Item 1. Business
General
Genovese Drug Stores, Inc. (the "registrant"), organized in 1924, operates a chain of retail drug and general merchandise stores primarily under the "Genovese" name, which as of February 2, 1996 totalled 120 stores in number. Its primary trading area covers Long Island and parts of New York City. Stores are also located in southeastern New York and in the states of New Jersey and Connecticut. During fiscal 1996, five stores were opened on Long Island, four in Queens and one in Manhattan. The registrant continued a program of acquiring independent drug stores within its marketing area, purchasing the pharmacy files and inventory of independent drug stores, in some cases employing the pharmacist owner/managers.
In addition, the registrant operates a mail order prescription service, one professional photo retail store, an arts and craft store and a photo processing facility for developing and printing film for its customers.
Operations
These stores, many of which are located in suburban areas, operate primarily on a self-service, cash and carry basis, and, as distinguished from the typical neighborhood drug store, service a relatively large trading area and offer a much broader selection of merchandise. The registrant's headquarters is located in Melville, New York.
The registrant operates a distribution center in Bohemia, New York, which is shipping approximately seventy percent of its store requirements. Merchandise is also purchased directly from manufacturers and other suppliers and is drop-shipped directly to each store. The registrant's business is seasonal and sales are normally greater during the fourth fiscal quarter of the year than during any of the first three fiscal quarters.
Merchandising
The registrant's stores contain a prescription drug department staffed by registered pharmacists and have a full line of prescription medicine. Besides proprietary drugs, cosmetics and toiletries, the merchandise carried includes housewares, hardware and small appliances, toys, books, paper goods, greeting cards, film, tobacco products and sick room needs. Approximately fifty-four stores offer on-site photofinishing services through the use of a In-Store Photo Lab.
The merchandising policy of the registrant is to maximize sales volume by offering a broad line of nationally advertised products at relatively low retail prices, in many cases below the manufacturer's suggested retail price.
The registrant also sells private label products in the vitamin and health and beauty aid areas. It is the policy of the registrant to replace or return the purchase price of any item, exclusive of prescription drugs, which proves unsatisfactory to a customer.
The registrant advertises throughout the year to stimulate customer interest, with particular emphasis on seasonal merchandise. Advertising is conducted principally through newspapers, mail, advertising circulars, radio and television.
Trademarks and Service Marks
The Genovese trademark is considered to be of material importance to the business of the registrant. The registrant holds the rights to certain other trademarks and service marks which the registrant also believes in the aggregate to be essential to the conduct of its business in the areas in which its stores are located.
Information as to Industry Segments and Product Lines
Operation of retail drug stores is the registrant's only significant industry segment. During its last five fiscal years, the only class of similar products sold by the registrant which contributed 10% or more to total sales and revenues was prescription drugs, which accounted for approximately the following percentages of total sales:
1996 36.1% 1995 35.4% 1994 34.4% 1993 33.2% 1992 31.9%
Competition
The business of the registrant is highly competitive. The registrant competes with a wide variety of retailers including drug stores, supermarkets, department stores and variety stores. Its competitors range from small independent stores to large regional and national chains, some of which have far greater resources than those of the registrant. The registrant believes that its ability to maintain its competitive position depends upon identifying and obtaining desirable locations for its stores, merchandising its products successfully, pricing its merchandise competitively and providing quality services.
Environmental Control
Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, have had no material effect upon the capital expenditures, earnings and competitive position of the Registrant.
Employees
The registrant has approximately 4,700 full time and part time employees, of whom approximately 4,000 are involved directly in store operations.
Item 2.
Item 2. Properties
The registrant's corporate headquarters are located in Melville, New York, where it owns a modern one-story brick building containing approximately 78,000 square feet of floor space. A portion of the building is dedicated to the registrant's mail order prescription division and an additional area is utlilized for the processing of damaged merchandise returned from the registrant's stores. The outstanding balance of the mortgage on the Melville building as of February 2, 1996 was $716,000. The registrant owns a distribution center located in Bohemia, New York, which consists of approximately 265,000 square feet. The outstanding balance of the mortgage on the Bohemia building as of February 2, 1996 was $2,990,000. The registrant owns a building with approximately 7,300 square feet of total floor space in Brooklyn, New York from which it operates a drug store and a building in Huntington, New York from which it operates a store with approximately 25,000 square feet of total floor space. The registrant also rents 100,000 square feet of public warehouse space for storing seasonal goods.
