<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 2, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
----------
155 HIDDEN RAVINES DRIVE
POWELL, OHIO 43065
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.10 PAR VALUE
(TITLE OF CLASS)
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 so such
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
At May 20, 1996, there were 13,184,085 shares of Drug Emporium
common stock outstanding. The aggregate market value of shares of common stock
held by non-affiliates of the Registrant as of May 20, 1996 was approximately
$55,208,356, based on a closing price of $4.1875 per share on Nasdaq National
Market on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Part II, Items 6., 7. and 8., and Part IV, Item 14. incorporate by
reference portions of the Drug Emporium, Inc. Annual Report to Stockholders for
the year ended March 2, 1996. Part III, Items 10., 11., 12., and 13. incorporate
by reference portions of the Drug Emporium, Inc. Proxy Statement for the 1996
Annual Meeting of Stockholders. With the exception of the information
specifically incorporated by reference, the Drug Emporium, Inc. Annual Report to
Stockholders for the year ended March 2, 1996 is not deemed filed as part of
this report.
<PAGE> 2
ITEM 1. BUSINESS
- ------- --------
INTRODUCTION
In 1977, the first Drug Emporium store was opened in Columbus,
Ohio. Today, the Company operates 136 company-owned stores, franchises 88
stores, and has license agreements with 2 stores, with combined revenues in
excess of $1.3 billion. The accompanying financial statements include only
amounts related to company-owned stores.
Drug Emporium is a category-dominant, value-added retailer selling
health and beauty care, over-the-counter medication, prescription drugs,
greeting cards, cosmetics and highly-consumable products at everyday low prices.
Product lines include a vast array of health items, cosmetics, designer
fragrances and seasonal lines. Pharmacy sales contributed 25%, 25% and 24% of
total revenue for fiscal 1996, 1995 and 1994.
The Company's common stock trades on the Nasdaq National Market
under the symbol DEMP. As of March 2, 1996, there were 13,184,085 shares
outstanding. Drug Emporium's 7-3/4% convertible subordinated debentures, due
October 1, 2014, are traded on the Nasdaq National Market under the symbol
DEMPG.
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 disposing of these 21 stores resulted in a
pretax charge of $11,850,000 recorded in November 1994. In the fourth quarter of
Fiscal 1996, an additional pretax charge of $3,000,000 was taken to cover rent
and related charges at several properties which have taken longer than expected
to sublease.
Management's goal is to sublease or through other means remove all
significant closed-store obligations by the end of Fiscal 1997. Since January
1993, the Company has closed 38 stores of which obligations continue at March 3,
1996 on eight stores. Of the remaining obligations, management intends to open
two stores under a close-out format and continues to seek ways to relieve
obligations on the remaining six stores.
Late in the third quarter the Company acquired 26 stores from F&M
Distributors, Inc. ("F&M") in two separate transactions. The acquired stores
were located in Milwaukee, Baltimore and Detroit, with Detroit representing a
new market for the Company. Three of the stores were subsequently closed or
merged with existing Drug Emporium operations. None of the closed stores carried
any future lease obligations to the Company.
The Company reviewed all of the F&M stores for possible acquisition
and selected these stores, approximately one-fourth of the available stores,
based on historical sales results, an evaluation of competition and an analysis
that showed that the acquisition would produce return-on-investment results
stronger and more quickly than building new stores in these markets.
Since the F&M stores were acquired, management has installed new
pharmacy, labor management and point-of-sale (POS) systems. The goals for
Fiscal 1997 for the acquired stores include increasing pharmacy sales,
re-introducing a discount image to the customers, improving labor productivity,
bringing the inventory mix into balance and having the stores contribute to
earnings.
Management believes that the acquired stores may put some pressure
on earnings in the first two quarters as operational investments are made to
position the stores for the future.
STORE OPERATIONS
Company stores range in size from 18,000 to 33,000 square feet,
with a typical store having approximately 25,000 square feet, including retail
selling space and storage space in the rear of each store.
Each store has a manager, one or two assistant managers, a head
pharmacist, and approximately 8 to 12 additional full-time employees. The stores
are grouped into six operational regions, each overseen by a regional vice
president. The regional vice presidents' responsibilities include visiting all
Company stores and assuring that Company standards for buying, merchandising,
customer service and store appearance are maintained.
<PAGE> 3
The Company's stores are located primarily in shopping centers on
major commercial thoroughfares. The capital expenditures required to fixture and
equip a store averages $200,000. Pre-opening expenses, including salaries and
promotional expenses, average $50,000 per store, and each store requires
approximately $1,000,000 in initial inventory.
The typical trade area for a Drug Emporium store encompasses
200,000 people in 75,000 households within a defined area, usually five miles.
The customer profile: 80 percent middle-to-upper income women between the ages
of 25 and 54 who shop on a two-and-a-half week cycle.
Drug Emporium stores accommodate 8,000 to 12,000 shoppers per week
and provide an environment for shoppers seeking a pleasant and social shopping
experience. Drug Emporium fills a unique tenant category in a shopping center's
merchandising mix. Preferably placed adjacent to a supermarket chain store, Drug
Emporium stores are well received by both hard and soft goods national
retailers.
Most stores are open seven days and 80 hours a week. Each store has
a similar layout, with the pharmacy located in the rear of the store. Company
stores accept payment in cash, check or credit card and from third-party
providers.
The table set forth below lists the 226 Drug Emporium stores by
market as of March 2, 1996:
<TABLE>
<CAPTION>
WHOLLY-OWNED:
-------------
<S> <C>
Atlanta, Augusta, GA, Baton Rouge, LA 24
Philadelphia, PA 23
Los Angeles, San Francisco, and San Diego CA 22
Columbus, Cincinnati, Dayton, OH 21
Detroit, MI 17
Baltimore, MD and Washington, DC 9
Milwaukee, WI 7
St. Louis, MO and Oklahoma City, OK 5
Louisville, KY 4
Minneapolis, MN 4
---
136
===
INDEPENDENT FRANCHISES:
-----------------------
Seattle, Tacoma, WA 18
Dallas, Ft. Worth, TX 15
Lafayette, Shreveport, LA, and Amarillo, Abilene,
Longview, Lubbock, Denton, TX, Little Rock, AZ,
and Wichita KS 12
Phoenix, Tucson, AZ 8
San Antonio, Austin, Houston, TX 7
Charlotte, Raleigh, Durham, Concord, NC 6
Virginia Beach, VA 6
Barboursville, Charleston, WV 3
Kansas City, MO 3
Greensboro, Winston-Salem, NC 2
Union City, NJ 2
Victoria, Brownsville, TX 2
Las Vegas, NV 1
Morris Plains, NJ 1
Nashville, TN 1
Omaha, NE 1
--
88
==
LICENSEES:
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Richmond, VA 2
==
</TABLE>
Subsequent to March 2, 1996, the Company acquired six stores in the
Philadelphia market.
The Company considers various geographic and demographic factors,
including population around the site, income level within that area, proximity
to major shopping malls, traffic count, accessibility of site, proximity of
competitors and available
<PAGE> 4
parking spaces. Extensive market research is utilized through an outside
market research firm which identifies, among other things, trade area, trade
area potential, demographic factors, competitors and competitors'
sales/strengths/weaknesses, and projects three-year anticipated sales volumes.
Company and, to a limited extent, franchisee pharmacy matters are
supervised by the Director of Pharmacy who directs compliance with state and
federal pharmacy regulations and training. The Company has implemented a
computerized pharmacy system across its network of Company stores. Most
franchisees have installed similar systems. The system simplifies the
preparation of labels and maintenance of patient profiles.
Drug Emporium continues to have a strong franchise network
consisting of 88 stores. In 1993, Drug Emporium, Inc. established a Franchise
Advisory Board designed to provide a forum to investigate and discuss issues
and concerns of the Company and its franchisees. One of the major
accomplishments of the Franchise Advisory Board was the formation of a program
called DESIRE, which stands for Drug Emporium Shares in Research and
Education.
