<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 November 16, 1996
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Commission File Number 1-5025
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Revco D.S., Inc.
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(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
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(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
---- -----
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 December 24, 1996, there were 68,769,662 shares of common stock
outstanding.
<PAGE> 2
REVCO D.S., INC.
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INDEX
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<TABLE>
<CAPTION>
Page No.
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Part I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
November 16, 1996 and June 1, 1996 3
Condensed Consolidated Statements of Income -
Twelve and Twenty-Four Weeks Ended
November 16, 1996 and November 18, 1995 4
Condensed Consolidated Statements of Cash Flows -
Twenty-Four Weeks Ended November 16, 1996
and November 18, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
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 12
Signatures
</TABLE>
2
<PAGE> 3
REVCO D.S., INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in Millions)
<TABLE>
<CAPTION>
(Unaudited)
November 16, June 1,
Assets 1996 1996
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<S> <C> <C>
Current assets:
Cash, including temporary cash investments $ 7.6 $ 8.4
Accounts receivable, net 177.9 120.6
Inventories 1,291.5 968.4
Prepaid expenses 15.4 19.4
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Total current assets 1,492.4 1,116.8
Property, equipment and leasehold improvements, net 359.9 320.1
Leasehold interests, net 53.6 51.3
Goodwill, net 602.8 367.2
Reorganization value in excess of amounts
allocable to identifiable assets, net 185.7 205.0
Net deferred tax asset 40.5 13.6
Other assets 67.0 59.5
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$2,801.9 $2,133.5
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Bank debit balances $ 54.2 $ 52.5
Accounts payable 518.6 335.7
Accrued liabilities 376.5 315.3
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Total current liabilities 949.3 703.5
Long-term debt 911.7 514.9
Long-term liabilities 46.9 46.5
Stockholders' equity:
Common stock .7 .7
Additional paid-in capital 699.5 693.3
Retained earnings 217.8 187.4
Treasury stock (24.0) (12.8)
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Total stockholders' equity 894.0 868.6
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$2,801.9 $2,133.5
======== ========
</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 Twenty-Four Weeks Ended
-------------------------- -----------------------------
November 16, November 18, November 16, November 18,
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Net sales $1,227.3 $1,137.0 $2,406.9 $2,213.7
Cost of sales 877.5 808.7 1,714.1 1,564.6
0perating expenses 283.0 268.1 562.5 532.3
Depreciation and amortization 26.3 23.7 51.9 49.3
-------- -------- -------- --------
Operating profit 40.5 36.5 78.4 67.5
Interest expense 11.0 14.6 22.3 29.7
Interest income (.1) (.2) (.2) (.5)
-------- -------- -------- --------
Income before income taxes 29.6 22.1 56.3 38.3
Income tax provision 13.6 10.6 25.9 18.4
-------- -------- -------- --------
Net income $ 16.0 $ 11.5 $ 30.4 $ 19.9
======== ======== ======== ========
Net income per share $ .24 $ .17 $ .45 $ .30
======== ======== ======== ========
</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>
Twenty-Four Weeks Ended
---------------------------
November 16, November 18,
1996 1995
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<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30.4 $ 19.9
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 51.9 49.3
Deferred income taxes -- 6.4
Net operating loss carryforwards utilized 11.2 4.9
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable, net (48.8) (38.6)
(Increase) decrease in inventories (113.3) (105.6)
(Increase) decrease in prepaid expenses 6.7 1.6
(Increase) decrease in other assets 3.0 (1.2)
Increase (decrease) in accounts payable 144.8 64.6
Increase (decrease) in accrued liabilities .9 24.6
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NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 86.8 25.9
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Net cash flows from investing activities:
Additions to property, equipment and leasehold improvements (34.8) (70.5)
Purchase of Big B subsidiary, net of cash acquired (372.1) --
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Net cash flows used by investing activities (406.9) (70.5)
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NET CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in bank debit balances (25.3) 2.4
Payments of long-term debt (11.7) (43.4)
Proceeds from issuance of long-term debt 359.2 82.1
Purchase of treasury stock (11.2) --
Proceeds from common stock issued under employee benefit plans 8.3 8.4
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Net cash flows provided by financing activities 319.3 49.5
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Net increase (decrease) in cash and temporary cash investments (.8) 4.9
Cash and temporary cash investments at beginning of period 8.4 3.4
------ ------
Cash and temporary cash investments at end of period $ 7.6 $ 8.3
====== ======
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SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS FOR:
Interest $ 20.5 $ 19.5
Income taxes 16.1 13.6
</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 1, 1996.
