<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 March 25, 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 INCORPORATION (IRS EMPLOYER ID NUMBER)
OR ORGANIZATION)
DRI I INC.* DELAWARE 04-3166107
DUANE READE* NEW YORK 11-2731721
DUANE READE REALTY, INC.* DELAWARE 13-4074383
DUANE READE INTERNATIONAL, INC.* DELAWARE 22-3672347
* 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 May 1, 2000:
17,505,785
================================================================================
<PAGE>
INDEX
PAGE
PART I
ITEM 1. - FINANCIAL STATEMENTS
Consolidated Statements of Operations (Unaudited)
For the 13 Weeks Ended March 25, 2000 and March 27, 1999 3
Consolidated Balance Sheets
As of March 25, 2000 (Unaudited) and December 25, 1999 4
Consolidated Statements of Cash Flows (Unaudited) -
For the 13 Weeks Ended March 25, 2000 and March 27, 1999 5
Notes to Consolidated Financial Statements 6
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION 12
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DUANE READE INC.
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the 13 Weeks Ended
---------------------------
March 25, March 27,
2000 1999
------------- ----------
<S> <C> <C>
Net sales $226,275 $190,364
Cost of sales 171,629 144,408
-------- --------
Gross profit 54,646 45,956
-------- --------
Selling, general & administrative expenses 36,748 31,721
Amortization 2,542 2,286
Depreciation 3,372 2,377
Store pre-opening expenses 305 279
-------- --------
42,967 36,663
-------- --------
Operating income 11,679 9,293
Interest expense, net 8,238 6,780
-------- --------
Income before income taxes 3,441 2,513
Income taxes 1,515 477
-------- --------
Net income $ 1,926 $ 2,036
======== ========
Per Common Share - Basic
Net income $ 0.11 $ 0.12
======== ========
Weighted Average Common Shares Outstanding 17,404 17,088
======== ========
Per Common Share - Diluted
Net income $ 0.11 $ 0.11
======== ========
Weighted Average Common Shares Outstanding 18,103 18,402
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
DUANE READE INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 25, December 25,
2000 1999
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash $ 1,116 $ 1,013
Receivables 37,515 38,266
Inventories 154,103 154,090
Deferred income taxes 15,427 15,427
Prepaid expenses 4,953 4,107
--------- ---------
TOTAL CURRENT ASSETS 213,114 212,903
Property and equipment, net 93,217 89,958
Goodwill, net of accumulated amortization of $27,793 and
$26,745 147,927 148,975
Deferred income taxes 18,793 19,808
Other assets 44,893 40,463
--------- ---------
TOTAL ASSETS $ 517,944 $ 512,107
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 36,473 $ 52,012
Accrued interest 1,560 3,519
Other accrued expenses 23,300 25,585
Current portion of long-term debt 10,450 9,850
Current portion of capital lease obligations 1,924 1,901
--------- ---------
TOTAL CURRENT LIABILITIES 73,707 92,867
Long-term debt, less current portion 336,750 326,313
Capital lease obligations, less current portion 2,331 2,978
Other noncurrent liabilities 30,974 23,433
--------- ---------
TOTAL LIABILITIES 443,762 445,591
--------- ---------
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 17,450,239 and 17,202,955
shares 175 172
Paid-in capital 134,978 129,241
Accumulated deficit (60,971) (62,897)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 74,182 66,516
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 517,944 $ 512,107
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
DUANE READE INC.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the 13 Weeks Ended
--------------------------
March 25, March 27,
2000 1999
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,926 $ 2,036
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment 3,372 2,377
Amortization of goodwill and other intangibles 2,940 3,049
Deferred Tax Provision 1,015 --
Other 1,250 1,074
Changes in operating assets and liabilities
(net of the effect of acquisitions):
Receivables 751 (3,118)
Inventories 178 2,532
Accounts payable (9,277) 5,574
Prepaid and accrued expenses (5,141) (10,712)
Other assets and liabilities, net (666) (1,737)
-------- --------
NET CASH PROVIDED BY / (USED IN) OPERATING
ACTIVITIES (3,652) 1,075
-------- --------
Cash flows from investing activities:
Capital expenditures (5,788) (11,834)
Lease acquisition & other costs (220) (2,064)
Proceeds from sale of assets -- 6,517
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (6,008) (7,381)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) - term loans 7,537 23,600
Net borrowings (repayments) - revolving credit facility 3,500 (16,500)
Exercise of stock options 327 752
Financing costs (1,139) (1,080)
Repayments of capital lease obligations (462) (423)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,763 6,349
-------- --------
Net increase in cash 103 43
Cash at beginning of period 1,013 869
-------- --------
Cash at end of period $ 1,116 $ 912
======== ========
</TABLE>
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 same accounting principles followed in the
preparation of the Company's annual financial statements for the 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 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. NET 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 694,934 shares at
March 25, 2000 and 58,234 shares at March 27, 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.
