<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
and Exchange Act of 1934
For the quarterly period ended Commission file number
March 28, 1998. 333-41239
------------------------------
DUANE READE INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3164702
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
DRI I INC.* DELAWARE 04-3166107
DUANE READE* NEW YORK 11-2731721
* Guarantors with respect to the Company's 9 1/4% Senior Subordinated
Notes due 2008
440 NINTH AVENUE
NEW YORK, NEW YORK 10001
(Address of principal executive offices) (Zip Code)
(212) 273-5700
(Registrant's telephone number, including area code)
-----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value New York Stock Exchange. Inc.
per share 9 1/4% Senior None
Subordinated Notes due 2008
----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
None.
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 [ ]
The number of shares of the Common Stock
outstanding as of May 8, 1998: 16,980,067.
===============================================================================
<PAGE>
INDEX
PAGE
PART I
ITEM 1. - FINANCIAL STATEMENTS (Unaudited)
Consolidated Statements of Operations -
For the 13 Weeks Ended March 28, 1998 and March 29, 1997 3
Consolidated Balance Sheets
As of March 28, 1998 and December 29, 1997 4
Consolidated Statements of Cash Flows -
For the 13 Weeks Ended March 28, 1998 and March 29, 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION 12
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Duane Reade Inc.
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the 13 Weeks Ended
----------------------
March 28, March 29,
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 119,383 $ 99,740
Cost of sales 90,577 75,903
--------- ---------
Gross profit 28,806 23,837
--------- ---------
Selling, general & administrative expenses 19,116 15,793
Amortization 1,416 1,268
Depreciation 1,086 844
Store pre-opening expenses 905 --
--------- ---------
22,523 17,905
--------- ---------
Operating income 6,283 5,932
Interest expense, net 7,238 8,097
--------- ---------
Loss before income taxes (955) (2,165)
Income taxes -- --
--------- ---------
Loss before extraordinary charge (955) (2,165)
Extraordinary charge, net of income taxes of $-0- (23,600) --
--------- ---------
Net loss $ (24,555) $ (2,165)
========= =========
Per Common Share ( Basic and Diluted)
Loss before extraordinary charge $ (0.07) $ (0.21)
Extraordinary charge $ (1.70) $ --
--------- ---------
Net loss $ (1.77) $ (0.21)
========= =========
Weighted Average Common Shares
Outstanding (Basic and Diluted) 13,839 10,062
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Duane Reade Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 28, December 27,
1998 1997
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash $ 995 $ 261
Receivables 9,633 9,592
Inventories 79,592 66,665
Prepaid expenses 2,257 2,556
Property held for sale 3,917 --
--------- ---------
TOTAL CURRENT ASSETS 96,394 79,074
Property and equipment, net 36,469 32,557
Goodwill, net of accumulated amortization of $19,145 and $18,264 120,009 120,890
Other assets 15,648 17,000
--------- ---------
TOTAL ASSETS $ 268,520 $ 249,521
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 31,527 $ 23,510
Accrued interest 2,355 4,634
Other accrued expenses 9,591 10,873
Current portion of long-term debt 2,550 660
Current portion of capital lease obligations 1,663 1,903
--------- ---------
TOTAL CURRENT LIABILITIES 47,686 41,580
Senior debt, less current portion 207,450 179,043
Subordinated zero coupon debt, net of unamortized discount
of $-0- and $30,827 -- 92,553
Capital lease obligations, less current portion 3,555 3,926
Other noncurrent liabilities 6,887 6,528
--------- ---------
TOTAL LIABILITIES 265,578 323,630
--------- ---------
Stockholders' equity (deficiency)
Preferred stock, $0.01 par; authorized 5,000,000 shares;
issued and outstanding: none -- --
Common stock, $0.01 par; authorized 30,000,000 shares; issued and
outstanding 16,974,580 and 10,260,577 shares 170 103
Paid-in capital 126,102 24,563
Accumulated deficit (123,330) (98,775)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 2,942 (74,109)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 268,520 $ 249,521
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Duane Reade Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the 13 Weeks Ended
------------------------
March 28, March 29,
1998 1997
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (24,555) $ (2,165)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary charge 23,600 --
Depreciation and amortization of property and equipment 1,086 844
Amortization of goodwill and other intangibles 1,713 1,903
Accretion of principal of zero coupon debt 1,659 3,086
Other 367 269
Changes in operating assets and liabilities:
