UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[X] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
DUANE READE INC.
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(Name of Registrant as Specified In Its Charter)
-------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
___________
(2) Aggregate number of securities to which transaction applies:
__________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
______________
(4) Proposed maximum aggregate value of transaction: ______________
(5) Total fee paid: ____________
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ____________
(2) Form, Schedule or Registration Statement No.: ____________
(3) Filing Party: __Duane Reade Inc.___
(4) Date Filed: _____February 19, 2004__________
For: Duane Reade Inc.
Approved By: John Henry
(212) 273-5746
SVP - Chief Financial Officer
Contact: Cara O'Brien/Lila Sharifian
Press: Stephanie Sampiere
(212) 850-5600
Financial Dynamics
FOR IMMEDIATE RELEASE
---------------------
DUANE READE INC. REPORTS FOURTH QUARTER AND FISCAL 2003 RESULTS
~ FOURTH QUARTER AND FULL YEAR DILUTED EPS OF $0.12 AND $0.49 RESPECTIVELY ~
New York, New York, February 19, 2004 - Duane Reade Inc. (NYSE: DRD)
today reported sales and earnings for the fourth quarter and full year ended
December 27, 2003.
FOURTH QUARTER RESULTS
----------------------
As previously announced, net sales increased 7.7% to $356.4 million
from $331.1 million in the same quarter last year. Net sales reflect an 11.9%
rise in pharmacy sales, comprising 43.7% of sales, offset by the adverse impact
of two December snow storms that disrupted seasonal business and contributed to
delayed openings of new stores. Same-store sales increased 3.0%, reflecting a
7.0% increase in pharmacy same-store sales and a 0.1% increase in front-end
same-store sales. Front-end same-store sales were favorably impacted by
approximately 0.5% due to an increase in the number of 24-hour stores and
expanded holiday hours.
In line with recently updated guidance, net income for the quarter
was $2.8 million, or $0.12 per diluted share, compared to $9.5 million, or $0.39
per diluted share, last year. The fourth quarter of 2003 includes a charge of
$0.6 million, or $0.02 per diluted share, representing costs associated with the
planned acquisition of the Company by an affiliate of Oak Hill Capital Partners,
L.P. The prior year's fourth quarter included pre-tax debt extinguishment income
of $2.1 million, or $0.05 per diluted share.
Gross margin for the quarter was 21.7% compared with 22.9% in the
same period last year. The decline was primarily attributable to the increased
proportion of lower margin pharmacy sales, lower overall pharmacy margins
attributable to reductions in NY Medicaid prescription reimbursement rates
enacted earlier in the year, and lower margins on generic medications. Store
level occupancy expenses were higher as a percent of sales, reflecting a lower
rate of sales growth and increased New York City real estate taxes that became
effective in January 2003. The final full-year LIFO provision resulted in a
fourth quarter increase in margin of $0.1 million, compared to an increase in
margin of $1.3 million in the previous year's fourth quarter.
Fourth quarter selling, general and administrative expenses were
17.1% of sales versus 16.1% of sales in the comparable period of 2002. The
increase is primarily attributable to a lower rate of sales growth, higher legal
and litigation- related expenses, a portion of which relates to the World Trade
Center business interruption insurance claim, higher labor costs to support
expanded store operating hours and increased promotional and advertising
expenses.
During the quarter, the Company opened three new stores and closed
one store compared to eight new store openings and one store closing in the same
period last year. As of December 27, 2003, the Company operated a total of 241
stores.
FISCAL 2003 RESULTS
-------------------
As previously announced, sales for the full year increased 8.6% to
$1.384 billion from $1.274 billion in the previous year. During the twelve month
period, same store sales increased 2.7%, with a same-store sales increase of
7.5% in pharmacy. Front-end same-store sales declined by 0.8%.
