<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 8, 1997
----------------
COMMISSION FILE NUMBER 1-5025
REVCO D.S., INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1527876
(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
----------------------------------------------------
(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 21, 1997, THERE WERE 68,858,692 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> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
February 8, 1997 and June 1, 1996 3
Condensed Consolidated Statements of Income -
Twelve and Thirty-Six Weeks Ended
February 8, 1997 and February 10, 1996 4
Condensed Consolidated Statements of Cash Flows -
Thirty-Six Weeks Ended February 8, 1997
and February 10, 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures
2
</TABLE>
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<TABLE>
<CAPTION>
REVCO D.S., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
FEBRUARY 8, JUNE 1,
Assets 1997 1996
------ ---------------- -------
<S> <C> <C>
Current assets:
Cash, including temporary cash investments $ 17.9 $ 8.4
Accounts receivable, net 202.9 120.6
Inventories 1,297.0 968.4
Prepaid expenses 22.0 19.4
-------- --------
Total current assets 1,539.8 1,116.8
Property, equipment and leasehold improvements, net 364.1 320.1
Leasehold interests, net 56.1 51.3
Goodwill, net 599.2 367.2
Reorganization value in excess of amounts
allocable to identifiable assets, net 170.3 205.0
Net deferred tax asset 52.8 13.6
Other assets 71.1 59.5
-------- --------
$2,853.4 $2,133.5
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Bank debit balances $ -- $ 52.5
Accounts payable 566.1 335.7
Accrued liabilities 408.6 315.3
-------- --------
Total current liabilities 974.7 703.5
Long-term debt 925.4 514.9
Long-term liabilities 45.5 46.5
Stockholders' equity:
Common stock .7 .7
Additional paid-in capital 701.9 693.3
Retained earnings 229.2 187.4
Treasury stock (24.0) (12.8)
-------- ---------
Total stockholders' equity 907.8 868.6
-------- ---------
$2,853.4 $2,133.5
======== ========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
3
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<TABLE>
<CAPTION>
REVCO D.S., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
TWELVE WEEKS ENDED THIRTY-SIX WEEKS ENDED
----------------------------------- ------------------------------------
FEBRUARY 8, FEBRUARY 10, FEBRUARY 8, FEBRUARY 10,
1997 1996 1997 1996
--------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net sales $1,537.7 $1,243.3 $3,944.6 $3,457.0
Cost of sales 1,096.4 880.1 2,810.5 2,444.7
Operating expenses 339.6 278.0 902.1 810.3
Depreciation and amortization 30.4 24.4 82.3 73.7
Non-recurring charge 31.0 -- 31.0 --
--------- --------- -------- --------
Operating profit 40.3 60.8 118.7 128.3
Interest expense 15.6 13.9 37.9 43.6
Interest income (.3) (.2) (.5) (.7)
--------- --------- -------- --------
Income before income taxes 25.0 47.1 81.3 85.4
Income tax provision 13.6 22.4 39.5 40.8
--------- --------- -------- --------
Net income $ 11.4 $ 24.7 $ 41.8 $ 44.6
========= ========= ======== ========
Net income per share $ .17 $ .37 $ .62 $ .67
========= ========= ======== ========
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
4
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<TABLE>
<CAPTION>
REVCO D.S., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN MILLIONS)
THIRTY-SIX WEEKS ENDED
-----------------------------------
FEBRUARY 8, FEBRUARY 10,
1997 1996
------------- ------------
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
- -----------------------------------------
Net income $ 41.8 $ 44.6
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 82.3 73.7
Deferred income taxes -- 14.2
Net operating loss carryforwards utilized 22.5 10.8
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable, net (73.8) (51.0)
(Increase) decrease in inventories (128.8) (62.8)
(Increase) decrease in prepaid expenses .2 (2.1)
(Increase) decrease in other assets (3.5) (1.0)
Increase (decrease) in accounts payable 163.5 43.4
Increase (decrease) in accrued liabilities 29.4 36.3
------- -------
Net cash flows provided by operating activities 133.6 106.1
-------- -------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
- -----------------------------------------
Additions to property, equipment and leasehold improvements (59.2) (91.6)
Purchase of Big B subsidiary, net of cash acquired (373.9) --
-------- -------
Net cash flows used by investing activities (433.1) (91.6)
-------- -------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
- -----------------------------------------
Decrease in bank debit balances (52.5) (14.7)
Borrowings (payments) of long-term debt 361.0 (12.3)
Purchase of treasury stock (11.2) --
Proceeds from common stock issued under employee benefit plans 11.7 11.4
------- ------
Net cash flows provided (used) by financing activities 309.0 (15.6)
-------- -------
Net increase (decrease) in cash and temporary cash investments 9.5 (1.1)
Cash and temporary cash investments at beginning of period 8.4 3.4
-------- -------
Cash and temporary cash investments at end of period $ 17.9 $ 2.3
======== =======
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS FOR:
Interest $ 40.6 $ 40.0
Income taxes 16.3 13.9
<FN>
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
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 thirty-six week
periods ended February 8, 1997 are not necessarily indicative of the results to
be expected for the full year.
