of Income -
Twelve and Thirty-Six Weeks Ended February 10, 1996
and February 4, 1995 4
Condensed Consolidated Statements of Cash Flows -
Thirty-Six Weeks Ended February 10, 1996
and February 4, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
Signatures
2
<PAGE> 3
REVCO D.S., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
(UNAUDITED)
FEBRUARY 10, JUNE 3,
Assets 1996 1995
------ ------------ -------
<S> <C> <C>
Current assets:
Cash, including temporary cash investments $ 2.3 $ 3.4
Accounts receivable, net 153.5 102.5
Inventories 1,025.7 962.9
Prepaid expenses 22.3 20.2
---------- ----------
Total current assets 1,203.8 1,089.0
Property, equipment and leasehold improvements, net 322.3 278.8
Leasehold interests, net 53.0 58.1
Goodwill, net 370.2 377.0
Reorganization value in excess of amounts
allocable to identifiable assets, net 211.4 241.3
Net deferred tax asset 38.2 38.2
Other assets 62.3 67.4
---------- ----------
$2,261.2 $2,149.8
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Bank debit balances $ 17.5 $ 32.2
Current portion of long-term debt -- 41.6
Accounts payable 368.8 325.4
Accrued liabilities 329.5 290.3
---------- ---------
Total current liabilities 715.8 689.5
Long-term debt 668.9 639.6
Long-term liabilities 46.6 47.6
Stockholders' equity:
Common stock .7 .7
Additional paid-in capital 686.2 674.0
Retained earnings 155.8 111.2
Treasury stock (12.8) (12.8)
----------- ---------
Total stockholders' equity 829.9 773.1
---------- ---------
$2,261.2 $2,149.8
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
REVCO D.S., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
------------------------------- ------------------------------
FEBRUARY 10, FEBRUARY 4, FEBRUARY 10, FEBRUARY 4,
1996 1995 1996 1995
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $1,243.3 $1,133.0 $3,457.0 $2,854.6
Cost of sales 880.1 797.2 2,444.7 2,010.2
Operating expenses 278.0 264.1 810.3 690.6
Depreciation and amortization 24.4 23.1 73.7 61.7
-------- -------- -------- --------
Operating profit 60.8 48.6 128.3 92.1
Interest expense 13.9 14.3 43.6 37.3
Interest income (.2) (.9) (.7) (1.9)
-------- -------- -------- --------
Income before income taxes and extraordinary item 47.1 35.2 85.4 56.7
Income tax provision 22.4 17.5 40.8 28.2
-------- -------- -------- --------
Net income before extraordinary item 24.7 17.7 44.6 28.5
Extraordinary item, loss related to early
retirement of debt, net of income tax benefit
of $2.4 million -- -- -- (2.8)
-------- -------- -------- --------
Net income $ 24.7 $ 17.7 $ 44.6 $ 25.7
======== ======== ======== ========
Net income per share:
Net income before extraordinary item $ .37 $ .27 $ .67 $ .45
Extraordinary item -- -- -- (.05)
-------- -------- -------- --------
Net income $ .37 $ .27 $ .67 $ .40
======== ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
REVCO D.S., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
-----------------------------------
FEBRUARY 10, FEBRUARY 4,
1996 1995
----------- ------------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
- - ----------------------------------------
Net income $ 44.6 $ 25.7
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 73.7 61.7
Deferred income taxes -- 17.6
Net operating loss carryforwards utilized 17.8 8.1
Extraordinary item, loss on early retirement of debt,
net of income tax benefit -- 2.8
Change in operating assets and liabilities:
Increase in accounts receivable, net (51.0) (53.3)
Increase in inventories (62.8) (257.9)
Increase in prepaid expenses (2.1) (14.8)
Increase in other assets (1.0) (1.3)
Increase in accounts payable 43.4 161.0
Increase in accrued liabilities 43.5 31.7
--------- ---------
Net cash flows provided (used) by operating activities 106.1 (18.7)
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
- - ----------------------------------------
Additions to property, equipment and leasehold improvements (91.6) (100.6)
Purchase of Hook-SupeRx, Inc. subsidiary, net of cash acquired -- (302.1)
Payment of professional fees associated with the Acquisition -- (7.4)
Proceeds from net assets to be divested -- 128.8
Acquisition reserve payments -- (81.6)
--------- ---------
Net cash flows used by investing activities (91.6) (362.9)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
- - ----------------------------------------
