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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
June 1, 1996 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
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
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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 06/01/96
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Common Stock, $.10 par value 13,184,085 shares
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1
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INDEX
DRUG EMPORIUM, INC.
PART I. FINANCIAL INFORMATION Page No.
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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
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Item 6. Exhibits and Reports on Form 8-K......................9
SIGNATURES........................................................10
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EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS
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PER SHARE................................................
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EXHIBIT 27 - FINANCIAL DATA SCHEDULE......................
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2
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DRUG EMPORIUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 1, 1996 March 2, 1996
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(Unaudited) (Audited)
(In thousands)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents...................................... $ 838 $ 767
Accounts receivable............................................ 14,403 13,018
Inventories.................................................... 188,501 188,498
Income taxes and other......................................... 5,761 5,874
-------- --------
Total current assets..................................... 209,503 208,157
Property and equipment, net....................................... 32,040 28,793
Goodwill.......................................................... 5,162 5,311
Other assets...................................................... 1,992 1,637
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Total assets............................................. $248,697 $243,898
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line.......................................... $ 28,300 $ 21,500
Accounts payable............................................... 72,904 69,143
Accrued liabilities............................................ 14,113 17,345
Deferred income................................................ 8,047 9,183
Accrued store closure.......................................... 5,962 6,182
Current maturities of long-term debt........................... 3,588 4,609
-------- --------
Total current liabilities................................ 132,914 127,962
Deferred rent.................................................. 4,232 4,107
Convertible subordinated debt.................................. 49,421 49,421
Long-term debt, other.......................................... 13,084 13,863
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 13,184,085 at June 1,
1996 and 13,184,085 at March 2, 1996......................... 1,318 1,318
Additional paid-in capital..................................... 32,121 32,121
Retained earnings.............................................. 15,607 15,106
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Total shareholders' equity............................... 49,046 48,545
-------- --------
Total liabilities and shareholders'
equity................................................. $248,697 $243,898
======== ========
</TABLE>
3
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DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
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JUNE 1, 1996 MAY 27, 1995
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(Unaudited)
(IN THOUSANDS,
EXCEPT PER-SHARE DATA)
<S> <C> <C>
Net sales............................................ $206,743 $165,091
Cost of sales........................................ 163,215 130,034
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43,528 35,057
Selling, administrative and occupancy expenses....... 40,799 32,862
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Operating income before store closure expense........ 2,729 2,195
Interest expense, net................................ 1,894 1,380
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Income before provision for income taxes............. 835 815
Provision for income taxes........................... 334 326
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Net income .......................................... $ 501 $ 489
======== ========
Net income per share................................. $.04 $.04
==== ====
Weighted average number of common shares used
in computing net income per share................. 13,184 13,166
====== ======
</TABLE>
4
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DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
JUNE 1, 1996 MAY 27, 1995
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(Unaudited)
(IN THOUSANDS)
Operating activities:
<S> <C> <C>
Net income ..................................... $ 501 $ 489
Adjustments to reconcile to cash
provided by (used for) operations:
Depreciation and amortization................. 1,912 2,201
LIFO provision................................ 845 751
Cash provided by current assets and liabilities:
Accounts payable and accrued liabilities (3,138) 8,081
Accounts receivable........................... (1,385) (835)
Inventories at current cost................... 6,413 (424)
Other......................................... (116) (1,092)
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Net cash provided by operating activities....... 5,032 9,171
Investing activities:
Purchase of property and equipment, net......... (1,245) (770)
Payment for purchase of retail stores, net
of cash acquired.............................. (8,716) (1,700)
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Net cash (used for) investing activities........ (9,961) (2,470)
Financing activities:
Net borrowings under revolving credit line 6,800 6,140
Proceeds from term debt......................... - (13,948)
Net repayments, other........................... (1,800) 48
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Net cash provided by (used for)
financing activities......................... 5,000 (7,760)
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Increase (decrease) in cash and cash
equivalents....................................... 71 (1,059)
Cash and cash equivalents, beginning of
period........................................ 767 1,722
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Cash and cash equivalents, end of period.......... $ 838 $ 663
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<FN>
SEE ACCOMPANYING NOTES.
</TABLE>
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 March 2, 1996 (File
No. 0-16998) for additional disclosures including a summary of the
company's accounting policies, which have not significantly changed.
4. On May 29, 1996, the Company completed a purchase of certain assets of
six stores in the Philadelphia market. The acquisition was accounted
for as a purchase. The consolidated statements of operations reflect
the results of operations of the stores since the date acquired.
5. The Company adopted SFAS 121 during the three months ended June 1,
1996. No charge was recorded related to this adoption.
6. The Company signed an amendment to its bank credit Agreement (the
"Agreement") on May 24, 1996. The amendment increased the available
borrowings to help fund the acquisition of stores in the Philadelphia
market.
The Agreement allows for a total credit facility of up to $75,000,000,
depending upon available collateral. On or before February 28, 1997,
the credit facility will be reduced by $5,000,000. The remaining
$55,000,000 revolver expires on May 31, 1999, while the term debt of
$15,000,000 is due in quarterly installments of $750,000, beginning on
May 31, 1996.
The interest rate on the Revolver and the term debt float at the bank's
prime rate. The Agreement requires a commitment fee on the revolver of
.375% on the unused available credit and has no compensating balance
requirements.