Receivables (41) 1,085
Inventories (12,927) (3,545)
Accounts payable 8,017 4,527
Prepaid and accrued expenses (3,262) (5,654)
Increase in other (assets) liabilities, net (938) 1,562
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (5,281) 1,912
--------- ---------
Cash flows from investing activities:
Capital expenditures (8,915) (667)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (8,915) (667)
--------- ---------
Cash flows from financing activities:
Proceeds from initial public offering, net 101,606 --
Proceeds from new term loan 130,000 --
Proceeds from new senior subordinated notes 80,000 --
Repayments of old term loan (65,310) (5,000)
Repayment of old senior subordinated notes (89,893) --
Repayment of zero coupon debt (99,346) --
Premiums paid on early extinguishment of debt (11,496) --
Fees and expenses related to early extinguishment of debt (478) --
Net borrowings (repayments) - old revolving credit facility (24,500) 4,500
Deferred financing costs (5,042) --
Repayments of capital lease obligations (611) (710)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 14,930 (1,210)
--------- ---------
Net increase in cash 734 35
Cash at beginning of period 261 216
--------- ---------
Cash at end of period $ 995 $ 251
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements included herein reflect all adjustments
which, in the opinion of management, are necessary to present fairly the
results of operations and financial position of Duane Reade Inc. (the
"Company"), and have been prepared in accordance with the same accounting
principles followed in the presentation of the Company's annual financial
statements for the year ended December 27, 1997. The financial statements
should be read in conjunction with the Company's financial statements included
in its Annual Report on Form 10K for the year ended December 27, 1997. The
results for the 13 weeks ended March 28, 1998 are not necessarily indicative of
the results expected for the full year.
2. NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average shares outstanding
during each period in accordance with the provisions of FASB Statement No. 128
"Earnings Per Share." Basic earnings per share is computed based on the
weighted average number of common shares outstanding during the period. Diluted
earnings per share gives effect to all dilutive potential common shares
outstanding during the period. Potential common shares include shares issuable
upon exercise of the Company's stock options, which were not included in the
weighted average number of shares for the periods presented because their
effect would have been anti-dilutuve.
On January 14, 1998, the Company effected an 8.326 reverse stock split of its
common stock. All references to common stock amounts, shares and per share data
included herein have been adjusted to give retroactive effect to such reverse
stock split.
3. INCOME TAXES
Income taxes are recorded based on the estimated effective tax rate expected to
be applicable for the full fiscal year. The Company has not generated taxable
income since its inception in 1992 and expects to generate a tax loss for 1998
due to the effect of costs incurred in connection with the early extinguishment
of debt. Accordingly, no income tax provision has been recorded for the periods
presented.
4. REFINANCING PLAN AND INITIAL PUBLIC OFFERING
In February 1998, the Company successfully completed an initial public offering
of its stock which was part of a plan to refinance all of the Company's
existing indebtedness (the "Refinancing Plan") in order to enhance the
Company's financial flexibility to pursue growth opportunities and implement
capital improvements. The Refinancing Plan resulted in a reduction in the
Company's overall indebtedness, a simplification of the Company's capital
structure and access to additional borrowings. The principal components of the
Refinancing Plan were; (i) the sale by the Company of 6.7 million shares of
common stock for net proceeds of approximately $102 million; (ii) the execution
of a new secured credit agreement (the "Existing Credit Agreement") which
provides for borrowings up to approximately $160 million ($130 million of term
loans and up to $30 million of revolving loans); (iii) the issuance of $80
million aggregate principal amount of the Company's 9 1/4% Senior Subordinated
Notes due 2008 (the "Senior Notes") for net proceeds of approximately $77
million; (iv) the repayment of all outstanding borrowings under the Company's
former credit agreement (the "Old Credit Agreement"); (v) the redemption of the
Company's outstanding Zero Coupon Notes; and (vi) the redemption of the
Company's outstanding 12% Senior Notes due 2002. The interest rates under the
Existing Credit Agreement will be approximately the same as interest rates
under the Old Credit Agreement.
