<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
May 27, 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
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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
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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 5/27/95
- ---------------------------- -----------------
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
</TABLE>
<TABLE>
<CAPTION>
PART II. OTHER INFORMATION
- ---------------------------
<S> <C> <C>
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
- ----------
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS
- ---------------------------------------------------
PER SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
---------
Exhibit 27 - FINANCIAL DATA SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
</TABLE>
<PAGE> 3
DRUG EMPORIUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 27, February 25,
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1995 1995
---- ----
(Unaudited) (Audited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 663 $ 1,722
Accounts receivable . . . . . . . . . . . . . . . . . . 11,578 10,368
Inventories . . . . . . . . . . . . . . . . . . . . . . 133,152 128,125
Income taxes and other . . . . . . . . . . . . . . . . . 6,394 6,006
-------- --------
Total current assets . . . . . . . . . . . . . . . 151,787 146,221
Property and equipment, net . . . . . . . . . . . . . . . . 22,079 22,824
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . 5,759 5,908
Other assets . . . . . . . . . . . . . . . . . . . . . . . 1,694 1,491
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . $181,319 $176,444
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line . . . . . . . . . . . . . . . . . $ 6,400 $ -
Accounts payable . . . . . . . . . . . . . . . . . . . . 44,032 38,438
Other current liabilities . . . . . . . . . . . . . . . 27,559 22,795
Current maturities of long-term debt . . . . . . . . . . 1,514 5,086
-------- --------
Total current liabilities . . . . . . . . . . . . 79,505 66,319
Convertible subordinated debt . . . . . . . . . . . . . . . 52,000 52,000
Long-term debt, other . . . . . . . . . . . . . . . . . . . 3,128 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 May 27,
1995 and 13,171,000 at February 25,
1995 . . . . . . . . . . . . . . . . . . . . . . . . . 1,318 1,317
Additional paid-in capital . . . . . . . . . . . . . . . 32,115 32,068
Retained earnings . . . . . . . . . . . . . . . . . . . 13,253 12,764
-------- --------
Total shareholders' equity . . . . . . . . . . . . 46,686 46,149
-------- --------
Total liabilities and shareholders'
equity . . . . . . . . . . . . . . . . . . . . . $181,319 $176,444
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
May 27, 1995 May 28, 1994
------------ ------------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $165,091 $188,678
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 129,877 149,260
-------- --------
35,214 39,418
Selling, administrative and
occupancy expenses . . . . . . . . . . . . . . . . . . . . 33,019 37,284
Interest expense, net . . . . . . . . . . . . . . . . . . . 1,380 1,686
-------- --------
Income before income taxes . . . . . . . . . . . . . . . . 815 448
Provision for income taxes . . . . . . . . . . . . . . . . 326 179
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 489 $ 269
======== ========
Net income per share . . . . . . . . . . . . . . . . . . . $.04 $.02
==== ====
Weighted average number of common shares used in computing
net income per share . . . . . . . . . . . . . . . . . . . 13,166 13,156
====== ======
</TABLE>
See accompanying notes.
4
<PAGE> 5
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
May 27, 1995 May 28, 1994
------------ ------------
(Unaudited)
(In thousands)
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 489 $ 269
Add non-cash charges:
Depreciation and amortization . . . . . . . . . . . . 2,201 1,796
LIFO provision . . . . . . . . . . . . . . . . . . . 751 806
Cash provided by current assets and
liabilities:
Accounts receivable . . . . . . . . . . . . . . (835) (157)
Inventories at current cost . . . . . . . . . . (424) 2,859
Accounts payable and other current
liabilities . . . . . . . . . . . . . . . . . . 8,081 (4,415)
Other . . . . . . . . . . . . . . . . . . . . . . (1,092) (86)
-------- --------
Net cash provided by operating
activities . . . . . . . . . . . . . . . . . . . . . 9,171 1,072
Investing activities:
Purchase of property and equipment,
net . . . . . . . . . . . . . . . . . . . . . . . . (770) (227)
Payment for purchase of franchisee, net
of cash acquired . . . . . . . . . . . . . . . . . . (1,700) -
-------- --------
Net cash used for investing activities . . . . . . . . (2,470) (227)
Financing activities:
Net borrowings (repayments) under
revolving credit line . . . . . . . . . . . . . . . . 6,140 (200)
Net repayments, other . . . . . . . . . . . . . . . . . (13,948) (629)
Other . . . . . . . . . . . . . . . . . . . . . . . . . 48 45
-------- --------
Net cash used for financing activities . . . . . . . . (7,760) (784)
-------- --------
Change in cash . . . . . . . . . . . . . . . . . . . . . (1,059) 61
Cash, beginning of period . . . . . . . . . . . . . . . . 1,722 585
-------- --------
Cash, end of period . . . . . . . . . . . . . . . . . . . $ 663 $ 646
======== ========
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities
- --------------------------------------------------------------------
The Company purchased the net assets of a franchisee for $3,136,000. In
addition to the payment of $1,700,000, a note payable was incurred in the amount
of $1,436,000.