Borrowings made pursuant to the Agreement are secured by the Company's
assets including inventory and accounts receivable. The Agreement
prohibits the payment of dividends, stock repurchases, and acquisition
of the Company's convertible subordinated debentures.
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
statements of operations expressed as a percentage of net sales for the periods
indicated.
Three Months Ended
June 1, 1996 May 27, 1995
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(Unaudited)
Net Sales (in thousands)..................... $206,743 $165,091
Gross margin................................. 21.1% 21.3%
Selling, administrative and
Occupancy expenses........................... 19.8% 20.0%
1.3% 1.3%
============================================================================
For the quarter, net sales increased 25% compared to the same period last
year. This was a result of a larger store base, an increase in average sales per
store and a three percent improvement in comparable-store sales. The increase in
average sales per store was partially brought about by the acquisition of
highvolume stores and the closing of under-performing units.
The following table lists corporately-owned store openings and store closings
through the first quarter ended June 1, 1996 and the similar prior year period.
Three Months Ended
June 1, 1996 May 27, 1995
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(Unaudited)
Number of stores at
Beginning of period................. 136 113
Stores opened or acquired............. 6 6
Stores closed or sold................. -1 -4
Total stores at end of period 141 115
==============================================================================
Gross margin as a percentage of sales decreased slightly during the three
month period ended June 1, 1996 over the comparable prior year period. This
decrease resulted from promotions, selective reductions in the retail prices of
competitive items and efforts to bring new business into markets acquired in
fiscal 1996. This decrease was partially offset by better shrink control, an
emphasis on lower product costs, selectively strengthened product pricing and
category management.
Selling, administrative and occupancy expenses decreased in the first quarter
of Fiscal 1997 compared to the similar prior year period as a percentage of
sales. The reduction primarily resulted from increased sales leverage and the
closure of underperforming stores.
7
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INVENTORY VALUATION
The Company uses the LIFO method of accounting for its inventories. Under
this method, the cost of merchandise sold and 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 two percent 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 periods indicated.
THREE MONTHS ENDED
JUNE 1, 1996 MAY 27, 1995
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(IN THOUSANDS)
LIFO charge................... $845 $751
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LIQUIDITY AND CAPITAL RESOURCES
The Company signed an amendment to its bank credit Agreement (the
"Agreement") on May 24, 1996. The amendment increased the available borrowings
to help fund the acquisition of stores in the Philadelphia market.
The Agreement allows for a total credit facility of up to $75,000,000,
depending upon available collateral. On or before February 28, 1997, the credit
facility will be reduced by $5,000,000. The remaining $55,000,000 revolver
expires on May 31, 1999, while the term debt of $15,000,000 is due in quarterly
installments of $750,000, beginning on May 31, 1996.
The interest rate on the Revolver and the term debt float at the bank's prime
rate. The Agreement requires a commitment fee on the revolver of .375% on the
unused available credit and has no compensating balance requirements.
Borrowings made pursuant to the Agreement are secured by the Company's assets
including inventory and accounts receivable. The Agreement prohibits the payment
of dividends, stock repurchases, and acquisition of the Company's convertible
subordinated debentures.
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) The Company filed a Form 8-K, dated June 7, 1996, to report
under Item 5, "Other Events," the purchase of certain assets
of the six "I got it at Gary's" stores in Philadelphia, and to
report the second amendment to its credit agreement.
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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 July 12, 1996 By /s/ David L. Kriegel
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David L. Kriegel
Chairman
Chief Executive Officer
Date July 12, 1996 By /s/ Timothy S. McCord
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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
JUNE 1,1996 MAY 27, 1995
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(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Primary:
Weighted average number of common shares out-
standing................................................................. 13,184 13,166
Net effect of dilutive stock options -- based on
treasury stock method using estimated average
market price............................................................. (a) (a)
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Weighted average common and common equivalent
shares................................................................... 13,184 13,166
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Net income .............................................................. $501 $489
==== ====
Net income per common and common equivalent
share.................................................................... $.04 $.04
==== ====
Fully Diluted:
Weighted average number of common shares out-
standing................................................................. 13,184 13,166
Net effect of dilutive stock options -- based on
treasury stock method using closing market price......................... (a) (a)
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Fully diluted shares..................................................... 13,184 13,166
====== ======
Net income .............................................................. $501 $489
==== ====
Net income per common share assuming full dilu-
tion..................................................................... $.04 $.04
==== ====
<FN>
(a) Excluded as amounts are antidilutive.
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-01-1997
<PERIOD-START> MAR-03-1996
<PERIOD-END> JUN-01-1996
<CASH> 838
<SECURITIES> 0
<RECEIVABLES> 14,403
<ALLOWANCES> 0
<INVENTORY> 188,501
<CURRENT-ASSETS> 209,503
<PP&E> 66,025
<DEPRECIATION> 33,985
<TOTAL-ASSETS> 248,697
<CURRENT-LIABILITIES> 132,914
<BONDS> 62,505
0
0
<COMMON> 1,318
<OTHER-SE> 47,728
<TOTAL-LIABILITY-AND-EQUITY> 248,697
<SALES> 206,743
<TOTAL-REVENUES> 206,743
<CGS> 163,215
<TOTAL-COSTS> 204,014
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,894
<INCOME-PRETAX> 835
<INCOME-TAX> 334
<INCOME-CONTINUING> 501
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 501
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
