<PAGE>
THIS PROSPECTUS IS FILED PURSUANT TO RULE 424(B)(3) OF THE
SECURITIES ACT OF 1933.
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 9, 1998.
DUANE READE INC.
9 1/4% SENIOR SUBORDINATED NOTES DUE 2008
ATTACHED IS THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL
QUARTER ENDED JUNE 27, 1998.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
<TABLE>
<CAPTION>
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities and Exchange Act of 1934
<S> <C>
For the quarterly period ended June 27, 1998. Commission file number 333-41239
</TABLE>
------------------------------
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:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
<S> <C>
Common Stock, $.01 par value per share New York Stock Exchange. Inc.
9 1/4% Senior Subordinated Notes due 2008 None
</TABLE>
----------------------------
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 August 5, 1998:
16,985,557.
===============================================================================
<PAGE>
INDEX
PAGE
PART I
ITEM 1. - FINANCIAL STATEMENTS (Unaudited)
Consolidated Statements of Operations -
For the 13 and 26 Weeks Ended June 27, 1998 and June 28, 1997 3
Consolidated Balance Sheets
As of June 27, 1998 and December 27, 1997 4
Consolidated Statements of Cash Flows -
For the 26 Weeks Ended June 27, 1998 and June 28, 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION 14
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 For the 26 Weeks Ended
------------------------------------- -------------------------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 134,796 $ 107,423 $ 254,179 $ 207,163
Cost of sales 100,233 81,482 190,810 157,385
---------------- ---------------- ----------------- ----------------
Gross profit 34,563 25,941 63,369 49,778
---------------- ---------------- ----------------- ----------------
Selling, general & administrative expenses 21,803 15,390 40,919 31,183
Amortization 1,436 1,252 2,852 2,520
Depreciation 1,300 840 2,386 1,684
Store pre-opening expenses 962 343 1,867 343
Nonrecurring charges - 9,700 - 9,700
---------------- ---------------- ----------------- ----------------
25,501 27,525 48,024 45,430
---------------- ---------------- ----------------- ----------------
Operating income 9,062 (1,584) 15,345 4,348
Interest expense, net 5,321 8,608 12,559 16,705
---------------- ---------------- ----------------- ----------------
Income (loss) before income taxes 3,741 (10,192) 2,786 (12,357)
Income taxes - - - -
---------------- ---------------- ----------------- ----------------
Income (loss) before extraordinary charge 3,741 (10,192) 2,786 (12,357)
Extraordinary charge, net of income taxes of $-0- - - (23,600) -
---------------- ---------------- ----------------- ----------------
Net income (loss) $ 3,741 $ (10,192) $ (20,814) $ (12,357)
================ ================ ================= ================
Per Common Share - Basic
Income (loss) before extraordinary charge $ 0.22 $ (1.01) $ 0.18 $ (1.23)
Extraordinary charge - - (1.53) -
---------------- ---------------- ----------------- ----------------
Net income (loss) $ 0.22 $ (1.01) $ (1.35) $ (1.23)
================ ================ ================= ================
Weighted average common shares outstanding 16,983 10,062 15,411 10,062
================ ================ ================= ================
Per Common Share - Diluted
Income (loss) before extraordinary charge $ 0.21 $ (1.01) $ 0.17 $ (1.23)
Extraordinary charge - - (1.42) -
---------------- ---------------- ----------------- ----------------
Net income (loss) $ 0.21 $ (1.01) $ (1.25) $ (1.23)
================ ================ ================= ================
Weighted average common shares outstanding 18,231 10,062 16,639 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>
June 27, December 27,
1998 1997
----------------------- -----------------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash $ 612 $ 261
Receivables 14,002 9,592
Inventories 96,607 66,665
Prepaid expenses 2,712 2,556
Property held for sale 3,864 -
----------------------- -----------------------
TOTAL CURRENT ASSETS 117,797 79,074
Property and equipment, net 43,052 32,557
Goodwill, net of accumulated amortization of $20,003 and $18,264 119,151 120,890
Other assets 16,912 17,000
----------------------- -----------------------
TOTAL ASSETS $ 296,912 $ 249,521
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 42,619 $ 23,510
Accrued interest 4,279 4,634
Other accrued expenses 9,193 10,873
Current portion of long-term debt 3,300 660
Current portion of capital leases 1,526 1,903
----------------------- -----------------------
TOTAL CURRENT LIABILITIES 60,917 41,580
