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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 30, 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 Realty, Inc* Delaware 13-4074383
Duane Reade International, Inc.* Delaware 22-3672347
* Guarantors with respect to the Company's 9 1/4% Senior Subordinated Notes
due 2008
440 NINTH AVENUE
NEW YORK, NEW YORK 10001
(Address of principal executive offices) (Zip Code)
(212) 273-5700
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
--------------------------------------------- ---------------------------------------------
Common Stock, $.01 par value per share New York Stock Exchange, Inc.
9 1/4% Senior Subordinated Notes due 2008 None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The only class of voting securities of Duane Reade Inc. is its Common Stock,
par value $.01 per share (the "Common Stock"). On March 16, 2001, the aggregate
market value of the voting stock held by non-affiliates of the registrant was
approximately $347 million.
The number of shares of the Common Stock outstanding as of March 16,
2001: 18,446,587
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT PART OF FORM 10-K
--------------------------------------------- ---------------------------------------------
Portions of the Proxy Statement for the Part III
Annual Meeting of Stockholders to be held May
14, 2001
Certain exhibits as listed on the Exhibit Index and filed with registrant's
registration statements on Form S-1 (Nos. 333-41239 and 333-43313) under the
Securities Act of 1933, as amended, are incorporated by reference into Part IV
of this Form 10-K.
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INDEX
PAGE
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PART I
ITEM 1. Business.................................................... 3
ITEM 2. Properties.................................................. 9
ITEM 3. Legal Proceedings........................................... 9
ITEM 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 10
ITEM 6. Selected Financial Data..................................... 11
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
ITEM 7A. Quantitative and Qualitative Discussions About Market
Risk........................................................ 18
ITEM 8. Financial Statements and Supplementary Data................. 19
ITEM 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 43
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 43
ITEM 11. Executive Compensation...................................... 43
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
ITEM 13. Certain Relationships and Related Transactions.............. 43
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 44
SIGNATURES............................................................. 47
2
PART I
ITEM 1. BUSINESS
GENERAL
Based on sales volume, we are the largest drugstore chain in metropolitan
New York, with 102 of our 172 stores located in Manhattan's high-traffic
business and residential districts. Since opening our first store in 1960, we
have successfully executed a marketing and operating strategy tailored to the
unique characteristics of New York, the largest and most densely populated
market in the United States. For the 53 week fiscal year ended December 30, 2000
we had sales of $1.0 billion and fully taxed net income of $22.7 million,
compared to sales of $839.8 million and net income of $40.7 million in the 52
week 1999 fiscal year. The 1999 fiscal year net income included a $10.5 million
one time tax benefit compared to a fiscal year 2000 tax provision of
$15.6 million. Pro forma fully taxed net income for the 1999 fiscal year
amounted to $16.1 million. Compared to fiscal 1999 sales and pro forma fully
taxed net income, fiscal 2000 sales and net income increased by 19.1% and 41.0%
respectively.
We enjoy strong brand name recognition in metropolitan New York, and we
believe this results from our many locations in high-traffic areas of Manhattan.
We have developed an operating strategy designed to capitalize on the unique
characteristics of the metropolitan New York market. These include high-traffic
volume, complex distribution logistics and high costs of occupancy, media
advertising and personnel. The key elements of our operating strategy are:
- an everyday low price format and broad product offerings;
- a low cost operating structure supported by high volume stores and low
advertising and distribution costs; and
- the ability to design and operate stores in a wide variety of sizes and
layouts.
We believe that our everyday low price format and broad product offerings
provide value and convenience for our customers and build customer loyalty. Our
everyday low price format results in prices that we believe are lower, on
average, than the prices offered by our competitors.
We are able to keep operating costs relatively low due to high per store
sales volume, relatively low warehouse and distribution costs and relatively low
advertising expenditures. Our high volume stores allow us to effectively
leverage occupancy costs, payroll and other store operating expenses. Our
450,000 square foot distribution facility is centrally located in Queens, New
York. This logistically efficient location, combined with the rapid turnover of
inventory in our stores, results in lower warehouse and distribution costs as a
percentage of sales.
We have demonstrated our ability to successfully operate stores using a wide
variety of store configurations and sizes. We believe this is necessary to
succeed in the metro New York City market. For example, our store size ranges
from 1,600 to 14,700 square feet, and we operate 36 bi-level stores. We believe
that flexibility in configuring stores provides us with a competitive advantage
in securing locations for new stores, as many of our competitors target more
standardized spaces for their stores, which are more difficult to find in
metropolitan New York. In addition, our management team has extensive experience
with, and knowledge of, the New York real estate market, allowing us to pursue
attractive real estate opportunities.
We were founded in 1960, and we have been a public company since
February 1998. At December 30, 2000, investment funds affiliated with DLJ
Merchant Banking Partners II, L.P. (the "DLJ Entities") owned approximately
45.5% of our issued and outstanding common stock.
In November 2000, the ultimate parent of the DLJ Entities, DLJ Inc., was
acquired by an indirect, wholly owned subsidiary of the Credit Suisse Group, and
on February 1, 2001, Donaldson Lufkin & Jenrette Securities Corporation, an
affiliate of the DLJ Entities and the market maker for our 9 1/4 Senior
3
Subordinated Notes due 2008, changed its name to Credit Suisse First Boston
Corporation. The acquisition of DLJ Inc. did not trigger a "change of control"
under the Indenture for our 9 1/4% Senior Subordinated Notes due 2008, our
Credit Agreement or the 1997 Equity Participation Plan.
We operate 172 stores, 24 of which were opened during 2000. During 1999 and
1998 we opened 21 stores and 33 stores respectively. We closed one store in 2000
and one store in 1999.
COMPANY OPERATIONS
MERCHANDISING: Our overall merchandising strategy is to provide the
broadest selection of branded and private label drugstore products available in
Manhattan and to sell them at everyday low prices. To further enhance customer
service and loyalty, we attempt to maintain a consistent in-stock position in
all merchandise categories. In addition to prescription and over-the-counter, or
OTC drugs, we offer brand name and private label health and beauty care
products, food and beverage items, tobacco products, cosmetics, housewares,
hosiery, greeting cards, photofinishing services, photo supplies, seasonal
merchandise and other products. Health and beauty care products, including OTC
drugs, represent our largest product categories. We allocate ample shelf space
to popular brands of health and beauty care products. We also offer large sizes,
which we believe appeal to the value consciousness of many New York consumers.
We place convenience items, such as candy, snacks and seasonal goods, near the
check out registers to provide all customers with optimum convenience and to
stimulate impulse purchases, while allowing the store employees to monitor those
product categories that are particularly susceptible to inventory shrink.
In addition to a wide array of brand products, we also offer our own private
label products. Private label products provide customers with high-quality,
lower priced alternatives to name brand products, while generating higher gross
profit margins than name brand products. These offerings also enhance our
reputation as a value-oriented retailer. We currently offer in excess of 600
private label products which, in fiscal 2000, accounted for approximately 6.1%
of non-pharmacy sales. We believe that our strong brand image, reputation for
quality and reliability in the New York City market, and our economies of scale
in purchasing allow us to aggressively promote private label goods.
We also offer next-day photofinishing services in all of our stores, and we
have installed one-hour photofinishing in 19 stores. Management believes that
photofinishing services contribute significantly to sales of other merchandise
categories because of the customer traffic increases that result from the
customer visiting a store twice, in order to drop off film and pick up the
processed photos.
During 2000, we added additional customer services such as ATM machines,
sales of lottery tickets and electronic benefits transfers using debit cards.
PHARMACY: We believe that our pharmacy business will continue to contribute
significantly to our growth. Management also believes that a larger and stronger
pharmacy business will enhance customer loyalty and generate incremental
customer traffic. We expect this to increase sales of our wide variety of OTC
drugs and other non-pharmacy merchandise. Our prescription drug sales, as
reflected by same store pharmacy sales, grew by 18.8% in 2000 compared to 1999.
Sales of prescription drugs represented 35.4% of total sales in 2000, compared
to 31.9% of total sales in 1999. The average number of prescriptions our
pharmacists fill per store per week increased to 1,005 in 2000, which remains
well below the national industry chain store average of approximately 1,185,
providing significant opportunity for continued pharmacy growth. We believe that
the average number of prescriptions filled per week lags behind the national
industry average because of historically low penetration of third party plans in
the New York City area and our concentration of stores in business areas, rather
than residential areas. We believe continued pharmacy growth will also increase
overall customer traffic and benefit our non-pharmacy sales.
We believe that our extensive network of conveniently located stores, strong
local market position, pricing policies and reputation for high quality health
care products and services provide a competitive
4
advantage in attracting pharmacy business from individual customers as well as
managed care organizations, insurance companies, employers and other third party
payors. The percentage of our total prescription drug sales attributable to
third party plans increased to approximately 84.0% in 2000 from approximately
81.2% in 1999. Gross margins on sales to third party plans are generally lower
than other prescription drug sales because of the highly competitive nature of
pricing for this business and the purchasing power of third party plans.
Management believes, however, that the higher volume of pharmacy sales to third
party plan customers offsets these lower gross profit margins. We believe this
allows us to leverage other fixed store operating expenses. In addition, we
believe that third party plans generate additional general merchandise sales by
increasing customer traffic in the stores. As of December 30, 2000, we had
contracts with over 200 third party plans, including every major third party
plan in our market areas. No single plan or customer accounted for 10% or more
of our total chain sales.
Another important component of our pharmacy growth strategy is the continued
acquisition of prescription files from independent pharmacies in market areas
currently served by existing Duane Reade stores. In 2000, we purchased the
prescription files of 13 independent pharmacies for an aggregate total of
$3.4 million. Independent pharmacies tend to have a higher proportion of
customers that are not affiliated with third party plans, which provide
incremental revenue and higher margin contribution. When appropriate, we will
retain the services of the pharmacist, whose personal relationship with the
customers generally maximizes the retention rate of the purchased file. Since
1996, we have experienced an estimated 80% customer retention rate with respect
to prescription files acquired. Given the large number of independent pharmacies
in metropolitan New York, we believe that these stores will provide additional
future acquisition opportunities.
All of our pharmacies are linked by computer systems which enable them to
provide customers with a broad range of services. Our pharmacy computer network
profiles customer medical and other relevant information, supplies customers
with information concerning their drug purchases for income tax and insurance
purposes and prepares prescription labels and receipts. The computer network
also expedites transactions with third party plans by electronically
transmitting prescription information directly to the third party plan and
providing on-line adjudication. At the time of sale, on-line adjudication
confirms customer eligibility, prescription coverage and pricing and co-payment
requirements and automatically bills the respective plan. On-line adjudication
also reduces losses from rejected claims and eliminates a portion of our
paperwork for billing and collection of receivables and related costs.
During 1999, we launched a new service initiative aimed at improving
customer service at our higher volume pharmacies. This service is a centrally
located pharmacy, which receives orders via internet, phone or fax from
customers and physicians, determines which prescriptions can be most efficiently
filled centrally and forwards the balance to the local stores. The selected
prescriptions are filled and then delivered to the store in advance of the
scheduled pickup, thereby reducing waiting times during peak periods. This
provides in-store pharmacy staff members with more time to service customers and
fill prescriptions that are needed on a more immediate basis. This centrally
located pharmacy also contributes to improved inventory management, since large
supplies of expensive medications can be maintained in a single location rather
than at each individual store. In addition, this concentration of inventory in
one central location results in higher fill rates on less frequently used
medications. At December 30, 2000, this facility serviced 24 of our stores.
INTERNET: In 1999, we launched an interactive website,
"www.duanereade.com," which customers may use to access company information,
fill prescriptions and purchase over-the-counter medications as well as health
and beauty care products and other non-pharmacy items. We were one of the first
major drug store chains to offer full service internet retailing to our
customers. Our strategy has been to develop the website as an additional vehicle
to deliver superior customer service, further supporting our strength as a
"brick-and-mortar" retailer. While sales generated on the website to date have
been immaterial to our business overall, we believe "www.duanereade.com" has
positioned us to exploit internet business as it may develop in the future.
5
STORE OPERATIONS: Our stores range in size from 1,600 to 14,700 square
feet, with an average of 7,166 square feet per store. Our stores are designed to
facilitate customer movement and to minimize inventory shrink. We believe that
providing wide, straight aisles and well-stocked shelves allow customers to find
merchandise easily and allow store managers, security guards, cashiers and stock
clerks to effectively monitor customer behavior. We attempt to group merchandise
logically in order to enable customers to locate items quickly and to stimulate
impulse purchases.
We establish each store's hours of operation in an attempt to best serve
customer traffic patterns and purchasing habits and to optimize store labor
productivity. Stores in Manhattan's business districts are generally open five
days a week. In residential and appropriate business/shopping districts, stores
are open six or seven days a week, with a heavy emphasis on convenient, early
morning openings and late evening closings. In fiscal 2000, 27 of our stores
were open 24 hours a day, 365 days a year. We intend to continue to identify
stores in which extended operating hours would improve customer service and
convenience and contribute to our profitability. Many of our stores offer
delivery services as an added customer convenience. Customers can arrange for
delivery by phone, fax, internet or at the store. Each store is supervised by
one store manager and one or more assistant store managers. Stores are supplied
by deliveries from our warehouse in Queens an average of three times per week,
allowing the stores to maintain a high in-stock position, maximize utilization
of store selling space and minimize inventory required to be held on hand.
We attempt to mitigate inventory shrink through: (1) the employment of full
time security guards in each store, (2) the use of a state-of-the-art Electronic
Article Surveillance, or EAS, system that detects unremoved EAS tags on valuable
or easily concealed merchandise and (3) merchandise delivery and stocking during
non-peak hours. Additionally, we train all store and warehouse employees to
monitor inventory shrink, and we use outside shopping services to monitor
employee behavior. We staff a full-time team of loss prevention professionals
and use an anonymous call-in line to allow employees to report instances of
theft. We also conduct ongoing audits of warehouse picking and receiving and
have an anonymous reward line for reporting theft. We believe that these
programs improve our control over inventory shrinkage which tends to be higher
in the urban markets within which our stores are located.