6
<PAGE>
5. EXTRAORDINARY CHARGE
During the 13 weeks ended March 28, 1998, as a result of the completion of the
Refinancing Plan, the Company incurred an extraordinary charge due to the early
extinguishment of debt. The extraordinary charge is comprised of the following
(dollars in millions):
7.5% call premium on Zero Coupon Notes $ 7.5
4.5% call premium on 12% Senior Notes due 2002 4.0
Accelerated amortization of deferred financing costs and
transaction expenses 6.8
Accelerated accretion of Zero Coupon Notes to the Indenture
stated value 4.0
Interest on 12% Senior Notes due 2002 and accretion of Zero
Coupon Notes during the 30 day defeasance period 1.3
Extraordinary charge 23.6
-----
Income taxes -
-----
Extraordinary charge, net of income taxes $23.6
=====
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
THE INFORMATION CONTAINED HEREIN INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS
THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. A NUMBER OF FACTS COULD CAUSE
ACTUAL RESULTS, PERFORMANCE, ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS
TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE,
BUT ARE NOT LIMITED TO, THE COMPETITIVE ENVIRONMENT IN THE DRUGSTORE INDUSTRY
IN GENERAL AND IN THE COMPANY'S SPECIFIC MARKET AREA; INFLATION, CHANGES IN
COSTS OF GOODS AND SERVICES; ECONOMIC CONDITIONS IN GENERAL AND IN THE
COMPANY'S SPECIFIC MARKET AREAS; DEMOGRAPHIC CHANGES; CHANGES IN PREVAILING
INTEREST RATES AND THE AVAILABILITY OF AND TERMS OF FINANCING TO FUND THE
ANTICIPATED GROWTH OF THE COMPANY'S BUSINESS; LIABILITY AND OTHER CLAIMS
ASSERTED AGAINST THE COMPANY; CHANGES IN OPERATION STRATEGY OR DEVELOPMENT
PLANS; THE ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL; THE SIGNIFICANT
INDEBTEDNESS OF THE COMPANY; LABOR DISTURBANCE; CHANGES IN THE COMPANY'S
ACQUISITION AND CAPITAL EXPENDITURE PLANS; AND OTHER FACTORS REFERENCED HEREIN.
IN ADDITION, SUCH FORWARD LOOKING STATEMENTS ARE NECESSARILY DEPENDENT UPON
ASSUMPTIONS, ESTIMATES AND DATES THAT MAY BE INCORRECT OR IMPRECISE AND INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS. ACCORDINGLY, ANY
FORWARD-LOOKING STATEMENTS INCLUDED HEREIN DO NOT PURPORT TO BE PREDICTIONS OF
FUTURE EVENTS OR CIRCUMSTANCES AND MAY NOT BE REALIZED. FORWARD-LOOKING
STATEMENTS CAN BE IDENTIFIED BY, AMONG OTHER THINGS, THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS, " "MAY, " "WILL," "SHOULD," "SEEKS,"
"PRO FORMA," "ANTICIPATES," "INTENDS" OR THE NEGATIVE OF ANY THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSION OF STRATEGY OR
INTENTIONS. GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY
DISCLAIMS ANY OBLIGATIONS TO UPDATE ANY SUCH FACTORS OR TO PUBLICLY ANNOUNCE
THE RESULTS OF ANY REVISIONS TO ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN TO REFLECT FUTURE EVENTS OR DEVELOPMENTS.
