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TRANSCRIPT OF FEBRUARY 19, 2004 CONFERENCE CALL
PRESENTATION
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OPERATOR
Good morning, Ladies and gentlemen. And welcome to the Duane Reade Incorporated
fourth quarter conference call. During the presentation, all participants will
be in listen-only mode. Afterwards, you will be invited to participate in a
question-and-answer session. And at that time, if you have a question, you will
need to press the star followed by the 1 on your push-button phone. Finally, any
reproduction of this call on whole or in part is not permitted without prior
express written authorization of Duane Reade. And, as a reminder, ladies and
gentlemen, this conference is being recorded.
I would now like to introduce your host for today's conference, Miss Cara
O'Brien of Financial Dynamics. Please go ahead ma'am.
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CARA O'BRIEN - FINANCIAL DYNAMICS - HOST
Thank you, operator. Good morning everyone. Thank you for joining us for this
discussion of Duane Reade's fourth quarter results. By now you should have
received a copy of the press release. But if you have not, please call my office
at 212-850-5600 and we'll get one out to you immediately.
Before introducing Duane Reade's management team, I need to take a few minutes
to read some language. In connection with the acquisition of the company by Oak
Hill, Duane Reade intends to file relevant materials with the SEC including a
proxy statement and acquiring entities will file other relevant documents with
the SEC. Because those documents will contain important information, holders of
Duane Reade common stock are urged to read them if and when they become
available.
When filed with the SEC, they will be available for free along with any other
documents and reports filed by Duane Reade with the SEC at the SEC's web site,
www.sec.gov and Duane Reade stockholders will receive information at an
appropriate time on how to obtain transaction-related documents for free from
Duane Reade. Such documents are not currently available.
Duane Reade LLC, Duane Reade Holdings Inc., and Duane Reade Acquisition Corp.
were formed as the acquiring entities at the direction of the equity sponsors
which currently include Oak Hill Capital Partners L.P., Oak Hill Capital
Management Partners L.P., and certain members of Duane Reade's management.
Andrew J. Nathanson and Tyler J. Wolfram are the initial directors of each
newly-formed Delaware corporation. These entities and their directors and
officers may be deemed to be participants in the solicitation of proxies in
connection with the proposed transaction.
As of the date of this communication, Mr. Nathanson has an indirect interest,
though his participation in investment -- excuse me, through his participation
in an investment partnership of less than 1% in the outstanding shares of the
common stock of Duane Reade and none of the other foregoing participants has any
direct or indirect interest by security holdings or otherwise in Duane Reade.
Duane Reade and its directors and executive officers may be deemed to be
participants in the solicitation of proxies from its stockholders in connection
with the proposed transaction.
Certain information regarding the participants and their interest in the
solicitation is set forth in proxy statement for Duane Reade's 2003 annual
meeting of stockholders filed with the SEC on April 10, 2003, and the form 4s
filed by Duane Reade's directors and executive officers since April 10, 2003.
Stockholders may obtain additional information regarding the interest of such
participants by reading the proxy statement relating to the proposed transaction
when it becomes available.
Except for historical information contained herein, and statements relating to
the acquisition of the company by Oak Hill, the statements in this earnings call
are forward-looking and are made pursuant to the safe harbor provisions of the
Private Securities Litigations Reform act of 1995.
In addition, this document may contain -- pardon me, this call may contain
statements, estimates or projections relating to, among other things, the
acquisition by -- of the company by Oak Hill that constitute forward-looking
statements as defined under U.S. federal securities laws. Forward-looking
statements involve known and unknown risks and uncertainties, which may cause
the company's actual results and future periods to differ materially from
forecasted or expected results.
Those risks include among other things the competitive environment in the drug
store industry in general and in the company's specific market area, inflation,
changes in costs-of-goods sold and services and economic conditions in general,
and in the company's specific market area. Those and other risks are more fully
described in Duane Reade's reports filed with the SEC from time to time
including its annual reports on form 10-K, quarterly reports on form 10-Q and
the current reports on form 8-K.
You should not place undue reliance on forward-looking statements which speak
only as of the date they are made. Except to the extent otherwise required by
federal securities laws, we do not undertake to publicly update or revise any
forward-looking statements.
I would now like to introduce Tony Cuti, Chairman of the Board and CEO, and John
Henry, Senior Vice President and CFO. Tony will make some opening comments about
the quarter and then they will take your questions. Tony, please go ahead.
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Thank you Cara, and good morning everyone.
The fourth quarter release is out, I think the numbers are available to
everyone. So, I won't just reread the figures. The key results we want to focus
on were the same-store sales, front-end and pharmacy respectively.
The pharmacy at 7% continues to run at less than what we would have anticipated
to be our comp store rate there. We think the sluggishness in pharmacy which we
and the industry continue to see is a product of first the comping against less
impactful numbers of the prior year as a result of some of the OTC moves we had,
but also very much a reduction in prescription, prescription issued as a result
of the long and persistent unemployment which persists not only in this area,
but nationally.
We think at the same time, we think as economic conditions improve, hopefully
that 7% pharmacy same-store sales should become a higher number as those
prescription counts go up for employed and insured parties. On the front-end
sector in the fourth quarter, we had a positive 1/10 of a percent increase in
front end of same-store sales. I think it's important to point out that that has
two very important elements in it.
One is a stronger, much stronger than anticipated response in the
over-the-counter cough/cold sector, which drove that group strongly positive in
the fourth quarter and offsetting those gains was a disappointing seasonal
business, which had less-than-anticipated sell-through, and I must say our
targets for Christmas were modest and having full insured from those were a
greater disappointment. We had a little bit of weather, but I think it's a
continued weakness in the economy that is prompting the seasonal showings we're
seeing.
In any case, the seasonal business being seasonal downfall being offset by the
cough/cold sector gain, neutralizes the sales line, however, it's an unfavorable
impact of what our expected gross profit would have been.
