<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the quarterly period ended September 23, 2000.
Commission file number 333-41239
------------------------------
DUANE READE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3164702
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
<TABLE>
<S> <C> <C>
DRI I INC.* DELAWARE 04-3166107
DUANE READE* NEW YORK 11-2731721
DUANE READE INTERNATIONAL, INC* DELAWARE 22-3672347
DUANE READE REALTY, INC * DELAWARE 13-4074383
</TABLE>
* Guarantors with respect to the Company's 9 1/4% Senior Subordinated Notes
due 2008
440 NINTH AVENUE
NEW YORK, NEW YORK 10001
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 273-5700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value per share New York Stock Exchange, Inc.
9 1/4% Senior Subordinated Notes due 2008 None
----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The number of shares of the Common Stock outstanding as of November 2, 2000:
18,151,235
================================================================================
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I -
ITEM 1. - FINANCIAL STATEMENTS
Consolidated Statements of Operations (Unaudited)-
For the 13 and 39 Weeks Ended September 23, 2000 and September 25, 1999 3
Consolidated Balance Sheets -
As of September 23, 2000 (Unaudited) and December 25, 1999 4
Consolidated Statements of Cash Flows (Unaudited)-
For the 39 Weeks Ended September 23, 2000 and September 25, 1999 5
Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION 14
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUANE READE INC.
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED FOR THE 39 WEEKS ENDED
Sept 23, Sept 25, Sept 23, Sept 25,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $242,978 $211,085 $712,803 $610,124
Cost of sales 178,291 154,989 533,039 455,853
-------- -------- -------- --------
Gross profit 64,687 56,096 179,764 154,271
-------- -------- -------- --------
Selling, general & administrative expenses 38,227 33,547 111,772 98,412
Amortization 2,794 2,783 8,043 7,574
Depreciation 3,373 2,790 10,118 7,593
Store pre-opening expenses 327 284 1,078 1,280
-------- -------- -------- --------
44,721 39,404 131,011 114,859
-------- -------- -------- --------
Operating income 19,966 16,692 48,753 39,412
Interest expense, net 9,011 7,730 26,045 21,680
-------- -------- -------- --------
Income before income taxes 10,955 8,962 22,708 17,732
Income taxes 4,729 1,702 9,583 3,369
-------- -------- -------- --------
Net income $ 6,226 $ 7,260 $ 13,125 $ 14,363
======== ======== ======== ========
Net income per common share - basic $ 0.35 $ 0.42 $ 0.75 $ 0.84
======== ======== ======== ========
Weighted average common shares outstanding 17,824 17,115 17,578 17,104
======== ======== ======== ========
Net income per common share - diluted $ 0.34 $ 0.39 $ 0.72 $ 0.78
======== ======== ======== ========
Weighted average common shares outstanding 18,555 18,425 18,344 18,377
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
<PAGE>
DUANE READE INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 23, December 25,
ASSETS 2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash $ 1,170 $ 1,013
Receivables 45,460 38,266
Inventories 173,188 152,277
Deferred income taxes 12,611 15,427
Prepaid expenses and other current assets 6,138 4,107
--------- ---------
TOTAL CURRENT ASSETS 238,567 211,090
Property and equipment, net 100,143 89,958
Goodwill, net of accumulated amortization of $29,905 and $26,745 154,425 148,975
Deferred income taxes 13,131 19,808
Other assets 50,709 40,463
--------- ---------
TOTAL ASSETS $ 556,975 $ 510,294
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 44,976 $ 50,199
Accrued interest 5,294 3,519
Other accrued expenses 21,317 25,585
Current portion of long-term debt 11,450 9,850
Current portion of capital lease obligations 1,880 1,901
--------- ---------
TOTAL CURRENT LIABILITIES 84,917 91,054
Long-term debt, less current portion 340,775 326,313
Capital lease obligations, less current portion 1,425 2,978
Other noncurrent liabilities 29,157 23,433
--------- ---------
TOTAL LIABILITIES 456,274 443,778
--------- ---------
Stockholders' equity
Preferred stock, $0.01 par; authorized 5,000,000 shares;
issued and outstanding: none
Common stock, $0.01 par; authorized 75,000,000 shares;
issued and outstanding 18,055,375 and 17,202,955 shares 181 172
Paid-in capital 150,293 129,241
Accumulated deficit (49,773) (62,897)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 100,701 66,516
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 556,975 $ 510,294
========= =========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
4
<PAGE>
DUANE READE INC.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the 39 Weeks Ended
-----------------------------
September 23, September 25,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,125 $ 14,363
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 10,118 7,593
Amortization of goodwill and other intangibles 9,298 8,580
Deferred tax provision 9,493 --
Gain on sale of assets -- (444)
Other 3,623 3,879
Changes in operating assets and liabilities (net of effect of acquisitions):
Receivables (7,194) (9,142)
Inventories (19,095) (9,611)
Accounts payable 932 1,910
Prepaid and accrued expenses (5,796) (10,146)
Increase in other (assets) liabilities, net (7,552) (2,917)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,952 4,065
-------- --------
Cash flows from investing activities:
Pharmacy acquisitions -- (10,332)
Proceeds from sale of assets -- 10,732
Lease acquisition and other costs (1,640) (4,297)
Capital expenditures (19,210) (28,126)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (20,850) (32,023)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) - term loans 2,562 20,675
Net borrowings (repayments) - revolving credit facility 13,500 9,000
Exercise of stock options 582 886
Financing costs (1,177) (1,080)
Repayments of capital lease obligations (1,412) (1,491)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,055 27,990
-------- --------
Net increase in cash 157 32
Cash at beginning of period 1,013 869
-------- --------
Cash at end of period $ 1,170 $ 901
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements included herein reflect all adjustments
(consisting of normal recurring items), which, in the opinion of management, are
necessary to present fairly the results of operations and financial position of
Duane Reade Inc. (the "Company"), and have been prepared, in all material
respects, in accordance with the accounting principles followed in the
preparation of the Company's annual financial statements for the fiscal year
ended December 25, 1999. These financial statements should be read in
conjunction with the Company's financial statements included in its Annual
Report on Form 10-K for the fiscal year ended December 25, 1999. The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated. Certain prior year amounts have been reclassified to conform to the
current year presentation. The results for the interim periods presented are not
necessarily indicative of the results expected for the full year.