Under its franchise system, the Company permits franchisees to
operate Drug Emporium stores in a specific geographic area based on ADIs
(areas of dominant influence of television signals). Prospective franchisees
must make a minimum equity investment of $1,000,000 per store and establish an
acceptable line of credit in the amount of $500,000 per store. The Company
assists franchisees in site selection, store layout, and establishing
purchasing and advertising policies.
The Company selects its franchisees carefully and works closely
with them to increase the likelihood of success for each franchisee.
Prospective franchisees sign confidentiality agreements in addition to a
non-compete clause contained within the executed franchise agreement. Upon
execution of a franchise agreement, the franchisee must pay a nonrefundable
$25,000 fee for the first store and a $10,000 commitment fee for each
additional store designated for that market. The balance of the $25,000 store
fee ($15,000) is payable upon the opening of each subsequent designated store
in the market.
The current franchise agreement provides for franchise royalties at
a minimum rate of $6,000 per store for the second year and $25,000 per year
per store for stores open three years or more against the following percentage
royalties: 1% on gross sales from $3.5 million to $6 million, 2% from $6
million to $8 million, 3% from $8 million to $10 million, and 1.25% on gross
sales over $10 million.
In addition, each franchisee must pay .1% of gross sales to the
Company to offset the cost of developing advertising. Each franchisee must
also spend at least 1% of gross sales for advertising. The current franchise
agreement permits the Company to require that .6% of the 1% advertising
expenditure be contributed to a national advertising program if such program
is established by the Company.
The Company may either open its own stores or allow other
franchisees to open stores in a franchisee's territory outside a defined area
for each existing store if the franchisee fails to comply with the development
schedule agreed upon by the Company and the franchisee.
During fiscal 1996, the Company had one new franchise market open
and two stores open under a license agreement.
The license agreement allows the Drug Emporium retail concept to
be operated within a grocery store with the Drug Emporium portion of sales
generating a royalty fee. During fiscal 1996, licensees were charged a flat
royalty fee of 1.25% of sales.
ACQUISITION OF FRANCHISEES
The Company, from time to time, has acquired or sought to acquire
certain of its franchise operations. The Company's decision to pursue the
acquisition of a franchisee is based on the Company's evaluation of the growth
opportunities in a particular market, the impact the acquisition would have on
earnings per share and the quality of the franchisee's existing management.
Since 1983, the Company has acquired franchisees located in Los Angeles,
Washington, D.C., Atlanta, Cincinnati, Milwaukee, Minneapolis, St. Louis,
Charleston, S.C., Indianapolis, Orlando, Baton Rouge, Louisville, and Oklahoma
City. The Company plans to evaluate future opportunities to acquire
appropriate franchisees from time to time and may use cash or securities to
pay for such acquisitions.
MERCHANDISING AND MARKETING
The Company's merchandising goal is to provide customers with the
widest available selection of health and beauty aids, cosmetics, prescription
drugs and general merchandise at everyday low prices. The Company estimates
that approximately 67% of a typical store's sales mix is health and beauty
aids and general merchandise, 25% pharmacy items and 8% cosmetics.
<PAGE> 5
The Company is continuing to aggressively oversee strategies
designed to lower the total cost of acquiring merchandise in order to continue
to be competitive with other national and regional chain discounters. The
Company completed implementation of POS scanning during fiscal 1996. POS has
provided information to better manage gross margins by electronically
capturing transactions at the store level.
During fiscal 1996, the Company's primary pharmacy supplier,
McKesson Drug, accounted for approximately 20% of the Company's purchases. No
other single vendor accounted for more than 10% of the Company's purchases.
The Company purchases from over 500 vendors, although the great majority of
the business is conducted with approximately 100 vendors. The Company believes
it is a significant customer for each of these 100 vendors.
The Company advertises through the use of television, radio,
newspaper and direct mail. Point of sale advertising is also used. The
Company's strategy of clustering stores within ADI markets is an important
factor in maximizing the effect of its advertising expenditures. The Company
works with an advertising agency that coordinates advertising for the entire
chain. Benefits of centralization include efficiencies of buys with media,
coordination of chain-wide promotional activities, and ability to negotiate
better prices with vendors.
CUSTOMER SERVICE
The Company believes that its commitment to customer service is an
important ingredient of its success. The Company encourages its managers and
other employees to be responsible to customers. The stores are designed to
make products easily accessible. Store employees are trained to be friendly
and helpful to customers. Each store has numerous cashiers to speed up and
facilitate customer check-out.
COMPETITION
The sale of deep discount health and beauty aids, cosmetics and
prescription drugs is highly competitive. The Company believes that the
principal bases of competition in this market are price, product variety,
service, site location and customer recognition. The Company also believes
there exist only a few similar companies, the major one being Phar-Mor Inc.
The Company's stores compete not only with those similar companies but with
numerous other drug stores with national or regional images, and also with
supermarkets, combination stores and discount stores. Many of the Company's
supermarket, combination store and discount and retail drug store competitors
have more outlets and substantially greater financial resources than the
Company or have more convenient locations than Company stores. The Company
believes that its prices are competitive and that it offers greater product
variety and better service than its competitors. The Company also believes
that the smaller size of its stores compared to the major discount competitors
provides a better shopping experience and allows a better selection of sites
in tight real estate markets that exist in some major cities. The Company's
ability to expand successfully into new markets is especially sensitive to the
competitive factors in those markets.
EMPLOYEES AND TRAINING
At March 2, 1996, the Company had a total of approximately 5,600
employees, both full-time and part-time, of which 160 were corporate staff
personnel. None of the employees are covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
Drug Emporium believes that the training of store employees and
franchisees is one of the most important elements of its business. The Company
conducts training classes at its headquarters, and senior management works
closely with regional and district managers in this regard.
REGULATION
The sale of franchises by the Company is subject to regulation by
the Federal Trade Commission and various states in which it does, or may in
the future do, business. Such regulations generally require the prior
registration or an exemption from registration for the sale of franchises and
delivery to prospective franchisees of a franchise disclosure document. No
assurances can be given that any future changes in the existing laws or the
promulgation of new laws will not adversely affect the Company.
The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime and other working conditions.
A portion of the Company's personnel are paid at rates related to the federal
minimum wage, and
<PAGE> 6
accordingly, further increases in the minimum wage increase the Company's
labor costs.
The prescription drug business is subject to the federal Food, Drug
and Cosmetic Act, Drug Abuse Prevention and Control Act and Fair Packaging and
Labeling Act relating to the content and labeling of drug products, comparable
state statutes and state regulation regarding recordkeeping and licensing
matters with civil and criminal penalties for violations.
SERVICE MARKS
The Company has obtained federal registrations of the servicemark
"Drug Emporium" and "Savings So Big You Need A Shopping Cart" for retail drug
store services "Drug Emporium" for technical aid and assistance in the
establishment and operation of retail drug stores and "Drug Emporium", plus
design, for retail drug store services. Federal registration of the
servicemarks "Food and Drug Emporium," "Drug Emporium RX," and "Drug Emporium
Express" are currently pending.
The mark "Drug Emporium" has been registered in the states of
Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Indiana,
Kansas, Kentucky, Louisiana, Maryland, Minnesota, Missouri, Nebraska, Nevada,
New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma,
Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington, West
Virginia and Wisconsin, as well as Mexico and Puerto Rico. The mark "Savings
So Big You Need A Shopping Cart" has been filed and is pending in Canada and
Mexico. The mark "Drug Emporium," plus design, and the shopping cart design
have been filed in Mexico, Japan and France, and the shopping cart design is
registered in Canada. The Company believes that these marks are of material
importance to its business.
Federal registration of a mark does not create new substantive
rights to use the mark or to assert rights based on ownership, but it does
provide additional remedies for the protection of the mark.
EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers are:
<TABLE>
<CAPTION>
Name Age Position (1) Served as
Officer Since
- ------------------------------- -------- ---------------------------------------------------------------------------
<S> <C> <C> <C>
David L. Kriegel 50 Chairman of the Board, Chief Executive 1992
Officer, President and Director
Robert E. Lyons, III 45 Senior Vice President 1990
Timothy S. McCord 37 Chief Financial Officer 1994
Jane H. Lagusch 50 Vice President, Secretary 1990
Keith E. Alessi 41 Treasurer 1993
A. Joel Arnold 60 Senior Vice President 1996
<FN>
(1) Officers serve until their successors are chosen and are qualified
subject to earlier removal by the board of directors, and subject
to rights, if any, under employment contracts.
</TABLE>
DAVID L. KRIEGEL
----------------
Since December 1992, Mr. Kriegel has been the Chairman and Chief
Executive Officer of the Company. Mr. Kriegel is Chairman and Chief
Executive Officer of Kriegel Holding Company, Inc., a privately-owned
corporation dealing with consumer products, real estate and distribution.
Until January 1993, Mr. Kriegel was Vice President of Cardinal Health and
Marketing Group, a division of Cardinal Distribution, Inc., a publicly
owned company. From September 1988 to December 1990, Mr. Kriegel was
Corporate Vice President of Roundy's Inc., a cooperative food distributor.
Mr. Kriegel is a director of Bank One, Lima, N.A.
ROBERT E. LYONS, III
--------------------
Mr. Lyons assumed a new position with the Company in January 1993
as Senior Vice President with key marketing and merchandising
responsibilities. From January 1990 to December 1992, Mr. Lyons was
President and Chief Operating Officer of the Company. Mr. Lyons has been
with the Company and/or associated with a franchise since 1983.
<PAGE> 7
TIMOTHY S. McCORD
- -----------------
Since June 1994, Mr. McCord, a Certified Public Accountant, has served as
Chief Financial Officer. From June 1993 to June 1994, Mr. McCord was Controller
of the Company. Previous to joining the Company, Mr. McCord was employed by
Ernst & Young, LLP, the external auditors to the Company, for ten years.
JANE H. LAGUSCH
- ---------------
Mrs. Lagusch has been associated with the Company in various capacities
since 1980 and she was appointed a Vice President of the Company January 30,
1993. Mrs. Lagusch has responsibility for corporate administrative functions.
KEITH E. ALESSI
- ---------------
Mr. Alessi is a member of the board of directors and Treasurer of the
Company. He served as Chief Financial Officer from January to June of 1994.
Since 1988, Mr. Alessi has been associated with Farm Fresh, Inc., a
privately-held grocery chain, in various capacities, and currently as Vice
Chairman and director. Mr. Alessi is also Chairman and Chief Executive Officer
of Virginia Supermarkets, Inc. and is a director of New Cort Holding, Inc.
A. JOEL ARNOLD
- --------------
Mr. Arnold was appointed to the office of Senior Vice President on June 15,
1995. He formerly held the position of Director of Merchandising and Operations
in which he served for two years. A registered pharmacist, Mr. Arnold has 37
years' experience in the retail drug industry in positions ranging from store
manager to senior vice president and general manager.
ITEM 2. PROPERTIES
- ------------------
Most of the Company's stores are occupied pursuant to long-term leases that
vary as to rental provisions, expiration dates, renewal options, and rental
amounts and payment provisions. The Company does not deem any individual stores
lease to be significant in relation to its overall operations. For information
as to the amount of the Company's rental obligations for retail store leases,
see Note 5 of Notes to Consolidated Financial Statements.
The Company also owns a 20,000 square foot executive office building for
its use as its principal office. The site includes five acres of property and is
located in Powell, Ohio, just north of Columbus.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
Nortex Drug Distributors, Inc v. Drug Emporium, Inc., Case No.
C2-93-767, filed August 6, 1993 which is pending in the United States District
Court, Southern District of Ohio, Eastern Division. The plaintiff is a
franchisee of the Company. The plaintiff is seeking treble damages and a
declaration that the noncompetition clause in the franchise agreements is
unenforceable. The plantiff is charging breach of contract on the franchise
agreement, Antitrust violations, conversion, fraud, interference with contract
and deceptive trade practices. Plaintiff also seeks a declaration that the
noncompete provision in the franchise agreement is unenforcable. No specific
amount of damages is claimed. The Company is aggressively defending this suit.
Texas Drug Distributors Inc. v. Drug Emporium, Inc. was settled and
dismissed with no material effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
Not applicable.
<PAGE> 8
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------------------
The Company's common stock is traded on the Nasdaq National Market
under the symbol DEMP. The following table sets forth, for the quarterly
periods shown, the high and low sale price per share as reported on Nasdaq
National Market:
<TABLE>
<CAPTION>
Fiscal Quarter Ended High Low
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
May 28, 1994 $6.125 $4.000
August 27, 1994 $5.500 $5.000
November 26, 1994 $5.375 $4.125
February 25, 1995 $5.625 $3.875
May 27, 1995 $4.750 $4.000
August 26, 1995 $5.063 $4.000
November 25, 1995 $5.063 $3.875
March 2, 1996 $4.250 $3.250
</TABLE>
The Company paid no dividends in fiscal 1996 or 1995.
The Company's bank credit agreement prohibits payment of dividends,
stock repurchases and acquisition of the Company's convertible subordinated
debt.
At April 29, 1996, the number of holders of record of the Company's
common stock, without determination of the number of individual participants
in security positions, was approximately 5,191.
ITEM 6. SELECTED FINANCIAL DATA
------- -----------------------
The information required by this Item 6 is incorporated by
reference from page 10 of the Drug Emporium, Inc. Annual Report to
Stockholders for the year ended March 2, 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information required by this Item 7 is incorporated by
reference from pages 11 and 12 of the Drug Emporium, Inc. Annual Report to
Stockholders for the year ended March 2, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------- -------------------------------------------
The information required by this Item 8 is incorporated by
reference from pages 13 through 22 of the Drug Emporium, Inc. Annual Report to
Stockholders for the year ended March 2, 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------- --------------------------------------------------
Certain of the information required by this Item 10 is set forth
under Item 1. "Executive Officers of the Company."
*
<PAGE> 9
ITEM 11. EXECUTIVE COMPENSATION
-------- ----------------------
*
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------- --------------------------------------------------------------
*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------
*
* Reference is made to information under the captions "Election of
Directors," "Executive Compensation," "Security Ownership of
Certain Beneficial Owners and Management," and "Certain
Relationships and Related Transactions," in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held June
26, 1996. The Company mailed its definitive proxy statement to
stockholders on or about May 20, 1996.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------- ---------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The following Consolidated Financial Statements of Drug Emporium,
Inc. are incorporated by reference in Item 8 from the pages set
forth below of the Drug Emporium, Inc. Annual Report to
Stockholders for the year ended March 2, 1996.
<TABLE>
<CAPTION>
Page Nos. of
Annual Report
----------------------
<S> <C>
Consolidated Balance Sheets as of March 2, 1996 and
February 25, 1995 13
Consolidated Statements of Operations for Each of the
Three Fiscal Years in the Period Ended March 2, 1996
14
Consolidated Statements of Shareholders' Equity for Each
of the Three Fiscal Years in the Period Ended March 2,
1996 15
Consolidated Statements of Cash Flows for Each of the
Three Fiscal Years in the Period Ended March 2, 1996 16
Notes to Consolidated Financial Statements 17-21
Report of Independent Auditors 22
</TABLE>
(2) Financial Statement Schedules
-----------------------------
Schedules for which provision is made in Regulation S-X are not
required under the instructions contained therein, are
inapplicable, or the information is included in the footnotes to
the Consolidated Financial Statements.
(3) Exhibits List
-------------
(3) Articles of Incorporation and By-Laws
-------------------------------------
3.3 Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.3 to the
Company's S-1 Registration Statement No. 33-21755)
<PAGE> 10
(10) Material Contracts
------------------
10.1 Drug Emporium, Inc. 1983 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the
Company's S-1 Registration Statement Registration No.
