<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1998
REGISTRATION NO. 333-41239
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DUANE READE INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 04-3164702 5912
(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification No.) Classification Code Number)
</TABLE>
440 NINTH AVENUE
NEW YORK, NEW YORK 10001
TELEPHONE: 212-273-5700
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
MR. ANTHONY J. CUTI
DUANE READE INC.
440 NINTH AVENUE
NEW YORK, NEW YORK 10001
TELEPHONE: 212-273-5700
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
<TABLE>
<CAPTION>
<S> <C>
Copies to:
Steven Della Rocca, Esq. Stephen M. Besen, Esq.
Latham & Watkins Weil, Gotshal & Manges LLP
885 Third Avenue, Suite 1000 767 Fifth Avenue
New York, New York 10022 New York, New York 10153
Telephone: 212-906-1200 Telephone: 212-310-8000
Telecopy: 212-751-4864 Telecopy: 212-310-8007
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BY ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 1998
PROSPECTUS
FEBRUARY , 1998
6,700,000 SHARES
[DUANE READE LOGO]
COMMON STOCK
All of the shares of common stock, $0.01 par value per share (the "Common
Stock"), offered hereby are being offered (the "Offering") by Duane Reade
Inc. ("Duane Reade" or the "Company"). The Offering is part of the
Refinancing Plan (as defined herein) of the Company. See "Prospectus
Summary--Refinancing Plan" and "Use of Proceeds."
Prior to this Offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will
be between $14.00 and $16.00 per share. See "Underwriting" for information
relating to the factors that will be considered in determining the initial
public offering price.
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to notice of official issuance, under the symbol "DRD."
SEE "RISK FACTORS," BEGINNING ON PAGE 9, FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------- ------------ ----------------- ------------
<S> <C> <C> <C>
Per Share..... $ $ $
Total(3)...... $ $ $
</TABLE>
- -----------------------------------------------------------------------------
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $965,000.
(3) Certain stockholders, including certain affiliates of Donaldson, Lufkin
& Jenrette Securities Corporation ("DLJ"), one of the Underwriters,
have granted to the Underwriters an option, exercisable within 30 days
of the date hereof, to purchase an aggregate of up to 1,005,000
additional shares of Common Stock (up to 946,783 of which will be sold
by such affiliates of DLJ) , solely to cover over-allotments, if any.
If the Underwriters exercise such option in full, the total Price to
the Public, Underwriting Discounts and Commissions, Proceeds to the
Company and aggregate proceeds to such selling stockholders (the
"Selling Stockholders") will be $ , $ , $ and $ , respectively.
See "Principal and Selling Stockholders" and "Underwriting." The
Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders, if any.
The shares of Common Stock are being offered by the several Underwriters
subject to prior sale, when, as and if delivered to and accepted by them,
subject to certain prior conditions. The Underwriters reserve the right to
reject any order in whole or in part. It is expected that delivery of the
shares of Common Stock will be made in New York, New York on or about
February , 1998.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
<PAGE>
[PICTURES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING TRANSACTIONS, SYNDICATE COVERING TRANSACTIONS, AND THE
IMPOSITION OF PENALTY BIDS. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN
CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE
COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
[DUANE READE INC. LOGO]
[PHOTO]
With 58 drugstores in Manhattan, four in Brooklyn, two in the Bronx, two
in Queens, and one in Newark, duane reade enjoys the largest share of drugstore
sale in the New York metropolitan market.
FLAGS APPROXIMATE STORE LOCATIONS.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto included elsewhere in
this Prospectus. Unless otherwise stated, the information contained in this
Prospectus assumes no exercise of the Underwriters' over-allotment option.
The share data set forth in this Prospectus reflects a reclassification of
the Company's capital stock pursuant to which each holder of shares of class
B common stock, $.01 par value per share ("Class B Common Stock"), is
entitled to receive one share of Common Stock for approximately 8.326 shares
of Common Stock (the "Reclassification"). Unless otherwise stated in this
Prospectus, references to the "Company" or "Duane Reade" shall mean Duane
Reade Inc. (formerly known as Duane Reade Holding Corp.), its consolidated
subsidiaries and their respective predecessors. The fiscal year of the
Company ends on the last Saturday in December. Fiscal years 1992 through 1996
each consisted of 52 weeks. All data regarding the number of the Company's
stores is as of November 25, 1997, unless otherwise specified.
The Company
Duane Reade is the largest drugstore chain in New York City, based on
sales volume, with 58 of its 67 stores located in Manhattan's high-traffic
business and residential districts. The Company operates almost twice as many
stores in Manhattan as its next largest competitor. Since opening its first
store in 1960, the Company has successfully executed a marketing and
operating strategy tailored to the unique characteristics of New York City,
the largest and most densely populated market in the United States. According
to Drug Store News, Duane Reade is the leading drugstore chain in the United
States in terms of sales per square foot, at $956 per square foot in 1996,
which was more than two times the national average for drugstore chains. For
the fiscal year ended December 28, 1996, the Company had sales of $381.5
million and EBITDA (as defined herein) of $35.3 million, increases of 13.2%
and 28.6%, respectively, over the 1995 fiscal year. For the 39 weeks ended
September 27, 1997, the Company had sales of $313.8 million and EBITDA of
$29.7 million, increases of 11.6% and 24.9%, respectively, over the
comparable 1996 period. For the fiscal year ended December 28, 1996 and the
39 week period ended September 27, 1997, the Company had net losses of $17.9
million and $14.2 million, respectively, and, on a pro forma basis, after
giving effect to the Offering and the Refinancing Plan, the Company would
have had net losses of $5.7 million and $3.9 million, respectively, for such
periods.
The Company enjoys strong brand name recognition in New York City, which
it believes results from the Company's many locations in high-traffic areas
of Manhattan and the 30 million shopping bags with the distinctive Duane
Reade logo that the Company distributes annually. Independent surveys
conducted in 1996 indicated that approximately 84% of the people who live or
work in Manhattan recognize the Duane Reade name, and seven out of ten
shopped at a Duane Reade store in the past twelve months. The Company was
also recently named "Regional Drug Store Chain of the Year" for 1997 by Drug
Store News.
The Company has developed an operating strategy designed to capitalize on
the unique characteristics of the New York City market, which include
high-traffic volume, complex distribution logistics and high costs of
occupancy, media advertising and personnel. The key elements of the Company's
operating strategy are its (i) everyday low price format and broad product
offering, (ii) low cost operating structure supported by its high volume
stores and low advertising and distribution costs and (iii) ability to design
and operate its stores in a wide variety of sizes and layouts.
The Company believes that its everyday low price format and broad product
offerings provide value and convenience for its customers and build customer
loyalty. The Company's everyday low price format results in prices that the
Company believes are lower, on average, than the prices offered by its
competitors.
The Company is able to keep its operating costs relatively low due to its
high per store sales volume, low warehouse and distribution costs and low
advertising expenditures. The Company's high volume stores allow it to
effectively leverage occupancy costs, payroll and other store operating
expenses. The Company's two primary distribution facilities are located
within five miles of all but one of its 67 stores and, combined with the
rapid turnover of inventory in Duane Reade's stores, result in relatively low
3
<PAGE>
warehouse and distribution costs. The Company's strong brand name recognition
in New York City and everyday low price format allow the Company to minimize
its use of costly media and print advertising and to rely instead on
in-window displays and other less expensive promotional activities.
The Company has demonstrated its ability to successfully operate stores
using a wide variety of store configurations and sizes, which the Company
believes is necessary to succeed in the New York City market. For example,
the size of the Company's stores ranges from 2,600 to 12,300 square feet, and
it operates 29 bi-level stores. The Company believes that its flexibility in
configuring stores provides it with a competitive advantage in securing
locations for its new stores, as many of its competitors target more
standarized spaces for their stores, which are more difficult to find in New
York City. In addition, the Company's management team has extensive
experience and knowledge of the New York City real estate market, allowing it
to aggressively pursue attractive real estate opportunities.
The Company was founded in 1960. In 1992, Bain Capital acquired the
Company from its founders and, in June 1997, investment funds affiliated with
DLJ Merchant Banking Partners II, L.P. ("DLJMBPII") acquired approximately
91.5% of the outstanding capital stock of the Company from Bain Capital and
certain other selling securityholders (the "Recapitalization"). Since the
1992 acquisition, the Company has incurred net losses in each fiscal year.
In 1994 and 1995, the Company experienced rapid expansion, growing from 40
stores to 59 stores. However, as a result of liquidity constraints and the
need for improved inventory controls, the Company was forced to suspend its
store expansion program in late 1995. In early 1996, a strengthened
management team led by Anthony Cuti, the Company's new Chairman and Chief
Executive Officer, took several measures to improve operations, including
improving inventory controls and decreasing out-of-stock occurrences,
creating a loss prevention function to control inventory shrink and
continuing to invest in management information systems ("MIS"). In 1997, the
Company resumed its store expansion program, opening seven stores. During Mr.
Cuti's tenure at the Company, EBITDA has increased by 53.2% from $26.9
million for the 52 weeks ended March 29, 1996 to $41.2 million for the 52
weeks ended September 27, 1997.
The Company was incorporated in Delaware in 1992. The Company's principal
executive offices are located at 440 Ninth Avenue, New York, New York 10001,
and its phone number is (212) 273-5700.
Growth Strategy
The Company believes that, as a result of its successful operating history
and market position in New York City, it is well positioned to capitalize on
the growth opportunities in its market. The Company's strategy for continued
growth is to (i) open additional stores in Manhattan and the surrounding
boroughs, (ii) continue to capitalize on favorable pharmacy trends, (iii)
make opportunistic acquisitions of independent drugstores and pharmacy files
and (iv) continue to implement merchandising initiatives in non-pharmacy
areas.
OPEN ADDITIONAL STORES. The Company believes that the New York City
drugstore market remains underpenetrated by drugstore chains, with only 50%
of the estimated $2.65 billion in annual drugstore-related sales controlled
by chains, compared to approximately 74% controlled by chains nationally.
This provides significant opportunities for the Company to open additional
stores in Manhattan as well as in the densely populated areas of the
surrounding boroughs. Some of the Company's most successful stores have been
opened in areas new to the Company, such as the residential areas of the
Upper East and West sides of Manhattan, Brooklyn, the Bronx and Queens. The
Company believes that its long-standing presence in, and knowledge of, the
New York City real estate market, combined with the use of a proprietary site
selection model that considers numerous demographic and traffic flow
variables, have allowed it to identify attractive store locations. Since
1993, all of the Company's new stores have become profitable on an operating
basis (i.e., prior to allocation of corporate expenses, goodwill
amortization, interest expense and income taxes) within the first full year
of operation. Over the next two years, the Company plans to open
approximately 30 to 40 stores, primarily in New York City.
CONTINUE TO CAPITALIZE ON FAVORABLE PHARMACY TRENDS. Sales of prescription
and over-the-counter ("OTC") drugs have been growing rapidly throughout the
drugstore industry. The Company expects
4
<PAGE>
demographic trends, such as the aging of the U.S. population, and industry
changes, such as growth of managed care organizations, insurance companies,
employers and other third-party payors (collectively, "Third Party Plans"),
to continue to drive increases in the prescription and OTC drug businesses.
Since 1994, the Company has focused on increasing its pharmacy sales by
entering into agreements to service Third Party Plans and by upgrading the
appearance and service level of its store pharmacies. While sales to
customers covered by Third Party Plans generally result in lower gross profit
margins due to competitive pricing, the Company believes that such lower
margins are offset by the increased volume of pharmacy sales and the
opportunity to leverage fixed expenses. The Company believes that its
initiatives, which are designed to capitalize on industry trends, have
resulted in the Company's pharmacy sales growing at an annual rate of
approximately 30% since 1994. Although these initiatives have helped increase
the average number of prescriptions filled by Duane Reade per store per week
from 640 in 1994 to 865 during 1997, the Company's average remains well below
the national industry chain store average of approximately 1,200, providing
significant opportunity for continued pharmacy growth. The Company believes
that continued pharmacy growth will increase overall customer traffic,
thereby also benefitting its non-pharmacy sales.
MAKE OPPORTUNISTIC ACQUISITIONS OF INDEPENDENT DRUGSTORES AND PHARMACY
FILES. The Company believes that the growth of Third Party Plans and the
continued penetration of chain drugstores such as Duane Reade have put
increasing pressure on the approximately 1,400 independent drugstores in New
York City. When appropriate, the Company considers acquiring small local
chains or independent drugstores. The Company also pursues the purchase of
pharmacy files of independent drugstores when such purchases are economically
attractive to the Company. The pharmacy files of independent pharmacists tend
to have a higher proportion of prescriptions not covered by Third Party
Plans, which generate incremental revenue and higher margins. When
appropriate, the Company retains the services of the pharmacist, whose
personal relationship with the customers generally maximizes the retention
rate of the purchased file. In 1997, the Company acquired one independent
drugstore and seven such pharmacy files and intends to aggressively pursue
additional purchases.
CONTINUE TO IMPLEMENT MERCHANDISING INITIATIVES IN NON-PHARMACY
AREAS. Management has recently undertaken a number of merchandising
initiatives, including the expansion of certain high-margin categories such
as greeting cards, cosmetics, vitamins, photofinishing and photo supplies and
an expanded seasonal merchandising program. The Company also continues to
focus on category management, which it believes will improve gross margins
and increase non-pharmacy sales. For example, in 1997 the Company introduced
one-hour photofinishing service in three of its stores and intends to
introduce one-hour photofinishing service in approximately seven to ten
additional stores in 1998. The Company has also increased its emphasis on the
sale of its own private label products, which it believes provide a
high-quality, lower priced alternative to name brand products while
generating higher gross profit margins than name brand products. In addition,
in the fourth quarter of 1997, Duane Reade completed installation of Point of
Sale ("POS") scanners in all of its stores and, by the end of the first
quarter of 1998, will have completed its "planogramming" (space management
system) initiative in all of its stores. These systems and initiatives will
allow the Company to better analyze sales trends and merchandise its stores
more effectively, which the Company believes will ultimately increase its
sales and profitability.
The success of the Company's growth strategy is dependent on a number of
factors, many of which are beyond the Company's control. The Company's
ability to continue to successfully execute its new store opening program is
subject to a number of factors including the availability and cost of
attractive new store locations, continued favorable retail and pharmacy
trends, competition, the general economic environment and the ability of
management to successfully oversee the Company's expanded operations. Due to
the above factors, there can be no assurance that the Company will be
successful in implementing the above growth strategy.
RECENT DEVELOPMENTS
The Company's 1997 fiscal year ended on December 27, 1997. While the final
results for the year ended December 27, 1997 are not yet available, the
Company currently estimates that net sales for the full 1997 fiscal year were
approximately $429.8 million, including approximately $107.8 million from
pharmacy sales.
5
<PAGE>
The information above is preliminary in nature only, and is subject in all
respects to completion of various internal analyses and procedures necessary
to finalize the Company's financial statements, and to completion of the
audit of the Company's financial statements for the fiscal year ended
December 27, 1997.
Refinancing Plan
The Offering is 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 successful consummation of the Refinancing Plan will reduce
the Company's overall indebtedness, simplify the Company's capital structure
and provide access to additional borrowings. The principal components of the
Refinancing Plan are: (i) the sale by the Company of 6,700,000 shares of
Common Stock in the Offering for estimated net proceeds of $92.5 million;
(ii) the execution of a new secured credit agreement (the "New Credit
Agreement"), which will provide for borrowings of up to approximately $160.0
million; (iii) the issuance (the "Notes Offering") of $80.0 million aggregate
principal amount of the Company's % Senior Subordinated Notes due 2008 (the
"New Senior Subordinated Notes") for estimated net proceeds of $77.1 million;
(iv) the repayment of all outstanding borrowings under the Company's existing
credit agreement (the "Existing Credit Agreement"), the outstanding principal
amount of which was $89.8 million as of December 27, 1997; (v) the redemption
of the Company's outstanding 15% Senior Subordinated Zero Coupon Notes due
2004 (the "Zero Coupon Notes") for $99.8 million (including a redemption
premium of $7.0 million); (vi) the redemption of the Company's outstanding
12% Senior Notes due 2002 (the "Senior Notes") for $93.9 million (including a
redemption premium of $4.0 million); and (vii) the merger of Daboco, Inc., a
direct wholly-owned subsidiary of the Company, with and into the Company (the
"Merger"). The Company believes that the Refinancing Plan will result in a
reduction in overall interest expense because total interest expense
associated with the New Credit Agreement and the Notes Offering will be less
than the total interest expense currently associated with the Senior Notes
and the Zero Coupon Notes. See "Selected Consolidated Historical Financial
and Operating Data." The Company expects that interest rates under the New
Credit Agreement will be approximately the same as interest rates under the
Existing Credit Agreement. See "Description of Certain Indebtedness--New
Credit Agreement." The Company expects that total fees and expenses
associated with the Refinancing Plan will be approximately $13.3 million. See
"Use of Proceeds." The consummation of the Offering will be conditional upon
the other components of the Refinancing Plan.
The Offering
Common Stock offered hereby ... 6,700,000 shares (1)
Common Stock to be outstanding
after the Offering ............ 16,957,832 shares (1)
Use of Proceeds ............... The net proceeds from the Offering, together
with borrowings under the New Credit
Agreement and the net proceeds from the
Notes Offering, will be used to complete the
Refinancing Plan. See "Prospectus
Summary--Refinancing Plan" and "Use of
Proceeds."
Proposed New York Stock
Exchange symbol ............... "DRD"
- ------------
(1) Excludes (i) outstanding options to purchase an aggregate of 1,651,959
shares of Common Stock and (ii) 315,409 additional shares reserved for
issuance under the Company's stock option plans.
6
<PAGE>
Summary Historical
Financial and Operating Data
(In thousands, except percentages and store data)
The following table sets forth summary consolidated historical financial
data for the fiscal years ended December 31, 1994, December 30, 1995 and
December 28, 1996 and for the 39 week periods ended September 28, 1996 and
September 27, 1997. This data should be read in conjunction with the
consolidated historical financial statements of the Company, together with
the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR 39 WEEKS ENDED
--------------------------------- --------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1996 1996 1997
---------- ---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................. $281,103 $336,922 $381,466 $281,093 $313,796
Gross profit .............................. 71,425 77,095 92,961 65,296 77,383
Nonrecurring charges (1) .................. -- -- -- -- 10,887
Operating income .......................... 11,042 12,166 14,542 11,849 11,268
Net interest expense ...................... 27,480 30,224 32,396 24,334 25,433
Net loss .................................. (16,438) (18,058) (17,854) (12,485) (14,165)
OPERATING AND OTHER DATA:
EBITDA (2)................................. $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747
EBITDA as a percentage of net sales ...... 11.1% 8.2% 9.3% 8.5% 9.5%
Number of stores at end of period ........ 51 59 60 60 65
Same store sales growth (3) ............... 1.6% (3.5)% 8.3% 7.8% 7.9%
Pharmacy same store sales growth (3) ..... 14.2% 7.0% 25.5% 25.1% 25.4%
Average store size (square feet) at end of
period ................................... 6,596 6,712 6,733 6,733 6,832
Sales per square foot (4) ................. $ 970 $ 898 $ 956 $ 708 $ 751
Pharmacy sales as a % of net sales ....... 17.6% 19.0% 21.8% 21.5% 24.8%
Third-Party Plan sales as a % of pharmacy
sales .................................... 45.7% 58.2% 64.4% 63.3% 72.9%
Capital expenditures....................... $ 9,947 $ 6,868 $ 1,247 $ 913 $ 4,931
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 28, 1996 SEPTEMBER 27, 1997
----------------- ---------------------------
(AS
(ACTUAL) ADJUSTED)(5)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .......................... $ 9,917 $ 29,849 $ 43,968
Total assets ............................. 222,476 239,520 257,860
Total debt and capital lease obligations 245,657 262,649 212,187
Stockholders' deficiency ................. (59,396) (73,561) (4,734)
</TABLE>
(footnotes on next page)
7
<PAGE>
(footnotes to Summary Historical Financial and Operating Data appearing on
the preceding page)
- ------------
(1) During the first quarter of fiscal 1997, the Company considered a
public offering of its common stock and took certain steps in
connection with these plans. Such plans were abandoned upon
consummation of the Recapitalization discussed in Note 10 of the Notes
to Consolidated Financial Statements (Unaudited) for the 39 weeks ended
September 27, 1997. Costs and expenses incurred in connection with the
abandoned public offering, the Recapitalization and the repurchase
offers referred to in Note 10 of the Notes to Consolidated Financial
Statements (Unaudited) aggregated approximately $10.9 million, including
investment banking fees of $7.7 million (including $3.5 million to an
affiliate of DLJMBPII and $0.6 million to certain affiliates of Bain
Capital), legal and accounting fees of $1.6 million, stand-by commitment
fees relating to certain change of control offers of $1.2 million to an
affiliate of DLJMBPII, and other costs of $0.4 million, which the
Company has treated as a non-recurring expense because such expenses are
related to financing activities in connection with the Recapitalization
and related events, which the Company does not expect to repeat.
(2) As used herein, "EBITDA" means net income (loss) plus nonrecurring
costs, interest, income taxes, depreciation, amortization and other
non-cash items (primarily deferred rents). Management believes that
EBITDA, as presented, represents a useful measure of assessing the
performance of the Company's ongoing operating activities as it
reflects the earnings trends of the Company without the impact of
certain non-cash charges. Targets and positive trends in EBITDA are
used as the performance measure for determining management's bonus
compensation; EBITDA is also utilized by the Company's creditors in
assessing debt covenant compliance. The Company understands that, while
EBITDA is frequently used by security analysts in the evaluation of
companies, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the
method of calculation. EBITDA is not intended as an alternative to cash
flow from operating activities as a measure of liquidity, nor an
alternative to net income as an indicator of the Company's operating
performance nor any other measure of performance in conformity with
generally accepted accounting principles ("GAAP").
A reconciliation of net loss to EBITDA for each period included above
is set forth below (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR 39 WEEKS ENDED
------------------------------------ --------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1996 1996 1997
----------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net loss ............. $(16,438) $(18,058) $(17,854) $(12,485) $(14,165)
Net interest expense 27,480 30,224 32,396 24,334 25,433
Amortization ......... 18,238 11,579 16,217 8,514 3,826
Depreciation ......... 1,184 1,929 3,015 2,295 2,584
Nonrecurring charges -- -- -- -- 10,887
Other non-cash item . 724 1,769 1,526 1,156 1,182
----------- ----------- ----------- --------------- ---------------
EBITDA ............... $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747
=========== =========== =========== =============== ===============
</TABLE>
(3) Same store sales figures include stores that have been in operation for
at least 13 months.
(4) The Company experienced a decline in sales per square foot from 1993
through 1995 as a result of the opening of additional stores in
connection with the Company's expansion. The opening of such additional
stores resulted in a decline in sales per square foot principally
because (i) the average square footage for the new stores was greater
than that of the existing store base and (ii) new stores generally take
some time to reach a mature level of sales. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General."
(5) Adjusted to give effect to (i) the Refinancing Plan, including the
consummation of the Offering and the Notes Offering and the application
of the net proceeds therefrom as set forth under "Use of Proceeds," as
if all such transactions had occurred at September 27, 1997, (ii) a
provision of $75,000 for compensation expense related to previously
issued stock options and (iii) an extraordinary loss of $23.6 million
for the 39 weeks ended September 27, 1997 arising from the redemption
of the Senior Notes and the Zero Coupon Notes and the write-off of the
related unamortized deferred financing fees, as if all such
transactions had occurred at September 27, 1997. See "Use of Proceeds"
and "Capitalization."
8
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
before making an investment in the Common Stock offered hereby.
RISKS ASSOCIATED WITH SUBSTANTIAL INDEBTEDNESS
After the Offering, the Company will have a substantial amount of
outstanding indebtedness. As of September 27, 1997, on a pro forma basis
giving effect to the Refinancing Plan, including the Offering and the Notes
Offering and the application of the net proceeds therefrom, the consolidated
indebtedness of the Company would have been approximately $212.2 million
(excluding trade payables, accrued expenses and other non-current
liabilities). In addition, the Company's earnings have historically been
insufficient to cover fixed charges and were insufficient by $17.9 million
and $14.2 million for the fiscal year ended December 28, 1996 and the 39 week
period ended September 27, 1997, respectively. Subject to certain limitations
contained in its outstanding debt instruments, the Company or its
subsidiaries may incur additional indebtedness to finance working capital,
capital expenditures or acquisitions or for general corporate purposes. The
Company's level of indebtedness could have important consequences to the
holders of Common Stock, including the following: (i) the Company's ability
to obtain additional capital for acquisitions, capital expenditures, working
capital or general corporate or other purposes may be limited and (ii) the
Company's level of indebtedness may reduce the Company's flexibility to
respond to changing business and economic conditions. Substantially all of
the Company's indebtedness under the New Credit Agreement is expected to be
subject to variable interest rates that fluctuate in accordance with changes
in the market rate to be specified in the New Credit Agreement. Fluctuations
in such interest rates may occur at any time in response to changing economic
conditions and other factors beyond the Company's control, and there can be
no assurance with respect to how long such rates will remain at their current
levels. Although the Company expects to enter into hedging agreements to
limit its exposure to interest rate fluctuations, a significant rise in
interest rates could have a material adverse effect on the Company. To date,
the Company has not entered into any such hedging arrangements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company's ability to service its indebtedness will be dependent on its
future performance, which will be affected by prevailing economic, financial,
business, competitive, legislative, regulatory and other conditions, certain
of which are beyond the Company's control. The Company believes that, based
upon current levels of operations and anticipated growth, it should be able
to meet its debt service obligations when due for the foreseeable future. If,
however, the Company becomes unable to service its indebtedness, it will be
forced to pursue one or more alternative strategies such as selling assets,
restructuring or refinancing its indebtedness or seeking additional equity
capital (which may substantially dilute the ownership interest of holders of
Common Stock), which actions are restricted, to some extent, under the terms
of the New Credit Agreement and the New Senior Subordinated Notes. There can
be no assurance that any of these strategies could be effected on
satisfactory terms, if at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The New Senior Subordinated Note Indenture will contain certain covenants
which, among other things, will restrict the ability of the Company and its
subsidiaries to incur additional indebtedness and issue preferred stock, pay
dividends or make other distributions, make certain restricted payments,
create certain liens, sell assets, enter into certain transactions with
affiliates, enter into certain mergers or consolidations or sell or issue
capital stock of the Company's subsidiaries. In addition, the New Credit
Agreement contains other and more restrictive covenants, including those
requiring the Company to maintain specified financial ratios and satisfy
certain tests relating to its financial condition, and prohibits the Company
from repaying its other indebtedness (including the New Senior Subordinated
Notes) prior to the maturity of the New Credit Agreement. The Company's
ability to comply with the covenants in the New Credit Agreement and/or the
New Senior Subordinated Note Indenture may be affected by events beyond its
control, including prevailing economic, financial, business, competitive,
legislative, regulatory
9
<PAGE>
and other conditions. The breach of any such covenants or restrictions could
result in a default under the New Credit Agreement and/or the New Senior
Subordinated Note Indenture. Upon the occurrence of an event of default under
the New Credit Agreement, the lenders thereunder could elect to declare all
amounts borrowed thereunder to be immediately due and payable, together with
accrued and unpaid interest, and terminate the commitments of the lenders to
make further extensions of credit under the New Credit Agreement. If the
Company were unable to repay its indebtedness to its lenders under the New
Credit Agreement, such lenders could proceed against any or all of the
collateral securing the indebtedness under the New Credit Agreement, which
collateral is expected to consist of substantially all of the assets of the
Company and the capital stock and substantially all of the assets of its
subsidiaries. See "Description of Certain Indebtedness--New Credit Agreement"
and "Description of Certain Indebtedness--New Senior Subordinated Notes."
COMPETITION
The markets in which the Company operates are highly competitive. In the
New York City area, the Company competes against national, regional and local
drugstore chains, discount drugstores, supermarkets, combination food and
drugstores, discount general merchandise stores, mass merchandisers,
independent drugstores and local merchants. Major chain competitors in the
New York City market include Rite-Aid, Genovese and CVS. Many of the
Company's competitors are larger and have greater financial resources than
the Company. In addition to competition from the foregoing, the Company's
pharmacy departments also compete with hospitals, health maintenance
organizations ("HMOs") and mail order prescription drug providers. The
Company's drugstores compete, among other things, on the basis of convenience
of location and store layout, product mix, selection, customer service and
price. There can be no assurance that such competition will not adversely
affect the Company's results of operations or financial condition. See
"Business--Competition."
NET LOSSES; INTANGIBLE ASSETS
The Company has experienced net losses of $24.4 million, $16.4 million,
$18.1 million, $17.9 million and $14.2 million for the prior four fiscal
years and the 39 weeks ended September 27, 1997, respectively. The net
proceeds from the Offering, the Notes Offering and the New Credit Agreement
will be used to reduce overall indebtedness of the Company and associated
interest expense. See "Prospectus Summary--Refinancing Plan" and "Use of
Proceeds." The Company's results of operations will continue to be affected
by events and conditions both within and beyond its control, including the
successful implementation of the Company's growth strategy, continued
performance of existing stores, competition and economic, financial, business
and other conditions. Therefore, there can be no assurance that the Company
will not continue to incur net losses in the future. As of September 27,
1997, the Company's consolidated stockholders' deficiency was $73.6 million.
On a pro forma basis giving effect to the Refinancing Plan, including the
Offering, the Notes Offering and the application of the net proceeds
therefrom, the Company would have had stockholders' deficiency of $4.7
million as of September 27, 1997. The Company also expects to realize an
extraordinary loss of approximately $23.5 million in the first quarter of
1998 as a result of the early retirement of the Senior Notes, the Zero Coupon
Notes and the Existing Credit Agreement.
Of the Company's total assets at December 28, 1996, approximately $142.4
million (or 64.0% of total assets) represented goodwill, net of amortization,
and other intangible assets arising principally from the acquisition of the
Company's predecessor by Bain Capital in 1992. It is possible that no cash
would be recoverable from the voluntary or involuntary sale of the intangible
assets of the Company, including its goodwill.
ECONOMIC CONDITIONS AND REGIONAL CONCENTRATION
Substantially all of the Company's stores are located in the New York City
area. As a result, the Company is sensitive to economic and competitive
conditions, the regulatory environment and the availability of labor in that
area. The success of the Company's future operations will be substantially
affected by its ability to compete effectively in the New York City area, and
no prediction can be made as to economic conditions in this region.
10
<PAGE>
UNCERTAINTY OF LEASE RENEWALS
All of the Company's stores are leased, with the leases expiring at
various dates from May 1998 to December 2022 (assuming renewal options are
exercised). Leases for eight stores that generated approximately 12.8% of the
Company's net sales for the 39 week period ended September 27, 1997 are
scheduled to expire before the end of 2000. Although the Company has
historically been successful in renewing most of its store leases when they
have expired, there can be no assurance that the Company will continue to be
able to do so on acceptable terms or at all. If the Company is unable to
renew the leases for the Company's store locations as they expire, or find
other favorable locations at acceptable lease rates, there can be no
assurance that such failures will not have a material adverse effect on the
Company's financial condition and results of operations. See
"Business--Properties; Leases."
RISKS ASSOCIATED WITH FUTURE GROWTH
The Company is experiencing a period of rapid expansion, which the Company
believes will continue for the foreseeable future. The operating complexity
of the Company's business, as well as the responsibilities of management
personnel, have increased as a result of this expansion. The Company's
ability to manage such growth effectively will require it to continue to
expand and improve its operating and financial systems and to expand, train
and manage its employee base. In addition, as the Company opens new stores,
there can be no assurance that a sufficient number of qualified personnel
will be available to manage such expanded operations or that such operations
will be successfully integrated into the Company. The Company's inability to
manage its expansion effectively, including the hiring of additional
personnel, could have a material adverse effect on its business and results
of operations. The Company's expansion prospects are also dependent on a
number of other factors, including, among other things, economic conditions,
competition, consumer preferences, financing and working capital needs, the
ability of the Company to negotiate store leases on favorable terms and the
availability of additional warehouse space and new store locations. In
addition, as the Company continues with its plans to open additional stores
in the New York City area, sales at existing stores may decrease as customers
shop at the Company's newer stores. There can be no assurance that the
Company will be able to effectively realize its plans for future expansion.
See "Business."
RISKS ASSOCIATED WITH REGULATORY AND OTHER CHANGES IN THE HEALTH CARE
INDUSTRY
Pharmacy sales accounted for approximately 22% of the Company's total
sales for 1996 and 25% of the Company's total sales for the 39 week period
ended September 27, 1997. Pharmacy sales to Third Party Plans accounted for
approximately 64% of the Company's total pharmacy sales for 1996 and
approximately 73% of the Company's total pharmacy sales for the 39 week
period ended September 27, 1997. The efforts of Third Party Plans to contain
costs have placed downward pressures on gross profit margins from sales of
prescription drugs. However, management believes that the penetration of
Third Party Plans in the New York City market will continue, and the
resulting increase in volume should help to mitigate the decrease in gross
profit margins. See "Business--The Drugstore Industry."
The Company's revenues from prescription drug sales may also be affected
by health care reform initiatives of federal and state governments, including
proposals designed to significantly reduce spending on Medicare, Medicaid and
other government programs, changes in programs providing for reimbursement
for the cost of prescription drugs by Third Party Plans and regulatory
changes relating to the approval process for prescription drugs. Such
initiatives could lead to the enactment of federal and state regulations that
may adversely impact the Company's prescription drug sales and, accordingly,
its results of operations.
REGULATORY MATTERS
The Company's business is subject to various federal and state
regulations. For example, pursuant to the Omnibus Budget Reconciliation Act
of 1990 ("OBRA") and comparable state regulations, the Company's pharmacists
are required to offer counseling, without additional charge, to their
customers about medication, dosage, delivery systems, common side effects and
other information deemed
11
<PAGE>
significant by the pharmacists and may have a duty to warn customers
regarding any potential adverse effects of a prescription drug if the warning
could reduce or negate such effects. The Company is also subject to federal,
state and local licensing and registration regulations with respect to, among
other things, its pharmacy operations. The Company believes that it has
satisfied all of its licensing and registration requirements and continues to
actively monitor its compliance with such requirements. However, violations
of any such regulations could result in various penalties, including
suspension or revocation of the Company's licenses or registrations or
monetary fines, which could adversely effect the Company's operations.
Additionally, the Company is subject to federal Drug Enforcement Agency
("DEA") regulations relative to its pharmacy operations, including
purchasing, storing and dispensing of controlled substances.
The Company is also subject to laws governing its relationship with
employees, including minimum wage requirements, overtime and working
conditions. Increases in the federal minimum wage rate, employee benefit
costs or other costs associated with employees could adversely affect the
Company's results of operations.
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends to a large extent on its executive
management team. Although the Company has entered into employment agreements
with each of the Company's executive officers, it is possible that members of
executive management may leave the Company, and such departures could have a
negative impact on the business of the Company. The Company does not maintain
key-man life insurance on any of its executive officers. See "Management."
CONTINUED INFLUENCE OF PRINCIPAL STOCKHOLDERS
Upon consummation of the Offering, investment funds affiliated with
DLJMPBII, an affiliate of DLJ, which is one of the Underwriters, and certain
of its affiliates will beneficially own an aggregate of approximately 52.4%
of the Company's fully diluted outstanding Common Stock (46.8% if the
Underwriters' overallotment option is exercised in full). In addition, two of
the Company's four directors are Managing Directors of DLJ Merchant Banking
II, Inc. ("DLJMB"), a general partner of DLJMBPII, and one director is a
Managing Director of DLJ. In connection with the consummation of the
Offering, the Company expects to add two independent directors to the Board
of Directors. See "Management" and "Principal and Selling Stockholders."
Under Delaware law and the Company's Amended and Restated Certificate of
Incorporation, owners of a majority of the Company's outstanding Common Stock
are able to elect all of the Company's directors and approve significant
corporate transactions without the approval or consent of the other
shareholders. As a result, DLJMBPII will continue to have the ability (either
alone or together with a small percentage of other shareholders) to elect all
of the Company's directors and to control the vote on all matters submitted
to a vote of the holders of the Common Stock, including any going private
transaction, merger, consolidation or sale of all or substantially all of the
Company's assets. The Company's Amended and Restated Certificate of
Incorporation provides that any action that can be taken by a meeting of the
shareholders may be taken by written consent in lieu of a meeting. See
"Description of Capital Stock."
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws may inhibit changes in control
of the Company not approved by the Company's Board of Directors. These
provisions, which, among other things, (i) authorize the Board of Directors
to issue preferred stock ranking senior to the Common Stock without any
action on the part of the shareholders and (ii) establish certain advance
notice procedures for shareholder proposals (including nominations of
directors) to be considered at shareholders' meetings may delay, defer or
prevent a takeover attempt that a stockholder might consider in its best
interests. These provisions also may adversely affect prevailing market
prices for the Common Stock. In addition, Section 203 of the Delaware General
Corporation Law restricts certain persons from engaging in business
combinations with the Company. See "Description of Capital Stock."
12
<PAGE>
RESTRICTIONS ON PAYMENT OF DIVIDENDS ON COMMON STOCK
Since 1993, the Company has not declared or paid any cash or other
dividends on the Common Stock and does not expect to pay dividends for the
foreseeable future. The New Senior Subordinated Note Indenture contains a
covenant that restricts the ability of the Company to pay cash dividends, and
the New Credit Agreement will prohibit the payment of cash dividends. If
these restrictions are subsequently removed, any future cash dividends will
depend upon the Company's results of operations, financial conditions, cash
requirements, the availability of a surplus and other factors. See "Dividend
Policy."
COLLECTIVE BARGAINING AGREEMENTS
As of September 27, 1997, approximately 1,800 of the Company's
approximately 2,000 employees were represented by various labor unions and
were covered by collective bargaining agreements. The Company's distribution
facility employees are represented by the International Brotherhood of
Teamsters, Chauffeurs and Warehousemen and Helpers of America, Local 815, and
all store employees are represented by the Allied Trade Council. The
Company's three-year contracts with these two unions expire on August 31,
1999 and August 31, 1998, respectively. The Company has not experienced any
material business interruption as a result of labor disputes within the past
15 years, and the Company considers its employee relations to be good.
However, there can be no assurance that, upon the expiration of any of the
Company's collective bargaining agreements, the Company will be able to
negotiate new collective bargaining agreements on terms favorable to the
Company or that the Company's business operations will not be interrupted as
a result of labor disputes or difficulties or delays in the process of
renegotiating its collective bargaining agreements. In such events, the
Company's results of operations could be materially adversely affected. See
"Business--Employees."