The Company has no assets or operations other than its investment in its
subsidiary guarantors. Accordingly, the consolidated financial statements
present the combined assets and operations of the subsidiary guarantors.
2. USE OF 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 in the consolidated financial statements and
accompanying footnotes. Actual results could differ from those estimates.
3. INCOME TAXES
Income taxes are recorded based on the estimated effective tax rate expected to
be applicable for the full fiscal year, less any applicable tax credits. The
effective tax rate is greater than the statutory rate, reflecting the impact of
non-deductible goodwill. For the quarter and nine months ended September 23,
2000, the tax provision was based on a 44.0% effective tax rate reduced by jobs
tax credits of $0.1 million and $0.4 million, respectively. For the quarter and
nine months ended September 25, 1999, the effective tax rate was 19.0%,
reflecting benefits of certain tax loss carryforwards.
4. ACQUISITIONS
During the thirty-nine weeks ended September 23, 2000, the Company acquired
certain assets of eleven separate independently owned pharmacy establishments,
along with five stores from the Value Drug chain. The total cost of these
acquisitions was $21.3 million, principally paid for by the issuance to the
sellers of additional capital stock of the Company. The transactions were
accounted for as purchases, with the purchase prices being allocated based on
the respective fair values as follows: inventory ($1.8 million), property and
equipment ($1.0 million), identifiable intangibles ($10.4 million) and goodwill
($8.6 million), net of reserves for expenses and liabilities assumed ($0.5
million). During the quarter ended September 23, 2000, the Company acquired
certain assets of eight pharmacy establishments (including the five Value Drug
locations) at a total cost of $12.5 million. The operations of the acquired
stores have been included in the consolidated statements of operations from
the date of acquisition and are not material to the results of operations
of the Company.
6
<PAGE>
5. INCOME PER COMMON SHARE
Net income per common share is based on the weighted average shares outstanding
during each period in accordance with the provisions of FASB Statement No. 128
"Earnings Per Share." Basic earnings per share is computed based on the weighted
average number of common shares outstanding during the period. Diluted earnings
per share gives effect to all dilutive potential common shares outstanding
during the period. Dilutive potential common shares include shares issuable upon
exercise of the Company's stock options. Options to purchase 659,168 shares for
the quarter ended September 23, 2000 and 59,593 shares for the quarter ended
September 25, 1999 were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of the common shares.
The following table sets forth the computation of income per common share for
the periods presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
For the 13 Weeks Ended For the 39 Weeks Ended
---------------------- ----------------------
Sept 23, Sept 25, Sept 23, Sept 25,
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 6,226 $ 7,260 $13,125 $14,363
======= ======= ======= =======
Weighted average number of common shares outstanding
during the period - basic 17,824 17,115 17,578 17,104
Potential dilutive shares 731 1,310 766 1,273
------- ------- ------- -------
Weighted average number of shares outstanding - diluted 18,555 18,425 18,344 18,377
======= ======= ======= =======
------- ------- ------- -------
Net income per common share - basic $ 0.35 $ 0.42 $ 0.75 $ 0.84
======= ======= ======= =======
------- ------- ------- -------
Net income per common share - diluted $ 0.34 $ 0.39 $ 0.72 $ 0.78
======= ======= ======= =======
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE INFORMATION CONTAINED HEREIN INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS
THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. A NUMBER OF FACTORS COULD
CAUSE ACTUAL RESULTS, PERFORMANCE, ACHIEVEMENTS OF THE COMPANY OR INDUSTRY
RESULTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE
FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE COMPETITIVE ENVIRONMENT IN THE
DRUGSTORE INDUSTRY IN GENERAL AND IN THE COMPANY'S SPECIFIC MARKET AREA;
INFLATION; CHANGES IN COSTS OF GOODS AND SERVICES; ECONOMIC CONDITIONS IN
GENERAL AND IN THE COMPANY'S SPECIFIC MARKET AREAS; DEMOGRAPHIC CHANGES; CHANGES
IN PREVAILING INTEREST RATES AND THE AVAILABILITY OF AND TERMS OF FINANCING TO
FUND THE ANTICIPATED GROWTH OF THE COMPANY'S BUSINESS; LIABILITY AND OTHER
CLAIMS ASSERTED AGAINST THE COMPANY; CHANGES IN OPERATING STRATEGY OR
DEVELOPMENT PLANS; THE ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL; THE
SIGNIFICANT INDEBTEDNESS OF THE COMPANY; LABOR DISTURBANCE; CHANGES IN THE
COMPANY'S ACQUISITION AND CAPITAL EXPENDITURE PLANS; AND OTHER FACTORS
REFERENCED HEREIN. IN ADDITION, SUCH FORWARD LOOKING STATEMENTS ARE NECESSARILY
DEPENDENT UPON ASSUMPTIONS, ESTIMATES AND DATES THAT MAY BE INCORRECT OR
IMPRECISE AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS.