PURCHASING AND DISTRIBUTION: We purchase approximately 96% of our
non-pharmacy merchandise directly from manufacturers. We distribute
approximately 86% of our non-pharmacy merchandise through our warehouse and
receive direct-to-store deliveries for approximately 14% of our non-pharmacy
purchases. Direct-to-store deliveries are made for greeting cards,
photofinishing, convenience foods and beverages. In total, we purchase from over
1,000 vendors. We believe that there are ample sources of supply for the
merchandise we currently sell, and that the loss of any one non-pharmacy
supplier would not have a material effect on our business.
We manage purchasing through a combination of forward buying and vendor
discount ("deal") buying in ways that we believe maximize our buying power. For
example, we use a computerized forecasting and investment program that is
designed to determine optimal forward buying quantities before an announced or
anticipated price increase has been implemented. By forward buying, we stock up
on regularly carried items when manufacturers temporarily reduce the cost of
goods or when a price increase has been announced or is anticipated.
We generally purchase prescription medications under long-term supply
agreements. Substantially all of our pharmacy inventory is shipped directly to
stores on a consignment basis.
We currently operate one warehouse in Queens, New York. The warehouse
contains approximately 450,000 square feet devoted to inventory. The close
proximity of the warehouse to the stores allows us to supply the stores
frequently, thereby minimizing inventory and maximizing distribution economies.
We also operate a fleet of trucks and vans, which we use for deliveries from the
warehouse to the stores.
ADVERTISING AND PROMOTION: We regularly promote key items at reduced retail
prices during promotional periods. We use store windows and in-store signs to
communicate savings and value to shoppers.
6
Additionally, our customers used over 77 million bags with the highly
recognizable Duane Reade logo in 2000, helping to promote our name throughout
metropolitan New York. We also use full color circulars to announce new stores
and heavily circulate them in local areas to attract customers. We usually do
not rely heavily on print or broadcast media to promote our stores. Rather,
because of our many high-traffic locations, we typically rely on in-window
displays as our primary method of advertising. We use radio advertising that
focuses on our pharmacy business, highlighting services enhanced by the modern
pharmacy computer system, pharmacist accessibility and enhanced convenience. In
1999, we introduced a "Dollar Rewards" card for frequent shoppers. This card
entitles the holder to additional discounts and price reductions. By the end of
February 2001, we had issued over 1.6 million cards.
MANAGEMENT INFORMATION SYSTEMS: We currently have modern pharmacy and
inventory management information systems. The pharmacy system, which is known as
PDX, has reduced the processing time for electronic reimbursement approval for
prescriptions from third party plan providers from 50 seconds to 7 seconds, and
our warehouse inventory management systems have allowed us to increase our
inventory turns. We use scanning point of sale, or POS, systems in each of our
stores. These systems allow better control of pricing, inventory and shrink,
while maximizing the benefits derived from the other parts of our systems
application development program. POS also provides sales analysis that allows
for improved labor scheduling and helps optimize product shelf space allocation
and design by allowing detailed analysis of stock-keeping unit sales.
During the fourth quarter of 1999, we implemented a computer-assisted
merchandise replenishment system for store orders sourced through our
distribution center. This system uses item-specific and store-specific sales
history to produce "suggested" orders for each store, which can be accepted or
modified by the stores before being released to the distribution center. The
system is fully automated and improves in-stock conditions at reduced inventory
levels. The system has been fully operational in our entire chain since the
middle of the 2000 fiscal year.
During fiscal 2000, we introduced radio frequency hand held scanning devices
to our stores. These devices communicate directly with our central processor
located at our headquarters facility and permit real-time updates of adjustments
to on-hand quantities in our perpetual inventory system. These devices are also
used to support inventory ordering, transfers, price changes and direct store
deliveries. We completed the installation of these devices during the first
quarter of 2001.
COMPETITION: Our stores compete on the basis of, among other things,
convenience of location and store layout, product mix, selection, customer
service and price. The New York City drugstore market is highly fragmented due
to the complexities and costs of doing business in the most densely populated
area of the country. The diverse labor pool, local customer needs and complex
real estate market in New York City all favor regional chains and independents
that are familiar with the market. We tailor our store format to meet all of
these requirements, and this has proven successful in both the business and
residential neighborhoods of Manhattan, as well as the outer boroughs and
surrounding areas.
Our primary competition comes from approximately 700 independent locations
in New York City as well as stores operated by major drug store chains including
CVS, Rite Aid, Eckerd and Walgreens. We believe that we have significant
competitive advantages over independent drugstores in New York City. These
include purchasing economies of scale, a centrally located warehouse that
minimizes store inventory and maximizes selling space, a full line of in-stock,
brand name merchandise and a convenient store format. Against major drug chain
competition, Duane Reade enjoys the advantages of a centrally located warehouse
and a larger number of convenient locations.
GOVERNMENT REGULATION: Pharmacies are subject to extensive federal, state
and local regulation. These regulations cover required qualifications, day to
day operations, reimbursement and documentation of activities. Our stores and
distribution facility are registered with the federal U.S. Drug Enforcement
Agency and are subject to various state and local licensing requirements. Each
of our pharmacies and
7
pharmacists located in New York are licensed by the State of New York. The State
of New Jersey licenses the pharmacies and pharmacists employed at our stores in
Newark, Bayonne and Edgewater, New Jersey. In addition, we have been granted
cigarette tax stamping licenses from the State of New York and from the City of
New York, which permit us to buy cigarettes directly from the manufacturers and
stamp the cigarettes ourselves. Our stores possess cigarette tax retail dealers
licenses issued by the State of New York, the City of New York and the State of
New Jersey. In addition, certain of our stores possess beer licenses issued by
the State of New York. We seek to comply with all such licensing and
registration requirements and continue to actively monitor our compliance with
such requirements. By virtue of these license and registration requirements, we
are obligated to observe certain rules and regulations and a violation of these
rules and regulations could result in suspension or revocation of one or more
licenses or registrations and/ or the imposition of monetary penalties or fines.
EMPLOYEES: As of December 30, 2000, we had approximately 5,500 employees,
80% of whom were full-time. Approximately 3,700 of our employees are represented
by unions. Non-union employees include employees at corporate headquarters,
employees at our personnel office, store management and most part-time
employees. The distribution facility employees are represented by the
International Brotherhood of Teamsters, Chauffeurs and Warehousemen and Helpers
of America, Local 815. Our three-year contract with this union expires on
August 31, 2002. Store employees are represented by the Allied Trade Council and
certain stores are represented by Local 340A New York Joint Board, Unite
AFL-CIO. Our contract with the Allied Trade Council expires August 31, 2001. The
contract with Local 340A New York Joint Board, Unite expires September 21, 2002.
We believe that our relations with our employees are good.
TRADEMARKS: The name "Duane Reade" and the "DR" logo are registered
trademarks. We believe that we have developed strong brand awareness within the
New York City area. As a result, we regard the Duane Reade logo as a valuable
asset. In addition, in connection with the Rock Bottom acquisition, we acquired
the "Rock Bottom" name, the "Rock Bottom" logo and "RXCELLENT SERVICE and
Design," each of which are registered trademarks.
THE FOREGOING INFORMATION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. A NUMBER OF FACTORS COULD CAUSE OUR
ACTUAL RESULTS, PERFORMANCE, ACHIEVEMENTS, OR INDUSTRY RESULTS, TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT
LIMITED TO, THE COMPETITIVE ENVIRONMENT IN THE DRUGSTORE INDUSTRY IN GENERAL AND
IN OUR SPECIFIC MARKET AREA; INFLATION; CHANGES IN COSTS OF GOODS AND SERVICES;
ECONOMIC CONDITIONS IN GENERAL AND IN OUR SPECIFIC MARKET AREAS; DEMOGRAPHIC
CHANGES; CHANGES IN PREVAILING INTEREST RATES AND THE AVAILABILITY OF AND TERMS
OF FINANCING TO FUND THE ANTICIPATED GROWTH OF OUR BUSINESS; LIABILITY AND OTHER
CLAIMS ASSERTED AGAINST US; CHANGES IN OPERATING STRATEGY OR DEVELOPMENT PLANS;
THE ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL; OUR SIGNIFICANT
INDEBTEDNESS; LABOR DISTURBANCES; CHANGES IN OUR ACQUISITION AND CAPITAL
EXPENDITURE PLANS AND OTHER FACTORS REFERENCED IN THIS REPORT. IN ADDITION,
THESE 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 IN THIS REPORT 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 OF THESE TERMS, OR
OTHER VARIATIONS ON THESE TERMS OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF
STRATEGY OR INTENTIONS. GIVEN THESE UNCERTAINTIES, WE CAUTION INVESTORS NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. WE DISCLAIM ANY
OBLIGATION TO UPDATE ANY OF THESE FACTORS OR TO PUBLICLY ANNOUNCE THE RESULTS OF
ANY REVISIONS TO ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT
TO REFLECT FUTURE EVENTS OR DEVELOPMENTS.
8
ITEM 2. PROPERTIES
As of December 30, 2000, we were operating stores in the following
locations:
NO. OF STORES
-------------
Manhattan, NY............................................... 102
Queens, NY.................................................. 21
Brooklyn, NY................................................ 18
Nassau County, NY........................................... 10
Bronx, NY................................................... 7
Westchester County, NY...................................... 5
Suffolk County, NY.......................................... 3
Staten Island, NY........................................... 3
New Jersey.................................................. 3
---
Total:...................................................... 172
---
Store leases are generally for 15-year terms. The average year of expiration
for stores operating as of December 30, 2000 is 2010. Lease rates are generally
subject only to increases based on inflation, real estate tax increases or
maintenance cost increases. The following table sets forth the lease expiration
dates of our leased stores over each of the next five years and thereafter. Of
the 40 stores with leases expiring in the next five years, 14 have renewal
options.
YEAR NO. OF STORES
---- -------------
2001........................................................ 3
2002........................................................ 13
2003........................................................ 7
2004........................................................ 9
2005........................................................ 8
Thereafter.................................................. 132
We occupy 49,000 square feet for our corporate headquarters, located in
Manhattan, New York, under leases that expire in 2002 and 2008.
We occupy a 450,000 square foot warehouse in Queens, New York, under a lease
that expires in 2017.
ITEM 3. LEGAL PROCEEDINGS
We are party to legal actions arising in the ordinary course of business.
Based on information presently available to us, we believe that we have 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
financial position, results of operations or cash flows of our company. In
addition, we are currently party to arbitration proceedings arising out of
disputes over the purchase price with respect to the Rock Bottom acquisition. We
believe that the ultimate outcome of these actions will not have a material
adverse effect on the financial position, results of operations or cash flows of
our company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 2000, we did not submit any matters to a
vote of our security holders.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE RANGE OF COMMON STOCK
YEAR ENDED
DECEMBER 30, 2000
-------------------
QUARTER ENDED HIGH LOW
------------- -------- --------
March 25, 2000.............................................. $28.81 $20.63
June 24, 2000............................................... 32.50 23.00
September 23, 2000.......................................... 31.38 20.94
December 30, 2000........................................... 31.94 23.13
YEAR ENDED
DECEMBER 25, 1999
-------------------
QUARTER ENDED HIGH LOW
------------- -------- --------
March 27, 1999.............................................. $38.50 $25.63
June 26, 1999............................................... 32.56 24.00
September 25, 1999.......................................... 34.00 27.38
December 25, 1999........................................... 30.75 20.25
Our common stock is listed on the New York Stock Exchange under the symbol
"DRD." At March 16, 2001 there were 48 registered stockholders of our common
stock, compared with 80 registered stockholders at March 10, 1999. Since a
portion of our common stock is held in "street" name or nominee name, we are
unable to determine the exact number of beneficial holders. Our credit agreement
and Subordinated Notes Indenture contain covenants prohibiting payment of cash
dividends. Accordingly, we paid no dividends in 2000 or 1999, and do not
currently anticipate paying cash dividends in the foreseeable future.
10
ITEM 6. SELECTED FINANCIAL DATA
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, PERCENTAGES AND STORE DATA
FISCAL YEAR(1) 2000 1999 1998 1997 1996
-------------- ---------- -------- -------- -------- --------
BALANCE SHEET DATA (AT END OF PERIOD)
Working capital.......................... $ 154,466 $120,036 $ 90,000 $ 37,494 $ 9,917
Total assets............................. 570,930 510,294 428,140 249,521 222,476
Total debt and capital lease
obligations............................ 353,001 341,042 310,969 278,085 245,657
Stockholders' equity (deficiency)........ 114,497 66,516 22,789 (74,109) (59,396)
STATEMENT OF OPERATIONS DATA
Net sales................................ $1,000,068 $839,771 $587,432 $429,816 $381,466
Cost of sales............................ 745,717 621,510 431,025 322,340 288,505
---------- -------- -------- -------- --------
Gross profit............................. 254,351 218,261 156,407 107,476 92,961
Selling, general & administrative
expenses............................... 155,584 135,786 94,577 65,414 59,048
Depreciation and amortization............ 23,151 21,415 14,158 8,810 19,232
Store pre-opening expenses............... 1,395 1,492 3,273 767 139
Non-recurring charges(2)................. -- -- -- 12,726 --
---------- -------- -------- -------- --------
Operating income......................... 74,221 59,568 44,399 19,759 14,542
Interest expense, net.................... 35,935 29,348 25,612 34,473 32,396
---------- -------- -------- -------- --------
Income (loss) before income taxes........ 38,286 30,220 18,787 (14,714) (17,854)
Income tax benefit (expense)............. (15,610) 10,471 -- -- --
---------- -------- -------- -------- --------
Income (loss) before extraordinary
charge................................. 22,676 40,691 18,787 (14,714) (17,854)
Extraordinary charge(3).................. -- -- (23,600) -- --
---------- -------- -------- -------- --------
Net income (loss)........................ $ 22,676 $ 40,691 $ (4,813) $(14,714) $(17,854)
========== ======== ======== ======== ========
Per common share-basic:(4)
Income (loss) before extraordinary
charge............................... $ 1.28 $ 2.38 $ 1.16 $ (1.45) $ (1.77)
Extraordinary charge................... -- -- (1.46) -- --
---------- -------- -------- -------- --------
Net income (loss)...................... $ 1.28 $ 2.38 $ (0.30) $ (1.45) $ (1.77)
---------- -------- -------- -------- --------
Weighted average common shares
outstanding(4)......................... 17,718 17,119 16,198 10,161 10,103
========== ======== ======== ======== ========
Per common share-diluted:(4)
Income (loss) before extraordinary
charge............................... $ 1.23 $ 2.26 $ 1.07 $ (1.45) $ (1.77)
Extraordinary charge................... -- -- (1.34) --
---------- -------- -------- -------- --------
Net income (loss)...................... $ 1.23 $ 2.26 $ (0.27) $ (1.45) $ (1.77)
---------- -------- -------- -------- --------
Weighted average common shares
outstanding(4)......................... 18,424 17,971 17,508 10,161 10,103
========== ======== ======== ======== ========
OPERATING AND OTHER DATA
EBITDA(5)................................ $ 101,357 $ 85,762 $ 62,016 $ 43,056 $ 35,300
EBITDA as a percentage of sales.......... 10.1% 10.2% 10.6% 10.0% 9.3%
Number of stores at end of period........ 172 149 128 67 60
Same store sales growth(6)............... 7.3% 8.9% 6.5% 7.6% 8.3%
Pharmacy same store sales growth......... 18.8% 21.0% 21.5% 24.6% 25.5%
Average store size (square feet) at end
of period.............................. 7,166 7,438 7,742 6,910 6,733
Sales per square foot(7)................. $ 847 $ 813 $ 1,040 $ 1,010 $ 956
Pharmacy sales as a % of net sales....... 35.4% 31.9% 28.3% 25.1% 21.8%
Third-Party Plan sales as a % of pharmacy
sales.................................. 84.0% 81.2% 77.9% 74.2% 64.4%
Capital expenditures..................... $ 29,750 $ 37,181 $ 33,266 $ 9,360 $ 3,539
------------------------
11
(1) The 2000 fiscal year contains 53 weeks. All other years shown contain 52
weeks.