IMMEDIATE AND SUBSTANTIAL DILUTION
Based upon an assumed public offering price of $15.00 per share (the
midpoint of the range set forth on the cover page of this Prospectus),
purchasers of Common Stock in the Offering will experience immediate and
substantial dilution of $23.35 per share in the net tangible book deficiency
per share of Common Stock. See "Dilution."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing, subject to
notice of issuance, on the New York Stock Exchange, there can be no assurance
that an active trading market for the Common Stock will develop or be
sustained or that purchasers of Common Stock in the Offering will be able to
resell their shares at prices at or above the initial offering price. The
initial public offering price of the Common Stock offered hereby will be
determined by negotiations among the Company and the representatives of the
Underwriters and may not be indicative of the market price for the Common
Stock after the Offering. See "Underwriting." After the Offering, the market
price for shares of the Common Stock may be volatile and may fluctuate based
upon a number of factors, including many that are beyond the control of the
Company, such as the Company's results of operations and business
performance, general industry trends, news announcements by competitors of
the Company, changes in the regulatory environment or in general, political,
market and economic conditions.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 16,957,832 shares
of Common Stock outstanding. The shares of Common Stock sold in the Offering
will be freely tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless held by an
"affiliate" of the Company, as that term is defined under Rule 144 under the
Securities Act ("Rule 144"), which shares will be subject to the resale
limitations of Rule 144. In addition, certain existing stockholders,
including holders of restricted Common Stock, have registration rights with
respect to Common Stock held by them. In connection with the Offering, all
existing stockholders have agreed not
13
<PAGE>
to dispose of any shares for a period of 180 days from the date of this
Prospectus, and the Company has agreed not to dispose of any shares (other
than shares sold by the Company in the Offering or issuances by the Company
of certain employee stock options and shares covered thereby) for a period of
180 days from the date of this Prospectus, without the prior written consent
of representatives of the Underwriters. Upon expiration of such 180-day
period, up to 386,125 shares of Common Stock will be eligible for sale
pursuant to Rule 144, without regard to volume limitations. No prediction can
be made as to the effect, if any, that market sales of shares of Common Stock
or the availability of shares of Common Stock for sale will have on the
market price of the Common Stock from time to time. The sale of a substantial
number of shares held by the existing stockholders, whether pursuant to a
subsequent public offering or otherwise, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could materially impair the Company's future ability to raise capital through
an offering of equity securities. See "Certain Relationships and Related
Transactions--Stockholders and Registration Rights Agreement," "Shares
Eligible for Future Sale" and "Underwriting."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering (after deducting the
estimated underwriting discounts and estimated other general offering
expenses) are estimated to be approximately $92.5 million, based on an
assumed initial public offering price of $15.00 per share (which represents
the midpoint of the range set forth on the cover page of the Prospectus). The
Company intends to use such net proceeds, together with estimated net
proceeds from the Notes Offering of approximately $77.1 million and net
borrowings under the New Credit Agreement of approximately $127.6 million, to
complete the Refinancing Plan, which is expected to consist of: (i) the
redemption of all of the Zero Coupon Notes for $99.8 million (including a
redemption premium of $7.0 million), (ii) the redemption of all of the Senior
Notes for $93.9 million (including a redemption premium of $4.0 million),
(iii) the repayment of all outstanding term loan indebtedness under the
Existing Credit Agreement, the outstanding principal amount of which was
$65.3 million as of December 27, 1997, (iv) the repayment of all outstanding
revolving indebtedness under the Existing Credit Agreement, the outstanding
principal amount of which was $24.5 million as of December 27, 1997, and (v)
the payment of fees and expenses incurred in connection with the Refinancing
Plan. The Company plans to use the proceeds of the Offering, the Notes
Offering and a portion of the proceeds from the New Credit Agreement to fund
the redemption of the Zero Coupon Notes and the Senior Notes. Accordingly,
the proceeds from the Offering and the Notes Offering will be used to defease
the Zero Coupon Notes and the Senior Notes pending such redemptions, which
the Company currently expects to occur approximately 30 days after the
closing of the Offering.
The term loan indebtedness under the Existing Credit Agreement has a
maturity date of June 2002 and currently bears interest at an annual rate of
LIBOR plus 3.0%, which, as of September 30, 1997, equaled approximately
8.625%. The revolving loan indebtedness under the Existing Credit Agreement
has a maturity date of June 2001 and currently bears interest at an annual
rate of LIBOR plus 2.5%, which, as of September 30, 1997, equaled
approximately 8.125%, and provides for a commitment fee ranging from 0.375%
to 0.5% per annum on the unused portion of the facility, depending on the
Company's ratio of consolidated debt to EBITDA (as defined in the Existing
Credit Agreement). The Zero Coupon Notes have a maturity date of September
2004 and accrete at a fixed rate of 15% per annum compounded semiannually,
with cash interest payments commencing in March 2000 at a fixed rate of 15%
per annum. The Senior Notes have a maturity date of September 2002 and bear
interest at a fixed rate of 12% per annum.
15
<PAGE>
DIVIDEND POLICY
Since 1993, the Company has not declared or paid any cash or other
dividends on its Common Stock and does not expect to pay dividends for the
foreseeable future. The Company anticipates that, for the foreseeable future,
earnings will be reinvested in the business and used to service indebtedness.
The declaration and payment of cash dividends by the Company are subject to
the discretion of the Board of Directors. In addition, the New Credit
Agreement will prohibit the payment of cash dividends, and the New Senior
Subordinated Notes Indenture will contain a covenant that restricts the
payment of cash dividends. See "Description of Certain Indebtedness." In
addition, any future determination to pay dividends will depend on the
Company's results of operations, financial condition, capital requirements,
contractual restrictions under its current or any future indebtedness, the
availability of a surplus and other factors deemed relevant by the Board of
Directors. See "Risk Factors--Restrictions on Payment of Dividends on Common
Stock."
16
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of September 27, 1997 and the pro forma capitalization as adjusted to give
effect to the Refinancing Plan (assuming consummation of the redemption of
the Senior Notes and the Zero Coupon Notes), including the sale by the
Company of 6,700,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $15.00 (the midpoint of the range set forth
on the cover page of this Prospectus). See "Use of Proceeds." This table
should be read in conjunction with the unaudited consolidated financial
statements of the Company, including the notes thereto, appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
--------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion):
Credit agreement(2) ......................... $ 81,475 $ --
New Credit Agreement(3) ..................... -- 130,000
Senior Notes(4) ............................. 89,893 --
Zero Coupon Notes(5) ........................ 89,094 --
% New Senior Subordinated Notes............. -- 80,000
Capital lease obligations ................... 2,187 2,187
---------- --------------
Total long-term debt ...................... 262,649 212,187
---------- --------------
Stockholders' equity (deficiency):
Common stock and additional paid-in capital 24,665 117,165
Preferred stock.............................. -- --
Accumulated deficit ......................... (98,226) (121,899)
---------- --------------
Total stockholders' equity (deficiency) .. (73,561) (4,734)
---------- --------------
Total capitalization .......................... $189,088 $ 207,453
========== ==============
</TABLE>
- ------------
(1) Adjusted to give effect to the Refinancing Plan, including the
consummation of the Offering and the Notes Offering and the application
of the net proceeds therefrom as set forth under "Use of Proceeds," as
if all such transactions had occurred at September 27, 1997.
(2) Reflects the outstanding balance under the Company's credit agreement
in effect on September 27, 1997, which was replaced by the Existing
Credit Agreement on September 30, 1997.
(3) Does not include $30.0 million of borrowing availability under the
revolving portion of the New Credit Agreement.
(4) Pursuant to the terms of the Indenture relating to the Senior Notes,
the Company has the right to call the Senior Notes at a price equal to
104.5% of the principal amount thereof (a premium of approximately $4.0
million). Concurrently with closing of the Offering and the Notes
Offering, the Company will call the Senior Notes (the "Senior Notes
Redemption") and currently expects that the Senior Notes Redemption
will occur approximately 30 days after the closing of the Offering.
(5) Pursuant to the terms of the Indenture relating to the Zero Coupon
Notes, the Company has the right to call the Zero Coupon Notes at a
price equal to 107.5% of the accreted value thereof (a premium of
approximately $7.0 million). Concurrently with the closing of the
Offering and the Notes Offering, the Company will call the Zero Coupon
Notes (the "Zero Coupon Notes Redemption") and currently expects that
the Zero Coupon Notes Redemption will occur approximately 30 days after
the closing of the Offering.
17
<PAGE>
DILUTION
The net tangible book deficiency of the Company as of September 27, 1997
was approximately $211.1 million, or $20.58 per share of Common Stock. Net
tangible book deficiency per share represents the amount of the Company's
total tangible assets less its total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the receipt of
$92.5 million of estimated net proceeds from the Offering and the application
thereof as described under "Use of Proceeds," the pro forma net tangible book
deficiency of the Company at September 27, 1997 would have been approximately
$141.6 million, or $8.35 per share of Common Stock. This represents an
immediate reduction in net tangible book deficiency of $12.23 per share to
the existing shareholders and an immediate net tangible book value dilution
of $23.35 per share to new investors purchasing shares in the Offering. The
following table illustrates this dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share .................. $ 15.00
Net tangible book deficiency per share at September 27, 1997 ..... $(20.58)
Decrease in net tangible book deficiency per share attributable
to new investors................................................. 12.23
----------
Pro forma net tangible book deficiency value per share after the
Offering ........................................................ (8.35)
---------
Dilution per share to new investors .............................. $(23.35)
=========
</TABLE>
The following table summarizes, on a pro forma basis after giving effect
to the Offering and the application of the estimated net proceeds therefrom
as of September 27, 1997, the number of shares of Common Stock purchased from
the Company, the total consideration paid to the Company for such shares and
the average price per share paid by the existing stockholders and the new
investors purchasing shares of Common Stock in the Offering (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE PER
----------------------- --------------------- SHARE
NUMBER PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C>
Existing stockholders (1) 10,257,832 60.5% $ 24,665 19.7% $ 2.40
New investors ............. 6,700,000 39.5% 100,500 80.3% 15.00
------------ --------- ---------- ---------
Total...................... 16,957,832 100.0% $125,165 100.0%
============ ========= ========== =========
</TABLE>
- ------------
(1) Excludes 1,651,959 shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding as of September 27, 1997 (with a
weighted average exercise price of $7.03 per share).
18
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements are based on the unaudited consolidated financial statements
included elsewhere in this Prospectus, adjusted to give effect to the
Refinancing Plan.
The unaudited pro forma statements of operations data are derived from the
consolidated statements of operations for the fiscal year ended December 28,
1996 and the 39 week period ended September 27, 1997, included elsewhere in
this Prospectus, and assume that the Refinancing Plan was consummated as of
December 31, 1995. The unaudited pro forma condensed consolidated balance
sheet data are derived from the unaudited consolidated balance sheet of the
Company as of September 27, 1997, included elsewhere in this Prospectus, and
assume that the Refinancing Plan was consummated on September 27, 1997. The
unaudited pro forma condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements of the
Company, included elsewhere in this Prospectus.
The unaudited pro forma condensed consolidated financial statements do not
purport to be indicative of the results that would actually have been
obtained if the Refinancing Plan had occurred on the dates indicated or of
the results that may be obtained in the future. The unaudited pro forma
condensed consolidated financial statements are presented for comparative
purposes only. The pro forma adjustments, as described in the accompanying
data, are based on available information and certain assumptions that
management believes are reasonable.
19
<PAGE>
DUANE READE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash........................................................ $ 218 $ 19,159 (1) $ 19,377
Receivables................................................. 9,084 9,084
Inventories................................................. 65,872 65,872
Prepaid expenses ........................................... 1,371 1,371
------------ ------------- -----------
TOTAL CURRENT ASSETS ...................................... 76,545 19,159 95,704
Property and equipment, net ................................. 24,918 24,918
Goodwill, net ............................................... 121,757 121,757
Other assets, net............................................ 16,300 2,425 (1) 15,481
2,900 (1)
2,700 (2)
(8,844)(5)
------------ ------------- -----------
Total assets .............................................. $239,520 $ 18,340 $ 257,860
============ ============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable ........................................... $ 30,710 $ $ 30,710
Accrued interest ........................................... 623 (600)(1) 23
(2,200)(1) 13,693
Accrued expenses ........................................... 13,193 2,700 (2)
5,800 (1)
Current portion of senior debt ............................. 660 (660)(1) 5,800
Current portion of capital lease obligations................ 1,510 1,510
------------ ------------- -----------
TOTAL CURRENT LIABILITIES ................................. 46,696 5,040 51,736
Senior debt, less current portion ........................... 170,708 124,200 (1) 204,200
80,000 (1)
(80,815)(1)
(93,938)(1)
4,045 (4)
Zero Coupon Notes, net....................................... 89,094 (99,803)(1) --
3,746 (3)
6,963 (4)
Capital lease obligations less current portion............... 677 677
Other non-current liabilities................................ 5,906 75 (6) 5,981
------------ ------------- -----------
TOTAL LIABILITIES ......................................... 313,081 (50,487) 262,594
------------ ------------- -----------
Stockholders' deficiency:
Common stock, $0.01 par; authorized 30,000,000 shares;
issued and outstanding 10,257,832 shares and 16,957,832
shares, respectively ....................................... 103 67 (1) 170
Paid-in-capital............................................. 24,562 100,433 (1) 116,995
(8,000)(1)
Accumulated deficit ........................................ (98,226) (3,746)(3) (121,899)
(11,008)(4)
(8,844)(5)
(75)(6)
------------ ------------- -----------
TOTAL STOCKHOLDERS' DEFICIENCY ............................ (73,561) 68,827 (4,734)
------------ ------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY ........... $239,520 $ 18,340 $ 257,860
============ ============= ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet.
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) The net effect on cash of the transactions and the application of
proceeds thereof, as of September 27, 1997, is as follows:
<TABLE>
<CAPTION>
<S> <C>
TOTAL SOURCES:
Proceeds from the Offering............................ $100,500
New Credit Agreement:
Current portion...................................... 5,800
Non-current portion.................................. 124,200
New Senior Subordinated Notes......................... 80,000
----------
Total sources....................................... $310,500
==========
TOTAL USES:
Existing Credit Agreement
Current portion...................................... $ 660
Non-current portion.................................. 80,815
Senior Notes, including redemption premium............ 93,938
Zero Coupon Notes, including redemption premium ...... 99,803
Offering fees and expenses............................ 8,000
New Credit Agreement fees and expenses................ 2,425
New Senior Subordinated Notes fees and expenses ...... 2,900
Accelerated payment of previously incurred liability 2,200
Accrued interest ..................................... 600
Cash.................................................. 19,159
----------
Total uses.......................................... $310,500
==========
</TABLE>
(2) Represents fees and expenses related to the Existing Credit Agreement.
(3) Represents adjustment of Zero Coupon Notes to accreted value in
accordance with the Zero Coupon Notes Indenture.
(4) Represents accrual of redemption premiums on the Senior Notes and the
Zero Coupon Notes.
(5) Represents a write-off of unamortized deferred financing costs related
to the Company's previously outstanding debt, including (i) $6,144
relating to the bank credit agreement of the Company that existed prior
to the Existing Credit Agreement, the Senior Notes and the Zero Coupon
Notes and (ii) $2,700 relating to the Existing Credit Agreement.
(6) Represents compensation expense in connection with stock options
granted.
21
<PAGE>
DUANE READE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FOR THE 39 WEEKS ENDED SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- ------------
<S> <C> <C> <C>
Net sales .................................... $313,796 $ $313,796
Cost of sales................................. 236,413 236,413
------------ ------------- ------------
Gross profit.................................. 77,383 -- 77,383
------------ ------------- ------------
Selling, general and administrative expenses 48,218 75 (2) 48,293
Amortization ................................. 3,826 3,826
Depreciation ................................. 2,584 2,584
Store pre-opening expenses.................... 600 600
Nonrecurring charge........................... 10,887 10,887
------------ ------------- ------------
66,115 75 66,190
------------ ------------- ------------
Operating income ............................. 11,268 (75) 11,193
Interest expense, net ........................ 25,433 (10,341)(1) 15,092
------------ ------------- ------------
Loss before income taxes...................... (14,165) 10,266 (3,899)(3)
Income taxes.................................. -- -- --
------------ ------------- ------------
Net loss..................................... $(14,165) $ 10,266 $ (3,899)
============ ============= ============
Net loss per common share.................... $ (1.34) $ (0.23)
============ ============
Weighted average common shares outstanding .. 10,600 17,300
============ ============
</TABLE>
FOR THE 52 WEEKS ENDED DECEMBER 28, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
<S> <C> <C> <C>
Net sales..................................... $381,466 $ $381,466
Cost of sales ................................ 288,505 288,505
------------ ------------- -----------
Gross profit ................................. 92,961 -- 92,961
------------ ------------- -----------
Selling, general and administrative expenses 59,048 59,048
Amortization.................................. 16,217 16,217
Depreciation.................................. 3,015 3,015
Store pre-opening expenses ................... 139 139
------------ ------------- -----------
78,419 -- 78,419
------------ ------------- -----------
Operating income.............................. 14,542 -- 14,542
Interest expense, net......................... 32,396 (12,167)(4) 20,229
------------ ------------- -----------
Loss before income taxes...................... (17,854) (12,167) (5,687)
Income taxes.................................. -- -- --
------------ ------------- -----------
Net loss..................................... $(17,854) $(12,167) $ (5,687)
============ ============= ===========
Net loss per common share.................... $ (1.69) $ (0.33)
============ ===========
Weighted average common shares outstanding ... 10,575 17,289
============ ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
reflect the following as if all transactions had occurred on December 31,
1995:
(1) For the 39 weeks ended September 27, 1997:
<TABLE>
<CAPTION>
<S> <C>
Interest expense related to the New Senior Subordinated Notes (at
an assumed interest rate of 9.75%)(a) ............................. $ 5,850
Interest expense related to the New Credit Agreement (at an assumed
weighted average interest rate of 8.53%) (b) ...................... 7,812
Amortization of deferred financing costs related to the New Credit
Agreement and New Senior Subordinated Notes ....................... 685
Elimination of interest expense and amortization of deferred
financing costs related to the Company's previously outstanding
debt .............................................................. (24,688)
----------
$(10,341)
==========
</TABLE>
(2) Reflects a provision for compensation expense in connection with stock
options issued.
(3) Upon the early retirement of the Senior Notes, the Zero Coupon Notes
and the Existing Credit Agreement as a consequence of the consummation
of the Refinancing Plan, the Company expects to realize an
extraordinary loss, which on a pro forma basis for the 39 weeks ended
September 27, 1997 would be approximately $23,598, comprised of:
<TABLE>
<CAPTION>
<S> <C>
Redemption premium on Senior Notes.............................. $ 4,045
Redemption premium on Zero Coupon Notes......................... 6,963
Adjustment of Zero Coupon Notes to accreted value in accordance
with the Zero Coupon Note Indenture............................ 3,746
Write-off of unamortized deferred financing costs related to
the Company's previously outstanding debt...................... 8,844
--------
Pro forma extraordinary loss (tax effect: none)................. $23,598
========
</TABLE>
(4) For the 52 weeks ended December 28, 1996:
<TABLE>
<CAPTION>
<S> <C>
Interest expense related to the New Senior Subordinated Notes (at
an assumed interest rate of 9.75%) (a) ............................ $ 7,800
Interest expense related to the New Credit Agreement (at an assumed
weighted average interest rate of 8.33%) (c) ...................... 10,642
Amortization of deferred financing costs related to the New Credit
Agreement and New Senior Subordinated Notes ....................... 1,093
Elimination of interest expense and amortization of deferred
financing costs related to the Company's previously outstanding
debt .............................................................. (31,702)
----------
$(12,167)
==========
</TABLE>
- ------------
(a) A 25 basis point (0.25%) increase or decrease in the assumed interest
rate would result in a change in interest expense of $150 for
the 39 weeks ended September 27, 1997 and $200 for the 52 weeks ended
December 28, 1996.
(b) A 25 basis point (0.25%) increase or decrease in the assumed interest
rate would result in a $228 change in interest expense.
(c) A 25 basis point (0.25%) increase or decrease in the assumed interest
rate would result in a $319 change in interest expense.
23
<PAGE>
SELECTED CONSOLIDATED HISTORICAL
FINANCIAL AND OPERATING DATA
(In thousands, except per share amounts, percentages and store data)
The data set forth below as of December 31, 1992 and for the period
September 26, 1992 through December 31, 1992, and as of January 1, 1994,
December 31, 1994, December 30, 1995, December 28, 1996 and for each of the
52 week periods then ended was derived from the consolidated financial
statements of the Company. As used below, the term "Predecessor" refers to
the operations of Duane Reade prior to the acquisition thereof by Bain
Capital in September 1992. The basis of accounting as of September 25, 1992
and for the period January 1, 1992 through September 25, 1992 reflects the
historical basis of accounting of the Predecessor prior to the acquisition
thereof by Bain Capital and such data was derived from the consolidated
financial statements of the Predecessor. The data presented below for the 39
weeks ended September 28, 1996 and September 27, 1997 and as of September 27,
1997 have been derived from the Company's unaudited consolidated financial
statements and, in the opinion of the Company's management, reflect and
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such results. The results of operations
for the 39 weeks ended September 27, 1997 are not necessarily indicative of
the results that may be expected for a full fiscal year. This information
should be read in conjunction with the historical consolidated financial
statements of the Company, including the notes thereto, included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR
-------------
PERIOD
JANUARY 1
TO
SEPTEMBER 25,
1992
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................. $167,634
Cost of sales ......................... 124,637
-------------
Gross profit .......................... 42,997
Selling, general and administrative
expenses ............................. 22,636
Amortization .......................... 0
Depreciation .......................... 723
Store pre-opening expenses ............ --
Nonrecurring charges (1) .............. --
-------------
Operating income (loss) ............... 19,638
Net interest expense .................. 3,298
-------------
Income (loss) before income tax ...... 16,340
Provision for taxes ................... 620
-------------
Net income (loss) ..................... $ 15,720
=============
Earnings (loss) per common share .....
Weighted average common shares
outstanding...........................
OPERATING AND OTHER DATA:
EBITDA (2) ............................ $ 20,380
EBITDA as a percentage of sales ...... 12.2%
Number of stores at end of period .... 37
Same store sales growth (3) ........... --
Pharmacy same store sales
growth (3)(5).........................
Average store size (square feet) at
end of period ........................ --
Sales per square foot (6).............. --
Pharmacy sales as a % of net sales
(5)................................... --
Third-Party Plan sales as a % of
pharmacy sales (7) ...................
Capital expenditures .................. $ 114
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital ....................... $ 13,943
Total assets .......................... 264,355
Total debt and capital lease
obligations (8)....................... 221,471
Stockholders' equity (deficiency) .... (35,622)
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COMPANY
------------------------------------------------------------------------------------
PERIOD 39 WEEKS ENDED
SEPTEMBER 26 --------------
TO FISCAL YEAR
DECEMBER 31, ------------------------------------------- SEPTEMBER 28, SEPTEMBER 27,
1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................. $60,785 $241,474 $281,103 $336,922 $381,466 $281,093 $313,796
Cost of sales ......................... 45,560 181,566 209,678 259,827 288,505 215,797 236,413
------------ --------- --------- --------- --------- ------------- -------------
Gross profit .......................... 15,225 59,908 71,425 77,095 92,961 65,296 77,383
Selling, general and administrative
expenses ............................. 8,019 29,666 39,741 50,326 59,048 42,499 48,218
Amortization .......................... 7,344 27,432 18,238 11,579 16,217 8,514 3,826
Depreciation .......................... 166 729 1,184 1,929 3,015 2,295 2,584
Store pre-opening expenses ............ -- 300 1,220 1,095 139 139 600
Nonrecurring charges (1) .............. -- -- -- -- -- -- 10,887
------------ --------- --------- --------- --------- ------------- -------------
Operating income (loss) ............... (304) 1,781 11,042 12,166 14,542 11,849 11,268
Net interest expense .................. 6,989 26,199 27,480 30,224 32,396 24,334 25,433
------------ --------- --------- --------- --------- ------------- -------------
Income (loss) before income tax ...... (7,293) (24,418) (16,438) (18,058) (17,854) (12,485) (14,165)
Provision for taxes ................... -- -- -- -- -- -- --
------------ --------- --------- --------- --------- ------------- -------------
Net income (loss) ..................... $(7,293) $(24,418) $(16,438) $(18,058) $(17,854) $(12,485) $(14,165)
============ ========= ========= ========= ========= ============= =============
Earnings (loss) per common share ..... $ (.73) $ (2.34) $ (1.55) $ (1.70) $ (1.69) $ (1.18) $ (1.34)
============ ========= ========= ========= ========= ============= =============
Weighted average common shares
outstanding........................... 10,046 10,448 10,633 10,650 10,575 10,589 10,600
============ ========= ========= ========= ========= ============= =============
OPERATING AND OTHER DATA:
EBITDA (2) ............................ $ 7,206 $ 29,975 $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747
EBITDA as a percentage of sales ...... 11.9% 12.4% 11.1% 8.2% 9.3% 8.5% 9.5%
Number of stores at end of period .... 37 40 51 59 60 60 65
Same store sales growth (3) ........... 2.4%(4) 3.3% 1.6% (3.5)% 8.3% 7.8% 7.9%
Pharmacy same store sales
growth (3)(5)......................... -- -- 14.2% 7.0% 25.5% 25.1% 25.4%
Average store size (square feet) at
end of period ........................ 6,166(4) 6,172 6,596 6,712 6,733 6,733 6,832
Sales per square foot (6).............. $ 1,001(4) $ 1,022 $ 970 $ 898 $ 956 $ 708 $ 751
Pharmacy sales as a % of net sales
(5)................................... -- 16.6% 17.6% 19.0% 21.8% 21.5% 24.8%
Third-Party Plan sales as a % of
pharmacy sales (7) ................... 45.7% 58.2% 64.4% 63.3% 72.9%
Capital expenditures .................. $ 960 $ 1,838 $ 9,947 $ 6,868 $ 1,247 $ 913 $ 4,931
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital ....................... $ 13,722 $ 14,285 $ 20,152 $ 13,699 $ 9,917 $ 8,220 $ 29,849
Total assets .......................... 260,674 234,430 229,699 235,860 222,476 226,060 239,520
Total debt and capital lease
obligations (8)....................... 221,815 223,422 228,764 244,104 245,657 247,570 262,649
Stockholders' equity (deficiency) .... 16,236 (6,757) (23,170) (41,196) (59,396) (54,027) (73,561)
</TABLE>
24
<PAGE>
- ------------
(1) During the first quarter of fiscal 1997, the Company considered a
public offering of its common stock and took certain steps in
connection with these plans. Such plans were abandoned upon
consummation of the Recapitalization discussed in Note 10 of the Notes
to Consolidated Financial Statements (Unaudited) for the 39 weeks ended
September 27, 1997. Costs and expenses incurred in connection with the
abandoned public offering, the Recapitalization and the exchange offers
referred to in Note 10 of the Notes to Consolidated Financial
Statements (Unaudited) aggregated approximately $10.9 million, including
investment banking fees of $7.7 million (including $3.5 million to an
affiliate of DLJMBPII and $0.6 million to certain affiliates of Bain
Capital), legal and accounting fees of $1.6 million, stand-by commitment
fees relating to certain change of control offers of $1.2 million to an
affiliate of DLJMBPII, and other costs of $0.4 million, which the
Company has treated as a non-recurring expense because such expenses
related to financing activities in connection with the Recapitalization
and related events, which the Company does not expect to repeat.
(2) As used herein, "EBITDA" means net income (loss) plus nonrecurring
charges, interest, income taxes, depreciation, amortization and other
non-cash items (primarily deferred rents). Management believes that
EBITDA, as presented, represents a useful measure of assessing the
performance of the Company's ongoing operating activities as it
reflects the earnings trends of the Company without the impact of
certain non-cash charges. Targets and positive trends in EBITDA are
used as the performance measure for determining management's bonus
compensation; EBITDA is also utilized by the Company's creditors in
assessing debt covenant compliance. The Company understands that, while
EBITDA is frequently used by security analysts in the evaluation of
companies, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the
method of calculation. EBITDA is not intended as an alternative to cash
flow from operating activities as a measure of liquidity, nor an
alternative to net income as an indicator of the Company's operating
performance nor any other measure of performance in conformity with
GAAP.
A reconciliation of net income (loss) to EBITDA for each period
included above is set forth below (dollars in thousands):
<TABLE>
<CAPTION>
JAN. 1 SEPT. 26 39 WEEKS ENDED
TO TO FISCAL YEAR --------------
SEPT. 25, DEC. 31, ------------------------------------------------ SEPT. 28, SEPT. 27,
1992 1992 1993 1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) .... $15,720 $(7,293) $(24,418) $(16,438) $(18,058) $(17,854) $(12,485) $(14,165)
Net interest expense 3,298 6,989 26,199 27,480 30,224 32,396 24,334 25,433
Amortization ......... -- 7,344 27,432 18,238 11,579 16,217 8,514 3,826
Depreciation ......... 723 166 729 1,184 1,929 3,015 2,295 2,584
Nonrecurring charges -- -- -- -- -- -- -- 10,887
Other non-cash items 639 -- 33 724 1,769 1,526 1,156 1,182
----------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
EBITDA ............... $20,380 $ 7,206 $ 29,975 $ 31,188 $ 27,443 $ 35,300 $ 23,814 $ 29,747
=========== ========== =========== =========== =========== =========== =========== ===========
</TABLE>
(3) Same store sales figures include stores that have been in operation for
at least 13 months.
(4) For the year ended December 31, 1992.
(5) Prior to 1993, the Company did not separately track pharmacy sales.
(6) The Company experienced a decline in sales per square foot from 1993
through 1995 as a result of the opening of additional stores in
connection with the Company's expansion. The opening of such additional
stores resulted in a decline in sales per square foot principally
because (i) the average square footage for the new stores was greater
than that of the existing store base and (ii) new stores generally take
some time to reach a mature level of sales. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General."
(7) Prior to fiscal year 1994, the Company's pharmacy system did not
separately track third-party sales.
(8) Excludes deferred rent obligations of approximately $4.0 million and
$5.4 million at December 28, 1996 and at September 27, 1997,
respectively.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in connection with the consolidated financial
statements of the Company and the notes thereto included elsewhere in this
Prospectus.
GENERAL
The Company generates revenues primarily through sales of OTC drugs and
prescription pharmaceutical products, health and beauty aids, food and
beverage items, tobacco products, cosmetics, housewares, hosiery, greeting
cards, photofinishing, photo supplies and seasonal merchandise. Health and
beauty products, including OTC drugs, represent the largest of the Company's
product categories. The Company's primary costs and expenses consist of (i)
inventory costs, (ii) labor expenses and (iii) occupancy costs.
In 1994 and 1995, the Company experienced rapid expansion, growing from 40
stores to 59 stores. However, as a result of liquidity constraints and the
need for improved inventory controls, the Company was forced to suspend its
store expansion program in late 1995. In early 1996, a strengthened
management team led by Anthony Cuti, the Company's new Chairman and Chief
Executive Officer, took several measures to improve operations such as
decreasing out-of-stock occurrences, creating a loss prevention function to
control inventory shrink and continuing to invest in MIS.
The Company had sales per square foot of $956 and approximately $1,054 in
fiscal 1996 and fiscal 1997, respectively. The Company believes that sales
per square foot are a useful measure of comparing the Company's performance
to that of its competitors because it is a measure of a store's sales
productivity. The Company experienced a decline in sales per square foot from
1993 through 1995 as a result of the opening of additional stores in
connection with the Company's expansion plans during that period. The opening
of such additional stores resulted in a decline in sales per square foot
principally because (i) the average square footage for the new stores was
greater than that of the existing store base and (ii) new stores generally
take some time to reach a mature level of sales. The Company currently
expects that its sales per square foot may decline as it embarks on its plan
to increase new store openings during 1998 and 1999. The Company believes
that its competitors in the industry experience increases and decreases in
sales per square foot for similar reasons.
In 1997, the Company resumed its store expansion program, opening seven
stores in 1997. Generally a new Duane Reade store requires an investment of
approximately $1.1 million in capital expenditures and working capital. Since
1993, all of the Company's new stores have become profitable on an operating
basis within the first full year of operation. Over the next two years, the
Company plans to open approximately 30 to 40 stores, primarily in New York
City.
Over the past two years, Third Party Plans, including managed care
providers and insurance companies, have comprised an increasing percentage of
the Company's pharmacy business as the health care industry shifts to managed
care. While sales to customers covered by Third Party Plans result in lower
gross profit rates due to competitive pricing, the Company believes that such
lower rates are offset by increased volume of pharmacy sales and the
opportunity to leverage fixed expenses.
The Company includes stores that have been in operation for at least 13
months for purposes of calculating comparable store sales figures.
The Company's predecessor was founded in 1960. In 1992, Bain Capital
formed the Company to acquire the Company's predecessor from its founders
through a leveraged buyout, financed primarily with the proceeds from the
Zero Coupon Notes and the Senior Notes. In June 1997, investment funds
affiliated with DLJMBPII (the "DLJMB Entities"), an affiliate of DLJ, one of
the Underwriters, acquired approximately 91.5% of the outstanding capital
stock of the Company from Bain Capital and certain other selling
securityholders, for approximately $78.7 million in cash, pursuant to a
Recapitalization Agreement, dated June 18, 1997 (the "Recapitalization
Agreement"). Upon consummation of such purchase, the Company reclassified all
of its outstanding capital stock (then consisting of four classes) into one
class of common stock, $0.01 par value per share. Upon consummation of the
Offering, assuming no exercise
26
<PAGE>
of the Underwriters' overallotment option, the DLJMB Entities will hold
approximately 52.4% of the Common Stock. See "Principal and Selling
Stockholders."
Prior to the consummation of the Offering, the Company's primary asset is
all of the outstanding common stock of Daboco, Inc., a New York corporation
("Daboco"), with Daboco and DRI I, Inc. ("DRI"), a direct wholly-owned
subsidiary of Daboco, together owning all of the outstanding partnership
interests of Duane Reade, a New York general partnership ("Duane Reade")
(Daboco owns a 99% partnership interest and DRI owns the remaining 1%
partnership interest). Substantially all of the operations of the Company are
conducted through Duane Reade. Concurrently with the consummation of the
Offering, Daboco will be merged with and into the Company (the "Merger"),
resulting in the Company directly owning 99% of the partnership interests of
Duane Reade (the "Partnership Interest") and DRI continuing to own a 1%
partnership interest. Following the consummation of the Merger, the primary
assets of the Company will be the Partnership Interest and 100% of the
outstanding common stock of DRI.
RESULTS OF OPERATIONS
The following sets forth the results of operations as a percentage of
sales for the periods indicated.
<TABLE>
<CAPTION>
39 WEEKS ENDED
--------------------------------
FISCAL YEAR SEPTEMBER 28, SEPTEMBER 27,
----------------------------
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C>
Net sales .................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales .............. 74.6 77.1 75.6 76.8 75.3
-------- -------- -------- --------------- ---------------
Gross profit ............... 25.4 22.9 24.4 23.2 24.7
-------- -------- -------- --------------- ---------------
Selling, general and
administrative expenses .. 14.1 14.9 15.5 15.1 15.4
Amortization ............... 6.5 3.5 4.3 3.0 1.2
Depreciation ............... 0.4 0.6 0.8 0.8 0.8
Store pre-opening expenses 0.4 0.3 0.0 0.1 0.2
Nonrecurring charges ....... -- -- -- -- 3.5
-------- -------- -------- --------------- ---------------
Operating income ........... 4.0 3.6 3.8 4.2 3.6
Net interest expense ....... 9.8 9.0 8.5 8.6 8.1
-------- -------- -------- --------------- ---------------
Net loss ................... (5.8)% (5.4)% (4.7)% (4.4)% (4.5)%
======== ======== ======== =============== ===============
</TABLE>
39 WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO 39 WEEKS ENDED SEPTEMBER 28,
1996
Net sales in the 39 weeks ended September 27, 1997 were $313.8 million, an
increase of 11.6% over net sales of $281.1 million for the 39 weeks ended
September 28, 1996. The increase was attributable to increased comparable
store sales of 7.9% and the inclusion of one new store opened during the 39
weeks ended September 28, 1996 for the entire 1997 period and five new stores
opened in 1997.
Cost of sales as a percentage of net sales decreased to 75.3% for the 39
weeks ended September 27, 1997 from 76.8% for the 39 weeks ended September
28, 1996, resulting in an increase in gross profit margin to 24.7% for the
1997 period from 23.2% during the same period in 1996. The increase in gross
margin resulted from a number of factors including (i) increased contribution
from 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 represented 15.4% and 15.1%
of net sales in the 39 weeks ended September 27, 1997 and September 28, 1996,
respectively. The percentage increase in 1997 compared to 1996 resulted
principally from higher selling and administrative expenses including (i)
higher store salaries as a percentage of net sales (principally from new
stores during the early months of
27
<PAGE>
operation) and (ii) operating costs related to the Company's management
information systems department, partially offset by elimination of agreements
requiring the annual payment of $1.0 million in management fees to Bain
Capital. Such agreements were terminated as a result of the Recapitalization.
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 39 weeks ended
September 27, 1997 and September 28, 1996 was $3.8 million and $8.5 million,
respectively. The decrease in amortization is principally a result of the
completion in 1996 of amortization of covenants not to compete and the
related write-off of the balance of such amounts during the fourth quarter of
1996.
Depreciation was $2.6 million and $2.3 million in the 39 weeks ended
September 27, 1997 and September 28, 1996, respectively.
Store pre-opening expenses increased from $0.1 million in the 39 weeks
ended September 28, 1996 to $0.6 million in the 39 weeks ended September 27,
1997 due to the opening of five new store locations in 1997 compared to one
in 1996.
Net interest expense was $25.4 million in the 39 weeks ended September 27,
1997 compared to $24.3 million in the 39 weeks ended September 28, 1996. The
increase in interest expense was principally due to (i) higher non-cash
accretion of the Zero Coupon Notes, (ii) interest related to financing of
third party accounts receivable and (iii) increased interest on borrowings
under the revolving credit facility, partially offset by (a) reduced interest
on term loan borrowings caused by the decrease in average balance from $72.8
million for the 39 weeks ended September 28, 1996 to $66.5 million for the 39
weeks ended September 27, 1997 and a decrease in the average interest rate
from 9.1% for the 39 weeks ended September 28, 1996 to 8.8% for the 39 weeks
ended September 27, 1997 and (b) reduced interest on capital lease
obligations.
The net loss for the Company increased by $1.7 million from $12.5 million
in the 39 weeks ended September 28, 1996 to $14.2 million in the 39 weeks
ended September 27, 1997 primarily as a result of nonrecurring charges (see
Note 11 of Notes to Consolidated Financial Statements (Unaudited)) and
increases in selling, general and administrative expenses and interest
expense, partially offset by increased sales and gross profit margin and
lower amortization of intangibles. The Company's EBITDA improved by $5.9
million or 24.9% to $29.7 million in the 39 weeks ended September 27, 1997
compared to $23.8 million in the 39 weeks ended September 28, 1996. EBITDA as
a percentage of sales increased to 9.5% in the 39 weeks ended September 27,
1997 from 8.5% in the 39 weeks ended September 28, 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales in 1996 were $381.5 million, an increase of 13.2% over 1995 net
sales of $336.9 million. The increase was due to increased comparable store
sales of 8.3% and the inclusion of eight stores opened during 1995 for the
entire 1996 period and of one store opened in 1996. The increase in
comparable store sales was primarily attributable to increased pharmacy
sales, which increased to 21.8% of total sales in 1996 compared to 19.0% of
total sales in 1995.
Cost of sales as a percentage of net sales decreased to 75.6% for 1996
from 77.1% for 1995, resulting in an increase in gross profit margin to 24.4%
for 1996 from 22.9% for 1995. The increase in gross margin resulted from a
number of factors including (i) lower inventory shrink losses, (ii) increased
contributions from the sale of generic drugs and private label products,
(iii) less promotional activity and (iv) lower rent-to-sales ratios in stores
opened during 1995 and 1994. The increases were partially offset by lower
gross margins resulting from sales to customers covered by Third Party Plans.
Selling, general and administrative expenses were $59.0 million or 15.5%
of net sales and $50.3 million or 14.9% of net sales in 1996 and 1995,
respectively. The percentage increase in 1996 compared to 1995 resulted
principally from higher administrative expenses, including (i) operating
costs related to the Company's management information systems department,
(ii) administrative salaries and one time executive search and severance
expenses and (iii) professional and consulting fees principally for the
warehouse and loss prevention areas. The increases were partially offset by
lower store operating
28
<PAGE>
expenses as a percentage of net sales primarily due to a higher volume of
pharmacy sales, which allows the Company to leverage other fixed store
operating expenses.
Amortization of goodwill and other intangibles in 1995 and 1996 was $11.6
million and $16.2 million, respectively. The increase in amortization was
caused by an increase in the amortization of covenants not to compete from
$8.1 million in 1995 to $11.4 million in 1996 and amortization of systems
installation and integration costs in an amount of $1.4 million in 1996. The
increase in amortization of covenants not to compete was caused by the
write-off of the balance of such intangibles in 1996 resulting from the
termination of the related agreements. Amortization of systems installation
and integration costs began in 1996.
The increase in depreciation from $1.9 million in 1995 to $3.0 million in
1996 resulted principally from (i) depreciation of data processing equipment
which began in 1996 and (ii) a full year's depreciation in 1996 of assets of
eight stores that were opened in 1995.
