<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
November 27, 1993 OR
------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
___________________ TO ___________________
Commission File Number 0-16998
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DRUG EMPORIUM, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 31-1064888
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
155 Hidden Ravines Drive, Powell, Ohio 43065
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (614) 548-7080
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_____________________________________________________________________________
Former name, former address and former fiscal year, if changed since last
report.
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
<TABLE>
<S> <C>
Class Outstanding at 11/27/93
- ---------------------------- -----------------
Common Stock, $.10 par value 13,136,085 shares
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</TABLE>
<PAGE> 2
INDEX
DRUG EMPORIUM, INC.
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets . . . . . . . . . . 2
Condensed consolidated statements of operations . . . . . 3
Condensed consolidated statements of cash flows . . . . . 4
Notes to condensed consolidated financial statements. . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . 6-8
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings. . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 9
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
- ----------
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS
- ---------------------------------------------------
(LOSS) PER SHARE . . . . . . . . . . . . . . . . . 11
----------------
</TABLE>
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<PAGE> 3
DRUG EMPORIUM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 27, 1993 February 27, 1993
--------------------- ------------------
(Unaudited) (Audited)
(000's omitted)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents. . . . . . . . $ 530 $ 723
Accounts receivable. . . . . . . . . . . 8,758 5,847
Inventories. . . . . . . . . . . . . . . 151,186 146,807
Deferred income taxes and other. . . . . 4,781 4,546
--------- ---------
Total current assets. . . . . . . . 165,255 157,923
Property and equipment, net. . . . . . . . . 30,351 32,072
Goodwill and other assets. . . . . . . . . . 5,587 5,630
--------- ---------
Total Assets. . . . . . . . . . . . $201,193 $195,625
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and notes payable . . . . . . . $ 42,940 $ 33,594
Other accrued expenses . . . . . . . . . 21,434 22,698
Revolving credit line. . . . . . . . . . 25,380 27,000
Current maturities of long-term debt . . 2,267 2,377
--------- ---------
Total current liabilities . . . . . 92,021 85,669
--------- ---------
Convertible subordinated debt. . . . . . . . 50,791 50,748
Long-term debt, other. . . . . . . . . . . . 4,243 5,832
Minority interest. . . . . . . . . . . . . . 3,553 3,281
Shareholders' equity
Preferred stock, authorized 2,000,000
shares, none issued. . . . . . . . . . - -
Common stock stated value $.10
per share, authorized 28,000,000
shares; issued and outstanding
13,136,000 and 13,117,000,
respectively . . . . . . . . . . . . . 1,313 1,312
Additional paid-in capital . . . . . . . 31,972 31,909
Retained earnings. . . . . . . . . . . . 17,300 16,874
--------- ---------
Total shareholders' equity . . . . . . . 50,585 50,095
--------- ---------
Total Liabilities and Shareholders' Equity . $201,193 $195,625
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE> 4
DRUG EMPORIUM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 27 (28), November 27 (28),
------------------ -----------------
1993 1992 1993 1992
-------- -------- -------- --------
(Unaudited) (Unaudited)
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $181,250 $183,305 $550,332 $555,405
Cost of sales . . . . . . . . . . . . . . . 142,347 145,355 434,012 442,921
-------- -------- -------- --------
38,903 37,950 116,320 112,484
Selling, administrative and
occupancy expense . . . . . . . . . . . . 37,260 39,226 110,999 113,245
Interest expense, net . . . . . . . . . . . 1,463 1,508 4,339 4,058
Minority interest . . . . . . . . . . . . . 32 103 272 261
-------- -------- -------- --------
Income (loss) before income
taxes . . . . . . . . . . . . . . . . . . 148 (2,887) 710 (5,080)
Provision (benefit) for income
taxes . . . . . . . . . . . . . . . . . . 59 (697) 284 (1,530)
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . $ 89 $ (2,190) $ 426 $ (3,550)