Decrease in bank debit balances (14.7) --
Payments of long-term debt (94.4) (386.7)
Proceeds from issuance of long-term debt 82.1 544.0
Payment of debt and stock issuance costs -- (14.4)
Proceeds from stock rights offering -- 217.0
Proceeds from common stock issued under employee benefit plans 11.4 10.2
--------- ---------
Net cash flows provided (used) by financing activities (15.6) 370.1
--------- ---------
Net decrease in cash and temporary cash investments (1.1) (11.5)
Cash and temporary cash investments at beginning of period 3.4 24.4
--------- ---------
Cash and temporary cash investments at end of period $ 2.3 $ 12.9
========= =========
- - --------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS FOR:
Interest $ 40.0 $ 33.3
Income taxes 13.9 3.2
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
REVCO D.S., INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements have been prepared
without audit,in accordance with the rules 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 in accordance with such rules and
regulations, although the Company believes that the disclosures herein are
adequate to make the information not misleading. These statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 3, 1995.
In the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair statement of results for the
interim periods presented. The results of operations for the twelve and
thirty-six week periods ended February 10, 1996 are not necessarily indicative
of the results to be expected for the full year.
(1) Company
-------
Revco D.S., Inc. ("Revco" or the "Company") is a retail drugstore
chain in the United States, operating 2,169 drugstores located in
fourteen contiguous states as of February 10, 1996.
(2) Inventories
-----------
Inventories, which consist principally of merchandise purchased for
resale, are stated at the lower of cost or market. The cost of
substantially all inventories is determined on a last-in, first-out
("LIFO") basis.
If the first-in, first-out ("FIFO") method of inventory valuation had
been used, inventories would have been approximately $48.5 million and
$36.1 million higher than reported at February 10, 1996 and June 3,
1995, respectively. Since the LIFO valuation can only be determined
at the end of each fiscal year when inflation rates and inventory
levels are finalized, estimates of LIFO inventory costs are required
for interim financial statements.
(3) Reclassification
----------------
Certain balance sheet balances at June 3, 1995 have been reclassified
to conform to the presentation at February 10, 1996.
(4) Earnings Per Share
------------------
Earnings per share were computed using the weighted average number of
shares of common stock outstanding of 66,884,631 and 66,543,486
for the twelve weeks ended February 10, 1996 and February 4, 1995,
respectively. For the thirty-six weeks ended February 10, 1996 and
February 4, 1995, the weighted average number of shares of common
stock outstanding were 66,591,908 and 63,566,524, respectively.
6
<PAGE> 7
(5) Financing
---------
Long-term debt consists of (in millions):
<TABLE>
<CAPTION>
(Unaudited)
February 10, 1996 June 3, 1995
----------------- ------------
<S> <C> <C>
Revolving Credit Facility $384.0 $167.5
Revco Term Credit Facility -- 51.0
HSI Term Credit Facility -- 177.8
9.125% Senior Notes 140.0 140.0
10.125% Senior Notes 144.9 144.9
------ ------
668.9 681.2
Less current portion -- (41.6)
------ ------
Total long-term debt $668.9 $639.6
====== ======
</TABLE>
On July 27, 1995, the Company completed a modification to the credit
agreements for its bank facilities. The key changes included in the
modification are: (1) the replacement of the HSI Term Credit Facility,
the Revco Term Credit Facility and the $400.0 million existing
revolving credit facility with a $650.0 million amortizing revolving
credit facility (the "Revolving Credit Facility") maturing on July 27,
2000; (2) a reduction in the Company's effective borrowing rate subject
to financial performance and long-term debt rating criteria contained
in the Revolving Credit Facility; and (3) the elimination of certain
financial covenants contained in the existing credit agreements. The
Company's obligations under the Revolving Credit Facility are unsecured
obligations of the Company.