Store pre-opening expenses decreased from $1.1 million in 1995 to $0.1
million in 1996 due to the opening of one new store location in 1996 compared
to eight in 1995.
Net interest expense increased 7.2% to $32.4 million in 1996 from $30.2
million in 1995. The increase in interest expense was principally due to the
higher non-cash accretion of the Zero Coupon Notes offset, in part, by
reduced interest on term loan borrowings resulting from the decrease in
average outstanding balance from $75.1 million to $72.0 million and a
decrease in the average interest rate from 9.5% to 9.1%.
The net loss for the Company decreased by $0.2 million or 1.1% from $18.1
million in 1995 to $17.9 million in 1996 primarily as a result of increased
sales and gross profit margin offset, in part, by increases in selling,
general and administrative expenses and amortization of intangibles. The
Company's EBITDA increased by $7.9 million or 28.6% to $35.3 million in 1996
compared to $27.4 million in 1995. EBITDA as a percentage of sales increased
to 9.3% in 1996 from 8.2% in 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales in 1995 were $336.9 million, an increase of 19.9% over 1994 net
sales of $281.1 million. The increase was primarily due to the inclusion of
11 new stores opened during 1994 for the entire 1995 period and of eight
stores opened during 1995, partially offset by a decrease in comparable store
sales of 3.5%.
Cost of sales as a percentage of net sales increased to 77.1% for 1995
from 74.6% for 1994. The increase in cost of sales resulted from a number of
factors, including: (i) increased inventory losses arising from inventory
shrink and from difficulties encountered in implementing new warehousing and
merchandising systems, (ii) delays in implementation of normal price
increases, (iii) increased promotional activity, primarily in the last
quarter of 1995, and (iv) increased occupancy expense as a percentage of
sales in 1995 as compared with 1994. These changes were partially offset by a
decline in amortization of certain acquisition costs, which amortization was
completed in the third quarter of 1994.
Selling, general and administrative expenses for 1995 increased to $50.3
million from $39.7 million for 1994, representing 14.9% and 14.1% of sales in
1995 and 1994, respectively. Such percentage increase in 1995 resulted
principally from additional costs from operating new stores and the
implementation of new MIS.
Amortization of goodwill and other intangibles decreased from $18.2
million in 1994 to $11.6 million in 1995. This decrease was primarily
attributable to a decrease in amortization of covenants not to compete from
$13.0 million in 1994 to $8.1 million in 1995. The decrease in amortization
of covenants not to compete in 1995 as compared to 1994 is a result of the
double declining balance method of amortization for such intangibles.
Amortization of customer files in connection with the acquisition of the
Company by Bain Capital in September 1992, which amounted to $1.7 million in
1994, was completed in the third quarter of 1994.
Depreciation charges in 1995 and 1994 were $1.9 million and $1.2 million,
respectively. The increase in 1995 resulted principally from (i) depreciation
in 1995 of assets of eight new store locations opened and (ii) a full year's
depreciation in 1995 of assets of 11 store locations that were opened in 1994
as compared to one-half year's depreciation of such assets in 1994.
29
<PAGE>
Store pre-opening expenses of $1.1 million and $1.2 million in 1995 and
1994, respectively, relate principally to eight new store locations opened in
1995 and 11 new store locations opened in 1994.
Net interest expense increased from $27.5 million in 1994 to $30.2 million
in 1995. This increase was principally due to an increase in the non-cash
accretion of the Zero Coupon Notes of $1.2 million and higher interest on
term loan borrowings resulting from a higher average interest rate of 9.5%
for 1995 as compared to 7.8% for 1994.
The net loss for the Company increased by $1.6 million or 9.8% from $16.4
million in 1994 to $18.1 million in 1995 primarily as a result of a decrease
in gross profit and an increase in selling, general and administrative
expenses offset, in part, by a decrease in amortization expense. The
Company's EBITDA decreased by $3.8 million or 12.2% to $27.4 million in 1995
compared to $31.2 million in 1994. EBITDA as a percentage of sales declined
to 8.2% in 1995 from 11.1% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1997, the Company entered into the Existing Credit
Agreement, which provides for, among other things, $65.5 million of term
loans and up to $30.0 million of revolving loans. As of October 25, 1997,
outstanding balances thereunder totaled $91.5 million. The Company utilizes
cash flow from operations, together with borrowings under the revolving
portion of the Existing Credit Agreement, to fund working capital needs,
investing activities (consisting primarily of capital expenditures) and
financing activities (normal debt service requirements, interest payments and
repayment of term and revolving loans outstanding). Concurrently with the
consummation of the Refinancing Plan, the Company expects to refinance and
replace the Existing Credit Agreement with the New Credit Agreement. See
"Description of Certain Indebtedness--New Credit Agreement."
Working capital was $9.9 million and $13.7 million as of December 28, 1996
and December 30, 1995, respectively, and $29.8 million on September 27, 1997.
The Company's capital requirements primarily result from opening and stocking
new stores and from the continuing development of new MIS. The Company's
ability to open stores in 1996 was limited to a certain degree by liquidity
considerations. The Company believes that there are significant opportunities
to open additional stores, and currently plans to open 30 to 40 stores in the
next two years. The Company expects to spend approximately $16 million in
1998 on capital expenditures primarily for new and replacement stores.
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 experienced a significant increase in accounts
receivable due to increased 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 fiscal year ended December 28, 1996, net cash provided by
operating activities was $12.6 million, compared to $6.7 million for the
fiscal year ended December 30, 1995. The primary reasons for this increase
relate to an increase in operating earnings before the amortization of
goodwill and other intangibles, depreciation and amortization of property and
equipment and interest expense, partially offset by a decrease in working
capital primarily due to a decrease in accounts payable. For the fiscal year
ended December 28, 1996, net cash used in investing activities was $3.8
million, compared to $12.8 million for the fiscal year ended December 30,
1995. This reduction primarily resulted from a decrease in capital
expenditures and a decrease in systems development costs. For the fiscal year
ended December 28, 1996, net cash used in financing activities was $10.7
million, compared to $4.8 million provided by financing activities for the
fiscal year ended December 30, 1995. This reduction primarily resulted from
decreased borrowings under the Company's then existing credit facility and a
decrease in capital lease financing.
For the 39 weeks ended September 27, 1997, net cash used in operating
activities was $3.2 million, compared to $6.7 million provided by operating
activities during the 39 weeks ended September 28, 1996. The primary reasons
for this decrease are (i) an increase in inventory and accounts payable
during the 1997 period, partially offset by an increase in operating
earnings. The Company's significant increase in inventory resulted from
management's decision to take advantage of
30
<PAGE>
a number of forward purchasing opportunities, accumulate inventory in
advance of additional store openings and seasonal inventory buildup during the
1997 period. The Company believes that the activities did not and will not
materially adversely affect its liquidity. For the 39 weeks ended September 27,
1997, net cash used in investing activities was $3.9 million, compared to
$2.9 million for the 39 weeks ended September 28, 1996. This increase primarily
resulted from an increase in capital expenditures during the 1997 period,
partially offset by a decrease in the capitalization of systems development
costs. For the 39 weeks ended September 27, 1997, net cash provided by financing
activities was $7.1 million, compared to $5.6 million used in financing
activities for the 39 weeks ended September 28, 1996. This increase primarily
resulted from increased borrowings under the revolving portion of the Existing
Credit Agreement.
Leases for eight of the Company's stores that generated approximately
12.8% of the Company's net sales for the 39 weeks ended September 27, 1997
are scheduled to expire before the end of the year 2000. The Company believes
that it will be able to renew such leases on economically favorable terms or,
alternatively, find other economically attractive locations to lease. See
"Risk Factors--Uncertainty of Lease Renewals."
As of September 27, 1997, approximately 1,800 of the Company's
approximately 2,000 employees were represented by various labor unions and
were covered by collective bargaining agreements. Pursuant to the terms of
such collectively bargaining agreements, the Company is required to pay
certain annual increases in salary and benefits to such employees. The
Company does not believe that such increases will have a material impact on
the Company's liquidity or results of operations. See "Risk
Factors--Collective Bargaining Agreements" and "Business--Employees."
The net proceeds received by the Company from the Offering, together with
the net proceeds received by the Company from the Notes Offering and
borrowings under the New Credit Agreement, will be used to complete the
Refinancing Plan. See "Use of Proceeds." The Refinancing Plan is designed to
enhance the Company's financial flexibility and enable it to pursue growth
opportunities and implement capital improvements. The Company expects that
the Refinancing Plan will reduce the Company's overall level of indebtedness,
simplify the Company's capital structure and provide it with access to
additional borrowings. See "Prospectus Summary--Refinancing Plan."
Following the implementation of the Refinancing Plan, 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 New 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, certain 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 payment of its indebtedness in the
future. The Company expects that substantially all of its borrowings under
the New Credit Agreement will 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. See "Risk
Factors--Risks Associated with Substantial Indebtedness."
TAX BENEFITS FROM NET OPERATING LOSSES
At September 27, 1997, the Company had net operating loss carryforwards
("NOLs") of approximately $71.0 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
31
<PAGE>
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. The Recapitalization caused the Company to experience an ownership
change. As a result, the Company currently is subject to an annual Section
382 Limitation of approximately $5.0 million on the amount of NOLs generated
prior to the Recapitalization that the Company may utilize to offset future
taxable income. In addition, the Company believes that it will generate
approximately $42.0 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. The Company does not believe that the Offering will
result in an ownership change.
YEAR 2000 COMPLIANCE
The Company has several computer software systems which will require
modification or upgrading to accomodate 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 seasonal
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.
INFLATION
The Company believes that inflation has not had a material impact on
results of operations for the Company during the three years ended December
28, 1996 and the 39 weeks ended September 27, 1997.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which requires the presentation of basic and
diluted earnings per share in a company's financial statements for reporting
periods ending subsequent to December 15, 1997. Early adoption of SFAS No.
128 is not permitted. The adoption of SFAS No. 128 is not expected to have a
material impact on the Company's consolidated financial statements.
As of September 27, 1997, there were outstanding options to purchase an
aggregate of 1,628,441 shares of Common Stock, which shares are not included
in the calculation of earnings per share for the 39 weeks ended September 27,
1997 and would not be included in such calculation under the guidance
prescribed by SFAS No. 128 because of the anti-dilutive nature of these
instruments.
32
<PAGE>
BUSINESS
THE DRUGSTORE INDUSTRY
The U.S. drugstore industry generated approximately $91 billion of retail
sales in 1996 according to Drug Store News. The industry has experienced
strong and steady growth, having expanded at a 6.2% compound annual rate over
the ten years through 1996. The industry is expected to continue to grow as
the aging of the population drives long-term demand growth for prescription
drugs. The Company believes that prescription drug use generally rises with
age. In addition to these positive demographic trends, the shift to
increasing use of Third Party Plans is increasing overall prescription drug
usage. Third Party Plans tend to favor lower cost drug therapies over
alternative treatment methods such as surgery or in-hospital treatment.
Additionally, by reducing the out-of-pocket expense to the consumer and by
improving patients' compliance for prescription drug use, Third Party Plans
have helped increase unit growth in prescription drugs.
In recent years, the drugstore industry has experienced significant
consolidation, as national chains have gained market share from independent
operators. According to Drug Store News, the number of drugstores has fallen
from approximately 54,000 in 1990 to approximately 40,000 in 1996. The share
of industry sales represented by independent drugstores (i.e., operators of
less than four stores) has fallen from 35% in 1991 to 24% in 1996. Over the
last ten years, sales at chain drugstores such as Duane Reade have grown at a
compound annual rate of 8.4% compared to the industry average of 6.2%.
The increased role of Third Party Plans has contributed significantly to
industry consolidation. According to IMS America, pharmacy business
attributable to Third Party Plans as a percentage of total pharmacy sales has
risen to 67% in 1996 from 37% in 1990. Third Party Plans typically require
drugstores to enter into contracts with third party payors (such as insurance
plans, HMOs, preferred-provider organizations ("PPOs") and other managed care
providers) to provide prescription drugs at specified rates of reimbursement
for their membership. Although sales to customers covered by Third Party
Plans typically result in lower gross margins compared to cash sales,
management believes that the lower gross margins are offset by the increased
volume of pharmacy sales generated by such Third Party Plans. Drugstore
chains such as the Company, which have high penetration within their markets
and are able to handle the payment processing of such Third Party Plans, are
better able to service the customers of the Third Party Plans and are
therefore gaining market share in the sale of prescription drugs from
independent drugstores and small chains.
Third Party Plans typically seek to form alliances with drugstore chains
in order to benefit from the chains' multiple locations and to take advantage
of on-line management information systems that facilitate claims processing.
Management believes that penetration of Third Party Plans in Manhattan has
historically lagged behind the penetration of such Third Party Plans in the
rest of the United States because until 1994, neither Duane Reade nor most of
Manhattan's independent drugstores aggressively pursued alliances with Third
Party Plans. The Company believes that its extensive network of conveniently
located stores, strong local market position, pricing policies and reputation
for high quality health care products and services provide Duane Reade with a
competitive advantage in attracting business from individual customers as
well as Third Party Plans. While management believes that Third Party Plans
have grown significantly in Manhattan since 1994, it still remains relatively
less penetrated than the rest of the country. The Company believes that as
Third Party Plans continue to penetrate the Manhattan market, the number of
independent drugstores will decline due to competitive pressures.
GENERAL
Duane Reade is the largest drugstore chain in New York City, based on
sales volume, with 58 of its 67 stores located in Manhattan's high-traffic
business and residential districts. The Company operates almost twice as many
stores in Manhattan as its next largest competitor. Since opening its first
store in 1960, the Company has successfully executed a marketing and
operating strategy tailored to the unique characteristics of New York City,
the largest and most densely populated market in the United States. According
to Drug Store News, Duane Reade is the leading drugstore chain in the United
States in terms
33
<PAGE>
of sales per square foot, at $956 per square foot in 1996, which was more
than two times the national average for drugstore chains. For the fiscal year
ended December 28, 1996, the Company had sales of $381.5 million and EBITDA
of $35.3 million, increases of 13.2% and 28.6%, respectively, over the 1995
fiscal year. For the 39 weeks ended September 27, 1997, the Company had sales
of $313.8 million and EBITDA of $29.7 million, increases of 11.6% and 24.9%,
respectively, over the comparable 1996 period. For the fiscal year ended
December 28, 1996 and the 39 week period ended September 27, 1997, the
Company had net losses of $17.9 million and $14.2 million, respectively, and,
on a pro forma basis, after giving effect to the Offering and the Refinancing
Plan, would have had net losses of $5.7 million and $3.9 million,
respectively, for such periods.
The Company enjoys strong brand name recognition in New York City, which
it believes results from the Company's many locations in high-traffic areas
of Manhattan and the 30 million shopping bags with the distinctive Duane
Reade logo that the Company distributes annually. An independent survey
conducted in 1996 indicated that approximately 84% of the people who live or
work in Manhattan recognize the Duane Reade name, and seven out of ten
shopped at a Duane Reade store in the past twelve months. The Company was
also recently named "Regional Drug Store Chain of the Year" for 1997 by Drug
Store News.
The Company has developed an operating strategy designed to capitalize on
the unique characteristics of the New York City market, which include
high-traffic volume, complex distribution logistics and high costs of
occupancy, media advertising and personnel. The key elements of the Company's
operating strategy are its (i) everyday low price format and broad product
offering, (ii) low cost operating structure supported by its high volume
stores and low advertising and distribution costs and (iii) ability to design
and operate its stores in a wide variety of sizes and layouts.
The Company believes that its everyday low price format and broad product
offerings provide value and convenience for its customers and build customer
loyalty. The Company's everyday low price format results in prices that the
Company believes are lower, on average, than the prices offered by its
competitors.
The Company is able to keep its operating costs relatively low due to its
high per store sales volume, low warehouse and distribution costs and low
advertising expenditures. The Company's high volume stores allow it to
effectively leverage occupancy costs, payroll and other store operating
expenses. The Company's two primary distribution facilities are located
within five miles of all but one of its 67 stores and, combined with the
rapid turnover of inventory in Duane Reade's stores, result in relatively low
warehouse and distribution costs. The Company's strong brand name recognition
in New York City and everyday low price format allow the Company to minimize
its use of costly media and print advertising and to rely instead on
in-window displays and other less expensive promotional activities.
The Company has demonstrated its ability to successfully operate stores
using a wide variety of store configurations and sizes, which the Company
believes is necessary to succeed in the New York City market. For example,
the size of the Company's stores ranges from 2,600 to 12,300 square feet, and
it operates 29 bi-level stores. The Company believes that its flexibility in
configuring stores provides it with a competitive advantage in securing
locations for its new stores, as many of its competitors target more
standarized spaces for their stores, which are more difficult to find in New
York City. In addition, the Company's management team has extensive
experience and knowledge of the New York City real estate market, allowing it
to aggressively pursue attractive real estate opportunities.
The Company's predecessor was founded in 1960. In 1992, Bain Capital
acquired the Company from its founders and, in June 1997, investment funds
affiliated with DLJMBPII acquired approximately 91.5% of the outstanding
capital stock of the Company from Bain Capital and certain other selling
securityholders. Since the 1992 acquisition, the Company has incurred net
losses in each fiscal year.
In 1994 and 1995 the Company experienced rapid expansion, growing from 40
stores to 59 stores. However, as a result of liquidity constraints and the
need for improved inventory controls, the Company was forced to suspend its
store expansion program in late 1995. In early 1996, a strengthened
management team led by Anthony Cuti, the Company's new Chairman and Chief
Executive Officer, took several
34
<PAGE>
measures to improve operations, including improving inventory controls and
decreasing out-of-stock occurrences, creating a loss prevention function to
control inventory shrink and continuing to invest in MIS. In 1997, the
Company resumed its store expansion program, opening seven stores in 1997.
During Mr. Cuti's tenure at the Company, EBITDA has increased by 53.2% from
$26.9 million for the 52 weeks ended March 29, 1996 to $41.2 million for the
52 weeks ended September 27, 1997, and the Company experienced net losses of
$19.8 million and $19.5 million for the 52 weeks ended March 29, 1996 and the
52 weeks ended September 27, 1997, respectively. Net loss before
non-recurring charges for the 52 weeks ended September 27, 1997 was $8.6
million.
GROWTH STRATEGY
The Company believes that, as a result of its successful operating history
and market position in New York City, it is well positioned to capitalize on
the growth opportunities in its market. The Company's strategy for continued
growth is to (i) open additional stores in Manhattan and the surrounding
boroughs, (ii) continue to capitalize on favorable pharmacy trends, (iii)
make opportunistic acquisitions of independent drugstores and pharmacy files
and (iv) continue to implement merchandising initiatives in non-pharmacy
areas.
Open Additional Stores. The Company believes that the Manhattan drugstore
market remains underpenetrated by drugstore chains, with only 50% of the
estimated $2.65 billion in annual drugstore-related sales controlled by
regional or national chains, compared to approximately 74% controlled by
chains nationally. This provides significant opportunities for the Company to
open additional stores in Manhattan as well as in the densely populated areas
of the surrounding boroughs. Some of the Company's most successful stores
have been opened in areas new to the Company, such as the residential areas
of the Upper East and West sides of Manhattan, Brooklyn, the Bronx and
Queens. The Company believes that its long-standing presence in, and
knowledge of, the New York City real estate market, combined with the use of
a proprietary site selection model that considers numerous demographic and
traffic flow variables, have allowed it to identify attractive store
locations. Since 1993, all of the Company's new stores have become profitable
on an operating basis (i.e., prior to allocation of corporate expenses,
goodwill amortization, interest expense and income taxes) within the first
full year of operation. Over the next two years, the Company plans to open
approximately 30 to 40 stores, primarily in New York City. See "Risk
Factors--Risks Associated with Future Growth."
Continue to Capitalize on Favorable Pharmacy Trends. Sales of prescription
and OTC drugs have been growing rapidly throughout the drugstore industry.
The Company expects demographic trends, such as the aging of the U.S.
population, and industry changes, such as growth of Third Party Plans, to
continue to drive increases in the prescription and OTC drug businesses.
Since 1994, the Company has focused on increasing its pharmacy sales by
entering into agreements to service Third Party Plans and by upgrading the
appearance and service level of its store pharmacies. While sales to
customers covered by Third Party Plans result in lower gross profit margins
due to competitive pricing, the Company believes that such lower margins are
offset by the increased volume of pharmacy sales and the opportunity to
leverage fixed expenses. The Company believes that its initiatives, which are
designed to capitalize on industry trends, have resulted in the Company's
pharmacy sales growing at an annual rate of approximately 30% since 1994.
Although these initiatives have helped increase the average number of
prescriptions filled by Duane Reade per store per week from 640 in 1994 to
865 during 1997, the Company's average remains well below the national
industry chain store average of approximately 1,200, providing significant
opportunity for continued pharmacy growth. The Company believes that
continued pharmacy growth will increase overall customer traffic, thereby
also benefitting its non-pharmacy sales.
Make Opportunistic Acquisitions of Independent Drugstores and Pharmacy
Files. The Company believes that the growth of Third Party Plans and the
continued penetration of chain drugstores such as Duane Reade have put
increasing pressure on the approximately 1,400 independent drugstores in New
York City. When appropriate, the Company considers acquiring small local
chains or independent drugstores. The Company also pursues the purchase of
pharmacy files of independent drugstores when such purchases are economically
attractive to the Company. The pharmacy files of independent pharmacists tend
to have a higher proportion of prescriptions not covered by Third Party
Plans, which
35
<PAGE>
generate incremental revenue and higher margins. When appropriate, the
Company retains the services of the pharmacist, whose personal relationship
with the customers generally maximizes the retention rate of the purchased
file. In 1997, the Company acquired one independent drugstore and seven such
pharmacy files and intends to aggressively pursue additional purchases.
Continue to Implement Merchandising Initiatives in Non-Pharmacy
Areas. Management has recently undertaken a number of merchandising
initiatives, including the expansion of certain high-margin categories such
as greeting cards, cosmetics, vitamins, photofinishing and photo supplies and
an expanded seasonal merchandising program. The Company also continues to
focus on category management, which it believes will improve gross margins
and increase non-pharmacy sales. For example, in 1997 the Company introduced
one-hour photofinishing service in three of its stores and intends to
introduce one-hour photofinishing service in approximately seven to ten
additional stores in 1998. The Company has also increased its emphasis on the
sale of its own private label products, which it believes provide a
high-quality, lower priced alternative to name brand products while
generating higher gross profit margins than name brand products. In addition,
in the fourth quarter of 1997, Duane Reade completed its installation of POS
scanners in all of its stores and, by the end of the first quarter of 1998,
will have completed its planogramming initiative in all of its stores. These
systems and initiatives will allow the Company to better analyze sales trends
and merchandise its stores more effectively, which the Company believes will
ultimately increase its sales and profitability.
COMPANY OPERATIONS
Merchandising. Duane Reade's overall merchandising strategy is to provide
the broadest selection of branded and private label drugstore products
available in Manhattan and to sell them at everyday low prices. To further
enhance customer service and loyalty, the Company attempts to maintain a
consistent in-stock position in all merchandise categories. In addition to
prescription and OTC drugs, the Company offers health and beauty aids, food
and beverage items, tobacco products, cosmetics, housewares, hosiery,
greeting cards, photofinishing, photo supplies, seasonal merchandise and
other products. Health and beauty care products, including OTC drugs,
represent the largest of the Company's product categories. Duane Reade
drugstores offer a wide variety of brand name and private label products,
including oral, skin and hair care products, bath supplies, vitamins and
nutritional supplements, feminine hygiene products, family planning products
and baby care products. Popular brands of health and beauty aids are given
ample shelf space, and large sizes are offered, which the Company believes
appeals to the value consciousness of many Manhattan consumers. Convenience
items such as candy, snacks and seasonal goods are positioned near the check
out registers to provide optimum convenience and stimulate impulse purchases
for the customers while allowing the store employees to monitor those product
categories that are particularly susceptible to inventory shrink.
In addition to the wide array of name brand products offered in its
stores, the Company offers its own private label products. Private label
products provide customers with high-quality, lower priced alternatives to
name brand products while generating higher gross profit margins than name
brand products. These offerings also enhance Duane Reade's reputation as a
value-oriented store. The Company currently offers approximately 400 private
label products. In 1996, these private label products accounted for
approximately 4.6% of non-pharmacy sales. The Company believes that its
strong brand image, reputation for quality and reliability in the New York
City market, and its economies of scale in purchasing allow it to
aggressively promote private label goods.
The Company has recently made efforts to increase the sales of certain
high-margin items, such as cosmetics, greeting cards and photofinishing. In
1996, the Company completed the remodeling of the cosmetics sections in 19
stores, which resulted in an approximately 23% increase in cosmetic sales in
those stores with no increase in linear footage. In the greeting cards
category, the Company increased seasonal selection and reformatted the card
section in many of its stores, resulting in a 26% increase in greeting card
sales in 1996 compared to 1995. Other merchandising initiatives completed
during 1996 include an expanded selection of seasonal merchandise, vitamins,
nutrition products and baby accessories, particularly in stores located in
residential areas. The Company believes there are additional opportunities to
continue to refine and improve the merchandise mix in its stores.
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<PAGE>
The Company also offers same-day photofinishing services in all of its
stores and has recently introduced one-hour photofinishing in three stores.
In 1998, the Company expects to introduce one-hour photofinishing in seven to
ten additional stores. Management believes that photofinishing services
contribute significantly to sales of other merchandise categories because of
customer traffic increases that result from the customer visiting a store
twice, in order to drop off film and pick up the processed photos.
Pharmacy. The Company believes that its pharmacy business will continue to
contribute significantly to the Company's growth. Management also believes
that a larger and stronger pharmacy business will enhance customer loyalty
and generate incremental customer traffic, which is expected to increase
sales of Duane Reade's wide variety of OTC drugs and other non-pharmacy
merchandise. Duane Reade significantly grew its prescription drug sales in
1996 as reflected by its same-store pharmacy sales increase of 25.5% during
1996 compared to 1995 and an increase of 25.4% for the 39 week period ended
September 27, 1997 compared to the same period in 1996. Sales of prescription
and OTC drugs represented approximately 35% of total sales in 1996 as
compared with 33% of total sales in 1995 and approximately 38% of total sales
for the 39 week period ended September 27, 1997. Although the average number
of prescriptions filled by Duane Reade per store per week has increased from
640 in 1994 to 865 during 1997, the Company's average remains well below the
industry chain store average of approximately 1,200, providing significant
opportunity for continued pharmacy growth. The Company believes that the
average number of prescriptions filled per week by it lags behind the
industry average because of (i) the historically low penetration of Third
Party Plans in the New York City area and (ii) the Company's concentration of
stores in business areas, rather than residential areas. The Company believes
continued pharmacy growth will also increase overall customer traffic and
benefit its non-pharmacy sales.
The Company generally locates the pharmacy at the rear of the store in
order to maximize the pharmacy customer's exposure to other categories of
merchandise in the front of the store. Each pharmacy is staffed with a
registered pharmacist and a drug clerk at all times to ensure quick and high
quality service. Each store carries a complete line of both branded and
generic prescription drugs. In 1996, the Company began a program to upgrade
the quality of its pharmacy service. The Company believes that this
initiative has contributed to its strong growth in pharmacy sales and should
continue to benefit the Company as customer loyalty builds in response to
improved service levels.
In addition to customer service initiatives in its pharmacy business, the
Company has remodeled or redesigned 16 of its pharmacies since the beginning
of 1996. This remodeling, which has primarily involved updating the pharmacy
counter area to allow pharmacists and customers to have more direct contact
and providing a consultation and waiting area for customers, has not resulted
in any significant reduction in total retail selling space. By improving the
store layout and accessibility of the pharmacist and pharmacy area, the
stores that have been remodeled have achieved strong growth in their pharmacy
business. All stores opened since 1995 have the new pharmacy counter area
design. The Company currently operates 24 such stores. The Company has also
launched pharmacy marketing initiatives, such as home delivery and
prescription-by-fax services, which it believes have contributed to the
increased sales and customer loyalty of the pharmacy business.
The Company believes that its extensive network of conveniently located
stores, strong local market position, pricing policies and reputation for
high quality health care products and services provide it with a competitive
advantage in attracting pharmacy business from individual customers as well
as Third Party Plans. The percentage of the Company's total prescription drug
sales attributable to Third Party Plans increased to approximately 64% in
1996 from approximately 58% in 1995, and to approximately 73% for the 39 week
period ended September 27, 1997. Although gross margins on sales to Third
Party Plans are generally lower than other prescription drug sales because of
the highly competitive nature of pricing for this business and the purchasing
power of Third Party Plans, management believes that the lower gross profit
margins are offset by the higher volume of pharmacy sales to Third Party Plan
customers allowing the Company to leverage other fixed store operating
expenses. In addition, the Company believes that Third Party Plans generate
additional general merchandise sales by increasing customer traffic in the
stores. As of September 27, 1997, the Company had contracts with over 100
Third Party Plans, including every major Third Party Plan in the Company's
market areas.
37
<PAGE>
Another important component of the Company's pharmacy growth strategy is
the continued acquisition of prescription files from independent pharmacies
in market areas currently served by existing Company stores. In 1997, the
Company purchased the prescription files of eight independent pharmacies for
an aggregate total of $830,000, which generated approximately $7 million in
revenues on an annualized basis. Independent pharmacists tend to have a
higher proportion of customers that are not Third Party Plans, which provide
the Company with incremental revenue and higher margin contribution. When
appropriate, the Company will retain the services of the pharmacist, whose
personal relationship with the customers generally maximizes the retention
rate of the purchased file. Since 1995, the Company has experienced an
estimated 80% customer retention rate with respect to prescription files
acquired. Presently, there are approximately 1,400 independent pharmacies in
New York City, and the Company believes that these stores will provide
additional acquisition opportunities in the future.
The Company's pharmacies employ computer systems that link all of the
Company's pharmacies and enable them to provide customers with a broad range
of services. The Company's pharmacy computer network profiles customer
medical and other relevant information, supplies customers with information
concerning their drug purchases for income tax and insurance purposes and
prepares prescription labels and receipts. The computer network also
expedites transactions with Third Party Plans by electronically transmitting
prescription information directly to the Third Party Plan and providing
on-line adjudication, which confirms at the time of sale customer
eligibility, prescription coverage and pricing and co-payment requirements
and automatically bills the respective plan. On-line adjudication reduces
losses from rejected claims and eliminates a portion of the Company's
paperwork for billing and collection of receivables and costs associated
therewith.
Store Operations. The majority of the Company's stores are located in the
business and residential areas of Manhattan, the most densely populated area
in the United States. The Company's operations have been tailored to handle
high-volume customer traffic. During 1996, an average Duane Reade store
served approximately 2,500 customers per weekday, and 700 customers during
each of the peak lunch and commuting periods of the day. Some of the
Company's stores may operate up to 25 registers during peak demand periods.
Duane Reade stores range in size from 2,600 to 12,300 square feet, with an
average of 6,800 square feet. The Company's stores are designed to facilitate
customer movement and to minimize inventory shrink. The Company believes that
its wide, straight aisles and well-stocked shelves allow customers to find
merchandise easily and allow the store's employees (managers, security
guards, cashiers and stock clerks) to effectively monitor customer behavior.
The Company attempts to group merchandise logically in order to enable
customers to locate items quickly and to stimulate impulse purchases.
In 1996, the Company began planogramming its stores by using a
computerized space management system to design each store's layout and
product displays. The system seeks to maximize productivity per square foot
of selling space, maintain consistency in merchandising and reduce inventory
levels. To date, 34 stores have been designed by the system. Management
believes that the Company's remaining stores will be planogrammed by the end
of the first quarter of 1998. As a result, the Company believes that it has
yet to realize the full benefits from this system.
The Company establishes each store's hours of operations in an attempt to
best serve customer traffic patterns and purchase habits and to optimize
store labor productivity. Stores in Manhattan's business districts are
generally open five days a week. In residential and appropriate
business/shopping districts, stores are open six or seven days a week with a
heavy emphasis on convenient, early morning and late evening openings. In
1997, the Company had seven stores which were open 24 hours a day, 365 days a
year. The Company intends to continue to identify stores in which extended
operating hours would improve customer service and convenience and contribute
to the Company's profitability. Each store is supervised by one store manager
and one or more assistant store managers. Stores are supplied by deliveries
from the Company's warehouses in Queens an average of three times a week,
allowing the stores to maintain a high in-stock position, maximize store
selling space and minimize inventory required to be held on hand.
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<PAGE>
The Company attempts to mitigate inventory shrink through (i) the
employment of full time security guards in each store, (ii) the use of a
state-of-the-art Electronic Article Surveillance ("EAS") system that detects
unremoved EAS tags on valuable or easily concealed merchandise and (iii)
merchandise delivery and stocking during non-peak hours. Additionally, all
store and warehouse employees are trained to monitor inventory shrink, and
the Company uses outside consulting services to monitor employee behavior.
Recently, the Company hired a full-time team of loss prevention professionals
and established an anonymous call-in line to allow employees to report
instances of theft. The Company also instituted ongoing audits of warehouse
picking and receiving and an anonymous reward line for the reporting of
theft. The Company believes that these programs have enabled it to control
inventory shrink and will enable it to continue to do so.
Purchasing and Distribution. The Company purchases approximately 82% of
its merchandise directly from manufacturers. The Company distributes
approximately 84% of its merchandise through the Company's warehouses and
receives direct-to-store deliveries for approximately 16% of its purchases.
Direct-to-store deliveries are made for pharmaceuticals, greeting cards,
photofinishing, convenience foods and beverages. The Company purchases from
over 1,000 vendors. The Company believes that there are ample sources of
supply for the merchandise currently sold in its stores. The Company manages
its purchasing through a combination of forward buying, national buying and
vendor discount ("deal") buying in ways in which it believes maximizes its
buying power. For example, the Company uses a computerized forecasting and
investment program that is designed to determine optimal forward buying
quantities before an announced or anticipated price increase has been
implemented. By forward buying, the Company stocks up on regularly carried
items when manufacturers temporarily reduce the cost of goods or when a price
increase has been announced or is anticipated.
The Company operates two warehouses, which are located within five miles
of all but one of its stores. The Company's primary warehouse contains
approximately 150,000 square feet devoted to inventory. The Company believes
that the close proximity of the warehouses to the stores allows the Company
to supply the stores frequently, thereby minimizing inventory and maximizing
distribution economies. The Company also owns a fleet of trucks and vans,
which it uses for all deliveries from the warehouses to the stores.
ADVERTISING AND PROMOTION
The Company regularly promotes key items at reduced retail prices during
four-week promotional periods. Store windows and in-store signs are utilized
to communicate savings and value to shoppers. Additionally, over 30 million
bags with the highly recognizable Duane Reade logo are used by its customers
each year, helping to promote the Company's name throughout New York City.
The Company also utilizes full color circulars to announce new stores and
heavily circulates them in local areas to attract customers. Typically, a new
store sells one to two times its regular volume during a grand opening
promotion, which generally lasts two to three weeks. The Company generally
does not rely heavily on the use of print or broadcast media to promote its
stores. Rather, because of its many high-traffic locations, the Company
typically relies on in-window displays as its primary method of advertising.
In 1997, the Company began using radio advertising. The radio advertising
focuses on the Company's pharmacy business, highlighting services enhanced by
the modern pharmacy computer system, pharmacist accessibility and enhanced
convenience.
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<PAGE>
PROPERTIES; LEASES
As of November 25, 1997, the Company is operating stores in the following
locations:
<TABLE>
<CAPTION>
LOCATION TOTAL
<S> <C>
Manhattan, NY ..... 58
Brooklyn, NY ...... 4
Bronx, NY ......... 2
Queens, NY ........ 2
Newark, NJ ........ 1
---------
Total ........... 67
</TABLE>
Store leases are generally for 15 year terms. The average year of
expiration for all the Company's leases is 2006. Lease rates are generally
subject only to increases based on inflation, real estate tax increases or
maintenance cost increases. The following table sets forth the lease
expiration dates of the Company's leased stores over each of the next five
years and thereafter. Of the stores with leases expiring in the next five
years, four have renewal options. See "Risk Factors--Uncertainty of Lease
Renewals."
<TABLE>
<CAPTION>
NUMBER OF
YEAR LEASES EXPIRING
<S> <C>
1997 ........... 0
1998 ........... 3
1999 ........... 1
2000 ........... 4
2001 ........... 0
Thereafter ..... 59
</TABLE>
The Company owns a distribution facility and related land in Long Island
City, New York. The building contains approximately 150,000 square feet of
space, all of which is used for warehousing and distribution. The Company
also leases a 50,000 square foot distribution facility in Maspeth, New York,
which is only one mile from the Long Island City facility. The Company leases
space for its corporate headquarters, which is located in Manhattan.
MANAGEMENT INFORMATION SYSTEMS
The Company currently has modern pharmacy and inventory management
information systems. In 1996, the Company completed the installation of a
host-based, modern pharmacy information system. The pharmacy information
system (PDX) has reduced the time for electronic reimbursement approval for
prescriptions from Third Party Plan providers from 50 seconds to seven
seconds, and the inventory management information systems (JDA merchandising
and E3 replenishment) have allowed the Company to increase inventory turns in
the warehouses from 11 to 13 per year. In early 1997, the Company began the
process of installing POS systems in its stores. The Company believes that
these systems will allow the Company to better control pricing, inventory and
shrink, while maximizing the benefits derived from the other parts of its
systems installation program. POS will also provide sales analysis that will
enable the Company to improve labor scheduling, and will help optimize
planogram design by allowing detailed analysis of stock-keeping-unit ("SKU")
sales. The installation of the Company's POS systems was completed in
December 1997. Additionally, the Company has upgraded its financial reporting
systems and installed local and wide area networks to facilitate the transfer
of data between systems and from the stores to headquarters.
COMPETITION
The Company's stores compete on the basis of, among other things,
convenience of location and store layout, product mix, selection, customer
service and price. The New York City drugstore market is highly fragmented
due to the complexities and costs of doing business in the most densely
populated area of the country. The diverse labor pool, local customer needs
and complex real estate market in New York City
40
<PAGE>
all favor regional chains and independent drugstores that are familiar with
the market. Duane Reade's store format is designed to meet the unique needs
of the New York City market and has proven successful in both the business
and residential neighborhoods of Manhattan.
Because of the difficulties of operating in a densely populated area, the
New York City drugstore market remains under-penetrated by national chains as
compared to the rest of the country. According to industry sources,
approximately 74% of the nationwide drugstore market was controlled by
chains, while in New York City that number was approximately 50%. There can
be no assurance that such underpenetration will continue.
Duane Reade believes that it has significant competitive advantages over
the approximately 1,400 independent drugstores in New York City, including
purchasing economies of scale, centrally located warehouses that minimize
store inventory and maximize selling space, a full line of in stock, brand
name merchandise and a convenient store format. Major chain competitors in
the New York City market include Rite-Aid, Genovese and CVS. See "Risk
Factors--Competition."
GOVERNMENT REGULATION
Duane Reade's stores and its distribution facilities are registered with
the federal DEA and are subject to various state and local licensing
requirements. Each of Duane Reade's pharmacies and pharmacists located in New
York are licensed by the State of New York. The pharmacy and pharmacists
employed at Duane Reade's store in Newark, New Jersey are licensed by the
State of New Jersey. In addition, Duane Reade has been granted cigarette tax
stamping licenses from the State of New York and from the City of New York,
which permit Duane Reade to buy cigarettes directly from the manufacturers
and stamp the cigarettes themselves. Duane Reade's stores possess cigarette
tax retail dealers licenses issued by the State of New York, the City of New
York and the State of New Jersey. See "Risk Factors--Regulatory Matters."