The 120 drug stores, the one arts & crafts store and the one professional photo retail store operated by the registrant are located in the following areas: Suffolk County (33), Nassau County (29), New York City (45), southeastern New York State (4), New Jersey (4) and Connecticut (7). These stores range in selling area from approximately 4,000 square feet to 22,000 square feet, generally averaging about 11,000 square feet of floor space per store. Nearly all are maintained under leases providing for terms which, in general, range from 15 to 20 years, presently expiring at various dates from 1997 through 2021.
The photo processing plant operated by the registrant, which contains approximately 10,000 square feet of space, is located in Glen Cove, New York, and has a lease which expires in 2005.
The fixtures and equipment contained in these operating facilities are owned or leased by the registrant. The registrant considers its facilities to be adequate for its present operations and are in good condition and well maintained.
Item 3.
Item 3. Legal Proceedings
There are various routine lawsuits and claims pending against the registrant. In the opinion of registrant's management, none of these actions will have a material adverse effect on the financial position or results of operations of the registrant.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no submissions of matters to a vote of stockholders to report during the fourth quarter of the registrant's fiscal year ended February 2, 1996.
Item 4A. Executive Officers of the Registrant
The information under this Item is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
The following table sets forth the name, age, current position and principal occupation and employment during the past five years of the registrant's executive officers.
* Leonard Genovese and Donald W. Gross are brothers-in-law.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
The Class A common stock of Genovese Drug Stores, Inc. is traded on the American Stock Exchange (ticker symbol GDX.A). The registrant's Class B common stock is not traded on any market and is restricted with respect to transfer (see Note 5 of the Notes to Finacial Statements).
Quarterly cash dividends aggregating $.22 per share and $.20 per share per fiscal year (after restatement for the 10 percent stock dividends distributed in fiscal 1996 and 1995) were paid for both Class A and Class B shares during the years ended February 2, 1996 and February 3, 1995, respectively. The registrant has certain loan agreements which contain covenants effectively limiting the payment of cash dividends (see Note 2 of the Notes to Financial Statements).
High and low stock prices for the last two fiscal years were:
The common stock prices, where appropriate, have been adjusted to reflect the 10 percent stock dividends distributed in fiscal 1996 and 1995.
* Since a portion of the Class A Common Stock is held in "street" name or nominee name, the registrant is unable to determine the exact number of beneficial holders.
Item 6.
Item 6. Selected Financial Data
The following is a summary of operations of Genovese Drug Stores, Inc. for the five years ended February 2, 1996.
(a) Fiscal 1995 was a 53 week year. All other fiscal years presented are 52 weeks.
(b) Stock options granted are not included as their dilutive effect was not material during the periods presented.
(c) Adjusted, where appropriate, to reflect the effect of the 10 percent stock dividends.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The registrant achieved record sales for the thirty-third consecutive year as sales increased 7.4% to $612,279,000. The sales increase was lead by a 5.6% increase in sales from stores open all of fiscal 1996 and 1995, on a comparable 52 week basis. Net income declined 17.4% to $7,607,000. On a per share basis, net income was $.69 versus $.83 last year. Fiscal 1996 was comprised of 52 weeks versus fiscal 1995 which was comprised of 53 weeks.
Prescription drug sales accounted for 36.1% of total sales in fiscal 1996 versus 35.4% in fiscal 1995. On a comparable 52 week basis, pharmacy sales increased 15.4% due to an increase in the number of prescriptions filled on a comparable store basis and the incremental sales from new stores along with an increase in the average prescription selling price. The increase in the number of prescriptions filled is a result of the registrant's continued acceptance of additional third party prescription plans and maturation of stores opened in recent years. The increase in average prescription selling price is a direct result of increases in the cost of prescription drugs.
During fiscal 1996, third party sales accounted for approximately 70% of total prescription sales compared to approximately 62% last year. The registrant expects this trend to continue as the number of people covered under third party plans increases.