(2) We incurred approximately $12.7 million of expenses in 1997 related to our
consideration and subsequent abandonment of plans for a public offering of
common stock. We treat these charges as non-recurring, as we do not expect
them to be repeated.
(3) Refer to Note 15 of the Consolidated Financial Statements for an
explanation of this extraordinary charge.
(4) On January 14, 1998, the Company effected an 8.326 reverse stock split of
its common stock. All references to common stock shares and per share data
have been adjusted to give retroactive effect to such reverse stock split.
(5) As used in this report, EBITDA means earnings before interest, income
taxes, depreciation, amortization, extraordinary charges, non-recurring
charges and other non-cash items (primarily deferred rents). Management
believes that 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. Targets and
positive trends in EBITDA are used as the performance measure for
determining management's bonus compensation; EBITDA is also used by our
creditors in assessing debt covenant compliance. We understand that,
although security analysts frequently use 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. EBITDA is not intended as an alternative to cash flow from
operating activities as a measure of liquidity, as an alternative to net
income as an indicator of our operating performance nor as any other measure
of performance in conformity with generally accepted accounting principles.
A reconciliation of net income (loss) to EBITDA for each period included
above is set forth below (dollars in thousands):
FISCAL YEAR 2000 1999 1998 1997 1996
----------- -------- -------- -------- -------- --------
Net income (loss)........... $ 22,676 $ 40,691 $(4,813) $(14,714) $(17,854)
Income tax (benefit)
expense................... 15,610 (10,471) -- -- --
Interest expense, net....... 35,935 29,348 25,612 34,473 32,396
Depreciation and
amortization.............. 23,151 21,415 14,158 8,810 19,232
Extraordinary charge........ -- -- 23,600 -- --
Non-recurring charges....... -- -- -- 12,726 --
Other non-cash items
(primarily deferred
rent)..................... 3,985 4,779 3,459 1,761 1,526
-------- -------- ------- -------- --------
EBITDA...................... $101,357 $ 85,762 $62,016 $ 43,056 $ 35,300
======== ======== ======= ======== ========
(6) Same store sales figures include stores that have been in operation for at
least 13 months.
(7) Sales per square foot prior to fiscal 1999 exclude 29 Rock Bottom stores
acquired in September of 1998, which were converted to the Duane Reade
format in fiscal 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in connection with all consolidated financial
statements and their notes included elsewhere in this report.
GENERAL
We generate revenues primarily through sales of OTC drugs and prescription
pharmaceutical products, health and beautycare products, food and beverage
items, tobacco products, cosmetics, housewares, hosiery, greeting cards,
photofinishing, photo supplies and seasonal merchandise. Health and beauty care
products, including OTC drugs, represent our largest product categories. Our
primary costs and expenses are (1) inventory costs, (2) labor expenses and
(3) occupancy costs.
We have sales per square foot of $847 in fiscal 2000 and $813 in fiscal
1999. We believe that sales per square foot is a useful measure of comparing our
performance to that of our competitors because it is a measure of a store's
sales productivity. We currently expect that our sales per square foot may
decline as we continue with our plan to increase new store openings during
fiscal 2001. The opening of these
12
additional stores may result in a decline in sales per square foot principally
because (1) the average square footage for new stores will often be greater than
that of the existing store base and (2) new stores generally take some time to
reach a mature level of sales. We believe that our competitors in the industry
experience increases and decreases in sales per square foot for similar reasons.
Over the next two years, we plan to open 50 to 60 stores, of which approximately
two-thirds will be located outside of our primary market of Manhattan, NYC.
On September 11, 1998, we purchased substantially all of the operating
assets, including inventory and leases, of Rock Bottom Stores, Inc., a drugstore
chain of 38 stores operating primarily in the outer boroughs of New York City.
We currently operate 29 of these stores, having sold or closed the remaining
nine.
Our primary assets are our ownership of 99% of the outstanding partnership
interest of Duane Reade, a New York general partnership, and ownership of all of
the outstanding common stock of DRI I Inc. DRI I Inc. owns the remaining 1%
partnership interest in Duane Reade. Substantially all of our operations are
conducted through Duane Reade. In August 1999, we established two new
subsidiaries, Duane Reade International and Duane Reade Realty. Duane Reade
distributed to Duane Reade Inc. and DRI I Inc. all rights, title, and interest
in all its trademarks, trade names and all other intellectual property rights.
In turn, Duane Reade Inc. and DRI I Inc. made a capital contribution of these
intellectual property rights to Duane Reade International. This change created a
controlled system to manage these intellectual property rights separate and
apart from the retail operations. In addition, Duane Reade distributed some of
its store leases to Duane Reade Inc. and DRI I Inc., which in turn made a
capital contribution of these leases to Duane Reade Realty. Duane Reade Realty
is the lessee under certain store leases entered into after its creation. Duane
Reade Realty subleases to Duane Reade the properties subject to those leases.
RESULTS OF OPERATIONS
The following sets forth the results of operations as a percentage of sales
for the periods indicated.
2000 1999 1998
-------- -------- --------
Net sales.......................................... 100.0 % 100.0% 100.0%
Cost of sales...................................... 74.6 74.0 73.4
----- ----- -----
Gross profit....................................... 25.4 26.0 26.6
Selling, general & administrative expenses......... 15.6 16.2 16.1
Depreciation and amortization...................... 2.3 2.6 2.4
Store pre-opening expenses......................... 0.1 0.2 0.5
----- ----- -----
Operating income................................... 7.4 7.0 7.6
Net interest expense............................... 3.6 3.5 4.4
----- ----- -----
Income before income taxes......................... 3.8 3.5 3.2
Income tax benefit (expense)....................... (1.5) 1.3 --
----- ----- -----
Income before extraordinary charge................. 2.3 4.8 3.2
Extraordinary charge............................... -- -- (4.0)
----- ----- -----
Net income (loss).................................. 2.3% 4.8% (0.8)%
===== ===== =====
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales in the 53-week year ended December 30, 2000 were $1.0 billion, an
increase of 19.1% over the 52-week year ended December 25, 1999 sales of
$839.8 million. On a comparable 52-week basis, net sales in 2000 increased 17.0%
over the same period in 1999. The increase was due to increased comparable store
sales of 7.3% and the inclusion of 21 stores opened during 1999 for the entire
2000 period and 23 net new stores opened in 2000. The increase in comparable
store sales was primarily attributable to improved pharmacy sales, which
increased to 35.4% of total sales in 2000 compared to 31.9% of total sales in
1999.
13
Pharmacy sales have followed the general industry trend reflecting accelerated
growth rates versus front-end sales. Pharmacy and front-end comparable sales
increased by 18.8% and 1.8%, respectively.
Cost of sales as a percentage of net sales increased to 74.6% for 2000 from
74.0% for 1999, resulting in a decrease in gross profit margin to 25.4% for 2000
from 26.0% for 1999. The decrease in gross margin resulted principally from the
faster growth rate of lower margin pharmacy sales and the inclusion of the 53rd
week in 2000, which included a significant portion of post-holiday markdowns not
included in the previous 52-week year.
Selling, general and administrative expenses were $155.6 million, or 15.6%
of net sales, and $135.8 million, or 16.2% of net sales, in 2000 and 1999,
respectively. The decrease as a percentage of sales reflects the favorable
leveraging of store operating costs from maturing retail sites, as well as the
leveraging of general and administrative expenses against new and comparative
store sales growth.
Depreciation and amortization of intangibles in 2000 and 1999 was
$23.2 million and $21.4 million, respectively. The increase was attributable to
capital spending for property and equipment during 1999 and 2000 as well as
amortization expenses for goodwill, pharmacy customer lists and lease
acquisition costs for acquisitions completed during 1999 and 2000. This was
partially offset by reduced amortization expenses related to a $22.2 million
reduction of goodwill in the fourth quarter of 1999, and a change in the
estimated useful life of pharmacy customer list acquisitions from 5 to 7 years.
Store pre-opening expenses of $1.4 million related to the opening of 24
stores in 2000 as compared to $1.5 million reflecting 21 store openings in 1999.
Net interest expense increased to $35.9 million in 2000 from $29.3 million
in 1999. The increase in interest expense was principally due to higher levels
of average borrowing and higher interest rates during 2000.
Our income before income taxes increased 26.7% to $38.3 million in 2000 from
$30.2 million in 1999.
During 2000, we recorded an income tax provision of $15.6 million, which
included certain wage related income tax credits, resulting in an effective tax
rate of 40.8%. During 1999, we recorded an income tax benefit of $10.5 million
due to the reversal of deferred tax asset valuation reserves of $30.8 million.
We recorded net income of $22.7 million in 2000, compared to net income of
$40.7 million in 1999. The decrease of $18.0 million is a result of the income
tax benefit of $10.5 million recorded in 1999 as compared to the income tax
provision of $15.6 million recorded in 2000, partially offset by the increase in
pre-tax income of $8.1 million in 2000 versus 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales in 1999 were $839.8 million, an increase of 43.0% over 1998 net
sales of $587.4 million. The increase was due to increased comparable store
sales of 8.9% and the inclusion of 33 stores opened during 1998 for the entire
1999 period and 21 new stores opened in 1999. The increase in comparable store
sales was primarily attributable to increased pharmacy sales, which increased to
31.9% of total sales in 1999 compared to 28.3% of total sales in 1998. Pharmacy
sales have followed the general industry trend reflecting accelerated growth
rates versus front-end sales.
Cost of sales as a percentage of net sales increased to 74.0% for 1999 from
73.4% for 1998, resulting in a decrease in gross profit margin to 26.0% for 1999
from 26.6% for 1998. The decrease in gross margin resulted principally from
pharmacy sales making up a greater percentage of total sales and the impact of
lower gross margins in the Rock Bottom stores acquired in September 1998.
Selling, general and administrative expenses were $135.8 million or 16.2% of
net sales and $94.6 million or 16.1% of net sales in 1999 and 1998,
respectively. The large number of new and immature stores, along with the
increased proportion of higher cost pharmacy business, offset the favorable
leveraging of expenses associated with sales growth.
The increase in depreciation and amortization of intangibles from
$14.2 million in 1998 to $21.4 million in 1999 resulted principally from capital
spending on property and equipment during 1998 and 1999 as well as full year
amortization and depreciation expenses related to identifiable intangibles,
goodwill and
14
property and equipment associated with the Rock Bottom Stores acquisition in
September 1998. In addition, amortization expenses increased due to the
intangible assets associated with the acquisition of a portion of the Love's
store chain in May 1999.
Store pre-opening expenses decreased from $3.3 million in 1998 to
$1.5 million in 1999 due to the opening of 21 new stores in 1999 compared to 33
in 1998.
Net interest expense increased to $29.3 million in 1999 from $25.6 million
in 1998. The increase in interest expense was principally due to higher levels
of average borrowing and higher interest rates during 1999.
Our income before income taxes increased 60.9% to $30.2 million in 1999 from
$18.8 million in 1998.
During 1999, we recorded an income tax benefit of $10.5 million due to the
reversal of deferred tax asset valuation reserves, which were partially offset
by the income tax provision for fiscal year 1999. We were not required to record
an income tax provision in 1998, as there was no taxable income and our net
operating loss carryforwards and related deferred tax asset had a valuation
reserve of 100%.
During 1998 we recorded a $23.6 million extraordinary charge related to the
early extinguishment of debt.
We recorded net income of $40.7 million in 1999, compared to a net loss of
$4.8 million in 1998. The increase of $45.5 million is a result of higher gross
profit as a result of higher sales, the extraordinary charge recorded in 1998,
and the income tax benefit recorded in 1999, partially offset by higher selling,
general and administrative expenses, amortization and depreciation expense.
LIQUIDITY AND CAPITAL RESOURCES
In February 1998, we successfully completed an initial public offering,
which was part of a plan to refinance all of our then existing indebtedness in
order to enhance financial flexibility to pursue growth opportunities and
implement capital improvements. This plan resulted in a reduction in our overall
indebtedness, a simplification of our capital structure and access to additional
borrowings. The principal components of this plan were: (1) our sale of
6.7 million shares of common stock for net proceeds of approximately
$102 million; (2) the execution of a new secured credit agreement, which
provided for borrowings up to approximately $160 million ($130 million of term
loans and up to $30 million of revolving loans); (3) our issuance of
$80 million aggregate principal amount of 9 1/4% Senior Subordinated Notes due
2008, for net proceeds of approximately $77 million; (4) the repayment of all
outstanding borrowings under our former credit agreement, the outstanding
principal amount of which was $89.8 million as of December 27, 1997; (5) the
redemption of our outstanding 15% Zero Coupon Senior Subordinated Notes due 2004
and (6) the redemption of our outstanding 12% Senior Notes due 2002.
