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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 8-K


CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): December 8, 2004


DUANE READE INC.
(Exact Name of Registrant as Specified in Its Charter)


    001-13843
(Commission File Number)
   
DELAWARE
(State or Other Jurisdiction
of Incorporation)
      04-3164702
(I.R.S. Employer
Identification No.)


440 Ninth Avenue
New York, NY 10001
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (212) 273-5700


Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))




Item 2.02.    Results of Operations and Financial Condition.

        The following information regarding Duane Reade Inc. ("we," "us" or the "Company") was provided on December 8, 2004 to potential lenders in connection with a proposed secured debt financing of up to $160.0 million to refinance its $155.0 million existing senior secured term loan facility.

1.
Pro forma financial information

        The unaudited pro forma financial data reflects adjustments to our consolidated historical financial data to give pro forma effect to the following transactions and other items (excluding non-recurring items), including:

2



 
  (dollars in thousands)

 
Cash   $ 34,300  
Inventory     256,200  
Other current assets     74,100  
Property, plant & equipment     194,000  
Identified intangibles     175,700  
Other assets     43,700  
Goodwill     188,900  
Deferred tax assets     9,900  
Current liabilities     (105,500 )
Non-current liabilities     (82,100 )
Senior convertible debt      
Capital leases     (3,100 )
Deferred tax liabilities     (38,600 )
   
 
  Total purchase price   $ 747,500  
   
 

        SEC rules would otherwise require that the pro forma consolidated financial information not give effect to the transactions described in the tenth bullet above, if any and the use of the proceeds from those transactions. However, in the pro forma financial statements included in this report, we are giving pro forma effect to such transactions as if they occurred in connection with the Acquisition. The pro forma financial information contained in this report has been prepared for our direct parent, Duane Reade Holdings, Inc. and all of its direct and indirect subsidiaries on a consolidated basis.

        The unaudited pro forma balance sheet as of September 25, 2004 consists of the historical balance sheet as of September 25, 2004, adjusted to give pro forma effect to the transactions listed in the tenth bullet above, as if such transactions had occurred on September 25, 2004. The unaudited pro forma statements of operations for the fiscal year ended December 27, 2003 and the twelve months and the 39 weeks ended September 25, 2004 give pro forma effect to each of the above items as if it had occurred as of the first day of the fiscal year ended December 27, 2003.

        The pro forma adjustments are based on preliminary estimates, available information and certain assumptions that we believe are reasonable and may be revised as additional information becomes available, some of which will be based on third-party appraisals currently being conducted. We fully expect to complete these valuations and the final allocation of the purchase price within the allowable one-year time frame from the completion of the Acquisition. The pro forma adjustments and certain assumptions are described in the accompanying notes.

        The unaudited pro forma financial information set forth below should be read in conjunction with our historical financial information and "Management's Discussion and Analysis of Financial Condition and Results of Operations" which are included in documents we have filed with the SEC.

3



Duane Reade Holdings, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
September 25, 2004
(dollars in thousands)

 
  Successor
  Pro Forma
Adjustments

  Pro Forma
Assets                  
Current assets                  
  Cash   $ 1,377   $   $ 1,377
  Receivables     56,686         56,686
  Inventories     264,064         264,064
  Deferred income taxes     20,590         20,590
  Prepaid expenses and other current assets     19,224         19,224
   
 
 
    Total current assets     361,941         361,941
Property and equipment, net     194,809         194,809
Goodwill     188,892         188,892
Other assets     217,508     4,300  (1)   217,213
            (4,595 )(2)    
   
 
 
    Total assets     963,150     (295 )   962,855
   
 
 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 
Current liabilities                  
  Accounts payable     80,323           80,323
  Accrued interest     3,839           3,839
  Other accrued expenses     63,747     (547 )(3)   63,200
  Current portion of capital leases     762           762
   
 
 
    Total current liabilities     148,671     (547 )   148,124
Long-term debt     502,971     5,000  (4)   510,918
            2,947  (5)    
Capital lease obligations     2,209           2,209
Deferred income taxes     17,196           17,196
Other non-current liabilities     90,149           90,149
   
 
 
    Total liabilities     761,196     7,400     768,596
Stockholders' equity     201,954     (7,695 )(6)   194,259
   
 
 
  Total liabilities and stockholders' equity     963,150     (295 )   962,855
   
 
 

The accompanying notes are an integral part of the
unaudited pro forma consolidated financial statements.

4



Notes to the Unaudited Pro Forma Consolidated Balance Sheet
(dollars in thousands)

(1)
To record the financing fees associated with the incurrence of new indebtedness.

(2)
To write-off the financing fees associated with the existing senior term loan facility.

(3)
To reflect the payment of accrued interest on the existing senior term loan facility.

