<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
. August 31, 1996 OR
---------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
____________________ TO ________________________
Commission File Number 0-16998
----------
DRUG EMPORIUM, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1064888
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 Hidden Ravines Drive, Powell, Ohio 43065
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 548-7080
----------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at 08/31/96
- ---------------------------- -------------
Common Stock, $.10 par value 13,153,485 shares
---------------
<PAGE> 2
INDEX
DRUG EMPORIUM, INC.
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets.......................................3
Consolidated Statements of Operations.............................4
Consolidated Statements of Cash Flows ............................5
Notes to Consolidated Financial Statements........................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............7-8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...........9
Item 6. Exhibits and Reports on Form 8-K..............................9
SIGNATURES................................................................10
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS
PER SHARE........................................................11
2
<PAGE> 3
DRUG EMPORIUM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, 1996 March 2, 1996
--------------- -------------
(Unaudited) (Audited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................. $ 834 $ 767
Accounts receivable ....................... 15,711 13,018
Inventories ............................... 164,609 188,498
Income taxes and other .................... 3,642 5,874
-------- --------
Total current assets ................ 184,796 208,157
Property and equipment, net .................. 31,823 28,793
Goodwill ..................................... 5,012 5,311
Other assets ................................. 1,745 1,637
-------- --------
Total assets ........................ $223,376 $243,898
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line ..................... $ 32,150 $ 21,500
Accounts payable .......................... 51,486 69,143
Accrued liabilities ....................... 9,523 17,345
Deferred income ........................... 6,731 9,183
Accrued store closure ..................... 4,973 6,182
Current maturities of long-term debt ...... 4,148 4,609
-------- --------
Total current liabilities ........... 109,011 127,962
Deferred rent ................................ 4,296 4,107
Convertible subordinated debt ................ 49,421 49,421
Long-term debt, other ........................ 11,525 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 13,153,485 at August
31, 1996 and 13,184,000 at March 2,
1996 .................................... 1,315 1,318
Additional paid-in capital ................ 31,951 32,121
Retained earnings ......................... 15,857 15,106
-------- --------
Total shareholders' equity .......... 49,123 48,545
-------- --------
Total liabilities and shareholders'
equity............................. $223,376 $243,898
======== ========
</TABLE>
3
<PAGE> 4
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 26, August 31, August 26,
1996 1995 1996 1995
----------------------------- --------------------------------
(Unaudited)
(In thousands, except per-share data)
<S> <C> <C> <C> <C>
Net sales................................. $212,573 $167,794 $419,316 $332,885
Cost of sales............................. 166,651 131,525 329,866 261,559
-------- -------- -------- --------
45,922 36,269 89,450 71,326
Selling, administrative and
occupancy expenses 43,448 34,112 84,247 66,973
-------- -------- -------- --------
Operating income ......................... 2,474 2,157 5,203 4,353
Interest expense, net..................... 2,057 1,379 3,951 2,760
-------- -------- -------- --------
Income before provision for
income taxes.............................. 417 778 1,252 1,593
Provision for income taxes................ 167 312 501 638
-------- -------- -------- --------
Net income ............................... $ 250 $ 466 $ 751 $ 955
======== ======== ======== ========
Net income per share...................... $.02 $.03 $.06 $.07
==== ==== ==== ====
Weighted average number of
common shares used in computing
net income per share...................... 13,184 13,183 13,184 13,181
====== ====== ====== ======
</TABLE>
4
<PAGE> 5
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
August 31, August 26,
1996 1995
-------------- -------------
(Unaudited)
(In thousands)
<S> <C> <C>
Operating activities:
Net income .................................................. $ 751 $ 955
Adjustments to reconcile to cash
provided by (used for) operations:
Depreciation and amortization.............................. 3,958 4,069
LIFO provision............................................. 1,690 1,502
Cash provided by current assets and liabilities:
Accounts payable and accrued liabilities (30,388) 1,621
Accounts receivable........................................ (2,693) (2,415)
Inventories at current cost................................ 29,460 (3,432)
Other...................................................... 2,208 (649)
------- --------
Net cash provided by operating activities.................... 4,986 1,651
Investing activities:
Purchase of property and equipment, net...................... (2,504) (1,405)
Payment for purchase of retail stores, net
of cash acquired........................................... (10,093) (2,766)
------- --------
Net cash (used for) investing activities..................... (12,597) (4,171)
Financing activities:
Net borrowings under revolving credit line 10,650 15,640
Net repayments, other........................................ (2,972) (14,268)
------- --------
Net cash provided by financing activities.................... 7,678 1,372
------- --------
Increase (decrease) in cash and cash equiva-
lents.......................................................... 67 (1,148)
Cash and cash equivalents, beginning of
period..................................................... 767 1,722
------- --------
Cash and cash equivalents, end of period....................... $ 834 $ 574
======= =========
</TABLE>
See accompanying notes.