ACCORDINGLY, ANY FORWARD-LOOKING STATEMENTS INCLUDED HEREIN DO NOT PURPORT TO BE
PREDICTIONS OF FUTURE EVENTS OR CIRCUMSTANCES AND MAY NOT BE REALIZED.
FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY, AMONG OTHER THINGS, THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL,"
"SHOULD," "SEEKS," "PRO FORMA," "ANTICIPATES," "INTENDS" OR THE NEGATIVE OF ANY
THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSION
OF STRATEGY OR INTENTIONS. GIVEN THESE UNCERTAINTIES, INVESTORS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY
DISCLAIMS ANY OBLIGATIONS TO UPDATE ANY SUCH FACTORS OR TO PUBLICLY ANNOUNCE THE
RESULTS OF ANY REVISIONS TO ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN TO REFLECT FUTURE EVENTS OR DEVELOPMENTS.
RESULTS OF OPERATIONS
The following sets forth the results of operations as a percentage of sales for
the periods indicated.
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
----------------------------- -----------------------------
September 23, September 25, September 23, September 25,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 73.4 73.4 74.8 74.7
----- ----- ----- -----
Gross profit 26.6 26.6 25.2 25.3
Selling, general and admin expenses 15.7 15.9 15.7 16.1
Amortization 1.1 1.3 1.1 1.2
Depreciation 1.4 1.3 1.4 1.3
Store pre-opening expense 0.1 0.1 0.2 0.2
----- ----- ----- -----
Operating income 8.3 8.0 6.8 6.5
Interest expense, net 3.7 3.7 3.7 3.6
----- ----- ----- -----
Income before income taxes 4.6 4.3 3.1 2.9
Income taxes 1.9 0.8 1.3 0.5
----- ----- ----- -----
Net income 2.7% 3.5% 1.8% 2.4%
===== ===== ===== =====
</TABLE>
8
<PAGE>
THIRTEEN WEEKS ENDED SEPTEMBER 23, 2000 VERSUS THIRTEEN WEEKS ENDED SEPTEMBER
25, 1999
Net sales in the third quarter 2000 were $243.0 million, an increase of 15.1%
over last year's third quarter net sales of $211.1 million. Pharmacy sales
increased 27.3% and represented 35.6% of total sales, while front-end sales
increased 9.3% and represented 64.4% of total sales. For the third quarter of
2000, third party pharmacy sales represented 84.5% of total pharmacy sales, as
compared to 82.3% for the same quarter last year. The increase in total sales
over last year was attributable to increased comparable store sales of 6.5%, the
full quarterly impact of three stores opened during the third quarter of 1999
and the sales from a net 21 additional stores that have opened since the
comparable period last year. The higher rate of growth in pharmacy sales over
the prior year was primarily attributable to higher inflation, the mix of
prescription drugs dispensed and a faster rate of growth in numbers of
prescriptions dispensed. All of these factors were in line with general industry
trends. In addition, cool, wet weather in July and August experienced throughout
our trading areas adversely impacted seasonal and front end sales.
The Company opened seven stores and closed one store during the third quarter
2000 and operated 166 stores at September 23, 2000, compared to 145 at September
25, 1999.
Gross profit margin was unchanged at 26.6% for the 13 weeks ended September 23,
2000 and September 25, 1999, due to improved front-end margins, which offset the
impact of a faster rate of growth in lower margin pharmacy sales.
Selling, general and administrative expenses were $38.2 million or 15.7% of net
sales and $33.5 million or 15.9% of net sales in the third quarters of 2000 and
1999, respectively. The percentage decrease in 2000 compared to 1999 reflects
the leveraging of store operating expenses from the maturing stores opened over
the past several years, as well as the continued leveraging of general and
administrative costs over a larger sales base.
Amortization of goodwill and other intangibles was $2.8 million in the third
quarters of both 2000 and 1999. The current year amount reflects a benefit of
$0.2 million due to an $18.6 million reduction of goodwill in the fourth quarter
of 1999 that was related to the recognition of tax loss carryforwards.