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 twenty-four week
periods ended November 16, 1996 are not necessarily indicative of the results to
be expected for the full year.
(1) Company
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Revco D.S., Inc. ("Revco" or the "Company"), excluding the impact of
the acquisition discussed in note 4, operates 2,200 retail drugstores
in fourteen contiguous Midwestern, Southeastern and Eastern states. The
Company's stores are health-oriented neighborhood pharmacies offering
pharmaceuticals and related merchandise.
(2) Inventories
-----------
Inventories 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 $66.9 million and
$55.8 million higher than reported at November 16, 1996 and June 1,
1996, 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) Earnings Per Share
------------------
Earnings per share were computed using the weighted average number of
shares of common stock outstanding of 67,458,616 and 66,520,225 for the
twelve weeks ended November 16, 1996 and November 18, 1995,
respectively. For the twenty-four weeks ended November 16, 1996 and
November 18, 1995, the weighted average number of shares of common
stock outstanding were 67,523,814 and 66,445,547, respectively.
(4) Acquisition of Big B, Inc.
--------------------------
On October 27, 1996, the Company and Big B, Inc. ("Big B"), a retail
drugstore chain formerly headquartered in Alabama that operates
approximately 400 drugstores in five Southern states, signed a
definitive merger agreement whereby the Company would acquire all of
the outstanding shares of Big B at a price of $17.25 per share in cash
(the "Acquisition"). On November 15, 1996, the Company announced that
it completed its cash tender offer for Big B's common stock (the
"Offer"), resulting in the Company owning approximately 85.0% of Big B
common stock. On December 23, 1996, the Company completed a second step
merger in which all remaining Big B shareholders received the same cash
price paid in the Offer. The aggregate transaction value, including the
assumption of Big B debt, is approximately $420.0 million.
6
<PAGE> 7
The Acquisition was accounted for under the purchase method of
accounting, using an effective date of November 16, 1996. Accordingly,
the accompanying condensed consolidated balance sheet at November 16,
1996 reflects the consolidated financial position of the Company and
Big B. The carrying values of Big B's net assets have been adjusted to
equal their estimated fair values; however, these values may be subject
to future revision. Based on a preliminary evaluation, the excess of
the purchase price of Big B over the net identifiable assets and
liabilities of Big B totaled $240.0 million and is reported as
goodwill, which will be amortized on a straight-line basis over 40
years.
The Company intends to convert the Big B drugstores to the Revco
format. This would include (i) the upgrading and remodeling of all of
the Big B stores to Revco's store design and signage package, (ii) the
installation of Revco's Prescription Access Link pharmacy system in all
Big B stores, (iii) the installation of point-of-sale scanning in all
Big B stores, (iv) the remerchandising of the Big B stores to Revco's
broader product mix, and (v) the installation of Revco's pricing and
advertising programs. In addition, until conversion of the Big B stores
to the Revco format and conversion of the Big B store systems to Revco
store systems, the Company has assumed there will be some level of
duplicative overhead expenses which has been considered a necessary
incidental cost of the Acquisition. The Company estimates that the
non-capitalizable portion of these consolidation and integration costs
will be approximately $15.0 - $20.0 million, net of tax, and will be
charged to operations in the third quarter. Big B's results of
operations will be consolidated with the Company's results of
operations beginning in the third quarter.