REFINANCING PLAN AND INITIAL PUBLIC OFFERING
In February 1998, the Company successfully completed an initial public offering
of its stock which was part of the Company's Refinancing Plan in order to
enhance the Company's financial flexibility to pursue growth opportunities and
implement capital improvements. The Refinancing Plan resulted in a reduction in
the Company's overall indebtedness, a simplification of the Company's capital
structure and access to additional borrowings. The principal components of the
Refinancing Plan were; (i) the sale by the Company of 6.7 million shares of
common stock for net proceeds of approximately $102 million; (ii) the execution
of the Existing Credit Agreement which provides for borrowings up to
approximately $160 million ($130 million of term loans and up to $30 million of
revolving loans); (iii) the issuance of $80 million aggregate principal amount
of the Company's Senior Notes for net proceeds of approximately $77 million;
(iv) the repayment of all outstanding borrowings under the Old Credit
Agreement; (v) the redemption of the Company's outstanding Zero Coupon Notes;
and (vi) the redemption of the Company's outstanding 12% Senior Notes due 2002.
The Company believes the Refinancing Plan will result in a reduction in overall
interest expense because total interest expense associated with the Existing
Credit Agreement and the Senior Notes will be less than the total interest
expense associated with the 12% Senior Notes due 2002 and the Zero Coupon
Notes. The interest rates under the Existing Credit Agreement will be
approximately the same as interest rates under the Old Credit Agreement.
8
<PAGE>
RESULTS OF OPERATIONS
The following sets forth the results of operations as a percentage of sales for
the periods indicated.
13 Weeks Ended
--------------
March 28, 1998 March 29, 1997
-------------- --------------
Net sales 100.0% 100.0%
Cost of sales 75.9 76.1
---- ----
Gross profit 24.1 23.9
Selling, general and administrative expenses 16.0 15.8
Amortization 1.2 1.3
Depreciation 0.9 0.9
Store pre-opening expenses 0.7 0.0
------ -----
Operating income 5.3 5.9
Interest expense, net 6.1 8.1
------ -----
Loss before extraordinary charge (0.8) (2.2)
Extraordinary charge (19.8) 0.0
------ -----
Net loss (20.6)% (2.2)%
====== =====
Net sales in the first quarter 1998 were $119.4 million, an increase of 19.7%
over last year's first quarter net sales of $99.7 million. The increase was
attributable to increased comparable store sales of 6.3% and the sales from new
stores. The Company opened nine stores during the first quarter of 1998; there
were no store openings during the first quarter of 1997.
Cost of sales as a percentage of net sales decreased to 75.9% this year from
76.1% last year resulting in an increase in gross profit margin to 24.1% from
23.9%. The increase in gross profit margin resulted from a number of factors
including (i) increased contribution form the sale of higher margin merchandise
such as cosmetics, vitamins, general merchandise, generic drugs and private
label products, (ii) higher promotional allowances received from vendors and
(iii) occupancy costs that increased at a lesser rate than the rate at which
sales increased.
Selling, general and administrative expenses were $19.1 million or 16.0% of net
sales and $15.8 million or 15.8% of net sales in the first quarter of 1998 and
1997, respectively. The percentage increase in 1998 compared to 1997 resulted
principally from higher selling expenses related to higher store salaries as a
percentage of net sales (principally from new stores during the early months of
operation). The Company believes that as the Company's new stores mature,
salaries will increase at a lesser rate than store sales.
Amortization of goodwill and other intangibles in the first quarter of 1998 and
1997 was $1.4 million and $1.3 million, respectively.
The Company incurred pre-opening costs of $0.9 million during the first quarter
of 1998 related to the opening of nine stores. There were no pre-opening costs
in the first quarter of 1997.