(4)
To adjust debt for the repayment of the existing senior term loan facility and the incurrence of new indebtedness.

(5)
To record the additional borrowings under our amended asset-based revolving loan facility.

(6)
To adjust stockholders' equity for the write-off of deferred financing fees and the payment of the premium on the existing senior term loan facility.

5



Duane Reade Holdings, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the thirty-nine weeks ended September 25, 2004
(dollars in thousands)

 
  Duane Reade Inc.
(Successor)

  Duane Reade Inc.
(Predecessor)

  Pro Forma
Adjustments

  Pro Forma
 
Net sales   $ 217,556   $ 846,842   $   $ 1,064,398  
Cost of sales     172,765     663,223         835,988  
   
 
 
 
 
  Gross profit     44,791     183,619         228,410  
Selling, general & administrative expenses     37,355     142,293     (927)  (1)   178,721  
Labor contingency expense     689     2,611         3,300  
CEO SERP Termination     24,500         (24,500)  (2)    
Transaction expenses     37,118     3,005     (40,123)  (8)    
Depreciation and amortization     7,280     21,902     7,049  (4)   36,231  
Store pre-opening expenses     366     470         836  
Other     791         2,637  (3)   3,428  
   
 
 
 
 
  Operating income (loss)     (63,308 )   13,338     55,864     5,894  
Interest expense, net     6,283           11,974  (5)   27,029  
            7,977     795  (6)      
   
 
 
 
 
  Income (loss) before income taxes     (69,591 )   5,361     43,095     (21,135 )
Income tax expense (benefit)     (32,048 )   1,555     19,565  (9)   (10,928 )
   
 
 
 
 
  Net income (loss)   $ (37,543 ) $ 3,806   $ 23,530   $ (10,207 )
   
 
 
 
 

The accompanying notes are an integral part of the
unaudited pro forma consolidated statements of operations.

6



Duane Reade Holdings, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the year ended December 27, 2003
(dollars in thousands)

 
  Duane Reade Inc.
(Predecessor)

  Pro Forma
Adjustments

  Pro Forma
 
Net sales   $ 1,383,828       $ 1,383,828  
Cost of sales     1,087,092         1,087,092  
   
 
 
 
  Gross profit     296,736         296,736  
Selling, general & administrative expenses     227,910     (1,344 )(1)   226,566  
Labor contingency expense     12,600         12,600  
Transaction expenses     644     (644 )(8)    
Depreciation and amortization     32,335     10,516  (4)   42,851  
Store pre-opening expenses     1,063         1,063  
Other         4,571  (3)   4,571  
   
 
 
 
  Operating income (loss)     22,184     (13,099 )   9,085  
Interest expense, net     14,117     20,835
1,565
 (5)
 (6)
  36,517  
Debt extinguishment     812     (812 )(7)    
   
 
 
 
  Income (loss) before income taxes     7,255     (34,687 )   (27,432 )
Income tax expense (benefit)     2,181     (15,748 )   (13,567 )
   
 
 
 
  Net income (loss)   $ 5,074   $ (18,939 ) $ (13,865 )
   
 
 
 

The accompanying notes are an integral part of the
unaudited pro forma consolidated statement of operations.

7



Duane Reade Holdings, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
For the fifty-two weeks ended September 25, 2004
(dollars in thousands)

 
  Duane Reade Inc.
(Successor)

  Duane Reade Inc.
(Predecessor)

  Pro Forma
Adjustments

  Pro Forma
 
Net sales   $ 217,556   $ 1,203,272   $   $ 1,420,828  
Cost of sales     172,765     942,192         1,114,957  
   
 
 
 
 
  Gross profit     44,791     261,080         305,871  
Selling, general & administrative expenses     37,355     203,071     (1,318 )(1)   239,108  
Labor contingency expense     689     15,211         15,900  
CEO SERP Termination     24,500         (24,500)  (2)    
Transaction expenses     37,118     3,649     (40,767)  (8)    
Depreciation and amortization     7,280     30,364     9,980  (4)   47,624  
Store pre-opening expenses     366     734         1,100  
Other     791         3,780  (3)   4,571  
   
 
 
 
 
  Operating income (loss)     (63,308 )   8,051     52,825     (2,432 )
Interest expense, net     6,283    
11,643
    17,212
1,192
 (5)
 (6)
  36,330  
   
 
 
 
 
  Income (loss) before income taxes     (69,591 )   (3,592 )   34,421     (38,762 )
Income tax expense (benefit)     (32,048 )   (3,396 )   15,627  (9)   (19,817 )
   
 
 
 
 
  Net income (loss)   $ (37,543 ) $ (196 ) $ 18,794   $ (18,945 )
   
 
 
 
 

The accompanying notes are an integral part of the
unaudited pro forma consolidated statement of operations.

