<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 June 24, 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 NUMBER)
INCORPORATION OR ORGANIZATION)
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
* Guarantors with respect to the Company's 9 1/4% Senior Subordinated Notes due
2008
440 NINTH AVENUE
NEW YORK, NEW YORK 10001
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 273-5700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Common Stock, $.01 par value per share New York Stock Exchange. Inc.
9 1/4% Senior Subordinated Notes due 2008 None
</TABLE>
----------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
None.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The number of shares of the Common Stock outstanding as of July 24, 2000:
17,662,648
==============================================================================
<PAGE>
INDEX
PAGE
<TABLE>
<CAPTION>
PART I -
ITEM 1. - FINANCIAL STATEMENTS
<S> <C>
Consolidated Statements of Operations (Unaudited)
For the 13 and 26 Weeks Ended June 24, 2000 and June 26, 1999 3
Consolidated Balance Sheets
As of June 24, 2000 (Unaudited) and December 25, 1999 4
Consolidated Statements of Cash Flows (Unaudited) -
For the 26 Weeks Ended June 24, 2000 and June 26, 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 13
</TABLE>
PART I - FINANCIAL INFORMATION
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
DUANE READE INC.
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED FOR THE 26 WEEKS ENDED
---------------------- ----------------------
June 24, June 26, June 24, June 26,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $243,549 $208,675 $469,824 $399,039
Cost of sales 183,119 156,456 354,747 300,864
-------- -------- -------- --------
Gross profit 60,430 52,219 115,077 98,175
-------- -------- -------- --------
Selling, general & administrative 36,797 33,144 73,545 64,865
expenses
Amortization 2,706 2,505 5,249 4,791
Depreciation 3,372 2,426 6,745 4,803
Store pre-opening expenses 447 717 751 996
-------- -------- -------- --------
43,322 38,792 86,290 75,455
-------- -------- -------- --------
Operating income 17,108 13,427 28,787 22,720
Interest expense, net 8,796 7,170 17,034 13,950
-------- -------- -------- --------
Income before income taxes 8,312 6,257 11,753 8,770
Income taxes 3,339 1,190 4,854 1,667
-------- -------- -------- --------
Net income $ 4,973 $ 5,067 $ 6,899 $ 7,103
======== ======== ======== ========
Per Common Share - Basic
Net income $ 0.28 $ 0.30 $ 0.40 $ 0.42
======== ======== ======== ========
Weighted Average Common Shares
Outstanding 17,506 17,112 17,455 17,100
======== ======== ======== ========
Per Common Share - Diluted
Net income $ 0.27 $ 0.28 $ 0.38 $ 0.39
======== ======== ======== ========
Weighted Average Common Shares
Outstanding 18,334 18,359 18,231 18,349
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
DUANE READE INC.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June 24, December 25,
ASSETS 2000 1999
--------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash $ 1,123 $ 1,013
Receivables 39,755 38,266
Inventories 159,716 152,277
Deferred income taxes 14,219 15,427
Prepaid expenses and other current assets 5,125 4,107
--------- ---------
TOTAL CURRENT ASSETS 219,938 211,090
Property and equipment, net 96,870 89,958
Goodwill, net of accumulated amortization of $28,841 and $26,745 146,878 148,975
Deferred income taxes 16,345 19,808
Other assets 46,858 40,463
--------- ---------
TOTAL ASSETS $ 526,889 $ 510,294
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 40,895 $ 50,199
Accrued interest 5,265 3,519
Other accrued expenses 21,706 25,585
Current portion of long-term debt 10,950 9,850
Current portion of capital lease obligations 1,927 1,901
--------- ---------
TOTAL CURRENT LIABILITIES 80,743 91,054
Long-term debt, less current portion 332,263 326,313
Capital lease obligations, less current portion 1,855 2,978
Other noncurrent liabilities 29,780 23,433
--------- ---------
TOTAL LIABILITIES 444,641 443,778
--------- ---------
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 17,584,217 and 17,202,955 shares 176 172
Paid-in capital 138,070 129,241
Accumulated deficit (55,998) (62,897)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 82,248 66,516
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 526,889 $ 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 26 Weeks Ended
---------------------------