5
<PAGE> 6
DRUG EMPORIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying financial statements include the accounts of Drug
Emporium, Inc. and subsidiaries.
The information furnished reflects all adjustments which are, in the
opinion of management, necessary to fairly present the consolidated
financial position, results of operations and cash flows on a
consistent basis. Certain amounts in prior period financial statements
have been reclassified to conform with the current presentation.
2. The Company's cost of sales is computed using the gross profit method.
The gross profit percentage used is validated by physical inventories
conducted twice a year primarily in the second and fourth quarters and
the actual results of the LIFO calculations in the fourth quarter.
3. The accompanying unaudited consolidated financial statements are
presented in accordance with the requirements for Form 10-Q and
consequently do not include all the disclosures normally required by
generally accepted accounting principles. Reference should be made to
the Company's Form 10-K for the fiscal year ended 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 first quarter of the current
fiscal year. 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 amount
consists of a $55,000,000 revolver expiring on May 31, 1999 and term
debt of $15,000,000. The term debt is due in quarterly installments of
$750,000 beginning on May 31, 1996. As of August 31, 1996, the revolver
balance was $32,150,000 and the term debt balance was $13,500,000.
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
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth selected items from the Company's consolidated
statements of operations expressed as a percentage of net sales for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 26, August 31, August 26,
1996 1995 1996 1995
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales (in thousands).......................... $212,573 $167,794 $419,316 $332,885
======== ======== ======== ========
Gross margin...................................... 21.6% 21.6% 21.3% 21.4%
Selling, administrative and
occupancy expenses................................ 20.4% 20.3% 20.1% 20.1%
----- ----- ----- -----
1.2% 1.3% 1.2% 1.3%
===== ===== ===== =====
</TABLE>
For the quarter, net sales increased 27% compared to the same period last
year. This was a result of a larger store base and an increase in average sales
per store. The increase in average sales per store was partially brought about
by the acquisition of higher-volume stores and the closing of under-performing
units. For stores open last year and this year, sales increased one percent for
the six months and decreased one percent for the three months ended August 31,
1996. The changes in sales were largely due to the level of promotional
activity.
The following table lists corporately-owned store openings and store closings
through the second quarter ended August 31, 1996 and the similar prior year
period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 26, August 31, August 26,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Number of stores at
beginning of period............................. 141 115 136 113
Stores opened or acquired......................... 2 2 8 8
Stores closed or sold............................. (2) (3) (3) (7)
--- --- --- ---
Total stores at end of 141 114 141 114
period.......................................... === === === ===
</TABLE>
The Company has experienced downward pressure on gross margins, particularly
in pharmacy, 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, among other measures, 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 expenses as a percentage of sales
increased slightly in the second quarter of Fiscal 1997 compared to the similar
prior year period. The increase primarily resulted from the impact of increased
advertising expenditures on acquired stores. Interest expense has increased over
prior periods as a result of additional debt brought about by the acquisition of
stores since last year.