33-21755) **
10.2 Drug Emporium, Inc. 1984 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the
Company's S-1 Registration Statement Registration No.
33-21755) **
10.3 Drug Emporium, Inc. 1987 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the
Company's S-1 Registration Statement Registration No.
33-21755) **
10.4 Drug Emporium, Inc. 1990 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.41 to the
Company's Annual Report on Form 10-K for the fiscal year
ended February 28, 1990) **
10.5 Drug Emporium, Inc. Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.5 to the
Company's S-1 Registration Statement Registration No.
33-21755) **
10.7 Form of License and Franchise Agreement (incorporated by
reference to Exhibit 10.7 to the Company's S-1
Registration Statement Registration No. 33-21755)
10.8 Form of Option Agreement (incorporated by reference to
Exhibit 10.8 to the Company's S-1 Registration Statement
Registration No. 33-21755)
10.10 Third Amended and Restated Revolving Credit and Team
Loan Agreement dated as of November 13, 1995, between
Drug Emporium, Inc. and Bank One, Columbus, N.A.
(incorporated by reference to Exhibit 10.1 of the
Company's Form 10-Q for the period ended
November 25, 1995)
10.11 Employment contract dated March 11, 1993 between David
L. Kriegel and Drug Emporium, Inc. (incorporated by
reference to the Company's Annual Report on Form 10-K
for the fiscal year ended February 27, 1993) **
10.12 Drug Emporium, Inc. 1993 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year
ended February 27, 1993) **
10.13 Drug Emporium, Inc. 1993 Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year
ended February 27, 1993) **
*(11) Statement re Computation of Per Share Earnings
----------------------------------------------
11.1 Computation of Per Share Earnings is
readily computable from information
disclosed in the financial statements
and therefore is not included as a
separate exhibit.
*(13) Annual Report to Security Holders, Form 10Q or Quarterly Report to
------------------------------------------------------------------
Security Holders
----------------
13.1 Annual Report to Stockholders for Fiscal Year Ended
March 2, 1996 (limited to those portions incorporated
herein)
<PAGE> 11
*(22) Subsidiaries of Registrant
--------------------------
22.1 The Company has the following wholly-owned subsidiaries:
<TABLE>
<CAPTION>
State of
Name Incorporation
- ------------------------------------------------------------------------
<S> <C>
Drug Emporium of Michigan, Inc. Delaware
Drug Emporium of Maryland, Inc. Delaware
Centerline, Inc. Delaware
Winter Fern Drug Distributors, Inc. Ohio
RJR Drug Distributors Inc. Delaware
Houston Venture, Inc. Ohio
Emporium Venture, Inc. Ohio
</TABLE>
*(24) Consent of Experts
------------------
24.1 Consent of Ernst & Young LLP
(27) Financial Data Schedule
-----------------------
27.1 Financial Data Schedule of the Company
*Included with this Annual Report on Form 10-K
**Compensatory plans, contracts or agreements
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the fourth quarter of fiscal 1996.
<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: May 30, 1996 By: /s/ David L. Kriegel
-----------------------------------
David L. Kriegel
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Date: May 30, 1996
/s/ Timothy S. McCord /s/ David L. Kriegel
---------------------------------- -----------------------------------
Timothy S. McCord David L. Kriegel
Chief Financial Officer Chairman and Chief Executive Officer
/s/ Michael P. Leach /s/ John B. Gerlach
---------------------------------- -----------------------------------
Michael P. Leach John B. Gerlach
Controller Director
/s/ Thomas D. Igoe
-----------------------------------
Thomas D. Igoe
Director
/s/ Robert S. Meeder, Sr.
-----------------------------------
Robert S. Meeder, Sr.
Director
/s/ William L. Sweet, Jr.
-----------------------------------
William L. Sweet, Jr.
Director
/s/ V. J. Wiechart, Sr.
-----------------------------------
V. J. Wiechart, Sr.
Director
<PAGE> 1
EXHIBIT 13.1
FINANCIAL REVIEW
Contents
Selected Consolidated Financial Data
10
Management's Discussion and Analysis of Financial
Condition and Results of Operations
11-12
Consolidated Balance Sheets
13
Consolidated Statements of Operations
14
Consolidated Statements of Shareholders' Equity
15
Consolidated Statements of Cash Flows
16
Notes to Consolidated Financial Statements
17-21
Report of Independent Auditors
22
Report of Management
23
Board of Directors and Company Management
24
Corporate Information
25
DRUG EMPORIUM, INC. AND SUBSIDIARIES 9
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data and other operating
information of the Company. The selected financial data is derived from the
consolidated financial statements of the Company. The financial data should be
read in conjunction with the consolidated financial statements and related notes
contained elsewhere in this report and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
Year Ended
- ---------------------------------------------------------------------------------------------------------------------------
March 2, February 25, February 26, February 27, February 29,
(in thousands, except per share data) 1996 1995 1994 1993 1992
(53 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 738,772 $ 729,503 $ 749,040 $ 756,710 $ 742,343
- ---------------------------------------------------------------------------------------------------------------------------
Gross margin 160,146 153,696 155,473 154,002 142,404
- ---------------------------------------------------------------------------------------------------------------------------
Selling, administrative and occupancy expenses 146,774 143,337 146,920 146,726 136,798
- ---------------------------------------------------------------------------------------------------------------------------
Operating income before store closure and
restructuring expense 13,372 10,359 8,553 7,276 5,606
- ---------------------------------------------------------------------------------------------------------------------------
Store closure and restructuring expense 3,000 11,850 -- 4,357 7,270
- ---------------------------------------------------------------------------------------------------------------------------
Interest, net 6,468 6,697 6,183 6,148 5,589
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 3,904 (8,188) 2,370 (3,229) (7,253)
- ---------------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes 1,562 (2,797) 1,089 (562) (2,583)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,342 $ (5,391) $ 1,281 $ (2,667) $ (4,670)
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net income (loss) $ 0.18 $ (0.41) $ 0.10 $ (0.20) $ (0.36)
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends $ -- $ -- $ -- $ 0.04 $ 0.12
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity $ 3.68 $ 3.50 $ 3.91 $ 3.82 $ 4.06
- ---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 80,195 $ 83,664 $ 82,176 $ 72,525 $ 74,239
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 243,898 $ 176,444 $ 198,085 $ 194,935 $ 188,948
- ---------------------------------------------------------------------------------------------------------------------------
Non-current liabilities $ 67,391 $ 67,738 $ 68,761 $ 59,861 $ 61,634
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 48,545 $ 46,149 $ 51,484 $ 50,095 $ 53,254
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
10 DRUG EMPORIUM, INC. AND SUBSIDIARIES
<PAGE> 3
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 years
indicated.
<TABLE>
<CAPTION>
Year Ended
March 2, February 25, February 26,
1996 1995 1994
(53 weeks) (52 weeks) (52 weeks)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (in thousands) $ 738,772 $ 729,503 $ 749,040
- -------------------------------------------------------------------------------
Gross margin 21.7% 21.1% 20.8%
- -------------------------------------------------------------------------------
Selling, administrative and
occupancy expense 19.9 19.7 19.6
- --------------------------------------------------------------------------------
1.8% 1.4% 1.2%
- -------------------------------------------------------------------------------
</TABLE>
SALES
Sales for Fiscal 1996 increased one percent over Fiscal 1995 while
comparable-store sales were down one percent due to increased competition in
most markets. Average sales per store, per week, for Fiscal 1996 (based on a
weighted average number of stores) were up three percent over Fiscal 1995 as a
result of the closing of underperforming stores late in Fiscal 1995 and the
acquisition of higher-volume stores in Fiscal 1996. In Fiscal 1996, the
additional one week of sales contributed $14.9 million to net sales. In Fiscal
1995, comparable-store sales increased one percent while overall sales decreased
due to the closing of unprofitable stores in the third and fourth quarters,
offset by increased sales from newer stores.