Sales of health and beauty care items and sundry merchandise increased by 8.0% on a comparable 52 week basis.
The registrant's gross profit declined from 30.1% in fiscal 1995 to 29.7% in 1996. The decrease is primarily due to the effect of decreasing margins from third party plans combined with the increased sales volume of such plans. The decreases in the pharmacy margins were partially offset by increases in gross margin on non-pharmacy merchandise.
The registrant uses the last-in, first-out (LIFO) method of inventory valuation, which states cost of merchandise sold at the most recent costs. The LIFO reserve calculated for 1996 was less than the prior year resulting in a $498,000 reduction in cost of merchandise sold. In fiscal 1995, the LIFO reserve calculation resulted in a reduction in cost of merchandise sold of $943,000. These reductions were the results of lower effective inflation rates caused by reductions in acquisition costs in certain lines of merchandise.
Selling, general and administrative expenses, including occupancy costs, increased as a percentage of sales to 27.0% in fiscal 1996 versus 26.8% in fiscal 1995. The increase is attributable to the costs associated with the opening of 18 new stores during fiscal 1996 and 1995 together with an increase in the number of stores open 24 hours and the opening of in-store photo labs. After considering the above, the registrant's efforts to control selling, general and administrative expenses resulted in a slight decrease as a percentage of sales on a comparable store basis.
Interest expense increased to $3.9 million from $2.6 million last year due to higher average borrowings and higher average interest rates.
During fiscal 1996 the registrant sold the assets of its nursing home pharmacy division to a third party for net proceeds of approximately $3.0 million. The Company recorded a gain of $1.3 million on the sale.
The registrant's effective tax rate decreased to 44.5% from 44.9% last year.
Liquidity and Capital Resources
As February 2, 1996, the registrant had $2,251,000 in cash compared to $2,229,000 at February 3, 1995. Working capital levels increased to $40.9 million at February 2, 1996 versus $35.8 million at February 3, 1995.
The registrant's cash requirements arise primarily from the need to finance the opening of new stores, remodeling of existing stores, purchase of inventory, debt service and payment of dividends.
During fiscal 1996, operating activities provided $5.5 million compared with $17.5 million in the prior year. This decrease was primarily a result of lower net income, and increases in receivables and merchandise inventory.
Investing activities used $12.9 million primarily for the purchase of property and equipment, which was partially offset by proceeds from the sale of the registrant's nursing home pharmacy division. During fiscal 1995 investing activities used $20.5 million primarily for the purchase of property and equipment.
Financing activities provided $7.4 million and $4.3 million during fiscal 1996 and 1995 respectively. The proceeds were primarily the result of additional borrowings offset by the payment of dividends and purchase of treasury stock.
As of February 2, 1996 the registrant maintained a revolving term loan agreement and short-term lines of credit with two banks which allowed for aggregate borrowings of $70 million. The registrant had approximately $20 million in available credit under these facilities at February 2, 1996.
Subsequent to February 2, 1996, the registrant has entered into discussions to restructure its debt. The registrant has received a commitment from a bank to enter into a revolving term loan agreement and short-term line of credit which will allow for aggregate borrowings of $50 million and is currently negotiating the terms of a private placement of $40 million in fixed rate notes payable.
The registrant made capital expenditures of $16.0 million during fiscal 1996 compared to $20.6 million during fiscal 1995. These capital expenditures relate primarily to the opening of new stores, the remodeling of existing stores and improvements in the registrant's distribution center and headquarters facilities. The registrant anticipates capital expenditures of approximately $25 million for fiscal 1997 primarily related to the opening of approximately 10 new stores, remodeling of certain existing stores, improvements in the distribution center and in the photo processing lab.
Management believes that its operations and capital resources will provide sufficient cash availability to meet its liquidity needs and finance planned growth.
Impact of Inflation
Although inflation has slowed in recent years, it is still a factor in our economy and the registrant continues to seek ways to mitigate its impact. To the extent permitted by competition , the registrant passes increased costs on to its customers by increasing sales prices over time. Sales reported in the registrant's financial statement have increased, in an indeterminable amount, due to increases in selling prices and sales volume.
