<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 26, 1995 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 8/26/95
- ---------------------------- --------------------
Common Stock, $.10 par value 13,182,585 shares
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<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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 Holders . . . . . . . . . . . . . . . . . . . . . . . 9
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
DRUG EMPORIUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 26, February 25,
---------- ------------
1995 1995
---- ----
(Unaudited) (Audited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 574 $ 1,722
Accounts receivable . . . . . . . . . . . . . . . . . . 12,939 10,368
Inventories . . . . . . . . . . . . . . . . . . . . . . 136,943 128,125
Income taxes and other . . . . . . . . . . . . . . . . . 4,680 6,006
-------- --------
Total current assets . . . . . . . . . . . . . . . 155,136 146,221
Property and equipment, net . . . . . . . . . . . . . . . . 21,063 22,824
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . 5,610 5,908
Other assets . . . . . . . . . . . . . . . . . . . . . . . 2,774 1,491
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . $184,583 $176,444
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line . . . . . . . . . . . . . . . . . $ 15,900 $ -
Accounts payable . . . . . . . . . . . . . . . . . . . . 38,122 38,438
Other current liabilities . . . . . . . . . . . . . . . 27,135 22,795
Current maturities of long-term debt . . . . . . . . . . 1,368 5,086
-------- --------
Total current liabilities . . . . . . . . . . . . 82,525 66,319
Convertible subordinated debt . . . . . . . . . . . . . . . 52,000 52,000
Long-term debt, other . . . . . . . . . . . . . . . . . . . 2,906 11,976
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 13,183,000 at August
26, 1995 and 13,171,000 at February 25,
1995 . . . . . . . . . . . . . . . . . . . . . . . . . 1,318 1,317
Additional paid-in capital . . . . . . . . . . . . . . . 32,115 32,068
Retained earnings . . . . . . . . . . . . . . . . . . . 13,719 12,764
-------- --------
Total shareholders' equity . . . . . . . . . . . . 47,152 46,149
-------- --------
Total liabilities and shareholders'
equity . . . . . . . . . . . . . . . . . . . . . $184,583 $176,444
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 26, August 27, August 26, August 27,
1995 1994 1995 1994
--------------------------- --------------------------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $167,794 $184,169 $332,885 $372,847
Cost of sales . . . . . . . . . . . . . . . 131,457 146,018 261,490 295,289
-------- -------- --------- ---------
36,337 38,151 71,395 77,558
Selling, administrative and
occupancy expenses . . . . . . . . . . . . 34,179 36,123 67,042 73,396
Interest expense, net . . . . . . . . . . . 1,380 1,654 2,760 3,340
-------- -------- --------- ---------
Income before income taxes . . . . . . . . 778 374 1,593 822
Provision for income taxes . . . . . . . . 312 146 638 325
-------- -------- --------- ---------
Net income . . . . . . . . . . . . . . . . $ 466 $ 228 $ 955 $ 497
======== ======== ======== ========
Net income per share . . . . . . . . . . . $.03 $.02 $.07 $.04
==== ==== ==== ====
Weighted average number of common shares
used in computing net income per share . .
13,183 13,169 13,181 13,162
====== ====== ======= =======
</TABLE>
See accompanying notes.