EMPLOYEES
As of September 27, 1997, Duane Reade had approximately 2,000 employees,
almost all of whom were full-time. Approximately 1,800 of the Company's 2,000
employees are represented by unions. Non-union employees include employees at
corporate headquarters and store management. The Company's distribution
facility employees are represented by the International Brotherhood of
Teamsters, Chauffeurs and Warehousemen and Helpers of America, Local 815, and
all store employees are represented by the Allied Trade Council. Duane
Reade's three year contracts with these two unions expire on August 31, 1999
and August 31, 1998, respectively. Duane Reade believes that its relations
with its employees are good. See "Risk Factors--Collective Bargaining
Agreements."
TRADEMARKS
The name "Duane Reade" and the "DR" logo are registered trademarks. The
Company believes that it has developed strong brand awareness within the New
York City area. As a result, the Company regards the Duane Reade logo as a
valuable asset.
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.
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the directors and executive officers of the
Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Anthony J. Cuti .... 51 Chairman, Chief Executive Officer and President
William Tennant .... 50 Senior Vice President and Chief Financial Officer
Gary Charboneau .... 53 Senior Vice President--Sales and Merchandising
Jerry M. Ray ........ 50 Senior Vice President--Store Operations
Nicole S. Arnaboldi 39 Director
David L. Jaffe....... 39 Director
Andrew J. Nathanson . 40 Director
</TABLE>
Two additional directors will be elected by the Board of Directors
following the completion of the Offering.
ANTHONY J. CUTI has been Chairman and Chief Executive Officer of the
Company since April 1996. Prior to joining the Company, Mr. Cuti served as
President and as a member of the Board of Directors of Supermarkets General
and Pathmark from 1993 to 1996 and, prior to being named President of
Supermarkets General and Pathmark, Mr. Cuti was Executive Vice President and
Chief Financial Officer of Supermarkets General. From 1984 to 1990, he was
the Chief Financial Officer of the Bristol-Myers International Group of the
Bristol-Myers Company and prior to that was employed by the Revlon
Corporation.
WILLIAM TENNANT has been Senior Vice President and Chief Financial Officer
of the Company since February 1997. Prior to joining the Company, Mr. Tennant
was Senior Vice President and Chief Financial Officer of Tops Appliance City,
a consumer electronics retailer, from 1993 to 1996. From 1986 to 1993, Mr.
Tennant served as Vice President and Controller for the Great Atlantic &
Pacific Tea Company.
GARY CHARBONEAU has been Senior Vice President in charge of Sales and
Merchandising of the Company since February 1993. Prior to joining the
Company, Mr. Charboneau held various positions at CVS, a retail drugstore
chain, from 1978 to February 1993, most recently as Executive Vice President.
JERRY M. RAY has been Senior Vice President in charge of Store Operations
since July 1996 and served as Vice President of Pharmacy Operations from
April 1995 to June 1996. From 1991 to 1994, Mr. Ray served as President and
CEO of Begley Drugstores, Inc.
NICOLE S. ARNABOLDI has been a Director of the Company since June 1997.
Ms. Arnaboldi is a Managing Director of DLJMB. She joined the DLJ Merchant
Banking Group in March 1993 after six years with The Sprout Group, DLJ's
venture capital affiliate.
DAVID L. JAFFE has been a Director of the Company since June 1997. Mr.
Jaffe is a Managing Director of DLJMB. Mr. Jaffe joined DLJ Merchant Banking
in 1984 and became a Managing Director in 1995. He currently sits on the
Board of Directors of each of EZ Buy and EZ Sell Recycler Corporation, OHA
Financial, Inc., OSF, Inc., Terra Nova Group, Pharmaceutical Fine Chemicals
SA and Brand Scaffold Services, Inc.
ANDREW J. NATHANSON has been a Director of the Company since June 1997.
Mr. Nathanson is a Managing Director of DLJ. Mr. Nathanson joined DLJ in 1989
from Drexel Burnham Lambert, and has been a Managing Director of DLJ since
1991. Mr. Nathanson also serves on the Board of Directors of Specialty Foods,
Inc.
Directors of the Company are currently elected annually by its
stockholders to serve during the ensuing year or until their respective
successors are elected and qualified. Executive officers of the Company are
elected by the Board of Directors to serve until their respective successors
are elected and qualified.
42
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to the Offering, the Board of Directors had no formal committees. In
connection with the completion of the Offering, the Board of Directors will
establish two committees: (i) an Audit Committee and (ii) a Compensation
Committee.
The Audit Committee will make recommendations to the Board of Directors
regarding the Company's independent auditors, approve the scope of the annual
audit activities of the independent auditors and review audit results. It is
expected that a majority of the directors comprising the Audit Committee will
be directors not otherwise affiliated with the Company or its principal
stockholders.
The duties of the Compensation Committee will be to provide a general
review of the Company's compensation and benefit plans to ensure that they
meet corporate objectives. In addition, the Compensation Committee will
review management's recommendations on (i) compensation of all officers of
the Company and (ii) adopting and changing major Company compensation
policies and practices, and report its recommendations to the entire Board of
Directors for approval and authorization. The Compensation Committee will
administer the Company's stock plans. The Board of Directors may also
establish other committees to assist in the discharge of its
responsibilities.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the principal components of compensation of
the Chief Executive Officer and the other four highest compensated executive
officers of the Company (the "Named Executive Officers") for the fiscal year
ended December 27, 1997. The compensation set forth below fully reflects
compensation for services performed on behalf of the Company and its
subsidiaries.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- --------------
SECURITIES
NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION OPTIONS (#) COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Cuti............. 1997 $386,000 $-- $-- 496,569 $--
Chief Executive Officer
Gary Charboneau............. 1997 243,000 -- -- 141,877 --
Senior Vice
President--Sales and
Merchandising
Jerry M. Ray................ 1997 200,000 -- -- 118,231 --
Senior Vice
President--Store
Operations
William J. Tennant.......... 1997 151,000(2) -- -- 115,393 --
Senior Vice
President--Chief Financial
Officer
Joseph S. Lacko............. 1997 150,000 -- -- 11,823 --
Vice President--Management
Information Systems
</TABLE>
- ------------
(1) Bonuses for 1997 have not yet been determined. Messrs. Cuti,
Charboneau, Ray and Lacko received bonuses in fiscal 1996 of $340,000,
$120,000, $100,000 and $25,000, respectively.
(2) Reflects Mr. Tennant's salary for the partial year from February 18,
1997 (when he joined the Company) through December 27, 1997.
43
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table discloses options granted during fiscal 1997 to the
Named Executive Officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT
INDIVIDUAL GRANTS ASSUMED RATES OF STOCK PRICE
APPRECIATION FOR OPTION
----------------------------------------------------------- TERM(2)
NUMBER OF % OF TOTAL ----------------------------
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Cuti ........ 496,569 45.5% $8.33 6/18/07 $2,602,022 $6,594,436
Gary Charboneau (3) .... 141,877 13.0 8.33 6/18/07 743,435 1,884,127
Jerry M. Ray (3)........ 118,231 10.8 8.33 6/18/07 619,530 1,570,081
William J. Tennant (4) 115,393 10.6 7.34-8.33 2/18/07-6/18/07 561,964(5) 1,579,108(5)
Joseph S. Lacko ........ 11,823 1.1 8.33 6/18/07 61,953 157,009
</TABLE>
- ------------
(1) All of such options vest fully on the eighth anniversary of the grant
date and may vest sooner based on the Company's achievement of certain
specified financial targets.
(2) Amounts reflect certain assumed rates of appreciation for the term of
the option as set forth in the executive compensation disclosure rules
of the Securities and Exchange Commission and are not intended to
forecast future appreciation of the Common Stock. Actual gains, if any,
on stock option exercises depend on future performance of the Company's
stock and overall market conditions. For each Named Executive Officer
other than Mr. Tennant, at an annual rate of appreciation of 5% per
year for the option term, the price of the Common Stock would be
approximately $13.57 per share as of the expiration date, and for Mr.
Tennant such price would be approximately $12.62 per share. For each
Named Executive Officer other than Mr. Tennant, at an annual rate of
appreciation of 10% per year for the option term, the price of the
Common Stock would be approximately $21.61 per share as of the
expiration date, and for Mr. Tennant such price would be approximately
$20.10 per share.
(3) All of such options were granted under the Equity Plan (as defined
below). The options granted under such plan are subject to repurchase
provisions upon termination of employment. See "--Stock Options."
(4) 68,101 of Mr. Tennant's options were granted pursuant to a separate
agreement with the Company, and the remaining 47,292 options were
granted pursuant to the Equity Plan.
(5) Amounts for Mr. Tennant are calculated based on a weighted average
exercise price of $7.75 per share.
FISCAL YEAR END OPTION VALUES
The following table summarizes the number and value of all unexercised
options held by the Named Executive Officers at the end of 1997. There were
no options exercised in the Company's last fiscal year.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON OPTIONS AT AT FISCAL YEAR END
NAME EXERCISE VALUE REALIZED FISCAL YEAR END ($)(1)
- ------------------- ------------- -------------- --------------- ---------------------
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Anthony J. Cuti..... -- -- 364,530/496,569 2,825,108/0
Gary Charboneau..... -- -- 56,013/141,877 306,443/0
Jerry M. Ray........ -- -- 45,032/118,231 285,161/0
William J. Tennant -- -- 68,101/47,292 67,420/0
Joseph S. Lacko ... -- -- 17,025/11,823 131,944/0
</TABLE>
- ------------
(1) Assumes the value of the Common Stock as of December 27, 1997 is equal
to $8.33 per share.
44
<PAGE>
Mr. Weston, the Company's former Chief Executive Officer, resigned from
the Company effective as of February 28, 1997. In connection with Mr.
Weston's severance from the Company and the Recapitalization, Mr. Weston
received approximately $1.6 million from DLJMB and all of his unexercised
options were effectively cancelled. In addition, Mr. Weston received
approximately $412,000 from the Company during 1997, a portion of which was
attributable to his 1995 and 1996 bonus and the remainder of which was
attributable to severance payments.
COMPENSATION OF DIRECTORS
Directors of the Company who are employees of the Company, DLJ or DLJMB or
their respective subsidiaries are not compensated for serving as directors.
Presently, the Company does not have directors who are not employees of the
Company, DLJ or DLJMB ("Non-Employee Directors"). However, the Company plans
to compensate future Non-Employee Directors with option grants for serving in
such capacity and for serving on committees of the Board of Directors and to
reimburse Non-Employee Directors for out-of-pocket expenses incurred in such
capacity.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Offering, the Company did not have a compensation committee.
Instead, compensation decisions regarding the Company's executive officers
were made by the Board of Directors. Each executive officer of the Company
has an employment agreement with the Company that establishes his annual
compensation. See "--Employment Agreements."
EMPLOYMENT AGREEMENTS
Effective June 18, 1997, the Company entered into an employment agreement
with Anthony J. Cuti (the "Cuti Employment Agreement"). Pursuant to the Cuti
Employment Agreement, Mr. Cuti serves as Chairman, President and Chief
Executive Officer of the Company. The Cuti Employment Agreement provides for
(i) a base salary of $425,000 per year, which will increase to $500,000 in
1998 and $550,000 in 1999 if certain EBITDA targets (as defined in the Cuti
Employment Agreement) are met and will increase every 18 months commencing
July 1, 2001 by not less than the percentage increase in a designated
consumer price index for such 18-month period, (ii) an annual incentive bonus
of up to 200% of base salary based on certain EBITDA targets and (iii)
participation in all benefit plans generally available to executive officers
of the Company.
Pursuant to the Cuti Employment Agreement and the Equity Plan described
below, on June 18, 1997, Mr. Cuti was granted non-qualified stock options to
purchase an aggregate of 496,569 shares of Common Stock at an exercise price
of $8.33 per share. Subject to Mr. Cuti's continued employment with the
Company, the options generally will become 100% vested on the eighth
anniversary of the date of grant, but may vest sooner based on the Company's
achievement of certain specified financial targets. Furthermore, the vesting
of options will accelerate upon the occurrence of a Sale of the Company (as
defined in the Cuti Employment Agreement) on or prior to December 30, 2001,
based on the Company's achievement of specified financial targets prior to
the date of any such Sale of the Company.
The Cuti Employment Agreement provides that following the Offering, Mr.
Cuti may generally only transfer up to 10% of his shares of Common Stock in
each calendar year while he is an employee of the Company, except pursuant to
certain rights and obligations (i) to transfer ("put") his shares to the
Company upon termination of employment and (ii) to transfer shares in
connection with certain transfers of Common Stock by DLJMBPII. The Cuti
Employment Agreement also provides that Mr. Cuti will be given the
opportunity to invest additional amounts in stock of the Company in the event
that DLJMBPII invests new equity in the Company or creates an intrument that
may be dilutive to Mr. Cuti's equity position relative to DLJMBPII.
Mr. Cuti's initial term of employment is for three years and, unless
terminated by notice of non-renewal by either the Company or Mr. Cuti, will
continue thereafter for successive one-year periods. Pursuant to the Cuti
Employment Agreement, if the Company terminates Mr. Cuti without "cause" (as
defined in the Cuti Employment Agreement) or by notice of non-renewal or Mr.
Cuti resigns with "good
45
<PAGE>
reason" (as defined in the Cuti Employment Agreement), Mr. Cuti will be
entitled to continued base salary and incentive bonus payments (at the rate
of two times base salary and bonus for the year prior to termination, which
can be increased to three times base salary and bonus upon the occurrence of
certain events, including a Sale of the Company) and employee benefits for a
two year period, which, under certain circumstances, including Mr. Cuti's
termination of employment prior to June 18, 2003 and within one year
following a Sale of the Company, may be extended by one year. Additionally,
the vesting of Mr. Cuti's options may accelerate upon such a termination of
employment, based on the Company's financial performance prior to such
termination and whether a Sale of the Company has occurred. The Cuti
Employment Agreement also contains certain non-compete, non-solicitation and
confidentiality provisions. See also "Certain Relationships and Related
Transactions--Cuti Loan Agreement."
The Company has also entered into agreements with Messrs. Charboneau and
Ray and certain other executives that provide for their initial base salary
as well as annual incentive bonuses based on certain EBITDA targets. Mr.
Charboneau's employment agreement provides for an annual base salary of
$220,000 and for additional increases from time to time as the Company may
determine. Mr. Ray's employment agreement provides for an annual base salary
of $150,000 and for additional increases from time to time as the Company may
determine. Each of Messrs. Charboneau and Ray are entitled to severance
payments equalling 12 months of their respective salaries if they are
terminated without "cause" (as respectively defined in the agreements).
The Company's agreement with Mr. Lacko provides for payment of an annual
base salary of $150,000 as well as for payment of annual incentive bonuses
based upon achievement of certain corporate and financial objectives. Mr.
Lacko's agreement also provides for the grant of stock options to acquire an
aggregate of 6,805 shares of Common Stock. These options vested on June 18,
1997 and have an exercise price of $8.33 per share. In addition, Mr. Lacko's
agreement provides for 12 months of salary continuation in the event Mr.
Lacko is terminated without cause.
The Company's agreement with Mr. Tennant provides for payment of an annual
base salary of $175,000 per year as well as for payment of annual incentive
bonuses based upon achievement of certain financial targets. Mr. Tennant's
agreement also provides for the grant of stock options to acquire an
aggregate of 68,101 shares of Common Stock at an exercise price of $7.34 per
share and for 12 months of salary continuation in the event Mr. Tennant is
terminated without cause.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company has established the Supplemental Executive Retirement Plan
("SERP"), an unfunded retirement plan that provides a lump sum benefit equal
to the actuarial present value of a life annuity commencing at the later of
age 65 or termination of employment for any reason other than for "cause."
The SERP benefit is calculated as a percentage of a participant's Final
Average Earnings (defined as the average base salary and bonus for the five
years which produce the greatest amount multiplied by the participant's years
of services with the Company). Currently, Mr. Cuti is the only SERP
participant. Mr. Cuti's estimated SERP benefit, based on his annualized 1996
includable compensation and upon discount rates effective for termination of
employment in December 1997, is estimated to be $619,000, if termination of
employment occurs after 10 years when Mr. Cuti will be age 60 1/2, or
$1,263,000 if termination of employment occurs after 14 1/2 years, when Mr.
Cuti will be age 65. Pursuant to the Cuti Employment Agreement, the Company
is required to set aside funds in a "rabbi trust" to pay Mr. Cuti's SERP
benefit in specified circumstances, including a Sale of the Company,
termination without "cause" and resignation for "good reason" (as
respectively defined in the Cuti Employment Agreement). Furthermore, in the
event of his termination without "cause" or by reason of the Company's
non-renewal, his resignation for "good reason," or his death or disability,
Mr. Cuti's SERP benefit will be calculated on the basis of 20 years of
employment regardless of his actual number of years of employment with the
Company (the present value of which was approximately $680,000 as of
September 27, 1997).
STOCK OPTIONS
1992 STOCK OPTION PLAN. The Board of Directors adopted and the Company's
stockholders approved the 1992 Stock Option Plan (the "1992 Plan") in
September 1992. Under the 1992 Plan, the
46
<PAGE>
Board of Directors may grant to executive and other key employees of the
Company nonqualified stock options to purchase up to an aggregate of 510,757
shares of Common Stock of the Company at exercise prices and terms specified
by the Board of Directors.
At September 27, 1997, there were outstanding nonqualified stock options
issued under the 1992 Plan to purchase up to an aggregate of 281,657 shares
of Common Stock of the Company at exercise prices ranging from $0.58 to
$40.88 per share. The 1992 Plan will be frozen as to the future grants
following the Offering. All options issued under the 1992 Plan are 100%
vested.
1997 EQUITY PARTICIPATION PLAN. As of June 18, 1997, the Board of
Directors and stockholders of the Company approved the 1997 Equity
Participation Plan (the "Equity Plan"). The Equity Plan has been administered
by the Board of Directors and, following consummation of the Offering, will
be administered by the Compensation Committee. The Board of Directors is
authorized under the Equity Plan to select the individuals to whom awards
will be made (the "Participants") and determine the terms and conditions of
the awards under the Equity Plan. The Equity Plan provides that the Board of
Directors may grant or issue stock options, stock appreciation rights,
restricted stock, deferred stock, dividend equivalents, performance awards,
stock payments, and other stock related benefits, or any combination thereof,
to any eligible employee or consultant. Each such award will be set forth in
a separate agreement with the person receiving the award and will indicate
the type, terms and conditions of the award. An aggregate of 1,321,181 shares
of Common Stock of the Company have been reserved for issuance under the
Equity Plan, subject to certain adjustments reflecting changes in the
Company's capitalization. The Equity Plan provides that no Participant may
receive awards relating to more than 480,429 shares of Common Stock per year.
SECTION 162(M) LIMITATION. In general, under Section 162(m) of the Code
("Section 162(m)"), income tax deductions of publicly-held corporations may
be limited to the extent total compensation (including base salary, annual
bonus, stock option exercises and non-qualified benefits) for certain
executive officers exceeds $1 million (less the amount of any "excess
parachute payments" as defined in Section 280G of the Code) in any one year.
Under a Section 162(m) transition rule for compensation plans of corporations
which are privately held and which become publicly held in an initial public
offering, the Equity Plan will not be subject to Section 162(m) until the
"Transition Date" which is defined as the earliest of (i) the material
modification of the Equity Plan; (ii) the issuance of all Common Stock and
other compensation that has been allocated under the Equity Plan; and (iii)
the first meeting of stockholders at which directors are to be elected that
occurs after December 31, 2001. After the Transition Date, rights and awards
granted under the Equity Plan will not qualify as "performance-based
compensation" for purposes of Section 162(m) unless such rights and awards
are granted by an independent compensation committee, and such awards are
granted or vest upon pre-established objective performance goals, the
material terms of which are disclosed to and approved by the stockholders of
the Company. The transition rule will also apply to base salary and bonus
payments made pursuant to employment agreements in effect at the time of the
Offering.
The Board of Directors generally will have the power and authority to
amend the Equity Plan at any time without approval of the Company's
stockholders, subject to applicable federal securities and tax law
limitations (including rules and regulations of the New York Stock Exchange).
47
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DLJMB RELATIONSHIPS
In connection with the Recapitalization, DLJMBPII and certain of its
affiliates (the "DLJ Entities") purchased an aggregate of 9,383,423 shares of
Common Stock, certain members of management retained an aggregate of 284,832
shares of Common Stock and certain other stockholders retained an aggregate
of 589,577 shares of Common Stock. The aggregate purchase price for the
shares acquired by the DLJ Entities was approximately $78.7 million or
approximately $8.33 per share. Each of these shareholders other than members
of management signed the Stockholders and Registration Rights Agreement. See
"--Stockholders and Registration Rights Agreement." Mr. Jaffe and Ms.
Arnaboldi, directors of the Company, are Managing Directors of DLJMB, and Mr.
Nathanson, also a director of the Company, is a Managing Director of DLJ.
On September 30, 1997, the Company entered into the Existing Credit
Agreement in which DLJ Capital Funding, Inc., an affiliate of DLJMBPII, acted
as the arranger and syndication agent. In connection with the Existing Credit
Agreement, DLJ Capital Funding, Inc. received a customary funding fee of
approximately $2.4 million.
DLJ (one of the Underwriters and an affiliate of DLJMBPII) acted as
financial advisor to the Company in connection with the structuring of the
Recapitalization and received customary fees for such services of
approximately $3.5 million and reimbursement for reasonable out-of-pocket
expenses and affiliates of DLJ received standby commitment fees of
approximately $1.2 million in connection with change of control offers for
the Zero Coupon Notes and the Senior Notes, which were required as a result
of the Recapitalization. The Company agreed to indemnify DLJ in connection
with its acting as financial advisor. In addition, DLJ will receive its pro
rata portion of the underwriters compensation set forth on the cover page of
this Prospectus. DLJ is also serving as sole underwriter in connection with
the Notes Offering and will receive an estimated $2.4 million of underwriting
compensation payable in connection therewith.
CUTI LOAN AGREEMENT
Pursuant to the terms of the Cuti Employment Agreement and a Secured Loan
Agreement and related agreements among Mr. Cuti, the Company and DLJ (the
"Loan Documents"), on November 20, 1997, Mr. Cuti borrowed $1 million from
DLJ (the "Loan"). The Loan is secured by Mr. Cuti's pledge to DLJ of his
options granted under the Equity Plan and his option to purchase 496,553
shares of Common Stock, and all Common Stock and other proceeds payable upon
exercise or other disposition thereof (the "Pledged Security"). The Loan is
subject to interest at the Federal Mid-Term Rate as in effect from time to
time and is generally payable in five equal installments commencing within 30
days after Mr. Cuti has the ability to receive cash in exchange for any of
the Pledged Security. In addition, the Company may apply any amounts to which
Mr. Cuti is entitled upon termination of employment to repayment of the Loan.
The Cuti Employment Agreement and the Loan Documents further provide that in
the event of termination of Mr. Cuti's employment by reason of termination by
the Company without "cause" or the Company's non-renewal or his resignation
with "good reason" (as such terms are defined in the Cuti Employment
Agreement), the Company will reimburse Mr. Cuti for all interest accrued as
of the date of such termination if the Company has achieved certain specified
financial targets for the year prior to termination and the year of such
termination. The Loan Documents permit DLJ to assign the Loan to certain of
its affiliates, including the Company, and the Company is obligated pursuant
to the Cuti Employment Agreement to assume the Loan from DLJ as soon as
practicable after the Company and DLJ agree that the Company may do so.
OTHER RELATIONSHIPS
The Company incurred aggregate fees owing to Credit Suisse First Boston
for financial services rendered from March 1995 through the consummation of
the Recapitalization in the aggregate amount of $3.6 million, of which $1.4
million was paid upon consummation of the Recapitalization and the remaining
$2.2 million will become payable upon consummation of the Offering.
48
<PAGE>
STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT
In connection with the Recapitalization, certain of the shareholders of
the Company (the "Initial Shareholders") entered into a Stockholders and
Registration Rights Agreement, pursuant to which the Company has granted the
Initial Shareholders the right to cause the Company to register shares of
Common Stock (the "registrable securities") under the Securities Act. Upon
consummation of the Offering, 10,257,832 outstanding shares of Common Stock
will constitute registrable securities and therefore will be eligible for
registration pursuant to the Stockholders and Registration Rights Agreement.
Under the terms of the Stockholders and Registration Rights Agreement, at any
time after the one year anniversary date of the Offering, (i) the holders of
at least a majority of the registrable securities held by the DLJ Entities
can require the Company, subject to certain limitations, to file a
registration statement under the Securities Act covering all or part of the
registrable securities held by the DLJ Entities and (ii) the remaining
Initial Shareholders can require the Company, subject to certain limitations,
to file a registration statement covering all or part of the registrable
securities held by such Initial Shareholders (each, a "demand registration").
The Company is obligated to pay all registration expenses (other than
underwriting discounts and commissions and subject to certain limitations)
incurred in connection with the demand registrations. In addition, the
Stockholders and Registration Rights Agreement provides the Initial
Shareholders with "piggyback" registration rights, subject to certain
limitations, whenever the Company files a registration statement on a
registration form that can be used to register securities held by such
Initial Shareholders.
49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
SELLING STOCKHOLDERS
In the event that the Underwriters' overallotment option is exercised
in full, DLJ Merchant Banking Partners II, L.P. ("DLJMBPII"), DLJ Merchant
Banking Partners II-A, L.P. ("DLJMBIIA"), DLJ Offshore Partners II, C.V.
("DLJOPII"), DLJ Diversified Partners, L.P. ("DLJDP"), DLJ Diversified
Partners-A, L.P. ("DLJDPA"), DLJMB Funding II, Inc. ("DLJMBFII"), DLJ
Millennium Partners ("Millennium"), DLJ Millennium-A, L.P. ("Millennium-A"),
DLJ EAB Partners, L.P. ("DLJEAB"), UK Investment Plan 1997 Partners ("UK
Investment") and DLJ First ESC L.P. ("DLJESC," and collectively, the "DLJMBPII
Entities") will sell up to 596,403; 23,752; 29,328; 34,868; 12,949; 115,355;
1,880; 9,643; 2,677; 15,780; and 104,146 shares of Common Stock, respectively,
resulting in beneficial ownership after such sales of 5,315,206 (or 29.6%);
211,676 (or 1.2%); 261,374 (or 1.5%); 310,751 (or 1.7%); 115,402; 1,028,067
(or 5.7%); 16,762; 85,941; 23,865; 140,631; and 928,160 (or 5.2%) shares of
Common Stock, respectively.
In addition, BCPI Associates ("BCPI"), BCPI Trust Associates
("BCPIT"), L.P., Tyler Capital Fund, L.P., BT Investment Partners, Inc.,
Continental Assurance Company on behalf of its Separate Account Continental
Assurance Company Pension Investment Fund, Muico & Co., Thomas Stemberg,
The Marion Trust, USL Capital Corporation and Bruce L. Weitz each of whom as of
January 15, 1998 beneficially owned 18,431; 3,948; 218,239; 13,084; 44,715;
32,821; 8,688; 21,880; 282; 5,744; 6,435; and 203,451 shares of Common Stock,
respectively, will sell up to 1,857; 398; 21,992; 1,319; 4,506; 3,307; 875;
2,205; 28; 579; 649; 20,502 shares of Common Stock, respectively, resulting in
ownership after such sales of 16,574; 3,550; 196,247 (or 1.1%); 11,765; 40,209;
29,514; 7,813; 19,675; 254; 5,165; 5,786; and 182,949 (or 1.0%) shares of
Common Stock, respectively. Prior to the Recapitalization, BCPI, BCPIT and
Tyler, affiliates of Bain Capital, were affiliates of the Company. Mr. Weitz
is a former Chief Executive Officer of the Company.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership (as defined by the regulations of the Securities and
Exchange Commission) of the Company's Common Stock (which constitutes the
only class of voting capital stock of the Company) by (i) each person known
to the Company to be the beneficial owner of 5% or more of the Common Stock,
(ii) each director, (iii) each Named Executive Officer and (iv) all executive
officers and directors as a group, based on data as of January 15, 1998.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
---------------------------------------
% OF CLASS % OF CLASS
PRIOR TO AFTER
NAME SHARES OFFERING OFFERING(2)
- -------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
DLJ Merchant Banking Partners II, L.P. and related
investors(3)(4) .................................. 9,383,423 91.5% 55.32%
Anthony Cuti....................................... 364,530 3.6% 2.1%
David Jaffe(5) .................................... -- -- --
Nicole S. Arnaboldi(5)............................. -- -- --
Andrew J. Nathanson(5) ............................ -- -- --
Gary Charboneau ................................... 259,464 2.5% 1.6%
Jerry M. Ray ...................................... 85,722 * *
William J. Tennant................................. 68,101 * *
Joseph S. Lacko.................................... 17,025 * *
All executive officers and directors as a group
(11 persons)(5) .................................. 815,996 8.0% 4.9%
</TABLE>
- ------------
* Less than one percent
(1) For purposes of this table, a person is deemed to have "beneficial
ownership" of any shares that such person has the right to acquire
within 60 days after the date of this Prospectus. For purposes of
calculating the percentage of outstanding shares held by each person
named above, any shares that such person has the right to acquire
within 60 days after the date of this Prospectus are deemed to be
outstanding, but not for the purpose of calculating the percentage
ownership of any other person.
(2) Assumes no exercise of the Underwriters' overallotment option.
(3) Consists of 9,383,423 shares held directly by the following related
investors, each of whom is affiliated with DLJ: DLJMBPII, 5,910,855
shares; DLJMBIIA, 235,398 shares; DLJOPII, 290,665 shares; DLJDP,
345,575 shares; DLJDPA, 128,335 shares; DLJMBFI, 1,049,443 shares;
Millennium, 95,572 shares; Millennium-A, 18,640 shares; DLJEAB, 26,539
shares; UK Investment, 156,390 shares; and DLJ ESC, 1,126,011 shares.
See "Certain Relationships and Related Transactions--DLJMB
50
<PAGE>
Relationships." The address of each of DLJMBPII, DLJMBIIA, DLJDP,
DLJDPA, DLJMBFII, Millennium, Millennium-A, DLJEAB, and DLJ ESC is 277
Park Avenue, New York, New York 10172. The address of DLJOPII is c/o
John B. Gorsiraweg, 14 Willemstad, Curacao, Netherlands Antilles. The
address of UK Investment is 2121 Avenue of the Stars, Fox Plaza, Suite
3000, Los Angeles, California 90067. As a general partner of each of
DLJMBPII, DLJMBIIA, DLJOPII, DLJDP, DLJDPA, DLJEAB, Millennium and
Millennium-A, DLJMB may be deemed to beneficially own indirectly all of
the shares held directly by DLJMBPII, DLJMBIIA, DLJOPII, DLJDP, DLJDPA,
DLJEAB, Millennium and Millennium-A, and as the parent of each of
DLJMB, DLJMBFII and DLJ LBO Plans Management Corporation (the general
partner of DLJ ESC and UK Investment), Donaldson, Lufkin & Jenrette
Inc., the parent of DLJ ("DLJ Inc.") may be deemed to beneficially own
indirectly all of the shares held by DLJMBPII, DLJMBIIA, DLJOPII,
DLJDP, DLJDPA, DLJEAB, Millennium, Millennium-A, DLJMBFII, DLJ ESC and
UK Investment. The address of DLJ Merchant Banking, Inc. is 277 Park
Avenue, New York, New York 10172.
(4) In the event that DLJMBPII Entities sell all of the shares pursuant to
the overallotment option, such entities will beneficially own
approximately 49.7% of the Common Stock outstanding after the Offering.
(5) Mr. Nathanson is a Managing Director of DLJ and as a result may be
deemed to beneficially own the shares of Common Stock held by the
DLJMBPII Entities. Mr. Nathanson expressly disclaims beneficial
ownership of such shares of Common Stock. Nicole Arnaboldi and David
Jaffe are managing directors of DLJMB and DLJ Diversified Partners,
Inc. ("DLJDPI"). DLJMB is the managing general partner of DLJMBII,
DLJMBIIA, DLJOPII, Millennium and Millennium-A. DLJDPI is the managing
general partner of DLJDP and DLJDPA. As a result, Ms. Arnaboldi and
Mr. Jaffe may be deemed to beneficially own the shares of Common Stock
held by each of DLJMBPII, DLJMBIIA, DLJOPII, DLJDP, DLJDPA, Millennium,
Millennium-A. Ms. Arnaboldi and Mr. Jaffe expressly disclaim beneficial
ownership of such shares of Common Stock.
DESCRIPTION OF CERTAIN INDEBTEDNESS
NEW CREDIT AGREEMENT
In connection with the Refinancing Plan, the Company will enter into the
New Credit Agreement pursuant to which DLJ Capital Funding, Inc., an
affiliate of DLJ, will act as an arranger and syndication agent, and a
financial institution to be determined will act as administrative agent. The
New Credit Agreement is expected to provide for total lending commitments of
up to $160.0 million. The New Credit Agreement will be comprised of (i) a
Revolving Credit Facility of up to $30.0 million, which includes borrowing
capacity available for letters of credit and for same-day notice swingline
loans in amounts to be agreed upon, (ii) Tranche A Term Loans of up to $50.0
million and (iii) Tranche B Term Loans of up to $80.0 million. Borrowings
under the New Credit Agreement, together with the proceeds of the Offering
and the Notes Offering, will be used to repay the Company's existing
indebtedness as described under "Use of Proceeds." The proceeds of loans
under the New Credit Agreement may also be used to fund the Company's working
capital needs, capital expenditures and other general corporate purposes,
including the issuance of letters of credit.
Borrowings under the New Credit Agreement, like the Company's Existing
Credit Agreement, will bear interest annually, at the Company's option, at
the rate based on either (i) an "Alternate Base Rate" (defined as, generally,
the higher of the Federal Funds Rate, as published by the Federal Reserve
Bank of New York, plus 0.5%, or the administrative agent's prime lending
rate) plus (a) in the case of Tranche A Term Loans or revolving credit loans,
1.5% or (b) in the case of Tranche B Term Loans, 2.0% or (ii) a
reserve-adjusted "LIBO" rate, plus (x) in the case of Tranche A Term Loans or
revolving credit loans, 2.5% or (y) in the case of Tranche B Term Loans,
3.0%. Margins set forth for Tranche A Term Loans and revolving credit loans
will be subject to certain performance-based reductions occurring not earlier
than six months from the closing date of the New Credit Agreement. In
addition, the Company must pay a fee on the face amount of each letter of
credit outstanding at a rate equal to the LIBO margin.
Borrowings under the New Credit Agreement will be guaranteed by, and
secured by a pledge of all of the capital stock and assets of, the Company's
subsidiaries.
The New Credit Agreement will contain various covenants that limit or
restrict, among other things, subject to certain exceptions, the incurrence
of indebtedness, the creation of liens, transactions with affiliates,
restricted payments, investments and acquisitions, mergers, consolidations,
dissolutions, asset sales, dividends, distributions, and certain other
transactions and business activities by the Company.
NEW SENIOR SUBORDINATED NOTES
Upon consummation of the Notes Offering, the Company will have outstanding
$80.0 million aggregate principal amount of New Senior Subordinated Notes,
which will bear interest at a rate of % per annum, payable semi-annually
in arrears on each and . The New Senior Subordinated
51
<PAGE>
Notes will mature on , 2008. The New Senior Subordinated Notes will
represent senior subordinated unsecured obligations of the Company. The
Company's payment obligations under the New Senior Subordinated Notes will be
guaranteed on a senior subordinated basis by all of the Company's present and
future subsidiaries.
The New Senior Subordinated Notes will not be redeemable at the option of
the Company prior to , 2003, except that prior to , 2001 the Company
will be permitted to redeem up to 35% of the New Senior Subordinated Notes at
a redemption price of % of the principal amount thereof, plus accrued and
unpaid interest, if any, with the net proceeds of one or more public or
private sales of common stock or preferred stock of the Company, provided
that at least 65% of the New Senior Subordinated Notes remain outstanding
immediately after the occurrence of any such redemption. At any time on or
after , 2003, the New Senior Subordinated Notes will be redeemable at the
option of the Company, in whole or in part, at a premium declining ratably to
par on , 2006.
The New Senior Subordinated Note Indenture will provide that, in the event
of a Change of Control (as defined in the New Senior Subordinated Note
Indenture) of the Company, the Company will be required to make an offer to
purchase in cash all or any part of the outstanding New Senior Subordinated
Notes at a price of 101% of the aggregate principal amount thereof.
The New Senior Subordinated Note Indenture contains restrictive covenants
that, among other things, impose limitations on the ability of the Company
and its subsidiaries (i) to incur additional indebtedness, (ii) to merge,
consolidate or sell or dispose of all or substantially all of its assets,
(iii) to issue certain preferred stock, pay cash dividends or make other
distributions on account of the Company's equity interests, repurchase equity
interests or subordinated indebtedness and make certain other restricted
payments, (iv) to create certain liens, (v) to enter into transactions with
affiliates and (vi) to sell assets.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offering, the total amount of authorized capital
stock of the Company will consist of 30,000,000 shares of Common Stock, par
value $0.01 per share, and 5,000,000 shares of preferred stock, par value
$0.01 per share (the "Preferred Stock"). Upon completion of the Offering,
16,957,832 shares of Common Stock will be outstanding and no shares of
Preferred Stock will be outstanding. Unless otherwise noted, the discussion
herein describes the Company's capital stock, the Amended and Restated
Certificate of Incorporation (the "Restated Certificate") and Amended and
Restated Bylaws (the "Bylaws") as anticipated to be in effect upon
consummation of the Offering. The following summary of certain provisions of
the Company's capital stock does not purport to be complete and is subject to
and qualified in its entirety by the Restated Certificate and the Bylaws of
the Company that are included as exhibits to the Registration Statement of
which this Prospectus forms a part and by the provisions of applicable law.
COMMON STOCK
The holders of the Company's Common Stock are entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders.
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered hereby will, upon payment therefor, be validly
issued, fully paid and nonassessable. Subject to the rights of the holders of
any shares of Preferred Stock, the holders of outstanding shares of Common
Stock are entitled to receive dividends out of assets legally available
therefor at such times and in such amounts as the Board of Directors may from
time to time determine. See "Dividend Policy." The shares of Common Stock are
not redeemable or convertible, and the holders thereof have no preemptive or
subscription rights to purchase any securities of the Company. Upon
liquidation, dissolution or winding up of the Company, the holders of shares
of Common Stock are entitled to receive on pro rata basis the assets of the
Company which are legally available for distribution, after payment of all
debts and other liabilities and subject to the preferential rights of any
holders of Preferred Stock.
52
<PAGE>
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to notice of issuance, under the symbol "DRD."
PREFERRED STOCK
The Board of Directors has the authority, without further action of the
shareholders of the Company, to issue up to an aggregate of 5,000,000 shares
of Preferred Stock in one or more series and to fix or determine the
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series.
The Board of Directors, without shareholder approval, can issue Preferred
Stock with voting and conversion rights that could adversely affect the
voting power of holders of Common Stock. The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, may have the effect of
discouraging, delaying, or preventing a change in control of the Company.
CERTAIN PROVISIONS OF THE BYLAWS
The Bylaws provide that special meetings of shareholders may be called
only by the Chairman of the Board of Directors, the President, or the Board
of Directors of the Company and that no business shall be transacted and no
corporate action may be taken at a special meeting of shareholders other than
as stated in the notice of the meeting. The Bylaws also provide that the only
business that may be brought before an annual meeting of shareholders is
limited to matters (i) brought before the meeting at the direction of the
Board of Directors or (ii) specified in a written notice given by or on
behalf of a shareholder of the Company in accordance with certain procedural
requirements specified in the Bylaws. These provisions could have the effect
of delaying shareholder actions that are favored by the holders of a majority
of the outstanding voting securities of the Company. These provisions may
also discourage another person or entity from making a tender offer for the
Company's Common Stock because such person or entity, even if it acquired a
majority of the outstanding voting securities of the Company, would be unable
to call a special meeting of shareholders to take action as a shareholder
(such as electing new directors or approving a merger).