Moving along, we did move to try to bolster sales by extending store operating
hours and expanding our holiday hours trying to capture as much of the holiday
season as we could and try to maximize the return on stores whose performance at
near opening and closing show promise as to bringing some more volume in. We did
get an increase as we reported in our release, unfortunately, much of that
increase and the benefits of it on the gross profit line were offset by the
operating costs of expanding, but we do believe it was a worthwhile move because
we needed to garner more sales and more marketshare in view of the flattish
results we have had historically.
I am going to turn this over to John and have him go through the financials and
give as much time to Q&A in view of the pending transaction. I will tell you
that with regard to the transaction before I turn it over to John, we are in the
throws of a paperwork nightmare, but we are thankfully in the last throws of it
and should be filing a proxy shortly, we're days away, not months away from
filing a proxy, and the information should be forthcoming for all investors to
review, you know, the fact that we made the announcement on December 22 was a
difficult time to start filing and proxy preparation.
Not only is it the holidays which virtually put everybody out of reach for about
10 days, but in addition to that, we had our normal responsibilities for filing
financial reports closing the year, which has burdened our financial group and
our counsel immensely, but, nevertheless, we're in the final throws, as I said,
and should be filing a proxy shortly.
Let me turn this over to John.
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JOHN HENRY - DUANE READE INCORPORATED - CFO, SENIOR VP, AND ASSISTANT SECRETARY
Thanks Tony.
I would like to speak a little bit about net income. For the quarter overall, it
was 2.8 million, 12 cents per diluted share, that is in line with our most
recent updated earnings guidance and compares to 9.5 million or 39 cents per
diluted share last year. The current year's fourth quarter earnings also include
a 600,000 charge or about 2 cents per diluted share or transaction-related costs
associated with the planned acquisition of the company by an affiliate of Oak
Hill Capital as we have been discussing, and the prior year's fourth quarter
earnings include debt extinguishment income of 2.1 million or a nickel per share
related to the repurchase of our portion of convertible notes last year. As Tony
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mentioned, sales for the quarter came in at $356.4 million, that is an increase
of 7.7% over last year. With pharmacy sales up a shade less that 12% and front
end sales up 4.6%.
Same-store sales increased 3% in the quarter in total with pharmacy same-store
sales up by 7%, and front-end same-store sales increasing by .1. Tony gave a lot
of discussion on that, but front-end sales were favorably impacted by about .5%
due to the increase in the number of 24-hour stores and the expanded holiday
hours. Third party prescription sales as a percentage of pharmacy sales in the
fourth quarter was 91.7%. Last year, it was 90.4% and in the third quarter, it
was 91.4.
At the end of the quarter, we operated 241 stores, including 17 stores we have
opened from the beginning of the year, and three during the fourth quarter.,
partially offset by four stores closed since the beginning of the year and one
store that we closed in the fourth quarter. Last year in the same period, the
company opened 32 new stores with 8 in the fourth quarter and closed four
stores, including one in the fourth quarter. The reduced number of store
openings is consistent with the reduced store expansion program that we
commenced in the fourth quarter of 2002.
Gross margin for the quarter was 21.7% of sales compared to 22.9% last year and
included a $100,000 LIFO credit, compared to a 1.3 million LIFO credit last
year. The decline in gross margin was also due to an increased proportion of
lower-margin pharmacy sales and lower overall pharmacy margins due to the
reductions in the New York Medicaid prescription reimbursements that became
effective in July of 2003.
It was also effected by lower margins on generic prescriptions and maximum
allowable cost limitations in pharmacy and higher occupancy costs as a percent
of sales due to a lower rate of sales growth. As well as the increases in real
estate tax rates that went into effect in January.
Front-end margins were higher than the prior-year, primarily due to lower
inventory shrink losses and favorable selling margins, which partially offset
lower vendor allowances. Selling general and administrative expenses as a
percent of sales was 17.1%, compared to 16.1% last year. The increase was due to
lower-than-usual sales growth, higher legal/litigation related expenses,
partially attributable to the September 11th business interruption insurance
claim that we have been litigating over.
We had increased costs as Tony mentioned, to support the additional 24-hour
stores and the expanded holiday hours and we also had higher promotional and
advertising expenses during the quarter. Small preopening expenses amounted to
$264,000 compared to $477,000 last year.
We had a lower tax provision in the fourth quarter of about 22%. That was
primarily attributable to the impact of favorable employment tax credit against
lower taxable income.
Turning to the balance sheet, our total working capital at the end of December
was 227.6 million compared to 216.1 million at December 28, 2002. The full-year
increase of 11.5 million is attributable inventory purchases to support 13 net
new stores and the timing of merchandise receipts and related payments.
Cash flow from operations for the full year amounted to 47.4 million or 3.4% of
sales compared to 42.5 million or 3.3% last year. The timing of merchandise
receipts and related payments did cause our operating cash flow to benefit by
about $8 million, that will wind up flipping negatively into 2004. But overall,
considering the earnings performance for the year, cash flow from operations
held up rather well.
Goodwill at December 27th was $161.3 million, it was unchanged from the third
quarter. Our total debt including current portion, and capitalized leases at the
end of the year amounted to 272.9 million compared to 269.7 million at the
beginning of the year.
There was overall an increase of 3.2 million for the year, or another way of
looking at it is we are 3.2 million shy of free cash flow. We did invest about
$54 million of investment capital spending in the year, the largest portion of
which was directed to support new and relocated stores and pharmacy file buys.
With that said, I will turn it over for question and answer. Operator?
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QUESTION AND ANSWER
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OPERATOR
Thank you, at this time, if you would like to ask a question, please press the
star and 1 on your touch-tone phone. If your question has been answered, you can
withdraw your question by pressing the pound key. So once again, to ask a
question, please press the star and 1 on your touch-tone phone.
Our first question comes from John Heinbockel of Goldman Sachs. Please go ahead.
