<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 26, 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
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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 11/26/94
- ---------------------------- ------------------
Common Stock, $.10 par value 13,170,585 shares
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<PAGE> 2
<TABLE>
INDEX
DRUG EMPORIUM, INC.
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
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 . . .. . . . . . 7-9
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . .. . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 11
- ----------
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS
- ---------------------------------------------------
PER SHARE . . . . . . . . . . . . . . . . . . . . .. . . . . . . 12
---------
EXHIBIT 27 - FINANCIAL DATA SCHEDULE . . . . . . . . . . . . . .. . . . . . . 13
- ------------------------------------
</TABLE>
2
<PAGE> 3
<TABLE>
DRUG EMPORIUM, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
November 26, February 26,
------------ ------------
1994 1994
---- ----
(Unaudited) (Audited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 482 $ 585
Accounts receivable . . . . . . . . . . . . . . . . . . 11,683 9,455
Inventories . . . . . . . . . . . . . . . . . . . . . . 157,889 146,569
Income taxes and other . . . . . . . . . . . . . . . . . 7,965 3,407
-------- --------
Total current assets . . . . . . . . . . . . . . . 178,019 160,016
Property and equipment, net . . . . . . . . . . . . . . . . 26,433 29,512
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . 6,058 6,736
Other assets . . . . . . . . . . . . . . . . . . . . . . . 481 626
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . $210,991 $196,890
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line . . . . . . . . . . . . . . . . . $ 16,280 $ 13,480
Accounts payable . . . . . . . . . . . . . . . . . . . . 53,134 37,375
Accrued expenses . . . . . . . . . . . . . . . . . . . . 28,596 22,875
Current maturities of long-term debt . . . . . . . . . . 4,120 4,110
-------- --------
Total current liabilities . . . . . . . . . . . . 102,130 77,840
Convertible subordinated debt . . . . . . . . . . . . . . . 50,848 50,805
Long-term debt, other . . . . . . . . . . . . . . . . . . . 13,870 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 November 26,
1994 and 13,154,000 at February 26, 1994 1,317 1,315
Additional paid-in capital . . . . . . . . . . . . . . . 32,067 32,014
Retained earnings . . . . . . . . . . . . . . . . . . . 10,759 18,155
-------- --------
Total shareholders' equity . . . . . . . . . . . . 44,143 51,484
-------- --------
Total liabilities and shareholders'
equity . . . . . . . . . . . . . . . . . . . . . $210,991 $196,890
======== ========
<FN>
See accompanying notes.
</TABLE>
3
<PAGE> 4
<TABLE>
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Nine Months Ended
November 26, November 27, November 26, November 27,
------------ ------------ ------------ ------------
1994 1993 1994 1993
---- ---- ---- ----
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . $176,343 $180,209 $549,190 $546,797
Cost of sales . . . . . . . . . . . . . . . 139,087 141,997 433,871 432,386
-------- -------- -------- --------
37,256 38,212 115,319 114,411
Selling, administrative and
occupancy expenses . . . . . . . . . . . . 35,674 36,569 109,575 109,090
Store closure provision . . . . . . . . . . 11,850 - 11,850 -
Interest expense, net . . . . . . . . . . . 1,824 1,495 5,165 4,611
-------- -------- -------- --------
Income (loss) before income taxes . . . . . (12,092) 148 (11,271) 710
Provision (benefit) for income taxes . . . (4,200) 59 (3,875) 284
------- -------- ------- --------
Net income (loss) . . . . . . . . . . . . . $(7,892) $ 89 $(7,396) $ 426
======= ======== ======= ========
Net income (loss) per share . . . . . . . . $(.60) $.01 $.(56) $.03
===== ==== ===== ====
Weighted average number of common shares
used in computing net income (loss) per
share . . . . . . . . . . . . . . . . . . . 13,171 13,131 13,165 13,127
====== ====== ====== ======
<FN>
See accompanying notes.