On August 14, 1998, in connection with the Rock Bottom acquisition, our
credit agreement was amended to allow for increased term loan borrowings of
$10 million. On September 11, 1998, also in connection with the Rock Bottom
acquisition, the credit agreement was amended and restated to increase available
term loan borrowings by $70 million, bringing the total permitted borrowings
under our credit agreement to $240 million ($210 million of term loans and up to
$30 million of revolving loans).
On March 17, 1999, in connection with additional planned pharmacy
acquisitions and capital spending requirements, the credit agreement was amended
and restated again to increase available borrowings by $35 million to
$275 million ($235 million of term loans and $40 million of revolving loans). On
December 16, 1999 the credit agreement was amended to increase permitted
revolving loan borrowings to $60 million of which $40 million was actually made
available to us at December 25, 1999.
On January 7, 2000 and February 11, 2000 available revolver borrowings were
increased by $6.0 million and $4.0 million respectively, bringing total
available revolver borrowings to $50 million.
On March 17, 2000, in order to provide us with additional availability of
capital for general working capital needs, the credit agreement was amended and
restated to permit available term loan borrowings to increase by up to
$30 million of which $10 million was actually made available to us. In addition,
available revolver borrowings were increased by $5 million, bringing total
available borrowings under the credit
15
agreement to $300 million ($245 million of term loans and $55 million of
revolver loans). We used the additional $10 million proceeds of the term loans
to reduce revolver borrowings.
On October 30, 2000, the remaining $20 million resulting from the March 17,
2000 credit agreement restatement was made available, bringing total term loan
borrowing to $265 million. The additional funds were again used to reduce
revolver borrowings.
On October 31, 2000, the credit agreement was restated to allow for an
additional $20 million of term loan borrowing, of which $10 million was made
available. This increased our total available borrowings to $330 million
($275 million of term loans and $55 million of revolver loans.) The proceeds of
this transaction were applied to the balance of the revolving credit line.
Working capital was $154.5 million as of December 30, 2000 and
$120.0 million as of December 25, 1999. The increase is primarily due to
increases in inventory related to the opening of 24 additional stores during
2000, and increases in accounts receivable due to additional volume and an
increase in the proportion of third party prescription sales.
Our EBITDA increased by $15.6 million, or 18.2%, to $101.4 million in 2000
compared to $85.8 million in 1999. EBITDA as a percentage of sales was 10.1% in
2000, compared to 10.2% in 1999.
For fiscal 2000, net cash provided by operating activities was
$22.1 million, compared to $16.9 million for fiscal 1999. The primary reason for
the increase in net cash provided was increased earnings from operations
partially offset by increases in working capital related to inventory for new
stores, accounts receivable and the timing of the year-end at December 30, 2000
versus December 25, 1999. As a result of the additional week and later year-end
date in 2000, certain disbursements such as sales tax and payroll were paid
prior to the year-end date in 2000, whereas they were paid after year-end in
1999.
For fiscal 2000, net cash used in investing activities was $32.6 million,
compared to $45.3 million in fiscal 1999. Net cash used in investing activities
in 2000 was for capital expenditures of $29.7 million primarily related to new
store openings and the remodeling and renovation of other stores, combined with
$2.9 million for lease acquisition and pharmacy file acquisition costs. Net cash
used in investing activities in 1999 was due to capital expenditures of
$37.2 million, $8.5 million for lease acquisition and pharmacy file acquisition
costs, $10.3 million to purchase six Love's stores and a Pasteur Pharmacy offset
by proceeds of $10.7 million from the sale of assets.
For fiscal 2000, net cash provided by financing activities was
$10.5 million, compared to $28.6 million in fiscal 1999. In both 2000 and 1999,
the net cash provided by financing activities was primarily due to additional
borrowings under our credit agreement.
Our capital requirements primarily result from opening and stocking new
stores, remodeling and renovating existing retail locations and from the
continuing development of management information systems. We believe that there
are significant opportunities to open additional stores, and currently plan to
open approximately 50 to 60 stores during the next two years. We expect to spend
approximately $30 million in fiscal 2001 on capital expenditures, primarily for
new and replacement stores and an additional $7 million for lease and pharmacy
file acquisition costs. We also require working capital to support inventory for
our existing stores. Historically, we have been able to lease our store
locations.
Leases for 16 of our stores that generated approximately 7.4% of our net
sales for fiscal 2000 are scheduled to expire before the end of fiscal 2002. We
believe that we will be able to renew these leases on economically favorable
terms or, alternatively, find other economically attractive locations to lease.
As of December 30, 2000, approximately 3,700 of our approximately 5,500
employees were represented by various labor unions and were covered by
collective bargaining agreements. Pursuant to the terms of these collective
bargaining agreements, we are required to pay specified annual increases in
salary and benefits to the member employees. We do not believe that these
increases will have a material impact on our liquidity or results of operations.
We believe that, based on current levels of operations and anticipated
growth, cash flow from operations, together with other available sources of
funds, including additional borrowings under our credit agreement, will be
adequate for at least the next two years to make required payments of principal
16
and interest on our indebtedness, to fund anticipated capital expenditures and
working capital requirements and to comply with the terms of our debt
agreements. As of December 30, 2000, we had borrowed approximately
$12.5 million under the revolving portion of our bank credit agreement and had
approximately $41.7 million of remaining availability. Our ability to meet our
debt service obligations and reduce our total debt will depend upon our future
performance which, in turn, will be subject to general economic, financial,
business, competitive, legislative, regulatory and other conditions, many of
which are beyond our control. In addition, we cannot assure you that our
operating results, cash flow and capital resources will be sufficient for
repayment of our indebtedness in the future. Substantially all of our borrowings
under the credit agreement bear interest at floating rates. Therefore, our
financial condition will be affected by changes in prevailing interest rates.
The credit agreement contains various covenants that limit or restrict,
among other things, subject to certain exceptions, capital expenditures, the
incurrence of indebtedness, the creation of liens, transactions with affiliates,
restricted payments, investments and acquisitions, mergers, consolidations,
dissolutions, asset sales, dividends, distributions, and certain other
transactions and business activities by the Company.
Financial performance covenants include interest coverage, leverage ratios,
minimum net worth requirements and fixed charge coverage. At December 30, 2000,
we were in compliance with all financial performance covenants.
On December 20, 2000, we entered into a two-year interest rate swap in the
notional amount of $150.0 million. This swap had an effective date of
January 12, 2001 and represented a hedging transaction whereby we would receive
interest at a floating rate and pay interest at a fixed LIBOR rate. The effect
of this swap is to fix our interest obligations on $150.0 million of floating
rate debt for two years at a LIBOR rate of 5.8075% plus the applicable margins
as defined in the credit agreement (see Note 8 to the Consolidated Financial
Statements). This agreement expires on January 13, 2003.
TAX BENEFITS FROM NET OPERATING LOSSES
At December 30, 2000, we had net operating loss carryforwards, or NOLs, of
approximately $23 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 our federal income taxes otherwise payable. The Internal Revenue
Code of 1986, as amended, imposes significant limitations on the utilization of
NOLs in the event of an "ownership change," as defined in Section 382 of the
Code. This 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. Our
recapitalization in 1997 caused us to experience an ownership change. As a
result, we currently are subject to an annual Section 382 limitation of
approximately $8.5 million in 2001 and approximately $5.1 million from 2002 to
2007 on the amount of NOLs generated prior to the recapitalization that we may
use to offset future taxable income. At December 30, 2000 all of the existing
NOLs were subject to this limitation. We cannot assure you that we will be able
to use any NOLs to offset future taxable income or that the NOLs will not become
subject to limitation due to future ownership changes. Based on our recent and
projected performance, however, management believes that it is more likely than
not that the full value of the NOLs will be realized.
SEASONALITY
The non-pharmacy business is seasonal in nature, with the Christmas holiday
season generating a higher proportion of sales and earnings than other periods.
See Note 18 to the Consolidated Financial Statements for an illustration of the
effect of seasonality on our results of operations.
17
INFLATION
We believe that inflation has not had a material impact on our results of
operations during the three years ended December 30, 2000; however, most recent
data available indicates that there has been a modest increase in the overall
inflation levels impacting our business and there can be no assurance that
inflation will not have a material impact 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. On December 20, 2000, the Company entered
into a two-year interest rate swap agreement in the notional amount of
$150.0 million, with an effective date of January 12, 2001. The agreement was
entered into as an interest rate hedging transaction and will effectively
convert $150.0 million of floating rate debt to a fixed rate of interest based
on LIBOR. The Company is required to adopt Statement No. 133 for the first
quarter of 2001. The adoption of Statement No. 133 is not expected to have a
material impact on our Consolidated Financial Statements.
In 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes guidance in applying generally accepted
accounting principles to revenue recognition. The adoption of SAB 101 had no
impact on our Consolidated Financial Statements.
In April 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (FIN 44) "Accounting for Certain Transactions Involving
Stock Compensation." Among other things, FIN 44 establishes criteria to
determine whether modifications to the terms of existing stock option awards
will result in compensation expense being recorded. In addition, FIN 44
clarifies the criteria for determining whether a stock based plan is
non-compensatory. The adoption of FIN 44 did not have a material impact on our
Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
Our financial results are subject to risk from interest rate fluctuations on
debt that carries variable interest rates. Variable rate debt outstanding under
our credit agreement was approximately $270 million at December 30, 2000. During
1998, in connection with the credit agreement requirements, we entered into an
interest rate protection agreement which capped the LIBOR rate at 6.5% on
$65 million of our floating rate debt. This agreement expired in November 2000.
On December 20, 2000, we purchased a two-year interest rate swap in the notional
amount of $150.0 million. This swap has an effective date of January 12, 2001
and represented a hedging transaction to effectively convert $150.0 million of
floating rate debt to a fixed rate. This fixed rate is equivalent to a LIBOR
rate of 5.8075% plus the applicable margins described in our credit agreement
(see note 8 to the Consolidated Financial Statements). The 90-day LIBOR rate at
December 30, 2000 was 6.8125%. Based on the December 30, 2000 outstanding
balances reduced by the $150.0 million interest rate swap described above, a
0.50% change in interest rates would affect pre-tax annual results of operations
by approximately $0.6 million. We also had $80 million of Senior Notes
outstanding at December 30, 2000. These notes, which bear interest at a fixed
annual rate of 9 1/4%, are not subject to risk from interest rate fluctuations.
The principal objective of our investment management activities is to
maintain acceptable levels of interest rate and liquidity risk and to facilitate
our funding needs. As part of our investment management, we may use additional
derivative financial products such as interest rate hedges and interest rate
swaps in the future.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF DUANE READE INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficiency) and
of cash flows present fairly, in all material respects, the financial position
of Duane Reade, Inc. and its subsidiaries (the "Company") at December 30, 2000
and December 25, 1999 and the results of their operations and their cash flows
for the 53 week period ended December 30, 2000 and for each of the 52 week
periods ended December 25, 1999 and December 26, 1998 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, NY
February 16, 2001
19
DUANE READE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE 52 WEEKS ENDED
53 WEEKS ENDED ---------------------------
DECEMBER 30, DECEMBER 25, DECEMBER 26,
2000 1999 1998
-------------- ------------ ------------
Net sales.............................................. $1,000,068 $839,771 $587,432
Cost of sales.......................................... 745,717 621,510 431,025
---------- -------- --------
Gross profit........................................... 254,351 218,261 156,407
---------- -------- --------
Selling, general & administrative expenses............. 155,584 135,786 94,577
Depreciation & amortization............................ 23,151 21,415 14,158
Store pre-opening expenses............................. 1,395 1,492 3,273
---------- -------- --------
180,130 158,693 112,008
---------- -------- --------
Operating income....................................... 74,221 59,568 44,399
Interest expense, net.................................. 35,935 29,348 25,612
---------- -------- --------
Income before income taxes............................. 38,286 30,220 18,787
Income tax benefit (expense)........................... (15,610) 10,471 --
---------- -------- --------
Income before extraordinary charge..................... 22,676 40,691 18,787
Extraordinary charge................................... -- -- (23,600)
---------- -------- --------
Net income (loss)...................................... $ 22,676 $ 40,691 $ (4,813)
========== ======== ========
Per common share--basic:
Income before extraordinary charge................... $ 1.28 $ 2.38 $ 1.16
Extraordinary charge................................. -- -- (1.46)
---------- -------- --------
Net income (loss).................................... $ 1.28 $ 2.38 $ (0.30)
---------- -------- --------
Weighted average common shares outstanding............. 17,718 17,119 16,198
========== ======== ========
Per common share--diluted:
Income before extraordinary charge................... $ 1.23 $ 2.26 $ 1.07
Extraordinary charge................................. -- -- (1.34)
---------- -------- --------
Net income (loss).................................... $ 1.23 $ 2.26 $ (0.27)
---------- -------- --------
Weighted average common shares outstanding............. 18,424 17,971 17,508
========== ======== ========
The accompanying notes are an integral part of these financial statements.
20
DUANE READE INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 30, DECEMBER 25,
2000 1999
------------ ------------
ASSETS
Current assets
Cash...................................................... $ 979 $ 1,013
Receivables............................................... 48,953 38,266
Inventories............................................... 172,568 152,277
Deferred income taxes..................................... 13,023 15,427
Prepaid expenses and other current assets................. 8,770 4,107
-------- --------
TOTAL CURRENT ASSETS...................................... 244,293 211,090
Property and equipment, net................................. 107,883 89,958
Goodwill, net of accumulated amortization of $31,020 and
$26,745................................................... 152,951 148,975
Deferred income taxes....................................... 8,852 19,808
Other assets................................................ 56,951 40,463
-------- --------
TOTAL ASSETS.............................................. $570,930 $510,294
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 47,575 $ 50,199
Accrued interest.......................................... 8,394 3,519
Other accrued expenses.................................... 19,830 25,585
Current portion of long-term debt......................... 12,325 9,850
Current portion of capital lease obligations.............. 1,703 1,901
-------- --------
TOTAL CURRENT LIABILITIES................................. 89,827 91,054
Long-term debt.............................................. 337,913 326,313
Capital lease obligations, less current portion............. 1,060 2,978
Other non-current liabilities............................... 27,633 23,433
-------- --------
TOTAL LIABILITIES......................................... 456,433 443,778
-------- --------
Commitments and Contingencies (Note 13)
Stockholders' equity
Preferred stock, $0.01 par; authorized 5,000,000 shares;
issued and outstanding: none............................ -- --
Common stock, $0.01 par; authorized 75,000,000 shares;
issued and outstanding: 18,232,339 and 17,202,955
shares.................................................. 182 172
Paid-in capital........................................... 154,536 129,241
Accumulated deficit....................................... (40,221) (62,897)
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................ 114,497 66,516
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $570,930 $510,294
======== ========
The accompanying notes are an integral part of these financial statements.