Senior debt, less current portion 218,250 179,043
Subordinated zero coupon debt, net of unamortized discount
of $-0- and $30,827 - 92,553
Capital lease obligations, less current portion 3,233 3,926
Other noncurrent liabilities 7,722 6,528
----------------------- -----------------------
TOTAL LIABILITIES 290,122 323,630
----------------------- -----------------------
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 16,985,557 and 10,260,577 shares 170 103
Paid-in capital 126,209 24,563
Accumulated deficit (119,589) (98,775)
----------------------- -----------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 6,790 (74,109)
----------------------- -----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 296,912 $ 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 26 Weeks Ended
---------------------------------------
June 27, June 28,
1998 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (20,814) $ (12,357)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary charge 23,600 -
Depreciation and amortization of property and equipment 2,386 1,684
Amortization of goodwill and other intangibles 3,366 3,819
Accretion of principal of zero coupon debt 1,659 6,292
Noncurrent portion of nonrecurring charges - 2,200
Other 1,201 714
Changes in operating assets and liabilities:
Receivables (4,410) 1,272
Inventories (29,942) (8,246)
Accounts payable 19,109 4,837
Prepaid and accrued expenses (2,190) (464)
Increase in other (assets) liabilities, net (2,996) 427
----------------- -----------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (9,031) 178
----------------- -----------------
Cash flows from investing activities:
Proceeds from sale of capital assets - 1,075
Capital expenditures (16,745) (2,170)
----------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (16,745) (1,095)
----------------- -----------------
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 -
Repayment of old term loan (65,310) (6,000)
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) 8,600
Deferred financing costs (5,042) (272)
Exercise of stock options 106 -
Repayments of new term loan (450) -
Net borrowings - new revolving credit facility 12,000 -
Repayments of capital lease obligations (1,070) (1,384)
----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 26,127 944
----------------- -----------------
Net increase in cash 351 27
Cash at beginning of period 261 216
----------------- -----------------
Cash at end of period $ 612 $ 243
================= =================
</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. These 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 interim periods presented are not necessarily indicative of the
results expected for the full year.
2. NET INCOME (LOSS) PER COMMON SHARE
Net income (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.
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>
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
5. EXTRAORDINARY CHARGE
During the 26 weeks ended June 27, 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):
<TABLE>
<CAPTION>
<S> <C>
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
=====
</TABLE>
6. NONRECURRING CHARGES
During the first quarter of 1997, the Company considered a public offering of
its common stock and took certain steps in connection with those plans. Such
plans were abandoned when the Company entered into a recapitalization agreement
with its stockholders ("Stockholders") and certain investors ("Investors").
Under the recapitalization agreement the Investors purchased from the
Stockholders substantially all of their stock holdings in the Company. In
addition, because of the change of control, the Company was obligated to and
made offers to repurchase all outstanding 12% Senior Notes due September 15,
2002 and 15% Senior Subordinated Zero Coupon Notes due September 15, 2004 for
the principal amount or accreted value thereof plus a premium. The costs and
expenses incurred in connection with the abandoned public offering and the
recapitalization have been treated as nonrecurring because the expenses were
related to financing activities which the Company does not expect to repeat.
7. SUBSEQUENT EVENT
On August 5, 1998 the Company announced that it has signed a definitive
agreement under which the Company will acquire the operating assets of Rock
Bottom Stores, Inc., a leading drug retailer operating 38 stores primarily in
the outerboroughs of New York City. The purchase price of the transaction is
approximately $30 million plus the net value of inventory at closing, which is
expected to be $31 million. Pending Hart-Scott-Rodino approval, the transaction
is expected to be consummated within the next 45 to 60 days.