Pharmacy sales as a percentage of total sales were 25 percent in Fiscal 1996
and 1995 and 24 percent in Fiscal 1994. Management expects that pharmacy sales
will continue to account for approximately one-fourth of sales in the coming
year.
The following table lists stores opened or acquired and stores closed for the
years indicated:
<TABLE>
<CAPTION>
Year Ended
March 2, February 25, February 26,
1996 1995 1994
(53 weeks) (52 weeks) (52 weeks)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of stores at
beginning of year 113 133 132
- -------------------------------------------------------------------------------
Stores opened or acquired 34 5 6
- -------------------------------------------------------------------------------
Stores closed (11) (25) (5)
- -------------------------------------------------------------------------------
Total stores at end of year 136 113 133
- -------------------------------------------------------------------------------
</TABLE>
GROSS MARGIN
Gross margin as a percentage of sales increased .6% in Fiscal 1996 over Fiscal
1995 and .3% in Fiscal 1995 over Fiscal 1994 amounts. The gross margin increases
have resulted from an emphasis on improving margins through lower product costs,
selectively strengthened product pricing, improved security through the use of
electronic article surveillance systems, and better category management,
partially offset by reductions in the retail price of the most competitive
items.
For Fiscal 1997, management expects downward pressure on the pharmacy margins
as sales through managed care networks continue to increase as a percentage of
pharmacy sales. Management's goal is to offset this downward pressure on margins
by utilizing scanning data to improve overall category gross margins where
opportunities allow, while at the same time protecting the low price image of
the stores.
SELLING, ADMINISTRATIVE AND OCCUPANCY
Selling, administrative and occupancy expenses increased in Fiscal 1996 compared
to Fiscal 1995 and Fiscal 1994 in total dollars and as a percentage of net sales
as a result of the implementation and routine cost of scanning, increased credit
card usage, and increased security costs. Management's goal is for these costs
to decline modestly as a percentage of net sales by the end of Fiscal 1997.
INTEREST, NET
Interest, net decreased during Fiscal 1996 and increased during Fiscal 1995. The
decrease in Fiscal 1996 is due to lower borrowings during the first three
quarters, partially offset by increased fourth quarter borrowings due to the
stores acquired from F&M Distributors, Inc. The increase in Fiscal 1995 is
primarily due to increases in interest rates during the year.
STORE CLOSURE
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. In the fourth quarter of Fiscal 1996, an
additional pretax charge of $3,000,000 was taken to cover rent and related
charges at several properties which have taken longer than expected to sublease.
Management's goal is to sublease or through other means remove all
significant closed-store obligations by the end of Fiscal 1997. Since January
1993, the Company has closed 38 stores of which obligations continue at March 3,
1996 on eight stores. Of the remaining obligations, management intends to open
two stores under a close-out format and continues to seek ways to relieve
obligations on the remaining six stores.
DRUG EMPORIUM, INC. AND SUBSIDIARIES 11
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
F&M ACQUISITION DISCUSSION
Late in the third quarter the Company acquired 26 stores from F&M Distributors,
Inc. ("F&M") in two separate transactions. The acquired stores were located in
Milwaukee, Baltimore and Detroit, with Detroit representing a new market for the
Company. Three of the stores were subsequently closed or merged with existing
Drug Emporium operations.
None of the closed stores carried any future lease obligations to the Company.
The Company reviewed all of the F&M stores for possible acquisition and
selected these stores, approximately one-fourth of the available stores, based
on historical sales results, an evaluation of competition and an analysis that
showed that the acquisition would produce return-on-investment results stronger
and more quickly than building new stores in these markets.
Since being acquired, management has installed new pharmacy, labor management
and point-of-sale systems. The goals for Fiscal 1997 include increasing pharmacy
sales, re-introducing a discount image to the customers, improving labor
productivity, bringing the inventory mix into balance and having the stores
contribute to earnings.
Management believes that the acquired stores may put some pressure on
earnings in the first two quarters as operational investments are made to
position the stores for the future.
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 charges throughout the fiscal year, uses
an estimated percentage rate of inflation determined at the beginning of the
fiscal year. This LIFO charge is adjusted at each year end based upon the actual
weighted average percentage rate of inflation during the fiscal year.
<TABLE>
<CAPTION>
Year Ended
- --------------------------------------------------------------------------------
March 2, February 25, February 26,
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
LIFO charge (in thousands) $ 1,572 $ 200 $ 654
- -------------------------------------------------------------------------------
Inflation rate 1.1% .1% .5%
- -------------------------------------------------------------------------------
</TABLE>
Inventory turnover approximated four turns for each of the years presented.
Management's goal is to increase turns in the future by adjusting buying based
on movement information provided through scanning and by seeking alternative
distribution methods that will allow for reduced inventory of slower moving
items.
LIQUIDITY AND CAPITAL RESOURCES
As of March 2, 1996, the Company's credit facility consisted of a term loan of
$15,000,000 and a revolving credit loan availability of up to $45,000,000. The
revolver expires on February 28, 1999, while the term debt is due in quarterly
installments of $750,000, beginning May 31, 1996.
During Fiscal 1996, the Company increased borrowings under the revolving
credit facility by $21.5 million, as set forth in the consolidated statements of
cash flows. This was a result of spending on acquisitions of approximately $41
million and increased inventory levels, partially offset by operational cash
flows and capital made available from closed stores. Accrued liabilities,
deferred income, and a portion of accounts payable at March 2, 1996 increased
over the prior year primarily due to the acquisition of retail stores during the
year.
Overall inventory levels increased in stores open at the beginning of the
year due to heavier seasonal carryover and purchases made to support the
advertising program. Management's goal is to reduce inventory levels in all
stores while protecting the in-stock position by adjusting purchases based on a
more comprehensive approach to category management utilizing scanning data to
identify overstock positions, being more selective on advertising buys, and by
seeking alternative distribution methods.
In Fiscal 1997, the Company will evaluate acquisitions of franchises and
others giving adequate consideration to overall capital needs and estimated
return on investment.
The Company's borrowing rate can fluctuate between the bank's prime rate and
a LIBO-based rate, depending on the ability of the Company to meet certain
financial covenants. 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 inventory
and accounts receivable. The agreement prohibits the payment of dividends, stock
repurchases and acquisition of the Company's convertible subordinated
debentures.
Cash paid for interest on the revolving credit line and long-term debt
approximated interest expense in Fiscal 1996, 1995 and 1994. The Company
believes that internally generated funds and borrowings available under its
agreement are sufficient to finance the Company's current operations.
DEFERRED TAX ASSET
The Company's deferred tax asset at March 2, 1996 is primarily comprised of a
net operating loss carryforward of $5,009,000. Management expects to generate
taxable income through operations of at least this amount during the next few
years. However, the Company has the ability to generate taxable income through
tax planning strategies, if necessary, to utilize the net operating loss
carryforward.