7
<PAGE> 8
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 26, August 31, August 26,
1996 1995 1996 1995
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
LIFO charge (in thousands)................. $845 $751 $1,690 $1,502
==== ==== ====== ======
</TABLE>
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 Company believes that internally generated funds and borrowings available
under its Agreement are sufficient to finance the Company's current operations.
8
<PAGE> 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of Drug Emporium, Inc.
was held on June 26, 1996. The only items voted on at the
meeting were the election of directors and ratification of
Ernst & Young LLP as the independent auditors. The proxies for
the meeting were solicited pursuant to Regulation 14 under the
Securities Exchange Act of 1934, there was no solicitation in
opposition to management's nominees and all such nominees were
elected.
The following persons were elected as directors for a
three-year term:
<TABLE>
<CAPTION>
Votes Votes Broker
----- ----- -------
Name For Against Non-Votes
---- --- ------- ---------
<S> <C> <C> <C>
Walter E. Sinterman 11,469,329 23,599 .1790%
V. J. Wiechart, Sr. 11,473,379 19,549 .1483%
</TABLE>
The following summarizes the vote with respect to the
independent auditors:
<TABLE>
<CAPTION>
Broker
--------
Votes For Votes Against Abstentions Non-Votes
--------- ------------- ----------- ---------
<S> <C> <C> <C>
11,453,995 13,151 25,782 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following Exhibit is included herein:
--Exhibit 11. Computation of earnings per share.
(b) No report on Form 8-K was filed during the quarter
ended August 31, 1996.
9
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRUG EMPORIUM, INC.
------------------------------
(Registrant)
Date October 9, 1996 By /s/ David L. Kriegel
----------------------- -----------------------------
David L. Kriegel
Chairman
Chief Executive Officer
Date October 9, 1996 By /s/ Timothy S. McCord
----------------------- --------------------------
Timothy S. McCord
Chief Financial Officer
10
<PAGE> 1
DRUG EMPORIUM, INC.
COMPUTATION OF EARNINGS PER SHARE
- Exhibit 11 -
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 26, August 31, August 26,
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Primary:
Weighted average number of
common shares outstanding.................. 13,184 13,183 13,184 13,181
Net effect of dilutive stock
options -- based on treasury
stock method using estimated
average market price....................... (a) (a) (a) (a)
------ ------ ------ ------
Weighted average common and
common equivalent shares................... 13,184 13,183 13,184 13,181
====== ====== ====== ======
Net income ................................ $250 $466 $751 $955
==== ==== ==== ====
Net income per common and com-
mon equivalent share....................... $0.02 $0.03 $0.06 $0.07
===== ===== ===== =====
Fully Diluted:
Weighted average number of
common shares outstanding.................. 13,184 13,183 13,184 13,181
Net effect of dilutive stock
options -- based on treasury
stock method using closing
market price............................... (a) (a) (a) (a)
------ ------ ------ ------
Fully diluted shares....................... 13,184 13,183 13,184 13,181
====== ====== ====== ======
Net income ................................ $250 $466 $751 $955
==== ==== ==== ====
Net income per common share
assuming full dilution..................... $0.02 $0.03 $0.06 $0.07
===== ===== ===== =====
(a) Excluded as amounts are antidilutive.
11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-01-1997
<PERIOD-START> JUN-02-1996
<PERIOD-END> AUG-31-1996
<CASH> 834
<SECURITIES> 0
<RECEIVABLES> 15,711
<ALLOWANCES> 0
<INVENTORY> 164,609
<CURRENT-ASSETS> 184,796
<PP&E> 66,459
<DEPRECIATION> 34,636
<TOTAL-ASSETS> 223,376
<CURRENT-LIABILITIES> 109,011
<BONDS> 49,421
<COMMON> 1,315
0
0
<OTHER-SE> 47,808
<TOTAL-LIABILITY-AND-EQUITY> 223,376
<SALES> 419,316
<TOTAL-REVENUES> 419,316
<CGS> 329,866
<TOTAL-COSTS> 414,113
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,951
<INCOME-PRETAX> 1,252
<INCOME-TAX> 501
<INCOME-CONTINUING> 751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 751
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