4
<PAGE> 5
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
August 26, 1995 August 27, 1994
--------------- ---------------
(Unaudited)
(In thousands)
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 955 $ 497
Add non-cash charges:
Depreciation and amortization . . . . . . . . . . . . 4,069 3,527
LIFO provision . . . . . . . . . . . . . . . . . . . 1,502 1,612
Cash provided by (used for) current assets and
liabilities:
Accounts receivable . . . . . . . . . . . . . . (2,415) (1,816)
Inventories at current cost . . . . . . . . . . (3,432) (6,979)
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . . . . 1,621 4,202
Other . . . . . . . . . . . . . . . . . . . . . (649) 182
-------- --------
Net cash provided by operating
activities . . . . . . . . . . . . . . . . . . . . . 1,651 1,225
Investing activities:
Purchase of property and equipment, (1,257)
net . . . . . . . . . . . . . . . . . . . . . . . . (1,405)
Payment for purchase of retail stores,
net of cash acquired . . . . . . . . . . . . . . . . (2,766) -
-------- --------
Net cash used for investing activities (4,171) (1,257)
Financing activities:
Net borrowings (repayments) under
revolving credit line . . . . . . . . . . . . . . . 15,640 1,800
Net repayments, other . . . . . . . . . . . . . . . . . (14,316) (1,575)
Other . . . . . . . . . . . . . . . . . . . . . . . . . 48 55
-------- --------
Net cash used for financing activities . . . . . . . . 1,372 280
-------- --------
Change in cash . . . . . . . . . . . . . . . . . . . . . (1,148) 248
Cash, beginning of period . . . . . . . . . . . . . . . . 1,722 585
-------- --------
Cash, end of period . . . . . . . . . . . . . . . . . . . $ 574 $ 833
======== ========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In addition to the payment for purchase of retail stores noted above, the
Company entered into a note payable agreement for $1.4 million as a component
of one of the acquisitions.
See accompanying notes.
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 25, 1995
(File No. 0-16998) for additional disclosures including a summary of
the Company's accounting policies, which have not significantly
changed.
4. During the six months ended August 26, 1995, the Company acquired six
stores in three separate transactions. These acquisitions were
accounted for as purchases. Proforma results have not been presented
since these acquisitions were not significant.
The consolidated statements of operations reflect the results of
operations of the acquired enterprises since the dates acquired.
6
<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
statements of operations expressed as a percentage of net sales for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 26, August 27, August 26, August 27,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales (in thousands) . . . . . . . . . . . $167,794 $184,169 $332,885 $372,847
Gross margin . . . . . . . . . . . . . . . . . 21.7% 20.7% 21.4% 20.8%
Selling, administrative and occupancy expenses 20.4 19.6 20.1 19.6
1.3% 1.1% 1.3% 1.2%
</TABLE>
For the quarter, average sales per store increased by four percent over the
prior year, however, total net sales decreased as a result of operating sixteen
fewer stores and a one percent decline in comparable store sales.
The following table lists corporately-owned store openings and store closings
through the second quarter ended August 26, 1995 and the similar prior year
period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 26, August 27, August 26, August 27,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Number of stores at
beginning of period . . . . . . . . . . . . . 115 131 113 133
Stores opened or acquired . . . . . . . . . . . 2 1 8 2
Stores closed or sold . . . . . . . . . . . . . (3) (2) (7) (5)
Total stores at end of
period . . . . . . . . . . . . . . . . . . . 114 130 114 130
</TABLE>
Gross margin as a percentage of sales increased one percent during the second
quarter over Fiscal 1995. This increase resulted from better shrink control, an
emphasis on lower product costs, selectively strengthened product pricing and
better category management, partially offset by reductions in the retail price
of most competitive items.
Selling, administrative and occupancy expenses decreased in the second
quarter of Fiscal 1996 compared to the similar prior year period in total
dollars but increased slightly as a percentage of sales. The reduction in cost
primarily resulted from the closure of underperforming stores, partially offset
by
7
<PAGE> 8
increased pressure on these costs resulting from the investments in scanning
and shrink control, which includes equipment lease costs, the impact of the
rollout on labor productivity, and training costs.
Interest expense has decreased over the prior year similar quarter primarily
from the payoff of the term debt in conjunction with a more favorable interest
rate, partially offset by the increased prime rate.
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 cost.