12 DRUG EMPORIUM, INC. AND SUBSIDIARIES
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands)
- ---------------------------------------------------------------------------------------------------------
ASSETS MARCH 2, 1996 February 25, 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 767 $ 1,722
Accounts receivable 13,018 10,368
Inventories 188,498 128,125
Income taxes and other current assets 5,874 6,006
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 208,157 146,221
- ---------------------------------------------------------------------------------------------------------
Property and equipment, net 28,793 22,824
Goodwill 5,311 5,908
Other assets 1,637 1,491
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 243,898 $ 176,444
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY MARCH 2, 1996 February 25, 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Revolving credit line $ 21,500 $ --
Accounts payable 69,143 38,438
Accrued liabilities 17,345 13,171
Deferred income 9,183 --
Accrued store closure 6,182 5,862
Current maturities of long-term debt 4,609 5,086
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 127,962 62,557
- ---------------------------------------------------------------------------------------------------------
Deferred rent 4,107 3,762
- ---------------------------------------------------------------------------------------------------------
Convertible subordinated debt 49,421 52,000
Long-term debt, other 13,863 11,976
- ---------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 63,284 63,976
- ---------------------------------------------------------------------------------------------------------
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 13,184,000 in 1996, 13,171,000 in 1995 1,318 1,317
Additional paid-in capital 32,121 32,068
Retained earnings 15,106 12,764
- ---------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 48,545 46,149
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 243,898 $ 176,444
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
DRUG EMPORIUM, INC. AND SUBSIDIARIES 13
<PAGE> 6
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
- ------------------------------------------------------------------------------------------------------------------
March 2, 1996 February 25, 1995 February 26, 1994
(in thousands, except per share amounts) (53 weeks) (52 weeks) (52 weeks)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $738,772 $ 729,503 $749,040
- ------------------------------------------------------------------------------------------------------------------
Cost of sales 578,626 575,807 593,567
- ------------------------------------------------------------------------------------------------------------------
Gross margin 160,146 153,696 155,473
- ------------------------------------------------------------------------------------------------------------------
Selling, administrative and occupancy expenses 146,774 143,337 146,920
- ------------------------------------------------------------------------------------------------------------------
Store closure expense 3,000 11,850 --
- ------------------------------------------------------------------------------------------------------------------
Interest expense, net 6,468 6,697 6,183
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before provision (benefit) for income taxes 3,904 (8,188) 2,370
- ------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes 1,562 (2,797) 1,089
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,342 $ (5,391) $ 1,281
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) per share $ .18 $ (.41) $ .10
- ------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares used in
computing net income (loss) per share 13,182 13,166 13,133
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
14 DRUG EMPORIUM, INC. AND SUBSIDIARIES
<PAGE> 7
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Common Additional Total
Stock Stock Paid-In Retained Shareholders'
(in thousands) Shares Amount Capital Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at February 28, 1993 13,117 $1,312 $31,909 $16,874 $50,095
Exercise of stock options 37 3 105 -- 108
Net income -- -- -- 1,281 1,281
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 26, 1994 13,154 1,315 32,014 18,155 51,484
Exercise of stock options 17 2 54 -- 56
Net loss -- -- -- (5,391) (5,391)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 25, 1995 13,171 1,317 32,068 12,764 46,149
Exercise of stock options 13 1 53 -- 54
Net income -- -- -- 2,342 2,342
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 2, 1996 13,184 $1,318 $32,121 $15,106 $48,545
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
DRUG EMPORIUM, INC. AND SUBSIDIARIES 15
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
- ---------------------------------------------------------------------------------------------------------------------------------
March 2, 1996 February 25, 1995 February 26, 1994
(in thousands) (53 weeks) (52 weeks) (52 weeks)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,342 $ (5,391) $ 1,281
- ---------------------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE TO CASH PROVIDED BY (USED FOR) OPERATIONS:
Depreciation and amortization 6,934 7,411 6,542
- ---------------------------------------------------------------------------------------------------------------------------------
Store closure 3,000 10,606 --
- ---------------------------------------------------------------------------------------------------------------------------------
Minority interest -- -- 200
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred income taxes 1,000 (1,000) 1,893
- ---------------------------------------------------------------------------------------------------------------------------------
LIFO provision 1,573 200 654
- ---------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) CURRENT ASSETS AND LIABILITIES:
Accounts payable and accrued liabilities 31,128 (3,415) 4,648
- ---------------------------------------------------------------------------------------------------------------------------------
Accounts receivable (2,494) (913) (3,067)
- ---------------------------------------------------------------------------------------------------------------------------------
Inventories at current cost (23,064) 14,444 (376)
- ---------------------------------------------------------------------------------------------------------------------------------
Other 3,446 (1,261) (1,429)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,865 20,681 10,346
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment, net (2,773) (3,513) (3,220)
- ---------------------------------------------------------------------------------------------------------------------------------
Proceeds from sale of property and equipment -- 1,202 --
- ---------------------------------------------------------------------------------------------------------------------------------
Payment for purchase of retail stores, net of cash acquired (40,644) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Acquisition of minority interest -- -- (6,256)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED FOR) INVESTING ACTIVITIES (43,417) (2,311) (9,476)
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net borrowings (repayments) under revolving credit line 21,500 (13,480) (13,520)
- ---------------------------------------------------------------------------------------------------------------------------------
Proceeds from term debt 15,000 -- 15,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net repayments, other (17,903) (3,753) (2,230)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 18,597 (17,233) (750)
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (955) 1,137 120
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,722 585 465
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 767 $ 1,722 $ 585
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
16 DRUG EMPORIUM, INC. AND SUBSIDIARIES
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of Drug Emporium,
Inc. and subsidiaries (the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Nature of Operations
The Company is primarily in the business of operating and franchising retail
stores specializing in the sale of health and beauty care products,
over-the-counter medication, prescription drugs, greeting cards, cosmetics and
highly-consumable products primarily in an everyday-low-price format. The stores
operate under the name of Drug Emporium or F&M Super Drug Stores. As of year
end, approximately eighty percent of the Company-owned stores were located in
the states of California, Georgia, Michigan, Ohio and Pennsylvania.
Fiscal Year
The fiscal year of the Company is the 52-53 week period ending on the Saturday
closest to February 28 (29). Fiscal 1996 contained 53 weeks of activity. The
quarter and fiscal year ends for 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Fiscal year 1996 Fiscal year 1995
- ----------------------------------------------------------------
<S> <C> <C>
First quarter May 27, 1995 May 28, 1994
Second quarter August 26, 1995 August 27, 1994
Third quarter November 25, 1995 November 26, 1994
Year end March 2, 1996 February 25, 1995
- ----------------------------------------------------------------
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand and deposits at financial institutions with maturities of less than three
months.
Accounts Receivable
The Company uses the allowance method of accounting for uncollectible accounts.
Accounts receivable are stated net of allowance for uncollectible accounts of
$924,000 and $845,000 as of March 2, 1996 and February 25, 1995, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by use of the LIFO method. If current cost had been used, inventories
would have been approximately $21,154,000 and $19,581,000 higher than reported
at March 2, 1996 and February 25, 1995, respectively. Cost of sales is primarily
computed on an estimated basis and adjusted based on physical inventory counts
which are generally taken at all locations twice annually.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of owned assets. Leasehold
improvements are amortized over the estimated useful life of the asset or the
term of the lease, whichever is shorter.
Pre-Opening Expenses
Expenditures related to the opening of new stores, other than expenditures for
capital assets, are charged against earnings
when incurred.
Goodwill
Goodwill is amortized over 15 years using the straight-line method. The Company
amortized $597,000, $611,000 and $512,000 of goodwill during Fiscal 1996, 1995
and 1994, respectively. Accumulated amortization was $3,225,000 at March 2, 1996
and $2,628,000 at February 25, 1995. The Company uses the cash flow method to
assess the recoverability of goodwill.
Debt Issuance Costs
Debt issuance costs incurred in connection with the convertible subordinated
debt are amortized using a straight-line method over the term of the debt.
Amortization expense related to the issuance costs is reported as interest
expense and approximated $57,000 in 1996, $58,000 in 1995, and $58,000 in 1994.
The amount of accumulated amortization, at March 2, 1996 and February 25, 1995,
was $354,000 and $312,000 respectively.
DRUG EMPORIUM, INC. AND SUBSIDIARIES 17
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Advertising Costs
The Company expenses production costs of radio and television advertising in the
year incurred. Gross advertising costs, before vendor reimbursements, as a
percentage of net sales, were as follows: 1996 - 2.3%; 1995 - 2.3%; and
1994 - 1.6%.
Net Income (Loss) Per Share
Net income (loss) per common share is determined by dividing the weighted
average number of common shares outstanding during the year into net income
(loss). Common share equivalents in the form of stock options are excluded from
the calculation since they have no dilutive effect on per-share figures. The
assumed conversion of subordinated convertible debt into common stock had no
dilutive effect on net earnings per common share.