The Revolving Credit Facility includes minimum interest and lease
expense coverage and maximum debt to EBITDA (earnings before
interest, income taxes, depreciation and amortization) ratios, as well
as customary other covenants, representations and warranties, funding
conditions and events of default. The Company does not believe that
the restrictions contained in these financial and operating covenants
will cause significant limitations on the Company's financial
flexibility.
(6) Plan of Merger
--------------
On November 30, 1995, the Company and Rite Aid Corporation ("Rite
Aid") jointly announced that they had entered into an Agreement and
Plan of Merger (the "Merger Agreement") pursuant to which Rite Aid
would acquire the Company in a two-step transaction involving an
initial tender offer followed by a merger of a wholly-owned acquisition
subsidiary of Rite Aid with and into the Company, with the Company
being the surviving corporation (the "Merger").
Under the Merger Agreement, Rite Aid would purchase, in a first-step
tender offer, at least 50.1% of the outstanding shares of Revco on a
fully-diluted basis for $27.50 per share in cash (the "Offer") and the
remainder of the outstanding shares would be converted into Rite Aid
stock in a second-step merger.
On February 27, 1996, Rite Aid announced that it had voluntarily agreed
with the Federal Trade Commission to extend the Hart-Scott-Rodino
waiting period in connection with the proposed Merger until Tuesday,
March 26, 1996. Rite Aid also announced that it had extended the
expiration date of the Offer to 11:59 p.m., New York City time, on
March 26, 1996.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion explains material changes in the Company's results of
operations, comparing the twelve and thirty-six week periods ended February 10,
1996 and February 4, 1995 and significant developments affecting financial
conditions since the end of fiscal year 1995. The following discussion should
be read in conjunction with the historical financial statements of the Company.
On July 15, 1994, Revco completed its previously reported acquisition of
Hook-SupeRx, Inc. ("HSI"). The operations of HSI include 801 drugstores and a
mail order facility. For financial reporting purposes, the operations of HSI
are included in the Company's results of operations since July 30, 1994, or for
twenty-seven of the thirty-six weeks in the "year-to-date 1995" period.
RESULTS OF OPERATIONS
Comparison of the 12 Weeks ended February 10, 1996 ("third quarter of 1996")
and February 4, 1995 ("third quarter of 1995")
Net sales increased 9.7% to $1,243.3 million for the third quarter of 1996,
from $1,133.0 million for the third quarter of 1995. On a comparable store
basis, net sales increased 7.8% for the quarter, with core Revco stores (prior
to the HSI acquisition) rising 7.6% and HSI stores rising 8.3%.
Prescription sales, which comprised 56.3% of net sales for the third quarter of
1996, were primarily responsible for the overall increase in net sales,
increasing $83.6 million, or 13.6%. The number of prescriptions filled by the
Company increased 9.1% from the third quarter of 1995 to the third quarter of
1996. Although a portion of this increase in prescriptions filled is
attributable to an increase in the number of store locations, the majority of
the increase is attributable to comparable store sales growth. The increase in
prescription sales is attributable to increases in managed care sales. These
sales continue to outpace the overall growth rate in prescription business.
Managed care sales, which comprised 70.6% of total prescription sales for the
third quarter of 1996, versus 65.2% for the third quarter of 1995, increased
22.9%.
Over-the-counter ("OTC") sales increased $26.7 million, or 5.2%, to $543.5
million for the third quarter of 1996 from $516.8 million in the third quarter
of 1995. The majority of this increase, $15.5 million, is attributable to
comparable store sales growth. In addition, the number of store locations
increased 4.0% from February 4, 1995.