</TABLE>
4
<PAGE> 5
<TABLE>
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended
November 26, 1994 November 27, 1993
----------------- -----------------
(Unaudited)
(In thousands)
<S> <C> <C>
Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . $ (7,396) $ 426
Add non-cash charges:
Depreciation and amortization . . . . . . . . . . . 5,398 5,133
Minority interest . . . . . . . . . . . . . . . . . - 272
LIFO provision . . . . . . . . . . . . . . . . . . 2,418 2,400
Store closure provision . . . . . . . . . . . . . . 11,850 -
Cash provided by current assets and
liabilities:
Accounts receivable . . . . . . . . . . . . . (2,228) (2,911)
Inventories at current cost . . . . . . . . . (13,738) (6,779)
Accounts payable and accrued
expenses . . . . . . . . . . . . . . . . . . 10,383 8,082
Other . . . . . . . . . . . . . . . . . . . . (4,345) (881)
-------- --------
Net cash provided by operating
activities . . . . . . . . . . . . . . . . . . . . 2,342 5,742
Investing activities:
Purchase of property and equipment,
net . . . . . . . . . . . . . . . . . . . . . . . (2,419) (2,723)
Financing activities:
Net borrowings (repayments) under
revolving credit line . . . . . . . . . . . . . . 2,800 (1,620)
Net repayments, other . . . . . . . . . . . . . . . . (2,881) (1,656)
Other . . . . . . . . . . . . . . . . . . . . . . . . 55 64
-------- --------
Net cash used for financing activities . . . . . . . (26) (3,212)
-------- --------
Change in cash . . . . . . . . . . . . . . . . . . . . (103) (193)
Cash, beginning of period . . . . . . . . . . . . . . . 585 723
-------- --------
Cash, end of period . . . . . . . . . . . . . . . . . . $ 482 $ 530
======== ========
<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
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
In January 1993 the Company developed and began executing a plan to improve
the operating results of the stores. As a result of these efforts the Company
reported seven consecutive profitable quarters. The profitable results were
achieved despite continued and consistent losses from the stores in the
Washington, D.C. market. Because the stores in the Washington, D.C. market did
not sufficiently respond to turnaround efforts and in order to free up capital
for investment in better performing markets, the Company sold seven stores in
the Washington, D.C. market and announced the closing of fourteen additional
stores. The cost associated with the 21 stores resulted in a pretax charge of
$11,850,000 recorded in November 1994. Of the $11,850,000 charge, $6,500,000
is expected to require cash outlays for rent, broker fees and other costs
associated with the leased properties. The remaining $5,350,000 primarily
results from write-downs of assets including leasehold improvements, goodwill
and discounts on liquidated inventories. The cash outlays required by the
charge are expected to be funded by the proceeds of the sale of assets in the
21 stores.
Proforma net income - assuming the 21 stores had been closed at the beginning
of the year - for the nine months was $2,717,000 or 21 cents per share,
compared with net income of $426,000 or three cents per share for the similar
period of the prior year. For the quarter the proforma net income was $724,000
or five cents per share, compared with the prior year reported net income for
the same period of $89,000 or one cent per share.
<TABLE>
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 Nine Months Ended
--------------------------------- --------------------------------
November 27 November 27
November 26, 1994 1993 November 26, 1994 1993
--------------------- ---------- --------------------- ----------
Proforma* Reported Reported Proforma* Reported Reported
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales (in thousands) . . $155,575 $176,343 $180,209 $482,352 $549,190 $546,797
Gross margin . . . . . . . . 21.1% 21.1 % 21.2% 21.0% 21.0 % 20.9%
Selling, administrative
and occupancy expenses . . 19.4 20.2 20.3 19.3 19.9 20.0
Interest expense, net . . . . .9 1.0 .8 .8 .9 .8
Store closing expense . . . . .- 6.7 .- .- 2.2 .-
-------- -------- -------- -------- -------- --------
Income before income
taxes . . . . . . . . . . .8 (6.8) .1 .9 (2.0) .1
Provision for income
taxes . . . . . . . . . . .3 (2.4) .- .4 (.7) .-
-------- -------- -------- -------- -------- --------
Net income . . . . . . . . . .5% (4.4)% .1% .5% (1.3)% .1%
======== ======== ======== ======== ======== ========
<FN>
*Proforma assumes sold and closed stores had been disposed of prior to the
beginning of the 1995 fiscal year.