SECTION 203 OF DELAWARE LAW
Following the consummation of the Offering, the Company will be subject to
the "business combination" provisions of the Delaware General Corporation
Law. In general, such provisions prohibit a publicly-held Delaware
corporation from engaging in various "business combination" transactions with
any "interested stockholder" for a period of three years after the date of
the transaction in which the person became an "interested stockholder,"
unless (i) the transaction is approved by the board of directors prior to the
date the interested stockholder obtained such status, (ii) upon consummation
of the transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b)
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (iii) on or subsequent to such
date the "business combination" is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned
by the "interested stockholder." A "business combination" is defined to
include mergers, asset sales and other transactions resulting in financial
benefit to a stockholder. In general, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or, within three years,
did own) 15% or more of a corporation's voting stock. The statute could
prohibit or delay mergers or other takeover or change in control attempts
with respect to the Company and, accordingly, may discourage attempts to
acquire the Company.
53
<PAGE>
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate provides that, to the fullest extent permitted by
Delaware law, no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary
duties as a director. The effect of this provision is to eliminate the rights
of the Company and its stockholders (through stockholder derivative suits on
behalf of the Company) to recover monetary damages against a director for
breach of fiduciary duty as a director (including breaches resulting from
grossly negligent conduct). This provision does not, however, exonerate the
directors from liability under federal securities laws or for (i) breach of a
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) certain willful or negligent acts in
connection with the payment of dividends or the repurchase or redemption of
securities, or (iv) any transaction from which the director derived an
improper personal benefit. The Bylaws provide for indemnification of the
officers and directors of the Company to the fullest extent permitted by
applicable law.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock will be BankBoston,
N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices of the Common Stock.
Upon the closing of the Offering, there will be 16,957,832 shares of
Common Stock outstanding. All of the shares of Common Stock sold in the
Offering will be freely tradable without restriction or further registration
under the Securities Act, unless held by an "affiliate" of the Company, as
that term is defined in Rule 144 under the Securities Act, which shares will
be subject to the resale limitations of Rule 144. All of the outstanding
shares have not been registered under the Securities Act and may not be sold
unless they are registered or unless an exemption from registration, such as
the exemption provided by Rule 144, is available.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities
acquired from the Company or an affiliate of the Company in a non-public
transaction) for at least one year, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of one
percent of the outstanding Common Stock or the average weekly trading volume
in the Common Stock during the four calendar weeks preceding the date on
which notice of such sale is filed pursuant to Rule 144. Sales under Rule 144
are also subject to certain provisions regarding the manner of sale, notice
requirements and the availability of current public information about the
Company. A stockholder (or stockholders whose shares are aggregated) who is
not an affiliate of the Company for at least 90 days prior to a proposed
transaction and who has beneficially owned "restricted securities" for at
least two years is entitled to sell such shares under Rule 144 without regard
to the volume limitations described above, and beginning 180 days after
completion of the Offering, 386,125 shares of Common Stock will be eligible
for sale without regard to such volume limitations.
All of the Company's existing stockholders, including the officers and
directors of the Company, have agreed that they will not, without the prior
written consent of DLJ on behalf of the Underwriters, sell or otherwise
dispose of any shares of Common Stock for a period of 180 days after the date
hereof. An aggregate of 10,257,832 outstanding shares of Common Stock are
subject to such agreement.
REGISTRATION RIGHTS
Pursuant to the Stockholders and Registration Rights Agreement, the
Company has granted the Initial Shareholders the right to cause the Company
to register shares of Common Stock (the "registrable securities") under the
Securities Act. Upon consummation of the Offering, 10,257,832 outstanding
shares
54
<PAGE>
of Common Stock will constitute registrable securities and therefore will be
eligible for registration pursuant to the Stockholders and Registration
Rights Agreement. Under the terms of the Stockholders and Registration Rights
Agreement, at any time after the one year anniversary date of the Offering,
(i) the holders of at least a majority of the registrable securities held by
the DLJ Entities can require the Company, subject to certain limitations, to
file a registration statement under the Securities Act covering all or part
of the registrable securities held by the DLJ Entities and (ii) the remaining
Initial Shareholders can require the Company, subject to certain limitations,
to file a registration statement covering all or part of the registrable
securities held by such Initial Shareholders (each, a "demand registration").
The Company is obligated to pay all registration expenses (other than
underwriting discounts and commissions and subject to certain limitations)
incurred in connection with the demand registrations. In addition, the
Stockholders and Registration Rights Agreement provides the Initial
Shareholders with "piggyback" registration rights, subject to certain
limitations, whenever the Company files a registration statement on a
registration form that can be used to register the securities held by such
Initial Shareholders.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting
Agreement (the "Underwriting Agreement"), the Underwriters named below (the
"Underwriters"), for whom DLJ, Goldman, Sachs & Co. and Smith Barney Inc. are
acting as representatives (the "Representatives"), have severally agreed to
purchase from the Company an aggregate of 6,700,000 shares of Common Stock.
The number of shares of Common Stock that each Underwriter has agreed to
purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation ....
Goldman, Sachs & Co. ....................................
Smith Barney Inc.........................................
-------------
Total .................................................. 6,700,000
=============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by
counsel and to certain other conditions. If any of the shares of Common Stock
are purchased by the Underwriters pursuant to the Underwriting Agreement, all
such shares (other than shares covered by the over-allotment option described
below) must be purchased.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus and to
certain dealers (who may include the Underwriters) at such price less a
concession not in excess of $ per share of Common Stock. The Underwriters
may allow, and such dealers may reallow, a discount not in excess of $ per
share of Common Stock on sales to any other Underwriter or certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
Certain Selling Stockholders have granted an option to the Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to
an aggregate of 1,005,000 additional shares of Common Stock at the initial
public offering price set forth on the cover page of this Prospectus, net of
underwriting discounts and commissions. Such option may be exercised at any
time until 30 days after the date of this Prospectus. To the extent that the
Representatives exercise such option, each of the Underwriters will be
committed, subject to certain conditions, to purchase a number of option
shares proportionate to such Underwriter's initial commitment as indicated in
the preceding table. The Company will not receive any proceeds from the sale
of the Common Stock by the Selling Stockholders.
At the Company's request, the Underwriters have reserved up to 5% of the
shares offered hereby for sale at the initial public offering price to
certain of the Company's employees, members of their immediate families and
other individuals who are business associates of the Company. The number of
shares of Common Stock available for sale to the general public will be
reduced to the extent these individuals purchase such reserved shares. Any
reserved shares not purchased will be offered by the Underwriters to the
general public on the same basis as the other shares offered hereby.
The Company and all of its existing shareholders, including its officers
and directors and certain of its employees, have agreed, subject to certain
exceptions, not to directly or indirectly sell, offer to sell, grant any
option for the sale of or otherwise dispose of (or transfer any portion of
the economic consequences associated with the ownership of) any shares of
Common Stock or securities convertible
56
<PAGE>
into or exchangeable or exercisable for Common Stock, or demand or exercise
any registration rights with respect to such securities, in each case,
without the prior written consent of DLJ, on behalf of the Underwriters, for
a period of 180 days after the date of this Prospectus. See "Shares Eligible
for Future Sale."
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined through
negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, are price-earnings ratios of publicly traded
companies that the Representatives believe to be comparable to the Company,
certain financial information of the Company, the history of, and the
prospects for, the Company and the industry in which it competes and
assessment of the Company's management, its past and present operations, the
prospects for, and timing of, future revenues of the Company, the present
state of the Company's development and the above factors in relation to
market values and various valuation measures of other companies engaged in
activities similar to the Company. There can be no assurance that an active
trading market will develop for the Common Stock or that the Common Stock
will trade in the public market subsequent to the Offering at or above the
initial public offering price.
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to notice of issuance, under the symbol "DRD."
The Underwriters do not intend to confirm sales of the Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and
purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members
in the Offering, if the syndicate repurchases previously distributed Common
Stock in syndicate covering transactions, in stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the market price
of the Common Stock above independent market levels. The Underwriters are not
required to engage in these activities, and may discontinue these activities
at any time.
Under Rule 2720 of the Conduct Rules of the NASD ("Rule 2720"), the
Company is considered an affiliate of DLJ. This Offering is being conducted
in accordance with Rule 2720, which provides that, among other things, when
an NASD member participates in the underwriting of an affiliate's equity
securities, the public offering price per share can be no lower than that
recommended by a "qualified independent underwriter" meeting certain
standards ("QIU"). In accordance with this requirement, Goldman, Sachs & Co.
has assumed the responsibilities of acting as QIU and will recommend a public
offering price for the Common Stock in compliance with the requirements of
Rule 2720. In connection with the Offering, Goldman, Sachs & Co. is
performing due diligence investigations and reviewing and participating in
the preparation of this Prospectus and the Registration Statement of which
this Prospectus forms a part. As compensation for the services of Goldman,
Sachs & Co. as QIU, the Company has agreed to pay $10,000 to Goldman, Sachs &
Co.
DLJ is also acting as the underwriter in connection with the Notes
Offering and will receive customary discounts and commissions in connection
therewith. DLJ Capital Funding, Inc. is one of the lenders under the Existing
Credit Agreement. The proceeds of the Offering, together with the proceeds
from the New Credit Agreement, are being used to effect the Refinancing Plan,
including the repayment of the Existing Credit Agreement. DLJ Capital
Funding, Inc., an affiliate of DLJ, is expected to act as syndication agent
and be a lender under the New Credit Agreement. From time to time, DLJ
provides investment banking services to the Company, for which it receives
customary compensation. See "Certain Relationships and Related Transactions."
57
<PAGE>
LEGAL MATTERS
The validity of the Common Stock being offered hereby and certain other
legal matters relating to the Offering will be passed upon for the Company by
Latham & Watkins, New York, New York. Latham & Watkins also represented
DLJMBPII in connection with the Recapitalization. Certain legal matters
relating to the Offering will be passed upon for the Underwriters by Weil,
Gotshal & Manges LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 30,
1995 and December 28, 1996 and for each of the 52 week periods ended December
31, 1994, December 30, 1995 and December 28, 1996 included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed the Registration Statement on Form S-1 with respect
to the Common Stock being offered hereby with the Commission under the
Securities Act. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain items of which are omitted in accordance with the rules
and regulations of the Commission. Statements contained in this Prospectus
concerning the provisions of documents filed with the Registration Statement
as exhibits are necessarily summaries of such documents, and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed as an exhibit to the Registration Statement. The
Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; at its Chicago Regional Office, Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and at its New
York Regional Office, Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material can be obtained from the public reference
section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission also maintains a website on the Internet at
http://www.sec.gov that contains reports, proxy statements and other
information with respect to companies that file documents electronically with
the Commission. For further information pertaining to the Company and the
Common Stock being offered hereby, reference is made to the Registration
Statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
DUANE READE HOLDING CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants ....................................................... F-2
Consolidated Balance Sheets as of December 30, 1995 and December 28, 1996 .............. F-3
Consolidated Statements of Operations for each of the 52 weeks ended December 31, 1994,
December 30, 1995 and December 28, 1996................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for each of the 52 weeks
ended December 31, 1994, December 30, 1995 and December 28, 1996........................ F-5
Consolidated Statements of Cash Flows for each of the 52 weeks ended December 31, 1994,
December 30, 1995 and December 28, 1996................................................. F-6
Notes to Consolidated Financial Statements .............................................. F-7
Consolidated Balance Sheet as of September 27, 1997 (Unaudited).......................... F-16
Consolidated Statements of Operations for each of the 39 weeks ended September 28, 1996
and September 27, 1997 (Unaudited)...................................................... F-17
Consolidated Statement of Stockholders' Equity (Deficiency) for the 39 weeks ended
September 27, 1997 (Unaudited).......................................................... F-18
Consolidated Statements of Cash Flows for the 39 weeks ended September 28, 1996 and
September 27, 1997 (Unaudited).......................................................... F-19
Notes to Consolidated Financial Statements (Unaudited) .................................. F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Duane Reade Holding Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficiency) and
cash flows present fairly, in all material respects, the financial position
of Duane Reade Holding Corp. ("Holdings") and its subsidiaries at December
30, 1995 and December 28, 1996 and the results of their operations and their
cash flows for each of the 52 week periods ended December 31, 1994, December
30, 1995 and December 28, 1996 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
Holdings' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
New York, New York
February 18, 1997, except as to the recapitalization and reverse stock split
described in Note 12 and net loss per common share described in Note 1 which
are as of January 14, 1998
F-2
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash................................................................ $ 2,133 $ 216
Government securities .............................................. 44 --
Receivables ........................................................ 5,740 7,171
Inventories ........................................................ 43,147 47,914
Prepaid expenses ................................................... 1,355 1,165
-------------- --------------
TOTAL CURRENT ASSETS ............................................... 52,419 56,466
Property and equipment, net ......................................... 24,832 23,065
Goodwill, net of accumulated amortization of $11,306 and $14,785 ... 127,848 124,369
Covenants not to compete, net of accumulated amortization of $48,660
and $60,000 ........................................................ 11,340 --
Other assets ........................................................ 19,421 18,576
-------------- --------------
TOTAL ASSETS ...................................................... $235,860 $222,476
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable.................................................... $ 20,427 $ 20,015
Accrued interest ................................................... 3,797 3,873
Other accrued expenses ............................................. 6,102 8,157
Current portion of long-term debt .................................. 5,625 12,000
Current portion of capital lease obligations ....................... 2,769 2,504
-------------- --------------
TOTAL CURRENT LIABILITIES ......................................... 38,720 46,549
Senior debt, less current portion ................................... 163,475 149,975
Subordinated zero coupon debt, net of unamortized discount of
$55,148 and $43,899 ................................................ 68,232 79,481
Capital lease obligations, less current portion ..................... 4,003 1,697
Other non-current liabilities ....................................... 2,626 4,170
-------------- --------------
TOTAL LIABILITIES ................................................. 277,056 281,872
-------------- --------------
Commitments and Contingencies (Note 8)
Stockholders' deficiency
Common stock, $0.01 par; authorized 30,000,000 shares; issued and
outstanding 10,184,565 and 10,062,497 shares ...................... 102 101
Paid-in-capital .................................................... 24,909 24,564
Accumulated deficit ................................................ (66,207) (84,061)
-------------- --------------
TOTAL STOCKHOLDERS' DEFICIENCY .................................... (41,196) (59,396)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY .................... $235,860 $222,476
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE 52 WEEKS ENDED
----------------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales .................................... $281,103 $336,922 $381,466
Cost of sales ................................ 209,678 259,827 288,505
-------------- -------------- --------------
Gross profit ................................. 71,425 77,095 92,961
-------------- -------------- --------------
Selling, general and administrative expenses 39,741 50,326 59,048
Amortization ................................. 18,238 11,579 16,217
Depreciation ................................. 1,184 1,929 3,015
Store pre-opening expenses ................... 1,220 1,095 139
-------------- -------------- --------------
60,383 64,929 78,419
-------------- -------------- --------------
Operating income ............................. 11,042 12,166 14,542
Interest expense, net ........................ 27,480 30,224 32,396
-------------- -------------- --------------
Loss before income taxes ..................... (16,438) (18,058) (17,854)
Income taxes ................................. -- -- --
-------------- -------------- --------------
NET LOSS..................................... $(16,438) $(18,058) $(17,854)
============== ============== ==============
NET LOSS PER COMMON SHARE.................... $ (1.55) $ (1.70) $ (1.69)
============== ============== ==============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING................................. 10,633 10,650 10,575
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ -------- ------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance , January 1, 1994 . 10,154,041 $102 $24,852 $(31,711) $ (6,757)
Sale of common stock to
executives ................ 10,173 -- 25 -- 25
Net loss ................... -- -- -- (16,438) (16,438)
------------ -------- --------- ------------- ----------
Balance, December 31, 1994 10,164,214 102 24,877 (48,149) (23,170)
Sale of common stock to
executives ................ 40,692 -- 100 -- 100
Repurchase of common stock (20,341) -- (68) -- (68)
Net loss ................... -- -- -- (18,058) (18,058)
------------ -------- --------- ------------- ----------
Balance, December 30, 1995 10,184,565 102 24,909 (66,207) (41,196)
Repurchase of common stock (122,068) (1) (345) -- (346)
Net loss ................... -- -- -- (17,854) (17,854)
------------ -------- --------- ------------- ----------
Balance, December 28, 1996 10,062,497 $101 $24,564 $(84,061) $(59,396)
============ ======== ========= ============= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE 52 WEEKS ENDED
----------------------------------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28,
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(16,438) $(18,058) $(17,854)
Adjustments to reconcile net loss to net
cash provided by operating activities .....
Depreciation and amortization of property
and equipment ............................ 1,184 1,929 3,015
Amortization of goodwill and other
intangibles .............................. 20,646 13,940 18,897
Accretion of principal of zero coupon debt 8,282 9,628 11,249
Other ..................................... 724 1,769 1,526
Changes in operating assets and liabilities
Receivables ............................... (225) (1,962) (1,431)
Inventories ............................... (4,838) (6,745) (4,767)
Accounts payable .......................... 5,716 7,382 (412)
Prepaid and accrued expenses .............. (110) (658) 2,321
Increase in other assets (liabilities)--net 356 (491) 51
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES . 15,297 6,734 12,595
-------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures ........................ (9,947) (6,868) (1,247)
Systems development costs ................... (2,425) (6,268) (2,566)
Sale of government securities--net ......... 1,134 382 44
-------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES ..... (11,238) (12,754) (3,769)
-------------- -------------- --------------
Cash flows from financing activities:
Financing costs ............................. -- (885) (952)
Repayments of term loan ..................... (8,000) (15,000) (5,625)
Proceeds from issuance of long-term debt ... -- 15,000 --
Net (repayments) borrowings--Revolving
credit ..................................... -- 4,000 (1,500)
Proceeds from issuance of stock ............. -- 25 --
Repurchase of stock ......................... -- (68) (95)
Capital lease financing ..................... 5,492 4,329 274
Repayments of capital lease obligations .... (432) (2,617) (2,845)
-------------- -------------- --------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES ................................ (2,940) 4,784 (10,743)
-------------- -------------- --------------
Net increase (decrease) in cash ............. 1,119 (1,236) (1,917)
Cash at beginning of year ................... 2,250 3,369 2,133
-------------- -------------- --------------
Cash at end of year.......................... $ 3,369 $ 2,133 $ 216
============== ============== ==============
Supplementary disclosures of cash flow
information ................................
Cash paid for interest...................... $ 16,969 $ 18,298 $ 18,391
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Duane Reade Holding Corp. ("Holdings") was formed on June 16, 1992 for the
purpose of acquiring Daboco, Inc. ("Daboco"). The acquisition took place on
September 25, 1992. Daboco and Duane Reade Inc. ("DR Inc."), a subsidiary of
Daboco, are general partners in Duane Reade, which operates a chain of retail
drug stores (60 at December 28, 1996) in the New York City area.
Significant accounting policies followed in the preparation of the
consolidated financial statements are as follows:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Holdings, Daboco, DR Inc. and Duane Reade (collectively, the
"Company"). All intercompany transactions and balances have been eliminated.
Certain prior period amounts have been reclassified to conform with the
current presentation.
REPORTING YEAR: The fiscal year for the Company is the 52/53 week
reporting period ending on the last Saturday in December.
RECEIVABLES: Receivables consist primarily of amounts due from various
insurance companies and governmental agencies under third party payment plans
for prescription sales and amounts due from vendors, a majority of which
relate to promotional programs. The Company has not provided an allowance for
doubtful accounts as its historical write-offs have been immaterial. The
Company reflects promotional allowances from vendors as income when such
allowances are earned.
INVENTORIES AND COST OF SALES: Substantially all inventories are stated at
the lower of cost, determined pursuant to the last-in, first-out retail
dollar value method (LIFO), or market. When appropriate, provision is made
for obsolete, slow-moving or damaged inventory. If current cost had been
used, inventories at December 30, 1995 and December 28, 1996 would not be
materially different from the amounts reflected on the accompanying balance
sheets. Cost of sales includes distribution and occupancy costs.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method
over estimated useful lives of assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements ............ 30 years
Furniture, fixtures and equipment .... 5-10 years
Leasehold improvements ................ Life of lease or, if shorter, asset
Property under capital leases.......... 7 years
</TABLE>
OTHER ASSETS: Deferred financing costs arose in connection with borrowings
under the Term Loan and with the issuance of the Senior Notes and the Zero
Coupon Notes and are amortized using the straight-line method, the results of
which are not materially different from the interest method, over the term of
the respective debt issue.
Systems development costs, consisting principally of costs relating to the
new management information systems, are amortized using the straight-line
method commencing in 1996 over a period of seven years.
INTANGIBLE ASSETS: In September 1992, Holdings and Duane Reade entered
into agreements with certain former members of management of Duane Reade,
former shareholders of Daboco and shareholders of former partners of Duane
Reade (collectively, the "Group") precluding such persons from competing with
the operations of Duane Reade for a period of five years. The covenants not
to compete were recorded at acquisition cost and were being amortized over
the period of benefit using an accelerated method. During the first quarter
of 1997, Holdings and Duane Reade entered into agreements
F-7
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in which the Company received consideration from the Group to terminate the
non-compete agreements. In accordance with APB Opinion No. 17, Intangible
Assets, the remaining carrying value of the non-compete agreements of $4.86
million as of December 28, 1996 was written off and has been included in the
accompanying consolidated statement of operations as amortization expense.
Goodwill is amortized on the straight-line method over 40 years. The
carrying value of goodwill is periodically reviewed and evaluated by the
Company based principally on its expected future undiscounted operating cash
flows. Should such evaluation result in the Company concluding that the
carrying amount of goodwill has been impaired, an appropriate write-down
would be made.
PRE-OPENING EXPENSES: Store pre-opening costs, other than capital
expenditures, are expensed when incurred.
INCOME TAXES: Income taxes are accounted for under the liability method
prescribed by Statement of Financial Accounting Standards No. 109.
RECENTLY ISSUED ACCOUNTING STANDARDS: In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, Earnings per Share ("FAS 128") which requires the presentation of
basic and diluted earnings per share in a company's financial statements for
reporting periods ending subsequent to December 15, 1997. Early adoption of
FAS 128 is not permitted. The adoption of FAS 128 is not expected to have
material impact on the Company's consolidated financial statements.
ACCOUNTING ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues, costs
and expenses during the reporting period. Actual results could differ from
those estimates.
NET LOSS PER COMMON SHARE: Net loss per common share is based on the
weighted average shares outstanding during each period (10,632,936 for the 52
weeks ended December 31, 1994, 10,649,895 for the 52 weeks ended December 30,
1995 and 10,575,299 for the 52 weeks ended December 28, 1996). Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, options
granted with exercise prices below the estimated initial public offering
price during the 12 month period preceding the date of the initial filing of
the Registration Statement have been included in the calculation of net loss
per common share, using the treasury stock method based on the estimated
initial public offering price of $15.00 per share, as if the options were
outstanding for all periods presented.
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Land............................................ $ 489 $ 489
Buildings and building improvements ............ 4,514 4,523
Furniture, fixtures and equipment .............. 6,261 6,881
Leasehold improvements ......................... 12,684 13,134
Property under capital leases .................. 4,894 5,063
-------------- --------------
28,842 30,090
Less--Accumulated depreciation and amortization 4,010 7,025
-------------- --------------
$24,832 $23,065
============== ==============
</TABLE>
F-8
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. OTHER ASSETS
Other assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Deferred financing costs (net of accumulated amortization of $7,737
and $10,417)....................................................... $ 9,539 $ 7,811
Systems and integration costs (net of accumulated amortization of
$0 and $1,461) .................................................... 8,693 9,798
Other .............................................................. 1,189 967
-------------- --------------
$19,421 $18,576
============== ==============
</TABLE>
4. DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Senior debt
Term loan facility (A)...................... $ 75,100 $ 69,475
Notes payable bank--revolving credit (A) .. 4,000 2,500
12% Senior Notes due September 15, 2002 (B) 90,000 90,000
Subordinated debt
15% Senior Subordinated Zero Coupon Notes
due
September 15, 2004 (C) .................... 68,232 79,481
-------------- --------------
237,332 241,456
Less--Current portion ...................... 5,625 12,000
-------------- --------------
$231,707 $229,456
============== ==============
</TABLE>
(A) Outstanding balances under a Credit Agreement dated as of September 24,
1992, as amended, with a syndicate of lending institutions bear interest at
floating rates, which at December 28, 1996 averaged 9.0%. In addition to the
term loans, the Credit Agreement provides for a revolving credit facility of
$10.0 million (less amounts of letters of credit issued under the Credit
Agreement) which may be used for general corporate purposes and which expires
on September 30, 1998. As of December 28, 1996, the borrowings outstanding
under the revolving credit facility were $2.5 million (classified as a
noncurrent liability) and $0.2 million in letters of credit had been issued,
leaving $7.3 million available for borrowing.
On March 23, 1995, the Credit Agreement, which provided an A Term loan and
a B Term loan, was amended providing the Company with a new Term loan (the "C
Term Loan") of $15.0 million and increasing the Company's existing capital
expenditure limits for its store expansion program.
The proceeds of such borrowing were used to prepay all amounts due under
the A Term Loan due during 1995 ($13.0 million) and a portion ($2.0 million)
of the payment due under the A Term Loan on March 31, 1996.
In 1996, the Credit Agreement was further amended providing for the
postponement of $2.5 million of principal payments due during 1997 until 1998
and $10.0 million of principal payments due during 1998 until 1999.
F-9
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 28, 1996, the aggregate principal amount of the term loan
matures during the fiscal year as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 ... $12,000
1998 ... 17,625
1999 ... 25,150
2000 ... 14,700
2001 ... --
---------
$69,475
=========
</TABLE>
Subject to certain conditions, voluntary prepayments of the Term Loan are
permitted without premium or penalty. Mandatory prepayments are required with
respect to asset sales, permitted issuance of debt or equity and 75% of
excess cash flows, as defined in the Credit Agreement, as amended. For the 52
weeks ended December 31, 1994, December 30, 1995 and December 28, 1996, there
were no voluntary or mandatory prepayments.
Obligations under the Credit Agreement are secured by a pledge of all of
Duane Reade's tangible and intangible assets and are guaranteed by its
partners, Daboco and DR Inc., which have pledged 100% of their partnership
interests in support of such guarantees. The guarantees are joint and several
and full and unconditional. The Credit Agreement contains restrictions on
indebtedness, asset sales, dividends and other distributions, capital
expenditures, transactions with affiliates and other unrelated business
activities. Financial performance covenants include interest coverage,
leverage ratio, minimum earnings and working capital levels. In 1996, the
Company obtained an Amendment revising certain covenant requirements and
limiting capital expenditures. At December 28, 1996, the Company is in
compliance with all of the covenants in the Credit Agreement.
(B) On September 25, 1992, Duane Reade issued $90,000,000 aggregate
principal amount of 12% Senior Notes due September 15, 2002, at face value.
Interest is payable at 12% semiannually. The Senior Notes are guaranteed by
Daboco and DR Inc. All of Daboco's assets are pledged to secure indebtedness
under the Credit Agreement discussed in (A) above. As a result, such
indebtedness will have claim on those assets that is prior to the claim of
holders of the Senior Notes. To the extent that the amount of senior
indebtedness exceeds the value of the collateral securing such indebtedness,
the Senior Notes will rank pari passu with the Term Loans.
Duane Reade is required to make a sinking fund payment on September 15,
2001 sufficient to retire 50% of the aggregate principal amount of Senior
Notes originally issued. The Senior Notes are subject to redemption at the
option of the issuer at 104.5% of par, plus accrued interest, at the end of
1997, declining to par, plus accrued interest, at the end of 2000. In the
event of a change in control, Duane Reade shall be obligated to make an offer
to purchase all outstanding Senior Notes at a repurchase price of 101% of the
principal amount.
(C) On September 25, 1992, Holdings issued $123,380,000 aggregate
principal amount of 15% Senior Subordinated Zero Coupon Notes due September
15, 2004 (the "Zero Coupon Notes"), net of an $81,909,000 discount. The
discount accretes through the Final Accretion Date of September 15, 1999.
Thereafter, cash interest is payable at 15% semi-annually through maturity.
Interest expense is determined using the effective interest method, which
applies a constant yield to carrying value over the life of the Zero Coupon
Notes.
The Credit Agreement and the Senior Note Indenture referred to in (A) and
(B) above provide for subordination of Holdings' debt to partnership debt.
The notes are redeemable at the option of the issuer, in whole or in part,
at 107.5% of Accreted Value (as defined in the Zero Coupon Note Indenture),
plus accrued interest, at the end of 1997 declining to par, plus accrued
interest, at the end of 2002. In the event of a change in control, Holdings
shall be obligated
F-10
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to make an offer to purchase all outstanding Zero Coupon Notes at a
repurchase price of 101% of Accreted Value (as defined in the Indenture) or
principal amount, as applicable. The Accreted Value of the Zero Coupon Notes
was $83,443,000 at December 28, 1996.
Purchasers of the Zero Coupon Notes received 15% of the fully diluted
common stock of Holdings, with registration rights, for aggregate
consideration of $3,529,000 (Note 10).
The Indentures governing the Zero Coupon Notes and the Senior Notes
include certain restrictive covenants. Subject to certain exceptions, the
Indentures restrict transactions with affiliates, the incurrence of
additional indebtedness, the payment of dividends, the creation of liens,
certain asset sales, mergers and consolidations and certain other payments.
The Company's debt is thinly traded in the market place. Accordingly,
management is unable to determine fair market values for such debt at
December 28, 1996.
The Zero Coupon Notes and the Senior Notes were issued pursuant to
Registration Rights Agreements under which Holdings and Duane Reade
consummated registered exchange offers pursuant to which Holdings and Duane
Reade exchanged the Zero Coupon Notes and the Senior Notes, respectively, for
identical notes which have been registered under the Securities Act of 1933,
as amended. Since 1994, the Company has not been required to follow the
periodic reporting requirements of the SEC.
5. CAPITAL LEASE OBLIGATIONS
During 1994, the Company commenced installation of new management
information systems. Capital requirements for hardware, software and
integration costs for the new systems were provided principally by capital
lease financing.
As of December 28, 1996, the present value of capital lease obligations
was $4.2 million (of which $2.5 million was payable during the next twelve
months). Such obligations are payable in monthly installments over three to
five year periods and bear interest at an average rate of 12.2%.
F-11
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between book and tax bases of the respective assets and liabilities at
December 30, 1995 and December 28, 1996 using a 44.7% combined federal, state
and local tax rate in each year and are comprised of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
-------------- --------------
<S> <C> <C>
Inventories...................... $ (3,238) $ (3,501)
-------------- --------------
Gross deferred tax liabilities . (3,238) (3,501)
-------------- --------------
Property and equipment .......... 719 955
Covenants not to compete ........ 4,318 1,851
Targeted jobs credit ............ 268 268
Zero Coupon debt discount ...... 9,885 14,041
Other ........................... 1,492 2,335
Net operating loss carryforward 49,217 50,072
-------------- --------------
Gross deferred tax assets ...... 65,899 69,522
-------------- --------------
Net deferred tax assets ......... 62,661 66,021
Valuation allowance ............. (62,661) (66,021)
-------------- --------------
$ -- $ --
============== ==============
</TABLE>
The Company deducted for income tax purposes for the period September 25
to December 31, 1992 approximately $88 million of payments made to former
partners of Duane Reade (the "Retirement Payments"). Approximately $38.5
million of the valuation allowance relates to these Retirement Payments. The
Retirement Payments and other current tax deductions resulted in a net
operating loss of approximately $112.0 million which may be available to
offset future taxable income of the Company through 2011. Due to the nature
of the Retirement Payments, future reductions in that portion of the
valuation allowance related to the Retirement Payments will be credited to
goodwill. Further, certain income tax law provisions may limit the use of the
available net operating loss carryforwards in the event of a significant
change in ownership interest.
The provision for income taxes for the 52 weeks ended December 31, 1994,
December 30, 1995 and December 28, 1996 differs from the amounts of income
tax determined by applying the applicable U.S. statutory federal income tax
rate to pretax loss as a result of the following (dollars in thousands):
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Pretax accounting loss ....... $(16,438) 100.0% $(18,058) 100.0% $(17,854) 100.0%
=========== ======== =========== ======== =========== ========
Statutory rate ............... (5,753) (35.0) (6,320) (35.0) (6,249) (35.0)
State and local taxes, net of
federal tax ................. (1,105) (6.7) (1,233) (6.8) (1,201) (6.7)
Goodwill amortization ........ 1,218 7.4 1,218 6.7 1,218 6.8
Net operating losses not
utilized .................... 5,213 31.7 5,828 32.3 5,534 31.0
Nondeductible interest
expense ..................... 504 3.1 585 3.2 684 3.8
Other ........................ (77) (0.5) (78) (0.4) 14 0.1
----------- -------- ----------- -------- ----------- --------
Effective tax rate ........... $ -- --% $ -- --% $ -- --%
=========== ======== =========== ======== =========== ========
</TABLE>
F-12
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STORE PRE-OPENING EXPENSES
Duane Reade opened eleven new store locations during the 52 weeks ended
December 31, 1994, eight new store locations during the 52 weeks ended
December 30, 1995 and one new store location during the 52 weeks ended
December 28, 1996.
8. COMMITMENTS AND CONTINGENCIES
LEASES
Duane Reade leases most store facilities under operating lease agreements
expiring on various dates through the year 2014. In addition to minimum
rentals, certain leases provide for annual increases based upon real estate
tax increases, maintenance cost increases and inflation. Rent expense for the
52 weeks ended December 31, 1994, December 30, 1995 and December 28, 1996 was
$17,373,000, $22,703,000 and $24,420,000, respectively.
Minimum annual rentals at December 28, 1996 (including obligations under a
new store lease entered into but not opened as of December 28, 1996) are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997................... $ 23,213
1998 .................. 22,879
1999 .................. 22,940
2000 .................. 22,070
2001 .................. 21,739
Remaining lease terms 126,837
----------
Total ................. $239,678
==========
</TABLE>
LITIGATION
The Company from time to time is involved in routine legal matters
incidental to its business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
MANAGEMENT AGREEMENTS
The Company has employment agreements with several of its executives
providing, among other things, for employment terms of up to three years.
Pursuant to the terms of such employment and related agreements, the Company
and various executives entered into agreements pursuant to which (i)
executives' salary and bonuses were established and (ii) executives purchased
shares of Holdings' Class P common stock at a price of $162.00 per share and
shares of Holdings' common stock at a price of $2.00 per share, each
representing original cost. In the event of employment termination, all of
the stock may be repurchased by Holdings. As a result of the recapitalization
and the reverse stock split (Note 12), all outstanding shares were converted
into common stock. As of December 28, 1996, an aggregate 488,283 shares of
common stock are held by employees and former employees.
In addition, the Company has established a Supplemental Executive
Retirement Plan ("SERP") which presently covers only its Chairman. Such SERP
provides for vesting over a twenty year period. However, if the Chairman's
employment is terminated without cause, as defined, or if the Chairman
resigns with cause, as defined, such vesting becomes immediate, in which
event the Company would be liable to the Chairman (in addition to amounts
accrued in the financial statements) in the amount of approximately $650,000.
F-13
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE BENEFIT PLANS
On October 12, 1992, the Board of Directors of Holdings adopted the 1992
Stock Option Plan of Duane Reade Holding Corp. (the "Plan"). Under the Plan,
a committee designated by the Board of Directors of Holdings to administer
the Plan (the "Committee") may grant, to executive and other key employees of
the Company, nonqualified stock options to purchase up to an aggregate of
510,757 (adjusted for the recapitalization and the reverse stock split--see
Note 12) shares of common stock of Holdings at an exercise price fixed by the
Committee. The options are exercisable at such time or times as the Committee
determines at or subsequent to grant. The term of the options set by the
Committee shall not exceed 10 years.
As permitted, the Company applies Accounting Principles Board Opinion No.
25 and related Interpretations in accounting for its stock-based compensation
plan. Had compensation cost for the Company's stock-based compensation plan
been determined based on the fair value at the grant dates for awards under
the Plan, consistent with the alternative method of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, the
effect on the Company's net loss for the 52 weeks ended December 30, 1995 and
December 28, 1996 would have been less than $100,000.
At December 28, 1996, there were outstanding nonqualified stock options to
purchase up to an aggregate of 820,403 (adjusted for the recapitalization and
the reverse stock split--see Note 12) shares of common stock (including
options granted outside the Plan). Options outstanding at each price level
vest over five years at 20% each year that the executive is employed. At
December 28, 1996, there were 102,207 vested share options.
Changes in options outstanding during 1995 and 1996 are summarized as
follows (adjusted for recapitalization--see Note 12):
<TABLE>
<CAPTION>
OPTION PRICE PER SHARE
--------------------------------------------- TOTAL
$.58 $7.34 $29.37 $40.86 OPTIONS
---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Options outstanding, December 31,
1994................................. 91,968 91,968 91,968 91,968 367,872
Options granted....................... 8,539 8,538 8,538 8,538 34,153
Options canceled...................... (60,397) (60,397) (60,397) (60,397) (241,588)
---------- ---------- ---------- ---------- -----------
Options outstanding, December 30,
1995................................. 40,110 40,109 40,109 40,109 160,437
Options granted....................... 723,662 2,745 2,745 2,745 731,897
Options canceled...................... (13,728) (13,726) (13,726) (13,726) (54,906)
---------- ---------- ---------- ---------- -----------
Options outstanding, December 28,
1996................................. 750,044 29,128 29,128 29,128 837,428
========== ========== ========== ========== ===========
Weighted average remaining life on
outstanding options.................. 9.2 years 7.1 years 7.1 years 7.1 years 9.0 years
</TABLE>
The Company maintains an employee savings plan pursuant to Section 401(k)
(the "401(k) Plan") of the Internal Revenue Code ("IRC") which covers
substantially all non union employees, excluding in 1996 all key employees as
defined by IRC. Eligible participating employees may contribute up to 10% of
their pretax salaries, subject to certain IRC limitations. The 401(k) Plan,
as amended, provides for employer matching provisions at the discretion of
the Company (to a maximum of 1% of pretax salaries) and has a feature under
which the Company may contribute additional amounts for all eligible
employees. The Company's policy is to fund such costs under the 401(k) Plan
as accrued. For the 52 weeks ended December 31, 1994 and December 30, 1995,
employer contributions to the 401(k) Plan were $158,000 and $166,000,
respectively. There were no employer contributions for the 52 weeks ended
December 28, 1996.
Duane Reade is under contract with local unions to contribute to
multi-employer pension and welfare benefit plans for certain of its
employees. For the 52 weeks ended December 31, 1994, December 30, 1995 and
December 28, 1996, contributions to such plans were $3,899,000, $5,200,000
and $5,783,000, respectively.
F-14
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. STOCKHOLDERS' DEFICIENCY
In September 1992, pursuant to the terms of the Purchase Agreement
governing the Zero Coupon Notes (Note 4), purchasers of such notes received
15% of the fully diluted common stock of the Company for aggregate cash
consideration of $3,529,000.
Distributions made by the Company to the holders of its common stock,
which are restricted by the terms of the Indentures described in Note 4,
shall be made in the following order:
Class P voting and Class P-1 non-voting common stockholders are entitled
to the aggregate unpaid amount of approximately $19,210,000 accruing on
the outstanding shares at an annual rate of 15%, compounded quarterly.
Such holders are then entitled to the aggregate unreturned original cost
($162 per share) of the outstanding shares.
Common stockholders (together as a group, voting and Class A non-voting)
shall then receive an amount equal to the aggregate unreturned original
cost ($2 per share) of outstanding shares.
Final distribution of any remaining portion shall be made to all classes
of outstanding common stock.
In the event of a public offering of stock or a change of control, and
with a written request to the Company, each holder of Class A non-voting
common stock or Class P-1 non-voting common stock is entitled to convert its
stock, on a one-for-one basis, into voting common stock or Class P common
stock, respectively.
As a result of the recapitalization discussed in Note 12, all outstanding
classes of the Company's common stock were converted into a newly designated
class of common stock.
11. RELATED PARTY TRANSACTIONS
In 1992, the Company and its then principal stockholder entered into a
Professional Services Agreement whereby consulting, advisory, financial and
other services were provided at the Company's request, for a five year term.