3. INCOME TAXES
Income taxes are recorded based on the estimated effective tax rate expected to
be applicable for the full fiscal year. The effective tax rate is greater than
the statutory rate, reflecting the impact of non-deductible goodwill.
4. ACQUISITIONS
During the first quarter of 2000, the Company acquired certain assets of three
separate independently owned single-site pharmacy establishments. The total cost
of these acquisitions was $5.4 million, paid for by the issuance of additional
capital stock and allocated as follows: lease acquisition ($4.0 million),
property and equipment ($0.7 million), customer lists ($0.6 million) and
inventory ($0.2 million), net of reserves for expenses and liabilities assumed
($0.1 million). The operations of the acquired stores have been included in the
consolidated statement of income from the dates of the acquisitions. The
pro-forma impact of these acquisitions was not material to sales or results of
operations of the Company for the period ending March 25, 2000.
6
<PAGE>
5. INCOME PER COMMON SHARE
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
------------------------------
March 25, March 27,
2000 1999
------------ --------------
<S> <C> <C>
Net Income $ 1,926 $ 2,036
Weighted average number of common shares
outstanding during the period - basic 17,404 17,088
Potential dilutive shares 699 1,314
------- -------
Weighted average number of shares outstanding -
diluted 18,103 18,402
======= =======
Per common share - basic
------- -------
Net Income $ 0.11 $ 0.12
======= =======
Per common share - diluted
------- -------
Net Income $ 0.11 $ 0.11
======= =======
</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 FACTS COULD CAUSE
ACTUAL RESULTS, PERFORMANCE, ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS TO
BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE,
BUT ARE NOT LIMITED TO, THE COMPETITIVE ENVIRONMENT IN THE DRUGSTORE INDUSTRY IN
GENERAL AND IN THE COMPANY'S SPECIFIC MARKET AREA; INFLATION, CHANGES IN COSTS
OF GOODS AND SERVICES; ECONOMIC CONDITIONS IN GENERAL AND IN THE COMPANY'S
SPECIFIC MARKET AREAS; DEMOGRAPHIC CHANGES; CHANGES IN PREVAILING INTEREST RATES
AND THE AVAILABILITY OF AND TERMS OF FINANCING TO FUND THE ANTICIPATED GROWTH OF
THE COMPANY'S BUSINESS; LIABILITY AND OTHER CLAIMS ASSERTED AGAINST THE COMPANY;
CHANGES IN 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,
PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS ANY OBLIGATIONS TO UPDATE ANY
SUCH FACTORS OR TO PUBLICLY ANNOUNCE THE RESULTS OF ANY REVISIONS TO ANY OF THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT FUTURE EVENTS OR
DEVELOPMENTS.
RESULTS OF OPERATIONS
The following sets forth the results of operations as a percentage of net sales
for the periods indicated.
For the 13 Weeks Ended
----------------------------
March 25, March 27,
2000 1999
------------ -----------
Net Sales 100.0% 100.0%
Cost of Sales 75.8 75.9
------------ -----------
Gross Profit 24.2 24.1
Selling, general and administrative expenses 16.2 16.7
Amortization 1.2 1.2
Depreciation 1.5 1.2
Store pre-opening expenses 0.1 0.1
------------ -----------
Operating Income 5.2 4.9
Interest expense, net 3.7 3.6
------------ -----------
Income before income taxes 1.5 1.3
Income taxes 0.6 0.2
------------ -----------
Net Income 0.9% 1.1%
============ ===========
Net sales in the first quarter 2000 were $226.3 million, an increase of 18.9%
over last year's first quarter net sales of $190.4 million. The increase was
attributable to increased comparable store sales of 8.1%, the full quarterly
impact
8
<PAGE>
of three stores opened during the first quarter of 1999 and the sales from 22
additional stores which have opened since the comparable period last year. The
Company opened four stores during the first quarter of 2000 compared to three
store openings during the first quarter of 1999. At March 25, 2000 the Company
operated 153 stores, versus 131 at March 27, 1999.
Gross Profit margin increased to 24.2% for the 13 weeks ended March 25, 2000
compared to 24.1% for the 13 weeks ended March 27, 1999. This increase reflects
the Company's successful efforts to re-merchandise its front-end departments,
offsetting the impact of the faster growth rate in lower margin pharmacy sales.