8



Notes to the Unaudited Pro Forma Consolidated Statements of Operations
(dollars in thousands)

(1)
Records the elimination of expenses associated with having listed equity securities.

(2)
Represents the reversal of the non-recurring expense associated with our election to terminate our CEO's Supplemental Executive Retirement Plan obligations in accordance with his amended employment agreement.

(3)
Records an annual management fee of $1.25 million payable to Oak Hill and employee benefit costs due to our CEO as a result of his new employment contract.

(4)
Records pro forma amortization expense relating to identifiable intangible assets as shown below with a weighted average amortizable life of 8.8 years.

Description
  Amount
  Amortizable
Life (years)

Lease acquisition costs   $ 108,780   10.0
Pharmacy customer files     75,486   7.0
   
 
    $ 184,266   8.8
   
 
(5)
Records pro forma interest expense associated with the incurrence of the senior subordinated notes, the additional borrowings under the amended asset-based revolving loan facility in connection with the Acquisition, the repurchase of the convertible notes and the transactions in connection with this offering, including (1) the incurrence of $160.0 million of new indebtedness, (2) an additional $2.9 million of borrowings under our amended asset-based revolving loan facility; and (3) the repayment of $155.0 million in outstanding principal, plus $3.6 million of premium and accrued but unpaid interest through September 25, 2004, under our existing senior term loan facility. As detailed in the table below, a change in the overall interest rate of one-eighth of one percent would affect annual interest expense by approximately $0.6 million.

 
  Pro forma adjustment
   
   
Debt component
  12 months
ended
December 27, 2003

  52 weeks
ended
September 25, 2004

  39 weeks
ended
September 25, 2004

  Pro forma principal
at
September 25, 2004

  Impact of 0.125%
change in
interest rate

Asset-based revolving loan   $ 2,113   $ 1,208   $ 1,008   $ 155,886   $ 195
New Indebtedness     7,182     7,230     5,148     160,000     200
9.75% senior subordinated notes     18,993     15,992     11,238     195,000     244
2.1478% senior convertible notes     (7,453 )   (7,218 )   (5,420 )   32     0
   
 
 
 
 
    $ 20,835     17,212   $ 11,794   $ 510,918   $ 639
   
 
 
 
 
(6)
Records the pro forma amortization of deferred financing fees, utilizing the interest method calculated over the lives of the underlying debt.

(7)
Records the reversal of debt extinguishment expense for debt retired as part of the Acquisition.

9


(8)
Records the reversal of non-recurring transaction-related expenses associated with the Acquisition as shown below (dollars in millions):

Non-Recurring
Transaction-
Related Expenses

  12 months
ended
December 27, 2003

  52 weeks
ended
September 25, 2004

  39 weeks
ended
September 25, 2004

Change of control payments to management   $   $ 14.7   $ 14.7
Legal and professional fees     0.6     18.0     17.4
Transaction fees payable to Oak Hill upon consummation of the Acquisition         8.0     8.0
   
 
 
    $ 0.6   $ 40.7   $ 40.1
   
 
 
(9)
Records the adjustment to the tax provision resulting from the pro forma adjustments. The calculation contemplates a federal statutory tax rate of 35.0%, a combined New York State and New York City statutory tax rate (net of the federal benefit) of 10.6%, and an overall effective tax rate of 45.4%.

10


2.
A reconciliation of pro forma net loss to pro forma Adjusted FIFO EBITDA is as follows:

 
  Pro Forma
Twelve Months
Ended
September 25, 2004

 
Net (loss)   $ (18,945 )
Income tax (benefit)     (19,817 )
Interest expense, net     36,330  
Depreciation and amortization(a)     47,624  
Labor contingency expense     15,900  
Deferred non-cash rent expense(b)     6,729  
Oak Hill management fee(c)     1,250  
Employee benefit cost due to the CEO(d)     3,321  
LIFO (Income) Provision     630  
   
 
Adjusted FIFO EBITDA   $ 73,022  
   
 

11


3.
The following are certain normalization adjustments for the pro forma fifty-two weeks ended September 25, 2004 and for the fiscal year ended (estimated) December 25, 2004:

($ in millions)

Normalization Adjustments

  LTM
9/25/04

  FYE
12/25/04

  Comments

One-Time Costs                
  Non-recurring professional fees   $ 5.4   $ 4.1   Non-recurring professional fees paid to outside legal counsel to cover unusual events
  Severance costs   $ 0.2   $ 0.2   Severance costs associated with workforce reduction
  Shelf relabeling program cost   $ 0.5   $ 0.1   One-time costs associated with implementation of shelf labeling program commencing in Q4' 03.
   