During each of the 52 weeks ended December 31, 1994, December 30, 1995 and
December 28, 1996, such fees aggregated approximately $1,000,000.
12. SUBSEQUENT EVENTS
During June 1997, the Company entered into a recapitalization agreement
(the "Agreement") with its stockholders ("Stockholders") and certain
investors ("Investors"). The Agreement provided for (i) the purchase by the
Investors from the Stockholders of substantially all their stock holdings in
the Company, (ii) a conversion of all of the outstanding shares of the
Company into a newly authorized class of Class B common stock and (iii) the
creation of a new authorized class of preferred stock which will carry the
rights and preferences granted by the Company's Board of Directors when
issued.
Shares were converted as follows:
<TABLE>
<CAPTION>
APPROXIMATE
PRIOR CLASS CONVERSION RATE
- ------------------------------------ ---------------
<S> <C>
Common and Common Class A ........... 28/1
Common Class P and Common Class P-1 355/1
</TABLE>
Additionally, on January 14, 1998, the Company effected an 8.326 reverse
stock split of the Company's common stock.
All references to common stock amounts, shares and per share data included
in the consolidated financial statements and notes have been adjusted to give
retroactive effect to the above transactions.
F-15
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 27,
1997
---------------
<S> <C>
ASSETS
Current assets ..............................................................
Cash ....................................................................... $ 218
Receivables ................................................................ 9,084
Inventories ................................................................ 65,872
Prepaid expenses ........................................................... 1,371
---------------
TOTAL CURRENT ASSETS ..................................................... 76,545
Property and equipment, net ................................................. 24,918
Goodwill, net of accumulated amortization of $17,397 ........................ 121,757
Other assets, net ........................................................... 16,300
---------------
TOTAL ASSETS ............................................................. $239,520
===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable ........................................................... $ 30,710
Accrued interest ........................................................... 623
Other accrued expenses ..................................................... 13,193
Current portion of senior debt ............................................. 660
Current portion of capital lease obligations ............................... 1,510
---------------
TOTAL CURRENT LIABILITIES ................................................ 46,696
Senior debt, less current portion ........................................... 170,708
Subordinated zero coupon debt, net of unamortized discount of $34,277 ...... 89,094
Capital lease obligations, less current portion ............................. 677
Other non-current liabilities ............................................... 5,906
---------------
TOTAL LIABILITIES ........................................................ 313,081
---------------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
Stockholders' Deficiency
Preferred stock, $0.01 par; authorized 5,000,000 shares; none issued or
outstanding................................................................ --
Common stock, $0.01 par; authorized 30,000,000 shares; issued and
outstanding 10,257,832 shares ............................................. 103
Paid-in-capital ............................................................ 24,562
Accumulated deficit ........................................................ (98,226)
---------------
TOTAL STOCKHOLDERS' DEFICIENCY ........................................... (73,561)
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY ........................... $239,520
===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE 39 WEEKS ENDED
--------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
--------------- ---------------
<S> <C> <C>
Net Sales..................................... $281,093 $313,796
Cost of sales ................................ 215,797 236,413
--------------- ---------------
Gross profit ................................. 65,296 77,383
--------------- ---------------
Selling, general and administrative expenses . 42,499 48,218
Amortization ................................. 8,514 3,826
Depreciation ................................. 2,295 2,584
Store pre-opening expenses ................... 139 600
Nonrecurring charges ......................... -- 10,887
--------------- ---------------
53,447 66,115
--------------- ---------------
Operating income ............................. 11,849 11,268
Interest expense, net ........................ 24,334 25,433
--------------- ---------------
Loss before income taxes ..................... (12,485) (14,165)
Income taxes ................................. -- --
--------------- ---------------
NET LOSS .................................. $(12,485) $(14,165)
=============== ===============
NET LOSS PER COMMON SHARE ................. $ (1.18) $ (1.34)
=============== ===============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................... 10,589 10,600
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------ ---------------------- PAID-IN ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-------- -------- ------------ --------- ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 28, 1996 . -- -- 10,062,497 $101 $24,564 $(84,061) $(59,396)
Issuance of common stock ... -- -- 195,335 2 (2) -- --
Net loss .................... -- -- -- -- -- (14,165) (14,165)
-------- -------- ------------ -------- --------- ------------- -----------
Balance, September 27, 1997 -- -- 10,257,832 $103 $24,562 $(98,226) $(73,561)
======== ======== ============ ======== ========= ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE 39 WEEKS ENDED
--------------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .......................................................... $(12,485) $(14,165)
Adjustments to reconcile net loss to net cash provided by/(used
in) operating activities .........................................
Depreciation and amortization of property and equipment ........ 2,295 2,584
Amortization of goodwill and other intangibles .................. 10,505 5,803
Accretion of principal of zero coupon debt ...................... 8,437 9,622
Other............................................................ 1,156 1,182
Changes in operating assets and liabilities:
Receivables .................................................... (385) (1,913)
Inventories .................................................... (1,844) (17,958)
Accounts payable ............................................... 1,546 10,695
Interest payable ............................................... (2,620) (3,250)
Prepaid and accrued expenses and other ......................... 51 4,197
--------------- ---------------
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES ............ 6,656 (3,203)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale of capital assets ............................. -- 1,075
Capital expenditures ............................................. (913) (4,931)
Systems development costs ........................................ (2,068) --
Sale of government securities .................................... 44 --
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES ........................... (2,937) (3,856)
--------------- ---------------
Cash flows from financing activities:
Deferred financing costs ......................................... (542) (309)
Repayments of senior debt ........................................ (4,625) (6,107)
Repayments of subordinated debt .................................. -- (9)
Proceeds from bank debt, revolving credit--net ................... 1,500 15,500
Capital lease financing .......................................... 274 --
Repayment of capital lease obligations ........................... (2,120) (2,014)
Repurchase of stock .............................................. (96) --
--------------- ---------------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES ............. (5,609) 7,061
--------------- ---------------
Net (decrease)/increase in cash .................................... (1,890) 2
Cash at beginning of period ........................................ 2,133 216
--------------- ---------------
Cash at end of period............................................... $ 243 $ 218
=============== ===============
Supplementary disclosure of cash flow information:
Cash paid for interest ........................................... $ 16,526 $ 16,541
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Holdings,
Daboco, DR Inc. and Duane Reade (collectively, the "Company"). All
intercompany transactions and balances have been eliminated.
The interim financial data is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. The results of operations for any interim period should not
necessarily be considered indicative of the results of operations for a full
year.
The accompanying unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto for the 52 weeks ended December 28, 1996 included elsewhere in this
prospectus.
RECEIVABLES: Receivables consist primarily of amounts due from vendors, a
majority of which relate to promotional programs. Receivables also arise as a
result of third party payment plans from the sale of prescription drugs;
commencing in May 1997, substantially all such receivables are sold without
recourse to a funding entity. The discount on the sale of such third party
receivables amounted to approximately $381,000 during the 39 weeks ended
September 27, 1997 and is included in interest expense.
INTANGIBLE ASSETS: In September 1992, Holdings and Duane Reade entered
into agreements with certain former members of management of Duane Reade,
former shareholders of Daboco and shareholders of former partners of Duane
Reade (collectively, the "Group") precluding such persons from competing with
the operations of Duane Reade for a period of five years. The covenants not
to compete were recorded at acquisition cost and were being amortized over
the period of benefit using an accelerated method. During the first quarter
of 1997, Holdings and Duane Reade entered into agreements with the Group in
which the Company received consideration from the Group to terminate the
non-compete agreements. In accordance with APB Opinion No. 17, Intangible
Assets, the remaining carrying value of the non-compete agreements of $4.86
million as of December 28, 1996 was written off during the fourth quarter of
1996 and charged to amortization expense.
Goodwill is amortized on the straight-line method over 40 years. The
carrying value of goodwill is periodically reviewed and evaluated by the
Company based on its expected future undiscounted operating cash flows.
Should such evaluation result in the Company concluding that the carrying
amount of goodwill has been impaired, an appropriate write-down would be
made.
NET LOSS PER COMMON SHARE: Net loss per common share is based on the
weighted average shares outstanding during each period: 10,588,862 and
10,599,722 for the 39 weeks ended September 28, 1996 and September 27, 1997,
respectively. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, options granted with exercise prices below the estimated
initial public offering price during the 12 month period preceding the date
of the initial filing of the Registration Statement have been included in the
calculation of net loss per common share, using the treasury stock method
based on the estimated initial public offering price of $15.00 per share, as
if the options were outstanding for all periods presented. Outstanding share
amounts have been restated to give effect to the recapitalization described
in Note 10 and the reverse stock split described in Note 13.
F-20
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
<S> <C>
Land............................................ $ 312
Buildings and building improvements ............ 4,286
Furniture, fixtures and equipment .............. 9,468
Leasehold improvements ......................... 15,303
Property under capital leases .................. 5,102
------------------
34,471
Less--Accumulated depreciation and amortization (9,553)
------------------
$24,918
==================
</TABLE>
3. OTHER ASSETS
Other assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
<S> <C>
Deferred financing costs (net of accumulated amortization of
$11,585)..................................................... $ 6,144
Systems and integration costs (net of accumulated
amortization of $2,653) ..................................... 8,364
Other ........................................................ 1,792
------------------
$16,300
==================
</TABLE>
4. DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
<S> <C>
Senior debt
Term loan facility (A)....................... $ 65,475
Notes payable bank--revolving credit (A) ... 16,000
12% Senior Notes due September 15, 2002 (B) 89,893
Subordinated debt
15% Senior Subordinated Zero Coupon Notes
due September 15, 2004 (C) ................. 89,094
------------------
260,462
Less--Current portion ........................ 660
------------------
$259,802
==================
</TABLE>
(A) Outstanding balances under a Credit Agreement dated as of September
24, 1992, as amended, with a syndicate of lending institutions bear interest
at floating rates, which at September 27, 1997 averaged 10.5%. In addition to
the term loan, the Credit Agreement provides for a revolving credit facility
of $20.0 million (less amounts of letters of credit issued under the Credit
Agreement) which may be used for general corporate purposes and which expires
on September 30, 1998. As of September 27, 1997, the borrowings outstanding
under the revolving credit facility were $16.0 million (classified as a
noncurrent liability) and $0.3 million in letters of credit had been issued.
F-21
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Subject to certain conditions, voluntary prepayments of the Term Loan are
permitted without premium or penalty. Mandatory prepayments are required with
respect to asset sales, permitted issuance of debt or equity and 75% of
excess cash flows, as defined in the Credit Agreement, as amended. For the 39
weeks ended September 27, 1997, there were no voluntary or mandatory
prepayments.
Obligations under the Credit Agreement are secured by a pledge of all of
Duane Reade's tangible and intangible assets and are guaranteed by its
partners, Daboco and DR Inc., which have pledged 100% of their partnership
interests in support of such guarantees. The guarantees are joint and several
and full and unconditional. The Credit Agreement contains restrictions on
indebtedness, asset sales, dividends and other distributions, capital
expenditures, transactions with affiliates and other unrelated business
activities. Financial performance covenants include interest coverage,
leverage ratio, minimum earnings and working capital levels. At September 27,
1997, the Company is in compliance with all of the covenants in the Credit
Agreement. See Note 13.
(B) On September 25, 1992, Duane Reade issued $90,000,000 aggregate
principal amount of 12% Senior Notes due September 15, 2002 (the "Senior
Notes"), at face value. Interest is payable at 12% semiannually. The Senior
Notes are guaranteed by Daboco and DR Inc. All of Daboco's assets are pledged
to secure indebtedness under the Credit Agreement discussed in (A) above. As
a result, such indebtedness will have claim on those assets that is prior to
the claim of holders of the Senior Notes. To the extent that the amount of
senior indebtedness exceeds the value of the collateral securing such
indebtedness, the Senior Notes will rank pari passu with the Term Loans.
Duane Reade is required to make a sinking fund payment on September 15,
2001 sufficient to retire 50% of the aggregate principal amount of Senior
Notes originally issued. The Senior Notes are subject to redemption at the
option of the issuer at 104.5% of par, plus accrued interest, at the end of
1997, declining to par, plus accrued interest, at the end of 2000. In the
event of a change in control, Duane Reade shall be obligated to make an offer
to purchase all outstanding Senior Notes at a repurchase price of 101% of the
principal amount. A change of control did occur in June 1997 (see Note 10).
(C) On September 25, 1992, Holdings issued $123,380,000 aggregate
principal amount of 15% Senior Subordinated Zero Coupon Notes due September
15, 2004 (the "Zero Coupon Notes"), net of an $81,909,000 discount. The
discount accretes through the Final Accretion Date of September 15, 1999.
Thereafter, cash interest is payable at 15% semi-annually through maturity.
Interest expense is determined using the effective interest method, which
applies a constant yield to carrying value over the life of the Zero Coupon
Notes.
The Credit Agreement and the Senior Note Indenture referred to in (A) and
(B) above provide for subordination of Holdings' debt to partnership debt.
The notes are redeemable at the option of the issuer, in whole or in part,
at 107.5% of Accreted Value (as defined in the Zero Coupon Note Indenture),
plus accrued interest, at the end of 1997 declining to par, plus accrued
interest, at the end of 2002. In the event of a change in control, Holdings
shall be obligated to make an offer to purchase all outstanding Zero Coupon
Notes at a repurchase price of 101% of Accreted Value (as defined in the
Indenture) or principal amount, as applicable. A change of control did occur
in June 1997 (see Note 10). The Accreted Value of the Zero Coupon Notes was
$92,840,000 at September 27, 1997.
Purchasers of the Zero Coupon Notes received 15% of the fully diluted
common stock of Holdings, with registration rights, for aggregate
consideration of $3,529,000.
The Indentures governing the Zero Coupon Notes and the Senior Notes
include certain restrictive covenants. Subject to certain exceptions, the
Indentures restrict transactions with affiliates, the incurrence of
additional indebtedness, the payment of dividends, the creation of liens,
certain asset sales, mergers and consolidations and certain other payments.
F-22
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
The Company's debt is thinly traded in the market place. Accordingly,
management is unable to determine fair market values for such debt at
September 27, 1997.
The Zero Coupon Notes and the Senior Notes were issued pursuant to
Registration Rights Agreements under which Holdings and Duane Reade
consummated registered exchange offers pursuant to which Holdings and Duane
Reade exchanged the Zero Coupon Notes and the Senior Notes, respectively, for
identical notes which have been registered under the Securities Act of 1933,
as amended.
5. CAPITAL LEASE OBLIGATIONS
As of September 27, 1997, the present value of capital lease obligations
was $2.2 million (of which $1.5 million is payable during the next twelve
months). Such obligations are payable in monthly installments over three to
five year periods and bear interest at an average rate of 12.2%.
6. INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between book and tax bases of the respective assets and liabilities at
September 27, 1997 using a 44.7% combined federal, state and local tax rate
and are comprised of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------
<S> <C>
Inventories .................... $ (3,382)
------------------
Gross deferred tax liabilities (3,382)
------------------
Property and equipment ......... 734
Deferred rent .................. 2,398
Targeted jobs credit ........... 284
Zero Coupon debt discount ..... 17,580
Net operating loss
carryforward................... 31,791
Other .......................... 352
------------------
Gross deferred tax assets ..... 53,139
------------------
Net deferred tax assets ........ 49,757
Valuation allowance............. (49,757)
------------------
$ --
==================
</TABLE>
The Company deducted for income tax purposes for the period September 25
to December 31, 1992 approximately $88 million of payments made to former
partners of Duane Reade (the "Retirement Payments"). Approximately $21
million of the valuation allowance relates to these Retirement Payments. The
Retirement Payments and other current tax deductions resulted in a net
operating loss of approximately $71 million which may be available to offset
future taxable income of the Company through 2012. Due to the nature of the
Retirement Payments, future reductions in that portion of the valuation
allowance related to the Retirement Payments will be credited to goodwill.
Further, due to the change in ownership arising as a result of the
recapitalization (see Note 10), certain income tax law provisions apply that
limit the ability of the Company to utilize the available net operating loss
carryforwards. It is estimated that the annual limitation will be $5.0
million.
F-23
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
The provision for income taxes for the 39 weeks ended September 28, 1996
and September 27, 1997 differs from the amounts of income tax determined by
applying the applicable U.S. statutory federal income tax rate to pretax loss
as a result of the following (dollars in thousands):
<TABLE>
<CAPTION>
39 WEEKS ENDED 39 WEEKS ENDED
SEPTEMBER 28, 1996 SEPTEMBER 27, 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
Pretax accounting loss .................... $(12,485) 100% $(14,165) 100%
=========== ========= =========== =========
Statutory rate............................. $ (4,370) (35.0)% $ (4,958) (35.0)%
State and local taxes, net of federal tax (837) (6.7) (262) (1.8)
Goodwill amortization ..................... 914 7.3 914 6.5
Net operating losses not utilized ........ 3,870 31.0 1,207 8.5
Nondeductible recapitalization costs ..... -- -- 2,485 17.5
Nondeductible interest expense ............ 513 4.1 596 4.2
Other ..................................... (90) (0.7) 18 0.1
----------- --------- ----------- ---------
Effective tax rate......................... $ -- --% $ -- --%
=========== ========= =========== =========
</TABLE>
7. STORE PRE-OPENING EXPENSES
Duane Reade opened one new store location during the 39 weeks ended
September 28, 1996 and five new stores during the 39 weeks ended September
27, 1997.
8. COMMITMENTS AND CONTINGENCIES
LEASES
Duane Reade leases all of its store facilities under operating lease
agreements expiring on various dates through the year 2014. In addition to
minimum rentals, certain leases provide for annual increases based upon real
estate tax increases, maintenance cost increases and inflation. Rent expense
for the 39 weeks ended September 28, 1996 and September 27, 1997 was
$18,248,000 and $19,572,000, respectively.
Minimum annual rentals at September 27, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
13 weeks ending December 27, 1997 $ 6,074
1998............................... 27,518
1999 .............................. 27,069
2000 .............................. 26,274
2001 .............................. 25,959
2002 .............................. 25,404
Remaining lease terms ............. 135,497
---------
Total.............................. $273,795
=========
</TABLE>
LITIGATION
The Company from time to time is involved in routine legal matters
incidental to its business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
MANAGEMENT AGREEMENTS
Pursuant to the terms of various employment and related agreements, the
Company and various executives entered into agreements pursuant to which (i)
executives' salary and bonuses were established
F-24
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
and (ii) executives purchased shares of Holdings' previously issued Class P
common stock at a price of $162.00 per share and shares of Holdings' common
stock at a price of $2.00 per share, each representing original cost. In the
event of employment termination, all of the stock may be repurchased by
Holdings. As a result of the recapitalization (see Note 10) and the reverse
stock split (see Note 13), all shares were converted into common stock. As of
September 27, 1997, an aggregate of 488,283 shares of common stock are held
by employees and former employees.
COMMITMENTS
At September 27, 1997, the Company had a commitment of approximately $4.0
million in connection with the acquisition and installation of a point of
sale scanning system. The Company intends to finance substantially all of
such acquisition and installation costs through capital lease financing.
The Company has employment agreements with several of its executives
providing, among other things, for employment terms of up to three years. In
addition, the Company has established a Supplemental Executive Retirement
Plan ("SERP") which presently covers only its Chairman. Such SERP provides
for vesting over a twenty year period. However, if the Chairman's employment
is terminated without cause, as defined, or if the Chairman resigns with
cause, as defined, such vesting becomes immediate, in which event the Company
would be liable to the Chairman (in addition to amounts accrued in the
financial statements) in the amount of approximately $680,000.
9. EMPLOYEE BENEFIT PLANS
On October 12, 1992, the Company adopted the 1992 Stock Option Plan of
Duane Reade Holding Corp. (the "Plan"). Under the Plan, a committee
designated by the Board of Directors to administer the Plan (the "Committee")
may grant, to executive and other key employees of the Company, nonqualified
stock options to purchase up to an aggregate of 510,757 (adjusted for the
recapitalization--See Note 10--and the reverse stock split--see Note 13)
shares of common stock of the Company at an exercise price fixed by the
Committee. The options are exercisable at such time or times as the Committee
determines at or subsequent to grant. The term of the options set by the
Committee shall not exceed 10 years.
At September 27, 1997, there were outstanding nonqualified stock options
to purchase up to an aggregate of 646,187 shares of common stock (including
options granted outside the Plan), all of which are vested.
Changes in options outstanding (including options granted outside the
Plan) during the 39 weeks ended September 27, 1997 are summarized as follows:
<TABLE>
<CAPTION>
OPTION PRICE PER SHARE
----------------------------------------------
TOTAL
$.58 $7.34-$12.77 $29.37 $40.86 OPTIONS
----------- -------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Options outstanding, December 28, 1996 . 750,044 29,128 29,128 29,128 837,428
Options granted......................... 851 68,953 851 851 71,506
Options canceled........................ (262,747) -- -- -- (262,747)
----------- -------------- -------- -------- -----------
Options outstanding, September 27,
1997................................... 488,148 98,081 29,979 29,979 646,187
=========== ============== ======== ======== ===========
Weighted average remaining life on
outstanding options.................... 8.4 years 8.5 years 6.4 years 6.4 years 8.3 years
</TABLE>
During the second quarter of 1997, the Company adopted an Equity
Participation Plan under which options for a total of 1,321,181 shares of
common stock of the Company may be granted to employees, consultants and
non-employee directors of the Company if the Company meets specific
performance targets. At September 27, 1997, options for 1,005,772 shares have
been granted to employees.
F-25
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Changes in options outstanding under the Equity Participation Plan during
the 39 weeks ended September 27, 1997 are summarized as follows:
<TABLE>
<CAPTION>
NUMBER
OF OPTIONS OPTION PRICE
------------ --------------
<S> <C> <C>
Options outstanding, December 28, 1996 -- --
Options granted ....................... 1,005,772 8.33
------------ --------------
Options outstanding, September 27,
1997.................................. 1,005,772 $8.33
============ ==============
</TABLE>
As permitted, the Company applies Accounting Principles Board Opinion No.
25 and related Interpretations in accounting for its stock-based compensation
plan. Had compensation cost for the Company's stock-based compensation plan
been determined based on the fair value at the grant dates for awards under
the Plan, consistent with the alternative method of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, the
effect on the Company's net loss for the 39 weeks ended September 28, 1996
and September 27, 1997 would have been less than $100,000 and $200,000,
respectively.
The Company maintains an employee savings plan pursuant to Section 401(k)
(the "401(k) Plan") of the Internal Revenue Code ("IRC") which covers
substantially all non-union employees other than key employees as defined by
IRC. Eligible participating employees may contribute up to 10% of their
pretax salaries, subject to certain IRC limitations. The 401(k) Plan, as
amended, provides for employer matching provisions at the discretion of the
Company (to a maximum of 1% of pretax salaries) and has a feature under which
the Company may contribute additional amounts for all eligible employees. The
Company's policy is to fund such costs under the 401(k) Plan as accrued.
There were no employer contributions for the 39 weeks ended September 28,
1996 and September 27, 1997.
Duane Reade is under contract with local unions to contribute to
multi-employer pension and welfare benefit plans for certain of its
employees. For the 39 weeks ended September 28, 1996 and September 27, 1997,
contributions to such plans were $4,121,000 and $4,844,000, respectively.
10. RECAPITALIZATION
During June 1997, the Company entered into a recapitalization agreement
(the "Agreement") with its stockholders ("Stockholders") and certain
investors ("Investors"). The Agreement provided for (i) the purchase by
Investors from the Stockholders of substantially all their stock holdings in
the Company, (ii) a conversion of all of the outstanding shares of the
Company into a newly authorized class of Class B Common stock and (iii) the
creation of a new authorized class of preferred stock which will carry the
rights and preferences granted by the Company's Board of Directors when
issued.
Shares were converted as follows:
<TABLE>
<CAPTION>
APPROXIMATE
PRIOR CLASS CONVERSION RATE
- ------------------------------------ ---------------
<S> <C>
Common and Common Class A ........... 28/1
Common Class P and Common Class P-1 355/1
</TABLE>
In addition, because of the change in control, the Company was obligated
to and made offers to repurchase all outstanding Senior Notes and Zero Coupon
Notes at 101% of the principal amount or accreted value thereof,
respectively. Such offers expired on September 12, 1997. The Company
repurchased an aggregate of $107,000 principal amount of Senior Notes and
$9,000 of Zero Coupon Notes pursuant to the offers.
These financial statements do not reflect any adjustments as a result of
the June 1997 change in control.
F-26
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
11. 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 these plans.
Such plans were abandoned upon consummation of the transaction discussed in
Note 10.
Costs and expenses incurred in connection with the abandoned public
offering and the recapitalization and the exchange offers referred to in Note
10 aggregated approximately $10.9 million, including investment banking fees
of $7.7 million (including $3.5 million to an affiliate of the Investors and
$0.6 million to the Stockholders), legal and accounting fees of $1.6 million,
stand-by commitment fees relating to the exchange offers of $1.2 million to
an affiliate of the Investors, and other costs of $0.4 million. The Company
has treated these expenses as non-recurring because such expenses related to
financing activities in connection with the Recapitalization and related
events, which the Company does not expect to repeat.
12. RELATED PARTY TRANSACTIONS
In 1992, the Company and the then principal stockholder of the Company
(who has subsequently sold most of its shares--see Note 10) entered into a
professional services agreement whereby consulting, advisory, financial and
other services were provided at the Company's request, for a five year term.
During the 39 weeks ended September 28, 1996, such fees aggregated
approximately $742,000. See Note 11.
In addition, the Investors paid an executive approximately $0.8 million
for advisory services rendered and a former executive approximately $1.6
million for the repurchase and cancellation of exercisable stock options. The
accompanying financial statements do not reflect such payments.
13. SUBSEQUENT EVENTS
On September 30, 1997, the Company entered into a credit agreement with an
affiliate of the Investors and various financial institutions providing for a
term loan of $65,475,000 and a revolving credit facility of $30,000,000.
Proceeds of the term loan were used to repay outstanding term loans
($63,475,000) and revolving loans ($2,000,000) pursuant to the Credit
Agreement discussed in Note 4.
The term loan is payable in quarterly installments of $165,000 from
December 1997 through March 2001, $31,000,000 in June 2001, quarterly
installments of $165,000 from September 2001 through March 2002 and
$31,000,000 in June 2002. Outstanding term and revolving loans at September
27, 1997 have been classified in accordance with such repayment terms.
Costs incurred in connection with the refinancing aggregated approximately
$2.7 million (including a funding fee of $2.4 million to an affiliate of the
Investors) and will be amortized over the term of the new credit agreement.
Unamortized deferred financing costs of approximately $1.8 million at
September 27, 1997 relating to the prior credit agreement will be charged to
earnings in the fourth quarter of 1997.
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.
F-27
<PAGE>
[DUANE READE INC. LOGO]
[PHOTO]
[PHOTO]
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY,
THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary ............................ 3
Risk Factors .................................. 9
Use of Proceeds ............................... 15
Dividend Policy ............................... 16
Capitalization ................................ 17
Dilution ...................................... 18
Unaudited Pro Forma Condensed Consolidated
Financial Statements.......................... 19
Selected Consolidated Historical Financial and
Operating Data ............................... 24
Management's Discussion and Analysis of
Financial Condition and Results of Operations 26
Business ...................................... 33
Management .................................... 42
Certain Relationships and Related Transactions 48
Principal Stockholders ........................ 50
Description of Certain Indebtedness ........... 51
Description of Capital Stock .................. 52
Shares Eligible for Future Sale ............... 54
Underwriting .................................. 55
Legal Matters ................................. 57
Experts ....................................... 57
Additional Information ........................ 57
Index to Financial Statements.................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
6,700,000 SHARES
[DUANE READE]
COMMON STOCK
PROSPECTUS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
FEBRUARY , 1998
<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses of the issuance and
distribution of the securities being registered other than underwriting
compensation:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee .................................... $ 34,849
NASD filing fee ......................................... 12,000
New York Stock Exchange original listing fee ........... 60,000
Blue sky fees and expenses (including attorneys' fees
and expenses) .......................................... 10,000
Printing and engraving expenses ......................... 175,000
Transfer agent's fees and expenses ...................... 10,000
Accounting fees and expenses ............................ 135,000
Legal fees and expenses ................................. 500,000
Miscellaneous expenses .................................. 28,151
----------
Total.................................................... $965,000
==========
</TABLE>
- ------------
* To be provided by amendment.
All amounts are estimated except for the SEC registration fee and the NASD
filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware ("Section
145") provides that a Delaware corporation may indemnify any person who is,
or is threatened to be made, a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation
or enterprise. The indemnity may include expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was illegal. A Delaware
corporation may indemnify any person who is, or is threatened to be made, a
party to any threatened, pending or completed action or suit by or in the
right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee
or agent of another corporation or enterprise. The indemnity may include
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit,
provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests except
that no indemnification is permitted without judicial approval if the officer
or director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him against the
expenses which such officer or director has actually and reasonably incurred.
The Company's Amended and Restated Certificate of Incorporation provides
for the indemnification of directors and officers of the Company to the
fullest extent permitted by Section 145.
In that regard, the Amended and Restated Certificate of Incorporation
provides that the Company shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative
II-1
<PAGE>
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director or officer of the Company, or is or was
serving at the request of the Company as a director, officer or member of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Indemnification in
connection with an action or suit by or in the right of the Company to
procure a judgment in its favor is limited to payment of settlement of such
an action or suit except that no such indemnification may be made in respect
of any claim, issue or matter as to which such person shall have been
adjudged to be liable for negligence or misconduct in the performance of his
duty to the indemnifying corporation unless and only to the extent that the
Court of Chancery of Delaware or the court in which such action or suit was
brought shall determine that, despite the adjudication of liability but in
consideration of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth in chronological order is information regarding all securities
sold and employee stock options granted by the Company since November 1994.
Further included is the consideration, if any, received by the Company for
such securities, and information relating to the section of the Securities
Act of 1933, as amended (the "Securities Act"), and the rules of the
Securities and Exchange Commission under which exemption from registration
was claimed. All awards of options did not involve any sale under the
Securities Act. No sale of securities involved the use of an underwriter, and
no commissions were paid in connection with the sales of any securities.
(1) On April 10, 1995, the Company issued 5,000 shares of the Company's
common stock (the "Common Stock") and 555.556 shares of the Company's
Class P common stock (the "Class P Stock") to Jerry M. Ray for $100,000,
pursuant to the exemption contained in Section 4(2) of the Securities Act.
(2) On June 9, 1997, the Company issued 9,639 shares of Common Stock to
Bankers Trust New York Corporation for 9,639 shares of the Company's Class
A common stock (the "Class A Stock"), pursuant to the exemption contained
in Section 3(a)(9) of the Securities Act.
(3) On June 18, 1997, in connection with the Recapitalization, the
Company issued to all holders of its then outstanding capital stock (the
"Retired Common Stock") shares of its newly authorized Class B Common
Stock in exchange for such Retired Common Stock. For each share of Common
Stock and Class A Stock, a stockholder received approximately 28 shares of
Class B Common Stock, and for each share of Class P Stock and the
Company's Class P-1 common stock (the "Class P-1 Stock"), a holder
received approximately 355 shares of Class B Common Stock. In total, the
Company issued an aggregate of 85,405,524.5 shares of Class B Common Stock
to its stockholders for an aggregate of 1,136,470.5 shares of Common
Stock, 100,000 shares of Class A Stock, 126,274.7 shares of Class P Stock
and 11,111.1 shares of Class P-1 Stock. Section3(a)(9) of the Securities
Act was relied upon for exemption of such issuance from registration. Set
forth in the table below are (i) each of the shareholders of the Company,
(ii) the number of shares of Retired Common Stock such shareholder
exchanged and (iii) the number of shares of Class B Common Stock that the
Company issued to such shareholder.
II-2
<PAGE>
<TABLE>
<CAPTION>
SHARES OF RETIRED COMMON STOCK EXCHANGED
----------------------------------------------------------------
SHARES OF CLASS B
SHAREHOLDERS CLASS A STOCK CLASS P STOCK CLASS P-1 STOCK COMMON STOCK COMMON STOCK ISSUED
- --------------------------------------- --------------- --------------- --------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
DLJ Merchant Banking Partners II, L.P. 90,361 122,386 11,111.1 943,960 9,383,423
BCIP Associates......................... 2,239.503 3,173.428 18,431
BCIP Trust Associates, L.P.............. 111.614 1,047.855 3,948
Tyler Capital Fund, L.P. ............... 33,021.798 31,072.102 218,239
Tyler International, L.P.-II............ 1,979.812 1,862.888 13,084
Tyler Massachusetts, L.P. .............. 6,765.861 6,366.439 44,715
Jeffrey C. Hammes....................... 104.161 98.039 689
Karl E. Lutz............................ 325.528 306.372 2,152
Pearlman Family Partners................ 390.653 367,647 2,582
Thomas Stemberg ........................ 82.700 282
The Marion Trust........................ 1,686.800 5,744
Bankers Trust New York Corporation .... 9,639 32,821
Sigler & Co. ........................... 2,551 8,688
Muico, Inc.............................. 6,426 21,880
Roton, Inc. ............................ 1,890 6,435
USL Capital Corporation................. 1,890 6,435
Bruce L. Weitz.......................... 2,777.775 25,000 203,451
Gary Charboneau......................... 2,777.775 25,000 203,451
Mike Cirilli............................ 138.889 1,250 10,173
Frank DeMarco........................... 138.889 1,250 10,173
Karen Durham............................ 138.889 1,250 10,173
Hyman Needleman......................... 138.889 1,250 10,173
Jerry M. Ray............................ 555.556 5,000 40,690
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------
<S> <C>
1.1** Form of Underwriting Agreement.
3.1(i) Amended and Restated Certificate of Incorporation of the Company.
3.1(ii) Form of Amended and Restated Bylaws of the Company.
4.1** Form of certificate representing shares of Common Stock, $0.01 par value per share.
5.1** Opinion of Latham & Watkins
10.1 Form of Duane Reade Inc. 1997 Equity Participation Plan.
10.2 Duane Reade Holding Corp. 1992 Stock Incentive Plan.
10.3 Employment Agreement, dated as of October 27, 1997, between the Company and Anthony J.
Cuti.
10.4 Employment Agreement, dated as of February 22, 1993, as amended, between the Company and
Gary Charboneau.
10.5 Employment Agreement, dated as of April 10, 1995, as amended, between Duane Reade and
Jerry M. Ray.
10.6 Employment Letter Agreement, dated as of October 9, 1996, between Duane Reade and Joseph
Lacko.
10.7 Employment Letter Agreement, dated as of February 12, 1997, between the Company and
William Tennant.
10.8 Agreement, dated as of November 22, 1996, between Duane Reade and Drug, Chemical,
Cosmetic, Plastics and Affiliated Industries Warehouse Employees Local 815.
10.9 Agreement, dated July 16, 1992, as amended, between Duane Reade and Allied Trades
Council.
II-3
<PAGE>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------
10.10 Agreement, dated February 4, 1997, as amended, between Duane Reade and The Pharmacy Fund,
Inc.
10.11 Indenture, dated as of September 15, 1992, between Duane Reade Holding Corp. and The
Connecticut National Bank, as trustee.
10.12 Indenture, dated as of September 15, 1992, among Duane Reade, Daboco Inc., Duane Reade
Inc. and The Connecticut National Bank, as trustee.
10.13 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.
10.14 Credit Agreement, dated as of September 30, 1997, among Duane Reade, Duane Reade Holding
Corp., Daboco Inc., Duane Reade Inc., various financial institutions, as Lenders, DLJ
Capital Funding, Inc., as Syndication Agent, Fleet National Bank, as Administrative
Agent, and Credit Lyonnais New York Branch, as Documentation Agent.
10.15 Partnership Security Agreement, dated as of September 30, 1997, among Daboco Inc., Duane
Reade Inc. and Fleet National Bank, as Administrative Agent.
10.16 Borrower Security Agreement, dated as of September 30, 1997, between Duane Reade and
Fleet National Bank, as Administrative Agent.
10.17 Parent Pledge Agreement, dated as of September 30, 1997, among Duane Reade Holding Corp.,
Daboco Inc. and Fleet National Bank, as Administrative Agent.
10.18 Underwriting Agreement between the Company and Donaldson, Lufkin & Jenrette Securities
Corporation (incorporated by reference to Exhibit 1.1 to the Company's Form S-1
Registration Statement (File No. 333-43313)).
10.19* Form of Irrevocable Trust Agreement with respect to Senior Notes and Zero Coupon Notes
between the Company and State Street Bank and Trust, as Trustee.
11.1** Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
23.1** Consent of Price Waterhouse LLP.
23.2** Consent of Latham & Watkins (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
27.1** Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
** Filed herewith.
(b) Financial Statement Schedules:
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.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required
by the underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described in Item 14, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
New York, State of New York on February 2, 1998.
DUANE READE INC.
By: /s/ Anthony J. Cuti
-------------------------------
Name: Anthony J. Cuti
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed on February 2, 1998, by the
following persons in the capacities indicated with respect to Duane Reade
Inc.:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- --------------------------- ------------------------------------------------
<S> <C>
/s/ Anthony J. Cuti Chairman, President, Chief Executive Officer and
--------------------------- Director (principal executive officer)
Anthony J. Cuti
* Chief Financial Officer
--------------------------- (principal accounting and financial officer)
William J. Tennant
* Director
---------------------------
Nicole S. Arnaboldi
* Director
---------------------------
David L. Jaffe
* Director
---------------------------
Andrew J. Nathanson
*By: /s/ Anthony J. Cuti
---------------------------
Anthony J. Cuti
Attorney-In-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
The following documents are the exhibits to this Registration Statement on
Form S-1. For convenient reference, each exhibit is listed according to the
Exhibit Table of Regulation S-K. The page number, if any, listed opposite an
exhibit indicates the page number in the sequential numbering system in the
manually signed original of this Registration Statement on Form S-1 where
such exhibit can be found.
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL PAGE
NUMBER EXHIBIT NUMBER
- ----------- -------------------------------------------------------------------------- -------------------
<S> <C> <C>
1.1** Form of Underwriting Agreement.
3.1(i) Amended and Restated Certificate of Incorporation of the Company.
3.1(ii)Form of Amended and Restated Bylaws of the Company.
4.1** Form of certificate representing shares of Common Stock, $0.01 par value
per share.
5.1** Opinion of Latham & Watkins
10.1 Form of Duane Reade Inc. 1997 Equity Participation Plan.
10.2 Duane Reade Holding Corp. 1992 Stock Incentive Plan.
10.3 Employment Agreement, dated as of October 27, 1997, between the Company
and Anthony J. Cuti.
10.4 Employment Agreement, dated as of February 22, 1993, as amended, between
the Company and Gary Charboneau.
10.5 Employment Agreement, dated as of April 10, 1995, as amended, between
Duane Reade and Jerry M. Ray.
10.6 Employment Letter Agreement, dated as of October 9, 1996, between Duane
Reade and Joseph Lacko.
10.7 Employment Letter Agreement, dated as of February 12, 1997, between the
Company and William Tennant.
10.8 Agreement, dated as of November 22, 1996, between Duane Reade and Drug,
Chemical, Cosmetic, Plastics and Affiliated Industries Warehouse Employees
Local 815.
10.9 Agreement, dated July 16, 1992, as amended, between Duane Reade and Allied
Trades Council.
10.10 Agreement, dated February 4, 1997, as amended, between Duane Reade and The
Pharmacy Fund, Inc.
10.11 Indenture, dated as of September 15, 1992, between Duane Reade Holding
Corp. and The Connecticut National Bank, as trustee.
10.12 Indenture, dated as of September 15, 1992, among Duane Reade, Daboco Inc.,
Duane Reade Inc. and The Connecticut National Bank, as trustee.
10.13 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.
<PAGE>
EXHIBIT SEQUENTIAL PAGE
NUMBER EXHIBIT NUMBER
- ----------- -------------------------------------------------------------------------- -------------------
10.14 Credit Agreement, dated as of September 30, 1997, among Duane Reade, Duane
Reade Holding Corp., Daboco Inc., Duane Reade Inc., various financial
institutions, as Lenders, DLJ Capital Funding, Inc., as Syndication Agent,
Fleet National Bank, as Administrative Agent, and Credit Lyonnais New York
Branch, as Documentation Agent.
