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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
May 28, 1994 OR
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
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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)
Delaware 31-1064888
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 Hidden Ravines Drive, Powell, Ohio 43065
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(Address of principal executive offices) (Zip Code)
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.
Class Outstanding at 05/28/94
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Common Stock, $.10 par value 13,167,585 shares
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<TABLE>
INDEX
DRUG EMPORIUM, INC.
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
- - ------------------------------ --------
<S> <C>
Item 1. Financial Statements (Unaudited)
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
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Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . .. . . . . . . . 9
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 10
- - ----------
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS
- - ---------------------------------------------------
PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 11
---------
</TABLE>
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DRUG EMPORIUM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 28, February 26,
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1994 1994
---- ----
(Unaudited) (Audited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 646 $ 585
Accounts receivable . . . . . . . . . . . . . . . . . . . 9,612 9,455
Inventories . . . . . . . . . . . . . . . . . . . . . . . 142,904 146,569
Income taxes and other . . . . . . . . . . . . . . . . . 3,526 3,407
-------- --------
Total current assets . . . . . . . . . . . . . . . 156,688 160,016
Property and equipment, net . . . . . . . . . . . . . . . . 28,115 29,512
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . 6,579 6,736
Other assets . . . . . . . . . . . . . . . . . . . . . . . 593 626
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . $191,975 $196,890
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line . . . . . . . . . . . . . . . . . . $ 13,280 $ 13,480
Accounts payable . . . . . . . . . . . . . . . . . . . . 33,385 37,375
Other accrued expenses . . . . . . . . . . . . . . . . . 22,450 22,875
Current maturities of long-term debt . . . . . . . . . . 3,977 4,110
-------- --------
Total current liabilities . . . . . . . . . . . . 73,092 77,840
Convertible subordinated debt . . . . . . . . . . . . . . . 50,820 50,805
Long-term debt, other . . . . . . . . . . . . . . . . . . . 16,265 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 13,168,000 at May 28,
1994 and 13,154,000 at February 26, 1,316 1,315
1994 . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . 32,058 32,014
Retained earnings . . . . . . . . . . . . . . . . . . . . 18,424 18,155
-------- --------
Total shareholders' equity . . . . . . . . . . . . 51,798 51,484
-------- --------
Total liabilities and shareholders'
equity . . . . . . . . . . . . . . . . . . . . . $191,975 $196,890
======== ========
</TABLE>
See accompanying notes.
3
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DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
May 28, 1994 May 29, 1993
------------ ------------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $188,678 $182,538
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 149,124 144,619
-------- --------
39,554 37,919
Selling, administrative and occupancy expenses . . . . . . . . . 37,420 36,110
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . 1,686 1,557
-------- --------
Income before income taxes . . . . . . . . . . . . . . . . . . . 448 252
Provision for income taxes . . . . . . . . . . . . . . . . . . . 179 101
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 269 $ 151
======== ========
Net income per share . . . . . . . . . . . . . . . . . . . . . . $.02 $.01
==== ====
Weighted average number of common shares used
in computing net income per share . . . . . . . . . . . . . . . 13,156 13,120
====== ======
</TABLE>
See accompanying notes.
4
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DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
May 28, 1994 May 29, 1993
------------ ------------
(Unaudited)
(In thousands)
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . $ 269 $ 151
Add non-cash charges:
Depreciation and amortization . . . . . . . . . . . 1,796 1,700
Minority interest . . . . . . . . . . . . . . . . . - 80
LIFO provision . . . . . . . . . . . . . . . . . . 806 800
Cash provided by current assets and
liabilities:
Accounts receivable . . . . . . . . . . . . . (157) 2,110
Inventories at current cost . . . . . . . . . 2,859 364
Accounts payable and accrued
expenses . . . . . . . . . . . . . . . . . . (4,415) 7,069
Other . . . . . . . . . . . . . . . . . . . . (86) (652)
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Net cash provided by operating
activities . . . . . . . . . . . . . . . . . . . . 1,072 11,622
Investing activities:
Purchase of property and equipment,
net . . . . . . . . . . . . . . . . . . . . . . . (227) (641)
Financing activities:
Net repayments under revolving credit
line . . . . . . . . . . . . . . . . . . . . . . . (200) (10,300)
Net repayments, other . . . . . . . . . . . . . . . . (629) (678)
Other . . . . . . . . . . . . . . . . . . . . . . . . 45 35
-------- --------
Net cash used for financing activities (784) (10,943)
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Increase in cash and cash equivalents . . . . . . . . . 61 38
Cash and cash equivalents, beginning of period. . . . . 585 465
-------- --------
Cash and cash equivalents, end of
period . . . . . . . . . . . . . . . . . . . . . . . $ 646 $ 503
======== ========
</TABLE>
See accompanying notes.