Depreciation increased from $2.8 million in the third quarter of 1999 to $3.4
million in the third quarter of 2000 due to the quarterly impact of a full
year's depreciation expense on 1999 capital spending to be recorded in the
current year versus a half year in fiscal 1999, as well as the quarterly impact
of a half year's depreciation expense on current year capital expenditures.
The Company incurred pre-opening costs of $0.3 million during the third quarter
of 2000 related to the opening of seven stores. Pre-opening costs of $0.3
million recorded during the third quarter of 1999 were attributable to the
opening of three stores. The lower per store pre-opening expenses in the current
year are attributable to a greater proportion of acquired new stores in the
current year.
Net interest expense increased 16.6% to $9.0 million in the third quarter of
2000 from $7.7 million in the third quarter of 1999. The increase is
attributable to several factors, including higher average borrowing on the
Company's revolving credit facility ($0.4 million), additional term and other
borrowings obtained subsequent to the third quarter of 1999 ($0.2 million) and
an increase in short-term interest rates ($0.7 million) that directly affected
the Company's floating rate term loan and revolving credit facilities.
Income before income taxes increased by $2.0 million or 22.2% from $9.0 million
in the third quarter of 1999 to $11.0 million in the third quarter of 2000.
Income tax expense for the third quarter of 2000 was $4.7 million or 1.9% of net
sales and reflects the anticipated full-year 44.0% tax rate reduced by a $0.1
million benefit for job tax credits. In the third quarter of 1999, the Company
recorded income tax expense of $1.7 million or 0.8% of sales, based upon an
effective rate of 19.0% that reflected the benefits of certain tax loss
carryforwards. Actual cash taxes paid during the third quarter of 2000 amounted
to $0.2 million due to continued cash flow benefits from tax loss carryforwards
recognized in the fourth quarter last year.
9
<PAGE>
The Company's net income decreased to $6.2 million in the third quarter of 2000
from $7.3 million in the third quarter of 1999, due to the higher tax provision
in the current year partially offset by the other factors impacting income
before taxes as discussed above.
THIRTY-NINE WEEKS ENDED SEPTEMBER 23, 2000 VERSUS THIRTY-NINE WEEKS ENDED
SEPTEMBER 25, 1999
Net sales for the thirty-nine weeks ended September 23, 2000 were $712.8
million, an increase of 16.8% over the net sales for the first thirty-nine weeks
of 1999 of $610.1 million. Pharmacy sales increased 30.1% and represented 35.1%
of total sales, while front-end sales increased 10.7% and represented 64.9% of
total sales. The increase in total sales was attributable to increased
comparable store sales of 7.3% and the sales generated by new stores. The
pharmacy sales increase was higher than the front-end sales increase due to a
higher rate of inflation, the mix of prescription drugs dispensed and a faster
rate of growth in the number of prescriptions dispensed. All of these factors
were in line with general industry trends.
The Company opened 18 stores and closed one store during the first thirty-nine
weeks of both the 2000 and 1999 fiscal years.
Gross profit margin as a percentage of net sales for the thirty-nine weeks ended
September 23, 2000 decreased slightly to 25.2% from 25.3% in the comparable
period last year due to the faster rate of sales growth in the lower-margin
pharmacy merchandise segment of the Company's business.
Selling, general and administrative expenses were $111.8 million or 15.7% of net
sales and $98.4 million or 16.1% of net sales for the thirty-nine weeks ended
September 23, 2000 and September 25, 1999, respectively. The percentage decrease
in 2000 compared to 1999 reflects the Company's continuing ability to leverage
store operating costs from maturing retail sites, as well as the leveraging of
general and administrative expenses against new store and comparative store
sales growth.
Amortization of goodwill and other intangibles for the thirty-nine weeks ended
September 23, 2000 and September 25, 1999 was $8.0 million and $7.6 million,
respectively. The increase resulted principally from the amortization of lease
acquisition and customer list costs for additional pharmacy acquisitions
completed subsequent to the third quarter of 1999, partially offset by a
cumulative benefit of approximately $0.6 million due to an $18.6 million
reduction of goodwill in the fourth quarter of 1999 that was related to the
recognition of tax loss carryforwards.
The increase in depreciation from $7.6 million for the thirty-nine weeks ended
September 25, 1999 to $10.1 million for the thirty-nine weeks ended September
23, 2000 was primarily attributable to incremental depreciation on stores opened
in 1999 and additional depreciation on new stores opened in the first
thirty-nine weeks of 2000.
The Company incurred pre-opening costs of $1.1 million during the thirty-nine
weeks ended September 23, 2000 related to the opening of 18 stores. Pre-opening
costs of $1.3 million were incurred during the thirty-nine weeks ended September
25, 1999 for the opening of 18 stores.
Net interest expense increased 20.1% to $26.1 million during the thirty-nine
weeks ended September 23, 2000 from $21.7 million in the comparable period last
year. The increase was principally due to the impact of additional term and
other borrowings secured since the prior year period ($1.3 million), higher
average borrowing on the Company's revolving credit facility ($1.5 million) and
the effect of increases in short-term interest rates ($1.6 million).
Income before income taxes for the thirty-nine weeks ended September 23, 2000
increased by $5.0 million to $22.7 million from $17.7 million in the comparable
prior year period, primarily as a result of increased sales and gross profit
dollars partially offset by increased selling, general, administrative and
interest expenses.