Net income for the full year was $11.9 million, or $0.49 per diluted
share, which includes pre-tax debt extinguishment costs of $0.8 million, or
$0.02 per diluted share, and the aforementioned transaction costs incurred in
the fourth quarter. The effective tax rate for fiscal 2003 was 40.0%, compared
to 36.3% in the previous year, reflecting changes in New York state tax
legislation enacted in the second quarter of 2003 that had retroactive
application to January 1, 2003. In comparison, 2002 income before the cumulative
effect of an accounting change was $24.8 million, or $1.01 per diluted share.
Including the cumulative effect of the accounting change, fiscal 2002 net income
was $15.6 million, or $0.63 per diluted share. The fiscal 2002 results included
pre-tax debt extinguishment costs of $11.4 million, or $0.27 per diluted share,
partially offset by the receipt of an initial payment of the Company's business
interruption insurance claim of $9.4 million, or $0.23 per diluted share.
Full year gross margin was 21.4% versus 22.5% last year, reflecting
the increased proportion of lower margin pharmacy sales, reductions in New York
Medicaid prescription reimbursement rates, reductions in gross margins on
generic prescriptions and higher store occupancy costs resulting in part from
lower sales growth and the aforementioned New York City real estate tax
increase. LIFO reduced gross margin in 2003 by $0.4 million, compared to an
increase in gross margin in 2002 of $0.1 million.
Selling, general and administrative expenses were 16.5% of sales,
compared to 15.6% of sales in the previous year. The higher expense ratio is
primarily attributable to a lower rate of same-store sales growth, increased
professional and litigation-related legal costs, increased costs for store labor
related to expanded operating hours, a new shelf labeling system implemented
during the second half of the year and increases in pharmacist wage rates. Also
reflected are higher promotional and advertising expenses, increased costs
associated with the large number of immature one-hour photo departments,
increased credit and debit card processing fees and higher insurance costs.
For the full year, the Company opened a total of 17 stores and closed
four locations, compared with 32 new stores opened and four stores closed in
2002.
Commenting on the Company's results, Anthony J. Cuti, Chairman of the
Board and Chief Executive Officer, stated, "The fourth quarter and year-end
results reflect the sustained challenges in the metro New York market as well as
the shifting trends in the industry. We are continuing to invest our energies
and strategies to improve the longer term prospects for our business by
providing improved convenience and service for our customers."
With respect to the acquisition of the Company by an affiliate of Oak
Hill Capital Partners, L.P. that was announced on December 22, 2003, the Company
expects to file a preliminary proxy statement this month, which will be subject
to the review and approval of the Securities and Exchange Commission. A special
meeting of the Company's stockholders will be scheduled as soon as practical to
approve this transaction, which is expected to close during the second quarter.
The Company will hold a conference call today, Thursday, February 19,
2004, at 10:00AM Eastern Time to discuss its financial results for the fourth
quarter of 2003. A live web cast of the call will be accessible from the
Investor Information section of the Duane Reade website
(http://www.duanereade.com) and the call will be archived on the website until
March 11, 2004. Additionally, a replay of the conference call will be available
from 12:00PM Eastern Time on February 19, 2004 until 12:00PM Eastern Time on
February 25, 2004. The replay can be accessed by dialing (888) 276-5316.
Founded in 1960, Duane Reade is the largest drug store chain in the
metropolitan New York City area, offering a wide variety of prescription and
over-the-counter drugs, health and beauty care items, cosmetics, hosiery,
greeting cards, photo supplies and photo finishing. As of December 27, 2003, the
Company operated 241 stores. Duane Reade maintains a website at
http://www.duanereade.com.
IMPORTANT INFORMATION
In connection with the acquisition of the Company by Oak Hill, Duane
Reade intends to file relevant materials with the Securities and Exchange
Commission (the "SEC"), including a proxy statement, and the acquiring entities
will file other relevant documents with the SEC. BECAUSE THOSE DOCUMENTS WILL
CONTAIN IMPORTANT INFORMATION, HOLDERS OF DUANE READE COMMON STOCK ARE URGED TO
READ THEM, IF AND WHEN THEY BECOME AVAILABLE. When filed with the SEC, they will
be available for free (along with any other documents and reports filed by Duane
Reade with the SEC) at the SEC's website, www.sec.gov, and Duane Reade
stockholders will receive information at an appropriate time on how to obtain
transaction-related documents for free from Duane Reade. Such documents are not
currently available.