Item 8.
Item 8. Financial Statements and Supplementary Data
The response to this Item is submitted in a separate section of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There was no change of accountants for the registrant within the twenty-four months prior to the date of the most recent financial statements, nor any disagreement on any matter of accounting principles or practices of financial disclosure.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information with respect to members of the Board of Directors of the registrant is contained in the Proxy Statement for the Annual Meeting of Shareholders (the "1996 Proxy Statement") to be held on June 17, 1996, under the heading "Election of Directors", and is incorporated herein by reference. Information regarding the executive officers of the registrant is included as Item 4A of Part I as permitted by Instruction 3 to Item 401(b) of Regulation S- K. The information required by Item 405 of Regulation S-K is incorporated by reference from the 1995 Proxy Statement.
Item 11.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the 1996 Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference from the 1996 Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference from the 1996 Proxy Statement.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) - The response to this portion of Item 14 is submitted as a separate section of this report.
(3) Listing of Exhibits
3.1 Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on June 27, 1995
3.2 By-Laws, as amended (Exhibit 3.2 of Annual Report on Form 10-K for the year ended January 31, 1992)
3.3 By-Law Section 1.01, as amended through December 4, 1995
10.1 1984 Employee Stock Option and Stock Appreciation Rights Plan (filed August 2, 1994 on Form S-8 Registration Statement No. 33-54857)
10.2 1987 Executive Bonus and Stock Plan, as amended through June 13, 1994 (Exhibit 10.2 of Annual Report on Form 10-K for the year ended February 3, 1995)
10.3 Registrant's Retirement Income Plan, as amended and restated effective as of January 1, 1989 (Exhibit 10.3 of Annual Report on Form 10-K for the year ended February 3, 1995)
10.4 Registrant's Employee Stock Ownership Plan and Trust, as amended and restated effective January 1, 1989 (Exhibit 10.4 of Annual Report on Form 10-K for the year ended February 3, 1995)
10.5 Registrant's Retirement and Savings Plan, effective January 1, 1994 (Exhibit 10.5 of Annual Report on Form 10-K for the year ended February 3, 1995)
10.6 Split Dollar Insurance Plan between Registrant and Leonard Genovese, dated October 13, 1994 (Exhibit 10.6 of Annual Report on Form 10-K for the year ended February 3, 1995)
10.7 Form of Severance Agreement
10.8 First Amendment to the Genovese Drug Stores Inc. Retirement Income Plan (As amended and restated effective January 1, 1989)
10.9 Split Dollar Insurance Plan between Registrant and Leonard Genovese, dated June 29, 1995
11 Computation of Net Income Per Common Share
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
(b) No reports on Form 8-K were filed for the twelve weeks ended February 2, 1996.
(c) Exhibits - The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules - The response to this portion of Item 14 is submitted as a separate section of this report.
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.
GENOVESE DRUG STORES, INC.
(Registrant)
Date: April 26, 1996 By: /s/ Jerome Stengel --------------------------- Jerome Stengel Vice President & Treasurer 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 and in the capacities and on the date indicated.
By: /s/ Leonard Genovese April 26, 1996 --------------------------------------- ----------------- Leonard Genovese, Chairman of the Board Date and President (Principal Executive Officer)
By: /s/ Jerome Stengel April 26, 1996 --------------------------------------- ----------------- Jerome Stengel, Vice President & Treasurer Date Chief Financial Officer (Principal Financial Officer)
By: /s/ Christopher Noonan April 26, 1996 --------------------------------------- ----------------- Christopher Noonan, Controller Date (Principal Accounting Officer)
By: /s/ Abraham Allen April 26, 1996 --------------------------------------- ----------------- Abraham Allen, Director Date
By: /s/ Thomas M. Cooney April 26, 1996 --------------------------------------- ----------------- Thomas M. Cooney, Director Date
By: /s/ Charles Hayward April 26, 1996 --------------------------------------- ----------------- Charles Hayward, Director Date
By: /s/ Herbert J. Kett April 26, 1996 --------------------------------------- ----------------- Herbert J. Kett, Director and Date Vice Chairman
By: /s/ William J. McKenna April 26, 1996 --------------------------------------- ----------------- William J. McKenna, Director Date
By: /s/ Thomas J. Moran April 26, 1996 --------------------------------------- ----------------- Thomas J. Moran, Director Date
By: /s/ Allan Patrick April 26, 1996 --------------------------------------- ----------------- Allan Patrick, Director and Executive Date Vice President
By: /s/ Frances G. Wangberg April 26, 1996 --------------------------------------- ----------------- Frances G. Wangberg, Director Date
GENOVESE DRUG STORES, INC.