======== ======== ======== ========
Net income (loss) per share . . . . . . . . $ .01 $ (.17) $ .03 $ (.27)
======== ======== ======== ========
Weighted average number of common
and common equivalent shares . . . . . . 13,131 13,116 13,127 13,114
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE> 5
DRUG EMPORIUM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
November 27 (28),
----------------------
1993 1992
---- ----
(Unaudited)
(000's omitted)
<S> <C> <C>
Operating activities:
Net income (loss). . . . . . . . . . . . $ 426 $ (3,550)
Add (deduct) non-cash charges (credits):
Depreciation and amortization. . . . . 5,133 4,678
Minority interest. . . . . . . . . . . 272 261
LIFO provision . . . . . . . . . . . . 2,400 3,614
Cash provided by (used for) current
assets and liabilities:
Accounts receivable. . . . . . . . . (2,911) 2,352
Inventories. . . . . . . . . . . . . (6,779) (28,972)
Deferred income taxes and other. . . (881) (1,481)
Accounts payable and accrued
expenses . . . . . . . . . . . . . 8,082 14,916
-------- --------
Net cash provided by operating
activities . . . . . . . . . . . . . . 5,742 (8,182)
Investing activities:
Purchase of property and equipment,
net. . . . . . . . . . . . . . . . . . (2,723) (4,597)
Financing activities:
Net borrowings under revolving credit
agreement. . . . . . . . . . . . . . . (1,620) 15,265
Net repayments, other. . . . . . . . . . (1,656) (1,906)
Net proceeds from exercise of common
stock options. . . . . . . . . . . . . 64 26
Cash dividends paid . . . . . . . . . . - (524)
-------- --------
Net cash used for financing activities . (3,212) 12,861
-------- --------
Change in cash and cash equivalents, net . . . . (193) 82
Cash and cash equivalents, beginning of period . 723 466
-------- --------
Cash and cash equivalents, end of period . . . . $ 530 $ 548
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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<PAGE> 6
DRUG EMPORIUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. The accompanying financial statements include the accounts of Drug
Emporium, Inc. and Subsidiaries.
The information furnished reflects all adjustments which are, in the
opinion of management, necessary to fairly present the condensed
consolidated financial position, results of operations, and cash flows
on a consistent basis. Certain reclassifications have been made to
selected financial statement groupings to make them consistent with
the current period.
The Company's cost of sales is computed using the gross profit method.
The gross profit percentage used is validated by physical inventories
conducted twice a year primarily in the second and fourth quarters and
the actual results of the LIFO calculations in the fourth quarter.
The accompanying unaudited consolidated financial statements are
presented in accordance with the requirements for Form 10-Q and
consequently do not include all the disclosures normally required by
generally accepted accounting principles. Reference should be made to
the Company's Form 10-K for fiscal year ended February 27, 1993 (File
No. 0-16998) for additional disclosures including a summary of the
Company's accounting policies, which have not significantly changed.
2. On December 3, 1993, the Company acquired substantially all the
remaining minority shares of the Drug Emporium franchise which
operates eleven stores in the Cincinnati and Dayton, Ohio areas for
$6.7 million. The cash transaction was financed utilizing the
Company's existing revolving credit line.
3. The Company signed a new bank credit agreement (Agreement) on January
4, 1994. The Agreement increases the available borrowings and replaces
the previous bank credit agreement that was due to expire August 31,
1996.
The Agreement allows for a total credit facility of $45,000,000,
depending on available collateral, consisting of a revolving credit
line (Revolver) of up to $30,000,000 and $15,000,000 of term debt.
The Revolver expires on February 28, 1997, while the term debt is due
in quarterly installments, as follows: $500,000 during fiscal 1995,
$750,000 during fiscal 1996 and fiscal 1997, and $875,000 during
fiscal 1998 and 1999. The interest rate on the Revolver and the term
debt float at the bank's prime rate (Prime) and Prime plus 1/4%,
respectively. The agreement requires a commitment fee on the Revolver
(.375% on the first $20,000,000 and .25% on the last $10,000,000) and
has no compensating balance requirements.