21
DUANE READE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE 52 WEEKS ENDED
53 WEEKS ENDED ---------------------------
DECEMBER 30, DECEMBER 25, DECEMBER 26,
2000 1999 1998
-------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 22,676 $ 40,691 $ (4,813)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................... 24,878 22,827 15,512
Deferred income taxes....................................... 13,360 18,353 --
Valuation allowance reversal................................ -- (30,843) --
Accretion of principal of zero coupon debt.................. -- -- 1,659
Extraordinary charge........................................ -- -- 23,600
Other non-cash expenses..................................... 3,985 4,779 3,459
Changes in operating assets and liabilities (net of effect
of acquisitions):
Receivables................................................. (10,686) (12,719) (15,955)
Inventories................................................. (18,022) (22,252) (44,976)
Accounts payable............................................ 3,532 1,984 22,288
Prepaid and accrued expenses................................ (6,577) (3,685) 4,624
Other assets and liabilities, net........................... (11,072) (2,247) 141
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 22,074 16,888 5,539
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Rock Bottom assets.............................. -- -- (64,906)
Purchase of Love's Stores and Pasteur Pharmacy.............. -- (10,332) --
Proceeds from sales of assets............................... -- 10,732 --
Capital expenditures........................................ (29,750) (37,181) (33,266)
Lease acquisition and customer lists........................ (2,897) (8,528) (13,403)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES....................... (32,647) (45,309) (111,575)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock offering, net.................... -- -- 101,606
Proceeds from new senior subordinated debt.................. -- -- 80,000
Repayment of old term loan.................................. -- -- (65,310)
Repayment of old revolving credit facility.................. -- -- (24,500)
Repayment of old senior subordinated notes.................. -- -- (89,893)
Repayment of zero coupon debt............................... -- -- (99,346)
Premiums paid on early extinguishment of debt............... -- -- (11,496)
Fees and expenses related to early extinguishment of debt... -- -- (478)
Proceeds from new term loan................................. 40,000 25,000 210,000
Repayment of new term loan.................................. (9,925) (5,787) (1,550)
Net borrowings from (repayments of) new revolving credit
facility.................................................. (16,000) 12,000 16,500
Deferred financing costs.................................... (2,284) (1,494) (6,961)
Proceeds from issuance of stock............................. 702 928 105
Repayment of capital lease obligations...................... (1,954) (2,082) (2,033)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 10,539 28,565 106,644
-------- -------- --------
Net increase (decrease) in cash............................. (34) 144 608
Cash at beginning of year................................... 1,013 869 261
-------- -------- --------
CASH AT END OF YEAR......................................... $ 979 $ 1,013 $ 869
======== ======== ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 29,079 $ 27,971 $ 76,688(1)
Cash paid for taxes on income............................... $ 1,467 $ 1,587 --
Acquisitions using common stock............................. $ 24,601 $ 2,109 --
------------------------------
(1) Includes $52,741 of accretion of Zero Coupon Notes from September 1992
through February 1998, which was repaid in connection with the Company's
Refinancing Plan in February 1998.
The accompanying notes are an integral part of these financial statements.
22
DUANE READE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)
PREFERRED STOCK COMMON-STOCK
------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT $ SHARES AMOUNT $ CAPITAL DEFICIT TOTAL
-------- -------- ----------- -------- -------- ----------- --------
Balance, December 27,
1997..................... -- -- 10,260,577 $103 $ 24,563 $ (98,775) $(74,109)
Common stock offering...... -- -- 6,700,000 67 101,539 -- 101,606
Common stock issued
for exercise of stock
options.................. -- -- 24,980 -- 105 -- 105
Net loss (1)............... -- -- -- -- -- (4,813) (4,813)
-------- -------- ----------- ---- -------- --------- --------
Balance, December 26,
1998..................... -- -- 16,985,557 170 126,207 (103,588) 22,789
Common stock issued
for exercise of stock
options.................. -- -- 134,953 1 926 -- 927
for acquisitions......... -- -- 82,445 1 2,108 -- 2,109
Net income (1)............. -- -- -- -- -- 40,691 40,691
-------- -------- ----------- ---- -------- --------- --------
Balance, December 25,
1999..................... -- -- 17,202,955 172 129,241 (62,897) 66,516
Common stock issued
for exercise of stock
options.................. -- -- 80,912 1 703 -- 704
for acquisitions......... -- -- 948,472 9 24,592 -- 24,601
Net income (1)............. -- -- -- -- -- 22,676 22,676
-------- -------- ----------- ---- -------- --------- --------
Balance, December 30,
2000..................... -- -- 18,232,339 $182 $154,536 $ (40,221) $114,497
======== ======== =========== ==== ======== ========= ========
------------------------
(1) The Company has no comprehensive income other than its net income/loss and,
therefore, comprehensive income is equal to the net income/loss in each of
the three years presented.
The accompanying notes are an integral part of these financial statements.
23
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Duane Reade Inc. (the "Company") was formed on June 16, 1992. The Company
and a wholly owned subsidiary, DRI I Inc. ("DRI"), are general partners in Duane
Reade, which operates retail drugstores (172 at December 30, 2000) in the New
York metropolitan area.
During June 1997, the Company entered into a recapitalization agreement (the
"Agreement") with its stockholders ("Stockholders") and DLJ Merchant Banking
Partners II, L.P. ("DLJMBPII") and certain of its affiliates (the "DLJ
Entities") as investors ("Investors"). The Agreement provided for (i) the
purchase by Investors from the Stockholders of substantially all their stock
holdings in the Company, (ii) a conversion of all of the outstanding shares of
the Company into a newly authorized class of Class B common stock and (iii) the
creation of a new authorized class of preferred stock which will carry the
rights and preferences granted by the Company's board of directors when issued.
Shares were converted as follows:
APPROXIMATE
PRIOR CLASS CONVERSION RATE
----------- ---------------
Common and Common Class A................................... 28/1
Common Class P and Common Class P-1......................... 355/1
In addition, because of the change in control, the Company was obligated to
and made offers to repurchase all outstanding 12% Senior Notes due 2002 (the
"12% Senior Notes") and 15% Zero Coupon Notes due 2004 (the "Zero Coupon Notes")
at 101% of the principal amount or accreted value thereof, respectively. Such
offers expired on September 12, 1997. The Company repurchased an aggregate of
$107,000 principal amount of 12% Senior Notes and $9,000 of Zero Coupon Notes
pursuant to the offers.
On January 14, 1998, the Company effected an 8.326 reverse stock split of
its common stock. All references to common stock amounts, shares and per share
data included herein have been adjusted to give retroactive effect to such
reverse stock split.
In February 1998, the Company successfully completed an initial public
offering of its stock which was part of a plan to refinance all of the Company's
existing indebtedness in order to enhance the Company's financial flexibility.
Significant accounting policies followed in the preparation of the
Consolidated Financial Statements are as follows:
PRINCIPLES OF CONSOLIDATION: 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 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.
REPORTING YEAR: The fiscal year for the Company is the 52 or 53 week
reporting period ending on the last Saturday in December. The 2000 fiscal year
contains 53 weeks, while the 1999 and 1998 fiscal years contain 52 weeks.
RECEIVABLES: Receivables consist primarily of amounts due from various
insurance companies and governmental agencies under third party payment plans
for prescription sales and amounts due from
24
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
vendors, a majority of which relate to promotional programs. The Company has not
provided an allowance for doubtful accounts as its historical write-offs have
been immaterial. The Company reflects promotional allowances from vendors as a
reduction of cost of sales or advertising expense, when such advertising or
promotions have been completed and the related allowances have been earned. The
carrying value of the Company's receivables approximates fair value given the
short-term maturity of these financial instruments.
INVENTORIES AND COST OF SALES: During the third quarter of 1998, the
Company changed its inventory costing method from the last-in, first-out retail
dollar value method (LIFO) to the first-in, first-out (FIFO) method. The effect
of this change was immaterial to the accompanying financial statements.
Inventories are stated at the lower of cost or market. When appropriate,
provision is made for obsolete, slow-moving or damaged inventory. In 1998, the
Company entered into an arrangement with a pharmaceutical distributor whereby
prescription drug inventory was shipped directly to the Company's stores, with
payment due only when inventory was sold. On November 19, 1999 the Company
terminated this arrangement and entered into a new arrangement with a different
pharmaceutical distributor, its primary supplier of pharmaceutical products.
Under the new arrangement, prescription drug inventory continues to be shipped
directly to the Company's stores. Such inventory is accounted for as consigned
merchandise and is not recorded on the Company's balance sheet. As of
December 30, 2000 and December 25, 1999, the cost of such consignment inventory
was approximately $30 million. Cost of sales includes distribution and occupancy
costs.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method over
estimated useful lives of assets as follows:
Buildings and improvements... 30 years
Furniture, fixtures and 5-10 years
equipment..................
Computer equipment........... 5-7 years
Leasehold improvements....... Life of lease or, if shorter, remaining asset life
OTHER ASSETS: Deferred financing costs which arose in connection with the
Credit Agreement and the Senior Subordinated Notes due 2008 are amortized using
the interest method, over the term of the debt.
Pharmacy file and lease acquisition costs are amortized over seven years and
the remaining life of the lease, respectively.
Systems development costs, consisting principally of external consultants
software application development costs relating to the new management
information systems, are amortized using the straight-line method over a period
of seven years.
INTANGIBLE ASSETS: Goodwill is amortized on the straight-line method over
40 years. The carrying values of goodwill, identifiable intangibles and long
lived fixed assets are periodically reviewed and evaluated by the Company when
events and circumstances indicate that the carrying amount of these assets may
not be recoverable. This evaluation is based on the expected future undiscounted
operating cash flows of the related assets. Should such evaluations result in
the Company concluding that the carrying amount of goodwill or other
identifiable intangibles or fixed assets has been impaired, an appropriate
write-down would be recorded.
25
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION: The Company recognizes revenues from the sale of
merchandise at the time that the merchandise is sold.
ADVERTISING EXPENSES: Costs incurred to produce media advertising are
charged to expense when the advertising takes place.
PRE-OPENING EXPENSES: Store pre-opening costs, other than capital
expenditures, are expensed when incurred.
INCOME TAXES: Income taxes are accounted for under the liability method
prescribed by Statement of Financial Accounting Standards No. 109. Deferred tax
assets and liabilities are determined based on the difference between book and
tax bases of the respective assets and liabilities as well as for the deferred
tax effects of tax credit carryforwards. Deferred tax assets and liabilities are
measured using the enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. Valuation allowances are established when management determines that it
is more likely than not that a deferred tax asset will not be realized.
RECENTLY ISSUED ACCOUNTING STANDARDS: 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. On
December 20, 2000, the Company entered into a two-year interest rate swap
agreement in the notional amount of $150.0 million, with an effective date of
January 12, 2001. The agreement was entered into as an interest rate hedging
transaction and will effectively convert $150.0 million of floating rate debt to
a fixed rate of interest based on LIBOR. The Company is required to adopt
Statement No. 133 for the first quarter of 2001. The adoption of Statement
No. 133 is not expected to have a material impact on our Consolidated Financial
Statements.
In 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes guidance in applying generally accepted
accounting principles to revenue recognition. The adoption of SAB 101 had no
impact on our Consolidated Financial Statements.
In April 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (FIN 44) "Accounting for Certain Transactions Involving
Stock Compensation." Among other things, FIN 44 establishes criteria to
determine whether modifications to the terms of existing stock options awards
will result in compensation expense being recorded. In addition, FIN 44
clarifies the criteria for determining whether a stock based plan is
non-compensatory. The adoption of FIN 44 did not have a material impact on our
Consolidated Financial Statements.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues, costs and
expenses during the reporting period. Actual results could differ from those
estimates.
NET INCOME (LOSS) PER COMMON SHARE: Basic earnings (loss) per share is
computed based on the weighted average number of common shares outstanding
during the period. Diluted earnings per share gives effect
26
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
2. REFINANCING PLAN AND INITIAL PUBLIC OFFERING
In February 1998, the Company successfully completed an initial public
offering of its stock which was part of a plan to refinance all of the Company's
existing indebtedness (the "Refinancing Plan") in order to enhance the Company's
financial flexibility to pursue growth opportunities and implement capital
improvements. The Refinancing Plan resulted in a reduction in the Company's
overall indebtedness, a simplification of the Company's capital structure and
access to additional borrowings. The principal components of the Refinancing
Plan were: (i) the sale by the Company of 6.7 million shares of common stock for
net proceeds of approximately $102 million; (ii) the execution of a new secured
credit agreement (the "Credit Agreement") which provided for borrowings up to
approximately $160 million ($130 million of term loans and up to $30 million of
revolving loans); (iii) the issuance of $80 million in aggregate principal
amount of the Company's 9 1/4% Senior Subordinated Notes due 2008 (the "Senior
Notes") for net proceeds of approximately $77 million (the "Notes Offering");
(iv) the repayment of all outstanding borrowings under the Company's former
credit agreement (the "Former Credit Agreement"); (v) the redemption of the
Company's outstanding Zero Coupon Notes; and (vi) the redemption of the
Company's outstanding 12% Senior Notes. The interest rates under the Credit
Agreement are approximately the same as interest rates under the Former Credit
Agreement.
3. ACQUISITIONS
During 2000, the Company purchased a portion of the operating assets (five
stores including inventory and leases) of Value Drugstores, a chain of drug
stores operating 10 stores in the New York metropolitan area. The purchase price
of $10.8 million was paid through the issuance of common stock. The transaction
was accounted for as a purchase, with the purchase price being allocated to
inventory ($0.7 million), property ($0.2 million), identifiable intangibles
($1.5 million) and goodwill ($8.6 million) net of reserves for expenses and
liabilities assumed ($0.2 million). The operations of the acquired Value Drug
stores have been included in the consolidated statement of income from the date
of acquisition and did not have a material effect on the reported results of
operations or financial position of the Company.