MELVILLE, NEW YORK
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2), (c) and (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
YEAR ENDED FEBRUARY 2, 1996 GENOVESE DRUG STORES, INC.
INDEPENDENT AUDITORS' REPORT
Genovese Drug Stores, Inc.:
We have audited the accompanying financial statements of Genovese Drug Stores, Inc., listed in the foregoing table of contents. Our audits also include the financial statement schedule listed in the table of contents. These financial statements and financial statement schedule 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at February 2, 1996 and February 3, 1995, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 2, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Jericho, New York March 5, 1996
GENOVESE DRUG STORES, INC.
BALANCE SHEETS FEBRUARY 2, 1996 AND FEBRUARY 3, 1995 (DOLLARS IN THOUSANDS)
See notes to financial statements.
GENOVESE DRUG STORES, INC.
STATEMENTS OF INCOME FOR THE YEARS ENDED FEBRUARY 2, 1996, FEBRUARY 3, 1995 AND JANUARY 28, 1994 (DOLLARS IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
See notes to financial statements.
GENOVESE DRUG STORES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED FEBRUARY 2, 1996, FEBRUARY 3, 1995 AND JANUARY 28, 1994 (DOLLARS IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
(Continued)
GENOVESE DRUG STORES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED FEBRUARY 2, 1996, FEBRUARY 3, 1995 AND JANUARY 28, 1994 (DOLLARS IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
See notes to financial statements.
GENOVESE DRUG STORES, INC.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED FEBRUARY 2, 1996, FEBRUARY 3, 1995 AND JANUARY 28, 1994 (DOLLARS IN THOUSANDS)
See notes to financial statements.
GENOVESE DRUG STORES, INC.
NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED FEBRUARY 2, 1996, FEBRUARY 3, 1995 AND JANUARY 28, 1994
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Genovese Drug Stores, Inc. (the "Company") is primarily engaged in the operation of a chain of super drug stores located in New York, New Jersey and Connecticut. The accounting policies relative to the Company are as follows:
a. Receivables - A majority of the Company's receivables are due from third-party providers (various insurance companies, benefit management companies and governmental agencies). As is industry practice, these receivables are uncollateralized. As of February 2, 1996 approximately 12.0 percent of receivables were due from a state welfare organization and 14.6 percent were due from a prescription benefits management company.
b. Merchandise Inventory - Merchandise inventory is valued at the lower of cost, determined on the last-in, first-out ("lifo") method, or market. If the inventory at February 2, 1996 and February 3, 1995 had been valued at year-end replacement costs, its value would have increased $18,950,000 and $19,448,000, respectively. As a result of a reduction in the lifo reserve, net income increased in fiscal 1996 and 1995 by approximately $276,000 and $520,000, respectively.
c. Depreciation and Amortization - Depreciation and amortization are determined by the straight-line method based on the estimated useful lives of the related items, such lives ranging from 3 to 35 years.
d. Intangible Assets - Intangible assets are being amortized over the estimated lives of the related assets, such lives ranging from 5 to 20 years.
e. Income Taxes - Deferred income taxes result from the recognition of income and expense in different periods for tax return and financial reporting purposes.
f. Net Income Per Common Share - Net income per common share is based on the average number of shares outstanding, after retroactive restatement for the 10 percent stock dividends distributed in each of fiscal 1996, 1995 and 1994. The weighted average number of shares, as adjusted, used in computing net income per common share was 11,086,000 in 1996, 11,059,000 in 1995 and 11,049,000 in 1994. The dilutive effect of outstanding common stock options was not material during any period presented.