Cost of sales increased 10.4% to $880.1 million in the third quarter of 1996
from $797.2 million in the third quarter of 1995. Gross margin increased 8.2%
but, as a percentage of sales, decreased slightly to 29.2% versus 29.6% for the
third quarter of 1996 and 1995, respectively. Margin rates associated with
prescription sales declined due to the increase in managed care sales as a
percentage of total prescription sales and the continued pressure on margin
rates within existing managed care business. Managed care sales have
positively impacted the Company's net sales and gross margin dollar growth, but
generally yield lower profit percentages than non-managed care sales. The OTC
gross margin rate held constant between quarters, with higher seasonal
clearance markdowns being offset by improved purchasing terms. The LIFO charge
increased $1.1 million from $3.0 million in the third quarter of 1995 to $4.1
million in the third quarter of 1996, but held constant as a percentage of
sales at .3%.
Operating expenses increased $13.9 million, or 5.3%, but decreased as a
percentage of sales to 22.4% in the third quarter of 1996 from 23.3% in the
third quarter of 1995. The dollar increase in operating expenses is
attributable to a 4.0% growth in the number of store locations. The
improvement in operating expenses as a percentage of sales is attributable to
the leveraging of relatively fixed, non-store expenses over a broader store
base made possible by the HSI acquisition, coupled with a more favorable store
labor rate to sales in the HSI stores as the Company realizes the benefits of
improved store systems installed in these locations in fiscal year 1995.
8
<PAGE> 9
The Company's effective income tax rate of 47.6% for the third quarter of 1996
differs from the federal income tax statutory rate of 35.0% principally because
of state and local income taxes (5.6%) and permanent differences arising from:
(i) amortization of reorganization value in excess of amounts allocable to
identifiable assets totaling $4.1 million; and (ii) amortization of goodwill
totaling $2.2 million for the quarter.
Comparison of the 36 Weeks ended February 10, 1996 ("year-to-date 1996") and
February 4, 1995 ("year-to-date 1995")
Net sales increased 21.1% to $3,457.0 million for the year-to-date 1996, from
$2,854.6 million for the year-to-date 1995. HSI retained operations generated
$365.3 million of the net sales increase, while net sales from core Revco
stores increased $237.1 million or 12.4%. On a comparable store basis, net
sales increased 8.3% for the year-to-date 1996, with core Revco stores rising
8.6% and HSI stores rising 7.8%.
Prescription sales, which comprised 57.8% of net sales for the year-to-date
1996, were primarily responsible for the overall increase in net sales,
increasing $407.9 million, or 25.7%. HSI retained operations generated $228.6
million of the prescription sales increase. Prescription sales in core Revco
stores increased $179.3 million, or 17.0%. The number of prescriptions filled
by the Company in core Revco stores increased 11.7% from the year-to-date 1995
to the year-to-date 1996, with the majority of the increase being attributable
to comparable store sales growth. The increase in prescription sales is
attributable to increases in managed care sales. Managed care sales comprised
69.6% of total prescription sales for the year-to-date 1996.
OTC sales increased $194.5 million, or 15.4%, to $1,459.6 million for the
year-to-date 1996 from $1,265.1 million for the year-to-date 1995. HSI
retained operations generated $136.7 million of the OTC sales increase. OTC
sales in core Revco stores increased $57.8 million, or 6.8%.
Cost of sales increased 21.6% to $2,444.7 million in the year-to-date 1996 from
$2,010.2 million in the year-to-date 1995. Gross margin increased 19.9% but,
as a percentage of sales, decreased slightly to 29.3% versus 29.6% for the
year-to-date 1996 and 1995, respectively. Margin rates associated with
prescription sales declined due to the increase in managed care sales as a
percentage of total prescription sales and the continued pressure on margin
rates within existing managed care business. Managed care sales have
positively impacted the Company's net sales and gross margin dollar growth, but
generally yield lower profit percentages than non-managed care sales. The LIFO
charge increased $4.3 million to $12.4 million in the year-to-date 1996
primarily due to increased inventory levels resulting from the HSI acquisition.