10.15 Partnership Security Agreement, dated as of September 30, 1997, among
Daboco Inc., Duane Reade Inc. and Fleet National Bank, as Administrative
Agent.
10.16 Borrower Security Agreement, dated as of September 30, 1997, between Duane
Reade and Fleet National Bank, as Administrative Agent.
10.17 Parent Pledge Agreement, dated as of September 30, 1997, among Duane Reade
Holding Corp., Daboco Inc. and Fleet National Bank, as Administrative
Agent.
10.18 Underwriting Agreement between the Company and Donaldson, Lufkin &
Jenrette Securities Corporation (incorporated by reference to Exhibit 1.1
to the Company's Form S-1 Registration Statement (File No. 333-43313)).
10.19** Form of Irrevocable Trust Agreement with respect to Senior Notes and Zero
Coupon Notes between the Company and State Street Bank and Trust, as
Trustee.
11.1** Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
23.1** Consent of Price Waterhouse LLP.
23.2** Consent of Latham & Watkins (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
27.1** Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
** Filed herewith.
<PAGE>
6,700,000 Shares
DUANE READE INC.
Common Stock
UNDERWRITING AGREEMENT
February ___, 1998
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
As representatives of the
several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Duane Reade Inc., a Delaware corporation (the "Company"),
proposes to issue and sell 6,700,000 shares of its common stock, $0.01 par
value per share (the "Firm Shares"), to the several underwriters named in
Schedule I hereto (the "Underwriters"). In addition, certain stockholders of
the Company named in Schedule II hereto (the "Selling Stockholders") propose to
sell to the Underwriters not more than an additional 1,005,000 shares of the
common stock of the Company, $0.01 par value per share (the "Additional
Shares"), in the amount set forth opposite each of such Selling Stockholder's
name in Schedule II hereto, if requested by the Underwriters as provided in
Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter
referred to collectively as the "Shares". The shares of common stock of the
Company to be outstanding after giving effect to the sales contemplated hereby
are hereinafter referred to as the "Common Stock". The Company and the Selling
Stockholders are hereinafter sometimes referred to collectively as the
"Sellers."
<PAGE>
The Company is concurrently executing and delivering to
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") an underwriting
agreement, dated of even date herewith (the "Debt Underwriting Agreement"),
with respect to the sale by the Company to DLJ of $80.0 million aggregate
principal amount of the Company's __% Senior Subordinated Notes due 2008 (the
"Notes").
SECTION 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company
has prepared and filed with the Securities and Exchange Commission (the
"Commission"), in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to
Rule 430A under the Act, is hereinafter referred to as the "Registration
Statement"; and the prospectus in the form first used to confirm sales of
Shares is hereinafter referred to as the "Prospectus". If the Company has filed
or is required pursuant to the terms hereof to file a registration statement
pursuant to Rule 462(b) under the Act registering additional shares of Common
Stock (a "Rule 462(b) Registration Statement"), then, unless otherwise
specified, any reference herein to the term "Registration Statement" shall be
deemed to include such Rule 462(b) Registration Statement.
SECTION 2. AGREEMENTS TO SELL AND PURCHASE; LOCK-UP
AGREEMENTS; QIU. On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Company agrees
to issue and sell, and each Underwriter agrees, severally and not jointly, to
purchase from the Company at a price per Share of $________ (the "Purchase
Price") the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Selling
Stockholders agree to sell the Additional Shares and the Underwriters shall
have the right to purchase, severally and not jointly, up to 1,005,000
Additional Shares from the Selling Stockholders at the Purchase Price.
Additional Shares may be purchased solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. The
Underwriters may exercise their right to purchase Additional Shares in whole or
in part from time to time by giving written notice thereof to the Attorneys (as
hereinafter defined) within 30 days after the date of this Agreement. You shall
give any such notice on behalf of the Underwriters and such notice shall
specify the aggregate number of Additional Shares to be purchased pursuant to
such exercise and the date for payment and delivery thereof, which date shall
be a business day (i) no earlier than two business days after such notice has
been given (and, in any event, no earlier than the Closing Date (as hereinafter
defined)) and (ii) no later than ten business days after such notice has been
given. If any Additional Shares are to be purchased, each Underwriter,
severally and not jointly, agrees
2
<PAGE>
to purchase from the Selling Stockholders the number of Additional Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Selling Stockholders as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I bears to
the total number of Firm Shares.
Each Seller hereby agrees not to (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (ii) enter into any swap or other arrangement that transfers
all or a portion of the economic consequences associated with the ownership of
any Common Stock (regardless of whether any of the transactions described in
clause (i) or (ii) is to be settled by the delivery of Common Stock, or such
other securities, in cash or otherwise), except to the Underwriters pursuant to
this Agreement and the Custody Agreement, for a period of 180 days after the
date of the Prospectus without the prior written consent of DLJ.
Notwithstanding the foregoing, during such period (i) the Company may grant
stock options pursuant to the Company's existing stock option plans and (ii)
the Company may issue shares of Common Stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof. The
Company also agrees not to file any registration statement with respect to any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days after the date of the
Prospectus without the prior written consent of DLJ. The Company shall, prior
to or concurrently with the execution of this Agreement, deliver an agreement
executed by (i) each of the directors and officers of the Company and (ii) each
stockholder listed on Annex I hereto to the effect that such person will not,
during the period commencing on the date such person signs such agreement and
ending 180 days after the date of the Prospectus, without the prior written
consent of DLJ, (A) engage in any of the transactions described in the first
sentence of this paragraph or (B) make any demand for, or exercise any right
with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock.
The Company hereby confirms its engagement of Goldman, Sachs
& Co. ("GS&Co.") as, and GS&Co. hereby confirms its agreement with the Company
to render services as, a "qualified independent underwriter", within the
meaning of Section (b)(15) of Rule 2720 of the National Association of
Securities Dealers, Inc. (the "NASD") with respect to the offering and sale of
the Shares. GS&Co., solely in its capacity as the qualified independent
underwriter and not otherwise, is referred to herein as the "QIU". As
compensation for the services of the QIU hereunder, the Company agrees to pay
the QIU $10,000 on the Closing Date. The price at which the Shares will be sold
to the public shall not be higher than the maximum price recommended by the
QIU.
3
<PAGE>
SECTION 3. TERMS OF PUBLIC OFFERING. The Company is advised
by you that the Underwriters propose (i) to make a public offering of their
respective portions of the Shares as soon after the execution and delivery of
this Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. DELIVERY AND PAYMENT. Delivery to the Underwriters
of and payment for the Firm Shares shall be made at 9:00 A.M., New York City
time, on February__, 1998 (the "Closing Date") at the offices of Latham &
Watkins, 885 Third Avenue, New York, New York 10022 or at such other place as
you shall designate. The Closing Date and the location of delivery of and
payment for the Firm Shares may be varied by agreement between you and the
Company.
Delivery to the Underwriters of and payment for any
Additional Shares to be purchased by the Underwriters shall be made at such
place as you shall designate at 9:00 A.M., New York City time, on the date
specified in the applicable exercise notice given by you pursuant to Section 2
(an "Option Closing Date"). Any such Option Closing Date and the location of
delivery of and payment for such Additional Shares may be varied by agreement
between you and the Company.
The Company authorizes DLJ to register the Shares in the name
of Cede & Co., a nominee of the Depositary Trust Company ("DTC"), or such other
name as DLJ shall determine prior to the Closing Date or an Option Closing
Date, as the case may be. On the Closing Date or the applicable Option Closing
Date, as the case may be, with any transfer taxes thereon duly paid by the
Company against payment to the Company by the several Underwriters of the
Purchase Price for the Shares in immediately available funds, the Company will
cause DTC to credit the Shares to the account of DLJ at DTC for the benefit of
the several Underwriters. Certificates representing the Shares shall be made
available to the Underwriters for inspection not later than 9:30 a.m., New York
City time, on the business day immediately preceding the Closing Date or any
Option Closing Date, as applicable.
SECTION 5. AGREEMENTS OF THE COMPANY. The Company agrees
with you:
(a) To advise you promptly and, if requested by you, to
confirm such advice in writing, (i) of any request by the Commission for
amendments to the Registration Statement or amendments or supplements to the
Prospectus or for additional information, (ii) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of the suspension of qualification of the Shares for offering or
sale in any jurisdiction, or the initiation of any proceeding for such
purposes, (iii) when any amendment to the Registration Statement becomes
effective, (iv) if the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, when the Rule 462(b)
Registration Statement has become effective and (v) of the happening of any
event during the period referred to in Section
4
<PAGE>
5(d) below which makes any statement of a material fact made in the
Registration Statement or the Prospectus untrue or which requires any additions
to or changes in the Registration Statement or the Prospectus in order to make
the statements therein not misleading. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, the Company will use its best efforts to obtain the withdrawal or
lifting of such order at the earliest possible time.
(b) To furnish to you four signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated
by you such number of conformed copies of the Registration Statement as so
filed and of each amendment to it, without exhibits, as you may reasonably
request.
(c) To prepare the Prospectus, the form and substance of
which shall be satisfactory to you, and to file the Prospectus in such form
with the Commission within the applicable period specified in Rule 424(b) under
the Act; during the period specified in Section 5(d) below, not to file any
further amendment to the Registration Statement and not to make any amendment
or supplement to the Prospectus of which you shall not previously have been
advised or to which you shall reasonably object after being so advised; and,
during such period, to prepare and file with the Commission, promptly upon your
reasonable request, any amendment to the Registration Statement or amendment or
supplement to the Prospectus which may be necessary or advisable in connection
with the distribution of the Shares by you, and to use its best efforts to
cause any such amendment to the Registration Statement to become promptly
effective.
(d) Prior to 10:00 A.M., New York City time, on the first
business day after the date of this Agreement and from time to time thereafter
for such period as in the opinion of counsel for the Underwriters a prospectus
is required by law to be delivered in connection with sales by an Underwriter
or a dealer, to furnish in New York City to each Underwriter and any dealer as
many copies of the Prospectus (and of any amendment or supplement to the
Prospectus) as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event
shall occur or condition shall exist as a result of which, in the opinion of
counsel for the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if, in the opinion of counsel for the Underwriters, it is necessary to amend
or supplement the Prospectus to comply with applicable law, forthwith to
prepare and file with the Commission an appropriate amendment or supplement to
the Prospectus so that the statements in the Prospectus, as so amended or
supplemented, will not in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with applicable
law, and
5
<PAGE>
to furnish to each Underwriter and to any dealer as many copies thereof as such
Underwriter or dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate
with you and counsel for the Underwriters in connection with the registration
or qualification of the Shares for offer and sale by the several Underwriters
and by dealers under the state securities or Blue Sky laws of such
jurisdictions as you may request, to continue such registration or
qualification in effect so long as required for distribution of the Shares and
to file such consents to service of process or other documents as may be
necessary in order to effect such registration or qualification; provided,
however, that the Company shall not be required in connection therewith to
qualify as a foreign corporation in any jurisdiction in which it is not now so
qualified or to take any action that would subject it to general consent to
service of process or taxation other than as to matters and transactions
relating to the Prospectus, the Registration Statement, any preliminary
prospectus or the offering or sale of the Shares, in any jurisdiction in which
it is not now so subject.
(g) To mail and make generally available to its stockholders
as soon as practicable an earnings statement covering the twelve-month period
ending February __, 1999 that shall satisfy the provisions of Section 11(a) of
the Act, and to advise you in writing when such statement has been so made
available.
(h) During the period of three years after the date of this
Agreement, to furnish to you as soon as available copies of all reports or
other communications furnished to the record holders of Common Stock or
furnished to or filed with the Commission or any national securities exchange
on which any class of securities of the Company is listed and such other
publicly available information concerning the Company and its subsidiaries as
you may reasonably request.
(i) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or cause to
be paid all expenses incident to the performance of its obligations under this
Agreement, including: (i) the reasonable fees and the disbursements and
expenses of the Company's counsel, the Company's accountants in connection with
the registration and delivery of the Shares under the Act and all other fees
and expenses in connection with the preparation, printing, filing and
distribution of the Registration Statement (including financial statements and
exhibits), any preliminary prospectus, the Prospectus and all amendments and
supplements to any of the foregoing, including the mailing and delivering of
copies thereof to the Underwriters and dealers in the quantities specified
herein, (ii) all costs and expenses related to the transfer and delivery of the
Shares to the Underwriters, including any transfer or other taxes payable
thereon, (iii) all costs of printing or producing this Agreement and any other
agreements or documents in connection with the offering, purchase, sale or
delivery of the Shares, (iv) all expenses in connection with the
6
<PAGE>
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in connection
therewith (including the filing fees and fees and disbursements of counsel for
the Underwriters in connection with such registration or qualification and
memoranda relating thereto), (v) the filing fees and disbursements of counsel
for the Underwriters in connection with the review and clearance of the
offering of the Shares by the NASD, (vi) all fees and expenses in connection
with the preparation and filing of the registration statement on Form 8-A
relating to the Common Stock and all costs and expenses incident to the listing
of the Shares on the New York Stock Exchange (the "NYSE"), (vii) the cost of
printing certificates representing the Shares, (viii) the costs and charges of
any transfer agent, registrar and/or depositary, (ix) the fees and expenses of
the QIU (including the fees and disbursements of counsel to the QIU), and (x)
all other costs and expenses incident to the performance of the obligations of
the Company and the Selling Stockholders hereunder for which provision is not
otherwise made in this Section. The provisions of this Section shall not
supersede or otherwise affect any agreement that the Company and the Selling
Stockholders may otherwise have for allocation of such expenses among
themselves.
(j) To use its best efforts to list, subject to notice of
issuance, the Shares on the NYSE and to maintain the listing of the Shares on
the NYSE for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by the
Company on or prior to the Closing Date or any Option Closing Date, as the case
may be, and to satisfy all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the
effectiveness of this Agreement does not cover all of the Shares, to file a
Rule 462(b) Registration Statement with the Commission registering the Shares
not so covered in compliance with Rule 462(b) by 10:00 P.M., New York City
time, on the date of this Agreement and to pay to the Commission the filing fee
for such Rule 462(b) Registration Statement at the time of the filing thereof
or to give irrevocable instructions for the payment of such fee pursuant to
Rule 111(b) under the Act.
(m) That it will, for so long as any of the Common Stock is
outstanding and if, in the reasonable judgment of any Underwriter (after
consultation with counsel), such Underwriter or any of its affiliates (as
defined in the Act) is required by the Act to deliver a prospectus in
connection with sales of Common Stock, (i) periodically amend the Registration
Statement so that the information contained in the Registration Statement
complies with the requirements of Section 10(a) of the Act, (ii) amend the
Registration Statement or amend or supplement the Prospectus when necessary to
reflect any material changes in the information provided therein and promptly
file such amendment or
7
<PAGE>
supplement with the Commission, (iii) provide such Underwriter with copies of
each amendment or supplement so filed and such other documents, including
opinions of counsel and "comfort" letters, as such Underwriter may reasonably
request and (iv) indemnify such Underwriter and if applicable, contribute to
any amount paid or payable by such Underwriter in a manner substantially
similar to that specified in Section 8 hereof (with appropriate modifications).
(n) That it will, on or as soon as practicable following the
Closing Date, apply the proceeds of the offerings contemplated by this
Agreement and the Debt Underwriting Agreement as set forth in the Prospectus
under the caption "Use of Proceeds".
(o) That it will comply with applicable laws and the rules of
the NASD in connection with the reserved share program described in the
Prospectus under the caption "Underwriting".
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other
than any Rule 462(b) Registration Statement to be filed by the Company after
the effectiveness of this Agreement); any Rule 462(b) Registration Statement
filed after the effectiveness of this Agreement will become effective no later
than 10:00 P.M., New York City time, on the date of this Agreement; and no stop
order suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement (other than any Rule
462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement), when it became effective, did not contain
and, as amended, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) the Registration
Statement (other than any Rule 462(b) Registration Statement to be filed by the
Company after the effectiveness of this Agreement) and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all material
respects with the Act, (iii) if the Company is required to file a Rule 462(b)
Registration Statement after the effectiveness of this Agreement, such Rule
462(b) Registration Statement and any amendments thereto, when they become
effective (A) will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (B) will comply in all material respects
with the Act, and (iv) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances
8
<PAGE>
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in the Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the Act, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in any preliminary prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(d) Each of the Company and its subsidiaries has been duly
organized and is validly existing and in good standing under the laws of its
jurisdiction of incorporation or formation, as the case may be, and has the
corporate or partnership, as the case may be, power and authority to carry on
its business as described in the Prospectus and to own, lease and operate its
properties, and each of the Company and the subsidiaries that are corporations
is duly qualified and is in good standing as a foreign corporation, authorized
to do business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole (a "Material Adverse Effect").
The Company has no subsidiaries except as listed on Exhibit 21 to the
Registration Statement.
(e) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens granted or
issued by the Company or any of its subsidiaries relating to or entitling any
person to purchase or otherwise to acquire any shares of the capital stock (or
other equity ownership or partnership interests) of the Company or any of its
subsidiaries, except as disclosed in the Registration Statement.
(f) All the outstanding shares of capital stock of the
Company (including the Additional Shares to be sold by the Selling
Stockholders) have been duly authorized and validly issued in accordance with
all applicable laws and the Company's certificate of incorporation and by-laws,
and are fully paid, non-assessable and not subject to any preemptive or similar
rights; and the Shares have been duly authorized and, when issued and delivered
to the Underwriters against payment therefor as provided by this
9
<PAGE>
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar
rights.
(g) All of the outstanding shares of capital stock of each of
the Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature. The
Company, through its direct wholly-owned subsidiary Daboco Inc., a New York
corporation ("Daboco"), and Daboco's direct wholly-owned subsidiary DRI I Inc.,
a Delaware corporation ("DRII"), owns all of the partnership interests in Duane
Reade, a New York general partnership ("DR"), free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature except as
set forth in the Prospectus.
(h) The authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the Prospectus in all
material respects.
(i) Neither the Company nor any of its subsidiaries is in
violation of its respective charter, by-laws or partnership agreement, or,
except as could not reasonably be expected to have a Material Adverse Effect,
is in default in the performance of any obligation, agreement, covenant or
condition contained in any indenture, loan agreement, mortgage, lease or other
agreement or instrument that is material to the Company and its subsidiaries,
taken as a whole, to which the Company or any of its subsidiaries is a party or
by which the Company or any of its subsidiaries or any of their respective
property is bound.
(j) The execution, delivery and performance of this Agreement
by the Company, the compliance by the Company with all the provisions hereof
and the consummation of the transactions contemplated hereby (including
application of the proceeds of the offerings contemplated by this Agreement and
the Debt Underwriting Agreement as set forth in the Prospectus under the
caption "Use of Proceeds") will not (i) require any consent, approval,
authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required from the NASD or
under the securities or Blue Sky laws of the various states), (ii) conflict
with, constitute a breach of, default under or accelerate the rights or
obligations of any person or entity under, any provision of the charter,
by-laws or partnership agreement of the Company or any of its subsidiaries or,
except as could not reasonably be expected to have a Material Adverse Effect or
materially adversely effect the ability of the Company and its subsidiaries to
consummate the transactions contemplated hereby, any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to the
Company and its subsidiaries to which the Company or any of its subsidiaries is
a party or by which the Company or any of its subsidiaries or any of their
respective property is bound, (iii) violate or conflict with any applicable law
or any rule, regulation, judgment,
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order or decree of any court or any governmental body or agency having
jurisdiction over the Company, any of its subsidiaries or their respective
property except as could not reasonably be expected to have a Material Adverse
Effect or materially adversely effect the ability of the Company and its
subsidiaries to consummate the transactions contemplated hereby or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
in Section 6(m) below) of the Company or any of its subsidiaries or any other
impairment of the rights of the holder of any such Authorization except as
could not reasonably be expected to have a Material Adverse Effect or
materially adversely effect the ability of the Company and its subsidiaries to
consummate the transactions contemplated hereby.
(k) There are no legal or governmental proceedings pending
or, to the knowledge of the Company, threatened to which the Company or any of
its subsidiaries is or is reasonably likely to be a party or to which any of
their respective property is or is reasonably likely to be subject that are
required to be described in the Registration Statement or the Prospectus and
are not so described; nor are there any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required.
(l) Neither the Company nor any of its subsidiaries has
violated any foreign, federal, state or local law or regulation relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), any
provisions of the Employee Retirement Income Security Act of 1974, as amended,
or any provisions of the Foreign Corrupt Practices Act or the rules and
regulations promulgated thereunder, except for such violations which, singly or
in the aggregate, could not reasonably be expected to have a Material Adverse
Effect. There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or
any Authorization, any related constraints on operating activities and any
potential liabilities to third parties) which could, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
(m) Each of the Company and its subsidiaries has such
permits, licenses, consents, exemptions, franchises, authorizations and other
approvals (each, an "Authorization") of, and has made all filings with and
notices to, all governmental or regulatory authorities and self-regulatory
organizations and all courts and other tribunals, including, without
limitation, under any applicable Environmental Laws, as are necessary to own,
lease, license and operate its respective properties and to conduct its
business, except where the failure to have any such Authorization or to make
any such filing or notice could not, singly or in the aggregate, reasonably be
expected to have a Material Adverse Effect. Each such Authorization is valid
and in full force and effect and each of the Company and its subsidiaries is in
compliance with all the terms and conditions
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thereof and with the rules and regulations of the authorities and governing
bodies having jurisdiction with respect thereto; and no event has occurred
(including, without limitation, the receipt of any notice from any authority or
governing body) which allows or, after notice or lapse of time or both, would
allow, revocation, suspension or termination of any such Authorization or
results or, after notice or lapse of time or both, would result in any other
impairment of the rights of the holder of any such Authorization; and such
Authorizations contain no restrictions that are unreasonably burdensome to the
Company or any of its subsidiaries; except where such failure to be valid and
in full force and effect or to be in compliance, the occurrence of any such
event or the presence of any such restriction could not, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect.
(n) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), together with related schedules and notes, present fairly the
consolidated financial position, results of operations and changes in financial
position of the Company and its subsidiaries on the basis stated therein at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
the periods involved, except as disclosed therein; the supporting schedules, if
any, included in the Registration Statement present fairly in accordance with
generally accepted accounting principles the information required to be stated
therein; and the other financial and statistical information and data set forth
in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) are, in all material respects, accurately presented and
prepared on a basis consistent with such financial statements and the books and
records of the Company. The pro forma financial information and data, and the
related notes thereto, set forth in the Registration Statement and the
Prospectus (and any supplement or amendment thereto) are, in all material
respects, accurately presented and are prepared on a basis consistent with the
historical financial statements of the Company and its subsidiaries.
(o) Price Waterhouse LLP are independent public accountants
with respect to the Company and its subsidiaries as required by the Act.
(p) No relationship, direct or indirect, exists between or
among the Company or any of its subsidiaries on the one hand, and the
directors, officers, stockholders, customers or suppliers of the Company or any
of its subsidiaries on the other hand, which is required by the Act to be
described in the Registration Statement or the Prospectus which is not so
described.
(q) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will
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not be, an "investment company" as such term is defined in the Investment
Company Act of 1940, as amended.
(r) Except as set forth in the Prospectus with respect to the
persons and entities listed on Annex I hereto, each of whom shall deliver the
agreement described in the third paragraph of Section 2 hereof, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares registered
pursuant to the Registration Statement.
(s) Since the respective dates as of which information is
given in the Prospectus other than as set forth in the Prospectus (exclusive of
any amendments or supplements thereto subsequent to the date of this
Agreement), (i) there has not occurred any material adverse change or any
development involving a prospective material adverse change in the condition,
financial or otherwise, or the earnings, business, management or operations of
the Company and its subsidiaries, taken as a whole, (ii) there has not been any
material adverse change or any development involving a prospective material
adverse change in the capital stock or in the long-term debt of the Company or
any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries has incurred any material liability or obligation, direct or
contingent.
(t) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or such
as do not materially interfere with the use made and proposed to be made of
such property by the Company or its subsidiaries, as applicable; and any real
property and buildings held under lease by the Company and its subsidiaries are
held by them under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company and its
subsidiaries, in each case, except as described in the Prospectus.
(u) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all trademarks, service marks, trade names,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures),
patents, patent rights, licenses and inventions (collectively, "intellectual
property") currently employed by them in connection with the business now
operated by them except where the failure to own or possess or otherwise be
able to acquire such intellectual property could not reasonably be expected to,
singly or in the aggregate, have a Material Adverse Effect; and neither the
Company nor any of its subsidiaries has received any notice of infringement of
or conflict with
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<PAGE>
asserted rights of others with respect to any of such intellectual property
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, could reasonably be expected to have a Material Adverse
Effect.
(v) There is no (i) significant unfair labor practice
complaint, grievance or arbitration proceeding pending or, to the knowledge of
the Company, threatened against the Company or any of its subsidiaries before
the National Labor Relations Board or any state or local labor relations board
or (ii) strike, labor dispute, slowdown or stoppage pending or, to the
knowledge of the Company, threatened against the Company or any of its
subsidiaries or, except for such actions specified in clause (i) or (ii) above,
which, singly or in the aggregate, could not reasonably be expected to, have a
Material Adverse Effect.
(w) All material tax returns required to be filed by the
Company and each of its subsidiaries in any jurisdiction have been filed, other
than those filings being contested in good faith, and all material taxes,
including withholding taxes, penalties and interest, assessments, fees and
other charges due pursuant to such returns or pursuant to any assessment
received by the Company or any of its subsidiaries have been paid, other than
those being contested in good faith and for which adequate reserves have been
provided.
(x) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which
they are engaged; and neither the Company nor any of its subsidiaries (i) has
received notice from any insurer or agent of such insurer that substantial
capital improvements or other material expenditures will have to be made in
order to continue such insurance or (ii) has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers at a cost that
could not reasonably be expected to have a Material Adverse Effect.
(y) The Company and each of its subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorizations; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
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(z) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida), or is and at all
relevant times has been duly exempt from complying therewith.
(aa) No "nationally recognized statistical rating
organization" as such term is defined for purposes of Rule 436(g)(2) under the
Act has indicated to the Company or any of its subsidiaries that it is
considering (i) the downgrading, suspension or withdrawal of, or any review for
a possible change that does not indicate the direction of the possible change
in, any rating assigned to the Company or any of its subsidiaries or any
securities of the Company or any of its subsidiaries or (ii) any adverse change
in the outlook for any rating of the Company or any of its subsidiaries or any
securities of the Company or any of its subsidiaries.
(bb) This Agreement and the Debt Underwriting Agreement have
each been duly authorized, executed and delivered by the Company and its
subsidiaries.
(cc) Each certificate signed by any officer of the Company
and delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to the Underwriters
as to the matters covered thereby.
SECTION 7. REPRESENTATIONS AND WARRANTIES AND COVENANTS OF
THE SELLING STOCKHOLDERS. Each Selling Stockholder represents and warrants to
each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the
Additional Shares to be sold by such Selling Stockholder pursuant to this
Agreement and has, and on the Option Closing Date will have, good and clear
title to such Additional Shares, free of all restrictions on transfer, liens,
encumbrances, security interests, equities and claims whatsoever.
(b) The Additional Shares to be sold by such Selling
Stockholder have been duly authorized and are validly issued, fully paid and
non-assessable.
(c) Such Selling Stockholder has, and on the Option Closing
Date will have, full legal right, power and authority, and all authorization
and approval required by law, to enter into this Agreement, the Custody
Agreement signed by such Selling Stockholder and BankBoston, N.A., as
Custodian, relating to the deposit of the Additional Shares to be sold by such
Selling Stockholder (the "Custody Agreement") and the Power of Attorney of such
Selling Stockholder appointing certain individuals as such Selling
Stockholder's attorneys-in-fact (the "Attorneys") to the extent set forth
therein, relating to the transactions contemplated hereby and by the
Registration Statement and the Custody Agreement (the "Power of Attorney") and
to sell, assign, transfer and deliver the Additional Shares to be sold by such
Selling Stockholder in the manner provided herein and therein.
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<PAGE>
(d) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder.
(e) The Custody Agreement of such Selling Stockholder has
been duly authorized, executed and delivered by such Selling Stockholder and is
a valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms.
(f) The Power of Attorney of such Selling Stockholder has
been duly authorized, executed and delivered by such Selling Stockholder and is
a valid and binding instrument of such Selling Stockholder, enforceable in
accordance with its terms, and, pursuant to such Power of Attorney, such
Selling Stockholder has, among other things, authorized the Attorneys, or any
one of them, to execute and deliver on such Selling Stockholder's behalf this
Agreement and any other document that they, or any one of them, may deem
necessary or desirable in connection with the transactions contemplated hereby
and thereby and to deliver the Additional Shares to be sold by such Selling
Stockholder pursuant to this Agreement.
(g) Upon delivery of and payment for the Additional Shares to
be sold by such Selling Stockholder pursuant to this Agreement, good and clear
title to such Additional Shares will pass to the Underwriters, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever.
(h) The execution, delivery and performance of this Agreement
and the Custody Agreement and Power of Attorney of such Selling Stockholder by
or on behalf of such Selling Stockholder, the compliance by such Selling
Stockholder with all the provisions hereof and thereof and the consummation of
the transactions contemplated hereby and thereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the organizational documents of such Selling Stockholder, if such Selling
Stockholder is not an individual, or any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any property of such Selling
Stockholder is bound or (iii) violate or conflict with any applicable law or
any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over such Selling Stockholder
or any property of such Selling Stockholder except in each case as would not
adversely affect the ability of such Selling Stockholder to consummate the
transactions contemplated hereby.
(i) The information in the Registration Statement under the
caption "Principal Stockholders" which specifically relates to such Selling
Stockholder does not, and will not on the Closing Date, contain any untrue
statement of a material fact or omit
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to state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
(j) At any time during the period described in Section 5(d),
if there is any change in the information referred to in Section 7(i), such
Selling Stockholder will immediately notify you of such change.
(k) Each certificate signed by or on behalf of such Selling
Stockholder and delivered to the Underwriters or counsel for the Underwriters
shall be deemed to be a representation and warranty by such Selling Stockholder
to the Underwriters as to the matters covered thereby.
SECTION 8. INDEMNIFICATION. (a) Each of the Company, DRII and
DR hereby jointly and severally agrees to indemnify and hold harmless each
Underwriter, its directors, its officers and each person, if any, who controls
any Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all losses, claims, damages, liabilities and judgments
(including, without limitation, any legal or other expenses incurred in
connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished in writing to the Company by such
Underwriter through you expressly for use therein. Each Selling Stockholder
hereby jointly and severally agrees to indemnify and hold harmless each
Underwriter, its directors, its officers and each person, if any, who controls
any Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act to the same extent as the foregoing indemnity from the Company
to each Underwriter but only with reference to information relating to such
Selling Stockholder furnished in writing to the Company by such Selling
Stockholder expressly for use in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus. Notwithstanding the foregoing, the aggregate liability
of any Selling Stockholder pursuant to this Section 8(a) shall be limited to an
amount equal to the total proceeds (before deducting underwriting discounts and
commissions and expenses) received by such Selling Stockholder from the
Underwriters for the sale of the Additional Shares sold by such Selling
Stockholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement
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and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, each Selling Stockholder and
each person, if any, who controls such Selling Stockholder within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act to the same extent
as the foregoing indemnity from the Company to such Underwriter but only with
reference to information relating to such Underwriter furnished in writing to
the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any
person in respect of which indemnity may be sought pursuant to Section 8(a) or
8(b) (the "indemnified party"), the indemnified party shall promptly notify the
person against whom such indemnity may be sought (the "indemnifying party") in
writing and the indemnifying party shall assume the defense of such action,
including the employment of counsel reasonably satisfactory to the indemnified
party and the payment of all reasonable fees and expenses of such counsel, as
incurred (except that in the case of any action in respect of which indemnity
may be sought pursuant to both Sections 8(a) and 8(b), the Underwriter shall
not be required to assume the defense of such action pursuant to this Section
8(c), but may employ separate counsel and participate in the defense thereof,
but the fees and expenses of such counsel, except as provided below, shall be
at the expense of such Underwriter). Any indemnified party shall have the right
to employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the indemnified party unless (i) the employment of such counsel shall have been
specifically authorized in writing by the indemnifying party, (ii) the
indemnifying party shall have failed to assume the defense of such action or
employ counsel reasonably satisfactory to the indemnified party or (iii) the
named parties to any such action (including any impleaded parties) include both
the indemnified party and the indemnifying party, and the indemnified party
shall have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the indemnifying party (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of the
indemnified party). In any such case, the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all indemnified
parties and all such fees and expenses shall be reimbursed as they are
incurred. Such firm shall be designated in writing by DLJ, in the case of
parties indemnified pursuant to Section 8(a), and by the Company, in the case
of parties indemnified pursuant to Section 8(b). The indemnifying party shall
indemnify and hold harmless the indemnified party from and against any and all
losses, claims, damages, liabilities and judgments by reason of any settlement
of any action (i) effected with its written consent or (ii) effected without
its written consent if the settlement is entered into more than thirty business
days after the indemnifying party shall have received a request
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<PAGE>
from the indemnified party for reimbursement for the fees and expenses of
counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request (or shall
have failed to contest, in good faith, all portions of such fees and expenses
not so reimbursed). No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement or compromise of, or
consent to the entry of judgment with respect to, any pending or threatened
action in respect of which the indemnified party is or could have been a party
and indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability on claims
that are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this
Section 8 is unavailable to an indemnified party or insufficient in respect of
any losses, claims, damages, liabilities or judgments referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause 8(d)(i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 8(d)(i) above
but also the relative fault of the Sellers on the one hand and the Underwriters
on the other hand in connection with the statements or omissions which resulted
in such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand shall be deemed
to be in the same proportion as the total net proceeds from the Offering (after
deducting underwriting discounts and commissions, but before deducting
expenses) received by the Sellers, and the total underwriting discounts and
commissions received by the Underwriters, bear to the total price to the public
of the Shares, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Sellers on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Stockholders, on the one
hand, or the Underwriters and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or
omission.
The Sellers and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 8(d) were
determined by pro rata
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allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
indemnified party in connection with investigating or defending any matter,
including any action, that could have given rise to such losses, claims,
damages, liabilities or judgments. Notwithstanding the provisions of this
Section 8, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such Underwriter has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 8(d) are several in proportion to the
respective number of Shares purchased by each of the Underwriters hereunder and
not joint.
(e) The remedies provided for in this Section 8 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(f) Each Selling Stockholder hereby designates [NAME OF
COMPANY], [ADDRESS OF COMPANY], as its authorized agent, upon which process may
be served in any action which may be instituted in any state or federal court
in the State of New York by any Underwriter, any director or officer of any
Underwriter or any person controlling any Underwriter asserting a claim for
indemnification or contribution under or pursuant to this Section 8, and each
Selling Stockholder will accept the jurisdiction of such court in such action,
and waives, to the fullest extent permitted by applicable law, any defense
based upon lack of personal jurisdiction or venue. A copy of any such process
shall be sent or given to such Selling Stockholder, at the address for notices
specified in Section 13 hereof.
SECTION 9. INDEMNIFICATION OF QIU. (a) Each of the Company,
DRII and DR hereby jointly and severally agrees to indemnify and hold harmless
the QIU, its directors, its officers and each person, if any, who controls the
QIU within the meaning of Section 15 of the Act or Section 20 of the Exchange
Act, from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses incurred
in connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) related to, based upon or arising out of (i) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any
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amendment thereto), the Prospectus (or any amendment or supplement thereto) or
any preliminary prospectus, or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) the QIU's activities as QIU under its
engagement pursuant to Section 2 hereof, except in the case of this clause (ii)
insofar as any such losses, claims, damages, liabilities or judgments are found
in a final judgment by a court of competent jurisdiction, not subject to
further appeal, to have resulted solely from the willful misconduct or gross
negligence of the QIU.
(b) In case any action shall be commenced involving any
person in respect of which indemnity may be sought pursuant to Section 9(a)
(the "QIU Indemnified Party"), the QIU Indemnified Party shall promptly notify
the person against whom such indemnity may be sought (the "QIU Indemnifying
Party") in writing and the QIU Indemnifying Party shall assume the defense of
such action, including the employment of counsel reasonably satisfactory to the
QIU Indemnified Party (which counsel shall not, except with the written consent
of the QIU Indemnified Party, be counsel to the QIU Indemnifying Party) and the
payment of all reasonable fees and expenses of such counsel, as incurred. Any
QIU Indemnified Party shall have the right to employ separate counsel in any
such action and participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of the QIU Indemnified Party unless (i)
the employment of such counsel shall have been specifically authorized in
writing by the QIU Indemnifying Party, (ii) the QIU Indemnifying Party shall
have failed to assume the defense of such action or employ counsel reasonably
satisfactory to the QIU Indemnified Party or (iii) the named parties to any
such action (including any impleaded parties) include both the QIU Indemnified
Party and the QIU Indemnifying Party, and the QIU Indemnified Party shall have
been advised by such counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to
the QIU Indemnifying Party (in which case the QIU Indemnifying Party shall not
have the right to assume the defense of such action on behalf of the QIU
Indemnified Party). In any such case, the QIU Indemnifying Party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all QIU Indemnified
Parties, which firm shall be designated by the QIU, and all such fees and
expenses shall be reimbursed as they are incurred. The QIU Indemnifying Parties
shall indemnify and hold harmless the QIU Indemnified Party from and against
any and all losses, claims, damages, liabilities and judgments by reason of any
settlement of any action (i) effected with its written consent or (ii) effected
without its written consent if the settlement is entered into more than thirty
business days after the QIU Indemnifying Party shall have received a request
from the QIU Indemnified Party for reimbursement for the fees and expenses of
counsel (in any case where such fees and expenses are at the expense of the QIU
Indemnifying Party) and, prior to the date of such settlement, the Company
shall have failed to comply with such reimbursement request (or shall have
failed to contest, in
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good faith, all portions of such fees and expenses not so reimbursed). The QIU
Indemnifying Party shall not, without the prior written consent of the QIU
Indemnified Party, effect any settlement or compromise of, or consent to the
entry of judgment with respect to, any pending or threatened action in respect
of which the QIU Indemnified Party is or could have been a party and indemnity
or contribution may be or could have been sought hereunder by the QIU
Indemnified Party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the QIU Indemnified Party from all liability on
claims that are or could have been the subject matter of such action and (ii)
does not include a statement as to or an admission of fault, culpability or a
failure to act, by or on behalf of the QIU Indemnified Party.
(c) To the extent the indemnification provided for in this
Section 8 is unavailable to a QIU Indemnified Party or insufficient in respect
of any losses, claims, damages, liabilities or judgments referred to therein,
then the QIU Indemnifying Party, in lieu of indemnifying such QIU Indemnified
Party, shall contribute to the amount paid or payable by such QIU Indemnified
Party as a result of such losses, claims, damages, liabilities and judgments
(i) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the QIU on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause 9(c)(i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 9(c)(i) above
but also the relative fault of the Company on the one hand and the QIU on the
other hand in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the QIU on the other hand shall be deemed to be in
the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company as set forth in the table on the
cover page of the Prospectus, and the fee received by the QIU pursuant to
Section 2 hereof, bear to the sum of such total net proceeds and such fee. The
relative fault of the Company on the one hand and the QIU on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
QIU and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission and whether the
QIU's activities as QIU under its engagement pursuant to Section 2 hereof
involved any willful misconduct or gross negligence on the part of the QIU.
The Company and the QIU agree that it would not be just and
equitable if contribution pursuant to this Section 9(c) were determined by pro
rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by a QIU Indemnified Party as a
result of the losses, claims, damages, liabilities or judgments referred to in
the immediately preceding paragraph shall be deemed to include, subject to
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the limitations set forth above, any legal or other expenses incurred by such
QIU Indemnified Party in connection with investigating or defending any matter,
including any action, that could have given rise to such losses, claims,
damages, liabilities or judgments. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
(d) The remedies provided for in this Section 9 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any QIU Indemnified Party at law or in equity.