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JOHN HEINBOCKEL - GOLDMAN SACHS & COMPANY - ANALYST
Hey, Tony. A couple of things. Let me start with the kind of New York macro. It
looks anecdotally, when you look at some of the things the mayor said, the
surplus, which is building back on the New York City budget, some of the
restoration of real estate taxes, employment. Looks like, you know, we're
starting to see a little bit of a pick up, you know, in the local macro here.
What is your take on that, and have you yet seen that in your sales and when do
you think you will, you know, if you indeed, think that the macro is getting
somewhat better.
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Well, I think we're all hopeful there is going to be some turnaround and,
although there are some signs of turnaround in reports from fiscal authorities,
the facts are that we still do not see the kind of movement at the front end or
the pharmacy that has suggested that we're in a rebound. I think that we have,
you know, frankly an increase. A negative trend, unfortunately, in unemployment
in this area recently, and I don't think that that's a sign that we're going
back into the negative long-term slide, but it certainly doesn't warm my heart
to hear -- see reports that in December unemployment increased in New York City,
which is what happened.
We have the president nationally pulling back on the, you know, job expansion
look. The way I understand it, I'm by no means an expert economist, but the
break-even point for our national economy is something like 150,000 jobs must be
added each month, otherwise unemployment rises, and we're well below that.
Numbers in the 90 to 110 range, so, you know, all of the national and local
forces that are talking about a turnaround have yet to cause it. Now, that -- I
think the mayor, the governor and the president are all working feverishly on
this, and you got to believe that it's going to start yielding results, so I'm
pro looking forward positively, but I would be wrong to tell you that we're
seeing anything right now.
January results to date are at best, at best equal to the fourth quarter if you
normalize the weather out of them. If you keep the weather in it is
significantly below the run rate we were experiencing in the fourth quarter,.
So, I just tell you that I have not seen the impetus take hold yet. I am still
very bullish that down the road the economy should start to get some of the
benefits of downtown's recovery investment and should, you know, our local
economy, and should start to see some of the benefits of the preparation for the
Olympics, which should commence early next year.
So, you know, longer-term, I think that the fodder for, you know, rebound is
there, but right now, I just -- I would be wrong to tell you that I see it.
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JOHN HEINBOCKEL - GOLDMAN SACHS & COMPANY - ANALYST
You still think there is a bull case for New York to be made when you look out
two or three years?
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Yeah, I do because I have always said, that you know, it's tough to read when
the fiscal authorities are going to actually let go of this money that is
supposed to be invested in downtown. I have been waiting for it like a very
patient -- all of us in New York are waiting for this investment, but I have got
to believe that that investment begins in '04, and continues through '05, '06,
we are talking about five or six years at least, if not more construction down
there, and billions of dollars being spent, that has to be a significant
adrenaline shot, and we should start to feel some benefit from it and at a very
minimum will go to offset the severe downturn we have seen to date. So,
longer-term, I am still a believer that that's a positive thing to look forward
to.
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JOHN HENRY - DUANE READE INCORPORATED - CFO, SENIOR VP, AND ASSISTANT SECRETARY
John, just as a statistic, the unemployment rate for New York City, in
December, was 7.9%.
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JOHN HEINBOCKEL - GOLDMAN SACHS & COMPANY - ANALYST
Yup.
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JOHN HENRY - DUANE READE INCORPORATED - CFO, SENIOR VP, AND ASSISTANT SECRETARY
And it compared to 5.7 nationally. So it's like 2.2% higher.
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JOHN HEINBOCKEL - GOLDMAN SACHS & COMPANY - ANALYST
Right.
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JOHN HENRY - DUANE READE INCORPORATED - CFO, SENIOR VP, AND ASSISTANT SECRETARY
December employment figures kicked down a little bit from November, although we
have seen higher unemployment rates in New York City earlier this year. We were
well in excess of 8% at one point.
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
The other issue, you understand that, is one of the things we watch carefully is
the office occupancy rates.
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JOHN HEINBOCKEL - GOLDMAN SACHS & COMPANY - ANALYST
Yup.
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
And if you notice the reports are showing 14 to 17% vacancy, and that is not
improved over the last year and that's another indicator of how many people are
in our turf, so, you know, again, it hasn't gotten worse, but it hasn't gotten
better yet, John. I do agree with you in saying that the political system seemed
to be signaling they're moving to turn this around but it hasn't turned yet.
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JOHN HEINBOCKEL - GOLDMAN SACHS & COMPANY - ANALYST
All right, secondly you guys have not come out and said anything with regard to
mandatory mail like some of your peers have. Where are you on that and how is
that going to play out, you up know, in this whole PBM battle? At what point do
we start to get mandatory mail reversing and going the opposite direction and
being killed in some of these plans?
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Well just to put that in perspective, first of all, we absolutely support CVS,
Walgreens, Rite-Aid, whoever else came out. I think most of the majors did. I
would be surprised if we all don't step in line. Because, every chain supports
denying participation in a program that mandates mail for 90 day script.
So, we support that and we haven't come out with any supportive statement
formally only because we're a small regional player and we think it's important
that the big 4 come out and step in line on that because that carries the bulk
of the weight, but we absolutely stand behind them in that, and we have already
stood firm on that with very large plans. I won't be specific on the plans, but
we have gone just recently last month, we have turned down an extremely large
plan and insisted that they either change the plan or that we're not going to
participate on a mandatory basis. So, we support that.
Now keep this in mind, John, that that's step one for the industry to make. Step
two, which is a much bigger step is getting legislation that precludes our
competing mail programs sponsored by chains that don't have the advantage of
formulary rebates that PBMs are sponsoring for their mail-order programs. So,
you know, that step needs to be made because we have a number of PBMs who bid
their mail order 90 day programs at below cost. And that is a move which is a
necessary second step. And that second step still has not been appropriately
dealt with by -- by the congress in this Medicare bill.
So, I would keep your eye out for the second step. Because that is far more
important than all of us saying we want a competitive bid. Because once the
playing field is flat, what good does that do us? Okay.