June 24, June 26,
2000 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,899 $ 7,103
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and 6,745 4,803
equipment
Amortization of goodwill and other intangibles 6,072 5,453
Deferred tax provision 4,671 0
Gain on sale of assets 0 (444)
Other 2,417 2,452
Changes in operating assets and liabilities
(net of effect of acquisitions):
Receivables (1,489) (4,537)
Inventories (7,233) (11,109)
Accounts payable (2,421) 8,534
Prepaid and accrued expenses (3,729) (7,280)
Increase in other (assets) liabilities, net (4,114) 34
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,818 5,009
-------- --------
Cash flows from investing activities:
Pharmacy acquisitions 0 (10,332)
Proceeds from sale of assets 0 10,732
Lease acquisition and other costs (464) (3,836)
Capital expenditures (12,764) (24,905)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (13,228) (28,341)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) - term loans 5,050 22,138
Net borrowings (repayments) - revolving credit facility 2,000 2,500
Exercise of stock options 582 840
Financing costs (1,177) (1,080)
Repayments of capital lease obligations (935) (973)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,520 23,425
-------- --------
Net increase in cash 110 93
Cash at beginning of period 1,013 869
-------- --------
Cash at end of period $ 1,123 $ 962
======== ========
</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 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 226,843 shares at
June 24, 2000 and 75,429 shares at June 26, 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, 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 twenty-six weeks ended June 24,
2000, the tax provision was based on a 44% effective tax rate reduced by $0.3
million for jobs tax credits. For the quarter and six months ended June 26,
1999, the effective tax rate was 19%, reflecting benefits of certain tax loss
carryforwards.
4. ACQUISITIONS
During the first six months of fiscal 2000, the Company acquired certain assets
of eight separate independently owned single site pharmacy establishments. The
total cost of these acquisitions was $8.7 million, principally paid for by the
issuance of additional capital stock and allocated as follows: lease acquisition
($5.6 million), customer lists ($1.8 million), inventory ($0.8 million), and
property and equipment ($0.8 million), net of reserves for expenses and
liabilities assumed ($0.3 million). For the 13 weeks ended June 24, 2000, the
Company acquired certain assets of five pharmacy establishments at a total cost
of $3.3 million. The operations of the acquired stores have been included in the
consolidated statement of income from the date of acquisition and are not
material to the results of operations of the Company.
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 For the 26 Weeks Ended
-------------------------- ------------------------
June 24, June 26, June 24, June 26,
2000 1999 2000 1999
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income $ 4,973 $ 5,067 $ 6,899 $ 7,103
======= ======= ======= =======
Weighted average number of common shares
outstanding during the period - basic 17,506 17,112 17,455 17,100
Potential dilutive shares 828 1,247 776 1,249
------- ------- ------- -------
Weighted average number of shares outstanding -
diluted 18,334 18,359 18,231 18,349
======= ======= ======= =======
Per common share - basic
------- ------- ------- -------
Net Income $ 0.28 $ 0.30 $ 0.40 $ 0.42
======= ======= ======= =======
Per common share - diluted
------- ------- ------- -------
Net Income $ 0.27 $ 0.28 $ 0.38 $ 0.39
======= ======= ======= =======
</TABLE>
6. SUBSEQUENT EVENTS
On July 6, 2000, the Company announced it had completed an agreement to acquire
five Manhattan-based stores from the Value Drug chain. The acquisition, subject
to certain closing conditions, is expected to be completed by early August. The
five new stores are expected to add approximately $25 million in annual sales
and $2.5 million in annual EBITDA. The cost of this acquisition is approximately
$10.0 million that will be funded primarily from issuance of additional common
stock. This transaction is part of the Company's normal planned expansion
program and is not expected to have a material impact on future financial
results of operations. As of July 25, the Company completed the acquisition of
four of these stores.