7
<PAGE>
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of income (loss) per common
share for the periods presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 26 Weeks Ended
--------------------------------------- ---------------------------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Income (loss) before extraordinary charge $ 3,741 $ (10,192) $ 2,786 $ (12,357)
Extraordinary charge - - (23,600) -
----------------- ----------------- ----------------- -----------------
Net income (loss) $ 3,741 $ (10,192) $ (20,814) $ (12,357)
================= ================= ================= =================
Weighted average number of common shares
outstanding during the period 16,983 10,062 15,411 10,062
Common equivalent common shares 1,248 - 1,228 -
----------------- ----------------- ----------------- -----------------
Weighted average number of shares outstanding 18,231 10,062 16,639 10,062
================= ================= ================= =================
Per common share - basic
Income (loss) before extraordinary charge $ 0.22 $ (1.01) $ 0.18 $ (1.23)
Extraordinary charge - - (1.53) -
----------------- ----------------- ----------------- -----------------
Net income (loss) $ 0.22 $ (1.01) $ (1.35) $ (1.23)
================= ================= ================= =================
Per common share - diluted
Income (loss) before extraordinary charge $ 0.21 $ (1.01) $ 0.17 $ (1.23)
Extraordinary charge - - (1.42) -
----------------- ----------------- ----------------- -----------------
Net income (loss) $ 0.21 $ (1.01) $ (1.25) $ (1.23)
================= ================= ================= =================
</TABLE>
8
<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. .
9
<PAGE>
RESULTS OF OPERATIONS
The following sets forth the results of operations as a percentage of sales for
the periods indicated.
<TABLE>
<CAPTION>
13 Weeks ended 26 Weeks Ended
-------------- ---------------
June 27, 1998 June 28, 1997 June 27, 1998 June 28, 1998
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Costs of Sales 74.4 75.9 75.1 76.0
------------- ------------ ------------- -------------
Gross Profit 25.6 24.1 24.9 24.0
Selling general and adminstrative expenses 16.2 14.3 16.1 15.0
Amortization 1.1 1.2 1.1 1.2
Depreciation 0.9 0.8 1.0 0.8
Store pre-opening expenses 0.7 0.3 0.7 0.2
Non-recurring charges 0.0 9.0 0.0 4.7
------------- ------------ ------------- -------------
Operating income 6.7 (1.5) 6.0 2.1
Interest expense net 3.9 8.0 4.9 8.1
------------- ------------ ------------- -------------
Income (loss) before extraordinary charge 2.8 (9.5) 1.1 (6.0)
Extraordinary charge 0.0 0.0 9.3 0.0
------------- ------------ ------------- -------------
Net loss 2.8% (9.5)% (8.2)% (6.0)%
============= ============ ============= =============
</TABLE>
SECOND QUARTER 1998 VERSUS SECOND QUARTER 1997
Net sales in the second quarter 1998 were $134.8 million, an increase of 25.5%
over last year's second quarter net sales of $107.4 million. The increase was
attributable to increased comparable store sales of 7.5% and the sales
generated by new stores. The Company opened eight stores during the second
quarter of 1998 compared to two stores during the second quarter of 1997.
Cost of sales as a percentage of net sales decreased to 74.4% this year from
75.9% in the comparable quarter last year resulting in an increase in gross
profit margin to 25.6% from 24.1%. The increase in gross profit margin resulted
from a number of factors including increased contribution from the sale of
higher margin merchandise such as cosmetics, vitamins, general merchandise,
generic drugs and private label products and higher promotional allowances
received from vendors.
Selling, general and administrative expenses were $21.8 million or 16.2% of net
sales and $15.4 million or 14.3% of net sales in the second 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 attributable to new stores during the
early months of operation). The Company believes that as the Company's new
stores mature, salaries as a percentage of sales, will increase at a lesser
rate than store sales. In addition, the second quarter of 1997 reflected a cost
savings related to the elimination of management fees; the 1998 results do not
include any such cost savings.
Amortization of goodwill and other intangibles in the second quarter of 1998
and 1997 was $1.4 million and $1.3 million, respectively.
During the second quarter of 1997, the Company recorded a $9.7 million
nonrecurring charge related to the Company's abandoned public offering and
recapitalization.
The Company incurred pre-opening costs of $1.0 million during the second
quarter of 1998 related to the opening of eight stores. Pre-opening costs of
$0.3 million were incurred during the second quarter of 1997 for the opening of
two stores.