Selling, general and administrative expenses were $36.7 million or 16.2% of net
sales and $31.7 million or 16.7% of net sales in the first quarter of 2000 and
1999, respectively. The percentage decrease in 2000 compared to 1999 resulted
principally from the Company's ability to leverage expenses from the maturing
stores opened over the past several years.
Amortization of goodwill and other intangibles in the first quarter of 2000 and
1999 was $2.5 million and $2.3 million, respectively. This increase resulted
primarily from increases in the amortization of lease acquisition and customer
list costs for pharmacy acquisitions completed since the prior year quarter.
The increase in depreciation expense from $2.4 million in the first quarter of
1999 to $3.4 million in the first quarter of 2000 is reflective of 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 estimated current year
capital expenditures.
The Company incurred pre-opening costs of $0.3 million during the first quarter
of 2000 related to the opening of four stores. Pre-opening costs in the first
quarter of 1999 of $0.3 million were attributable to the opening of three
stores.
Net interest expense increased 21.5% to $8.2 million in the first quarter of
2000 from $6.8 million in the first quarter of 1999. The increase is
attributable to several factors, including higher average borrowings on the
Company's revolving credit facility ($0.6 million), additional term and other
borrowings obtained subsequent to the first quarter of 1999 ($0.5 million) and
an increase in short-term interest rates ($0.3 million) that directly affected
the Company's interest rate on its floating rate term and revolving loans.
Income before income taxes in the first quarter of 2000 improved 36.9% to $3.4
million from $2.5 million a year ago, reflecting increased sales and operating
margins partially offset by increases in interest expense.
In the first quarter of 2000, the Company recorded an income tax provision of
$1.5 million. This was based on an estimated annual statutory rate of 41.0%,
adjusted to reflect the non-deductibility of $3.0 million of goodwill charges
anticipated to be included in the current year's results. The resultant
effective annual tax rate for the current year is expected to be 44.0% of
pre-tax income. In the comparable period last year, income taxes of $0.5 million
were based on an effective tax rate of 19.0%, which reflected the recognition of
tax benefits related to net operating loss carryforwards.
The Company's first quarter net income was $1.9 million, compared to $2.0
million in the first quarter of 1999, due to the factors previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $139.4 million and $120.1 million as of March 25, 2000 and
December 25, 1999 respectively. The increase is primarily due to reductions in
accounts payable resulting from payments for inventory acquired
9
<PAGE>
during the fourth quarter related to the year 2000 contingency plan, extended
vendor dating on approximately $5.0 million of fourth quarter 1999 purchases
paid during the first quarter this year and the reclassification of
approximately $6.0 million of accounts payable liabilities from short term to
long term related to the termination of a secondary pharmaceutical supplier
contract.
The Company's EBITDA (earnings before interest, taxes, depreciation,
amortization, and other non-cash charges) for the first quarter of 2000
increased by 25.4% to $18.8 million from $15.0 million in the first quarter of
1999. EBITDA as a percentage of sales was 8.3% in 2000 compared to 7.9% in 1999.
For the first quarter of 2000, net cash used in operating activities was $3.7
million, compared to cash provided by operating activities of $1.1 million
during the first quarter of 1999. The primary reason for this use of cash was
the decrease in accounts payable of $9.3 million, resulting from payments made
for fourth quarter 1999 inventory purchases.
During the first quarter of 2000, net cash used in investing activities was $6.0
million compared to $7.4 million during the first quarter of 1999. While both
figures reflect expenditures related to new store openings and remodeling of
existing locations, the 1999 results include costs associated with the
conversion of former Rock Bottom stores, net of proceeds realized from the
disposition of assets of certain Rock Bottom locations and the Company's former
primary distribution center.
For the quarter ended March 25, 2000, net cash provided by financing activities
was $9.8 million compared to $6.3 million for the quarter ended March 27, 1999.
The increase from last year resulted from higher average borrowings on the
Company's revolving credit facility combined with $10 million of incremental
term loan financing which the Company secured during the first quarter of 2000.
In addition, the Company increased the capacity of its revolving credit facility
from $40 million to $55 million. This will provide the Company with additional
flexibility under the Company's credit agreement and allow the Company to
adequately fund working capital requirements. At March 25, 2000, the Company had
$32 million outstanding under the revolving credit facility and remaining
availability of approximately $23 million.
The Company's capital requirements primarily result from opening and stocking
new stores, renovations of existing stores and from the continuing development
of management information systems. The Company believes that there are
significant opportunities to open additional stores, and currently plans to open
approximately 20 stores during the 2000 fiscal year. The Company expects to
spend approximately $25 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.
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 entered into an interest rate
protection agreement to minimize the impact from a rise in interest rates (see
"Market Risk" on page 11).
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
10
<PAGE>
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 the DLJ
entities 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.