The decline in the prescription margin rate and higher LIFO charge was
partially offset by an increase in the OTC gross margin rate due to improved
purchasing terms.
Operating expenses increased $119.7 million, or 17.3%, but decreased as a
percentage of sales to 23.4% in the year-to-date 1996 from 24.2% in the
year-to-date 1995. The dollar increase in operating expenses is attributable
to the growth in number of store locations, primarily as a result of the HSI
acquisition. The improvement in operating expenses as a percentage of sales is
attributable to the leveraging of relatively fixed, non-store expenses over a
broader store base made possible by the HSI acquisition, coupled with a more
favorable store labor rate to sales in the HSI stores as the Company realizes
the benefits of improved store systems installed in these locations in fiscal
year 1995.
Depreciation and amortization expense increased $12.0 million, from $61.7
million in the year-to-date 1995 to $73.7 million in the year-to-date 1996, due
to the inclusion of HSI operations in the Company's consolidated results of
operations for thirty-six weeks in the year-to-date 1996 period versus
twenty-seven weeks in the year-to-date 1995 period, coupled with increased
depreciation expense associated with the remodeling and signage of the HSI
stores.
Net interest expense was $42.9 million for the year-to-date 1996 compared to
$35.4 million for the year-to-date 1995. The increase in net interest expense
is attributable to higher average debt balances outstanding as a result of the
HSI acquisition.
9
<PAGE> 10
The Company's effective income tax rate of 47.8% for the year-to-date 1996
differs from the federal income tax statutory rate of 35.0% principally because
of state and local income taxes (5.6%) and permanent differences arising from:
(i) amortization of reorganization value in excess of amounts allocable to
identifiable assets totaling $12.3 million; and (ii) amortization of goodwill
totaling $6.6 million for the year-to-date 1996.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion regarding liquidity and capital resources should be
read in conjunction with the Company's Condensed Consolidated Balance Sheets as
of February 10, 1996 and June 3, 1995 and the Condensed Consolidated Statement
of Cash Flows for the period ended February 10, 1996.
Cash, including temporary cash investments, decreased $1.1 million to $2.3
million. Cash generated by operations, before working capital items, totaled
$136.1 million, an improvement of $20.2 million from the $115.9 million
generated during the year-to-date 1995. Net changes in working capital items
(and other operating assets and liabilities) resulted in a $30.0 million use of
cash, the majority of which, $19.4 million, represented an increase in
inventory levels, net of vendor support.
Cash generated by operations includes $17.8 million of an estimated $31.5
million in tax benefits from net operating loss carryforwards ("NOLs") expected
to be utilized on the Company's 1996 federal income tax return. For fiscal
year 1996, the Company's management expects to utilize approximately $90.0
million of NOLs on its federal income tax return. These NOLs are attributable
to the time period prior to the Company's emergence from Chapter 11 in fiscal
1992. Accordingly, benefits realized from these preconfirmation NOLs are being
used to reduce reorganization value in excess of amounts allocable to
identifiable assets if and when realized.
Net cash used for investing activities totaled $91.6 million, all of which
related to the Company's capital expenditures during the year-to-date 1996.
Among other capital expenditures, $44.4 million represented the Company's
investment in new stores and the upgrade through relocation or expansion of its
existing drugstore base. During the year-to-date 1996, the Company opened 114
new stores, of which 38 were relocations and 16 were acquired stores, and
closed 25 stores. The Company spent $13.2 million to upgrade POS registers
with improved technology in existing core Revco drugstores. An additional
$16.2 million was spent on the HSI store base during the year-to-date 1996 to
install anti-theft detection systems in all of the remaining HSI stores and to
continue remodeling the HSI stores to Revco's store design and decor package.
During the year-to-date 1996, Revco completed the remodeling of 148 acquired
HSI stores, bringing the total number of former HSI stores remodeled since the
HSI acquisition to 303 stores.