Pro Forma Information
The acquisition of Big B creates a combined drugstore operation of
approximately 2,600 stores operating in 17 contiguous states. To
provide a more meaningful analysis of operating trends, unaudited pro
forma information for second quarter year-to-date 1997 and 1996 have
been presented in the table below. The unaudited pro forma data
reflects the financial results of the Company as if the Acquisition had
occurred, and such transactions had been consummated, as of the
beginning of the periods presented. The unaudited pro forma information
reflects pro forma adjustments to historical results of operations of
the Company to: (a) record additional interest expense on the
incremental debt levels used to finance the Acquisition, (b) record
amortization of goodwill recognized in connection with the Acquisition,
(c) adjust historical depreciation and amortization expense of Big B as
a result of purchase accounting adjustments, and (d) record adjustments
to the historical tax provision based upon a revised effective tax
rate.
The pro forma information presented does not consider any future events
which may occur after the Acquisition has been consummated. The pro
forma information presented does not attempt to quantify any operating
expense synergies or cost reductions of the combined operations of the
Company and Big B that may be realized after the Company has completed
its conversion of the Big B stores to the Revco format and installed
its store systems and marketing programs. Nor does the pro forma
information consider the incremental expenses, capital or conversion
costs which may be incurred as a result of the Acquisition. The pro
forma information does not consider the impact of any store closings
which may occur; however, the Company's management does not expect the
number of locations to be closed within the first year of the
Acquisition to be significant.
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts)
-----------------------------------------------------------
As Reported Pro Forma
Twenty-Four Weeks Ended Twenty-Four Weeks Ended
------------------------------- ---------------------------
Nov 16, Nov 18, Nov 16, Nov 18,
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Net sales $ 2,406.9 $ 2,213.7 $ 2,755.5 $ 2,534.6
========================= =======================
Operating profit $ 78.4 $ 67.5 $ 84.8 $ 75.0
========================= =======================
Net income $ 30.4 $ 19.9 $ 24.7 $ 14.6
========================= =======================
Net income per share $ .45 $ .30 $ .37 $ .22
========================= =======================
</TABLE>
7
<PAGE> 8
(5) Bank Facilities
---------------
The Company has a $650 million revolving credit facility (the
"Revolving Credit Facility") pursuant to an Amended and Restated Credit
Agreement (the "Credit Agreement") dated as of July 27, 1995, among the
Company, and Banque Paribas and Bank of America, as managing agents.
In addition to the Credit Agreement, the Company entered into a $125
million 364-day Revolving Credit Agreement (the "364-day Agreement")
with its managing agents on November 15, 1996, to provide financial
flexibility in light of the completed Acquisition. The Credit Agreement
and the 364-day Agreement (the "Bank Facilities") provide for the
payment by the Company of (i) a non-use fee on the aggregate unused
commitment under the Revolving Credit Facility and the 364-day
Agreement, respectively, (ii) a fronting fee with respect to letters of
credit and a letter of credit fee based on the average outstanding
amount of letters of credit and (iii) certain other administrative
fees. The interest rate on loans varies depending on the type of loan,
length of interest rate period chosen and current market rate of
certain types of loans. The Bank Facilities contain customary
conditions to borrowing, representations and warranties, covenants and
events of default. The commitment of the lenders under the Credit
Agreement expires no later than July 27, 2000 and under the 364-day
Agreement no later than November 14, 1997.
Long-term debt consists of (dollars in millions):
<TABLE>
<CAPTION>
Nov 16, June 1,
1996 1996
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<S> <C> <C>
Bank Facilities $616.5 $230.0
9.125% Senior Notes 140.0 140.0
10.125% Senior Notes 144.9 144.9
Big B Industrial Development
Bonds 10.3 --
------ ------
$911.7 $514.9
====== ======
</TABLE>
8
<PAGE> 9
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 twenty-four week periods ended November 16,
1996 and November 18, 1995 and significant developments affecting financial
conditions since the end of fiscal year 1996. The following discussion should be
read in conjunction with the historical financial statements of the Company.