Franchise Arrangements
Arrangements with franchisees and licensees who operate throughout the United
States generally provide for initial fees, new store opening fees and continuing
payments to the Company based upon a percentage of sales. The fees, when earned,
and related costs are recorded net and included in the Company's selling,
administrative and occupancy expenses.
Impairment of Long-Lived Assets
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the asset's carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed. The Company will adopt Statement 121 in the first
quarter of Fiscal 1997. Due to the significant number of stores and markets in
which the Company operates and the extensive number of estimates that must be
made to assess the impact of Statement 121, the financial statement impact of
adoption has not yet been determined.
Reclassifications
Certain amounts in prior years' financial statements have been reclassified to
conform with the Fiscal 1996 presentation.
NOTE 2 - STORE CLOSURES
During Fiscal 1995, the Company sold seven stores in the Washington, D.C. market
and closed fourteen additional stores. The cost associated with the 21 stores
resulted in a pretax charge of $11,850,000 recorded in November 1994. In the
fourth quarter of Fiscal 1996, a $3,000,000 pretax charge was recorded to cover
additional costs associated with the stores not yet subleased. Sales generated
from these closed stores during fiscal years 1996, 1995 and 1994 were as
follows: $0, $71,797,000 and $90,894,000, respectively.
NOTE 3 - REVOLVING CREDIT LINE
The Company signed a new bank agreement (the Agreement) on November 13, 1995.
The Agreement increased the available borrowings to help fund store acquisitions
and replaced the previous bank credit agreement that was due to expire February
28, 1997.
The Agreement was structured to initially provide total credit of
$75,000,000, depending on available collateral, which included a $60,000,000
revolving credit facility and a $15,000,000 term loan. The $60,000,000 revolver
included temporary financing of $15,000,000 for a period from November 13, 1995
up to April 1, 1996. In accordance with the terms of the Agreement, the Company
elected to take an early reduction of $15,000,000 in its revolving credit
facility in order to achieve a more favorable borrowing rate.
As of March 2, 1996, the Company's credit facility consisted of the term loan
of $15,000,000 (see Note 4) and a revolving credit loan availability of up to
$45,000,000 of which $21,500,000 was utilized. The revolver expires on February
28, 1999, while the term debt is due in quarterly installments of $750,000,
beginning May 31, 1996.
The Company's borrowing rate can fluctuate between the bank's prime rate and
a LIBO-based rate, depending on the ability of the Company to meet certain
financial covenants. The Agreement requires a commitment fee on the revolver of
.375% on the unused available credit and has no compensating balance
requirements. The weighted average borrowing rate under the Agreement was 7.89%
at year end.
Borrowings made pursuant to the Agreement are secured by inventory and
accounts receivable. The Agreement prohibits the payment of dividends, stock
repurchases, and acquisition of the Company's convertible subordinated
debentures.
18 DRUG EMPORIUM, INC. AND SUBSIDIARIES
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - LONG-TERM DEBT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in thousands) March 2, 1996 February 25, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Convertible subordinated debentures $ 49,421 $ 52,000
- -------------------------------------------------------------------------------
Term debt 15,000 13,500
Equipment finance agreements 745 2,100
Other 2,727 1,462
- -------------------------------------------------------------------------------
67,893 69,062
- -------------------------------------------------------------------------------
Less current maturities (4,609) (5,086)
- -------------------------------------------------------------------------------
$ 63,284 $ 63,976
- -------------------------------------------------------------------------------
</TABLE>
In September 1989, the Company issued $52,000,000 of 7-3/4% convertible
subordinated debentures. These debentures are unsecured obligations of the
Company and may be converted into common stock of the Company at any time prior
to maturity, unless previously redeemed. The conversion rate is 65.1466 shares
per $1,000 principal amount of debentures (or approximately $15.35 per share),
subject to certain adjustments under the terms of these debentures. These
debentures are redeemable at the option of the Company at 102.8% of par plus
accrued interest. This redemption rate declines by .7% annually to par on
October 1, 1999. The debentures are subject to a sinking fund, commencing
October 1, 2000, calculated to retire at least 70% of the debentures prior to
the final maturity date of October 1, 2014. The Company has reserved 3,387,624
shares of common stock for issuance upon conversion of the debentures and 33,900
shares of Series A Preferred Stock in connection with the rights to be
distributed under the Shareholder Rights Plan (Note 8) with respect to the
reserved shares of common stock. During Fiscal 1996, the convertible debentures
traded in a range of 70% to 81% of par, with a year end price of 73% of par.
During 1996 the Company repurchased $2,579,000 of face value of its
convertible subordinated debentures on the open market resulting in an after-tax
gain of approximately $300,000.
The term debt is part of the Agreement discussed in Note 3 and is payable in
quarterly installments, with annual amounts of $3,000,000 due in Fiscal 1997,
1998, 1999, 2000 and 2001.
As of March 2, 1996, substantially all of the Company's furniture, fixtures
and equipment have been pledged as security for the repayment of the equipment
finance agreements. These financing agreements contain interest rates ranging
from 4.5% to 12.0%. Principal amounts related to these agreements due for fiscal
years 1997 through 1999 are $701,000, $37,000 and $7,000, respectively.
The Company has other notes bearing interest at rates ranging from 8.18% to
9.00%. Principal amounts related to the notes due for fiscal years 1997 through
2001 are $908,000, $922,000, $219,000, $236,000 and $253,000, respectively.
NOTE 5 - OPERATING LEASES
The Company leases retail stores and certain equipment under non-cancelable
operating leases which expire at various dates. Certain of the store leases
require contingent rentals based upon sales in excess of specified amounts and
generally require the Company to pay utilities, insurance and taxes, and certain
are renewable with escalation clauses. Rent expense (excluding rent expense for
closed stores from the date closed) was $28,354,000, $27,704,000 and $27,960,000
during Fiscal 1996, 1995 and 1994, respectively.
At March 2, 1996, future minimum operating lease payments during the next
five years and thereafter are: 1997 - $35,755,000; 1998 - $34,670,000; 1999-
$33,156,000; 2000 - $26,186,000; 2001 - $22,428,000, and $64,925,000 thereafter.
At March 2, 1996, the future minimum lease payments for closed stores total
approximately $18,523,000; the Company estimates it will receive approximately
$16,350,000 of sublease income (for which there are subleases in force
aggregating $6,270,000 at March 2, 1996). This estimate is based on the ability
of the Company to sublease remaining closed-store leases within approximately
one year.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) March 2, 1996 February 25, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Land and building $ 3,475 $ 2,525
- --------------------------------------------------------------------------------
Furniture and fixtures 34,544 31,936
Acquired leases and leasehold
improvements 23,371 17,053
- --------------------------------------------------------------------------------
61,390 51,514
- --------------------------------------------------------------------------------
Less allowances for depreciation
and amortization $(32,597) $(28,690)
- --------------------------------------------------------------------------------
$ 28,793 $ 22,824
- --------------------------------------------------------------------------------
</TABLE>
DRUG EMPORIUM, INC. AND SUBSIDIARIES 19
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The tax amounts recorded in the consolidated balance sheets consisted of the
following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TAX AFFECTED AMOUNTS
- --------------------------------------------------------------------------------
(in thousands) March 2, 1996 February 25, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS (LIABILITIES):
Loss and AMT credit carryforwards $ 4,000 $ 5,000
- -------------------------------------------------------------------------------
Store closing reserve 2,000 2,000
- -------------------------------------------------------------------------------
Inventory valuation (2,000) (3,000)
- -------------------------------------------------------------------------------
Other, net (2,000) (1,000)
- -------------------------------------------------------------------------------
2,000 3,000
- -------------------------------------------------------------------------------
Current tax balance 1,000 2,000
- -------------------------------------------------------------------------------
$ 3,000 $ 5,000
- -------------------------------------------------------------------------------
</TABLE>
There were no significant deferred tax valuation allowances as of March 2,
1996 and February 25, 1995.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT:
Federal $ 298 $(2,060) $ (997)
- -------------------------------------------------------------------------------
State and local 264 263 193
- -------------------------------------------------------------------------------
Total current 562 (1,797) (804)
- -------------------------------------------------------------------------------
Deferred 1,000 (1,000) 1,893
- -------------------------------------------------------------------------------
$ 1,562 $(2,797) $ 1,089
- -------------------------------------------------------------------------------
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense (benefit) is:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate $ 1,327 $(2,784) $ 806
- -------------------------------------------------------------------------------
State income tax, net 174 174 95
- -------------------------------------------------------------------------------
Goodwill and minority interest 203 208 205
- -------------------------------------------------------------------------------
Other, net (142) (395) (17)
- -------------------------------------------------------------------------------
$ 1,562 $(2,797) $ 1,089
- -------------------------------------------------------------------------------
</TABLE>
The Company received refunds, net of income taxes paid, of $1,889,000 and
$49,000 during Fiscal 1996 and Fiscal 1995, respectively, and made income tax
payments of $1,203,000 in Fiscal 1994.