SECTION 10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The
several obligations of the Underwriters to purchase the Shares under this
Agreement are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b)
Registration Statement after the effectiveness of this Agreement, such Rule
462(b) Registration Statement shall have become effective by 10:00 P.M., New
York City time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or, to the knowledge of the Company, contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate
dated the Closing Date, signed by Anthony J. Cuti and William Tennant, in their
capacities as the President and Chief Executive Officer and Senior Vice
President and Chief Financial Officer, respectively, of the Company, confirming
the matters set forth in Sections 6(s), 10(a) and 10(b) and that the Company
has complied with all of the agreements and satisfied all of the conditions
herein contained and required to be complied with or satisfied by the Company
on or prior to the Closing Date.
(d) Since the respective dates as of which information is
given in the Prospectus other than as set forth in the Prospectus (exclusive of
any amendments or supplements thereto subsequent to the date of this
Agreement), (i) there shall not have occurred any change or any development
involving a prospective change in the condition, financial or otherwise, or the
earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there shall not have been any change or
any development involving a prospective change in the capital stock or in the
long-term debt of the Company or any of its subsidiaries and (iii) neither the
Company nor any of its
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subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 10(d)(i),
10(d)(ii) or 10(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling
Stockholder contained in this Agreement shall be true and correct on the Option
Closing Date with the same force and effect as if made on and as of the Option
Closing Date and you shall have received on the Option Closing Date a
certificate dated the Option Closing Date from each Selling Stockholder to such
effect and to the effect that such Selling Stockholder has complied with all of
the agreements and satisfied all of the conditions herein contained and
required to be complied with or satisfied by such Selling Stockholder on or
prior to the Option Closing Date.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Latham & Watkins, counsel for the Company, to the effect that:
(i) Each of the Company and DRII has been duly
incorporated and is validly existing and is in good standing
under the laws of the state of Delaware, with corporate power
and authority to own, lease and operate their respective
properties and conduct their business as described in the
Prospectus; and DR has been duly formed as a general
partnership under the laws of the state of New York with the
partnership power and authority to own, lease and operate its
properties and conduct its business as described in the
Prospectus;
(ii) each of the Company and its subsidiaries is
duly qualified and is in good standing as a foreign
corporation or partnership, as the case may be, authorized to
do business in each jurisdiction in which the nature of its
business or its ownership or leasing of property requires
such qualification, except where the failure to be so
qualified would not have a Material Adverse Effect;
(iii) all the outstanding shares of capital stock of
the Company (including the Additional Shares to be sold by
the Selling Stockholders) have been duly authorized and
validly issued and are fully paid, non-assessable and, to the
knowledge of such counsel, have not been issued in violation
of any preemptive rights;
(iv) the Shares have been duly authorized and, when
issued and delivered to the Underwriters against payment
therefor as provided by this Agreement, will be validly
issued, fully paid and non-assessable, and, to the
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knowledge of such counsel, the issuance of such Shares will
not be subject to any preemptive rights;
(v) all of the outstanding shares of capital stock
of DRII have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned of record by the
Company, directly or indirectly through one or more
subsidiaries, free and clear of any security interest, claim,
lien, encumbrance or adverse interest of any nature, except
as discussed in the Prospectus; and all of the partnership
interests in DR are owned of record by the Company and DRII,
free and clear of any security interest, claim, lien,
encumbrance or adverse interest of any nature, except as
disclosed in the Prospectus;
(vi) this Agreement has been duly authorized,
executed and delivered by the Company, DRII and DR and by or
on behalf of each of DLJ Merchant Banking Partners II, L.P.,
a ________ limited partnership, and certain of its affiliates
listed in Schedule II hereto;
(vii) the Registration Statement has become
effective under the Act, and to the knowledge of such counsel
no stop order suspending its effectiveness has been issued
under the Act and no proceedings for that purpose are, to the
best of such counsel's knowledge after due inquiry, pending
before by the Commission;
(viii) the statements under the captions "Risk
Factors-Regulatory Matters", "Risk Factors-Shares Eligible
for Future Sale", "Dividend Policy", "Management's Discussion
and Analysis of Financial Condition and Results of
Operations-Tax Benefits From Net Operating Losses",
"Description of Capital Stock", "Shares Eligible for Future
Sale" and "Underwriting" in the Prospectus and Items 14 and
15 of Part II of the Registration Statement, insofar as such
statements constitute a summary of the legal matters,
documents or proceedings referred to therein, are accurate in
all material respects;
(ix) neither the Company nor any of its subsidiaries
is in violation of its respective charter, by-laws or
partnership agreement and, to the best of such counsel's
knowledge after due inquiry, neither the Company nor any of
its subsidiaries is in default in the performance of any
obligation, agreement, covenant or condition contained in any
indenture, loan agreement, mortgage, lease or other agreement
or instrument that is material to the Company and its
subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any
of its subsidiaries or any of their respective property is
bound;
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(x) the execution, delivery and performance of this
Agreement by the Company, DRII and DR, the issuance and sale
of the shares by the Company pursuant to this Agreement and
the consummation of the Refinancing Plan (as such term is
defined in the Prospectus) will not (A) require any consent,
approval, authorization or other order of, or qualification
with, any court or governmental body or agency (except such
as has been obtained or as may be required from the NASD or
under the securities or Blue Sky laws of the various states),
(B) violate the charter or by-laws of the Company or any of
its subsidiaries or the partnership agreement of DR or any
indenture, loan agreement, mortgage, lease or other agreement
or instrument that is material to the Company and its
subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any
of its subsidiaries or any of their respective property is
bound or (C) violate or conflict with any applicable federal
or New York statute, law, rule, regulation, judgment, order
or decree of any court or any governmental body or agency
having jurisdiction over the Company, any of its subsidiaries
or their respective property;
(xi) such counsel does not know of any legal or
governmental proceedings pending or threatened to which the
Company or any of its subsidiaries is or could be a party or
to which any of their respective property is or could be
subject that are required to be described in the Registration
Statement or the Prospectus and are not so described, or of
any statutes, regulations, contracts or other documents that
are required to be described in the Registration Statement or
the Prospectus or to be filed as exhibits to the Registration
Statement that are not so described or filed as required;
(xii) the Company is not and, after giving effect to
the offering and sale of the Shares and the application of
the proceeds thereof as described in the Prospectus, will not
be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended;
(xiii) to the best of such counsel's knowledge after
due inquiry, except as disclosed in the Registration
Statement, there are no contracts, agreements or
understandings between the Company and any person granting
such person the right to require the Company to file a
registration statement under the Act with respect to any
securities of the Company or to require the Company to
include such securities with the Shares registered pursuant
to the Registration Statement; and
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(xiv) the Registration Statement and the Prospectus
comply as to form in all material respects with the
requirements for registration statements on Form S-1 under
the Act; it being understood, however, that such counsel
expresses no opinion with respect to the financial data
included in the Registration Statement or the Prospectus.
In addition, such counsel has participated in
conferences with officers and other representatives of the
Company, representatives of the independent public
accountants for the Company, and your representatives, at
which the contents of the Registration Statement and
Prospectus and related matters were discussed and, although
such counsel is not passing upon, and do not assume any
responsibility for, the accuracy, completeness or fairness of
the statements contained in the Registration Statement or
Prospectus and have not made any independent check or
verification thereof, during the course of such
participation, no facts came to such counsel's attention that
caused such counsel to believe that the Registration
Statement, at the time it became effective, contained an
untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the
Prospectus, as of its date and as of the Closing Date,
contained an untrue statement of a material fact or omitted
to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they
were made, not misleading, it being understood that such
counsel need not express any belief with respect to the
financial statements or other financial data included in the
Registration Statement or the Prospectus.
The opinion of Latham & Watkins described in Section 10(f)
above shall be rendered to you at the request of the Company and shall so state
therein.
(g) You shall have received on the Closing Date an opinion,
dated the Closing Date, of Weil, Gotshal & Manges LLP, counsel for the
Underwriters, as to the matters referred to in Sections 10(f)(iv), 10(f)(vi)
(but only with respect to the Company), (10)(f)(viii) (but only with respect to
the statements under the caption "Description of Capital Stock" and
"Underwriting") and 10(f)(xiv).
In giving such opinions with respect to the matters covered
by Section 10(f) and 10(g), respectively, Latham & Watkins and Weil, Gotshal &
Manges LLP may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
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(h) You shall have received on the Option Closing Date an
opinion or opinions (satisfactory to you and counsel for the Underwriters),
dated the Option Closing Date, of counsel for each of the Selling Stockholders,
to the effect that:
(i) such Selling Stockholder is the lawful owner of
the Additional Shares to be sold by such Selling Stockholder
pursuant to this Agreement and has good and clear title to
such Additional Shares, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims
whatsoever;
(ii) such Selling Stockholder has full legal right,
power and authority, and all authorization and approval
required by law, to enter into this Agreement and the Custody
Agreement and the Power of Attorney of such Selling
Stockholder and to sell, assign, transfer and deliver the
Additional Shares to be sold by such Selling Stockholder in
the manner provided herein and therein;
(iii) the Custody Agreement of such Selling
Stockholder has been duly authorized, executed and delivered
by such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in
accordance with its terms;
(iv) the Power of Attorney of each Selling
Stockholder has been duly authorized, executed and delivered
by such Selling Stockholder and is a valid and binding
instrument of such Selling Stockholder, enforceable in
accordance with its terms, and, pursuant to such Power of
Attorney, such Selling Stockholder has, among other things,
authorized the Attorneys, or any one of them, to execute and
deliver on such Selling Stockholder's behalf this Agreement
and any other document they, or any one of them, may deem
necessary or desirable in connection with the transactions
contemplated hereby and thereby and to deliver the Additional
Shares to be sold by such Selling Stockholder pursuant to
this Agreement;
(v) upon delivery of and payment for the Additional
Shares to be sold by such Selling Stockholder pursuant to
this Agreement, good and clear title to such Additional
Shares will pass to the Underwriters, free of all
restrictions on transfer, liens, encumbrances, security
interests, equities and claims whatsoever; and
(vi) the execution, delivery and performance of this
Agreement and the Custody Agreement and Power of Attorney of
such Selling Stockholder by such Selling Stockholder, the
compliance by such Selling Stockholder
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with all the provisions hereof and thereof and the
consummation of the transactions contemplated hereby and
thereby will not (A) require any consent, approval,
authorization or other order of, or qualification with, any
court or governmental body or agency (except such as has been
obtained or as may be required from the NASD or under the
securities laws or Blue Sky laws of the various states), (B)
violate the organizational documents of such Selling
Stockholder, if such Selling Stockholder is not an
individual, or any indenture, loan agreement, mortgage, lease
or other agreement or instrument to which such Selling
Stockholder is a party or by which any property of such
Selling Stockholder is bound or (C) violate or conflict with
any federal or New York State statute, law, regulation,
judgment, order or decree of any court or any governmental
body or agency having jurisdiction over such Selling
Stockholder or any property of such Selling Stockholder.
(i) Daboco shall have merged with and into the Company.
(j) You shall have received, on each of the date hereof and
the Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to you, from Price Waterhouse
LLP, independent public accountants, containing the information and statements
of the type ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
(k) The Company shall have delivered to you the agreements
specified in Section 2 hereof which agreements shall be in full force and
effect on the Closing Date.
(l) The Shares shall have been listed, subject to notice
of issuance, on the NYSE.
(m) The Company shall not have failed on or prior to the
Closing Date to perform or comply with any of the agreements herein contained
and required to be performed or complied with by the Company on or prior to the
Closing Date.
(n) On or after the date hereof, (i) there shall not have
occurred any downgrading, suspension or withdrawal of, nor shall any notice
have been given of any potential or intended downgrading, suspension or
withdrawal of, or of any review (or of any potential or intended review) for a
possible change that does not indicate the direction of the possible change in,
any rating of any securities of the Company or any of its subsidiaries
(including, without limitation, the placing of any of the foregoing ratings on
credit watch with negative or developing implications or under review with an
uncertain direction) by any "nationally recognized statistical rating
organization" as such term is defined for purposes of Rule 436(g)(2) under the
Act and (ii) there shall not have occurred
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any adverse change, nor shall any notice have been given of any potential or
intended change, in the outlook for any rating of the Company or any of its
subsidiaries or any securities of the Company or any of its subsidiaries.
(o) The closing under the Debt Underwriting Agreement shall
have occurred and the Company shall have (A) issued and sold to DLJ, and DLJ
shall have purchased from the Company, the Notes pursuant to the terms of the
Debt Underwriting Agreement, (B) entered into the New Credit Agreement (as
defined in, and on the terms described in, the Prospectus), and (C) to your
reasonable satisfaction, established the defeasance account and made such
arrangements with respect to the repayment of its outstanding indebtedness with
the proceeds of the sale of the Shares and the Notes as described in the
Prospectus under the caption "Use of Proceeds".
The several obligations of the Underwriters to purchase any
Additional Shares hereunder are subject to the delivery to you on the
applicable Option Closing Date of such documents as you may reasonably request
with respect to the good standing of the Company, the due authorization of such
Additional Shares and other matters related to such Additional Shares.
SECTION 11. EFFECTIVENESS OF AGREEMENT AND TERMINATION.
This Agreement shall become effective upon the execution and delivery of this
Agreement by the parties hereto.
This Agreement may be terminated at any time on or prior to
the Closing Date by you by written notice to the Sellers if any of the
following has occurred: (i) any outbreak or escalation of hostilities or other
national or international calamity or crisis or change in economic conditions
or in the financial markets of the United States or elsewhere that, in your
judgment, is material and adverse and, in your judgment, makes it impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus, (ii) the suspension or material limitation of trading in securities
or other instruments on the NYSE, the American Stock Exchange, the Chicago
Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board
of Trade or the Nasdaq National Market or limitation on prices for securities
or other instruments on any such exchange or the Nasdaq National Market, (iii)
the suspension of trading of any securities of the Company on any exchange or
in the over-the-counter market, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of any court or other governmental authority which in the judgment of the
Underwriters causes, or will cause a Material Adverse Effect, (v) the
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
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If on the Closing Date or on an Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase the Firm Shares or Additional Shares, as the case may be, which it has
or they have agreed to purchase hereunder on such date and the aggregate number
of Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not
more than one-tenth of the total number of Firm Shares or Additional Shares, as
the case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion
which the number of Firm Shares set forth opposite its name in Schedule I bears
to the total number of Firm Shares which all the non-defaulting Underwriters
have agreed to purchase, or in such other proportion as you may specify, to
purchase the Firm Shares or Additional Shares, as the case may be, which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date; provided that in no event shall the number of Firm Shares or
Additional Shares, as the case may be, which any Underwriter has agreed to
purchase pursuant to Section 2 hereof be increased pursuant to this Section 11
by an amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Firm Shares to be purchased by all Underwriters and arrangements satisfactory
to you and the Company for purchase of such Firm Shares are not made within 48
hours after such default, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter and the Company. In any such case
which does not result in termination of this Agreement, either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or
arrangements may be effected. If, on an Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased on such date, the non-defaulting Underwriters shall have the option
to (i) terminate their obligation hereunder to purchase such Additional Shares
or (ii) purchase not less than the number of Additional Shares that such
non-defaulting Underwriters would have been obligated to purchase on such date
in the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
any such Underwriter under this Agreement.
SECTION 12. AGREEMENTS OF THE SELLING STOCKHOLDERS. Each
Selling Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable
in connection with the transfer of the Additional Shares to be sold by such
Selling Stockholder to the Underwriters.
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(b) To do and perform all things to be done and performed by
such Selling Stockholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Additional Shares to be
sold by such Selling Stockholder pursuant to this Agreement.
SECTION 13. MISCELLANEOUS. Notices given pursuant to any
provision of this Agreement shall be addressed as follows: (i) if to the
Company, to Duane Reade Inc., 440 Ninth Avenue, New York, New York 10001,
Attention: Chief Executive Officer, (ii) if to the Selling Stockholders, to
[NAME OF ATTORNEY-IN-FACT] c/o [ADDRESS OF ATTORNEY-IN-FACT] and (iii) if to
any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities
Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate
Department, or in any case to such other address as the person to be notified
may have requested in writing.
The respective indemnities, contribution agreements,
representations, warranties and other statements of the Company, the Selling
Stockholders and the several Underwriters set forth in or made pursuant to this
Agreement shall remain operative and in full force and effect, and will survive
delivery of and payment for the Shares, regardless of (i) any investigation, or
statement as to the results thereof, made by or on behalf of any Underwriter,
the officers or directors of any Underwriter, any person controlling any
Underwriter, any QIU Indemnified Party, the Company, the officers or directors
of the Company, any person controlling the Company, any Selling Stockholder or
any person controlling such Selling Stockholder, (ii) acceptance of the Shares
and payment for them hereunder and (iii) termination of this Agreement.
If for any reason the Shares are not delivered by or on
behalf of any Seller as provided herein (other than as a result of any
termination of this Agreement pursuant to Section 11), the Sellers agree to
reimburse the several Underwriters for all out-of-pocket expenses (including
the reasonable fees and disbursements of counsel) incurred by them.
Notwithstanding any termination of this Agreement, the Company shall be liable
for all expenses which it has agreed to pay pursuant to Section 5(i) hereof.
The Sellers also agree, jointly and severally, to reimburse the several
Underwriters, their directors and officers, any persons controlling any of the
Underwriters, and the QIU Indemnified Parties for any and all fees and expenses
(including, without limitation, the fees disbursements of counsel) incurred by
them in connection with enforcing their rights hereunder (including, without
limitation, pursuant to Sections 8 and 9 hereof).
Except as otherwise provided, this Agreement has been and is
made solely for the benefit of and shall be binding upon the Company, the
Underwriters, the Selling Stockholders, the Underwriters' directors and
officers, any controlling persons referred to herein, the QIU Indemnified
Parties, the Company's directors and the Company's officers who sign the
Registration Statement and their respective successors and assigns, all as and
to the extent provided in this Agreement, and no other person shall acquire or
have any
32
<PAGE>
right under or by virtue of this Agreement. The term "successors and assigns"
shall not include a purchaser of any of the Shares from any of the several
Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance
with the laws of the State of New York.
This Agreement may be signed in various counterparts which
together shall constitute one and the same instrument.
[signature pages follow]
33
<PAGE>
Please confirm that the foregoing correctly sets forth the
agreement between the Company, the Selling Stockholders and the several
Underwriters.
Very truly yours,
DUANE READE INC.
By: ______________________________
Name:
Title:
Agreed, with respect to
Sections 7, 8 and 11:
DRI I INC.
By: ______________________________
Name:
Title:
DUANE READE
By: Daboco Inc., a general partner
By: _______________________________
Name:
Title:
By: DRI I Inc., a general partner
By: ___________________________
Name:
Title:
34
<PAGE>
By: __________________________________
Title:
THE SELLING STOCKHOLDERS
NAMED IN SCHEDULE II HERETO,
ACTING SEVERALLY
By ________________________________
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
Acting severally on behalf of themselves
and the several Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: _______________________________________
Name:
Title:
35
<PAGE>
SCHEDULE I
Number of Firm Shares
Underwriters to be Purchased
- ------------ ----------------------
Donaldson, Lufkin & Jenrette
Securities Corporation
Goldman, Sachs & Co.
Smith Barney Inc.
[Other Underwriters]
Total
36
<PAGE>
SCHEDULE II
Selling Stockholders
Number of Additional Shares
Selling Stockholders to be Sold
- -------------------- ---------------------------
DLJ Merchant Banking Partners II,
L.P. on behalf of itself and the following related
investors:
o DLJ Merchant Banking Partners II-A, L.P.
o DLJ Offshore Partners II, C.V.
o DLJ Diversified Partners, L.P.
o DLJ Diversified Partners-A, L.P.
o DLJMB Funding II, Inc.
o DLJ Millennium Partners, L.P.
o DLJ Millennium-A, L.P.
o DLJ EAB Partners, L.P.
o UK Investment Plan 1997 Partners
o DLJ First ESC L.P.
[Name of other Selling Stockholders]
Total
37
<PAGE>
Annex I
[Stockholders of the Company who will be required to sign lock-ups]
38
<PAGE>
TEMPORARY CERTIFICATE-EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE
WHEN READY FOR DELIVERY
NUMBER SHARES
[DUANE READE LOGO]
TDR DUANE READE INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS
IN BOSTON, MA OR NEW YORK, NY CUSIP 263578 10 6
THIS CERTIFIES THAT
is the owner of:
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF
- -------------------------------DUANE READE INC.--------------------------------
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this Certificate properly
endorsed.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ HYMAN NEEDLEMAN DUANE READE INC. /s/ ANTHONY J. CUTI
SECRETARY CORPORATE CHAIRMAN, PRESIDENT
SEAL AND CHIEF EXECUTIVE
1992 OFFICER
DELAWARE
Countersigned and Registered
BANKBOSTON, N.A.
Transfer Agent
and Registrar
By /s/ AUTHORIZED SIGNATORY
Authorized Signature
<PAGE>
DUANE READE INC.
The Company will furnish without charge to each stockholder, the powers,
designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and or rights.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _________Custodian___________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act ________________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------
- ------------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________________________shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________Attorney
to transfer the said stock on the books of the within named Company with full
power of substitution in the premises.
Dated __________________________
_________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
______________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS,
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
[LETTERHEAD OF LATHAM & WATKINS]
February 2, 1998
Duane Reade Inc.
440 Ninth Avenue
New York, New York 10001
Re: Registration Statement No. 333-41239; up to
7,705,000 shares of Common Stock, par vale $.01 per share
---------------------------------------------------------
Ladies and Gentlemen:
In connection with the registration of up to 7,705,000 shares of common
stock of Duane Reade Inc., a Delaware corporation (the "Company"), par value
$.01 per share (the "Shares"), under the Securities Act of 1933, as amended
(the "Act") on a registration statement on Form S-1 filed with the Securities
and Exchange Commission (the "Commission") on November 28, 1997 (File
No. 333-41239), as amended by Amendment No. 1 filed with the Commission on
January 15, 1998 and by Amendment No. 2 filed with the Commission on
February 2, 1998 (collectively, the "Registration Statement") of which
6,700,000 Shares are to be offered by the Company (together with additional
Shares, if any, to be offered by the Company and registered pursuant to Rule
462(b) of the Act, the "Company Shares") and up to 1,005,000 Shares may be
offered by certain selling stockholders of the Company pursuant to an over-
allotment option granted to the underwriters (together with additional Shares,
if any, to be offered by such selling stockholders and registered pursuant to
Rule 462(b) of the Act, the "Selling Stockholder Shares"), you have requested
our opinion with respect to the matters set forth below.
In our capacity as your counsel in connection with such registration, we
are familiar with the proceedings taken and proposed to be taken by the
Company in connection with
<PAGE>
Duane Reade Inc.
February 2, 1998
Page 2
the authorization, issuance and sale of the Shares, and for the purposes of
this opinion, have assumed such proceedings will be timely completed in the
manner presently proposed. In addition, we have made such legal and factual
examinations and inquiries, including an examination of originals or copies
certified or otherwise identified to our satisfaction of such documents,
corporate records and instruments, as we have deemed necessary or appropriate
for purposes of this opinion.
In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity
to authentic original documents of all documents submitted to us as copies.
We are opining herein as to the effect on the subject transaction only of
the General Corporation Law of the State of Delaware, and we express no opinion
with respect to the applicability thereto, or the effect thereon, of any other
laws or the laws of any other jurisdiction, or as to any matters of municipal
law or the laws of any other local agencies within the state.
Subject to the foregoing, it is our opinion that (i) the Company Shares
have been duly authorized, and, upon issuance, delivery and payment therefor
in the manner contemplated by the Registration Statement, will be validly
issued, fully paid and nonassessable and (ii) the Selling Stockholder Shares
have been duly authorized and are validly issued, fully paid and nonassessable.
We consent to your filing this opinion as an exhibit to the Registration
Statement and any registration statement for the same offering covered by the
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) under the Act and to the reference to our firm contained under the
heading "Legal Matters."
Very truly yours,
/s/ Latham & Watkins
<PAGE>
===============================================================================
FORM OF
IRREVOCABLE TRUST AGREEMENT
BETWEEN
DUANE READE INC.
AND
STATE STREET BANK AND TRUST COMPANY
OF CONNECTICUT, N.A.
AS IRREVOCABLE TRUSTEE
---------------
FEBRUARY __, 1998
===============================================================================
<PAGE>
IRREVOCABLE TRUST AGREEMENT, dated as of February __, 1998
(the "Agreement"), between Duane Reade Inc., a Delaware corporation (the
"Company"), and ("State Street").
WITNESSETH:
WHEREAS, the Company has heretofore entered into an
indenture dated as of September 15, 1992 by and among the Company (formerly
Duane Reade Holding Corp.), and State Street as indenture trustee (formerly
The Connecticut National Bank) (the "Indenture Trustee") (the "Indenture")
(defined terms used herein and not otherwise defined herein have the meanings
set forth in the Indenture);
WHEREAS, pursuant to, and governed by the terms of, the
Indenture, the Company currently has outstanding _____________ in aggregate
principal amount at maturity of its __________ Notes due September 15, 200__
(the "Notes");
WHEREAS, the Company desires to create an irrevocable trust
pursuant to Sections 1301(b) and 1302 of the Indenture to hold as trust funds
in trust U.S Government Obligations (the "Defeasance Fund"), sufficient to
provide for the payment and discharge of the principal of, premium and
interest on, the Notes on March __, 1998 in accordance with the terms of the
Indenture and the Notes (the "Payment Obligations"), for the purpose of
releasing and discharging the Company from its obligations under certain
covenants (the "Defeasance"), as more particularly set forth in Article Eight
of the Indenture;
WHEREAS, State Street has full power and authority to
execute this Agreement and to accept the trust imposed upon it;
NOW, THEREFORE, in consideration of the mutual promises
herein contained, the parties hereto hereby agree as follows:
ARTICLE I
APPOINTMENT OF IRREVOCABLE TRUSTEE
1.1 Appointment of Irrevocable Trustee. The Company hereby
appoints State Street as trustee hereunder (the "Irrevocable Trustee"), and
the Irrevocable Trustee accepts the trust created by this Agreement upon the
terms and conditions contained herein.
ARTICLE II
DEPOSIT
2.1 Deposit of U.S. Government Obligations. The Company
hereby irrevocably deposits with the Irrevocable Trustee as trust funds in
trust the [amount of cash in U.S. Legal Tender (the "Cash")] U.S. Government
Obligations set forth on Schedule 1 hereto to provide for the Payment
1
<PAGE>
Obligations in accordance with the terms of the Indenture and the Irrevocable
Trustee hereby acknowledges receipt of the cash identified on Schedule 1
hereto. The Defeasance Fund deposited with the Irrevocable Trustee shall be
held in trust and applied by the Irrevocable Trustee in accordance with the
provisions of the Indenture and the Notes, to the payment, either directly or
through any Paying Agent (including the Company or any of its Subsidiaries
acting as its own Paying Agent) as the Irrevocable Trustee may determine, to
the Holders of such Notes of all sums due and to become due thereon in respect
of the Payment Obligations.
2.2 Redemption. The Company hereby instructs the Irrevocable
Trustee to call the Notes for redemption on March __, 1998.
[2.3 Pledge and Security Agreement. The Company hereby
instructs the Irrevocable Trustee to enter into the Pledge and Security
Agreement of even date herewith for the benefit of the holders of the Notes.]
ARTICLE III
THE TRUST ESTATE
3.1 Assignment of Rights and Interests. With respect to the
Notes, there is hereby created and established with the Irrevocable Trustee a
special and irrevocable trust (the "Trust") to be held by the Irrevocable
Trustee separate and apart from all other assets of the Company or the
Irrevocable Trustee. The Company hereby transfers and assigns to the
Irrevocable Trustee and its successors, in trust, for the purposes herein
specified, all right, title and interest of the Company in and to the
Defeasance Fund for the benefit of Holders of the Notes. The Defeasance Fund
held in trust hereunder as well as any interest or other payments received
thereon by the Irrevocable Trustee are hereinafter referred to as the "Trust
Estate."
The Irrevocable Trustee shall deposit into the Trust Estate,
as and when received by the Irrevocable Trustee, the Defeasance Fund and any
interest or other payments received thereon.
3.2 Purpose of Trust. The Trust is established for the
purpose of satisfying the Company's obligations in respect of the Defeasance
as provided in Section 8.01 of the Indenture.
3.3 Administration of Trust Estate. Interest and other
payments deposited in the Trust Estate after the date hereof shall be held by
the Irrevocable Trustee in the Trust Estate and used to satisfy the Payment
Obligations. If for any reason the Defeasance Fund is insufficient to satisfy
the Payment Obligations, and the Company does not correct such deficiency
within 15 days after notice by the Irrevocable Trustee, the Irrevocable
Trustee may [sell the U.S. Government Obligations as set forth in that certain
Pledge and Security Agreement of even date herewith between the Company and
the Irrevocable Trustee.]
3.4 Defeasance Funds. Any Defeasance Funds that are a part
of the Trust Estate that are in excess of the amounts necessary to satisfy the
Payment Obligations shall be paid to the Company from, and free of, the Trust
in accordance with Section 8.05 of the Indenture.
2
<PAGE>
ARTICLE IV
THE IRREVOCABLE TRUSTEE
4.1 Limitations on Liability. (a) The duties and obligations
of the Irrevocable Trustee shall be determined solely by the express
provisions of this Agreement, and the Irrevocable Trustee shall not be liable
except for the performance of such duties and obligations as are specifically
set forth in this Agreement. The liability of the Irrevocable Trustee for the
payment to Holders of the Notes shall be limited to the application of the
Defeasance Fund. This Agreement does not substitute the Irrevocable Trustee as
the obligor on the Notes.
(b) The Irrevocable Trustee may rely, and shall be
protected in acting or refraining from acting upon, any direction,
certificate, statement or other paper or document believed by it to be genuine
and to have been signed or presented by the proper person or persons.
(c) The Irrevocable Trustee may consult with counsel
and any written opinion of such counsel shall be full and complete
authorization and protection in respect of any action taken or suffered or
omitted by the Irrevocable Trustee hereunder in good faith and in accordance
with such opinion of counsel.
(d) The Irrevocable Trustee shall not be liable for
any action it takes or omits to take in good faith which it believes to be
authorized or within the rights or powers conferred upon it by this Agreement.
(e) The Irrevocable Trustee may execute any of the
trust powers hereunder and perform any duties hereunder either directly or by
or through its agents or attorneys-in-fact.
(f) The Irrevocable Trustee shall have no duty with
respect to amounts payable to it in respect of the Trust Estate other than to
receive them and to apply the amounts actually received in accordance with
this Agreement. The Irrevocable Trustee shall not be obligated to take legal
action to enforce the payment obligations of the issuers of any securities in
the Trust Estate. The Company may, after 10 days' written notice to the
Irrevocable Trustee, enforce any such obligations, in the Company's name or in
the Irrevocable Trustee's name, at the Company's sole expense.
(g) The Irrevocable Trustee shall not be under any
duty in respect of any tax or assessment or other governmental charge which
may be levied or assessed on the Trust Estate or any part thereof or against
the Company.
(h) The Irrevocable Trustee shall not be required to
post any bond or other security or risk any funds in connection with its
duties as Irrevocable Trustee hereunder.
[(i) The Irrevocable Trustee shall not be liable for
any loss resulting from any investment made pursuant to the terms of this
Agreement, except as otherwise provided by Section 4.1(d) hereof.]
4.2 Indemnification. The Company agrees to indemnify, defend
and hold harmless the Irrevocable Trustee and its successors from and against
any and all liabilities, losses, damages, penalties, claims, actions, suits,
costs, expenses and disbursements (including reasonable legal fees and
expenses) of whatsoever kind and nature, which may be imposed on, incurred by
or asserted against, at
3
<PAGE>
any time, the Irrevocable Trustee, arising from or out of the execution,
delivery or administration, of this Agreement (including, without limitation,
the establishment of the Trust Estate, the acceptance of the cash, securities
or other assets deposited therein, the sufficiency of the Defeasance Fund, the
retention of the Defeasance Fund or the proceeds thereof and any payment,
transfer or other application of securities or cash by the Irrevocable Trustee
in accordance with the provisions of this Agreement or as may arise by reason
of any act, omission or error of the Irrevocable Trustee made in good faith in
the conduct of its duties hereunder) except for those caused by its own
negligence or bad faith. The obligations of the Company to indemnify the
Irrevocable Trustee pursuant to this paragraph shall survive the termination
of this Agreement. The Irrevocable Trustee shall have no right to obtain
payment from the Trust Estate of amounts owing to the Irrevocable Trustee
pursuant to this Section 4.2.
4.3 Compensation of the Irrevocable Trustee. In
consideration of the service rendered by the Irrevocable Trustee under this
Agreement, the Company agrees to and shall pay to the Irrevocable Trustee
reasonable compensation as agreed from time to time between the Irrevocable
Trustee and the Company. The Irrevocable Trustee shall be reimbursed upon its
request for all of its reasonable expenses, disbursements and advances
incurred by it as Irrevocable Trustee with respect to the Trust Estate
(including the reasonable compensation and the expenses and disbursements of
its agents and counsel). The Irrevocable Trustee shall have no right to obtain
payment of its fees and expenses hereunder from the Trust Estate. The
provisions of this Section 4.3 shall survive the termination of this
Agreement.
4.4 Authorization to Hold Funds. The Irrevocable Trustee is
authorized to hold U.S. Government Obligations and cash exclusively or in any
combination or proportion, and shall have no liability to any Holder of Notes
for purchasing, holding, or failing to dispose of U.S. Government Obligations
or cash.
ARTICLE V
MISCELLANEOUS
5.1 Termination. This Agreement shall terminate upon the
earlier of (a) September 15, 2004, and (b) payment by the Irrevocable Trustee
to the Holders of the Notes of the final sum due on the Notes in respect of
the Payment Obligations, or upon receipt by the Irrevocable Trustee of notice
from the Indenture Trustee that the Company has discharged its obligations
with respect to the Notes under the Indenture, whether by payment in full,
defeasance, redemption, or any other reason. Upon termination of this
Agreement subject to Section 4.3, any cash, securities or other assets
remaining in the Trust Estate shall be transferred promptly to the Company.
5.2 Effect On Indenture and Notes. Except as expressly
provided in the Indenture, this Agreement (and the consummation of the
transactions contemplated hereby) is not, and shall not be construed to be, a
termination of the Indenture, nor shall it alter any provision of the Notes.
4
<PAGE>
5.3 Notices. All instruction, notices and other
communications shall be given by mail, addressed as follows:
In the case of the Company:
Duane Reade Inc.
440 Ninth Avenue
New York, New York
Attention: Chief Executive Officer
In the case of the Irrevocable Trustee:
State Street Bank and Trust Company
of Connecticut, N.A.
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
Attention: Corporate Trust Department
or at any other address furnished in writing by either of the parties hereto.
5.4 Counterparts. This Agreement may be executed in any
number of counterparts, each of which so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same instrument.
5.5 Severability. The provisions of this Agreement are
severable, and if any clause or provision shall be held invalid or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect only such clause or provision, or part thereof,
in such jurisdiction and shall not in any manner affect such clause or
provision in any other jurisdiction, or any other clause or provision of this
Agreement in any jurisdiction.
5.6 Validity of Trust. The validity of the trust created
hereby shall be governed by the internal laws of the State of New York.
5
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first written above.
DUANE READE INC.
By:
----------------------------
Its:
---------------------------
STATE STREET BANK AND TRUST
COMPANY OF CONNECTICUT, N.A.
225 Asylum Street, 23rd Floor
Hartford, Connecticut 06103
as Irrevocable Trustee
By:
----------------------------
Its:
---------------------------
S-1
<PAGE>
DUANE READE HOLDING CORP. EXHIBIT 11.1
EARNINGS PER SHARE
<TABLE>
<CAPTION>
MONTHS SHARES WEIGHTED WEIGHTED AVERAGE NET NET LOSS
OUTSTANDING OUTSTANDING SHARES SHARES LOSS PER SHARE
------------- ------------- ------------ ---------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
52 WEEKS ENDED DECEMBER 31, 1994
- --------------------------------
Balance at 1/2/94....................... 12 10,154,041 121,848,492 10,154,041
Issuance of Common Stock................ 8 10,173 81,384 6,782
1996/1997 Cheap Stock (A)............... 12 472,113 5,665,356 472,113
---------------
10,632,936 (16,438,000) (1.55)
---------------
52 WEEKS ENDED DECEMBER 30, 1995
- --------------------------------
Balance at 1/1/95....................... 3 10,164,214 30,492,642 2,541,054
After repurchase of certain shares ..... 9 10,143,873 91,294,857 7,607,905
Issuance of Common Stock................ 8.5 40,692 345,882 28,824
1996/1997 Cheap Stock(A)................ 12 472,113 5,665,356 472,113
---------------
10,649,895 (18,058,000) (1.70)
---------------
52 WEEKS ENDED DECEMBER 28, 1996
- --------------------------------
Balance at 12/31/95..................... 3 10,184,565 30,553,695 2,546,141
After repurhcase of certain shares ..... 3 10,103,185 30,309,555 2,525,796
After repurchase of certain shares ..... 6 10,062,497 60,374,982 5,031,249
1996/1997 Cheap Stock (A)............... 12 472,113 5,665,356 472,113
---------------
10,575,299 (17,854,000) (1.69)
---------------
39 WEEKS ENDED SEPTEMBER 28, 1996
- ---------------------------------
Balance at 12/31/95..................... 3 10,184,565 30,553,695 3,394,855
After repurchase of certain shares ..... 3 10,103,185 30,309,555 3,367,728
After repurchase of certain shares ..... 3 10,062,497 30,187,491 3,354,166
1996/1997 Cheap Stock(A)................ 9 472,113 4,249,017 472,113
---------------
10,588,862 (12,485,000) (1.18)
---------------
39 WEEKS ENDED SEPTEMBER 27, 1997
- ---------------------------------
Balance at 12/28/96..................... 9 10,062,497 90,562,473 10,062,497
Issuance of Common Stock................ 3 195,335 586,005 65,112
1996/1997 Cheap Stock (A)............... 9 472,113 4,249,017 472,113
---------------
10,599,722 (14,165,000) (1.34)
---------------
</TABLE>
(A) COMPUTED USING THE TREASURY STOCK METHOD AND AN ASSUMED OFFERING PRICE OF
$15 PER SHARE.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-1 of our report dated February 18, 1997,
except as to the recapitalization and the reverse stock split described in
Note 12 and net loss per common share described in Note 1 which are as of
January 14, 1998, relating to the financial statements of Duane Reade
Holding Corp., which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
New York, New York
February 4, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 28, 1996 AND SEPTEMBER 27,
1997 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 52 WEEKS
ENDED DECEMBER 28,1996 AND 39 WEEKS ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-28-1996 DEC-27-1997
<PERIOD-END> DEC-28-1996 SEP-27-1997
<CASH> 216 218
<SECURITIES> 0 0
<RECEIVABLES> 7,171 9,084
<ALLOWANCES> 0 0
<INVENTORY> 47,914 65,872
<CURRENT-ASSETS> 56,466 76,545
<PP&E> 30,090 34,471
<DEPRECIATION> (7,025) (9,553)
<TOTAL-ASSETS> 222,476 239,520
<CURRENT-LIABILITIES> 46,549 46,696
<BONDS> 245,657 262,649
0 0
0 0
<COMMON> 101 103
<OTHER-SE> (59,497) (73,664)
<TOTAL-LIABILITY-AND-EQUITY> 222,476 239,520
<SALES> 381,466 313,796
<TOTAL-REVENUES> 381,466 313,796
<CGS> 288,505 236,413
<TOTAL-COSTS> 288,505 236,413
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 32,396 25,433
<INCOME-PRETAX> (17,854) (14,165)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (17,854) (14,165)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (17,854) (14,165)
<EPS-PRIMARY> (1.69) (1.34)
<EPS-DILUTED> 0 0
</TABLE>