RESULTS OF OPERATIONS
Comparison of the 12 Weeks ended November 16, 1996 ("second quarter of 1997")
and November 18, 1995 ("second quarter of 1996"):
Net sales increased 7.9% to $1,227.3 million for the second quarter of 1997,
from $1,137.0 million for the second quarter of 1996. On a comparable store
basis, net sales increased 6.0% for the quarter.
Prescription sales, which comprised 61.4% of net sales for the second quarter of
1997, increased $79.2 million, or 11.7%. 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 increased
19.4% and represented 74.5% of total prescription sales for the quarter,
compared to 69.8% in the year ago period.
Over-the-counter ("OTC") sales increased $11.1 million, or 2.4%, to $473.6
million for the second quarter of 1997 due to the increased number of store
locations from November 18, 1995.
Cost of sales increased 8.5% to $877.5 million in the second quarter of 1997.
Gross margin increased 6.5% but, as a percentage of sales, decreased to 28.50%
versus 28.87% for the second quarter of 1997 and 1996, 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 the managed care business. Managed care sales
have positively impacted the Company's net sales and gross margin dollar growth,
but yield lower profit percentages than non-managed care sales. The LIFO charge
increased $.7 million from $4.2 million in the second quarter of 1996 to $4.9
million in the second quarter of 1997, but remained flat as a percentage of
sales at .4%. The decline in the prescription margin rate and higher LIFO charge
was partially offset by a moderate increase in the OTC gross margin rate due to
continued favorable purchasing terms and less emphasis on promotional sales than
in the prior year.
Operating expenses increased $14.9 million, or 5.6%, but decreased as a
percentage of sales to 23.06% in the second quarter of 1997 from 23.58% in the
second quarter of 1996. The dollar increase in operating expenses is
attributable to a 2.8% growth in the number of store locations. The improvement
in operating expenses as a percentage of sales is primarily attributable to
continued focus on comparable store expenses. Management has been effective in
controlling costs at a slower growth rate than the growth in sales and margin.
Also contributing to the improvement in the operating expense percentage is the
leveraging of relatively fixed, non-store expenses over a broader store base.
Interest expense, net of interest income, was $10.9 million in the second
quarter of 1997 compared with $14.4 million in the second quarter of 1996. The
decrease in interest expense was attributable to lower average debt balances
outstanding in the second quarter of 1997 compared to the second quarter of
1996.
The Company's effective income tax rate of 46.0% for the second quarter of 1997
differs from the federal income tax statutory rate of 35.0% principally because
of state and local income taxes (5.0%) and permanent differences arising from:
(i) amortization of reorganization value in excess of amounts allocable to
identifiable assets totaling $4.0 million; and (ii) amortization of goodwill
totaling $2.2 million for the quarter.
9
<PAGE> 10
Comparison of the 24 Weeks ended November 16, 1996 ("year-to-date 1997") and
November 18, 1995 ("year-to-date 1996"):
Net sales increased 8.7% to $2,406.9 million for the year-to-date 1997, from
$2,213.7 million for the year-to-date 1996. On a comparable store basis, net
sales increased 6.9% for the year-to-date period.
Prescription sales, which comprised 60.6% of net sales for the year-to-date
1997, increased $160.6 million, or 12.4%. The increase in prescription sales is
attributable to increases in managed care sales. Managed care sales increased
20.2% and represented 73.9% of total prescription sales for the year-to-date
1997, compared to 69.0% in the year ago period.
OTC sales increased $32.6 million, or 3.6%, to $948.7 million for the
year-to-date 1997. The majority of this increase is attributable to a 2.8%
increase in the number of store locations over the prior year.
Cost of sales increased 9.6% to $1,714.1 million in the year-to-date 1997 from
$1,564.6 million in the year-to-date 1996. Gross margin increased 6.7% but, as a
percentage of sales, decreased to 28.78% versus 29.32% for the year-to-date 1997
and 1996, 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 the managed care
business. The LIFO charge increased $2.8 million from $8.3 million in the
year-to-date 1996 to $11.1 million in the year-to-date 1997, increasing as a
percentage of sales from .4% to .5%. The decline in the prescription margin rate
and higher LIFO charge was partially offset by a moderate increase in the OTC
gross margin rate due to continued favorable purchasing terms and less emphasis
on promotional sales than in the prior year.