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 first quarter ended
August 27, 1995 and the similar prior year period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 26, August 27, August 26, August 27,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
LIFO charge (in thousands). . . . . . . . . . . $751 $806 $1,502 $1,612
==== ==== ====== ======
</TABLE>
Liquidity and Capital Resources
In April 1995, the Company completed negotiations to improve its bank credit
agreement (Agreement) to allow for more flexibility in managing cash flow. On
May 12, 1995, an amendment to the Agreement became effective which included
paying off the term debt under the Agreement, increasing the allowable
borrowings under the revolving credit line to $45,000,000, depending on
available collateral and extending the term of the Agreement to April 30, 1998.
The Company had $29,100,000 of available unused credit line at August 26, 1995.
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 15, 1995. The only items voted on at the meeting were the election of
directors and ratification of Ernst & Young LLP as the independent auditors.
The proxies for the meeting were solicited pursuant to Regulation 14 under the
Securities Act of 1934, there was no solicitation in opposition to management's
nominees and all such nominees were elected.
The following persons were elected as directors for a three-year term:
Votes Broker
Name Votes For Withheld Non-Votes
---- --------- -------- ---------
Robert S. Needer, Sr. 11,103,502 80,720
William L. Sweet, Jr. 11,111,908 72,314
The following summarizes the vote with respect to the independent auditors:
Broker
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
11,135,674 33,377 15,171
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibits are included herein:
--Exhibit 11. Computation of earnings per share
--Exhibit 27. Financial Data Schedule
(b) No report on Form 8-K was filed during the quarter ended
August 26, 1995.
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 October 10, 1995 By /s/ David L. Kriegel
--------------------------- --------------------------------
David L. Kriegel
Chairman
Chief Executive Officer
Date October 10, 1995 By /s/ Timothy S. McCord
--------------------------- --------------------------------
Timothy S. McCord
Chief Financial Officer
10
<PAGE> 1
DRUG EMPORIUM, INC.
COMPUTATION OF EARNINGS PER
SHARE
- Exhibit 11 -
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 26, August 27, August 26, August 27,
1995 1994 1995 1994
---------- ---------- ---------- ---------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Primary:
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . . 13,183 13,169 13,181 13,162
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 . . . . . . . . . . . . . . . . . . . 13,183 13,169 13,181 13,162
====== ====== ====== ======
Net income . . . . . . . . . . . . . . . . $466 $228 $955 $497
==== ==== ==== ====
Net income per common and common equivalent
share . . . . . . . . . . . . . . . . . . . $0.03 $0.02 $0.07 $0.04
===== ===== ===== =====
Fully Diluted:
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . . 13,183 13,169 13,181 13,162
Net effect of dilutive stock options -- based
on treasury stock method using closing market
price . . . . . . . . . . . . . . . . . . . (a) (a) (a) (a)
------ ------ ------ ------
Fully diluted shares . . . . . . . . . . . . 13,183 13,169 13,181 13,162
====== ====== ====== ======
Net income . . . . . . . . . . . . . . . . $466 $228 $955 $497
==== ==== ==== ====
Net income per common share assuming full
dilution . . . . . . . . . . . . . . . . . . $0.03 $0.02 $0.07 $0.04
===== ===== ===== =====
<FN>
(a) Excluded as amounts are antidilutive.
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-02-1996
<PERIOD-START> FEB-26-1995
<PERIOD-END> AUG-26-1995
<CASH> 574
<SECURITIES> 0
<RECEIVABLES> 12,939
<ALLOWANCES> 0
<INVENTORY> 136,943
<CURRENT-ASSETS> 155,136
<PP&E> 50,521
<DEPRECIATION> (29,458)
<TOTAL-ASSETS> 184,583
<CURRENT-LIABILITIES> 82,525
<BONDS> 54,906
<COMMON> 1,318
0
0
<OTHER-SE> 45,834
<TOTAL-LIABILITY-AND-EQUITY> 184,583
<SALES> 332,885
<TOTAL-REVENUES> 332,885
<CGS> 261,490
<TOTAL-COSTS> 328,532
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,760
<INCOME-PRETAX> 1,593
<INCOME-TAX> 638
<INCOME-CONTINUING> 955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 955
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