10
<PAGE>
Net interest expense decreased 38.4% to $5.3 million in the second quarter of
1998 from $8.6 million in the second 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 net income increased by $13.9 million to $3.7 million in the
second quarter of 1998 from a net loss of $10.2 million in the second quarter
of 1997 primarily as a result of the absence of the $9.7 million nonrecurring
charge that occurred in the prior year period, reduced interest expense, and
increased sales and gross profit margin, partially offset by increased selling,
general and administrative expenses, store pre-opening costs and depreciation
and amortization. The Company's EBITDA (earnings before interest, taxes,
depreciation, amortization, nonrecurring charges and extraordinary charge) for
the second quarter of 1998 increased by 18.6% to $12.6 million from $10.6
million in second quarter of 1997, primarily as a result of the foregoing
reasons.
TWENTY-SIX WEEKS ENDED JUNE 27, 1998 VERSUS TWENTY-SIX WEEKS ENDED JUNE 28, 1997
Net sales for the twenty-six weeks ended June 27, 1998 were $254.2 million, an
increase of 22.7% over the net sales for the first twenty-six weeks of 1997 of
$207.2 million. The increase was attributable to increased comparable store
sales of 6.9% and the sales generated by new stores. The Company opened 17
stores during the period compared to two store openings during the same period
last year.
Cost of sales for the twenty-six weeks ended June 27, 1998 as a percentage of
net sales decreased to 75.1% from 76.0% in the comparable period last year,
resulting in an increase in gross profit margin to 24.9% from 24.0%. The
increase in gross profit margin resulted from increased contribution from the
sale of higher margin merchandise such as cosmetics, vitamins, general
merchandise, generic drugs and private label products; and higher promotional
allowances received from vendors.
Selling, general and administrative expenses were $40.9 million or 16.1% of net
sales and $31.2 million or 15.0% of net sales for the twenty-six weeks ended
June 27, 1998 and June 28, 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 and increases in other store
related expenses (principally attributable to new stores during the early
months of operation). The Company believes that as new stores mature, these
expenses will increase at a lesser rate than store sales.
Amortization of goodwill and other intangibles for the twenty-six weeks ended
June 27, 1998 and June 28, 1997 was $2.9 million and $2.5 million,
respectively.
During the twenty-six weeks ended June 27, 1998, as a result of the completion
of the Refinancing Plan, the Company incurred a $23.6 million extraordinary
charge due to the early extinguishment of debt.
During the twenty-six weeks ended June 28, 1997, the Company recorded a $9.7
million nonrecurring charge related to the Company's abandoned public offering
and recapitalization.
The Company incurred pre-opening costs of $1.9 million during the twenty-six
weeks ended June 27, 1998 related to the opening of 17 stores. Pre-opening
costs of $0.3 million were incurred during the twenty-six weeks ended June 28,
1997 for the opening of two stores.
Net interest expense decreased 24.6% to $12.6 million during the twenty-six
weeks ended June 27,1998 from $16.7 million in the comparable period last year.
The decrease was due to the impact of the debt refinancing completed during
February 1998 (in connection with the Company's Refinancing Plan) which
resulted in lower overall debt levels and a reduction of interest rates.
11
<PAGE>
The Company's income before extraordinary charge increased by $15.2 million to
$2.8 million for the twenty-six weeks ended June 27, 1998 from a net loss of
$12.4 million in the twenty-six weeks ended June 28, 1997 primarily as a result
of the $9.7 million nonrecurring charge in the prior year period, decreased
interest expense, and increased sales and gross profit margin, partially offset
by increased selling, general and administrative expenses, store pre-opening
costs, depreciation and amortization. Including the extraordinary charge, the
net loss for the twenty-six weeks ended June 27, 1998 was $20.8 million. The
Company's EBITDA (earnings before interest, taxes, depreciation, amortization,
nonrecurring charges and extraordinary charge) for the twenty-six weeks ended
June 27, 1998 was $21.8 million, an increase of $2.8 million or 14.9% from
$19.0 million in the year ago period , primarily as a result of the foregoing
factors.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $56.9 million and $37.5 million as of June 27, 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 twenty-six
weeks of 1998 and the Company's investing in forward-buy inventory as well as
an increase in vendor receivables for rebates related to the increased
inventory purchases. 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 has transferred a portion of its warehouse operations to
the new facility and expects to be fully operational by early fall 1998. The
Company's capital requirements primarily result from opening and stocking new
stores and from the continuing development of management information systems.