Net interest expense decreased 10.6% to $7.2 million in the first quarter of
1998 from $8.1 million in the first quarter of 1997. The decrease was
principally due to the impact of debt refinancing completed during February
1998 (in connection with the Refinancing Plan) which resulted in lower overall
debt levels and a reduction of interest rates.
The Company's loss before extraordinary charge decreased by $1.2 million to
$1.0 million in the first quarter of 1998 from $2.2 million in the first
quarter of 1997 primarily as a result of increased sales and gross profit
margin, and decreased interest expense, partially offset by an increase in
selling, general and administrative expenses and store pre-opening costs.
Including the extraordinary charge, the net loss for the first quarter 1998 was
$24.6 million. The Company's EBITDA (earnings before interest, taxes,
depreciation, amortization and extraordinary
9
<PAGE>
charge) for the first quarter of 1998 increased by 10% to $9.2 million from
$8.3 million in first quarter of 1997. EBITDA as a percentage of sales was 7.7%
in 1998 compared to 8.3% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $48.7 million and $37.5 million as of March 28, 1998 and
December 27 1997, respectively. The increase is primarily due to increases in
inventory related to the opening of additional stores in the first six months
of 1998 and the Company's investing in forward-buy inventory as well as
reclassification of the Company's owned warehouse to property held for sale.
The Company has leased a 300,000 square foot distribution center in Maspeth,
New York. This new facility which will double the Company's distribution
capacity, is located one mile away from the Company's current center. The
Company expects to be operating from the new facility by late summer 1998. The
Company's capital requirements primarily result from opening and stocking new
stores and from the continuing development of new management information
systems. The Company believes that there are significant opportunities to open
additional stores, and currently plans to open approximately 30 stores in the
next eighteen months. The Company expects to spend approximately $18 million in
1998 on capital expenditures primarily for new and replacement stores, and the
warehouse replacement. Working capital is also required to support inventory
for the Company's existing stores. Historically, the Company has been able to
lease its store locations. The Company has significant accounts receivable
related to pharmacy sales in connection with Third Party Plans, as compared to
non-Third Party Plan sales which are generally paid by cash or credit card.
However, the Company believes that it has adequately provided for liquidity by
entering into a non-recourse factoring arrangement whereby the Company resells
accounts receivable associated with Third Party Plans.
For the first quarter of 1998, net cash used in operating activities was $5.3
million, compared to $1.9 million provided by operating activities during the
first quarter of 1997. The primary reason for this decrease is an increase in
inventory. The Company's significant increase in inventory resulted from
management's decision to take advantage of a number of forward purchasing
opportunities and accumulate inventory in advance of additional store openings.
The Company believes that the activities did not and will not materially
adversely affect its liquidity.
During the first quarter of 1998, net cash used in investing activities was
$8.9 million compared to $0.7 million during the first quarter of 1997. The
increase reflects capital expenditures in 1998 related to new store openings.
For the quarter ended March 28, 1998, net cash provided by financing activities
was $14.9 million compared to $1.2 million used in financing activities for the
quarter ended March 29, 1997. This increase resulted from successful
implementation of the Company's Refinancing Plan during February 1998. The net
proceeds from the initial public offering of approximately $102 million, the
net proceeds from the new Senior Notes of approximately $77 million and the
proceeds from the term loan under the Existing Credit Agreement exceeded the
cash required to repay outstanding indebtedness under the Old Credit Agreement,
to redeem the Company's Zero Coupon Notes and 12% Senior Notes due 2002 as well
as cash required for call premiums on the early extinguishment debt and other
related expenses.
The Company believes that, based on current levels of operations and
anticipated growth, cash flow from operations, together with other available
sources of funds, including borrowings under the Existing Credit Agreement,
will be adequate for at least the next two years to make required payments of
principal and interest on the Company's indebtedness, to fund anticipated
capital expenditures and working capital requirements and to comply with the
terms of its debt agreements. The ability of the Company to meet its debt
service obligations and reduce its total debt will be dependent upon the future
performance of the Company and its subsidiaries which, in turn, will be subject
to general economic. financial, business, competitive, legislative, regulatory
and other conditions, many of which are beyond the Company's control. In
addition, there can be no assurance that the Company's operating results, cash
flow and capital resources will be sufficient for repayment of its indebtedness
in the future. Substantially all of the Company's borrowings under the Existing
Credit Agreement bear interest at floating rates; therefore, the Company's
financial condition will be affected by the changes in prevailing interest
rates. The Company expects to enter into interest rate protection agreements to
minimize the impact from a rise in interest rates.