During 1999, the Company purchased a portion of the operating assets (six
stores including inventory and leases) of Love's Pharmacies, a chain of drug
stores operating 17 stores in New York City and substantially all of the assets
of a Pasteur Drug Store (one store including inventory and lease). The aggregate
purchase price paid for the two acquisitions was $15.3 million, and was
allocated to inventory ($1.8 million), property and equipment ($0.1 million),
identifiable intangibles ($1.4 million) and goodwill ($12.4 million) net of
reserves for expenses and liabilities assumed ($0.4 million). The operations of
the acquired Love's and Pasteur stores have been included in the consolidated
statement of income from the date of acquisition and did not have a material
effect on the reported results of operations or financial position of the
Company.
On September 11, 1998, the Company purchased substantially all of the
operating assets (including inventory and leases) of Rock Bottom Stores, Inc., a
health and beauty aid retailer operating 38 stores primarily in the outer
boroughs of New York City (the "Rock Bottom Acquisition"). Ten stores acquired
as part of the acquisition were originally designated for sale or closure as of
December 26, 1998. These stores were operated for a period of time after the
acquisition. Since the acquisition, six of the stores were sold
27
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
with no resultant gain or loss. One of the stores was turned back to the
landlord and the Company was released from the lease obligation, one of the
stores was taken for municipal use in a condemnation proceeding and the Company
was released from the lease obligation, one of the stores has been subleased,
and the remaining store is still being operated. The results of the operations
of these ten stores were not included in the Company's operating statements
through September, 1999 (one year after acquisition). Their results, including
the proceeds from asset sales, were included in goodwill which, during the 1999
fiscal year, resulted in an increase in goodwill of $1.3 million. The one store
remaining in operation has been included in the results of operations since
September, 1999.
The operating results of the Rock Bottom stores to be retained have been
included in the consolidated statement of income from the date of acquisition.
The unaudited pro forma results below assume the acquisition occurred as of
December 28, 1997 (in thousands, except per share amounts).
FOR THE 52 WEEKS ENDED
53 WEEKS ENDED ---------------------------
DECEMBER 30, DECEMBER 25, DECEMBER 26,
2000 1999 1998
HISTORICAL HISTORICAL PROFORMA
-------------- ------------ ------------
(UNAUDITED)
Net sales.............................................. $1,000,068 $839,771 $725,069
---------- -------- --------
Operating income....................................... $ 74,221 $ 59,568 $ 49,431
---------- -------- --------
Income before extraordinary charge..................... $ 22,676 $ 40,691 $ 19,429
Extraordinary charge, net of income taxes of $0........ -- -- (23,600)
---------- -------- --------
Net income (loss)...................................... $ 22,676 $ 40,691 $ (4,171)
========== ======== ========
Per common share--Basic
Income before extraordinary charge..................... $ 1.28 $ 2.38 $ 1.20
Extraordinary charge................................... -- -- (1.46)
---------- -------- --------
Net income (loss)...................................... $ 1.28 $ 2.38 $ (0.26)
========== ======== ========
Per common share--Diluted
Income before extraordinary charge..................... $ 1.23 $ 2.26 $ 1.10
Extraordinary charge................................... -- -- (1.34)
---------- -------- --------
Net income (loss)...................................... $ 1.23 $ 2.26 $ (0.24)
========== ======== ========
In management's opinion, the unaudited pro forma combined results are not
necessarily indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of fiscal 1998 or of future
results of the combined operations under the ownership and management of the
Company.
During 2000, the Company acquired the pharmacy files of 13 independent
pharmacies (excluding the Value Drug acquisition) for $3.4 million. Such
acquisitions are recorded as additions to customer lists and amortized over
7 years. During 1999, the Company acquired the pharmacy files of 11 independent
pharmacies (excluding the Love's and Pasteur acquisitions) for total
consideration of $2.9 million.
28
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
Total consideration for the purchase of a portion of the Value Drug Stores
chain and individual store acquisitions paid through the issuance of common
stock amounted to $24.6 million in 2000. Acquisitions of drug stores through the
issuance of common stock amounted to $2.1 million in 1999.
4. RECEIVABLES
Receivables are summarized as follows (in thousands):
DECEMBER 30, DECEMBER 25,
2000 1999
------------ ------------
Third party pharmacy plans.......................... $21,453 $18,233
Due from vendors.................................... 19,793 17,027
Credit cards and other receivables.................. 7,707 3,006
------- -------
$48,953 $38,266
======= =======
5. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
DECEMBER 30, DECEMBER 25,
2000 1999
------------ ------------
Furniture, fixtures and equipment................... $ 76,325 $ 64,742
Leasehold improvements including construction in
progress.......................................... 56,715 40,741
Property under capital leases....................... 12,079 12,079
-------- --------
145,119 117,562
Less accumulated depreciation and amortization...... 37,236 27,604
-------- --------
$107,883 $ 89,958
======== ========
Depreciation expense totaled $12,942, $10,885 and $7,037 in fiscal years
2000, 1999 and 1998, respectively.
29
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS
Other assets are summarized as follows (in thousands):
DECEMBER 30, DECEMBER 25,
2000 1999
------------ ------------
Lease acquisition costs (net of accumulated
amortization of $4,696 and $2,614)................ $23,897 $14,171
Customer lists (net of accumulated amortization of
$5,322 and $3,451)................................ 11,748 9,095
Deferred financing costs (net of accumulated
amortization of $4,338 and $2,608)................ 6,398 5,845
Systems and integration costs (net of accumulated
amortization of $7,911 and $6,196)................ 3,405 5,120
Other............................................... 11,503 6,232
------- -------
$56,951 $40,463
======= =======
Included in other assets are notes receivable from executives in the amount
of $3,095 at December 30, 2000 and $2,622 at December 25, 1999. Also included in
other assets are lease related security deposits and the cash surrender value of
executive life insurance policies.
7. OTHER ACCRUED EXPENSES
Other accrued expenses are summarized as follows (in thousands):
DECEMBER 30, DECEMBER 25,
2000 1999
------------ ------------
Accrued payroll..................................... 6,235 $ 7,533
Insurance related claims costs...................... 2,410 2,030
Sales tax payable................................... 1,860 3,342
Expense payables.................................... 1,710 3,754
Other............................................... 7,615 8,926
------- -------
$19,830 $25,585
======= =======
8. DEBT
Long-term debt is summarized as follows (in thousands):
DECEMBER 30, DECEMBER 25,
2000 1999
------------ ------------
Term loan facility.................................. $257,738 $227,663
Revolving credit facility........................... 12,500 28,500
9 1/4% Senior Subordinated Notes due February 15,
2008.............................................. 80,000 80,000
-------- --------
350,238 336,163
Less-Current portion................................ 12,325 9,850
-------- --------
$337,913 $326,313
======== ========
30
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
CREDIT AGREEMENT: In February 1998, in connection with the Refinancing Plan
(Note 2), the Company entered into the Credit Agreement with an affiliate of the
DLJ Entities and various financial institutions providing for term loans of
$130 million and a revolving credit facility of $30 million. At that time, the
Credit Agreement was comprised of (i) a revolving credit facility of up to
$30 million, which included borrowing capacity available for letters of credit
and for same-day notice swingline loans, (ii) Tranche A term loans of
$50 million and (iii) Tranche B term loans of $80 million. The proceeds of loans
under the Credit Agreement were used to fund the Company's working capital
needs, capital expenditures and other general corporate purposes, including the
issuance of letters of credit.
On August 14, 1998, in connection with the Rock Bottom acquisition, (see
note 3), the Credit Agreement was amended to allow for increased Tranche C term
loan borrowings of $10 million. On September 11, 1998, also in connection with
the Rock Bottom Acquisition, the Credit Agreement was amended and restated to
increase Tranche C term loans by $70 million, bringing the total permitted
borrowings to $240 million ($210 million of term loans and up to $30 million of
revolving loans). Proceeds from the additional term loan were used for the
$64.9 million purchase price and for additional working capital needs and
capital expenditures in connection with the acquisition.
On March 17, 1999 the Credit Agreement was amended and restated to increase
available borrowings by $35 million, bringing total permitted borrowings under
the Credit Agreement to $275 million ($235 million of term loans and
$40 million of revolving loans). On December 16, 1999 the Credit Agreement was
amended to increase permitted revolving loan borrowings to $60 million, of which
$40 million was made available to the Company at December 25, 1999.
On January 7, 2000 and February 11, 2000 available revolver borrowings were
increased by $6.0 million and $4.0 million respectively, bringing total
available revolver borrowings to $50 million.
On March 17, 2000, the Credit Agreement was amended and restated to permit
available term loan borrowings to increase by up to $30 million of which
$10 million was made available. In addition, available revolver borrowings were
increased by $5 million, bringing total available borrowings under the Credit
Agreement to $300 million ($245 million of term loans and $55 million of
revolver loans).
On October 30, 2000, the remaining $20 million resulting from the March 17,
2000 Credit Agreement restatement was made available, increasing total term loan
borrowing to $265 million. On October 31, 2000, the Credit Agreement was
restated to allow for an additional $20 million of term loan borrowing, of which
$10 million was made available. This increased total available borrowings to
$330 million ($275 million of term loans and $55 million of revolver loans.)
As of December 30, 2000, borrowings outstanding under the revolving credit
facility were $12.5 million (classified as a noncurrent liability); in addition,
$0.8 million in letters of credit had been issued. The revolving credit facility
expires on February 15, 2004, and the term loan agreement expires on
February 15, 2006.
31
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
At December 30, 2000, the aggregate maturities of debt are as follows
(dollars in thousands):
2001........................................................ $ 12,325
2002........................................................ 12,250
2003........................................................ 14,250
2004........................................................ 75,800
2005........................................................ 121,500
Thereafter.................................................. 114,113
--------
$350,238
========
The weighted average interest rates on all borrowings under the Credit
Agreement at December 30, 2000 and December 25, 1999 were 9.5% and 8.7%,
respectively.
Borrowings under the Credit Agreement bear interest annually, at the
Company's option, at a rate based on either (i) an "Alternate Base Rate"
(defined as, generally, the higher of the Federal Funds Rate, as published by
the Federal Reserve Bank of New York, plus 0.5%, or the administrative agent's
prime lending rate) plus the applicable base rate margin of (a) in the case of
Tranche A term loans or revolving credit loans, 0.75%; (b) in the case of
Tranche B term loans, 2.00%; (c) in the case of Tranche C term loans, 2.00%; or
(ii) a reserve-adjusted "LIBO" rate, plus the applicable LIBO rate margin of
(x) in the case of Tranche A term loans or revolving credit loans, 1.75%;
(y) in the case of Tranche B term loans, 3.00%; (z) in the case of Tranche C
term loans, 3.00%. In addition, the Company must pay a fee on the face amount of
each letter of credit outstanding at a rate equal to the applicable LIBO margin
for revolving credit loans.
Borrowings under the Credit Agreement are guaranteed by, and collateralized
by a pledge of all of the capital stock and assets of, the Company's
subsidiaries.
The Credit Agreement contains various covenants that limit or restrict,
among other things, subject to certain exceptions, capital expenditures, the
incurrence of indebtedness, the creation of liens, transactions with affiliates,
restricted payments, investments and acquisitions, mergers, consolidations,
dissolutions, asset sales, dividends, distributions, and certain other
transactions and business activities by the Company.
Financial performance covenants include interest coverage, leverage ratios,
minimum net worth requirements and fixed charge coverage. At December 30, 2000,
the Company was in compliance with all financial performance covenants.
9 1/4% SENIOR SUBORDINATED NOTES DUE FEBRUARY 15, 2008: In connection with
the Refinancing Plan (see Note 2) the Company issued $80 million aggregate
principal amount of Senior Notes, which bear interest at a rate of 9 1/4% per
annum, payable semi-annually in arrears on each February 15 and August 15
beginning on August 15, 1998. The Senior Notes will mature on February 15, 2008.
The Senior Notes represent senior subordinated unsecured obligations of the
Company. The Company's payment obligations under the Senior Notes are guaranteed
on a senior subordinated basis by all of the Company's present and future
subsidiaries.
Prior to February 15, 2001 the Company was permitted to redeem up to 35% of
the Senior Notes at a redemption price of 109.25% of the principal amount
thereof, plus accrued and unpaid interest, if any. The Company did not redeem
any of the Senior Notes. At any time on or after February 15, 2003, the Senior
32
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
Notes are redeemable at the option of the Company, in whole or in part, at a
redemption price of 104.625% of the principal amount thereof declining ratably
to par on February 15, 2006.
The indenture governing the Senior Notes (the "Senior Note Indenture")
provides that, in the event of a Change of Control (as defined in the Senior
Note Indenture) of the Company, the Company is required to make an offer to
purchase in cash all or any part of the outstanding Senior Notes at a price of
101% of the aggregate principal amount thereof plus accrued and unpaid interest
thereon to the date of repurchase.
The Senior Note Indenture contains restrictive covenants that, among other
things, impose limitations on the ability of the Company and its subsidiaries
(i) to incur additional indebtedness, (ii) to merge, consolidate or sell or
dispose of all or substantially all of its assets, (iii) to issue certain
preferred stock, pay cash dividends or make other distributions on account of
the Company's equity interests, repurchase equity interests or subordinated
indebtedness and make certain other restricted payments, (iv) to create certain
liens, (v) to enter into transactions with affiliates and (vi) to sell assets.
9. CAPITAL LEASE OBLIGATIONS
As of December 30, 2000, the present value of capital lease obligations was
$2.8 million. Such obligations are payable in monthly installments and bear
interest at an average rate of 10.8%. At December 30, 2000 the aggregate
maturities of capitalized lease obligations are as follows (dollars in
thousands):
2001........................................................ $1,703
2002........................................................ 983
2003........................................................ 77
------
$2,763
======
There was no property acquired under capital lease financing during the 53
weeks ended December 30, 2000. Property acquired under capital lease financing
was $945,000 and $35,000 during the fiscal years ended December 25, 1999 and
December 26, 1998, respectively.
10. PREFERRED STOCK
The Company's authorized preferred stock, par value $.01 per share, consists
of 5,000,000 shares of which no shares were issued or outstanding at
December 30, 2000.
The Company's Board of Directors has the authority, without further action
of the shareholders of the Company, to issue shares of preferred stock in one or
more series and to fix or determine the designations, preferences, rights and
any qualifications, limitations or restrictions on the shares of each such
series thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences, and the number of shares
constituting any series.