Borrowings made pursuant to the Agreement are secured by inventory and
accounts receivable. The Agreement contains certain covenants
pertaining to, among other things, the Company's investments, net
worth, working capital, indebtedness and fixed charge coverage. The
Agreement also restricts payment of dividends, stock repurchases and
acquisition of the Company's convertible subordinated debt to 50% of
the cumulative net income (as defined).
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<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth selected items from the Company's
Consolidated Statement of Operations expressed as a percentage of net sales for
the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 27 (28), November 27 (28),
----------------- -----------------
1993 1992 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . 100.0% 100.0 % 100.0% 100.0%
Cost of sales . . . . . . . . . . . . . . . 78.5 79.3 78.9 79.7
Selling, administrative and
occupancy expenses . . . . . . . . . . . 20.6 21.4 20.2 20.4
Other expenses, net . . . . . . . . . . . . .8 .9 .8 .8
----- ----- ----- -----
Total costs and expenses . . . . . . . 99.9 101.6 99.9 100.9
----- ----- ----- -----
Income (loss) before income
taxes . . . . . . . . . . . . . . . . . . .1 (1.6) .1 (.9)
Provision (benefit) for income
taxes . . . . . . . . . . . . . . . . . . - (.4 ) - (.3)
----- ----- ----- ----
Net income (loss) . . . . . . . . . . . . . .1% (1.2)% .1% (.6)%
===== ===== ===== ====
Provision (benefit) for income
taxes as a percentage of income
(loss) before income taxes . . . . . . . 39.9% (24.1)% 40.0% (30.1)%
===== ===== ===== ====
</TABLE>
The following table lists store openings and store closings during the
specified period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 27 (28), November 27 (28),
-------------------- -------------------
1993 1992 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of Stores at
Beginning of
Period 133 132 132 128
Stores Opened 2 4 7 11
Stores Closed (1) (1) (5) (4)
Total Stores at End
of Period 134 135 134 135
</TABLE>
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<PAGE> 8
Net store sales decreased in the third quarter and for the nine months
ended November 27, 1993, due to: (1) a decline in comparable store sales of
(.8%) and (2.5%), respectively; (2) an overall weakness in consumer spending;
and (3) a decline in the number of Company-owned stores in operation.
The table below sets forth net sales by Company-owned stores and
franchise fees and royalties earned during the specified period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 27 (28), November 27, (28),
----------------- ------------------
1993 1992 1993 1992
---- ---- ---- ----
(000's omitted)
<S> <C> <C> <C> <C>
Net store sales . . . . . . . . . . $180,210 $182,358 $546,798 $552,554
Franchise fees and royalties. . . . 1,040 947 3,534 2,851
-------- -------- -------- --------
Total net sales . . . . . . . . $181,250 $183,305 $550,332 $555,405
======== ======== ======== ========
</TABLE>
Cost of sales as a percentage of net sales decreased for the third
quarter and nine months ended November 27, 1993, versus the similar prior year
periods. This is primarily due to lower product costs, private label and
selectively strengthened product pricing.
The Company uses the LIFO method of accounting for its inventories.
Under this method, the cost of merchandise sold reported in the financial
statements approximates current costs. The Company, in computing its LIFO
provision throughout the fiscal year, uses an estimated percentage rate of
inflation. The LIFO provision is adjusted at each year end based upon the
actual weighted average percentage rate of inflation during the fiscal year.
Cost of sales has been impacted by the estimated LIFO provision as noted in the
following table:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 27 (28), November 27 (28),
----------------- ------------------
1993 1992 1993 1992
---- ---- ---- ----
(000's omitted)
<S> <C> <C> <C> <C>
LIFO provision . . . . . . . . . . . $780 $538 $2,400 $3,613
</TABLE>
Selling, administrative and occupancy expenses declined for the third
quarter and for the nine months ended November 27, 1993, as compared to the
similar prior year periods, on a per-store basis and in total, due to: (1)
staff reductions and efficiencies realized from the centralization that began
during fiscal 1993, (2) controlling net advertising expense; partially offset
by (3) an increase in occupancy costs on stores opened.
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<PAGE> 9
Liquidity and Capital Resources
On December 3, 1993, the Company acquired substantially all the
remaining minority shares of the Drug Emporium franchise which operates eleven
stores in the Cincinnati and Dayton, Ohio areas for $6.7 million. The cash
transaction was financed utilizing the Company's existing revolving credit
line.