At March 2, 1996, the Company has net operating loss carryforwards of
$5,009,000 for income tax purposes that expire in years 2009 and 2010 and
$2,381,000 of alternative minimum tax credit carryforward which has no
expiration date.
NOTE 8 - SHAREHOLDERS' EQUITY
The Company has authorized 2,000,000 shares of $1.00 par value preferred stock.
The terms of the preferred stock are subject to determination by the Company's
Board of Directors. The Company has a shareholder rights plan which provides for
the distribution of a right to purchase one-hundredth of a share of preferred
stock to each holder of common stock. The rights become exercisable upon the
occurrence of certain triggering events, as defined in the plan.
NOTE 9 - STOCK OPTION PLANS
The Company has adopted stock option plans for key employees and accounts for
such plans under APB Opinion No. 25, Accounting for Stock Options Issued to
Employees. Under such plans, the Board of Directors may grant options for shares
of common stock at a price not less than 100% of the fair market value of the
shares on the date of grant. If an employee owns stock possessing more than 10%
of the total combined voting power of the Company, the option price must be 110%
of the fair market value on the date of grant. The options vest based on the
term of the optionee's continuous employment at 10% to 30% per year. Service
prior to date of grant is considered under certain plans. The following is a
summary of transactions under the option plans:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
SHARES UNDER OPTION
- --------------------------------------------------------------------------
(in thousands, except per share amounts) 1996 1995 1994
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, beginning of year 931 664 395
- --------------------------------------------------------------------------
Granted (at $4.13 to $6.50 per share) 5 323 384
- --------------------------------------------------------------------------
Cancelled (42) (39) (78)
- --------------------------------------------------------------------------
Exercised (at $2.14 to 4.83 per share) (13) (17) (37)
- --------------------------------------------------------------------------
Outstanding, end of year
(at prices ranging from $4.00 to $8.81 per share) 881 931 664
- --------------------------------------------------------------------------
Exercisable, end of year
(at prices ranging from $4.00 to $8.81 per share) 302 283 516
- --------------------------------------------------------------------------
</TABLE>
At the end of fiscal years 1996, 1995 and 1994, there were 217,000, 221,000 and
775,000 shares, respectively, reserved for future grants.
20 DRUG EMPORIUM, INC. AND SUBSIDIARIES
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10 - ACQUISITIONS
During Fiscal 1996, the Company acquired 32 stores in five separate transactions
for a total purchase price of $42 million. Three of the stores were subsequently
closed or merged with existing Drug Emporium operations. The majority of the
stores were acquired late in the third fiscal quarter from F&M Distributors,
Inc. with the remainder being purchased from Drug Emporium franchisees at
various times during the year. These acquisitions were accounted for as
purchases.
The consolidated statements of operations reflect the results of operations
of the acquired enterprises since the dates acquired. The acquired stores
contributed $80 million in sales during Fiscal 1996. Management has not
disclosed proforma information because of concerns surrounding the accuracy of
available historical operating data.
NOTE 11 - DEFINED CONTRIBUTION PLAN
The Company provides a defined contribution 401(k) plan to substantially all
employees. Participants may make voluntary contributions to the plan up to 15%
of their compensation. Approximately $50,000 was charged to expense for this
plan in fiscal years 1996, 1995 and 1994.
NOTE 12 - CONTINGENCY
The Company is a defendant in suits filed by two current franchisees of the
Company alleging failure to perform as required by the franchise agreements and
violation of state and federal antitrust laws. The plaintiffs claim a loss of
investment capital, out-of-pocket expenses and lost profits and goodwill and
seek an unspecified amount of damages. The Company intends to vigorously defend
these suits and believes the ultimate outcome of these suits will not materially
affect the financial position or results of operations of the Company.
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Net Gross Net Income Net Income (Loss) Stock Prices Dividends Paid
Sales Profit (Loss) Per Common Share High Low Per Common Share
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996:
First quarter $165,091 $35,057(a) $ 489 $ .04 $4.75 $4.00 --
Second quarter 167,794 36,269(a) 466 .03 5.06 4.00 --
Third quarter 170,954 36,895 347 .03 5.06 3.88 --
Fourth quarter 234,933 51,925 1,040(b) .08 4.25 3.25 --
$738,772 $160,146 $ 2,342 $ .18 --
- ------------------------------------------------------------------------------------------------------------------------------------
1995:
First quarter $188,678 $ 39,407 $ 269 $ .02 $6.13 $4.00 --
Second quarter 184,169 38,141 228 .02 5.50 5.00 --
Third quarter 176,343 36,987 (7,892)(c) (.60) 5.38 4.13 --
Fourth quarter 180,313 39,161 2,004 .15 5.63 3.88 --
- ------------------------------------------------------------------------------------------------------------------------------------
$729,503 $153,696 $(5,391) $ (.41) --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(a) Amounts differ from previously filed quarterly reports due to
reclassifications between accounts. Previous reported net income has not
changed.
(b) Includes a before-tax charge of $3,000,000 related to store closings.
(c) Includes a before-tax charge of $11,850,000 related to store closings.
DRUG EMPORIUM, INC. AND SUBSIDIARIES 21
<PAGE> 14
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Drug Emporium, Inc.
We have audited the accompanying consolidated balance sheets of Drug Emporium,
Inc. and subsidiaries as of March 2, 1996 and February 25, 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended March 2, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Drug Emporium, Inc. and subsidiaries at March 2, 1996 and February 25, 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended March 2, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Columbus, Ohio
April 3, 1996
22 DRUG EMPORIUM, INC. AND SUBSIDIARIES
<PAGE> 1
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8, Numbers 33-25768 and 33-69638) of Drug Emporium, Inc. and
subsidiaries of our report dated April 3, 1996, with respect to the consolidated
financial statements of Drug Emporium, Inc. and subsidiaries incorporated by
reference in this Annual Report (Form 10-K) for the year ended March 2, 1996.
ERNST & YOUNG LLP
Columbus, Ohio
May 24, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-02-1996
<PERIOD-START> FEB-26-1995
<PERIOD-END> MAR-02-1996
<CASH> 767
<SECURITIES> 0
<RECEIVABLES> 13,018
<ALLOWANCES> 0
<INVENTORY> 188,498
<CURRENT-ASSETS> 12,822
<PP&E> 61,390
<DEPRECIATION> (32,597)
<TOTAL-ASSETS> 243,898
<CURRENT-LIABILITIES> 127,962
<BONDS> 67,391
<COMMON> 1,318
0
0
<OTHER-SE> 47,227
<TOTAL-LIABILITY-AND-EQUITY> 243,898
<SALES> 738,772
<TOTAL-REVENUES> 738,772
<CGS> 578,626
<TOTAL-COSTS> 146,774
<OTHER-EXPENSES> 3,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,468
<INCOME-PRETAX> 3,904
<INCOME-TAX> 1,562
<INCOME-CONTINUING> 2,342
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,342
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