10
<PAGE>
TAX BENEFITS FROM NET OPERATING LOSSES
At December 27, 1997, the Company had net operating loss carryforwards ("NOLs")
of approximately $71 million, which are due to expire in the years 2007 through
2012. These NOLs may be used to offset future taxable income through 2012 and
thereby reduce or eliminate the Company's federal income taxes otherwise
payable. The Internal Revenue Code of 1986, as amended (the "Code"), imposes
significant limitations on the utilization of NOLs in the event of an
"ownership change," as defined in Section 382 of the Code (the "Section 382
Limitation"). The Section 382 Limitation is an annual limitation on the amount
of pre-ownership change NOLs that a corporation may use to offset its
post-ownership change income. The Section 382 Limitation is calculated by
multiplying the value of a corporation's stock immediately before an ownership
change by the long-term tax-exempt rate (as published by the Internal Revenue
Service). Generally, an ownership change occurs with respect to a corporation
if the aggregate increase in the percentage of stock ownership (by value) of
that corporation by one or more 5% shareholders (including certain groups of
shareholders who in the aggregate own at least 5% of that corporation's stock)
exceeds 50 percentage points over a three-year testing period. During June
1997, the Company entered into a recapitalization agreement with its
stockholders and certain investors whereby the investors purchased
substantially all of the stockholders stock holdings in the Company, all of the
outstanding shares of the Company were converted into a newly authorized class
of Common Stock and a new authorized class of preferred stock was created.
These transactions caused the Company to experience an ownership change. As a
result, the Company currently is subject to an annual Section 382 Limitation of
approximately $5 million on the amount of NOL generated prior to June 1997 that
the Company may utilize to offset future taxable income. In addition, the
Company believes that it will generate approximately $42 million of NOLs in
connection with the Refinancing Plan. Such NOLs will not be subject to the
Section 382 Limitation and may be utilized to offset future taxable income.
However, there can be no assurance that any NOLs will be able to be utilized by
the Company to offset future taxable income or that such NOLs will not become
subject to limitation due to future ownership changes.
YEAR 2000 COMPLIANCE
The Company has several computer software systems which will require
modification or upgrading to accommodate the year 2000 and thereafter. The
Company believes that all systems can be changed by the end of 1999 and does
not expect the cost of the changes to be material to the Company's financial
condition or results of operations.
SEASONALITY
In general, sales of drugstore items such as prescription drugs, OTC drugs and
health and beauty care products exhibit limited seasonality in the aggregate,
but do vary by product category. Quarterly results are primarily affected by
the timing of new store openings and the sale of seasonable products. In view
of the Company's recent expansion of seasonal merchandising, the Company
expects slightly greater revenue sensitivity relating to seasonality in the
future.
11
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to certain legal actions arising in the
ordinary course of business. Based on information presently available to the
Company, the Company believes that it has adequate legal defenses or insurance
coverage for these actions and that the ultimate outcome of these actions will
not have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) The following documents are filed as a part of this report:
(i) Financial Statements
(ii) Exhibits:
3.1(i) Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1(i) to the Company's
Registration Statement No. 333-41239 (the "Common Stock S-1")).
3.1(ii) Form of Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.1(i) to the Common Stock S-1).
3.2(i) Certificate of Incorporation of DRI I Inc. (incorporated by reference
to Exhibit 3.2(i) to the S-1 Registration Statement No. 333-43313 with
respect to the Company's 9 1/4% Senior Subordinated Notes due 2008
(the "Notes S-1")).
3.2(ii) By-laws of DRI I Inc. (incorporated by reference to Exhibit 3.2(ii) of
the Notes S-1)
3.3 Second Amended and Restated Partnership Agreement of Duane Reade
(incorporated by reference to Exhibit 3.3 of the Notes S-1)
4.1 Form of Indenture (incorporated by reference to Exhibit 4.1 of the
Notes S-1)
10.1 Duane Reade Inc. 1997 Equity Participation Plan (incorporated by
reference to Exhibit 10.1 to the Company's Form S-1 registration
Statement (File No. 333-41239), the "Common Stock S-1").
12
<PAGE>
10.2 Duane Reade Inc. Holding Corp. 1992 Stock Incentive Plan (incorporated
by reference to Exhibit 10.2 to the Common Stock S-1).
10.3 Employment Agreement, dated as of October 27, 1997, between the
Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.3
to the Common Stock S-1).
10.4 Employment Agreement, dated as of February 22, 1993, as amended,
between the Company and Gary Charboneau (incorporated by reference to
Exhibit 10.4 to the Common Stock S-1).
10.5 Employment Agreement, dated as of April 10, 1995, as amended, between
Duane Reade and Jerry M. Ray (incorporated by reference to Exhibit
10.5 to the Common Stock S-1).
10.6 Employment Letter Agreement, dated as of October 9, 1996, between
Duane Reade and Joseph Lacko (incorporated by reference to Exhibit
10.6 to the Common Stock S-1).
10.7 Employment Letter Agreement, dated as of February 12, 1997, between
the Company and William Tennant (incorporated by reference to Exhibit
10.7 to the Common Stock S-1).
10.8 Agreement, dated as of November 22, 1996 between Duane Reade and Drug,
Chemical, Cosmetic, Plastics and Affiliated Industries Warehouse
Employees Local 815 (incorporated by reference to Exhibit 10.8 to the
Common Stock S-1).
10.9 Agreement, dated July 16, 1992, as amended, between Duane Reade and
Allied Trades Council (incorporated by reference to Exhibit 10.9 to
the Common Stock S-1).
10.10 Agreement, dated February 4, 1997, as amended between Duane Reade and
The Pharmacy Fund, Inc. (incorporated by reference to Exhibit 10.10 to
the Common Stock S-1).
10.11 Stockholders and Registration Rights Agreement, dated as of June 18,
1997, among the Company, DLJMB Funding II, Inc., DLJ Merchant Banking
Partners II, L.P., DLJ Diversified Partners, L.P., DLJ First ESC
L.L.C., DLJ Offshore Partners, II, C.V., DLJ EAB Partners, L.P., UK
Investment Plan 1997 Partners, Bankers Trust New York Corporation,
Conac & Co., Muico & Co., Roton & Co. , Putnam High Yield Trust,
PaineWebber Managed Investment Trust on behalf of PaineWebber High
Income Fund, USL Capital Corporation, Pearlman Family Partners, The
Marion Trust, Bruce L. Weitz, BCIP Associates, BCIP Trust Associates,
L.P., Tyler Capital Fund L.P., Tyler International, L.P.-II, and Tyler
Massachusetts, L.P. (incorporated by reference to Exhibit 10.13 to the
Common Stock S-1).
10.12 Credit Agreement, dated as of February 13, 1998, among Duane Reade, as
the Borrower, Duane Reade Inc. and DRI I Inc., as the Parent
Guarantors, Various Financial Institutions set forth therein, as the
Lenders, DLJ Capital Funding, Inc., as the Syndication Agent for the
Lenders, Fleet National Bank, as the Administrative Agent for the
Lenders and Credit Lyonnais New York Branch, as the Documentation
Agent for the Lenders. (Incorporated by reference to Exhibit 10.12 of
the Company's Annual Report on Form 10-K for 1997).