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. 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, but may do so in the
future. The Company is required to adopt Statement No. 133 for the third quarter
of 2000 and may adopt it earlier.
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 $267.2
million at March 25, 2000, which is about the same level the Company expects its
outstanding variable debt rate to be during the next twelve months. Based on
March 25, 2000 outstanding balances, a 0.50% change in interest rates would
affect pre-tax annual results of operations by approximately $1.3 million. The
Company also has $80 million of Senior Notes outstanding at March 25, 2000.
These notes, which bear interest payable semi-annually at a fixed 9 1/4%, 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 quarter ended March 25, 2000, in connection with the
Company's credit agreement requirements, the Company had an interest rate
protection agreement in place. This agreement, which expires in November 2000,
caps the LIBOR interest rate at 6.5% on $65 million of variable rate debt. At
March 25, 2000 the thirty-day LIBOR rate was 6.00%.
11
<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).
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).
12
<PAGE>
10.4 Employment Agreement, dated as of February 22, 1993, as
amended, between the Company and Gary Charboneau
(incorporated by reference to Exhibit 10.4 to the Common
Stock S-1).
10.5 Employment Agreement, dated as of April 10, 1995, as
amended, between Duane Reade and Jerry M. Ray (incorporated
by reference to Exhibit 10.5 to the Common Stock S-1).
10.6 Employment Letter Agreement, dated as of October 9, 1996,
between Duane Reade and Joseph Lacko (incorporated by
reference to Exhibit 10.6 to the Common Stock S-1).
10.7 Employment Letter Agreement, dated as of February 12, 1997,
between the Company and William Tennant (incorporated by
reference to Exhibit 10.7 to the Common Stock S-1).
10.8 Agreement, dated as of November 22, 1996, between Duane
Reade and Drug, Chemical, Cosmetic, Plastics and Affiliated
Industries Warehouse Employees Local 815 (incorporated by
reference to Exhibit 10.8 to the Common Stock S-1).
10.9 Agreement, dated July 16, 1992, as amended, between Duane
Reade and Allied Trades Council (incorporated by reference
to Exhibit 10.9 to the Common Stock S-1).
10.10 Agreement, dated February 4, 1997, as amended, between
Duane Reade and The Pharmacy Fund, Inc. (incorporated by
reference to Exhibit 10.10 to the Common Stock S-1).
10.11 Stockholders and Registration Rights Agreement, dated as of
June 18, 1997, among the Company, DLJMB Funding II, Inc.,
DLJ Merchant Banking Partners II, L.P., DLJ Diversified
Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners,
II, C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997
Partners, Bankers Trust New York Corporation, Conac & Co.,
Muico & Co., Roton & Co., Putnam High Yield Trust,
PaineWebber Managed Investment Trust on behalf of
PaineWebber High Income Fund, USL Capital Corporation,
Pearlman Family Partners, The Marion Trust, Bruce L. Weitz,
BCIP Associates, BCIP Trust Associates, L.P., Tyler Capital
Fund L.P., Tyler International, L.P.-II, and Tyler
Massachusetts, L.P. (incorporated by reference to Exhibit
10.13 to the Common Stock S-1).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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
13
<PAGE>
and Credit Lyonnais New York Branch as Documentation Agent
(incorporated by reference to Exhibit 10.22 to the 1999
10-K).
10.21 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).
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.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 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 May 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)
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 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 May 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)
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 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 May 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):
<TABLE>
<CAPTION>
SIGNATURES TITLES
---------- ------
<S> <C>
/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)
</TABLE>
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: May 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 May 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: May 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 May 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)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AS OF MARCH 25, 2000 AND THE RELATED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE 13 WEEKS ENDED MARCH 25, 2000 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000895364
<NAME> DUANE READE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-2000
<PERIOD-END> MAR-25-2000
<CASH> 1,116
<SECURITIES> 0
<RECEIVABLES> 37,515
<ALLOWANCES> 0
<INVENTORY> 154,103
<CURRENT-ASSETS> 213,114
<PP&E> 124,216
<DEPRECIATION> (30,999)
<TOTAL-ASSETS> 517,944
<CURRENT-LIABILITIES> 73,707
<BONDS> 339,081
0
0
<COMMON> 175
<OTHER-SE> 74,007
<TOTAL-LIABILITY-AND-EQUITY> 517,944
<SALES> 226,275
<TOTAL-REVENUES> 226,275
<CGS> 171,629
<TOTAL-COSTS> 171,629
<OTHER-EXPENSES> 42,967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,238
<INCOME-PRETAX> 3,441
<INCOME-TAX> 1,515
<INCOME-CONTINUING> 1,926
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,926
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
</TABLE>