g. Fiscal Year - The Company's fiscal year ends on the Friday closest to January 31. The fiscal year ended February 3, 1995 was comprised of 53 weeks.
h. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities at the date of the financial statements and statements of income during the periods presented. Actual results could differ from those estimates.
i. Stock Options - In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." This standard established a fair value method for stock-based compensation plans, including stock option plans, either through recognition or disclosure. The Company intends to adopt this standard in fiscal 1997 by disclosing the pro forma net income and earnings per share amounts assuming the fair value method was adopted as of the beginning of fiscal 1996. The adoption of this standard will not impact the Company's results of operations, financial position or cash flows.
j. Disclosure of Fair Value of Financial Instruments - Management of the Company believes that the fair value of financial instruments approximates their market value as of February 2, 1996 and February 3, 1995.
k. Reclassification - Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform with the 1996 presentation.
2. LONG-TERM LIABILITIES AND NOTES PAYABLE TO BANKS
Long-term liabilities consist of the following (dollars in thousands):
Revolving Term Loan Agreement
As of February 2, 1996, the Company maintained a revolving term loan agreement with two banks under which the banks were committed to lend up to $45,000,000 to the Company. As part of these agreements, the Company was obligated to pay a commitment fee of .375 percent of the unused portion of the commitment. Borrowings under these agreements bore interest at fifty basis points below the banks' prime lending rate (8.25 percent at February 2, 1996) or seventy-five basis points over the London Interbank Offered Rate ("LIBOR").
In addition, the Company maintained a short-term line of credit with two banks under which the banks will lend up to $25,000,000 to the Company, with interest at fifty basis points below the banks' prime lending rate or seventy-five basis points over LIBOR.
Information on short-term borrowings and interest rates follows (dollars in thousands):
The loan agreements contain certain covenants which include (i) maintenance of certain financial ratios, (ii) maintenance of certain amounts of working capital and net worth, (iii) limitations on capital expenditures, (iv) limitations on the payment of dividends, (v) limitations on other indebtedness, (vi) restrictions on the disposal of assets, and (vii) limitations on corporate reorganizations. The Company has received waivers from the debt holders as to noncompliance with certain of the aforementioned covenants.
Subsequent to year end, the Company received a commitment from a bank to enter into a revolving term loan agreement under which the Company may borrow up to $35,000,000 on an unsecured basis. Borrowings under this agreement will bear interest at seventy-five basis points below the bank's prime lending rate or fifty basis points over LIBOR, and will be due in fiscal 2001. As part of this facility, the Company will pay a commitment fee of .125 percent of the unused portion of this commitment. Additionally, the Company will have available up to $15,000,000 under a short-term line of credit with interest at seventy-five basis points below the bank's prime lending rate or fifty basis points over LIBOR.
The revised loan agreements contain covenants which include (i) the maintenance of certain financial ratios, (ii) the maintenance of certain amounts of tangible net worth, (iii) limitations on capital expenditures, (iv) limitations on other indebtedness, (v) limitations on the payment of dividends and purchase of treasury stock, (vi) limitations on the disposal of assets, and (vii) limitations on corporate reorganizations.
Industrial Development Revenue Bonds
The 1985 Industrial Development Revenue Bond bears interest at 72% of the prime lending rate (5.94 % at February 2, 1996), is payable in equal monthly installments through January 2001 and is secured by land and building, with an aggregate carrying value of $8,223,000, which were purchased substantially with the bond proceeds.
The 1982 Industrial Development Revenue Bond bears interest at 65% of the prime lending rate (5.36% at February 2, 1996), is payable in equal monthly installments through August 2002 and is secured by land, building and equipment, with an aggregate carrying value of $2,781,000, which were purchased substantially with the bond proceeds.
Other long-term liabilities consist of (i) retirement benefits payable to certain executives, (ii) an accrual for the noncash portion of rental payments and (iii) an accrual for insurance.
Interest expense aggregated approximately $3,902,000, $2,635,000 and $1,583,000 in 1996, 1995 and 1994, respectively.