10.13 Partnership Security Agreement, dated as of February 13, 1998, among
Duane Reade Inc. and DRI I Inc. and Fleet National Bank, as
Administrative Agent (Incorporated by reference to Exhibit 10.13 of
the Company's 1997 Annual Report on Form 10-K).
10.14 Borrower Security Agreement, dated as of February 13, 1998 between
Duane Reade and Fleet National Bank as Administrative Agent
(Incorporated by reference to Exhibit 10.14 of the Company's 1997
Annual Report on Form 10-K).
10.15 Holdings Pledge Agreement, dated as of February 13, 1997, among Duane
Reade Inc. and Fleet National Bank, as Administrative Agent
(Incorporated by reference to Exhibit 10.15 of the Company's 1997
Annual Report on Form 10-K).
27.1* Financial Data Schedule.
* Filed herewith.
13
<PAGE>
(b) Reports on Form 8-K. None.
(c) Financial Statement Schedules: None.
Schedules for which provision is made in the applicable accounting regulations
of the Commission are either not required under the related instructions, are
inapplicable or not material, or the information called for thereby is
otherwise included in the financial statements and therefore has been omitted.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: May 11, 1998
DUANE READE INC.
(Registrant)
By: /s/ William J. Tennant
--------------------------------
Name: William J. Tennant
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on May 11, 1998.
SIGNATURES TITLES
---------- ------
/s/ Anthony J. Cuti President and Chief Executive Officer
- ----------------------------- and Director (Principal Executive
Anthony J. Cuti Officer)
/s/ William J. Tennant Senior Vice President, Chief Financial
- ----------------------------- Officer (Principal Financial Officer;
William J. Tennant Principal Accounting Officer)
/s/ Nicole S. Arnaboldi Director
- -----------------------------
Nicole S. Arnaboldi
Director
- -----------------------------
David L. Jaffe
Director
- -----------------------------
David W. Johnson
Director
- -----------------------------
Andrew J. Nathanson
Director
- -----------------------------
Kevin Roberg
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: May 11, 1998
DRI I INC.
By: /s/ William J. Tennant
--------------------------------
Name: William J. Tennant
Title: Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on May 11, 1998 by:
SIGNATURES TITLES
/s/ Anthony J. Cuti President and Chief Executive Officer
- ----------------------------- and Director (Principal Executive
Anthony J. Cuti Officer)
/s/ William J. Tennant Senior Vice President, Chief Financial
- ----------------------------- Officer (Principal Financial Officer;
William J. Tennant Principal Accounting Officer)
/s/ Nicole S. Arnaboldi Director
- -----------------------------
Nicole S. Arnaboldi
Director
- -----------------------------
David L. Jaffe
Director
- -----------------------------
Andrew J. Nathanson
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: May 11, 1998
DUANE READE INC.,
By: DRI I Inc. a general partner By: Duane Reade Inc., a general
partner
By: /s/ William J. Tennant By: /s/ William J. Tennant
------------------------------ ------------------------------
Name: William J. Tennant Name: William J. Tennant
Title: Senior Vice President and Title: Senior Vice President and
Chief Financial Officer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on May 11, 1998 by the following persons in
the capacities indicated with respect to Duane Reade Inc. and DRI I Inc., the
general partners of Duane Reade, on behalf of Duane Reade (except as otherwise
indicated):
SIGNATURES TITLES
/s/ Anthony J. Cuti President and Chief Executive Officer
- ----------------------------- and Director (principal executive
Anthony J. Cuti officer)
/s/ William J. Tennant Senior Vice President, Chief Financial
- ----------------------------- Officer (principal accounting and
William J. Tennant financial officer)
/s/ Nicole S. Arnaboldi Director
- -----------------------------
Nicole S. Arnaboldi
Director
- -----------------------------
David L. Jaffe
Director*
- -----------------------------
David W. Johnson
Director
- -----------------------------
Andrew J. Nathanson
Director*
- -----------------------------
Kevin Roberg
* Duane Reade Inc. only
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