The Company's Board of Directors, without shareholder approval, can issue
preferred stock with voting and conversion rights that could adversely affect
the voting power of holders of common stock. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, may have the effect of discouraging, delaying, or
preventing a change in control of the Company.
33
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMON STOCK
The Company's authorized common stock, par value $.01 per share, consists of
75,000,000 shares of which 18,232,339 shares were issued and outstanding at
December 30, 2000.
Holders of the common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. The issued and
outstanding shares of common stock are validly issued, fully paid and
nonassessable. Subject to the rights of the holders of any shares of preferred
stock, the holders of outstanding shares of common stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the board of directors may from time to time determine. The shares of
common stock are not redeemable or convertible, and the holders thereof have no
preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution or winding up of the Company, the holders of
shares of common stock are entitled to receive on a pro rata basis the assets of
the Company which are legally available for distribution, after payment of all
debts and other liabilities and subject to the preferential rights of any
holders of preferred stock.
12. INCOME TAXES
The income tax provision (benefit) for the 53 weeks ended December 30, 2000
and the 52 weeks ended December 25, 1999 consists of the following:
53 WEEKS ENDED 52 WEEKS ENDED
DECEMBER 30, DECEMBER 25,
2000 1999
-------------- --------------
Current:
Federal........................................ $ 981 $ 787
State & local.................................. 1,269 1,232
Deferred:
Federal........................................ 11,966 11,045
State & local.................................. 1,394 7,308
Valuation reserve reversal..................... -- (30,843)
------- --------
$15,610 $(10,471)
======= ========
The Company did not record a provision for income taxes during the 52 weeks
ended December 26, 1998, due to the fact that it had no taxable income.
Deferred tax assets and liabilities are determined based on the difference
between book and tax bases of the respective assets and liabilities at
December 30, 2000 and December 25, 1999 and are summarized as follows (in
thousands):
DECEMBER 30, DECEMBER 25,
2000 1999
------------ ------------
Inventories......................................... ($2,999) ($4,269)
------- -------
Gross deferred tax liabilities...................... (2,999) (4,269)
------- -------
Deferred rent....................................... 7,631 6,496
Other............................................... 7,549 3,749
Net operating loss carryforward..................... 9,694 29,259
------- -------
Gross deferred tax assets........................... 24,874 39,504
------- -------
34
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
DECEMBER 30, DECEMBER 25,
2000 1999
------------ ------------
Net deferred tax assets............................. $21,875 $35,235
======= =======
At December 30, 2000, the Company had net operating losses ("NOLs")
aggregating $22.5 million, which may be used to reduce future taxable income of
the Company through 2018. Due to a change in control, all of the existing NOLs
are subject to an annual utilization limit of $8.5 million in 2001 and
$5.1 million thereafter through 2007.
As of December 26, 1998, management concluded that realization of the
deferred tax assets was not more likely than not and a valuation allowance of
$53.0 million was recorded. During the 52 weeks ended December 25, 1999, the
valuation allowance was reduced by $18.3 million related to deferred tax assets.
Such reduction resulted in an $8.5 million reduction of goodwill (relating to
NOLs arising in 1992) and the recognition of a tax benefit of $9.8 million. As
of December 25, 1999, based upon the Company's performance and projections of
future earnings, management concluded that realization of the remaining deferred
tax assets was more likely than not and accordingly reversed the remaining
valuation allowance, resulting in reduction of goodwill by $13.7 million
(relating to NOLs arising in 1992) and the recognition of a tax benefit of
$21.0 million.
The provision for income taxes for the 53 weeks ended December 30, 2000 and
the 52 weeks ended December 25, 1999 and December 26, 1998 differs from the
amounts of income tax determined by applying the applicable U.S. statutory
federal income tax rate to pretax income (loss) as a result of the following (in
thousands):
FOR THE 53 WEEKS
ENDED FOR THE 52 WEEKS ENDED
---------------------- -----------------------------------------------
DECEMBER 30, DECEMBER 25, DECEMBER 26,
2000 1999 1998
---------------------- ---------------------- -------------------
Pretax accounting income
(loss)........................ $38,286 100.0% $ 30,220 100.0% $(4,813) 100.0%
------- ------- -------- ------ ------- ------
Statutory rate.................. 13,400 35.0 10,577 35.0 (1,685) (35.0)
State and local taxes, net of
federal tax benefit........... 1,753 4.6 4,253 14.1 (89) (1.8)
Goodwill amortization........... 1,065 2.8 1,218 4.0 1,292 26.8
Net operating losses not
utilized...................... -- -- -- -- 350 7.3
Nondeductible interest
expense....................... -- -- -- -- 101 2.1
Employment tax credits.......... (814) (2.1) -- -- -- --
Other........................... 206 0.5 35 0.1 31 0.6
Change in rate (1).............. -- -- 4,289 14.2 -- --
Reversal of valuation
allowance..................... -- -- (30,843) (102.0) -- --
------- ------- -------- ------ ------- ------
Income tax expense (benefit).... $15,610 40.8% $(10,471) (34.6)% $ -- --%
======= ======= ======== ====== ======= ======
------------------------
(1) Principally due to permanent differences between book and taxable income
relative to the structure of the Company.
35
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
LEASES: Duane Reade leases all of its store facilities under operating
lease agreements expiring on various dates through the year 2024. In addition to
minimum rentals, certain leases provide for annual increases based upon real
estate tax increases, maintenance cost increases and inflation. Five stores have
additional rent obligations calculated based upon sales in excess of specified
amounts. Rent expense for the fiscal years ended December 30, 2000,
December 25, 1999 and December 26, 1998 was $69,685,000, $59,535,000 and
$40,538,000, respectively.
Minimum annual rentals under non-cancellable operating leases at
December 30, 2000 (including obligations under new store leases entered into but
not opened as of December 30, 2000) are as follows (in thousands):
2001........................................................ $ 74,045
2002........................................................ 75,162
2003........................................................ 73,724
2004........................................................ 70,804
2005........................................................ 70,371
2006 to 2010................................................ 299,495
2011 to 2015................................................ 167,788
2016 to 2020................................................ 30,356
2021 to 2024................................................ 2,016
--------
Total....................................................... $863,761
========
LITIGATION: The Company is involved in routine legal matters incidental to
its business. In the opinion of management, the ultimate resolution of such
matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows. In addition, the Company is
currently party to arbitration proceedings arising out of disputes over the
purchase price with respect to the Rock Bottom acquisition. The Company believes
that the ultimate outcome of these actions will not have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
MANAGEMENT AGREEMENTS: The Company has employment agreements with several
of its executives providing, among other things, for employment terms of up to
three years. Pursuant to the terms of such employment and related agreements,
the Company may be obligated for certain compensation and benefits in the event
of termination.
COMMITMENTS: The Company has established a Supplemental Executive
Retirement Plan ("SERP") which presently covers only its Chairman and CEO ("the
Chairman"). Such SERP provides for vesting over a twenty-year period. However,
if the Chairman's employment is terminated without cause, as defined, or if the
Chairman resigns with cause, as defined, such vesting becomes immediate, in
which event the Company would be liable to the Chairman (in addition to amounts
accrued in the financial statements) in the amount of approximately $790,000.
The Company is subject to a loan agreement between the Company, certain of
the DLJ Entities and an executive of the Company whereby the Company has an
obligation to assume a $600,000 loan made to said executive, should certain of
the DLJ Entities elect. At December 30, 2000, the DLJ Entities have not
exercised such election (see Note 16 to Consolidated Financial Statements).
36
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. BENEFIT PLANS
On October 12, 1992, the Company adopted the 1992 Stock Option Plan of Duane
Reade Holding Corp. (the "Plan"). Under the Plan, a committee designated by the
Board of Directors to administer the Plan (the "Committee") may grant, to
executives and other key employees of the Company, nonqualified stock options to
purchase up to an aggregate of 510,757 shares of common stock of the Company at
an exercise price fixed by the Committee. The options are exercisable at such
time or times as the Committee determines at or subsequent to grant. The term of
the options set by the Committee shall not exceed 10 years. The plan has been
frozen with respect to future grants.
At December 30, 2000, there were outstanding nonqualified stock options to
purchase up to an aggregate of 506,994 shares of common stock (including 364,530
options granted outside the Plan), all of which are vested.
Changes in options outstanding (including options granted outside the Plan)
during 2000, 1999 and 1998 are summarized as follows:
OPTION PRICE PER SHARE
---------------------------------------------------------
$7.34- TOTAL
$0.58 12.77 $29.37 $40.86 OPTIONS
--------- --------- --------- --------- ---------
Options outstanding, December 27, 1997.... 485,403 95,336 27,234 27,234 635,207
Options exercised......................... (16,746) (8,234) -- -- (24,980)
Options cancelled......................... (1,099) (1,099) (9,333) (9,333) (20,864)
--------- --------- --------- --------- ---------
Options outstanding and exerciseable,
December 26, 1998....................... 467,558 86,003 17,901 17,901 589,363
Options exercised......................... (44,159) (9,609) (1,373) -- (55,141)
Options cancelled......................... -- -- -- -- --
--------- --------- --------- --------- ---------
Options outstanding and exerciseable,
December 25, 1999....................... 423,399 76,394 16,528 17,901 534,222
Options exercised......................... (17,046) (4,692) -- -- (21,738)
Options cancelled......................... -- -- (2,745) (2,745) (5,490)
--------- --------- --------- --------- ---------
Options outstanding and exerciseable,
December 30, 2000....................... 406,353 71,702 13,783 15,156 506,994
========= ========= ========= ========= =========
Weighted average remaining life of
outstanding options..................... 5.3 years 6.1 years 3.2 years 3.2 years 5.3 years
37
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. BENEFIT PLANS (CONTINUED)
During 1997, the Company adopted an Equity Participation Plan, as amended,
which provides 1,971,181 options for shares of common stock of the Company to be
granted to employees, consultants and non-employee directors of the Company if
the Company meets specific performance targets. At December 30, 2000, options
for 1,957,587 shares have been granted (net of options for 69,678 shares that
have been cancelled) to employees and certain non-employee directors. Under the
plan, shares granted to employees vest 20% on each of the first through fifth
anniversaries of the issue date, with some options subject to accelerated
vesting if certain EBITDA targets are achieved.
Changes in options outstanding under the Equity Participation Plan during
2000, 1999 and 1998 are summarized as follows:
OPTION PRICE PER SHARE
----------------------------------------------------------
$21.24- $31.39- TOTAL
$8.33 $16.50 $29.38 $39.24 OPTIONS
---------- --------- --------- --------- ---------
Options outstanding, December 27, 1997........... 1,019,284 -- -- -- 1,019,284
Options granted.................................. -- 143,000 40,000 40,000 223,000
Options cancelled................................ (13,512) -- -- -- (13,512)
---------- --------- --------- --------- ---------
Options outstanding, December 26, 1998........... 1,005,772 143,000 40,000 40,000 1,228,772
Options granted.................................. -- -- 596,981 4,000 600,981
Options exercised................................ (71,612) (7,200) (1,000) -- (79,812)
Options cancelled................................ (6,081) (6,400) (6,577) -- (19,058)
---------- --------- --------- --------- ---------
Options outstanding, December 25, 1999........... 928,079 129,400 629,404 44,000 1,730,883
Options granted.................................. -- -- 184,000 -- 184,000
Options exercised................................ (43,473) (14,502) (1,200) -- (59,175)
Options cancelled................................ -- (20,000) (17,108) -- (37,108)
---------- --------- --------- --------- ---------
Options outstanding, December 30, 2000........... 884,606 94,898 795,096 44,000 1,818,600
========== ========= ========= ========= =========
Weighted average remaining life of outstanding
options........................................ 6.5 years 7.1 years 8.4 years 7.9 years 7.4 years
Options exercisable at December 26, 1998......... 609,000 -- 10,000 -- 619,000
Options exercisable at December 25, 1999......... 928,079 25,880 7,000 8,000 968,959
Options exercisable at December 30, 2000......... 884,606 37,959 129,884 16,800 1,069,249
As permitted, the Company applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its stock-based
compensation plans. Had compensation cost for the Company's stock-based
compensation plan been determined based on the fair value at the grant dates for
awards under the Plan, consistent with the alternative method of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the pro forma decrease in the Company's net income for the 53
weeks ended December 30, 2000 would have been $2,875,000. The pro forma decrease
in the Company's net income for the 52 weeks ended December 25, 1999 and pro
forma increase in the Company's net loss for the 52 weeks ended December 26,
1998 would have been $2,470,000 and $420,000, respectively. The pro forma
compensation expense for stock options has been estimated using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%, expected volatility of 50.0% in 2000, 50.0% in 1999 and 50.0% in
1998, risk free interest rates of 6.6% in 2000, 6.6% in 1999 and a range from
4.16% to 5.79% in 1998 and an expected term of 8 years. These pro forma
disclosures may not be representative of the effects on reported net income for
future years since options vest over several years and options granted prior to
fiscal 1995 are not considered.
38
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. BENEFIT PLANS (CONTINUED)
The Company maintains an employee savings plan pursuant to Section 401(k)
(the "401(k) Plan") of the Internal Revenue Code ("IRC") which covers
substantially all non-union employees. Eligible participating employees may
contribute up to 10% of their pretax salaries, subject to certain IRC
limitations. The 401(k) Plan, as amended, provides for employer matching
contributions at the discretion of the Company (to a maximum of 1% of pretax
salaries) and has a feature under which the Company may contribute additional
discretionary amounts for all eligible employees. During the 53 weeks ended
December 30, 2000 and the 52 weeks ended December 25, 1999, the Company funded
$107,000 and $59,000 of employer matching contributions for the 1999 and 1998
plan years, respectively. At December 30, 2000, the Company had accrued $226,000
for the employer matching contribution related to the 2000 plan year.
Duane Reade is under contract with local unions to contribute to
multi-employer pension and welfare benefit plans for certain of its employees.
For the fiscal years ended December 30, 2000, December 25, 1999 and
December 26, 1998, contributions to such plans were $9,885,000, $10,159,000 and
$8,658,000, respectively.
15. EXTRAORDINARY CHARGE
During the 52 weeks ended December 26, 1998, as a result of the completion
of the Refinancing Plan, the Company incurred a $23.6 million extraordinary
charge due to the early extinguishment of debt. The extraordinary charge
included redemption premiums on the Senior Notes and Zero Coupon Notes of
approximately $11.5 million, accelerated amortization of deferred financing
costs and other transaction expenses of approximately $8.1 million, and
accelerated accretion of Zero Coupon Notes to the indenture stated value of
approximately $4.0 million.