This acquisition was accounted for as a purchase. Proforma results have not been
presented for this acquisition since amounts were not significant.
The consolidated statements of operations reflect only the May 1995 results of
this acquired enterprise.
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. The Company is operating under a bank credit agreement as amended
(Agreement) dated May 12, 1995. The Agreement allows for a revolving
credit line (Revolver) of up to $45,000,000, depending on available
collateral. The Revolver expires on April 30, 1998. The interest
rate on the Revolver floated at the bank's prime rate (9% at May 27,
1995) during the first quarter of Fiscal 1996. The Agreement requires
a commitment fee (.25% on the first $20,000,000 and .375% on the last
$25,000,000) and has no compensating balance requirements.
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 Statement of Operations expressed as a percentage of net sales for
the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
May 27, 1995 May 28, 1994
------------- -------------
<S> <C> <C>
Net sales (in thousands) . . . . . . . . . . . . . . $165,091 $188,678
Gross Margin . . . . . . . . . . . . . . . . . . . 21.3% 20.8%
Selling, administrative and
occupancy expenses . . . . . . . . . . . . . . . . 20.0 19.7
------- ------
1.3% 1.1%
</TABLE>
Net sales decreased 12.5% for the three months ended May 27, 1995 over the
similar period last year, attributable to the closing of unprofitable stores in
the third and fourth quarters of Fiscal 1995 and a decrease of 2% in comparable
store sales.
The following table lists corporately-owned store openings and store closings
for the first quarter ended May 27, 1995 and the similar prior year period.
<TABLE>
<CAPTION>
Three Months Ended
May 27, 1995 May 28, 1994
------------ ------------
<S> <C> <C>
Number of stores at
beginning of period . . . . . . . . . . . 113 133
Stores opened or acquired . . . . . . . . . 6 1
Stores closed or sold . . . . . . . . . . . (4) (3)
---- ----
Total stores at end of
period . . . . . . . . . . . . . . . . . 115 131
</TABLE>
Gross margin as a percentage of sales increased .5% during the first quarter
over Fiscal 1995. This increase resulted from 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
and downward pressure on pharmacy margins as sales through managed care
networks have increased as a percentage of pharmacy sales.
Selling, administrative and occupancy expenses decreased in the first 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
increased pressure on these costs resulting from the investment in scanning,
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.
7
<PAGE> 8
The table below sets forth the LIFO charge for the first quarter ended May
27, 1995 and the similar prior year period.
<TABLE>
<CAPTION>
Three Months Ended
May 27, 1995 May 28, 1994
------------ ------------
(In thousands)
<S> <C> <C>
LIFO charge . . . . . . . . . . . . . . . . . $751 $806
==== ====
</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 $38,600,000 of available unused credit line at May 27, 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 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 May
27, 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 July 11, 1995 By /s/ David L. Kriegel
------------- ------------------------
David L. Kriegel
Chairman
Chief Executive Officer
Date July 11, 1995 By /s/ Timothy S. McCord
------------- -------------------------
Timothy S. McCord
Chief Financial Officer
10
<PAGE> 1
DRUG EMPORIUM, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
- Exhibit 11 -
<TABLE>
<CAPTION>
Three Months Ended
May 27, 1995 May 28, 1994
------------- ------------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C>
Primary:
Weighted average number of common shares outstanding . . . . . . . . 13,166 13,156
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 . . . . . . . . . 13,166 13,156
====== ======
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $489 $269
==== ====
Net income per common and common equivalent share . . . . . . . . . . $.04 $.02
==== ====
Fully Diluted:
Weighted average number of common shares outstanding . . . . . . . . 13,166 13,156
Net effect of dilutive stock options -- based on treasury stock method
using closing market price . . . . . . . . . . . . . . . . . . . . . . (a) (a)
------ ------
Fully diluted shares . . . . . . . . . . . . . . . . . . . . . . . . . 13,166 13,156
====== ======
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $489 $269
==== ====
Net income per common share assuming full dilution . . . . . . . . . $.04 $.02
==== ====
</TABLE>
(a) Excluded as amounts are antidilutive.
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-2-1996
<PERIOD-START> FEB-26-1995
<PERIOD-END> MAY-27-1995
<CASH> 663
<SECURITIES> 0
<RECEIVABLES> 11,578
<ALLOWANCES> 0
<INVENTORY> 133,152
<CURRENT-ASSETS> 13,847
<PP&E> 51,334
<DEPRECIATION> (29,255)
<TOTAL-ASSETS> 181,319
<CURRENT-LIABILITIES> 77,991
<BONDS> 56,642
<COMMON> 1,318
0
0
<OTHER-SE> 45,368
<TOTAL-LIABILITY-AND-EQUITY> 181,319
<SALES> 165,091
<TOTAL-REVENUES> 165,091
<CGS> 129,877
<TOTAL-COSTS> 129,877
<OTHER-EXPENSES> 33,019
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,380
<INCOME-PRETAX> 815
<INCOME-TAX> 326
<INCOME-CONTINUING> 489
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 489
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