Operating expenses increased $30.2 million, or 5.7%, but decreased as a
percentage of sales to 23.37% in the year-to-date 1997 from 24.05% in the
year-to-date 1996. The dollar increase in operating expenses is attributable to
a 2.8% growth in the number of store locations. The improvement in operating
expenses as a percentage of sales is primarily attributable to continued focus
on comparable store expenses. Also contributing to the improvement in the
operating expense percentage is the leveraging of relatively fixed, non-store
expenses over a broader store base.
Interest expense, net of interest income, was $22.1 million in the year-to-date
1997 compared with $29.2 million in the year-to-date 1996. The decrease in
interest expense was attributable to lower average debt balances outstanding in
the year-to-date 1997 compared to the year-to-date 1996.
The Company's effective income tax rate of 46.0% for the year-to-date 1997
differs from the federal income tax statutory rate of 35.0% principally because
of state and local income taxes (5.0%) and permanent differences arising from:
(i) amortization of reorganization value in excess of amounts allocable to
identifiable assets totaling $8.1 million; and (ii) amortization of goodwill
totaling $4.4 million for the year-to-date 1997.
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 November 16, 1996 and June 1, 1996 and the Condensed Consolidated Statement
of Cash Flows for the twenty-four weeks ended November 16, 1996.
Cash, including temporary cash investments, decreased $.8 million to $7.6
million. Cash generated by operations, before working capital items, totaled
$93.5 million, an improvement of $13.0 million from the $80.5 million generated
during the year-to-date 1996. Net changes in working capital items (and other
operating assets and liabilities) resulted in a $6.7 million use of cash,
compared to a $54.6 million use of cash in the year-to-date 1996.
Cash generated by operations includes $11.2 million of an estimated $36.0
million in tax benefits from the realization of approximately $100.0 million of
net operating loss carryforwards ("NOLs") expected to be utilized on the
Company's 1997 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 pre-Chapter 11 emergence NOLs are
recognized as a reduction in "reorganization value in excess of amounts
allocable to identifiable assets" as realized.
10
<PAGE> 11
Net cash used for investing activities totaled $406.9 million, consisting of the
purchase of Big B, Inc. ("Big B") for $372.1 million, net of cash acquired, and
$34.8 million in capital expenditures. The Big B acquisition is discussed
further in note 4 to the condensed consolidated financial statements. The
majority of the capital expenditures in the year-to-date 1997 represent the
Company's investment in new stores and the upgrade through relocation or
expansion of its existing drugstore base. During the year-to-date 1997, the
Company opened 72 new stores, of which 35 were relocations and 10 were acquired
stores, and closed 21 stores. During the year-to-date 1997, Revco completed the
remodeling of 50 former Hook-SupeRx, Inc. ("HSI") stores, bringing the total
number of former HSI stores remodeled to 354 stores.
Net cash generated by financing activities was $319.3 million, representing
$359.2 million of debt issued in connection with the acquisition of Big B,
partially offset by a $37.0 million net decrease in bank debit balances and
borrowings outstanding under the Company's Bank Facilities, as defined below,
and $11.2 million in treasury stock repurchases. In May 1996, the Company's
Board of Directors authorized the repurchase by the Company of up to three
million of the Company's outstanding shares of common stock. In July 1996, the
Company repurchased 502,000 shares at an aggregate purchase price of $11.2
million.
During the remainder of fiscal 1997, the Company intends to open approximately
33 additional new stores and relocate an additional 25 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
Bank Facilities and cash generated internally.
The Company has three principal sources of liquidity: (i) cash and cash
equivalents; (ii) the Bank Facilities; 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 Bank
Facilities, will be sufficient to cover its working capital, capital expenditure
and debt service requirements until the maturity dates of the Bank Facilities.