Net cash used by financing activities was $15.6 million, primarily representing
a net decrease in bank debit balances and borrowings outstanding under the
Company's revolving credit facility. On July 27, 1995, the Company completed a
modification to the credit agreements for its bank facilities. The key changes
included in the modification are: (1) the replacement of its term credit
facilities and its existing $400.0 million revolving credit facility with a
$650.0 million amortizing revolving credit facility (the "Revolving Credit
Facility") maturing on July 27, 2000; (2) a reduction in the Company's
effective borrowing rate subject to financial performance and long-term debt
rating criteria contained in the Revolving Credit Facility; and (3) the
elimination of certain financial covenants contained in the existing credit
agreements. The Company's obligations under the Revolving Credit Facility are
unsecured obligations of the Company.
The Revolving Credit Facility includes minimum interest and lease expense
coverage and maximum debt to EBITDA (earnings before interest, income taxes,
depreciation and amortization) ratios, as well as customary other covenants,
representations and warranties, funding conditions and events of default. The
Company does not believe that the restrictions contained in these financial and
operating covenants will cause significant limitations on the Company's
financial flexibility.
In addition to cash borrowings outstanding, the Company had approximately $21.2
million in outstanding letters of credit issued under the Revolving Credit
Facility at February 10, 1996, to support insurance programs and other general
corporate needs.
10
<PAGE> 11
During the remainder of fiscal 1996, the Company intends to open approximately
30 additional new stores and relocate an additional 16 existing stores. The
Company has no material commitments in connection with these planned capital
expenditures. Funds for these expenditures are expected to be provided from
the Revolving Credit Facility and cash generated internally.
The Company has three principal sources of liquidity: (i) cash and cash
equivalents; (ii) the $650.0 million Revolving Credit Facility; and (iii) cash
generated from operations. Management of the Company believes that the
Company's cash on hand and cash from operations, together with borrowings and
letters of credit under the Revolving Credit Facility, will be sufficient to
cover its working capital, capital expenditure and debt service requirements
until the maturity date of the Revolving Credit Facility.
On October 1, 1995, the Company completed the sale of substantially all of the
assets of Revco Home Health Care Centers, Inc., a wholly-owned home care
subsidiary which operated 32 retail locations providing medical supplies,
durable medical equipment and medical services, for $10.4 million in cash plus
the assumption by the buyer of obligations arising under the store leases from
and after the closing date. The Company used the sales proceeds to reduce
borrowings under the Revolving Credit Facility.
On November 30, 1995, the Company and Rite Aid Corporation ("Rite Aid") jointly
announced that they had entered into an Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which Rite Aid would acquire the Company in a
two-step transaction involving an initial tender offer followed by a merger of
a wholly-owned acquisition subsidiary of Rite Aid with and into the Company,
with the Company being the surviving corporation (the "Merger").
Under the Merger Agreement, Rite Aid would purchase, in a first-step tender
offer, at least 50.1% of the outstanding shares of Revco on a fully-diluted
basis for $27.50 per share in cash (the "Offer") and the remainder of the
outstanding shares would be converted into Rite Aid stock in a second-step
merger.
On February 27, 1996, Rite Aid announced that it had voluntarily agreed with
the Federal Trade Commission to extend the Hart-Scott-Rodino waiting period in
connection with the proposed Merger until Tuesday, March 26, 1996. Rite Aid
also announced that it had extended the expiration date of the Offer to 11:59
p.m., New York City time, on March 26, 1996.
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
In addition to being involved from time to time in the assertion of
claims and in litigation incidental to the normal course of
business, the Company's wholly-owned subsidiary, HSI, is a defendant
in a lawsuit in connection with various claims of injuries resulting
from the consumption of L-Tryptophan which was claimed to have been
sold by HSI. The insurance company for the vendor who sold the
product to HSI has assumed the legal defense of the outstanding
lawsuit, which is further described on Exhibit 99.1.