PARTICIPANT INFORMATION
Duane Reade Shareholders, LLC, Duane Reade Holdings, Inc. and Duane
Reade Acquisition Corp. were formed as the acquiring entities at the direction
of the equity sponsors, which currently include Oak Hill Capital Partners, L.P.,
Oak Hill Capital Management Partners, L.P. and certain members of Duane Reade's
management. Andrew J. Nathanson and Tyler J. Wolfram are the initial directors
of each newly formed Delaware corporation. These entities and their directors
and officers may be deemed to be participants in the solicitation of proxies in
connection with the proposed transaction. As of the date of this communication,
Mr. Nathanson has an indirect interest (through his participation in an
investment partnership) of less than 1% in the outstanding shares of the common
stock of Duane Reade and none of the other foregoing participants has any direct
or indirect interest, by security holdings or otherwise, in Duane Reade.
Duane Reade and its directors and executive officers may be deemed to
be participants in the solicitation of proxies from its stockholders in
connection with the proposed transaction. Certain information regarding the
participants and their interest in the solicitation is set forth in the proxy
statement for Duane Reade's 2003 annual meeting of stockholders filed with the
SEC on April 10, 2003 and the Form 4s filed by Duane Reade's directors and
executive officers since April 10, 2003. Stockholders may obtain additional
information regarding the interests of such participants by reading the proxy
statement relating to the proposed transaction when it becomes available.
Except for historical information contained herein and statements
relating to the acquisition of the Company by Oak Hill, the statements in this
release and the accompanying discussion on the earnings conference call are
forward-looking and made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. In addition, this document may contain
statements, estimates or projections relating to, among other things, the
acquisition of the Company by Oak Hill that constitute "forward looking"
statements as defined under U.S federal securities laws. Forward-looking
statements involve known and unknown risks and uncertainties, which may cause
the Company's actual results in future periods to differ materially from
forecasted or expected results. Those risks include, among other things, the
competitive environment in the drugstore industry in general and in the
Company's specific market area, inflation, changes in costs of goods and
services and economic conditions in general and in the Company's specific market
area. Those and other risks are more fully described in Duane Reade's reports
filed with the SEC from time to time, including its annual reports on Form 10-K,
quarterly reports on Form 10-Q and the current reports on Form 8-K. You should
not place undue reliance on forward-looking statements, which speak only as of
the date they are made. Except to the extent otherwise required by federal
securities laws, we do not undertake to publicly update or revise any
forward-looking statements.
--TABLES FOLLOW--
Duane Reade Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
For the 13 Weeks Ended For the 52 Weeks Ended
------------------------------ ----------------------------
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
--------------- ------------- ------------- -------------
Net sales $ 356,430 $ 331,075 $ 1,383,828 $ 1,274,451
Cost of sales 278,969 255,364 1,087,092 988,033
--------------- ------------- ------------- -------------
Gross profit 77,461 75,711 296,736 286,418
--------------- ------------- ------------- -------------
Selling, general & administrative expenses 60,778 53,434 227,910 198,513
Transaction expenses (1) 644 - 644 -
Insurance recovery - - - (9,378)
Depreciation and amortization 8,462 6,557 32,335 26,935
Store pre-opening expenses 264 477 1,063 2,086
--------------- ------------- ------------- -------------
70,148 60,468 261,952 218,156
--------------- ------------- ------------- -------------
Operating income 7,313 15,243 34,784 68,262
Interest expense, net 3,666 3,550 14,117 17,925
Debt extinguishment (2) - (2,061) 812 11,371
--------------- ------------- ------------- -------------
Income before income taxes and cumulative
effect of accounting change 3,647 13,754 19,855 38,966
Income taxes 804 4,291 7,936 14,127