Nevertheless, the Company may increase its borrowing capabilities under the Bank
Facilities if management believes it would be advantageous to do so, and the
Company has begun preliminary discussions with its managing agents on expanding
the borrowing capacity of the Bank Facilities.
Bank Facilities
The Company has a $650 million revolving credit facility (the "Revolving Credit
Facility") pursuant to an Amended and Restated Credit Agreement (the "Credit
Agreement") dated as of July 27, 1995, among the Company, and Banque Paribas and
Bank of America, as managing agents.
In addition to the Credit Agreement, the Company entered into a $125 million
364-day Revolving Credit Agreement (the "364-day Agreement") with its managing
agents on November 15, 1996 to provide financial flexibility in light of the
completed Acquisition. The Credit Agreement and the 364-day Agreement (the "Bank
Facilities") provide for the payment by the Company of (i) a non-use fee on the
aggregate unused commitment under the Revolving Credit Facility and the 364-day
Agreement, respectively, (ii) a fronting fee with respect to letters of credit
and a letter of credit fee based on the average outstanding amount of letters of
credit and (iii) certain other administrative fees. The interest rate on loans
varies depending on the type of loan, length of interest rate period chosen and
current market rate of certain types of loans. The Bank Facilities contain
customary conditions to borrowing, representations and warranties, covenants and
events of default. The commitment of the lenders under the Credit Agreement
expires no later than July 27, 2000 and under the 364-day Agreement no later
than November 14, 1997.
The Bank Facilities include minimum interest and lease expense coverage ratio,
maximum total indebtedness to adjusted earnings before interest, income taxes,
depreciation and amortization (EBITDA) ratio, 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 $24.0
million in outstanding letters of credit issued under the Bank Facilities at
November 16, 1996, to support insurance programs and other general corporate
needs.
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,
two of the Company's wholly-owned subsidiaries are defendants in
lawsuits in connection with various claims of injuries resulting from
the consumption of L-Tryptophan which was claimed to have been sold by
the subsidiaries. The insurance companies for the vendors who sold the
product to the subsidiaries have assumed the legal defense of the
outstanding lawsuits, which are 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.
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
-----------------
As previously noted, on December 23, 1996, the Company completed the
acquisition of Big B.
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
The Company previously reported its September 12, 1996 filing
of a Form 8-K in connection with the Acquisition. In addition,
on November 26, 1996, the Company filed, under Item 2, a Form
8-K dated November 15, 1996 reporting the Company's
completion, on such date, of the Offer.
12
<PAGE> 13
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.
REVCO D.S., INC.
(Registrant)
Dated: 12/30/96 By: /s/ Jack A. Staph
-----------------------------------
Jack A. Staph
Senior Vice President,
Secretary and General Counsel
Dated: 12/30/96 By: /s/ Brian P. Carney
-----------------------------------
Brian P. Carney
Senior Vice President, Finance
(principal financial officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-02-1996
<PERIOD-END> NOV-16-1996
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 204
<ALLOWANCES> 26
<INVENTORY> 1,292
<CURRENT-ASSETS> 1,492
<PP&E> 546
<DEPRECIATION> 186
<TOTAL-ASSETS> 2,802
<CURRENT-LIABILITIES> 949
<BONDS> 10
<COMMON> 1
0
0
<OTHER-SE> 893
<TOTAL-LIABILITY-AND-EQUITY> 2,802
<SALES> 2,407
<TOTAL-REVENUES> 2,407
<CGS> 1,714
<TOTAL-COSTS> 1,714
<OTHER-EXPENSES> 614
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 56
<INCOME-TAX> 26
<INCOME-CONTINUING> 30
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</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
2. LYDIA MARTINEZ V. SHOWA DENKO AMERICA, INC., ET. AL.
Thirteenth Judicial District Court, County of Cibola, State of New Mexico
(No. 96-59-CV).