The aggregate debt maturities subsequent to February 2, 1996 are as follows (dollars in thousands):
3. INCOME TAXES
The provision (benefit) for income taxes consist of the following (dollars in thousands):
The components of the deferred tax provision (benefit) consist of the following (in thousands):
The components of the deferred tax liability at February 2, 1996 and February 3, 1995 are as follows (in thousands):
The Company's effective income tax rate differs from the Federal statutory rate. The reasons for this difference are as follows (dollars in thousands):
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is required to make rental payments under noncancelable operating leases covering retail stores and certain equipment. Substantially all real estate leases include renewal options of five to twenty years and require additional rentals based on a percentage of sales and increases in real estate taxes. Rent expense for retail stores and equipment was $24,221,000 in 1996, $23,377,000 in 1995 and $20,435,000 in 1994. The contingent portion of rent expense amounted to $877,000, $902,000 and $695,000 in 1996, 1995 and 1994, respectively.
Minimum rental commitments at February 2, 1996 under all noncancelable operating leases are as follows (dollars in thousands):
The minimum rental commitments above do not include contingent amounts due of approximately $1,394,000 if the purchasers of stores sold by the Company were to default on the lease obligations assumed.
The Company has been named as a defendant in certain claims and lawsuits incidental to the Company's business. Management of the Company, based upon discussions with legal counsel, believes that the ultimate resolution of such claims and lawsuits will not result in any material adverse effect on the Company's financial position or results of operations.
5. COMMON STOCK
During fiscal 1996, the stockholders of the Company ratified an amendment to the Company's Certificate of Incorporation which increased the number of authorized Class A common stock from 12,000,000 shares to 20,000,000 shares. The par value of both classes of common stock is $1.00 per share. The Class A common stock entitles the holders to one vote per share. The Class B common stock entitles the holders to 10 votes per share. The Class B common stock is restrictive with respect to transfer. Upon the sale or change in beneficial ownership of a share of Class B common stock, the purchaser or new beneficial owner shall only be entitled to receive Class A common stock, except in certain instances.
Neither class will have preference over the other with regard to dividends or upon liquidation.
During fiscal 1996, 1995 and 1994, the Company's Board of Directors declared and effected 10 percent stock dividends. Common share amounts and per common share amounts have been retroactively adjusted to reflect the effect of the above-mentioned 10 percent stock dividends where appropriate.
As of February 2, 1996, under the Company's 1984 Employee Stock Option and Appreciation Rights Plan (the "Option Plan"), approximately 650,000 shares of Class A common stock were reserved for future issuance under options granted but not exercised or to be granted for periods of up to five years at an exercise price not less than the fair market value of the shares
at the date of grant. The Company makes no charge to income in connection with the Option Plan, but does record the tax benefit of the difference between the option price and the market value at the date of exercise in capital in excess of par value ($5,000, $100,000 and $10,000 in 1996, 1995 and 1994, respectively).
Additional information regarding the Option Plan follows (amounts have been restated to reflect the 10 percent stock dividends distributed in fiscal 1996, 1995 and 1994):
6. PENSION PLAN
In an earlier year, the Company elected to freeze the accumulation of retirement benefits in the Retirement Income Pension Plan (the "Plan") as of December 31, 1988. The adoption of this amendment has resulted in the freezing of the maximum benefits available to employees covered by the Plan as of December 31, 1988.
Net pension expense for 1996, 1995 and 1994 was $108,000, $78,000 and $69,000, respectively.
The components of net pension expense for 1996, 1995 and 1994 are summarized as follows (dollars in thousands):
The funded status of the plan and the amounts included in the accompanying balance sheets as of February 2, 1996 and February 3, 1995 are as follows (dollars in thousands):
Plan assets are invested primarily in bank pooled equity funds, bank fixed income funds, the Company's Class A common stock and a money market account. At February 2, 1996 the Plan held approximately 29,000 shares of the Company's Class A common stock.
Significant assumptions used in determining net periodic pension expense and related prepaid pension expense were as follows:
Unrecognized net obligations at transition date are being amortized over 33.57 years and unrecognized gains and losses subsequent to transition date are being amortized over 17 years.
7. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan (the "ESOP"), a defined contribution plan, for the benefit of all employees meeting certain minimum service requirements. Contributions to the ESOP are determined annually and are made at the discretion of the Company's Board of Directors. The ESOP's investments consists primarily of Class A common stock of the Company. The Company provided for a contribution of $103,000 in 1996, $130,000 in 1995 and $200,000 in 1994. At February 2, 1996, the ESOP held approximately 370,000 shares of the Company's Class A common stock.
8. INCENTIVE COMPENSATION PLAN
The 1987 Executive Bonus and Stock Plan (the "Executive Plan") allows the Compensation Committee of the Board of Directors of the Company to grant to certain executives of the Company awards based upon the achievement of certain targeted performance levels. Fifty percent of such awards shall be paid in cash and the balance shall be paid in Class A common stock of the Company over a four year period in five equal installments of twenty percent, assuming the continued employment of such executives. The Company has reserved approximately 300,000 shares of Class A common stock to be awarded under the Executive Plan. For fiscal year 1996, no awards were authorized. As of February 2, 1996, 24,418 shares of Class A common stock from the fiscal 1995 award will be issuable in three equal installments to certain executives over the next three years, 18,967 shares of Class A common stock from
the fiscal 1994 award will be issuable in equal installments to certain executives in the next two years and 8,429 shares of Class A common stock from fiscal 1993 award will be issuable in the next year. The Company records the compensation expense related to the 24,418, 18,967 and 8,429 undistributed shares of Class A common stock as such shares are vested in by the executives.
9. RETIREMENT AND SAVINGS PLAN
During fiscal 1991, the Company adopted the Genovese Retirement and Savings Plan (the "Savings Plan"), a contributory savings plan under Section 401(k) of the Internal Revenue Code, for the benefit of all employees meeting certain minimum service requirements. The Company's contribution under the Savings Plan, which amounts to 50 percent of the employees' contribution up to a maximum of two percent of the employees' compensation, was $373,000 in 1996, $352,000 in 1995 and $343,000 in 1994.
10. GAIN ON THE SALE OF DIVISION
During fiscal 1996, the Company sold the assets of its nursing home pharmacy division to a third party for net proceeds of approximately $3,014,000. The Company recorded a gain of $1,300,000 on the sale.
11. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for the years ended February 2, 1996 and February 3, 1995 follows (dollars in thousands, except per common share amounts):
(a) Adjusted, where appropriate, to reflect the effect of the 10 percent stock dividends distributed in both fiscal 1996 and 1995.
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SCHEDULE I
GENOVESE DRUG STORES, INC.
VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Index to Exhibits
3.1 Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on June 27, 1995
3.2 By-Laws, as amended (Exhibit 3.2 of Annual Report on Form 10-K for the year ended January 31, 1992)
3.3 By-Law Section 1.01, as amended through December 4, 1995
10.1 1984 Employee Stock Option and Stock Appreciation Rights Plan (filed August 2, 1994 on Form S-8 Registration Statement No. 33-54857)
10.2 1987 Executive Bonus and Stock Plan, as amended through June 13, 1994 (Exhibit 10.2 of Annual Report on Form 10-K for the year ended February 3, 1995)
10.3 Registrant's Retirement Income Plan, as amended and restated effective as of January 1, 1989 (Exhibit 10.3 of Annual Report on Form 10-K for the year ended February 3, 1995)
10.4 Registrant's Employee Stock Ownership Plan and Trust, as amended and restated effective January 1, 1989 (Exhibit 10.4 of Annual Report on Form 10-K for the year ended February 3, 1995)
10.5 Registrant's Retirement and Savings Plan, effective January 1, 1994 (Exhibit 10.5 of Annual Report on Form 10-K for the year ended February 3, 1995)
10.6 Split Dollar Insurance Plan between Registrant and Leonard Genovese, dated October 13, 1994 (Exhibit 10.6 of Annual Report on Form 10-K for the year ended February 3, 1995)
10.7 Form of Severance Agreement
10.8 First Amendment to the Genovese Drug Stores Inc. Retirement Income Plan (As amended and restated effective January 1, 1989)
10.9 Split Dollar Insurance Plan between Registrant and Leonard Genovese, dated June 29, 1995
11 Computation of Net Income Per Common Share
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule