<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
AUGUST 27, 1994 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
-----------
DRUG EMPORIUM, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 31-1064888
- - -----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 HIDDEN RAVINES DRIVE, POWELL, OHIO 43065
- - -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 548-7080
---------------------------
_____________________________________________________________________________
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.
CLASS Outstanding at 8/27/94
- - ---------------------------- -----------------
Common Stock, $.10 par value 13,170,585 shares
---------------
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<TABLE>
INDEX
DRUG EMPORIUM, INC.
PART I. FINANCIAL INFORMATION PAGE NO.
- - ------------------------------ --------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) PAGE NUMBER
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-8
PART II. OTHER INFORMATION
- - ---------------------------
Item 4. Submission of Matters to a Vote of
Security Holder
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
- - ----------
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS
- - ---------------------------------------------------
PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
---------
</TABLE>
2
<PAGE> 3
<TABLE>
DRUG EMPORIUM, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
AUGUST 27, FEBRUARY 26,
----------- ------------
1994 1994
---- ----
(Unaudited) (Audited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 833 $ 585
Accounts receivable . . . . . . . . . . . . . . . . . . 11,271 9,455
Inventories . . . . . . . . . . . . . . . . . . . . . . 151,936 146,569
Income taxes and other . . . . . . . . . . . . . . . . . 3,245 3,407
-------- --------
Total current assets . . . . . . . . . . . . . . . 167,285 160,016
Property and equipment, net . . . . . . . . . . . . . . . . 27,645 29,512
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . 6,426 6,736
Other assets . . . . . . . . . . . . . . . . . . . . . . . 542 626
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . $201,898 $196,890
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line . . . . . . . . . . . . . . . . . $ 15,280 $ 13,480
Accounts payable . . . . . . . . . . . . . . . . . . . . 42,072 37,375
Other accrued expenses . . . . . . . . . . . . . . . . . 22,380 22,875
Current maturities of long-term debt . . . . . . . . . . 4,178 4,110
-------- --------
Total current liabilities . . . . . . . . . . . . 83,910 77,840
Convertible subordinated debt . . . . . . . . . . . . . . . 50,834 50,805
Long-term debt, other . . . . . . . . . . . . . . . . . . . 15,118 16,761
Shareholders' equity:
Preferred stock, authorized 2,000,000
shares, none issued . . . . . . . . . . . . . . . . . - -
Common stock, stated value $.10 per
share, authorized 28,000,000, issued
and outstanding 13,171,000 at August 27,
1994 and 13,154,000 at February 26,
1994 . . . . . . . . . . . . . . . . . . . . . . . . . 1,317 1,315
Additional paid-in capital . . . . . . . . . . . . . . . 32,067 32,014
Retained earnings . . . . . . . . . . . . . . . . . . . 18,652 18,155
-------- --------
Total shareholders' equity . . . . . . . . . . . . 52,036 51,484
-------- --------
Total liabilities and shareholders'
equity . . . . . . . . . . . . . . . . . . . . . $201,898 $196,890
======== ========
<FN>
See accompanying notes.
</TABLE>
3
<PAGE> 4
<TABLE>
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Six Months Ended
August 27, August 28, August 27, August 28,
---------- ---------- ---------- ----------
1994 1993 1994 1993
---- ---- ---- ----
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $184,169 $184,050 $372,847 $366,588
Cost of sales . . . . . . . . . . . . . . . 145,660 145,770 294,784 290,389
-------- -------- -------- --------
38,509 38,280 78,063 76,199
Selling, administrative and occupancy
expenses . . . . . . . . . . . . . . . . . 36,481 36,411 73,901 72,521
Interest expense, net . . . . . . . . . . . 1,654 1,559 3,340 3,116
-------- -------- -------- --------
Income before income taxes . . . . . . . . 374 310 822 562
Provision for income taxes . . . . . . . . 146 124 325 225
-------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . $ 228 $ 186 $ 497 $ 337
======== ======== ======== ========
Net income per share . . . . . . . . . . . $.02 $.01 $.04 $.03
==== ==== ==== ====
Weighted average number of common shares
used in computing net income per share . .
13,169 13,179 13,162 13,140
====== ====== ====== ======
<FN>
See accompanying notes.
</TABLE>
4
<PAGE> 5
<TABLE>
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Six Months Ended
AUGUST 27, 1994 AUGUST 28, 1993
--------------- ---------------
(Unaudited)
(In thousands)
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . $ 497 $ 337
Add non-cash charges:
Depreciation and amortization . . . . . . . . . . . 3,527 3,302
Minority interest . . . . . . . . . . . . . . . . . - 240
LIFO provision . . . . . . . . . . . . . . . . . . 1,612 1,620
Cash provided by current assets and
liabilities:
Accounts receivable . . . . . . . . . . . . . (1,816) (1,021)
Inventories at current cost . . . . . . . . . (6,979) 6,061
Accounts payable and accrued
expenses . . . . . . . . . . . . . . . . . . 4,202 5,092
Other . . . . . . . . . . . . . . . . . . . . 182 (533)
-------- --------
Net cash provided by operating
activities . . . . . . . . . . . . . . . . . . . . 1,225 15,098
Investing activities:
Purchase of property and equipment,
net . . . . . . . . . . . . . . . . . . . . . . . (1,257) (1,952)
Financing activities:
Net repayments under revolving credit
line . . . . . . . . . . . . . . . . . . . . . . . 1,800 (12,000)
Net repayments, other . . . . . . . . . . . . . . . . (1,575) (1,153)
Other . . . . . . . . . . . . . . . . . . . . . . . . 55 51
-------- --------
Net cash provided by (used for)
financing activities 280 (13,102)
-------- --------
Increase in cash and cash equivalents . . . . . . . . . 248 44
Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . . . . . . . . . . 585 465
-------- --------
Cash and cash equivalents, end of
period . . . . . . . . . . . . . . . . . . . . . . . $ 833 $ 509
======== ========
<FN>
See accompanying notes.
</TABLE>
5
<PAGE> 6
DRUG EMPORIUM, INC.
NOTES TO 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 consolidated financial position, results of operations and cash
flows on a consistent basis. Certain amounts in prior period
financial statements have been reclassified to conform with the
current presentation.
2. 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.
3. 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 the fiscal year ended February 26, 1994
(File No. 0-16998) for additional disclosures including a summary of
the Company's accounting policies, which have not significantly
changed.
6
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<TABLE>
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.
<CAPTION>
Three Months Ended Six Months Ended
August 27, August 28, August 27, August 28,
--------------- ---------- ---------- ----------
1994 1993 1994 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales (in thousands) $184,169 $184,050 $372,847 $366,588
Gross margin 20.9% 20.8% 20.9% 20.8%
Selling, administrative
and occupancy expenses 19.8 19.8 19.8 19.8
Interest expense, net .9 .8 .9 .9
----- ----- ----- -----
Income before income taxes .2 .2 .2 .2
Provision for income taxes .1 .1 .1 .1
------ ----- ----- -----
Net income .1% .1% .1% .1%
===== ===== ===== =====
</TABLE>
The net sales increase, during the second quarter and the six months ended
August 27, 1994, over similar periods last year is primarily attributable to
new third-party pharmacy sales and a more effective advertising campaign,
partially offset by a reduction in store count.
The following table lists corporately owned store openings and store closings
for the second quarter ended August 27, 1994 and the similar prior year period.
<TABLE>
<CAPTION>
/.====================================+======================================+================================.\
|| | Three Months Ended | Six Months Ended ||
|| | August 27, August 28, | August 27, August 28, ||
|| | 1994 1993 | 1994 1993 ||
|+------------------------------------+---------------------+----------------+-----------------+--------------+|
|| <S> | <C> | <C> | <C> | <C> ||
|| | | | | ||
|| Number of stores at | | | | ||
|| beginning of period | 131 | 133 | 133 | 132 ||
|+------------------------------------+---------------------+----------------+-----------------+--------------+|
|| | | | | ||
|| | | | | ||
|| Stores Opened | 1 | 3 | 2 | 5 ||
|+------------------------------------+---------------------+----------------+-----------------+--------------+|
|| | | | | ||
|| | | | | ||
|| Stores Closed | (2) | (3) | (5) | (4) ||
|+------------------------------------+---------------------+----------------+-----------------+--------------+|
|| | | | | ||
|| | | | | ||
|| Total stores at end of | | | | ||
|| end of period | 130 | 133 | 130 | 133 ||
\.====================================+======================================+================================./
</TABLE>
7
<PAGE> 8
Gross margin as a percentage of net sales increased slightly during the
second quarter and six months ended as compared to the similar prior year
periods. This increase is due to better buying management, sales mix, and
selectively strengthened product pricing, partially offset by reductions in the
retail price of the most competitive items and increased distribution costs.
Selling, administrative and occupancy expenses have remained constant as a
percentage of sales.
Interest expense has increased as a percentage of sales over the prior year
similar quarter primarily from borrowings made to acquire a franchise on
December 27, 1993 and changes in interest rates.
Inventory Valuation
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 charge throughout the fiscal year, uses an
estimated percentage rate of inflation. The estimated inflation rate used in
the table below was 2% for all periods. This LIFO charge is adjusted at each
year-end based upon the actual weighted average percentage rate of inflation
during the fiscal year.
The table below sets forth the LIFO charge for the second quarter and six
months ended August 27, 1994 and the similar prior year period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 27, August 28, August 27, August 28,
--------------- ---------- ---------- ----------
1994 1993 1994 1993
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
LIFO charge $806 $800 $1,612 $1,620
==== ==== ====== ======
</TABLE>
Liquidity and Capital Resources
The Company signed a new bank credit agreement (Agreement) on January 4,
1994. The Agreement increased the available borrowings and replaced 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.
The Company believes that internally generated funds and borrowings available
under its Agreement are sufficient to finance the Company's current operations.
8
<PAGE> 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of Drug Emporium, Inc.
was held on June 23, 1994. The only items voted on at the
meeting were the election of directors and ratification of
Ernst & Young as the independent auditors. The proxies for
the meeting were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934, there was no solicitation in
opposition to management's nominees and all such nominees were
elected.
<TABLE>
The following persons were elected as directors for a three-year term:
<CAPTION>
Votes Broker
Against Non-
Name Votes For (Withheld) Abstentions Votes
---- --------- ---------- ----------- -----
<S> <C> <C>
Macy T. Block 10,821,805 50,858
John B. Gerlach 10,820,731 51,932
David L. Kriegel 10,821,731 50,932
</TABLE>
<TABLE>
The following summarizes the vote with respect to the independent auditors:
<CAPTION>
Votes Broker
Against Non-
Votes For (Withheld) Abstentions Votes
--------- ---------- ----------- -----
<S> <C> <C>
10,754,993 87,117 20,553
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are included herein:
--Exhibit 11. Computation of earnings per share
(b) No report on Form 8-K was filed during the quarter
ended August 27, 1994.
9
<PAGE> 10
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)
Date September 30, 1994 By /s/ David L. Kriegel
------------------------ -----------------------------------
David L. Kriegel
Chairman
Chief Executive Officer
Date September 30, 1994 By /s/ Timothy S. McCord
------------------------ ------------------------------------
Timothy S. McCord
Chief Financial Officer
10
<PAGE> 1
<TABLE>
DRUG EMPORIUM, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
- Exhibit 11 -
<CAPTION>
Three Months Ended Six Months Ended
August 27, August 28, August 27, August 28,
---------- ---------- ---------- ----------
1994 1993 1994 1993
---- ---- ---- ----
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Primary:
Weighted average number of common
share outstanding 13,169 13,132 13,162 13,124
Net effect of dilutive stock
options -- based on treasury stock
method using estimated average
market price (a) 47 (a) (a)
------ ------ ------ ------
Weighted average common and common
equivalent shares 13,169 13,179 13,162 13,124
====== ====== ====== ======
Net income $228 $186 $496 $337
==== ==== ==== ====
Net income per common and common
equivalent share $0.02 $0.01 $0.04 $0.03
===== ===== ===== =====
Fully Diluted:
Weighted average number of common
shares outstanding 13,169 13,132 13,162 13,124
Net effect of dilutive stock
options -- based on treasury stock
method using an estimated period -
closing market price (a) 47 (a) 16
------ ------ ----- ------
Fully diluted shares 13,169 13,179 13,162 13,140
====== ====== ====== ======
Net income $228 $186 $497 $337
==== ==== ==== ====
Net income per common share
assuming full dilution $0.02 $0.01 $0.04 $0.03
===== ===== ===== =====
<FN>
(a) Excluded since amounts are antidilutive.
</TABLE>
11