</TABLE>
7
<PAGE> 8
The net sales decrease during the third quarter and the nine months ended
November 26, 1994 over similar periods last year is attributable to the
reduction in the number of stores in operation. Same store sales have
increased 1% for the nine months and are flat for the quarter.
The following table lists corporately-owned store openings and store closings
for the third quarter and year-to-date periods ended November 26, 1994 and the
similar prior year periods.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 26, November 27, November 26, November 27,
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Number of stores at
beginning of period ................ 130 133 133 132
Stores opened ........................ - 2 2 7
Stores closed or sold ................ (7) (1) (12) (5)
Total stores at end of period ....... 123 134 123 134
</TABLE>
Proforma selling, administrative and occupancy expenses decreased over the
reported amounts as a result of the closing stores not having sufficient net
sales to adequately cover direct operating costs.
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 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 second quarter and nine
months ended November 26, 1994 and the similar prior year period.
8
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 26 November 27 November 26 November 27
1994 1993 1994 1993
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
LIFO charge $806 $780 $2,418 $2,400
==== ==== ====== ======
</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.
9
<PAGE> 10
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) The Company filed a Form 8-K dated November 11, 1994 to report
under Item 5, "Other Events," the disposition of assets in the
Washington D.C. market. The Form 8-K contained statements of
operations and proforma statements for the six months ended August 27,
1994.
10
<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)
Date January 6, 1995 By /s/ David L. Kriegel
------------------------ ----------------------------
David L. Kriegel
Chairman
Chief Executive Officer
Date January 6, 1995 By /s/ Timothy S. McCord
------------------------ -----------------------------
Timothy S. McCord
Chief Financial Officer
11
<PAGE> 1
<TABLE>
DRUG EMPORIUM, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
- Exhibit 11 -
<CAPTION>
Three Months Ended Nine Months Ended
November 26, November 27, November 26, November 27,
1994 1993 1994 1993
---- ---- ---- ----
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Primary:
Weighted average number of common
shares outstanding 13,171 13,131 13,165 13,127
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 13,171 13,131 13,165 13,127
====== ====== ====== ======
Net income (loss) $(7,892) $89 $(7,396) $426
======= === ======= ====
Net income (loss) per common and
common equivalent share $(0.60) $0.01 $(0.56) $0.03
====== ===== ====== =====
Fully Diluted:
Weighted average number of common
shares outstanding 13,171 13,131 13,165 13,127
Net effect of dilutive stock
options -- based on treasury
stock method using closing market
price (a) (a) (a) (a)
------ ------ ------ ------
Fully diluted shares 13,171 13,131 13,165 13,127
====== ====== ====== ======
Net income (loss) $(7,892) $89 $(7,396) $426
======= === ======= ====
Net income (loss) per common
share assuming full dilution $(0.60) $0.01 $(0.56) $0.03
====== ===== ====== =====
<FN>
(a) Excluded as amounts are antidilutive.
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-25-1995
<PERIOD-START> FEB-27-1994
<PERIOD-END> NOV-26-1994
<CASH> 482
<SECURITIES> 0
<RECEIVABLES> 11,683
<ALLOWANCES> 0
<INVENTORY> 157,889
<CURRENT-ASSETS> 178,019
<PP&E> 56,319
<DEPRECIATION> 29,886
<TOTAL-ASSETS> 210,991
<CURRENT-LIABILITIES> 102,130
<BONDS> 64,718
<COMMON> 1,317
0
0
<OTHER-SE> 42,826
<TOTAL-LIABILITY-AND-EQUITY> 210,991
<SALES> 549,190
<TOTAL-REVENUES> 549,190
<CGS> 433,871
<TOTAL-COSTS> 543,446
<OTHER-EXPENSES> 11,850<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,165
<INCOME-PRETAX> (11,271)
<INCOME-TAX> (3,875)
<INCOME-CONTINUING> (7,396)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,396)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
<FN>
<F1> Store closure provision: The quarter includes a provision of $11.8
million to sell or close 21 unprofitable stores.
</FN>
</TABLE>