The Company believes that there are significant opportunities to open
additional stores, and currently plans to open approximately 25 to 30 stores
during 1998. The Company expects to spend approximately $22 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 twenty-six weeks ended June 27, 1998, net cash used in operating
activities was $9.0 million, compared to $0.2 million provided by operating
activities during the twenty-six weeks ended June 28, 1997. The primary reason
for this use of cash was an increase in inventory and vendor receivables. 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. Vendor
receivables increased as a result of rebates related to increased inventory
purchases. The Company believes that the activities did not and will not
materially adversely affect its liquidity.
During the twenty-six weeks ended June 27, 1998, net cash used in investing
activities was $16.7 million compared to $1.0 million during the year ago
period. The increase reflects capital expenditures in 1998 related to store
openings.
For the twenty-six weeks ended June 27, 1998, net cash provided by financing
activities was $26.1 million compared to $0.9 million for the twenty-six weeks
ended June 28, 1997. This increase resulted from borrowings of new revolving
credit facility net of repayments for capital lease obligations.
12
<PAGE>
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. As of June 27, 1998, the Company had borrowed
approximately $12 million under the revolving portion of its bank credit
facility and had approximately $18 million of remaining availability. 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.
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.
13
<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").
10.2 Duane Reade Inc. Holding Corp. 1992 Stock Incentive Plan (incorporated
by reference to
14
<PAGE>
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.
15
<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.
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: August 6, 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 August 6, 1998.
SIGNATURES TITLES
---------- ------
/s/ Anthony J. Cuti President and Chief Executive Officer and Director
- ----------------------- (Principal Executive Officer)
Anthony J. Cuti
/s/ William J. Tennant Senior Vice President, Chief Financial Officer
- ----------------------- (Principal Financial Officer; Principal Accounting
William J. Tennant Officer)
17
<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: August 6, 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 August 6, 1998 by:
SIGNATURES TITLES
---------- ------
/s/ Anthony J. Cuti President and Chief Executive Officer and Director
- ------------------------- (Principal Executive Officer)
Anthony J. Cuti
/s/ William J. Tennant Senior Vice President, Chief Financial Officer
- ------------------------- (Principal Financial Officer; Principal Accounting
William J. Tennant Officer)
18
<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: August 6, 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 Chief Title: Senior Vice President and Chief
Financial Officer Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on August 6, 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 officer)
Anthony J. Cuti
/s/ William J. Tennant Senior Vice President, Chief Financial Officer
- ---------------------- (principal accounting and financial officer)
William J. Tennant
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BABALCE SHEET AS OF JUNE 27, 1998 AND THE RELATED
CONSOLIDATED STATEMENT OF OPERATIONS FOR 13 AND 26 WEEKS ENDED JUNE
27, 1998 AND IS QUALIFIED ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000895364
<NAME> DUANE READE INC.
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-27-1998 DEC-26-1998
<PERIOD-END> JUN-27-1998 JUN-27-1998
<CASH> 612 612
<SECURITIES> 0 0
<RECEIVABLES> 14,002 14,002
<ALLOWANCES> 0 0
<INVENTORY> 96,607 96,607
<CURRENT-ASSETS> 117,797 117,797
<PP&E> 43,052 43,052
<DEPRECIATION> (12,861) (12,861)
<TOTAL-ASSETS> 296,912 296,912
<CURRENT-LIABILITIES> 60,917 60,917
<BONDS> 226,309 226,309
0 0
0 0
<COMMON> 170 170
<OTHER-SE> 6,620 6,620
<TOTAL-LIABILITY-AND-EQUITY> 296,912 296,912
<SALES> 134,796 254,179
<TOTAL-REVENUES> 134,796 254,179
<CGS> 100,233 190,810
<TOTAL-COSTS> 100,233 190,810
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,321 12,559
<INCOME-PRETAX> 3,741 2,786
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 3,741 2,786
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (23,600)
<CHANGES> 0 0
<NET-INCOME> 3,741 (20,814)
<EPS-PRIMARY> .22 (1.35)
<EPS-DILUTED> .21 (1.25)
</TABLE>