--------------- ------------- ------------- -------------
Income before cumulative effect of accounting change 2,843 9,463 11,919 24,839
Cumulative effect of accounting change, net of income taxes - - - (9,262)
--------------- ------------- ------------- -------------
Net income $ 2,843 $ 9,463 $ 11,919 $ 15,577
=============== ============= ============= =============
Net Income (Loss) Per Common Share - Basic (3):
Income before cumulative effect of accounting change $ 0.12 $ 0.39 $ 0.50 $ 1.04
Cumulative effect of accounting change, net of income taxes - - - (0.39)
--------------- ------------- ------------- -------------
Net income $ 0.12 $ 0.39 $ 0.50 $ 0.65
=============== ============= ============= =============
Weighted average common shares outstanding 24,058 23,961 24,043 23,852
=============== ============= ============= =============
Net Income (Loss) Per Common Share - Diluted (3):
Income before cumulative effect of accounting change $ 0.12 $ 0.39 $ 0.49 $ 1.01
Cumulative effect of accounting change, net of income taxes - - - (0.38)
--------------- ------------- ------------- -------------
Net income $ 0.12 $ 0.39 $ 0.49 $ 0.63
=============== ============= ============= =============
Weighted average common shares outstanding 24,415 24,430 24,427 24,563
=============== ============= ============= =============
(1) Transaction expenses represent costs associated with the planned
acquisition of the Company by an affiliate of Oak Hill Capital Partners,
L.P.
(2) In accordance with the provisions of FAS 145, gains and losses associated
with the extinguishment of debt have been reclassified from "Extraordinary
items" to "Debt extinguishment."
(3) Earnings per share amounts are calculated based on the weighted average
shares outstanding and may not add due to rounding.
Duane Reade Inc.
Consolidated Balance Sheets
(In thousands)
December 27, December 28,
2003 2002
----------------- ----------------
Current Assets
Cash $ 1,252 $ 4,183
Receivables (1) 53,689 62,008
Inventories (2) 259,765 220,338
Current Portion of Deferred Taxes 8,150 5,416
Prepaid Expenses and Other Current Assets (3) 19,504 16,006
----------------- ----------------
Total Current Assets 342,360 307,951
Property and Equipment, net 189,469 169,507
Goodwill, net 161,318 160,403
Deferred Taxes - 6,489
Other Assets (4) 88,836 85,173
----------------- ----------------
Total Assets $ 781,983 $ 729,523
================= ================
Current Liabilities
Accounts Payable (5) $ 85,258 $ 57,776
Accrued Expenses 29,122 29,645
Current Portion of Senior Debt and Capital Leases (6) 422 4,434
----------------- ----------------
Total Current Liabilities 114,802 91,855
Other Liabilities (7) 50,315 42,493
Deferred Taxes 212 -
Long Term Debt and Capital Leases (8) 272,489 265,307
----------------- ----------------
Total Liabilities 437,818 399,655
----------------- ----------------
Total Stockholders' Equity 344,165 329,868
----------------- ----------------
Total Liabilities and Stockholders' Equity $ 781,983 $ 729,523
================= ================
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
(1) Includes third party pharmacy receivables of $33,672 and $33,532 at
December 27, 2003 and December 28, 2002, respectively.
(2) Inventory increase of $39,427 from December 28, 2002 is attributable to the
operation of 13 additional stores and the timing of both pharmacy and
front-end inventory purchases versus the previous year.
(3) Increase in prepaids and other current assets from December 28, 2002 is
primarily due to an increase in the amount of prepaid rent expense and an
increase in the prepaid portion of the Company's annual insurance premiums,
partially reduced by the receipt of insurance settlements related to
certain property loss claims.
(4) Increase in other assets from December 28, 2002 is primarily due to the
payment of premiums for an executive split dollar life insurance policy.
(5) Increase in accounts payable from December 28, 2002 is primarily due to the
timing of both pharmacy and front-end inventory purchases versus the
previous year.
(6) Decrease in current portion of debt from December 28, 2002 reflects
repayment of outstanding term loans resulting from the new asset-based
credit agreement entered into by the Company in July 2003.
(7) Increase in other liabilities from December 28, 2002 is primarily due to
the deferred rent impact of new stores added during the year.