The Company signed a new bank credit agreement (Agreement) on January
4, 1994. The Agreement increases the available borrowings and replaces the
previous bank credit agreement that was due to expire August 31, 1996.
The Agreement allows for a total credit facility of $45,000,000,
depending on available collateral, consisting of a revolving credit line
(Revolver) of up to $30,000,000 and $15,000,000 of term debt. The Revolver
expires on February 28, 1997, while the term debt is due in quarterly
installments, as follows: $500,000 during fiscal 1995, $750,000 during fiscal
1996 and fiscal 1997, and $875,000 during fiscal 1998 and 1999. The interest
rate on the Revolver and the term debt float at the bank's prime rate (Prime)
and Prime plus 1/4%, respectively. The Agreement requires a commitment fee on
the Revolver (.375% on the first $20,000,000 and .25% on the last $10,000,000)
and has no compensating balance requirements.
Borrowings made pursuant to the Agreement are secured by inventory and
accounts receivable. The Agreement contains certain covenants pertaining to,
among other things, the Company's investments, net worth, working capital,
indebtedness and fixed charge coverage. The Agreement also restricts payment
of dividends, stock repurchases and acquisition of the Company's convertible
subordinated debt to 50% of the cumulative net income (as defined). The
Company believes that internally generated funds and borrowings available under
its Agreement are sufficient to finance the Company's current operations.
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<PAGE> 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See the Form 10-Q for the quarter ended August 28, 1993 for a
discussion of certain legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are included herein:
--Exhibit 11. Computation of earnings (loss) per share
(b) No report on Form 8-K was filed during the quarter
ended November 27, 1993.
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<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRUG EMPORIUM, INC.
---------------------------------
(Registrant)
<TABLE>
<S> <C>
Date January 5, 1994 By /s/ David Kriegel
------------------ -----------------------------
David Kriegel
Chairman
Chief Executive Officer
Date January 5, 1994 By /s/ Keith E. Alessi
------------------ -----------------------------
Keith E. Alessi
Chief Financial Officer
</TABLE>
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<PAGE> 12
<TABLE>
DRUG EMPORIUM, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<CAPTION>
Three Months Ended Nine Months Ended
November 27 (28), November 27 (28),
-------------------- -----------------
1993 1992 1993 1992
---- ---- ---- ----
(000's omitted, except per share data)
<S> <C> <C> <C> <C>
Primary:
Weighted average number
of common shares
outstanding . . . . . . . . . . . . . . 13,131 13,116 13,127 13,114
Net effect of dilutive
stock options--based
on treasury stock
method using estimated
average market price . . . . . . . . . (a) (a) (a) (a)
------ ------ ------ ------
Weighted average common
and common equivalent
shares . . . . . . . . . . . . . . . . 13,131 13,116 13,127 13,114
====== ====== ====== ======
Net income (loss) . . . . . . . . . . . . $ 89 $(2,190) $ 426 $(3,550)
====== ======= ====== =======
Net income (loss) per
common and common
equivalent share . . . . . . . . . . . $ .01 $ (0.17) $ .03 $(0.27)
====== ======= ====== ======
Fully Diluted:
Weighted average number
of common shares
outstanding . . . . . . . . . . . . . . 13,131 13,116 13,127 13,114
Net effect of dilutive
stock options--based
on treasury stock
method using an
estimated period -
end market price . . . . . . . . . . . (a) (a) (a) (a)
------ ------ ------ ------
Fully diluted shares . . . . . . . . . . 13,131 13,116 13,127 13,114
====== ====== ====== ======
Net income (loss) . . . . . . . . . . . . $ 89 $(2,190) $ 426 $(3,550)
====== ======= ====== =======
Net income (loss) per
common share assuming
full dilution . . . . . . . . . . . . . $ .01 $(0.17) $ .03 $(0.27)
====== ====== ====== ======
<FN>
(a) Excluded since amounts are antidilutive.
</TABLE>
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