Income tax expense for the thirty-nine weeks ended September 23, 2000 was $9.6
million or 1.3% of net sales, compared to $3.4 million or 0.5% of net sales for
the thirty-nine weeks ended September 25, 1999. The current year's expense
reflects an effective rate of 44.0%, offset by $0.4 million in jobs tax credit
10
<PAGE>
benefits, resulting in a net tax rate of 42.2%. The 19.0% effective tax rate
used in 1999 reflected the utilization of accumulated net operating loss
carryforwards. Cash taxes paid during the thirty-nine week period this year
amounted to $1.6 million due to continued cash flow benefits from tax loss
carryforwards recognized in the fourth quarter last year.
The Company's net income for the thirty-nine weeks ended September 23, 2000
decreased by 8.6% to $13.1 million compared to $14.4 million for the thirty-nine
weeks ended September 25, 1999, due to the higher tax provision in the current
year partially offset by the other factors impacting income before taxes as
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of September 23, 2000 and December 25, 1999 was $153.7
million and $120.0 million, respectively. The increase is primarily due to
additional inventory of $20.9 million resulting from the opening of 18 stores
during the first nine months of fiscal 2000 and the reclassification of
approximately $6.0 million of accounts payable liabilities from short term to
long term related to the negotiated termination of a secondary pharmaceutical
supplier contract. Additionally, accounts receivable increased by $7.2 million,
reflecting volume increases in third party prescription plans combined with the
timing of collections of certain post-Labor Day and other third quarter
promotional rebates and advertising allowances.
The Company's EBITDA (earnings before interest, taxes, depreciation,
amortization, and other non-cash items) for the third quarter of 2000 increased
by 15.4% to $27.3 million from $23.7 million for the third quarter of 1999.
EBITDA as a percentage of sales was 11.3% for the third quarter of 2000 compared
to 11.2% for the third quarter of 1999. The Company's EBITDA for the thirty-nine
weeks ended September 23, 2000 increased by 21.6% to $70.5 million from $58.0
million for the thirty-nine weeks ended September 25, 1999. EBITDA as a
percentage of sales was 9.9%, compared to 9.5% in the comparable prior year
period.
For the thirty-nine weeks ended September 23, 2000 net cash provided by
operating activities was $7.0 million, compared to $4.1 million during the
thirty-nine weeks ended September 25, 1999. The increase of $2.9 million is
primarily attributable to the increase in EBITDA of $12.5 million, partially
offset by the incremental increase in inventory of $9.5 million.
During the thirty-nine weeks ended September 23, 2000, net cash used in
investing activities was $20.9 million compared to $32.0 million during the
thirty-nine weeks ended September 25, 1999. The decrease from 1999 of $11.1
million is primarily due to non-recurring capital expenditures made last year to
complete the conversions of acquired Rock Bottom store locations. Cash used for
investing activities in the thirty-nine weeks ended September 25, 1999 included
$10.3 million of pharmacy acquisitions offset by $10.7 million of proceeds from
the disposition of six former Rock Bottom store locations as well as the sale of
the Company's former distribution center.
For the thirty-nine weeks ended September 23, 2000, net cash provided by
financing activities was $14.1 million, compared to $28.0 million during the
thirty-nine weeks ended September 25, 1999. The reduction from last year is
attributable to increased cash provided by operations and the reduced level of
capital expenditures. On March 17, 2000, the Company secured an additional $10.0
million of term loan financing, and increased the capacity of its revolving
credit facility from $40.0 million to $55.0 million. This provided the Company
with additional flexibility under the Company's credit agreement and provided
access to additional debt financing to fund future working capital requirements.
At September 23, 2000, the Company had $42.0 million outstanding under the
revolving credit facility and remaining availability of approximately $12.3
million.
The Company's capital requirements primarily result from opening and stocking
new stores, renovations of existing stores and the continuing development of
management information systems. The Company believes that there are significant
opportunities to open additional stores, and currently plans to open
approximately 22 stores, including the 18 stores opened through September 23,
2000, during the current fiscal year. The Company expects to spend approximately
$27.0 million in 2000 on capital expenditures primarily for new and replacement
stores. Working capital is also required to provide inventory for the Company's
existing stores. Historically, the Company has been able to lease its store
locations.
11
<PAGE>
On October 30, 2000, the Company obtained an additional $20.0 million of term
loan financing under its current credit agreement and used the proceeds to
reduce its outstanding revolver borrowings. The reduction in revolver borrowings
increased available borrowings by $20.0 million that can be used to fund
additional working capital needs as may be required.
On October 31, 2000, the Company's credit agreement was amended to permit
available term loan borrowings to increase up to an additional $20.0 million,
for which the Company has received a commitment of $10.0 million as of
November 2, 2000. Proceeds from this additional $10.0 million will also be
used to reduce outstanding revolver borrowings and further increase available
borrowings.