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JOHN HEINBOCKEL - GOLDMAN SACHS & COMPANY - ANALYST
The plan that you guys said you were not participating, how has that been
resolved or has it?
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
It has been resolved. They came back and said they would not mandate mail
order.
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JOHN HEINBOCKEL - GOLDMAN SACHS & COMPANY - ANALYST
Okay, and then finally, the pharmacy alliance and express scripts, how good,
you know, how good is that for the industry? Is it, you know, -- my concern is
maybe it's not what it seems and, you know, it's not the answer here. I'm still
not sure that that resolves the conflict between the two parties, the two
channels of trade. How important is that in this whole process?
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
In my eyes, I think it's a very big and important step. It may in two years
when we look back on it, it might be a watershed event. It's too early to tell
now, but it's certainly a major move by the industry.
5
National association of chain drugs and its members met long and hard on this
subject. I was at the meeting and I got to tell you that of all the meetings I
have been to in all the years, there was never more time and effort spent on one
single subject than this, and it's a major move for the industry, it is a
partnership which tries to align the industry and the PBM for the first time in
quite awhile, and it, I think, it's certainly going to be a compelling alliance
for the next year and a half to two years before the Medicare program is in full
force because it effectively introduces a discount card which will be unique in
the nation, will be the only single card that is accepted by all chains or
members of any CDS, and you know, you have a choice as an elderly citizen, you
know, walk around with a pocket full of plastic trying to figure out what
manufacturers card or retail card you're going to use for medication or just
carry one and be assured that no matter where you are, you walk in and it will
be honored.
That's a huge advantage express scripts has and a huge advantage anybody
associated with this has, and I think it's going to create a lot of back
pressure on competing PBMs and indemnity programs to try to introduce a card
that positions itself against it. So, with that entree, it's going to create a
strength in the industry and its participation in Medicare, which is formidable,
and I think it's a great step so that we're all positioned in the industry to
take the lions share of the Medicare program, and when it is introduce in '06.
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JOHN HEINBOCKEL - GOLDMAN SACHS & COMPANY - ANALYST
There shouldn't be any concern they're using the industry, any CDS to learn the
Medicare market ahead '06, and then in 06, the alliance doesn't hold up.
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Well, there is that concern and that concern is something that we bantered about
quite a bit. We have an understanding in our program, in our alliance with
express scripts on how information sharing is going to be handled, and you know,
all of those specifics so that reasonable safeguards have been taken. There is
always the exposure that that could happen down the road, but it's -- it just
seems to us that it's going to be too positive for express scripts in '06 not to
want to continue to play ball and -- and help us develop a formidable program to
support Medicare effectively and efficiently rather than to become, once again,
juxtaposed to us and juxtaposed to all the other indemnities PBMs that they're
competing against.
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JOHN HEINBOCKEL - GOLDMAN SACHS & COMPANY - ANALYST
so --
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
I --
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JOHN HEINBOCKEL - GOLDMAN SACHS & COMPANY - ANALYST
Okay.
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OPERATOR
Thank you, our next question comes from Bob Summers of Bank of America. Please
go ahead.
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WES - BANK OF AMERICA - ANALYST
This is Wes [inaudible] for Bob Summers. I have a question on the litigation
expense. Do you guys intend to break out the amount of litigation expense. I
guess this relates to the excess that you had in the fourth quarter and could
you characterize why the expense increased this quarter above your original
plan.
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JOHN HENRY - DUANE READE INCORPORATED - CFO, SENIOR VP, AND ASSISTANT SECRETARY
Well, in terms of breaking it out, we don't break out litigation expense
separate from SG&A. I will tell you that a very large portion of the litigation
expense is related to the fact that we are continuing to pursue our claim
against the carrier on the world trade center business interruption. From a
standpoint of that litigation, that was appealed by Saint Paul. There was a
trial in September. It was appealed. We have had to respond to that appeal.
There's been a whole effort undertaken to bring it to an appraisal, and there
has been a lot of costs involved in that whole process. So, a substantial amount
did go into that particular claim. That's really the primary aspect of that
bearing.
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Keep in mind, that you know, the -- trying to anticipate that when you have a
victory in court, whether the insurer is going to appeal or not, is a difficult
thing, and we were trying to guess, you know, at which point the insurer is just
going concede the finding and let the process go to a appraisal and final
settlement rather than continuing to appeal every legal aspect of the claim as
it's found by a court.
6
Saint Paul continues to be frustratingly aggressive in posing forth appeal
arguments to every finding that every judge makes in this case and that has
caused delays in the case settlement and significant increases in our litigation
expense because we have to defend their arguments on appeal. So, you know, we
perhaps were more bullish that we could get, you know, this thing closer to
resolution as, you know, we had finding after finding to our favor in court but
Saint Paul continues to seek out, you know, a basis for appeal and extends the
time for settlement as well as the cost of supporting this case, you know, out
into the future.
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WES - BANK OF AMERICA - ANALYST
All right. And one additional question is the number of 24-hour stores that you
have open now and whether that was a temporary measure for the holiday or
whether you intend to extend that on a permanent basis.
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JOHN HENRY - DUANE READE INCORPORATED - CFO, SENIOR VP, AND ASSISTANT SECRETARY
Increased it by 10 stores and we have something north of just 40 stores or so
that are 24-hour. We also expanded hours in the week prior to the holiday, to
the Christmas holiday just prior to the holiday we expanded. We opened, I think,
200 stores stayed open until very late at night in that week prior to Christmas.
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
So the latter move is a seasonal move, whereas the former, that is the 24-hour
store is a permanent move.
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WES - BANK OF AMERICA - ANALYST
Alright. Thank you.
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OPERATOR
Thank you, our next question comes from Monica Aggarwal with Merrill Lynch.
Please go ahead.
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MONICA AGGARWAL - MERRILL LYNCH GLOBAL SECURITIES - ANALYST
Good morning. As you gear to go private, are you changing your strategy in terms
of Cap Ex and how you deal with the rebuilding process? Any thoughts on '04
right now? Thanks.