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, 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 26 Weeks Ended
------------------------------- -------------------------------
June 24, 2000 June 26, 1999 June 24, 2000 June 26, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 75.2 75.0 75.5 75.4
------------ ------------ ------------ ------------
Gross profit 24.8 25.0 24.5 24.6
Selling, general and admin expenses 15.1 15.9 15.7 16.3
Amortization 1.1 1.2 1.1 1.2
Depreciation 1.4 1.2 1.4 1.2
Store pre-opening expense 0.2 0.3 0.2 0.2
------------ ------------ ------------ ------------
Operating income 7.0 6.4 6.1 5.7
Interest expense, net 3.6 3.4 3.6 3.5
------------ ------------ ------------ ------------
Income before income taxes 3.4 3.0 2.5 2.2
Income taxes 1.4 0.6 1.0 0.4
------------ ------------ ------------ ------------
Net income 2.0 % 2.4 % 1.5 % 1.8 %
============ ============ ============ ============
</TABLE>
THIRTEEN WEEKS ENDED JUNE 24, 2000 VERSUS THIRTEEN WEEKS ENDED JUNE 26, 1999
Net sales in the second quarter 2000 were $243.5 million, an increase of 16.7%
over last year's second quarter net sales of $208.7 million. Pharmacy sales
increased 29.0% and represented 35.0% of total sales while front-end sales
increased 11.0% and represented 65.0% of total sales. The increase in total
sales over last year was attributable to increased comparable store sales of
7.3%, the full quarterly impact of 11 stores opened during the second quarter
1999 and the sales from 18 additional stores which have opened since the
comparable period last year. The higher rate of growth in pharmacy sales over
the prior year was attributable to higher inflation, the mix of prescription
drugs
8
<PAGE>
dispensed and a faster rate of growth in numbers of prescriptions dispensed. All
of these factors were in line with general industry trends.
The Company opened seven stores during the second quarter 2000 and operated 160
stores at June 24, 2000, compared to 142 at June 26, 1999.
Gross profit margin decreased to 24.8% for the 13 weeks ended June 24, 2000
compared to 25.0% for the 13 weeks ended June 26, 1999, reflecting the impact of
a faster rate of growth in lower margin pharmacy sales.
Selling, general and administrative expenses were $36.8 million or 15.1% of net
sales and $33.1 million or 15.9% of net sales in the second 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 in the second quarters of 2000
and 1999 was $2.7 million and $2.5 million, respectively. This increase resulted
primarily from increases in the amortization of lease acquisition and customer
list costs for pharmacy acquisitions completed since the comparable period last
year.
Depreciation increased from $2.4 million in the second quarter of 1999 to $3.4
million in the second 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 $0.4 million during the second quarter
of 2000 related to the opening of seven stores. Pre-opening costs of $0.7
million recorded during the second quarter of 1999 were attributable to the
opening of eleven stores.
Net interest expense increased 22.2% to $8.8 million in the second quarter of
2000 from $7.2 million in the second quarter of 1999. The increase is
attributable to several factors, including higher average borrowing on the
Company's revolving credit facility ($0.6 million), additional term and other
borrowings obtained subsequent to the second quarter of 1999 ($0.4 million) and
an increase in short-term interest rates ($0.6 million) that directly affected
the Company's interest rate on its floating rate term and revolving loans.
Income before income taxes increased by $2.0 million or 32.8% from $6.3 million
in the second quarter of 1999 to $8.3 million in the second quarter of 2000.
Income tax expense for the second quarter of 2000 was $3.3 million or 1.4% of
net sales, and reflects the anticipated full-year 44% tax rate reduced by a $0.3
million benefit for job tax credits. In the second quarter of 1999, the Company
recorded income tax expense of $1.2 million or 0.6% of sales, based upon an
effective rate of 19% that reflected the benefits of certain tax loss
carryforwards.