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 revolving and term loan borrowings under the Company's credit
agreement, will be adequate for at least the next two years to make required
payments of principal and interest on the Company's indebtedness, to fund
anticipated capital expenditures and working capital requirements and to comply
with the terms of its debt agreements. The ability of the Company to meet its
debt service obligations and reduce its total debt will be dependent upon the
future performance of the Company and its subsidiaries which, in turn, will be
subject to general economic, financial, business, competitive, legislative,
regulatory and other conditions, many of which are beyond the Company's control.
In addition, there can be no assurance that the Company's operating results,
cash flow and capital resources will be sufficient for repayment of its
indebtedness in the future. Substantially all of the Company's revolving and
term loan borrowings under its credit agreement bear interest at floating rates;
therefore, the Company's financial condition will be affected by the changes in
prevailing interest rates. The Company has an interest rate protection agreement
in place to minimize the impact from a rise in interest rates (see "Market Risk"
on page 13).
TAX BENEFITS FROM NET OPERATING LOSSES
At December 25, 1999, the Company had net operating loss carryforwards ("NOLs")
of approximately $68 million, which are due to expire in the years 2007 through
2018. These NOLs may be used to offset future taxable income through 2018 and
thereby reduce or eliminate the Company's federal income taxes otherwise
payable. The Internal Revenue Code of 1986, as amended (the "Code"), imposes
significant limitations on the utilization of NOLs in the event of an "ownership
change," as defined in Section 382 of the Code (the "Section 382 Limitation").
The Section 382 Limitation is an annual limitation on the amount of
pre-ownership change NOLs that a corporation may use to offset its
post-ownership change income. The Section 382 Limitation is calculated by
multiplying the value of a corporation's stock immediately before an ownership
change by the long-term tax-exempt rate (as published by the Internal Revenue
Service). Generally, an ownership change occurs with respect to a corporation if
the aggregate increase in the percentage of stock ownership (by value) of that
corporation by one or more 5% shareholders (including certain groups of
shareholders who in the aggregate own at least 5% of that corporation's stock)
exceeds 50 percentage points over a three-year testing period. The 1997
recapitalization of the Company, in which DLJ Merchant Banking Partners II, L.P.
and certain of its affiliates acquired a significant portion of the Company's
outstanding capital stock ("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 $8.5 million in 2000 and 2001
and approximately $5.1 million from 2002 to 2018 on the amount of NOLs generated
prior to the Recapitalization that the Company may utilize to offset future
taxable income. NOLs generated by the Company since the Recapitalization
(approximately $18 million) are not subject to the Section 382 Limitation and
may be used to offset future taxable income. There can be no assurance that any
NOLs will be able to be used by the Company to offset future taxable income or
that such NOLs will not become subject to limitation due to future ownership
changes.
12
<PAGE>
SEASONALITY
In general, sales of drugstore items such as prescription drugs, over the
counter 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.
The Company typically realizes greater revenue in the fourth quarter resulting
from increased sales of winter holiday merchandise. In view of the Company's
expansion of seasonal merchandising, the Company expects slightly greater
revenue sensitivity relating to seasonality in the future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities" requires that derivative instruments such as options, forward
contracts and swaps be recorded as assets and liabilities at fair value and
provides guidance for recognition of changes in fair value depending on the
reason for holding the derivative. The Company does not presently have
significant transactions involving derivative instruments, other than the
interest rate protection agreement described below (see "Market Risk"), but may
do so in the future. The Company will adopt FASB Statement No. 133, effective
with the first quarter of fiscal 2001, but this is not anticipated to have a
material effect on the Company's financial statements or results of operations.
MARKET RISK
The financial results of the Company are subject to risk from interest rate
fluctuations on debt which carries variable interest rates. Variable rate debt
outstanding (under the Company's credit agreement) was approximately $272.2
million at September 23, 2000, which is about the same level the Company expects
its outstanding variable rate debt to be during the next twelve months. Based on
September 23, 2000 outstanding balances, a 0.50% change in interest rates would
affect pre-tax annual results of operations by approximately $1.4 million. The
Company also has $80 million of Senior Notes outstanding at September 23, 2000.
These notes, which bear interest payable semi-annually at a fixed 9.25%, are not
subject to risk from interest rate fluctuations.
The principal objective of the Company's investment management activities is to
maintain acceptable levels of interest rate and liquidity risk to facilitate the
funding needs of the Company. As part of its investment management, the Company
may use derivative financial products such as interest rate hedges and interest
rate swaps. During the nine months ended September 23, 2000, the Company had an
interest rate protection agreement in place. This agreement, which expires in
November 2000, provides for a maximum LIBOR interest rate of 6.5% on $65 million
of variable rate debt. At September 23, 2000 the thirty-day LIBOR rate was
approximately 6.63%.
13
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to legal actions arising in the ordinary
course of business. Based on information presently available to the Company, the
Company believes that it has adequate legal defenses or insurance coverage for
these actions and that the ultimate outcome of these actions will not have a
material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) The following documents are filed as a part of this report:
(i) Financial Statements
(ii) Exhibits:
3.1(i) Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1(i) to the
Company's Registration Statement No. 333-41239 (the "Common
Stock S-1")).
3.1(ii) Form of Amended and Restated By-laws of the Company
(incorporated by reference to Exhibit 3.1(i) to the Common
Stock S-1).
3.2(i) Certificate of Incorporation of DRI I Inc. (incorporated by
reference to Exhibit 3.2(i) to the S-1 Registration Statement
No. 333-43313 with respect to the Company's 9 1/4% Senior
Subordinated Notes due 2008 (the "Notes S-1")).
3.2(ii) By-laws of DRI I Inc. (incorporated by reference to Exhibit
3.2(ii) to the Notes S-1).
3.3 Second Amended and Restated Partnership Agreement of Duane
Reade (incorporated by reference to Exhibit 3.3 to the Notes
S-1)
3.4(i) Certificate of Incorporation of Duane Reade International,
Inc. (incorporated by reference to Exhibit 3.4(i) to the
Company's Annual Report on Form 10-K for the year ended
December 26, 1999 (the "1999 10-K")).
3.4(ii) By-laws of Duane Reade International, Inc. (incorporated by
reference to exhibit 3.4(ii) to the 1999 10-K).
3.5(i) Certificate of Incorporation of Duane Reade Realty, Inc.
(incorporated by reference to Exhibit 3.5(i) to the 1999
10-K).
14
<PAGE>
3.5(ii) By-laws of Duane Reade Realty, Inc. (incorporated by reference
to Exhibit 3.5(ii) to the 1999 10-K).
4.1 Form of Indenture (incorporated by reference to Exhibit 4.1 to
the Notes S-1)
10.1 Duane Reade Inc. 1997 Equity Participation Plan (incorporated
by reference to Exhibit 10.1 to the Common Stock S-1).
10.2 Duane Reade Inc. Holding Corp. 1992 Stock Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Common Stock
S-1).
10.3 Employment Agreement, dated as of October 27, 1997, between
the Company and Anthony J. Cuti (incorporated by reference to
Exhibit 10.3 to the Common Stock S-1).
10.4 Employment Agreement, dated as of February 22, 1993, between
the Company and Gary Charboneau (incorporated by reference to
Exhibit 10.4 to the Common Stock S-1).
10.5 Employment Agreement, dated as of April 10, 1995, as amended,
between Duane Reade and Jerry M. Ray (incorporated by
reference to Exhibit 10.5 to the Common Stock S-1).
10.6 Employment Letter Agreement, dated as of October 9, 1996,
between Duane Reade and Joseph Lacko (incorporated by
reference to Exhibit 10.6 to the Common Stock S-1).
10.7 Employment Letter Agreement, dated as of February 12, 1997,
between the Company and William Tennant (incorporated by
reference to Exhibit 10.7 to the Common Stock S-1).
10.8 Agreement, dated as of November 22, 1996, as amended, between
Duane Reade and Drug, Chemical, Cosmetic, Plastics and
Affiliated Industries Warehouse Employees Local 815
(incorporated by reference to Exhibit 10.8 to the Common Stock
S-1).
10.9 Agreement, dated July 16, 1992, as amended, between Duane
Reade and Allied Trades Council (incorporated by reference to
Exhibit 10.9 to the Common Stock S-1).
10.10 Stockholders and Registration Rights Agreement, dated as of
June 18, 1997, among the Company, DLJMB Funding II, Inc., DLJ
Merchant Banking Partners II, L.P., DLJ Diversified Partners,
L.P., DLJ First ESC L.L.C., DLJ Offshore Partners, II, C.V.,
DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners,
Bankers Trust New York Corporation, Conac & Co., Muico & Co.,
Roton & Co., Putnam High Yield Trust, PaineWebber Managed
Investment Trust on behalf of PaineWebber High Income Fund,
USL Capital Corporation, Pearlman Family Partners, The Marion
Trust, Bruce L. Weitz, BCIP Associates, BCIP Trust Associates,
L.P., Tyler Capital Fund L.P., Tyler International, L.P.-II,
and Tyler Massachusetts, L.P. (incorporated by reference to
Exhibit 10.13 to the Common Stock S-1).
10.11 Amended and Restated Partnership Security Agreement, dated as
of September 11, 1998, among Duane Reade Inc. and DRI I Inc.
and Fleet National Bank, as Administrative Agent (incorporated
by reference to Exhibit 10.15 to the Company's Current Report
on Form 8-K dated September 24, 1998).
10.12 Amended and Restated Borrower Security Agreement, dated as of
September 11, 1998, between Duane Reade and Fleet National
Bank as Administrative Agent (incorporated by reference to
Exhibit 10.16 to the Company's Current Report on Form 8-K
dated September 24, 1998).
10.13 Amended and Restated Holdings Pledge Agreement, dated as of
September 11, 1998, among Duane Reade Inc. and Fleet National
Bank, as Administrative Agent (incorporated by reference to
Exhibit 10.17 to the Company's Current Report on Form 8-K
dated September 24, 1998).
10.14 Promissory Note, dated as of November 9, 1998, between the
Company and Anthony J. Cuti (incorporated by reference to
Exhibit 10.16 to the Company's 1998 Annual Report on Form
10-K).
10.15 Employment Letter, dated June 10, 1999, between the Company
and John K. Henry (incorporated by reference to Exhibit 10.18
to the 1999 10-K).