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Monica as far as the private plans in capital structure spending levels and
what we're doing there, that will all be part of the proxy that we issue. You
know obviously, the proxy is going to reflect the plans and desires of the
private company as compared to what we would have done as a public company for
our investors in a public environment, so they may very well be different as
they're expressed in the proxy versus what our longer-term plans would have been
as a public company.
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MONICA AGGARWAL - MERRILL LYNCH GLOBAL SECURITIES - ANALYST
Okay. Thanks.
--------------------------------------------------------------------------------
OPERATOR
Once again, if you have any more questions, please press the star and 1 on your
touch-tone phone. Our next question comes from Steven Miller with SEM Capital.
Please go ahead.
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STEVEN MILLER - SEM CAPITAL - ANALYST
Hello, Anthony?
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Yes.
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STEVEN MILLER - SEM CAPITAL - ANALYST
Hi Anthony, I'm a very large shareholder of Duane Reade, and have been for quite
sometime. Seems that the only thing here that has been good out of Duane Reade
has been your salesmanship. You sold some bill of goods, in my opinion, to your
friend over there, Nathanson at Oak Hill Partners. This company has gone public,
what, at $16 around there? This is a company that now is being sold for $17 a
share, so in all of those years, nothing has happened except, of course, I guess
you're using Duane Reade for your personal piggy bank, reaping millions of
dollars. The only question here I have is: Why -- why weren't you sold? Why
weren't the board of directors more proactive in looking for another CEO and
instead of blaming it on the economy and everything else that you don't seem to
have control over, but the things do you seem to have control over, which is the
poor merchandising, the terrible checkout that goes on in the Duane Reade stores
7
that we experience all the time and, yet at the same time, your competitors, the
Walgreens of the world continue to come into this market, continue to try and
take the marketshare.
But you don't seem to talk about that. You seem to talk about the unemployment
rates and so on and so forth. But yet if you look back at the history of New
York and you'll see that during the great depression many of the retailers grew
their businesses in those terrible times and continued to take marketshare, but
yet the Walgreens and CVS come into New York continue to grow and I mean can it
be said that they're also taking marketshare? They obviously see an opportunity
here. Why do they continue to grow here? Thank you.
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Will you repeat your question, please?
--------------------------------------------------------------------------------
STEVEN MILLER - SEM CAPITAL - ANALYST
Can I repeat my question?
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Yeah, I'm not sure what it was.
--------------------------------------------------------------------------------
STEVEN MILLER - SEM CAPITAL - ANALYST
Okay, my question is how come we have never heard you take the blame for the
poor operation and the horrible deteriorating situation that continues to happen
here. I mean the gross margins continue to fall down. The 10 quarters in a row,
10 quarters in a row of misguidance. I mean at some point don't you think you
should have taken the blame? That's my question. And also, is there some sort of
a conflict here? I mean this guy Nathanson is a fellow that was once, I believe,
on the board, wasn't he? Thank you.
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
I think the proxy will be filed shortly and hopefully when you read it you will
understand more about the background of the merger. With regard to historical
performance, I think the company's stock and its trends were affected by a lot
of issues, not the least of which were the economy.
I think if you compare us to the other companies in the industry and how their
stocks have performed since we went public, you will be surprised to learn that
Duane Reade at $17 versus public offering price of $16 in 1998 is one of the few
issues that is actually up over that period of time. Not that we're proud of the
results, we always hope for better, but I think if you're talking about versus
the industry and the trends, we're -- we think we have held our own rather well,
particularly in the fact we're regionally a New York-based company and the 9/11
events was particularly harsh on our region. With regard to personal
performance, I can tell you that the board did its duty very carefully,
consistently reviewed myself and management, and I feel that they have a good
grasp of what has gone on and have made the appropriate decisions in that sector
as well.
Next question.
--------------------------------------------------------------------------------
OPERATOR
Thank you, our next question comes from Karen Short of Lehman Brothers. Please
go ahead.
--------------------------------------------------------------------------------
KAREN SHORT - LEHMAN BROTHERS - ANALYST
Hi, this is actually a fairly basic question on pharmacy. I wanted to find out
if you saw any increases in copays for the beginning of January '04, and I also
wanted to talk to you a little bit about what you think the generic outlook is
for pharmacy for this fiscal year and next. Thanks.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
When you say increase in copays, you're talking about not state or federal,
you're talking about indemnity plan programs.
--------------------------------------------------------------------------------
KAREN SHORT - LEHMAN BROTHERS - ANALYST
Yeah, third party.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
I think we're starting to see a little bit of reaching back into the cookie jar
attempts by a number of third-party plans. I don't know whether it's going to be
systemic or not, but we're seeing a number of plans when all is relatively quiet
for a couple of years. Trying to come back at us to see whether there is more
there, type of thing. We are resistant because, you know, we have the industry
pretty well strapped, there's not much left in the prescription business and
8
certainly not enough to start, you know, sharpening even further the
reimbursement rates.
Now in the increases in copays, there are programs that increase the copays for
nongeneric product when generic is available. There are increases in copays for
nonformuly product that we're part of and I think to that extent those are not
margin-infringing issues. They're simply issues to help manage the program for
the benefit of an efficient formulary, and, yes, we have seen that over time.
With regard to generics, generics, two things are happening there. There's a
little bit of flattishness in the generics which I think can be supported by two
events. One is, there are troughs and valleys that you go through from time to
time in the off patent periods, and we happen to be in a lighter period now. As
soon as you get a flurry of off patent activity, you get a flurry of generic
activity particularly in the six months of off patent. So, there is a little bit
of that going on.
Perhaps more importantly is that I think the PBMs and many of the indemnity
programs have found a favor with pushing formularies toward higher-cost branded
products and away from generics. That is that they rationalize many and many
cases in my opinion that branded products are a better way to go in the
formulary than a generic, and when they do that, they do that, I believe,
because of the economics that's favorable to them and not necessarily because of
the convincing and overwhelming medical data, and in doing so, that sponsors
higher-cost medication and sponsors less generics out there, so there's a little
bit of both going on, and I think that you have seen flattishness in growth in
the generic sector as a result of those two.