5
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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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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
May 28, 1994 May 29, 1993
------------ ------------
<S> <C> <C>
Net sales (in thousands) $188,678 $182,538
Gross margin 20.9% 20.8%
Selling, administrative and occupancy expenses 19.8 19.8
Interest expense, net .9 .9
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Income before income taxes .2 .1
Provision for income taxes .1 .0
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Net income .1% .1%
======== ========
</TABLE>
Net sales increased 3.4% for the three months ended May 28, 1994 over the
comparable period in fiscal 1994 inclusive of an increase in comparable store
sales of 2.9%. This increase is due to additional third-party pharmacy plans,
aggressive pharmacy pricing, customer loyalty, and an increased advertising
campaign, partially offset by store closings.
The following table lists store openings and store closings for the first
quarter ended May 28, 1994 and the similar prior year period.
<TABLE>
<CAPTION>
Three Months Ended
May 28, 1994 May 29, 1993
-------------------------------------
<S> <C> <C>
Number of Stores at Beginning of Period 133 132
Stores Opened 1 2
Stores Closed (3) (1)
Total Stores at End of Period 131 133
</TABLE>
Gross margin as a percentage of net sales increased slightly during the
quarter as compared to the similar prior year period. The increased gross
margin 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, increased distribution costs, and
estimated shrink.
Selling, administrative and occupancy expenses have remained constant as a
percentage of sales.
7
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Interest expense has remained constant as a percentage of sales in the quarter
but has increased over the similar period in the prior year. The expense
increase resulted primarily from borrowings made to acquire a franchise on
December 3, 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. 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 first quarter ended May
28, 1994 and the similar prior year period.
<TABLE>
<CAPTION>
Three Months Ended
May 28, 1994 May 29, 1993
------------ ------------
(In thousands)
<S> <C> <C>
LIFO charge $806 $800
==== ====
Estimated inflation 2% 2%
== ==
</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
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PART II - OTHER INFORMATION
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 May 28, 1994.
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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.
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(Registrant)
Date June 30, 1994 By /s/ David L. Kriegel
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David L. Kriegel
Chairman
Chief Executive Officer
Date June 30, 1994 By /s/ Timothy S. McCord
-------------------------
Timothy S. McCord
Chief Financial Officer
10
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DRUG EMPORIUM, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
- Exhibit 11 -
<TABLE>
<CAPTION>
Three Months Ended
May 28, 1994 May 29, 1993
------------ ------------
(Unaudited)
<S> <C> <C>
Primary:
Weighted average number of common
shares outstanding 13,155,948 13,119,890
Net effect of dilutive stock
options -- based on treasury
stock method using estimated
average market price (a) (a)
---------- ----------
Weighted average common and common
equivalent shares 13,155,948 13,119,890
Net income $269,000 $151,000
======== ========
Net income per common and common
equivalent share $0.02 $0.01
===== =====
Fully Diluted:
Weighted average number of common
shares outstanding 13,155,948 13,119,890
Net effect of dilutive stock
options -- based on treasury
stock method using an
estimated period - closing
market price (a) (a)
---------- ----------
Fully diluted shares 13,155,948 13,119,890
========== ==========
Net income $269,000 $151,000
======== ========
Net income per common share
assuming full dilution $0.02 $0.01
===== =====
(a) Excluded since amounts are antidilutive.
</TABLE>
11