10.16 Promissory Note, dated as of June 7, 1999, between the Company
and Anthony J. Cuti (incorporated by reference to Exhibit
10.19 to the 1999 10-K).
10.17 Promissory Note, dated as of December 30, 1999, between the
Company and Anthony J. Cuti (incorporated by reference to
Exhibit 10.20 to the 1999 10-K).
15
<PAGE>
10.18 Third Amended and Restated Credit Agreement, dated as of March
17, 2000, among Duane Reade, as the Borrower, Duane Reade Inc.
and DRI I Inc., as the Parent Guarantors, Various Financial
Institutions set forth therein, as the Lenders, DLJ Capital
Funding, Inc., as the Syndication Agent for the Lenders, and
Credit Lyonnais New York Branch, as the Documentation Agent
for the Lenders (incorporated by reference to Exhibit 10.21 to
the 1999 10-K).
10.19 Amendment Agreement to Credit Agreement, dated as of March 17,
2000 among Duane Reade, Duane Reade Inc., DRI I 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 (incorporated by reference to Exhibit 10.22 to the 1999
10-K).
10.20 First Amendment to Employment Agreement, dated March 13, 2000,
between the Company and Anthony J. Cuti. (incorporated by
reference to Exhibit 10.23 to the 1999 10-K).
10.21 Agreement, dated April 1, 1999, between Duane Reade and Local
340A/340B, New York.
10.22* First Amendment to Third Amended and Restated Credit
Agreement, dated as of September 5, 2000 by and among Duane
Reade, each Designated Guarantor, Duane Reade, Inc.,
DRI I Inc., DLJ Capital Funding, Inc. as Syndication Agent
and Fleet National Bank as Administrative Agent.
10.23* Second Amendment to Third Amended and Restated Credit
Agreement, dated as of October 31, 2000 among Duane Reade,
Duane Reade Inc., DRI I 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.
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the 1999 10-K).
27.1 * Financial Data Schedules
* Filed herewith.
(b) Reports on Form 8-K: None
(c) Financial Statement Schedules: None
Schedules for which provision is made in the applicable accounting regulations
of the Commission are either not required under the related instructions, are
inapplicable or not material, or the information called for thereby is otherwise
included in the financial statements and therefore has been omitted.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 3, 2000
DUANE READE INC.
(Registrant)
By: /s/ John K. Henry
------------------
Name: John K. Henry
Title: Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on November 3, 2000
SIGNATURES TITLES
---------- ------
/s/ Anthony J. Cuti President and Chief Executive Officer and
----------------------------- Director
Anthony J. Cuti (Principal Executive Officer)
/s/ John K. Henry Senior Vice President and Chief
----------------------------- Financial Officer
John K. Henry (Principal Accounting and Financial Officer)
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 3, 2000
DRI I INC.
By: /s/ John K. Henry
-------------------
Name: John K. Henry
Title: Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on November 3, 2000 by:
SIGNATURES TITLES
---------- ------
/s/ Anthony J. Cuti President and Chief Executive Officer and
----------------------------- Director
Anthony J. Cuti (Principal Executive Officer)
/s/ John K. Henry Senior Vice President and Chief
----------------------------- Financial Officer
John K. Henry (Principal Accounting and Financial Officer)
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 3, 2000
DUANE READE
By: DRI I Inc., a general partner By: Duane Reade Inc., a general partner
By: /s/ John K. Henry By: /s/ John K. Henry
--------------------------------- -----------------------------------
Name: John K. Henry Name: John K. Henry
Title: Senior Vice President and Title: Senior Vice President and Chief
Chief Financial Officer Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on November 3, 2000 by the following persons
in the capacities indicated with respect to Duane Reade Inc. and DRI I Inc., the
general partners of Duane Reade, on behalf of Duane Reade (except as otherwise
indicated):
SIGNATURES TITLES
---------- ------
/s/ Anthony J. Cuti President and Chief Executive Officer and
----------------------------- Director
Anthony J. Cuti (Principal Executive Officer)
/s/ John K. Henry Senior Vice President and Chief
----------------------------- Financial Officer
John K. Henry (Principal Accounting and Financial Officer)
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 3, 2000
DUANE READE REALTY, INC.
By: /s/ John K. Henry
-------------------------------------
Name: John K. Henry
Title: Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on November 3, 2000 by:
SIGNATURES TITLES
---------- ------
/s/ Anthony J. Cuti President and Chief Executive Officer and
----------------------------- Director
Anthony J. Cuti (Principal Executive Officer)
/s/ John K. Henry Senior Vice President and Chief
----------------------------- Financial Officer
John K. Henry (Principal Accounting and Financial Officer)
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 3, 2000
DUANE READE INTERNATIONAL, INC.
By: /s/ John K. Henry
-------------------------------------
Name: John K. Henry
Title: Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on November 3, 2000 by:
SIGNATURES TITLES
---------- ------
/s/ Anthony J. Cuti President and Chief Executive Officer and
----------------------------- Director
Anthony J. Cuti (Principal Executive Officer)
/s/ John K. Henry Senior Vice President and Chief
----------------------------- Financial Officer
John K. Henry (Principal Accounting and Financial Officer)
21