I think longer-term, the generic sector will continue to climb. I think
regulatory pressures against those kinds of trends and formulary control are
going to be significant. There is a number of litigations going on that are
going to drive formularies back toward reason and back toward generics, and
state programs are going to get wise. They haven't yet but eventually they will
to start sponsoring more generic substitutions rather than chasing pharmacies
for less reimbursement. So, I think the opportunities for generic are still
significant out there, and in the longer-term, generics should continue to rise.
But right now, we're in a little bit of a trough.
--------------------------------------------------------------------------------
KAREN SHORT - LEHMAN BROTHERS - ANALYST
Okay, I just have one other question. Have you guys looked into whether or not
can you fill 90-day prescriptions at retail? Have you been testing that at all?
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
No, we absolutely can sell 90-day prescriptions at retail. That's not an issue
at all. The question, of course, becomes the mail order structure for 90-day
script is one fee and that's where the challenge is that, you know, to do the
economics at the pharmacy where a 90-day script for one dispensing makes sense,
and we believe on a level playing field versus a mail-order program, the both --
both the industry mail order and the industry filled 90-day script in store can
be competitive. What we've battling both Duane Reade and the industry is
mail-order programs that are bidding below cost and sponsoring and subsidizing
those losses with formulary rebates by pushing medication toward the high-end
and getting rebates for it.
So, that's the separation, so to speak, of church and state we're looking for
for PBMs and we need legislation to support that. But setting that aside for the
level playing field, we can fill 90-day scripts and mail-order scripts
competitively with anyone else.
--------------------------------------------------------------------------------
KAREN SHORT - LEHMAN BROTHERS - ANALYST
Actually in existing contracts you have with PBMs that will allow you? Your
contracts allow you to today to fill 90-day.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
If a patient comes in and the contract allows the patient to get a 90-day
script, some contracts don't allow the patient to do that. Some contracts say
you must fill 30 days. But we have no contracts where the patient is mandated to
mail order.
--------------------------------------------------------------------------------
KAREN SHORT - LEHMAN BROTHERS - ANALYST
Okay.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
90 days.
--------------------------------------------------------------------------------
KAREN SHORT - LEHMAN BROTHERS - ANALYST
Okay. Thanks.
--------------------------------------------------------------------------------
OPERATOR
Thank you, our next question comes from [inaudible] of Glenview Capital. Please
go ahead.
9
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
I have a few quick questions. First, did you actually give the cost of
litigation out for the quarter?
--------------------------------------------------------------------------------
JOHN HENRY - DUANE READE INCORPORATED - CFO, SENIOR VP, AND ASSISTANT SECRETARY
No, we didn't.
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ANALYST - GLENVIEW CAPITAL
Would you please.
--------------------------------------------------------------------------------
JOHN HENRY - DUANE READE INCORPORATED - CFO, SENIOR VP, AND ASSISTANT SECRETARY
We're not providing the specific detail on that. I indicated that a big portion
of the SG&A variance had to do with litigation.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
Okay, just we're trying to figure out what the normalized SG&A increase is.
That's all.
--------------------------------------------------------------------------------
JOHN HENRY - DUANE READE INCORPORATED - CFO, SENIOR VP, AND ASSISTANT SECRETARY
Right --
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
Without that can you give us some sense for what the SG&A would have done?
--------------------------------------------------------------------------------
JOHN HENRY - DUANE READE INCORPORATED - CFO, SENIOR VP, AND ASSISTANT SECRETARY
The litigation cost in terms of how much higher they were than we expected were
in the neighborhood of about $1 million.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
All right, could you repeat that in.
--------------------------------------------------------------------------------
JOHN HENRY - DUANE READE INCORPORATED - CFO, SENIOR VP, AND ASSISTANT SECRETARY
In the neighborhood of about a million dollars.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
Million dollars cost during the quarter.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
No, what John said to you was the extraordinary level of costs in the quarter
in litigation was a million more than we expected so if you took a million out
of your number, you would have a quarter with expected litigation costs rather
than the unexpected.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
Okay. Then I still don't understand why you can't give the exact number, but
that's fine. The second question is: There was a question asked before about
'04. And you chose not to comment. Could you please comment partly just some
sense for sales trends and what, like there are so many one-time items in the
expenses, some sense for what the break-even comp would be.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
I'm sorry, with regard to '04 or '03?
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
'04.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
We made a comment with regard to expenses for '04? I don't recall doing that.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
No, I'm asking you the question, which is somebody asked the question before,
would you take a stab at '04. I'm repeating the question to you.
10
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
I didn't hear that but it's okay. We'll comment on '04.
As I indicated, we're submitting a proxy shortly and there are pro formas in
there which would include look-forward data like '04, so we're, you know, we're
right on advice of counsel saying to wait for the issuance of proxy. Because
trying to leak out portions of that proxy right now is not appropriate in view
of the filing we're under. I would tell you this, though, that the '04 look that
you would see is not surprising. I mean it's in keeping with the assumptions we
have been talking about through the fourth quarter in this phone call, which is
that we're hopeful of return latter part of this year. You're, you know, earlier
this year, we were continuing to project flattish results. We think pharmacy
might benefit a little bit from cycling, statistically, it's OTC shifts and it's
hormone therapy depletion effects of '02, but other than that, the cycling,
we're not projecting any surge of prescription counts as unemployment continues
to harass us in this market. So, I think, generally speaking there are no volume
or expense surprises, you know, from what many of you were probably looking out
of Duane Reade in '04. But I want to leave the specifics to the proxy.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
That's fair.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Okay.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
The next question is: Have you ever commented on, you know, as a private
company, are you going to make efforts to turn sales around and get expenses in
line and all of those types of things that you talked about on the call, I
think, on the 23rd. Have you ever talked about publicly what the cost of some of
those programs would be? How long would it take, just so that all public
shareholders working with similar facts that the -- some of the private equity
guys may have?