(1) Company
-------
Revco D.S., Inc. ("Revco" or the "Company") operates 2,556 retail
drugstores in seventeen 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 $72.1 million and
$55.8 million higher than reported at February 8, 1997 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 67,565,777 and 66,884,631 for the
twelve weeks ended February 8, 1997 and February 10, 1996,
respectively. For the thirty-six weeks ended February 8, 1997 and
February 10, 1996, the weighted average number of shares of common
stock outstanding were 67,537,802 and 66,591,908, 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 operated
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 step
acquisition 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, was 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. The carrying
values of Big B's net assets acquired have been recorded based upon
their estimated fair values. Favorable leasehold interests with an
asset value of $11.0 million were established based upon market
appraisals. In accordance with Emerging Issues Task Force Issue No.
95-3 ("EITF 95-3"), Recognition of Liabilities in Connection with a
Purchase Business Combination, the Company accrued severance,
representing costs associated with the involuntary termination of
employees, totaling $11.0 million ($6.6 million, net of tax), when
establishing the net identifiable liabilities of Big B. These amounts
were determined based upon actual amounts, where known, and best
estimates, where the final actual cost was unknown. 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 is being amortized on a
straight-line basis over 40 years. Certain estimates may be subject to
future revisions; the effect, if any, will not be material to the
results of operations of the Company. Big B's results of operations
have been consolidated with the Company's results of operations
beginning in the third quarter (the twelve weeks ended February 8,
1997).
The Company is converting the Big B drugstores to the Revco format.
This conversion includes (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 store
systems to Revco store systems, which Management expects to be
completed in the fourth quarter of fiscal 1997, the Company will incur
duplicative overhead expenses which were considered a necessary
incidental cost of the Acquisition.
The Company recorded a $31.0 million pretax, non-recurring charge
($18.6 million, net of tax) during the third quarter, for certain
non-capitalizable costs associated with the restructuring of the Big B
operations. This non-recurring charge included the following (dollars
in millions):
Store, distribution and MIS conversion costs $5.3
Store closing costs 18.7
Duplicative headquarters and administration costs 7.0
-----
$31.0
=====
In accordance with Emerging Issues Task Force Issue No. 94-3 ("EITF
94-3"), Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring), this non-recurring charge includes an accrued
liability of approximately $26.0 million in the accompanying balance
sheet related to certain exit plans for identified stores and
duplicate corporate facilities.
Pro Forma Information
To provide a more meaningful analysis of operating trends, unaudited
pro forma information for third quarter year-to-date 1997 and 1996 are
presented below reflecting 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: (i) record
additional interest expense on the incremental debt levels used to
finance the Acquisition using an interest rate of 6.0%, which
approximates the effective interest rate on the Bank Facilities in
effect at the date of the Acquisition, (ii) record amortization of
goodwill recognized in connection with the Acquisition, (iii) adjust
historical depreciation and amortization expense of Big B as a result
of purchase accounting adjustments, and (iv) 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 efficiencies 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 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.
7
<PAGE> 8
The pro forma information excludes the non-recurring charge of $31.0
million to expense the non-capitalizable portion of consolidation and
integration costs attributable to the Acquisition.
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts)
-----------------------------------------------------------
As Reported Pro Forma
Thirty-Six Weeks Ended Thirty-Six Weeks Ended
------------------------------- ---------------------------
Feb 8, Feb 10, Feb 8, Feb 10,
1997 1996 1997 1996
------------- ------------- --- ------------ --------------
<S> <C> <C> <C> <C>
Net sales $ 3,944.6 $ 3,457.0 $ 4,293.2 $ 3,943.2
========== ========== ========== ==========
Operating profit from continuing
operations $ 149.7 $ 128.3 $ 156.0 $ 126.5
========== ========== ========== ==========
Net income from continuing
operations $ 60.4 $ 44.6 $ 55.3 $ 30.8
========== ========== ========== ==========
Net income per share from
continuing operations $ .89 $ .67 $ .82 $ .46
========== ========= ========== ==========
</TABLE>
(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
(the "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 the Managing Agents on November 15, 1996, to provide financial
flexibility in connection with the Acquisition. The Credit Agreement
and the 364-day Agreement (collectively, the "Bank Facilities") provide
for the payment by the Company of (i) a non-use fee on the aggregate
unused commitment under the Bank Facilities, (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 average interest rate on borrowings
under the Bank Facilities was 5.88% as of February 8, 1997. 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.