The Company is also a defendant (i) in a lawsuit filed in the United
States District Court for the Western District of Oklahoma (Case
Number CIV-95-1321-T) by seven plaintiffs, acting individually and as
representatives of five deceased infants, and (ii) in a lawsuit filed
in the District Court of Oklahoma County, State of Oklahoma (Case
Number CJ-95-5737-62) by three plaintiffs, acting individually and as
representatives of a deceased infant, alleging personal injury or
death due to a product, E-Ferol, manufactured by Carter-Glogau
Laboratories, Inc., an inactive subsidiary of the Company now known as
Retrac, Inc., prior to December 1986. The plaintiffs are seeking
unspecified actual and exemplary damages. As of the date of this
report, the case was in the early stages of discovery.
On November 30, 1995, a purported class action entitled Silvert v.
Revco D.S., Inc. et al. ("Silvert"), was filed in the Court of
Chancery of the State of Delaware, New Castle County, on behalf of the
class of all the Company's stockholders. The Silvert complaint named
the Company, all of the Company's directors and Rite Aid as
defendants. The Silvert complaint alleges that the $27.50 per share
price offered by Rite Aid in its tender offer is insufficient and
unfair to the Company's stockholders and represents an attempt by the
defendants to enrich themselves at the expense of the plaintiff class.
The plaintiff in the Silvert action asserts that defendants violated
their fiduciary duties to the Company's stockholders by allegedly
failing adequately to evaluate the Company as a potential acquisition
candidate; to take adequate steps to enhance the Company's value as an
acquisition candidate; and to create an active and open auction for
the Company. The Silvert complaint further alleges that the Company's
grant to Rite Aid of a stock option in connection with the Merger
Agreement impedes the maximization of Company stockholder value. The
Silvert complaint seeks, among other relief, a preliminary and
permanent injunction barring defendants from taking any steps to
accomplish the proposed merger at a price that is not fair and
equitable to the plaintiffs and enjoining any improper device or
transaction which will impede maximization of stockholder value. The
Silvert complaint also seeks unspecified damages for losses suffered
and to be suffered by the plaintiff class as a result of the acts
alleged in the Silvert complaint.
Management is of the opinion that although the ultimate resolution of
such litigation cannot be forecast with certainty, final disposition
of this and other litigation should not materially affect the
consolidated financial position of the Company.
ITEM 2. CHANGES IN SECURITIES
---------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
-----------------
None.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27 - Financial Data Schedule
99.1 - Certain Litigation
(b) Reports on Form 8-K
See the Company's Quarterly Report on Form 10-Q filed with the
Commission on December 21, 1995.
13
<PAGE> 14
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.
<TABLE>
<CAPTION>
REVCO D.S., INC.
(Registrant)
<S> <C> <C> <C>
Dated: March 13, 1996 By: /s/ Jack A. Staph
--------------------------------
Jack A. Staph
Senior Vice President,
Secretary and General Counsel
Dated: March 13, 1996 By: /s/ James J. Hagan
--------------------------------
James J. Hagan
Executive Vice President-Finance
and Chief Financial Officer
(principal financial officer)
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-01-1996
<PERIOD-START> JUN-04-1995
<PERIOD-END> FEB-10-1996
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 179
<ALLOWANCES> (25)
<INVENTORY> 1,026
<CURRENT-ASSETS> 1,204
<PP&E> 462
<DEPRECIATION> (140)
<TOTAL-ASSETS> 2,261
<CURRENT-LIABILITIES> 716
<BONDS> 669
<COMMON> 1
0
0
<OTHER-SE> 829
<TOTAL-LIABILITY-AND-EQUITY> 2,261
<SALES> 3,457
<TOTAL-REVENUES> 3,457
<CGS> 2,445
<TOTAL-COSTS> 3,329
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> 85
<INCOME-TAX> 41
<INCOME-CONTINUING> 45
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
</TABLE>
<PAGE> 1
Exhibit 99.1
1. Charles R. Dexter and Charlotte L. Dexter v. Brooks Drug, Inc.,
---------------------------------------------------------------
Goldline Laboratories, Inc., Showa Denko of America, Inc., et al.
-----------------------------------------------------------------
United States District Court for the District of New Hampshire
Civil Action No. C 92-584-M