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Well, I think in that phone call what I made reference to was the numerous
phone calls we have had as a company with our shareholders in the preceding
quarters regarding those types of programs. I made reference to, going all the
way back to the summer of '02 when we went out and spent a substantial amount of
money on a new promotional merchandising program and the shareholders reacted
violently anti that move, literally six weeks after we invested in it, so there
was no patience on that event, and then we invested a significant amount of
money in digital one-hour photo, which, by the way is probably one of our best
categories right now, and the costs and impact of profits were also very
negatively received by the shareholder group, but we stayed with that program
because we thought it was in the best interest of the company longer-term. You
know there are a number of other items like that, investments we are making in
technology and the kiosks are running negatives, but we think it's in the
long-term interest of the company, the central fill investment, which was
substantial, was in the long-term interest of the company, and the pharmacy
trends down the road, but they continue to hammer away at the EBITDA and pretax,
or earnings per share numbers that we released and shareholders kept negatively
responding.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
Would some of those details for going forward programs be in the proxy as well?
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
What do you mean by details for going forward, I'm not sure what you mean.
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ANALYST - GLENVIEW CAPITAL
These efforts that you're making on a going forward basis --
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Yes.
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ANALYST - GLENVIEW CAPITAL
Would you care to detail them on the proxy as well, just so that we know --how
much expenses we are talking about.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
I'm not sure what you mean as far as detailing these efforts going forward.
What I'm suggesting is this: That the proxy details the go-forward estimate in
sales and go-forward estimates of major items in the P&L and balance sheet.
11
The think the point I'm making is that you made reference to the turnaround
issues and as I indicated in my previous phone call, there are a number of
turnaround issues that we started in years gone by, and continue to embark on
and there are more we're planning, obviously, they're competitive issues and to
preannounce the exact nature of a program on a public phone call is not
competitively smart.
We generally announced all the issues I just discussed after they were in effect
and have been seen in the marketplace and got their competitive advantage. We
have similar programs like that, but they're not public announcements because of
the competitive advantage, but we feel that since historically the five or six
ventures we did make were ill-received because of the burden they placed on the
shareholder, we felt that the programs to come would probably receive the same
reception. There is no guarantee, that's just speculation.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
That part I understand. That's fine.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Yeah.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
Last question is $55 million of Cap Ex or $54 million of Cap Ex, is that a
normalized amount or broken out Cap Ex of 54 into different categories. Could
you do that?
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
That's 54 million comprised of what we call, you see on our cash flow
statement, about 41 million of what we'll call Cap Ex. That would be dollars
that we invest for new stores, maintenance, PLS equipment, dollars we put into
our distribution center. All of the traditional-type capital expenditure
spending.
There is also about 13 million, 12.7 million or so of what we call
acquisition-related investments. These would be lease acquisition costs,
pharmacy file-buys, and those type of acquisition-related spending. File-buys,
we buy a number of pharmacy files, integrate them into our existing store base.
It's one of the best capital investments that we make.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
And is that recurring at that 13 million or so?
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Yeah --
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
Or is there a one-time element in that.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
No, there is no one-time real element in that. That's in line with what we have
been spending on a cash basis.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
Okay.
So if your capital plan comes out drastically different than the proxy, then the
55 we have been spending and you kind of mentioned that private company may
spend differently than public, is my assumption correct that they may be
drastically different or --
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
I think you have to wait for the proxy to review that. I think you're, kind of,
trying to characterize where it was drastic or different. I think that the proxy
speaks for itself, you will read it. As I said, I don't find anything in there
surprising, but I think it's for the investor to read and come to a conclusion
themselves.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
That's fair.
12
The last question: which is would you consider holding a call after the proxy is
filed just so that everybody can get their questions answered in a public forum?
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
You know, I don't know about that. We have to stand on the advice of counsel on
something like that. I think we have certainly made ourselves available to all
the principal shareholders who have wanted to have a discussion regarding, you
know, what was discussed and, you know, we don't release anything we haven't
openly released anyway, but for the purpose of clarifying what we have said we
certainly have left an open door to principal shareholders who wanted to discuss
that.
--------------------------------------------------------------------------------
ANALYST - GLENVIEW CAPITAL
Great, thank you for your time.
--------------------------------------------------------------------------------
OPERATOR
Thank you, our next question comes from Paul Smith, Smith Capital. Please go
ahead.
--------------------------------------------------------------------------------
PAUL SMITH - SMITH CAPITAL - ANALYST
Hi, how are you doing?
I just want to know why the shareholders are not being adequately compensated
for the litigation settlement, which is going to amount to over a dollar a share
you're going to receive for the World Trade Center or the litigation
settlement/insurance proceeds. I mean how is that fair that, you know, three,
six, nine months down the road the buyout group is going to be netting this
windfall and the shareholders, which have been paying the litigation expenses,
are not going to be compensated at all?
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
I think we have covered that topic in our previous special when we made this
announcement.
Just to reiterate, the World Trade Center estimated claim costs were combined
with a number of other legal items and that net positive was included in the
consideration of the offer. So, it was not ignored as part of the math that got
us to the $17.
--------------------------------------------------------------------------------
PAUL SMITH - SMITH CAPITAL - ANALYST
All right, well let me just state on the record, you know, just as a standard
shareholder, I think I speak for the majority of shareholders, where I think
this whole thing is a joke, and I think you're going to be surprised at the
result of the shareholder vote.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
You know, I respect your opinion. We've gotten -- I want to tell you since you
want to be on the record, we've gotten, I believe, overwhelming support for the
transaction as being fair at the north end of what have we believe to be
fairness. We have received, since we made the announcement, not a single level
of interest in topping the bid, and it's been out there for at least two months.
So, you know, I think that --
--------------------------------------------------------------------------------
PAUL SMITH - SMITH CAPITAL - ANALYST
Alright, I'm not sure I buy, that but we'll see. We'll see what happens at the
vote.