(8) Increase in non-current portion of debt from December 28, 2002 reflects
increased borrowings on the Company's revolving credit facility, a portion
of which was used for repayment of outstanding term loans that were
classified as current portion of long term debt at December 28, 2002.
Duane Reade Inc.
Operating Data
(Dollars in thousands)
(Unaudited)
13 Weeks Ended 52 Weeks Ended
---------------------------------------- -----------------------------------
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
----------------- ----------------- ------------------ --------------
EBITDA (1) $ 18,490 $ 23,629 $ 76,214 $ 104,787
EBITDA as a percentage of net sales 5.2% 7.1% 5.5% 8.2%
Capital expenditures $ 6,513 $ 11,199 $ 41,036 $ 47,599
Same-store sales growth 3.0% 3.8% 2.7% 4.8%
Pharmacy same-store sales growth 7.0% 8.0% 7.5% 12.1%
Front-end same-store sales growth 0.1% 0.8% -0.8% 0.0%
Pharmacy sales as a % of net sales 43.7% 42.0% 43.6% 41.8%
Third Party sales as a % of pharmacy sales 91.7% 90.4% 91.4% 90.2%
Average weekly prescriptions filled per store (2) 897 890 929 932
Number of stores at end of period 241 228
Retail square footage at end of period 1,714,601 1,577,980
Average store size (sq.ft.) at end of period 7,115 6,921
(1) As used in this report, EBITDA means earnings before interest, income taxes,
depreciation, amortization, transaction expenses, debt extinguishment costs,
extraordinary charges, non-recurring charges and other non-cash items (primarily
deferred rents). We believe that EBITDA, as presented, represents a useful
measure of assessing the performance of our operating activities, as it reflects
our earnings trends without the impact of certain non-cash and unusual charges
or income. 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
provided by operating activities as a measure of liquidity, as an alternative to
net income as an indicator of our operating performance, nor as an alternative
to any other measure of performance in conformity with generally accepted
accounting principles. A reconciliation of EBITDA to both net income and cash
flow provided by operating activities is provided on the following page of this
release.
(2) Comparative stores only, does not include new stores.
Duane Reade Inc.
Reconciliation of EBITDA to Net Income and
Net Cash Provided by Operating Activities
(Dollars in thousands)
For the 13 Weeks Ended For the 52 Weeks Ended
------------------------------------ -----------------------------------
December 27, December 28, December 27, December 28,
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
EBITDA $ 18,490 $ 23,629 $ 76,214 $ 104,787
Depreciation and amortization (8,462) (6,557) (32,335) (26,935)
Deferred rent (2,071) (1,829) (8,451) (9,590)
Transaction expenses (644) - (644) -
Debt extinguishment - 2,061 (812) (11,371)
Interest expense (3,666) (3,550) (14,117) (17,925)
Income taxes (804) (4,291) (7,936) (14,127)
Cumulative effect of accounting change, net - - - (9,262)
---------------- ---------------- ---------------- ----------------
Net income $ 2,843 $ 9,463 $ 11,919 $ 15,577
---------------- ---------------- ---------------- ----------------
Net income $ 2,843 $ 9,463 $ 11,919 $ 15,577
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization of property 5,712 4,290 21,574 18,170
Amortization of intangibles and deferred
financing costs 3,226 2,806 12,697 10,666
Deferred tax provision (1,739) (3,564) 3,967 6,684
Cumulative effect of accounting change, net - 9,262
Non-cash rent expense and other 2,071 372 9,181 10,572
Changes in operating assets and liabilities
(net of effect of acquisitions):
Receivables 9,436 (4,861) 8,319 (4,323)
Inventories (15,541) 2,919 (38,308) (13,639)
Accounts payable 15,425 3,269 27,482 (11,312)
Prepaid and accrued expenses (1,422) 6,558 (1,681) 6,857
Other assets/liabilities, net (2,331) 1,620 (7,706) (5,977)
---------------- ---------------- ---------------- ----------------
Cash provided by operating activities $ 17,680 $ 22,872 $ 47,444 $ 42,537
---------------- ---------------- ---------------- ----------------
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