The Company's net income decreased slightly to $5.0 million in the second
quarter of 2000 from $5.1 million in the second quarter 1999 due to the factors
previously discussed.
TWENTY-SIX WEEKS ENDED JUNE 24, 2000 VERSUS TWENTY-SIX WEEKS ENDED JUNE 26, 1999
Net sales for the twenty-six weeks ended June 24, 2000 were $469.8 million, an
increase of 17.7% over the net sales for the first twenty-six weeks of 1999 of
$399.0 million. Pharmacy sales increased 31.6% and represented 34.8% of total
sales while front-end sales increased 11.5% and represented 65.2% of total
sales. The increase in total sales was attributable to increased comparable
store sales of 7.7% 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.
9
<PAGE>
The Company opened 11 stores during the first half of 2000 compared to 14 store
openings during the same period last year.
Gross profit margin for the twenty-six weeks ended June 24, 2000 as a percentage
of net sales decreased slightly to 24.5% from 24.6% 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 $73.5 million or 15.7% of net
sales and $64.9 million or 16.3% of net sales for the twenty-six weeks ended
June 24, 2000 and June 26, 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 twenty-six weeks ended
June 24, 2000 and June 26, 1999 was $5.2 million and $4.8 million, respectively.
The increase resulted principally from the amortization of lease acquisition and
customer list costs for additional pharmacy acquisitions completed during the
second half of 1999 and the first half of 2000.
The increase in depreciation from $4.8 million for the twenty-six weeks ended
June 26, 1999 to $6.7 million for the twenty-six weeks ended June 24, 2000 was
primarily attributable to incremental depreciation on stores opened in 1999 and
additional depreciation on new stores opened in the first half of 2000.
The Company incurred pre-opening costs of $0.8 million during the twenty-six
weeks ended June 24, 2000 related to the opening of 11 stores. Pre-opening costs
of $1.0 million were incurred during the twenty-six weeks ended June 26, 1999
for the opening of 14 stores.
Net interest expense increased 21.4% to $17.0 million during the twenty-six
weeks ended June 24, 2000 from $14.0 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 ($0.9 million), higher average
borrowing on the Company's revolving credit facility ($1.1 million) and the
effect of increases in short-term interest rates ($1.0 million).
Income before income taxes for the twenty-six weeks ended June 26, 2000
increased by $3.0 million to $11.8 million from $8.8 million in the comparable
prior year period, primarily as a result of increased sales and gross profit
dollars partially offset by increased selling, general and administrative
expenses.
Income tax expense for the twenty-six weeks ended June 24, 2000 was $4.9
million or 1.0% of net sales, compared to $1.7 million or 0.4% of net sales
for the first half of 1999. The current year's expense reflects an effective
rate of 44.0%, offset by $0.3 million in jobs tax credit benefits, resulting
in a net tax rate of 41.3%. The 19.0% effective tax rate used in 1999
reflected the utilization of accumulated net operating loss carryforwards.
The Company's net income for the twenty-six weeks ended June 24, 2000 decreased
by 2.8% to $6.9 million compared to $7.1 million for the twenty-six weeks ended
June 26, 1999 due to the factors previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $139.2 million and $120.0 million as of June 24, 2000 and
December 25, 1999, respectively. The increase is primarily due to additional
inventory of $7.4 million resulting from the opening of 11 stores during the
first six months of 2000, reduction of accrued expenses by $2.0 million
reflecting payment of prior year incentives 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.
The Company's EBITDA (earnings before interest, taxes, depreciation,
amortization, and other non-cash items) for the second quarter of 2000 increased
by 26.3% to $24.4 million from $19.3 million for the second quarter of 1999.