<TABLE>
<CAPTION>
Long-term debt consists of (dollars in millions):
Feb 8, June 1,
1997 1996
------------- ------------
<S> <C> <C>
Bank Facilities $630.2 $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 --
------ ------
$925.4 $514.9
====== ======
</TABLE>
8
<PAGE> 9
(6) CVS Merger Agreement
--------------------
On February 7, 1997, the Company and CVS Corporation ("CVS") announced
that they had entered into an Agreement and Plan of Merger (the "Merger
Agreement"). The press release announcing the execution of the Merger
Agreement was included as an exhibit to the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on February
10, 1997.
9
<PAGE> 10
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 8,
1997 and February 10, 1996 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 February 8, 1997 ("third quarter of 1997")
and February 10, 1996 ("third quarter of 1996"):
Net sales, aided by the acquisition of Big B, increased 23.7% to $1,537.7
million for the third quarter of 1997, from $1,243.3 million for the third
quarter of 1996. Net sales from core Revco stores (prior to the acquisition of
Big B) increased $115.5 million or 9.3%. On a comparable store basis, net sales
in core Revco stores increased 8.0% for the quarter.
Prescription sales, which comprised 58.4% of net sales for the third quarter of
1997, increased $198.4 million, or 28.4%. Prescription sales in core Revco
stores increased 14.8%. 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 represented 75.4% of
total prescription sales for the quarter, compared to 70.6% in the third quarter
of 1996. Managed care sales for core Revco stores increased 23.0% for the
quarter.
Over-the-counter ("OTC") sales increased $96.0 million, or 17.7%, to $639.5
million for the third quarter of 1997 due to the Big B acquisition. OTC sales in
core Revco stores increased 2.1%.
Cost of sales increased 24.6% to $1,096.4 million in the third quarter of 1997.
Gross margin increased 21.5% but, as a percentage of sales, decreased to 28.70%
versus 29.21% for the third 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 $1.1 million from $4.1 million in the third quarter of 1996 to $5.2
million in the third quarter of 1997, but remained flat as a percentage of sales
at .3%. The decline in the prescription margin rate and the higher LIFO charge
were 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 $61.6 million, or 22.2%, but decreased as a
percentage of sales to 22.08% in the third quarter of 1997 from 22.36% in the
third quarter of 1996. The dollar increase in operating expenses is primarily
attributable to a 17.8% growth in the number of store locations. The improvement
in operating expenses as a percentage of sales is primarily attributable to the
leveraging of relatively fixed, non-store expenses over a broader store base due
to the Big B acquisition. Management has also been effective in managing store
level costs to a slower growth rate than the growth in sales and margin.
Interest expense, net of interest income, was $15.3 million in the third quarter
of 1997 compared with $13.7 million in the third quarter of 1996. The increase
in interest expense was attributable to higher average debt balances
outstanding, due to the Big B acquisition, in the third quarter of 1997 compared
to the third quarter of 1996.
The Company's effective income tax rate of 54.4% for the third 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 $4.1 million; and (ii) amortization of goodwill
totaling $3.6 million for the quarter.
10
<PAGE> 11
Comparison of the 36 Weeks ended February 8, 1997 ("year-to-date 1997") and
February 10, 1996 ("year-to-date 1996"):
Net sales increased 14.1% to $3,944.6 million for the year-to-date 1997, from
$3,457.0 million for the year-to-date 1996. Net sales from core Revco stores
increased $308.7 million or 8.9%. On a comparable store basis, net sales in
core Revco stores increased 7.3% for the year-to-date period.
Prescription sales, which comprised 59.7% of net sales for the year-to-date
1997, increased $359.0 million, or 18.0%. Prescription sales in core Revco
stores increased 13.2%. The increase in prescription sales is attributable to
increases in managed care sales. Managed care sales represented 74.4% of total
prescription sales for the year-to-date 1997, compared to 69.6% in the year ago
period. Managed care sales for core Revco stores increased 21.7% for the
year-to-date period.
OTC sales increased $128.6 million, or 8.8%, to $1,588.2 million for the
year-to-date 1997. OTC sales in core Revco stores increased 3.0%.