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Next question.
--------------------------------------------------------------------------------
OPERATOR
Thank you, we have time for one more question. Our next last question comes
from Dave Gordon of Cap Capital. Please go ahead.
--------------------------------------------------------------------------------
DAVE GORDON - CAP CAPITAL - ANALYST
Thank you. Mr. Cuti, I have a question in regards to an article that was in
"Business Week" on Friday, and I just wanted to get clarity on a specific issue.
It mentioned that Mr. Nathanson was a former board of directors and it mentioned
another individual named Mr. Jaffe. Is it true that Mr. Jaffe is still on the
board and there is also another individual named Mr. Pradelli or Pradula that is
on the board. If so, these three individuals had all worked together, at, I take
it DLJ, were these two individuals involved in the vote process or were they
precluded from the vote? Thank you.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
I think you must not have a very good background on the company, so let me help
you out a little bit.
13
--------------------------------------------------------------------------------
DAVE GORDON - CAP CAPITAL - ANALYST
I appreciate it.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
All right.
The company was originally owned by Donaldson, Lufkin & Jenrette, alright and
when Donaldson, Lufkin & Jenrette was here as owner, it had a majority of the
members of the board. As DLJ became a minority and a small holder, it --
disinterested parties left the board. At some time, DLJ was acquired by CSFB,
during that entire process various and sundry, people at DLJ left and went their
merry way. David Jaffe for quite awhile, has not been associated with DLJ, but
is a managing director of Center Partners. Andrew Nathanson left DLJ went to a
group called Oak Hill. Carl Pradelli is running a company called Advanced Health
Solutions and that's also been happening for quite sometime.
No three parties are or have been associated with Donaldson, Lufkin & Jenrette
for quite sometime. Two of the parties remained on our board, Jaffe and Pradelli
as directors, getting the formidable well-entrenched directors is difficult, but
they remained on our board and served us quite well and they have financial
backgrounds. So, obviously, when the board of directors which has a number of
notables on it, wanted guidance, they, you know, counted on Pradelli and Jaffe
to feed and guide the process because they're the most astute in the process and
then the Nathanson, who was part of Oak Hill, I think, you will find when you
read the proxy, was a late-comer to the process of getting a private equity deal
going.
We had solicitations from a number of parties and Oak Hill jumped in actually
toward the end of the process and became a competitive bidder and, obviously,
the parties who are most knowledgeable like Mr. Nathanson who were out there are
going to come in here and see value. So, now there's quite a few other parties
at other investment banks, by the way, who were ex-DLJ people who also had the
same opportunity and did not bid as aggressively as Oak Hill.
I would tell you right now it's difficult to find a significant investment bank
in the nation that doesn't have ex- Donaldson, Lufkin & Jenrette people working
for them. So, you know, the fact that you have a private equity party with DLJ
person bidding, I will tell you we were speaking to at least two other
institutions who were bidding, who also had people at Mr. Nathanson's level who
previously worked at DLJ. So I don't know if that means anything.
What it does means is that people who have a knowledge of the company are going
to be more confident and bid higher than people who, perhaps, have a lesser
knowledge, and I think it's in the best interest of the shareholders to get the
highest possible price. So, it was no surprise to me to find that for someone
who has some knowledge and has faith and confidence in the company to be the
most aggressive bidder. But I don't know that's a negative, I think it's a
positive.
--------------------------------------------------------------------------------
DAVE GORDON - CAP CAPITAL - ANALYST
But it's safe to say that these three individuals did serve on the board
together at some point in time.
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Well, it's not only safe to say, it's a matter of record and has been a matter
of record for seven years. It's only new news to someone who just became aware
of the background of Duane Reade. But it's certainly been out there, published,
it's been in the annual report. It is not a surprise.
--------------------------------------------------------------------------------
DAVE GORDON - CAP CAPITAL - ANALYST
I appreciate you clarifying that. Just one last question. If the board is truly
independent, why at some point in time didn't they try and bring in new
management? Obviously you had trouble getting it right, why not replace you?
--------------------------------------------------------------------------------
TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
Well, it depends --
--------------------------------------------------------------------------------
DAVE GORDON - CAP CAPITAL - ANALYST
What else --
14
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
I think it depends whether the conclusion is that what's going on is a product
of the management issue or whether what is going on is a product of other
forces. And, I think if you take a look at all the forces that are here and the
influence they're having, the conclusion that outside forces are causing the
bulk of our problems is not wrong.
So, you know, the question becomes: Is everyone stepping in line in that
direction or not? I would tell you that the bulk of people feel that Duane Reade
has been plagued by a New York City economy and a significant change in pharmacy
industry trends. A few people, and there are a few out there, believe that they
can point to management and there is somebody who can walk in and overwhelm the
pharmacy industry trends and the New York City economic trends, but our board
did not believe that to be the case.
--------------------------------------------------------------------------------
OPERATOR
Thank you, there are no further questions, gentlemen. Please continue with any
closing comments.
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TONY CUTI - DUANE READE INCORPORATED - CHAIRMAN, PRESIDENT, AND CEO
All right, well, thank you very much for your participation. As I indicated to
all of you, I think there is obviously, you know, going to be interest in
reviewing our proxy. I would encourage shareholders as the opening comments
says, to read it thoroughly and we keep an open dialogue as we always have with
shareholders on appropriate and pertinent questions, we're here to answer them.
I want to continue to indicate to you that we keep our ear out there listening
for every opportunity in a way to bring more value as I indicated earlier in the
call, to one of the questions.
We have yet to receive a single level of interest offer for consideration by
Bear Stearns that would bring any significant, any value, whatsoever, greater
than the value offered to date. But we keep our ear closely attuned to that
opportunity. Once again, thank you and stay tuned for hopefully what will be a
smooth and productive closing in the second quarter.
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OPERATOR
Ladies and gentlemen, that does conclude our conference call for today. You may
all disconnect and thank you for participating.
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