10
<PAGE>
EBITDA as a percentage of sales was 10.0% for the second quarter of 2000
compared to 9.2% for the second quarter of 1999. The Company's EBITDA for the
twenty-six weeks ended June 24, 2000 increased by 25.9% to $43.2 million from
$34.3 million for the twenty-six weeks ended June 26, 1999. EBITDA as a
percentage of sales was 9.2%, compared to 8.6% in the comparable prior year
period.
For the twenty-six weeks ended June 24, 2000 net cash provided by operating
activities was $7.8 million, compared to $5.0 million during the twenty-six
weeks ended June 26, 1999. The increase of $2.8 million is primarily
attributable to the increase in EBITDA of $8.9 million, partially offset by the
increase in interest expense of $3.1 million and a deferred payment of $2.5
million related to the 1999 acquisition of several pharmacies.
During the twenty-six weeks ended June 24, 2000, net cash used in investing
activities was $13.2 million compared to $28.3 million during the twenty-six
weeks ended June 26, 1999. The decrease from 1999 of $15.1 million is primarily
due to capital expenditures made last year to complete the conversions of
acquired Rock Bottom locations, as well as three fewer store openings completed
in the first twenty-six weeks this year. Cash used for investing activities in
the twenty-six weeks ended June 26, 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 and the related inventory as well as the
Company's former distribution center.
For the twenty-six weeks ended June 24, 2000, net cash provided by financing
activities was $5.5 million, compared to $23.4 million during the twenty-six
weeks ended June 26, 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 action 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 June 24, 2000, the Company had $30.5 million outstanding under the revolving
credit facility and remaining availability of approximately $24.5 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 20 stores, including the 11 stores opened through June 24, during
the current fiscal year. The Company expects to spend approximately $27 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 12).
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
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<PAGE>
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.
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, but may do so in the future.
The Company is required to adopt Statement No. 133 for the third quarter of
2000. Adoption of Statement No. 133 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 $263.2
million at June 24, 2000 which is about the same level the Company expects its
outstanding variable rate debt to be during the next twelve months. Based on
June 24, 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 June 24, 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 six months ended June 24, 2000, 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 June 24, 2000 the thirty-day LIBOR rate was approximately 6.7%.
12
<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
The Company's annual meeting of stockholders was held on May 1,
2000. At the meeting, the shareholders elected Carl M. Pradelli to serve as a
new member of the Board of Directors through the 2001 meeting. The election of
Mr. Pradelli fills the vacancy resulting from the resignation of Mr. Andrew J.
Nathanson. All remaining members of the Board of Directors, composed of Anthony
J. Cuti, Nicole Arnaboldi, David L. Jaffe, Kevin Roberg and David W. Johnson,
were re-elected to serve through the 2001 meeting.
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
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<PAGE>
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).
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, 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.
14
<PAGE>
(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).
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.
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.
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: July 27, 2000
DUANE READE, INC.
(Registrant)
By: /s/ John K. Henry
-----------------
Name: John K. Henry
Title: Senior Vice President and
Chief Financial Officer
15
<PAGE>
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 July 27, 2000.
SIGNATURES TITLES
---------- ------
/s/ Anthony J. Cuti President and Chief Executive Officer and
------------------------------ Director (Principal Executive Officer)
Anthony J. Cuti
/s/ John K. Henry Senior Vice President and Chief Financial
------------------------------ Officer (Principal Accounting and Financial
John K. Henry 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: July 27, 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 July 27, 2000 by:
SIGNATURES TITLES
---------- ------
/s/ Anthony J. Cuti President and Chief Executive Officer and
------------------------------ Director (Principal Executive Officer)
Anthony J. Cuti
/s/ John K. Henry Senior Vice President and Chief Financial
------------------------------ Officer (Principal Accounting and Financial
John K. Henry 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: July 27, 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 Chief Title: Senior Vice President and
Financial Officer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on July 27, 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)
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: July 27, 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 July 27, 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)
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: July 27, 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 July 27, 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