Cost of sales increased 15.0% to $2,810.5 million in the year-to-date 1997 from
$2,444.7 million in the year-to-date 1996. Gross margin increased 12.0% but, as
a percentage of sales, decreased to 28.75% versus 29.28% 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 $3.9 million from $12.4 million in the
year-to-date 1996 to $16.3 million in the year-to-date 1997, but remained flat
as a percentage of sales at .4%. The decline in the prescription margin rate and
the higher LIFO charge were 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 $91.8 million, or 11.3%, but decreased as a
percentage of sales to 22.87% in the year-to-date 1997 from 23.44% in the
year-to-date 1996. The dollar increase in operating expenses is primarily
attributable to a 17.8% growth in the number of store locations, most notably
due to the Big B acquisition, but also as a result of internal store growth. 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 as a result of
the Big B acquisition in the third quarter.
Interest expense, net of interest income, was $37.4 million in the year-to-date
1997 compared with $42.9 million in the year-to-date 1996. The decrease in
interest expense in the year-to-date 1997 compared to the year-to-date 1996 was
attributable to lower average debt balances outstanding in the first and second
quarters, offset in part by higher debt balances outstanding during the third
quarter due to the Big B acquisition.
The Company's effective income tax rate of 48.6% 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 $12.2 million; and (ii) amortization of goodwill
totaling $8.0 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 February 8, 1997 and June 1, 1996 and the Condensed Consolidated Statement of
Cash Flows for the thirty-six weeks ended February 8, 1997.
Cash, including temporary cash investments, increased $9.5 million to $17.9
million. Cash generated by operations, before working capital items, totaled
$146.6 million, an improvement of $3.3 million from the $143.3 million generated
during the year-to-date 1996. Net changes in working capital items (and other
operating assets and liabilities) resulted in a $13.0 million use of cash,
compared to a $37.2 million use of cash in the year-to-date 1996, due to
improved vendor support on the Company's seasonal inventory build.
11
<PAGE> 12
Cash generated by operations includes $22.5 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 in 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.
Net cash used for investing activities totaled $433.1 million, consisting of the
purchase of Big B for $373.9 million, net of cash acquired, and $59.2 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 97 new stores, of which
48 were relocations and 16 were acquired stores, and closed 26 stores. During
the year-to-date 1997, Revco completed the remodeling of 66 former Hook-SupeRx,
Inc. ("HSI") stores, bringing the total number of former HSI stores remodeled to
370 stores.
Net cash generated by financing activities was $309.0 million, representing
$359.2 million of debt issued in connection with the acquisition of Big B,
partially offset by a $52.5 million net decrease in bank debit balances, 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
27 additional new stores and relocate an additional 12 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.
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 (the "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 the Managing
Agents on November 15, 1996, to provide financial flexibility in connection with
the Acquisition. The Credit Agreement and the 364-day Agreement (collectively,
the "Bank Facilities") provide for the payment by the Company of (i) a non-use
fee on the aggregate unused commitment under the Bank Facilities, (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 average interest rate on borrowings under the Bank
Facilities was 5.88% as of February 8, 1997. 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.
12
<PAGE> 13
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 $20.1
million in outstanding letters of credit issued under the Bank Facilities at
February 8, 1997, to support insurance programs and other general corporate
needs.
13
<PAGE> 14
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.
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 will not materially affect the consolidated
financial position, operating results or liquidity 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.
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 November 26, 1996 filing
of a Form 8-K, under Item 2, in connection with the Company's
completion of its tender offer for all of the outstanding
shares of common stock of Big B. The November 26, 1996 filing
was preceded by Form 8-K filings on November 1, 1996 and
September 12, 1996, each under Item 5, related to the Big B
acquisition. On February 10, 1997, the Company filed a Form
8-K, under Item 5, in connection with the February 7, 1997
announcement of the execution of a merger agreement with CVS
Corporation.
14
<PAGE> 15
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: 3/24/97 By: /s/ Jack A. Staph
-------------------------
Jack A. Staph
Senior Vice President,
Secretary and General Counsel
Dated: 3/24/97 By:/s/ Brian P. Carney
-------------------------
Brian P. Carney
Senior Vice President, Finance
(principal financial officer)
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<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-02-1996
<PERIOD-END> FEB-08-1997
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 230
<ALLOWANCES> 27
<INVENTORY> 1,297
<CURRENT-ASSETS> 1,540
<PP&E> 568
<DEPRECIATION> 204
<TOTAL-ASSETS> 2,853
<CURRENT-LIABILITIES> 975
<BONDS> 10
<COMMON> 1
0
0
<OTHER-SE> 907
<TOTAL-LIABILITY-AND-EQUITY> 2,853
<SALES> 3,945
<TOTAL-REVENUES> 3,945
<CGS> 2,811
<TOTAL-COSTS> 2,811
<OTHER-EXPENSES> 1,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 81
<INCOME-TAX> 40
<INCOME-CONTINUING> 42
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<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).