16. RELATED PARTY TRANSACTIONS
In 1992, the Company and the then principal stockholder of the Company (who
has subsequently sold most of its shares, see Note 1) entered into a
professional services agreement whereby consulting, advisory, financial and
other services were provided at the Company's request, for a five year term.
During the fiscal years ended December 30, 2000, December 25, 1999 and
December 26, 1998, such fees aggregated approximately $0.2 million,
$0.4 million and $1.0 million, respectively.
On February 13, 1998, the Company entered into the Credit Agreement (see
Note 8), for which DLJ Funding acted as the manager and syndication agent. In
connection with the Credit Agreement, DLJ Funding received a customary funding
fee of approximately $1.9 million. On September 11, 1998, the Credit Agreement
was amended and restated for which DLJ Funding acted as the manager and
syndication agent and for which DLJ Funding received a customary funding fee of
approximately $1.8 million. On March 17, 1999 and again on December 16, 1999 the
Credit Agreement was amended and restated for which DLJ Funding acted as the
manager and syndication agent and for which DLJ received a customary funding fee
of $0.7 million. On March 17, 2000 and again on October 31, 2000 the Credit
Agreement was amended and restated for which DLJ Funding acted as the manager
and syndication agent and for which DLJ received a customary funding fee of
$1.5 million.
DLJ (an affiliate of the DLJ Entities) acted as financial advisor to the
Company in connection with the structuring of the Recapitalization and received
customary fees for such services of approximately $3.5 million and reimbursement
for reasonable out-of-pocket expenses, and affiliates of DLJ received standby
commitment fees of approximately $1.2 million in connection with change of
control offers for the Zero Coupon Notes and the 12% Senior Notes, which were
required as a result of the Recapitalization.
39
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company agreed to indemnify DLJ in connection with its acting as financial
advisor. In addition, as lead underwriter, DLJ received its pro rata portion of
the underwriter's compensation for consummation of the Offering, which was
approximately $4.3 million. DLJ also served as sole underwriter in connection
with the Offering of the Company's Senior Notes and received an estimated
$2.4 million of underwriting compensation payable in connection therewith. In
addition, the DLJ Entities sold 1,091,658 additional shares of common stock in
the Offering pursuant to the exercise by the underwriters of an over-allotment
option, and the total net proceeds to such DLJ Entities were approximately
$16.8 million.
On November 9, 1998, upon unanimous approval of the Board of Directors of
the Company, the Company extended a $2.0 million loan to the Company's Chief
Executive Officer (the "CEO Loan"). For so long as the Credit Agreement is
outstanding, the CEO Loan bears interest at the rate of interest paid by the
Company on its revolving loans outstanding under the Credit Agreement.
Thereafter, the CEO Loan will bear interest at LIBOR plus 300 basis points. The
CEO Loan becomes due upon the earliest to occur of (i) the termination of the
executive's employment with the Company, (ii) the termination of the executive's
employment agreement with the Company, (iii) any sale by the executive of 15% or
more of the Company's common stock held by the executive or (iv) November 9,
2003.
The Company is subject to a loan agreement between the Company, certain of
the DLJ Entities and the Company's Chief Executive Officer ("Executive") whereby
the Company has an obligation to assume a $600,000 loan made to the Executive
should certain of the DLJ Entities elect. At December 30, 2000, the DLJ Entities
have not exercised such election. During 1999, as approved by the Board of
Directors, the Company paid $200,000 of the original principal amount of
$1,000,000 under the loan agreement to the DLJ entities, as well as $97,314 in
interest. The Executive has entered into a separate promissory note dated
June 7, 1999 with the Company for the amount of the total Company payment of
$297,314. On December 30, 1999 the Company made an additional payment of
$200,000 to the DLJ Entities on the remaining balance of $800,000 as well as
$78,583 in interest. The Executive has entered into a separate promissory note
dated December 30, 1999 with the Company for the amount of the total Company
payment of $278,583. On January 10, 2001 the Company made an additional payment
of $200,000 to the DLJ Entities on the remaining balance of $600,000 as well as
$59,666 in interest. The Executive has entered into a separate promissory note
dated January 10, 2001 with the Company for the amount of the total Company
payment of $259,666. The terms of these promissory notes require the executive
to repay the principal amount of the notes and all accrued interest in full on
December 19, 2002. Interest accrues on these notes at the federal mid-term rate
in effect within 30 days after the payment by the Company to the Executive of
any incentive bonus. Under the Executive's employment contract, interest on
these notes will be forgiven by the Company if certain EBITDA targets are
achieved.
40
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of income (loss) per common
share for the periods presented (in thousands, except per share amounts):
FOR THE 52 WEEKS ENDED
53 WEEKS ENDED ---------------------------
DECEMBER 30, DECEMBER 25, DECEMBER 26,
2000 1999 1998
----------------------- ------------ ------------
Income before extraordinary charge..................... $ 22,676 $40,691 $18,787
Extraordinary charge................................... -- -- (23,600)
----------------------- ------- -------
Net income (loss)...................................... $ 22,676 $40,691 $(4,813)
======================= ======= =======
Weighted average number of common shares outstanding
during the period-basic.............................. 17,718 17,119 16,198
Dilutive potential securities.......................... 706 852 1,310
----------------------- ------- -------
Weighted average number of shares
outstanding-diluted.................................. 18,424 17,971 17,508
======================= ======= =======
Per common share-basic
Income before extraordinary charge..................... $ 1.28 $ 2.38 $ 1.16
Extraordinary charge................................... -- -- (1.46)
----------------------- ------- -------
Net income (loss)...................................... $ 1.28 $ 2.38 $ (0.30)
======================= ======= =======
Per common share-diluted
Income before extraordinary charge..................... $ 1.23 $ 2.26 $ 1.07
Extraordinary charge................................... -- -- (1.34)
----------------------- ------- -------
Net income (loss)...................................... $ 1.23 $ 2.26 $ (0.27)
======================= ======= =======
Options to purchase 223,035 shares of common stock were not included in the
computation of diluted earnings per share for the 53 weeks ended December 30,
2000 because the options' exercise prices were greater than the average market
price of the Common Shares.
41
DUANE READE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SELECTED QUARTERLY INFORMATION (UNAUDITED)
DECEMBER 30, DECEMBER 25,
QUARTER 2000 1999
------- ------------ ------------
IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS
SALES
First............................................. $ 226,276 $190,364
Second............................................ 243,549 208,675
Third............................................. 242,978 211,085
Fourth............................................ 287,265 229,647
---------- --------
Year.............................................. $1,000,068 $839,771
========== ========
GROSS PROFIT
First............................................. $ 54,647 $ 45,956
Second............................................ 60,430 52,219
Third............................................. 64,687 56,096
Fourth............................................ 74,587 63,990
---------- --------
Year.............................................. $ 254,351 $218,261
========== ========
NET INCOME
First............................................. $ 1,926 $ 2,036
Second............................................ 4,973 5,067
Third............................................. 6,226 7,260
Fourth............................................ 9,551 26,328(1)
---------- --------
Year.............................................. $ 22,676 $ 40,691
========== ========
NET INCOME PER COMMON SHARE (BASIC)
First............................................. $ 0.11 $ 0.12
Second............................................ 0.28 0.30
Third............................................. 0.35 0.42
Fourth............................................ 0.53 1.53
Year.............................................. 1.28 2.38
NET INCOME PER COMMON SHARE (DILUTED)
First............................................. $ 0.11 $ 0.11
Second............................................ 0.27 0.28
Third............................................. 0.34 0.39
Fourth............................................ 0.51 1.47
Year.............................................. 1.23 2.26
------------------------
(1) Includes a tax benefit of $13.9 million due to the reversal of a
$30.8 million deferred tax asset valuation reserve.
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the headings "Election of Directors,"
"Executive Officers and Key Employees" and "Other Business for
Meeting-Compliance with Section 16(a) of the Securities Exchange Act of 1934" in
our Proxy Statement for the Annual Meeting of Stockholders scheduled to be held
on May 14, 2001 to be filed with the Securities and Exchange Commission on or
before April 14, 2001 is incorporated in this report by reference with respect
to each of our directors and the executive officers who are not also directors
of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the headings "Director Compensation,"
"Executive Compensation" and "Report of Compensation Committee" of our 2001
Proxy Statement is incorporated in this report by reference with respect to our
chief executive officer, our four other most highly compensated executive
officers and our directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" of the 2001 Proxy Statement is incorporated in
this report by reference with respect to certain beneficial owners, the
directors and management.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Relationships and
Related Transactions" of the 2001 Proxy Statement is incorporated in this report
by reference.
43
PART IV
ITEM 14. 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:
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1(i) Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1(i) to the
Common Stock S-1).
3.1(ii) Form of Amended and Restated Bylaws 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 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) of the Notes S-1).
3.3 Second Amended and Restated Partnership Agreement of Duane
Reade. (incorporated by reference to Exhibit 3.3 of 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
1999 10-K).
3.4(ii) Bylaws 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) Bylaws 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
of the Notes S-1).
10.1 Duane Reade Inc. 1997 Equity Participation Plan
(incorporated by reference to Exhibit 10.1 to the Company's
Form S-1 registration Statement (File No. 333-41239), 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).
44
EXHIBIT NO. DESCRIPTION
----------- -----------
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 10.17 to the 1998 10-K).
10.15 Employment Letter, dated June 10, 1999, between the Company
and John K. Henry (incorporated by reference to Exhibit
10.18 to the 1999 10-K).
10.16 Promissory Note, dated as of June 7, 1999, between the
Company and Anthony J. Cuti (incorporated by reference to
Exhibit 10.19 to the 1999 10-K).
10.17 Promissory Note, dated as of December 30, 1999, between the
Company and Anthony J. Cuti (incorporated by reference to
Exhibit 10.20 to the 1999 10-K).
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).
45
EXHIBIT NO. DESCRIPTION
----------- -----------
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 (incorporated by reference to
Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q
for the period ended September 23, 2000).
10.22 First Amendment to Third Amended and Restated Credit
Agreement, dated as of September 5, 2000 by and among Duane
Reade, each designated Guarantor, Duane Reade Inc., DRI I
Inc., DLJ Capital Funding, Inc. as Syndication Agent and
Fleet National Bank as Administrative Agent (incorporated by
reference to Exhibit 10.22 to the Company's Quarterly Report
on Form 10-Q for the period ended September 23, 2000).
10.23 Second Amendment to Third Amended and Restated Credit
Agreement, dated as of October 31, 2000 among Duane Reade,
Duane Reade Inc., DRI I Inc., Various Financial Institutions
as Lenders, DLJ Capital Funding, Inc. as Syndication Agent,
Fleet National Bank as Administrative Agent and Credit
Lyonnais New York Branch as Documentation Agent
(incorporated by reference to Exhibit 10.23 to the Company's
Quarterly Report on Form 10-Q for the period ended September
23, 2000).
10.24* Promissory Note, dated as of January 10, 2001, between the
Company and Anthony J. Cuti.
21.1 Subsidiaries of the Company
------------------------
* 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.
46
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: March 28, 2001
DUANE READE INC.
(Registrant)
By: /s/ JOHN K. HENRY
-----------------------------------------
Name: John K. Henry
Title: Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 28, 2001:
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)
/s/ NICOLE S. ARNABOLDI
---------------------------- Director
Nicole S. Arnaboldi
/s/ DAVID L. JAFFE
---------------------------- Director
David L. Jaffe
/s/ DAVID W. JOHNSON
---------------------------- Director
David W. Johnson
/s/ CARL M. PRADELLI
---------------------------- Director
Carl M. Pradelli
/s/ KEVIN ROBERG
---------------------------- Director
Kevin Roberg
/s/ WILLIAM SIMON
---------------------------- Director
William Simon
47
SIGNATURES
Pursuant to the requirements of Section 13 or Section 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: March 28, 2001
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 below on March 28, 2001 by the following persons in the
capacities indicated with respect to DRI I Inc.:
SIGNATURE CAPACITY
--------- --------
/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)
/s/ NICOLE S. ARNABOLDI
---------------------------- Director
Nicole S. Arnaboldi
/s/ DAVID L. JAFFE
---------------------------- Director
David L. Jaffe
48
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: March 28, 2001
DRI I INC., A GENERAL PARTNER DUANE READE INC.
By: /s/ JOHN K. HENRY By: /s/ JOHN K. HENRY
------------------------------------------ ------------------------------------------
Name: John K. Henry Name: John K. Henry
Title: Senior Vice President and Title: Senior Vice President and
Chief Financial Officer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 28, 2001 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:
SIGNATURE CAPACITY
--------- --------
/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)
/s/ NICOLE S. ARNABOLDI Director
--------------------------------------------
Nicole S. Arnaboldi
/s/ DAVID L. JAFFE Director
--------------------------------------------
David L. Jaffe
/s/ DAVID W. JOHNSON Director*
--------------------------------------------
David W. Johnson
/s/ CARL M. PRADELLI Director*
--------------------------------------------
Carl M. Pradelli
/s/ KEVIN ROBERG Director*
--------------------------------------------
Kevin Roberg
/s/ WILLIAM SIMON Director*
--------------------------------------------
William Simon
------------------------
* Duane Reade Inc. only
49
SIGNATURES
Pursuant to the requirements of Section 13 or Section 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: March 28, 2001
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 below on March 28, 2001 by the following persons in the
capacities indicated with respect to Duane Reade Realty Inc.:
SIGNATURE CAPACITY
--------- --------
/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 (Principal Accounting and Financial
John K. Henry Officer)
/s/ NICOLE S. ARNABOLDI Director
--------------------------------------------
Nicole S. Arnaboldi
/s/ DAVID L. JAFFE Director
--------------------------------------------
David L. Jaffe
50
SIGNATURES
Pursuant to the requirements of Section 13 or Section 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: March 28, 2001
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 below on March 28, 2001 by the following persons in the
capacities indicated with respect to Duane Reade International Inc.:
SIGNATURE CAPACITY
--------- --------
/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 Executive
John K. Henry Officer)
/s/ GARY CHARBONEAU Senior Vice President and Director
-------------------------------------------
Gary Charboneau
/s/ WILLIAM J. TENNANT Senior Vice President and Director
-------------------------------------------
William J. Tennant
51