 
   
  Total one-time costs   $ 6.1   $ 4.4    
Implemented Costs Reductions                
  Workforce reduction savings   $ 1.0   $ 0.3   Payroll costs associated with 66 employees which have been terminated or moved to recently vacated or newly opened store manager positions
  Shelf relabeling costs savings   $ 0.5       Unrealized cost savings associated with shelf relabeling program to give full year effect
   
 
   
  Total cost reductions   $ 1.5   $ 0.3    
  Public company expenses   $ (a) $ 0.9    
   
 
   
Total Normalization Adjustments   $ 7.6   $ 5.6    

(a)
These costs were eliminated in the pro forma statements of operations for the 52 weeks ended September 25, 2004 and amounted to $1.3 million.

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4.
Collateral Coverage

($ in millions)

  September 25, 2004
Balance

Collateral for Amended Asset-Based Revolving Loan Facility      
Accounts Receivable, net   $ 56.7
Inventory, net     264.1
Prescription File(1)     67.0
   
Total Collateral   $ 387.8

Other Collateral

 

 

 
Tangible      
Property and Equipment, net   $ 191.1

Intangible

 

 

 
Trademark(2)   $ 130.0
Market Value of Real Estate Leases(3)     100.0
   
Total   $ 421.1

Senior Secured Debt as a % of Total Enterprise Value

 

 

42.1%

(1)
Appraised value of prescription files based on the amended asset-based revolving loan agreement.

(2)
Management estimate based on previous 3rd party analysis.

(3)
Based on lease analysis provided by a third party. Value represents present value of below market leases.

13


        As used in this offering memorandum, Adjusted FIFO EBITDA means earnings before interest, income taxes, depreciation, amortization, expenses related to the Acquisition, labor contingency expense, non-cash charges and credits related to the LIFO inventory valuation method, extraordinary charges and other non-recurring charges. We believe that Adjusted FIFO EBITDA, as presented, represents a useful measure of assessing the performance of our ongoing operating activities, as it reflects our earnings trends without the impact of certain non-cash charges and other non-recurring items. Targets and positive trends in Adjusted FIFO EBITDA are used as performance measures for determining certain compensation of management. Adjusted FIFO EBITDA is also used by some of our creditors in assessing debt covenant compliance.

        We understand that, although security analysts frequently use Adjusted FIFO EBITDA in the evaluation of companies, it is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. Adjusted FIFO EBITDA is not intended as alternative to net income as an indicator of our operating performance, as an alternative to any other measure of performance in conformity with generally accepted accounting principles nor as an alternative to cash flow from operating activities as a measure of liquidity.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This report contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Securities Exchange Act and the Private Securities Litigation Reform Act of 1995, that involve a number of risks and uncertainties. These statements relate to future events or our future financial performance with respect to our financial condition, results of operations, business plans and strategies, operating efficiencies or synergies, competitive positions, growth opportunities for existing products such as private label merchandise, plans and objectives of management, capital expenditures, growth and maturation of our stores and other matters. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "could," "would," "should," "expect," "plan," "anticipate," "intend," "believe," "estimate," "predict," "potential," "pro forma," "seek" or "continue" or the negative of those terms or other comparable terminology. These statements are only predictions and such expectations may prove to be incorrect. Some of the things that could cause our actual results to differ substantially from our expectations are:

14


        We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this report. We do not, nor does any other person, assume responsibility for the accuracy and completeness of those statements.

        We caution you that the areas of risk described above may not be exhaustive. We operate in a continually changing business environment, and new risks emerge from time to time. Management cannot predict such new risks, nor can it assess the impact, if any, of such risks on our businesses or the extent to which any risk or combination of risks, may cause actual results to differ materially from those projected in any forward-looking statements. In light of these risks, uncertainties and assumptions, you should keep in mind that any forward-looking statement made in this offering memorandum might not occur.

15



SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: December 8, 2004

    DUANE READE INC.

 

 

By:

/s/  
JOHN K. HENRY      
John K. Henry
Senior Vice President and Chief Financial Officer

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QuickLinks

Duane Reade Holdings, Inc. Unaudited Pro Forma Consolidated Balance Sheet September 25, 2004 (dollars in thousands)
Notes to the Unaudited Pro Forma Consolidated Balance Sheet (dollars in thousands)
Duane Reade Holdings, Inc. Unaudited Pro Forma Consolidated Statement of Operations For the thirty-nine weeks ended September 25, 2004 (dollars in thousands)
Duane Reade Holdings, Inc. Unaudited Pro Forma Consolidated Statement of Operations For the year ended December 27, 2003 (dollars in thousands)
Duane Reade Holdings, Inc. Unaudited Pro Forma Consolidated Statement of Operations For the fifty-two weeks ended September 25, 2004 (dollars in thousands)
Notes to the Unaudited Pro Forma Consolidated Statements of Operations (dollars in thousands)
SIGNATURES